[House Report 115-958]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-958
_______________________________________________________________________
PROTECTING FAMILY AND SMALL BUSINESS TAX CUTS ACT OF 2018
__________
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 6760
together with
DISSENTING VIEWS
[Including cost estimate of the Congressional Budget Office]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
September 24, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
________
U.S. GOVERNMENT PUBLISHING OFFICE
31-578 WASHINGTON: 2018
C O N T E N T S
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Page
I. SUMMARY AND BACKGROUND..........................................18
A. Purpose and Summary................................. 18
B. Background and Need for Legislation................. 18
C. Legislative History................................. 19
II. EXPLANATION OF THE BILL.........................................19
III. VOTES OF THE COMMITTEE..........................................24
IV. BUDGET EFFECTS OF THE BILL......................................29
A. Committee Estimate of Budgetary Effects............. 29
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 33
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 33
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......40
A. Committee Oversight Findings and Recommendations.... 40
B. Statement of General Performance Goals and
Objectives......................................... 40
C. Information Relating to Unfunded Mandates........... 40
D. Applicability of House Rule XXI 5(b)................ 40
E. Tax Complexity Analysis............................. 40
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 49
G. Duplication of Federal Programs..................... 49
H. Disclosure of Directed Rule Makings................. 49
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........49
A. Changes in Existing Law Proposed by the Bill, as
Reported........................................... 49
VII. DISSENTING VIEWS...............................................681
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-958
======================================================================
PROTECTING FAMILY AND SMALL BUSINESS TAX CUTS ACT OF 2018
_______
September 24, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 6760]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 6760) to amend the Internal Revenue Code of 1986 to
make permanent certain provisions of the Tax Cuts and Jobs Act
affecting individuals, families, and small businesses, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE, ETC.
(a) Short Title.--This Act may be cited as the ``Protecting Family
and Small Business Tax Cuts Act of 2018''.
(b) Amendment of 1986 Code.--Except as otherwise expressly provided,
whenever in this Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
(c) References to the Tax Cuts and Jobs Act.--Title I of Public Law
115-97 may be cited as the ``Tax Cuts and Jobs Act''.
(d) Table of Contents.--The table of contents of this Act is as
follows:
Sec. 1. Short title, etc.
TITLE I--INDIVIDUAL REFORM MADE PERMANENT
Subtitle A--Rate Reform
Sec. 101. Modification of rates.
Subtitle B--Deduction for Qualified Business Income of Pass-thru
Entities
Sec. 111. Deduction for qualified business income.
Sec. 112. Limitation on losses for taxpayers other than corporations.
Subtitle C--Tax Benefits for Families and Individuals
Sec. 121. Increase in standard deduction.
Sec. 122. Increase in and modification of child tax credit.
Sec. 123. Increased limitation for certain charitable contributions.
Sec. 124. Increased contributions to ABLE accounts.
Sec. 125. Rollovers to ABLE programs from 529 programs.
Sec. 126. Treatment of certain individuals performing services in the
Sinai Peninsula of Egypt.
Sec. 127. Extension of reduction in threshold for medical expense
deduction.
Subtitle D--Education
Sec. 131. Treatment of student loans discharged on account of death or
disability.
Subtitle E--Deductions and Exclusions
Sec. 141. Repeal of deduction for personal exemptions.
Sec. 142. Limitation on deduction for State and local, etc. taxes.
Sec. 143. Limitation on deduction for qualified residence interest.
Sec. 144. Modification of deduction for personal casualty losses.
Sec. 145. Termination of miscellaneous itemized deductions.
Sec. 146. Repeal of overall limitation on itemized deductions.
Sec. 147. Termination of exclusion for qualified bicycle commuting
reimbursement.
Sec. 148. Qualified moving expense reimbursement exclusion limited to
members of Armed Forces.
Sec. 149. Deduction for moving expenses limited to members of Armed
Forces.
Sec. 150. Limitation on wagering losses.
Subtitle F--Increase in Estate and Gift Tax Exemption
Sec. 151. Increase in estate and gift tax exemption.
TITLE II--INCREASED EXEMPTION FOR ALTERNATIVE MINIMUM TAX MADE
PERMANENT
Sec. 201. Increased exemption for individuals.
TITLE I--INDIVIDUAL REFORM MADE PERMANENT
Subtitle A--Rate Reform
SEC. 101. MODIFICATION OF RATES.
(a) Married Individuals Filing Joint Returns and Surviving Spouses.--
Section 1(a) is amended by striking the table contained therein and
inserting the following:
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $19,050..................... 10% of taxable income.
Over $19,050 but not over $77,400.... $1,905, plus 12% of the excess
over $19,050.
Over $77,400 but not over $165,000... $8,907, plus 22% of the excess
over $77,400.
Over $165,000 but not over $315,000.. $28,179, plus 24% of the excess
over $165,000.
Over $315,000 but not over $400,000.. $64,179, plus 32% of the excess
over $315,000.
Over $400,000 but not over $600,000.. $91,379, plus 35% of the excess
over $400,000.
Over $600,000........................ $161,379, plus 37% of the excess
over $600,000.''.
(b) Head of Households.--Section 1(b) is amended by striking the
table contained therein and inserting the following:
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $13,600..................... 10% of taxable income.
Over $13,600 but not over $51,800.... $1,360, plus 12% of the excess
over $13,600.
Over $51,800 but not over $82,500.... $5,944, plus 22% of the excess
over $51,800.
Over $82,500 but not over $157,500... $12,698, plus 24% of the excess
over $82,500.
Over $157,500 but not over $200,000.. $30,698, plus 32% of the excess
over $157,500.
Over $200,000 but not over $500,000.. $44,298, plus 35% of the excess
over $200,000.
Over $500,000........................ $149,298, plus 37% of the excess
over $500,000.''.
(c) Unmarried Individuals Other Than Surviving Spouses and Heads of
Household.--Section 1(c) is amended by striking the table contained
therein and inserting the following:
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $500,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $500,000........................ $150,689.50, plus 37% of the
excess over $500,000.''.
(d) Married Individuals Filing Separate Returns.--Section 1(d) is
amended by striking the table contained therein and inserting the
following:
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $300,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $300,000........................ $80,689.50, plus 37% of the
excess over $300,000.''.
(e) Estates and Trusts.--Section 1(e) is amended by striking the
table contained therein and inserting the following:
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $2,550...................... 10% of taxable income.
Over $2,550 but not over $9,150...... $255, plus 24% of the excess over
$2,550.
Over $9,150 but not over $12,500..... $1,839, plus 35% of the excess
over $9,150.
Over $12,500......................... $3,011.50, plus 37% of the excess
over $12,500.''.
(f) Inflation Adjustments.--Section 1(f) is amended--
(1) by striking ``1993'' in paragraph (1) and inserting
``2018'',
(2) by amending paragraph (2)(A) to read as follows:
``(A) by increasing the minimum and maximum dollar
amounts for each bracket for which a tax is imposed
under such table by the cost-of-living adjustment for
such calendar year, determined under this subsection
for such calendar year by substituting `2017' for
`2016' in paragraph (3)(A)(ii),'',
(3) in paragraph (7)(B), by striking all that precedes
``(other than with respect to'' and inserting the following:
``(B) Special rule.--In the case of a table
prescribed in lieu of the table contained in subsection
(b), (c), or (d), subparagraph (A)'',
(4) by striking paragraph (8), and
(5) in the heading, by striking ``Phaseout of Marriage
Penalty in 15-percent Bracket; Adjustments'' and inserting
``Adjustments''.
(g) Special Rules for Certain Children With Unearned Income.--
(1) In general.--Section 1(g) is amended by striking all that
precedes paragraph (2) and inserting the following:
``(g) Special Rules for Certain Children With Unearned Income.--
``(1) In general.--In the case of any child to whom this
subsection applies--
``(A) Modifications to applicable rate brackets.--In
determining the amount of tax imposed by this section
for the taxable year on such child, the income tax
table otherwise applicable under this section to such
child shall be applied with the following
modifications:
``(i) 24-percent bracket.--The maximum
taxable income which is taxed at a rate below
24 percent shall not be more than the sum of--
``(I) the earned taxable income of
such child, plus
``(II) the minimum taxable income for
the 24-percent bracket in the table
under subsection (e) (as adjusted under
subsection (f)) for the taxable year.
``(ii) 35-percent bracket.--The maximum
taxable income which is taxed at a rate below
35 percent shall not be more than the sum of--
``(I) the earned taxable income of
such child, plus
``(II) the minimum taxable income for
the 35-percent bracket in the table
under subsection (e) (as adjusted under
subsection (f)) for the taxable year.
``(iii) 37-percent bracket.--The maximum
taxable income which is taxed at a rate below
37 percent shall not be more than the sum of--
``(I) the earned taxable income of
such child, plus
``(II) the minimum taxable income for
the 37-percent bracket in the table
under subsection (e) (as adjusted under
subsection (f)) for the taxable year.
``(B) Coordination with capital gains rates.--For
purposes of applying section 1(h)--
``(i) the maximum zero rate amount shall not
be more than the sum of--
``(I) the earned taxable income of
such child, plus
``(II) the amount in effect under
subsection (h)(13) for the taxable
year, and
``(ii) the maximum 15-percent rate amount
shall not be more than the sum of--
``(I) the earned taxable income of
such child, plus
``(II) the amount in effect under
subsection (h)(12)(D) for the taxable
year.''.
(2) Earned taxable income.--Section 1(g)(3) is amended to
read as follows:
``(3) Earned taxable income.--For purposes of this
subsection, the term `earned taxable income' means, with
respect to any child for any taxable year, the taxable income
of such child reduced (but not below zero) by the net unearned
income of such child.''.
(3) Conforming amendment.--So much of paragraph (5) of
section 1(g) as precedes subparagraph (A) thereof is amended to
read as follows:
``(5) Special rules for determining parent eligible to make
election.--For purposes of paragraph (7), the parent referred
to in subparagraph (A)(iv) thereof is--''.
(h) Application of Income Tax Brackets to Capital Gains Brackets.--
Section 1(h) is amended--
(1) in paragraph (1)(B)(i), by striking ``25 percent'' and
inserting ``22 percent'',
(2) in paragraph (1)(C)(ii)(I), by striking ``which would
(without regard to this paragraph) be taxed at a rate below
39.6 percent'' and inserting ``below the maximum 15-percent
rate amount'', and
(3) by adding at the end the following new paragraphs:
``(12) Maximum 15-percent rate amount defined.--For purposes
of this subsection, the maximum 15-percent rate amount shall
be--
``(A) in the case of a joint return or surviving
spouse (as defined in section 2(a)), $479,000 (\1/2\
such amount in the case of a married individual filing
a separate return),
``(B) in the case of an individual who is the head of
a household (as defined in section 2(b)), $452,400,
``(C) in the case of any other individual (other than
an estate or trust), $425,800, and
``(D) in the case of an estate or trust, $12,700.
``(13) Determination of 0 percent rate bracket for estates
and trusts.--In the case of any estate or trust, paragraph
(1)(B) shall be applied by treating the amount determined in
clause (i) thereof as being equal to $2,600.
``(14) Inflation adjustment.--
``(A) In general.--In the case of any taxable year
beginning after 2018, each of the dollar amounts in
paragraphs (12) and (13) shall be increased by an
amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under subsection (f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2017'
for `calendar year 2016' in subparagraph
(A)(ii) thereof.
``(B) Rounding.--If any increase under subparagraph
(A) is not a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.''.
(i) Application of Section 15.--
(1) In general.--Subsection (a) of section 15 is amended by
striking ``If any rate of tax'' and inserting ``In the case of
a corporation, if any rate of tax''.
(2) Conforming amendments.--
(A) Section 15 is amended by striking subsections
(d), (e), and (f).
(B) Section 6013(c) is amended by striking ``sections
15, 443, and 7851(a)(1)(A)'' and inserting ``section
443''.
(C) The heading of section 15 is amended by inserting
``on corporations'' after ``effect of changes''.
(D) The table of sections for part III of subchapter
A of chapter 1 is amended by striking the item relating
to section 15 and inserting the following new item:
``Sec. 15. Effect of changes on corporations.''.
(j) Conforming Amendments.--
(1) Section 1 is amended by striking subsections (i) and (j).
(2) Section 3402(q)(1) is amended by striking ``third
lowest'' and inserting ``fourth lowest''.
(k) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2017.
(2) Application of section 15.--Section 15 of the Internal
Revenue Code of 1986 shall not apply to any change in a rate of
tax by reason of--
(A) section 1(j) of such Code (as in effect before
its repeal by this section), or
(B) any amendment made by this Act.
Subtitle B--Deduction for Qualified Business Income of Pass-thru
Entities
SEC. 111. DEDUCTION FOR QUALIFIED BUSINESS INCOME.
(a) In General.--Section 199A is amended by striking subsection (i).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 112. LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN CORPORATIONS.
(a) In General.--Section 461 is amended--
(1) by amending subsection (l)(1) to read as follows:
``(1) Limitation.--In the case of a taxpayer other than a
corporation, any excess business loss of the taxpayer for the
taxable year shall not be allowed.'', and
(2) by striking subsection (j) and redesignating subsections
(k) and (l) (as amended) as subsections (j) and (k),
respectively.
(b) Conforming Amendments.--
(1) Section 58(a)(2)(A) is amended by striking ``461(k)'' and
inserting ``461(j)''.
(2) Section 461(i)(4) is amended by striking ``subsection
(k)'' and inserting ``subsection (j)''.
(3) Section 464(d)(2)(B)(iii) is amended by striking
``section 461(k)(2)(E)'' and inserting ``section
461(j)(2)(E)''.
(4) Subparagraphs (B) and (C) of section 1256(e)(3) are each
amended by striking ``section 461(k)(4)'' and inserting
``section 461(j)(4)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle C--Tax Benefits for Families and Individuals
SEC. 121. INCREASE IN STANDARD DEDUCTION.
(a) In General.--Section 63(c)(2) is amended--
(1) by striking ``$4,400'' in subparagraph (B) and inserting
``$18,000'', and
(2) by striking ``$3,000'' in subparagraph (C) and inserting
``$12,000''.
(b) Inflation Adjustment.--Section 63(c)(4) is amended to read as
follows:
``(4) Adjustments for inflation.--
``(A) In general.--In the case of a taxable year
beginning after 2018, each dollar amount in paragraph
(2)(B), (2)(C), or (5) or subsection (f) shall be
increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting for `2016' in
subparagraph (A)(ii) thereof--
``(I) in the case of the dollar
amounts contained in paragraph (2)(B)
or (2)(C), `2017',
``(II) in the case of the dollar
amounts contained in paragraph (5)(A)
or subsection (f), `1987', and
``(III) in the case of the dollar
amount contained in paragraph (5)(B),
`1997'.
``(B) Rounding.--If any increase under subparagraph
(A) is not a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.''.
(c) Conforming Amendments.--
(1) Section 1(f)(7)(A) is amended by striking ``section
63(c)(4),''.
(2) Section 1(f)(7)(B) is amended by striking ``sections
63(c)(4) and'' and inserting ``section''.
(3) Section 63(c) is amended by striking paragraph (7).
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 122. INCREASE IN AND MODIFICATION OF CHILD TAX CREDIT.
(a) In General.--Section 24 is amended by striking subsections (a),
(b), and (c) and inserting the following new subsections:
``(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an amount
equal to the sum of--
``(1) $2,000 for each qualifying child of the taxpayer, and
``(2) $500 for each qualifying dependent (other than a
qualifying child) of the taxpayer.
``(b) Limitation Based on Adjusted Gross Income.--The amount of the
credit allowable under subsection (a) shall be reduced (but not below
zero) by $50 for each $1,000 (or fraction thereof) by which the
taxpayer's modified adjusted gross income exceeds $400,000 in the case
of a joint return ($200,000 in any other case). For purposes of the
preceding sentence, the term ``modified adjusted gross income'' means
adjusted gross income increased by any amount excluded from gross
income under section 911, 931, or 933.
``(c) Qualifying Child; Qualifying Dependent.--For purposes of this
section--
``(1) Qualifying child.--The term `qualifying child' means
any qualifying dependent of the taxpayer--
``(A) who is a qualifying child (as defined in
section 7706(c)) of the taxpayer,
``(B) who has not attained age 17 at the close of the
calendar year in which the taxable year of the taxpayer
begins, and
``(C) whose name and social security number are
included on the taxpayer's return of tax for the
taxable year.
``(2) Qualifying dependent.--The term `qualifying dependent'
means any dependent of the taxpayer (as defined in section 7706
without regard to all that follows `resident of the United
States' in section 7706(b)(3)(A)) whose name and TIN are
included on the taxpayer's return of tax for the taxable year.
``(3) Social security number defined.--For purposes of this
subsection, the term `social security number' means, with
respect to a return of tax, a social security number issued to
an individual by the Social Security Administration, but only
if the social security number is issued--
``(A) to a citizen of the United States or pursuant
to subclause (I) (or that portion of subclause (III)
that relates to subclause (I)) of section
205(c)(2)(B)(i) of the Social Security Act, and
``(B) on or before the due date of filing such
return.''.
(b) Portion of Credit Refundable.--
(1) In general.--Section 24(d)(1)(A) is amended to read as
follows:
``(A) the credit which would be allowed under this
section determined--
``(i) by substituting `$1,400' for `$2,000'
in subsection (a)(1),
``(ii) without regard to subsection (a)(2),
and
``(iii) without regard to this subsection and
the limitation under section 26(a), or''.
(2) Modification of limitation based on earned income.--
Section 24(d)(1)(B)(i) is amended by striking ``$3,000'' and
inserting ``$2,500''.
(3) Inflation adjustment.--Section 24(d) is amended by
inserting after paragraph (3) the following new paragraph:
``(4) Adjustment for inflation.--
``(A) In general.--In the case of a taxable year
beginning after 2018, the $1,400 amount in paragraph
(1)(A)(i) shall be increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `2017' for `2016' in
subparagraph (A)(ii) thereof.
``(B) Rounding.--If any increase under subparagraph
(A) is not a multiple of $100, such increase shall be
rounded to the next lowest multiple of $100.
``(C) Limitation.--The amount of any increase under
subparagraph (A) (after the application of subparagraph
(B)) shall not exceed $600.''.
(4) Conforming amendments.--
(A) Section 24(e) is amended to read as follows:
``(e) Taxpayer Identification Requirement.--No credit shall be
allowed under this section if the identifying number of the taxpayer
was issued after the due date for filing the return of tax for the
taxable year.''.
(B) Section 24 is amended by striking subsection (h).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 123. INCREASED LIMITATION FOR CERTAIN CHARITABLE CONTRIBUTIONS.
(a) In General.--Section 170(b)(1)(G) is amended to read as follows:
``(G) Cash contributions.--
``(i) In general.--Any contribution of cash
to an organization described in subparagraph
(A) shall be allowed to the extent that the
aggregate of such contributions does not exceed
60 percent of the taxpayer's contribution base
for the taxable year, reduced by the aggregate
amount of contributions allowable under
subparagraph (A) for such taxpayer for such
year.
``(ii) Carryover.--If the aggregate amount of
contributions described in clause (i) exceeds
the limitation of clause (i), such excess shall
be treated (in a manner consistent with the
rules of subsection (d)(1)) as a charitable
contribution to which clause (i) applies in
each of the 5 succeeding years in order of
time.''.
(b) Coordination With Limitations on Other Contributions.--
(1) Coordination with 50 percent limitation.--Section
170(b)(1)(A) is amended by striking ``Any charitable
contribution'' and inserting ``Any charitable contribution
other than a contribution described in subparagraph (G)''.
(2) Coordination with 30 percent limitation.--Section
170(b)(1)(B) is amended--
(A) in the matter preceding clause (i), by striking
``to which subparagraph (A) applies'' and inserting
``to which subparagraph (A) or (G) applies'',
(B) by amending clause (ii) to read as follows:
``(ii) the excess of--
``(I) the sum of 50 percent of the
taxpayer's contribution base for the
taxable year, plus so much of the
amount of charitable contributions
allowable under subparagraph (G) as
does not exceed 10 percent of such
contribution base, over
``(II) the amount of charitable
contributions allowable under
subparagraphs (A) and (G) (determined
without regard to subparagraph (C)).'',
and
(C) in the matter following clause (ii), by striking
``(to which subparagraph (A) does not apply)'' and
inserting ``(to which neither subparagraph (A) nor (G)
applies)''.
(c) Effective Date.--The amendments made by this section shall apply
to contributions made in taxable years beginning after December 31,
2017.
SEC. 124. INCREASED CONTRIBUTIONS TO ABLE ACCOUNTS.
(a) Increase in Limitation for Contributions From Compensation of
Individuals With Disabilities.--Section 529A(b)(2)(B)(ii) is amended by
striking ``before January 1, 2026''.
(b) Allowance of Saver's Credit for ABLE Contributions by Account
Holder.--Section 25B(d)(1)(D) is amended by striking ``made before
January 1, 2026,''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 125. ROLLOVERS TO ABLE PROGRAMS FROM 529 PROGRAMS.
(a) In General.--Section 529(c)(3)(C)(i)(III) is amended by striking
``before January 1, 2026,''.
(b) Effective Date.--The amendments made by this section shall apply
to distributions after December 31, 2017.
SEC. 126. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN THE
SINAI PENINSULA OF EGYPT.
(a) In General.--Section 112(c)(2) is amended--
(1) by striking ``means any area'' and inserting ``means--
``(A) any area'', and
(2) by striking the period at the end and inserting ``, and
``(B) the Sinai Peninsula of Egypt.''.
(b) Period of Treatment.--Section 112(c)(3) is amended--
(1) by striking ``only if performed'' and inserting ``only
if--
``(A) in the case of an area described in paragraph
(2)(A), such service is performed'', and
(2) by striking the period at the end and inserting ``, and
``(B) in the case of the area described in paragraph
(2)(B), such service is performed during any period
with respect to which one or more members of the Armed
Forces of the United States are entitled to special pay
under section 310 of title 37, United States Code
(relating to special pay; duty subject to hostile fire
or imminent danger), for service performed in such
area.''.
(c) Conforming Amendment.--The Tax Cuts and Jobs Act is amended by
striking section 11026.
(d) Effective Date.--The amendments made by this section shall apply
with respect to services performed on or after the date of the
enactment of this Act.
SEC. 127. EXTENSION OF REDUCTION IN THRESHOLD FOR MEDICAL EXPENSE
DEDUCTION.
(a) In General.--Section 213(a) is amended by inserting ``(7.5
percent in the case of any taxable year beginning after December 31,
2018, and ending before January 1, 2021)'' after ``10 percent''.
(b) Conforming Amendments.--
(1) Section 56(b)(1) is amended by striking subparagraph (B)
and by redesignating subparagraphs (C) through (F) as
subparagraphs (B) through (E), respectively.
(2) Section 213 is amended by striking subsection (f).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2018.
Subtitle D--Education
SEC. 131. TREATMENT OF STUDENT LOANS DISCHARGED ON ACCOUNT OF DEATH OR
DISABILITY.
(a) In General.--Section 108(f)(5) is amended by striking ``after
December 31, 2017, and before January 1, 2026''.
(b) Effective Date.--The amendment made by this section shall apply
to discharges of indebtedness after December 31, 2017.
Subtitle E--Deductions and Exclusions
SEC. 141. REPEAL OF DEDUCTION FOR PERSONAL EXEMPTIONS.
(a) In General.--Part V of subchapter B of chapter 1 is hereby
repealed.
(b) Definition of Dependent Retained.--Section 152, prior to the
repeal made by subsection (a), is hereby redesignated as section 7706
and moved to the end of chapter 79.
(c) Application to Trusts and Estates.--Section 642(b) is amended--
(1) in paragraph (2)(C)--
(A) in clause (i), by striking ``the exemption amount
under section 151(d)'' and all that follows through the
period at the end and inserting ``the dollar amount in
effect under section 7706(d)(1)(B).'', and
(B) by striking clause (iii),
(2) by striking paragraph (3), and
(3) by striking ``Deduction For Personal Exemption'' in the
heading thereof and inserting ``Basic Deduction''.
(d) Application to Nonresident Aliens.--Section 873(b) is amended by
striking paragraph (3).
(e) Modification of Return Requirement.--
(1) In general.--Section 6012(a)(1) is amended to read as
follows:
``(1) Every individual who has gross income for the taxable
year, except that a return shall not be required of--
``(A) an individual who is not married (determined by
applying section 7703) and who has gross income for the
taxable year which does not exceed the standard
deduction applicable to such individual for such
taxable year under section 63, or
``(B) an individual entitled to make a joint return
if--
``(i) the gross income of such individual,
when combined with the gross income of such
individual's spouse, for the taxable year does
not exceed the standard deduction which would
be applicable for such taxable year under
section 63 if such individual and such
individual's spouse made a joint return,
``(ii) such individual's spouse does not make
a separate return, and
``(iii) neither such individual nor such
individual's spouse is an individual described
in section 63(c)(4) who has income (other than
earned income) in excess of the amount in
effect under section 63(c)(4)(A).''.
(2) Bankruptcy estates.--Section 6012(a)(8) is amended by
striking ``the sum of the exemption amount plus''.
(3) Conforming amendment.--Section 6012 is amended by
striking subsection (f).
(f) Conforming Amendments.--
(1) Section 1(f)(7), as amended by section 121, is amended--
(A) by striking ``, section 68(b)(2) or section
151(d)(4)'' in subparagraph (A) and inserting ``or
section 68(b)(2)'', and
(B) by striking ``(other than with respect to section
151(d)(4)(A))'' in subparagraph (B).
(2) Section 1(g)(5)(A) is amended by striking ``section
152(e)'' and inserting ``section 7706(e)''.
(3) Section 2(a)(1)(B) is amended--
(A) by striking ``section 152'' and inserting
``section 7706'', and
(B) by striking ``with respect to whom the taxpayer
is entitled to a deduction for the taxable year under
section 151'' and inserting ``whose TIN is included on
the taxpayer's return of tax for the taxable year''.
(4) Section 2(b)(1)(A)(i) is amended--
(A) in the matter preceding subclause (I)--
(i) by striking ``section 152(c)'' and
inserting ``section 7706(c)'', and
(ii) by striking ``section 152(e)'' and
inserting ``section 7706(e)'', and
(B) in subclause (II), by striking ``section
152(b)(2) or 152(b)(3)'' and inserting ``section
7706(b)(2) or 7706(b)(3)''.
(5) Section 2(b)(1)(A)(ii) is amended by striking ``if the
taxpayer is entitled to a deduction for the taxable year for
such person under section 151'' and inserting ``if the taxpayer
included such person's TIN on the return of tax for the taxable
year''.
(6) Section 2(b)(1)(B) is amended by striking ``if the
taxpayer is entitled to a deduction for the taxable year for
such father or mother under section 151'' and inserting ``if
such father or mother is a dependent of the taxpayer and the
taxpayer included such father or mother's TIN on the return of
tax for the taxable year''.
(7) Section 2(b)(3)(B) is amended--
(A) by striking ``section 152(d)(2)'' in clause (i)
and inserting ``section 7706(d)(2)'', and
(B) by striking ``section 152(d)'' in clause (ii) and
inserting ``section 7706(d)''.
(8) Section 21(b)(1)(A) is amended by striking ``section
152(a)(1)'' and inserting ``section 7706(a)(1)''.
(9) Section 21(b)(1)(B) is amended by striking ``section
152'' and inserting ``section 7706''.
(10) Section 21(e)(5)(A) is amended by striking ``section
152(e)'' and inserting ``section 7706(e)''.
(11) Section 21(e)(5) is amended by striking ``section
152(e)(4)(A)'' in the matter following subparagraph (B) and
inserting ``section 7706(e)(4)(A)''.
(12) Section 21(e)(6)(A) is amended to read as follows:
``(A) who is a dependent of either the taxpayer or
the taxpayer's spouse for the taxable year, or''.
(13) Section 21(e)(6)(B) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(14) Section 25A(f)(1)(A)(iii) is amended by striking ``with
respect to whom the taxpayer is allowed a deduction under
section 151''.
(15) Section 25A(g)(3) is amended by striking ``If a
deduction under section 151 with respect to an individual is
allowed to another taxpayer'' and inserting ``If an individual
is a dependent of another taxpayer''.
(16) Section 25B(c)(2)(A) is amended by striking ``any
individual with respect to whom a deduction under section 151
is allowed to another taxpayer'' and inserting ``any individual
who is a dependent of another taxpayer''.
(17) Section 25B(c)(2)(B) is amended by striking ``section
152(f)(2)'' and inserting ``section 7706(f)(2)''.
(18) Section 32(c)(1)(A)(ii)(III) is amended by striking ``a
dependent for whom a deduction is allowable under section 151
to another taxpayer'' and inserting ``a dependent of another
taxpayer''.
(19) Section 32(c)(3) is amended--
(A) in subparagraph (A)--
(i) by striking ``section 152(c)'' and
inserting ``section 7706(c)'', and
(ii) by striking ``section 152(e)'' and
inserting ``section 7706(e)'',
(B) in subparagraph (B), by striking ``unless the
taxpayer is entitled to a deduction under section 151
for such taxable year with respect to such individual
(or would be so entitled but for section 152(e)'' and
inserting ``if such individual is not treated as a
dependent of such taxpayer for such taxable year by
reason of section 7706(b)(2) (determined without regard
to section 7706(e))'', and
(C) in subparagraph (C), by striking ``section
152(c)(1)(B)'' and inserting ``section 7706(c)(1)(B)''.
(20) Section 35(d)(1)(B) is amended by striking ``with
respect to whom the taxpayer is entitled to a deduction under
section 151(c)'' and inserting ``if the taxpayer included such
person's TIN on the return of tax for the taxable year''.
(21) Section 35(d)(2) is amended--
(A) by striking ``section 152(e)'' and inserting
``section 7706(e)'', and
(B) by striking ``section 152(e)(4)(A)'' and
inserting ``section 7706(e)(4)(A)''.
(22) Section 36B(b)(2)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(23) Section 36B(b)(3)(B) is amended by striking ``unless a
deduction is allowed under section 151 for the taxable year
with respect to a dependent'' in the flush matter at the end
and inserting ``unless the taxpayer has a dependent for the
taxable year (and the taxpayer included such dependent's TIN on
the return of tax for the taxable year)''.
(24) Section 36B(c)(1)(D) is amended by striking ``with
respect to whom a deduction under section 151 is allowable to
another taxpayer'' and inserting ``who is a dependent of
another taxpayer''.
(25) Section 36B(d)(1) is amended by striking ``equal to the
number of individuals for whom the taxpayer is allowed a
deduction under section 151 (relating to allowance of deduction
for personal exemptions) for the taxable year'' and inserting
``the sum of 1 (2 in the case of a joint return) plus the
number of individuals who are dependents of the taxpayer for
the taxable year''.
(26) Section 36B(e)(1) is amended by striking ``1 or more
individuals for whom a taxpayer is allowed a deduction under
section 151 (relating to allowance of deduction for personal
exemptions) for the taxable year (including the taxpayer or his
spouse)'' and inserting ``1 or more of the taxpayer, the
taxpayer's spouse, or any dependent of the taxpayer''.
(27) Section 42(i)(3)(D)(ii)(I) is amended by striking
``section 152'' and inserting ``section 7706''.
(28) Section 45R(e)(1)(A)(iv) is amended--
(A) by striking ``section 152(d)(2)'' and inserting
``section 7706(d)(2)'', and
(B) by striking ``section 152(d)(2)(H)'' and
inserting ``section 7706(d)(2)(H)''.
(29) Section 51(i)(1) is amended--
(A) by striking ``section 152(d)(2)'' in
subparagraphs (A) and (B) and inserting ``section
7706(d)(2)'', and
(B) by striking ``section 152(d)(2)(H)'' in
subparagraph (C) and inserting ``section
7706(d)(2)(H)''.
(30) Section 56(b)(1)(D), as amended by the preceding
provisions of this Act, is amended--
(A) by striking ``, the deduction for personal
exemptions under section 151,'', and
(B) by striking ``and deduction for personal
exemptions'' in the heading thereof.
(31) Section 63(b) is amended by adding ``and'' at the end of
paragraph (1), by striking paragraph (2), and by redesignating
paragraph (3) as paragraph (2).
(32)(A) Section 63(c), as amended by section 121, is amended
by striking paragraph (3) and redesignating paragraphs (4),
(5), and (6) as paragraphs (3), (4), and (5), respectively.
(B) Section 1(g)(4)(A)(ii)(I) is amended by striking
``section 63(c)(5)(A)'' and inserting ``section 63(c)(4)(A)''.
(33) Section 63(c)(4), as redesignated, is amended--
(A) by striking ``with respect to whom a deduction
under section 151 is allowable to'' and inserting ``who
is a dependent of'', and
(B) by striking ``certain'' in the heading thereof.
(34) Section 63(d) is amended by adding ``and'' at the end of
paragraph (1), by striking paragraph (2), and by redesignating
paragraph (3) as paragraph (2).
(35) Section 63(f) is amended by striking all that precedes
paragraph (3) and inserting the following:
``(f) Additional Standard Deduction for the Aged and Blind.--
``(1) In general.--For purposes of subsection (c)(1), the
additional standard deduction is, with respect to a taxpayer
for a taxable year, the sum of--
``(A) $600 if the taxpayer has attained age 65 before
the close of such taxable year, and
``(B) $600 if the taxpayer is blind as of the close
of such taxable year.
``(2) Application to married individuals.--
``(A) Joint returns.--In the case of a joint return,
paragraph (1) shall be applied separately with respect
to each spouse.
``(B) Certain married individuals filing
separately.--In the case of a married individual filing
a separate return, if--
``(i) the spouse of such individual has no
gross income for the calendar year in which the
taxable year of such individual begins,
``(ii) such spouse is not the dependent of
another taxpayer for a taxable year beginning
in the calendar year in which such individual's
taxable year begins, and
``(iii) the TIN of such spouse is included on
such individual's return of tax for the taxable
year,
the additional standard deduction shall be determined
in the same manner as if such individual and such
individual's spouse filed a joint return.''.
(36) Section 63(f)(3) is amended by striking ``paragraphs (1)
and (2)'' and inserting ``subparagraphs (A) and (B) of
paragraph (1)''.
(37) Section 72(t)(2)(D)(i)(III) is amended by striking
``section 152'' and inserting ``section 7706''.
(38) Section 72(t)(7)(A)(iii) is amended by striking
``section 152(f)(1)'' and inserting ``section 7706(f)(1)''.
(39) Section 105(b) is amended--
(A) by striking ``as defined in section 152'' and
inserting ``as defined in section 7706'',
(B) by striking ``section 152(f)(1)'' and inserting
``section 7706(f)(1)'' and
(C) by striking ``section 152(e)'' and inserting
``section 7706(e)''.
(40) Section 105(c)(1) is amended by striking ``section 152''
and inserting ``section 7706''.
(41) Section 125(e)(1)(D) is amended by striking ``section
152'' and inserting ``section 7706''.
(42) Section 129(c)(1) is amended to read as follows:
``(1) who is a dependent of such employee or of such
employee's spouse, or''.
(43) Section 129(c)(2) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(44) Section 132(h)(2)(B) is amended--
(A) by striking ``section 152(f)(1)'' and inserting
``section 7706(f)(1)'', and
(B) by striking ``section 152(e)'' and inserting
``section 7706(e)''.
(45) Section 139D(c)(5) is amended by striking ``section
152'' and inserting ``section 7706''.
(46) Section 139E(c)(2) is amended by striking ``section
152'' and inserting ``section 7706''.
(47) Section 162(l)(1)(D) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(48) Section 170(g)(1) is amended by striking ``section 152''
and inserting ``section 7706''.
(49) Section 170(g)(3) is amended by striking ``section
152(d)(2)'' and inserting ``section 7706(d)(2)''.
(50) Section 172(d) is amended by striking paragraph (3).
(51) Section 213(a) is amended by striking ``section 152''
and inserting ``section 7706''.
(52) Section 213(d)(5) is amended by striking ``section
152(e)'' and inserting ``section 7706(e)''.
(53) Section 213(d)(11) is amended by striking ``section
152(d)(2)'' in the matter following subparagraph (B) and
inserting ``section 7706(d)(2)''.
(54) Section 220(b)(6) is amended by striking ``with respect
to whom a deduction under section 151 is allowable to'' and
inserting ``who is a dependent of''.
(55) Section 220(d)(2)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(56) Section 221(d)(4) is amended by striking ``section 152''
and inserting ``section 7706''.
(57) Section 222(c)(3) is amended by striking ``with respect
to whom a deduction under section 151 is allowable to'' and
inserting ``who is a dependent of''.
(58) Section 223(b)(6) is amended by striking ``with respect
to whom a deduction under section 151 is allowable to'' and
inserting ``who is a dependent of''.
(59) Section 223(d)(2)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(60) Section 401(h) is amended by striking ``section
152(f)(1)'' in the last sentence and inserting ``section
7706(f)(1)''.
(61) Section 402(l)(4)(D) is amended by striking ``section
152'' and inserting ``section 7706''.
(62) Section 409A(a)(2)(B)(ii)(I) is amended by striking
``section 152(a)'' and inserting ``section 7706(a)''.
(63) Section 441(f)(2)(B)(iii) is amended by striking ``, but
only the adjusted amount of the deductions for personal
exemptions as described in section 443(c)''.
(64) Section 443 is amended--
(A) in subsection (b)--
(i) by striking paragraph (3), and
(ii) by striking ``modified taxable income''
and inserting ``taxable income'' each place
such term appears,
(B) by striking subsection (c), and
(C) by redesignating subsections (d) and (e) as
subsections (c) and (d), respectively.
(65) Section 501(c)(9) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(66) Section 529(e)(2)(B) is amended by striking ``section
152(d)(2)'' and inserting ``section 7706(d)(2)''.
(67) Section 529A(e)(4) is amended--
(A) by striking ``section 152(d)(2)(B)'' and
inserting ``section 7706(d)(2)(B)'', and
(B) by striking ``section 152(f)(1)(B)'' and
inserting ``section 7706(f)(1)(B)''.
(68) Section 643(a)(2) is amended--
(A) by striking ``(relating to deduction for personal
exemptions)'' and inserting ``(relating to basic
deduction)'', and
(B) by striking ``Deduction for personal exemption''
in the heading thereof and inserting ``Basic
deduction''.
(69) Section 703(a)(2) is amended by striking subparagraph
(A) and by redesignating subparagraphs (B) through (F) as
subparagraphs (A) through (E), respectively.
(70) Section 874 is amended by striking subsection (b) and by
redesignating subsection (c) as subsection (b).
(71) Section 891 is amended by striking ``under section 151
and''.
(72) Section 904(b)(1) is amended to read as follows:
``(1) Deduction for estates and trusts.--For purposes of
subsection (a), the taxable income of an estate or trust shall
be computed without any deduction under section 642(b).''.
(73) Section 931(b)(1) is amended to read as follows:
``(1) any deduction from gross income, or''.
(74) Section 933 is amended--
(A) by striking ``as a deduction from his gross
income any deductions (other than the deduction under
section 151, relating to personal exemptions)'' in
paragraph (1) and inserting ``any deduction from gross
income'', and
(B) by striking ``as a deduction from his gross
income any deductions (other than the deduction for
personal exemptions under section 151)'' in paragraph
(2) and inserting ``any deduction from gross income''.
(75) Section 1212(b)(2)(B)(ii) is amended to read as follows:
``(ii) in the case of an estate or trust, the
deduction allowed for such year under section
642(b).''.
(76) Section 1361(c)(1)(C) is amended by striking ``section
152(f)(1)(C)'' and inserting ``section 7706(f)(1)(C)''.
(77) Section 1402(a) is amended by striking paragraph (7).
(78) Section 2032A(c)(7)(D) is amended by striking ``section
152(f)(2)'' and inserting ``section 7706(f)(2)''.
(79) Section 3402(m)(1) is amended by striking ``other than
the deductions referred to in section 151 and''.
(80) Section 3402(r)(2) is amended by striking ``the sum of--
'' and all that follows and inserting ``the basic standard
deduction (as defined in section 63(c)) for an individual to
whom section 63(c)(2)(C) applies.''.
(81) Section 5000A(b)(3)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(82) Section 5000A(c)(4)(A) is amended by striking ``the
number of individuals for whom the taxpayer is allowed a
deduction under section 151 (relating to allowance of deduction
for personal exemptions) for the taxable year'' and inserting
``the sum of 1 (2 in the case of a joint return) plus the
number of the taxpayer's dependents for the taxable year''.
(83) Section 6013(b)(3)(A) is amended--
(A) by striking ``had less than the exemption amount
of gross income'' in clause (ii) and inserting ``had no
gross income'',
(B) by striking ``had gross income of the exemption
amount or more'' in clause (iii) and inserting ``had
any gross income'', and
(C) by striking the flush language following clause
(iii).
(84) Section 6014(a) is amended by striking ``section
6012(a)(1)(C)(i)'' and inserting ``section
6012(a)(1)(B)(iii)''.
(85) Section 6014(b)(4) is amended by striking ``63(c)(5)''
and inserting ``63(c)(4)''.
(86) Section 6103(l)(21)(A)(iii) is amended to read as
follows:
``(iii) the number of the taxpayer's
dependents,''.
(87) Section 6213(g)(2)(H) is amended by striking ``section
21 (relating to expenses for household and dependent care
services necessary for gainful employment) or section 151
(relating to allowance of deductions for personal exemptions)''
and inserting ``subsection (a)(1)(B), (b)(1)(A)(ii), or
(b)(1)(B) of section 2 or section 21, 35(d)(1)(B),
36B(b)(3)(B), or 63(f)(2)(B)''.
(88) Section 6334(d) is amended--
(A) by amending paragraph (2) to read as follows:
``(2) Exempt amount.--
``(A) In general.--For purposes of paragraph (1), the
term `exempt amount' means an amount equal to--
``(i) the sum of the amount determined under
subparagraph (B) and the standard deduction,
divided by
``(ii) 52.
``(B) Amount determined.--For purposes of
subparagraph (A), the amount determined under this
subparagraph is--
``(i) the dollar amount in effect under
section 7706(d)(1)(B), multiplied by
``(ii) the number of the taxpayer's
dependents for the taxable year in which the
levy occurs.
``(C) Verified statement.--Unless the taxpayer
submits to the Secretary a written and properly
verified statement specifying the facts necessary to
determine the proper amount under subparagraph (A),
subparagraph (A) shall be applied as if the taxpayer
were a married individual filing a separate return with
no dependents.'', and
(B) by striking paragraph (4).
(89) Section 7702B(f)(2)(C)(iii) is amended by striking
``section 152(d)(2)'' and inserting ``section 7706(d)(2)''.
(90) Section 7703(a) is amended by striking ``part V of
subchapter B of chapter 1 and''.
(91) Section 7703(b)(1) is amended by striking ``section
152(f)(1))'' and all that follows and inserting ``section
7706(f)(1)) who is a dependent of such individual for the
taxable year (or would be but for section 7706(e)),''.
(92) Section 7706(a), as redesignated by this section, is
amended by striking ``this subtitle'' and inserting ``subtitle
A''.
(93)(A) Section 7706(d)(1)(B), as redesignated by this
section, is amended by striking ``the exemption amount (as
defined in section 151(d))'' and inserting ``$4,150''.
(B) Section 7706(d), as redesignated by this section, is
amended by adding at the end the following new paragraph:
``(6) Inflation adjustment.--In the case of any taxable year
beginning in a calendar year beginning after 2018, the $4,150
amount in paragraph (1)(B) shall be increased by an amount
equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(c)(2)(A) for the calendar year in which such
taxable year begins, determined by substituting
`calendar year 2017' for `calendar year 2016' in clause
(ii) thereof.
If any increase determined under the preceding sentence is not
a multiple of $50, such increase shall be rounded to the next
lowest multiple of $50.''.
(94) Section 7706(e)(3), as redesignated by this section, is
amended by inserting ``(as in effect before its repeal)'' after
``section 151''.
(95) Section 7706(f)(6)(B), as redesignated by this section,
is amended by striking clause (i) and designating clauses (ii),
(iii), and (iv) as clauses (i), (ii), and (iii), respectively.
(96) The table of parts for subchapter B of chapter 1 is
amended by striking the item relating to part V.
(97) The table of sections for chapter 79 is amended by
adding at the end the following new item:
``Sec. 7706. Dependent defined.''.
(g) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 142. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES.
(a) In General.--Section 164(b)(6) is amended by striking all that
precedes ``The preceding sentence'' and inserting the following:
``(6) Limitation on individual deductions.--In the case of an
individual--
``(A) no deduction shall be allowed under this
chapter for foreign real property taxes paid or accrued
during the taxable year, and
``(B) the aggregate amount of the deduction allowed
under this chapter for taxes described in paragraphs
(1), (2), and (3) of subsection (a) and paragraph (5)
of this subsection paid or accrued by the taxpayer
during the taxable year shall not exceed $10,000
($5,000 in the case of a married individual filing a
separate return).''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 143. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.
(a) Interest on Home Equity Indebtedness.--Section 163(h)(3)(A) is
amended by striking ``during the taxable year on'' and all that follows
through ``residence of the taxpayer.'' and inserting ``during the
taxable year on acquisition indebtedness with respect to any qualified
residence of the taxpayer.''.
(b) Limitation on Acquisition Indebtedness.--Section 163(h)(3)(B)(ii)
is amended to read as follows:
``(ii) Limitation.--The aggregate amount
treated as acquisition indebtedness for any
period shall not exceed the excess (if any)
of--
``(I) $750,00 ($375,000, in the case
of a married individual filing a
separate return), over
``(II) the sum of the aggregate
outstanding pre-October 13, 1987,
indebtedness (as defined in
subparagraph (D)) plus the aggregate
outstanding pre-December 15, 2017,
indebtedness (as defined in
subparagraph (C)).''.
(c) Treatment of Indebtedness Incurred on or Before December 15,
2017.--Section 163(h)(3)(C) is amended to read as follows:
``(C) Treatment of indebtedness incurred on or before
december 15, 2017.--
``(i) In general.--In the case of any pre-
December 15, 2017, indebtedness, subparagraph
(B)(ii) shall not apply and the aggregate
amount of such indebtedness treated as
acquisition indebtedness for any period shall
not exceed the excess (if any) of--
``(I) $1,000,000 ($500,000, in the
case of a married individual filing a
separate return), over
``(II) the aggregate outstanding pre-
October 13, 1987, indebtedness (as
defined in subparagraph (D)).
``(ii) Pre-december 15, 2017, indebtedness.--
For purposes of this subparagraph--
``(I) In general.--The term `pre-
December 15, 2017, indebtedness' means
indebtedness (other than pre-October
13, 1987, indebtedness) incurred on or
before December 15, 2017.
``(II) Binding written contract
exception.--In the case of a taxpayer
who enters into a written binding
contract before December 15, 2017, to
close on the purchase of a principal
residence before January 1, 2018, and
who purchases such residence before
April 1, 2018, the term `pre-December
15, 2017, indebtedness' shall include
indebtedness secured by such residence.
``(iii) Refinancing indebtedness.--
``(I) In general.--In the case of any
indebtedness which is incurred to
refinance indebtedness, such refinanced
indebtedness shall be treated for
purposes of this subparagraph as
incurred on the date that the original
indebtedness was incurred to the extent
the amount of the indebtedness
resulting from such refinancing does
not exceed the amount of the refinanced
indebtedness.
``(II) Limitation on period of
refinancing.--Subclause (I) shall not
apply to any indebtedness after the
expiration of the term of the original
indebtedness or, if the principal of
such original indebtedness is not
amortized over its term, the expiration
of the term of the 1st refinancing of
such indebtedness (or if earlier, the
date which is 30 years after the date
of such 1st refinancing).''.
(d) Coordination With Treatment of Indebtedness Incurred on or Before
October 13, 1987.--Section 163(h)(3)(D) is amended--
(1) by striking clause (ii) and redesignating clauses (iii)
and (iv) as clauses (ii) and (iii), respectively, and
(2) in clause (iii) (as so redesignated)--
(A) by striking ``clause (iii)'' in the matter
preceding subclause (I) and inserting ``clause (ii)'',
and
(B) by striking ``clause (iii)(I)'' in subclauses (I)
and (II) and inserting ``clause (ii)(I)''.
(e) Coordination With Exclusion of Income From Discharge of
Indebtedness.--Section 108(h)(2) is amended by striking ``$1,000,000
($500,000'' and inserting ``$750,000 ($375,000''.
(f) Conforming Amendment.--Section 163(h)(3) is amended by striking
subparagraph (F).
(g) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 144. MODIFICATION OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.
(a) In General.--Section 165(h)(5)(A) is amended by striking ``in a
taxable year beginning after December 31, 2017, and before January 1,
2026,''.
(b) Conforming Amendments.--
(1) Section 165(h)(5)(B) is amended by striking ``for any
taxable year to which subparagraph (A) applies''.
(2) Section 165(h)(5) is amended by striking ``for taxable
years 2018 through 2025'' in the heading thereof and inserting
``to losses attributable to federally declared disasters''.
(c) Effective Date.--The amendments made by this section shall apply
to losses sustained in taxable years beginning after December 31, 2017.
SEC. 145. TERMINATION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.
(a) In General.--Section 67 is amended--
(1) by amending subsection (a) to read as follows:
``(a) In General.--In the case of an individual, miscellaneous
itemized deductions shall not be allowed.'', and
(2) by striking subsection (g).
(b) Movement of Definition of Adjusted Gross Income for Estates and
Trusts.--
(1) Section 67 is amended by striking subsection (e).
(2) Section 641 is amended by adding at the end the following
new subsection:
``(d) Computation of Adjusted Gross Income.--For purposes of this
title, the adjusted gross income of an estate or trust shall be
computed in the same manner as in the case of an individual, except
that--
``(1) the deductions for costs which are paid or incurred in
connection with the administration of the estate or trust and
which would not have been incurred if the property were not
held in such trust or estate, and
``(2) the deductions allowable under sections 642(b), 651,
and 661,
shall be treated as allowable in arriving at adjusted gross income.''.
(c) Conforming Amendments.--
(1) Section 56(b)(1)(A) is amended to read as follows:
``(A) Certain taxes.--No deduction (other than a
deduction allowable in computing adjusted gross income)
shall be allowed for any taxes described in paragraph
(1), (2), or (3) of section 164(a) or clause (ii) of
section 164(b)(5)(A).''.
(2) Section 56(b)(1)(C), as amended by the preceding
provisions of this Act, is amended by striking ``subparagraph
(A)(ii)'' and inserting ``subparagraph (A)''.
(3) Section 62(a) is amended by striking ``subtitle'' in the
matter preceding paragraph (1) and inserting ``title''.
(4) Section 641(c)(2)(E) is amended to read as follows:
``(E) Section 642(c) shall not apply.''.
(5) Section 1411(a)(2) is amended by striking ``(as defined
in section 67(e))''.
(6) Section 6654(d)(1)(C) is amended by striking clause
(iii).
(7) Section 67 is amended in the heading, by striking ``2-
percent floor on'' and inserting ``denial of''.
(8) The table of sections for part 1 of subchapter B of
chapter 1 is amended by striking the item relating to section
67 and inserting the following new item:
``Sec. 67. Denial of miscellaneous itemized deductions.''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 146. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
(a) In General.--Part 1 of subchapter B of chapter 1 is amended by
striking section 68 (and the item relating to such section in the table
of sections for such part).
(b) Conforming Amendments.--
(1) Section 1(f)(7)(A), as amended by sections 121 and 141,
is amended by striking ``or section 68(b)(2)''.
(2) Section 56(b)(1), as amended by the preceding provisions
of this Act, is amended by striking subparagraph (E).
(3) Section 164(b)(5)(H)(ii)(III) is amended by striking
``(as determined under section 68(b))''.
(4) Section 164(b)(5)(H) is amended by adding at the end the
following new clause:
``(iii) Applicable amount defined.--For
purposes of clause (ii), the term `applicable
amount' means--
``(I) $300,000 in the case of a joint
return or a surviving spouse,
``(II) $275,000 in the case of a head
of household,
``(III) $250,000 in the case of an
individual who is not married and who
is not a surviving spouse or head of
household, and
``(IV) \1/2\ the amount applicable
under subclause (I) in the case of a
married individual filing a separate
return.
For purposes of this paragraph, marital status
shall be determined under section 7703. In the
case of any taxable year beginning in calendar
years after 2017, each of the dollar amounts in
this clause shall be increased by an amount
equal to such dollar amount, multiplied by the
cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `2012' for `2016' in subparagraph
(A)(ii) thereof. If any amount after adjustment
under the preceding sentence is not a multiple
of $50, such amount shall be rounded to the
next lowest multiple of $50.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 147. TERMINATION OF EXCLUSION FOR QUALIFIED BICYCLE COMMUTING
REIMBURSEMENT.
(a) In General.--Section 132(f)(1) is amended by striking
subparagraph (D).
(b) Conforming Amendments.--
(1) Section 132(f)(2) is amended by adding ``and'' at the end
of subparagraph (A), striking ``, and'' at the end of
subparagraph (B) and inserting a period, and striking
subparagraph (C).
(2) Section 132(f)(4) is amended by striking ``(other than a
qualified bicycle commuting reimbursement)''.
(3) Section 132(f) is amended by striking paragraph (8).
(4) Section 274(l)(2) is amended by striking ``after December
31, 2017, and before January 1, 2026''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 148. QUALIFIED MOVING EXPENSE REIMBURSEMENT EXCLUSION LIMITED TO
MEMBERS OF ARMED FORCES.
(a) In General.--Section 132(g) is amended--
(1) by striking ``by an individual'' in paragraph (1) and
inserting ``by a qualified military individual'', and
(2) by striking paragraph (2) and inserting the following new
paragraph:
``(2) Qualified military individual.--For purposes of this
subsection, the term `qualified military individual' means a
member of the Armed Forces of the United States on active duty
who moves pursuant to a military order and incident to a
permanent change of station.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 149. DEDUCTION FOR MOVING EXPENSES LIMITED TO MEMBERS OF ARMED
FORCES.
(a) In General.--Section 217 is amended--
(1) by amending subsection (a) to read as follows:
``(a) Deduction Allowed.--There shall be allowed as a deduction
moving expenses paid or incurred during the taxable year by a member of
the Armed Forces of the United States on active duty who moves pursuant
to a military order and incident to a permanent change of station.'',
(2) by striking subsections (c), (d), (f), and (g) and
redesignating subsections (h), (i), (j), and (k) as subsections
(c), (d), (f) and (g), respectively, and
(3) by inserting after subsection (d), as so redesignated,
the following new subsection:
``(e) Expenses Furnished in Kind.--Any moving and storage expenses
which are furnished in kind (or for which reimbursement or an allowance
is provided, but only to the extent of the expenses paid or incurred)--
``(1) to such member, his spouse, or his dependents, shall
not be includible in gross income, and no reporting with
respect to such expenses shall be required by the Secretary of
Defense or the Secretary of Transportation, as the case may be,
and
``(2) to such member's spouse and his dependents with regard
to moving to a location other than the one to which such member
moves (or from a location other than the one from which such
member moves), this section shall apply with respect to the
moving expenses of his spouse and dependents as if his spouse
commenced work as an employee at a new principal place of work
at such location.''.
(b) Conforming Amendments.--
(1) Subsections (d)(3)(C) and (e) of section 23 are each
amended by striking ``section 217(h)(3)'' and inserting
``section 217(c)(3)''.
(2) Section 7872(f) is amended by striking paragraph (11).
(3) Section 217 is amended in the heading by striking
``moving expenses'' and inserting ``certain moving expenses of
members of armed forces''.
(4) The table of sections for part VII of subchapter B of
chapter 1 is amended by striking the item relating to section
217 and inserting the following new item:
``Sec. 217. Certain moving expenses of members of Armed Forces.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 150. LIMITATION ON WAGERING LOSSES.
(a) In General.--Section 165(d) is amended by striking ``in the case
of taxable years beginning after December 31, 2017, and before January
1, 2026,''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle F--Increase in Estate and Gift Tax Exemption
SEC. 151. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.
(a) In General.--Section 2010(c)(3) is amended in subparagraph (A),
by striking ``$5,000,000'' and inserting ``$10,000,000''.
(b) Conforming Amendments.--
(1) Section 2001(g) is amended to read as follows:
``(g) Modifications to Gift Tax Payable to Reflect Different Tax
Rates.--For purposes of applying subsection (b)(2) with respect to 1 or
more gifts, the rates of tax under subsection (c) in effect at the
decedent's death shall, in lieu of the rates of tax in effect at the
time of such gifts, be used both to compute--
``(1) the tax imposed by chapter 12 with respect to such
gifts, and
``(2) the credit allowed against such tax under section 2505,
including in computing--
``(A) the applicable credit amount under section
2505(a)(1), and
``(B) the sum of the amounts allowed as a credit for
all preceding periods under section 2505(a)(2).''.
(2) Section 2010(c)(3) is amended by striking subparagraph
(C).
(c) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying and gifts made after December 31, 2017.
TITLE II--INCREASED EXEMPTION FOR ALTERNATIVE MINIMUM TAX MADE
PERMANENT
SEC. 201. INCREASED EXEMPTION FOR INDIVIDUALS.
(a) In General.--Section 55(d)(1) is amended--
(1) by striking ``$78,750'' in subparagraph (A) and inserting
``$109,400'', and
(2) by striking ``$50,600'' in subparagraph (B) and inserting
``$70,300''.
(b) Phase-out of Exemption Amount.--Section 55(d)(2) is amended--
(1) by striking ``$150,000'' in subparagraph (A) and
inserting ``$1,000,000'', and
(2) by striking subparagraphs (B) and (C) and by inserting
the following new subparagraphs:
``(B) 50 percent of the dollar amount applicable
under subparagraph (A) in the case of a taxpayer
described in paragraph (1)(B) or (1)(C), and
``(C) $75,000 in the case of a taxpayer described in
paragraph (1)(D).'',
(c) Inflation Adjustment.--Section 55(d)(3) is amended to read as
follows:
``(3) Inflation adjustment.--In the case of any taxable year
beginning in a calendar year after 2018, each dollar amount
described in clause (i) or (ii) of subparagraph (B) shall be
increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the
taxable year begins, determined by substituting--
``(i) in the case of a dollar amount
contained in paragraph (1)(D) or (2)(C) or in
subsection (b)(1)(A), `calendar year 2011' for
`calendar year 2016' in subparagraph (A)(ii)
thereof, and
``(ii) in the case of a dollar amount
contained in paragraph (1)(A), (1)(B), or
(2)(A), `calendar year 2017' for `calendar year
2016' in subparagraph (A)(ii) thereof.
Any increased amount determined under this paragraph shall be
rounded to the nearest multiple of $100 ($50 in the case of the
dollar amount contained in paragraph (2)(C)).''.
(d) Conforming Amendment.--Section 55(d) is amended by striking
paragraph (4).
(e) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 6760, as reported by the Committee on Ways and Means,
makes permanent the comprehensive reforms to the Internal
Revenue Code of 1986 to provide tax relief and simplification
to American families, individuals, and small businesses that
were enacted on a temporary basis by subtitles A and B of the
Tax Cuts and Jobs Act (Public Law 115-97).
B. Background and Need for Legislation
H.R. 6760 furthers the goals of the Tax Cuts and Jobs Act
(Public Law 115-97) in comprehensively reforming the tax code
to reduce tax burdens and encourage growth and job creation.
Making permanent these important reforms that lower the tax
burden on the middle class and create a healthier economy will
promote stability, certainty, and growth.
C. Legislative History
Background
H.R. 6760 was introduced on September 10, 2018, and was
referred to the Committee on Ways and Means.
Committee action
The Ways and Means Committee and the Subcommittee on Tax
Policy have held extensive hearings over many years focused on
the benefits of tax reform and permanent tax policy, including
hearings during the 115th Congress that addressed the
particular aspects of tax reform that are made permanent by
H.R. 6760:
Tax Reform and Small Business: Growing Our
Economy and Creating Jobs (May 23, 2018)
Growing Our Economy and Creating Jobs (May
16, 2018)
How Tax Reform Will Help America's Small
Businesses Grow and Create New Jobs (July 13, 2017)
How Tax Reform Will Simplify Our Broken Tax
Code and Help Individuals and Families (July 19, 2017)
How Tax Reform Will Grow our Economy and
Create Jobs (May 18, 2017)
The President's Fiscal Year 2018 Budget
Proposals (May 24, 2017)
II. EXPLANATION OF THE BILL
PRESENT LAW
On December 22, 2017, Public Law 115-97\1\ (referred to
herein as the Tax Cuts and Jobs Act or the TCJA) was enacted
into law. The TCJA made numerous changes to the income tax
system, many of which expire for taxable years beginning after
December 31, 2025. These temporary provisions include the
following:
---------------------------------------------------------------------------
\1\31 Stat. 2054.
---------------------------------------------------------------------------
1. The TCJA modifies the tax rates and tax bracket
breakpoints in order to provide tax relief to
individuals and pass-through businesses.\2\ For taxable
years beginning after December 31, 2025, the tax rates
and brackets revert to their inflation-adjusted levels
based on the law as in existence in 2017.\3\
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\2\Sec. 11001 of the TCJA and sec. 1 of the Internal Revenue code
of 1986, as amended (the ``Code'').
\3\Because the TCJA modified the method used to index dollar
amounts in the Code, switching the measurement of inflation from the
Consumer Price Index (``CPI'') to the Chained Consumer Price Index
(``C-CPI-U'') the C-CPI-U, and because this switch does not expire, the
actual tax bracket breakpoints are projected to be lower in 2026 than
they would have been had the TCJA not been enacted.
---------------------------------------------------------------------------
2. The TCJA modifies the tax on unearned income of a
minor child (known as the ``kiddie tax'') such that the
tax is generally imposed using the tax brackets
applicable to trusts and estates, rather than with
reference to the child's parents' tax situation.\4\
---------------------------------------------------------------------------
\4\Sec. 11001 of the TCJA and sec. 1 of the Code.
---------------------------------------------------------------------------
3. The TCJA creates a deduction for qualified
business income, generally equaling up to 20-percent of
non-wage income for qualified individuals.\5\
---------------------------------------------------------------------------
\5\Sec. 11011 of the TCJA and new sec. 199A of the Code. Note that
the treatment of income relating to cooperatives under section 199A (as
originally enacted on December 22, 2017) was modified by the
Consolidated Appropriations Act, 2018, Pub. L. No. 115-141, enacted on
March 23, 2018. For a description of the modification, see Joint
Committee on Taxation, Technical Explanation of the Revenue Provisions
of the House Amendment to the Senate Amendment to H.R. 1625 (Rules
Committee Print 115-66), JCX-6-18, March 22, 2018, pp. 5-27.
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4. The TCJA limits the deduction for business losses
to $500,000 for joint filers and $250,000 for other
individuals.\6\
---------------------------------------------------------------------------
\6\Sec. 11012 of the TCJA and sec. 461 of the Code.
---------------------------------------------------------------------------
5. The TCJA increases the standard deduction to
$24,000 for married taxpayers filing jointly and
surviving spouses, $18,000 for heads of household, and
$12,000 for all other taxpayers.\7\ These amounts are
indexed for inflation. For taxable years beginning
after December 31, 2025, the standard deduction reverts
to its inflation-adjusted 2017 levels.
---------------------------------------------------------------------------
\7\Sec. 11021 of the TCJA and sec. 63 of the Code.
---------------------------------------------------------------------------
6. The TCJA increases the child tax credit from
$1,000 to $2,000, and increases the phaseout thresholds
to $400,000 for married couples filing a joint return
($200,000 for all other taxpayers).\8\ Additionally,
the TCJA provides for a $500 non-refundable credit for
non-child dependents. The refundable child tax credit
is modified by lowering the earned income threshold
from $3,000 to $2,500, and increasing the maximum value
of the refundable credit to $1,400 (indexed). Finally,
the TCJA modifies the identification requirements
applicable to a child on whose behalf the credit is
claimed, requiring that the child's taxpayer
identification number be a Social Security number
issued by the due date of the return in order to
qualify for the $2,000 credit.
---------------------------------------------------------------------------
\8\Sec. 11022 of the TCJA and sec. 24 of the Code.
---------------------------------------------------------------------------
7. The TCJA increases the charitable contribution
percentage limit from 50 percent to 60 percent of the
contribution base (generally, adjusted gross income)
for contributions of cash to organizations described in
section 170(b)(1)(A) (generally, public charities and
certain private foundations that are not nonoperating
private foundations).\9\
---------------------------------------------------------------------------
\9\Sec. 11023 of the TCJA and sec. 170(b)(1)(G) of the Code.
---------------------------------------------------------------------------
8. The TCJA allows ABLE account owners to make
contributions of earned income, but not in excess of
the Federal poverty line, to their ABLE accounts, in
addition to the limitations imposed on other
contributions made to such accounts.\10\ Additionally
the TCJA allows individuals who make such contributions
to be eligible for the saver's credit. These
modifications do not apply for contributions made to
ABLE accounts after December 31, 2025.
---------------------------------------------------------------------------
\10\Sec. 11024 of the TCJA and sec. 529A of the Code.
---------------------------------------------------------------------------
9. The TCJA allows amounts in qualified tuition
programs (known as 529 accounts) to be rolled over into
ABLE accounts, subject to the overall contribution
limits on ABLE accounts.\11\ This provision does not
apply to rollovers made after December 31, 2025.
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\11\Sec. 11025 of the TCJA and secs. 529 and 529A of the Code.
---------------------------------------------------------------------------
10. The TCJA grants combat zone tax benefits to those
members of the Armed Forces serving in the Sinai
Peninsula of Egypt.\12\
---------------------------------------------------------------------------
\12\Sec. 11026 of the TCJA, affecting various Code sections.
---------------------------------------------------------------------------
11. The TCJA reduces the threshold above which
unreimbursed medical expenses may be deducted from 10
percent to 7.5 percent of adjusted gross income
(``AGI'') for taxable years beginning after December
31, 2016 and ending before January 1, 2019.\13\
---------------------------------------------------------------------------
\13\Sec. 11027 of the TCJA and sec. 213 of the Code.
---------------------------------------------------------------------------
12. The TCJA provides that certain student loans that
are discharged on account of the death or disability of
the borrower are excluded from gross income.\14\ This
exclusion does not apply for student loans discharged
after December 31, 2025.
---------------------------------------------------------------------------
\14\Sec. 11031 of the TCJA and sec. 108 of the Code.
---------------------------------------------------------------------------
13. The TCJA reduces the amount of the personal
exemption deduction to zero.\15\ For taxable years
beginning after December 31, 2025, the personal
exemption deduction reverts to its inflation-adjusted
2017 level.
---------------------------------------------------------------------------
\15\Sec. 11041 of the TCJA and sec. 151 of the Code.
---------------------------------------------------------------------------
14. The TCJA limits the itemized deduction for State
and local property taxes (other than paid or accrued in
carrying on a trade or business, or an activity
described in section 212) and State and local income,
war profits, and excess profits taxes (or sales taxes
in lieu of income taxes) to $10,000 for all taxpayers
other than married taxpayers filing separate returns,
for whom the limit is $5,000.\16\ The TCJA also repeals
the deduction for foreign real property taxes (other
than paid or accrued in carrying on a trade or
business, or an activity described in section 212).
---------------------------------------------------------------------------
\16\Sec. 11042 of the TCJA and sec. 164 of the Code.
---------------------------------------------------------------------------
15. The TCJA reduces the $1 million limitation of
acquisition indebtedness with respect to which interest
is deductible to $750,000 ($375,000 in the case of
married taxpayers filing a separate return) in the case
of acquisition indebtedness incurred on or after
December 15, 2017.\17\ Additionally, under the TCJA,
home equity interest is not deductible.
---------------------------------------------------------------------------
\17\Sec. 11043 of the TCJA and sec. 163 of the Code.
---------------------------------------------------------------------------
16. The TCJA suspends the deduction for a personal
casualty loss, or for theft, unless such casualty loss
or theft is attributable to a disaster declared by the
President under section 401 of the Robert T. Stafford
Disaster Relief and Emergency Assistance Act.\18\
---------------------------------------------------------------------------
\18\Sec. 11044 of the TCJA and sec. 165 of the Code.
---------------------------------------------------------------------------
17. The TCJA suspends the deduction for miscellaneous
itemized deductions.\19\
---------------------------------------------------------------------------
\19\Sec. 11045 of the TCJA and sec. 67 of the Code.
---------------------------------------------------------------------------
18. The TCJA suspends the overall limitation on
itemized deductions (commonly referred to as the
``Pease limitation'').\20\
---------------------------------------------------------------------------
\20\Sec. 11046 of the TCJA and sec. 68 of the Code.
---------------------------------------------------------------------------
19. The TCJA suspends the exclusion from gross income
and wages for qualified bicycle commuting
reimbursements.\21\
---------------------------------------------------------------------------
\21\Sec. 11047 of the TCJA and sec. 132(f) of the Code.
---------------------------------------------------------------------------
20. The TCJA suspends the exclusion from gross income
and wages for qualified moving expense reimbursements
for all taxpayers other than members of the Armed
Forces of the United States on active duty who move
pursuant to a military order and incident to a
permanent change of station.\22\
---------------------------------------------------------------------------
\22\Sec. 11048 of the TCJA and sec. 132(g) of the Code.
---------------------------------------------------------------------------
21. The TCJA suspends the above-the-line deduction
for moving expenses incurred in connection with the
relocation of a taxpayer for a new principal place of
work for all taxpayers other than members of the Armed
Forces of the United States on active duty who move
pursuant to a military order and incident to a
permanent change of station.\23\
---------------------------------------------------------------------------
\23\Sec. 11049 of the TCJA and sec. 217 of the Code.
---------------------------------------------------------------------------
22. The TCJA provides that wagering losses, and the
limitations applicable to those losses, include
expenses incurred in connection with the conduct of
such individual's gambling activity (and not only the
actual costs of the wagers incurred by such
individual).\24\
---------------------------------------------------------------------------
\24\Sec. 11050 of the TCJA and sec. 165(d) of the Code.
---------------------------------------------------------------------------
23. The TCJA doubles the estate and gift tax
exemption amounts, such that for 2018 the exemption
amount is $11.2 million per individual.\25\ For estates
of decedents dying and gifts made after December 31,
2025, the exemption amount reverts to its inflation-
adjusted 2017 amount.
---------------------------------------------------------------------------
\25\Sec. 11061 of the TCJA and sec. 2010 of the Code.
---------------------------------------------------------------------------
24. The TCJA increases the alternative minimum tax
exemption amount to $109,400 for joint returns and
surviving spouses (half this amount for married
taxpayers filing a separate return) and $70,300 for all
other taxpayers (other than trusts and estates).
Additionally the phaseout thresholds for the exemption
amount are increased to $1,000,000 for married
taxpayers filing a joint return and $500,000 for all
other taxpayers (other than trusts and estates).\26\
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\26\Sec. 12001 of the TCJA and sec. 55 of the Code.
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REASONS FOR CHANGE
The Committee believes that the tax relief provided by the
Tax Cuts and Jobs Act has spurred economic growth and created
jobs. The Committee believes it is appropriate to permanently
extend the individual and pass-through business provisions that
were temporary in the TCJA, in order to provide certainty to
individuals, families, and small businesses and continue to
drive economic growth and job creation.
EXPLANATION OF PROVISION
For the above-described provisions that expire after
December 31, 2025, the provision repeals the expiration date,
thereby fully and permanently integrating the policy enacted by
the Tax Cuts and Jobs Act into the tax code.
The provision extends the reduction of the threshold above
which unreimbursed medical expenses may be deducted, so that
this reduction in the threshold from 10 percent to 7.5 percent
of AGI applies to taxable years beginning after December 31,
2016 and ending before January 1, 2021.
Other modifications contained in the provision
The provision makes other modifications to certain
provisions relating to the TCJA.
Modification to capital gains bracket breakpoints
The provision modifies the breakpoints between the zero and
15-percent rate on long-term capital gains and qualified
dividends, conforming the breakpoints to the maximum ordinary
income amounts taxed at rates below the 22-percent bracket
breakpoint on ordinary income. This modification assures that
taxpayers cannot have long-term capital gains income taxed at a
higher rate of tax than ordinary income would be taxed. The
capital gains breakpoints applicable to trusts and estates are
not modified under this provision.
Modification of return requirement
The provision modifies the tax filing requirement so that a
married taxpayer does not need to file an income tax return if
the combined gross income of the taxpayer (individual and
spouse) is less than the applicable standard deduction, even if
the individual and spouse do not have the same household as
their home at the close of the taxable year.\27\
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\27\Sec. 6012(a)(1)(A)(iv) of the Code.
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Modification to section 15
Section 15 provides a rule for the computation of tax in
the event of a tax rate change (or a repeal of a tax) for a
taxable year beginning on a date other than the first date of a
taxpayer's taxable year. This provision does not apply to
changes due to individual inflation adjustments or to changes
in the individual tax rates made by the various tax Acts
enacted in recent years. The provision modifies section 15 to
apply only to changes in corporate tax rates.
Technical and clerical modifications contained in the provision
Modification of rules related to rounding of income tax
brackets
The provision modifies the rounding rule applicable to the
income tax brackets applicable to heads of household, so as to
conform those rules to those that apply to the tax brackets
applicable to unmarried individuals (other than heads of
household or surviving spouses). Under the provision the income
tax brackets for heads of household, unmarried individuals, and
married individuals filing separately all round to the next
lowest multiple of $25.
ITIN requirement for non-child dependents
The provision clarifies that a taxpayer identification
number is necessary with respect to any non-child dependent for
whom the $500 non-refundable credit is claimed. The taxpayer
identification number may be either a Social Security number or
an individual taxpayer identification number.
Gross income requirement for non-child dependent
The provision makes a technical change to provide that, as
under 2017 law, an individual other than a child may qualify as
a dependent of another taxpayer if such individual has gross
income not in excess of $4,150. This amount is indexed for
inflation.
Increased limitation for certain charitable contributions
The provision provides that the 60-percent limit for cash
contributions is applied after (and reduced by) the amount of
noncash contributions to organizations described in section
170(b)(1)(A). For example, assume an individual with a
contribution base of $100,000 for the taxable year makes a
contribution of unappreciated property with a fair market value
of $50,000 and a contribution of $10,000 cash to a qualified
public charity. Under the provision, the cash contribution
limit is determined after accounting for noncash contributions.
Thus, in the above example, the $50,000 contribution of
unappreciated property is accounted for first, using up the
entire 50-percent contribution limit described in section
170(b)(1)(A), but leaving $10,000 in allowable cash
contributions under the 60-percent limit.
Limitation on deduction for State and local, etc. taxes
The provision makes a technical change to clarify that the
$10,000 limitation on the itemized deduction for State and
local property taxes (other than paid or accrued in carrying on
a trade or business, or an activity described in section 212)
and State and local income, war profits and excess profits
taxes (or sales taxes in lieu of income taxes) applies with
respect to all such State and local taxes otherwise deducible
under chapter 1 of the Internal Revenue Code.
EFFECTIVE DATE
The provision is generally effective for taxable years
beginning after December 31, 2017.
III. VOTES OF THE COMMITTEE
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on the amendment offered by Mr. Pascrell to the
amendment in the nature of a substitute to H.R. 6760, which
would expand the itemized deduction for state and local taxes
and increase the corporate tax rate, was not agreed to by a
roll call vote of 15 yeas to 21 nays (with a quorum being
present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Reichert................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Blumenauer... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Kind......... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Crowley...... X ........ .........
Ms. Black...................... ........ X ......... Mr. Davis........ X ........ .........
Mr. Reed....................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Kelly...................... ........ X ......... Mr. Higgins...... ........ ........ .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... X ........ .........
Ms. Noem....................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... X ........ .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
Mr. LaHood..................... ........ X .........
Mr. Wenstrup................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on the amendment offered by Mr. Neal to the
amendment in the nature of a substitute to H.R. 6760, which
would expand several individual tax credits and increase the
top individual tax rate, was not agreed to by a roll call vote
of 15 yeas to 21 nays (with a quorum being present). The vote
was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Reichert................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Blumenauer... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Kind......... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Crowley...... X ........ .........
Ms. Black...................... ........ X ......... Mr. Davis........ X ........ .........
Mr. Reed....................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Kelly...................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... ........ ........ .........
Ms. Noem....................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... X ........ .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
Mr. LaHood..................... ........ X .........
Mr. Wenstrup................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on the amendment offered by Mr. Thompson to the
amendment in the nature of a substitute to H.R. 6760, which
would expand the itemized deduction for casualty losses,
include permanent provisions related to federally-declared
disasters, and increase the corporate tax rate, was not agreed
to by a roll call vote of 15 yeas to 21 nays (with a quorum
being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Reichert................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Blumenauer... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Kind......... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Crowley...... X ........ .........
Ms. Black...................... ........ X ......... Mr. Davis........ X ........ .........
Mr. Reed....................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Kelly...................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... ........ ........ .........
Ms. Noem....................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... X ........ .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
Mr. LaHood..................... ........ X .........
Mr. Wenstrup................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on the amendment offered by Ms. Sanchez to the
amendment in the nature of a substitute to H.R. 6760, which
would make the 7.5 percent of adjusted gross income floor on
the deduction for certain medical expenses permanent and
increase the corporate tax rate, was not agreed to by a roll
call vote of 15 yeas to 21 nays (with a quorum being present).
The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Reichert................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Blumenauer... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Kind......... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Crowley...... X ........ .........
Ms. Black...................... ........ X ......... Mr. Davis........ X ........ .........
Mr. Reed....................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Kelly...................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... ........ ........ .........
Ms. Noem....................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... X ........ .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
Mr. LaHood..................... ........ X .........
Mr. Wenstrup................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on Mr. Reichert's motion to table Mr. Doggett's
appeal of the ruling of the Chair was agreed to by a roll call
vote of 21 yeas to 15 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Reichert................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Blumenauer... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Kind......... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Crowley...... ........ X .........
Ms. Black...................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Reed....................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Kelly...................... X ........ ......... Mr. Higgins...... ........ X .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... ........ ........ .........
Ms. Noem....................... X ........ ......... Ms. DelBene...... ........ X .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... ........ X .........
Mr. Smith (MO)................. X ........ .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. X ........ .........
Ms. Walorski................... X ........ .........
Mr. Curbelo.................... X ........ .........
Mr. Bishop..................... X ........ .........
Mr. LaHood..................... X ........ .........
Mr. Wenstrup................... X ........ .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on the amendment offered by Mr. Larson to the
amendment in the nature of a substitute to H.R. 6760, which
would condition the provisions of the bill on an actuarial
certification regarding the Social Security and Medicare Trust
Funds was not agreed to by a roll call vote of 15 yeas to 21
nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Reichert................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Blumenauer... ........ ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Kind......... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Crowley...... X ........ .........
Ms. Black...................... ........ X ......... Mr. Davis........ X ........ .........
Mr. Reed....................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Kelly...................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... X ........ .........
Ms. Noem....................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... X ........ .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
Mr. LaHood..................... ........ X .........
Mr. Wenstrup................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
The vote on Mr. Reichert's motion to table Mr. Doggett's
appeal of the ruling of the Chair was agreed to by a roll call
vote of 21 yeas to 15 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Reichert................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Blumenauer... ........ ........ .........
Ms. Jenkins.................... X ........ ......... Mr. Kind......... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Crowley...... ........ X .........
Ms. Black...................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Reed....................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Kelly...................... X ........ ......... Mr. Higgins...... ........ X .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... ........ X .........
Ms. Noem....................... X ........ ......... Ms. DelBene...... ........ X .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... ........ X .........
Mr. Smith (MO)................. X ........ .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. X ........ .........
Ms. Walorski................... X ........ .........
Mr. Curbelo.................... X ........ .........
Mr. Bishop..................... X ........ .........
Mr. LaHood..................... X ........ .........
Mr. Wenstrup................... X ........ .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6760, ``Protecting Family and Small
Business Tax Cuts Act of 2018'' on September 13, 2018.
H.R. 6760 was ordered favorably reported to the House of
Representatives as amended by an amendment in the nature of a
substitute offered by Chairman Brady by a roll call vote of 21
yeas to 15 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Reichert................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Blumenauer... ........ ........ .........
Ms. Jenkins.................... X ........ ......... Mr. Kind......... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Crowley...... ........ X .........
Ms. Black...................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Reed....................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Kelly...................... X ........ ......... Mr. Higgins...... ........ X .........
Mr. Renacci.................... ........ ........ ......... Ms. Sewell....... ........ X .........
Ms. Noem....................... X ........ ......... Ms. DelBene...... ........ X .........
Mr. Holding.................... ........ ........ ......... Ms. Chu.......... ........ X .........
Mr. Smith (MO)................. X ........ .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. X ........ .........
Ms. Walorski................... X ........ .........
Mr. Curbelo.................... X ........ .........
Mr. Bishop..................... X ........ .........
Mr. LaHood..................... X ........ .........
Mr. Wenstrup................... X ........ .........
----------------------------------------------------------------------------------------------------------------
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 6760, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal fiscal year budget receipts for the period
2019-2028:
Clause 8 of rule XIII of the Rules of the House of
Representatives requires that an estimate provided by the Joint
Committee on Taxation to the Director of the Congressional
Budget Office under section 201(f) of the Congressional Budget
Act of 1974 for any major legislation shall, to the extent
practicable, incorporate the budgetary effects of changes in
economic output, employment, capital stock, and other
macroeconomic variables resulting from such legislation. Major
legislation is defined as legislation having a gross budgetary
effect (before incorporating macroeconomic effects) that is
greater in any fiscal year than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year. The bill meets this definition of major
legislation.
The staff of the Joint Committee on Taxation is currently
analyzing changes in economic output, employment, capital
stock, and other macroeconomic variables resulting from the
bill for purposes of determining these budgetary effects.
However, it was not practicable to complete this analysis,
which requires accounting for the effects of each provision in
this bill, along with interactions between these provisions, by
the filing of this report.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue provisions involve no
new tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 21, 2018.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6760, the
Protecting Family and Small Business Tax Cuts Act of 2018. It
contains estimates of tax provisions prepared by the staff of
the Joint Committee on Taxation.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Cecilia
Pastrone.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 6760--Protecting Family and Small Business Tax Cuts Act of 2018
Summary: H.R. 6760, the Protecting Family and Small
Business Tax Cuts Act of 2018, would repeal the December 31,
2025 expiration date for numerous provisions of U.S. tax law
that were temporarily changed by the 2017 tax act (Public Law
115-97). The bill would make permanent the individual income
tax brackets and tax rates, standard deduction and child tax
credit amounts, business income deduction, and exemption
amounts for the Alternative Minimum Tax in effect under current
law. Deductions for personal exemptions and certain itemized
deductions would be permanently repealed.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting the bill would reduce revenues by about
$597 billion over the 2019-2028 period, and increase outlays by
$34 billion over the same period, leading to an increase in the
deficit of $631 billion over the next 10 years. A portion of
the changes in revenues would be from Social Security payroll
taxes, which are off-budget. Excluding the estimated $687
million increase in off-budget revenues over the next 10 years,
JCT estimates that H.R. 6760 would increase on-budget deficits
by about $632 billion over the period from 2019 to 2028. Pay-
as-you-go procedures apply because enacting the legislation
would affect direct spending and revenues.
JCT estimates that enacting H.R. 6760 would increase on-
budget deficits by more than $5 billion in at least one of the
four 10-year periods beginning in 2029. CBO and JCT estimate
that enacting the legislation would increase net direct
spending by more than $2.5 billion in at least one of the four
consecutive 10-year periods beginning in 2029.
Because of the magnitude of the estimated budgetary
effects, this bill is considered to be ``major legislation,''
as defined in section 5107 of H. Con. Res. 71, the Concurrent
Resolution on the Budget for Fiscal Year 2018. Hence, it
triggers the requirement that the cost estimate, to the extent
practicable, include the budgetary impact of its macroeconomic
effects. The staff of the Joint Committee on Taxation is
currently analyzing changes in economic output, employment,
capital stock, and other macroeconomic variables resulting from
the bill for purposes of determining these budgetary effects.
However, JCT indicates a macroeconomic analysis incorporating
the full effects of all of the provisions in the bill,
including interactions between these provisions, is not
available at the time of filing of the committee report.
JCT has determined that the tax provisions of the bill
contain no intergovernmental or private sector mandates as
defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 6760 is shown in the following table.
Basis of estimate:
Revenues and direct spending
The Congressional Budget Act of 1974, as amended,
stipulates that revenue estimates provided by the staff of the
Joint Committee on Taxation will be the official estimates for
all tax legislation considered by the Congress. As such, CBO
incorporates those estimates into its cost estimates of the
effects of legislation. All of the estimates for the provisions
of H.R. 6760 were provided by JCT.\1\ The date of enactment is
generally assumed to be October 1, 2018.
---------------------------------------------------------------------------
\1\For JCT's description of the bill and estimates of the
provisions, which include detail beyond the summary presented below,
see Joint Committee on Taxation, Description Of H.R. 6760, the
``Protecting Family And Small Business Tax Cuts Act Of 2018,'' JCX-69-
18, https://www.jct.gov/publications.html?func=startdown&id=5134, and
Estimated Revenue Effects of H.R. 6760, the ``Protecting Family And
Small Business Tax Cuts Act Of 2018,'' JCX-71-18, https://www.jct.gov/
publications.html?func=startdown&id=5136.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
----------------------------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-2023 2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Estimated Changes in Revenues.................... 0 -0.4 -2.0 -1.6 0.0 0.0 -0.1 -6.1 -102.4 -233.4 -250.9 -4.0 -596.8
On-Budget.................................... 0 -0.4 -2.0 -1.6 0.0 0.0 -0.1 -6.1 -102.6 -233.6 -251.1 -4.0 -597.5
Off-Budgeta.................................. 0 0 0 0 0 0 0 0 0.2 0.2 0.3 0 0.7
CHANGES IN DIRECT SPENDING
Total Changes in Direct Spending:
Estimated Budget Authority................... 0 0 0 0 0 0 0 0 0 17.0 17.1 0 34.1
Estimated Outlays............................ 0 0 0 0 0 0 0 0 0 17.0 17.1 0 34.1
NET INCREASE OR DECREASE (-) IN THE DEFICIT FROM
CHANGES IN DIRECT SPENDING AND REVENUES
Effect on Deficit................................ 0 0.4 2.0 1.6 0.0 0.0 0.1 6.1 102.4 250.4 268.0 4.0 630.9
On-Budget Deficit............................ 0 0.4 2.0 1.6 0.0 0.0 0.1 6.1 102.6 250.6 268.2 4.0 631.6
Off-Budget Deficit........................... 0 0 0 0 0 0 0 0 -0.2 -0.2 -0.3 0 -0.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not add to totals due to rounding.
aOff-budget revenues result from changes in Social Security payroll tax receipts.
Individual Reform Made Permanent. H.R. 6760 would make
permanent numerous changes to tax law pertaining to individuals
made by the 2017 tax act. Such provisions estimated to reduce
revenues over the 2019 to 2028 period include the following
changes made by the 2017 tax act, which would no longer expire
in 2026:
Establish seven brackets with tax rates of
10 percent, 12 percent, 22 percent, 24 percent, 32
percent, 35 percent, and 37 percent;
Increase the standard deduction;
Establish a deduction for qualified business
income;
Repeal the overall limit on itemized
deductions (``Pease limitation'');
Increase the child tax credit, and add a
$500 credit for non-child dependents; and
Double the exemption amount allowed under
estate and gift taxes.
Provisions estimated to increase revenues over the 2019 to
2028 period include the following changes made by the 2017 tax
act, which would no longer expire in 2026:
Repeal deductions for personal exemptions;
and
Repeal and limit certain itemized
deductions, including limiting the deduction for state
and local taxes to $10,000.
The largest revenue reductions would result from the
provision to permanently extend the current income tax rate and
bracket structure, which JCT estimates would reduce revenues by
$520 billion over the period from 2019 to 2028 and increase
outlays for refundable tax credits by $2 billion over the same
period. In addition, extending the increase in the standard
deduction would reduce revenues by $286 billion over the period
from 2019 to 2028 and increase outlays for refundable tax
credits by $21 billion over the same period, according to JCT's
estimates. Making the increased exemptions to the alternative
minimum tax on individuals permanent would reduce revenues by
$283 billion from 2019 to 2028.
JCT also estimates that permanently extending the deduction
for qualified business income would reduce revenues by $179
billion over the period from 2019 to 2028, and that extending
the modified child tax credit would, over the same 10-year
period, reduce revenues by $155 billion and increase outlays
for refundable tax credits by $53 billion. JCT estimates that
additional revenue reductions, totaling $28 billion from 2019
to 2028, would result from making the 2017 tax act
modifications to estate and gift taxes permanent.
The largest revenue increases would result from permanently
repealing deductions for personal exemptions, which JCT
estimates would increase revenues by $463 billion and reduce
outlays for refundable credits by $36 billion over the 2019 to
2028 period. In addition, JCT estimates that the permanent
repeal and limitation of certain itemized deductions would
increase revenues by $317 billion and reduce outlays for
refundable credits by $828 million from 2019 to 2028.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table. Only on-budget changes to outlays or revenues
are subject to pay-as-you-go procedures.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 6760, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 13, 2018
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
----------------------------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-2023 2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE ON-BUDGET DEFICIT
Statutory Pay-As-You-Go Effects.................. 0 0.4 2.0 1.6 0.0 0.0 0.1 6.1 102.6 250.6 268.2 4.0 631.6
Memorandum:a
Change in Outlays............................ 0 0 0 0 0 0 0 0 0 17.0 17.1 0 34.1
Change in On-Budget Revenues................. 0 -0.4 -2.0 -1.6 0.0 0.0 -0.1 -6.1 -102.6 -233.6 -251.1 -4.0 -597.5
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not add to totals due to rounding.
aA positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues.
Increase in long term direct spending and deficits: JCT
estimates that enacting H.R. 6760 would increase on-budget
deficits by more than $5 billion in at least one of the four
10-year periods beginning in 2029. CBO and JCT estimate that
enacting the legislation would increase net direct spending by
more than $2.5 billion in at least one of the four consecutive
10-year periods beginning in 2029.
Mandates: JCT has determined that H.R. 6760 contains no
private-sector or intergovernmental mandates as defined by
UMRA.
Estimate prepared by: Staff of the Joint Committee on
Taxation and Cecilia Pastrone.
Estimate reviewed by: Joshua Shakin, Chief, Revenue
Estimating Unit; John McClelland, Assistant Director for Tax
Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated into
the description portions of this report.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, for each such provision identified by
the staff of the Joint Committee on Taxation, a summary
description of the provision is provided below along with an
estimate of the number and type of affected taxpayers, and a
discussion regarding the relevant complexity and administrative
issues.
Following the analysis of the staff of the Joint Committee
on Taxation are the comments of the IRS and Treasury regarding
each provision included in the complexity analysis.
Make permanent modification of tax rates, tax brackets, standard
deduction and repeal of personal exemptions (secs. 101, 121,
and 141 of the bill)
Summary description of the provisions
The bill makes permanent the structure of the individual
income tax as modified in Pub. L. No. 97-115. Under the
permanent rate structure, the tax brackets are 10-percent, 12-
percent, 22-percent, 24-percent, 32-percent, 35-percent and 37-
percent. The bill makes permanent the increase in the size the
standard deduction amount (for 2018 the standard deduction is
$24,000 for joint filers, $18,000 for heads of household and
$12,000 for other filers), and makes permanent the elimination
of personal exemptions.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 129 million tax returns in 2026.
Discussion
It is not anticipated that individuals will need to keep
additional records due to these provisions. It should not
result in an increase in disputes with the IRS, nor will
regulatory guidance be necessary to implement this provision.
The provision will save the IRS from needing to re-adjust
its wage withholding tables to reflect the expiration of these
provisions for the taxable year 2026. Further, the IRS will no
longer need to modify its forms and publications to reflect the
expiration of these provisions for taxable year 2026.
Taxpayers who, under the provisions of Pub. L. No. 115-97,
were able to claim the standard deduction rather than
itemizing, will now continue to be able to do so after taxable
year 2025. According to estimates by the staff of the Joint
Committee on Taxation, approximately 89 percent of taxpayers
will claim the standard deduction in 2026 under the bill, up
from approximately 70 percent in 2017. For these taxpayers, it
will not be necessary to file Schedule A to Form 1040, allowing
a significant number to forgo record keeping inherent in
itemizing below-the-line deductions. Moreover, by claiming the
standard deduction, such taxpayers may qualify to use simpler
versions of the Form 1040 (i.e., Form 1040EZ or Form 1040A)
that are not available to individuals who itemize their
deductions. These forms simplify the return preparation process
by eliminating from the Form 1040 those items that do not apply
to particular taxpayers.
This reduction in complexity and record keeping also may
result in a decline in the number of individuals using a tax
preparation service, or tax preparation software, or a decline
in the cost of such service or software. The provision also
should reduce the number of disputes between taxpayers and the
IRS regarding the substantiation of itemized deductions.
Make permanent the deduction for qualified business income (sec. 111 of
the bill)
Summary description of the provisions
The bill makes permanent the provision enacted in Pub. L.
No. 115-97 (Code section 199A), as subsequently modified by
Pub. L. No. 115-141. Under the provision, an individual
taxpayer generally may deduct 20 percent of qualified business
income from a partnership, S corporation, or sole
proprietorship, as well as 20 percent of aggregate qualified
REIT dividends and qualified publicly traded partnership
income. Special rules apply to specified agricultural or
horticultural cooperatives and their patrons.
A limitation based on the greater of 50 percent of W-2
wages paid, or the sum of 25 percent of W-2 wages paid plus a
capital allowance, is phased in above a threshold amount of
taxable income. A disallowance of the deduction with respect to
specified service trades or businesses is also phased in above
the same threshold amount of taxable income. The threshold
amount is $157,500 (twice that amount or $315,000 in the case
of a joint return), indexed. These limitations are fully phased
in for a taxpayer with taxable income in excess of the
threshold amount plus $50,000 ($100,000 in the case of a joint
return).
Qualified business income for a taxable year generally
means the net amount of domestic qualified items of income,
gain, deduction, and loss with respect to the taxpayer's
qualified businesses. Qualified business income does not
include any amount paid by an S corporation that is treated as
reasonable compensation of the taxpayer. Similarly, qualified
business income does not include any guaranteed payment for
services rendered with respect to the trade or business, and to
the extent provided in regulations, does not include any amount
allocated or distributed by a partnership to a partner who is
acting other than in his or her capacity as a partner for
services. Qualified business income or loss does not include
certain investment-related income, gain, deductions, or loss.
Number of affected taxpayers
It is estimated that the provision will affect over ten
percent of small business tax returns.
Discussion
In the absence of making the provision permanent, the
period of time with respect to which taxpayers could have to
keep additional records, or might engage in disputes with the
IRS regarding application of the provision, would end. On the
other hand, in the absence of making the provision permanent,
the IRS would have to revise forms and promulgate revised
guidance relating to the end of the period in which the
provision applies. Making the provision permanent provides more
time for a body of law, including regulations or other
guidance, to clarify the application of the provision generally
as well as in particular fact situations, potentially
facilitating taxpayer compliance with, and IRS administration
of, the provision as it remains in effect. Over time,
increasing familiarity of the provision may result in a decline
in the annual number of questions that taxpayers ask the IRS,
such as how to calculate qualified business income and how to
apply the phaseins of the W-2 wage (or W-2 wage and capital)
limit and of the exclusion of service business income in the
case of taxpayers with taxable income exceeding the threshold
amount of $157,500 (twice that amount or $315,000 in the case
of a joint return), indexed. The possible decline in the volume
of questions could improve efficiency of the IRS and permit the
use of greater IRS resources for taxpayer service and
administration of other aspects of the tax law. Making the
provision permanent principally affects taxable years beginning
after 2025, so the provision will have been in effect for
several years by the end of 2025, potentially permitting tax
advisors and tax software makers to improve aids for taxpayers'
compliance. Consequently, making the provision permanent should
not increase the tax preparation costs for most individuals.
Increase in child tax credit made permanent (sec. 122 of the bill)
Summary description of the provisions
The bill makes permanent the provision of Pub. L. No. 115-
97 that increases the value of the child tax credit to $2,000,
and providing for a refundable child tax credit of up to $1,400
per child. This $1,400 limitation is indexed for inflation. In
order to qualify for the child tax credit, a Social Security
number must be provided for the qualifying child for whom such
credit is claimed.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 53 million tax returns in 2026.
Discussion
It is not anticipated that individuals will need to keep
additional records due to these provisions. It should not
result in an increase in disputes with the IRS, nor will
regulatory guidance be necessary to implement this provision.
The IRS will no longer need to modify its forms and
publications for taxable year 2026 to reflect the expiration of
this provision.
Make permanent the limitation on deduction for State and local income
taxes (sec. 142 of the bill)
Summary description of the provisions
The bill makes permanent the provision contained in Pub. L.
No. 115-97 which provides that, the case of an individual, as a
general matter, State, local, and foreign property taxes and
State and local sales taxes are allowed as a deduction only
when paid or accrued in carrying on a trade or business, or an
activity described in section 212 (relating to expenses for the
production of income).
The bill makes permanent the exception provided by Pub. L.
No. 115-97 to the above-stated rule. Under the provision a
taxpayer may claim an itemized deduction of up to $10,000
($5,000 for married taxpayer filing a separate return) for the
aggregate of (i) State and local property taxes not paid or
accrued in carrying on a trade or business, or an activity
described in section 212, and (ii) State and local income, war
profits, and excess profits taxes (or sales taxes in lieu of
income, etc. taxes) paid or accrued in the taxable year.
Foreign real property taxes may not be deducted under this
exception.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 19 million tax returns in 2026.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision.
To the extent the IRS would have needed to modify its forms
and publications to reflect the expiration of this provision
for taxable years beginning after 2025, it will no longer need
to do so.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program, (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139, or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to section 6104 of
title 31, United States Code.
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (115th Congress),
the following statement is made concerning directed rule
makings: The Committee advises that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
A. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows
(existing law proposed to be omitted is enclosed in black
brackets, new matter is printed in italic, existing law in
which no change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 1. TAX IMPOSED.
(a) Married individuals filing joint returns and surviving
spouses.--There is hereby imposed on the taxable income of--
(1) every married individual (as defined in section
7703) who makes a single return jointly with his spouse
under section 6013, and
(2) every surviving spouse (as defined in section
2(a)), a tax determined in accordance with the
following table:
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $36,900 15% of taxable income.
Over $36,900 but not over $89,150 $5,535, plus 28% of the excess
over $36,900.
Over $89,150 but not over $140,000 $20,165, plus 31% of the excess
over $89,150.
Over $140,000 but not over $250,000 $35,928.50, plus 36% of the
excess over $140,000.
Over $250,000 $75,528.50, plus 39.6% of the
excess over $250,000.]
------------------------------------------------------------------------
If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $19,050..................... 10% of taxable income.
Over $19,050 but not over $77,400.... $1,905, plus 12% of the excess
over $19,050.
Over $77,400 but not over $165,000... $8,907, plus 22% of the excess
over $77,400.
Over $165,000 but not over $315,000.. $28,179, plus 24% of the excess
over $165,000.
Over $315,000 but not over $400,000.. $64,179, plus 32% of the excess
over $315,000.
Over $400,000 but not over $600,000.. $91,379, plus 35% of the excess
over $400,000.
Over $600,000........................ $161,379, plus 37% of the excess
over $600,000.
(b) Heads of households.--There is hereby imposed on the
taxable income of every head of a household (as defined in
section 2(b)) a tax determined in accordance with the following
table:
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $29,600 15% of taxable income.
Over $29,600 but not over $76,400 $4,440, plus 28% of the excess
over $29,600.
Over $76,400 but not over $127,500 $17,544, plus 31% of the excess
over $76,400.
Over $127,500 but not over $250,000 $33,385, plus 36% of the excess
over $127,500.
Over $250,000 $77,485, plus 39.6% of the excess
over $250,000.]
------------------------------------------------------------------------
If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $13,600..................... 10% of taxable income.
Over $13,600 but not over $51,800.... $1,360, plus 12% of the excess
over $13,600.
Over $51,800 but not over $82,500.... $5,944, plus 22% of the excess
over $51,800.
Over $82,500 but not over $157,500... $12,698, plus 24% of the excess
over $82,500.
Over $157,500 but not over $200,000.. $30,698, plus 32% of the excess
over $157,500.
Over $200,000 but not over $500,000.. $44,298, plus 35% of the excess
over $200,000.
Over $500,000........................ $149,298, plus 37% of the excess
over $500,000.
(c) Unmarried individuals (other than surviving spouses and
heads of households).--There is hereby imposed on the taxable
income of every individual (other than a surviving spouse as
defined in section 2(a) or the head of a household as defined
in section 2(b)) who is not a married individual (as defined in
section 7703) a tax determined in accordance with the following
table:
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $22,100 15% of taxable income.
Over $22,100 but not over $53,500 $3,315, plus 28% of the excess
over $22,100.
Over $53,500 but not over $115,000 $12,107, plus 31% of the excess
over $53,500.
Over $115,000 but not over $250,000 $31,172, plus 36% of the excess
over $115,000.
Over $250,000 $79,772, plus 39.6% of the excess
over $250,000.]
------------------------------------------------------------------------
If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $500,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $500,000........................ $150,689.50, plus 37% of the
excess over $500,000.
(d) Married individuals filing separate returns.--There is
hereby imposed on the taxable income of every married
individual (as defined in section 7703) who does not make a
single return jointly with his spouse under section 6013, a tax
determined in accordance with the following table:
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $18,450 15% of taxable income.
Over $18,450 but not over $44,575 $2,767.50, plus 28% of the excess
over $18,450.
Over $44,575 but not over $70,000 $10,082.50, plus 31% of the
excess over $44,575.
Over $70,000 but not over $125,000 $17,964.25, plus 36% of the
excess over $70,000.
Over $125,000 $37,764.25, plus 39.6% of the
excess over $125,000.]
------------------------------------------------------------------------
If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $300,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $300,000........................ $80,689.50, plus 37% of the
excess over $300,000.
(e) Estates and trusts.--There is hereby imposed on the
taxable income of--
(1) every estate, and
(2) every trust, taxable under this subsection a tax
determined in accordance with the following table:
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $1,500 15% of taxable income.
Over $1,500 but not over $3,500 $225, plus 28% of the excess over
$1,500.
Over $3,500 but not over $5,500 $785, plus 31% of the excess over
$3,500.
Over $5,500 but not over $7,500 $1,405, plus 36% of the excess
over $5,500.
Over $7,500 $2,125, plus 39.6% of the excess
over $7,500.]
------------------------------------------------------------------------
If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $2,550...................... 10% of taxable income.
Over $2,550 but not over $9,150...... $255, plus 24% of the excess over
$2,550.
Over $9,150 but not over $12,500..... $1,839, plus 35% of the excess
over $9,150.
Over $12,500......................... $3,011.50, plus 37% of the excess
over $12,500.
(f) [Phaseout of Marriage Penalty in 15-Percent Bracket;
Adjustments] Adjustments in tax tables so that inflation will
not result in tax increases.--
(1) In general.--Not later than December 15 of [1993]
2018, and each subsequent calendar year, the Secretary
shall prescribe tables which shall apply in lieu of the
tables contained in subsections (a), (b), (c), (d), and
(e) with respect to taxable years beginning in the
succeeding calendar year.
(2) Method of prescribing tables.--The table which
under paragraph (1) is to apply in lieu of the table
contained in subsection (a), (b), (c), (d), or (e), as
the case may be, with respect to taxable years
beginning in any calendar year shall be prescribed--
[(A) except as provided in paragraph (8), by
increasing the minimum and maximum dollar
amounts for each bracket for which a tax is
imposed under such table by the cost-of-living
adjustment for such calendar year, determined--
[(i) except as provided in clause
(ii), by substituting ``1992'' for
``2016'' in paragraph (3)(A)(ii), and
[(ii) in the case of adjustments to
the dollar amounts at which the 36
percent rate bracket begins or at which
the 39.6 percent rate bracket begins,
by substituting ``1993'' for ``2016''
in paragraph (3)(A)(ii),]
(A) by increasing the minimum and maximum
dollar amounts for each bracket for which a tax
is imposed under such table by the cost-of-
living adjustment for such calendar year,
determined under this subsection for such
calendar year by substituting ``2017'' for
``2016'' in paragraph (3)(A)(ii),
(B) by not changing the rate applicable to
any rate bracket as adjusted under subparagraph
(A), and
(C) by adjusting the amounts setting forth
the tax to the extent necessary to reflect the
adjustments in the rate brackets.
(3) Cost-of-living adjustment.--For purposes of this
subsection--
(A) In general.--The cost-of-living
adjustment for any calendar year is the
percentage (if any) by which--
(i) the C-CPI-U for the preceding
calendar year, exceeds
(ii) the CPI for calendar year 2016,
multiplied by the amount determined
under subparagraph (B).
(B) Amount determined.--The amount determined
under this clause is the amount obtained by
dividing--
(i) the C-CPI-U for calendar year
2016, by
(ii) the CPI for calendar year 2016.
(C) Special rule for adjustments with a base
year after 2016.--For purposes of any provision
of this title which provides for the
substitution of a year after 2016 for ``2016''
in subparagraph (A)(ii), subparagraph (A) shall
be applied by substituting ``the C-CPI-U for
calendar year 2016'' for ``the CPI for calendar
year 2016'' and all that follows in clause (ii)
thereof.
(4) CPI for any calendar year.--For purposes of
paragraph (3), 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.
(5) Consumer Price Index.--For purposes of paragraph
(4), the term ``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 1986 shall be used.
(6) C-CPI-U.--For purposes of this subsection--
(A) In general.--The term ``C-CPI-U'' means
the Chained Consumer Price Index for All Urban
Consumers (as published by the Bureau of Labor
Statistics of the Department of Labor). The
values of the Chained Consumer Price Index for
All Urban Consumers taken into account for
purposes of determining the cost-of-living
adjustment for any calendar year under this
subsection shall be the latest values so
published as of the date on which such Bureau
publishes the initial value of the Chained
Consumer Price Index for All Urban Consumers
for the month of August for the preceding
calendar year.
(B) Determination for calendar year.--The C-
CPI-U for any calendar year is the average of
the C-CPI-U as of the close of the 12-month
period ending on August 31 of such calendar
year.
(7) Rounding.--
(A) In general.--If any increase determined
under paragraph (2)(A) [, section 63(c)(4),
section 68(b)(2) or section 151(d)(4)] is not
multiple of $50, such increase shall be rounded
to the next lowest multiple of $50.
[(B) Table for married individuals filing
separately.--In the case of a married
individual filing a separate return,
subparagraph (A)]
(B) Special rule._In the case of a table
prescribed in lieu of the table contained in
subsection (b), (c), or (d), subparagraph (A)
[(other than with respect to sections 63(c)(4)
and 151(d)(4)(A))]shall be applied by
substituting ``$25'' for ``$50'' each place it
appears.
[(8) Elimination of marriage penalty in 15-percent
bracket.--With respect to taxable years beginning after
December 31, 2003, in prescribing the tables under
paragraph (1)--
[(A) the maximum taxable income in the 15-
percent rate bracket in the table contained in
subsection (a) (and the minimum taxable income
in the next higher taxable income bracket in
such table) shall be 200 percent of the maximum
taxable income in the 15-percent rate bracket
in the table contained in subsection (c) (after
any other adjustment under this subsection),
and
[(B) the comparable taxable income amounts in
the table contained in subsection (d) shall be
\1/2\ of the amounts determined under
subparagraph (A).]
[(g) Certain unearned income of children taxed as if parent's
income.--
[(1) In general.--In the case of any child to whom
this subsection applies, the tax imposed by this
section shall be equal to the greater of--
[(A) the tax imposed by this section without
regard to this subsection, or
[(B) the sum of--
[(i) the tax which would be imposed
by this section if the taxable income
of such child for the taxable year were
reduced by the net unearned income of
such child, plus
[(ii) such child's share of the
allocable parental tax.]
(g) Special Rules for Certain Children with Unearned
Income.--
(1) In general.--In the case of any child to whom
this subsection applies--
(A) Modifications to applicable rate
brackets.--In determining the amount of tax
imposed by this section for the taxable year on
such child, the income tax table otherwise
applicable under this section to such child
shall be applied with the following
modifications:
(i) 24-percent bracket.--The maximum
taxable income which is taxed at a rate
below 24 percent shall not be more than
the sum of--
(I) the earned taxable income
of such child, plus
(II) the minimum taxable
income for the 24-percent
bracket in the table under
subsection (e) (as adjusted
under subsection (f)) for the
taxable year.
(ii) 35-percent bracket.--The maximum
taxable income which is taxed at a rate
below 35 percent shall not be more than
the sum of--
(I) the earned taxable income
of such child, plus
(II) the minimum taxable
income for the 35-percent
bracket in the table under
subsection (e) (as adjusted
under subsection (f)) for the
taxable year.
(iii) 37-percent bracket.--The
maximum taxable income which is taxed
at a rate below 37 percent shall not be
more than the sum of--
(I) the earned taxable income
of such child, plus
(II) the minimum taxable
income for the 37-percent
bracket in the table under
subsection (e) (as adjusted
under subsection (f)) for the
taxable year.
(B) Coordination with capital gains rates.--
For purposes of applying section 1(h)--
(i) the maximum zero rate amount
shall not be more than the sum of--
(I) the earned taxable income
of such child, plus
(II) the amount in effect
under subsection (h)(13) for
the taxable year, and
(ii) the maximum 15-percent rate
amount shall not be more than the sum
of--
(I) the earned taxable income
of such child, plus
(II) the amount in effect
under subsection (h)(12)(D) for
the taxable year.
(2) Child to whom subsection applies.--This
subsection shall apply to any child for any taxable
year if--
(A) such child--
(i) has not attained age 18 before
the close of the taxable year, or
(ii)(I) has attained age 18 before
the close of the taxable year and meets
the age requirements of section
152(c)(3) (determined without regard to
subparagraph (B) thereof), and
(II) whose earned income (as
defined in section 911(d)(2))
for such taxable year does not
exceed one-half of the amount
of the individual's support
(within the meaning of section
152(c)(1)(D) after the
application of section
152(f)(5) (without regard to
subparagraph (A) thereof)) for
such taxable year,
(B) either parent of such child is alive at
the close of the taxable year, and
(C) such child does not file a joint return
for the taxable year.
[(3) Allocable parental tax.--For purposes of this
subsection--
[(A) In general.--The term ``allocable
parental tax'' means the excess of--
[(i) the tax which would be imposed
by this section on the parent's taxable
income if such income included the net
unearned income of all children of the
parent to whom this subsection applies,
over
[(ii) the tax imposed by this section
on the parent without regard to this
subsection.
For purposes of clause (i), net unearned income
of all children of the parent shall not be
taken into account in computing any exclusion,
deduction, or credit of the parent.
[(B) Child's share.--A child's share of any
allocable parental tax of a parent shall be
equal to an amount which 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
of such parent to whom this subsection applies.
[(C) Special rule where parent has different
taxable year.--Except as provided in
regulations, if the parent does not have the
same taxable year as the child, the allocable
parental tax shall be determined on the basis
of the taxable year of the parent ending in the
child's taxable year.]
(3) Earned taxable income.--For purposes of this
subsection, the term ``earned taxable income'' means,
with respect to any child for any taxable year, the
taxable income of such child reduced (but not below
zero) by the net unearned income of such child.
(4) Net unearned income.--For purposes of this
subsection--
(A) In general.--The term ``net unearned
income'' means the excess of--
(i) the portion of the adjusted gross
income for the taxable year which is
not attributable to earned income (as
defined in section 911(d)(2)), over
(ii) the sum of--
(I) the amount in effect for
the taxable year under section
63(c)(5)(A) (relating to
limitation on standard
deduction in the case of
certain dependents), plus
(II) the greater of the
amount described in subclause
(I) or, if the child itemizes
his deductions for the taxable
year, the amount of the
itemized deductions allowed by
this chapter for the taxable
year which are directly
connected with the production
of the portion of adjusted
gross income referred to in
clause (i).
(B) Limitation based on taxable income.--The
amount of the net unearned income for any
taxable year shall not exceed the individual's
taxable income for such taxable year.
(C) Treatment of distributions from qualified
disability trusts.--For purposes of this
subsection, in the case of any child who is a
beneficiary of a qualified disability trust (as
defined in section 642(b)(2)(C)(ii)), any
amount included in the income of such child
under sections 652 and 662 during a taxable
year shall be considered earned income of such
child for such taxable year.
(5) [Special rules for determining parent to whom
subsection applies.--] Special rules for determining
parent eligible to make election._[For purposes of this
subsection, the parent whose taxable income shall be
taken into account shall be--] For purposes of
paragraph (7), the parent referred to in subparagraph
(A)(iv) thereof is--
(A) in the case of parents who are not
married (within the meaning of section 7703),
the custodial parent (within the meaning of
[section 152(e)] section 7706(e)) of the child,
and
(B) in the case of married individuals filing
separately, the individual with the greater
taxable income.
(6) Providing of parent's TIN.--The parent of any
child to whom this subsection applies for any taxable
year shall provide the TIN of such parent to such child
and such child shall include such TIN on the child's
return of tax imposed by this section for such taxable
year.
(7) Election to claim certain unearned income of
child on parent's return.--
(A) In general.--If--
(i) any child to whom this subsection
applies has gross income for the
taxable year only from interest and
dividends (including Alaska Permanent
Fund dividends),
(ii) such gross income is more than
the amount described in paragraph
(4)(A)(ii)(I) and less than 10 times
the amount so described,
(iii) no estimated tax payments for
such year are made in the name and TIN
of such child, and no amount has been
deducted and withheld under section
3406, and
(iv) the parent of such child (as
determined under paragraph (5)) elects
the application of subparagraph (B),
such child shall be treated (other than for
purposes of this paragraph) as having no gross
income for such year and shall not be required
to file a return under section 6012.
(B) Income included on parent's return.--In
the case of a parent making the election under
this paragraph--
(i) the gross income of each child to
whom such election applies (to the
extent the gross income of such child
exceeds twice the amount described in
paragraph (4)(A)(ii)(I)) shall be
included in such parent's gross income
for the taxable year,
(ii) the tax imposed by this section
for such year with respect to such
parent shall be the amount equal to the
sum of--
(I) the amount determined
under this section after the
application of clause (i), plus
(II) for each such child, 10
percent of the lesser of the
amount described in paragraph
(4)(A)(ii)(I) or the excess of
the gross income of such child
over the amount so described,
and
(iii) any interest which is an item
of tax preference under section
57(a)(5) of the child shall be treated
as an item of tax preference of such
parent (and not of such child).
(C) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph.
(h) Maximum capital gains rate.--
(1) In general.--If a taxpayer has a net capital gain
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 the greater of--
(i) taxable income reduced by the net
capital gain; or
(ii) the lesser of--
(I) the amount of taxable
income taxed at a rate below 25
percent; or
(II) taxable income reduced
by the adjusted net capital
gain;
(B) 0 percent of so much of the adjusted net
capital gain (or, if less, taxable income) as
does not exceed the excess (if any) of--
(i) the amount of taxable income
which would (without regard to this
paragraph) be taxed at a rate below [25
percent] 22 percent, over
(ii) the taxable income reduced by
the adjusted net capital gain;
(C) 15 percent of the lesser of--
(i) so much of the adjusted net
capital gain (or, if less, taxable
income) as exceeds the amount on which
a tax is determined under subparagraph
(B), or
(ii) the excess of--
(I) the amount of taxable
income [which would (without
regard to this paragraph) be
taxed at a rate below 39.6
percent] below the maximum 15-
percent rate amount, over
(II) the sum of the amounts
on which a tax is determined
under subparagraphs (A) and
(B),
(D) 20 percent of the adjusted net capital
gain (or, if less, taxable income) in excess of
the sum of the amounts on which tax is
determined under subparagraphs (B) and (C),
(E) 25 percent of the excess (if any) of--
(i) the unrecaptured section 1250
gain (or, if less, the net capital gain
(determined without regard to paragraph
(11))), over
(ii) the excess (if any) of--
(I) the sum of the amount on
which tax is determined under
subparagraph (A) plus the net
capital gain, over
(II) taxable income; and
(F) 28 percent of the amount of taxable
income in excess of the sum of the amounts on
which tax is determined under the preceding
subparagraphs of this paragraph.
(2) Net capital gain taken into account as investment
income.--For purposes of this subsection, the net
capital gain for any taxable year shall be reduced (but
not below zero) by the amount which the taxpayer takes
into account as investment income under section
163(d)(4)(B)(iii).
(3) Adjusted net capital gain.--For purposes of this
subsection, the term ``adjusted net capital gain''
means the sum of--
(A) net capital gain (determined without
regard to paragraph (11)) reduced (but not
below zero) by the sum of--
(i) unrecaptured section 1250 gain,
and
(ii) 28-percent rate gain, plus
(B) qualified dividend income (as defined in
paragraph (11)).
(4) 28-percent rate gain.--For purposes of this
subsection, the term ``28-percent rate gain'' means the
excess (if any) of--
(A) the sum of--
(i) collectibles gain; and
(ii) section 1202 gain, over
(B) the sum of--
(i) collectibles loss;
(ii) the net short-term capital loss;
and
(iii) the amount of long-term capital
loss carried under section
1212(b)(1)(B) to the taxable year.
(5) Collectibles gain and loss.--For purposes of this
subsection--
(A) In general.--The terms ``collectibles
gain'' and ``collectibles loss'' mean gain or
loss (respectively) from the sale or exchange
of a collectible (as defined in section 408(m)
without regard to paragraph (3) thereof) which
is a capital asset held for more than 1 year
but only to the extent such gain is taken into
account in computing gross income and such loss
is taken into account in computing taxable
income.
(B) Partnerships, etc..--For purposes of
subparagraph (A), any gain from the sale of an
interest in a partnership, S corporation, or
trust which is attributable to unrealized
appreciation in the value of collectibles shall
be treated as gain from the sale or exchange of
a collectible. Rules similar to the rules of
section 751 shall apply for purposes of the
preceding sentence.
(6) Unrecaptured section 1250 gain.--For purposes of
this subsection--
(A) In general.--The term ``unrecaptured
section 1250 gain'' means the excess (if any)
of--
(i) the amount of long-term capital
gain (not otherwise treated as ordinary
income) which would be treated as
ordinary income if section 1250(b)(1)
included all depreciation and the
applicable percentage under section
1250(a) were 100 percent, over
(ii) the excess (if any) of--
(I) the amount described in
paragraph (4)(B); over
(II) the amount described in
paragraph (4)(A).
(B) Limitation with respect to section 1231
property.--The amount described in subparagraph
(A)(i) from sales, exchanges, and conversions
described in section 1231(a)(3)(A) for any
taxable year shall not exceed the net section
1231 gain (as defined in section 1231(c)(3))
for such year.
(7) Section 1202 gain.--For purposes of this
subsection, the term ``section 1202 gain'' means the
excess of--
(A) the gain which would be excluded from
gross income under section 1202 but for the
percentage limitation in section 1202(a), over
(B) the gain excluded from gross income under
section 1202.
(8) Coordination with recapture of net ordinary
losses under section 1231.--If any amount is treated as
ordinary income under section 1231(c), such amount
shall be allocated among the separate categories of net
section 1231 gain (as defined in section 1231(c)(3)) in
such manner as the Secretary may by forms or
regulations prescribe.
(9) Regulations.--The Secretary may prescribe such
regulations as are appropriate (including regulations
requiring reporting) to apply this subsection in the
case of sales and exchanges by pass-thru entities and
of interests in such entities.
(10) Pass-thru entity defined.--For purposes of this
subsection, the term ``pass-thru entity'' means--
(A) a regulated investment company;
(B) a real estate investment trust;
(C) an S corporation;
(D) a partnership;
(E) an estate or trust;
(F) a common trust fund; and
(G) a qualified electing fund (as defined in
section 1295).
(11) Dividends taxed as net capital gain.--
(A) In general.--For purposes of this
subsection, the term ``net capital gain'' means
net capital gain (determined without regard to
this paragraph) increased by qualified dividend
income.
(B) Qualified dividend income.--For purposes
of this paragraph--
(i) In general.--The term ``qualified
dividend income'' means dividends
received during the taxable year from--
(I) domestic corporations,
and
(II) qualified foreign
corporations.
(ii) Certain dividends excluded.--
Such term shall not include--
(I) any dividend from a
corporation which for the
taxable year of the corporation
in which the distribution is
made, or the preceding taxable
year, is a corporation exempt
from tax under section 501 or
521,
(II) any amount allowed as a
deduction under section 591
(relating to deduction for
dividends paid by mutual
savings banks, etc.), and
(III) any dividend described
in section 404(k).
(iii) Coordination with section
246(c).--Such term shall not include
any dividend on any share of stock--
(I) with respect to which the
holding period requirements of
section 246(c) are not met
(determined by substituting in
section 246(c) ``60 days'' for
``45 days'' each place it
appears and by substituting
``121- day period'' for ``91-
day period''), or
(II) to the extent that the
taxpayer is under an obligation
(whether pursuant to a short
sale or otherwise) to make
related payments with respect
to positions in substantially
similar or related property.
(C) Qualified foreign corporations.--
(i) In general.--Except as otherwise
provided in this paragraph, the term
``qualified foreign corporation'' means
any foreign corporation if--
(I) such corporation is
incorporated in a possession of
the United States, or
(II) such corporation is
eligible for benefits of a
comprehensive income tax treaty
with the United States which
the Secretary determines is
satisfactory for purposes of
this paragraph and which
includes an exchange of
information program.
(ii) Dividends on stock readily
tradable on United States securities
market.--A foreign corporation not
otherwise treated as a qualified
foreign corporation under clause (i)
shall be so treated with respect to any
dividend paid by such corporation if
the stock with respect to which such
dividend is paid is readily tradable on
an established securities market in the
United States.
(iii) Exclusion of dividends of
certain foreign corporations.--Such
term shall not include--
(I) any foreign corporation
which for the taxable year of
the corporation in which the
dividend was paid, or the
preceding taxable year, is a
passive foreign investment
company (as defined in section
1297), and
(II) any corporation which
first becomes a surrogate
foreign corporation (as defined
in section 7874(a)(2)(B)) after
the date of the enactment of
this subclause, other than a
foreign corporation which is
treated as a domestic
corporation under section
7874(b).
(iv) Coordination with foreign tax
credit limitation.--Rules similar to
the rules of section 904(b)(2)(B) shall
apply with respect to the dividend rate
differential under this paragraph.
(D) Special rules.--
(i) Amounts taken into account as
investment income.--Qualified dividend
income shall not include any amount
which the taxpayer takes into account
as investment income under section
163(d)(4)(B).
(ii) Extraordinary dividends.--If a
taxpayer to whom this section applies
receives, with respect to any share of
stock, qualified dividend income from 1
or more dividends which are
extraordinary dividends (within the
meaning of section 1059(c)), any loss
on the sale or exchange of such share
shall, to the extent of such dividends,
be treated as long- term capital loss.
(iii) Treatment of dividends from
regulated investment companies and real
estate investment trusts.--A dividend
received from a regulated investment
company or a real estate investment
trust shall be subject to the
limitations prescribed in sections 854
and 857.
(12) Maximum 15-percent rate amount defined.--For
purposes of this subsection, the maximum 15-percent
rate amount shall be--
(A) in the case of a joint return or
surviving spouse (as defined in section 2(a)),
$479,000 (\1/2\ such amount in the case of a
married individual filing a separate return),
(B) in the case of an individual who is the
head of a household (as defined in section
2(b)), $452,400,
(C) in the case of any other individual
(other than an estate or trust), $425,800, and
(D) in the case of an estate or trust,
$12,700.
(13) Determination of 0 percent rate bracket for
estates and trusts.--In the case of any estate or
trust, paragraph (1)(B) shall be applied by treating
the amount determined in clause (i) thereof as being
equal to $2,600.
(14) Inflation adjustment.--
(A) In general.--In the case of any taxable
year beginning after 2018, each of the dollar
amounts in paragraphs (12) and (13) shall be
increased by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under subsection (f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``calendar year 2017'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
(B) Rounding.--If any increase under
subparagraph (A) is not a multiple of $50, such
increase shall be rounded to the next lowest
multiple of $50.
[(i) Rate reductions after 2000.--
[(1) 10-percent rate bracket
[(A) In general.--In the case of taxable
years beginning after December 31, 2000--
[(i) the rate of tax under
subsections (a), (b), (c), and (d) on
taxable income not over the initial
bracket amount shall be 10 percent, and
[(ii) the 15 percent rate of tax
shall apply only to taxable income over
the initial bracket amount but not over
the maximum dollar amount for the 15-
percent rate bracket.
[(B) Initial bracket amount.--For purposes of
this paragraph, the initial bracket amount is--
[(i) $14,000 in the case of
subsection (a),
[(ii) $10,000 in the case of
subsection (b), and
[(iii) 1/2 the amount applicable
under clause (i) (after adjustment, if
any, under subparagraph (C)) in the
case of subsections (c) and (d).
[(C) Inflation adjustment.--In prescribing
the tables under subsection (f) which apply
with respect to taxable years beginning in
calendar years after 2003--
[(i) the cost-of-living adjustment
shall be determined under subsection
(f)(3) by substituting ``2002'' for
``2016'' in subparagraph (A)(ii)
thereof, and
[(ii) the adjustments under clause
(i) shall not apply to the amount
referred to in subparagraph (B)(iii).
If any amount after adjustment under the
preceding sentence is not a multiple of $50,
such amount shall be rounded to the next lowest
multiple of $50.
[(2) 25-, 28-, and 33-percent rate brackets.--The
tables under subsections (a), (b), (c), (d), and (e)
shall be applied--
[(A) by substituting ``25%'' for ``28%'' each
place it appears (before the application of
subparagraph (B)),
[(B) by substituting ``28%'' for ``31%'' each
place it appears, and
[(C) by substituting ``33%'' for ``36%'' each
place it appears.
[(3) Modifications to income tax brackets for high-
income taxpayers.--
[(A) 35-percent rate bracket.--In the case of
taxable years beginning after December 31,
2012--
[(i) the rate of tax under
subsections (a), (b), (c), and (d) on a
taxpayer's taxable income in the
highest rate bracket shall be 35
percent to the extent such income does
not exceed an amount equal to the
excess of--
[(I) the applicable
threshold, over
[(II) the dollar amount at
which such bracket begins, and
[(ii) the 39.6 percent rate of tax
under such subsections shall apply only
to the taxpayer's taxable income in
such bracket in excess of the amount to
which clause (i) applies.
[(B) Applicable threshold.--For purposes of
this paragraph, the term ``applicable
threshold'' means--
[(i) $450,000 in the case of
subsection (a),
[(ii) $425,000 in the case of
subsection (b),
[(iii) $400,000 in the case of
subsection (c), and
[(iv) \1/2\ the amount applicable
under clause (i) (after adjustment, if
any, under subparagraph (C)) in the
case of subsection (d).
[(C) Inflation adjustment.--For purposes of
this paragraph, with respect to taxable years
beginning in calendar years after 2013, each of
the dollar amounts under clauses (i), (ii), and
(iii) of subparagraph (B) shall be adjusted in
the same manner as under paragraph (1)(C)(i),
except that subsection (f)(3)(A)(ii) shall be
applied by substituting ``2012'' for ``2016''.
[(4) Adjustment of tables.--The Secretary shall
adjust the tables prescribed under subsection (f) to
carry out this subsection.
[(j) Modifications for taxable years 2018 through 2025.--
[(1) In general.--In the case of a taxable year
beginning after December 31, 2017, and before January
1, 2026--
[(A) subsection (i) shall not apply, and
[(B) this section (other than subsection (i))
shall be applied as provided in paragraphs (2)
through (6).
[(2) Rate tables.--
[(A) Married individuals filing joint returns
and surviving spouses.--The following table
shall be applied in lieu of the table contained
in subsection (a):
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $19,050..................... 10% of taxable income.
Over $19,050 but not over $77,400.... $1,905, plus 12% of the excess
over $19,050.
Over $77,400 but not over $165,000... $8,907, plus 22% of the excess
over $77,400.
Over $165,000 but not over $315,000.. $28,179, plus 24% of the excess
over $165,000.
Over $315,000 but not over $400,000.. $64,179, plus 32% of the excess
over $315,000.
Over $400,000 but not over $600,000.. $91,379, plus 35% of the excess
over $400,000.
Over $600,000........................ $161,379, plus 37% of the excess
over $600,000.
------------------------------------------------------------------------
[(B) Heads of households.--The following
table shall be applied in lieu of the table
contained in subsection (b):
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $13,600..................... 10% of taxable income.
Over $13,600 but not over $51,800.... $1,360, plus 12% of the excess
over $13,600.
Over $51,800 but not over $82,500.... $5,944, plus 22% of the excess
over $51,800.
Over $82,500 but not over $157,500... $12,698, plus 24% of the excess
over $82,500.
Over $157,500 but not over $200,000.. $30,698, plus 32% of the excess
over $157,500.
Over $200,000 but not over $500,000.. $44,298, plus 35% of the excess
over $200,000.
Over $500,000........................ $149,298, plus 37% of the excess
over $500,000.
------------------------------------------------------------------------
[(C) Unmarried individuals other than
surviving spouses and heads of households.--The
following table shall be applied in lieu of the
table contained in subsection (c):
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $500,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $500,000........................ $150,689.50, plus 37% of the
excess over $500,000.
------------------------------------------------------------------------
[(D) Married individuals filing separate
returns.--The following table shall be applied
in lieu of the table contained in subsection
(d):
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $300,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $300,000........................ $80,689.50, plus 37% of the
excess over $300,000.
------------------------------------------------------------------------
[(E) Estates and trusts.--The following table
shall be applied in lieu of the table contained
in subsection (e):
------------------------------------------------------------------------
[If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $2,550...................... 10% of taxable income.
Over $2,550 but not over $9,150...... $255, plus 24% of the excess over
$2,550.
Over $9,150 but not over $12,500..... $1,839, plus 35% of the excess
over $9,150.
Over $12,500......................... $3,011.50, plus 37% of the excess
over $12,500.
------------------------------------------------------------------------
[(F) References to rate tables.--Any
reference in this title to a rate of tax under
subsection (c) shall be treated as a reference
to the corresponding rate bracket under
subparagraph (C) of this paragraph, except that
the reference in section 3402(q)(1) to the
third lowest rate of tax applicable under
subsection (c) shall be treated as a reference
to the fourth lowest rate of tax under
subparagraph (C).
[(3) Adjustments.--
[(A) No adjustment in 2018.--The tables
contained in paragraph (2) shall apply without
adjustment for taxable years beginning after
December 31, 2017, and before January 1, 2019.
[(B) Subsequent years.--For taxable years
beginning after December 31, 2018, the
Secretary shall prescribe tables which shall
apply in lieu of the tables contained in
paragraph (2) in the same manner as under
paragraphs (1) and (2) of subsection (f)
(applied without regard to clauses (i) and (ii)
of subsection (f)(2)(A)), except that in
prescribing such tables--
[(i) subsection (f)(3) shall be
applied by substituting ``calendar year
2017'' for ``calendar year 2016'' in
subparagraph (A)(ii) thereof,
[(ii) subsection (f)(7)(B) shall
apply to any unmarried individual other
than a surviving spouse or head of
household, and
[(iii) subsection (f)(8) shall not
apply.
[(4) Special rules for certain children with unearned
income.--
[(A) In general.--In the case of a child to
whom subsection (g) applies for the taxable
year, the rules of subparagraphs (B) and (C)
shall apply in lieu of the rule under
subsection (g)(1).
[(B) Modifications to applicable rate
brackets.--In determining the amount of tax
imposed by this section for the taxable year on
a child described in subparagraph (A), the
income tax table otherwise applicable under
this subsection to the child shall be applied
with the following modifications:
[(i) 24-percent bracket.--The maximum
taxable income which is taxed at a rate
below 24 percent shall not be more than
the sum of--
[(I) the earned taxable
income of such child, plus
[(II) the minimum taxable
income for the 24-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
[(ii) 35-percent bracket.--The
maximum taxable income which is taxed
at a rate below 35 percent shall not be
more than the sum of--
[(I) the earned taxable
income of such child, plus (II)
the minimum taxable income for
the 35-percent bracket in the
table under paragraph (2)(E)
(as adjusted under paragraph
(3)) for the taxable year.
[(iii) 37-percent bracket.--The
maximum taxable income which is taxed
at a rate below 37 percent shall not be
more than the sum of--
[(I) the earned taxable
income of such child, plus
[(II) the minimum taxable
income for the 37-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
[(C) Coordination with capital gains rates.--
For purposes of applying section 1(h) (after
the modifications under paragraph (5)(A))--
[(i) the maximum zero rate amount
shall not be more than the sum of--
[(I) the earned taxable
income of such child, plus
[(II) the amount in effect
under paragraph (5)(B)(i)(IV)
for the taxable year, and
[(ii) the maximum 15-percent rate
amount shall not be more than the sum
of--
[(I) the earned taxable
income of such child, plus
[(II) the amount in effect
under paragraph (5)(B)(ii)(IV)
for the taxable year.
[(D) Earned taxable income.--For purposes of
this paragraph, the term ``earned taxable
income'' means, with respect to any child for
any taxable year, the taxable income of such
child reduced (but not below zero) by the net
unearned income (as defined in subsection
(g)(4)) of such child.
[(5) Application of current income tax brackets to
capital gains brackets.--
[(A) In general.--Section 1(h)(1) shall be
applied--
[(i) by substituting ``below the
maximum zero rate amount'' for ``which
would (without regard to this
paragraph) be taxed at a rate below 25
percent'' in subparagraph (B)(i), and
[(ii) by substituting ``below the
maximum 15-percent rate amount'' for
``which would (without regard to this
paragraph) be taxed at a rate below
39.6 percent'' in subparagraph
(C)(ii)(I).
[(B) Maximum amounts defined.--For purposes
of applying section 1(h) with the modifications
described in subparagraph (A)--
[(i) Maximum zero rate amount.--The
maximum zero rate amount shall be--
[(I) in the case of a joint
return or surviving spouse,
$77,200,
[(II) in the case of an
individual who is a head of
household (as defined in
section 2(b)), $51,700,
[(III) in the case of any
other individual (other than an
estate or trust), an amount
equal to \1/2\ of the amount in
effect for the taxable year
under subclause (I), and
[(IV) in the case of an
estate or trust, $2,600.
[(ii) Maximum 15-percent rate
amount.--The maximum 15- percent rate
amount shall be--
[(I) in the case of a joint
return or surviving spouse,
$479,000 (\1/2\ such amount in
the case of a married
individual filing a separate
return),
[(II) in the case of an
individual who is the head of a
household (as defined in
section 2(b)), $452,400,
[(III) in the case of any
other individual (other than an
estate or trust), $425,800, and
[(IV) in the case of an
estate or trust, $12,700.
[(C) Inflation adjustment.--In the case of
any taxable year beginning after 2018, each of
the dollar amounts in clauses (i) and (ii) of
subparagraph (B) shall be increased by an
amount equal to--
[(i) such dollar amount, multiplied
by
[(ii) the cost-of-living adjustment
determined under subsection (f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``calendar year 2017'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
If any increase under this subparagraph is not
a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.
[(6) Section 15 not to apply.--Section 15 shall not
apply to any change in a rate of tax by reason of this
subsection.]
SEC. 2. DEFINITIONS AND SPECIAL RULES.
(a) Definition of surviving spouse.--
(1) In general.--For purposes of section 1, the term
``surviving spouse'' means a taxpayer--
(A) whose spouse died during either of his
two taxable years immediately preceding the
taxable year, and
(B) who maintains as his home a household
which constitutes for the taxable year the
principal place of abode (as a member of such
household) of a dependent (i) who (within the
meaning of [section 152] section 7706,
determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof) is a
son, stepson, daughter, or stepdaughter of the
taxpayer, and (ii) [with respect to whom the
taxpayer is entitled to a deduction for the
taxable year under section 151] whose TIN is
included on the taxpayer's return of tax for
the taxable year.
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 1 a taxpayer shall not be
considered to be a surviving spouse--
(A) if the taxpayer has remarried at any time
before the close of the taxable year, or
(B) unless, for the taxpayer's taxable year
during which 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 (as determined for purposes
of section 112) 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) except in the case of the combat zone
designated for purposes of the Vietnam
conflict, the date which is 2 years after the
date designated under section 112 as the date
of termination of combatant activities in that
zone.
(b) Definition of head of household.--
(1) In general.--For purposes of this subtitle, 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 qualifying child of the
individual (as defined in [section
152(c)] section 7706(c), determined
without regard to [section 152(e)]
section 7706(e)), but not if such
child--
(I) is married at the close
of the taxpayer's taxable year,
and
(II) is not a dependent of
such individual by reason of
[section 152(b)(2) or
152(b)(3)] section 7706(b)(2)
or 7706(b)(3), or both, or
(ii) any other person who is a
dependent of the taxpayer, [if the
taxpayer is entitled to a deduction for
the taxable year for such person under
section 151] if the taxpayer included
such person's TIN on the return of tax
for the taxable year, or
(B) maintains a household which constitutes
for such taxable year the principal place of
abode of the father or mother of the taxpayer,
[if the taxpayer is entitled to a deduction for
the taxable year for such father or mother
under section 151] if such father or mother is
a dependent of the taxpayer and the taxpayer
included such father or mother's TIN on the
return of tax for the taxable year.
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) an individual who is legally separated
from his spouse under a decree of divorce or of
separate maintenance shall not be considered as
married;
(B) 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
(C) a taxpayer shall be considered as married
at the close of his taxable year if his spouse
(other than a spouse described in subparagraph
(B)) died during the taxable year.
(3) Limitations.--Notwithstanding paragraph (1), for
purposes of this subtitle 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)] section 7706(d)(2), or
(ii) paragraph (3) of [section
152(d)] section 7706(d).
(c) Certain married individuals living apart.--For purposes
of this part, an individual shall be treated as not married at
the close of the taxable year if such individual is so treated
under the provisions of section 7703(b).
(d) Nonresident aliens.--In the case of a nonresident alien
individual, the taxes imposed by sections 1 and 55 shall apply
only as provided by section 871 or 877.
(e) Cross reference.--For definition of taxable income, see
section 63.
* * * * * * *
PART III--CHANGES IN RATES DURING A TAXABLE YEAR
[Sec. 15. Effect of changes.]
Sec. 15. Effect of changes on corporations.
SEC. 15. EFFECT OF CHANGES ON CORPORATIONS.
(a) General rule.--[If any rate of tax] In the case of a
corporation, if any rate of tax imposed by this chapter
changes, and if the taxable year includes the effective date of
the change (unless that date is the first day of the taxable
year), then--
(1) tentative taxes shall be computed by applying the
rate for the period before the effective date of the
change, and the rate for the period on and after such
date, to the taxable income for the entire taxable
year; and
(2) the tax for such taxable year shall be the sum of
that proportion of each tentative tax which the number
of days in each period bears to the number of days in
the entire taxable year.
(b) Repeal of tax.--For purposes of subsection (a)--
(1) if a tax is repealed, the repeal shall be
considered a change of rate; and
(2) the rate for the period after the repeal shall be
zero.
(c) Effective date of change.--For purposes of subsections
(a) and (b)--
(1) if the rate changes for taxable years ``beginning
after'' or ``ending after'' a certain date, the
following day shall be considered the effective date of
the change; and
(2) if a rate changes for taxable years ``beginning
on or after'' a certain date, that date shall be
considered the effective date of the change.
[(d) Section not to apply to inflation adjustments.--This
section shall not apply to any change in rates under subsection
(f) of section 1 (relating to adjustments in tax tables so that
inflation will not result in tax increases).
[(e) References to highest rate.--If the change referred to
in subsection (a) involves a change in the highest rate of tax
imposed by section 1 or 11(b), any reference in this chapter to
such highest rate (other than in a provision imposing a tax by
reference to such rate) shall be treated as a reference to the
weighted average of the highest rates before and after the
change determined on the basis of the respective portions of
the taxable year before the date of the change and on or after
the date of the change.
[(f) Rate reductions enacted by Economic Growth and Tax
Relief Reconciliation Act of 2001.--This section shall not
apply to any change in rates under subsection (i) of section 1
(relating to rate reductions after 2000).]
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart A--Nonrefundable Personal Credits
* * * * * * *
SEC. 21. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY
FOR GAINFUL EMPLOYMENT.
(a) Allowance of credit.--
(1) In general.--In the case of an individual for
which there are 1 or more qualifying individuals (as
defined in subsection (b)(1)) with respect to such
individual, there shall be allowed as a credit against
the tax imposed by this chapter for the taxable year an
amount equal to the applicable percentage of the
employment-related expenses (as defined in subsection
(b)(2)) paid by such individual during the taxable
year.
(2) Applicable percentage defined.--For purposes of
paragraph (1), the term ``applicable percentage'' means
35 percent reduced (but not below 20 percent) by 1
percentage point for each $2,000 (or fraction thereof)
by which the taxpayer's adjusted gross income for the
taxable year exceeds $15,000.
(b) Definitions of qualifying individual and employment-
related expenses.--For purposes of this section--
(1) Qualifying individual.--The term ``qualifying
individual'' means--
(A) a dependent of the taxpayer (as defined
in [section 152(a)(1)] section 7706(a)(1)) who
has not attained age 13,
(B) a dependent of the taxpayer (as defined
in [section 152] section 7706, determined
without regard to subsections (b)(1), (b)(2),
and (d)(1)(B)) who is physically or mentally
incapable of caring for himself or herself and
who has the same principal place of abode as
the taxpayer for more than one-half of such
taxable year, or
(C) the spouse of the taxpayer, if the spouse
is physically or mentally incapable of caring
for himself or herself and who has the same
principal place of abode as the taxpayer for
more than one-half of such taxable year.
(2) Employment-related expenses.--
(A) In general.--The term ``employment-
related expenses'' means amounts paid for the
following expenses, but only if such expenses
are incurred to enable the taxpayer to be
gainfully employed for any period for which
there are 1 or more qualifying individuals with
respect to the taxpayer:
(i) expenses for household services,
and
(ii) expenses for the care of a
qualifying individual.
Such term shall not include any amount paid for
services outside the taxpayer's household at a
camp where the qualifying individual stays
overnight.
(B) Exception.--Employment-related expenses
described in subparagraph (A) which are
incurred for services outside the taxpayer's
household shall be taken into account only if
incurred for the care of--
(i) a qualifying individual described
in paragraph (1)(A), or
(ii) a qualifying individual (not
described in paragraph (1)(A)) who
regularly spends at least 8 hours each
day in the taxpayer's household.
(C) Dependent care centers.--Employment-
related expenses described in subparagraph (A)
which are incurred for services provided
outside the taxpayer's household by a dependent
care center (as defined in subparagraph (D))
shall be taken into account only if--
(i) such center complies with all
applicable laws and regulations of a
State or unit of local government, and
(ii) the requirements of subparagraph
(B) are met.
(D) Dependent care center defined.--For
purposes of this paragraph, the term
``dependent care center'' means any facility
which--
(i) provides care for more than six
individuals (other than individuals who
reside at the facility), and
(ii) receives a fee, payment, or
grant for providing services for any of
the individuals (regardless of whether
such facility is operated for profit).
(c) Dollar limit on amount creditable.--The amount of the
employment-related expenses incurred during any taxable year
which may be taken into account under subsection (a) shall not
exceed--
(1) $3,000 if there is 1 qualifying individual with
respect to the taxpayer for such taxable year, or
(2) $6,000 if there are 2 or more qualifying
individuals with respect to the taxpayer for such
taxable year.
The amount determined under paragraph (1) or (2) (whichever is
applicable) shall be reduced by the aggregate amount excludable
from gross income under section 129 for the taxable year.
(d) Earned income limitation.--
(1) In general.--Except as otherwise provided in this
subsection, the amount of the employment-related
expenses incurred during any taxable year which may be
taken into account under subsection (a) shall not
exceed--
(A) in the case of an individual who is not
married at the close of such year, such
individual's earned income for such year, or
(B) in the case of an individual who is
married at the close of such year, the lesser
of such individual's earned income or the
earned income of his spouse for such year.
(2) Special rule for spouse who is a student or
incapable of caring for himself.--In the case of a
spouse who is a student or a qualifying individual
described in subsection (b)(1)(C), for purposes of
paragraph (1), such spouse shall be deemed for each
month during which such spouse is a full-time student
at an educational institution, or is such a qualifying
individual, to be gainfully employed and to have earned
income of not less than--
(A) $250 if subsection (c)(1) applies for the
taxable year, or
(B) $500 if subsection (c)(2) applies for the
taxable year.
In the case of any husband and wife, this paragraph
shall apply with respect to only one spouse for any one
month.
(e) Special rules.--For purposes of this section--
(1) Place of abode.--An individual shall not be
treated as having the same principal place of abode of
the taxpayer if at any time during the taxable year of
the taxpayer the relationship between the individual
and the taxpayer is in violation of local law.
(2) Married couples must file joint return.--If the
taxpayer is married at the close of the taxable year,
the credit shall be allowed under subsection (a) only
if the taxpayer and his spouse file a joint return for
the taxable year.
(3) Marital status.--An individual legally separated
from his spouse under a decree of divorce or of
separate maintenance shall not be considered as
married.
(4) Certain married individuals living apart.--If--
(A) an individual who is married and who
files a separate return--
(i) maintains as his home a household
which constitutes for more than one-
half of the taxable year the principal
place of abode of a qualifying
individual, and
(ii) furnishes over half of the cost
of maintaining such household during
the taxable year, and
(B) during the last 6 months of such taxable
year such individual's spouse is not a member
of such household,
such individual shall not be considered as married.
(5) Special dependency test in case of divorced
parents, etc..--If--
(A) [section 152(e)] section 7706(e) applies
to any child with respect to any calendar year,
and
(B) such child is under the age of 13 or is
physically or mentally incapable of caring for
himself,
in the case of any taxable year beginning in such
calendar year, such child shall be treated as a
qualifying individual described in subparagraph (A) or
(B) of subsection (b)(1) (whichever is appropriate)
with respect to the custodial parent (as defined in
[section 152(e)(4)(A)] section 7706(e)(4)(A)), and
shall not be treated as a qualifying individual with
respect to the noncustodial parent.
(6) Payments to related individuals.--No credit shall
be allowed under subsection (a) for any amount paid by
the taxpayer to an individual--
[(A) with respect to whom, for the taxable
year, a deduction under section 151(c)
(relating to deduction for personal exemptions
for dependents) is allowable either to the
taxpayer or his spouse, or]
(A) who is a dependent of either the taxpayer
or the taxpayer's spouse for the taxable year,
or
(B) who is a child of the taxpayer (within
the meaning of [section 152(f)(1)] section
7706(f)(1)) who has not attained the age of 19
at the close of the taxable year.
For purposes of this paragraph, the term ``taxable
year'' means the taxable year of the taxpayer in which
the service is performed.
(7) Student.--The term ``student'' means an
individual who during each of 5 calendar months during
the taxable year is a full-time student at an
educational organization.
(8) Educational organization.--The term ``educational
organization'' means an educational organization
described in section 170(b)(1)(A)(ii).
(9) Identifying information required with respect to
service provider.--No credit shall be allowed under
subsection (a) for any amount paid to any person
unless--
(A) the name, address, and taxpayer
identification number of such person are
included on the return claiming the credit, or
(B) if such person is an organization
described in section 501(c)(3) and exempt from
tax under section 501(a), the name and address
of such person are included on the return
claiming the credit.
In the case of a failure to provide the information
required under the preceding sentence, the preceding
sentence shall not apply if it is shown that the
taxpayer exercised due diligence in attempting to
provide the information so required.
(10) Identifying information required with respect to
qualifying individuals..--No credit shall be allowed
under this section with respect to any qualifying
individual unless the TIN of such individual is
included on the return claiming the credit.
(f) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
* * * * * * *
SEC. 23. ADOPTION EXPENSES.
(a) Allowance of credit.--
(1) In general.--In the case of an individual, there
shall be allowed as a credit against the tax imposed by
this chapter the amount of the qualified adoption
expenses paid or incurred by the taxpayer.
(2) Year credit allowed.--The credit under paragraph
(1) with respect to any expense shall be allowed--
(A) in the case of any expense paid or
incurred before the taxable year in which such
adoption becomes final, for the taxable year
following the taxable year during which such
expense is paid or incurred, and
(B) in the case of an expense paid or
incurred during or after the taxable year in
which such adoption becomes final, for the
taxable year in which such expense is paid or
incurred.
(3) $10,000 credit for adoption of child with special
needs regardless of expenses.--In the case of an
adoption of a child with special needs which becomes
final during a taxable year, the taxpayer shall be
treated as having paid during such year qualified
adoption expenses with respect to such adoption in an
amount equal to the excess (if any) of $10,000 over the
aggregate qualified adoption expenses actually paid or
incurred by the taxpayer with respect to such adoption
during such taxable year and all prior taxable years.
(b) Limitations.--
(1) Dollar limitation.--The aggregate amount of
qualified adoption expenses which may be taken into
account under subsection (a) for all taxable years with
respect to the adoption of a child by the taxpayer
shall not exceed $10,000.
(2) Income limitation.--
(A) In general.--The amount allowable as a
credit under subsection (a) for any taxable
year (determined without regard to subsection
(c)) shall be reduced (but not below zero) by
an amount which bears the same ratio to the
amount so allowable (determined without regard
to this paragraph but with regard to paragraph
(1)) as--
(i) the amount (if any) by which the
taxpayer's adjusted gross income
exceeds $150,000, bears to
(ii) $40,000.
(B) Determination of adjusted gross income.--
For purposes of subparagraph (A), adjusted
gross income shall be determined without regard
to sections 911, 931, and 933.
(3) Denial of double benefit.--
(A) In general.--No credit shall be allowed
under subsection (a) for any expense for which
a deduction or credit is allowed under any
other provision of this chapter.
(B) Grants.--No credit shall be allowed under
subsection (a) for any expense to the extent
that funds for such expense are received under
any Federal, State, or local program.
(c) Carryforwards of unused credit.--
(1) In general.--If the credit allowable under
subsection (a) for any taxable year exceeds the
limitation imposed by section 26(a) for such taxable
year reduced by the sum of the credits allowable under
this subpart (other than this section and section 25D),
such excess shall be carried to the succeeding taxable
year and added to the credit allowable under subsection
(a) for such taxable year.
(2) Limitation.--No credit may be carried forward
under this subsection to any taxable year following the
fifth taxable year after the taxable year in which the
credit arose. For purposes of the preceding sentence,
credits shall be treated as used on a first-in first-
out basis.
(d) Definitions.--For purposes of this section--
(1) Qualified adoption expenses.--The term
``qualified adoption expenses'' means reasonable and
necessary adoption fees, court costs, attorney fees,
and other expenses--
(A) which are directly related to, and the
principal purpose of which is for, the legal
adoption of an eligible child by the taxpayer,
(B) which are not incurred in violation of
State or Federal law or in carrying out any
surrogate parenting arrangement,
(C) which are not expenses in connection with
the adoption by an individual of a child who is
the child of such individual's spouse, and
(D) which are not reimbursed under an
employer program or otherwise.
(2) Eligible child.--The term ``eligible child''
means any individual who--
(A) has not attained age 18, or
(B) is physically or mentally incapable of
caring for himself.
(3) Child with special needs.--The term ``child with
special needs'' means any child if--
(A) a State has determined that the child
cannot or should not be returned to the home of
his parents,
(B) such State has determined that there
exists with respect to the child a specific
factor or condition (such as his ethnic
background, age, or membership in a minority or
sibling group, or the presence of factors such
as medical conditions or physical, mental, or
emotional handicaps) because of which it is
reasonable to conclude that such child cannot
be placed with adoptive parents without
providing adoption assistance, and
(C) such child is a citizen or resident of
the United States (as defined in [section
217(h)(3)] section 217(c)(3)).
(e) Special rules for foreign adoptions.--In the case of an
adoption of a child who is not a citizen or resident of the
United States (as defined in [section 217(h)(3)] section
217(c)(3))--
(1) subsection (a) shall not apply to any qualified
adoption expense with respect to such adoption unless
such adoption becomes final, and
(2) any such expense which is paid or incurred before
the taxable year in which such adoption becomes final
shall be taken into account under this section as if
such expense were paid or incurred during such year.
(f) Filing requirements.--
(1) Married couples must file joint returns.--Rules
similar to the rules of paragraphs (2), (3), and (4) of
section 21(e) shall apply for purposes of this section.
(2) Taxpayer must include TIN.--
(A) In general.--No credit shall be allowed
under this section with respect to any eligible
child unless the taxpayer includes (if known)
the name, age, and TIN of such child on the
return of tax for the taxable year.
(B) Other methods.--The Secretary may, in
lieu of the information referred to in
subparagraph (A), require other information
meeting the purposes of subparagraph (A),
including identification of an agent assisting
with the adoption.
(g) Basis adjustments.--For purposes of this subtitle, if a
credit is allowed under this section for any expenditure with
respect to any property, the increase in the basis of such
property which would (but for this subsection) result from such
expenditure shall be reduced by the amount of the credit so
allowed.
(h) Adjustments for inflation.--In the case of a taxable year
beginning after December 31, 2002, each of the dollar amounts
in subsection (a)(3) and paragraphs (1) and (2)(A)(i) of
subsection (b) shall be increased by an amount equal to--
(1) such dollar amount, multiplied by
(2) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the
taxable year begins, determined by substituting
``calendar year 2001'' for ``calendar year 2016'' in
subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not
a multiple of $10, such amount shall be rounded to the nearest
multiple of $10.
(i) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out this section and
section 137, including regulations which treat unmarried
individuals who pay or incur qualified adoption expenses with
respect to the same child as 1 taxpayer for purposes of
applying the dollar amounts in subsections (a)(3) and (b)(1) of
this section and in section 137(b)(1).
SEC. 24. CHILD TAX CREDIT.
[(a) Allowance of credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year
with respect to each qualifying child of the taxpayer for which
the taxpayer is allowed a deduction under section 151 an amount
equal to $1,000.
[(b) Limitations.--
[(1) Limitation based on adjusted gross income.--The
amount of the credit allowable under subsection (a)
shall be reduced (but not below zero) by $50 for each
$1,000 (or fraction thereof) by which the taxpayer's
modified adjusted gross income exceeds the threshold
amount. For purposes of the preceding sentence, the
term ``modified adjusted gross income'' means adjusted
gross income increased by any amount excluded from
gross income under section 911, 931, or 933.
[(2) Threshold amount.--For purposes of paragraph
(1), the term ``threshold amount'' means--
[(A) $110,000 in the case of a joint return,
[(B) $75,000 in the case of an individual who
is not married, and
[(C) $55,000 in the case of a married
individual filing a separate return.
For purposes of this paragraph, marital status shall be
determined under section 7703.
[(c) Qualifying child.--For purposes of this section--
[(1) In general.--The term ``qualifying child'' means
a qualifying child of the taxpayer (as defined in
section 152(c)) who has not attained age 17.
[(2) Exception for certain noncitizens.--The term
``qualifying child'' shall not include any individual
who would not be a dependent if subparagraph (A) of
section 152(b)(3) were applied without regard to all
that follows ``resident of the United States''.]
(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an
amount equal to the sum of--
(1) $2,000 for each qualifying child of the taxpayer,
and
(2) $500 for each qualifying dependent (other than a
qualifying child) of the taxpayer.
(b) Limitation Based on Adjusted Gross Income.--The amount of
the credit allowable under subsection (a) shall be reduced (but
not below zero) by $50 for each $1,000 (or fraction thereof) by
which the taxpayer's modified adjusted gross income exceeds
$400,000 in the case of a joint return ($200,000 in any other
case). For purposes of the preceding sentence, the term
``modified adjusted gross income'' means adjusted gross income
increased by any amount excluded from gross income under
section 911, 931, or 933.
(c) Qualifying Child; Qualifying Dependent.--For purposes of
this section--
(1) Qualifying child.--The term ``qualifying child''
means any qualifying dependent of the taxpayer--
(A) who is a qualifying child (as defined in
section 7706(c)) of the taxpayer,
(B) who has not attained age 17 at the close
of the calendar year in which the taxable year
of the taxpayer begins, and
(C) whose name and social security number are
included on the taxpayer's return of tax for
the taxable year.
(2) Qualifying dependent.--The term ``qualifying
dependent'' means any dependent of the taxpayer (as
defined in section 7706 without regard to all that
follows ``resident of the United States'' in section
7706(b)(3)(A)) whose name and TIN are included on the
taxpayer's return of tax for the taxable year.
(3) Social security number defined.--For purposes of
this subsection, the term ``social security number''
means, with respect to a return of tax, a social
security number issued to an individual by the Social
Security Administration, but only if the social
security number is issued--
(A) to a citizen of the United States or
pursuant to subclause (I) (or that portion of
subclause (III) that relates to subclause (I))
of section 205(c)(2)(B)(i) of the Social
Security Act, and
(B) on or before the due date of filing such
return.
(d) Portion of credit refundable.--
(1) In general.--The aggregate credits allowed to a
taxpayer under subpart C shall be increased by the
lesser of--
[(A) the credit which would be allowed under
this section without regard to this subsection
and the limitation under section 26(a) or]
(A) the credit which would be allowed under
this section determined--
(i) by substituting ``$1,400'' for
``$2,000'' in subsection (a)(1),
(ii) without regard to subsection
(a)(2), and
(iii) without regard to this
subsection and the limitation under
section 26(a), or
(B) the amount by which the aggregate amount
of credits allowed by this subpart (determined
without regard to this subsection) would
increase if the limitation imposed by section
26(a) were increased by the greater of--
(i) 15 percent of so much of the
taxpayer's earned income (within the
meaning of section 32) which is taken
into account in computing taxable
income for the taxable year as exceeds
[$3,000] $2,500, or
(ii) in the case of a taxpayer with 3
or more qualifying children, the excess
(if any) of--
(I) the taxpayer's social
security taxes for the taxable
year, over
(II) the credit allowed under
section 32 for the taxable
year.
The amount of the credit allowed under this subsection
shall not be treated as a credit allowed under this
subpart and shall reduce the amount of credit otherwise
allowable under subsection (a) without regard to
section 26(a). For purposes of subparagraph (B), any
amount excluded from gross income by reason of section
112 shall be treated as earned income which is taken
into account in computing taxable income for the
taxable year.
(2) Social security taxes.--For purposes of paragraph
(1)--
(A) In general.--The term ``social security
taxes'' means, with respect to any taxpayer for
any taxable year--
(i) the amount of the taxes imposed
by sections 3101 and 3201(a) on amounts
received by the taxpayer during the
calendar year in which the taxable year
begins,
(ii) 50 percent of the taxes imposed
by section 1401 on the self-employment
income of the taxpayer for the taxable
year, and
(iii) 50 percent of the taxes imposed
by section 3211(a) on amounts received
by the taxpayer during the calendar
year in which the taxable year begins.
(B) Coordination with special refund of
social security taxes.--The term ``social
security taxes'' shall not include any taxes to
the extent the taxpayer is entitled to a
special refund of such taxes under section
6413(c).
(C) Special rule.--Any amounts paid pursuant
to an agreement under section 3121(l) (relating
to agreements entered into by American
employers with respect to foreign affiliates)
which are equivalent to the taxes referred to
in subparagraph (A)(i) shall be treated as
taxes referred to in such subparagraph.
(3) Exception for taxpayers excluding foreign earned
income.--Paragraph (1) shall not apply to any taxpayer
for any taxable year if such taxpayer elects to exclude
any amount from gross income under section 911 for such
taxable year.
(4) Adjustment for inflation.--
(A) In general.--In the case of a taxable
year beginning after 2018, the $1,400 amount in
paragraph (1)(A)(i) shall be increased by an
amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``2017'' for ``2016'' in subparagraph
(A)(ii) thereof.
(B) Rounding.--If any increase under
subparagraph (A) is not a multiple of $100,
such increase shall be rounded to the next
lowest multiple of $100.
(C) Limitation.--The amount of any increase
under subparagraph (A) (after the application
of subparagraph (B)) shall not exceed $600.
[(e) Identification requirements.--
[(1) Qualifying child identification requirement.--No
credit shall be allowed under this section to a
taxpayer with respect to any qualifying child unless
the taxpayer includes the name and taxpayer
identification number of such qualifying child on the
return of tax for the taxable year and such taxpayer
identification number was issued on or before the due
date for filing such return.
[(2) Taxpayer identification requirement.--No credit
shall be allowed under this section if the taxpayer
identification number of the taxpayer was issued after
the due date for filing the return for the taxable
year.]
(e) Taxpayer Identification Requirement.--No credit shall be
allowed under this section if the identifying number of the
taxpayer was issued after the due date for filing the return of
tax for the taxable year.
(f) Taxable year must be full taxable year.--Except in the
case of a taxable year closed by reason of the death of the
taxpayer, no credit shall be allowable under this section in
the case of a taxable year covering a period of less than 12
months.
(g) Restrictions on taxpayers who improperly claimed credit
in prior year.--
(1) Taxpayers making prior fraudulent or reckless
claims.--
(A) In general.--No credit shall be allowed
under this section for any taxable year in the
disallowance period.
(B) Disallowance period.--For purposes of
subparagraph (A), the disallowance period is--
(i) the period of 10 taxable years
after the most recent taxable year for
which there was a final determination
that the taxpayer's claim of credit
under this section was due to fraud,
and
(ii) the period of 2 taxable years
after the most recent taxable year for
which there was a final determination
that the taxpayer's claim of credit
under this section was due to reckless
or intentional disregard of rules and
regulations (but not due to fraud).
(2) Taxpayers making improper prior claims.--In the
case of a taxpayer who is denied credit under this
section for any taxable year as a result of the
deficiency procedures under subchapter B of chapter 63,
no credit shall be allowed under this section for any
subsequent taxable year unless the taxpayer provides
such information as the Secretary may require to
demonstrate eligibility for such credit.
[(h) Special rules for taxable years 2018 through 2025.--
[(1) In general.--In the case of a taxable year
beginning after December 31, 2017, and before January
1, 2026, this section shall be applied as provided in
paragraphs (2) through (7).
[(2) Credit amount.--Subsection (a) shall be applied
by substituting ``$2,000'' for ``$1,000''.
[(3) Limitation.--In lieu of the amount determined
under subsection (b)(2), the threshold amount shall be
$400,000 in the case of a joint return ($200,000 in any
other case).
[(4) Partial credit allowed for certain other
dependents.--
[(A) In general.--The credit determined under
subsection (a) (after the application of
paragraph (2)) shall be increased by $500 for
each dependent of the taxpayer (as defined in
section 152) other than a qualifying child
described in subsection (c).
[(B) Exception for certain noncitizens.--
Subparagraph (A) shall not apply with respect
to any individual who would not be a dependent
if subparagraph (A) of section 152(b)(3) were
applied without regard to all that follows
``resident of the United States''.
[(C) Certain qualifying children.--In the
case of any qualifying child with respect to
whom a credit is not allowed under this section
by reason of paragraph (7), such child shall be
treated as a dependent to whom subparagraph (A)
applies.
[(5) Maximum amount of refundable credit.--
[(A) In general.--The amount determined under
subsection (d)(1)(A) with respect to any
qualifying child shall not exceed $1,400, and
such subsection shall be applied without regard
to paragraph (4) of this subsection.
[(B) Adjustment for inflation.--In the case
of a taxable year beginning after 2018, the
$1,400 amount in subparagraph (A) shall be
increased by an amount equal to--
[(i) such dollar amount, multiplied
by
[(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``2017'' for ``2016'' in subparagraph
(A)(ii) thereof.
If any increase under this clause is not a
multiple of $100, such increase shall be
rounded to the next lowest multiple of $100.
[(6) Earned income threshold for refundable credit.--
Subsection (d)(1)(B)(i) shall be applied by
substituting ``$2,500'' for ``$3,000''.
[(7) Social security number required.--No credit
shall be allowed under this section to a taxpayer with
respect to any qualifying child unless the taxpayer
includes the social security number of such child on
the return of tax for the taxable year. For purposes of
the preceding sentence, the term ``social security
number'' means a social security number issued to an
individual by the Social Security Administration, but
only if the social security number is issued--
[(A) to a citizen of the United States or
pursuant to subclause (I) (or that portion of
subclause (III) that relates to subclause (I))
of section 205(c)(2)(B)(i) of the Social
Security Act, and
[(B) before the due date for such return.]
* * * * * * *
SEC. 25A. AMERICAN OPPORTUNITY AND LIFETIME LEARNING CREDITS.
(a) Allowance of credit.--In the case of an individual, there
shall be allowed as a credit against the tax imposed by this
chapter for the taxable year the amount equal to the sum of--
(1) the American Opportunity Tax Credit, plus
(2) the Lifetime Learning Credit.
(b) American Opportunity Tax Credit.--
(1) Per student credit.--In the case of any eligible
student for whom an election is in effect under this
section for any taxable year, the American Opportunity
Tax Credit is an amount equal to the sum of--
(A) 100 percent of so much of the qualified
tuition and related expenses paid by the
taxpayer during the taxable year (for education
furnished to the eligible student during any
academic period beginning in such taxable year)
as does not exceed $2,000, plus
(B) 25 percent of such expenses so paid as
exceeds $2,000 but does not exceed $4,000.
(2) Limitations applicable to American Opportunity
Tax Credit.--
(A) Credit allowed only for 4 taxable
years.--An election to have this section apply
with respect to any eligible student for
purposes of the American Opportunity Tax Credit
under subsection (a)(1) may not be made for any
taxable year if such an election (by the
taxpayer or any other individual) is in effect
with respect to such student for any 4 prior
taxable years.
(B) Credit allowed for year only if
individual is at least 1/2 time student for
portion of year.--The American Opportunity Tax
Credit under subsection (a)(1) shall not be
allowed for a taxable year with respect to the
qualified tuition and related expenses of an
individual unless such individual is an
eligible student for at least one academic
period which begins during such year.
(C) Credit allowed only for first 4 years of
post-secondary education.--The American
Opportunity Tax Credit under subsection (a)(1)
shall not be allowed for a taxable year with
respect to the qualified tuition and related
expenses of an eligible student if the student
has completed (before the beginning of such
taxable year) the first 4 years of
postsecondary education at an eligible
educational institution.
(D) Denial of credit if student convicted of
a felony drug offense.--The American
Opportunity Tax Credit under subsection (a)(1)
shall not be allowed for qualified tuition and
related expenses for the enrollment or
attendance of a student for any academic period
if such student has been convicted of a Federal
or State felony offense consisting of the
possession or distribution of a controlled
substance before the end of the taxable year
with or within which such period ends.
(3) Eligible student.--For purposes of this
subsection, the term ``eligible student'' means, with
respect to any academic period, a student who--
(A) meets the requirements of section
484(a)(1) of the Higher Education Act of 1965
(20 U.S.C. 1091(a)(1)), as in effect on the
date of the enactment of this section, and
(B) is carrying at least 1/2 the normal full-
time work load for the course of study the
student is pursuing.
(4) Restrictions on taxpayers who improperly claimed
American Opportunity Tax credit in prior years.--
(A) Taxpayers making prior fraudulent or
reckless claims.--
(i) In general.--No American
Opportunity Tax Credit shall be allowed
under this section for any taxable year
in the disallowance period.
(ii) Disallowance period.--For
purposes of subparagraph (A), the
disallowance period is--
(I) the period of 10 taxable
years after the most recent
taxable year for which there
was a final determination that
the taxpayer's claim of the
American Opportunity Tax Credit
under this section was due to
fraud, and
(II) the period of 2 taxable
years after the most recent
taxable year for which there
was a final determination that
the taxpayer's claim of the
American Opportunity Tax Credit
under this section was due to
reckless or intentional
disregard of rules and
regulations (but not due to
fraud).
(B) Taxpayers making improper prior claims.--
In the case of a taxpayer who is denied the
American Opportunity Tax Credit under this
section for any taxable year as a result of the
deficiency procedures under subchapter B of
chapter 63, no American Opportunity Tax Credit
shall be allowed under this section for any
subsequent taxable year unless the taxpayer
provides such information as the Secretary may
require to demonstrate eligibility for such
credit.
(c) Lifetime Learning Credit.--
(1) Per taxpayer credit.--The Lifetime Learning
Credit for any taxpayer for any taxable year is an
amount equal to 20 percent of so much of the qualified
tuition and related expenses paid by the taxpayer
during the taxable year (for education furnished during
any academic period beginning in such taxable year) as
does not exceed $10,000.
(2) Special rules for determining expenses.--
(A) Coordination with American Opportunity
Tax Credit.--The qualified tuition and related
expenses with respect to an individual who is
an eligible student for whom a American
Opportunity Tax Credit under subsection (a)(1)
is allowed for the taxable year shall not be
taken into account under this subsection.
(B) Expenses eligible for lifetime learning
credit.--For purposes of paragraph (1),
qualified tuition and related expenses shall
include expenses described in subsection (f)(1)
with respect to any course of instruction at an
eligible educational institution to acquire or
improve job skills of the individual.
(d) Limitations based on modified adjusted gross income.--
(1) American opportunity tax credit.--The American
Opportunity Tax Credit (determined without regard to
this paragraph) shall be reduced (but not below zero)
by the amount which bears the same ratio to such credit
(as so determined) as--
(A) the excess of--
(i) the taxpayer's modified adjusted
gross income for such taxable year,
over
(ii) $80,000 ($160,000 in the case of
a joint return), bears to (B) $10,000
($20,000 in the case of a joint
return).
(2) Lifetime learning credit.--The Lifetime Learning
Credit (determined without regard to this paragraph)
shall be reduced (but not below zero) by the amount
which bears the same ratio to such credit (as so
determined) as--
(A) the excess of--
(i) the taxpayer's modified adjusted
gross income for such taxable year,
over
(ii) $40,000 ($80,000 in the case of
a joint return), bears to (B) $10,000
($20,000 in the case of a joint
return).
(3) Modified adjusted gross income.--For purposes of
this subsection, the term ``modified adjusted gross
income'' means the adjusted gross income of the
taxpayer for the taxable year increased by any amount
excluded from gross income under section 911, 931, or
933.
(e) Election not to have section apply.--A taxpayer may elect
not to have this section apply with respect to the qualified
tuition and related expenses of an individual for any taxable
year.
(f) Definitions.--For purposes of this section--
(1) Qualified tuition and related expenses.--
(A) In general.--The term ``qualified tuition
and related expenses'' means tuition and fees
required for the enrollment or attendance of--
(i) the taxpayer,
(ii) the taxpayer's spouse, or
(iii) any dependent of the taxpayer
[with respect to whom the taxpayer is
allowed a deduction under section 151],
at an eligible educational institution for
courses of instruction of such individual at
such institution.
(B) Exception for education involving sports,
etc.--Such term does not include expenses with
respect to any course or other education
involving sports, games, or hobbies, unless
such course or other education is part of the
individual's degree program.
(C) Exception for nonacademic fees.--Such
term does not include student activity fees,
athletic fees, insurance expenses, or other
expenses unrelated to an individual's academic
course of instruction.
(D) Required course materials taken into
account for American Opportunity Tax Credit.--
For purposes of determining the American
Opportunity Tax Credit, subparagraph (A) shall
be applied by substituting ``tuition, fees, and
course materials'' for ``tuition and fees''.
(2) Eligible educational institution.--The term
``eligible educational institution'' means an
institution--
(A) which is described in section 481 of the
Higher Education Act of 1965 (20 U.S.C. 1088),
as in effect on the date of the enactment of
this section, and
(B) which is eligible to participate in a
program under title IV of such Act.
(g) Special rules.--
(1) Identification requirement.--
(A) In general.--No credit shall be allowed
under subsection (a) to a taxpayer with respect
to the qualified tuition and related expenses
of an individual unless the taxpayer includes
the name and taxpayer identification number of
such individual on the return of tax for the
taxable year.
(B) Additional identification requirements
with respect to American Opportunity Tax
Credit.--
(i) Student.--The requirements of
subparagraph (A) shall not be treated
as met with respect to the American
Opportunity Tax Credit unless the
individual's taxpayer identification
number was issued on or before the due
date for filing the return of tax for
the taxable year.
(ii) Taxpayer.--No American
Opportunity Tax Credit shall be allowed
under this section if the taxpayer
identification number of the taxpayer
was issued after the due date for
filing the return for the taxable year.
(iii) Institution.--No American
Opportunity Tax Credit shall be allowed
under this section unless the taxpayer
includes the employer identification
number of any institution to which
qualified tuition and related expenses
were paid with respect to the
individual.
(2) Adjustment for certain scholarships, etc..--The
amount of qualified tuition and related expenses
otherwise taken into account under subsection (a) with
respect to an individual for an academic period shall
be reduced (before the application of subsections (b),
(c), and (d)) by the sum of any amounts paid for the
benefit of such individual which are allocable to such
period as--
(A) a qualified scholarship which is
excludable from gross income under section 117,
(B) an educational assistance allowance under
chapter 30, 31, 32, 34, or 35 of title 38,
United States Code, or under chapter 1606 of
title 10, United States Code, and
(C) a payment (other than a gift, bequest,
devise, or inheritance within the meaning of
section 102(a)) for such individual's
educational expenses, or attributable to such
individual's enrollment at an eligible
educational institution, which is excludable
from gross income under any law of the United
States.
(3) Treatment of expenses paid by dependent.--[If a
deduction under section 151 with respect to an
individual is allowed to another taxpayer] If an
individual is a dependent of another taxpayer for a
taxable year beginning in the calendar year in which
such individual's taxable year begins--
(A) no credit shall be allowed under
subsection (a) to such individual for such
individual's taxable year,
(B) qualified tuition and related expenses
paid by such individual during such
individual's taxable year shall be treated for
purposes of this section as paid by such other
taxpayer, and
(C) a statement described in paragraph (8)
and received by such individual shall be
treated as received by the taxpayer.
(4) Treatment of certain prepayments.--If qualified
tuition and related expenses are paid by the taxpayer
during a taxable year for an academic period which
begins during the first 3 months following such taxable
year, such academic period shall be treated for
purposes of this section as beginning during such
taxable year.
(5) Denial of double benefit.--No credit shall be
allowed under this section for any expense for which a
deduction is allowed under any other provision of this
chapter.
(6) No credit for married individuals filing separate
returns.--If the taxpayer is a married individual
(within the meaning of section 7703), this section
shall apply only if the taxpayer and the taxpayer's
spouse file a joint return for the taxable year.
(7) Nonresident aliens.--If the taxpayer is a
nonresident alien individual for any portion of the
taxable year, this section shall apply only if such
individual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
(8) Payee statement requirement.--Except as otherwise
provided by the Secretary, no credit shall be allowed
under this section unless the taxpayer receives a
statement furnished under section 6050S(d) which
contains all of the information required by paragraph
(2) thereof.
(h) Inflation adjustment.--
(1) In general.--In the case of a taxable year
beginning after 2001, the $40,000 and $80,000 amounts
in subsection (d)(2) shall each be increased by an
amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2000'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $1,000, such amount
shall be rounded to the next lowest multiple of $1,000.
(i) Portion of American Opportunity Tax Credit made
refundable.--Forty percent of so much of the credit allowed
under subsection (a) as is attributable to the American
Opportunity Tax Credit (determined after application of
subsection (d) and without regard to this paragraph and section
26(a)) shall be treated as a credit allowable under subpart C
(and not allowed under subsection (a)). The preceding sentence
shall not apply to any taxpayer for any taxable year if such
taxpayer is a child to whom subsection (g) of section 1 applies
for such taxable year.
(j) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry out
this section, including regulations providing for a recapture
of the credit allowed under this section in cases where there
is a refund in a subsequent taxable year of any amount which
was taken into account in determining the amount of such
credit.
SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN
INDIVIDUALS.
(a) Allowance of credit.--In the case of an eligible
individual, there shall be allowed as a credit against the tax
imposed by this subtitle for the taxable year an amount equal
to the applicable percentage of so much of the qualified
retirement savings contributions of the eligible individual for
the taxable year as do not exceed $2,000.
(b) Applicable percentage.--For purposes of this section--
(1) Joint returns.--In the case of a joint return,
the applicable percentage is--
(A) if the adjusted gross income of the
taxpayer is not over $30,000, 50 percent,
(B) if the adjusted gross income of the
taxpayer is over $30,000 but not over $32,500,
20 percent,
(C) if the adjusted gross income of the
taxpayer is over $32,500 but not over $50,000,
10 percent, and
(D) if the adjusted gross income of the
taxpayer is over $50,000, zero percent.
(2) Other returns.--In the case of--
(A) a head of household, the applicable
percentage shall be determined under paragraph
(1) except that such paragraph shall be applied
by substituting for each dollar amount therein
(as adjusted under paragraph (3)) a dollar
amount equal to 75 percent of such dollar
amount, and
(B) any taxpayer not described in paragraph
(1) or subparagraph (A), the applicable
percentage shall be determined under paragraph
(1) except that such paragraph shall be applied
by substituting for each dollar amount therein
(as adjusted under paragraph (3)) a dollar
amount equal to 50 percent of such dollar
amount.
(3) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 2006, each of
the dollar amounts in paragraph (1) shall be increased
by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2005'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $500.
(c) Eligible individual.--For purposes of this section--
(1) In general.--The term ``eligible individual''
means any individual if such individual has attained
the age of 18 as of the close of the taxable year.
(2) Dependents and full-time students not eligible.--
The term ``eligible individual'' shall not include--
(A) [any individual with respect to whom a
deduction under section 151 is allowed to
another taxpayer] any individual who is a
dependent of another taxpayer for a taxable
year beginning in the calendar year in which
such individual's taxable year begins, and
(B) any individual who is a student (as
defined in [section 152(f)(2)] section
7706(f)(2)).
(d) Qualified retirement savings contributions.--For purposes
of this section--
(1) In general.--The term ``qualified retirement
savings contributions'' means, with respect to any
taxable year, the sum of--
(A) the amount of the qualified retirement
contributions (as defined in section 219(e))
made by the eligible individual,
(B) the amount of--
(i) any elective deferrals (as
defined in section 402(g)(3)) of such
individual, and
(ii) any elective deferral of
compensation by such individual under
an eligible deferred compensation plan
(as defined in section 457(b)) of an
eligible employer described in section
457(e)(1)(A),
(C) the amount of voluntary employee
contributions by such individual to any
qualified retirement plan (as defined in
section 4974(c)), and
(D) the amount of contributions [made before
January 1, 2026,] by such individual to the
ABLE account (within the meaning of section
529A) of which such individual is the
designated beneficiary.
(2) Reduction for certain distributions.--
(A) In general.--The qualified retirement
savings contributions determined under
paragraph (1) shall be reduced (but not below
zero) by the aggregate distributions received
by the individual during the testing period
from any entity of a type to which
contributions under paragraph (1) may be made.
The preceding sentence shall not apply to the
portion of any distribution which is not
includible in gross income by reason of a
trustee-to-trustee transfer or a rollover
distribution.
(B) Testing period.--For purposes of
subparagraph (A), the testing period, with
respect to a taxable year, is the period which
includes--
(i) such taxable year,
(ii) the 2 preceding taxable years,
and
(iii) the period after such taxable
year and before the due date (including
extensions) for filing the return of
tax for such taxable year.
(C) Excepted distributions.--There shall not
be taken into account under subparagraph (A)--
(i) any distribution referred to in
section 72(p), 401(k)(8), 401(m)(6),
402(g)(2), 404(k), or 408(d)(4), and
(ii) any distribution to which
section 408A(d)(3) applies.
(D) Treatment of distributions received by
spouse of individual.--For purposes of
determining distributions received by an
individual under subparagraph (A) for any
taxable year, any distribution received by the
spouse of such individual shall be treated as
received by such individual if such individual
and spouse file a joint return for such taxable
year and for the taxable year during which the
spouse receives the distribution.
(e) Adjusted gross income.--For purposes of this section,
adjusted gross income shall be determined without regard to
sections 911, 931, and 933.
(f) Investment in the contract.--Notwithstanding any other
provision of law, a qualified retirement savings contribution
shall not fail to be included in determining the investment in
the contract for purposes of section 72 by reason of the credit
under this section.
* * * * * * *
Subpart C--Refundable Credits
* * * * * * *
SEC. 32. EARNED INCOME.
(a) Allowance of credit.--
(1) In general.--In the case of an eligible
individual, there shall be allowed as a credit against
the tax imposed by this subtitle for the taxable year
an amount equal to the credit percentage of so much of
the taxpayer's earned income for the taxable year as
does not exceed the earned income amount.
(2) Limitation.--The amount of the credit allowable
to a taxpayer under paragraph (1) for any taxable year
shall not exceed the excess (if any) of--
(A) the credit percentage of the earned
income amount, over
(B) the phaseout percentage of so much of the
adjusted gross income (or, if greater, the
earned income) of the taxpayer for the taxable
year as exceeds the phaseout amount.
(b) Percentages and amounts.--For purposes of subsection
(a)--
(1) Percentages.--The credit percentage and the
phaseout percentage shall be determined as follows:
------------------------------------------------------------------------
In the case of an
eligible individual The credit percentage The phaseout
with: is: percentage is:
------------------------------------------------------------------------
1 qualifying child 34 15.98
2 qualifying children 40 21.06
3 or more qualifying 45 21.06
children
No qualifying children 7.65 7.65
------------------------------------------------------------------------
(2) Amounts.--
(A) In general.--Subject to subparagraph (B),
the earned income amount and the phaseout
amount shall be determined as follows:
------------------------------------------------------------------------
In the case of an The earned income The phaseout amount
eligible individual with: amount is: is:
------------------------------------------------------------------------
1 qualifying child $6,330 $11,610
2 or more qualifying $8,890 $11,610
children
No qualifying children $4,220 $ 5,280
------------------------------------------------------------------------
(B) Joint returns.--In the case of a joint
return filed by an eligible individual and such
individual's spouse, the phaseout amount
determined under subparagraph (A) shall be
increased by $5,000.
(c) Definitions and special rules.--For purposes of this
section--
(1) Eligible individual.--
(A) In general.--The term ``eligible
individual'' means--
(i) any individual who has a
qualifying child for the taxable year,
or
(ii) any other individual who does
not have a qualifying child for the
taxable year, if--
(I) such individual's
principal place of abode is in
the United States for more than
one-half of such taxable year,
(II) such individual (or, if
the individual is married,
either the individual or the
individual's spouse) has
attained age 25 but not
attained age 65 before the
close of the taxable year, and
(III) such individual is not
[a dependent for whom a
deduction is allowable under
section 151 to another
taxpayer] a dependent of
another taxpayer for any
taxable year beginning in the
same calendar year as such
taxable year.
For purposes of the preceding sentence, marital
status shall be determined under section 7703.
(B) Qualifying child ineligible.--If an
individual is the qualifying child of a
taxpayer for any taxable year of such taxpayer
beginning in a calendar year, such individual
shall not be treated as an eligible individual
for any taxable year of such individual
beginning in such calendar year.
(C) Exception for individual claiming
benefits under section 911.--The term
``eligible individual'' does not include any
individual who claims the benefits of section
911 (relating to citizens or residents living
abroad) for the taxable year.
(D) Limitation on eligibility of nonresident
aliens.--The term ``eligible individual'' shall
not include any individual who is a nonresident
alien individual for any portion of the taxable
year unless such individual is treated for such
taxable year as a resident of the United States
for purposes of this chapter by reason of an
election under subsection (g) or (h) of section
6013.
(E) Identification number requirement.--No
credit shall be allowed under this section to
an eligible individual who does not include on
the return of tax for the taxable year--
(i) such individual's taxpayer
identification number, and
(ii) if the individual is married
(within the meaning of section
7703),the taxpayer identification
number of such individual's spouse.
(G) Individuals who do not include TIN, etc.,
of any qualifying child.--No credit shall be
allowed under this section to any eligible
individual who has one or more qualifying
children if no qualifying child of such
individual is taken into account under
subsection (b) by reason of paragraph (3)(D).
(2) Earned income.--
(A) The term ``earned income'' means--
(i) wages, salaries, tips, and other
employee compensation, but only if such
amounts are includible in gross income
for the taxable year, plus
(ii) the amount of the taxpayer's net
earnings from self-employment for the
taxable year (within the meaning of
section 1402(a)), but such net earnings
shall be determined with regard to the
deduction allowed to the taxpayer by
section 164(f).
(B) 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 amount to which section
871(a) applies (relating to income of
nonresident alien individuals not
connected with United States business)
shall be taken into account,
(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,
(v) no amount described in
subparagraph (A) received for service
performed in work activities as defined
in paragraph (4) or (7) of section
407(d) of the Social Security Act to
which the taxpayer is assigned under
any State program under part A of title
IV of such Act shall be taken into
account, but only to the extent such
amount is subsidized under such State
program, and
(vi) a taxpayer may elect to treat
amounts excluded from gross income by
reason of section 112 as earned income.
(3) Qualifying child.--
(A) In general.--The term ``qualifying
child'' means a qualifying child of the
taxpayer (as defined in [section 152(c)]
section 7706(c), determined without regard to
paragraph (1)(D) thereof and [section 152(e)]
section 7706(e)).
(B) Married individual.--The term
``qualifying child'' shall not include an
individual who is married as of the close of
the taxpayer's taxable year [unless the
taxpayer is entitled to a deduction under
section 151 for such taxable year with respect
to such individual (or would be so entitled but
for section 152(e)] if such individual is not
treated as a dependent of such taxpayer for
such taxable year by reason of section
7706(b)(2) (determined without regard to
section 7706(e))).
(C) Place of abode.--For purposes of
subparagraph (A), the requirements of [section
152(c)(1)(B)] section 7706(c)(1)(B) shall be
met only if the principal place of abode is in
the United States.
(D) Identification requirements.--
(i) In general.--A qualifying child
shall not be taken into account under
subsection (b) unless the taxpayer
includes the name, age, and TIN of the
qualifying child on the return of tax
for the taxable year.
(ii) Other methods.--The Secretary
may prescribe other methods for
providing the information described in
clause (i).
(4) Treatment of military personnel stationed outside
the United States.--For purposes of paragraphs
(1)(A)(ii)(I) and (3)(C), the principal place of abode
of a member of the Armed Forces of the United States
shall be treated as in the United States during any
period during which such member is stationed outside
the United States while serving on extended active duty
with the Armed Forces of the United States. For
purposes of the preceding sentence, the term ``extended
active duty'' means any period of active duty pursuant
to a call or order to such duty for a period in excess
of 90 days or for an indefinite period.
(d) Married individuals.--In the case of an individual who is
married (within the meaning of section 7703), this section
shall apply only if a joint return is filed for the taxable
year under section 6013.
(e) Taxable year must be full taxable year.--Except in the
case of a taxable year closed by reason of the death of the
taxpayer, no credit shall be allowable under this section in
the case of a taxable year covering a period of less than 12
months.
(f) Amount of credit to be determined under tables.--
(1) In general.--The amount of the credit allowed by
this section shall be determined under tables
prescribed by the Secretary.
(2) Requirements for tables.--The tables prescribed
under paragraph (1) shall reflect the provisions of
subsections (a) and (b) and shall have income brackets
of not greater than $50 each--
(A) for earned income between $0 and the
amount of earned income at which the credit is
phased out under subsection (b), and
(B) for adjusted gross income between the
dollar amount at which the phaseout begins
under subsection (b) and the amount of adjusted
gross income at which the credit is phased out
under subsection (b).
(i) Denial of credit for individuals having excessive
investment income.--
(1) In general.--No credit shall be allowed under
subsection (a) for the taxable year if the aggregate
amount of disqualified income of the taxpayer for the
taxable year exceeds $2,200.
(2) Disqualified income.--For purposes of paragraph
(1), the term ``disqualified income'' means--
(A) interest or dividends to the extent
includible in gross income for the taxable
year,
(B) interest received or accrued during the
taxable year which is exempt from tax imposed
by this chapter,
(C) the excess (if any) of--
(i) gross income from rents or
royalties not derived in the ordinary
course of a trade or business, over
(ii) the sum of--
(I) the deductions (other
than interest) which are
clearly and directly allocable
to such gross income, plus
(II) interest deductions
properly allocable to such
gross income,
(D) the capital gain net income (as defined
in section 1222) of the taxpayer for such
taxable year, and
(E) the excess (if any) of--
(i) the aggregate income from all
passive activities for the taxable year
(determined without regard to any
amount included in earned income under
subsection (c)(2) or described in a
preceding subparagraph), over
(ii) the aggregate losses from all
passive activities for the taxable year
(as so determined).
For purposes of subparagraph (E), the term
``passive activity'' has the meaning given such
term by section 469.
(j) Inflation adjustments.--
(1) In general.--In the case of any taxable year
beginning after 2015, each of the dollar amounts in
subsections (b)(2) and (i)(1) shall be increased by an
amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting in subparagraph (A)(ii) thereof--
(i) in the case of amounts in
subsections (b)(2)(A) and (i)(1),
"calendar year 1995" for "calendar year
2016, and
(ii) in the case of the $5,000 amount
in subsection (b)(2)(B), ``calendar
year 2008'' for ``calendar year 2016''.
(2) Rounding.--
(A) In general.--If any dollar amount in
subsection (b)(2)(A) (after being increased
under subparagraph (B) thereof), after being
increased under paragraph (1), is not a
multiple of $10, such dollar amount shall be
rounded to the nearest multiple of $10.
(B) Disqualified income threshold amount.--If
the dollar amount in subsection (i)(1), after
being increased under paragraph (1), is not a
multiple of $50, such amount shall be rounded
to the next lowest multiple of $50.
(k) Restrictions on taxpayers who improperly claimed credit
in prior year.--
(1) Taxpayers making prior fraudulent or reckless
claims.--
(A) In general.--No credit shall be allowed
under this section for any taxable year in the
disallowance period.
(B) Disallowance period.--For purposes of
paragraph (1), the disallowance period is--
(i) the period of 10 taxable years
after the most recent taxable year for
which there was a final determination
that the taxpayer's claim of credit
under this section was due to fraud,
and
(ii) the period of 2 taxable years
after the most recent taxable year for
which there was a final determination
that the taxpayer's claim of credit
under this section was due to reckless
or intentional disregard of rules and
regulations (but not due to fraud).
(2) Taxpayers making improper prior claims.--In the
case of a taxpayer who is denied credit under this
section for any taxable year as a result of the
deficiency procedures under subchapter B of chapter 63,
no credit shall be allowed under this section for any
subsequent taxable year unless the taxpayer provides
such information as the Secretary may require to
demonstrate eligibility for such credit.
(l) Coordination with certain means-tested programs.--For
purposes of--
(1) the United States Housing Act of 1937,
(2) title V of the Housing Act of 1949,
(3) section 101 of the Housing and Urban Development
Act of 1965,
(4) sections 221(d)(3), 235, and 236 of the National
Housing Act, and
(5) the Food and Nutrition Act of 2008, any refund
made to an individual (or the spouse of an individual)
by reason of this section shall not be treated as
income (and shall not be taken into account in
determining resources for the month of its receipt and
the following month).
(m) Identification numbers.--Solely for purposes of
subsections (c)(1)(E) and (c)(3)(D), a taxpayer identification
number means a social security number issued to an individual
by the Social Security Administration (other than a social
security number issued pursuant to clause (II) (or that portion
of clause (III) that relates to clause (II)) of section
205(c)(2)(B)(i) of the Social Security Act) on or before the
due date for filing the return for the taxable year.
* * * * * * *
SEC. 35. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS.
(a) In general.--In the case of an individual, there shall be
allowed as a credit against the tax imposed by subtitle A an
amount equal to 72.5 percent of the amount paid by the taxpayer
for coverage of the taxpayer and qualifying family members
under qualified health insurance for eligible coverage months
beginning in the taxable year.
(b) Eligible coverage month.--For purposes of this section--
(1) In general.--The term ``eligible coverage month''
means any month if--
(A) as of the first day of such month, the
taxpayer--
(i) is an eligible individual,
(ii) is covered by qualified health
insurance, the premium for which is
paid by the taxpayer,
(iii) does not have other specified
coverage, and
(iv) is not imprisoned under Federal,
State, or local authority, and
(B) such month begins more than 90 days after
the date of the enactment of the Trade Act of
2002, and before January 1, 2020.
(2) Joint returns.--In the case of a joint return,
the requirements of paragraph (1)(A) shall be treated
as met with respect to any month if at least 1 spouse
satisfies such requirements.
(c) Eligible individual.--For purposes of this section--
(1) In general.--The term ``eligible individual''
means--
(A) an eligible TAA recipient,
(B) an eligible alternative TAA recipient,
and
(C) an eligible PBGC pension recipient.
(2) Eligible TAA recipient.--
(A) In general.--Except as provided in
subparagraph (B), the term ``eligible TAA
recipient'' means, with respect to any month,
any individual who is receiving for any day of
such month a trade readjustment allowance under
chapter 2 of title II of the Trade Act of 1974
or who would be eligible to receive such
allowance if section 231 of such Act were
applied without regard to subsection (a)(3)(B)
of such section. An individual shall continue
to be treated as an eligible TAA recipient
during the first month that such individual
would otherwise cease to be an eligible TAA
recipient by reason of the preceding sentence.
(B) Special rule.--In the case of any
eligible coverage month beginning after the
date of the enactment of this paragraph, the
term ``eligible TAA recipient'' means, with
respect to any month, any individual who--
(i) is receiving for any day of such
month a trade readjustment allowance
under chapter 2 of title II of the
Trade Act of 1974,
(ii) would be eligible to receive
such allowance except that such
individual is in a break in training
provided under a training program
approved under section 236 of such Act
that exceeds the period specified in
section 233(e) of such Act, but is
within the period for receiving such
allowances provided under section
233(a) of such Act, or
(iii) is receiving unemployment
compensation (as defined in section
85(b)) for any day of such month and
who would be eligible to receive such
allowance for such month if section 231
of such Act were applied without regard
to subsections (a)(3)(B) and (a)(5)
thereof.
An individual shall continue to be treated as
an eligible TAA recipient during the first
month that such individual would otherwise
cease to be an eligible TAA recipient by reason
of the preceding sentence.
(3) Eligible alternative TAA recipient.--The term
``eligible alternative TAA recipient'' means, with
respect to any month, any individual who--
(A) is a worker described in section
246(a)(3)(B) of the Trade Act of 1974 who is
participating in the program established under
section 246(a)(1) of such Act, and
(B) is receiving a benefit for such month
under section 246(a)(2) of such Act.
An individual shall continue to be treated as an
eligible alternative TAA recipient during the first
month that such individual would otherwise cease to be
an eligible alternative TAA recipient by reason of the
preceding sentence.
(4) Eligible PBGC pension recipient.--The term
``eligible PBGC pension recipient'' means, with respect
to any month, any individual who--
(A) has attained age 55 as of the first day
of such month, and
(B) is receiving a benefit for such month any
portion of which is paid by the Pension Benefit
Guaranty Corporation under title IV of the
Employee Retirement Income Security Act of
1974.
(d) Qualifying family member.--For purposes of this section--
(1) In general.--The term ``qualifying family
member'' means--
(A) the taxpayer's spouse, and
(B) any dependent of the taxpayer [with
respect to whom the taxpayer is entitled to a
deduction under section 151(c)] if the taxpayer
included such person's TIN on the return of tax
for the taxable year.
Such term does not include any individual who has other
specified coverage.
(2) Special dependency test in case of divorced
parents, etc..--If [section 152(e)] section 7706(e)
applies to any child with respect to any calendar year,
in the case of any taxable year beginning in such
calendar year, such child shall be treated as described
in paragraph (1)(B) with respect to the custodial
parent (as defined in [section 152(e)(4)(A)] section
7706(e)(4)(A)) and not with respect to the noncustodial
parent.
(e) Qualified health insurance.--For purposes of this
section--
(1) In general.--The term ``qualified health
insurance'' means any of the following:
(A) Coverage under a COBRA continuation
provision (as defined in section 9832(d)(1)).
(B) State-based continuation coverage
provided by the State under a State law that
requires such coverage.
(C) Coverage offered through a qualified
State high risk pool (as defined in section
2744(c)(2) of the Public Health Service Act).
(D) Coverage under a health insurance program
offered for State employees.
(E) Coverage under a State-based health
insurance program that is comparable to the
health insurance program offered for State
employees.
(F) Coverage through an arrangement entered
into by a State and--
(i) a group health plan (including
such a plan which is a multiemployer
plan as defined in section 3(37) of the
Employee Retirement Income Security Act
of 1974),
(ii) an issuer of health insurance
coverage,
(iii) an administrator, or
(iv) an employer.
(G) Coverage offered through a State
arrangement with a private sector health care
coverage purchasing pool.
(H) Coverage under a State-operated health
plan that does not receive any Federal
financial participation.
(I) Coverage under a group health plan that
is available through the employment of the
eligible individual's spouse.
(J) In the case of any eligible individual
and such individual's qualifying family
members, coverage under individual health
insurance (other than coverage enrolled in
through an Exchange established under the
Patient Protection and Affordable Care Act).
For purposes of this subparagraph, the term
``individual health insurance'' means any
insurance which constitutes medical care
offered to individuals other than in connection
with a group health plan and does not include
Federal- or State-based health insurance
coverage.
(K) Coverage under an employee benefit plan
funded by a voluntary employees' beneficiary
association (as defined in section 501(c)(9))
established pursuant to an order of a
bankruptcy court, or by agreement with an
authorized representative, as provided in
section 1114 of title 11, United States Code.
(2) Requirements for State-based coverage.--
(A) In general.--The term ``qualified health
insurance'' does not include any coverage
described in subparagraphs (B) through (H) of
paragraph (1) unless the State involved has
elected to have such coverage treated as
qualified health insurance under this section
and such coverage meets the following
requirements:
(i) Guaranteed issue.--Each
qualifying individual is guaranteed
enrollment if the individual pays the
premium for enrollment or provides a
qualified health insurance costs credit
eligibility certificate described in
section 7527 and pays the remainder of
such premium.
(ii) No imposition of preexisting
condition exclusion.--No pre-existing
condition limitations are imposed with
respect to any qualifying individual.
(iii) Nondiscriminatory premium.--The
total premium (as determined without
regard to any subsidies) with respect
to a qualifying individual may not be
greater than the total premium (as so
determined) for a similarly situated
individual who is not a qualifying
individual.
(iv) Same benefits.--Benefits under
the coverage are the same as (or
substantially similar to) the benefits
provided to similarly situated
individuals who are not qualifying
individuals.
(B) Qualifying individual.--For purposes of
this paragraph, the term ``qualifying
individual'' means--
(i) an eligible individual for whom,
as of the date on which the individual
seeks to enroll in the coverage
described in subparagraphs (B) through
(H) of paragraph (1), the aggregate of
the periods of creditable coverage (as
defined in section 9801(c)) is 3 months
or longer and who, with respect to any
month, meets the requirements of
clauses (iii) and (iv) of subsection
(b)(1)(A); and
(ii) the qualifying family members of
such eligible individual.
(3) Exception.--The term ``qualified health
insurance'' shall not include--
(A) a flexible spending or similar
arrangement, and
(B) any insurance if substantially all of its
coverage is of excepted benefits described in
section 9832(c).
(f) Other specified coverage.--For purposes of this section,
an individual has other specified coverage for any month if, as
of the first day of such month--
(1) Subsidized coverage.--
(A) In general.--Such individual is covered
under any insurance which constitutes medical
care (except insurance substantially all of the
coverage of which is of excepted benefits
described in section 9832(c)) under any health
plan maintained by any employer (or former
employer) of the taxpayer or the taxpayer's
spouse and at least 50 percent of the cost of
such coverage (determined under section 4980B)
is paid or incurred by the employer.
(B) Eligible alternative TAA recipients.--In
the case of an eligible alternative TAA
recipient, such individual is either--
(i) eligible for coverage under any
qualified health insurance (other than
insurance described in subparagraph
(A), (B), or (F) of subsection (e)(1))
under which at least 50 percent of the
cost of coverage (determined under
section 4980B(f)(4)) is paid or
incurred by an employer (or former
employer) of the taxpayer or the
taxpayer's spouse, or
(ii) covered under any such qualified
health insurance under which any
portion of the cost of coverage (as so
determined) is paid or incurred by an
employer (or former employer) of the
taxpayer or the taxpayer's spouse.
(C) Treatment of cafeteria plans.--For
purposes of subparagraphs (A) and (B), the cost
of coverage shall be treated as paid or
incurred by an employer to the extent the
coverage is in lieu of a right to receive cash
or other qualified benefits under a cafeteria
plan (as defined in section 125(d)).
(2) Coverage under medicare, medicaid, or SCHIP.--
Such individual--
(A) is entitled to benefits under part A of
title XVIII of the Social Security Act or is
enrolled under part B of such title, or
(B) is enrolled in the program under title
XIX or XXI of such Act (other than under
section 1928 of such Act).
(3) Certain other coverage.--Such individual--
(A) is enrolled in a health benefits plan
under chapter 89 of title 5, United States
Code, or
(B) is entitled to receive benefits under
chapter 55 of title 10, United States Code.
(g) Special rules.--
(1) Coordination with advance payments of credit.--
With respect to any taxable year, the amount which
would (but for this subsection) be allowed as a credit
to the taxpayer under subsection (a) shall be reduced
(but not below zero) by the aggregate amount paid on
behalf of such taxpayer under section 7527 for months
beginning in such taxable year.
(2) Coordination with other deductions.--Amounts
taken into account under subsection (a) shall not be
taken into account in determining any deduction allowed
under section 162(l) or 213.
(3) Medical and health savings accounts.--Amounts
distributed from an Archer MSA (as defined in section
220(d)) or from a health savings account (as defined in
section 223(d)) shall not be taken into account under
subsection (a).
(4) Denial of credit to dependents.--No credit shall
be allowed under this section to any individual with
respect to whom a deduction under section 151 is
allowable to another taxpayer for a taxable year
beginning in the calendar year in which such
individual's taxable year begins.
(5) Both spouses eligible individuals.--The spouse of
the taxpayer shall not be treated as a qualifying
family member for purposes of subsection (a), if--
(A) the taxpayer is married at the close of
the taxable year,
(B) the taxpayer and the taxpayer's spouse
are both eligible individuals during the
taxable year, and
(C) the taxpayer files a separate return for
the taxable year.
(6) Marital status; certain married individuals
living apart.--Rules similar to the rules of paragraphs
(3) and (4) of section 21(e) shall apply for purposes
of this section.
(7) Insurance which covers other individuals.--For
purposes of this section, rules similar to the rules of
section 213(d)(6) shall apply with respect to any
contract for qualified health insurance under which
amounts are payable for coverage of an individual other
than the taxpayer and qualifying family members.
(8) Treatment of payments.--For purposes of this
section--
(A) Payments by Secretary.--Payments made by
the Secretary on behalf of any individual under
section 7527 (relating to advance payment of
credit for health insurance costs of eligible
individuals) shall be treated as having been
made by the taxpayer on the first day of the
month for which such payment was made.
(B) Payments by taxpayer.--Payments made by
the taxpayer for eligible coverage months shall
be treated as having been made by the taxpayer
on the first day of the month for which such
payment was made.
(9) COBRA premium assistance.--In the case of an
assistance eligible individual who receives premium
reduction for COBRA continuation coverage under section
3001(a) of title III of division B of the American
Recovery and Reinvestment Act of 2009 for any month
during the taxable year, such individual shall not be
treated as an eligible individual, a certified
individual, or a qualifying family member for purposes
of this section or section 7527 with respect to such
month.
(10) Continued qualification of family members after
certain events.--
(A) Medicare eligibility.--In the case of any
month which would be an eligible coverage month
with respect to an eligible individual but for
subsection (f)(2)(A), such month shall be
treated as an eligible coverage month with
respect to such eligible individual solely for
purposes of determining the amount of the
credit under this section with respect to any
qualifying family members of such individual
(and any advance payment of such credit under
section 7527). This subparagraph shall only
apply with respect to the first 24 months after
such eligible individual is first entitled to
the benefits described in subsection (f)(2)(A).
(B) Divorce.--In the case of the finalization
of a divorce between an eligible individual and
such individual's spouse, such spouse shall be
treated as an eligible individual for purposes
of this section and section 7527 for a period
of 24 months beginning with the date of such
finalization, except that the only qualifying
family members who may be taken into account
with respect to such spouse are those
individuals who were qualifying family members
immediately before such finalization.
(C) Death.--In the case of the death of an
eligible individual--
(i) any spouse of such individual
(determined at the time of such death)
shall be treated as an eligible
individual for purposes of this section
and section 7527 for a period of 24
months beginning with the date of such
death, except that the only qualifying
family members who may be taken into
account with respect to such spouse are
those individuals who were qualifying
family members immediately before such
death, and
(ii) any individual who was a
qualifying family member of the
decedent immediately before such death
(or, in the case of an individual to
whom paragraph (4) applies, the
taxpayer to whom the deduction under
section 151 is allowable) shall be
treated as an eligible individual for
purposes of this section and section
7527 for a period of 24 months
beginning with the date of such death,
except that in determining the amount
of such credit only such qualifying
family member may be taken into
account.
(11) Election.--
(A) In general.--This section shall not apply
to any taxpayer for any eligible coverage month
unless such taxpayer elects the application of
this section for such month.
(B) Timing and applicability of election.--
Except as the Secretary may provide--
(i) an election to have this section
apply for any eligible coverage month
in a taxable year shall be made not
later than the due date (including
extensions) for the return of tax for
the taxable year; and
(ii) any election for this section to
apply for an eligible coverage month
shall apply for all subsequent eligible
coverage months in the taxable year
and, once made, shall be irrevocable
with respect to such months.
(12) Coordination with premium tax credit.--
(A) In general.--An eligible coverage month
to which the election under paragraph (11)
applies shall not be treated as a coverage
month (as defined in section 36B(c)(2)) for
purposes of section 36B with respect to the
taxpayer.
(B) Coordination with advance payments of
premium tax credit.--In the case of a taxpayer
who makes the election under paragraph (11)
with respect to any eligible coverage month in
a taxable year or on behalf of whom any advance
payment is made under section 7527 with respect
to any month in such taxable year--
(i) the tax imposed by this chapter
for the taxable year shall be increased
by the excess, if any, of--
(I) the sum of any advance
payments made on behalf of the
taxpayer under section 1412 of
the Patient Protection and
Affordable Care Act and section
7527 for months during such
taxable year, over
(II) the sum of the credits
allowed under this section
(determined without regard to
paragraph (1)) and section 36B
(determined without regard to
subsection (f)(1) thereof) for
such taxable year; and
(ii) section 36B(f)(2) shall not
apply with respect to such taxpayer for
such taxable year, except that if such
taxpayer received any advance payments
under section 7527 for any month in
such taxable year and is later allowed
a credit under section 36B for such
taxable year, then section 36B(f)(2)(B)
shall be applied by substituting the
amount determined under clause (i) for
the amount determined under section
36B(f)(2)(A).
(13) Regulations.--The Secretary may prescribe such
regulations and other guidance as may be necessary or
appropriate to carry out this section, section 6050T,
and section 7527.
* * * * * * *
SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.
(a) In general.--In the case of an applicable taxpayer, there
shall be allowed as a credit against the tax imposed by this
subtitle for any taxable year an amount equal to the premium
assistance credit amount of the taxpayer for the taxable year.
(b) Premium assistance credit amount.--For purposes of this
section--
(1) In general.--The term ``premium assistance credit
amount'' means, with respect to any taxable year, the
sum of the premium assistance amounts determined under
paragraph (2) with respect to all coverage months of
the taxpayer occurring during the taxable year.
(2) Premium assistance amount.--The premium
assistance amount determined under this subsection with
respect to any coverage month is the amount equal to
the lesser of--
(A) the monthly premiums for such month for 1
or more qualified health plans offered in the
individual market within a State which cover
the taxpayer, the taxpayer's spouse, or any
dependent (as defined in [section 152] section
7706) of the taxpayer and which were enrolled
in through an Exchange established by the State
under 1311 of the Patient Protection and
Affordable Care Act, or
(B) the excess (if any) of--
(i) the adjusted monthly premium for
such month for the applicable second
lowest cost silver plan with respect to
the taxpayer, over
(ii) an amount equal to 1/12 of the
product of the applicable percentage
and the taxpayer's household income for
the taxable year.
(3) Other terms and rules relating to premium
assistance amounts.--For purposes of paragraph (2)--
(A) Applicable percentage.--
(i) In general.--Except as provided
in clause (ii), the applicable
percentage for any taxable year shall
be the percentage such that the
applicable percentage for any taxpayer
whose household income is within an
income tier specified in the following
table shall increase, on a sliding
scale in a linear manner, from the
initial premium percentage to the final
premium percentage specified in such
table for such income tier:
------------------------------------------------------------------------
In the case of
household income
(expressed as a percent The initial premium The final premium
of poverty line) within percentage is-- percentage is--
the following income
tier:
------------------------------------------------------------------------
Up to 133% 2.0% 2.0%
133% up to 150% 3.0% 4.0%
150% up to 200% 4.0% 6.3%
200% up to 250% 6.3% 8.05%
250% up to 300% 8.05% 9.5%
300% up to 400% 9.5% 9.5%
------------------------------------------------------------------------
(ii) Indexing.--
(I) In general.--Subject to
subclause (II), in the case of
taxable years beginning in any
calendar year after 2014, the
initial and final applicable
percentages under clause (i)
(as in effect for the preceding
calendar year after application
of this clause) shall be
adjusted to reflect the excess
of the rate of premium growth
for the preceding calendar year
over the rate of income growth
for the preceding calendar
year.
(II) Additional adjustment.--
Except as provided in subclause
(III), in the case of any
calendar year after 2018, the
percentages described in
subclause (I) shall, in
addition to the adjustment
under subclause (I), be
adjusted to reflect the excess
(if any) of the rate of premium
growth estimated under
subclause (I) for the preceding
calendar year over the rate of
growth in the consumer price
index for the preceding
calendar year.
(III) Failsafe.--Subclause
(II) shall apply for any
calendar year only if the
aggregate amount of premium tax
credits under this section and
cost-sharing reductions under
section 1402 of the Patient
Protection and Affordable Care
Act for the preceding calendar
year exceeds an amount equal to
0.504 percent of the gross
domestic product for the
preceding calendar year.
(B) Applicable second lowest cost silver
plan.--The applicable second lowest cost silver
plan with respect to any applicable taxpayer is
the second lowest cost silver plan of the
individual market in the rating area in which
the taxpayer resides which--
(i) is offered through the same
Exchange through which the qualified
health plans taken into account under
paragraph (2)(A) were offered, and
(ii) provides--
(I) self-only coverage in the
case of an applicable
taxpayer--
(aa) whose tax for
the taxable year is
determined under
section 1(c) (relating
to unmarried
individuals other than
surviving spouses and
heads of households)
and who is not allowed
a deduction under
section 151 for the
taxable year with
respect to a dependent,
or
(bb) who is not
described in item (aa)
but who purchases only
self-only coverage, and
(II) family coverage in the
case of any other applicable
taxpayer.
If a taxpayer files a joint return and no
credit is allowed under this section with
respect to 1 of the spouses by reason of
subsection (e), the taxpayer shall be treated
as described in clause (ii)(I) [unless a
deduction is allowed under section 151 for the
taxable year with respect to a dependent]
unless the taxpayer has a dependent for the
taxable year (and the taxpayer included such
dependent's TIN on the return of tax for the
taxable year) other than either spouse and
subsection (e) does not apply to the dependent.
(C) Adjusted monthly premium.--The adjusted
monthly premium for an applicable second lowest
cost silver plan is the monthly premium which
would have been charged (for the rating area
with respect to which the premiums under
paragraph (2)(A) were determined) for the plan
if each individual covered under a qualified
health plan taken into account under paragraph
(2)(A) were covered by such silver plan and the
premium was adjusted only for the age of each
such individual in the manner allowed under
section 2701 of the Public Health Service Act.
In the case of a State participating in the
wellness discount demonstration project under
section 2705(d) of the Public Health Service
Act, the adjusted monthly premium shall be
determined without regard to any premium
discount or rebate under such project.
(D) Additional benefits.--If--
(i) a qualified health plan under
section 1302(b)(5) of the Patient
Protection and Affordable Care Act
offers benefits in addition to the
essential health benefits required to
be provided by the plan, or
(ii) a State requires a qualified
health plan under section 1311(d)(3)(B)
of such Act to cover benefits in
addition to the essential health
benefits required to be provided by the
plan,
the portion of the premium for the plan
properly allocable (under rules prescribed by
the Secretary of Health and Human Services) to
such additional benefits shall not be taken
into account in determining either the monthly
premium or the adjusted monthly premium under
paragraph (2).
(E) Special rule for pediatric dental
coverage.--For purposes of determining the
amount of any monthly premium, if an individual
enrolls in both a qualified health plan and a
plan described in section 1311(d)(2)(B)(ii) (I)
of the Patient Protection and Affordable Care
Act for any plan year, the portion of the
premium for the plan described in such section
that (under regulations prescribed by the
Secretary) is properly allocable to pediatric
dental benefits which are included in the
essential health benefits required to be
provided by a qualified health plan under
section 1302(b)(1)(J) of such Act shall be
treated as a premium payable for a qualified
health plan.
(c) Definition and rules relating to applicable taxpayers,
coverage months, and qualified health plan.--For purposes of
this section--
(1) Applicable taxpayer.--
(A) In general.--The term ``applicable
taxpayer'' means, with respect to any taxable
year, a taxpayer whose household income for the
taxable year equals or exceeds 100 percent but
does not exceed 400 percent of an amount equal
to the poverty line for a family of the size
involved.
(B) Special rule for certain individuals
lawfully present in the United States.--If--
(i) a taxpayer has a household income
which is not greater than 100 percent
of an amount equal to the poverty line
for a family of the size involved, and
(ii) the taxpayer is an alien
lawfully present in the United States,
but is not eligible for the medicaid
program under title XIX of the Social
Security Act by reason of such alien
status,
the taxpayer shall, for purposes of the credit
under this section, be treated as an applicable
taxpayer with a household income which is equal
to 100 percent of the poverty line for a family
of the size involved.
(C) Married couples must file joint return.--
If the taxpayer is married (within the meaning
of section 7703) at the close of the taxable
year, the taxpayer shall be treated as an
applicable taxpayer only if the taxpayer and
the taxpayer's spouse file a joint return for
the taxable year.
(D) Denial of credit to dependents.--No
credit shall be allowed under this section to
any individual [with respect to whom a
deduction under section 151 is allowable to
another taxpayer] who is a dependent of another
taxpayer for a taxable year beginning in the
calendar year in which such individual's
taxable year begins.
(2) Coverage month.--For purposes of this
subsection--
(A) In general.--The term ``coverage month''
means, with respect to an applicable taxpayer,
any month if--
(i) as of the first day of such month
the taxpayer, the taxpayer's spouse, or
any dependent of the taxpayer is
covered by a qualified health plan
described in subsection (b)(2)(A) that
was enrolled in through an Exchange
established by the State under section
1311 of the Patient Protection and
Affordable Care Act, and
(ii) the premium for coverage under
such plan for such month is paid by the
taxpayer (or through advance payment of
the credit under subsection (a) under
section 1412 of the Patient Protection
and Affordable Care Act).
(B) Exception for minimum essential
coverage.--
(i) In general.--The term ``coverage
month'' shall not include any month
with respect to an individual if for
such month the individual is eligible
for minimum essential coverage other
than eligibility for coverage described
in section 5000A(f)(1)(C) (relating to
coverage in the individual market).
(ii) Minimum essential coverage.--The
term ``minimum essential coverage'' has
the meaning given such term by section
5000A(f).
(C) Special rule for employer-sponsored
minimum essential coverage.--For purposes of
subparagraph (B)--
(i) Coverage must be affordable.--
Except as provided in clause (iii), an
employee shall not be treated as
eligible for minimum essential coverage
if such coverage--
(I) consists of an eligible
employer-sponsored plan (as
defined in section
5000A(f)(2)), and
(II) the employee's required
contribution (within the
meaning of section
5000A(e)(1)(B)) with respect to
the plan exceeds 9.5 percent of
the applicable taxpayer's
household income.
This clause shall also apply to an
individual who is eligible to enroll in
the plan by reason of a relationship
the individual bears to the employee.
(ii) Coverage must provide minimum
value.--Except as provided in clause
(iii), an employee shall not be treated
as eligible for minimum essential
coverage if such coverage consists of
an eligible employer-sponsored plan (as
defined in section 5000A(f)(2)) and the
plan's share of the total allowed costs
of benefits provided under the plan is
less than 60 percent of such costs.
(iii) Employee or family must not be
covered under employer plan.--Clauses
(i) and (ii) shall not apply if the
employee (or any individual described
in the last sentence of clause (i)) is
covered under the eligible employer-
sponsored plan or the grandfathered
health plan.
(iv) Indexing.--In the case of plan
years beginning in any calendar year
after 2014, the Secretary shall adjust
the 9.5 percent under clause (i)(II) in
the same manner as the percentages are
adjusted under subsection
(b)(3)(A)(ii).
(3) Definitions and other rules.--
(A) Qualified health plan.--The term
``qualified health plan'' has the meaning given
such term by section 1301(a) of the Patient
Protection and Affordable Care Act, except that
such term shall not include a qualified health
plan which is a catastrophic plan described in
section 1302(e) of such Act.
(B) Grandfathered health plan.--The term
``grandfathered health plan'' has the meaning
given such term by section 1251 of the Patient
Protection and Affordable Care Act.
(4) Special rules for qualified small employer health
reimbursement arrangements.--
(A) In general.--The term ``coverage month''
shall not include any month with respect to an
employee (or any spouse or dependent of such
employee) if for such month the employee is
provided a qualified small employer health
reimbursement arrangement which constitutes
affordable coverage.
(B) Denial of double benefit.--In the case of
any employee who is provided a qualified small
employer health reimbursement arrangement for
any coverage month (determined without regard
to subparagraph (A)), the credit otherwise
allowable under subsection (a) to the taxpayer
for such month shall be reduced (but not below
zero) by the amount described in subparagraph
(C)(i)(II) for such month.
(C) Affordable coverage.--For purposes of
subparagraph (A), a qualified small employer
health reimbursement arrangement shall be
treated as constituting affordable coverage for
a month if--
(i) the excess of--
(I) the amount that would be
paid by the employee as the
premium for such month for
self-only coverage under the
second lowest cost silver plan
offered in the relevant
individual health insurance
market, over
(II) \1/12\ of the employee's
permitted benefit (as defined
in section 9831(d)(3)(C)) under
such arrangement, does not
exceed--
(ii) \1/12\ of 9.5 percent of the
employee's household income.
(D) Qualified small employer health
reimbursement arrangement.--For purposes of
this paragraph, the term ``qualified small
employer health reimbursement arrangement'' has
the meaning given such term by section
9831(d)(2).
(E) Coverage for less than entire year.--In
the case of an employee who is provided a
qualified small employer health reimbursement
arrangement for less than an entire year,
subparagraph (C)(i)(II) shall be applied by
substituting "the number of months during the
year for which such arrangement was provided"
for "12'.
(F) Indexing.--In the case of plan years
beginning in any calendar year after 2014, the
Secretary shall adjust the 9.5 percent amount
under subparagraph (C)(ii) in the same manner
as the percentages are adjusted under
subsection (b)(3)(A)(ii).
(d) Terms relating to income and families.--For purposes of
this section--
(1) Family size.--The family size involved with
respect to any taxpayer shall be [equal to the number
of individuals for whom the taxpayer is allowed a
deduction under section 151 (relating to allowance of
deduction for personal exemptions) for the taxable
year] the sum of 1 (2 in the case of a joint return)
plus the number of individuals who are dependents of
the taxpayer for the taxable year.
(2) Household income.--
(A) Household income.--The term ``household
income'' means, with respect to any taxpayer,
an amount equal to the sum of--
(i) the modified adjusted gross
income of the taxpayer, plus
(ii) the aggregate modified adjusted
gross incomes of all other individuals
who--
(I) were taken into account
in determining the taxpayer's
family size under paragraph
(1), and
(II) were required to file a
return of tax imposed by
section 1 for the taxable year.
(B) Modified adjusted gross income.--The term
``modified adjusted gross income'' means
adjusted gross income increased by--
(i) any amount excluded from gross
income under section 911,
(ii) any amount of interest received
or accrued by the taxpayer during the
taxable year which is exempt from tax,
and
(iii) an amount equal to the portion
of the taxpayer's social security
benefits (as defined in section 86(d))
which is not included in gross income
under section 86 for the taxable year.
(3) Poverty line.--
(A) In general.--The term ``poverty line''
has the meaning given that term in section
2110(c)(5) of the Social Security Act (42
U.S.C. 1397jj(c)(5)).
(B) Poverty line used.--In the case of any
qualified health plan offered through an
Exchange for coverage during a taxable year
beginning in a calendar year, the poverty line
used shall be the most recently published
poverty line as of the 1st day of the regular
enrollment period for coverage during such
calendar year.
(e) Rules for individuals not lawfully present.--
(1) In general.--If [1 or more individuals for whom a
taxpayer is allowed a deduction under section 151
(relating to allowance of deduction for personal
exemptions) for the taxable year (including the
taxpayer or his spouse)] 1 or more of the taxpayer, the
taxpayer's spouse, or any dependent of the taxpayer are
individuals who are not lawfully present--
(A) the aggregate amount of premiums
otherwise taken into account under clauses (i)
and (ii) of subsection (b)(2)(A) shall be
reduced by the portion (if any) of such
premiums which is attributable to such
individuals, and
(B) for purposes of applying this section,
the determination as to what percentage a
taxpayer's household income bears to the
poverty level for a family of the size involved
shall be made under one of the following
methods:
(i) A method under which--
(I) the taxpayer's family
size is determined by not
taking such individuals into
account, and
(II) the taxpayer's household
income is equal to the product
of the taxpayer's household
income (determined without
regard to this subsection) and
a fraction--
(aa) the numerator of
which is the poverty
line for the taxpayer's
family size determined
after application of
subclause (I), and
(bb) the denominator
of which is the poverty
line for the taxpayer's
family size determined
without regard to
subclause (I).
(ii) A comparable method reaching the
same result as the method under clause
(i).
(2) Lawfully present.--For purposes of this section,
an individual shall be treated as lawfully present only
if the individual is, and is reasonably expected to be
for the entire period of enrollment for which the
credit under this section is being claimed, a citizen
or national of the United States or an alien lawfully
present in the United States.
(3) Secretarial authority.--The Secretary of Health
and Human Services, in consultation with the Secretary,
shall prescribe rules setting forth the methods by
which calculations of family size and household income
are made for purposes of this subsection. Such rules
shall be designed to ensure that the least burden is
placed on individuals enrolling in qualified health
plans through an Exchange and taxpayers eligible for
the credit allowable under this section.
(f) Reconciliation of credit and advance credit.--
(1) In general.--The amount of the credit allowed
under this section for any taxable year shall be
reduced (but not below zero) by the amount of any
advance payment of such credit under section 1412 of
the Patient Protection and Affordable Care Act.
(2) Excess advance payments.--
(A) In general.--If the advance payments to a
taxpayer under section 1412 of the Patient
Protection and Affordable Care Act for a
taxable year exceed the credit allowed by this
section (determined without regard to paragraph
(1)), the tax imposed by this chapter for the
taxable year shall be increased by the amount
of such excess.
(B) Limitation on increase.--
(i) In general.--In the case of a
taxpayer whose household income is less
than 400 percent of the poverty line
for the size of the family involved for
the taxable year, the amount of the
increase under subparagraph (A) shall
in no event exceed the applicable
dollar amount determined in accordance
with the following table (one-half of
such amount in the case of a taxpayer
whose tax is determined under section
1(c) for the taxable year):
------------------------------------------------------------------------
If the household income (expressed
as a percent of poverty line) is: The applicable dollar amount is:
------------------------------------------------------------------------
Less than 200% $600
At least 200% but less than 300% $1,500
At least 300% but less than 400% $2,500
------------------------------------------------------------------------
(ii) Indexing of amount.--In the case
of any calendar year beginning after
2014, each of the dollar amounts in the
table contained under clause (i) shall
be increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year, determined by
substituting ``calendar year
2013'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
If the amount of any increase under
clause (i) is not a multiple of $50,
such increase shall be rounded to the
next lowest multiple of $50.
(3) Information requirement.--Each Exchange (or any
person carrying out 1 or more responsibilities of an
Exchange under section 1311(f)(3) or 1321(c) of the
Patient Protection and Affordable Care Act) shall
provide the following information to the Secretary and
to the taxpayer with respect to any health plan
provided through the Exchange:
(A) The level of coverage described in
section 1302(d) of the Patient Protection and
Affordable Care Act and the period such
coverage was in effect.
(B) The total premium for the coverage
without regard to the credit under this section
or cost-sharing reductions under section 1402
of such Act.
(C) The aggregate amount of any advance
payment of such credit or reductions under
section 1412 of such Act.
(D) The name, address, and TIN of the primary
insured and the name and TIN of each other
individual obtaining coverage under the policy.
(E) Any information provided to the Exchange,
including any change of circumstances,
necessary to determine eligibility for, and the
amount of, such credit.
(F) Information necessary to determine
whether a taxpayer has received excess advance
payments.
(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions of
this section, including regulations which provide for--
(1) the coordination of the credit allowed under this
section with the program for advance payment of the
credit under section 1412 of the Patient Protection and
Affordable Care Act, and
(2) the application of subsection (f) where the
filing status of the taxpayer for a taxable year is
different from such status used for determining the
advance payment of the credit.
* * * * * * *
Subpart D--Business Related Credits
* * * * * * *
SEC. 42. LOW-INCOME HOUSING CREDIT.
(a) In general.--For purposes of section 38, the amount of
the low-income housing credit determined under this section for
any taxable year in the credit period shall be an amount equal
to--
(1) the applicable percentage of
(2) the qualified basis of each qualified low-income
building.
(b) Applicable percentage: 70 percent present value credit
for certain new buildings; 30 percent present value credit for
certain other buildings.--
(1) Determination of applicable percentage.--For
purposes of this section--
(A) In general.--The term ``applicable
percentage'' means, with respect to any
building, the appropriate percentage prescribed
by the Secretary for the earlier of--
(i) the month in which such building
is placed in service, or
(ii) at the election of the
taxpayer--
(I) the month in which the
taxpayer and the housing credit
agency enter into an agreement
with respect to such building
(which is binding on such
agency, the taxpayer, and all
successors in interest) as to
the housing credit dollar
amount to be allocated to such
building, or
(II) in the case of any
building to which subsection
(h)(4)(B) applies, the month in
which the tax-exempt
obligations are issued.
A month may be elected under clause (ii) only
if the election is made not later than the 5th
day after the close of such month. Such an
election, once made, shall be irrevocable.
(B) Method of prescribing percentages.--The
percentages prescribed by the Secretary for any
month shall be percentages which will yield
over a 10-year period amounts of credit under
subsection (a) which have a present value equal
to--
(i) 70 percent of the qualified basis
of a new building which is not
federally subsidized for the taxable
year, and
(ii) 30 percent of the qualified
basis of a building not described in
clause (i).
(C) Method of discounting.--The present value
under subparagraph (B) shall be determined--
(i) as of the last day of the 1st
year of the 10-year period referred to
in subparagraph (B),
(ii) by using a discount rate equal
to 72 percent of the average of the
annual Federal mid-term rate and the
annual Federal long-term rate
applicable under section 1274(d)(1) to
the month applicable under clause (i)
or (ii) of subparagraph (A) and
compounded annually, and
(iii) by assuming that the credit
allowable under this section for any
year is received on the last day of
such year.
(2) Minimum credit rate for non-federally subsidized
new buildings.--In the case of any new building--
(A) which is placed in service by the
taxpayer after the date of the enactment of
this paragraph, and
(B) which is not federally subsidized for the
taxable year,
the applicable percentage shall not be less than 9
percent.
(3) Cross references.--
(A) For treatment of certain rehabilitation
expenditures as separate new buildings, see
subsection (e).
(B) For determination of applicable
percentage for increases in qualified basis
after the 1st year of the credit period, see
subsection (f)(3).
(C) For authority of housing credit agency to
limit applicable percentage and qualified basis
which may be taken into account under this
section with respect to any building, see
subsection (h)(7).
(c) Qualified basis; qualified low-income building.--For
purposes of this section--
(1) Qualified basis.--
(A) Determination.--The qualified basis of
any qualified low-income building for any
taxable year is an amount equal to--
(i) the applicable fraction
(determined as of the close of such
taxable year) of
(ii) the eligible basis of such
building (determined under subsection
(d)(5)).
(B) Applicable fraction.--For purposes of
subparagraph (A), the term ``applicable
fraction'' means the smaller of the unit
fraction or the floor space fraction.
(C) Unit fraction.--For purposes of
subparagraph (B), the term ``unit fraction''
means the fraction--
(i) the numerator of which is the
number of low-income units in the
building, and
(ii) the denominator of which is the
number of residential rental units
(whether or not occupied) in such
building.
(D) Floor space fraction.--For purposes of
subparagraph (B), the term ``floor space
fraction'' means the fraction--
(i) the numerator of which is the
total floor space of the low-income
units in such building, and
(ii) the denominator of which is the
total floor space of the residential
rental units (whether or not occupied)
in such building.
(E) Qualified basis to include portion of
building used to provide supportive services
for homeless.--In the case of a qualified low-
income building described in subsection
(i)(3)(B)(iii), the qualified basis of such
building for any taxable year shall be
increased by the lesser of--
(i) so much of the eligible basis of
such building as is used throughout the
year to provide supportive services
designed to assist tenants in locating
and retaining permanent housing, or
(ii) 20 percent of the qualified
basis of such building (determined
without regard to this subparagraph).
(2) Qualified low-income building.--The term
``qualified low-income building'' means any building--
(A) which is part of a qualified low-income
housing project at all times during the
period--
(i) beginning on the 1st day in the
compliance period on which such
building is part of such a project, and
(ii) ending on the last day of the
compliance period with respect to such
building, and
(B) to which the amendments made by section
201(a) of the Tax Reform Act of 1986 apply.
(d) Eligible basis.--For purposes of this section--
(1) New buildings.--The eligible basis of a new
building is its adjusted basis as of the close of the
1st taxable year of the credit period.
(2) Existing buildings.--
(A) In general.--The eligible basis of an
existing building is--
(i) in the case of a building which
meets the requirements of subparagraph
(B), its adjusted basis as of the close
of the 1st taxable year of the credit
period, and
(ii) zero in any other case.
(B) Requirements.--A building meets the
requirements of this subparagraph if--
(i) the building is acquired by
purchase (as defined in section
179(d)(2)),
(ii) there is a period of at least 10
years between the date of its
acquisition by the taxpayer and the
date the building was last placed in
service,
(iii) the building was not previously
placed in service by the taxpayer or by
any person who was a related person
with respect to the taxpayer as of the
time previously placed in service, and
(iv) except as provided in subsection
(f)(5), a credit is allowable under
subsection (a) by reason of subsection
(e) with respect to the building.
(C) Adjusted basis.--For purposes of
subparagraph (A), the adjusted basis of any
building shall not include so much of the basis
of such building as is determined by reference
to the basis of other property held at any time
by the person acquiring the building.
(D) Special rules for subparagraph (B)
(i) Special rules for certain
transfers.--For purposes of determining
under subparagraph (B)(ii) when a
building was last placed in service,
there shall not be taken into account
any placement in service--
(I) in connection with the
acquisition of the building in
a transaction in which the
basis of the building in the
hands of the person acquiring
it is determined in whole or in
part by reference to the
adjusted basis of such building
in the hands of the person from
whom acquired,
(II) by a person whose basis
in such building is determined
under section 1014(a) (relating
to property acquired from a
decedent),
(III) by any governmental
unit or qualified nonprofit
organization (as defined in
subsection (h)(5)) if the
requirements of subparagraph
(B)(ii) are met with respect to
the placement in service by
such unit or organization and
all the income from such
property is exempt from Federal
income taxation,
(IV) by any person who
acquired such building by
foreclosure (or by instrument
in lieu of foreclosure) of any
purchase-money security
interest held by such person if
the requirements of
subparagraph (B)(ii) are met
with respect to the placement
in service by such person and
such building is resold within
12 months after the date such
building is placed in service
by such person after such
foreclosure, or
(V) of a single-family
residence by any individual who
owned and used such residence
for no other purpose than as
his principal residence.
(ii) Related person.--For purposes of
subparagraph (B)(iii), a person
(hereinafter in this subclause referred
to as the ``related person'') is
related to any person if the related
person bears a relationship to such
person specified in section 267(b) or
707(b)(1), or the related person and
such person are engaged in trades or
businesses under common control (within
the meaning of subsections (a) and (b)
of section 52).
(3) Eligible basis reduced where disproportionate
standards for units.--
(A) In general.--Except as provided in
subparagraph (B), the eligible basis of any
building shall be reduced by an amount equal to
the portion of the adjusted basis of the
building which is attributable to residential
rental units in the building which are not low-
income units and which are above the average
quality standard of the low-income units in the
building.
(B) Exception where taxpayer elects to
exclude excess costs.--
(i) In general.--Subparagraph (A)
shall not apply with respect to a
residential rental unit in a building
which is not a low-income unit if--
(I) the excess described in
clause (ii) with respect to
such unit is not greater than
15 percent of the cost
described in clause (ii)(II),
and
(II) the taxpayer elects to
exclude from the eligible basis
of such building the excess
described in clause (ii) with
respect to such unit.
(ii) Excess.--The excess described in
this clause with respect to any unit is
the excess of--
(I) the cost of such unit,
over
(II) the amount which would
be the cost of such unit if the
average cost per square foot of
low-income units in the
building were substituted for
the cost per square foot of
such unit.
The Secretary may by regulation provide
for the determination of the excess
under this clause on a basis other than
square foot costs.
(4) Special rules relating to determination of
adjusted basis.--For purposes of this subsection--
(A) In general.--Except as provided in
subparagraphs (B) and (C), the adjusted basis
of any building shall be determined without
regard to the adjusted basis of any property
which is not residential rental property.
(B) Basis of property in common areas, etc.,
included.--The adjusted basis of any building
shall be determined by taking into account the
adjusted basis of property (of a character
subject to the allowance for depreciation) used
in common areas or provided as comparable
amenities to all residential rental units in
such building.
(C) Inclusion of basis of property used to
provide services for certain nontenants.--
(i) In general.--The adjusted basis
of any building located in a qualified
census tract (as defined in paragraph
(5)(B)(ii)) shall be determined by
taking into account the adjusted basis
of property (of a character subject to
the allowance for depreciation and not
otherwise taken into account) used
throughout the taxable year in
providing any community service
facility.
(ii) Limitation.--The increase in the
adjusted basis of any building which is
taken into account by reason of clause
(i) shall not exceed the sum of--
(I) 25 percent of so much of
the eligible basis of the
qualified low-income housing
project of which it is a part
as does not exceed $15,000,000,
plus
(II) 10 percent of so much of
the eligible basis of such
project as is not taken into
account under subclause (I).
For purposes of the preceding sentence,
all community service facilities which
are part of the same qualified low-
income housing project shall be treated
as one facility.
(iii) Community service facility.--
For purposes of this subparagraph, the
term ``community service facility''
means any facility designed to serve
primarily individuals whose income is
60 percent or less of area median
income (within the meaning of
subsection (g)(1)(B)).
(D) No reduction for depreciation.--The
adjusted basis of any building shall be
determined without regard to paragraphs (2) and
(3) of section 1016(a).
(5) Special rules for determining eligible basis.--
(A) Federal grants not taken into account in
determining eligible basis.--The eligible basis
of a building shall not include any costs
financed with the proceeds of a federally
funded grant.
(B) Increase in credit for buildings in high
cost areas.--
(i) In general.--In the case of any
building located in a qualified census
tract or difficult development area
which is designated for purposes of
this subparagraph--
(I) in the case of a new
building, the eligible basis of
such building shall be 130
percent of such basis
determined without regard to
this subparagraph, and
(II) in the case of an
existing building, the
rehabilitation expenditures
taken into account under
subsection (e) shall be 130
percent of such expenditures
determined without regard to
this subparagraph.
(ii) Qualified census tract.--
(I) In general.--The term
``qualified census tract''
means any census tract which is
designated by the Secretary of
Housing and Urban Development
and, for the most recent year
for which census data are
available on household income
in such tract, either in which
50 percent or more of the
households have an income which
is less than 60 percent of the
area median gross income for
such year or which has a
poverty rate of at least 25
percent. If the Secretary of
Housing and Urban Development
determines that sufficient data
for any period are not
available to apply this clause
on the basis of census tracts,
such Secretary shall apply this
clause for such period on the
basis of enumeration districts.
(II) Limit on MSA's
designated.--The portion of a
metropolitan statistical area
which may be designated for
purposes of this subparagraph
shall not exceed an area having
20 percent of the population of
such metropolitan statistical
area.
(III) Determination of
areas.--For purposes of this
clause, each metropolitan
statistical area shall be
treated as a separate area and
all nonmetropolitan areas in a
State shall be treated as 1
area.
(iii) Difficult development areas.--
(I) In general.--The term
``difficult development areas''
means any area designated by
the Secretary of Housing and
Urban Development as an area
which has high construction,
land, and utility costs
relative to area median gross
income.
(II) Limit on areas
designated.--The portions of
metropolitan statistical areas
which may be designated for
purposes of this subparagraph
shall not exceed an aggregate
area having 20 percent of the
population of such metropolitan
statistical areas. A comparable
rule shall apply to
nonmetropolitan areas.
(iv) Special rules and definitions.--
For purposes of this subparagraph--
(I) population shall be
determined on the basis of the
most recent decennial census
for which data are available,
(II) area median gross income
shall be determined in
accordance with subsection
(g)(4),
(III) the term ``metropolitan
statistical area'' has the same
meaning as when used in section
143(k)(2)(B), and
(IV) the term
``nonmetropolitan area'' means
any county (or portion thereof)
which is not within a
metropolitan statistical area.
(v) Buildings designated by State
housing credit agency.--Any building
which is designated by the State
housing credit agency as requiring the
increase in credit under this
subparagraph in order for such building
to be financially feasible as part of a
qualified low-income housing project
shall be treated for purposes of this
subparagraph as located in a difficult
development area which is designated
for purposes of this subparagraph. The
preceding sentence shall not apply to
any building if paragraph (1) of
subsection (h) does not apply to any
portion of the eligible basis of such
building by reason of paragraph (4) of
such subsection.
(6) Credit allowable for certain buildings acquired
during 10-year period described in paragraph (2)(B)(ii)
(A) In general.--Paragraph (2)(B)(ii) shall
not apply to any federally- or State-assisted
building.
(B) Buildings acquired from insured
depository institutions in default.--On
application by the taxpayer, the Secretary may
waive paragraph (2)(B)(ii) with respect to any
building acquired from an insured depository
institution in default (as defined in section 3
of the Federal Deposit Insurance Act) or from a
receiver or conservator of such an institution.
(C) Federally- or State-assisted building.--
For purposes of this paragraph--
(i) Federally-assisted building.--The
term ``federally-assisted building''
means any building which is
substantially assisted, financed, or
operated under section 8 of the United
States Housing Act of 1937, section
221(d)(3), 221(d)(4), or 236 of the
National Housing Act, section 515 of
the Housing Act of 1949, or any other
housing program administered by the
Department of Housing and Urban
Development or by the Rural Housing
Service of the Department of
Agriculture.
(ii) State-assisted building.--The
term ``State- assisted building'' means
any building which is substantially
assisted, financed, or operated under
any State law similar in purposes to
any of the laws referred to in clause
(i).
(7) Acquisition of building before end of prior
compliance period.--
(A) In general.--Under regulations prescribed
by the Secretary, in the case of a building
described in subparagraph (B) (or interest
therein) which is acquired by the taxpayer--
(i) paragraph (2)(B) shall not apply,
but
(ii) the credit allowable by reason
of subsection (a) to the taxpayer for
any period after such acquisition shall
be equal to the amount of credit which
would have been allowable under
subsection (a) for such period to the
prior owner referred to in subparagraph
(B) had such owner not disposed of the
building.
(B) Description of building.--A building is
described in this subparagraph if--
(i) a credit was allowed by reason of
subsection (a) to any prior owner of
such building, and
(ii) the taxpayer acquired such
building before the end of the
compliance period for such building
with respect to such prior owner
(determined without regard to any
disposition by such prior owner).
(e) Rehabilitation expenditures treated as separate new
building.--
(1) In general.--Rehabilitation expenditures paid or
incurred by the taxpayer with respect to any building
shall be treated for purposes of this section as a
separate new building.
(2) Rehabilitation expenditures.--For purposes of
paragraph (1)--
(A) In general.--The term ``rehabilitation
expenditures'' means amounts chargeable to
capital account and incurred for property (or
additions or improvements to property) of a
character subject to the allowance for
depreciation in connection with the
rehabilitation of a building.
(B) Cost of acquisition, etc., not
included.--Such term does not include the cost
of acquiring any building (or interest therein)
or any amount not permitted to be taken into
account under paragraph (3) or (4) of
subsection (d).
(3) Minimum expenditures to qualify.--
(A) In general.--Paragraph (1) shall apply to
rehabilitation expenditures with respect to any
building only if--
(i) the expenditures are allocable to
1 or more low-income units or
substantially benefit such units, and
(ii) the amount of such expenditures
during any 24-month period meets the
requirements of whichever of the
following subclauses requires the
greater amount of such expenditures:
(I) The requirement of this
subclause is met if such amount
is not less than 20 percent of
the adjusted basis of the
building (determined as of the
1st day of such period and
without regard to paragraphs
(2) and (3) of section
1016(a)).
(II) The requirement of this
subclause is met if the
qualified basis attributable to
such amount, when divided by
the number of low-income units
in the building, is $6,000 or
more.
(B) Exception from 10 percent
rehabilitation.--In the case of a building
acquired by the taxpayer from a governmental
unit, at the election of the taxpayer,
subparagraph (A)(ii)(I) shall not apply and the
credit under this section for such
rehabilitation expenditures shall be determined
using the percentage applicable under
subsection (b)(2)(B)(ii).
(C) Date of determination.--The determination
under subparagraph (A) shall be made as of the
close of the 1st taxable year in the credit
period with respect to such expenditures.
(D) Inflation adjustment.--In the case of any
expenditures which are treated under paragraph
(4) as placed in service during any calendar
year after 2009, the $6,000 amount in
subparagraph (A)(ii)(II) shall be increased by
an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year by substituting
``calendar year 2008'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
Any increase under the preceding sentence which
is not a multiple of $100 shall be rounded to
the nearest multiple of $100.
(4) Special rules.--For purposes of applying this
section with respect to expenditures which are treated
as a separate building by reason of this subsection--
(A) such expenditures shall be treated as
placed in service at the close of the 24-month
period referred to in paragraph (3)(A), and
(B) the applicable fraction under subsection
(c)(1) shall be the applicable fraction for the
building (without regard to paragraph (1)) with
respect to which the expenditures were
incurred.
Nothing in subsection (d)(2) shall prevent a credit
from being allowed by reason of this subsection.
(5) No double counting.--Rehabilitation expenditures
may, at the election of the taxpayer, be taken into
account under this subsection or subsection
(d)(2)(A)(i) but not under both such subsections.
(6) Regulations to apply subsection with respect to
group of units in building.--The Secretary may
prescribe regulations, consistent with the purposes of
this subsection, treating a group of units with respect
to which rehabilitation expenditures are incurred as a
separate new building.
(f) Definition and special rules relating to credit period.--
(1) Credit period defined.--For purposes of this
section, the term ``credit period'' means, with respect
to any building, the period of 10 taxable years
beginning with--
(A) the taxable year in which the building is
placed in service, or
(B) at the election of the taxpayer, the
succeeding taxable year,
but only if the building is a qualified low-income
building as of the close of the 1st year of such
period. The election under subparagraph (B), once made,
shall be irrevocable.
(2) Special rule for 1st year of credit period.--
(A) In general.--The credit allowable under
subsection (a) with respect to any building for
the 1st taxable year of the credit period shall
be determined by substituting for the
applicable fraction under subsection (c)(1) the
fraction--
(i) the numerator of which is the sum
of the applicable fractions determined
under subsection (c)(1) as of the close
of each full month of such year during
which such building was in service, and
(ii) the denominator of which is 12.
(B) Disallowed 1st year credit allowed in
11th year.--Any reduction by reason of
subparagraph (A) in the credit allowable
(without regard to subparagraph (A)) for the
1st taxable year of the credit period shall be
allowable under subsection (a) for the 1st
taxable year following the credit period.
(3) Determination of applicable percentage with
respect to increases in qualified basis after 1st year
of credit period.--
(A) In general.--In the case of any building
which was a qualified low-income building as of
the close of the 1st year of the credit period,
if--
(i) as of the close of any taxable
year in the compliance period (after
the 1st year of the credit period) the
qualified basis of such building
exceeds
(ii) the qualified basis of such
building as of the close of the 1st
year of the credit period,
the applicable percentage which shall apply
under subsection (a) for the taxable year to
such excess shall be the percentage equal to 2/
3 of the applicable percentage which (after the
application of subsection (h)) would but for
this paragraph apply to such basis.
(B) 1st year computation applies.--A rule
similar to the rule of paragraph (2)(A) shall
apply to any increase in qualified basis to
which subparagraph (A) applies for the 1st year
of such increase.
(4) Dispositions of property.--If a building (or an
interest therein) is disposed of during any year for
which credit is allowable under subsection (a), such
credit shall be allocated between the parties on the
basis of the number of days during such year the
building (or interest) was held by each. In any such
case, proper adjustments shall be made in the
application of subsection (j).
(5) Credit period for existing buildings not to begin
before rehabilitation credit allowed.--
(A) In general.--The credit period for an
existing building shall not begin before the
1st taxable year of the credit period for
rehabilitation expenditures with respect to the
building.
(B) Acquisition credit allowed for certain
buildings not allowed a rehabilitation
credit.--
(i) In general.--In the case of a
building described in clause (ii)--
(I) subsection (d)(2)(B)(iv)
shall not apply, and
(II) the credit period for
such building shall not begin
before the taxable year which
would be the 1st taxable year
of the credit period for
rehabilitation expenditures
with respect to the building
under the modifications
described in clause (ii)(II).
(ii) Building described.--A building
is described in this clause if--
(I) a waiver is granted under
subsection (d)(6)(B) with
respect to the acquisition of
the building, and
(II) a credit would be
allowed for rehabilitation
expenditures with respect to
such building if subsection
(e)(3)(A)(ii)(I) did not apply
and if the dollar amount in
effect under subsection
(e)(3)(A)(ii)(II) were two-
thirds of such amount.
(g) Qualified low-income housing project.--For purposes of
this section--
(1) In general.--The term ``qualified low-income
housing project'' means any project for residential
rental property if the project meets the requirements
of subparagraph (A), (B), or (C) whichever is elected
by the taxpayer:
(A) 20-50 test.--The project meets the
requirements of this subparagraph if 20 percent
or more of the residential units in such
project are both rent-restricted and occupied
by individuals whose income is 50 percent or
less of area median gross income.
(B) 40-60 test.--The project meets the
requirements of this subparagraph if 40 percent
or more of the residential units in such
project are both rent-restricted and occupied
by individuals whose income is 60 percent or
less of area median gross income.
(C) Average income test.--
(i) In general.--The project meets
the minimum requirements of this
subparagraph if 40 percent or more (25
percent or more in the case of a
project described in section 142(d)(6))
of the residential units in such
project are both rent-restricted and
occupied by individuals whose income
does not exceed the imputed income
limitation designated by the taxpayer
with respect to the respective unit.
(ii) Special rules relating to income
limitation.--For purposes of clause
(i)--
(I) Designation.--The
taxpayer shall designate the
imputed income limitation of
each unit taken into account
under such clause.
(II) Average test.--The
average of the imputed income
limitations designated under
subclause (I) shall not exceed
60 percent of area median gross
income.
(III) 10-percent
increments.--The designated
imputed income limitation of
any unit under subclause (I)
shall be 20 percent, 30
percent, 40 percent, 50
percent, 60 percent, 70
percent, or 80 percent of area
median gross income.
Any election under this paragraph, once made,
shall be irrevocable. For purposes of this
paragraph, any property shall not be treated as
failing to be residential rental property
merely because part of the building in which
such property is located is used for purposes
other than residential rental purposes.
(2) Rent-restricted units.--
(A) In general.--For purposes of paragraph
(1), a residential unit is rent-restricted if
the gross rent with respect to such unit does
not exceed 30 percent of the imputed income
limitation applicable to such unit. For
purposes of the preceding sentence, the amount
of the income limitation under paragraph (1)
applicable for any period shall not be less
than such limitation applicable for the
earliest period the building (which contains
the unit) was included in the determination of
whether the project is a qualified low-income
housing project.
(B) Gross rent.--For purposes of subparagraph
(A), gross rent--
(i) does not include any payment
under section 8 of the United States
Housing Act of 1937 or any comparable
rental assistance program (with respect
to such unit or occupants thereof),
(ii) includes any utility allowance
determined by the Secretary after
taking into account such determinations
under section 8 of the United States
Housing Act of 1937,
(iii) does not include any fee for a
supportive service which is paid to the
owner of the unit (on the basis of the
low-income status of the tenant of the
unit) by any governmental program of
assistance (or by an organization
described in section 501(c)(3) and
exempt from tax under section 501(a))
if such program (or organization)
provides assistance for rent and the
amount of assistance provided for rent
is not separable from the amount of
assistance provided for supportive
services, and
(iv) does not include any rental
payment to the owner of the unit to the
extent such owner pays an equivalent
amount to the Farmers' Home
Administration under section 515 of the
Housing Act of 1949.
For purposes of clause (iii), the term
``supportive service'' means any service
provided under a planned program of services
designed to enable residents of a residential
rental property to remain independent and avoid
placement in a hospital, nursing home, or
intermediate care facility for the mentally or
physically handicapped. In the case of a
single-room occupancy unit or a building
described in subsection (i)(3)(B)(iii), such
term includes any service provided to assist
tenants in locating and retaining permanent
housing.
(C) Imputed income limitation applicable to
unit.--For purposes of this paragraph, the
imputed income limitation applicable to a unit
is the income limitation which would apply
under paragraph (1) to individuals occupying
the unit if the number of individuals occupying
the unit were as follows:
(i) In the case of a unit which does
not have a separate bedroom, 1
individual.
(ii) In the case of a unit which has
1 or more separate bedrooms, 1.5
individuals for each separate bedroom.
In the case of a project with respect to which
a credit is allowable by reason of this section
and for which financing is provided by a bond
described in section 142(a)(7), the imputed
income limitation shall apply in lieu of the
otherwise applicable income limitation for
purposes of applying section 142(d)(4)(B)(ii).
(D) Treatment of units occupied by
individuals whose incomes rise above limit.--
(i) In general.--Except as provided
in clauses (ii), (iii), and (iv),
notwithstanding an increase in the
income of the occupants of a low-income
unit above the income limitation
applicable under paragraph (1), such
unit shall continue to be treated as a
low-income unit if the income of such
occupants initially met such income
limitation and such unit continues to
be rent-restricted.
(ii) Rental of next available unit in
case of 20-50 or 40-60 test.--In the
case of a project with respect to which
the taxpayer elects the requirements of
subparagraph (A) or (B) of paragraph
(1), if the income of the occupants of
the unit increases above 140 percent of
the income limitation applicable under
paragraph (1), clause (i) shall cease
to apply to such unit if any
residential rental unit in the building
(of a size comparable to, or smaller
than, such unit) is occupied by a new
resident whose income exceeds such
income limitation.
(iii) Rental of next available unit
in case of average income test
In the case of a project with respect
to which the taxpayer elects the
requirements of subparagraph (C) of
paragraph (1), if the income of the
occupants of the unit increases above
140 percent of the greater of--
(I) 60 percent of area median
gross income, or
(II) the imputed income
limitation designated with
respect to the unit under
paragraph (1)(C)(ii)(I),
clause (i) shall cease to apply to any
such unit if any residential rental
unit in the building (of a size
comparable to, or smaller than, such
unit) is occupied by a new resident
whose income exceeds the limitation
described in clause (v).
(iv) Deep rent skewed projects.--In
the case of a project described in
section 142(d)(4)(B), clause (ii) or
(iii), whichever is applicable, shall
be applied by substituting ``170
percent'' for ``140 percent'', and--
(I) in the case of clause
(ii), by substituting ``any
low-income unit in the building
is occupied by a new resident
whose income exceeds 40 percent
of area median gross income''
for ``any residential rental
unit'' and all that follows in
such clause, and
(II) in the case of clause
(iii), by substituting ``any
low-income unit in the building
is occupied by a new resident
whose income exceeds the lesser
of 40 percent of area median
gross income or the imputed
income limitation designated
with respect to such unit under
paragraph (1)(C)(ii)(I)'' for
``any residential rental unit''
and all that follows in such
clause.
(v) Limitation described.--For
purposes of clause (iii), the
limitation described in this clause
with respect to any unit is--
(I) the imputed income
limitation designated with
respect to such unit under
paragraph (1)(C)(ii)(I), in the
case of a unit which was taken
into account as a low-income
unit prior to becoming vacant,
and
(II) the imputed income
limitation which would have to
be designated with respect to
such unit under such paragraph
in order for the project to
continue to meet the
requirements of paragraph
(1)(C)(ii)(II), in the case of
any other unit.
(E) Units where Federal rental assistance is
reduced as tenant's income increases.--If the
gross rent with respect to a residential unit
exceeds the limitation under subparagraph (A)
by reason of the fact that the income of the
occupants thereof exceeds the income limitation
applicable under paragraph (1), such unit
shall, nevertheless, be treated as a rent-
restricted unit for purposes of paragraph (1)
if--
(i) a Federal rental assistance
payment described in subparagraph
(B)(i) is made with respect to such
unit or its occupants, and
(ii) the sum of such payment and the
gross rent with respect to such unit
does not exceed the sum of the amount
of such payment which would be made and
the gross rent which would be payable
with respect to such unit if--
(I) the income of the
occupants thereof did not
exceed the income limitation
applicable under paragraph (1),
and
(II) such units were rent-
restricted within the meaning
of subparagraph (A).
The preceding sentence shall apply to any unit
only if the result described in clause (ii) is
required by Federal statute as of the date of
the enactment of this subparagraph and as of
the date the Federal rental assistance payment
is made.
(3) Date for meeting requirements.--
(A) In general.--Except as otherwise provided
in this paragraph, a building shall be treated
as a qualified low-income building only if the
project (of which such building is a part)
meets the requirements of paragraph (1) not
later than the close of the 1st year of the
credit period for such building.
(B) Buildings which rely on later buildings
for qualification.--
(i) In general.--In determining
whether a building (hereinafter in this
subparagraph referred to as the ``prior
building'') is a qualified low-income
building, the taxpayer may take into
account 1 or more additional buildings
placed in service during the 12-month
period described in subparagraph (A)
with respect to the prior building only
if the taxpayer elects to apply clause
(ii) with respect to each additional
building taken into account.
(ii) Treatment of elected
buildings.--In the case of a building
which the taxpayer elects to take into
account under clause (i), the period
under subparagraph (A) for such
building shall end at the close of the
12-month period applicable to the prior
building.
(iii) Date prior building is treated
as placed in service.--For purposes of
determining the credit period and the
compliance period for the prior
building, the prior building shall be
treated for purposes of this section as
placed in service on the most recent
date any additional building elected by
the taxpayer (with respect to such
prior building) was placed in service.
(C) Special rule.--A building--
(i) other than the 1st building
placed in service as part of a project,
and
(ii) other than a building which is
placed in service during the 12-month
period described in subparagraph (A)
with respect to a prior building which
becomes a qualified low-income
building,
shall in no event be treated as a qualified
low-income building unless the project is a
qualified low-income housing project (without
regard to such building) on the date such
building is placed in service.
(D) Projects with more than 1 building must
be identified.--For purposes of this section, a
project shall be treated as consisting of only
1 building unless, before the close of the 1st
calendar year in the project period (as defined
in subsection (h)(1)(F)(ii)), each building
which is (or will be) part of such project is
identified in such form and manner as the
Secretary may provide.
(4) Certain rules made applicable.--Paragraphs (2)
(other than subparagraph (A) thereof), (3), (4), (5),
(6), and (7) of section 142(d), and section 6652(j),
shall apply for purposes of determining whether any
project is a qualified low-income housing project and
whether any unit is a low-income unit; except that, in
applying such provisions for such purposes, the term
``gross rent'' shall have the meaning given such term
by paragraph (2)(B) of this subsection.
(5) Election to treat building after compliance
period as not part of a project.--For purposes of this
section, the taxpayer may elect to treat any building
as not part of a qualified low-income housing project
for any period beginning after the compliance period
for such building.
(6) Special rule where de minimis equity
contribution.--Property shall not be treated as failing
to be residential rental property for purposes of this
section merely because the occupant of a residential
unit in the project pays (on a voluntary basis) to the
lessor a de minimis amount to be held toward the
purchase by such occupant of a residential unit in such
project if--
(A) all amounts so paid are refunded to the
occupant on the cessation of his occupancy of a
unit in the project, and
(B) the purchase of the unit is not permitted
until after the close of the compliance period
with respect to the building in which the unit
is located.
Any amount paid to the lessor as described in the
preceding sentence shall be included in gross rent
under paragraph (2) for purposes of determining whether
the unit is rent- restricted.
(7) Scattered site projects.--Buildings which would
(but for their lack of proximity) be treated as a
project for purposes of this section shall be so
treated if all of the dwelling units in each of the
buildings are rent-restricted (within the meaning of
paragraph (2)) residential rental units.
(8) Waiver of certain de minimis errors and
recertifications.--On application by the taxpayer, the
Secretary may waive--
(A) any recapture under subsection (j) in the
case of any de minimis error in complying with
paragraph (1), or
(B) any annual recertification of tenant
income for purposes of this subsection, if the
entire building is occupied by low-income
tenants.
(9) Clarification of general public use
requirement.--A project does not fail to meet the
general public use requirement solely because of
occupancy restrictions or preferences that favor
tenants--
(A) with special needs,
(B) who are members of a specified group
under a Federal program or State program or
policy that supports housing for such a
specified group, or
(C) who are involved in artistic or literary
activities.
(h) Limitation on aggregate credit allowable with respect to
projects located in a State.--
(1) Credit may not exceed credit amount allocated to
building.--
(A) In general.--The amount of the credit
determined under this section for any taxable
year with respect to any building shall not
exceed the housing credit dollar amount
allocated to such building under this
subsection.
(B) Time for making allocation.--Except in
the case of an allocation which meets the
requirements of subparagraph (C), (D), (E), or
(F), an allocation shall be taken into account
under subparagraph (A) only if it is made not
later than the close of the calendar year in
which the building is placed in service.
(C) Exception where binding commitment.--An
allocation meets the requirements of this
subparagraph if there is a binding commitment
(not later than the close of the calendar year
in which the building is placed in service) by
the housing credit agency to allocate a
specified housing credit dollar amount to such
building beginning in a specified later taxable
year.
(D) Exception where increase in qualified
basis.--
(i) In general.--An allocation meets
the requirements of this subparagraph
if such allocation is made not later
than the close of the calendar year in
which ends the taxable year to which it
will 1st apply but only to the extent
the amount of such allocation does not
exceed the limitation under clause
(ii).
(ii) Limitation.--The limitation
under this clause is the amount of
credit allowable under this section
(without regard to this subsection) for
a taxable year with respect to an
increase in the qualified basis of the
building equal to the excess of--
(I) the qualified basis of
such building as of the close
of the 1st taxable year to
which such allocation will
apply, over
(II) the qualified basis of
such building as of the close
of the 1st taxable year to
which the most recent prior
housing credit allocation with
respect to such building
applied.
(iii) Housing credit dollar amount
reduced by full allocation.--
Notwithstanding clause (i), the full
amount of the allocation shall be taken
into account under paragraph (2).
(E) Exception where 10 percent of cost
incurred.--
(i) In general.--An allocation meets
the requirements of this subparagraph
if such allocation is made with respect
to a qualified building which is placed
in service not later than the close of
the second calendar year following the
calendar year in which the allocation
is made.
(ii) Qualified building.--For
purposes of clause (i), the term
``qualified building'' means any
building which is part of a project if
the taxpayer's basis in such project
(as of the date which is 1 year after
the date that the allocation was made)
is more than 10 percent of the
taxpayer's reasonably expected basis in
such project (as of the close of the
second calendar year referred to in
clause (i)). Such term does not include
any existing building unless a credit
is allowable under subsection (e) for
rehabilitation expenditures paid or
incurred by the taxpayer with respect
to such building for a taxable year
ending during the second calendar year
referred to in clause (i) or the prior
taxable year.
(F) Allocation of credit on a project
basis.--
(i) In general.--In the case of a
project which includes (or will
include) more than 1 building, an
allocation meets the requirements of
this subparagraph if--
(I) the allocation is made to
the project for a calendar year
during the project period,
(II) the allocation only
applies to buildings placed in
service during or after the
calendar year for which the
allocation is made, and
(III) the portion of such
allocation which is allocated
to any building in such project
is specified not later than the
close of the calendar year in
which the building is placed in
service.
(ii) Project period.--For purposes of
clause (i), the term ``project period''
means the period--
(I) beginning with the 1st
calendar year for which an
allocation may be made for the
1st building placed in service
as part of such project, and
(II) ending with the calendar
year the last building is
placed in service as part of
such project.
(2) Allocated credit amount to apply to all taxable
years ending during or after credit allocation year.--
Any housing credit dollar amount allocated to any
building for any calendar year--
(A) shall apply to such building for all
taxable years in the compliance period ending
during or after such calendar year, and
(B) shall reduce the aggregate housing credit
dollar amount of the allocating agency only for
such calendar year.
(3) Housing credit dollar amount for agencies.--
(A) In general.--The aggregate housing credit
dollar amount which a housing credit agency may
allocate for any calendar year is the portion
of the State housing credit ceiling allocated
under this paragraph for such calendar year to
such agency.
(B) State ceiling initially allocated to
State housing credit agencies.--Except as
provided in subparagraphs (D) and (E), the
State housing credit ceiling for each calendar
year shall be allocated to the housing credit
agency of such State. If there is more than 1
housing credit agency of a State, all such
agencies shall be treated as a single agency.
(C) State housing credit ceiling.--The State
housing credit ceiling applicable to any State
for any calendar year shall be an amount equal
to the sum of--
(i) the unused State housing credit
ceiling (if any) of such State for the
preceding calendar year,
(ii) the greater of--
(I) $1.75 multiplied by the
State population, or
(II) $2,000,000,
(iii) the amount of State housing
credit ceiling returned in the calendar
year, plus
(iv) the amount (if any) allocated
under subparagraph (D) to such State by
the Secretary.
For purposes of clause (i), the unused State
housing credit ceiling for any calendar year is
the excess (if any) of the sum of the amounts
described in clauses (ii) through (iv) over the
aggregate housing credit dollar amount
allocated for such year. For purposes of clause
(iii), the amount of State housing credit
ceiling returned in the calendar year equals
the housing credit dollar amount previously
allocated within the State to any project which
fails to meet the 10 percent test under
paragraph (1)(E)(ii) on a date after the close
of the calendar year in which the allocation
was made or which does not become a qualified
low-income housing project within the period
required by this section or the terms of the
allocation or to any project with respect to
which an allocation is cancelled by mutual
consent of the housing credit agency and the
allocation recipient.
(D) Unused housing credit carryovers
allocated among certain States.--
(i) In general.--The unused housing
credit carryover of a State for any
calendar year shall be assigned to the
Secretary for allocation among
qualified States for the succeeding
calendar year.
(ii) Unused housing credit
carryover.--For purposes of this
subparagraph, the unused housing credit
carryover of a State for any calendar
year is the excess (if any) of--
(I) the unused State housing
credit ceiling for the year
preceding such year, over
(II) the aggregate housing
credit dollar amount allocated
for such year.
(iii) Formula for allocation of
unused housing credit carryovers among
qualified States.--The amount allocated
under this subparagraph to a qualified
State for any calendar year shall be
the amount determined by the Secretary
to bear the same ratio to the aggregate
unused housing credit carryovers of all
States for the preceding calendar year
as such State's population for the
calendar year bears to the population
of all qualified States for the
calendar year. For purposes of the
preceding sentence, population shall be
determined in accordance with section
146(j).
(iv) Qualified State.--For purposes
of this subparagraph, the term
``qualified State'' means, with respect
to a calendar year, any State--
(I) which allocated its
entire State housing credit
ceiling for the preceding
calendar year, and
(II) for which a request is
made (not later than May 1 of
the calendar year) to receive
an allocation under clause
(iii).
(E) Special rule for States with
constitutional home rule cities.--For purposes
of this subsection--
(i) In general.--The aggregate
housing credit dollar amount for any
constitutional home rule city for any
calendar year shall be an amount which
bears the same ratio to the State
housing credit ceiling for such
calendar year as--
(I) the population of such
city, bears to
(II) the population of the
entire State.
(ii) Coordination with other
allocations.--In the case of any State
which contains 1 or more constitutional
home rule cities, for purposes of
applying this paragraph with respect to
housing credit agencies in such State
other than constitutional home rule
cities, the State housing credit
ceiling for any calendar year shall be
reduced by the aggregate housing credit
dollar amounts determined for such year
for all constitutional home rule cities
in such State.
(iii) Constitutional home rule
city.--For purposes of this paragraph,
the term ``constitutional home rule
city'' has the meaning given such term
by section 146(d)(3)(C).
(F) State may provide for different
allocation.--Rules similar to the rules of
section 146(e) (other than paragraph (2)(B)
thereof) shall apply for purposes of this
paragraph.
(G) Population.--For purposes of this
paragraph, population shall be determined in
accordance with section 146(j).
(H) Cost-of-living adjustment.--
(i) In general.--In the case of a
calendar year after 2002, the
$2,000,000 and $1.75 amounts in
subparagraph (C) shall each be
increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for such
calendar year by substituting
``calendar year 2001'' for
``calendar year 2016'' in
subparagraph (A)(ii) thereof.
(ii) Rounding.--
(I) In the case of the
$2,000,000 amount, any increase
under clause (i) which is not a
multiple of $5,000 shall be
rounded to the next lowest
multiple of $5,000.
(II) In the case of the $1.75
amount, any increase under
clause (i) which is not a
multiple of 5 cents shall be
rounded to the next lowest
multiple of 5 cents.
(I) Increase in State housing credit ceiling
for 2018, 2019, 2020, and 2021.--In the case of
calendar years 2018, 2019, 2020, and 2021, each
of the dollar amounts in effect under clauses
(I) and (II) of subparagraph (C)(ii) for any
calendar year (after any increase under
subparagraph (H)) shall be increased by
multiplying such dollar amount by 1.125.
(4) Credit for buildings financed by tax-exempt bonds
subject to volume cap not taken into account.--
(A) In general.--Paragraph (1) shall not
apply to the portion of any credit allowable
under subsection (a) which is attributable to
eligible basis financed by any obligation the
interest on which is exempt from tax under
section 103 if--
(i) such obligation is taken into
account under section 146, and
(ii) principal payments on such
financing are applied within a
reasonable period to redeem obligations
the proceeds of which were used to
provide such financing or such
financing is refunded as described in
section 146(i)(6).
(B) Special rule where 50 percent or more of
building is financed with tax-exempt bonds
subject to volume cap.--For purposes of
subparagraph (A), if 50 percent or more of the
aggregate basis of any building and the land on
which the building is located is financed by
any obligation described in subparagraph (A),
paragraph (1) shall not apply to any portion of
the credit allowable under subsection (a) with
respect to such building.
(5) Portion of State ceiling set-aside for certain
projects involving qualified nonprofit organizations.--
(A) In general.--Not more than 90 percent of
the State housing credit ceiling for any State
for any calendar year shall be allocated to
projects other than qualified low-income
housing projects described in subparagraph (B).
(B) Projects involving qualified nonprofit
organizations.--For purposes of subparagraph
(A), a qualified low-income housing project is
described in this subparagraph if a qualified
nonprofit organization is to own an interest in
the project (directly or through a partnership)
and materially participate (within the meaning
of section 469(h)) in the development and
operation of the project throughout the
compliance period.
(C) Qualified nonprofit organization.--For
purposes of this paragraph, the term
``qualified nonprofit organization'' means any
organization if--
(i) such organization is described in
paragraph (3) or (4) of section 501(c)
and is exempt from tax under section
501(a),
(ii) such organization is determined
by the State housing credit agency not
to be affiliated with or controlled by
a for-profit organization, and
(iii) 1 of the exempt purposes of
such organization includes the
fostering of low-income housing.
(D) Treatment of certain subsidiaries.--
(i) In general.--For purposes of this
paragraph, a qualified nonprofit
organization shall be treated as
satisfying the ownership and material
participation test of subparagraph (B)
if any qualified corporation in which
such organization holds stock satisfies
such test.
(ii) Qualified corporation.--For
purposes of clause (i), the term
``qualified corporation'' means any
corporation if 100 percent of the stock
of such corporation is held by 1 or
more qualified nonprofit organizations
at all times during the period such
corporation is in existence.
(E) State may not override set-aside.--
Nothing in subparagraph (F) of paragraph (3)
shall be construed to permit a State not to
comply with subparagraph (A) of this paragraph.
(6) Buildings eligible for credit only if minimum
long-term commitment to low-income housing.--
(A) In general.--No credit shall be allowed
by reason of this section with respect to any
building for the taxable year unless an
extended low-income housing commitment is in
effect as of the end of such taxable year.
(B) Extended low-income housing commitment.--
For purposes of this paragraph, the term
``extended low-income housing commitment''
means any agreement between the taxpayer and
the housing credit agency--
(i) which requires that the
applicable fraction (as defined in
subsection (c)(1)) for the building for
each taxable year in the extended use
period will not be less than the
applicable fraction specified in such
agreement and which prohibits the
actions described in subclauses (I) and
(II) of subparagraph (E)(ii),
(ii) which allows individuals who
meet the income limitation applicable
to the building under subsection (g)
(whether prospective, present, or
former occupants of the building) the
right to enforce in any State court the
requirement and prohibitions of clause
(i),
(iii) which prohibits the disposition
to any person of any portion of the
building to which such agreement
applies unless all of the building to
which such agreement applies is
disposed of to such person,
(iv) which prohibits the refusal to
lease to a holder of a voucher or
certificate of eligibility under
section 8 of the United States Housing
Act of 1937 because of the status of
the prospective tenant as such a
holder,
(v) which is binding on all
successors of the taxpayer, and
(vi) which, with respect to the
property, is recorded pursuant to State
law as a restrictive covenant.
(C) Allocation of credit may not exceed
amount necessary to support commitment.--
(i) In general.--The housing credit
dollar amount allocated to any building
may not exceed the amount necessary to
support the applicable fraction
specified in the extended low-income
housing commitment for such building,
including any increase in such fraction
pursuant to the application of
subsection (f)(3) if such increase is
reflected in an amended low-income
housing commitment.
(ii) Buildings financed by tax-exempt
bonds.--If paragraph (4) applies to any
building the amount of credit allowed
in any taxable year may not exceed the
amount necessary to support the
applicable fraction specified in the
extended low-income housing commitment
for such building. Such commitment may
be amended to increase such fraction.
(D) Extended use period.--For purposes of
this paragraph, the term ``extended use
period'' means the period--
(i) beginning on the 1st day in the
compliance period on which such
building is part of a qualified low-
income housing project, and
(ii) ending on the later of--
(I) the date specified by
such agency in such agreement,
or
(II) the date which is 15
years after the close of the
compliance period.
(E) Exceptions if foreclosure or if no buyer
willing to maintain low-income status.--
(i) In general.--The extended use
period for any building shall
terminate--
(I) on the date the building
is acquired by foreclosure (or
instrument in lieu of
foreclosure) unless the
Secretary determines that such
acquisition is part of an
arrangement with the taxpayer a
purpose of which is to
terminate such period, or
(II) on the last day of the
period specified in
subparagraph (I) if the housing
credit agency is unable to
present during such period a
qualified contract for the
acquisition of the low-income
portion of the building by any
person who will continue to
operate such portion as a
qualified low-income building.
Subclause (II) shall not apply to the
extent more stringent requirements are
provided in the agreement or in State
law.
(ii) Eviction, etc. of existing low-
income tenants not permitted.--The
termination of an extended use period
under clause (i) shall not be construed
to permit before the close of the 3-
year period following such
termination--
(I) the eviction or the
termination of tenancy (other
than for good cause) of an
existing tenant of any low-
income unit, or
(II) any increase in the
gross rent with respect to such
unit not otherwise permitted
under this section.
(F) Qualified contract.--For purposes of
subparagraph (E), the term ``qualified
contract'' means a bona fide contract to
acquire (within a reasonable period after the
contract is entered into) the nonlow-income
portion of the building for fair market value
and the low-income portion of the building for
an amount not less than the applicable fraction
(specified in the extended low-income housing
commitment) of--
(i) the sum of--
(I) the outstanding
indebtedness secured by, or
with respect to, the building,
(II) the adjusted investor
equity in the building, plus
(III) other capital
contributions not reflected in
the amounts described in
subclause (I) or (II), reduced
by (ii) cash distributions from
(or available for distribution
from) the project.
The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out
this paragraph, including regulations to
prevent the manipulation of the amount
determined under the preceding sentence.
(G) Adjusted investor equity.--
(i) In general.--For purposes of
subparagraph (E), the term ``adjusted
investor equity'' means, with respect
to any calendar year, the aggregate
amount of cash taxpayers invested with
respect to the project increased by the
amount equal to--
(I) such amount, multiplied
by
(II) the cost-of-living
adjustment for such calendar
year, determined under section
1(f)(3) by substituting the
base calendar year for
``calendar year 2016'' in
subparagraph (A)(ii) thereof.
An amount shall be taken into account
as an investment in the project only to
the extent there was an obligation to
invest such amount as of the beginning
of the credit period and to the extent
such amount is reflected in the
adjusted basis of the project.
(ii) Cost-of-living increases in
excess of 5 percent not taken into
account.--Under regulations prescribed
by the Secretary, if the C-CPI-U for
any calendar year (as defined in
section 1(f)(6)) exceeds the C-CPI-U
for the preceding calendar year by more
than 5 percent, the C-CPI-U for the
base calendar year shall be increased
such that such excess shall never be
taken into account under clause (i). In
the case of a base calendar year before
2017, the C-CPI-U for such year shall
be determined by multiplying the CPI
for such year by the amount determined
under section 1(f)(3)(B).
(iii) Base calendar year.--For
purposes of this subparagraph, the term
``base calendar year'' means the
calendar year with or within which the
1st taxable year of the credit period
ends.
(H) Low-income portion.--For purposes of this
paragraph, the low-income portion of a building
is the portion of such building equal to the
applicable fraction specified in the extended
low-income housing commitment for the building.
(I) Period for finding buyer.--The period
referred to in this subparagraph is the 1-year
period beginning on the date (after the 14th
year of the compliance period) the taxpayer
submits a written request to the housing credit
agency to find a person to acquire the
taxpayer's interest in the low-income portion
of the building.
(J) Effect of noncompliance.--If, during a
taxable year, there is a determination that an
extended low-income housing agreement was not
in effect as of the beginning of such year,
such determination shall not apply to any
period before such year and subparagraph (A)
shall be applied without regard to such
determination if the failure is corrected
within 1 year from the date of the
determination.
(K) Projects which consist of more than 1
building.--The application of this paragraph to
projects which consist of more than 1 building
shall be made under regulations prescribed by
the Secretary.
(7) Special rules.--
(A) Building must be located within
jurisdiction of credit agency.--A housing
credit agency may allocate its aggregate
housing credit dollar amount only to buildings
located in the jurisdiction of the governmental
unit of which such agency is a part.
(B) Agency allocations in excess of limit.--
If the aggregate housing credit dollar amounts
allocated by a housing credit agency for any
calendar year exceed the portion of the State
housing credit ceiling allocated to such agency
for such calendar year, the housing credit
dollar amounts so allocated shall be reduced
(to the extent of such excess) for buildings in
the reverse of the order in which the
allocations of such amounts were made.
(C) Credit reduced if allocated credit dollar
amount is less than credit which would be
allowable without regard to placed in service
convention, etc.
(i) In general.--The amount of the
credit determined under this section
with respect to any building shall not
exceed the clause (ii) percentage of
the amount of the credit which would
(but for this subparagraph) be
determined under this section with
respect to such building.
(ii) Determination of percentage.--
For purposes of clause (i), the clause
(ii) percentage with respect to any
building is the percentage which--
(I) the housing credit dollar
amount allocated to such
building bears to
(II) the credit amount
determined in accordance with
clause (iii).
(iii) Determination of credit
amount.--The credit amount determined
in accordance with this clause is the
amount of the credit which would (but
for this subparagraph) be determined
under this section with respect to the
building if--
(I) this section were applied
without regard to paragraphs
(2)(A) and (3)(B) of subsection
(f), and
(II) subsection (f)(3)(A)
were applied without regard to
``the percentage equal to 2/3
of''.
(D) Housing credit agency to specify
applicable percentage and maximum qualified
basis.--In allocating a housing credit dollar
amount to any building, the housing credit
agency shall specify the applicable percentage
and the maximum qualified basis which may be
taken into account under this section with
respect to such building. The applicable
percentage and maximum qualified basis so
specified shall not exceed the applicable
percentage and qualified basis determined under
this section without regard to this subsection.
(8) Other definitions.--For purposes of this
subsection--
(A) Housing credit agency.--The term
``housing credit agency'' means any agency
authorized to carry out this subsection.
(B) Possessions treated as States.--The term
``State'' includes a possession of the United
States.
(i) Definitions and special rules.--For purposes of this
section--
(1) Compliance period.--The term ``compliance
period'' means, with respect to any building, the
period of 15 taxable years beginning with the 1st
taxable year of the credit period with respect thereto.
(2) Determination of whether building is federally
subsidized.--
(A) In general.--Except as otherwise provided
in this paragraph, for purposes of subsection
(b)(1), a new building shall be treated as
federally subsidized for any taxable year if,
at any time during such taxable year or any
prior taxable year, there is or was outstanding
any obligation the interest on which is exempt
from tax under section 103 the proceeds of
which are or were used (directly or indirectly)
with respect to such building or the operation
thereof.
(B) Election to reduce eligible basis by
proceeds of obligations.--A tax-exempt
obligation shall not be taken into account
under subparagraph (A) if the taxpayer elects
to exclude from the eligible basis of the
building for purposes of subsection (d) the
proceeds of such obligation.
(C) Special rule for subsidized construction
financing.--Subparagraph (A) shall not apply to
any tax-exempt obligation used to provide
construction financing for any building if--
(i) such obligation (when issued)
identified the building for which the
proceeds of such obligation would be
used, and
(ii) such obligation is redeemed
before such building is placed in
service.
(3) Low-income unit.--
(A) In general.--The term ``low-income unit''
means any unit in a building if--
(i) such unit is rent-restricted (as
defined in subsection (g)(2)), and
(ii) the individuals occupying such
unit meet the income limitation
applicable under subsection (g)(1) to
the project of which such building is a
part.
(B) Exceptions.--
(i) In general.--A unit shall not be
treated as a low-income unit unless the
unit is suitable for occupancy and used
other than on a transient basis.
(ii) Suitability for occupancy.--For
purposes of clause (i), the suitability
of a unit for occupancy shall be
determined under regulations prescribed
by the Secretary taking into account
local health, safety, and building
codes.
(iii) Transitional housing for
homeless.--For purposes of clause (i),
a unit shall be considered to be used
other than on a transient basis if the
unit contains sleeping accommodations
and kitchen and bathroom facilities and
is located in a building--
(I) which is used exclusively
to facilitate the transition of
homeless individuals (within
the meaning of section 103 of
the McKinney-Vento Homeless
Assistance Act (42 U.S.C.
11302), as in effect on the
date of the enactment of this
clause) to independent living
within 24 months, and
(II) in which a governmental
entity or qualified nonprofit
organization (as defined in
subsection (h)(5)) provides
such individuals with temporary
housing and supportive services
designed to assist such
individuals in locating and
retaining permanent housing.
(iv) Single-room occupancy units.--
For purposes of clause (i), a single-
room occupancy unit shall not be
treated as used on a transient basis
merely because it is rented on a month-
by-month basis.
(C) Special rule for buildings having 4 or
fewer units.--In the case of any building which
has 4 or fewer residential rental units, no
unit in such building shall be treated as a
low-income unit if the units in such building
are owned by--
(i) any individual who occupies a
residential unit in such building, or
(ii) any person who is related (as
defined in subsection (d)(2)(D)(iii))
to such individual.
(D) Certain students not to disqualify
unit.--A unit shall not fail to be treated as a
low-income unit merely because it is occupied--
(i) by an individual who is--
(I) a student and receiving
assistance under title IV of
the Social Security Act,
(II) a student who was
previously under the care and
placement responsibility of the
State agency responsible for
administering a plan under part
B or part E of title IV of the
Social Security Act, or
(III) enrolled in a job
training program receiving
assistance under the Job
Training Partnership Act or
under other similar Federal,
State, or local laws, or
(ii) entirely by full-time students
if such students are--
(I) single parents and their
children and such parents are
not dependents (as defined in
[section 152] section 7706,
determined without regard to
subsections (b)(1), (b)(2), and
(d)(1)(B) thereof) of another
individual and such children
are not dependents (as so
defined) of another individual
other than a parent of such
children, or
(II) married and file a joint
return.
(E) Owner-occupied buildings having 4 or
fewer units eligible for credit where
development plan.--
(i) In general.--Subparagraph (C)
shall not apply to the acquisition or
rehabilitation of a building pursuant
to a development plan of action
sponsored by a State or local
government or a qualified nonprofit
organization (as defined in subsection
(h)(5)(C)).
(ii) Limitation on credit.--In the
case of a building to which clause (i)
applies, the applicable fraction shall
not exceed 80 percent of the unit
fraction.
(iii) Certain unrented units treated
as owner-occupied.--In the case of a
building to which clause (i) applies,
any unit which is not rented for 90
days or more shall be treated as
occupied by the owner of the building
as of the 1st day it is not rented.
(4) New building.--The term ``new building'' means a
building the original use of which begins with the
taxpayer.
(5) Existing building.--The term ``existing
building'' means any building which is not a new
building.
(6) Application to estates and trusts.--In the case
of an estate or trust, the amount of the credit
determined under subsection (a) and any increase in tax
under subsection (j) shall be apportioned between the
estate or trust and the beneficiaries on the basis of
the income of the estate or trust allocable to each.
(7) Impact of tenant's right of 1st refusal to
acquire property.--
(A) In general.--No Federal income tax
benefit shall fail to be allowable to the
taxpayer with respect to any qualified low-
income building merely by reason of a right of
1st refusal held by the tenants (in cooperative
form or otherwise) or resident management
corporation of such building or by a qualified
nonprofit organization (as defined in
subsection (h)(5)(C)) or government agency to
purchase the property after the close of the
compliance period for a price which is not less
than the minimum purchase price determined
under subparagraph (B).
(B) Minimum purchase price.--For purposes of
subparagraph (A), the minimum purchase price
under this subparagraph is an amount equal to
the sum of--
(i) the principal amount of
outstanding indebtedness secured by the
building (other than indebtedness
incurred within the 5-year period
ending on the date of the sale to the
tenants), and
(ii) all Federal, State, and local
taxes attributable to such sale.
Except in the case of Federal income taxes,
there shall not be taken into account under
clause (ii) any additional tax attributable to
the application of clause (ii).
(8) Treatment of rural projects.--For purposes of
this section, in the case of any project for
residential rental property located in a rural area (as
defined in section 520 of the Housing Act of 1949), any
income limitation measured by reference to area median
gross income shall be measured by reference to the
greater of area median gross income or national non-
metropolitan median income. The preceding sentence
shall not apply with respect to any building if
paragraph (1) of section 42(h) does not apply by reason
of paragraph (4) thereof to any portion of the credit
determined under this section with respect to such
building.
(9) Coordination with low-income housing grants.--
(A) Reduction in State housing credit ceiling
for low-income housing grants received in
2009.--For purposes of this section, the
amounts described in clauses (i) through (iv)
of subsection (h)(3)(C) with respect to any
State for 2009 shall each be reduced by so much
of such amount as is taken into account in
determining the amount of any grant to such
State under section 1602 of the American
Recovery and Reinvestment Tax Act of 2009.
(B) Special rule for basis.--Basis of a
qualified low-income building shall not be
reduced by the amount of any grant described in
subparagraph (A).
(j) Recapture of credit.--
(1) In general.--If--
(A) as of the close of any taxable year in
the compliance period, the amount of the
qualified basis of any building with respect to
the taxpayer is less than
(B) the amount of such basis as of the close
of the preceding taxable year,
then the taxpayer's tax under this chapter for the
taxable year shall be increased by the credit recapture
amount.
(2) Credit recapture amount.--For purposes of
paragraph (1), the credit recapture amount is an amount
equal to the sum of--
(A) the aggregate decrease in the credits
allowed to the taxpayer under section 38 for
all prior taxable years which would have
resulted if the accelerated portion of the
credit allowable by reason of this section were
not allowed for all prior taxable years with
respect to the excess of the amount described
in paragraph (1)(B) over the amount described
in paragraph (1)(A), plus
(B) interest at the overpayment rate
established under section 6621 on the amount
determined under subparagraph (A) for each
prior taxable year for the period beginning on
the due date for filing the return for the
prior taxable year involved.
No deduction shall be allowed under this chapter for
interest described in subparagraph (B).
(3) Accelerated portion of credit.--For purposes of
paragraph (2), the accelerated portion of the credit
for the prior taxable years with respect to any amount
of basis is the excess of--
(A) the aggregate credit allowed by reason of
this section (without regard to this
subsection) for such years with respect to such
basis, over
(B) the aggregate credit which would be
allowable by reason of this section for such
years with respect to such basis if the
aggregate credit which would (but for this
subsection) have been allowable for the entire
compliance period were allowable ratably over
15 years.
(4) Special rules.--
(A) Tax benefit rule.--The tax for the
taxable year shall be increased under paragraph
(1) only with respect to credits allowed by
reason of this section which were used to
reduce tax liability. In the case of credits
not so used to reduce tax liability, the
carryforwards and carrybacks under section 39
shall be appropriately adjusted.
(B) Only basis for which credit allowed taken
into account.--Qualified basis shall be taken
into account under paragraph (1)(B) only to the
extent such basis was taken into account in
determining the credit under subsection (a) for
the preceding taxable year referred to in such
paragraph.
(C) No recapture of additional credit
allowable by reason of subsection (f)(3).--
Paragraph (1) shall apply to a decrease in
qualified basis only to the extent such
decrease exceeds the amount of qualified basis
with respect to which a credit was allowable
for the taxable year referred to in paragraph
(1)(B) by reason of subsection (f)(3).
(D) No credits against tax.--Any increase in
tax under this subsection shall not be treated
as a tax imposed by this chapter for purposes
of determining the amount of any credit under
this chapter.
(E) No recapture by reason of casualty
loss.--The increase in tax under this
subsection shall not apply to a reduction in
qualified basis by reason of a casualty loss to
the extent such loss is restored by
reconstruction or replacement within a
reasonable period established by the Secretary.
(F) No recapture where de minimis changes in
floor space.--The Secretary may provide that
the increase in tax under this subsection shall
not apply with respect to any building if--
(i) such increase results from a de
minimis change in the floor space
fraction under subsection (c)(1), and
(ii) the building is a qualified low-
income building after such change.
(5) Certain partnerships treated as the taxpayer.--
(A) In general.--For purposes of applying
this subsection to a partnership to which this
paragraph applies--
(i) such partnership shall be treated
as the taxpayer to which the credit
allowable under subsection (a) was
allowed,
(ii) the amount of such credit
allowed shall be treated as the amount
which would have been allowed to the
partnership were such credit allowable
to such partnership,
(iii) paragraph (4)(A) shall not
apply, and
(iv) the amount of the increase in
tax under this subsection for any
taxable year shall be allocated among
the partners of such partnership in the
same manner as such partnership's
taxable income for such year is
allocated among such partners.
(B) Partnerships to which paragraph
applies.--This paragraph shall apply to any
partnership which has 35 or more partners
unless the partnership elects not to have this
paragraph apply.
(C) Special rules.--
(i) Husband and wife treated as 1
partner.--For purposes of subparagraph
(B)(i), a husband and wife (and their
estates) shall be treated as 1 partner.
(ii) Election irrevocable.--Any
election under subparagraph (B), once
made, shall be irrevocable.
(6) No recapture on disposition of building which
continues in qualified use.--
(A) In general.--The increase in tax under
this subsection shall not apply solely by
reason of the disposition of a building (or an
interest therein) if it is reasonably expected
that such building will continue to be operated
as a qualified low-income building for the
remaining compliance period with respect to
such building.
(B) Statute of limitations.--If a building
(or an interest therein) is disposed of during
any taxable year and there is any reduction in
the qualified basis of such building which
results in an increase in tax under this
subsection for such taxable or any subsequent
taxable year, then--
(i) the statutory period for the
assessment of any deficiency with
respect to such increase in tax shall
not expire before the expiration of 3
years from the date the Secretary is
notified by the taxpayer (in such
manner as the Secretary may prescribe)
of such reduction in qualified basis,
and
(ii) such deficiency may be assessed
before the expiration of such 3-year
period notwithstanding the provisions
of any other law or rule of law which
would otherwise prevent such
assessment.
(k) Application of at-risk rules.--For purposes of this
section--
(1) In general.--Except as otherwise provided in this
subsection, rules similar to the rules of section
49(a)(1) (other than subparagraphs (D)(ii)(II) and
(D)(iv)(I) thereof), section 49(a)(2), and section
49(b)(1) shall apply in determining the qualified basis
of any building in the same manner as such sections
apply in determining the credit base of property.
(2) Special rules for determining qualified person.--
For purposes of paragraph (1)--
(A) In general.--If the requirements of
subparagraphs (B), (C), and (D) are met with
respect to any financing borrowed from a
qualified nonprofit organization (as defined in
subsection (h)(5)), the determination of
whether such financing is qualified commercial
financing with respect to any qualified low-
income building shall be made without regard to
whether such organization--
(i) is actively and regularly engaged
in the business of lending money, or
(ii) is a person described in section
49(a)(1)(D)(iv)(II).
(B) Financing secured by property.--The
requirements of this subparagraph are met with
respect to any financing if such financing is
secured by the qualified low-income building,
except that this subparagraph shall not apply
in the case of a federally assisted building
described in subsection (d)(6)(C) if--
(i) a security interest in such
building is not permitted by a Federal
agency holding or insuring the mortgage
secured by such building, and
(ii) the proceeds from the financing
(if any) are applied to acquire or
improve such building.
(C) Portion of building attributable to
financing.--The requirements of this
subparagraph are met with respect to any
financing for any taxable year in the
compliance period if, as of the close of such
taxable year, not more than 60 percent of the
eligible basis of the qualified low-income
building is attributable to such financing
(reduced by the principal and interest of any
governmental financing which is part of a wrap-
around mortgage involving such financing).
(D) Repayment of principal and interest.--The
requirements of this subparagraph are met with
respect to any financing if such financing is
fully repaid on or before the earliest of--
(i) the date on which such financing
matures,
(ii) the 90th day after the close of
the compliance period with respect to
the qualified low-income building, or
(iii) the date of its refinancing or
the sale of the building to which such
financing relates.
In the case of a qualified nonprofit
organization which is not described in section
49(a)(1)(D)(iv)(II) with respect to a building,
clause (ii) of this subparagraph shall be
applied as if the date described therein were
the 90th day after the earlier of the date the
building ceases to be a qualified low-income
building or the date which is 15 years after
the close of a compliance period with respect
thereto.
(3) Present value of financing.--If the rate of
interest on any financing described in paragraph (2)(A)
is less than the rate which is 1 percentage point below
the applicable Federal rate as of the time such
financing is incurred, then the qualified basis (to
which such financing relates) of the qualified low-
income building shall be the present value of the
amount of such financing, using as the discount rate
such applicable Federal rate. For purposes of the
preceding sentence, the rate of interest on any
financing shall be determined by treating interest to
the extent of government subsidies as not payable.
(4) Failure to fully repay.--
(A) In general.--To the extent that the
requirements of paragraph (2)(D) are not met,
then the taxpayer's tax under this chapter for
the taxable year in which such failure occurs
shall be increased by an amount equal to the
applicable portion of the credit under this
section with respect to such building,
increased by an amount of interest for the
period--
(i) beginning with the due date for
the filing of the return of tax imposed
by chapter 1 for the 1st taxable year
for which such credit was allowable,
and
(ii) ending with the due date for the
taxable year in which such failure
occurs,
determined by using the underpayment rate and
method under section 6621.
(B) Applicable portion.--For purposes of
subparagraph (A), the term ``applicable
portion'' means the aggregate decrease in the
credits allowed to a taxpayer under section 38
for all prior taxable years which would have
resulted if the eligible basis of the building
were reduced by the amount of financing which
does not meet requirements of paragraph (2)(D).
(C) Certain rules to apply.--Rules similar to
the rules of subparagraphs (A) and (D) of
subsection (j)(4) shall apply for purposes of
this subsection.
(l) Certifications and other reports to Secretary.--
(1) Certification with respect to 1st year of credit
period.--Following the close of the 1st taxable year in
the credit period with respect to any qualified low-
income building, the taxpayer shall certify to the
Secretary (at such time and in such form and in such
manner as the Secretary prescribes)--
(A) the taxable year, and calendar year, in
which such building was placed in service,
(B) the adjusted basis and eligible basis of
such building as of the close of the 1st year
of the credit period,
(C) the maximum applicable percentage and
qualified basis permitted to be taken into
account by the appropriate housing credit
agency under subsection (h),
(D) the election made under subsection (g)
with respect to the qualified low-income
housing project of which such building is a
part, and
(E) such other information as the Secretary
may require.
In the case of a failure to make the certification
required by the preceding sentence on the date
prescribed therefor, unless it is shown that such
failure is due to reasonable cause and not to willful
neglect, no credit shall be allowable by reason of
subsection (a) with respect to such building for any
taxable year ending before such certification is made.
(2) Annual reports to the Secretary.--The Secretary
may require taxpayers to submit an information return
(at such time and in such form and manner as the
Secretary prescribes) for each taxable year setting
forth--
(A) the qualified basis for the taxable year
of each qualified low-income building of the
taxpayer,
(B) the information described in paragraph
(1)(C) for the taxable year, and
(C) such other information as the Secretary
may require.
The penalty under section 6652(j) shall apply to any
failure to submit the return required by the Secretary
under the preceding sentence on the date prescribed
therefor.
(3) Annual reports from housing credit agencies.--
Each agency which allocates any housing credit amount
to any building for any calendar year shall submit to
the Secretary (at such time and in such manner as the
Secretary shall prescribe) an annual report
specifying--
(A) the amount of housing credit amount
allocated to each building for such year,
(B) sufficient information to identify each
such building and the taxpayer with respect
thereto, and
(C) such other information as the Secretary
may require.
The penalty under section 6652(j) shall apply to any
failure to submit the report required by the preceding
sentence on the date prescribed therefor.
(m) Responsibilities of housing credit agencies.--
(1) Plans for allocation of credit among projects.--
(A) In general.--Notwithstanding any other
provision of this section, the housing credit
dollar amount with respect to any building
shall be zero unless--
(i) such amount was allocated
pursuant to a qualified allocation plan
of the housing credit agency which is
approved by the governmental unit (in
accordance with rules similar to the
rules of section 147(f)(2) (other than
subparagraph (B)(ii) thereof)) of which
such agency is a part,
(ii) such agency notifies the chief
executive officer (or the equivalent)
of the local jurisdiction within which
the building is located of such project
and provides such individual a
reasonable opportunity to comment on
the project,
(iii) a comprehensive market study of
the housing needs of low-income
individuals in the area to be served by
the project is conducted before the
credit allocation is made and at the
developer's expense by a disinterested
party who is approved by such agency,
and
(iv) a written explanation is
available to the general public for any
allocation of a housing credit dollar
amount which is not made in accordance
with established priorities and
selection criteria of the housing
credit agency.
(B) Qualified allocation plan.--For purposes
of this paragraph, the term ``qualified
allocation plan'' means any plan--
(i) which sets forth selection
criteria to be used to determine
housing priorities of the housing
credit agency which are appropriate to
local conditions,
(ii) which also gives preference in
allocating housing credit dollar
amounts among selected projects to--
(I) projects serving the
lowest income tenants,
(II) projects obligated to
serve qualified tenants for the
longest periods, and
(III) projects which are
located in qualified census
tracts (as defined in
subsection (d)(5)(B)(ii)) and
the development of which
contributes to a concerted
community revitalization plan,
and
(iii) which provides a procedure that
the agency (or an agent or other
private contractor of such agency) will
follow in monitoring for noncompliance
with the provisions of this section and
in notifying the Internal Revenue
Service of such noncompliance which
such agency becomes aware of and in
monitoring for noncompliance with
habitability standards through regular
site visits.
(C) Certain selection criteria must be
used.--The selection criteria set forth in a
qualified allocation plan must include
(i) project location,
(ii) housing needs characteristics,
(iii) project characteristics,
including whether the project includes
the use of existing housing as part of
a community revitalization plan,
(iv) sponsor characteristics,
(v) tenant populations with special
housing needs,
(vi) public housing waiting lists,
(vii) tenant populations of
individuals with children,
(viii) projects intended for eventual
tenant ownership,
(ix) the energy efficiency of the
project, and
(x) the historic nature of the
project.
(D) Application to bond financed projects.--
Subsection (h)(4) shall not apply to any
project unless the project satisfies the
requirements for allocation of a housing credit
dollar amount under the qualified allocation
plan applicable to the area in which the
project is located.
(2) Credit allocated to building not to exceed amount
necessary to assure project feasibility.--
(A) In general.--The housing credit dollar
amount allocated to a project shall not exceed
the amount the housing credit agency determines
is necessary for the financial feasibility of
the project and its viability as a qualified
low-income housing project throughout the
credit period.
(B) Agency evaluation.--In making the
determination under subparagraph (A), the
housing credit agency shall consider--
(i) the sources and uses of funds and
the total financing planned for the
project,
(ii) any proceeds or receipts
expected to be generated by reason of
tax benefits,
(iii) the percentage of the housing
credit dollar amount used for project
costs other than the cost of
intermediaries, and
(iv) the reasonableness of the
developmental and operational costs of
the project.
Clause (iii) shall not be applied so as to
impede the development of projects in hard-to-
develop areas. Such a determination shall not
be construed to be a representation or warranty
as to the feasibility or viability of the
project.
(C) Determination made when credit amount
applied for and when building placed in
service.--
(i) In general.--A determination
under subparagraph (A) shall be made as
of each of the following times:
(I) The application for the
housing credit dollar amount.
(II) The allocation of the
housing credit dollar amount.
(III) The date the building
is placed in service.
(ii) Certification as to amount of
other subsidies.--Prior to each
determination under clause (i), the
taxpayer shall certify to the housing
credit agency the full extent of all
Federal, State, and local subsidies
which apply (or which the taxpayer
expects to apply) with respect to the
building.
(D) Application to bond financed projects.--
Subsection (h)(4) shall not apply to any
project unless the governmental unit which
issued the bonds (or on behalf of which the
bonds were issued) makes a determination under
rules similar to the rules of subparagraphs (A)
and (B).
(n) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations--
(1) dealing with--
(A) projects which include more than 1
building or only a portion of a building,
(B) buildings which are placed in service in
portions,
(2) providing for the application of this section to
short taxable years,
(3) preventing the avoidance of the rules of this
section, and
(4) providing the opportunity for housing credit
agencies to correct administrative errors and omissions
with respect to allocations and record keeping within a
reasonable period after their discovery, taking into
account the availability of regulations and other
administrative guidance from the Secretary.
* * * * * * *
SEC. 45R. EMPLOYEE HEALTH INSURANCE EXPENSES OF SMALL EMPLOYERS.
(a) General rule.--For purposes of section 38, in the case of
an eligible small employer, the small employer health insurance
credit determined under this section for any taxable year in
the credit period is the amount determined under subsection
(b).
(b) Health insurance credit amount.--Subject to subsection
(c), the amount determined under this subsection with respect
to any eligible small employer is equal to 50 percent (35
percent in the case of a tax-exempt eligible small employer) of
the lesser of--
(1) the aggregate amount of nonelective contributions
the employer made on behalf of its employees during the
taxable year under the arrangement described in
subsection (d)(4) for premiums for qualified health
plans offered by the employer to its employees through
an Exchange, or
(2) the aggregate amount of nonelective contributions
which the employer would have made during the taxable
year under the arrangement if each employee taken into
account under paragraph (1) had enrolled in a qualified
health plan which had a premium equal to the average
premium (as determined by the Secretary of Health and
Human Services) for the small group market in the
rating area in which the employee enrolls for coverage.
(c) Phaseout of credit amount based on number of employees
and average wages.--The amount of the credit determined under
subsection (b) without regard to this subsection shall be
reduced (but not below zero) by the sum of the following
amounts:
(1) Such amount multiplied by a fraction the
numerator of which is the total number of full-time
equivalent employees of the employer in excess of 10
and the denominator of which is 15.
(2) Such amount multiplied by a fraction the
numerator of which is the average annual wages of the
employer in excess of the dollar amount in effect under
subsection (d)(3)(B) and the denominator of which is
such dollar amount.
(d) Eligible small employer.--For purposes of this section--
(1) In general.--The term ``eligible small employer''
means, with respect to any taxable year, an employer--
(A) which has no more than 25 full-time
equivalent employees for the taxable year,
(B) the average annual wages of which do not
exceed an amount equal to twice the dollar
amount in effect under paragraph (3)(B) for the
taxable year, and
(C) which has in effect an arrangement
described in paragraph (4).
(2) Full-time equivalent employees.--
(A) In general.--The term ``full-time
equivalent employees'' means a number of
employees equal to the number determined by
dividing--
(i) the total number of hours of
service for which wages were paid by
the employer to employees during the
taxable year, by
(ii) 2,080.
Such number shall be rounded to the next lowest
whole number if not otherwise a whole number.
(B) Excess hours not counted.--If an employee
works in excess of 2,080 hours of service
during any taxable year, such excess shall not
be taken into account under subparagraph (A).
(C) Hours of service.--The Secretary, in
consultation with the Secretary of Labor, shall
prescribe such regulations, rules, and guidance
as may be necessary to determine the hours of
service of an employee, including rules for the
application of this paragraph to employees who
are not compensated on an hourly basis.
(3) Average annual wages.--
(A) In general.--The average annual wages of
an eligible small employer for any taxable year
is the amount determined by dividing--
(i) the aggregate amount of wages
which were paid by the employer to
employees during the taxable year, by
(ii) the number of full-time
equivalent employees of the employee
determined under paragraph (2) for the
taxable year.
Such amount shall be rounded to the next lowest
multiple of $1,000 if not otherwise such a
multiple.
(B) Dollar amount.--For purposes of paragraph
(1)(B) and subsection (c)(2)--
(i) 2010, 2011, 2012, and 2013.--The
dollar amount in effect under this
paragraph for taxable years beginning
in 2010, 2011, 2012, or 2013 is
$25,000.
(ii) Subsequent years.--In the case
of a taxable year beginning in a
calendar year after 2013, the dollar
amount in effect under this paragraph
shall be equal to $25,000, multiplied
by the cost-of-living adjustment under
section 1(f)(3) for the calendar year,
determined by substituting ``calendar
year 2012'' for ``calendar year 2016''
in subparagraph (A)(ii) thereof.
(4) Contribution arrangement.--An arrangement is
described in this paragraph if it requires an eligible
small employer to make a nonelective contribution on
behalf of each employee who enrolls in a qualified
health plan offered to employees by the employer
through an exchange in an amount equal to a uniform
percentage (not less than 50 percent) of the premium
cost of the qualified health plan.
(5) Seasonal worker hours and wages not counted.--For
purposes of this subsection--
(A) In general.--The number of hours of
service worked by, and wages paid to, a
seasonal worker of an employer shall not be
taken into account in determining the full-time
equivalent employees and average annual wages
of the employer unless the worker works for the
employer on more than 120 days during the
taxable year.
(B) Definition of seasonal worker.--The term
``seasonal worker'' means a worker who performs
labor or services on a seasonal basis as
defined by the Secretary of Labor, including
workers covered by section 500.20(s)(1) of
title 29, Code of Federal Regulations and
retail workers employed exclusively during
holiday seasons.
(e) Other rules and definitions.--For purposes of this
section--
(1) Employee.--
(A) Certain employees excluded.--The term
``employee'' shall not include--
(i) an employee within the meaning of
section 401(c)(1),
(ii) any 2-percent shareholder (as
defined in section 1372(b)) of an
eligible small business which is an S
corporation,
(iii) any 5-percent owner (as defined
in section 416(i)(1)(B)(i)) of an
eligible small business, or
(iv) any individual who bears any of
the relationships described in
subparagraphs (A) through (G) of
[section 152(d)(2)] section 7706(d)(2)
to, or is a dependent described in
[section 152(d)(2)(H)] section
7706(d)(2)(H) of, an individual
described in clause (i), (ii), or
(iii).
(B) Leased employees.--The term ``employee''
shall include a leased employee within the
meaning of section 414(n).
(2) Credit period.--The term ``credit period'' means,
with respect to any eligible small employer, the 2-
consecutive-taxable year period beginning with the 1st
taxable year in which the employer (or any predecessor)
offers 1 or more qualified health plans to its
employees through an Exchange.
(3) Nonelective contribution.--The term ``nonelective
contribution'' means an employer contribution other
than an employer contribution pursuant to a salary
reduction arrangement.
(4) Wages.--The term ``wages'' has the meaning given
such term by section 3121(a) (determined without regard
to any dollar limitation contained in such section).
(5) Aggregation and other rules made applicable.--
(A) Aggregation rules.--All employers treated
as a single employer under subsection (b), (c),
(m), or (o) of section 414 shall be treated as
a single employer for purposes of this section.
(B) Other rules.--Rules similar to the rules
of subsections (c), (d), and (e) of section 52
shall apply.
(f) Credit made available to tax-exempt eligible small
employers.--
(1) In general.--In the case of a tax-exempt eligible
small employer, there shall be treated as a credit
allowable under subpart C (and not allowable under this
subpart) the lesser of--
(A) the amount of the credit determined under
this section with respect to such employer, or
(B) the amount of the payroll taxes of the
employer during the calendar year in which the
taxable year begins.
(2) Tax-exempt eligible small employer.--For purposes
of this section, the term ``tax-exempt eligible small
employer'' means an eligible small employer which is
any organization described in section 501(c) which is
exempt from taxation under section 501(a).
(3) Payroll taxes.--For purposes of this subsection--
(A) In general.--The term ``payroll taxes''
means--
(i) amounts required to be withheld
from the employees of the tax-exempt
eligible small employer under section
3401(a),
(ii) amounts required to be withheld
from such employees under section
3101(b), and
(iii) amounts of the taxes imposed on
the tax-exempt eligible small employer
under section 3111(b).
(B) Special rule.--A rule similar to the rule
of section 24(d)(2)(C) shall apply for purposes
of subparagraph (A).
(g) Application of section for calendar years 2010, 2011,
2012, and 2013.--In the case of any taxable year beginning in
2010, 2011, 2012, or 2013, the following modifications to this
section shall apply in determining the amount of the credit
under subsection (a):
(1) No credit period required.--The credit shall be
determined without regard to whether the taxable year
is in a credit period and for purposes of applying this
section to taxable years beginning after 2013, no
credit period shall be treated as beginning with a
taxable year beginning before 2014.
(2) Amount of credit.--The amount of the credit
determined under subsection (b) shall be determined--
(A) by substituting ``35 percent (25 percent
in the case of a tax-exempt eligible small
employer)'' for ``50 percent (35 percent in the
case of a tax-exempt eligible small
employer)'',
(B) by reference to an eligible small
employer's nonelective contributions for
premiums paid for health insurance coverage
(within the meaning of section 9832(b)(1)) of
an employee, and
(C) by substituting for the average premium
determined under subsection (b)(2) the amount
the Secretary of Health and Human Services
determines is the average premium for the small
group market in the State in which the employer
is offering health insurance coverage (or for
such area within the State as is specified by
the Secretary).
(3) Contribution arrangement.--An arrangement shall
not fail to meet the requirements of subsection (d)(4)
solely because it provides for the offering of
insurance outside of an Exchange.
(h) Insurance definitions.--Any term used in this section
which is also used in the Public Health Service Act or subtitle
A of title I of the Patient Protection and Affordable Care Act
shall have the meaning given such term by such Act or subtitle.
(i) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions of
this section, including regulations to prevent the avoidance of
the 2-year limit on the credit period through the use of
successor entities and the avoidance of the limitations under
subsection (c) through the use of multiple entities.
* * * * * * *
Subpart F--Rules for Computing Work Opportunity Credit
* * * * * * *
SEC. 51. AMOUNT OF CREDIT.
(a) Determination of amount.--For purposes of section 38, the
amount of the work opportunity credit determined under this
section for the taxable year shall be equal to 40 percent of
the qualified first-year wages for such year.
(b) Qualified wages defined.--For purposes of this subpart--
(1) In general.--The term ``qualified wages'' means
the wages paid or incurred by the employer during the
taxable year to individuals who are members of a
targeted group.
(2) Qualified first-year wages.--The term ``qualified
first-year wages'' means, with respect to any
individual, qualified wages attributable to service
rendered during the 1-year period beginning with the
day the individual begins work for the employer.
(3) Limitation on wages per year taken into
account.--The amount of the qualified first-year wages
which may be taken into account with respect to any
individual shall not exceed $6,000 per year ($12,000
per year in the case of any individual who is a
qualified veteran by reason of subsection
(d)(3)(A)(ii)(I), $14,000 per year in the case of any
individual who is a qualified veteran by reason of
subsection (d)(3)(A)(iv), and $24,000 per year in the
case of any individual who is a qualified veteran by
reason of subsection (d)(3)(A)(ii)(II)).
(c) Wages defined.--For purposes of this subpart--
(1) In general.--Except as otherwise provided in this
subsection and subsection (h)(2), the term ``wages''
has the meaning given to such term by subsection (b) of
section 3306 (determined without regard to any dollar
limitation contained in such section).
(2) On-the-job training and work supplementation
payments.--
(A) Exclusion for employers receiving on-the-
job training payments.--The term ``wages''
shall not include any amounts paid or incurred
by an employer for any period to any individual
for whom the employer receives federally funded
payments for on-the-job training of such
individual for such period.
(B) Reduction for work supplementation
payments to employers.--The amount of wages
which would (but for this subparagraph) be
qualified wages under this section for an
employer with respect to an individual for a
taxable year shall be reduced by an amount
equal to the amount of the payments made to
such employer (however utilized by such
employer) with respect to such individual for
such taxable year under a program established
under section 482(e) of the Social Security
Act.
(3) Payments for services during labor disputes.--
If--
(A) the principal place of employment of an
individual with the employer is at a plant or
facility, and
(B) there is a strike or lockout involving
employees at such plant or facility,
the term ``wages'' shall not include any amount paid or
incurred by the employer to such individual for
services which are the same as, or substantially
similar to, those services performed by employees
participating in, or affected by, the strike or lockout
during the period of such strike or lockout.
(4) Termination.--The term ``wages'' shall not
include any amount paid or incurred to an individual
who begins work for the employer after December 31,
2019.
(5) Coordination with payroll tax forgiveness.--The
term ``wages'' shall not include any amount paid or
incurred to a qualified individual (as defined in
section 3111(d)(3)) during the 1-year period beginning
on the hiring date of such individual by a qualified
employer (as defined in section 3111(d)) unless such
qualified employer makes an election not to have
section 3111(d) apply.
(d) Members of targeted groups.--For purposes of this
subpart--
(1) In general.--An individual is a member of a
targeted group if such individual is--
(A) a qualified IV-A recipient,
(B) a qualified veteran,
(C) a qualified ex-felon,
(D) a designated community resident,
(E) a vocational rehabilitation referral,
(F) a qualified summer youth employee,
(G) a qualified supplemental nutrition
assistance program benefits recipient,
(H) a qualified SSI recipient,
(I) a long-term family assistance recipient,
or
(J) a qualified long-term unemployment
recipient.
(2) Qualified IV-A recipient.--
(A) In general.--The term ``qualified IV-A
recipient'' means any individual who is
certified by the designated local agency as
being a member of a family receiving assistance
under a IV-A program for any 9 months during
the 18-month period ending on the hiring date.
(B) IV-A program.--For purposes of this
paragraph, the term ``IV-A program'' means any
program providing assistance under a State
program funded under part A of title IV of the
Social Security Act and any successor of such
program.
(3) Qualified veteran.--
(A) In general.--The term ``qualified
veteran'' means any veteran who is certified by
the designated local agency as--
(i) being a member of a family
receiving assistance under a
supplemental nutrition assistance
program under the Food and Nutrition
Act of 2008 for at least a 3-month
period ending during the 12-month
period ending on the hiring date,
(ii) entitled to compensation for a
service-connected disability, and--
(I) having a hiring date
which is not more that 1 year
after having been discharged or
released from active duty in
the Armed Forces of the United
States, or
(II) having aggregate periods
of unemployment during the 1-
year period ending on the
hiring date which equal or
exceed 6 months,
(iii) having aggregate periods of
unemployment during the 1-year period
ending on the hiring date which equal
or exceed 4 weeks (but less than 6
months), or
(iv) having aggregate periods of
unemployment during the 1-year period
ending on the hiring date which equal
or exceed 6 months.
(B) Veteran.--For purposes of subparagraph
(A), the term ``veteran'' means any individual
who is certified by the designated local agency
as--
(i)
(I) having served on active
duty (other than active duty
for training) in the Armed
Forces of the United States for
a period of more than 180 days,
or
(II) having been discharged
or released from active duty in
the Armed Forces of the United
States for a service-connected
disability, and
(ii) not having any day during the
60-day period ending on the hiring date
which was a day of extended active duty
in the Armed Forces of the United
States.
For purposes of clause (ii), the term
``extended active duty'' means a period of more
than 90 days during which the individual was on
active duty (other than active duty for
training).
(C) Other definitions.--For purposes of
subparagraph (A), the terms ``compensation''
and ``service-connected'' have the meanings
given such terms under section 101 of title 38,
United States Code.
(4) Qualified ex-felon.--The term ``qualified ex-
felon'' means any individual who is certified by the
designated local agency--
(A) as having been convicted of a felony
under any statute of the United States or any
State, and
(B) as having a hiring date which is not more
than 1 year after the last date on which such
individual was so convicted or was released
from prison.
(5) Designated community residents.--
(A) In general.--The term ``designated
community resident'' means any individual who
is certified by the designated local agency--
(i) as having attained age 18 but not
age 40 on the hiring date, and
(ii) as having his principal place of
abode within an empowerment zone,
enterprise community, renewal
community, or rural renewal county.
(B) Individual must continue to reside in
zone, community, or county.--In the case of a
designated community resident, the term
``qualified wages'' shall not include wages
paid or incurred for services performed while
the individual's principal place of abode is
outside an empowerment zone, enterprise
community, renewal community, or rural renewal
county.
(C) Rural renewal county.--For purposes of
this paragraph, the term ``rural renewal
county'' means any county which--
(i) is outside a metropolitan
statistical area (defined as such by
the Office of Management and Budget),
and
(ii) during the 5-year periods 1990
through 1994 and 1995 through 1999 had
a net population loss.
(6) Vocational rehabilitation referral.--The term
``vocational rehabilitation referral'' means any
individual who is certified by the designated local
agency as--
(A) having a physical or mental disability
which, for such individual, constitutes or
results in a substantial handicap to
employment, and
(B) having been referred to the employer upon
completion of (or while receiving)
rehabilitative services pursuant to--
(i) an individualized written plan
for employment under a State plan for
vocational rehabilitation services
approved under the Rehabilitation Act
of 1973,
(ii) a program of vocational
rehabilitation carried out under
chapter 31 of title 38, United States
Code, or
(iii) an individual work plan
developed and implemented by an
employment network pursuant to
subsection (g) of section 1148 of the
Social Security Act with respect to
which the requirements of such
subsection are met.
(7) Qualified summer youth employee.--
(A) In general.--The term ``qualified summer
youth employee'' means any individual--
(i) who performs services for the
employer between May 1 and September
15,
(ii) who is certified by the
designated local agency as having
attained age 16 but not 18 on the
hiring date (or if later, on May 1 of
the calendar year involved),
(iii) who has not been an employee of
the employer during any period prior to
the 90-day period described in
subparagraph (B)(i), and
(iv) who is certified by the
designated local agency as having his
principal place of abode within an
empowerment zone, enterprise community,
or renewal community.
(B) Special rules for determining amount of
credit.--For purposes of applying this subpart
to wages paid or incurred to any qualified
summer youth employee--
(i) subsection (b)(2) shall be
applied by substituting ``any 90-day
period between May 1 and September 15''
for ``the 1-year period beginning with
the day the individual begins work for
the employer'', and
(ii) subsection (b)(3) shall be
applied by substituting ``$3,000'' for
``$6,000''.
The preceding sentence shall not apply to an
individual who, with respect to the same
employer, is certified as a member of another
targeted group after such individual has been a
qualified summer youth employee.
(C) Youth must continue to reside in zone or
community.--Paragraph (5)(B) shall apply for
purposes of subparagraph (A)(iv).
(8) Qualified supplemental nutrition assistance
program benefits recipient.--
(A) In general.--The term ``qualified
supplemental nutrition assistance program
benefits recipient'' means any individual who
is certified by the designated local agency--
(i) as having attained age 18 but not
age 40 on the hiring date, and
(ii) as being a member of a family--
(I) receiving assistance
under a supplemental nutrition
assistance program under the
Food and Nutrition Act of 2008
for the 6-month period ending
on the hiring date, or
(II) receiving such
assistance for at least 3
months of the 5-month period
ending on the hiring date, in
the case of a member of a
family who ceases to be
eligible for such assistance
under section 6(o) of the Food
and Nutrition Act of 2008.
(B) Participation information.--
Notwithstanding any other provision of law, the
Secretary of the Treasury and the Secretary of
Agriculture shall enter into an agreement to
provide information to designated local
agencies with respect to participation in the
supplemental nutrition assistance program.
(9) Qualified SSI recipient.--The term ``qualified
SSI recipient'' means any individual who is certified
by the designated local agency as receiving
supplemental security income benefits under title XVI
of the Social Security Act (including supplemental
security income benefits of the type described in
section 1616 of such Act or section 212 of Public Law
93-66) for any month ending within the 60-day period
ending on the hiring date.
(10) Long-term family assistance recipient.--The term
``long-term family assistance recipient'' means any
individual who is certified by the designated local
agency--
(A) as being a member of a family receiving
assistance under a IV-A program (as defined in
paragraph (2)(B)) for at least the 18-month
period ending on the hiring date,
(B)(i) as being a member of a family
receiving such assistance for 18 months
beginning after August 5, 1997, and
(ii) as having a hiring date which is not
more than 2 years after the end of the earliest
such 18-month period, or
(C)(i) as being a member of a family which
ceased to be eligible for such assistance by
reason of any limitation imposed by Federal or
State law on the maximum period such assistance
is payable to a family, and
(ii) as having a hiring date which is not
more than 2 years after the date of such
cessation.
(11) Hiring date.--The term ``hiring date'' means the
day the individual is hired by the employer.
(12) Designated local agency.--The term ``designated
local agency'' means a State employment security agency
established in accordance with the Act of June 6, 1933,
as amended (29 U.S.C. 49-49n).
(13) Special rules for certifications.--
(A) In general.--An individual shall not be
treated as a member of a targeted group
unless--
(i) on or before the day on which
such individual begins work for the
employer, the employer has received a
certification from a designated local
agency that such individual is a member
of a targeted group, or
(ii)(I) on or before the day the
individual is offered employment with
the employer, a pre-screening notice is
completed by the employer with respect
to such individual, and
(II) not later than the 28th day
after the individual begins work for
the employer, the employer submits such
notice, signed by the employer and the
individual under penalties of perjury,
to the designated local agency as part
of a written request for such a
certification from such agency.
For purposes of this paragraph, the term ``pre-
screening notice'' means a document (in such form as
the Secretary shall prescribe) which contains
information provided by the individual on the basis of
which the employer believes that the individual is a
member of a targeted group.
(B) Incorrect certifications.--If--
(i) an individual has been certified
by a designated local agency as a
member of a targeted group, and
(ii) such certification is incorrect
because it was based on false
information provided by such
individual, the certification shall be
revoked and wages paid by the employer
after the date on which notice of
revocation is received by the employer
shall not be treated as qualified
wages.
(C) Explanation of denial of request.--If a
designated local agency denies a request for
certification of membership in a targeted
group, such agency shall provide to the person
making such request a written explanation of
the reasons for such denial.
(D) Credit for unemployed veterans.--
(i) In general.--Notwithstanding
subparagraph (A), for purposes of
paragraph (3)(A)--
(I) a veteran will be treated
as certified by the designated
local agency as having
aggregate periods of
unemployment meeting the
requirements of clause (ii)(II)
or (iv) of such paragraph
(whichever is applicable) if
such veteran is certified by
such agency as being in receipt
of unemployment compensation
under State or Federal law for
not less than 6 months during
the 1-year period ending on the
hiring date, and
(II) a veteran will be
treated as certified by the
designated local agency as
having aggregate periods of
unemployment meeting the
requirements of clause (iii) of
such paragraph if such veteran
is certified by such agency as
being in receipt of
unemployment compensation under
State or Federal law for not
less than 4 weeks (but less
than 6 months) during the 1-
year period ending on the
hiring date.
(ii) Regulatory authority.--The
Secretary may provide alternative
methods for certification of a veteran
as a qualified veteran described in
clause (ii)(II), (iii), or (iv) of
paragraph (3)(A), at the Secretary's
discretion.
(14) Credit allowed for unemployed veterans and
disconnected youth hired in 2009 or 2010.--
(A) In general.--Any unemployed veteran or
disconnected youth who begins work for the
employer during 2009 or 2010 shall be treated
as a member of a targeted group for purposes of
this subpart.
(B) Definitions.--For purposes of this
paragraph--
(i) Unemployed veteran.--The term
``unemployed veteran'' means any
veteran (as defined in paragraph
(3)(B), determined without regard to
clause (ii) thereof) who is certified
by the designated local agency as--
(I) having been discharged or
released from active duty in
the Armed Forces at any time
during the 5-year period ending
on the hiring date, and
(II) being in receipt of
unemployment compensation under
State or Federal law for not
less than 4 weeks during the 1-
year period ending on the
hiring date.
(ii) Disconnected youth.--The term
``disconnected youth'' means any
individual who is certified by the
designated local agency--
(I) as having attained age 16
but not age 25 on the hiring
date,
(II) as not regularly
attending any secondary,
technical, or post-secondary
school during the 6-month
period preceding the hiring
date,
(III) as not regularly
employed during such 6- month
period, and
(IV) as not readily
employable by reason of lacking
a sufficient number of basic
skills.
(15) Qualified long-term unemployment recipient.--The
term ``qualified long-term unemployment recipient''
means any individual who is certified by the designated
local agency as being in a period of unemployment
which--
(A) is not less than 27 consecutive weeks,
and
(B) includes a period in which the individual
was receiving unemployment compensation under
State or Federal law.
(e) Credit for second-year wages for employment of long-term
family assistance recipients.--
(1) In general.--With respect to the employment of a
long- term family assistance recipient--
(A) the amount of the work opportunity credit
determined under this section for the taxable
year shall include 50 percent of the qualified
second-year wages for such year, and
(B) in lieu of applying subsection (b)(3),
the amount of the qualified first-year wages,
and the amount of qualified second-year wages,
which may be taken into account with respect to
such a recipient shall not exceed $10,000 per
year.
(2) Qualified second-year wages.--For purposes of
this subsection, the term ``qualified second-year
wages'' means qualified wages--
(A) which are paid to a long-term family
assistance recipient, and
(B) which are attributable to service
rendered during the 1-year period beginning on
the day after the last day of the 1-year period
with respect to such recipient determined under
subsection (b)(2).
(3) Special rules for agricultural and railway
labor.--If such recipient is an employee to whom
subparagraph (A) or (B) of subsection (h)(1) applies,
rules similar to the rules of such subparagraphs shall
apply except that--
(A) such subparagraph (A) shall be applied by
substituting ``$10,000'' for ``$6,000'', and
(B) such subparagraph (B) shall be applied by
substituting ``$833.33'' for ``$500''.
(f) Remuneration must be for trade or business employment.--
(1) In general.--For purposes of this subpart,
remuneration paid by an employer to an employee during
any taxable year shall be taken into account only if
more than one-half of the remuneration so paid is for
services performed in a trade or business of the
employer.
(2) Special rule for certain determination.--Any
determination as to whether paragraph (1), or
subparagraph (A) or (B) of subsection (h)(1), applies
with respect to any employee for any taxable year shall
be made without regard to subsections (a) and (b) of
section 52.
(g) United States Employment Service to notify employers of
availability of credit.--The United States Employment Service,
in consultation with the Internal Revenue Service, shall take
such steps as may be necessary or appropriate to keep employers
apprised of the availability of the work opportunity credit
determined under this subpart.
(h) Special rules for agricultural labor and railway labor.--
For purposes of this subpart--
(1) Unemployment insurance wages.--
(A) Agricultural labor.--If the services
performed by any employee for an employer
during more than one-half of any pay period
(within the meaning of section 3306(d)) taken
into account with respect to any year
constitute agricultural labor (within the
meaning of section 3306(k)), the term
``unemployment insurance wages'' means, with
respect to the remuneration paid by the
employer to such employee for such year, an
amount equal to so much of such remuneration as
constitutes ``wages'' within the meaning of
section 3121(a), except that the contribution
and benefit base for each calendar year shall
be deemed to be $6,000.
(B) Railway labor.--If more than one-half of
remuneration paid by an employer to an employee
during any year is remuneration for service
described in section 3306(c)(9), the term
``unemployment insurance wages'' means, with
respect to such employee for such year, an
amount equal to so much of the remuneration
paid to such employee during such year which
would be subject to contributions under section
8(a) of the Railroad Unemployment Insurance Act
(45 USC Sec. 358(a)) if the maximum amount
subject to such contributions were $500 per
month.
(2) Wages.--In any case to which subparagraph (A) or
(B) of paragraph (1) applies, the term ``wages'' means
unemployment insurance wages (determined without regard
to any dollar limitation).
(i) Certain individuals ineligible.--
(1) Related individuals.--No wages shall be taken
into account under subsection (a) with respect to an
individual who--
(A) bears any of the relationships described
in subparagraphs (A) through (G) of [section
152(d)(2)] section 7706(d)(2) to the taxpayer,
or, if the taxpayer is a corporation, to an
individual who owns, directly or indirectly,
more than 50 percent in value of the
outstanding stock of the corporation, or, if
the taxpayer is an entity other than a
corporation, to any individual who owns,
directly or indirectly, more than 50 percent of
the capital and profits interests in the entity
(determined with the application of section
267(c)),
(B) if the taxpayer is an estate or trust, is
a grantor, beneficiary, or fiduciary of the
estate or trust, or is an individual who bears
any of the relationships described in
subparagraphs (A) through (G) of [section
152(d)(2)] section 7706(d)(2) to a grantor,
beneficiary, or fiduciary of the estate or
trust, or
(C) is a dependent (described in [section
152(d)(2)(H)] section 7706(d)(2)(H)) of the
taxpayer, or, if the taxpayer is a corporation,
of an individual described in subparagraph (A),
or, if the taxpayer is an estate or trust, of a
grantor, beneficiary, or fiduciary of the
estate or trust.
(2) Nonqualifying rehires.--No wages shall be taken
into account under subsection (a) with respect to any
individual if, prior to the hiring date of such
individual, such individual had been employed by the
employer at any time.
(3) Individuals not meeting minimum employment
period.--
(A) Reduction of credit for individuals
performing fewer than 400 hours of service.--In
the case of an individual who has performed at
least 120 hours, but less than 400 hours, of
service for the employer, subsection (a) shall
be applied by substituting ``25 percent'' for
``40 percent''.
(B) Denial of credit for individuals
performing fewer than 120 hours of service.--No
wages shall be taken into account under
subsection (a) with respect to any individual
unless such individual has performed at least
120 hours of service for the employer.
(j) Election to have work opportunity credit not apply.--
(1) In general.--A taxpayer may elect to have this
section not apply for any taxable year.
(2) Time for making election.--An election under
paragraph (1) for any taxable year may be made (or
revoked) at any time before the expiration of the 3-
year period beginning on the last date prescribed by
law for filing the return for such taxable year
(determined without regard to extensions)
(3) Manner of making election.--An election under
paragraph (1) (or revocation thereof) shall be made in
such manner as the Secretary may by regulations
prescribe.
(k) Treatment of successor employers; treatment of employees
performing services for other persons.--
(1) Treatment of successor employers.--Under
regulations prescribed by the Secretary, in the case of
a successor employer referred to in section 3306(b)(1),
the determination of the amount of the credit under
this section with respect to wages paid by such
successor employer shall be made in the same manner as
if such wages were paid by the predecessor employer
referred to in such section.
(2) Treatment of employees performing services for
other persons.--No credit shall be determined under
this section with respect to remuneration paid by an
employer to an employee for services performed by such
employee for another person unless the amount
reasonably expected to be received by the employer for
such services from such other person exceeds the
remuneration paid by the employer to such employee for
such services.
* * * * * * *
PART VI--ALTERNATIVE MINIMUM TAX
* * * * * * *
SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.
(a) General rule.--In the case of a taxpayer other than a
corporation, there is hereby imposed (in addition to any other
tax imposed by this subtitle) a tax equal to the excess (if
any) of--
(1) the tentative minimum tax for the taxable year,
over
(2) the regular tax for the taxable year.
(b) Tentative minimum tax.--For purposes of this part--
(1) Amount of tentative tax.--
(A) In general.--The tentative minimum tax
for the taxable year is the sum of--
(i) 26 percent of so much of the
taxable excess as does not exceed
$175,000, plus
(ii) 28 percent of so much of the
taxable excess as exceeds $175,000.
The amount determined under the preceding
sentence shall be reduced by the alternative
minimum tax foreign tax credit for the taxable
year.
(B) Taxable excess.--For purposes of this
subsection, the term ``taxable excess'' means
so much of the alternative minimum taxable
income for the taxable year as exceeds the
exemption amount.
(C) Married individual filing separate
return.--In the case of a married individual
filing a separate return, subparagraph (A)
shall be applied by substituting 50 percent of
the dollar amount otherwise applicable under
clause (i) and clause (ii) thereof. For
purposes of the preceding sentence, marital
status shall be determined under section 7703.
(2) Alternative minimum taxable income.--The term
``alternative minimum taxable income'' means the
taxable income of the taxpayer for the taxable year--
(A) determined with the adjustments provided
in section 56 and section 58, and
(B) increased by the amount of the items of
tax preference described in section 57.
If a taxpayer is subject to the regular tax, such
taxpayer shall be subject to the tax imposed by this
section (and, if the regular tax is determined by
reference to an amount other than taxable income, such
amount shall be treated as the taxable income of such
taxpayer for purposes of the preceding sentence).
(3) Maximum rate of tax on net capital gain of
noncorporate taxpayers.--The amount determined under
the first sentence of paragraph (1)(A) shall not exceed
the sum of--
(A) the amount determined under such first
sentence computed at the rates and in the same
manner as if this paragraph had not been
enacted on the taxable excess reduced by the
lesser of--
(i) the net capital gain; or
(ii) the sum of--
(I) the adjusted net capital
gain, plus
(II) the unrecaptured section
1250 gain, plus
(B) 0 percent of so much of the adjusted net
capital gain (or, if less, taxable excess) as
does not exceed an amount equal to the excess
described in section 1(h)(1)(B), plus
(C) 15 percent of the lesser of--
(i) so much of the adjusted net
capital gain (or, if less, taxable
excess) as exceeds the amount on which
tax is determined under subparagraph
(B), or
(ii) the excess described in section
1(h)(1)(C)(ii), plus
(D) 20 percent of the adjusted net capital
gain (or, if less, taxable excess) in excess of
the sum of the amounts on which tax is
determined under subparagraphs (B) and (C),
plus
(E) 25 percent of the amount of taxable
excess in excess of the sum of the amounts on
which tax is determined under the preceding
subparagraphs of this paragraph.
Terms used in this paragraph which are also used in
section 1(h) shall have the respective meanings given
such terms by section 1(h) but computed with the
adjustments under this part.
(c) Regular tax.--
(1) In general.--For purposes of this section, the
term ``regular tax'' means the regular tax liability
for the taxable year (as defined in section 26(b))
reduced by the foreign tax credit allowable under
section 27(a). Such term shall not include any increase
in tax under section 45(e)(11)(C), 49(b) or 50(a) or
subsection (j) or (k) of section 42.
(2) Coordination with income averaging for farmers
and fishermen.--Solely for purposes of this section,
section 1301 (relating to averaging of farm and fishing
income) shall not apply in computing the regular tax
liability.
(3) Cross references.--For provisions providing that
certain credits are not allowable against the tax
imposed by this section, see sections 30C(d)(2) and
38(c).
(d) Exemption amount.--For purposes of this section--
(1) Exemption amount for taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation, the term ``exemption amount'' means--
(A) [$78,750] $109,400 in the case of--
(i) a joint return, or
(ii) a surviving spouse,
(B) [$50,600] $70,300 in the case of an
individual who--
(i) is not a married individual, and
(ii) is not a surviving spouse,
(C) 50 percent of the dollar amount
applicable under subparagraph (A) in the case
of a married individual who files a separate
return, and
(D) $22,500 in the case of an estate or
trust.
For purposes of this paragraph, the term ``surviving
spouse'' has the meaning given to such term by section
2(a), and marital status shall be determined under
section 7703.
(2) Phase-out of exemption amount.--The exemption
amount of any taxpayer shall be reduced (but not below
zero) by an amount equal to 25 percent of the amount by
which the alternative minimum taxable income of the
taxpayer exceeds--
(A) [$150,000] $1,000,000 in the case of a
taxpayer described in paragraph (1)(A),
[(B) $112,500 in the case of a taxpayer
described in paragraph (1)(B), and
[(C) 50 percent of the dollar amount
applicable under subparagraph (A) in the case
of a taxpayer described in subparagraph (C) or
(D) of paragraph (1).]
(B) 50 percent of the dollar amount
applicable under subparagraph (A) in the case
of a taxpayer described in paragraph (1)(B) or
(1)(C), and
(C) $75,000 in the case of a taxpayer
described in paragraph (1)(D).
In the case of a taxpayer described in paragraph
(1)(C), alternative minimum taxable income shall be
increased by the lesser of (i) 25 percent of the excess
of alternative minimum taxable income (determined
without regard to this sentence) over the minimum
amount of such income (as so determined) for which the
exemption amount under paragraph (1)(C) is zero, or
(ii) such exemption amount (determined without regard
to this paragraph).
[(3) Inflation adjustment.--
[(A) In general.--In the case of any taxable
year beginning in a calendar year after 2012,
the amounts described in subparagraph (B) shall
each be increased by an amount equal to--
[(i) such dollar amount, multiplied
by
[(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``calendar year 2011'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
[(B) Amounts described.--The amounts
described in this subparagraph are--
[(i) each of the dollar amounts
contained in subsection (b)(1)(A),
[(ii) each of the dollar amounts
contained in subparagraphs (A), (B),
and (D) of paragraph (1), and
[(iii) each of the dollar amounts in
subparagraphs (A) and (B) of paragraph
(2).
[(C) Rounding.--Any increased amount
determined under subparagraph (A) shall be
rounded to the nearest multiple of $100.
[(4) Special rule for taxable years beginning after
2017 and before 2026.--
[(A) In general.--In the case of any taxable
year beginning after December 31, 2017, and
before January 1, 2026--
[(i) paragraph (1) shall be applied--
[(I) by substituting
``$109,400'' for ``$78,750'' in
subparagraph (A), and
[(II) by substituting
``$70,300'' for ``$50,600'' in
subparagraph (B), and
[(ii) paragraph (2) shall be
applied--
[(I) by substituting
``$1,000,000'' for ``$150,000''
in subparagraph (A),
[(II) by substituting ``50
percent of the dollar amount
applicable under subparagraph
(A)'' for ``$112,500'' in
subparagraph (B), and
[(III) in the case of a
taxpayer described in paragraph
(1)(D), without regard to the
substitution under subclause
(I).
[(B) Inflation adjustment.--
[(i) In general.--In the case of any
taxable year beginning in a calendar
year after 2018, the amounts described
in clause (ii) shall each be increased
by an amount equal to--
[(I) such dollar amount,
multiplied by
[(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting ``calendar year
2017'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
[(ii) Amounts described.--The amounts
described in this clause are the
$109,400 amount in subparagraph
(A)(i)(I), the $70,300 amount in
subparagraph (A)(i)(II), and the
$1,000,000 amount in subparagraph
(A)(ii)(I).
[(iii) Rounding.--Any increased
amount determined under clause (i)
shall be rounded to the nearest
multiple of $100.
[(iv) Coordination with current
adjustments.--In the case of any
taxable year to which subparagraph (A)
applies, no adjustment shall be made
under paragraph (3) to any of the
numbers which are substituted under
subparagraph (A) and adjusted under
this subparagraph.]
(3) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 2018, each
dollar amount described in clause (i) or (ii) of
subparagraph (B) shall be increased by an amount equal
to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting--
(i) in the case of a dollar amount
contained in paragraph (1)(D) or (2)(C)
or in subsection (b)(1)(A), ``calendar
year 2011'' for ``calendar year 2016''
in subparagraph (A)(ii) thereof, and
(ii) in the case of a dollar amount
contained in paragraph (1)(A), (1)(B),
or (2)(A), ``calendar year 2017'' for
``calendar year 2016'' in subparagraph
(A)(ii) thereof.
Any increased amount determined under this paragraph
shall be rounded to the nearest multiple of $100 ($50
in the case of the dollar amount contained in paragraph
(2)(C)).
SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.
(a) Adjustments applicable to all taxpayers.--In determining
the amount of the alternative minimum taxable income for any
taxable year the following treatment shall apply (in lieu of
the treatment applicable for purposes of computing the regular
tax):
(1) Depreciation.--
(A) In general.--
(i) Property other than certain
personal property.--Except as provided
in clause (ii), the depreciation
deduction allowable under section 167
with respect to any tangible property
placed in service after December 31,
1986, shall be determined under the
alternative system of section 168(g).
In the case of property placed in
service after December 31, 1998, the
preceding sentence shall not apply but
clause (ii) shall continue to apply.
(ii) 150-percent declining balance
method for certain property.--The
method of depreciation used shall be--
(I) the 150 percent declining
balance method,
(II) switching to the
straight line method for the
1st taxable year for which
using the straight line method
with respect to the adjusted
basis as of the beginning of
the year will yield a higher
allowance.
The preceding sentence shall not apply
to any section 1250 property (as
defined in section 1250(c)) (and the
straight line method shall be used for
such section 1250 property)or to any
other property if the depreciation
deduction determined under section 168
with respect to such other property for
purposes of the regular tax is
determined by using the straight line
method.
(B) Exception for certain property.--This
paragraph shall not apply to property described
in paragraph (1), (2), (3), or (4) of section
168(f), or in section 168(e)(3)(C)(iv).
(C) Coordination with transitional rules.--
(i) In general.--This paragraph shall
not apply to property placed in service
after December 31, 1986, to which the
amendments made by section 201 of the
Tax Reform Act of 1986 do not apply by
reason of section 203, 204, or 251(d)
of such Act.
(ii) Treatment of certain property
placed in service before 1987.--This
paragraph shall apply to any property
to which the amendments made by section
201 of the Tax Reform Act of 1986 apply
by reason of an election under section
203(a)(1)(B) of such Act without regard
to the requirement of subparagraph (A)
that the property be placed in service
after December 31, 1986.
(D) Normalization rules.--With respect to
public utility property described in section
168(i)(10), the Secretary shall prescribe the
requirements of a normalization method of
accounting for this section.
(2) Mining exploration and development costs.--
(A) In general.--With respect to each mine or
other natural deposit (other than an oil, gas,
or geothermal well) of the taxpayer, the amount
allowable as a deduction under section 616(a)
or 617(a) (determined without regard to section
291(b)) in computing the regular tax for costs
paid or incurred after December 31, 1986, shall
be capitalized and amortized ratably over the
10-year period beginning with the taxable year
in which the expenditures were made.
(B) Loss allowed.--If a loss is sustained
with respect to any property described in
subparagraph (A), a deduction shall be allowed
for the expenditures described in subparagraph
(A) for the taxable year in which such loss is
sustained in an amount equal to the lesser of--
(i) the amount allowable under
section 165(a) for the expenditures if
they had remained capitalized, or
(ii) the amount of such expenditures
which have not previously been
amortized under subparagraph (A).
(3) Treatment of certain long-term contracts.--In the
case of any long-term contract entered into by the
taxpayer on or after March 1, 1986, the taxable income
from such contract shall be determined under the
percentage of completion method of accounting (as
modified by section 460(b)). For purposes of the
preceding sentence, in the case of a contract described
in section 460(e)(1), the percentage of the contract
completed shall be determined under section 460(b)(1)
by using the simplified procedures for allocation of
costs prescribed under section 460(b)(3). The first
sentence of this paragraph shall not apply to any home
construction contract (as defined in section
460(e)(6)).
(4) Alternative tax net operating loss deduction.--
The alternative tax net operating loss deduction shall
be allowed in lieu of the net operating loss deduction
allowed under section 172.
(5) Pollution control facilities.--In the case of any
certified pollution control facility placed in service
after December 31, 1986, the deduction allowable under
section 169 (without regard to section 291) shall be
determined under the alternative system of section
168(g). In the case of such a facility placed in
service after December 31, 1998, such deduction shall
be determined under section 168 using the straight line
method.
(6) Adjusted basis.--The adjusted basis of any
property to which paragraph (1) or (5) applies (or with
respect to which there are any expenditures to which
paragraph (2) or subsection (b)(2) applies) shall be
determined on the basis of the treatment prescribed in
paragraph (1), (2), or (5), or subsection (b)(2),
whichever applies.
(7) Section 87 not applicable.--Section 87 (relating
to alcohol fuel credit) shall not apply.
(b) Adjustments applicable to individuals.--In determining
the amount of the alternative minimum taxable income of any
taxpayer (other than a corporation), the following treatment
shall apply (in lieu of the treatment applicable for purposes
of computing the regular tax):
(1) Limitation on deductions.--
[(A) In general.--No deduction shall be
allowed--
[(i) for any miscellaneous itemized
deduction (as defined in section
67(b)), or
[(ii) for any taxes described in
paragraph (1), (2), or (3) of section
164(a) or clause (ii) of section
164(b)(5)(A).
Clause (ii) shall not apply to any amount
allowable in computing adjusted gross income.
[(B) Medical expenses.--In determining the
amount allowable as a deduction under section
213, subsection (a) of section 213 shall be
applied without regard to subsection (f) of
such section. This subparagraph shall not apply
to taxable years beginning after December 31,
2016, and ending before January 1, 2019]
(A) Certain taxes.--No deduction (other than
a deduction allowable in computing adjusted
gross income) shall be allowed for any taxes
described in paragraph (1), (2), or (3) of
section 164(a) or clause (ii) of section
164(b)(5)(A).
[(C)] (B) Interest.--In determining the
amount allowable as a deduction for interest,
subsections (d) and (h) of section 163 shall
apply, except that--
(i) in lieu of the exception under
section 163(h)(2)(D), the term
``personal interest'' shall not include
any qualified housing interest (as
defined in subsection (e)),
(ii) interest on any specified
private activity bond (and any amount
treated as interest on a specified
private activity bond under section
57(a)(5)(B)), and any deduction
referred to in section 57(a)(5)(A),
shall be treated as includible in gross
income (or as deductible) for purposes
of applying section 163(d),
(iii) in lieu of the exception under
section 163(d)(3)(B)(i), the term
``investment interest'' shall not
include any qualified housing interest
(as defined in subsection (e)), and
(iv) the adjustments of this section
and sections 57 and 58 shall apply in
determining net investment income under
section 163(d).
[(D)] (C) Treatment of certain recoveries.--
No recovery of any tax to which [subparagraph
(A)(ii)] subparagraph (A) applied shall be
included in gross income for purposes of
determining alternative minimum taxable income.
[(E)] (D) Standard deduction [and deduction
for personal exemptions] not allowed.--The
standard deduction under section 63(c)[, the
deduction for personal exemptions under section
151,] and the deduction under section 642(b)
shall not be allowed.
[(F) Section 68 not applicable.--Section 68
shall not apply.]
(2) Circulation and research and experimental
expenditures.--
(A) In general.--The amount allowable as a
deduction under section 173 or 174(a) in
computing the regular tax for amounts paid or
incurred after December 31, 1986, shall be
capitalized and--
(i) in the case of circulation
expenditures described in section 173,
shall be amortized ratably over the 3-
year period beginning with the taxable
year in which the expenditures were
made, or
(ii) in the case of research and
experimental expenditures described in
section 174(a), shall be amortized
ratably over the 10-year period
beginning with the taxable year in
which the expenditures were made.
(B) Loss allowed.--If a loss is sustained
with respect to any property described in
subparagraph (A), a deduction shall be allowed
for the expenditures described in subparagraph
(A) for the taxable year in which such loss is
sustained in an amount equal to the lesser of--
(i) the amount allowable under
section 165(a) for the expenditures if
they had remained capitalized, or
(ii) the amount of such expenditures
which have not previously been
amortized under subparagraph (A).
(C) Exception for certain research and
experimental expenditures.--If the taxpayer
materially participates (within the meaning of
section 469(h)) in an activity, this paragraph
shall not apply to any amount allowable as a
deduction under section 174(a) for expenditures
paid or incurred in connection with such
activity.
(3) Treatment of incentive stock options.--Section
421 shall not apply to the transfer of stock acquired
pursuant to the exercise of an incentive stock option
(as defined in section 422). Section 422(c)(2) shall
apply in any case where the disposition and the
inclusion for purposes of this part are within the same
taxable year and such section shall not apply in any
other case. The adjusted basis of any stock so acquired
shall be determined on the basis of the treatment
prescribed by this paragraph.
(d) Alternative tax net operating loss deduction defined.--
(1) In general.--For purposes of subsection (a)(4),
the term ``alternative tax net operating loss
deduction'' means the net operating loss deduction
allowable for the taxable year under section 172,
except that--
(A) the amount of such deduction shall not
exceed the sum of--
(i) the lesser of--
(I) the amount of such
deduction attributable to net
operating losses (other than
the deduction described in
clause (ii)(I)), or
(II) 90 percent of
alternative minimum taxable
income determined without
regard to such deduction and
the deduction under section
199, plus
(ii) the lesser of--
(I) the amount of such
deduction attributable to an
applicable net operating loss
with respect to which an
election is made under section
172(b)(1)(H) (as in effect
before its repeal by the Tax
Increase Prevention Act of
2014), or
(II) alternative minimum
taxable income determined
without regard to such
deduction and the deduction
under section 199 reduced by
the amount determined under
clause (i), and
(B) in determining the amount of such
deduction--
(i) the net operating loss (within
the meaning of section 172(c)) for any
loss year shall be adjusted as provided
in paragraph (2), and
(ii) appropriate adjustments in the
application of section 172(b)(2) shall
be made to take into account the
limitation of subparagraph (A).
(2) Adjustments to net operating loss computation.--
(A) Post-1986 loss years.--In the case of a
loss year beginning after December 31, 1986,
the net operating loss for such year under
section 172(c) shall--
(i) be determined with the
adjustments provided in this section
and section 58, and
(ii) be reduced by the items of tax
preference determined under section 57
for such year.
An item of tax preference shall be taken into
account under clause (ii) only to the extent
such item increased the amount of the net
operating loss for the taxable year under
section 172(c).
(B) Pre-1987 years.--In the case of loss
years beginning before January 1, 1987, the
amount of the net operating loss which may be
carried over to taxable years beginning after
December 31, 1986, for purposes of paragraph
(2), shall be equal to the amount which may be
carried from the loss year to the first taxable
year of the taxpayer beginning after December
31, 1986.
(e) Qualified housing interest.--For purposes of this part--
(1) In general.--The term ``qualified housing
interest'' means interest which is qualified residence
interest (as defined in section 163(h)(3)) and is paid
or accrued during the taxable year on indebtedness
which is incurred in acquiring, constructing, or
substantially improving any property which--
(A) is the principal residence (within the
meaning of section 121) of the taxpayer at the
time such interest accrues, or
(B) is a qualified dwelling which is a
qualified residence (within the meaning of
section 163(h)(4)).
Such term also includes interest on any indebtedness
resulting from the refinancing of indebtedness meeting
the requirements of the preceding sentence; but only to
the extent that the amount of the indebtedness
resulting from such refinancing does not exceed the
amount of the refinanced indebtedness immediately
before the refinancing.
(2) Qualified dwelling.--The term ``qualified
dwelling'' means any--
(A) house,
(B) apartment,
(C) condominium, or
(D) mobile home not used on a transient basis
(within the meaning of section
7701(a)(19)(C)(v)),
including all structures or other property appurtenant
thereto.
(3) Special rule for indebtedness incurred before
July 1, 1982.--The term ``qualified housing interest''
includes interest which is qualified residence interest
(as defined in section 163(h)(3)) and is paid or
accrued on indebtedness which--
(A) was incurred by the taxpayer before July
1, 1982, and
(B) is secured by property which, at the time
such indebtedness was incurred, was--
(i) the principal residence (within
the meaning of section 121) of the
taxpayer, or
(ii) a qualified dwelling used by the
taxpayer (or any member of his family
(within the meaning of section
267(c)(4))).
* * * * * * *
SEC. 58. DENIAL OF CERTAIN LOSSES.
(a) Denial of farm loss.--
(1) In general.--For purposes of computing the amount
of the alternative minimum taxable income for any
taxable year of a taxpayer other than a corporation--
(A) Disallowance of farm loss.--No loss of
the taxpayer for such taxable year from any tax
shelter farm activity shall be allowed.
(B) Deduction in succeeding taxable year.--
Any loss from a tax shelter farm activity
disallowed under subparagraph (A) shall be
treated as a deduction allocable to such
activity in the 1st succeeding taxable year.
(2) Tax shelter farm activity.--For purposes of this
subsection, the term ``tax shelter farm activity''
means--
(A) any farming syndicate as defined in
section [461(k)] 461(j), and
(B) any other activity consisting of farming
which is a passive activity (within the meaning
of section 469(c)).
(3) Determination of loss.--In determining the amount
of the loss from any tax shelter farm activity, the
adjustments of sections 56 and 57 shall apply.
(b) Disallowance of passive activity loss.--In computing the
alternative minimum taxable income of the taxpayer for any
taxable year, section 469 shall apply, except that in applying
section 469 -
(1) the adjustments of sections 56 and 57 shall
apply, and
(2) in lieu of applying section 469(j)(7), the
passive activity loss of a taxpayer shall be computed
without regard to qualified housing interest (as
defined in section 56(e)).
(c) Special rules.--For purposes of this section--
(1) Special rule for insolvent taxpayers.--
(A) In general.--The amount of losses to
which subsection (a) or (b) applies shall be
reduced by the amount (if any) by which the
taxpayer is insolvent as of the close of the
taxable year.
(B) Insolvent.--For purposes of this
paragraph, the term ``insolvent'' means the
excess of liabilities over the fair market
value of assets.
(2) Loss allowed for year of disposition of farm
shelter activity.--If the taxpayer disposes of his
entire interest in any tax shelter farm activity during
any taxable year, the amount of the loss attributable
to such activity (determined after carryovers under
subsection (a)(1)(B)) shall (to the extent otherwise
allowable) be allowed for such taxable year in
computing alternative minimum taxable income and not
treated as a loss from a tax shelter farm activity.
* * * * * * *
Subchapter B--Computation of Taxable Income
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC
* * * * * * *
[PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC
Sec. 61. Gross income defined.
* * * * * * *
[Sec. 67. 2-percent floor on miscellaneous itemized deductions.]
Sec. 67. Denial of miscellaneous itemized deductions.
[Sec. 68. Overall limitation on itemized deductions.]
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General rule.--For purposes of this [subtitle] title, the
term ``adjusted gross income'' means, in the case of an
individual, gross income minus the following deductions:
(1) Trade and business deductions.--The deductions
allowed by this chapter (other than by part VII of this
subchapter) which are attributable to a trade or
business carried on by the taxpayer, if such trade or
business does not consist of the performance of
services by the taxpayer as an employee.
(2) Certain trade and business deductions of
employees.--
(A) Reimbursed expenses of employees.--The
deductions allowed by part VI (section 161 and
following) which consist of expenses paid or
incurred by the taxpayer, in connection with
the performance by him of services as an
employee, under a reimbursement or other
expense allowance arrangement with his
employer. The fact that the reimbursement may
be provided by a third party shall not be
determinative of whether or not the preceding
sentence applies.
(B) Certain expenses of performing artists.--
The deductions allowed by section 162 which
consist of expenses paid or incurred by a
qualified performing artist in connection with
the performances by him of services in the
performing arts as an employee.
(C) Certain expenses of officials.--The
deductions allowed by section 162 which consist
of expenses paid or incurred with respect to
services performed by an official as an
employee of a State or a political subdivision
thereof in a position compensated in whole or
in part on a fee basis.
(D) Certain expenses of elementary and
secondary school teachers.--The deductions
allowed by section 162 which consist of
expenses, not in excess of $250, paid or
incurred by an eligible educator--
(i) by reason of the participation of
the educator in professional
development courses related to the
curriculum in which the educator
provides instruction or to the students
for which the educator provides
instruction, and
(ii) in connection with books,
supplies (other than nonathletic
supplies for courses of instruction in
health or physical education), computer
equipment (including related software
and services) and other equipment, and
supplementary materials used by the
eligible educator in the classroom.
(E) Certain expenses of members of reserve
components of the Armed Forces of the United
States.--The deductions allowed by section 162
which consist of expenses, determined at a rate
not in excess of the rates for travel expenses
(including per diem in lieu of subsistence)
authorized for employees of agencies under
subchapter I of chapter 57 of title 5, United
States Code, paid or incurred by the taxpayer
in connection with the performance of services
by such taxpayer as a member of a reserve
component of the Armed Forces of the United
States for any period during which such
individual is more than 100 miles away from
home in connection with such services.
(3) Losses from sale or exchange of property.--The
deductions allowed by part VI (sec. 161 and following)
as losses from the sale or exchange of property.
(4) Deductions attributable to rents and royalties.--
The deductions allowed by part VI (sec. 161 and
following), by section 212 (relating to expenses for
production of income), and by section 611 (relating to
depletion) which are attributable to property held for
the production of rents or royalties.
(5) Certain deductions of life tenants and income
beneficiaries of property.--In the case of a life
tenant of property, or an income beneficiary of
property held in trust, or an heir, legatee, or devisee
of an estate, the deduction for depreciation allowed by
section 167 and the deduction allowed by section 611.
(6) Pension, profit-sharing, and annuity plans of
self-employed individuals.--In the case of an
individual who is an employee within the meaning of
section 401(c)(1), the deduction allowed by section
404.
(7) Retirement savings.--The deduction allowed by
section 219 (relating to deduction of certain
retirement savings).
(9) Penalties forfeited because of premature
withdrawal of funds from time savings accounts or
deposits.--The deductions allowed by section 165 for
losses incurred in any transaction entered into for
profit, though not connected with a trade or business,
to the extent that such losses include amounts
forfeited to a bank, mutual savings bank, savings and
loan association, building and loan association,
cooperative bank or homestead association as a penalty
for premature withdrawal of funds from a time savings
account, certificate of deposit, or similar class of
deposit.
(11) Reforestation expenses.--The deduction allowed
by section 194.
(12) Certain required repayments of supplemental
unemployment compensation benefits.--The deduction
allowed by section 165 for the repayment to a trust
described in paragraph (9) or (17) of section 501(c) of
supplemental unemployment compensation benefits
received from such trust if such repayment is required
because of the receipt of trade readjustment allowances
under section 231 or 232 of the Trade Act of 1974 (19
U.S.C. Sec. 2291 and 2292).
(13) Jury duty pay remitted to employer.--Any
deduction allowable under this chapter by reason of an
individual remitting any portion of any jury pay to
such individual's employer in exchange for payment by
the employer of compensation for the period such
individual was performing jury duty. For purposes of
the preceding sentence, the term ``jury pay'' means any
payment received by the individual for the discharge of
jury duty.
(15) Moving expenses.--The deduction allowed by
section 217.
(16) Archer MSAs.--The deduction allowed by section
220.
(17) Interest on education loans.--The deduction
allowed by section 221.
(18) Higher education expenses.--The deduction
allowed by section 222.
(19) Health savings accounts.--The deduction allowed
by section 223.
(20) Costs involving discrimination suits, etc..--Any
deduction allowable under this chapter for attorney
fees and court costs paid by, or on behalf of, the
taxpayer in connection with any action involving a
claim of unlawful discrimination (as defined in
subsection (e)) or a claim of a violation of subchapter
III of chapter 37 of title 31, United States Code or a
claim made under section 1862(b)(3)(A) of the Social
Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding
sentence shall not apply to any deduction in excess of
the amount includible in the taxpayer's gross income
for the taxable year on account of a judgment or
settlement (whether by suit or agreement and whether as
lump sum or periodic payments) resulting from such
claim.
(21) Attorneys' fees relating to awards to
whistleblowers.--
(A) In general.--Any deduction allowable
under this chapter for attorney fees and court
costs paid by, or on behalf of, the taxpayer in
connection with any award under--
(i) section 7623(b), or
(ii) in the case of taxable years
beginning after December 31, 2017, any
action brought under--
(I) section 21F of the
Securities Exchange Act of 1934
(15 U.S.C. 78u-6),
(II) a State false claims
act, including a State false
claims act with qui tam
provisions, or
(III) section 23 of the
Commodity Exchange Act (7
U.S.C. 26).
(B) May not exceed award.--Subparagraph (A)
shall not apply to any deduction in excess of
the amount includible in the taxpayer's gross
income for the taxable year on account of such
award.
Nothing in this section shall permit the same item to
be deducted more than once. Any deduction allowed by
section 199A shall not be treated as a deduction
described in any of the preceding paragraphs of this
subsection.
(b) Qualified performing artist.--
(1) In general.--For purposes of subsection
(a)(2)(B), the term ``qualified performing artist''
means, with respect to any taxable year, any individual
if--
(A) such individual performed services in the
performing arts as an employee during the
taxable year for at least 2 employers,
(B) the aggregate amount allowable as a
deduction under section 162 in connection with
the performance of such services exceeds 10
percent of such individual's gross income
attributable to the performance of such
services, and
(C) the adjusted gross income of such
individual for the taxable year (determined
without regard to subsection (a)(2)(B)) does
not exceed $16,000.
(2) Nominal employer not taken into account.--An
individual shall not be treated as performing services
in the performing arts as an employee for any employer
during any taxable year unless the amount received by
such individual from such employer for the performance
of such services during the taxable year equals or
exceeds $200.
(3) Special rules for married couples.--
(A) In general.--Except in the case of a
husband and wife who lived apart at all times
during the taxable year, if the taxpayer is
married at the close of the taxable year,
subsection (a)(2)(B) shall apply only if the
taxpayer and his spouse file a joint return for
the taxable year.
(B) Application of paragraph (1).--In the
case of a joint return--
(i) paragraph (1) (other than
subparagraph (C) thereof) shall be
applied separately with respect to each
spouse, but
(ii) paragraph (1)(C) shall be
applied with respect to their combined
adjusted gross income.
(C) Determination of marital status.--For
purposes of this subsection, marital status
shall be determined under section 7703(a).
(D) Joint return.--For purposes of this
subsection, the term ``joint return'' means the
joint return of a husband and wife made under
section 6013.
(c) Certain arrangements not treated as reimbursement
arrangements.--For purposes of subsection (a)(2)(A), an
arrangement shall in no event be treated as a reimbursement or
other expense allowance arrangement if--
(1) such arrangement does not require the employee to
substantiate the expenses covered by the arrangement to
the person providing the reimbursement, or
(2) such arrangement provides the employee the right
to retain any amount in excess of the substantiated
expenses covered under the arrangement.
The substantiation requirements of the preceding sentence shall
not apply to any expense to the extent that substantiation is
not required under section 274(d) for such expense by reason of
the regulations prescribed under the 2nd sentence thereof.
(d) Definition; special rules.--
(1) Eligible educator.--
(A) In general.--For purposes of subsection
(a)(2)(D), the term ``eligible educator''
means, with respect to any taxable year, an
individual who is a kindergarten through grade
12 teacher, instructor, counselor, principal,
or aide in a school for at least 900 hours
during a school year.
(B) School.--The term ``school'' means any
school which provides elementary education or
secondary education (kindergarten through grade
12), as determined under State law.
(2) Coordination with exclusions.--A deduction shall
be allowed under subsection (a)(2)(D) for expenses only
to the extent the amount of such expenses exceeds the
amount excludable under section 135, 529(c)(1), or
530(d)(2) for the taxable year.
(3) Inflation adjustment.--In the case of any taxable
year beginning after 2015, the $250 amount in
subsection (a)(2)(D) shall be increased by an amount
equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2014'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $50.
(e) Unlawful discrimination defined.--For purposes of
subsection (a)(20), the term ``unlawful discrimination'' means
an act that is unlawful under any of the following:
(1) Section 302 of the Civil Rights Act of 1991 (42
U.S.C. 2000e-16b).
(2) Section 201, 202, 203, 204, 205, 206, or 207 of
the Congressional Accountability Act of 1995 (2 U.S.C.
1311, 1312, 1313, 1314, 1315, 1316, or 1317).
(3) The National Labor Relations Act (29 U.S.C. 151
et seq.).
(4) The Fair Labor Standards Act of 1938 (29 U.S.C.
201 et seq.).
(5) Section 4 or 15 of the Age Discrimination in
Employment Act of 1967 (29 U.S.C. 623 or 633a).
(6) Section 501 or 504 of the Rehabilitation Act of
1973 (29 U.S.C. 791 or 794).
(7) Section 510 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1140).
(8) Title IX of the Education Amendments of 1972 (20
U.S.C. 1681 et seq.).
(9) The Employee Polygraph Protection Act of 1988 (29
U.S.C. 2001 et seq.).
(10) The Worker Adjustment and Retraining
Notification Act (29 U.S.C. 2102 et seq.).
(11) Section 105 of the Family and Medical Leave Act
of 1993 (29 U.S.C. 2615).
(12) Chapter 43 of title 38, United States Code
(relating to employment and reemployment rights of
members of the uniformed services).
(13) Section 1977, 1979, or 1980 of the Revised
Statutes (42 U.S.C. 1981, 1983, or 1985).
(14) Section 703, 704, or 717 of the Civil Rights Act
of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
(15) Section 804, 805, 806, 808, or 818 of the Fair
Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or
3617).
(16) Section 102, 202, 302, or 503 of the Americans
with Disabilities Act of 1990 (42 U.S.C. 12112, 12132,
12182, or 12203).
(17) Any provision of Federal law (popularly known as
whistleblower protection provisions) prohibiting the
discharge of an employee, the discrimination against an
employee, or any other form of retaliation or reprisal
against an employee for asserting rights or taking
other actions permitted under Federal law.
(18) Any provision of Federal, State, or local law,
or common law claims permitted under Federal, State, or
local law--
(i) providing for the enforcement of civil
rights, or
(ii) regulating any aspect of the employment
relationship, including claims for wages,
compensation, or benefits, or prohibiting the
discharge of an employee, the discrimination
against an employee, or any other form of
retaliation or reprisal against an employee for
asserting rights or taking other actions
permitted by law.
SEC. 63. TAXABLE INCOME DEFINED.
(a) In general.--Except as provided in subsection (b), for
purposes of this subtitle, the term ``taxable income'' means
gross income minus the deductions allowed by this chapter
(other than the standard deduction).
(b) Individuals who do not itemize their deductions.--In the
case of an individual who does not elect to itemize his
deductions for the taxable year, for purposes of this subtitle,
the term ``taxable income'' means adjusted gross income,
minus--
(1) the standard deduction, and
[(2) the deduction for personal exemptions provided
in section 151, and.
[(3)] (2) any deduction provided in section 199A.
(c) Standard deduction.--For purposes of this subtitle--
(1) In general.--Except as otherwise provided in this
subsection, the term ``standard deduction'' means the
sum of--
(A) the basic standard deduction, and
(B) the additional standard deduction.
(2) Basic standard deduction.--For purposes of
paragraph (1), the basic standard deduction is--
(A) 200 percent of the dollar amount in
effect under subparagraph (C) for the taxable
year in the case of--
(i) a joint return, or
(ii) a surviving spouse (as defined
in section 2(a)),
(B) [$4,400] $18,000 in the case of a head of
household (as defined in section 2(b)), or
(C) [$3,000] $12,000 in any other case.
[(3) Additional standard deduction for aged and
blind.--For purposes of paragraph (1), the additional
standard deduction is the sum of each additional amount
to which the taxpayer is entitled under subsection (f).
[(4) Adjustments for inflation.--In the case of any
taxable year beginning in a calendar year after 1988,
each dollar amount contained in paragraph (2)(B),
(2)(C), or (5) or subsection (f) shall be increased by
an amount equal to--
[(A) such dollar amount, multiplied by
[(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
for ``calendar year 2016'' in subparagraph
(A)(ii) thereof--
[(i) ``calendar year 1987'' in the
case of the dollar amounts contained in
paragraph (2)(B), (2)(C), or (5)(A) or
subsection (f), and
[(ii) ``calendar year 1997'' in the
case of the dollar amount contained in
paragraph (5)(B).]
(3) Adjustments for inflation.--
(A) In general.--In the case of a taxable
year beginning after 2018, each dollar amount
in paragraph (2)(B), (2)(C), or (5) or
subsection (f) shall be increased by an amount
equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
for ``2016'' in subparagraph (A)(ii)
thereof--
(I) in the case of the dollar
amounts contained in paragraph
(2)(B) or (2)(C), ``2017'',
(II) in the case of the
dollar amounts contained in
paragraph (5)(A) or subsection
(f), ``1987'', and
(III) in the case of the
dollar amount contained in
paragraph (5)(B), ``1997''.
(B) Rounding.--If any increase under
subparagraph (A) is not a multiple of $50, such
increase shall be rounded to the next lowest
multiple of $50.
[(5)] (4) Limitation on basic standard deduction in
the case of [certain] dependents.--In the case of an
individual [with respect to whom a deduction under
section 151 is allowable to] who is a dependent of
another taxpayer for a taxable year beginning in the
calendar year in which the individual's taxable year
begins, the basic standard deduction applicable to such
individual for such individual's taxable year shall not
exceed the greater of--
(A) $500, or
(B) the sum of $250 and such individual's
earned income.
[(6)] (5) Certain individuals, etc., not eligible for
standard deduction.--In the case of--
(A) a married individual filing a separate
return where either spouse itemizes deductions,
(B) a nonresident alien individual,
(C) an individual making a return under
section 443(a)(1) for a period of less than 12
months on account of a change in his annual
accounting period, or
(D) an estate or trust, common trust fund, or
partnership, the standard deduction shall be
zero.
[(7) Special rules for taxable years 2018 through
2025.--In the case of a taxable year beginning after
December 31, 2017, and before January 1, 2026--
[(A) Increase in standard deduction.--
Paragraph (2) shall be applied--
[(i) by substituting ``$18,000'' for
``$4,400'' in subparagraph (B), and
[(ii) by substituting ``$12,000'' for
``$3,000'' in subparagraph (C).
[(B) Adjustment for inflation.--
[(i) In general.--Paragraph (4) shall
not apply to the dollar amounts
contained in paragraphs (2)(B) and
(2)(C).
[(ii) Adjustment of increased
amounts.--In the case of a taxable year
beginning after 2018, the $18,000 and
$12,000 amounts in subparagraph (A)
shall each be increased by an amount
equal to--
[(I) such dollar amount,
multiplied by
[(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting ``2017'' for
``2016'' in subparagraph
(A)(ii) thereof.
If any increase under this clause is
not a multiple of $50, such increase
shall be rounded to the next lowest
multiple of $50.]
(d) Itemized deductions.--For purposes of this subtitle, the
term ``itemized deductions'' means the deductions allowable
under this chapter other than--
(1) the deductions allowable in arriving at adjusted
gross income, and
[(2) the deduction for personal exemptions provided
by section 151, and
[(3)] (2) any deduction provided in section 199A.
(e) Election to itemize.--
(1) In general.--Unless an individual makes an
election under this subsection for the taxable year, no
itemized deduction shall be allowed for the taxable
year. For purposes of this subtitle, the determination
of whether a deduction is allowable under this chapter
shall be made without regard to the preceding sentence.
(2) Time and manner of election.--Any election under
this subsection shall be made on the taxpayer's return,
and the Secretary shall prescribe the manner of
signifying such election on the return.
(3) Change of election.--Under regulations prescribed
by the Secretary, a change of election with respect to
itemized deductions for any taxable year may be made
after the filing of the return for such year. If the
spouse of the taxpayer filed a separate return for any
taxable year corresponding to the taxable year of the
taxpayer, the change shall not be allowed unless, in
accordance with such regulations--
(A) the spouse makes a change of election
with respect to itemized deductions, for the
taxable year covered in such separate return,
consistent with the change of treatment sought
by the taxpayer, and
(B) the taxpayer and his spouse consent in
writing to the assessment (within such period
as may be agreed on with the Secretary) of any
deficiency, to the extent attributable to such
change of election, even though at the time of
the filing of such consent the assessment of
such deficiency would otherwise be prevented by
the operation of any law or rule of law.
This paragraph shall not apply if the tax liability of
the taxpayer's spouse for the taxable year
corresponding to the taxable year of the taxpayer has
been compromised under section 7122.
[(f) Aged or blind additional amounts.--
[(1) Additional amounts for the aged.--The taxpayer
shall be entitled to an additional amount of $600--
[(A) for himself if he has attained age 65
before the close of his taxable year, and
[(B) for the spouse of the taxpayer if the
spouse has attained age 65 before the close of
the taxable year and an additional exemption is
allowable to the taxpayer for such spouse under
section 151(b).
[(2) Additional amount for blind.--The taxpayer shall
be entitled to an additional amount of $600--
[(A) for himself if he is blind at the close
of the taxable year, and
[(B) for the spouse of the taxpayer if the
spouse is blind as of the close of the taxable
year and an additional exemption is allowable
to the taxpayer for such spouse under section
151(b).
For purposes of subparagraph (B), if the spouse dies
during the taxable year the determination of whether
such spouse is blind shall be made as of the time of
such death.]
(f) Additional Standard Deduction for the Aged and Blind.--
(1) In general.--For purposes of subsection (c)(1),
the additional standard deduction is, with respect to a
taxpayer for a taxable year, the sum of--
(A) $600 if the taxpayer has attained age 65
before the close of such taxable year, and
(B) $600 if the taxpayer is blind as of the
close of such taxable year.
(2) Application to married individuals.--
(A) Joint returns.--In the case of a joint
return, paragraph (1) shall be applied
separately with respect to each spouse.
(B) Certain married individuals filing
separately.--In the case of a married
individual filing a separate return, if--
(i) the spouse of such individual has
no gross income for the calendar year
in which the taxable year of such
individual begins,
(ii) such spouse is not the dependent
of another taxpayer for a taxable year
beginning in the calendar year in which
such individual's taxable year begins,
and
(iii) the TIN of such spouse is
included on such individual's return of
tax for the taxable year,
the additional standard deduction shall be
determined in the same manner as if such
individual and such individual's spouse filed a
joint return.
(3) Higher amount for certain unmarried
individuals.--In the case of an individual who is not
married and is not a surviving spouse, [paragraphs (1)
and (2)] subparagraphs (A) and (B) of paragraph (1)
shall be applied by substituting ``$750'' for ``$600''.
(4) Blindness defined.--For purposes of this
subsection, an individual is blind only if his central
visual acuity does not exceed 20/200 in the better eye
with correcting lenses, or if his visual acuity is
greater than 20/200 but is accompanied by a limitation
in the fields of vision such that the widest diameter
of the visual field subtends an angle no greater than
20 degrees.
(g) Marital status.--For purposes of this section, marital
status shall be determined under section 7703.
* * * * * * *
SEC. 67. [2-PERCENT FLOOR ON] DENIAL OF MISCELLANEOUS ITEMIZED
DEDUCTIONS.
[(a) General rule.--In the case of an individual, the
miscellaneous itemized deductions for any taxable year shall be
allowed only to the extent that the aggregate of such
deductions exceeds 2 percent of adjusted gross income.]
(a) In General.--In the case of an individual, miscellaneous
itemized deductions shall not be allowed.
(b) Miscellaneous itemized deductions.--For purposes of this
section, the term ``miscellaneous itemized deductions'' means
the itemized deductions other than--
(1) the deduction under section 163 (relating to
interest),
(2) the deduction under section 164 (relating to
taxes),
(3) the deduction under section 165(a) for casualty
or theft losses described in paragraph (2) or (3) of
section 165(c) or for losses described in section
165(d),
(4) the deductions under section 170 (relating to
charitable, etc., contributions and gifts) and section
642(c) (relating to deduction for amounts paid or
permanently set aside for a charitable purpose),
(5) the deduction under section 213 (relating to
medical, dental, etc., expenses),
(6) any deduction allowable for impairment-related
work expenses,
(7) the deduction under section 691(c) (relating to
deduction for estate tax in case of income in respect
of the decedent),
(8) any deduction allowable in connection with
personal property used in a short sale,
(9) the deduction under section 1341 (relating to
computation of tax where taxpayer restores substantial
amount held under claim of right),
(10) the deduction under section 72(b)(3) (relating
to deduction where annuity payments cease before
investment recovered),
(11) the deduction under section 171 (relating to
deduction for amortizable bond premium), and
(12) the deduction under section 216 (relating to
deductions in connection with cooperative housing
corporations).
(c) Disallowance of indirect deduction through pass-thru
entity.--
(1) In general.--The Secretary shall prescribe
regulations which prohibit the indirect deduction
through pass-thru entities of amounts which are not
allowable as a deduction if paid or incurred directly
by an individual and which contain such reporting
requirements as may be necessary to carry out the
purposes of this subsection.
(2) Treatment of publicly offered regulated
investment companies.--
(A) In general.--Paragraph (1) shall not
apply with respect to any publicly offered
regulated investment company.
(B) Publicly offered regulated investment
companies.--For purposes of this subsection--
(i) In general.--The term ``publicly
offered regulated investment company''
means a regulated investment company
the shares of which are--
(I) continuously offered
pursuant to a public offering
(within the meaning of section
4 of the Securities Act of
1933, as amended (15 U.S.C. 77a
to 77aa)),
(II) regularly traded on an
established securities market,
or
(III) held by or for no fewer
than 500 persons at all times
during the taxable year.
(ii) Secretary may reduce 500 person
requirement.--The Secretary may by
regulation decrease the minimum
shareholder requirement of clause
(i)(III) in the case of regulated
investment companies which experience a
loss of shareholders through net
redemptions of their shares.
(3) Treatment of certain other entities.--Paragraph
(1) shall not apply--
(A) with respect to cooperatives and real
estate investment trusts, and
(B) except as provided in regulations, with
respect to estates and trusts.
(d) Impairment-related work expenses.--For purposes of this
section, the term ``impairment-related work expenses'' means
expenses--
(1) of a handicapped individual (as defined in
section 190(b)(3)) for attendant care services at the
individual's place of employment and other expenses in
connection with such place of employment which are
necessary for such individual to be able to work, and
(2) with respect to which a deduction is allowable
under section 162 (determined without regard to this
section).
[(e) Determination of adjusted gross income in case of
estates and trusts.--For purposes of this section, the adjusted
gross income of an estate or trust shall be computed in the
same manner as in the case of an individual, except that--
[(1) the deductions for costs which are paid or
incurred in connection with the administration of the
estate or trust and which would not have been incurred
if the property were not held in such trust or estate,
and
[(2) the deductions allowable under sections 642(b),
651, and 661, shall be treated as
allowable in arriving at adjusted gross income. Under
regulations, appropriate adjustments shall be made in the
application of part I of subchapter J of this chapter to take
into account the provisions of this section.]
(f) Coordination with other limitation.--This section shall
be applied before the application of the dollar limitation of
the second sentence of section 162(a) (relating to trade or
business expenses).
[(g) Suspension for taxable years 2018 through 2025.--
Notwithstanding subsection (a), no miscellaneous itemized
deduction shall be allowed for any taxable year beginning after
December 31, 2017, and before January 1, 2026.]
[SEC. 68. OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
[(a) General rule.--In the case of an individual whose
adjusted gross income exceeds the applicable amount, the amount
of the itemized deductions otherwise allowable for the taxable
year shall be reduced by the lesser of--
[(1) 3 percent of the excess of adjusted gross income
over the applicable amount, or
[(2) 80 percent of the amount of the itemized
deductions otherwise allowable for such taxable year.
[(b) Applicable amount.--
[(1) In general.--For purposes of this section, the
term ``applicable amount'' means--
[(A) $300,000 in the case of a joint return
or a surviving spouse (as defined in section
2(a)),
[(B) $275,000 in the case of a head of
household (as defined in section 2(b)),
[(C) $250,000 in the case of an individual
who is not married and who is not a surviving
spouse or head of household, and
[(D) \1/2\ the amount applicable under
subparagraph (A) (after adjustment, if any,
under paragraph (2)) in the case of a married
individual filing a separate return.
For purposes of this paragraph, marital status shall be
determined under section 7703.
[(2) Inflation adjustment.--In the case of any
taxable year beginning in calendar years after 2013,
each of the dollar amounts under subparagraphs (A),
(B), and (C) of paragraph (1) shall be increased by an
amount equal to--
[(A) such dollar amount, multiplied by
[(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, except that
section 1(f)(3)(A)(ii) shall be applied by
substituting ``2012'' for ``2016''.
If any amount after adjustment under the preceding
sentence is not a multiple of $50, such amount shall be
rounded to the next lowest multiple of $50.
[(c) Exception for certain itemized deductions.--For purposes
of this section, the term ``itemized deductions'' does not
include--
[(1) the deduction under section 213 (relating to
medical, etc. expenses),
[(2) any deduction for investment interest (as
defined in section 163(d)), and
[(3) the deduction under section 165(a) for casualty
or theft losses described in paragraph (2) or (3) of
section 165(c) or for losses described in section
165(d).
[(d) Coordination with other limitations.--This section shall
be applied after the application of any other limitation on the
allowance of any itemized deduction.
[(e) Exception for estates and trusts.--This section shall
not apply to any estate or trust.
[(f) Section not to apply.--This section shall not apply to
any taxable year beginning after December 31, 2017, and before
January 1, 2026.]
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
(a) General rules for annuities.--
(1) Income inclusion.--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.
(2) Partial annuitization.--If any amount is received
as an annuity for a period of 10 years or more or
during one or more lives under any portion of an
annuity, endowment, or life insurance contract--
(A) such portion shall be treated as a
separate contract for purposes of this section,
(B) for purposes of applying subsections (b),
(c), and (e), the investment in the contract
shall be allocated pro rata between each
portion of the contract from which amounts are
received as an annuity and the portion of the
contract from which amounts are not received as
an annuity, and
(C) a separate annuity starting date under
subsection (c)(4) shall be determined with
respect to each portion of the contract from
which amounts are received as an annuity.
(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 to 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) Net operating loss deductions provided.--
For purposes of section 172, a deduction
allowed under this paragraph shall be treated
as if it were attributable to a trade or
business of the taxpayer.
(4) Unrecovered investment.--For purposes of this
subsection, the unrecovered investment in the contract
as of any date is--
(A) the investment in the contract
(determined without regard to subsection
(c)(2)) as of the annuity starting date,
reduced by
(B) the aggregate amount received under the
contract on or after such annuity starting date
and before the date as of which the
determination is being made, to the extent such
amount was excludable from gross income under
this subtitle.
(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, 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) Adjustment in investment where there is refund
feature.--If--
(A) the expected return under the contract
depends in whole or in part on the life
expectancy of one or more individuals;
(B) the contract provides for payments to be
made to a beneficiary (or to the estate of an
annuitant) on or after the death of the
annuitant or annuitants; and
(C) such payments are in the nature of a
refund of the consideration paid,
then the value (computed without discount for interest)
of such payments on the annuity starting date shall be
subtracted from the amount determined under paragraph
(1). Such value shall be computed in accordance with
actuarial tables prescribed by the Secretary. For
purposes of this paragraph and of subsection (e)(2)(A),
the term ``refund of the consideration paid'' includes
amounts payable after the death of an annuitant by
reason of a provision in the contract for a life
annuity with minimum period of payments certain, but
(if part of the consideration was contributed by an
employer) does not include that part of any payment to
a beneficiary (or to the estate of the annuitant) which
is not attributable to the consideration paid by the
employee for the contract as determined under paragraph
(1)(A).
(3) Expected return.--For purposes of subsection (b),
the expected return under the contract shall be
determined as follows:
(A) Life expectancy.--If the expected return
under the contract, for the period on and after
the annuity starting date, depends in whole or
in part on the life expectancy of one or more
individuals, the expected return shall be
computed with reference to actuarial tables
prescribed by the Secretary.
(B) Installment payments.--If subparagraph
(A) does not apply, the expected return is the
aggregate of the amounts receivable under the
contract as an annuity.
(4) Annuity starting date.--For purposes of this
section, the annuity starting date in the case of any
contract is the first day of the first period for which
an amount is received as an annuity under the contract.
(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 The number of anticipated payments
annuity starting date is: is:
------------------------------------------------------------------------
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 annuitants
are: The number is:
------------------------------------------------------------------------
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) Adjustment for refund feature not
applicable.--For purposes of this paragraph,
investment in the contract shall be determined
under subsection (c)(1) without regard to
subsection (c)(2).
(D) 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.
(E) 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.
(F) Adjustment where annuity payments not on
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.
(G) 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) Allocation to income.--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) Allocation to investment.--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 policyholder dividends.--Any
amount described in paragraph (1)(B) shall not
be included in gross income under paragraph
(2)(B)(i) to the extent such amount is retained
by the insurer as a premium or other
consideration paid for the contract.
(C) 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 1041(a)
(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.--
(A) In general.--In any case to which this
paragraph applies--
(i) paragraphs (2)(B) and (4)(A)
shall not apply, and
(ii) if paragraph (2)(A) does not
apply, the amount shall be included in
gross income, but only to the extent it
exceeds the investment in the contract.
(B) Existing contracts.--This paragraph shall
apply to contracts entered into before August
14, 1982. Any amount allocable to investment in
the contract after August 13, 1982, shall be
treated as from a contract entered into after
such date.
(C) Certain life insurance and endowment
contracts.--Except as provided in paragraph
(10) and except to the extent prescribed by the
Secretary by regulations, this paragraph shall
apply to any amount not received as an annuity
which is received under a life insurance or
endowment contract.
(D) Contracts under qualified plans.--Except
as provided in paragraph (8), this paragraph
shall apply to any amount received--
(i) from a trust described in section
401(a)which is exempt from tax under
section 501(a),
(ii) from a contract--
(I) purchased by a trust
described in clause (i),
(II) purchased as part of a
plan described in section
403(a),
(III) described in section
403(b), or
(IV) provided for employees
of a life insurance company
under a plan described in
section 818(a)(3), or
(iii) from an individual retirement
account or an individual retirement
annuity.
Any dividend described in section 404(k) which
is received by a participant or beneficiary
shall, for purposes of this subparagraph, be
treated as paid under a separate contract to
which clause (ii)(I) applies.
(E) Full refunds, surrenders, redemptions,
and maturities.--This paragraph shall apply
to--
(i) any amount received, whether in a
single sum or otherwise, under a
contract in full discharge of the
obligation under the contract which is
in the nature of a refund of the
consideration paid for the contract,
and
(ii) any amount received under a
contract on its complete surrender,
redemption, or maturity.
In the case of any amount to which the
preceding sentence applies, the rule of
paragraph (2)(A) shall not apply.
(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.
(8) Extension 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.
(9) Extension of paragraph (2)(b) to qualified
tuition programs and Coverdell education savings
accounts.--Notwithstanding any other provision of this
subsection, paragraph (2)(B) shall apply to amounts
received under a qualified tuition program (as defined
in section 529(b)) or under a Coverdell education
savings account (as defined in section 530(b)). The
rule of paragraph (8)(B) shall apply for purposes of
this paragraph.
(10) 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.
(11) Special rules for certain combination contracts
providing long-term care insurance.--Notwithstanding
paragraphs (2), (5)(C), and (10), in the case of any
charge against the cash value of an annuity contract or
the cash surrender value of a life insurance contract
made as payment for coverage under a qualified long-
term care insurance contract which is part of or a
rider on such annuity or life insurance contract--
(A) the investment in the contract shall be
reduced (but not below zero) by such charge,
and
(B) such charge shall not be includible in
gross income.
(12) 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.
Paragraph (2) shall not apply to amounts which were contributed
by the employer after December 31, 1962, and which would not
have been includible in the gross income of the employee by
reason of the application of section 911 if such amounts had
been paid directly to the employee at the time of contribution.
The preceding sentence shall not apply to amounts which were
contributed by the employer, as determined under regulations
prescribed by the Secretary, to provide pension or annuity
credits, to the extent such credits are attributable to
services performed before January 1, 1963, and are provided
pursuant to pension or annuity plan provisions in existence on
March 12, 1962, and on that date applicable to such services,
or to the extent such credits are attributable to services
performed as a foreign missionary (within the meaning of
section 403(b)(2)(D)(iii), as in effect before the enactment of
the Economic Growth and Tax Relief Reconciliation Act of 2001).
(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 the first day of the
first period for which the transferee received an
amount under the contract as an annuity.
For purposes of this subsection, the term ``transferee''
includes a beneficiary of, or the estate of, the transferee.
(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.
(j) 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.
(l) 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.
(m) Special rules applicable to employee annuities and
distributions under employee plans.--
(2) 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.
(3) 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 under section 501(a) 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.
(5) 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)).
(6) 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).
(7) 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.
(10) 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.
(n) 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) 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)), plus any amount treated pursuant to
section 101 (b)(2)(D) (as in effect on the day before the date
of the enactment of the Small Business Job Protection Act of
1996) as additional consideration paid by the employee.
Thereafter all amounts so received shall be included in gross
income.
(o) 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.
(3) Amounts constructively received.--
(A) In general.--For purposes of this
subsection, rules similar to the rules provided
by subsection (p) (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.
(4) Special rule for treatment of rollover amounts.--
For purposes of sections 402(c), 403(a)(4), 403(b)(8),
408(d)(3), and 457(e)(16), 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.
(5) Definitions and special rules.--For purposes of
this subsection--
(A) Deductible employee contributions.--The
term ``deductible employee contributions''
means any qualified voluntary employee
contribution (as defined in section 219(e)(2))
made after December 31, 1981, in a taxable year
beginning after such date and made for a
taxable year beginning before January 1, 1987,
and allowable as a deduction under section
219(a) for such taxable year.
(B) Accumulated deductible employee
contributions.--The term ``accumulated
deductible employee contributions'' means the
deductible employee contributions--
(i) increased by the amount of income
and gain allocable to such
contributions, and
(ii) reduced by the sum of the amount
of loss and expense allocable to such
contributions and the amounts
distributed with respect to the
employee which are attributable to such
contributions (or income or gain
allocable to such contributions).
(C) Qualified employer plan.--The term
``qualified employer plan'' has the meaning
given to such term by subsection (p)(3)(A)(i).
(D) Government plan.--The term ``government
plan'' has the meaning given such term by
subsection (p)(3)(B).
(6) 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.
(p) 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 (o)(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.
(3) Denial of interest deductions in certain cases.--
(A) In general.--No deduction otherwise
allowable under this chapter shall be allowed
under this chapter for any interest paid or
accrued on any loan to which paragraph (1) does
not apply by reason of paragraph (2) during the
period described in subparagraph (B).
(B) Period to which subparagraph (A)
applies.--For purposes of subparagraph (A), the
period described in this subparagraph is the
period--
(i) on or after the 1st day on which
the individual to whom the loan is made
is a key employee (as defined in
section 416(i)), or
(ii) such loan is secured by amounts
attributable to elective deferrals
described in subparagraph (A) or (C) of
section 402(g)(3).
(4) Qualified employer plan, etc..--For purposes of
this subsection--
(A) Qualified employer plan.--
(i) In general.--The term ``qualified
employer plan'' means--
(I) a plan described in
section 401(a) which includes a
trust exempt from tax under
section 501(a),
(II) an annuity plan
described in section 403(a),
and
(III) a plan under which
amounts are contributed by an
individual's employer for an
annuity contract described in
section 403(b).
(ii) Special rule.--The term
``qualified employer plan'' shall
include any plan which was (or was
determined to be) a qualified employer
plan or a government plan.
(B) Government plan.--The term ``government
plan'' means any plan, whether or not
qualified, established and maintained 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.
(5) Special rules for loans, etc., from certain
contracts.--For purposes of this subsection, any amount
received as a loan under a contract purchased under a
qualified employer plan (and any assignment or pledge
with respect to such a contract) shall be treated as a
loan under such employer plan.
(q) 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 (as defined in
subsection (s)(6)(B))),
(C) attributable to the taxpayer's becoming
disabled within the meaning of subsection
(m)(7),
(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 subsection (e)(5)(D),
(F) allocable to investment in the contract
before August 14, 1982, or
(G) under a qualified funding asset (within
the meaning of section 130(d), but without
regard to whether there is a qualified
assignment),
(H) to which subsection (t) applies (without
regard to paragraph (2) thereof),
(I) under an immediate annuity contract
(within the meaning of section 72(u)(4)), 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
(t)(4)(B)).
(r) 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.--
(A) In general.--For purposes of paragraph
(1)--
(i) the tier 2 portion of the tax
imposed by section 3201 (relating to
tax on employees) shall be treated as
an employee contribution,
(ii) the tier 2 portion of the tax
imposed by section 3211 (relating to
tax on employee representatives) shall
be treated as an employee contribution,
and
(iii) the tier 2 portion of the tax
imposed by section 3221 (relating to
tax on employers) shall be treated as
an employer contribution.
(B) Tier 2 portion.--For purposes of
subparagraph (A)--
(i) After 1984.--With respect to
compensation paid after 1984, the tier
2 portion shall be the taxes imposed by
sections 3201(b), 3211(b), and 3221(b).
(ii) After September 30, 1981, and
before 1985.--With respect to
compensation paid before 1985 for
services rendered after September 30,
1981, the tier 2 portion shall be--
(I) so much of the tax
imposed by section 3201 as is
determined at the 2 percent
rate, and
(II) so much of the taxes
imposed by sections 3211 and
3221 as is determined at the
11.75 percent rate.
With respect to compensation paid for services
rendered after December 31, 1983, and before
1985, subclause (I) shall be applied by
substituting ``2.75 percent'' for ``2
percent'', and subclause (II) shall be applied
by substituting ``12.75 percent'' for ``11.75
percent''.
(iii) Before October 1, 1981.--With
respect to compensation paid for
services rendered during any period
before October 1, 1981, the tier 2
portion shall be the excess (if any)
of--
(I) the tax imposed for such
period by section 3201, 3211,
or 3221, as the case may be
(other than any tax imposed
with respect to man-hours),
over
(II) the tax which would have
been imposed by such section
for such period had the rates
of the comparable taxes imposed
by chapter 21 for such period
applied under such section.
(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
86(d)(4).
(s) 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 title 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 (as
defined in section 130(d), but without regard
to whether there is a qualified assignment).
(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.
(t) 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 (m)(7),
(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),
(vii) made on account of a levy under
section 6331 on the qualified
retirement plan, or
(viii) payments under a phased
retirement annuity under section
8366a(a)(5) or 8412a(a)(5) of title 5,
United States Code, or a composite
retirement annuity under section
8366a(a)(1) or 8412a(a)(1) of such
title.
(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
213 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) with
respect to the individual and
the individual's spouse and
dependents (as defined in
[section 152] section 7706,
determined without regard to
subsections (b)(1), (b)(2), and
(d)(1)(B) thereof).
(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).
(G) Distributions from retirement plans to
individuals called to active duty.--
(i) In general.--Any qualified
reservist distribution.
(ii) Amount distributed may be
repaid.--Any individual who receives a
qualified reservist distribution may,
at any time during the 2-year period
beginning on the day after the end of
the active duty period, make one or
more contributions to an individual
retirement plan of such individual in
an aggregate amount not to exceed the
amount of such distribution. The dollar
limitations otherwise applicable to
contributions to individual retirement
plans shall not apply to any
contribution made pursuant to the
preceding sentence. No deduction shall
be allowed for any contribution
pursuant to this clause.
(iii) Qualified reservist
distribution.--For purposes of this
subparagraph, the term ``qualified
reservist distribution'' means any
distribution to an individual if--
(I) such distribution is from
an individual retirement plan,
or from amounts attributable to
employer contributions made
pursuant to elective deferrals
described in subparagraph (A)
or (C) of section 402(g)(3) or
section 501(c)(18)(D)(iii),
(II) such individual was (by
reason of being a member of a
reserve component (as defined
in section 101 of title 37,
United States Code)) ordered or
called to active duty for a
period in excess of 179 days or
for an indefinite period, and
(III) such distribution is
made during the period
beginning on the date of such
order or call and ending at the
close of the active duty
period.
(iv) Application of subparagraph.--
This subparagraph applies to
individuals ordered or called to active
duty after September 11, 2001. In no
event shall the 2-year period referred
to in clause (ii) end before the date
which is 2 years after the date of the
enactment of this subparagraph.
(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)
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 or a distribution to
which paragraph (10) applies)--
(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
529(e)(3)) for education furnished to--
(i) the taxpayer,
(ii) the taxpayer's spouse, or
(iii) any child (as defined in
[section 152(f)(1)] section 7706(f)(1))
or grandchild of the taxpayer or the
taxpayer's spouse,
at an eligible educational institution (as
defined in section 529(e)(5)).
(B) Coordination with other benefits.--The
amount of qualified higher education expenses
for any taxable year shall be reduced as
provided in section 25A(g)(2).
(8) Qualified first-time homebuyer distributions.--
For purposes of paragraph (2)(F)--
(A) In general.--The term ``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.--For
purposes of this paragraph, the term
``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.--The term
``first-time homebuyer'' means any
individual if--
(I) 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) subsection (h) or (k) of
section 1034 (as in effect on
the day before the date of the
enactment of this paragraph)
did not suspend the running of
any period of time specified in
section 1034 (as so in effect)
with respect to such individual
on the day before the date the
distribution is applied
pursuant to subparagraph (A).
(ii) Principal residence.--The term
``principal residence'' has the same
meaning as when used in section 121.
(iii) Date of acquisition.--The term
``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.--If any distribution from any
individual retirement plan fails to meet the
requirements of subparagraph (A) solely by
reason of a delay or cancellation of the
purchase or construction of the residence, the
amount of the distribution may be contributed
to an individual retirement plan as provided in
section 408(d)(3)(A)(i) (determined by
substituting ``120th day'' for ``60th day'' in
such section), except that--
(i) section 408(d)(3)(B) shall not be
applied to such contribution, and
(ii) such amount shall not be taken
into account in determining whether
section 408(d)(3)(B) applies to any
other amount.
(9) Special rule for rollovers to section 457
plans.--For purposes of this subsection, a distribution
from an eligible deferred compensation plan (as defined
in section 457(b)) of an eligible employer described in
section 457(e)(1)(A) shall be treated as a distribution
from a qualified retirement plan described in
4974(c)(1) to the extent that such distribution is
attributable to an amount transferred to an eligible
deferred compensation plan from a qualified retirement
plan (as defined in section 4974(c)).
(10) Distributions to qualified public safety
employees in governmental plans.--
(A) In general.--In the case of a
distribution to a qualified public safety
employee from a governmental plan (within the
meaning of section 414(d)), paragraph (2)(A)(v)
shall be applied by substituting ``age 50'' for
``age 55''.
(B) Qualified public safety employee.--For
purposes of this paragraph, the term
``qualified public safety employee'' means--
(i) any employee of a State or
political subdivision of a State who
provides police protection,
firefighting services, or emergency
medical services for any area within
the jurisdiction of such State or
political subdivision, or
(ii) any Federal law enforcement
officer described in section 8331(20)
or 8401(17) of title 5, United States
Code, any Federal customs and border
protection officer described in section
8331(31) or 8401(36) of such title, any
Federal firefighter described in
section 8331(21) or 8401(14) of such
title, any air traffic controller
described in 8331(30) or 8401(35) of
such title, any nuclear materials
courier described in section 8331(27)
or 8401(33) of such title, any member
of the United States Capitol Police,
any member of the Supreme Court Police,
or any diplomatic security special
agent of the Department of State.
(u) Treatment of annuity contracts not held by natural
persons.--
(1) In general.--If any annuity contract is held by a
person who is not a natural person--
(A) such contract shall not be treated as an
annuity contract for purposes of this subtitle
(other than subchapter L), and
(B) the income on the contract for any
taxable year of the policyholder shall be
treated as ordinary income received or accrued
by the owner during such taxable year.
For purposes of this paragraph, holding by a trust or
other entity as an agent for a natural person shall not
be taken into account.
(2) Income on the contract.--
(A) In general.--For purposes of paragraph
(1), the term ``income on the contract'' means,
with respect to any taxable year of the
policyholder, the excess of--
(i) the sum of the net surrender
value of the contract as of the close
of the taxable year plus all
distributions under the contract
received during the taxable year or any
prior taxable year, reduced by
(ii) the sum of the amount of net
premiums under the contract for the
taxable year and prior taxable years
and amounts includible in gross income
for prior taxable years with respect to
such contract under this subsection.
Where necessary to prevent the avoidance of
this subsection, the Secretary may substitute
``fair market value of the contract'' for ``net
surrender value of the contract'' each place it
appears in the preceding sentence.
(B) Net premiums.--For purposes of this
paragraph, the term ``net premiums'' means the
amount of premiums paid under the contract
reduced by any policyholder dividends.
(3) Exceptions.--This subsection shall not apply to
any annuity contract which--
(A) is acquired by the estate of a decedent
by reason of the death of the decedent,
(B) is held under a plan described in section
401(a) or 403(a), under a program described in
section 403(b), or under an individual
retirement plan,
(C) is a qualified funding asset (as defined
in section 130(d), but without regard to
whether there is a qualified assignment),
(D) is purchased by an employer upon the
termination of a plan described in section
401(a) or 403(a) and is held by the employer
until all amounts under such contract are
distributed to the employee for whom such
contract was purchased or the employee's
beneficiary, or
(E) is an immediate annuity.
(4) Immediate annuity.--For purposes of this
subsection, the term ``immediate annuity'' means an
annuity--
(A) which is purchased with a single premium
or annuity consideration,
(B) the annuity starting date (as defined in
subsection (c)(4)) of which commences no later
than 1 year from the date of the purchase of
the annuity, and
(C) which provides for a series of
substantially equal periodic payments (to be
made not less frequently than annually) during
the annuity period.
(v) 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.
(w) Application of basis rules to nonresident aliens.--
(1) In general.--Notwithstanding any other provision
of this section, for purposes of determining the
portion of any distribution which is includible in
gross income of a distributee who is a citizen or
resident of the United States, the investment in the
contract shall not include any applicable nontaxable
contributions or applicable nontaxable earnings.
(2) Applicable nontaxable contribution.--For purposes
of this subsection, the term ``applicable nontaxable
contribution'' means any employer or employee
contribution--
(A) which was made with respect to
compensation--
(i) for labor or personal services
performed by an employee who, at the
time the labor or services were
performed, was a nonresident alien for
purposes of the laws of the United
States in effect at such time, and
(ii) which is treated as from sources
without the United States, and
(B) which was not subject to income tax (and
would have been subject to income tax if paid
as cash compensation when the services were
rendered) under the laws of the United States
or any foreign country.
(3) Applicable nontaxable earnings.--For purposes of
this subsection, the term ``applicable nontaxable
earnings'' means earnings--
(A) which are paid or accrued with respect to
any employer or employee contribution which was
made with respect to compensation for labor or
personal services performed by an employee,
(B) with respect to which the employee was at
the time the earnings were paid or accrued a
nonresident alien for purposes of the laws of
the United States, and
(C) which were not subject to income tax
under the laws of the United States or any
foreign country.
(4) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
provisions of this subsection, including regulations
treating contributions and earnings as not subject to
tax under the laws of any foreign country where
appropriate to carry out the purposes of this
subsection.
(x) Cross reference.--For limitation on adjustments to basis
of annuity contracts sold, see section 1021.
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
* * * * * * *
SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS.
(a) Amounts attributable to employer contributions.--Except
as otherwise provided in this section, amounts received by an
employee through accident or health insurance for personal
injuries or sickness shall be included in gross income to the
extent such amounts (1) are attributable to contributions by
the employer which were not includible in the gross income of
the employee, or (2) are paid by the employer.
(b) Amounts expended for medical care.--Except in the case of
amounts attributable to (and not in excess of) deductions
allowed under section 213 (relating to medical, etc., expenses)
for any prior taxable year, gross income does not include
amounts referred to in subsection (a) if such amounts are paid,
directly or indirectly, to the taxpayer to reimburse the
taxpayer for expenses incurred by him for the medical care (as
defined in section 213(d)) of the taxpayer, his spouse, his
dependents ([as defined in section 152] as defined in section
7706, determined without regard to subsections (b)(1), (b)(2),
and (d)(1)(B) thereof), and any child (as defined in [section
152(f)(1)] section 7706(f)(1)) of the taxpayer who as of the
end of the taxable year has not attained age 27. Any child to
whom [section 152(e)] section 7706(e) applies shall be treated
as a dependent of both parents for purposes of this subsection.
(c) Payments unrelated to absence from work.--Gross income
does not include amounts referred to in subsection (a) to the
extent such amounts--
(1) constitute payment for the permanent loss or loss
of use of a member or function of the body, or the
permanent disfigurement, of the taxpayer, his spouse,
or a dependent (as defined in [section 152] section
7706, determined without regard to subsections (b)(1),
(b)(2), and (d)(1)(B) thereof), and
(2) are computed with reference to the nature of the
injury without regard to the period the employee is
absent from work.
(e) Accident and health plans.--For purposes of this section
and section 104--
(1) amounts received under an accident or health plan
for employees, and
(2) amounts received from a sickness and disability
fund for employees maintained under the law of a State
or the District of Columbia,
shall be treated as amounts received through accident or health
insurance.
(f) Rules for application of section 213.--For purposes of
section 213(a) (relating to medical, dental, etc., expenses)
amounts excluded from gross income under subsection (c) shall
not be considered as compensation (by insurance or otherwise)
for expenses paid for medical care.
(g) Self-employed individual not considered an employee.--For
purposes of this section, the term ``employee'' does not
include an individual who is an employee within the meaning of
section 401(c)(1) (relating to self-employed individuals).
(h) Amount paid to highly compensated individuals under a
discriminatory self-insured medical expense reimbursement
plan.--
(1) In general.--In the case of amounts paid to a
highly compensated individual under a self-insured
medical reimbursement plan which does not satisfy the
requirements of paragraph (2) for a plan year,
subsection (b) shall not apply to such amounts to the
extent they constitute an excess reimbursement of such
highly compensated individual.
(2) Prohibition of discrimination.--A self-insured
medical reimbursement plan satisfies the requirements
of this paragraph only if--
(A) the plan does not discriminate in favor
of highly compensated individuals as to
eligibility to participate; and
(B) the benefits provided under the plan do
not discriminate in favor of participants who
are highly compensated individuals.
(3) Nondiscriminatory eligibility classifications.--
(A) In general.--A self-insured medical
reimbursement plan does not satisfy the
requirements of subparagraph (A) of paragraph
(2) unless such plan benefits--
(i) 70 percent or more of all
employees, or 80 percent or more of all
the employees who are eligible to
benefit under the plan if 70 percent or
more of all employees are eligible to
benefit under the plan; or
(ii) such employees as qualify under
a classification set up by the employer
and found by the Secretary not to be
discriminatory in favor of highly
compensated individuals.
(B) Exclusion of certain employees.--For
purposes of subparagraph (A), there may be
excluded from consideration--
(i) employees who have not completed
3 years of service;
(ii) employees who have not attained
age 25;
(iii) part-time or seasonal
employees;
(iv) employees not included in the
plan who are included in a unit of
employees covered by an agreement
between employee representatives and
one or more employers which the
Secretary finds to be a collective
bargaining agreement, if accident and
health benefits were the subject of
good faith bargaining between such
employee representatives and such
employer or employers; and
(v) employees who are nonresident
aliens and who receive no earned income
(within the meaning of section
911(d)(2)) from the employer which
constitutes income from sources within
the United States (within the meaning
of section 861(a)(3)).
(4) Nondiscriminatory benefits.--A self-insured
medical reimbursement plan does not meet the
requirements of subparagraph (B) of paragraph (2)
unless all benefits provided for participants who are
highly compensated individuals are provided for all
other participants.
(5) Highly compensated individual defined.--For
purposes of this subsection, the term ``highly
compensated individual'' means an individual who is--
(A) one of the 5 highest paid officers,
(B) a shareholder who owns (with the
application of section 318) more than 10
percent in value of the stock of the employer,
or
(C) among the highest paid 25 percent of all
employees (other than employees described in
paragraph (3)(B) who are not participants).
(6) Self-insured medical reimbursement plan.--The
term ``self-insured medical reimbursement plan'' means
a plan of an employer to reimburse employees for
expenses referred to in subsection (b) for which
reimbursement is not provided under a policy of
accident and health insurance.
(7) Excess reimbursement of highly compensated
individual.--For purposes of this section, the excess
reimbursement of a highly compensated individual which
is attributable to a self-insured medical reimbursement
plan is--
(A) in the case of a benefit available to
highly compensated individuals but not to all
other participants (or which otherwise fails to
satisfy the requirements of paragraph (2)(B)),
the amount reimbursed under the plan to the
employee with respect to such benefit, and
(B) in the case of benefits (other than
benefits described in subparagraph (A)) paid to
a highly compensated individual by a plan which
fails to satisfy the requirements of paragraph
(2), the total amount reimbursed to the highly
compensated individual for the plan year
multiplied by a fraction--
(i) the numerator of which is the
total amount reimbursed to all
participants who are highly compensated
individuals under the plan for the plan
year, and
(ii) the denominator of which is the
total amount reimbursed to all
employees under the plan for such plan
year.
In determining the fraction under subparagraph (B),
there shall not be taken into account any reimbursement
which is attributable to a benefit described in
subparagraph (A).
(8) Certain controlled groups, etc..--All employees
who are treated as employed by a single employer under
subsection (b), (c), or (m) of section 414 shall be
treated as employed by a single employer for purposes
of this section.
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
provisions of this section.
(10) Time of inclusion.--Any amount paid for a plan
year that is included in income by reason of this
subsection shall be treated as received or accrued in
the taxable year of the participant in which the plan
year ends.
(i) Sick pay under Railroad Unemployment Insurance Act.--
Notwithstanding any other provision of law, gross income
includes benefits paid under section 2(a) of the Railroad
Unemployment Insurance Act for days of sickness; except to the
extent such sickness (as determined in accordance with
standards prescribed by the Railroad Retirement Board) is the
result of on-the-job injury.
(j) Special rule for certain governmental plans.--
(1) In general.--For purposes of subsection (b),
amounts paid (directly or indirectly) to a qualified
taxpayer from an accident or health plan described in
paragraph (2) shall not fail to be excluded from gross
income solely because such plan, on or before January
1, 2008, provides for reimbursements of health care
expenses of a deceased employee's beneficiary (other
than an individual described in paragraph (3)(B)).
(2) Plan described.--An accident or health plan is
described in this paragraph if such plan is funded by a
medical trust that is established in connection with a
public retirement system or established by or on behalf
of a State or political subdivision thereof and that--
(A) has been authorized by a State
legislature, or
(B) has received a favorable ruling from the
Internal Revenue Service that the trust's
income is not includible in gross income under
section 115 or 501(c)(9).
(3) Qualified taxpayer.--For purposes of paragraph
(1), with respect to an accident or health plan
described in paragraph (2), the term ``qualified
taxpayer'' means a taxpayer who is--
(A) an employee, or
(B) the spouse, dependent (as defined for
purposes of subsection (b)), or child (as
defined for purposes of such subsection) of an
employee.
* * * * * * *
SEC. 108. INCOME FROM DISCHARGE OF INDEBTEDNESS.
(a) Exclusion from gross income.--
(1) In general.--Gross income does not include any
amount which (but for this subsection) would be
includible in gross income by reason of the discharge
(in whole or in part) of indebtedness of the taxpayer
if--
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is
insolvent,
(C) the indebtedness discharged is qualified
farm indebtedness,
(D) in the case of a taxpayer other than a C
corporation, the indebtedness discharged is
qualified real property business indebtedness,
or
(E) the indebtedness discharged is qualified
principal residence indebtedness which is
discharged--
(i) before January 1, 2018, or ii)
subject to an arrangement that is
entered into and evidenced in writing
before January 1, 2018.
(2) Coordination of exclusions.--
(A) Title 11 exclusion takes precedence.--
Subparagraphs (B), (C), (D), and (E) of
paragraph (1) shall not apply to a discharge
which occurs in a title 11 case.
(B) Insolvency exclusion takes precedence
over qualified farm exclusion and qualified
real property business exclusion.--
Subparagraphs (C) and (D) of paragraph (1)
shall not apply to a discharge to the extent
the taxpayer is insolvent.
(C) Principal residence exclusion takes
precedence over insolvency exclusion unless
elected otherwise.--Paragraph (1)(B) shall not
apply to a discharge to which paragraph (1)(E)
applies unless the taxpayer elects to apply
paragraph (1)(B) in lieu of paragraph (1)(E).
(3) Insolvency exclusion limited to amount of
insolvency.--In the case of a discharge to which
paragraph (1)(B) applies, the amount excluded under
paragraph (1)(B) shall not exceed the amount by which
the taxpayer is insolvent.
(b) Reduction of tax attributes.--
(1) In general.--The amount excluded from gross
income under subparagraph (A), (B), or (C) of
subsection (a)(1) shall be applied to reduce the tax
attributes of the taxpayer as provided in paragraph
(2).
(2) Tax attributes affected; order of reduction.--
Except as provided in paragraph (5), the reduction
referred to in paragraph (1) shall be made in the
following tax attributes in the following order:
(A) NOL.--Any net operating loss for the
taxable year of the discharge, and any net
operating loss carryover to such taxable year.
(B) General business credit.--Any carryover
to or from the taxable year of a discharge of
an amount for purposes for determining the
amount allowable as a credit under section 38
(relating to general business credit).
(C) Minimum tax credit.--The amount of the
minimum tax credit available under section
53(b) as of the beginning of the taxable year
immediately following the taxable year of the
discharge.
(D) Capital loss carryovers.--Any net capital
loss for the taxable year of the discharge, and
any capital loss carryover to such taxable year
under section 1212.
(E) Basis reduction.--
(i) In general.--The basis of the
property of the taxpayer.
(ii) Cross reference.--For provisions
for making the reduction described in
clause (i), see section 1017.
(F) Passive activity loss and credit
carryovers.--Any passive activity loss or
credit carryover of the taxpayer under section
469(b) from the taxable year of the discharge.
(G) Foreign tax credit carryovers.--Any
carryover to or from the taxable year of the
discharge for purposes of determining the
amount of the credit allowable under section
27.
(3) Amount of reduction.--
(A) In general.--Except as provided in
subparagraph (B), the reductions described in
paragraph (2) shall be one dollar for each
dollar excluded by subsection (a).
(B) Credit carryover reduction.--The
reductions described in subparagraphs (B), (C),
and (G) shall be 33 1/3 cents for each dollar
excluded by subsection (a). The reduction
described in subparagraph (F) in any passive
activity credit carryover shall be 33 1/3 cents
for each dollar excluded by subsection (a).
(4) Ordering rules.--
(A) Reductions made after determination of
tax for year.--The reductions described in
paragraph (2) shall be made after the
determination of the tax imposed by this
chapter for the taxable year of the discharge.
(B) Reductions under subparagraph (A) or (D)
of paragraph (2).--The reductions described in
subparagraph (A) or (D) of paragraph (2) (as
the case may be) shall be made first in the
loss for the taxable year of the discharge and
then in the carryovers to such taxable year in
the order of the taxable years from which each
such carryover arose.
(C) Reductions under subparagraphs (B) and
(G) of paragraph (2).--The reductions described
in subparagraphs (B) and (G) of paragraph (2)
shall be made in the order in which carryovers
are taken into account under this chapter for
the taxable year of the discharge.
(5) Election to apply reduction first against
depreciable property.--
(A) In general.--The taxpayer may elect to
apply any portion of the reduction referred to
in paragraph (1) to the reduction under section
1017 of the basis of the depreciable property
of the taxpayer.
(B) Limitation.--The amount to which an
election under subparagraph (A) applies shall
not exceed the aggregate adjusted bases of the
depreciable property held by the taxpayer as of
the beginning of the taxable year following the
taxable year in which the discharge occurs.
(C) Other tax attributes not reduced.--
Paragraph (2) shall not apply to any amount to
which an election under this paragraph applies.
(c) Treatment of discharge of qualified real property
business indebtedness.--
(1) Basis reduction.--
(A) In general.--The amount excluded from
gross income under subparagraph (D) of
subsection (a)(1) shall be applied to reduce
the basis of the depreciable real property of
the taxpayer.
(B) Cross reference.--For provisions making
the reduction described in subparagraph (A),
see section 1017.
(2) Limitations.--
(A) Indebtedness in excess of value.--The
amount excluded under subparagraph (D) of
subsection (a)(1) with respect to any qualified
real property business indebtedness shall not
exceed the excess (if any) of--
(i) the outstanding principal amount
of such indebtedness (immediately
before the discharge), over
(ii) the fair market value of the
real property described in paragraph
(3)(A) (as of such time), reduced by
the outstanding principal amount of any
other qualified real property business
indebtedness secured by such property
(as of such time).
(B) Overall limitation.--The amount excluded
under subparagraph (D) of subsection (a)(1)
shall not exceed the aggregate adjusted bases
of depreciable real property (determined after
any reductions under subsections (b) and (g))
held by the taxpayer immediately before the
discharge (other than depreciable real property
acquired in contemplation of such discharge).
(3) Qualified real property business indebtedness.--
The term ``qualified real property business
indebtedness'' means indebtedness which--
(A) was incurred or assumed by the taxpayer
in connection with real property used in a
trade or business and is secured by such real
property,
(B) was incurred or assumed before January 1,
1993, or if incurred or assumed on or after
such date, is qualified acquisition
indebtedness, and
(C) with respect to which such taxpayer makes
an election to have this paragraph apply.
Such term shall not include qualified farm
indebtedness. Indebtedness under subparagraph (B) shall
include indebtedness resulting from the refinancing of
indebtedness under subparagraph (B) (or this sentence),
but only to the extent it does not exceed the amount of
the indebtedness being refinanced.
(4) Qualified acquisition indebtedness.--For purposes
of paragraph (3)(B), the term ``qualified acquisition
indebtedness'' means, with respect to any real property
described in paragraph (3)(A), indebtedness incurred or
assumed to acquire, construct, reconstruct, or
substantially improve such property.
(5) Regulations.--The Secretary shall issue such
regulations as are necessary to carry out this
subsection, including regulations preventing the abuse
of this subsection through cross-collateralization or
other means.
(d) Meaning of terms; special rules relating to certain
provisions.--
(1) Indebtedness of taxpayer.--For purposes of this
section, the term ``indebtedness of the taxpayer''
means any indebtedness--
(A) for which the taxpayer is liable, or
(B) subject to which the taxpayer holds
property.
(2) Title 11 case.--For purposes of this section, the
term ``title 11 case'' means a case under title 11 of
the United States Code (relating to bankruptcy), but
only if the taxpayer is under the jurisdiction of the
court in such case and the discharge of indebtedness is
granted by the court or is pursuant to a plan approved
by the court.
(3) Insolvent.--For purposes of this section, the
term ``insolvent'' means the excess of liabilities over
the fair market value of assets. With respect to any
discharge, whether or not the taxpayer is insolvent,
and the amount by which the taxpayer is insolvent,
shall be determined on the basis of the taxpayer's
assets and liabilities immediately before the
discharge.
(4) Repealed. Pub. L. 99-514, title VIII, Sec.
822(b)(3)(A), Oct. 22, 1986, 100 Stat. 2373
(5) Depreciable property.--The term ``depreciable
property'' has the same meaning as when used in section
1017.
(6) Certain provisions to be applied at partner
level.--In the case of a partnership, subsections (a),
(b), (c), and (g) shall be applied at the partner
level.
(7) Special rules for S corporation.--
(A) Certain provisions to be applied at
corporate level.--In the case of an S
corporation, subsections (a), (b), (c), and (g)
shall be applied at the corporate level,
including by not taking into account under
section 1366(a) any amount excluded under
subsection (a) of this section.
(B) Reduction in carryover of disallowed
losses and deductions.--In the case of an S
corporation, for purposes of subparagraph (A)
of subsection (b)(2), any loss or deduction
which is disallowed for the taxable year of the
discharge under section 1366(d)(1) shall be
treated as a net operating loss for such
taxable year. The preceding sentence shall not
apply to any discharge to the extent that
subsection (a)(1)(D) applies to such discharge.
(C) Coordination with basis adjustments under
section 1367(b)(2).--For purposes of subsection
(e)(6), a shareholder's adjusted basis in
indebtedness of an S corporation shall be
determined without regard to any adjustments
made under section 1367(b)(2).
(8) Reductions of tax attributes in title 11 cases of
individuals to be made by estate.--In any case under
chapter 7 or 11 of title 11 of the United States Code
to which section 1398 applies, for purposes of
paragraphs (1) and (5) of subsection (b) the estate
(and not the individual) shall be treated as the
taxpayer. The preceding sentence shall not apply for
purposes of applying section 1017 to property
transferred by the estate to the individual.
(9) Time for making election, etc..--
(A) Time.--An election under paragraph (5) of
subsection (b) or under paragraph (3)(C) of
subsection (c) shall be made on the taxpayer's
return for the taxable year in which the
discharge occurs or at such other time as may
be permitted in regulations prescribed by the
Secretary.
(B) Revocation only with consent.--An
election referred to in subparagraph (A), once
made, may be revoked only with the consent of
the Secretary.
(C) Manner.--An election referred to in
subparagraph (A) shall be made in such manner
as the Secretary may by regulations prescribe.
(10) Cross reference.--For provision that no
reduction is to be made in the basis of exempt property
of an individual debtor, see section 1017(c)(1).
(e) General rules for discharge of indebtedness (including
discharges not in title 11 cases or insolvency).--For purposes
of this title--
(1) No other insolvency exception.--Except as
otherwise provided in this section, there shall be no
insolvency exception from the general rule that gross
income includes income from the discharge of
indebtedness.
(2) Income not realized to extent of lost
deductions.--No income shall be realized from the
discharge of indebtedness to the extent that payment of
the liability would have given rise to a deduction.
(3) Adjustments for unamortized premium and
discount.--The amount taken into account with respect
to any discharge shall be properly adjusted for
unamortized premium and unamortized discount with
respect to the indebtedness discharged.
(4) Acquisition of indebtedness by person related to
debtor.--
(A) Treated as acquisition by debtor.--For
purposes of determining income of the debtor
from discharge of indebtedness, to the extent
provided in regulations prescribed by the
Secretary, the acquisition of outstanding
indebtedness by a person bearing a relationship
to the debtor specified in section 267(b) or
707(b)(1) from a person who does not bear such
a relationship to the debtor shall be treated
as the acquisition of such indebtedness by the
debtor. Such regulations shall provide for such
adjustments in the treatment of any subsequent
transactions involving the indebtedness as may
be appropriate by reason of the application of
the preceding sentence.
(B) Members of family.--For purposes of this
paragraph, sections 267(b) and 707(b)(1) shall
be applied as if section 267(c)(4) provided
that the family of an individual consists of
the individual's spouse, the individual's
children, grandchildren, and parents, and any
spouse of the individual's children or
grandchildren.
(C) Entities under common control treated as
related.--For purposes of this paragraph, two
entities which are treated as a single employer
under subsection (b) or (c) of section 414
shall be treated as bearing a relationship to
each other which is described in section
267(b).
(5) Purchase-money debt reduction for solvent debtor
treated as price reduction.--If--
(A) the debt of a purchaser of property to
the seller of such property which arose out of
the purchase of such property is reduced,
(B) such reduction does not occur--
(i) in a title 11 case, or
(ii) when the purchaser is insolvent,
and
(C) but for this paragraph, such reduction
would be treated as income to the purchaser
from the discharge of indebtedness,
then such reduction shall be treated as a purchase
price adjustment.
(6) Indebtedness contributed to capital.--Except as
provided in regulations, for purposes of determining
income of the debtor from discharge of indebtedness, if
a debtor corporation acquires its indebtedness from a
shareholder as a contribution to capital--
(A) section 118 shall not apply, but
(B) such corporation shall be treated as
having satisfied the indebtedness with an
amount of money equal to the shareholder's
adjusted basis in the indebtedness.
(7) Recapture of gain on subsequent sale of stock.--
(A) In general.--If a creditor acquires stock
of a debtor corporation in satisfaction of such
corporation's indebtedness, for purposes of
section 1245--
(i) such stock (and any other
property the basis of which is
determined in whole or in part by
reference to the adjusted basis of such
stock) shall be treated as section 1245
property,
(ii) the aggregate amount allowed to
the creditor--
(I) as deductions under
subsection (a) or (b) of
section 166 (by reason of the
worthlessness or partial
worthlessness of the
indebtedness), or
(II) as an ordinary loss on
the exchange, shall be treated
as an amount allowed as a
deduction for depreciation, and
(iii) an exchange of such stock
qualifying under section 354(a),
355(a), or 356(a) shall be treated as
an exchange to which section 1245(b)(3)
applies.
The amount determined under clause (ii) shall
be reduced by the amount (if any) included in
the creditor's gross income on the exchange.
(B) Special rule for cash basis taxpayers.--
In the case of any creditor who computes his
taxable income under the cash receipts and
disbursements method, proper adjustment shall
be made in the amount taken into account under
clause (ii) of subparagraph (A) for any amount
which was not included in the creditor's gross
income but which would have been included in
such gross income if such indebtedness had been
satisfied in full.
(C) Stock of parent corporation.--For
purposes of this paragraph, stock of a
corporation in control (within the meaning of
section 368(c)) of the debtor corporation shall
be treated as stock of the debtor corporation.
(D) Treatment of successor corporation.--For
purposes of this paragraph, the term ``debtor
corporation'' includes a successor corporation.
(E) Partnership rule.--Under regulations
prescribed by the Secretary, rules similar to
the rules of the foregoing subparagraphs of
this paragraph shall apply with respect to the
indebtedness of a partnership.
(8) Indebtedness satisfied by corporate stock or
partnership interest.--For purposes of determining
income of a debtor from discharge of indebtedness, if--
(A) a debtor corporation transfers stock, or
(B) a debtor partnership transfers a capital
or profits interest in such partnership,
to a creditor in satisfaction of its recourse or
nonrecourse indebtedness, such corporation or
partnership shall be treated as having satisfied the
indebtedness with an amount of money equal to the fair
market value of the stock or interest. In the case of
any partnership, any discharge of indebtedness income
recognized under this paragraph shall be included in
the distributive shares of taxpayers which were the
partners in the partnership immediately before such
discharge.
(9) Discharge of indebtedness income not taken into
account in determining whether entity meets REIT
qualifications.--Any amount included in gross income by
reason of the discharge of indebtedness shall not be
taken into account for purposes of paragraphs (2) and
(3) of section 856(c).
(10) Indebtedness satisfied by issuance of debt
instrument.--
(A) In general.--For purposes of determining
income of a debtor from discharge of
indebtedness, if a debtor issues a debt
instrument in satisfaction of indebtedness,
such debtor shall be treated as having
satisfied the indebtedness with an amount of
money equal to the issue price of such debt
instrument.
(B) Issue price.--For purposes of
subparagraph (A), the issue price of any debt
instrument shall be determined under sections
1273 and 1274. For purposes of the preceding
sentence, section 1273(b)(4) shall be applied
by reducing the stated redemption price of any
instrument by the portion of such stated
redemption price which is treated as interest
for purposes of this chapter.
(f) Student loans.--
(1) In general.--In the case of an individual, gross
income does not include any amount which (but for this
subsection) would be includible in gross income by
reason of the discharge (in whole or in part) of any
student loan if such discharge was pursuant to a
provision of such loan under which all or part of the
indebtedness of the individual would be discharged if
the individual worked for a certain period of time in
certain professions for any of a broad class of
employers.
(2) Student loan.--For purposes of this subsection,
the term ``student loan'' means any loan to an
individual to assist the individual in attending an
educational organization described in section
170(b)(1)(A)(ii) made by--
(A) the United States, or an instrumentality
or agency thereof,
(B) a State, territory, or possession of the
United States, or the District of Columbia, or
any political subdivision thereof,
(C) a public benefit corporation--
(i) which is exempt from taxation
under section 501(c)(3),
(ii) which has assumed control over a
State, county, or municipal hospital,
and
(iii) whose employees have been
deemed to be public employees under
State law, or
(D) any educational organization described in
section 170(b)(1)(A)(ii) if such loan is made--
(i) pursuant to an agreement with any
entity described in subparagraph (A),
(B), or (C) under which the funds from
which the loan was made were provided
to such educational organization, or
(ii) pursuant to a program of such
educational organization which is
designed to encourage its students to
serve in occupations with unmet needs
or in areas with unmet needs and under
which the services provided by the
students (or former students) are for
or under the direction of a
governmental unit or an organization
described in section 501(c)(3) and
exempt from tax under section 501(a).
The term ``student loan'' includes any loan made by an
educational organization described in section
170(b)(1)(A)(ii) or by an organization exempt from tax
under section 501(a) to refinance a loan to an
individual to assist the individual in attending any
such educational organization but only if the
refinancing loan is pursuant to a program of the
refinancing organization which is designed as described
in subparagraph (D)(ii).
(3) Exception for discharges on account of services
performed for certain lenders.--Paragraph (1) shall not
apply to the discharge of a loan made by an
organization described in paragraph (2)(D) if the
discharge is on account of services performed for
either such organization.
(4) Payments under National Health Service Corps loan
repayment program and certain state loan repayment
programs.--In the case of an individual, gross income
shall not include any amount received under section
338B(g) of the Public Health Service Act, under a State
program described in section 338I of such Act, or under
any other State loan repayment or loan forgiveness
program that is intended to provide for the increased
availability of health care services in underserved or
health professional shortage areas (as determined by
such State).
(5) Discharges on account of death or disability.--
(A) In general.--In the case of an
individual, gross income does not include any
amount which (but for this subsection) would be
includible in gross income for such taxable
year by reasons of the discharge (in whole or
in part) of any loan described in subparagraph
(B) [after December 31, 2017, and before
January 1, 2026], if such discharge was--
(i) pursuant to subsection (a) or (d)
of section 437 of the Higher Education
Act of 1965 or the parallel benefit
under part D of title IV of such Act
(relating to the repayment of loan
liability),
(ii) pursuant to section 464(c)(1)(F)
of such Act, or
(iii) otherwise discharged on account
of the death or total and permanent
disability of the student.
(B) Loans described.--A loan is described in
this subparagraph if such loan is--
(i) a student loan (as defined in
paragraph (2)), or
(ii) a private education loan (as
defined in section 140(7) of the
Consumer Credit Protection Act (15
U.S.C. 1650(7))).
(g) Special rules for discharge of qualified farm
indebtedness.--
(1) Discharge must be by qualified person.--
(A) In general.--Subparagraph (C) of
subsection (a)(1) shall apply only if the
discharge is by a qualified person.
(B) Qualified person.--For purposes of
subparagraph (A), the term ``qualified person''
has the meaning given to such term by section
49(a)(1)(D)(iv); except that such term shall
include any Federal, State, or local government
or agency or instrumentality thereof.
(2) Qualified farm indebtedness.--For purposes of
this section, indebtedness of a taxpayer shall be
treated as qualified farm indebtedness if--
(A) such indebtedness was incurred directly
in connection with the operation by the
taxpayer of the trade or business of farming,
and
(B) 50 percent or more of the aggregate gross
receipts of the taxpayer for the 3 taxable
years preceding the taxable year in which the
discharge of such indebtedness occurs is
attributable to the trade or business of
farming.
(3) Amount excluded cannot exceed sum of tax
attributes and business and investment assets.--
(A) In general.--The amount excluded under
subparagraph (C) of subsection (a)(1) shall not
exceed the sum of--
(i) the adjusted tax attributes of
the taxpayer, and
(ii) the aggregate adjusted bases of
qualified property held by the taxpayer
as of the beginning of the taxable year
following the taxable year in which the
discharge occurs.
(B) Adjusted tax attributes.--For purposes of
subparagraph (A), the term ``adjusted tax
attributes'' means the sum of the tax
attributes described in subparagraphs (A), (B),
(C), (D), (F), and (G) of subsection (b)(2)
determined by taking into account $3 for each
$1 of the attributes described in subparagraphs
(B), (C), and (G) of subsection (b)(2) and the
attribute described in subparagraph (F) of
subsection (b)(2) to the extent attributable to
any passive activity credit carryover.
(C) Qualified property.--For purposes of this
paragraph, the term ``qualified property''
means any property which is used or is held for
use in a trade or business or for the
production of income.
(D) Coordination with insolvency exclusion.--
For purposes of this paragraph, the adjusted
basis of any qualified property and the amount
of the adjusted tax attributes shall be
determined after any reduction under subsection
(b) by reason of amounts excluded from gross
income under subsection (a)(1)(B).
(h) Special rules relating to qualified principal residence
indebtedness.--
(1) Basis reduction.--The amount excluded from gross
income by reason of subsection (a)(1)(E) shall be
applied to reduce (but not below zero) the basis of the
principal residence of the taxpayer.
(2) Qualified principal residence indebtedness.--For
purposes of this section, the term ``qualified
principal residence indebtedness'' means acquisition
indebtedness (within the meaning of section
163(h)(3)(B), applied by substituting ``$2,000,000
($1,000,000'' for ``[$1,000,000 ($500,000] $750,000
($375,000'' in clause (ii) thereof) with respect to the
principal residence of the taxpayer.
(3) Exception for certain discharges not related to
taxpayer's financial condition.--Subsection (a)(1)(E)
shall not apply to the discharge of a loan if the
discharge is on account of services performed for the
lender or any other factor not directly related to a
decline in the value of the residence or to the
financial condition of the taxpayer.
(4) Ordering rule.--If any loan is discharged, in
whole or in part, and only a portion of such loan is
qualified principal residence indebtedness, subsection
(a)(1)(E) shall apply only to so much of the amount
discharged as exceeds the amount of the loan (as
determined immediately before such discharge) which is
not qualified principal residence indebtedness.
(5) Principal residence.--For purposes of this
subsection, the term ``principal residence'' has the
same meaning as when used in section 121.
(i) Deferral and ratable inclusion of income arising from
business indebtedness discharged by the reacquisition of a debt
instrument.--
(1) In general.--At the election of the taxpayer,
income from the discharge of indebtedness in connection
with the reacquisition after December 31, 2008, and
before January 1, 2011, of an applicable debt
instrument shall be includible in gross income ratably
over the 5-taxable-year period beginning with--
(A) in the case of a reacquisition occurring
in 2009, the fifth taxable year following the
taxable year in which the reacquisition occurs,
and
(B) in the case of a reacquisition occurring
in 2010, the fourth taxable year following the
taxable year in which the reacquisition occurs.
(2) Deferral of deduction for original issue discount
in debt for debt exchanges.--
(A) In general.--If, as part of a
reacquisition to which paragraph (1) applies,
any debt instrument is issued for the
applicable debt instrument being reacquired (or
is treated as so issued under subsection (e)(4)
and the regulations thereunder) and there is
any original issue discount determined under
subpart A of part V of subchapter P of this
chapter with respect to the debt instrument so
issued--
(i) except as provided in clause
(ii), no deduction otherwise allowable
under this chapter shall be allowed to
the issuer of such debt instrument with
respect to the portion of such original
issue discount which--
(I) accrues before the 1st
taxable year in the 5-taxable-
year period in which income
from the discharge of
indebtedness attributable to
the reacquisition of the debt
instrument is includible under
paragraph (1), and
(II) does not exceed the
income from the discharge of
indebtedness with respect to
the debt instrument being
reacquired, and
(ii) the aggregate amount of
deductions disallowed under clause (i)
shall be allowed as a deduction ratably
over the 5-taxable-year period
described in clause (i)(I).
If the amount of the original issue discount
accruing before such 1st taxable year exceeds
the income from the discharge of indebtedness
with respect to the applicable debt instrument
being reacquired, the deductions shall be
disallowed in the order in which the original
issue discount is accrued.
(B) Deemed debt for debt exchanges.--For
purposes of subparagraph (A), if any debt
instrument is issued by an issuer and the
proceeds of such debt instrument are used
directly or indirectly by the issuer to
reacquire an applicable debt instrument of the
issuer, the debt instrument so issued shall be
treated as issued for the debt instrument being
reacquired. If only a portion of the proceeds
from a debt instrument are so used, the rules
of subparagraph (A) shall apply to the portion
of any original issue discount on the newly
issued debt instrument which is equal to the
portion of the proceeds from such instrument
used to reacquire the outstanding instrument.
(3) Applicable debt instrument.--For purposes of this
subsection--
(A) Applicable debt instrument.--The term
``applicable debt instrument'' means any debt
instrument which was issued by--
(i) a C corporation, or
(ii) any other person in connection
with the conduct of a trade or business
by such person.
(B) Debt instrument.--The term ``debt
instrument'' means a bond, debenture, note,
certificate, or any other instrument or
contractual arrangement constituting
indebtedness (within the meaning of section
1275(a)(1)).
(4) Reacquisition.--For purposes of this subsection--
(A) In general.--The term ``reacquisition''
means, with respect to any applicable debt
instrument, any acquisition of the debt
instrument by--
(i) the debtor which issued (or is
otherwise the obligor under) the debt
instrument, or
(ii) a related person to such debtor.
(B) Acquisition.--The term ``acquisition''
shall, with respect to any applicable debt
instrument, include an acquisition of the debt
instrument for cash, the exchange of the debt
instrument for another debt instrument
(including an exchange resulting from a
modification of the debt instrument), the
exchange of the debt instrument for corporate
stock or a partnership interest, and the
contribution of the debt instrument to capital.
Such term shall also include the complete
forgiveness of the indebtedness by the holder
of the debt instrument.
(5) Other definitions and rules.--For purposes of
this subsection--
(A) Related person.--The determination of
whether a person is related to another person
shall be made in the same manner as under
subsection (e)(4).
(B) Election.--
(i) In general.--An election under
this subsection with respect to any
applicable debt instrument shall be
made by including with the return of
tax imposed by chapter 1 for the
taxable year in which the reacquisition
of the debt instrument occurs a
statement which--
(I) clearly identifies such
instrument, and
(II) includes the amount of
income to which paragraph (1)
applies and such other
information as the Secretary
may prescribe.
(ii) Election irrevocable.--Such
election, once made, is irrevocable.
(iii) Pass-thru entities.--In the
case of a partnership, S corporation,
or other pass-thru entity, the election
under this subsection shall be made by
the partnership, the S corporation, or
other entity involved.
(C) Coordination with other exclusions.--If a
taxpayer elects to have this subsection apply
to an applicable debt instrument, subparagraphs
(A), (B), (C), and (D) of subsection (a)(1)
shall not apply to the income from the
discharge of such indebtedness for the taxable
year of the election or any subsequent taxable
year.
(D) Acceleration of deferred items.--
(i) In general.--In the case of the
death of the taxpayer, the liquidation
or sale of substantially all the assets
of the taxpayer (including in a title
11 or similar case), the cessation of
business by the taxpayer, or similar
circumstances, any item of income or
deduction which is deferred under this
subsection (and has not previously been
taken into account) shall be taken into
account in the taxable year in which
such event occurs (or in the case of a
title 11 or similar case, the day
before the petition is filed).
(ii) Special rule for pass-thru
entities.--The rule of clause (i) shall
also apply in the case of the sale or
exchange or redemption of an interest
in a partnership, S corporation, or
other pass- thru entity by a partner,
shareholder, or other person holding an
ownership interest in such entity.
(6) Special rule for partnerships.--In the case of a
partnership, any income deferred under this subsection
shall be allocated to the partners in the partnership
immediately before the discharge in the manner such
amounts would have been included in the distributive
shares of such partners under section 704 if such
income were recognized at such time. Any decrease in a
partner's share of partnership liabilities as a result
of such discharge shall not be taken into account for
purposes of section 752 at the time of the discharge to
the extent it would cause the partner to recognize gain
under section 731. Any decrease in partnership
liabilities deferred under the preceding sentence shall
be taken into account by such partner at the same time,
and to the extent remaining in the same amount, as
income deferred under this subsection is recognized.
(7) Secretarial authority.--The Secretary may
prescribe such regulations, rules, or other guidance as
may be necessary or appropriate for purposes of
applying this subsection, including--
(A) extending the application of the rules of
paragraph (5)(D) to other circumstances where
appropriate,
(B) requiring reporting of the election (and
such other information as the Secretary may
require) on returns of tax for subsequent
taxable years, and
(C) rules for the application of this
subsection to partnerships, S corporations, and
other pass-thru entities, including for the
allocation of deferred deductions.
* * * * * * *
SEC. 112. CERTAIN COMBAT ZONE COMPENSATION OF MEMBERS OF THE ARMED
FORCES.
(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.
With respect to service in the combat zone designated for
purposes of the Vietnam conflict, paragraph (2) shall not apply
to any month after January 1978.
(b) Commissioned officers.--Gross income does not include so
much of the compensation as does not exceed the maximum
enlisted amount 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.
With respect to service in the combat zone designated for
purposes of the Vietnam conflict, paragraph (2) shall not apply
to any month after January 1978.
(c) Definitions.--For purposes of this section--
(1) The term ``commissioned officer'' does not
include a commissioned warrant officer.
(2) The term ``combat zone'' [means any area] means--
(A) 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, as an area
in which Armed Forces of the United States are
or have engaged in combat[.] , and
(B) the Sinai Peninsula of Egypt.
(3) Service is performed in a combat zone [only if
performed] only if--
(A) in the case of an area described in
paragraph (2)(A), such service is 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[.] , and
(B) in the case of the area described in
paragraph (2)(B), such service is performed
during any period with respect to which one or
more members of the Armed Forces of the United
States are entitled to special pay under
section 310 of title 37, United States Code
(relating to special pay; duty subject to
hostile fire or imminent danger), for service
performed in such area.
(4) The term ``compensation'' does not include
pensions and retirement pay.
(5) The term ``maximum enlisted amount'' means, for
any month, the sum of--
(A) the highest rate of basic pay payable for
such month to any enlisted member of the Armed
Forces of the United States at the highest pay
grade applicable to enlisted members, and
(B) in the case of an officer entitled to
special pay under section 310, or paragraph (1)
or (3) of section 351(a), of title 37, United
States Code, for such month, the amount of such
special pay payable to such officer for such
month.
(d) Prisoners of war, etc..--
(1) Members of the Armed Forces.--Gross income does
not include compensation received for active service as
a member of the Armed Forces of the United States for
any month during any part of which such member is in a
missing status (as defined in section 551(2) of title
37, United States Code) during the Vietnam conflict as
a result of such conflict, other than a period with
respect to which it is officially determined under
section 552(c) of such title 37 that he is officially
absent from his post of duty without authority.
(2) Civilian employees.--Gross income does not
include compensation received for active service as an
employee for any month during any part of which such
employee is in a missing status during the Vietnam
conflict as a result of such conflict. For purposes of
this paragraph, the terms ``active service'',
``employee'', and ``missing status'' have the
respective meanings given to such terms by section 5561
of title 5 of the United States Code.
(3) Period of conflict.--For purposes of this
subsection, the Vietnam conflict began February 28,
1961, and ends on the date designated by the President
by Executive order as the date of the termination of
combatant activities in Vietnam. For purposes of this
subsection, an individual is in a missing status as a
result of the Vietnam conflict if immediately before
such status began he was performing service in Vietnam
or was performing service in Southeast Asia in direct
support of military operations in Vietnam.
* * * * * * *
SEC. 125. CAFETERIA PLANS.
(a) General rule.--Except as provided in subsection (b), no
amount shall be included in the gross income of a participant
in a cafeteria plan solely because, under the plan, the
participant may choose among the benefits of the plan.
(b) Exception for highly compensated participants and key
employees.--
(1) Highly compensated participants.--In the case of
a highly compensated participant, subsection (a) shall
not apply to any benefit attributable to a plan year
for which the plan discriminates in favor of--
(A) highly compensated individuals as to
eligibility to participate, or
(B) highly compensated participants as to
contributions and benefits.
(2) Key employees.--In the case of a key employee
(within the meaning of section 416(i)(1)), subsection
(a) shall not apply to any benefit attributable to a
plan for which the qualified benefits provided to key
employees exceed 25 percent of the aggregate of such
benefits provided for all employees under the plan. For
purposes of the preceding sentence, qualified benefits
shall be determined without regard to the second
sentence of subsection (f).
(3) Year of inclusion.--For purposes of determining
the taxable year of inclusion, any benefit described in
paragraph (1) or (2) shall be treated as received or
accrued in the taxable year of the participant or key
employee in which the plan year ends.
(c) Discrimination as to benefits or contributions.--For
purposes of subparagraph (B) of subsection (b)(1), a cafeteria
plan does not discriminate where qualified benefits and total
benefits (or employer contributions allocable to qualified
benefits and employer contributions for total benefits) do not
discriminate in favor of highly compensated participants.
(d) Cafeteria plan defined.--For purposes of this section--
(1) In general.--The term ``cafeteria plan'' means a
written plan under which--
(A) all participants are employees, and
(B) the participants may choose among 2 or
more benefits consisting of cash and qualified
benefits.
(2) Deferred compensation plans excluded.--
(A) In general.--The term ``cafeteria plan''
does not include any plan which provides for
deferred compensation.
(B) Exception for cash and deferred
arrangements.--Subparagraph (A) shall not apply
to a profit-sharing or stock bonus plan or
rural cooperative plan (within the meaning of
section 401(k)(7)) which includes a qualified
cash or deferred arrangement (as defined in
section 401(k)(2)) to the extent of amounts
which a covered employee may elect to have the
employer pay as contributions to a trust under
such plan on behalf of the employee.
(C) Exception for certain plans maintained by
educational institutions.--Subparagraph (A)
shall not apply to a plan maintained by an
educational organization described in section
170(b)(1)(A)(ii) to the extent of amounts which
a covered employee may elect to have the
employer pay as contributions for post-
retirement group life insurance if--
(i) all contributions for such
insurance must be made before
retirement, and
(ii) such life insurance does not
have a cash surrender value at any
time.
For purposes of section 79, any life insurance
described in the preceding sentence shall be
treated as group-term life insurance.
(D) Exception for health savings accounts.--
Subparagraph (A) shall not apply to a plan to
the extent of amounts which a covered employee
may elect to have the employer pay as
contributions to a health savings account
established on behalf of the employee.
(e) Highly compensated participant and individual defined.--
For purposes of this section--
(1) Highly compensated participant.--The term
``highly compensated participant'' means a participant
who is--
(A) an officer,
(B) a shareholder owning more than 5 percent
of the voting power or value of all classes of
stock of the employer,
(C) highly compensated, or
(D) a spouse or dependent (within the meaning
of [section 152] section 7706, determined
without regard to subsections (b)(1), (b)(2),
and (d)(1)(B) thereof) of an individual
described in subparagraph (A), (B), or (C).
(2) Highly compensated individual.--The term ``highly
compensated individual'' means an individual who is
described in subparagraph (A), (B), (C), or (D) of
paragraph (1).
(f) Qualified benefits defined.--For purposes of this
section--
(1) In general.--The term ``qualified benefit'' means
any benefit which, with the application of subsection
(a), is not includible in the gross income of the
employee by reason of an express provision of this
chapter (other than section 106(b), 117, 127, or 132).
Such term includes any group term life insurance which
is includible in gross income only because it exceeds
the dollar limitation of section 79 and such term
includes any other benefit permitted under regulations.
(2) Long-term care insurance not qualified.--The term
``qualified benefit'' shall not include any product
which is advertised, marketed, or offered as long-term
care insurance.
(3) Certain exchange-participating qualified health
plans not qualified.--
(A) In general.--The term ``qualified
benefit'' shall not include any qualified
health plan (as defined in section 1301(a) of
the Patient Protection and Affordable Care Act)
offered through an Exchange established under
section 1311 of such Act.
(B) Exception for exchange-eligible
employers.--Subparagraph (A) shall not apply
with respect to any employee if such employee's
employer is a qualified employer (as defined in
section 1312(f)(2) of the Patient Protection
and Affordable Care Act) offering the employee
the opportunity to enroll through such an
Exchange in a qualified health plan in a group
market.
(g) Special rules.--
(1) Collectively bargained plan not considered
discriminatory.--For purposes of this section, a plan
shall not be treated as discriminatory if the plan is
maintained under an agreement which the Secretary finds
to be a collective bargaining agreement between
employee representatives and one or more employers.
(2) Health benefits.--For purposes of subparagraph
(B) of subsection (b)(1), a cafeteria plan which
provides health benefits shall not be treated as
discriminatory if--
(A) contributions under the plan on behalf of
each participant include an amount which--
(i) equals 100 percent of the cost of
the health benefit coverage under the
plan of the majority of the highly
compensated participants similarly
situated, or
(ii) equals or exceeds 75 percent of
the cost of the health benefit coverage
of the participant (similarly situated)
having the highest cost health benefit
coverage under the plan, and
(B) contributions or benefits under the plan
in excess of those described in subparagraph
(A) bear a uniform relationship to
compensation.
(3) Certain participation eligibility rules not
treated as discriminatory.--For purposes of
subparagraph (A) of subsection (b)(1), a classification
shall not be treated as discriminatory if the plan--
(A) benefits a group of employees described
in section 410(b)(2)(A)(i), and
(B) meets the requirements of clauses (i) and
(ii):
(i) No employee is required to
complete more than 3 years of
employment with the employer or
employers maintaining the plan as a
condition of participation in the plan,
and the employment requirement for each
employee is the same.
(ii) Any employee who has satisfied
the employment requirement of clause
(i) and who is otherwise entitled to
participate in the plan commences
participation no later than the first
day of the first plan year beginning
after the date the employment
requirement was satisfied unless the
employee was separated from service
before the first day of that plan year.
(4) Certain controlled groups, etc..--All employees
who are treated as employed by a single employer under
subsection (b), (c), or (m) of section 414 shall be
treated as employed by a single employer for purposes
of this section.
(h) Special rule for unused benefits in health flexible
spending arrangements of individuals called to active duty.--
(1) In general.--For purposes of this title, a plan
or other arrangement shall not fail to be treated as a
cafeteria plan or health flexible spending arrangement
(and shall not fail to be treated as an accident or
health plan) merely because such arrangement provides
for qualified reservist distributions.
(2) Qualified reservist distribution.--For purposes
of this subsection, the term ``qualified reservist
distribution'' means any distribution to an individual
of all or a portion of the balance in the employee's
account under such arrangement if--
(A) such individual was (by reason of being a
member of a reserve component (as defined in
section 101 of title 37, United States Code))
ordered or called to active duty for a period
in excess of 179 days or for an indefinite
period, and
(B) such distribution is made during the
period beginning on the date of such order or
call and ending on the last date that
reimbursements could otherwise be made under
such arrangement for the plan year which
includes the date of such order or call.
(i) Limitation on health flexible spending arrangements.--
(1) In general.--For purposes of this section, if a
benefit is provided under a cafeteria plan through
employer contributions to a health flexible spending
arrangement, such benefit shall not be treated as a
qualified benefit unless the cafeteria plan provides
that an employee may not elect for any taxable year to
have salary reduction contributions in excess of $2,500
made to such arrangement.
(2) Adjustment for inflation.--In the case of any
taxable year beginning after December 31, 2013, the
dollar amount in paragraph (1) shall be increased by an
amount equal to--
(A) such amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which such taxable year begins by substituting
``calendar year 2012'' for ``calendar year
2016'' in subparagraph (A)(ii) thereof.
If any increase determined under this paragraph is not
a multiple of $50, such increase shall be rounded to
the next lowest multiple of $50.
(j) Simple cafeteria plans for small businesses.--
(1) In general.--An eligible employer maintaining a
simple cafeteria plan with respect to which the
requirements of this subsection are met for any year
shall be treated as meeting any applicable
nondiscrimination requirement during such year.
(2) Simple cafeteria plan.--For purposes of this
subsection, the term ``simple cafeteria plan'' means a
cafeteria plan--
(A) which is established and maintained by an
eligible employer, and
(B) with respect to which the contribution
requirements of paragraph (3), and the
eligibility and participation requirements of
paragraph (4), are met.
(3) Contribution requirements.--
(A) In general.--The requirements of this
paragraph are met if, under the plan the
employer is required, without regard to whether
a qualified employee makes any salary reduction
contribution, to make a contribution to provide
qualified benefits under the plan on behalf of
each qualified employee in an amount equal to--
(i) a uniform percentage (not less
than 2 percent) of the employee's
compensation for the plan year, or
(ii) an amount which is not less than
the lesser of--
(I) 6 percent of the
employee's compensation for the
plan year, or
(II) twice the amount of the
salary reduction contributions
of each qualified employee.
(B) Matching contributions on behalf of
highly compensated and key employees.--The
requirements of subparagraph (A)(ii) shall not
be treated as met if, under the plan, the rate
of contributions with respect to any salary
reduction contribution of a highly compensated
or key employee at any rate of contribution is
greater than that with respect to an employee
who is not a highly compensated or key
employee.
(C) Additional contributions.--Subject to
subparagraph (B), nothing in this paragraph
shall be treated as prohibiting an employer
from making contributions to provide qualified
benefits under the plan in addition to
contributions required under subparagraph (A).
(D) Definitions.--For purposes of this
paragraph--
(i) Salary reduction contribution.--
The term ``salary reduction
contribution'' means, with respect to a
cafeteria plan, any amount which is
contributed to the plan at the election
of the employee and which is not
includible in gross income by reason of
this section.
(ii) Qualified employee.--The term
``qualified employee'' means, with
respect to a cafeteria plan, any
employee who is not a highly
compensated or key employee and who is
eligible to participate in the plan.
(iii) Highly compensated employee.--
The term ``highly compensated
employee'' has the meaning given such
term by section 414(q).
(iv) Key employee.--The term ``key
employee'' has the meaning given such
term by section 416(i).
(4) Minimum eligibility and participation
requirements.--
(A) In general.--The requirements of this
paragraph shall be treated as met with respect
to any year if, under the plan--
(i) all employees who had at least
1,000 hours of service for the
preceding plan year are eligible to
participate, and
(ii) each employee eligible to
participate in the plan may, subject to
terms and conditions applicable to all
participants, elect any benefit
available under the plan.
(B) Certain employees may be excluded.--For
purposes of subparagraph (A)(i), an employer
may elect to exclude under the plan employees--
(i) who have not attained the age of
21 before the close of a plan year,
(ii) who have less than 1 year of
service with the employer as of any day
during the plan year,
(iii) who are covered under an
agreement which the Secretary of Labor
finds to be a collective bargaining
agreement if there is evidence that the
benefits covered under the cafeteria
plan were the subject of good faith
bargaining between employee
representatives and the employer, or
(iv) who are described in section
410(b)(3)(C) (relating to nonresident
aliens working outside the United
States).
A plan may provide a shorter period of service
or younger age for purposes of clause (i) or
(ii).
(5) Eligible employer.--For purposes of this
subsection--
(A) In general.--The term ``eligible
employer'' means, with respect to any year, any
employer if such employer employed an average
of 100 or fewer employees on business days
during either of the 2 preceding years. For
purposes of this subparagraph, a year may only
be taken into account if the employer was in
existence throughout the year.
(B) Employers not in existence during
preceding year.--If an employer was not in
existence throughout the preceding year, the
determination under subparagraph (A) shall be
based on the average number of employees that
it is reasonably expected such employer will
employ on business days in the current year.
(C) Growing employers retain treatment as
small employer.--
(i) In general.--If--
(I) an employer was an
eligible employer for any year
(a ``qualified year''), and
(II) such employer
establishes a simple cafeteria
plan for its employees for such
year,
then, notwithstanding the fact the
employer fails to meet the requirements
of subparagraph (A) for any subsequent
year, such employer shall be treated as
an eligible employer for such
subsequent year with respect to
employees (whether or not employees
during a qualified year) of any trade
or business which was covered by the
plan during any qualified year.
(ii) Exception.--This subparagraph
shall cease to apply if the employer
employs an average of 200 or more
employees on business days during any
year preceding any such subsequent
year.
(D) Special rules.--
(i) Predecessors.--Any reference in
this paragraph to an employer shall
include a reference to any predecessor
of such employer.
(ii) Aggregation rules.--All persons
treated as a single employer under
subsection (a) or (b) of section 52, or
subsection (n) or (o) of section 414,
shall be treated as one person.
(6) Applicable nondiscrimination requirement.--For
purposes of this subsection, the term ``applicable
nondiscrimination requirement'' means any requirement
under subsection (b) of this section, section 79(d),
section 105(h), or paragraph (2), (3), (4), or (8) of
section 129(d).
(7) Compensation.--The term ``compensation'' has the
meaning given such term by section 414(s).
(k) Cross reference.--For reporting and recordkeeping
requirements, see section 6039D.
(l) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions of
this section.
* * * * * * *
SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.
(a) Exclusion.--
(1) In general.--Gross income of an employee does not
include amounts paid or incurred by the employer for
dependent care assistance provided to such employee if
the assistance is furnished pursuant to a program which
is described in subsection (d).
(2) Limitation of exclusion.--
(A) In general.--The amount which may be
excluded under paragraph (1) for dependent care
assistance with respect to dependent care
services provided during a taxable year shall
not exceed $5,000 ($2,500 in the case of a
separate return by a married individual).
(B) Year of inclusion.--The amount of any
excess under subparagraph (A) shall be included
in gross income in the taxable year in which
the dependent care services were provided (even
if payment of dependent care assistance for
such services occurs in a subsequent taxable
year).
(C) Marital status.--For purposes of this
paragraph, marital status shall be determined
under the rules of paragraphs (3) and (4) of
section 21(e).
(b) Earned income limitation.--
(1) In general.--The amount excluded from the income
of an employee under subsection (a) for any taxable
year shall not exceed--
(A) in the case of an employee who is not
married at the close of such taxable year, the
earned income of such employee for such taxable
year, or
(B) in the case of an employee who is married
at the close of such taxable year, the lesser
of--
(i) the earned income of such
employee for such taxable year, or
(ii) the earned income of the spouse
of such employee for such taxable year.
(2) Special rule for certain spouses.--For purposes
of paragraph (1), the provisions of section 21(d)(2)
shall apply in determining the earned income of a
spouse who is a student or incapable of caring for
himself.
(c) Payments to related individuals.--No amount paid or
incurred during the taxable year of an employee by an employer
in providing dependent care assistance to such employee shall
be excluded under subsection (a) if such amount was paid or
incurred to an individual--
[(1) with respect to whom, for such taxable year, a
deduction is allowable under section 151(c) (relating
to personal exemptions for dependents) to such employee
or the spouse of such employee, or]
(1) who is a dependent of such employee or of such
employee's spouse, or
(2) who is a child of such employee (within the
meaning of [section 152(f)(1)] section 7706(f)(1))
under the age of 19 at the close of such taxable year.
(d) Dependent care assistance program.--
(1) In general.--For purposes of this section a
dependent care assistance program is a separate written
plan of an employer for the exclusive benefit of his
employees to provide such employees with dependent care
assistance which meets the requirements of paragraphs
(2) through (8) of this subsection. If any plan would
qualify as a dependent care assistance program but for
a failure to meet the requirements of this subsection,
then, notwithstanding such failure, such plan shall be
treated as a dependent care assistance program in the
case of employees who are not highly compensated
employees.
(2) Discrimination.--The contributions or benefits
provided under the plan shall not discriminate in favor
of employees who are highly compensated employees
(within the meaning of section 414(q)) or their
dependents.
(3) Eligibility.--The program shall benefit employees
who qualify under a classification set up by the
employer and found by the Secretary not to be
discriminatory in favor of employees described in
paragraph (2), or their dependents.
(4) Principal shareholders or owners.--Not more than
25 percent of the amounts paid or incurred by the
employer for dependent care assistance during the year
may be provided for the class of individuals who are
shareholders or owners (or their spouses or
dependents), each of whom (on any day of the year) owns
more than 5 percent of the stock or of the capital or
profits interest in the employer.
(5) No funding required.--A program referred to in
paragraph (1) is not required to be funded.
(6) Notification of eligible employees.--Reasonable
notification of the availability and terms of the
program shall be provided to eligible employees.
(7) Statement of expenses.--The plan shall furnish to
an employee, on or before January 31, a written
statement showing the amounts paid or expenses incurred
by the employer in providing dependent care assistance
to such employee during the previous calendar year.
(8) Benefits.--
(A) In general.--A plan meets the
requirements of this paragraph if the average
benefits provided to employees who are not
highly compensated employees under all plans of
the employer is at least 55 percent of the
average benefits provided to highly compensated
employees under all plans of the employer.
(B) Salary reduction agreements.--For
purposes of subparagraph (A), in the case of
any benefits provided through a salary
reduction agreement, a plan may disregard any
employees whose compensation is less than
$25,000. For purposes of this subparagraph, the
term ``compensation'' has the meaning given
such term by section 414(q)(4), except that,
under rules prescribed by the Secretary, an
employer may elect to determine compensation on
any other basis which does not discriminate in
favor of highly compensated employees.
(9) Excluded employees.--For purposes of paragraphs
(3) and (8), there shall be excluded from
consideration--
(A) subject to rules similar to the rules of
section 410(b)(4), employees who have not
attained the age of 21 and completed 1 year of
service (as defined in section 410(a)(3)), and
(B) employees not included in a dependent
care assistance program who are included in a
unit of employees covered by an agreement which
the Secretary finds to be a collective
bargaining agreement between employee
representatives and 1 or more employees, if
there is evidence that dependent care benefits
were the subject of good faith bargaining
between such employee representatives and such
employer or employers.
(e) Definitions and special rules.--For purposes of this
section--
(1) Dependent care assistance.--The term ``dependent
care assistance'' means the payment of, or provision
of, those services which if paid for by the employee
would be considered employment-related expenses under
section 21(b)(2) (relating to expenses for household
and dependent care services necessary for gainful
employment).
(2) Earned income.--The term ``earned income'' shall
have the meaning given such term in section 32(c)(2),
but such term shall not include any amounts paid or
incurred by an employer for dependent care assistance
to an employee.
(3) Employee.--The term ``employee'' includes, for
any year, an individual who is an employee within the
meaning of section 401(c)(1) (relating to self-employed
individuals).
(4) Employer.--An individual who owns the entire
interest in an unincorporated trade or business shall
be treated as his own employer. A partnership shall be
treated as the employer of each partner who is an
employee within the meaning of paragraph (3).
(5) Attribution rules.--
(A) Ownership of stock.--Ownership of stock
in a corporation shall be determined in
accordance with the rules provided under
subsections (d) and (e) of section 1563
(without regard to section 1563(e)(3)(C)).
(B) Interest in unincorporated trade or
business.--The interest of an employee in a
trade or business which is not incorporated
shall be determined in accordance with
regulations prescribed by the Secretary, which
shall be based on principles similar to the
principles which apply in the case of
subparagraph (A).
(6) Utilization test not applicable.--A dependent
care assistance program shall not be held or considered
to fail to meet any requirements of subsection (d)
(other than paragraphs (4) and (8) thereof) merely
because of utilization rates for the different types of
assistance made available under the program.
(7) Disallowance of excluded amounts as credit or
deduction.--No deduction or credit shall be allowed to
the employee under any other section of this chapter
for any amount excluded from the gross income of the
employee by reason of this section.
(8) Treatment of onsite facilities.--In the case of
an onsite facility maintained by an employer, except to
the extent provided in regulations, the amount of
dependent care assistance provided to an employee
excluded with respect to any dependent shall be based
on--
(A) utilization of the facility by a
dependent of the employee, and
(B) the value of the services provided with
respect to such dependent.
(9) Identifying information required with respect to
service provider.--No amount paid or incurred by an
employer for dependent care assistance provided to an
employee shall be excluded from the gross income of
such employee unless--
(A) the name, address, and taxpayer
identification number of the person performing
the services are included on the return to
which the exclusion relates, or
(B) if such person is an organization
described in section 501(c)(3) and exempt from
tax under section 501(a), the name and address
of such person are included on the return to
which the exclusion relates.
In the case of a failure to provide the information
required under the preceding sentence, the preceding
sentence shall not apply if it is shown that the
taxpayer exercised due diligence in attempting to
provide the information so required.
* * * * * * *
SEC. 132. CERTAIN FRINGE BENEFITS.
(a) Exclusion from gross income.--Gross income shall not
include any fringe benefit which qualifies as a--
(1) no-additional-cost service,
(2) qualified employee discount,
(3) working condition fringe,
(4) de minimis fringe,
(5) qualified transportation fringe,
(6) qualified moving expense reimbursement,
(7) qualified retirement planning services, or
(8) qualified military base realignment and closure
fringe.
(b) No-additional-cost service defined.--For purposes of this
section, the term ``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.--For purposes of
this section--
(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.--The term ``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 sale 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.--The term ``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.--The term
``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.
(d) Working condition fringe defined.--For purposes of this
section, the term ``working condition fringe'' means any
property or services provided to an employee of the employer to
the extent that, if the employee paid for such property or
services, such payment would be allowable as a deduction under
section 162 or 167.
(e) De minimis fringe defined.--For purposes of this
section--
(1) In general.--The term ``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. For
purposes of subparagraph (B), an employee entitled under
section 119 to exclude the value of a meal provided at such
facility shall be treated as having paid an amount for such
meal equal to the direct operating costs of the facility
attributable to such meal.
(f) Qualified transportation fringe.--
(1) In general.--For purposes of this section, the
term ``qualified transportation fringe'' means any of
the following provided by an employer to an employee:
(A) Transportation in a commuter highway
vehicle if such transportation is in connection
with travel between the employee's residence
and place of employment.
(B) Any transit pass.
(C) Qualified parking.
[(D) Any qualified bicycle commuting
reimbursement.]
(2) Limitation on exclusion.--The amount of the
fringe benefits which are provided by an employer to
any employee and which may be excluded from gross
income under subsection (a)(5) shall not exceed--
(A) $175 per month in the case of the
aggregate of the benefits described in
subparagraphs (A) and (B) of paragraph (1), and
(B) $175 per month in the case of qualified
parking[, and].
[(C) the applicable annual limitation in the
case of any qualified bicycle commuting
reimbursement.]
(3) Cash reimbursements.--For purposes of this
subsection, the term ``qualified transportation
fringe'' includes a cash reimbursement by an employer
to an employee for a benefit described in paragraph
(1). The preceding sentence shall apply to a cash
reimbursement for any transit pass only if a voucher or
similar item which may be exchanged only for a transit
pass is not readily available for direct distribution
by the employer to the employee.
(4) No constructive receipt.--No amount shall be
included in the gross income of an employee solely
because the employee may choose between any qualified
transportation fringe [(other than a qualified bicycle
commuting reimbursement)] and compensation which would
otherwise be includible in gross income of such
employee.
(5) Definitions.--For purposes of this subsection--
(A) Transit pass.--The term ``transit pass''
means any pass, token, farecard, voucher, or
similar item entitling a person to
transportation (or transportation at a reduced
price) if such transportation is--
(i) on mass transit facilities
(whether or not publicly owned), or
(ii) provided by any person in the
business of transporting persons for
compensation or hire if such
transportation is provided in a vehicle
meeting the requirements of
subparagraph (B)(i).
(B) Commuter highway vehicle.--The term
``commuter highway vehicle'' means any highway
vehicle--
(i) the seating capacity of which is
at least 6 adults (not including the
driver), and
(ii) at least 80 percent of the
mileage use of which can reasonably be
expected to be--
(I) for purposes of
transporting employees in
connection with travel between
their residences and their
place of employment, and
(II) on trips during which
the number of employees
transported for such purposes
is at least 1/2 of the adult
seating capacity of such
vehicle (not including the
driver).
(C) Qualified parking.--The term ``qualified
parking'' means parking provided to an employee
on or near the business premises of the
employer or on or near a location from which
the employee commutes to work by transportation
described in subparagraph (A), in a commuter
highway vehicle, or by carpool. Such term shall
not include any parking on or near property
used by the employee for residential purposes.
(D) Transportation provided by employer.--
Transportation referred to in paragraph (1)(A)
shall be considered to be provided by an
employer if such transportation is furnished in
a commuter highway vehicle operated by or for
the employer.
(E) Employee.--For purposes of this
subsection, the term ``employee'' does not
include an individual who is an employee within
the meaning of section 401(c)(1).
(F) Definitions related to bicycle commuting
reimbursement.--
(i) Qualified bicycle commuting
reimbursement.--The term ``qualified
bicycle commuting reimbursement''
means, with respect to any calendar
year, any employer reimbursement during
the 15-month period beginning with the
first day of such calendar year for
reasonable expenses incurred by the
employee during such calendar year for
the purchase of a bicycle and bicycle
improvements, repair, and storage, if
such bicycle is regularly used for
travel between the employee's residence
and place of employment.
(ii) Applicable annual limitation.--
The term ``applicable annual
limitation'' means, with respect to any
employee for any calendar year, the
product of $20 multiplied by the number
of qualified bicycle commuting months
during such year.
(iii) Qualified bicycle commuting
month.--The term ``qualified bicycle
commuting month'' means, with respect
to any employee, any month during which
such employee--
(I) regularly uses the
bicycle for a substantial
portion of the travel between
the employee's residence and
place of employment, and
(II) does not receive any
benefit described in
subparagraph (A), (B), or (C)
of paragraph (1).
(6) Inflation adjustment.--
(A) In general.--In the case of any taxable
year beginning in a calendar year after 1999,
the dollar amounts contained in subparagraphs
(A) and (B) of paragraph (2) shall be increased
by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, by substituting ``calendar
year 1998'' for ``calendar year 2016''
in subparagraph (A)(ii) thereof.
In the case of any taxable year beginning in a
calendar year after 2002, clause (ii) shall be
applied by substituting ``calendar year 2001''
for ``calendar year 1998'' for purposes of
adjusting the dollar amount contained in
paragraph (2)(A).
(B) Rounding.--If any increase determined
under subparagraph (A) is not a multiple of $5,
such increase shall be rounded to the next
lowest multiple of $5.
(7) Coordination with other provisions.--For purposes
of this section, the terms ``working condition fringe''
and ``de minimis fringe'' shall not include any
qualified transportation fringe (determined without
regard to paragraph (2)).
[(8) Suspension of qualified bicycle commuting
reimbursement exclusion.--Paragraph (1)(D) shall not
apply to any taxable year beginning after December 31,
2017, and before January 1, 2026.]
(g) Qualified moving expense reimbursement.--For purposes of
this section--
(1) In general.--The term ``qualified moving expense
reimbursement'' means any amount received (directly or
indirectly) [by an individual] by a qualified military
individual from an employer as a payment for (or a
reimbursement of) expenses which would be deductible as
moving expenses under section 217 if directly paid or
incurred by the individual. Such term shall not include
any payment for (or reimbursement of) an expense
actually deducted by the individual in a prior taxable
year.
[(2) Suspension for taxable years 2018 through
2025.--Except in the case of a member of the Armed
Forces of the United States on active duty who moves
pursuant to a military order and incident to a
permanent change of station, subsection (a)(6) shall
not apply to any taxable year beginning after December
31, 2017, and before January 1, 2026.]
(2) Qualified military individual.--For purposes of
this subsection, the term ``qualified military
individual'' means a member of the Armed Forces of the
United States on active duty who moves pursuant to a
military order and incident to a permanent change of
station.
(h) Certain individuals treated as employees for purposes of
subsections (a)(1) and (2).--For purposes of paragraphs (1) and
(2) of subsection (a)--
(1) Retired and disabled employees and surviving
spouse of employee treated as employee.--With respect
to a line of business of an employer, the term
``employee'' includes--
(A) any individual who was formerly employed
by such employer in such line of business and
who separated from service with such employer
in such line of business by reason of
retirement or disability, and
(B) any widow or widower of any individual
who died while employed by such employer in
such line of business or while an employee
within the meaning of subparagraph (A).
(2) Spouse and dependent children.--
(A) In general.--Any use by the spouse or a
dependent child of the employee shall be
treated as use by the employee.
(B) Dependent child.--For purposes of
subparagraph (A), the term ``dependent child''
means any child (as defined in [section
152(f)(1)] section 7706(f)(1)) of the
employee--
(i) who is a dependent of the
employee, or
(ii) both of whose parents are
deceased and who has not attained age
25.
For purposes of the preceding sentence, any
child to whom [section 152(e)] section 7706(e)
applies shall be treated as the dependent of
both parents.
(3) Special rule for parents in the case of air
transportation.--Any use of air transportation by a
parent of an employee (determined without regard to
paragraph (1)(B)) shall be treated as use by the
employee.
(i) Reciprocal agreements.--For purposes of paragraph (1) of
subsection (a), any service provided by an employer to an
employee of another employer shall be treated as provided by
the employer of such employee if--
(1) such service is provided pursuant to a written
agreement between such employers, and
(2) neither of such employers incurs any substantial
additional costs (including foregone revenue) in
providing such service or pursuant to such agreement.
(j) Special rules.--
(1) Exclusions under subsection (a)(1) and (2) apply
to highly compensated employees only if no
discrimination.--Paragraphs (1) and (2) of subsection
(a) shall apply with respect to any fringe benefit
described therein provided with respect to any highly
compensated employee only if such fringe benefit 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.
(2) Special rule for leased sections of department
stores.--
(A) In general.--For purposes of paragraph
(2) of subsection (a), in the case of a leased
section of a department store--
(i) such section shall be treated as
part of the line of business of the
person operating the department store,
and
(ii) employees in the leased section
shall be treated as employees of the
person operating the department store.
(B) Leased section of department store.--For
purposes of subparagraph (A), a leased section
of a department store is any part of a
department store where over-the-counter sales
of property are made under a lease or similar
arrangement where it appears to the general
public that individuals making such sales are
employed by the person operating the department
store.
(3) Auto salesmen.--
(A) In general.--For purposes of subsection
(a)(3), qualified automobile demonstration use
shall be treated as a working condition fringe.
(B) Qualified automobile demonstration use.--
For purposes of subparagraph (A), the term
``qualified automobile demonstration use''
means any use of an automobile by a full-time
automobile salesman in the sales area in which
the automobile dealer's sales office is located
if--
(i) such use is provided primarily to
facilitate the salesman's performance
of services for the employer, and
(ii) there are substantial
restrictions on the personal use of
such automobile by such salesman.
(4) On-premises gyms and other athletic facilities.--
(A) In general.--Gross income shall not
include the value of any on-premises athletic
facility provided by an employer to his
employees.
(B) On-premises athletic facility.--For
purposes of this paragraph, the term ``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 (within the meaning of
subsection (h)).
(5) Special rule for affiliates of airlines.--
(A) In general.--If--
(i) a qualified affiliate is a member
of an affiliated group another member
of which operates an airline, and
(ii) employees of the qualified
affiliate who are directly engaged in
providing airline-related services are
entitled to no-additional-cost service
with respect to air transportation
provided by such other member,
then, for purposes of applying paragraph (1) of
subsection (a) to such no-additional-cost
service provided to such employees, such
qualified affiliate shall be treated as engaged
in the same line of business as such other
member.
(B) Qualified affiliate.--For purposes of
this paragraph, the term ``qualified
affiliate'' means any corporation which is
predominantly engaged in airline-related
services.
(C) Airline-related services.--For purposes
of this paragraph, the term ``airline-related
services'' means any of the following services
provided in connection with air transportation:
(i) Catering.
(ii) Baggage handling.
(iii) Ticketing and reservations.
(iv) Flight planning and weather
analysis.
(v) Restaurants and gift shops
located at an airport.
(vi) Such other similar services
provided to the airline as the
Secretary may prescribe.
(D) Affiliated group.--For purposes of this
paragraph, the term ``affiliated group'' has
the meaning given such term by section 1504(a).
(6) Highly compensated employee.--For purposes of
this section, the term ``highly compensated employee''
has the meaning given such term by section 414(q).
(7) Air cargo.--For purposes of subsection (b), the
transportation of cargo by air and the transportation
of passengers by air shall be treated as the same
service.
(8) Application of section to otherwise taxable
educational or training benefits.--Amounts paid or
expenses incurred by the employer for education or
training provided to the employee which are not
excludable from gross income under section 127 shall be
excluded from gross income under this section if (and
only if) such amounts or expenses are a working
condition fringe.
(k) Customers not to include employees.--For purposes of this
section (other than subsection (c)(2)), the term ``customers''
shall only include customers who are not employees.
(l) Section not to apply to fringe benefits expressly
provided for elsewhere.--This section (other than subsections
(e) and (g)) shall not apply to any fringe benefits of a type
the tax treatment of which is expressly provided for in any
other section of this chapter.
(m) Qualified retirement planning services.--
(1) In general.--For purposes of this section, the
term ``qualified retirement planning services'' means
any retirement planning advice or information provided
to an employee and his spouse by an employer
maintaining a qualified employer plan.
(2) Nondiscrimination rule.--Subsection (a)(7) shall
apply in the case of highly compensated employees only
if such services are available on substantially the
same terms to each member of the group of employees
normally provided education and information regarding
the employer's qualified employer plan.
(3) Qualified employer plan.--For purposes of this
subsection, the term ``qualified employer plan'' means
a plan, contract, pension, or account described in
section 219(g)(5).
(n) Qualified military base realignment and closure fringe.--
For purposes of this section--
(1) In general.--The term ``qualified military base
realignment and closure fringe'' means 1 or more
payments under the authority of section 1013 of the
Demonstration Cities and Metropolitan Development Act
of 1966 (42 U.S.C. 3374) (as in effect on the date of
the enactment of the American Recovery and Reinvestment
Tax Act of 2009).
(2) Limitation.--With respect to any property, such
term shall not include any payment referred to in
paragraph (1) to the extent that the sum of all of such
payments related to such property exceeds the maximum
amount described in subsection (c) of such section (as
in effect on such date).
(o) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.
* * * * * * *
SEC. 139D. INDIAN HEALTH CARE BENEFITS.
(a) General rule.--Except as otherwise provided in this
section, gross income does not include the value of any
qualified Indian health care benefit.
(b) Qualified Indian health care benefit.--For purposes of
this section, the term ``qualified Indian health care benefit''
means--
(1) any health service or benefit provided or
purchased, directly or indirectly, by the Indian Health
Service through a grant to or a contract or compact
with an Indian tribe or tribal organization, or through
a third-party program funded by the Indian Health
Service,
(2) medical care provided or purchased by, or amounts
to reimburse for such medical care provided by, an
Indian tribe or tribal organization for, or to, a
member of an Indian tribe, including a spouse or
dependent of such a member,
(3) coverage under accident or health insurance (or
an arrangement having the effect of accident or health
insurance), or an accident or health plan, provided by
an Indian tribe or tribal organization for medical care
to a member of an Indian tribe, include a spouse or
dependent of such a member, and
(4) any other medical care provided by an Indian
tribe or tribal organization that supplements,
replaces, or substitutes for a program or service
relating to medical care provided by the Federal
government to Indian tribes or members of such a tribe.
(c) Definitions.--For purposes of this section--
(1) Indian tribe.--The term ``Indian tribe'' has the
meaning given such term by section 45A(c)(6).
(2) Tribal organization.--The term ``tribal
organization'' has the meaning given such term by
section 4(l) of the Indian Self-Determination and
Education Assistance Act.
(3) Medical care.--The term ``medical care'' has the
same meaning as when used in section 213.
(4) Accident or health insurance; accident or health
plan.--The terms ``accident or health insurance'' and
``accident or health plan'' have the same meaning as
when used in section 105.
(5) Dependent.--The term ``dependent'' has the
meaning given such term by [section 152] section 7706,
determined without regard to subsections (b)(1),
(b)(2), and (d)(1)(B) thereof.
(d) Denial of double benefit.--Subsection (a) shall not apply
to the amount of any qualified Indian health care benefit which
is not includible in gross income of the beneficiary of such
benefit under any other provision of this chapter, or to the
amount of any such benefit for which a deduction is allowed to
such beneficiary under any other provision of this chapter.
SEC. 139E. INDIAN GENERAL WELFARE BENEFITS.
(a) In general.--Gross income does not include the value of
any Indian general welfare benefit.
(b) Indian general welfare benefit.--For purposes of this
section, the term ``Indian general welfare benefit'' includes
any payment made or services provided to or on behalf of a
member of an Indian tribe (or any spouse or dependent of such a
member) pursuant to an Indian tribal government program, but
only if--
(1) the program is administered under specified
guidelines and does not discriminate in favor of
members of the governing body of the tribe, and
(2) the benefits provided under such program--
(A) are available to any tribal member who
meets such guidelines,
(B) are for the promotion of general welfare,
(C) are not lavish or extravagant, and
(D) are not compensation for services.
(c) Definitions and special rules.--For purposes of this
section--
(1) Indian tribal government.--For purposes of this
section, the term ``Indian tribal government'' includes
any agencies or instrumentalities of an Indian tribal
government and any Alaska Native regional or village
corporation, as defined in, or established pursuant to,
the Alaska Native Claims Settlement Act (43 U.S.C. 1601
et seq.).
(2) Dependent.--The term ``dependent'' has the
meaning given such term by [section 152] section 7706,
determined without regard to subsections (b)(1),
(b)(2), and (d)(1)(B).
(3) Lavish or extravagant.--The Secretary shall, in
consultation with the Tribal Advisory Committee (as
established under section 3(a) of the Tribal General
Welfare Exclusion Act of 2014), establish guidelines
for what constitutes lavish or extravagant benefits
with respect to Indian tribal government programs.
(4) Establishment of tribal government program.--A
program shall not fail to be treated as an Indian
tribal government program solely by reason of the
program being established by tribal custom or
government practice.
(5) Ceremonial activities.--Any items of cultural
significance, reimbursement of costs, or cash
honorarium for participation in cultural or ceremonial
activities for the transmission of tribal culture shall
not be treated as compensation for services.
* * * * * * *
[PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS
[SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.
[(a) Allowance of deductions.--In the case of an individual,
the exemptions provided by this section shall be allowed as
deductions in computing taxable income.
[(b) Taxpayer and spouse.--An exemption of the exemption
amount for the taxpayer; and an additional exemption of the
exemption amount for the spouse of the taxpayer if a joint
return is not made by the taxpayer and his spouse, and if the
spouse, for the calendar year in which the taxable year of the
taxpayer begins, has no gross income and is not the dependent
of another taxpayer.
[(c) Additional exemption for dependents.--An exemption of
the exemption amount for each individual who is a dependent (as
defined in section 152) of the taxpayer for the taxable year.
[(d) Exemption amount.--For purposes of this section--
[(1) In general.--Except as otherwise provided in
this subsection, the term ``exemption amount'' means
$2,000.
[(2) Exemption amount disallowed in case of certain
dependents.--In the case of an individual with respect
to whom a deduction under this section is allowable to
another taxpayer for a taxable year beginning in the
calendar year in which the individual's taxable year
begins, the exemption amount applicable to such
individual for such individual's taxable year shall be
zero.
[(3) Phaseout.--
[(A) In general.--In the case of any taxpayer
whose adjusted gross income for the taxable
year exceeds the applicable amount in effect
under section 68(b), the exemption amount shall
be reduced by the applicable percentage.
[(B) Applicable percentage.--For purposes of
subparagraph (A), the term ``applicable
percentage'' means 2 percentage points for each
$2,500 (or fraction thereof) by which the
taxpayer's adjusted gross income for the
taxable year exceeds the applicable amount in
effect under section 68(b). In the case of a
married individual filing a separate return,
the preceding sentence shall be applied by
substituting ``$1,250'' for ``$2,500''. In no
event shall the applicable percentage exceed
100 percent.
[(C) Coordination with other provisions.--The
provisions of this paragraph shall not apply
for purposes of determining whether a deduction
under this section with respect to any
individual is allowable to another taxpayer for
any taxable year.
[(4) Inflation adjustment.--Except as provided in
paragraph (5), in the case of any taxable year
beginning in a calendar year after 1989, the dollar
amount contained in paragraph (1) shall be increased by
an amount equal to--
[(A) such dollar amount, multiplied by
[(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
``calendar year 1988'' for ``calendar year
2016'' in subparagraph (A)(ii) thereof.
[(5) Special rules for taxable years 2018 through
2025.--In the case of a taxable year beginning after
December 31, 2017, and before January 1, 2026--
[(A) Exemption amount.--The term ``exemption
amount'' means zero.
[(B) References.--For purposes of any other
provision of this title, the reduction of the
exemption amount to zero under subparagraph (A)
shall not be taken into account in determining
whether a deduction is allowed or allowable, or
whether a taxpayer is entitled to a deduction,
under this section.
[(e) Identifying information required.--No exemption shall be
allowed under this section with respect to any individual
unless the TIN of such individual is included on the return
claiming the exemption.
[SEC. 153. CROSS REFERENCES.
[(1) For deductions of estates and trusts, in lieu of the
exemptions under section 151, see section 642(b).
[(2) For exemptions of nonresident aliens, see section
873(b)(3).
[(3) For determination of marital status, see section 7703.]
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In general.--There shall be allowed as a deduction all
the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including--
(1) a reasonable allowance for salaries or other
compensation for personal services actually rendered;
(2) traveling expenses (including amounts expended
for meals and lodging other than amounts which are
lavish or extravagant under the circumstances) while
away from home in the pursuit of a trade or business;
and
(3) rentals or other payments required to be made as
a condition to the continued use or possession, for
purposes of the trade or business, of property to which
the taxpayer has not taken or is not taking title or in
which he has no equity.
For purposes of the preceding sentence, the place of residence
of a Member of Congress (including any Delegate and Resident
Commissioner) within the State, congressional district, or
possession which he represents in Congress shall be considered
his home, but amounts expended by such Members within each
taxable year for living expenses shall not be deductible for
income tax purposes. For purposes of paragraph (2), the
taxpayer shall not be treated as being temporarily away from
home during any period of employment if such period exceeds 1
year. The preceding sentence shall not apply to any Federal
employee during any period for which such employee is certified
by the Attorney General (or the designee thereof) as traveling
on behalf of the United States in temporary duty status to
investigate or prosecute, or provide support services for the
investigation or prosecution of, a Federal crime.
(b) Charitable contributions and gifts excepted.--No
deduction shall be allowed under subsection (a) for any
contribution or gift which would be allowable as a deduction
under section 170 were it not for the percentage limitations,
the dollar limitations, or the requirements as to the time of
payment, set forth in such section.
(c) Illegal bribes, kickbacks, and other payments.--
(1) Illegal payments to government officials or
employees.--No deduction shall be allowed under
subsection (a) for any payment made, directly or
indirectly, to an official or employee of any
government, or of any agency or instrumentality of any
government, if the payment constitutes an illegal bribe
or kickback or, if the payment is to an official or
employee of a foreign government, the payment is
unlawful under the Foreign Corrupt Practices Act of
1977. The burden of proof in respect of the issue, for
the purposes of this paragraph, as to whether a payment
constitutes an illegal bribe or kickback (or is
unlawful under the Foreign Corrupt Practices Act of
1977) shall be upon the Secretary to the same extent as
he bears the burden of proof under section 7454
(concerning the burden of proof when the issue relates
to fraud).
(2) Other illegal payments.--No deduction shall be
allowed under subsection (a) for any payment (other
than a payment described in paragraph (1)) made,
directly or indirectly, to any person, if the payment
constitutes an illegal bribe, illegal kickback, or
other illegal payment under any law of the United
States, or under any law of a State (but only if such
State law is generally enforced), which subjects the
payor to a criminal penalty or the loss of license or
privilege to engage in a trade or business. For
purposes of this paragraph, a kickback includes a
payment in consideration of the referral of a client,
patient, or customer. The burden of proof in respect of
the issue, for purposes of this paragraph, as to
whether a payment constitutes an illegal bribe, illegal
kickback, or other illegal payment shall be upon the
Secretary to the same extent as he bears the burden of
proof under section 7454 (concerning the burden of
proof when the issue relates to fraud).
(3) Kickbacks, rebates, and bribes under medicare and
medicaid.--No deduction shall be allowed under
subsection (a) for any kickback, rebate, or bribe made
by any provider of services, supplier, physician, or
other person who furnishes items or services for which
payment is or may be made under the Social Security
Act, or in whole or in part out of Federal funds under
a State plan approved under such Act, if such kickback,
rebate, or bribe is made in connection with the
furnishing of such items or services or the making or
receipt of such payments. For purposes of this
paragraph, a kickback includes a payment in
consideration of the referral of a client, patient, or
customer.
(d) Capital contributions to Federal National Mortgage
Association.--For purposes of this subtitle, whenever the
amount of capital contributions evidenced by a share of stock
issued pursuant to section 303(c) of the Federal National
Mortgage Association Charter Act (12 U.S.C., sec. 1718) exceeds
the fair market value of the stock as of the issue date of such
stock, the initial holder of the stock shall treat the excess
as ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a trade or business.
(e) Denial of deduction for certain lobbying and political
expenditures.--
(1) In general.--No deduction shall be allowed under
subsection (a) for any amount paid or incurred in
connection with--
(A) influencing legislation,
(B) participation in, or intervention in, any
political campaign on behalf of (or in
opposition to) any candidate for public office,
(C) any attempt to influence the general
public, or segments thereof, with respect to
elections, legislative matters, or referendums,
or
(D) any direct communication with a covered
executive branch official in an attempt to
influence the official actions or positions of
such official.
(2) Application to dues of tax-exempt
organizations.--No deduction shall be allowed under
subsection (a) for the portion of dues or other similar
amounts paid by the taxpayer to an organization which
is exempt from tax under this subtitle which the
organization notifies the taxpayer under section
6033(e)(1)(A)(ii) is allocable to expenditures to which
paragraph (1) applies.
(3) Influencing legislation.--For purposes of this
subsection--
(A) In general.--The term ``influencing
legislation'' means any attempt to influence
any legislation through communication with any
member or employee of a legislative body, or
with any government official or employee who
may participate in the formulation of
legislation.
(B) Legislation.--The term ``legislation''
has the meaning given such term by section
4911(e)(2).
(4) Other special rules.--
(A) Exception for certain taxpayers.--In the
case of any taxpayer engaged in the trade or
business of conducting activities described in
paragraph (1), paragraph (1) shall not apply to
expenditures of the taxpayer in conducting such
activities directly on behalf of another person
(but shall apply to payments by such other
person to the taxpayer for conducting such
activities).
(B) De minimis exception.--
(i) In general.--Paragraph (1) shall
not apply to any in-house expenditures
for any taxable year if such
expenditures do not exceed $2,000. In
determining whether a taxpayer exceeds
the $2,000 limit under this clause,
there shall not be taken into account
overhead costs otherwise allocable to
activities described in paragraphs
(1)(A) and (D).
(ii) In-house expenditures.--For
purposes of clause (i), the term ``in-
house expenditures'' means expenditures
described in paragraphs (1)(A) and (D)
other than--
(I) payments by the taxpayer
to a person engaged in the
trade or business of conducting
activities described in
paragraph (1) for the conduct
of such activities on behalf of
the taxpayer, or
(II) dues or other similar
amounts paid or incurred by the
taxpayer which are allocable to
activities described in
paragraph (1).
(C) Expenses incurred in connection with
lobbying and political activities.--Any amount
paid or incurred for research for, or
preparation, planning, or coordination of, any
activity described in paragraph (1) shall be
treated as paid or incurred in connection with
such activity.
(5) Covered executive branch official.--For purposes
of this subsection, the term ``covered executive branch
official'' means--
(A) the President,
(B) the Vice President,
(C) any officer or employee of the White
House Office of the Executive Office of the
President, and the 2 most senior level officers
of each of the other agencies in such Executive
Office, and
(D)(i) any individual serving in a position
in level I of the Executive Schedule under
section 5312 of title 5, United States Code,
(ii) any other individual designated by the
President as having Cabinet level status, and
(iii) any immediate deputy of an individual
described in clause (i) or (ii).
(6) Cross reference.--For reporting requirements and
alternative taxes related to this subsection, see
section 6033(e).
(f) Fines, penalties, and other amounts.--
(1) In general.--Except as provided in the following
paragraphs of this subsection, no deduction otherwise
allowable shall be allowed under this chapter for any
amount paid or incurred (whether by suit, agreement, or
otherwise) to, or at the direction of, a government or
governmental entity in relation to the violation of any
law or the investigation or inquiry by such government
or entity into the potential violation of any law.
(2) Exception for amounts constituting restitution or
paid to come into compliance with law.--
(A) In general.--Paragraph (1) shall not
apply to any amount that--
(i) the taxpayer establishes--
(I) constitutes restitution
(including remediation of
property) for damage or harm
which was or may be caused by
the violation of any law or the
potential violation of any law,
or
(II) is paid to come into
compliance with any law which
was violated or otherwise
involved in the investigation
or inquiry described in
paragraph (1),
(ii) is identified as restitution or
as an amount paid to come into
compliance with such law, as the case
may be, in the court order or
settlement agreement, and
(iii) in the case of any amount of
restitution for failure to pay any tax
imposed under this title in the same
manner as if such amount were such tax,
would have been allowed as a deduction
under this chapter if it had been
timely paid.
The identification under clause (ii) alone
shall not be sufficient to make the
establishment required under clause (i).
(B) Limitation.--Subparagraph (A) shall not
apply to any amount paid or incurred as
reimbursement to the government or entity for
the costs of any investigation or litigation.
(3) Exception for amounts paid or incurred as the
result of certain court orders.--Paragraph (1) shall
not apply to any amount paid or incurred by reason of
any order of a court in a suit in which no government
or governmental entity is a party.
(4) Exception for taxes due.--Paragraph (1) shall not
apply to any amount paid or incurred as taxes due.
(5) Treatment of certain nongovernmental regulatory
entities.--For purposes of this subsection, the
following nongovernmental entities shall be treated as
governmental entities:
(A) Any nongovernmental entity which
exercises self-regulatory powers (including
imposing sanctions) in connection with a
qualified board or exchange (as defined in
section 1256(g)(7)).
(B) To the extent provided in regulations,
any nongovernmental entity which exercises
self-regulatory powers (including imposing
sanctions) as part of performing an essential
governmental function.
(g) Treble damage payments under the antitrust laws.--If in a
criminal proceeding a taxpayer is convicted of a violation of
the antitrust laws, or his plea of guilty or nolo contendere to
an indictment or information charging such a violation is
entered or accepted in such a proceeding, no deduction shall be
allowed under subsection (a) for two-thirds of any amount paid
or incurred--
(1) on any judgment for damages entered against the
taxpayer under section 4 of the Act entitled ``An Act
to supplement existing laws against unlawful restraints
and monopolies, and for other purposes'', approved
October 15, 1914 (commonly known as the Clayton Act),
on account of such violation or any related violation
of the antitrust laws which occurred prior to the date
of the final judgment of such conviction, or
(2) in settlement of any action brought under such
section 4 on account of such violation or related
violation.
(h) State legislators' travel expenses away from home.--
(1) In general.--For purposes of subsection (a), in
the case of any individual who is a State legislator at
any time during the taxable year and who makes an
election under this subsection for the taxable year--
(A) the place of residence of such individual
within the legislative district which he
represented shall be considered his home,
(B) he shall be deemed to have expended for
living expenses (in connection with his trade
or business as a legislator) an amount equal to
the sum of the amounts determined by
multiplying each legislative day of such
individual during the taxable year by the
greater of--
(i) the amount generally allowable
with respect to such day to employees
of the State of which he is a
legislator for per diem while away from
home, to the extent such amount does
not exceed 110 percent of the amount
described in clause (ii) with respect
to such day, or
(ii) the amount generally allowable
with respect to such day to employees
of the executive branch of the Federal
Government for per diem while away from
home but serving in the United States,
and
(C) he shall be deemed to be away from home
in the pursuit of a trade or business on each
legislative day.
(2) Legislative days.--For purposes of paragraph (1),
a legislative day during any taxable year for any
individual shall be any day during such year on which--
(A) the legislature was in session (including
any day in which the legislature was not in
session for a period of 4 consecutive days or
less), or
(B) the legislature was not in session but
the physical presence of the individual was
formally recorded at a meeting of a committee
of such legislature.
(3) Election.--An election under this subsection for
any taxable year shall be made at such time and in such
manner as the Secretary shall by regulations prescribe.
(4) Section not to apply to legislators who reside
near capitol.--This subsection shall not apply to any
legislator whose place of residence within the
legislative district which he represents is 50 or fewer
miles from the capitol building of the State.
(j) Certain foreign advertising expenses.--
(1) In general.--No deduction shall be allowed under
subsection (a) for any expenses of an advertisement
carried by a foreign broadcast undertaking and directed
primarily to a market in the United States. This
paragraph shall apply only to foreign broadcast
undertakings located in a country which denies a
similar deduction for the cost of advertising directed
primarily to a market in the foreign country when
placed with a United States broadcast undertaking.
(2) Broadcast undertaking.--For purposes of paragraph
(1), the term ``broadcast undertaking'' includes (but
is not limited to) radio and television stations.
(k) Stock reacquisition expenses.--
(1) In general.--Except as provided in paragraph (2),
no deduction otherwise allowable shall be allowed under
this chapter for any amount paid or incurred by a
corporation in connection with the reacquisition of its
stock or of the stock of any related person (as defined
in section 465(b)(3)(C)).
(2) Exceptions.--Paragraph (1) shall not apply to--
(A) Certain specific deductions.--Any--
(i) deduction allowable under section
163 (relating to interest),
(ii) deduction for amounts which are
properly allocable to indebtedness and
amortized over the term of such
indebtedness, or
(iii) deduction for dividends paid
(within the meaning of section 561).
(B) Stock of certain regulated investment
companies.--Any amount paid or incurred in
connection with the redemption of any stock in
a regulated investment company which issues
only stock which is redeemable upon the demand
of the shareholder.
(l) Special rules for health insurance costs of self-employed
individuals.--
(1) Allowance of deduction.--In the case of a
taxpayer who is an employee within the meaning of
section 401(c)(1), there shall be allowed as a
deduction under this section an amount equal to the
amount paid during the taxable year for insurance which
constitutes medical care for--
(A) the taxpayer,
(B) the taxpayer's spouse,
(C) the taxpayer's dependents, and
(D) any child (as defined in [section
152(f)(1)] section 7706(f)(1)) of the taxpayer
who as of the end of the taxable year has not
attained age 27.
(2) Limitations.--
(A) Dollar amount.--No deduction shall be
allowed under paragraph (1) to the extent that
the amount of such deduction exceeds the
taxpayer's earned income (within the meaning of
section 401(c)) derived by the taxpayer from
the trade or business with respect to which the
plan providing the medical care coverage is
established.
(B) Other coverage.--Paragraph (1) shall not
apply to any taxpayer for any calendar month
for which the taxpayer is eligible to
participate in any subsidized health plan
maintained by any employer of the taxpayer or
of the spouse of, or any dependent, or
individual described in subparagraph (D) of
paragraph (1) with respect to, the taxpayer.
The preceding sentence shall be applied
separately with respect to--
(i) plans which include coverage for
qualified long-term care services (as
defined in section 7702B(c)) or are
qualified long-term care insurance
contracts (as defined in section
7702B(b)), and
(ii) plans which do not include such
coverage and are not such contracts.
(C) Long-term care premiums.--In the case of
a qualified long-term care insurance contract
(as defined in section 7702B(b)), only eligible
long-term care premiums (as defined in section
213(d)(10)) shall be taken into account under
paragraph (1).
(3) Coordination with medical deduction.--Any amount
paid by a taxpayer for insurance to which paragraph (1)
applies shall not be taken into account in computing
the amount allowable to the taxpayer as a deduction
under section 213(a).
(4) Deduction not allowed for self-employment tax
purposes.--The deduction allowable by reason of this
subsection shall not be taken into account in
determining an individual's net earnings from self-
employment (within the meaning of section 1402(a)) for
purposes of chapter 2 for taxable years beginning
before January 1, 2010, or after December 31, 2010.
(5) Treatment of certain S corporation
shareholders.--This subsection shall apply in the case
of any individual treated as a partner under section
1372(a), except that--
(A) for purposes of this subsection, such
individual's wages (as defined in section 3121)
from the S corporation shall be treated as such
individual's earned income (within the meaning
of section 401(c)(1)), and
(B) there shall be such adjustments in the
application of this subsection as the Secretary
may by regulations prescribe.
(m) Certain excessive employee remuneration.--
(1) In general.--In the case of any publicly held
corporation, no deduction shall be allowed under this
chapter for applicable employee remuneration with
respect to any covered employee to the extent that the
amount of such remuneration for the taxable year with
respect to such employee exceeds $1,000,000.
(2) Publicly held corporation.--For purposes of this
subsection, the term ``publicly held corporation''
means any corporation which is an issuer (as defined in
section 3 of the Securities Exchange Act of 1934 (15
U.S.C. 78c))--
(A) the securities of which are required to
be registered under section 12 of such Act (15
U.S.C. 78l), or
(B) that is required to file reports under
section 15(d) of such Act (15 U.S.C. 78o(d)).
(3) Covered employee.--For purposes of this
subsection, the term ``covered employee'' means any
employee of the taxpayer if--
(A) such employee is the principal executive
officer or principal financial officer of the
taxpayer at any time during the taxable year,
or was an individual acting in such a capacity,
(B) the total compensation of such employee
for the taxable year is required to be reported
to shareholders under the Securities Exchange
Act of 1934 by reason of such employee being
among the 3 highest compensated officers for
the taxable year (other than any individual
described in subparagraph (A)), or
(C) was a covered employee of the taxpayer
(or any predecessor) for any preceding taxable
year beginning after December 31, 2016.
Such term shall include any employee who would be
described in subparagraph (B) if the reporting
described in such subparagraph were required as so
described.
(4) Applicable employee remuneration.--For purposes
of this subsection--
(A) In general.--Except as otherwise provided
in this paragraph, the term ``applicable
employee remuneration'' means, with respect to
any covered employee for any taxable year, the
aggregate amount allowable as a deduction under
this chapter for such taxable year (determined
without regard to this subsection) for
remuneration for services performed by such
employee (whether or not during the taxable
year).
(B) Exception for existing binding
contracts.--The term ``applicable employee
remuneration'' shall not include any
remuneration payable under a written binding
contract which was in effect on February 17,
1993, and which was not modified thereafter in
any material respect before such remuneration
is paid.
(C) Remuneration.--For purposes of this
paragraph, the term ``remuneration'' includes
any remuneration (including benefits) in any
medium other than cash, but shall not include--
(i) any payment referred to in so
much of section 3121(a)(5) as precedes
subparagraph (E) thereof, and
(ii) any benefit provided to or on
behalf of an employee if at the time
such benefit is provided it is
reasonable to believe that the employee
will be able to exclude such benefit
from gross income under this chapter.
For purposes of clause (i), section 3121(a)(5)
shall be applied without regard to section
3121(v)(1).
(D) Coordination with disallowed golden
parachute payments.--The dollar limitation
contained in paragraph (1) shall be reduced
(but not below zero) by the amount (if any)
which would have been included in the
applicable employee remuneration of the covered
employee for the taxable year but for being
disallowed under section 280G.
(E) Coordination with excise tax on specified
stock compensation.--The dollar limitation
contained in paragraph (1) with respect to any
covered employee shall be reduced (but not
below zero) by the amount of any payment (with
respect to such employee) of the tax imposed by
section 4985 directly or indirectly by the
expatriated corporation (as defined in such
section) or by any member of the expanded
affiliated group (as defined in such section)
which includes such corporation.
(F) Special rule for remuneration paid to
beneficiaries, etc..--Remuneration shall not
fail to be applicable employee remuneration
merely because it is includible in the income
of, or paid to, a person other than the covered
employee, including after the death of the
covered employee.
(5) Special rule for application to employers
participating in the Troubled Assets Relief Program.--
(A) In general.--In the case of an applicable
employer, no deduction shall be allowed under
this chapter--
(i) in the case of executive
remuneration for any applicable taxable
year which is attributable to services
performed by a covered executive during
such applicable taxable year, to the
extent that the amount of such
remuneration exceeds $500,000, or
(ii) in the case of deferred
deduction executive remuneration for
any taxable year for services performed
during any applicable taxable year by a
covered executive, to the extent that
the amount of such remuneration exceeds
$500,000 reduced (but not below zero)
by the sum of--
(I) the executive
remuneration for such
applicable taxable year, plus
(II) the portion of the
deferred deduction executive
remuneration for such services
which was taken into account
under this clause in a
preceding taxable year.
(B) Applicable employer.--For purposes of
this paragraph--
(i) In general.--Except as provided
in clause (ii), the term ``applicable
employer'' means any employer from whom
1 or more troubled assets are acquired
under a program established by the
Secretary under section 101(a) of the
Emergency Economic Stabilization Act of
2008 if the aggregate amount of the
assets so acquired for all taxable
years exceeds $300,000,000.
(ii) Disregard of certain assets sold
through direct purchase.--If the only
sales of troubled assets by an employer
under the program described in clause
(i) are through 1 or more direct
purchases (within the meaning of
section 113(c) of the Emergency
Economic Stabilization Act of 2008),
such assets shall not be taken into
account under clause (i) in determining
whether the employer is an applicable
employer for purposes of this
paragraph.
(iii) Aggregation rules.--Two or more
persons who are treated as a single
employer under subsection (b) or (c) of
section 414 shall be treated as a
single employer, except that in
applying section 1563(a) for purposes
of either such subsection, paragraphs
(2) and (3) thereof shall be
disregarded.
(C) Applicable taxable year.--For purposes of
this paragraph, the term ``applicable taxable
year'' means, with respect to any employer--
(i) the first taxable year of the
employer--
(I) which includes any
portion of the period during
which the authorities under
section 101(a) of the Emergency
Economic Stabilization Act of
2008 are in effect (determined
under section 120 thereof), and
(II) in which the aggregate
amount of troubled assets
acquired from the employer
during the taxable year
pursuant to such authorities
(other than assets to which
subparagraph (B)(ii) applies),
when added to the aggregate
amount so acquired for all
preceding taxable years,
exceeds $300,000,000, and
(ii) any subsequent taxable year
which includes any portion of such
period.
(D) Covered executive.--For purposes of this
paragraph--
(i) In general.--The term ``covered
executive'' means, with respect to any
applicable taxable year, any employee--
(I) who, at any time during
the portion of the taxable year
during which the authorities
under section 101(a) of the
Emergency Economic
Stabilization Act of 2008 are
in effect (determined under
section 120 thereof), is the
chief executive officer of the
applicable employer or the
chief financial officer of the
applicable employer, or an
individual acting in either
such capacity, or
(II) who is described in
clause (ii).
(ii) Highest compensated employees.--
An employee is described in this clause
if the employee is 1 of the 3 highest
compensated officers of the applicable
employer for the taxable year (other
than an individual described in clause
(i)(I)), determined--
(I) on the basis of the
shareholder disclosure rules
for compensation under the
Securities Exchange Act of 1934
(without regard to whether
those rules apply to the
employer), and
(II) by only taking into
account employees employed
during the portion of the
taxable year described in
clause (i)(I).
(iii) Employee remains covered
executive.--If an employee is a covered
executive with respect to an applicable
employer for any applicable taxable
year, such employee shall be treated as
a covered executive with respect to
such employer for all subsequent
applicable taxable years and for all
subsequent taxable years in which
deferred deduction executive
remuneration with respect to services
performed in all such applicable
taxable years would (but for this
paragraph) be deductible.
(E) Executive remuneration.--For purposes of
this paragraph, the term ``executive
remuneration'' means the applicable employee
remuneration of the covered executive, as
determined under paragraph (4) without regard
to subparagraph (B) thereof. Such term shall
not include any deferred deduction executive
remuneration with respect to services performed
in a prior applicable taxable year.
(F) Deferred deduction executive
remuneration.--For purposes of this paragraph,
the term ``deferred deduction executive
remuneration'' means remuneration which would
be executive remuneration for services
performed in an applicable taxable year but for
the fact that the deduction under this chapter
(determined without regard to this paragraph)
for such remuneration is allowable in a
subsequent taxable year.
(G) Coordination.--Rules similar to the rules
of subparagraphs (D) and (E) of paragraph (4)
shall apply for purposes of this paragraph.
(H) Regulatory authority.--The Secretary may
prescribe such guidance, rules, or regulations
as are necessary to carry out the purposes of
this paragraph and the Emergency Economic
Stabilization Act of 2008, including the extent
to which this paragraph applies in the case of
any acquisition, merger, or reorganization of
an applicable employer.
(6) Special rule for application to certain health
insurance providers.--
(A) In general.--No deduction shall be
allowed under this chapter--
(i) in the case of applicable
individual remuneration which is for
any disqualified taxable year beginning
after December 31, 2012, and which is
attributable to services performed by
an applicable individual during such
taxable year, to the extent that the
amount of such remuneration exceeds
$500,000, or
(ii) in the case of deferred
deduction remuneration for any taxable
year beginning after December 31, 2012,
which is attributable to services
performed by an applicable individual
during any disqualified taxable year
beginning after December 31, 2009, to
the extent that the amount of such
remuneration exceeds $500,000 reduced
(but not below zero) by the sum of--
(I) the applicable individual
remuneration for such
disqualified taxable year, plus
(II) the portion of the
deferred deduction remuneration
for such services which was
taken into account under this
clause in a preceding taxable
year (or which would have been
taken into account under this
clause in a preceding taxable
year if this clause were
applied by substituting
`December 31, 2009' for
`December 31, 2012' in the
matter preceding subclause
(I)).
(B) Disqualified taxable year.--For purposes
of this paragraph, the term ``disqualified
taxable year'' means, with respect to any
employer, any taxable year for which such
employer is a covered health insurance
provider.
(C) Covered health insurance provider.--For
purposes of this paragraph--
(i) In general.--The term ``covered
health insurance provider'' means--
(I) with respect to taxable
years beginning after December
31, 2009, and before January 1,
2013, any employer which is a
health insurance issuer (as
defined in section 9832(b)(2))
and which receives premiums
from providing health insurance
coverage (as defined in section
9832(b)(1)), and
(II) with respect to taxable
years beginning after December
31, 2012, any employer which is
a health insurance issuer (as
defined in section 9832(b)(2))
and with respect to which not
less than 25 percent of the
gross premiums received from
providing health insurance
coverage (as defined in section
9832(b)(1)) is from minimum
essential coverage (as defined
in section 5000A(f)).
(ii) Aggregation rules.--Two or more
persons who are treated as a single
employer under subsection (b), (c),
(m), or (o) of section 414 shall be
treated as a single employer, except
that in applying section 1563(a) for
purposes of any such subsection,
paragraphs (2) and (3) thereof shall be
disregarded.
(D) Applicable individual remuneration.--For
purposes of this paragraph, the term
``applicable individual remuneration'' means,
with respect to any applicable individual for
any disqualified taxable year, the aggregate
amount allowable as a deduction under this
chapter for such taxable year (determined
without regard to this subsection) for
remuneration (as defined in paragraph (4)
without regard to subparagraph (B) thereof) for
services performed by such individual (whether
or not during the taxable year). Such term
shall not include any deferred deduction
remuneration with respect to services performed
during the disqualified taxable year.
(E) Deferred deduction remuneration.--For
purposes of this paragraph, the term ``deferred
deduction remuneration'' means remuneration
which would be applicable individual
remuneration for services performed in a
disqualified taxable year but for the fact that
the deduction under this chapter (determined
without regard to this paragraph) for such
remuneration is allowable in a subsequent
taxable year.
(F) Applicable individual.--For purposes of
this paragraph, the term ``applicable
individual'' means, with respect to any covered
health insurance provider for any disqualified
taxable year, any individual--
(i) who is an officer, director, or
employee in such taxable year, or
(ii) who provides services for or on
behalf of such covered health insurance
provider during such taxable year.
(G) Coordination.--Rules similar to the rules
of subparagraphs (D) and (E) of paragraph (4)
shall apply for purposes of this paragraph.
(H) Regulatory authority.--The Secretary may
prescribe such guidance, rules, or regulations
as are necessary to carry out the purposes of
this paragraph.
(n) Special rule for certain group health plans.--
(1) In general.--No deduction shall be allowed under
this chapter to an employer for any amount paid or
incurred in connection with a group health plan if the
plan does not reimburse for inpatient hospital care
services provided in the State of New York--
(A) except as provided in subparagraphs (B)
and (C), at the same rate as licensed
commercial insurers are required to reimburse
hospitals for such services when such
reimbursement is not through such a plan,
(B) in the case of any reimbursement through
a health maintenance organization, at the same
rate as health maintenance organizations are
required to reimburse hospitals for such
services for individuals not covered by such a
plan (determined without regard to any
government-supported individuals exempt from
such rate), or
(C) in the case of any reimbursement through
any corporation organized under Article 43 of
the New York State Insurance Law, at the same
rate as any such corporation is required to
reimburse hospitals for such services for
individuals not covered by such a plan.
(2) State law exception.--Paragraph (1) shall not
apply to any group health plan which is not required
under the laws of the State of New York (determined
without regard to this subsection or other provisions
of Federal law) to reimburse at the rates provided in
paragraph (1).
(3) Group health plan.--For purposes of this
subsection, the term ``group health plan'' means a plan
of, or contributed to by, an employer or employee
organization (including a self-insured plan) to provide
health care (directly or otherwise) to any employee,
any former employee, the employer, or any other
individual associated or formerly associated with the
employer in a business relationship, or any member of
their family.
(o) Treatment of certain expenses of rural mail carriers.--
(1) General rule.--In the case of any employee of the
United States Postal Service who performs services
involving the collection and delivery of mail on a
rural route and who receives qualified reimbursements
for the expenses incurred by such employee for the use
of a vehicle in performing such services--
(A) the amount allowable as a deduction under
this chapter for the use of a vehicle in
performing such services shall be equal to the
amount of such qualified reimbursements; and
(B) such qualified reimbursements shall be
treated as paid under a reimbursement or other
expense allowance arrangement for purposes of
section 62(a)(2)(A) (and section 62(c) shall
not apply to such qualified reimbursements).
(2) Special rule where expenses exceed
reimbursements.--Notwithstanding paragraph (1)(A), if
the expenses incurred by an employee for the use of a
vehicle in performing services described in paragraph
(1) exceed the qualified reimbursements for such
expenses, such excess shall be taken into account in
computing the miscellaneous itemized deductions of the
employee under section 67.
(3) Definition of qualified reimbursements.--For
purposes of this subsection, the term ``qualified
reimbursements'' means the amounts paid by the United
States Postal Service to employees as an equipment
maintenance allowance under the 1991 collective
bargaining agreement between the United States Postal
Service and the National Rural Letter Carriers'
Association. Amounts paid as an equipment maintenance
allowance by such Postal Service under later collective
bargaining agreements that supersede the 1991 agreement
shall be considered qualified reimbursements if such
amounts do not exceed the amounts that would have been
paid under the 1991 agreement, adjusted by increasing
any such amount under the 1991 agreement by an amount
equal to--
(A) such amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
``calendar year 1990'' for ``calendar year
2016'' in subparagraph (A)(ii) thereof.
(p) Treatment of expenses of members of reserve component of
Armed Forces of the United States.--For purposes of subsection
(a)(2), in the case of an individual who performs services as a
member of a reserve component of the Armed Forces of the United
States at any time during the taxable year, such individual
shall be deemed to be away from home in the pursuit of a trade
or business for any period during which such individual is away
from home in connection with such service.
(q) Payments related to sexual harassment and sexual abuse.--
No deduction shall be allowed under this chapter for--
(1) any settlement or payment related to sexual
harassment or sexual abuse if such settlement or
payment is subject to a nondisclosure agreement, or
(2) attorney's fees related to such a settlement or
payment.
(r) Disallowance of FDIC premiums paid by certain large
financial institutions.--
(1) In general.--No deduction shall be allowed for
the applicable percentage of any FDIC premium paid or
incurred by the taxpayer.
(2) Exception for small institutions.--Paragraph (1)
shall not apply to any taxpayer for any taxable year if
the total consolidated assets of such taxpayer
(determined as of the close of such taxable year) do
not exceed $10,000,000,000.
(3) Applicable percentage.--For purposes of this
subsection, the term ``applicable percentage'' means,
with respect to any taxpayer for any taxable year, the
ratio (expressed as a percentage but not greater than
100 percent) which--
(A) the excess of--
(i) the total consolidated assets of
such taxpayer (determined as of the
close of such taxable year), over
(ii) $10,000,000,000, bears to (B)
$40,000,000,000.
(4) FDIC premiums.--For purposes of this subsection,
the term ``FDIC premium'' means any assessment imposed
under section 7(b) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)).
(5) Total consolidated assets.--For purposes of this
subsection, the term ``total consolidated assets'' has
the meaning given such term under section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection
Act (12 U.S.C. 5365).
(6) Aggregation rule.--
(A) In general.--Members of an expanded
affiliated group shall be treated as a single
taxpayer for purposes of applying this
subsection.
(B) Expanded affiliated group.--
(i) In general.--For purposes of this
paragraph, the term ``expanded
affiliated group'' means an affiliated
group as defined in section 1504(a),
determined--
(I) by substituting ``more
than 50 percent'' for ``at
least 80 percent'' each place
it appears, and
(II) without regard to
paragraphs (2) and (3) of
section 1504(b).
(ii) Control of non-corporate
entities.--A partnership or any other
entity (other than a corporation) shall
be treated as a member of an expanded
affiliated group if such entity is
controlled (within the meaning of
section 954(d)(3)) by members of such
group (including any entity treated as
a member of such group by reason of
this clause).
(s) Cross reference.--
(1) For special rule relating to expenses in
connection with subdividing real property for sale, see
section 1237.
(2) For special rule relating to the treatment of
payments by a transferee of a franchise, trademark, or
trade name, see section 1253.
(3) For special rules relating to--
(A) funded welfare benefit plans, see section
419, and
(B) deferred compensation and other deferred
benefits, see section 404.
SEC. 163. INTEREST.
(a) General rule.--There shall be allowed as a deduction all
interest paid or accrued within the taxable year on
indebtedness.
(b) Installment purchases where interest charge is not
separately stated.--
(1) General rule.--If personal property or
educational services are purchased under a contract--
(A) which provides that payment of part or
all of the purchase price is to be made in
installments, and
(B) in which carrying charges are separately
stated but the interest charge cannot be
ascertained,
then the payments made during the taxable year under
the contract shall be treated for purposes of this
section as if they included interest equal to 6 percent
of the average unpaid balance under the contract during
the taxable year. For purposes of the preceding
sentence, the average unpaid balance is the sum of the
unpaid balance outstanding on the first day of each
month beginning during the taxable year, divided by 12.
For purposes of this paragraph, the term ``educational
services'' means any service (including lodging) which
is purchased from an educational organization described
in section 170(b)(1)(A)(ii) and which is provided for a
student of such organization.
(2) Limitation.--In the case of any contract to which
paragraph (1) applies, the amount treated as interest
for any taxable year shall not exceed the aggregate
carrying charges which are properly attributable to
such taxable year.
(c) Redeemable ground rents.--For purposes of this subtitle,
any annual or periodic rental under a redeemable ground rent
(excluding amounts in redemption thereof) shall be treated as
interest on an indebtedness secured by a mortgage.
(d) Limitation on investment interest.--
(1) In general.--In the case of a taxpayer other than
a corporation, the amount allowed as a deduction under
this chapter for investment interest for any taxable
year shall not exceed the net investment income of the
taxpayer for the taxable year.
(2) Carryforward of disallowed interest.--The amount
not allowed as a deduction for any taxable year by
reason of paragraph (1) shall be treated as investment
interest paid or accrued by the taxpayer in the
succeeding taxable year.
(3) Investment interest.--For purposes of this
subsection--
(A) In general.--The term ``investment
interest'' means any interest allowable as a
deduction under this chapter (determined
without regard to paragraph (1)) which is paid
or accrued on indebtedness properly allocable
to property held for investment.
(B) Exceptions.--The term ``investment
interest'' shall not include--
(i) any qualified residence interest
(as defined in subsection (h)(3)), or
(ii) any interest which is taken into
account under section 469 in computing
income or loss from a passive activity
of the taxpayer.
(C) Personal property used in short sale.--
For purposes of this paragraph, the term
``interest'' includes any amount allowable as a
deduction in connection with personal property
used in a short sale.
(4) Net investment income.--For purposes of this
subsection--
(A) In general.--The term ``net investment
income'' means the excess of--
(i) investment income, over
(ii) investment expenses.
(B) Investment income.--The term ``investment
income'' means the sum of--
(i) gross income from property held
for investment (other than any gain
taken into account under clause
(ii)(I)),
(ii) the excess (if any) of--
(I) the net gain attributable
to the disposition of property
held for investment, over
(II) the net capital gain
determined by only taking into
account gains and losses from
dispositions of property held
for investment, plus (iii) so
much of the net capital gain
referred to in clause (ii)(II)
(or, if lesser, the net gain
referred to in clause (ii)(I))
as the taxpayer elects to take
into account under this clause.
Such term shall include qualified dividend
income (as defined in section 1(h)(11)(B)) only
to the extent the taxpayer elects to treat such
income as investment income for purposes of
this subsection.
(C) Investment expenses.--The term
``investment expenses'' means the deductions
allowed under this chapter (other than for
interest) which are directly connected with the
production of investment income.
(D) Income and expenses from passive
activities.--Investment income and investment
expenses shall not include any income or
expenses taken into account under section 469
in computing income or loss from a passive
activity.
(5) Property held for investment.--For purposes of
this subsection--
(A) In general.--The term ``property held for
investment'' shall include--
(i) any property which produces
income of a type described in section
469(e)(1), and
(ii) any interest held by a taxpayer
in an activity involving the conduct of
a trade or business--
(I) which is not a passive
activity, and
(II) with respect to which
the taxpayer does not
materially participate.
(B) Investment expenses.--In the case of
property described in subparagraph (A)(i),
expenses shall be allocated to such property in
the same manner as under section 469.
(C) Terms.--For purposes of this paragraph,
the terms ``activity'', ``passive activity'',
and ``materially participate'' have the
meanings given such terms by section 469.
(e) Original issue discount.--
(1) In general.--The portion of the original issue
discount with respect to any debt instrument which is
allowable as a deduction to the issuer for any taxable
year shall be equal to the aggregate daily portions of
the original issue discount for days during such
taxable year.
(2) Definitions and special rules.--For purposes of
this subsection--
(A) Debt instrument.--The term ``debt
instrument'' has the meaning given such term by
section 1275(a)(1).
(B) Daily portions.--The daily portion of the
original issue discount for any day shall be
determined under section 1272(a) (without
regard to paragraph (7) thereof and without
regard to section 1273(a)(3)).
(C) Short-term obligations.--In the case of
an obligor of a short-term obligation (as
defined in section 1283(a)(1)(A)) who uses the
cash receipts and disbursements method of
accounting, the original issue discount (and
any other interest payable) on such obligation
shall be deductible only when paid.
(3) Special rule for original issue discount on
obligation held by related foreign person.--
(A) In general.--If any debt instrument
having original issue discount is held by a
related foreign person, any portion of such
original issue discount shall not be allowable
as a deduction to the issuer until paid. The
preceding sentence shall not apply to the
extent that the original issue discount is
effectively connected with the conduct by such
foreign related person of a trade or business
within the United States unless such original
issue discount is exempt from taxation (or is
subject to a reduced rate of tax) pursuant to a
treaty obligation of the United States.
(B) Special rule for certain foreign
entities.--
(i) In general.--In the case of any
debt instrument having original issue
discount which is held by a related
foreign person which is a controlled
foreign corporation (as defined in
section 957) or a passive foreign
investment company (as defined in
section 1297), a deduction shall be
allowable to the issuer with respect to
such original issue discount for any
taxable year before the taxable year in
which paid only to the extent such
original issue discount is includible
(determined without regard to properly
allocable deductions and qualified
deficits under section 952(c)(1)(B))
during such prior taxable year in the
gross income of a United States person
who owns (within the meaning of section
958(a)) stock in such corporation.
(ii) Secretarial authority.--The
Secretary may by regulation exempt
transactions from the application of
clause (i), including any transaction
which is entered into by a payor in the
ordinary course of a trade or business
in which the payor is predominantly
engaged.
(C) Related foreign person.--For purposes of
subparagraph (A), the term ``related foreign
person'' means any person--
(i) who is not a United States
person, and
(ii) who is related (within the
meaning of section 267(b)) to the
issuer.
(4) Exception.--This subsection shall not apply to
any debt instrument described in section 1272(a)(2)(D)
(relating to loans between natural persons).
(5) Special rules for original issue discount on
certain high yield obligations.--
(A) In general.--In the case of an applicable
high yield discount obligation issued by a
corporation--
(i) no deduction shall be allowed
under this chapter for the disqualified
portion of the original issue discount
on such obligation, and
(ii) the remainder of such original
issue discount shall not be allowable
as a deduction until paid.
For purposes of this paragraph, rules similar
to the rules of subsection (i)(3)(B) shall
apply in determining the amount of the original
issue discount and when the original issue
discount is paid.
(B) Disqualified portion treated as stock
distribution for purposes of dividend received
deduction.--
(i) In general.--Solely for purposes
of sections 243, 245, 246, and 246A,
the dividend equivalent portion of any
amount includible in gross income of a
corporation under section 1272(a) in
respect of an applicable high yield
discount obligation shall be treated as
a dividend received by such corporation
from the corporation issuing such
obligation.
(ii) Dividend equivalent portion.--
For purposes of clause (i), the
dividend equivalent portion of any
amount includible in gross income under
section 1272(a) in respect of an
applicable high yield discount
obligation is the portion of the amount
so includible--
(I) which is attributable to
the disqualified portion of the
original issue discount on such
obligation, and
(II) which would have been
treated as a dividend if it had
been a distribution made by the
issuing corporation with
respect to stock in such
corporation.
(C) Disqualified portion.--
(i) In general.--For purposes of this
paragraph, the disqualified portion of
the original issue discount on any
applicable high yield discount
obligation is the lesser of--
(I) the amount of such
original issue discount, or
(II) the portion of the total
return on such obligation which
bears the same ratio to such
total return as the
disqualified yield on such
obligation bears to the yield
to maturity on such obligation.
(ii) Definitions.--For purposes of
clause (i), the term ``disqualified
yield'' means the excess of the yield
to maturity on the obligation over the
sum referred to in subsection (i)(1)(B)
plus 1 percentage point, and the term
``total return'' is the amount which
would have been the original issue
discount on the obligation if interest
described in the parenthetical in
section 1273(a)(2) were included in the
stated redemption price at maturity.
(D) Exception for S corporations.--This
paragraph shall not apply to any obligation
issued by any corporation for any period for
which such corporation is an S corporation.
(E) Effect on earnings and profits.--This
paragraph shall not apply for purposes of
determining earnings and profits; except that,
for purposes of determining the dividend
equivalent portion of any amount includible in
gross income under section 1272(a) in respect
of an applicable high yield discount
obligation, no reduction shall be made for any
amount attributable to the disqualified portion
of any original issue discount on such
obligation.
(F) Suspension of application of paragraph.--
(i) Temporary suspension.--This
paragraph shall not apply to any
applicable high yield discount
obligation issued during the period
beginning on September 1, 2008, and
ending on December 31, 2009, in
exchange (including an exchange
resulting from a modification of the
debt instrument) for an obligation
which is not an applicable high yield
discount obligation and the issuer (or
obligor) of which is the same as the
issuer (or obligor) of such applicable
high yield discount obligation. The
preceding sentence shall not apply to
any obligation the interest on which is
interest described in section 871(h)(4)
(without regard to subparagraph (D)
thereof) or to any obligation issued to
a related person (within the meaning of
section 108(e)(4)).
(ii) Successive application.--Any
obligation to which clause (i) applies
shall not be treated as an applicable
high yield discount obligation for
purposes of applying this subparagraph
to any other obligation issued in
exchange for such obligation.
(iii) Secretarial authority to
suspend application.--The Secretary may
apply this paragraph with respect to
debt instruments issued in periods
following the period described in
clause (i) if the Secretary determines
that such application is appropriate in
light of distressed conditions in the
debt capital markets.
(G) Cross reference.--For definition of
applicable high yield discount obligation, see
subsection (i).
(6) Cross references For provision relating to
deduction of original issue.--discount on tax-exempt
obligation, see section 1288.
For special rules in the case of the borrower
under certain loans for personal use, see
section 1275(b).
(f) Denial of deduction for interest on certain obligations
not in registered form.--
(1) In general.--Nothing in subsection (a) or in any
other provision of law shall be construed to provide a
deduction for interest on any registration-required
obligation unless such obligation is in registered
form.
(2) Registration-required obligation.--For purposes
of this section--
(A) In general.--The term ``registration-
required obligation'' means any obligation
(including any obligation issued by a
governmental entity) other than an obligation
which--
(i) is issued by a natural person,
(ii) is not of a type offered to the
public, or
(iii) has a maturity (at issue) of
not more than 1 year.
(B) Authority to include other obligations.--
Clauses (ii) and (iii) of subparagraph (A)
shall not apply to any obligation if--
(i) such obligation is of a type
which the Secretary has determined by
regulations to be used frequently in
avoiding Federal taxes, and
(ii) such obligation is issued after
the date on which the regulations
referred to in clause (i) take effect.
(3) Book entries permitted, etc..--For purposes of
this subsection, rules similar to the rules of section
149(a)(3) shall apply, except that a dematerialized
book entry system or other book entry system specified
by the Secretary shall be treated as a book entry
system described in such section.
(g) Reduction of deduction where section 25 credit taken.--
The amount of the deduction under this section for interest
paid or accrued during any taxable year on indebtedness with
respect to which a mortgage credit certificate has been issued
under section 25 shall be reduced by the amount of the credit
allowable with respect to such interest under section 25
(determined without regard to section 26).
(h) Disallowance of deduction for personal interest.--
(1) In general.--In the case of a taxpayer other than
a corporation, no deduction shall be allowed under this
chapter for personal interest paid or accrued during
the taxable year.
(2) Personal interest.--For purposes of this
subsection, the term ``personal interest'' means any
interest allowable as a deduction under this chapter
other than--
(A) interest paid or accrued on indebtedness
properly allocable to a trade or business
(other than the trade or business of performing
services as an employee),
(B) any investment interest (within the
meaning of subsection (d)),
(C) any interest which is taken into account
under section 469 in computing income or loss
from a passive activity of the taxpayer,
(D) any qualified residence interest (within
the meaning of paragraph (3)),
(E) any interest payable under section 6601
on any unpaid portion of the tax imposed by
section 2001 for the period during which an
extension of time for payment of such tax is in
effect under section 6163, and
(F) any interest allowable as a deduction
under section 221 (relating to interest on
educational loans).
(3) Qualified residence interest.--For purposes of
this subsection--
(A) In general.--The term ``qualified
residence interest'' means any interest which
is paid or accrued [during the taxable year
on--]
[(i) acquisition indebtedness with
respect to any qualified residence of
the taxpayer, or
[(ii)] [home equity indebtedness with
respect to any qualified residence of
the taxpayer.] during the taxable year
on acquisition indebtedness with
respect to any qualified residence of
the taxpayer.
For purposes of the preceding sentence, the
determination of whether any property is a
qualified residence of the taxpayer shall be
made as of the time the interest is accrued.
(B) Acquisition indebtedness.--
(i) In general.--The term
``acquisition indebtedness'' means any
indebtedness which--
(I) is incurred in acquiring,
constructing, or substantially
improving any qualified
residence of the taxpayer, and
(II) is secured by such
residence.
Such term also includes any
indebtedness secured by such residence
resulting from the refinancing of
indebtedness meeting the requirements
of the preceding sentence (or this
sentence); but only to the extent the
amount of the indebtedness resulting
from such refinancing does not exceed
the amount of the refinanced
indebtedness.
[(ii) $1,000,000 limitation.--The
aggregate amount treated as acquisition
indebtedness for any period shall not
exceed $1,000,000 ($500,000 in the case
of a married individual filing a
separate return).]
(ii) Limitation.--The aggregate
amount treated as acquisition
indebtedness for any period shall not
exceed the excess (if any) of--
(I) $750,00 ($375,000, in the
case of a married individual
filing a separate return), over
(II) the sum of the aggregate
outstanding pre-October 13,
1987, indebtedness (as defined
in subparagraph (D)) plus the
aggregate outstanding pre-
December 15, 2017, indebtedness
(as defined in subparagraph
(C)).
[(C) Home equity indebtedness.--
[(i) In general.--The term ``home
equity indebtedness'' means any
indebtedness (other than acquisition
indebtedness) secured by a qualified
residence to the extent the aggregate
amount of such indebtedness does not
exceed--
[(I) the fair market value of
such qualified residence,
reduced by
[(II) the amount of
acquisition indebtedness with
respect to such residence.
[(ii) Limitation.--The aggregate
amount treated as home equity
indebtedness for any period shall not
exceed $100,000 ($50,000 in the case of
a separate return by a married
individual).]
(C) Treatment of indebtedness incurred on or
before december 15, 2017.--
(i) In general.--In the case of any
pre-December 15, 2017, indebtedness,
subparagraph (B)(ii) shall not apply
and the aggregate amount of such
indebtedness treated as acquisition
indebtedness for any period shall not
exceed the excess (if any) of--
(I) $1,000,000 ($500,000, in
the case of a married
individual filing a separate
return), over
(II) the aggregate
outstanding pre-October 13,
1987, indebtedness (as defined
in subparagraph (D)).
(ii) Pre-december 15, 2017,
indebtedness.--For purposes of this
subparagraph--
(I) In general.--The term
``pre-December 15, 2017,
indebtedness'' means
indebtedness (other than pre-
October 13, 1987, indebtedness)
incurred on or before December
15, 2017.
(II) Binding written contract
exception.--In the case of a
taxpayer who enters into a
written binding contract before
December 15, 2017, to close on
the purchase of a principal
residence before January 1,
2018, and who purchases such
residence before April 1, 2018,
the term ``pre-December 15,
2017, indebtedness'' shall
include indebtedness secured by
such residence.
(iii) Refinancing indebtedness.--
(I) In general.--In the case
of any indebtedness which is
incurred to refinance
indebtedness, such refinanced
indebtedness shall be treated
for purposes of this
subparagraph as incurred on the
date that the original
indebtedness was incurred to
the extent the amount of the
indebtedness resulting from
such refinancing does not
exceed the amount of the
refinanced indebtedness.
(II) Limitation on period of
refinancing.--Subclause (I)
shall not apply to any
indebtedness after the
expiration of the term of the
original indebtedness or, if
the principal of such original
indebtedness is not amortized
over its term, the expiration
of the term of the 1st
refinancing of such
indebtedness (or if earlier,
the date which is 30 years
after the date of such 1st
refinancing).
(D) Treatment of indebtedness incurred on or
before October 13, 1987.--
(i) In general.--In the case of any
pre-October 13, 1987, indebtedness--
(I) such indebtedness shall
be treated as acquisition
indebtedness, and
(II) the limitation of
subparagraph (B)(ii) shall not
apply.
[(ii) Reduction in $1,000,000
limitation.--The limitation of
subparagraph (B)(ii) shall be reduced
(but not below zero) by the aggregate
amount of outstanding pre-October 13,
1987, indebtedness.
[(iii)] (ii) Pre-October 13, 1987,
indebtedness.--The term ``pre-October
13, 1987, indebtedness'' means--
(I) any indebtedness which
was incurred on or before
October 13, 1987, and which was
secured by a qualified
residence on October 13, 1987,
and at all times thereafter
before the interest is paid or
accrued, or
(II) any indebtedness which
is secured by the qualified
residence and was incurred
after October 13, 1987, to
refinance indebtedness
described in subclause (I) (or
refinanced indebtedness meeting
the requirements of this
subclause) to the extent
(immediately after the
refinancing) the principal
amount of the indebtedness
resulting from the refinancing
does not exceed the principal
amount of the refinanced
indebtedness (immediately
before the refinancing).
[(iv)] (iii) Limitation on period of
refinancing.--Subclause (II) of [clause
(iii)] clause (ii) shall not apply to
any indebtedness after--
(I) the expiration of the
term of the indebtedness
described in [clause (iii)(I)]
clause (ii)(I), or
(II) if the principal of the
indebtedness described in
[clause (iii)(I)] clause
(ii)(I) is not amortized over
its term, the expiration of the
term of the 1st refinancing of
such indebtedness (or if
earlier, the date which is 30
years after the date of such
1st refinancing).
(E) Mortgage insurance premiums treated as
interest.--
(i) In general.--Premiums paid or
accrued for qualified mortgage
insurance by a taxpayer during the
taxable year in connection with
acquisition indebtedness with respect
to a qualified residence of the
taxpayer shall be treated for purposes
of this section as interest which is
qualified residence interest.
(ii) Phaseout.--The amount otherwise
treated as interest under clause (i)
shall be reduced (but not below zero)
by 10 percent of such amount for each
$1,000 ($500 in the case of a married
individual filing a separate return)
(or fraction thereof) that the
taxpayer's adjusted gross income for
the taxable year exceeds $100,000
($50,000 in the case of a married
individual filing a separate return).
(iii) Limitation.--Clause (i) shall
not apply with respect to any mortgage
insurance contracts issued before
January 1, 2007.
(iv) Termination.--Clause (i) shall
not apply to amounts--
(I) paid or accrued after
December 31, 2017, or
(II) properly allocable to
any period after such date.
[(F) Special rules for taxable years 2018
through 2025.--
[(i) In general.--In the case of
taxable years beginning after December
31, 2017, and before January 1, 2026--
[(I) Disallowance of home
equity indebtedness interest.--
Subparagraph (A)(ii) shall not
apply.
[(II) Limitation on
acquisition indebtedness.--
Subparagraph (B)(ii) shall be
applied by substituting
``$750,000 ($375,000'' for
``$1,000,000 ($500,000''.
[(III) Treatment of
indebtedness incurred on or
before December 15,
2017Subclause (II) shall not
apply to any indebtedness
incurred on or before December
15, 2017, and, in applying such
subclause to any indebtedness
incurred after such date, the
limitation under such subclause
shall be reduced (but not below
zero) by the amount of any
indebtedness incurred on or
before December 15, 2017, which
is treated as acquisition
indebtedness for purposes of
this subsection for the taxable
year.
[(IV) Binding contract
exception.--In the case of a
taxpayer who enters into a
written binding contract before
December 15, 2017, to close on
the purchase of a principal
residence before January 1,
2018, and who purchases such
residence before April 1, 2018,
subclause (III) shall be
applied by substituting ``April
1, 2018'' for ``December 15,
2017''.
[(ii) Treatment of limitation in
taxable years after December 31,
2025.--In the case of taxable years
beginning after December 31, 2025, the
limitation under subparagraph (B)(ii)
shall be applied to the aggregate
amount of indebtedness of the taxpayer
described in subparagraph (B)(i)
without regard to the taxable year in
which the indebtedness was incurred.
[(iii) Treatment of refinancings of
indebtedness.--
[(I) In general.--In the case
of any indebtedness which is
incurred to refinance
indebtedness, such refinanced
indebtedness shall be treated
for purposes of clause (i)(III)
as incurred on the date that
the original indebtedness was
incurred to the extent the
amount of the indebtedness
resulting from such refinancing
does not exceed the amount of
the refinanced indebtedness.
[(II) Limitation on period of
refinancing.--Subclause (I)
shall not apply to any
indebtedness after the
expiration of the term of the
original indebtedness or, if
the principal of such original
indebtedness is not amortized
over its term, the expiration
of the term of the 1st
refinancing of such
indebtedness (or if earlier,
the date which is 30 years
after the date of such 1st
refinancing).
[(iv) Coordination with exclusion of
income from discharge of
indebtedness.--Section 108(h)(2) shall
be applied without regard to this
subparagraph.]
(4) Other definitions and special rules.--For
purposes of this subsection--
(A) Qualified residence.--
(i) In general.--The term ``qualified
residence'' means--
(I) the principal residence
(within the meaning of section
121) of the taxpayer, and
(II) 1 other residence of the
taxpayer which is selected by
the taxpayer for purposes of
this subsection for the taxable
year and which is used by the
taxpayer as a residence (within
the meaning of section
280A(d)(1)).
(ii) Married individuals filing
separate returns.--If a married couple
does not file a joint return for the
taxable year--
(I) such couple shall be
treated as 1 taxpayer for
purposes of clause (i), and
(II) each individual shall be
entitled to take into account 1
residence unless both
individuals consent in writing
to 1 individual taking into
account the principal residence
and 1 other residence.
(iii) Residence not rented.--For
purposes of clause (i)(II),
notwithstanding section 280A(d)(1), if
the taxpayer does not rent a dwelling
unit at any time during a taxable year,
such unit may be treated as a residence
for such taxable year.
(B) Special rule for cooperative housing
corporations.--Any indebtedness secured by
stock held by the taxpayer as a tenant-
stockholder (as defined in section 216) in a
cooperative housing corporation (as so defined)
shall be treated as secured by the house or
apartment which the taxpayer is entitled to
occupy as such a tenant-stockholder. If stock
described in the preceding sentence may not be
used to secure indebtedness, indebtedness shall
be treated as so secured if the taxpayer
establishes to the satisfaction of the
Secretary that such indebtedness was incurred
to acquire such stock.
(C) Unenforceable security interests.--
Indebtedness shall not fail to be treated as
secured by any property solely because, under
any applicable State or local homestead or
other debtor protection law in effect on August
16, 1986, the security interest is ineffective
or the enforceability of the security interest
is restricted.
(D) Special rules for estates and trusts.--
For purposes of determining whether any
interest paid or accrued by an estate or trust
is qualified residence interest, any residence
held by such estate or trust shall be treated
as a qualified residence of such estate or
trust if such estate or trust establishes that
such residence is a qualified residence of a
beneficiary who has a present interest in such
estate or trust or an interest in the residuary
of such estate or trust.
(E) Qualified mortgage insurance.--The term
``qualified mortgage insurance'' means--
(i) mortgage insurance provided by
the Department of Veterans Affairs, the
Federal Housing Administration, or the
Rural Housing Service, and
(ii) private mortgage insurance (as
defined by section 2 of the Homeowners
Protection Act of 1998 (12 U.S.C.
4901), as in effect on the date of the
enactment of this subparagraph).
(F) Special rules for prepaid qualified
mortgage insurance.--Any amount paid by the
taxpayer for qualified mortgage insurance that
is properly allocable to any mortgage the
payment of which extends to periods that are
after the close of the taxable year in which
such amount is paid shall be chargeable to
capital account and shall be treated as paid in
such periods to which so allocated. No
deduction shall be allowed for the unamortized
balance of such account if such mortgage is
satisfied before the end of its term. The
preceding sentences shall not apply to amounts
paid for qualified mortgage insurance provided
by the Department of Veterans Affairs or the
Rural Housing Service.
(i) Applicable high yield discount obligation.--
(1) In general.--For purposes of this section, the
term ``applicable high yield discount obligation''
means any debt instrument if--
(A) the maturity date of such instrument is
more than 5 years from the date of issue,
(B) the yield to maturity on such instrument
equals or exceeds the sum of--
(i) the applicable Federal rate in
effect under section 1274(d) for the
calendar month in which the obligation
is issued, plus
(ii) 5 percentage points, and (C)
such instrument has significant
original issue discount.
For purposes of subparagraph (B)(i), the Secretary may
by regulation (i) permit a rate to be used with respect
to any debt instrument which is higher than the
applicable Federal rate if the taxpayer establishes to
the satisfaction of the Secretary that such higher rate
is based on the same principles as the applicable
Federal rate and is appropriate for the term of the
instrument, or (ii) permit, on a temporary basis, a
rate to be used with respect to any debt instrument
which is higher than the applicable Federal rate if the
Secretary determines that such rate is appropriate in
light of distressed conditions in the debt capital
markets.
(2) Significant original issue discount.--For
purposes of paragraph (1)(C), a debt instrument shall
be treated as having significant original issue
discount if--
(A) the aggregate amount which would be
includible in gross income with respect to such
instrument for periods before the close of any
accrual period (as defined in section
1272(a)(5)) ending after the date 5 years after
the date of issue, exceeds--
(B) the sum of--
(i) the aggregate amount of interest
to be paid under the instrument before
the close of such accrual period, and
(ii) the product of the issue price
of such instrument (as defined in
sections 1273(b) and 1274(a)) and its
yield to maturity.
(3) Special rules.--For purposes of determining
whether a debt instrument is an applicable high yield
discount obligation--
(A) any payment under the instrument shall be
assumed to be made on the last day permitted
under the instrument, and
(B) any payment to be made in the form of
another obligation of the issuer (or a related
person within the meaning of section 453(f)(1))
shall be assumed to be made when such
obligation is required to be paid in cash or in
property other than such obligation.
Except for purposes of paragraph (1)(B), any reference
to an obligation in subparagraph (B) of this paragraph
shall be treated as including a reference to stock.
(4) Debt instrument.--For purposes of this
subsection, the term ``debt instrument'' means any
instrument which is a debt instrument as defined in
section 1275(a).
(5) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the
purposes of this subsection and subsection (e)(5),
including--
(A) regulations providing for modifications
to the provisions of this subsection and
subsection (e)(5) in the case of varying rates
of interest, put or call options, indefinite
maturities, contingent payments, assumptions of
debt instruments, conversion rights, or other
circumstances where such modifications are
appropriate to carry out the purposes of this
subsection and subsection (e)(5), and
(B) regulations to prevent avoidance of the
purposes of this subsection and subsection
(e)(5) through the use of issuers other than C
corporations, agreements to borrow amounts due
under the debt instrument, or other
arrangements.
(j) Limitation on business interest.--
(1) In general.--The amount allowed as a deduction
under this chapter for any taxable year for business
interest shall not exceed the sum of--
(A) the business interest income of such
taxpayer for such taxable year,
(B) 30 percent of the adjusted taxable income
of such taxpayer for such taxable year, plus
(C) the floor plan financing interest of such
taxpayer for such taxable year.
The amount determined under subparagraph (B) shall not
be less than zero.
(2) Carryforward of disallowed business interest.--
The amount of any business interest not allowed as a
deduction for any taxable year by reason of paragraph
(1) shall be treated as business interest paid or
accrued in the succeeding taxable year.
(3) Exemption for certain small businesses.--In the
case of any taxpayer (other than a tax shelter
prohibited from using the cash receipts and
disbursements method of accounting under section
448(a)(3)) which meets the gross receipts test of
section 448(c) for any taxable year, paragraph (1)
shall not apply to such taxpayer for such taxable year.
In the case of any taxpayer which is not a corporation
or a partnership, the gross receipts test of section
448(c) shall be applied in the same manner as if such
taxpayer were a corporation or partnership.
(4) Application to partnerships, etc.--
(A) In general.--In the case of any
partnership--
(i) this subsection shall be applied
at the partnership level and any
deduction for business interest shall
be taken into account in determining
the non- separately stated taxable
income or loss of the partnership, and
(ii) the adjusted taxable income of
each partner of such partnership--
(I) shall be determined
without regard to such
partner's distributive share of
any items of income, gain,
deduction, or loss of such
partnership, and
(II) shall be increased by
such partner's distributive
share of such partnership's
excess taxable income.
For purposes of clause (ii)(II), a partner's
distributive share of partnership excess
taxable income shall be determined in the same
manner as the partner's distributive share of
nonseparately stated taxable income or loss of
the partnership.
(B) Special rules for carryforwards.--
(i) In general.--The amount of any
business interest not allowed as a
deduction to a partnership for any
taxable year by reason of paragraph (1)
for any taxable year--
(I) shall not be treated
under paragraph (2) as business
interest paid or accrued by the
partnership in the succeeding
taxable year, and
(II) shall, subject to clause
(ii), be treated as excess
business interest which is
allocated to each partner in
the same manner as the non-
separately stated taxable
income or loss of the
partnership.
(ii) Treatment of excess business
interest allocated to partners.--If a
partner is allocated any excess
business interest from a partnership
under clause (i) for any taxable year--
(I) such excess business
interest shall be treated as
business interest paid or
accrued by the partner in the
next succeeding taxable year in
which the partner is allocated
excess taxable income from such
partnership, but only to the
extent of such excess taxable
income, and
(II) any portion of such
excess business interest
remaining after the application
of subclause (I) shall, subject
to the limitations of subclause
(I), be treated as business
interest paid or accrued in
succeeding taxable years.
For purposes of applying this
paragraph, excess taxable income
allocated to a partner from a
partnership for any taxable year shall
not be taken into account under
paragraph (1)(A) with respect to any
business interest other than excess
business interest from the partnership
until all such excess business interest
for such taxable year and all preceding
taxable years has been treated as paid
or accrued under clause (ii).
(iii) Basis adjustments.--
(I) In general.--The adjusted
basis of a partner in a
partnership interest shall be
reduced (but not below zero) by
the amount of excess business
interest allocated to the
partner under clause (i)(II).
(II) Special rule for
dispositions.--If a partner
disposes of a partnership
interest, the adjusted basis of
the partner in the partnership
interest shall be increased
immediately before the
disposition by the amount of
the excess (if any) of the
amount of the basis reduction
under subclause (I) over the
portion of any excess business
interest allocated to the
partner under clause (i)(II)
which has previously been
treated under clause (ii) as
business interest paid or
accrued by the partner. The
preceding sentence shall also
apply to transfers of the
partnership interest (including
by reason of death) in a
transaction in which gain is
not recognized in whole or in
part. No deduction shall be
allowed to the transferor or
transferee under this chapter
for any excess business
interest resulting in a basis
increase under this subclause.
(C) Excess taxable income.--The term ``excess
taxable income'' means, with respect to any
partnership, the amount which bears the same
ratio to the partnership's adjusted taxable
income as--
(i) the excess (if any) of--
(I) the amount determined for
the partnership under paragraph
(1)(B), over
(II) the amount (if any) by
which the business interest of
the partnership, reduced by the
floor plan financing interest,
exceeds the business interest
income of the partnership,
bears to
(ii) the amount determined for the
partnership under paragraph (1)(B).
(D) Application to s corporations.--Rules
similar to the rules of subparagraphs (A) and
(C) shall apply with respect to any S
corporation and its shareholders.
(5) Business interest.--For purposes of this
subsection, the term ``business interest'' means any
interest paid or accrued on indebtedness properly
allocable to a trade or business. Such term shall not
include investment interest (within the meaning of
subsection (d)).
(6) Business interest income.--For purposes of this
subsection, the term ``business interest income'' means
the amount of interest includible in the gross income
of the taxpayer for the taxable year which is properly
allocable to a trade or business. Such term shall not
include investment income (within the meaning of
subsection (d)).
(7) Trade or business.--For purposes of this
subsection--
(A) In general.--The term ``trade or
business'' shall not include--
(i) the trade or business of
performing services as an employee,
(ii) any electing real property trade
or business,
(iii) any electing farming business,
or
(iv) the trade or business of the
furnishing or sale of--
(I) electrical energy, water,
or sewage disposal services,
(II) gas or steam through a
local distribution system, or
(III) transportation of gas
or steam by pipeline, if the
rates for such furnishing or
sale, as the case may be, have
been established or approved by
a State or political
subdivision thereof, by any
agency or instrumentality of
the United States, by a public
service or public utility
commission or other similar
body of any State or political
subdivision thereof, or by the
governing or ratemaking body of
an electric cooperative.
(B) Electing real property trade or
business.--For purposes of this paragraph, the
term ``electing real property trade or
business'' means any trade or business which is
described in section 469(c)(7)(C) and which
makes an election under this subparagraph. Any
such election shall be made at such time and in
such manner as the Secretary shall prescribe,
and, once made, shall be irrevocable.
(C) Electing farming business.--For purposes
of this paragraph, the term ``electing farming
business'' means--
(i) a farming business (as defined in
section 263A(e)(4)) which makes an
election under this subparagraph, or
(ii) any trade or business of a
specified agricultural or horticultural
cooperative (as defined in section
199A(g)(2)) with respect to which the
cooperative makes an election under
this subparagraph.
Any such election shall be made at such time
and in such manner as the Secretary shall
prescribe, and, once made, shall be
irrevocable.
(8) Adjusted taxable income.--For purposes of this
subsection, the term ``adjusted taxable income'' means
the taxable income of the taxpayer--
(A) computed without regard to--
(i) any item of income, gain,
deduction, or loss which is not
properly allocable to a trade or
business,
(ii) any business interest or
business interest income,
(iii) the amount of any net operating
loss deduction under section 172,
(iv) the amount of any deduction
allowed under section 199A, and
(v) in the case of taxable years
beginning before January 1, 2022, any
deduction allowable for depreciation,
amortization, or depletion, and
(B) computed with such other adjustments as
provided by the Secretary.
(9) Floor plan financing interest defined.--For
purposes of this subsection--
(A) In general.--The term ``floor plan
financing interest'' means interest paid or
accrued on floor plan financing indebtedness.
(B) Floor plan financing indebtedness.--The
term ``floor plan financing indebtedness''
means indebtedness--
(i) used to finance the acquisition
of motor vehicles held for sale or
lease, and
(ii) secured by the inventory so
acquired.
(C) Motor vehicle.--The term ``motor
vehicle'' means a motor vehicle that is any of
the following:
(i) Any self-propelled vehicle
designed for transporting persons or
property on a public street, highway,
or road.
(ii) A boat.
(iii) Farm machinery or equipment.
(10) Cross references.--
(A) For requirement that an electing real
property trade or business use the alternative
depreciation system, see section 168(g)(1)(F).
(B) For requirement that an electing farming
business use the alternative depreciation
system, see section 168(g)(1)(G).
(k) Section 6166 interest.--No deduction shall be allowed
under this section for any interest payable under section 6601
on any unpaid portion of the tax imposed by section 2001 for
the period during which an extension of time for payment of
such tax is in effect under section 6166.
(l) Disallowance of deduction on certain debt instruments of
corporations.--
(1) In general.--No deduction shall be allowed under
this chapter for any interest paid or accrued on a
disqualified debt instrument.
(2) Disqualified debt instrument.--For purposes of
this subsection, the term ``disqualified debt
instrument'' means any indebtedness of a corporation
which is payable in equity of the issuer or a related
party or equity held by the issuer (or any related
party) in any other person.
(3) Special rules for amounts payable in equity.--For
purposes of paragraph (2), indebtedness shall be
treated as payable in equity of the issuer or any other
person only if--
(A) a substantial amount of the principal or
interest is required to be paid or converted,
or at the option of the issuer or a related
party is payable in, or convertible into, such
equity,
(B) a substantial amount of the principal or
interest is required to be determined, or at
the option of the issuer or a related party is
determined, by reference to the value of such
equity, or
(C) the indebtedness is part of an
arrangement which is reasonably expected to
result in a transaction described in
subparagraph (A) or (B).
For purposes of this paragraph, principal or interest
shall be treated as required to be so paid, converted,
or determined if it may be required at the option of
the holder or a related party and there is a
substantial certainty the option will be exercised.
(4) Capitalization allowed with respect to equity of
persons other than issuer and related parties.--If the
disqualified debt instrument of a corporation is
payable in equity held by the issuer (or any related
party) in any other person (other than a related
party), the basis of such equity shall be increased by
the amount not allowed as a deduction by reason of
paragraph (1) with respect to the instrument.
(5) Exception for certain instruments issued by
dealers in securities.--For purposes of this
subsection, the term ``disqualified debt instrument''
does not include indebtedness issued by a dealer in
securities (or a related party) which is payable in, or
by reference to, equity (other than equity of the
issuer or a related party) held by such dealer in its
capacity as a dealer in securities. For purposes of
this paragraph, the term ``dealer in securities'' has
the meaning given such term by section 475.
(6) Related party.--For purposes of this subsection,
a person is a related party with respect to another
person if such person bears a relationship to such
other person described in section 267(b) or 707(b).
(7) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection, including
regulations preventing avoidance of this subsection
through the use of an issuer other than a corporation.
(m) Interest on unpaid taxes attributable to nondisclosed
reportable transactions.--No deduction shall be allowed under
this chapter for any interest paid or accrued under section
6601 on any underpayment of tax which is attributable to the
portion of any reportable transaction understatement (as
defined in section 6662A(b)) with respect to which the
requirement of section 6664(d)(2)(A) is not met.
(n) Cross references.--
(1) For disallowance of certain amounts paid in
connection with insurance, endowment, or annuity
contracts, see section 264.
(2) For disallowance of deduction for interest
relating to tax-exempt income, see section 265(a)(2).
(3) For disallowance of deduction for carrying
charges chargeable to capital account, see section 266.
(4) For disallowance of interest with respect to
transactions between related taxpayers, see section
267.
(5) For treatment of redeemable ground rents and real
property held subject to liabilities under redeemable
ground rents, see section 1055.
SEC. 164. TAXES.
(a) General rule.--Except as otherwise provided in this
section, the following taxes shall be allowed as a deduction
for the taxable year within which paid or accrued:
(1) State and local, and foreign, real property
taxes.
(2) State and local personal property taxes.
(3) State and local, and foreign, income, war
profits, and excess profits taxes.
(4) The GST tax imposed on income distributions.
In addition, there shall be allowed as a deduction State and
local, and foreign, taxes not described in the preceding
sentence which are paid or accrued within the taxable year in
carrying on a trade or business or an activity described in
section 212 (relating to expenses for production of income).
Notwithstanding the preceding sentence, any tax (not described
in the first sentence of this subsection) which is paid or
accrued by the taxpayer in connection with an acquisition or
disposition of property shall be treated as part of the cost of
the acquired property or, in the case of a disposition, as a
reduction in the amount realized on the disposition.
(b) Definitions and special rules.--For purposes of this
section--
(1) Personal property taxes.--The term ``personal
property tax'' means an ad valorem tax which is imposed
on an annual basis in respect of personal property.
(2) State or local taxes.--A State or local tax
includes only a tax imposed by a State, a possession of
the United States, or a political subdivision of any of
the foregoing, or by the District of Columbia.
(3) Foreign taxes.--A foreign tax includes only a tax
imposed by the authority of a foreign country.
(4) Special rules for GST tax.--
(A) In general.--The GST tax imposed on
income distributions is--
(i) the tax imposed by section 2601,
and
(ii) any State tax described in
section 2604 (as in effect before its
repeal),
but only to the extent such tax is imposed on a
transfer which is included in the gross income
of the distributee and to which section 666
does not apply.
(B) Special rule for tax paid before due
date.--Any tax referred to in subparagraph (A)
imposed with respect to a transfer occurring
during the taxable year of the distributee (or,
in the case of a taxable termination, the
trust) which is paid not later than the time
prescribed by law (including extensions) for
filing the return with respect to such transfer
shall be treated as having been paid on the
last day of the taxable year in which the
transfer was made.
(5) General sales taxes.--For purposes of subsection
(a)--
(A) Election to deduct state and local sales
taxes in lieu of state and local income
taxes.--At the election of the taxpayer for the
taxable year, subsection (a) shall be applied--
(i) without regard to the reference
to State and local income taxes, and
(ii) as if State and local general
sales taxes were referred to in a
paragraph thereof.
(B) Definition of general sales tax.--The
term ``general sales tax'' means a tax imposed
at one rate with respect to the sale at retail
of a broad range of classes of items.
(C) Special rules for food, etc..--In the
case of items of food, clothing, medical
supplies, and motor vehicles--
(i) the fact that the tax does not
apply with respect to some or all of
such items shall not be taken into
account in determining whether the tax
applies with respect to a broad range
of classes of items, and
(ii) the fact that the rate of tax
applicable with respect to some or all
of such items is lower than the general
rate of tax shall not be taken into
account in determining whether the tax
is imposed at one rate.
(D) Items taxed at different rates.--Except
in the case of a lower rate of tax applicable
with respect to an item described in
subparagraph (C), no deduction shall be allowed
under this paragraph for any general sales tax
imposed with respect to an item at a rate other
than the general rate of tax.
(E) Compensating use taxes.--A compensating
use tax with respect to an item shall be
treated as a general sales tax. For purposes of
the preceding sentence, the term ``compensating
use tax'' means, with respect to any item, a
tax which--
(i) is imposed on the use, storage,
or consumption of such item, and
(ii) is complementary to a general
sales tax, but only if a deduction is
allowable under this paragraph with
respect to items sold at retail in the
taxing jurisdiction which are similar
to such item.
(F) Special rule for motor vehicles.--In the
case of motor vehicles, if the rate of tax
exceeds the general rate, such excess shall be
disregarded and the general rate shall be
treated as the rate of tax.
(G) Separately stated general sales taxes.--
If the amount of any general sales tax is
separately stated, then, to the extent that the
amount so stated is paid by the consumer (other
than in connection with the consumer's trade or
business) to the seller, such amount shall be
treated as a tax imposed on, and paid by, such
consumer.
(H) Amount of deduction may be determined
under tables.--
(i) In general.--At the election of
the taxpayer for the taxable year, the
amount of the deduction allowed under
this paragraph for such year shall be--
(I) the amount determined
under this paragraph (without
regard to this subparagraph)
with respect to motor vehicles,
boats, and other items
specified by the Secretary, and
(II) the amount determined
under tables prescribed by the
Secretary with respect to items
to which subclause (I) does not
apply.
(ii) Requirements for tables.--The
tables prescribed under clause (i)--
(I) shall reflect the
provisions of this paragraph,
(II) shall be based on the
average consumption by
taxpayers on a State-by-State
basis (as determined by the
Secretary) of items to which
clause (i)(I) does not apply,
taking into account filing
status, number of dependents,
adjusted gross income, and
rates of State and local
general sales taxation, and
(III) need only be determined
with respect to adjusted gross
incomes up to the applicable
amount [(as determined under
section 68(b))].
(iii) Applicable amount defined.--For
purposes of clause (ii), the term
``applicable amount'' means--
(I) $300,000 in the case of a
joint return or a surviving
spouse,
(II) $275,000 in the case of
a head of household,
(III) $250,000 in the case of
an individual who is not
married and who is not a
surviving spouse or head of
household, and
(IV) 1/2 the amount
applicable under subclause (I)
in the case of a married
individual filing a separate
return.
For purposes of this paragraph, marital
status shall be determined under
section 7703. In the case of any
taxable year beginning in calendar
years after 2017, each of the dollar
amounts in this clause shall be
increased by an amount equal to such
dollar amount, multiplied by the cost-
of-living adjustment determined under
section 1(f)(3) for the calendar year
in which the taxable year begins,
determined by substituting ``2012'' for
``2016'' in subparagraph (A)(ii)
thereof. If any amount after adjustment
under the preceding sentence is not a
multiple of $50, such amount shall be
rounded to the next lowest multiple of
$50.
[(6) Limitation on individual deductions for taxable
years 2018 through 2025.--In the case of an individual
and a taxable year beginning after December 31, 2017,
and before January 1, 2026--
[(A) foreign real property taxes shall not be
taken into account under subsection (a)(1), and
[(B) the aggregate amount of taxes taken into
account under paragraphs (1), (2), and (3) of
subsection (a) and paragraph (5) of this
subsection for any taxable year shall not
exceed $10,000 ($5,000 in the case of a married
individual filing a separate return).]
(6) Limitation on individual deductions.--In the case
of an individual--
(A) no deduction shall be allowed under this
chapter for foreign real property taxes paid or
accrued during the taxable year, and
(B) the aggregate amount of the deduction
allowed under this chapter for taxes described
in paragraphs (1), (2), and (3) of subsection
(a) and paragraph (5) of this subsection paid
or accrued by the taxpayer during the taxable
year shall not exceed $10,000 ($5,000 in the
case of a married individual filing a separate
return).
The preceding sentence shall not apply to any foreign
taxes described in subsection (a)(3) or to any taxes
described in paragraph (1) and (2) of subsection (a)
which are paid or accrued in carrying on a trade or
business or an activity described in section 212. For
purposes of subparagraph (B), an amount paid in a
taxable year beginning before January 1, 2018, with
respect to a State or local income tax imposed for a
taxable year beginning after December 31, 2017, shall
be treated as paid on the last day of the taxable year
for which such tax is so imposed.
(c) Deduction denied in case of certain taxes.--No deduction
shall be allowed for the following taxes:
(1) Taxes assessed against local benefits of a kind
tending to increase the value of the property assessed;
but this paragraph shall not prevent the deduction of
so much of such taxes as is properly allocable to
maintenance or interest charges.
(2) Taxes on real property, to the extent that
subsection (d) requires such taxes to be treated as
imposed on another taxpayer.
(d) Apportionment of taxes on real property between seller
and purchaser.--
(1) General rule.--For purposes of subsection (a), if
real property is sold during any real property tax
year, then--
(A) so much of the real property tax as is
properly allocable to that part of such year
which ends on the day before the date of the
sale shall be treated as a tax imposed on the
seller, and
(B) so much of such tax as is properly
allocable to that part of such year which
begins on the date of the sale shall be treated
as a tax imposed on the purchaser.
(2) Special rules.--
(A) in the case of any sale of real property,
if--
(i) a taxpayer may not, by reason of
his method of accounting, deduct any
amount for taxes unless paid, and
(ii) the other party to the sale is
(under the law imposing the real
property tax) liable for the real
property tax for the real property tax
year,
then for purposes of subsection (a) the
taxpayer shall be treated as having paid, on
the date of the sale, so much of such tax as,
under paragraph (1) of this subsection, is
treated as imposed on the taxpayer. For
purposes of the preceding sentence, if neither
party is liable for the tax, then the party
holding the property at the time the tax
becomes a lien on the property shall be
considered liable for the real property tax for
the real property tax year.
(B) In the case of any sale of real property,
if the taxpayer's taxable income for the
taxable year during which the sale occurs is
computed under an accrual method of accounting,
and if no election under section 461(c)
(relating to the accrual of real property
taxes) applies, then, for purposes of
subsection (a), that portion of such tax
which--
(i) is treated, under paragraph (1)
of this subsection, as imposed on the
taxpayer, and
(ii) may not, by reason of the
taxpayer's method of accounting, be
deducted by the taxpayer for any
taxable year,
shall be treated as having accrued on the date
of the sale.
(e) Taxes of shareholder paid by corporation.--Where a
corporation pays a tax imposed on a shareholder on his interest
as a shareholder, and where the shareholder does not reimburse
the corporation, then--
(1) the deduction allowed by subsection (a) shall be
allowed to the corporation; and
(2) no deduction shall be allowed the shareholder for
such tax.
(f) Deduction for one-half of self-employment taxes.--
(1) In general.--In the case of an individual, in
addition to the taxes described in subsection (a),
there shall be allowed as a deduction for the taxable
year an amount equal to one-half of the taxes imposed
by section 1401 (other than the taxes imposed by
section 1401(b)(2)) for such taxable year.
(2) Deduction treated as attributable to trade or
business.--For purposes of this chapter, the deduction
allowed by paragraph (1) shall be treated as
attributable to a trade or business carried on by the
taxpayer which does not consist of the performance of
services by the taxpayer as an employee.
(g) Cross references.--
(1) For provisions disallowing any deduction for
certain taxes, see section 275.
(2) For treatment of taxes imposed by Indian tribal
governments (or their subdivisions), see section 7871.
SEC. 165. LOSSES.
(a) General rule.--There shall be allowed as a deduction any
loss sustained during the taxable year and not compensated for
by insurance or otherwise.
(b) Amount of deduction.--For purposes of subsection (a), the
basis for determining the amount of the deduction for any loss
shall be the adjusted basis provided in section 1011 for
determining the loss from the sale or other disposition of
property.
(c) Limitation on losses of individuals.--In the case of an
individual, the deduction under subsection (a) shall be limited
to--
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into
for profit, though not connected with a trade or
business; and
(3) except as provided in subsection (h), losses of
property not connected with a trade or business or a
transaction entered into for profit, if such losses
arise from fire, storm, shipwreck, or other casualty,
or from theft.
(d) Wagering losses.--Losses from wagering transactions shall
be allowed only to the extent of the gains from such
transactions. For purposes of the preceding sentence, [in the
case of taxable years beginning after December 31, 2017, and
before January 1, 2026,] the term ``losses from wagering
transactions'' includes any deduction otherwise allowable under
this chapter incurred in carrying on any wagering transaction.
(e) Theft losses.--For purposes of subsection (a), any loss
arising from theft shall be treated as sustained during the
taxable year in which the taxpayer discovers such loss.
(f) Capital losses.--Losses from sales or exchanges of
capital assets shall be allowed only to the extent allowed in
sections 1211 and 1212.
(g) Worthless securities.--
(1) General rule.--If any security which is a capital
asset becomes worthless during the taxable year, the
loss resulting therefrom shall, for purposes of this
subtitle, be treated as a loss from the sale or
exchange, on the last day of the taxable year, of a
capital asset.
(2) Security defined.--For purposes of this
subsection, the term ``security'' means--
(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive,
a share of stock in a corporation; or
(C) a bond, debenture, note, or certificate,
or other evidence of indebtedness, issued by a
corporation or by a government or political
subdivision thereof, with interest coupons or
in registered form.
(3) Securities in affiliated corporation.--For
purposes of paragraph (1), any security in a
corporation affiliated with a taxpayer which is a
domestic corporation shall not be treated as a capital
asset. For purposes of the preceding sentence, a
corporation shall be treated as affiliated with the
taxpayer only if--
(A) the taxpayer owns directly stock in such
corporation meeting the requirements of section
1504(a)(2), and
(B) more than 90 percent of the aggregate of
its gross receipts for all taxable years has
been from sources other than royalties, rents
(except rents derived from rental of properties
to employees of the corporation in the ordinary
course of its operating business), dividends,
interest (except interest received on deferred
purchase price of operating assets sold),
annuities, and gains from sales or exchanges of
stocks and securities.
In computing gross receipts for purposes of the
preceding sentence, gross receipts from sales or
exchanges of stocks and securities shall be taken into
account only to the extent of gains therefrom.
(h) Treatment of casualty gains and losses.--
(1) Dollar limitation per casualty.--Any loss of an
individual described in subsection (c)(3) shall be
allowed only to the extent that the amount of the loss
to such individual arising from each casualty, or from
each theft, exceeds $500 ($100 for taxable years
beginning after December 31, 2009).
(2) Net casualty loss allowed only to the extent it
exceeds 10 percent of adjusted gross income.--
(A) In general.--If the personal casualty
losses for any taxable year exceed the personal
casualty gains for such taxable year, such
losses shall be allowed for the taxable year
only to the extent of the sum of--
(i) the amount of the personal
casualty gains for the taxable year,
plus
(ii) so much of such excess as
exceeds 10 percent of the adjusted
gross income of the individual.
(B) Special rule where personal casualty
gains exceed personal casualty losses.--If the
personal casualty gains for any taxable year
exceed the personal casualty losses for such
taxable year--
(i) all such gains shall be treated
as gains from sales or exchanges of
capital assets, and
(ii) all such losses shall be treated
as losses from sales or exchanges of
capital assets.
(3) Definitions of personal casualty gain and
personal casualty loss.--For purposes of this
subsection--
(A) Personal casualty gain.--The term
``personal casualty gain'' means the recognized
gain from any involuntary conversion of
property which is described in subsection
(c)(3) arising from fire, storm, shipwreck, or
other casualty, or from theft.
(B) Personal casualty loss.--The term
``personal casualty loss'' means any loss
described in subsection (c)(3). For purposes of
paragraph (2), the amount of any personal
casualty loss shall be determined after the
application of paragraph (1).
(4) Special rules.--
(A) Personal casualty losses allowable in
computing adjusted gross income to the extent
of personal casualty gains.--In any case to
which paragraph (2)(A) applies, the deduction
for personal casualty losses for any taxable
year shall be treated as a deduction allowable
in computing adjusted gross income to the
extent such losses do not exceed the personal
casualty gains for the taxable year.
(B) Joint returns.--For purposes of this
subsection, a husband and wife making a joint
return for the taxable year shall be treated as
1 individual.
(C) Determination of adjusted gross income in
case of estates and trusts.--For purposes of
paragraph (2), the adjusted gross income of an
estate or trust shall be computed in the same
manner as in the case of an individual, except
that the deductions for costs paid or incurred
in connection with the administration of the
estate or trust shall be treated as allowable
in arriving at adjusted gross income.
(D) Coordination with estate tax.--No loss
described in subsection (c)(3) shall be allowed
if, at the time of filing the return, such loss
has been claimed for estate tax purposes in the
estate tax return.
(E) Claim required to be filed in certain
cases.--Any loss of an individual described in
subsection (c)(3) to the extent covered by
insurance shall be taken into account under
this section only if the individual files a
timely insurance claim with respect to such
loss.
(5) Limitation [for taxable years 2018 through 2025]
to losses attributable to federally declared
disasters.--
(A) In general.--In the case of an
individual, except as provided in subparagraph
(B), any personal casualty loss which (but for
this paragraph) would be deductible [in a
taxable year beginning after December 31, 2017,
and before January 1, 2026,] shall be allowed
as a deduction under subsection (a) only to the
extent it is attributable to a Federally
declared disaster (as defined in subsection
(i)(5)).
(B) Exception related to personal casualty
gains.--If a taxpayer has personal casualty
gains [for any taxable year to which
subparagraph (A) applies]--
(i) subparagraph (A) shall not apply
to the portion of the personal casualty
loss not attributable to a Federally
declared disaster (as so defined) to
the extent such loss does not exceed
such gains, and
(ii) in applying paragraph (2) for
purposes of subparagraph (A) to the
portion of personal casualty loss which
is so attributable to such a disaster,
the amount of personal casualty gains
taken into account under paragraph
(2)(A) shall be reduced by the portion
of such gains taken into account under
clause (i).
(i) Disaster losses.--
(1) Election to take deduction for preceding year.--
Notwithstanding the provisions of subsection (a), any
loss occurring in a disaster area and attributable to a
federally declared disaster may, at the election of the
taxpayer, be taken into account for the taxable year
immediately preceding the taxable year in which the
disaster occurred.
(2) Year of loss.--If an election is made under this
subsection, the casualty resulting in the loss shall be
treated for purposes of this title as having occurred
in the taxable year for which the deduction is claimed.
(3) Amount of loss.--The amount of the loss taken
into account in the preceding taxable year by reason of
paragraph (1) shall not exceed the uncompensated amount
determined on the basis of the facts existing at the
date the taxpayer claims the loss.
(4) Use of disaster loan appraisals to establish
amount of loss.--Nothing in this title shall be
construed to prohibit the Secretary from prescribing
regulations or other guidance under which an appraisal
for the purpose of obtaining a loan of Federal funds or
a loan guarantee from the Federal Government as a
result of a federally declared disaster may be used to
establish the amount of any loss described in paragraph
(1) or (2).
(5) Federally declared disasters.--For purposes of
this subsection--
(A) In general.--The term ``Federallydeclared
disaster'' means any disaster subsequently
determined by the President of the United
States to warrant assistance by the Federal
Government under the Robert T. Stafford
Disaster Relief and Emergency Assistance Act.
(B) Disaster area.--The term ``disaster
area'' means the area so determined to warrant
such assistance.
(j) Denial of deduction for losses on certain obligations not
in registered form.--
(1) In general.--Nothing in subsection (a) or in any
other provision of law shall be construed to provide a
deduction for any loss sustained on any registration-
required obligation unless such obligation is in
registered form (or the issuance of such obligation was
subject to tax under section 4701).
(2) Definitions.--For purposes of this subsection--
(A) Registration-required obligation.--The
term ``registration-required obligation'' has
the meaning given to such term by section
163(f)(2).
(B) Registered form.--The term ``registered
form'' has the same meaning as when used in
section 163(f).
(3) Exceptions.--The Secretary may, by regulations,
provide that this subsection and section 1287 shall not
apply with respect to obligations held by any person
if--
(A) such person holds such obligations in
connection with a trade or business outside the
United States,
(B) such person holds such obligations as a
broker dealer (registered under Federal or
State law) for sale to customers in the
ordinary course of his trade or business,
(C) such person complies with reporting
requirements with respect to ownership,
transfers, and payments as the Secretary may
require, or
(D) such person promptly surrenders the
obligation to the issuer for the issuance of a
new obligation in registered form,
but only if such obligations are held under
arrangements provided in regulations or otherwise which
are designed to assure that such obligations are not
delivered to any United States person other than a
person described in subparagraph (A), (B), or (C).
(k) Treatment as disaster loss where taxpayer ordered to
demolish or relocate residence in disaster area because of
disaster.--In the case of a taxpayer whose residence is located
in an area which has been determined by the President of the
United States to warrant assistance by the Federal Government
under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act, if--
(1) not later than the 120th day after the date of
such determination, the taxpayer is ordered, by the
government of the State or any political subdivision
thereof in which such residence is located, to demolish
or relocate such residence, and
(2) the residence has been rendered unsafe for use as
a residence by reason of the disaster,
any loss attributable to such disaster shall be treated as a
loss which arises from a casualty and which is described in
subsection (i).
(l) Treatment of certain losses in insolvent financial
institutions.--
(1) In general.--If--
(A) as of the close of the taxable year, it
can reasonably be estimated that there is a
loss on a qualified individual's deposit in a
qualified financial institution, and
(B) such loss is on account of the bankruptcy
or insolvency of such institution,
then the taxpayer may elect to treat the amount so
estimated as a loss described in subsection (c)(3)
incurred during the taxable year.
(2) Qualified individual defined.--For purposes of
this subsection, the term ``qualified individual''
means any individual, except an individual--
(A) who owns at least 1 percent in value of
the outstanding stock of the qualified
financial institution,
(B) who is an officer of the qualified
financial institution,
(C) who is a sibling (whether by the whole or
half blood), spouse, aunt, uncle, nephew,
niece, ancestor, or lineal descendant of an
individual described in subparagraph (A) or
(B), or
(D) who otherwise is a related person (as
defined in section 267(b)) with respect to an
individual described in subparagraph (A) or
(B).
(3) Qualified financial institution.--For purposes of
this subsection, the term ``qualified financial
institution'' means--
(A) any bank (as defined in section 581),
(B) any institution described in section 591,
(C) any credit union the deposits or accounts
in which are insured under Federal or State law
or are protected or guaranteed under State law,
or
(D) any similar institution chartered and
supervised under Federal or State law.
(4) Deposit.--For purposes of this subsection, the
term ``deposit'' means any deposit, withdrawable
account, or withdrawable or repurchasable share.
(5) Election to treat as ordinary loss.--
(A) In general.--In lieu of any election
under paragraph (1), the taxpayer may elect to
treat the amount referred to in paragraph (1)
for the taxable year as an ordinary loss
described in subsection (c)(2) incurred during
the taxable year.
(B) Limitations.--
(i) Deposit may not be federally
insured.--No election may be made under
subparagraph (A) with respect to any
loss on a deposit in a qualified
financial institution if part or all of
such deposit is insured under Federal
law.
(ii) Dollar limitation.--With respect
to each financial institution, the
aggregate amount of losses attributable
to deposits in such financial
institution to which an election under
subparagraph (A) may be made by the
taxpayer for any taxable year shall not
exceed $20,000 ($10,000 in the case of
a separate return by a married
individual). The limitation of the
preceding sentence shall be reduced by
the amount of any insurance proceeds
under any State law which can
reasonably be expected to be received
with respect to losses on deposits in
such institution.
(6) Election.--Any election by the taxpayer under
this subsection for any taxable year--
(A) shall apply to all losses for such
taxable year of the taxpayer on deposits in the
institution with respect to which such election
was made, and
(B) may be revoked only with the consent of
the Secretary.
(7) Coordination with section 166.--Section 166 shall
not apply to any loss to which an election under this
subsection applies.
(m) Cross references.--
(1) For special rule for banks with respect to
worthless securities, see section 582.
(2) For disallowance of deduction for worthlessness
of securities to which subsection (g)(2)(C) applies, if
issued by a political party or similar organization,
see section 271.
(3) For special rule for losses on stock in a small
business investment company, see section 1242.
(4) For special rule for losses of a small business
investment company, see section 1243.
(5) For special rule for losses on small business
stock, see section 1244.
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) Allowance of deduction.--
(1) General rule.--There shall be allowed as a
deduction any charitable contribution (as defined in
subsection (c)) payment of which is made within the
taxable year. A charitable contribution shall be
allowable as a deduction only if verified under
regulations prescribed by the Secretary.
(2) Corporations on accrual basis.--In the case of a
corporation reporting its taxable income on the accrual
basis, if--
(A) the board of directors authorizes a
charitable contribution during any taxable
year, and
(B) payment of such contribution is made
after the close of such taxable year and on or
before the 15th day of the fourth month
following the close of such taxable year,
then the taxpayer may elect to treat such contribution
as paid during such taxable year. The election may be
made only at the time of the filing of the return for
such taxable year, and shall be signified in such
manner as the Secretary shall by regulations prescribe.
(3) Future interests in tangible personal property.--
For purposes of this section, payment of a charitable
contribution which consists of a future interest in
tangible personal property shall be treated as made
only when all intervening interests in, and rights to
the actual possession or enjoyment of, the property
have expired or are held by persons other than the
taxpayer or those standing in a relationship to the
taxpayer described in section 267(b) or 707(b). For
purposes of the preceding sentence, a fixture which is
intended to be severed from the real property shall be
treated as tangible personal property.
(b) Percentage limitations.--
(1) Individuals.--In the case of an individual, the
deduction provided in subsection (a) shall be limited
as provided in the succeeding subparagraphs.
(A) General rule.--[Any charitable
contribution] Any charitable contribution other
than a contribution described in subparagraph
(G) to--
(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, and 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,
(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 501(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 501(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 (F),
(viii) an organization described in
section 509(a)(2) or (3), or
(ix) an agricultural research
organization directly engaged in the
continuous active conduct of
agricultural research (as defined in
section 1404 of the National
Agricultural Research, Extension, and
Teaching Policy Act of 1977) in
conjunction with a land-grant college
or university (as defined in such
section) or a non-land grant college of
agriculture (as defined in such
section), and during the calendar year
in which the contribution is made such
organization is committed to spend such
contribution for such research before
January 1 of the fifth calendar year
which begins after the date such
contribution is made,
shall be allowed to the extent that the
aggregate of such contributions does not exceed
50 percent of the taxpayer's contribution base
for the taxable year.
(B) Other contributions.--Any charitable
contribution other than a charitable
contribution [to which subparagraph (A)
applies] to which subparagraph (A) or (G)
applies shall be allowed to the extent that the
aggregate of such contributions does not exceed
the lesser of--
(i) 30 percent of the taxpayer's
contribution base for the taxable year,
or
[(ii) the excess of 50 percent of the
taxpayer's contribution base for the
taxable year over the amount of
charitable contributions allowable
under subparagraph (A) (determined
without regard to subparagraph (C)).]
(ii) the excess of--
(I) the sum of 50 percent of
the taxpayer's contribution
base for the taxable year, plus
so much of the amount of
charitable contributions
allowable under subparagraph
(G) as does not exceed 10
percent of such contribution
base, over
(II) the amount of charitable
contributions allowable under
subparagraphs (A) and (G)
(determined without regard to
subparagraph (C)).
If the aggregate of such contributions exceeds
the limitation of the preceding sentence, such
excess shall be treated (in a manner consistent
with the rules of subsection (d)(1)) as a
charitable contribution [(to which subparagraph
(A) does not apply)] (to which neither
subparagraph (A) nor (G) applies) in each of
the 5 succeeding taxable years in order of
time.
(C) Special limitation with respect to
contributions described in subparagraph (A) of
certain capital gain property (i) In the case
of charitable contributions described in
subparagraph (A) of capital gain property to
which subsection (e)(1)(B) does not apply, the
total amount of contributions of such property
which may be taken into account under
subsection (a) for any taxable year shall not
exceed 30 percent of the taxpayer's
contribution base for such year. For purposes
of this subsection, contributions of capital
gain property to which this subparagraph
applies shall be taken into account after all
other charitable contributions (other than
charitable contributions to which subparagraph
(D) applies).
(ii) If charitable contributions
described in subparagraph (A) of
capital gain property to which clause
(i) applies exceeds 30 percent of the
taxpayer's contribution base for any
taxable year, such excess shall be
treated, in a manner consistent with
the rules of subsection (d)(1), as a
charitable contribution of capital gain
property to which clause (i) applies in
each of the 5 succeeding taxable years
in order of time.
(iii) At the election of the taxpayer
(made at such time and in such manner
as the Secretary prescribes by
regulations), subsection (e)(1) shall
apply to all contributions of capital
gain property (to which subsection
(e)(1)(B) does not otherwise apply)
made by the taxpayer during the taxable
year. If such an election is made,
clauses (i) and (ii) shall not apply to
contributions of capital gain property
made during the taxable year, and, in
applying subsection (d)(1) for such
taxable year with respect to
contributions of capital gain property
made in any prior contribution year for
which an election was not made under
this clause, such contributions shall
be reduced as if subsection (e)(1) had
applied to such contributions in the
year in which made.
(iv) For purposes of this paragraph,
the term ``capital gain property''
means, with respect to any
contribution, any capital asset the
sale of which at its fair market value
at the time of the contribution would
have resulted in gain which would have
been long-term capital gain. For
purposes of the preceding sentence, any
property which is property used in the
trade or business (as defined in
section 1231(b)) shall be treated as a
capital asset.
(D) Special limitation with respect to
contributions of capital gain property to
organizations not described in subparagraph (A)
(i) In general.--In the case of
charitable contributions (other than
charitable contributions to which
subparagraph (A) applies) of capital
gain property, the total amount of such
contributions of such property taken
into account under subsection (a) for
any taxable year shall not exceed the
lesser of--
(I) 20 percent of the
taxpayer's contribution base
for the taxable year, or
(II) the excess of 30 percent
of the taxpayer's contribution
base for the taxable year over
the amount of the contributions
of capital gain property to
which subparagraph (C) applies.
For purposes of this subsection,
contributions of capital gain property
to which this subparagraph applies
shall be taken into account after all
other charitable contributions.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution of capital gain
property to which clause (i) applies in
each of the 5 succeeding taxable years
in order of time.
(E) Contributions of qualified conservation
contributions.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1)) shall be allowed
to the extent the aggregate of such
contributions does not exceed the
excess of 50 percent of the taxpayer's
contribution base over the amount of
all other charitable contributions
allowable under this paragraph.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding years in order of time.
(iii) Coordination with other
subparagraphs.--For purposes of
applying this subsection and subsection
(d)(1), contributions described in
clause (i) shall not be treated as
described in subparagraph (A), (B),
(C), or (D) and such subparagraphs
shall apply without regard to such
contributions.
(iv) Special rule for contribution of
property used in agriculture or
livestock production.--
(I) In general.--If the
individual is a qualified
farmer or rancher for the
taxable year for which the
contribution is made, clause
(i) shall be applied by
substituting ``100 percent''
for ``50 percent''.
(II) Exception.--Subclause
(I) shall not apply to any
contribution of property made
after the date of the enactment
of this subparagraph which is
used in agriculture or
livestock production (or
available for such production)
unless such contribution is
subject to a restriction that
such property remain available
for such production. This
subparagraph shall be applied
separately with respect to
property to which subclause (I)
does not apply by reason of the
preceding sentence prior to its
application to property to
which subclause (I) does apply.
(v) Definition.--For purposes of
clause (iv), the term ``qualified
farmer or rancher'' means a taxpayer
whose gross income from the trade or
business of farming (within the meaning
of section 2032A(e)(5)) is greater than
50 percent of the taxpayer's gross
income for the taxable year.
(F) 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 509(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 509(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 509(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.
[(G) Increased limitation for cash
contributions.--
[(i) In general.--In the case of any
contribution of cash to an organization
described in subparagraph (A), the
total amount of such contributions
which may be taken into account under
subsection (a) for any taxable year
beginning after December 31, 2017, and
before January 1, 2026, shall not
exceed 60 percent of the taxpayer's
contribution base for such year.
[(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the applicable
limitation under clause (i) for any
taxable year described in such clause,
such excess shall be treated (in a
manner consistent with the rules of
subsection (d)(1)) as a charitable
contribution to which clause (i)
applies in each of the 5 succeeding
years in order of time.
[(iii) Coordination with
subparagraphs (A) and (B)
[(I) In general.--
Contributions taken into
account under this subparagraph
shall not be taken into account
under subparagraph (A).
[(II) Limitation reduction.--
For each taxable year described
in clause (i), and each taxable
year to which any contribution
under this subparagraph is
carried over under clause (ii),
subparagraph (A) shall be
applied by reducing (but not
below zero) the contribution
limitation allowed for the
taxable year under such
subparagraph by the aggregate
contributions allowed under
this subparagraph for such
taxable year, and subparagraph
(B) shall be applied by
treating any reference to
subparagraph (A) as a reference
to both subparagraph (A) and
this subparagraph.]
(G) Cash contributions.--
(i) In general.--Any contribution of
cash to an organization described in
subparagraph (A) shall be allowed to
the extent that the aggregate of such
contributions does not exceed 60
percent of the taxpayer's contribution
base for the taxable year, reduced by
the aggregate amount of contributions
allowable under subparagraph (A) for
such taxpayer for such year.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution to which clause
(i) applies in each of the 5 succeeding
years in order of time.
(H) Contribution base defined.--For purposes
of this section, the term ``contribution base''
means adjusted gross income (computed without
regard to any net operating loss carryback to
the taxable year under section 172).
(2) Corporations.--In the case of a corporation--
(A) In general.--The total deductions under
subsection (a) for any taxable year (other than
for contributions to which subparagraph (B) or
(C) applies) shall not exceed 10 percent of the
taxpayer's taxable income.
(B) Qualified conservation contributions by
certain corporate farmers and ranchers.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1))--
(I) which is made by a
corporation which, for the
taxable year during which the
contribution is made, is a
qualified farmer or rancher (as
defined in paragraph (1)(E)(v))
and the stock of which is not
readily tradable on an
established securities market
at any time during such year,
and
(II) which, in the case of
contributions made after the
date of the enactment of this
subparagraph, is a contribution
of property which is used in
agriculture or livestock
production (or available for
such production) and which is
subject to a restriction that
such property remain available
for such production,
shall be allowed to the extent the
aggregate of such contributions does
not exceed the excess of the taxpayer's
taxable income over the amount of
charitable contributions allowable
under subparagraph (A).
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(2)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding taxable years in order of
time.
(C) Qualified conservation contributions by
certain Native Corporations.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1)) which--
(I) is made by a Native
Corporation, and
(II) is a contribution of
property which was land
conveyed under the Alaska
Native Claims Settlement Act,
shall be allowed to the extent that the
aggregate amount of such contributions
does not exceed the excess of the
taxpayer's taxable income over the
amount of charitable contributions
allowable under subparagraph (A).
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(2)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding taxable years in order of
time.
(iii) Native Corporation.--For
purposes of this subparagraph, the term
``Native Corporation'' has the meaning
given such term by section 3(m) of the
Alaska Native Claims Settlement Act.
(D) Taxable income.--For purposes of this
paragraph, taxable income shall be computed
without regard to--
(i) this section,
(ii) part VIII (except section 248),
(iii) any net operating loss
carryback to the taxable year under
section 172,
(iv) any capital loss carryback to
the taxable year under section
1212(a)(1)
(v) section 199A(g).
(c) Charitable contribution defined.--For purposes of this
section, the term ``charitable contribution'' means a
contribution or gift to or 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, or to foster national or
international amateur sports competition (but
only if no part of its activities involve the
provision of athletic facilities or equipment),
or for the prevention of cruelty to children or
animals;
(C) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual; and
(D) which is not disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on behalf
of (or in opposition to) any candidate for
public office.
A contribution or gift by a corporation to a trust,
chest, fund, or foundation shall be deductible by
reason of this paragraph only if it is to be used
within the United States or any of its possessions
exclusively for purposes specified in subparagraph (B).
Rules similar to the rules of section 501(j) shall
apply for purposes of this paragraph.
(3) A post or organization of war veterans, or an
auxiliary unit or society of, or trust or foundation
for, any such post or organization--
(A) organized in the United States or any of
its possessions, and
(B) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual.
(4) In the case of a contribution or gift by an
individual, a domestic fraternal society, order, or
association, operating under the lodge system, but only
if such contribution or gift is to be used exclusively
for religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty
to children or animals.
(5) A cemetery company owned and operated exclusively
for the benefit of its members, or any corporation
chartered solely for burial purposes as a cemetery
corporation and not permitted by its charter to engage
in any business not necessarily incident to that
purpose, if such company or corporation is not operated
for profit and no part of the net earnings of such
company or corporation inures to the benefit of any
private shareholder or individual.
For purposes of this section, the term ``charitable
contribution'' also means an amount treated under subsection
(g) as paid for the use of an organization described in
paragraph (2), (3), or (4).
(d) Carryovers of excess contributions.--
(1) Individuals.--
(A) In general.--In the case of an
individual, if the amount of charitable
contributions described in subsection (b)(1)(A)
payment of which is made within a taxable year
(hereinafter in this paragraph referred to as
the ``contribution year'') exceeds 50 percent
of the taxpayer's contribution base for such
year, such excess shall be treated as a
charitable contribution described in subsection
(b)(1)(A) paid in each of the 5 succeeding
taxable years in order of time, but, with
respect to any such succeeding taxable year,
only to the extent of the lesser of the two
following amounts:
(i) the amount by which 50 percent of
the taxpayer's contribution base for
such succeeding taxable year exceeds
the sum of the charitable contributions
described in subsection (b)(1)(A)
payment of which is made by the
taxpayer within such succeeding taxable
year (determined without regard to this
subparagraph) and the charitable
contributions described in subsection
(b)(1)(A) payment of which was made in
taxable years before the contribution
year which are treated under this
subparagraph as having been paid in
such succeeding taxable year; or
(ii) in the case of the first
succeeding taxable year, the amount of
such excess, and in the case of the
second, third, fourth, or fifth
succeeding taxable year, the portion of
such excess not treated under this
subparagraph as a charitable
contribution described in subsection
(b)(1)(A) paid in any taxable year
intervening between the contribution
year and such succeeding taxable year.
(B) Special rule for net operating loss
carryovers.--In applying subparagraph (A), the
excess determined under subparagraph (A) for
the contribution year shall be reduced to the
extent that such excess reduces taxable income
(as computed for purposes of the second
sentence of section 172(b)(2)) and increases
the net operating loss deduction for a taxable
year succeeding the contribution year.
(2) Corporations.--
(A) In general.--Any contribution made by a
corporation in a taxable year (hereinafter in
this paragraph referred to as the
``contribution year'') in excess of the amount
deductible for such year under subsection
(b)(2)(A) shall be deductible for each of the 5
succeeding taxable years in order of time, but
only to the extent of the lesser of the two
following amounts: (i) the excess of the
maximum amount deductible for such succeeding
taxable year under subsection (b)(2)(A) over
the sum of the contributions made in such year
plus the aggregate of the excess contributions
which were made in taxable years before the
contribution year and which are deductible
under this subparagraph for such succeeding
taxable year; or (ii) in the case of the first
succeeding taxable year, the amount of such
excess contribution, and in the case of the
second, third, fourth, or fifth succeeding
taxable year, the portion of such excess
contribution not deductible under this
subparagraph for any taxable year intervening
between the contribution year and such
succeeding taxable year.
(B) Special rule for net operating loss
carryovers.--For purposes of subparagraph (A),
the excess of--
(i) the contributions made by a
corporation in a taxable year to which
this section applies, over
(ii) the amount deductible in such
year under the limitation in subsection
(b)(2)(A),
shall be reduced to the extent that such excess
reduces taxable income (as computed for
purposes of the second sentence of section
172(b)(2)) and increases a net operating loss
carryover under section 172 to a succeeding
taxable year.
(e) Certain contributions of ordinary income and capital gain
property.--
(1) General rule.--The amount of any charitable
contribution of property otherwise taken into account
under this section shall be reduced by the sum of--
(A) the amount of gain which would not have
been long-term capital gain (determined without
regard to section 1221(b)(3)) if the property
contributed had been sold by the taxpayer at
its fair market value (determined at the time
of such contribution), and
(B) in the case of a charitable
contribution--
(i) of tangible personal property--
(I) if the use by the donee
is unrelated to the purpose or
function constituting the basis
for its exemption under section
501 (or, in the case of a
governmental unit, to any
purpose or function described
in subsection (c)), or
(II) which is applicable
property (as defined in
paragraph (7)(C), but without
regard to clause (ii) thereof)
which is sold, exchanged, or
otherwise disposed of by the
donee before the last day of
the taxable year in which the
contribution was made and with
respect to which the donee has
not made a certification in
accordance with paragraph
(7)(D),
(ii) to or for the use of a private
foundation (as defined in section
509(a)), other than a private
foundation described in subsection
(b)(1)(F),
(iii) of any patent, copyright (other
than a copyright described in section
1221(a)(3) or 1231(b)(1)(C)),
trademark, trade name, trade secret,
know- how, software (other than
software described in section
197(e)(3)(A)(i)), or similar property,
or applications or registrations of
such property, or
(iv) of any taxidermy property which
is contributed by the person who
prepared, stuffed, or mounted the
property or by any person who paid or
incurred the cost of such preparation,
stuffing, or mounting,
the amount of gain which would have been long-
term capital gain if the property contributed
had been sold by the taxpayer at its fair
market value (determined at the time of such
contribution).
For purposes of applying this paragraph (other than in
the case of gain to which section 617(d)(1), 1245(a),
1250(a), 1252(a), or 1254(a) applies), property which
is property used in the trade or business (as defined
in section 1231(b)) shall be treated as a capital
asset. For purposes of applying this paragraph in the
case of a charitable contribution of stock in an S
corporation, rules similar to the rules of section 751
shall apply in determining whether gain on such stock
would have been long-term capital gain if such stock
were sold by the taxpayer.
(2) Allocation of basis.--For purposes of paragraph
(1), in the case of a charitable contribution of less
than the taxpayer's entire interest in the property
contributed, the taxpayer's adjusted basis in such
property shall be allocated between the interest
contributed and any interest not contributed in
accordance with regulations prescribed by the
Secretary.
(3) Special rule for certain contributions of
inventory and other property.--
(A) Qualified contributions.--For purposes of
this paragraph, a qualified contribution shall
mean a charitable contribution of property
described in paragraph (1) or (2) of section
1221(a), by a corporation (other than a
corporation which is an S corporation) to an
organization which is described in section
501(c)(3) and is exempt under section 501(a)
(other than a private foundation, as defined in
section 509(a), which is not an operating
foundation, as defined in section 4942(j)(3)),
but only if--
(i) the use of the property by the
donee is related to the purpose or
function constituting the basis for its
exemption under section 501 and the
property is to be used by the donee
solely for the care of the ill, the
needy, or infants;
(ii) the property is not transferred
by the donee in exchange for money,
other property, or services;
(iii) the taxpayer receives from the
donee a written statement representing
that its use and disposition of the
property will be in accordance with the
provisions of clauses (i) and (ii); and
(iv) in the case where the property
is subject to regulation under the
Federal Food, Drug, and Cosmetic Act,
as amended, such property must fully
satisfy the applicable requirements of
such Act and regulations promulgated
thereunder on the date of transfer and
for one hundred and eighty days prior
thereto.
(B) Amount of reduction.--The reduction under
paragraph (1)(A) for any qualified contribution
(as defined in subparagraph (A)) shall be no
greater than the sum of--
(i) one-half of the amount computed
under paragraph (1)(A) (computed
without regard to this paragraph), and
(ii) the amount (if any) by which the
charitable contribution deduction under
this section for any qualified
contribution (computed by taking into
account the amount determined in clause
(i), but without regard to this clause)
exceeds twice the basis of such
property.
(C) Special rule for contributions of food
inventory.--
(i) General rule.--In the case of a
charitable contribution of food from
any trade or business of the taxpayer,
this paragraph shall be applied--
(I) without regard to whether
the contribution is made by a C
corporation, and
(II) only to food that is
apparently wholesome food.
(ii) Limitation.--The aggregate
amount of such contributions for any
taxable year which may be taken into
account under this section shall not
exceed--
(I) in the case of any
taxpayer other than a C
corporation, 15 percent of the
taxpayer's aggregate net income
for such taxable year from all
trades or businesses from which
such contributions were made
for such year, computed without
regard to this section, and
(II) in the case of a C
corporation, 15 percent of
taxable income (as defined in
subsection (b)(2)(D)).
(iii) Rules related to limitation.--
(I) Carryover.--If such
aggregate amount exceeds the
limitation imposed under clause
(ii), such excess shall be
treated (in a manner consistent
with the rules of subsection
(d)) as a charitable
contribution described in
clause (i) in each of the 5
succeeding taxable years in
order of time.
(II) Coordination with
overall corporate limitation.--
In the case of any charitable
contribution which is allowable
after the application of clause
(ii)(II), subsection (b)(2)(A)
shall not apply to such
contribution, but the
limitation imposed by such
subsection shall be reduced
(but not below zero) by the
aggregate amount of such
contributions. For purposes of
subsection (b)(2)(B), such
contributions shall be treated
as allowable under subsection
(b)(2)(A).
(iv) Determination of basis for
certain taxpayers.--If a taxpayer--
(I) does not account for
inventories under section 471,
and
(II) is not required to
capitalize indirect costs under
section 263A,
the taxpayer may elect, solely for
purposes of subparagraph (B), to treat
the basis of any apparently wholesome
food as being equal to 25 percent of
the fair market value of such food.
(v) Determination of fair market
value.--In the case of any such
contribution of apparently wholesome
food which cannot or will not be sold
solely by reason of internal standards
of the taxpayer, lack of market, or
similar circumstances, or by reason of
being produced by the taxpayer
exclusively for the purposes of
transferring the food to an
organization described in subparagraph
(A), the fair market value of such
contribution shall be determined--
(I) without regard to such
internal standards, such lack
of market, such circumstances,
or such exclusive purpose, and
(II) by taking into account
the price at which the same or
substantially the same food
items (as to both type and
quality) are sold by the
taxpayer at the time of the
contribution (or, if not so
sold at such time, in the
recent past).
(vi) Apparently wholesome food.--For
purposes of this subparagraph, the term
``apparently wholesome food'' has the
meaning given to such term by section
22(b)(2) of the Bill Emerson Good
Samaritan Food Donation Act (42 U.S.C.
1791(b)(2)), as in effect on the date
of the enactment of this subparagraph.
(D) This paragraph shall not apply to so much
of the amount of the gain described in
paragraph (1)(A) which would be long-term
capital gain but for the application of
sections 617, 1245, 1250, or 1252.
(4) Special rule for contributions of scientific
property used for research.--
(A) Limit on reduction.--In the case of a
qualified research contribution, the reduction
under paragraph (1)(A) shall be no greater than
the amount determined under paragraph (3)(B).
(B) Qualified research contributions.--For
purposes of this paragraph, the term
``qualified research contribution'' means a
charitable contribution by a corporation of
tangible personal property described in
paragraph (1) of section 1221(a), but only if--
(i) the contribution is to an
organization described in subparagraph
(A) or subparagraph (B) of section
41(e)(6),
(ii) the property is constructed or
assembled by the taxpayer,
(iii) the contribution is made not
later than 2 years after the date the
construction or assembly of the
property is substantially completed,
(iv) the original use of the property
is by the donee,
(v) the property is scientific
equipment or apparatus substantially
all of the use of which by the donee is
for research or experimentation (within
the meaning of section 174), or for
research training, in the United States
in physical or biological sciences,
(vi) the property is not transferred
by the donee in exchange for money,
other property, or services, and
(vii) the taxpayer receives from the
donee a written statement representing
that its use and disposition of the
property will be in accordance with the
provisions of clauses (v) and (vi).
(C) Construction of property by taxpayer.--
For purposes of this paragraph, property shall
be treated as constructed by the taxpayer only
if the cost of the parts used in the
construction of such property (other than parts
manufactured by the taxpayer or a related
person) do not exceed 50 percent of the
taxpayer's basis in such property.
(D) Corporation.--For purposes of this
paragraph, the term ``corporation'' shall not
include--
(i) an S corporation,
(ii) a personal holding company (as
defined in section 542), and
(iii) a service organization (as
defined in section 414(m)(3)).
(5) Special rule for contributions of stock for which
market quotations are readily available.--
(A) In general.--Subparagraph (B)(ii) of
paragraph (1) shall not apply to any
contribution of qualified appreciated stock.
(B) Qualified appreciated stock.--Except as
provided in subparagraph (C), for purposes of
this paragraph, the term ``qualified
appreciated stock'' means any stock of a
corporation--
(i) for which (as of the date of the
contribution) market quotations are
readily available on an established
securities market, and
(ii) which is capital gain property
(as defined in subsection
(b)(1)(C)(iv)).
(C) Donor may not contribute more than 10
percent of stock of corporation.--
(i) In general.--In the case of any
donor, the term ``qualified appreciated
stock'' shall not include any stock of
a corporation contributed by the donor
in a contribution to which paragraph
(1)(B)(ii) applies (determined without
regard to this paragraph) to the extent
that the amount of the stock so
contributed (when increased by the
aggregate amount of all prior such
contributions by the donor of stock in
such corporation) exceeds 10 percent
(in value) of all of the outstanding
stock of such corporation.
(ii) Special rule.--For purposes of
clause (i), an individual shall be
treated as making all contributions
made by any member of his family (as
defined in section 267(c)(4)).
(7) Recapture of deduction on certain dispositions of
exempt use property.--
(A) In general.--In the case of an applicable
disposition of applicable property, there shall
be included in the income of the donor of such
property for the taxable year of such donor in
which the applicable disposition occurs an
amount equal to the excess (if any) of--
(i) the amount of the deduction
allowed to the donor under this section
with respect to such property, over
(ii) the donor's basis in such
property at the time such property was
contributed.
(B) Applicable disposition.--For purposes of
this paragraph, the term ``applicable
disposition'' means any sale, exchange, or
other disposition by the donee of applicable
property--
(i) after the last day of the taxable
year of the donor in which such
property was contributed, and
(ii) before the last day of the 3-
year period beginning on the date of
the contribution of such property,
unless the donee makes a certification in
accordance with subparagraph (D).
(C) Applicable property.--For purposes of
this paragraph, the term ``applicable
property'' means charitable deduction property
(as defined in section 6050L(a)(2)(A))--
(i) which is tangible personal
property the use of which is identified
by the donee as related to the purpose
or function constituting the basis of
the donee's exemption under section
501, and
(ii) for which a deduction in excess
of the donor's basis is allowed.
(D) Certification.--A certification meets the
requirements of this subparagraph if it is a
written statement which is signed under penalty
of perjury by an officer of the donee
organization and--
(i) which--
(I) certifies that the use of
the property by the donee was
substantial and related to the
purpose or function
constituting the basis for the
donee's exemption under section
501, and
(II) describes how the
property was used and how such
use furthered such purpose or
function, or
(ii) which--
(I) states the intended use
of the property by the donee at
the time of the contribution,
and
(II) certifies that such
intended use has become
impossible or infeasible to
implement.
(f) Disallowance of deduction in certain cases and special
rules.--
(1) In general.--No deduction shall be allowed under
this section for a contribution to or for the use of an
organization or trust described in section 508(d) or
4948(c)(4) subject to the conditions specified in such
sections.
(2) Contributions of property placed in trust.--
(A) Remainder interest.--In the case of
property transferred in trust, no deduction
shall be allowed under this section for the
value of a contribution of a remainder interest
unless the trust is a charitable remainder
annuity trust or a charitable remainder
unitrust (described in section 664), or a
pooled income fund (described in section
642(c)(5)).
(B) Income interests, etc..--No deduction
shall be allowed under this section for the
value of any interest in property (other than a
remainder interest) transferred in trust unless
the interest is in the form of a guaranteed
annuity or the trust instrument specifies that
the interest is a fixed percentage distributed
yearly of the fair market value of the trust
property (to be determined yearly) and the
grantor is treated as the owner of such
interest for purposes of applying section 671.
If the donor ceases to be treated as the owner
of such an interest for purposes of applying
section 671, at the time the donor ceases to be
so treated, the donor shall for purposes of
this chapter be considered as having received
an amount of income equal to the amount of any
deduction he received under this section for
the contribution reduced by the discounted
value of all amounts of income earned by the
trust and taxable to him before the time at
which he ceases to be treated as the owner of
the interest. Such amounts of income shall be
discounted to the date of the contribution. The
Secretary shall prescribe such regulations as
may be necessary to carry out the purposes of
this subparagraph.
(C) Denial of deduction in case of payments
by certain trusts.--In any case in which a
deduction is allowed under this section for the
value of an interest in property described in
subparagraph (B), transferred in trust, no
deduction shall be allowed under this section
to the grantor or any other person for the
amount of any contribution made by the trust
with respect to such interest.
(D) Exception.--This paragraph shall not
apply in a case in which the value of all
interests in property transferred in trust are
deductible under subsection (a).
(3) Denial of deduction in case of certain
contributions of partial interests in property.--
(A) In general.--In the case of a
contribution (not made by a transfer in trust)
of an interest in property which consists of
less than the taxpayer's entire interest in
such property, a deduction shall be allowed
under this section only to the extent that the
value of the interest contributed would be
allowable as a deduction under this section if
such interest had been transferred in trust.
For purposes of this subparagraph, a
contribution by a taxpayer of the right to use
property shall be treated as a contribution of
less than the taxpayer's entire interest in
such property.
(B) Exceptions.--Subparagraph (A) shall not
apply to--
(i) a contribution of a remainder
interest in a personal residence or
farm,
(ii) a contribution of an undivided
portion of the taxpayer's entire
interest in property, and
(iii) a qualified conservation
contribution.
(4) Valuation of remainder interest in real
property.--For purposes of this section, in determining
the value of a remainder interest in real property,
depreciation (computed on the straight line method) and
depletion of such property shall be taken into account,
and such value shall be discounted at a rate of 6
percent per annum, except that the Secretary may
prescribe a different rate.
(5) Reduction for certain interest.--If, in
connection with any charitable contribution, a
liability is assumed by the recipient or by any other
person, or if a charitable contribution is of property
which is subject to a liability, then, to the extent
necessary to avoid the duplication of amounts, the
amount taken into account for purposes of this section
as the amount of the charitable contribution--
(A) shall be reduced for interest (i) which
has been paid (or is to be paid) by the
taxpayer, (ii) which is attributable to the
liability, and (iii) which is attributable to
any period after the making of the
contribution, and
(B) in the case of a bond, shall be further
reduced for interest (i) which has been paid
(or is to be paid) by the taxpayer on
indebtedness incurred or continued to purchase
or carry such bond, and (ii) which is
attributable to any period before the making of
the contribution.
The reduction pursuant to subparagraph (B) shall not
exceed the interest (including interest equivalent) on
the bond which is attributable to any period before the
making of the contribution and which is not (under the
taxpayer's method of accounting) includible in the
gross income of the taxpayer for any taxable year. For
purposes of this paragraph, the term ``bond'' means any
bond, debenture, note, or certificate or other evidence
of indebtedness.
(6) Deductions for out-of-pocket expenditures.--No
deduction shall be allowed under this section for an
out-of-pocket expenditure made by any person on behalf
of an organization described in subsection (c) (other
than an organization described in section 501(h)(5)
(relating to churches, etc.)) if the expenditure is
made for the purpose of influencing legislation (within
the meaning of section 501(c)(3)).
(7) Reformations to comply with paragraph (2)
(A) In general.--A deduction shall be allowed
under subsection (a) in respect of any
qualified reformation (within the meaning of
section 2055(e)(3)(B)).
(B) Rules similar to section 2055(e)(3) to
apply.--For purposes of this paragraph, rules
similar to the rules of section 2055(e)(3)
shall apply.
(8) Substantiation requirement for certain
contributions.--
(A) General rule.--No deduction shall be
allowed under subsection (a) for any
contribution of $250 or more unless the
taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the
contribution by the donee organization that
meets the requirements of subparagraph (B).
(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
(i) The amount of cash and a
description (but not value) of any
property other than cash contributed.
(ii) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for
any property described in clause (i).
(iii) A description and good faith
estimate of the value of any goods or
services referred to in clause (ii) or,
if such goods or services consist
solely of intangible religious
benefits, a statement to that effect.
For purposes of this subparagraph, the term
``intangible religious benefit'' means any
intangible religious benefit which is provided
by an organization organized exclusively for
religious purposes and which generally is not
sold in a commercial transaction outside the
donative context.
(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgment shall be
considered to be contemporaneous if the
taxpayer obtains the acknowledgment on or
before the earlier of--
(i) the date on which the taxpayer
files a return for the taxable year in
which the contribution was made, or
(ii) the due date (including
extensions) for filing such return.
(D) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations that may
provide that some or all of the requirements of
this paragraph do not apply in appropriate
cases.
(9) Denial of deduction where contribution for
lobbying activities.--No deduction shall be allowed
under this section for a contribution to an
organization which conducts activities to which section
162(e)(1) applies on matters of direct financial
interest to the donor's trade or business, if a
principal purpose of the contribution was to avoid
Federal income tax by securing a deduction for such
activities under this section which would be disallowed
by reason of section 162(e) if the donor had conducted
such activities directly. No deduction shall be allowed
under section 162(a) for any amount for which a
deduction is disallowed under the preceding sentence.
(10) Split-dollar life insurance, annuity, and
endowment contracts.--
(A) In general.--Nothing in this section or
in section 545(b)(2), 642(c), 2055, 2106(a)(2),
or 2522 shall be construed to allow a
deduction, and no deduction shall be allowed,
for any transfer to or for the use of an
organization described in subsection (c) if in
connection with such transfer--
(i) the organization directly or
indirectly pays, or has previously
paid, any premium on any personal
benefit contract with respect to the
transferor, or
(ii) there is an understanding or
expectation that any person will
directly or indirectly pay any premium
on any personal benefit contract with
respect to the transferor.
(B) Personal benefit contract.--For purposes
of subparagraph (A), the term ``personal
benefit contract'' means, with respect to the
transferor, any life insurance, annuity, or
endowment contract if any direct or indirect
beneficiary under such contract is the
transferor, any member of the transferor's
family, or any other person (other than an
organization described in subsection (c))
designated by the transferor.
(C) Application to charitable remainder
trusts.--In the case of a transfer to a trust
referred to in subparagraph (E), references in
subparagraphs (A) and (F) to an organization
described in subsection (c) shall be treated as
a reference to such trust.
(D) Exception for certain annuity
contracts.--If, in connection with a transfer
to or for the use of an organization described
in subsection (c), such organization incurs an
obligation to pay a charitable gift annuity (as
defined in section 501(m)) and such
organization purchases any annuity contract to
fund such obligation, persons receiving
payments under the charitable gift annuity
shall not be treated for purposes of
subparagraph (B) as indirect beneficiaries
under such contract if--
(i) such organization possesses all
of the incidents of ownership under
such contract,
(ii) such organization is entitled to
all the payments under such contract,
and
(iii) the timing and amount of
payments under such contract are
substantially the same as the timing
and amount of payments to each such
person under such obligation (as such
obligation is in effect at the time of
such transfer).
(E) Exception for certain contracts held by
charitable remainder trusts.--A person shall
not be treated for purposes of subparagraph (B)
as an indirect beneficiary under any life
insurance, annuity, or endowment contract held
by a charitable remainder annuity trust or a
charitable remainder unitrust (as defined in
section 664(d)) solely by reason of being
entitled to any payment referred to in
paragraph (1)(A) or (2)(A) of section 664(d)
if--
(i) such trust possesses all of the
incidents of ownership under such
contract, and
(ii) such trust is entitled to all
the payments under such contract.
(F) Excise tax on premiums paid.--
(i) In general.--There is hereby
imposed on any organization described
in subsection (c) an excise tax equal
to the premiums paid by such
organization on any life insurance,
annuity, or endowment contract if the
payment of premiums on such contract is
in connection with a transfer for which
a deduction is not allowable under
subparagraph (A), determined without
regard to when such transfer is made.
(ii) Payments by other persons.--For
purposes of clause (i), payments made
by any other person pursuant to an
understanding or expectation referred
to in subparagraph (A) shall be treated
as made by the organization.
(iii) Reporting.--Any organization on
which tax is imposed by clause (i) with
respect to any premium shall file an
annual return which includes--
(I) the amount of such
premiums paid during the year
and the name and TIN of each
beneficiary under the contract
to which the premium relates,
and
(II) such other information
as the Secretary may require.
The penalties applicable to returns
required under section 6033 shall apply
to returns required under this clause.
Returns required under this clause
shall be furnished at such time and in
such manner as the Secretary shall by
forms or regulations require.
(iv) Certain rules to apply.--The tax
imposed by this subparagraph shall be
treated as imposed by chapter 42 for
purposes of this title other than
subchapter B of chapter 42.
(G) Special rule where state requires
specification of charitable gift annuitant in
contract.--In the case of an obligation to pay
a charitable gift annuity referred to in
subparagraph (D) which is entered into under
the laws of a State which requires, in order
for the charitable gift annuity to be exempt
from insurance regulation by such State, that
each beneficiary under the charitable gift
annuity be named as a beneficiary under an
annuity contract issued by an insurance company
authorized to transact business in such State,
the requirements of clauses (i) and (ii) of
subparagraph (D) shall be treated as met if--
(i) such State law requirement was in
effect on February 8, 1999,
(ii) each such beneficiary under the
charitable gift annuity is a bona fide
resident of such State at the time the
obligation to pay a charitable gift
annuity is entered into, and
(iii) the only persons entitled to
payments under such contract are
persons entitled to payments as
beneficiaries under such obligation on
the date such obligation is entered
into.
(H) Member of family.--For purposes of this
paragraph, an individual's family consists of
the individual's grandparents, the grandparents
of such individual's spouse, the lineal
descendants of such grandparents, and any
spouse of such a lineal descendant.
(I) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations to
prevent the avoidance of such purposes.
(11) Qualified appraisal and other documentation for
certain contributions.--
(A) In general.--
(i) Denial of deduction.--In the case
of an individual, partnership, or
corporation, no deduction shall be
allowed under subsection (a) for any
contribution of property for which a
deduction of more than $500 is claimed
unless such person meets the
requirements of subparagraphs (B), (C),
and (D), as the case may be, with
respect to such contribution.
(ii) Exceptions.--
(I) Readily valued
property.--Subparagraphs (C)
and (D) shall not apply to
cash, property described in
subsection (e)(1)(B)(iii) or
section 1221(a)(1), publicly
traded securities (as defined
in section 6050L(a)(2)(B)), and
any qualified vehicle described
in paragraph (12)(A)(ii) for
which an acknowledgement under
paragraph (12)(B)(iii) is
provided.
(II) Reasonable cause.--
Clause (i) shall not apply if
it is shown that the failure to
meet such requirements is due
to reasonable cause and not to
willful neglect.
(B) Property description for contributions of
more than $500.--In the case of contributions
of property for which a deduction of more than
$500 is claimed, the requirements of this
subparagraph are met if the individual,
partnership or corporation includes with the
return for the taxable year in which the
contribution is made a description of such
property and such other information as the
Secretary may require. The requirements of this
subparagraph shall not apply to a C corporation
which is not a personal service corporation or
a closely held C corporation.
(C) Qualified appraisal for contributions of
more than $5,000.--In the case of contributions
of property for which a deduction of more than
$5,000 is claimed, the requirements of this
subparagraph are met if the individual,
partnership, or corporation obtains a qualified
appraisal of such property and attaches to the
return for the taxable year in which such
contribution is made such information regarding
such property and such appraisal as the
Secretary may require.
(D) Substantiation for contributions of more
than $500,000.--In the case of contributions of
property for which a deduction of more than
$500,000 is claimed, the requirements of this
subparagraph are met if the individual,
partnership, or corporation attaches to the
return for the taxable year a qualified
appraisal of such property.
(E) Qualified appraisal and appraiser.--For
purposes of this paragraph--
(i) Qualified appraisal.--The term
``qualified appraisal'' means, with
respect to any property, an appraisal
of such property which--
(I) is treated for purposes
of this paragraph as a
qualified appraisal under
regulations or other guidance
prescribed by the Secretary,
and
(II) is conducted by a
qualified appraiser in
accordance with generally
accepted appraisal standards
and any regulations or other
guidance prescribed under
subclause (I).
(ii) Qualified appraiser.--Except as
provided in clause (iii), the term
``qualified appraiser'' means an
individual who--
(I) has earned an appraisal
designation from a recognized
professional appraiser
organization or has otherwise
met minimum education and
experience requirements set
forth in regulations prescribed
by the Secretary,
(II) regularly performs
appraisals for which the
individual receives
compensation, and
(III) meets such other
requirements as may be
prescribed by the Secretary in
regulations or other guidance.
(iii) Specific appraisals.--An
individual shall not be treated as a
qualified appraiser with respect to any
specific appraisal unless--
(I) the individual
demonstrates verifiable
education and experience in
valuing the type of property
subject to the appraisal, and
(II) the individual has not
been prohibited from practicing
before the Internal Revenue
Service by the Secretary under
section 330(c) of title 31,
United States Code, at any time
during the 3-year period ending
on the date of the appraisal.
(F) Aggregation of similar items of
property.--For purposes of determining
thresholds under this paragraph, property and
all similar items of property donated to 1 or
more donees shall be treated as 1 property.
(G) Special rule for pass-thru entities.--In
the case of a partnership or S corporation,
this paragraph shall be applied at the entity
level, except that the deduction shall be
denied at the partner or shareholder level.
(H) Regulations.--The Secretary may prescribe
such regulations as may be necessary or
appropriate to carry out the purposes of this
paragraph, including regulations that may
provide that some or all of the requirements of
this paragraph do not apply in appropriate
cases.
(12) Contributions of used motor vehicles, boats, and
airplanes.--
(A) In general.--In the case of a
contribution of a qualified vehicle the claimed
value of which exceeds $500--
(i) paragraph (8) shall not apply and
no deduction shall be allowed under
subsection (a) for such contribution
unless the taxpayer substantiates the
contribution by a contemporaneous
written acknowledgement of the
contribution by the donee organization
that meets the requirements of
subparagraph (B) and includes the
acknowledgement with the taxpayer's
return of tax which includes the
deduction, and
(ii) if the organization sells the
vehicle without any significant
intervening use or material improvement
of such vehicle by the organization,
the amount of the deduction allowed
under subsection (a) shall not exceed
the gross proceeds received from such
sale.
(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
(i) The name and taxpayer
identification number of the donor.
(ii) The vehicle identification
number or similar number.
(iii) In the case of a qualified
vehicle to which subparagraph (A)(ii)
applies--
(I) a certification that the
vehicle was sold in an arm's
length transaction between
unrelated parties,
(II) the gross proceeds from
the sale, and
(III) a statement that the
deductible amount may not
exceed the amount of such gross
proceeds.
(iv) In the case of a qualified
vehicle to which subparagraph (A)(ii)
does not apply--
(I) a certification of the
intended use or material
improvement of the vehicle and
the intended duration of such
use, and
(II) a certification that the
vehicle would not be
transferred in exchange for
money, other property, or
services before completion of
such use or improvement.
(v) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for
the qualified vehicle.
(vi) A description and good faith
estimate of the value of any goods or
services referred to in clause (v) or,
if such goods or services consist
solely of intangible religious benefits
(as defined in paragraph (8)(B)), a
statement to that effect.
(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgement shall be
considered to be contemporaneous if the donee
organization provides it within 30 days of--
(i) the sale of the qualified
vehicle, or
(ii) in the case of an
acknowledgement including a
certification described in subparagraph
(B)(iv), the contribution of the
qualified vehicle.
(D) Information to Secretary.--A donee
organization required to provide an
acknowledgement under this paragraph shall
provide to the Secretary the information
contained in the acknowledgement. Such
information shall be provided at such time and
in such manner as the Secretary may prescribe.
(E) Qualified vehicle.--For purposes of this
paragraph, the term ``qualified vehicle'' means
any--
(i) motor vehicle manufactured
primarily for use on public streets,
roads, and highways,
(ii) boat, or
(iii) airplane.
Such term shall not include any property which
is described in section 1221(a)(1).
(F) Regulations or other guidance.--The
Secretary shall prescribe such regulations or
other guidance as may be necessary to carry out
the purposes of this paragraph. The Secretary
may prescribe regulations or other guidance
which exempts sales by the donee organization
which are in direct furtherance of such
organization's charitable purpose from the
requirements of subparagraphs (A)(ii) and
(B)(iv)(II).
(13) Contributions of certain interests in buildings
located in registered historic districts.--
(A) In general.--No deduction shall be
allowed with respect to any contribution
described in subparagraph (B) unless the
taxpayer includes with the return for the
taxable year of the contribution a $500 filing
fee.
(B) Contribution described.--A contribution
is described in this subparagraph if such
contribution is a qualified conservation
contribution (as defined in subsection (h))
which is a restriction with respect to the
exterior of a building described in subsection
(h)(4)(C)(ii) and for which a deduction is
claimed in excess of $10,000.
(C) Dedication of fee.--Any fee collected
under this paragraph shall be used for the
enforcement of the provisions of subsection
(h).
(14) Reduction for amounts attributable to
rehabilitation credit.--In the case of any qualified
conservation contribution (as defined in subsection
(h)), the amount of the deduction allowed under this
section shall be reduced by an amount which bears the
same ratio to the fair market value of the contribution
as--
(A) the sum of the credits allowed to the
taxpayer under section 47 for the 5 preceding
taxable years with respect to any building
which is a part of such contribution, bears to
(B) the fair market value of the building on
the date of the contribution.
(15) Special rule for taxidermy property.--
(A) Basis.--For purposes of this section and
notwithstanding section 1012, in the case of a
charitable contribution of taxidermy property
which is made by the person who prepared,
stuffed, or mounted the property or by any
person who paid or incurred the cost of such
preparation, stuffing, or mounting, only the
cost of the preparing, stuffing, or mounting
shall be included in the basis of such
property.
(B) Taxidermy property.--For purposes of this
section, the term ``taxidermy property'' means
any work of art which--
(i) is the reproduction or
preservation of an animal, in whole or
in part,
(ii) is prepared, stuffed, or mounted
for purposes of recreating one or more
characteristics of such animal, and
(iii) contains a part of the body of
the dead animal.
(16) Contributions of clothing and household items.--
(A) In general.--In the case of an
individual, partnership, or corporation, no
deduction shall be allowed under subsection (a)
for any contribution of clothing or a household
item unless such clothing or household item is
in good used condition or better.
(B) Items of minimal value.--Notwithstanding
subparagraph (A), the Secretary may by
regulation deny a deduction under subsection
(a) for any contribution of clothing or a
household item which has minimal monetary
value.
(C) Exception for certain property.--
Subparagraphs (A) and (B) shall not apply to
any contribution of a single item of clothing
or a household item for which a deduction of
more than $500 is claimed if the taxpayer
includes with the taxpayer's return a qualified
appraisal with respect to the property.
(D) Household items.--For purposes of this
paragraph--
(i) In general.--The term ``household
items'' includes furniture,
furnishings, electronics, appliances,
linens, and other similar items.
(ii) Excluded items.--Such term does
not include--
(I) food,
(II) paintings, antiques, and
other objects of art,
(III) jewelry and gems, and
(IV) collections.
(E) Special rule for pass-thru entities.--In
the case of a partnership or S corporation,
this paragraph shall be applied at the entity
level, except that the deduction shall be
denied at the partner or shareholder level.
(17) Recordkeeping.--No deduction shall be allowed
under subsection (a) for any contribution of a cash,
check, or other monetary gift unless the donor
maintains as a record of such contribution a bank
record or a written communication from the donee
showing the name of the donee organization, the date of
the contribution, and the amount of the contribution.
(18) Contributions to donor advised funds.--A
deduction otherwise allowed under subsection (a) for
any contribution to a donor advised fund (as defined in
section 4966(d)(2)) shall only be allowed if--
(A) the sponsoring organization (as defined
in section 4966(d)(1)) with respect to such
donor advised fund is not--
(i) described in paragraph (3), (4),
or (5) of subsection (c), or
(ii) a type III supporting
organization (as defined in section
4943(f)(5)(A)) which is not a
functionally integrated type III
supporting organization (as defined in
section 4943(f)(5)(B)), and
(B) the taxpayer obtains a contemporaneous
written acknowledgment (determined under rules
similar to the rules of paragraph (8)(C)) from
the sponsoring organization (as so defined) of
such donor advised fund that such organization
has exclusive legal control over the assets
contributed.
(g) Amounts paid to maintain certain students as members of
taxpayer's household.--
(1) In general.--Subject to the limitations provided
by paragraph (2), amounts paid by the taxpayer to
maintain an individual (other than a dependent, as
defined in [section 152] section 7706 (determined
without regard to subsections (b)(1), (b)(2), and
(d)(1)(B) thereof), or a relative of the taxpayer) as a
member of his household during the period that such
individual is--
(A) a member of the taxpayer's household
under a written agreement between the taxpayer
and an organization described in paragraph (2),
(3), or (4) of subsection (c) to implement a
program of the organization to provide
educational opportunities for pupils or
students in private homes, and
(B) a full-time pupil or student in the
twelfth or any lower grade at an educational
organization described in section
170(b)(1)(A)(ii) located in the United States,
shall be treated as amounts paid for the use of
the organization.
(2) Limitations.--
(A) Amount.--Paragraph (1) shall apply to
amounts paid within the taxable year only to
the extent that such amounts do not exceed $50
multiplied by the number of full calendar
months during the taxable year which fall
within the period described in paragraph (1).
For purposes of the preceding sentence, if 15
or more days of a calendar month fall within
such period such month shall be considered as a
full calendar month.
(B) Compensation or reimbursement.--Paragraph
(1) shall not apply to any amount paid by the
taxpayer within the taxable year if the
taxpayer receives any money or other property
as compensation or reimbursement for
maintaining the individual in his household
during the period described in paragraph (1).
(3) Relative defined.--For purposes of paragraph (1),
the term ``relative of the taxpayer'' means an
individual who, with respect to the taxpayer, bears any
of the relationships described in subparagraphs (A)
through (G) of [section 152(d)(2)] section 7706(d)(2).
(4) No other amount allowed as deduction.--No
deduction shall be allowed under subsection (a) for any
amount paid by a taxpayer to maintain an individual as
a member of his household under a program described in
paragraph (1)(A) except as provided in this subsection.
(h) Qualified conservation contribution.--
(1) In general.--For purposes of subsection
(f)(3)(B)(iii), the term ``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.--For purposes
of this subsection, the term ``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 501(c)(3) and--
(i) meets the requirements of section
509(a)(2), or
(ii) meets the requirements of
section 509(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) Special rules with respect to buildings
in registered historic districts.--In the case
of any contribution of a qualified real
property interest which is a restriction with
respect to the exterior of a building described
in subparagraph (C)(ii), such contribution
shall not be considered to be exclusively for
conservation purposes unless--
(i) such interest--
(I) includes a restriction
which preserves the entire
exterior of the building
(including the front, sides,
rear, and height of the
building), and
(II) prohibits any change in
the exterior of the building
which is inconsistent with the
historical character of such
exterior,
(ii) the donor and donee enter into a
written agreement certifying, under
penalty of perjury, that the donee--
(I) is a qualified
organization (as defined in
paragraph (3)) with a purpose
of environmental protection,
land conservation, open space
preservation, or historic
preservation, and
(II) has the resources to
manage and enforce the
restriction and a commitment to
do so, and
(iii) in the case of any contribution
made in a taxable year beginning after
the date of the enactment of this
subparagraph, the taxpayer includes
with the taxpayer's return for the
taxable year of the contribution--
(I) a qualified appraisal
(within the meaning of
subsection (f)(11)(E)) of the
qualified property interest,
(II) photographs of the
entire exterior of the
building, and
(III) a description of all
restrictions on the development
of the building.
(C) Certified historic structure.--For
purposes of subparagraph (A)(iv), the term
``certified historic structure'' means--
(i) any building, structure, or land
area which is listed in the National
Register, or
(ii) any building which is located in
a registered historic district (as
defined in section 47(c)(3)(B)) 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 has been and remains
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.
(i) Standard mileage rate for use of passenger automobile.--
For purposes of computing the deduction under this section for
use of a passenger automobile, the standard mileage rate shall
be 14 cents per mile.
(j) Denial of deduction for certain travel expenses.--No
deduction shall be allowed under this section for traveling
expenses (including amounts expended for meals and lodging)
while away from home, whether paid directly or by
reimbursement, unless there is no significant element of
personal pleasure, recreation, or vacation in such travel.
(l) Treatment of certain amounts paid to or for the benefit
of institutions of higher education.--
(1) In general.--No deduction shall be allowed under
this section for any amount described in paragraph (2).
(2) Amount described.--For purposes of paragraph (1),
an amount is described in this paragraph if--
(A) the amount is paid by the taxpayer to or
for the benefit of an educational
organization--
(i) which is described in subsection
(b)(1)(A)(ii), and
(ii) which is an institution of
higher education (as defined in section
3304(f)), and
(B) the taxpayer receives (directly or
indirectly) as a result of paying such amount
the right to purchase tickets for seating at an
athletic event in an athletic stadium of such
institution.
If any portion of a payment is for the purchase of such
tickets, such portion and the remaining portion (if
any) of such payment shall be treated as separate
amounts for purposes of this subsection.
(m) Certain donee income from intellectual property treated
as an additional charitable contribution.--
(1) Treatment as additional contribution.--In the
case of a taxpayer who makes a qualified intellectual
property contribution, the deduction allowed under
subsection (a) for each taxable year of the taxpayer
ending on or after the date of such contribution shall
be increased (subject to the limitations under
subsection (b)) by the applicable percentage of
qualified donee income with respect to such
contribution which is properly allocable to such year
under this subsection.
(2) Reduction in additional deductions to extent of
initial deduction.--With respect to any qualified
intellectual property contribution, the deduction
allowed under subsection (a) shall be increased under
paragraph (1) only to the extent that the aggregate
amount of such increases with respect to such
contribution exceed the amount allowed as a deduction
under subsection (a) with respect to such contribution
determined without regard to this subsection.
(3) Qualified donee income.--For purposes of this
subsection, the term ``qualified donee income'' means
any net income received by or accrued to the donee
which is properly allocable to the qualified
intellectual property.
(4) Allocation of qualified donee income to taxable
years of donor.--For purposes of this subsection,
qualified donee income shall be treated as properly
allocable to a taxable year of the donor if such income
is received by or accrued to the donee for the taxable
year of the donee which ends within or with such
taxable year of the donor.
(5) 10-year limitation.--Income shall not be treated
as properly allocable to qualified intellectual
property for purposes of this subsection if such income
is received by or accrued to the donee after the 10-
year period beginning on the date of the contribution
of such property.
(6) Benefit limited to life of intellectual
property.--Income shall not be treated as properly
allocable to qualified intellectual property for
purposes of this subsection if such income is received
by or accrued to the donee after the expiration of the
legal life of such property.
(7) Applicable percentage.--For purposes of this
subsection, the term ``applicable percentage'' means
the percentage determined under the following table
which corresponds to a taxable year of the donor ending
on or after the date of the qualified intellectual
property contribution:
------------------------------------------------------------------------
Taxable Year of Donor Ending on or
After Date of Contribution: Applicable Percentage:
------------------------------------------------------------------------
1st................................. 100
..
2nd................................. 100
..
3rd................................. 90
..
4th................................. 80
..
5th................................. 70
..
6th................................. 60
..
7th................................. 50
..
8th................................. 40
..
9th................................. 30
..
10th................................ 20
..
11th................................ 10
..
12th................................ 10
..
------------------------------------------------------------------------
(8) Qualified intellectual property contribution.--
For purposes of this subsection, the term ``qualified
intellectual property contribution'' means any
charitable contribution of qualified intellectual
property--
(A) the amount of which taken into account
under this section is reduced by reason of
subsection (e)(1), and
(B) with respect to which the donor informs
the donee at the time of such contribution that
the donor intends to treat such contribution as
a qualified intellectual property contribution
for purposes of this subsection and section
6050L.
(9) Qualified intellectual property.--For purposes of
this subsection, the term ``qualified intellectual
property'' means property described in subsection
(e)(1)(B)(iii) (other than property contributed to or
for the use of an organization described in subsection
(e)(1)(B)(ii)).
(10) Other special rules.--
(A) Application of limitations on charitable
contributions.--Any increase under this
subsection of the deduction provided under
subsection (a) shall be treated for purposes of
subsection (b) as a deduction which is
attributable to a charitable contribution to
the donee to which such increase relates.
(B) Net income determined by donee.--The net
income taken into account under paragraph (3)
shall not exceed the amount of such income
reported under section 6050L(b)(1).
(C) Deduction limited to 12 taxable years.--
Except as may be provided under subparagraph
(D)(i), this subsection shall not apply with
respect to any qualified intellectual property
contribution for any taxable year of the donor
after the 12th taxable year of the donor which
ends on or after the date of such contribution.
(D) Regulations.--The Secretary may issue
regulations or other guidance to carry out the
purposes of this subsection, including
regulations or guidance--
(i) modifying the application of this
subsection in the case of a donor or
donee with a short taxable year, and
(ii) providing for the determination
of an amount to be treated as net
income of the donee which is properly
allocable to qualified intellectual
property in the case of a donee who
uses such property to further a purpose
or function constituting the basis of
the donee's exemption under section 501
(or, in the case of a governmental
unit, any purpose described in section
170(c)) and does not possess a right to
receive any payment from a third party
with respect to such property.
(n) Expenses paid by certain whaling captains in support of
Native Alaskan subsistence whaling.--
(1) In general.--In the case of an individual who is
recognized by the Alaska Eskimo Whaling Commission as a
whaling captain charged with the responsibility of
maintaining and carrying out sanctioned whaling
activities and who engages in such activities during
the taxable year, the amount described in paragraph (2)
(to the extent such amount does not exceed $10,000 for
the taxable year) shall be treated for purposes of this
section as a charitable contribution.
(2) Amount described.--
(A) In general.--The amount described in this
paragraph is the aggregate of the reasonable
and necessary whaling expenses paid by the
taxpayer during the taxable year in carrying
out sanctioned whaling activities.
(B) Whaling expenses.--For purposes of
subparagraph (A), the term ``whaling expenses''
includes expenses for--
(i) the acquisition and maintenance
of whaling boats, weapons, and gear
used in sanctioned whaling activities,
(ii) the supplying of food for the
crew and other provisions for carrying
out such activities, and
(iii) storage and distribution of the
catch from such activities.
(3) Sanctioned whaling activities.--For purposes of
this subsection, the term ``sanctioned whaling
activities'' means subsistence bowhead whale hunting
activities conducted pursuant to the management plan of
the Alaska Eskimo Whaling Commission.
(4) Substantiation of expenses.--The Secretary shall
issue guidance requiring that the taxpayer substantiate
the whaling expenses for which a deduction is claimed
under this subsection, including by maintaining
appropriate written records with respect to the time,
place, date, amount, and nature of the expense, as well
as the taxpayer's eligibility for such deduction, and
that (to the extent provided by the Secretary) such
substantiation be provided as part of the taxpayer's
return of tax.
(o) Special rules for fractional gifts.--
(1) Denial of deduction in certain cases.--
(A) In general.--No deduction shall be
allowed for a contribution of an undivided
portion of a taxpayer's entire interest in
tangible personal property unless all interests
in the property are held immediately before
such contribution by--
(i) the taxpayer, or
(ii) the taxpayer and the donee.
(B) Exceptions.--The Secretary may, by
regulation, provide for exceptions to
subparagraph (A) in cases where all persons who
hold an interest in the property make
proportional contributions of an undivided
portion of the entire interest held by such
persons.
(2) Valuation of subsequent gifts.--In the case of
any additional contribution, the fair market value of
such contribution shall be determined by using the
lesser of--
(A) the fair market value of the property at
the time of the initial fractional
contribution, or
(B) the fair market value of the property at
the time of the additional contribution.
(3) Recapture of deduction in certain cases; addition
to tax.--
(A) Recapture.--The Secretary shall provide
for the recapture of the amount of any
deduction allowed under this section (plus
interest) with respect to any contribution of
an undivided portion of a taxpayer's entire
interest in tangible personal property--
(i) in any case in which the donor
does not contribute all of the
remaining interests in such property to
the donee (or, if such donee is no
longer in existence, to any person
described in section 170(c)) on or
before the earlier of--
(I) the date that is 10 years
after the date of the initial
fractional contribution, or
(II) the date of the death of
the donor, and (ii) in any case
in which the donee has not,
during the period beginning on
the date of the initial
fractional contribution and
ending on the date described in
clause (i)--
(I) had substantial physical
possession of the property, and
(II) used the property in a
use which is related to a
purpose or function
constituting the basis for the
organizations' exemption under
section 501.
(B) Addition to tax.--The tax imposed under
this chapter for any taxable year for which
there is a recapture under subparagraph (A)
shall be increased by 10 percent of the amount
so recaptured.
(4) Definitions.--For purposes of this subsection--
(A) Additional contribution.--The term
``additional contribution'' means any
charitable contribution by the taxpayer of any
interest in property with respect to which the
taxpayer has previously made an initial
fractional contribution.
(B) Initial fractional contribution.--The
term ``initial fractional contribution'' means,
with respect to any taxpayer, the first
charitable contribution of an undivided portion
of the taxpayer's entire interest in any
tangible personal property.
(p) Other cross references.--
(1) For treatment of certain organizations providing
child care, see section 501(k).
(2) For charitable contributions of estates and
trusts, see section 642(c).
(3) For nondeductibility of contributions by common
trust funds, see section 584.
(4) For charitable contributions of partners, see
section 702.
(5) For charitable contributions of nonresident
aliens, see section 873.
(6) For treatment of gifts for benefit of or use in
connection with the Naval Academy as gifts to or for
use of the United States, see section 6973 of title 10,
United States Code.
(7) For treatment of gifts accepted by the Secretary
of State, the Director of the International
Communication Agency, or the Director of the United
States International Development Cooperation Agency, as
gifts to or for the use of the United States, see
section 25 of the State Department Basic Authorities
Act of 1956.
(8) For treatment of gifts of money accepted by the
Attorney General for credit to the ``Commissary Funds
Federal Prisons'' as gifts to or for the use of the
United States, see section 4043 of title 18, United
States Code.
(9) For charitable contributions to or for the use of
Indian tribal governments (or their subdivisions), see
section 7871.
* * * * * * *
SEC. 172. NET OPERATING LOSS DEDUCTION.
(a) Deduction allowed.--There shall be allowed as a deduction
for the taxable year an amount equal to the lesser of--
(1) the aggregate of the net operating loss
carryovers to such year, plus the net operating loss
carrybacks to such year, or
(2) 80 percent of taxable income computed without
regard to the deduction allowable under this section.
For purposes of this subtitle, the term ``net operating loss
deduction'' means the deduction allowed by this subsection.
(b) Net operating loss carrybacks and carryovers.--
(1) Years to which loss may be carried.--
(A) General rule.--Except as otherwise
provided in this paragraph, a net operating
loss for any taxable year--
(i) except as otherwise provided in
this paragraph, shall not be a net
operating loss carryback to any taxable
year preceding the taxable year of such
loss, and
(ii) shall be a net operating loss
carryover to each taxable year
following the taxable year of the loss.
(B) Farming losses.--
(i) In general.--In the case of any
portion of a net operating loss for the
taxable year which is a farming loss
with respect to the taxpayer, such loss
shall be a net operating loss carryback
to each of the 2 taxable years
preceding the taxable year of such
loss.
(ii) Farming loss.--For purposes of
this section, the term ``farming loss''
means the lesser of--
(I) the amount which would be
the net operating loss for the
taxable year if only income and
deductions attributable to
farming businesses (as defined
in section 263A(e)(4)) are
taken into account, or
(II) the amount of the net
operating loss for such taxable
year.
(iii) Coordination with paragraph
(2).--For purposes of applying
paragraph (2), a farming loss for any
taxable year shall be treated as a
separate net operating loss for such
taxable year to be taken into account
after the remaining portion of the net
operating loss for such taxable year.
(iv) Election.--Any taxpayer entitled
to a 2-year carryback under clause (i)
from any loss year may elect not to
have such clause apply to such loss
year. Such election shall be made in
such manner as prescribed by the
Secretary and shall be made by the due
date (including extensions of time) for
filing the taxpayer's return for the
taxable year of the net operating loss.
Such election, once made for any
taxable year, shall be irrevocable for
such taxable year.
(C) Insurance companies.--In the case of an
insurance company (as defined in section
816(a)) other than a life insurance company,
the net operating loss for any taxable year--
(i) shall be a net operating loss
carryback to each of the 2 taxable
years preceding the taxable year of
such loss, and
(ii) shall be a net operating loss
carryover to each of the 20 taxable
years following the taxable year of the
loss.
(2) Amount of carrybacks and carryovers.--The entire
amount of the net operating loss for any taxable year
(hereinafter in this section referred to as the ``loss
year'') shall be carried to the earliest of the taxable
years to which (by reason of paragraph (1)) such loss
may be carried. The portion of such loss which shall be
carried to each of the other taxable years shall be the
excess, if any, of the amount of such loss over the sum
of the taxable income for each of the prior taxable
years to which such loss may be carried. For purposes
of the preceding sentence, the taxable income for any
such prior taxable year shall--
(A) be computed with the modifications
specified in subsection (d) other than
paragraphs (1), (4), and (5) thereof, and by
determining the amount of the net operating
loss deduction without regard to the net
operating loss for the loss year or for any
taxable year thereafter,
(B) not be considered to be less than zero,
and
(C) not exceed the amount determined under
subsection (a)(2) for such prior taxable year.
(3) Election to waive carryback.--Any taxpayer
entitled to a carryback period under paragraph (1) may
elect to relinquish the entire carryback period with
respect to a net operating loss for any taxable year.
Such election shall be made in such manner as may be
prescribed by the Secretary, and shall be made by the
due date (including extensions of time) for filing the
taxpayer's return for the taxable year of the net
operating loss for which the election is to be in
effect. Such election, once made for any taxable year,
shall be irrevocable for such taxable year.
(c) Net operating loss defined.--For purposes of this
section, the term ``net operating loss'' means the excess of
the deductions allowed by this chapter over the gross income.
Such excess shall be computed with the modifications specified
in subsection (d).
(d) Modifications.--The modifications referred to in this
section are as follows:
(1) Net operating loss deduction.--No net operating
loss deduction shall be allowed.
(2) Capital gains and losses of taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation--
(A) the amount deductible on account of
losses from sales or exchanges of capital
assets shall not exceed the amount includable
on account of gains from sales or exchanges of
capital assets; and
(B) the exclusion provided by section 1202
shall not be allowed.
[(3) Deduction for personal exemptions.--No deduction
shall be allowed under section 151 (relating to
personal exemptions). No deduction in lieu of any such
deduction shall be allowed.]
(4) Nonbusiness deductions of taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation, the deductions allowable by this chapter
which are not attributable to a taxpayer's trade or
business shall be allowed only to the extent of the
amount of the gross income not derived from such trade
or business. For purposes of the preceding sentence--
(A) any gain or loss from the sale or other
disposition of--
(i) property, used in the trade or
business, of a character which is
subject to the allowance for
depreciation provided in section 167,
or
(ii) real property used in the trade
or business, shall be treated as
attributable to the trade or business;
(B) the modifications specified in paragraphs
(1), (2)(B), and (3) shall be taken into
account;
(C) any deduction for casualty or theft
losses allowable under paragraph (2) or (3) of
section 165(c) shall be treated as attributable
to the trade or business; and
(D) any deduction allowed under section 404
to the extent attributable to contributions
which are made on behalf of an individual who
is an employee within the meaning of section
401(c)(1) shall not be treated as attributable
to the trade or business of such individual.
(5) Computation of deduction for dividends
received.--The deductions allowed by sections 243
(relating to dividends received by corporations) and
245 (relating to dividends received from certain
foreign corporations) shall be computed without regard
to section 246(b) (relating to limitation on aggregate
amount of deductions).
(6) Modifications related to real estate investment
trusts.--In the case of any taxable year for which part
II of subchapter M (relating to real estate investment
trusts) applies to the taxpayer--
(A) the net operating loss for such taxable
year shall be computed by taking into account
the adjustments described in section 857(b)(2)
(other than the deduction for dividends paid
described in section 857(b)(2)(B));
(B) where such taxable year is a ``prior
taxable year'' referred to in paragraph (2) of
subsection (b), the term ``taxable income'' in
such paragraph shall mean ``real estate
investment trust taxable income'' (as defined
in section 857(b)(2)); and
(C) subsection (a)(2) shall be applied by
substituting ``real estate investment trust
taxable income (as defined in section 857(b)(2)
but without regard to the deduction for
dividends paid (as defined in section 561))''
for ``taxable income''.
(8) Qualified business income deduction.--Any
deduction under section 199A shall not be allowed.
(9) Deduction for foreign-derived intangible
income.--The deduction under section 250 shall not be
allowed.
(e) Law applicable to computations.--In determining the
amount of any net operating loss carryback or carryover to any
taxable year, the necessary computations involving any other
taxable year shall be made under the law applicable to such
other taxable year.
(f) Special rule for insurance companies.--In the case of an
insurance company (as defined in section 816(a)) other than a
life insurance company--
(1) the amount of the deduction allowed under
subsection (a) shall be the aggregate of the net
operating loss carryovers to such year, plus the net
operating loss carrybacks to such year, and
(2) subparagraph (C) of subsection (b)(2) shall not
apply.
(g) Cross references.--
(1) For treatment of net operating loss carryovers in
certain corporate acquisitions, see section 381.
(2) For special limitation on net operating loss
carryovers in case of a corporate change of ownership,
see section 382.
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 199A. QUALIFIED BUSINESS INCOME.
(a) Allowance of deduction.--In the case of a taxpayer other
than a corporation, there shall be allowed as a deduction for
any taxable year an amount equal to the lesser of--
(1) the combined qualified business income amount of
the taxpayer, or
(2) an amount equal to 20 percent of the excess (if
any) of--
(A) the taxable income of the taxpayer for
the taxable year, over
(B) the net capital gain (as defined in
section 1(h)) of the taxpayer for such taxable
year.
(b) Combined qualified business income amount.--For purposes
of this section--
(1) In general.--The term ``combined qualified
business income amount'' means, with respect to any
taxable year, an amount equal to--
(A) the sum of the amounts determined under
paragraph (2) for each qualified trade or
business carried on by the taxpayer, plus
(B) 20 percent of the aggregate amount of the
qualified REIT dividends and qualified publicly
traded partnership income of the taxpayer for
the taxable year.
(2) Determination of deductible amount for each trade
or business.--The amount determined under this
paragraph with respect to any qualified trade or
business is the lesser of--
(A) 20 percent of the taxpayer's qualified
business income with respect to the qualified
trade or business, or
(B) the greater of--
(i) 50 percent of the W-2 wages with
respect to the qualified trade or
business, or
(ii) the sum of 25 percent of the W-2
wages with respect to the qualified
trade or business, plus 2.5 percent of
the unadjusted basis immediately after
acquisition of all qualified property.
(3) Modifications to limit based on taxable income.--
(A) Exception from limit.--In the case of any
taxpayer whose taxable income for the taxable
year does not exceed the threshold amount,
paragraph (2) shall be applied without regard
to subparagraph (B).
(B) Phase-in of limit for certain
taxpayers.--
(i) In general.--If--
(I) the taxable income of a
taxpayer for any taxable year
exceeds the threshold amount,
but does not exceed the sum of
the threshold amount plus
$50,000 ($100,000 in the case
of a joint return), and
(II) the amount determined
under paragraph (2)(B)
(determined without regard to
this subparagraph) with respect
to any qualified trade or
business carried on by the
taxpayer is less than the
amount determined under
paragraph (2)(A) with respect
such trade or business, then
paragraph (2) shall be applied
with respect to such trade or
business without regard to
subparagraph (B) thereof and by
reducing the amount determined
under subparagraph (A) thereof
by the amount determined under
clause (ii).
(ii) Amount of reduction.--The amount
determined under this subparagraph is
the amount which bears the same ratio
to the excess amount as--
(I) the amount by which the
taxpayer's taxable income for
the taxable year exceeds the
threshold amount, bears to
(II) $50,000 ($100,000 in the
case of a joint return).
(iii) Excess amount.--For purposes of
clause (ii), the excess amount is the
excess of--
(I) the amount determined
under paragraph (2)(A)
(determined without regard to
this paragraph), over
(II) the amount determined
under paragraph (2)(B)
(determined without regard to
this paragraph).
(4) Wages, etc.
(A) In general.--The term ``W-2 wages''
means, with respect to any person for any
taxable year of such person, the amounts
described in paragraphs (3) and (8) of section
6051(a) paid by such person with respect to
employment of employees by such person during
the calendar year ending during such taxable
year.
(B) Limitation to wages attributable to
qualified business income.--Such term shall not
include any amount which is not properly
allocable to qualified business income for
purposes of subsection (c)(1).
(C) Return requirement.--Such term shall not
include any amount which is not properly
included in a return filed with the Social
Security Administration on or before the 60th
day after the due date (including extensions)
for such return.
(5) Acquisitions, dispositions, and short taxable
years.--The Secretary shall provide for the application
of this subsection in cases of a short taxable year or
where the taxpayer acquires, or disposes of, the major
portion of a trade or business or the major portion of
a separate unit of a trade or business during the
taxable year.
(6) Qualified property.--For purposes of this
section:
(A) In general.--The term ``qualified
property'' means, with respect to any qualified
trade or business for a taxable year, tangible
property of a character subject to the
allowance for depreciation under section 167--
(i) which is held by, and available
for use in, the qualified trade or
business at the close of the taxable
year,
(ii) which is used at any point
during the taxable year in the
production of qualified business
income, and
(iii) the depreciable period for
which has not ended before the close of
the taxable year.
(B) Depreciable period.--The term
``depreciable period'' means, with respect to
qualified property of a taxpayer, the period
beginning on the date the property was first
placed in service by the taxpayer and ending on
the later of--
(i) the date that is 10 years after
such date, or
(ii) the last day of the last full
year in the applicable recovery period
that would apply to the property under
section 168 (determined without regard
to subsection (g) thereof).
(7) Special rule with respect to income received from
cooperatives.--In the case of any qualified trade or
business of a patron of a specified agricultural or
horticultural cooperative, the amount determined under
paragraph (2) with respect to such trade or business
shall be reduced by the lesser of--
(A) 9 percent of so much of the qualified
business income with respect to such trade or
business as is properly allocable to qualified
payments received from such cooperative, or
(B) 50 percent of so much of the W-2 wages
with respect to such trade or business as are
so allocable.
(c) Qualified business income.--For purposes of this
section--
(1) In general.--The term ``qualified business
income'' means, for any taxable year, the net amount of
qualified items of income, gain, deduction, and loss
with respect to any qualified trade or business of the
taxpayer. Such term shall not include any qualified
REIT dividends, or qualified publicly traded
partnership income.
(2) Carryover of losses.--If the net amount of
qualified income, gain, deduction, and loss with
respect to qualified trades or businesses of the
taxpayer for any taxable year is less than zero, such
amount shall be treated as a loss from a qualified
trade or business in the succeeding taxable year.
(3) Qualified items of income, gain, deduction, and
loss.--For purposes of this subsection--
(A) In general.--The term ``qualified items
of income, gain, deduction, and loss'' means
items of income, gain, deduction, and loss to
the extent such items are--
(i) effectively connected with the
conduct of a trade or business within
the United States (within the meaning
of section 864(c), determined by
substituting ``qualified trade or
business (within the meaning of section
199A)'' for ``nonresident alien
individual or a foreign corporation''
or for ``a foreign corporation'' each
place it appears), and
(ii) included or allowed in
determining taxable income for the
taxable year.
(B) Exceptions.--The following items shall
not be taken into account as a qualified item
of income, gain, deduction, or loss:
(i) Any item of short-term capital
gain, short-term capital loss, long-
term capital gain, or long-term capital
loss.
(ii) Any dividend, income equivalent
to a dividend, or payment in lieu of
dividends described in section
954(c)(1)(G). Any amount described in
section 1385(a)(1) shall not be treated
as described in this clause.
(iii) Any interest income other than
interest income which is properly
allocable to a trade or business.
(iv) Any item of gain or loss
described in subparagraph (C) or (D) of
section 954(c)(1) (applied by
substituting ``qualified trade or
business'' for ``controlled foreign
corporation'').
(v) Any item of income, gain,
deduction, or loss taken into account
under section 954(c)(1)(F) (determined
without regard to clause (ii) thereof
and other than items attributable to
notional principal contracts entered
into in transactions qualifying under
section 1221(a)(7)).
(vi) Any amount received from an
annuity which is not received in
connection with the trade or business.
(vii) Any item of deduction or loss
properly allocable to an amount
described in any of the preceding
clauses.
(4) Treatment of reasonable compensation and
guaranteed payments.--Qualified business income shall
not include--
(A) reasonable compensation paid to the
taxpayer by any qualified trade or business of
the taxpayer for services rendered with respect
to the trade or business,
(B) any guaranteed payment described in
section 707(c) paid to a partner for services
rendered with respect to the trade or business,
and
(C) to the extent provided in regulations,
any payment described in section 707(a) to a
partner for services rendered with respect to
the trade or business.
(d) Qualified trade or business.--For purposes of this
section--
(1) In general.--The term ``qualified trade or
business'' means any trade or business other than--
(A) a specified service trade or business, or
(B) the trade or business of performing
services as an employee.
(2) Specified service trade or business.--The term
``specified service trade or business'' means any trade
or business--
(A) which is described in section
1202(e)(3)(A) (applied without regard to the
words ``engineering, architecture,'') or which
would be so described if the term ``employees
or owners'' were substituted for ``employees''
therein, or
(B) which involves the performance of
services that consist of investing and
investment management, trading, or dealing in
securities (as defined in section 475(c)(2)),
partnership interests, or commodities (as
defined in section 475(e)(2)).
(3) Exception for specified service businesses based
on taxpayer's income.--
(A) In general.--If, for any taxable year,
the taxable income of any taxpayer is less than
the sum of the threshold amount plus $50,000
($100,000 in the case of a joint return),
then--
(i) any specified service trade or
business of the taxpayer shall not fail
to be treated as a qualified trade or
business due to paragraph (1)(A), but
(ii) only the applicable percentage
of qualified items of income, gain,
deduction, or loss, and the W-2 wages
and the unadjusted basis immediately
after acquisition of qualified
property, of the taxpayer allocable to
such specified service trade or
business shall be taken into account in
computing the qualified business
income, W-2 wages, and the unadjusted
basis immediately after acquisition of
qualified property of the taxpayer for
the taxable year for purposes of
applying this section.
(B) Applicable percentage.--For purposes of
subparagraph (A), the term ``applicable
percentage'' means, with respect to any taxable
year, 100 percent reduced (not below zero) by
the percentage equal to the ratio of--
(i) the taxable income of the
taxpayer for the taxable year in excess
of the threshold amount, bears to
(ii) $50,000 ($100,000 in the case of
a joint return).
(e) Other definitions.--For purposes of this section--
(1) Taxable income.--Except as otherwise provided in
subsection (g)(2)(B), taxable income shall be computed
without regard to any deduction allowable under this
section.
(2) Threshold amount.--
(A) In general.--The term ``threshold
amount'' means $157,500 (200 percent of such
amount in the case of a joint return).
(B) Inflation adjustment.--In the case of any
taxable year beginning after 2018, the dollar
amount in subparagraph (A) shall be increased
by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``calendar year 2017'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
The amount of any increase under the preceding
sentence shall be rounded as provided in
section 1(f)(7).
(3) Qualified REIT dividend.--The term ``qualified
REIT dividend'' means any dividend from a real estate
investment trust received during the taxable year
which--
(A) is not a capital gain dividend, as
defined in section 857(b)(3), and
(B) is not qualified dividend income, as
defined in section 1(h)(11).
(4) Qualified publicly traded partnership income.--
The term ``qualified publicly traded partnership
income'' means, with respect to any qualified trade or
business of a taxpayer, the sum of--
(A) the net amount of such taxpayer's
allocable share of each qualified item of
income, gain, deduction, and loss (as defined
in subsection (c)(3) and determined after the
application of subsection (c)(4)) from a
publicly traded partnership (as defined in
section 7704(a)) which is not treated as a
corporation under section 7704(c), plus
(B) any gain recognized by such taxpayer upon
disposition of its interest in such partnership
to the extent such gain is treated as an amount
realized from the sale or exchange of property
other than a capital asset under section
751(a).
(f) Special rules.--
(1) Application to partnerships and s corporations.--
(A) In general.--In the case of a partnership
or S corporation--
(i) this section shall be applied at
the partner or shareholder level,
(ii) each partner or shareholder
shall take into account such person's
allocable share of each qualified item
of income, gain, deduction, and loss,
and
(iii) each partner or shareholder
shall be treated for purposes of
subsection (b) as having W-2 wages and
unadjusted basis immediately after
acquisition of qualified property for
the taxable year in an amount equal to
such person's allocable share of the W-
2 wages and the unadjusted basis
immediately after acquisition of
qualified property of the partnership
or S corporation for the taxable year
(as determined under regulations
prescribed by the Secretary).
For purposes of clause (iii), a partner's or
shareholder's allocable share of W-2 wages
shall be determined in the same manner as the
partner's or shareholder's allocable share of
wage expenses. For purposes of such clause,
partner's or shareholder's allocable share of
the unadjusted basis immediately after
acquisition of qualified property shall be
determined in the same manner as the partner's
or shareholder's allocable share of
depreciation. For purposes of this
subparagraph, in the case of an S corporation,
an allocable share shall be the shareholder's
pro rata share of an item.
(B) Application to trusts and estates.--Rules
similar to the rules under section
199(d)(1)(B)(i) (as in effect on December 1,
2017) for the apportionment of W-2 wages shall
apply to the apportionment of W-2 wages and the
apportionment of unadjusted basis immediately
after acquisition of qualified property under
this section.
(C) Treatment of trades or business in Puerto
Rico.--
(i) In general.--In the case of any
taxpayer with qualified business income
from sources within the commonwealth of
Puerto Rico, if all such income is
taxable under section 1 for such
taxable year, then for purposes of
determining the qualified business
income of such taxpayer for such
taxable year, the term ``United
States'' shall include the Commonwealth
of Puerto Rico.
(ii) Special rule for applying
limit.--In the case of any taxpayer
described in clause (i), the
determination of W-2 wages of such
taxpayer with respect to any qualified
trade or business conducted in Puerto
Rico shall be made without regard to
any exclusion under section 3401(a)(8)
for remuneration paid for services in
Puerto Rico.
(2) Coordination with minimum tax.--For purposes of
determining alternative minimum taxable income under
section 55, qualified business income shall be
determined without regard to any adjustments under
sections 56 through 59.
(3) Deduction limited to income taxes.--The deduction
under subsection (a) shall only be allowed for purposes
of this chapter.
(4) Regulations.--The Secretary shall prescribe such
regulations as are necessary to carry out the purposes
of this section, including regulations--
(A) for requiring or restricting the
allocation of items and wages under this
section and such reporting requirements as the
Secretary determines appropriate, and
(B) for the application of this section in
the case of tiered entities.
(g) Deduction for income attributable to domestic production
activities of specified agricultural or horticultural
cooperatives.--
(1) Allowance of deduction.--
(A) In general.--In the case of a taxpayer
which is a specified agricultural or
horticultural cooperative, there shall be
allowed as a deduction an amount equal to 9
percent of the lesser of--
(i) the qualified production
activities income of the taxpayer for
the taxable year, or
(ii) the taxable income of the
taxpayer for the taxable year.
(B) Limitation.--
(i) In general.--The deduction
allowable under subparagraph (A) for
any taxable year shall not exceed 50
percent of the W-2 wages of the
taxpayer for the taxable year.
(ii) W-2 wages.--For purposes of this
subparagraph, the W-2 wages of the
taxpayer shall be determined in the
same manner as under subsection (b)(4)
(without regard to subparagraph (B)
thereof and after application of
subsection (b)(5)), except that such
wages shall not include any amount
which is not properly allocable to
domestic production gross receipts for
purposes of paragraph (3)(A).
(C) Taxable income of cooperatives determined
without regard to certain deductions.--For
purposes of this subsection, the taxable income
of a specified agricultural or horticultural
cooperative shall be computed without regard to
any deduction allowable under subsection (b) or
(c) of section 1382 (relating to patronage
dividends, per-unit retain allocations, and
nonpatronage distributions).
(2) Deduction allowed to patrons.--
(A) In general.--In the case of any eligible
taxpayer who receives a qualified payment from
a specified agricultural or horticultural
cooperative, there shall be allowed as a
deduction for the taxable year in which such
payment is received an amount equal to the
portion of the deduction allowed under
paragraph (1) to such cooperative which is--
(i) allowed with respect to the
portion of the qualified production
activities income to which such payment
is attributable, and
(ii) identified by such cooperative
in a written notice mailed to such
taxpayer during the payment period
described in section 1382(d).
(B) Limitation based on taxable income.--The
deduction allowed to any taxpayer under this
paragraph shall not exceed the taxable income
of the taxpayer determined without regard to
the deduction allowed under this paragraph and
after taking into account any deduction allowed
to the taxpayer under subsection (a) for the
taxable year.
(C) Cooperative denied deduction for portion
of qualified payments.--The taxable income of a
specified agricultural or horticultural
cooperative shall not be reduced under section
1382 by reason of that portion of any qualified
payment as does not exceed the deduction
allowable under subparagraph (A) with respect
to such payment.
(D) Eligible taxpayer.--For purposes of this
paragraph, the term ``eligible taxpayer''
means--
(i) a taxpayer other than a
corporation, or
(ii) a specified agricultural or
horticultural cooperative.
(E) Qualified payment.--For purposes of this
section, the term ``qualified payment'' means,
with respect to any eligible taxpayer, any
amount which--
(i) is described in paragraph (1) or
(3) of section 1385(a),
(ii) is received by such taxpayer
from a specified agricultural or
horticultural cooperative, and
(iii) is attributable to qualified
production activities income with
respect to which a deduction is allowed
to such cooperative under paragraph
(1).
(3) Qualified production activities income.--For
purposes of this subsection--
(A) In general.--The term ``qualified
production activities income'' for any taxable
year means an amount equal to the excess (if
any) of--
(i) the taxpayer's domestic
production gross receipts for such
taxable year, over
(ii) the sum of--
(I) the cost of goods sold
that are allocable to such
receipts, and
(II) other expenses, losses,
or deductions (other than the
deduction allowed under this
subsection), which are properly
allocable to such receipts.
(B) Allocation method.--The Secretary shall
prescribe rules for the proper allocation of
items described in subparagraph (A) for
purposes of determining qualified production
activities income. Such rules shall provide for
the proper allocation of items whether or not
such items are directly allocable to domestic
production gross receipts.
(C) Special rules for determining costs.--
(i) In general.--For purposes of
determining costs under subclause (I)
of subparagraph (A)(ii), any item or
service brought into the United States
shall be treated as acquired by
purchase, and its cost shall be treated
as not less than its value immediately
after it entered the United States. A
similar rule shall apply in determining
the adjusted basis of leased or rented
property where the lease or rental
gives rise to domestic production gross
receipts.
(ii) Exports for further
manufacture.--In the case of any
property described in clause (i) that
had been exported by the taxpayer for
further manufacture, the increase in
cost or adjusted basis under clause (i)
shall not exceed the difference between
the value of the property when exported
and the value of the property when
brought back into the United States
after the further manufacture.
(D) Domestic production gross receipts.--
(i) In general.--The term ``domestic
production gross receipts'' means the
gross receipts of the taxpayer which
are derived from any lease, rental,
license, sale, exchange, or other
disposition of any agricultural or
horticultural product which was
manufactured, produced, grown, or
extracted by the taxpayer (determined
after the application of paragraph
(4)(B)) in whole or significant part
within the United States. Such term
shall not include gross receipts of the
taxpayer which are derived from the
lease, rental, license, sale, exchange,
or other disposition of land.
(ii) Related persons.--
(I) In general.--The term
``domestic production gross
receipts'' shall not include
any gross receipts of the
taxpayer derived from property
leased, licensed, or rented by
the taxpayer for use by any
related person.
(II) Related person.--For
purposes of subclause (I), a
person shall be treated as
related to another person if
such persons are treated as a
single employer under
subsection (a) or (b) of
section 52 or subsection (m) or
(o) of section 414, except that
determinations under
subsections (a) and (b) of
section 52 shall be made
without regard to section
1563(b).
(4) Specified agricultural or horticultural
cooperative.--For purposes of this section--
(A) In general.--The term ``specified
agricultural or horticultural cooperative''
means an organization to which part I of
subchapter T applies which is engaged--
(i) in the manufacturing, production,
growth, or extraction in whole or
significant part of any agricultural or
horticultural product, or
(ii) in the marketing of agricultural
or horticultural products.
(B) Application to marketing cooperatives.--A
specified agricultural or horticultural
cooperative described in subparagraph (A)(ii)
shall be treated as having manufactured,
produced, grown, or extracted in whole or
significant part any agricultural or
horticultural product marketed by the specified
agricultural or horticultural cooperative which
its patrons have so manufactured, produced,
grown, or extracted.
(5) Definitions and special rules.--
(A) Special rule for affiliated groups.--
(i) In general.--All members of an
expanded affiliated group shall be
treated as a single corporation for
purposes of this subsection.
(ii) Partnerships owned by expanded
affiliated groups.--For purposes of
paragraph (3)(D), if all of the
interests in the capital and profits of
a partnership are owned by members of a
single expanded affiliated group at all
times during the taxable year of such
partnership, the partnership and all
members of such group shall be treated
as a single taxpayer during such
period.
(iii) Expanded affiliated group.--For
purposes of this subsection, the term
``expanded affiliated group'' means an
affiliated group as defined in section
1504(a), determined--
(I) by substituting ``more
than 50 percent'' for ``at
least 80 percent'' each place
it appears, and
(II) without regard to
paragraphs (2) and (4) of
section 1504(b).
(iv) Allocation of deduction.--Except
as provided in regulations, the
deduction under paragraph (1) shall be
allocated among the members of the
expanded affiliated group in proportion
to each member's respective amount (if
any) of qualified production activities
income.
(B) Special rule for cooperative partners.--
In the case of a specified agricultural or
horticultural cooperative which is a partner in
a partnership, rules similar to the rules of
subsection (f)(1) shall apply for purposes of
this subsection.
(C) Trade or business requirement.--This
subsection shall be applied by only taking into
account items which are attributable to the
actual conduct of a trade or business.
(D) Unrelated business taxable income.--For
purposes of determining the tax imposed by
section 511, this section shall be applied by
substituting ``unrelated business taxable
income'' for ``taxable income'' each place it
appears in this section (other than this
subparagraph).
(E) Special rule for cooperative with oil
related qualified production activities
income.--
(i) In general.--If a specified
agricultural or horticultural
cooperative has oil related qualified
production activities income for any
taxable year, the amount otherwise
allowable as a deduction under
paragraph (1) shall be reduced by 3
percent of the least of--
(I) the oil related qualified
production activities income of
the cooperative for the taxable
year,
(II) the qualified production
activities income of the
cooperative for the taxable
year, or
(III) taxable income.
(ii) Oil related qualified production
activities income.--For purposes of
this subparagraph, the term ``oil
related qualified production activities
income'' means for any taxable year the
qualified production activities income
which is attributable to the
production, refining, processing,
transportation, or distribution of oil,
gas, or any primary product thereof
(within the meaning of section
927(a)(2)(C), as in effect before its
repeal) during such taxable year.
(6) Regulations.--The Secretary shall prescribe such
regulations as are necessary to carry out the purposes
of this subsection, including regulations which prevent
more than 1 taxpayer from being allowed a deduction
under this subsection with respect to any activity
described in paragraph (3)(D)(i). Such regulations
shall be based on the regulations applicable to
cooperatives and their patrons under section 199 (as in
effect before its repeal).
(h) Anti-abuse rules.--The Secretary shall--
(1) apply rules similar to the rules under section
179(d)(2) in order to prevent the manipulation of the
depreciable period of qualified property using
transactions between related parties, and
(2) prescribe rules for determining the unadjusted
basis immediately after acquisition of qualified
property acquired in like-kind exchanges or involuntary
conversions.
[(i) Termination.--This section shall not apply to taxable
years beginning after December 31, 2025.]
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
Sec. 211. Allowance of deductions.
* * * * * * *
[Sec. 217. Moving expenses.]
Sec. 217. Certain moving expenses of members of Armed Forces.
* * * * * * *
SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.
(a) Allowance of deduction.--There shall be allowed as a
deduction the expenses paid during the taxable year, not
compensated for by insurance or otherwise, for medical care of
the taxpayer, his spouse, or a dependent (as defined in
[section 152] section 7706, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the
extent that such expenses exceed 10 percent (7.5 percent in the
case of any taxable year beginning after December 31, 2018, and
ending before January 1, 2021) of adjusted gross income.
(b) Limitation with respect to medicine and drugs.--An amount
paid during the taxable year for medicine or a drug shall be
taken into account under subsection (a) only if such medicine
or drug is a prescribed drug or is insulin.
(c) Special rule for decedents.--
(1) Treatment of expenses paid after death.--For
purposes of subsection (a), expenses for the medical
care of the taxpayer which are paid out of his estate
during the 1-year period beginning with the day after
the date of his death shall be treated as paid by the
taxpayer at the time incurred.
(2) Limitation.--Paragraph (1) shall not apply if the
amount paid is allowable under section 2053 as a
deduction in computing the taxable estate of the
decedent, but this paragraph shall not apply if (within
the time and in the manner and form prescribed by the
Secretary) there is filed--
(A) a statement that such amount has not been
allowed as a deduction under section 2053, and
(B) a waiver of the right to have such amount
allowed at any time as a deduction under
section 2053.
(d) Definitions.--For purposes of this section--
(1) The term ``medical care'' means amounts paid--
(A) for the diagnosis, cure, mitigation,
treatment, or prevention of disease, or for the
purpose of affecting any structure or function
of the body,
(B) for transportation primarily for and
essential to medical care referred to in
subparagraph (A),
(C) for qualified long-term care services (as
defined in section 7702B(c)), or
(D) for insurance (including amounts paid as
premiums under part B of title XVIII of the
Social Security Act, relating to supplementary
medical insurance for the aged) covering
medical care referred to in subparagraphs (A)
and (B) or for any qualified long- term care
insurance contract (as defined in section
7702B(b)).
In the case of a qualified long-term care insurance
contract (as defined in section 7702B(b)), only
eligible long-term care premiums (as defined in
paragraph (10)) shall be taken into account under
subparagraph (D).
(2) Amounts paid for certain lodging away from home
treated as paid for medical care
Amounts paid for lodging (not lavish or extravagant
under the circumstances) while away from home primarily
for and essential to medical care referred to in
paragraph (1)(A) shall be treated as amounts paid for
medical care if--
(A) the medical care referred to in paragraph
(1)(A) is provided by a physician in a licensed
hospital (or in a medical care facility which
is related to, or the equivalent of, a licensed
hospital), and
(B) there is no significant element of
personal pleasure, recreation, or vacation in
the travel away from home.
The amount taken into account under the preceding
sentence shall not exceed $50 for each night for each
individual.
(3) Prescribed drug
The term ``prescribed drug'' means a drug or
biological which requires a prescription of a physician
for its use by an individual.
(4) Physician
The term ``physician'' has the meaning given to such
term by section 1861(r) of the Social Security Act (42
U.S.C. 1395x(r)).
(5) Special rule in the case of child of divorced
parents, etc.
Any child to whom [section 152(e)] section 7706(e)
applies shall be treated as a dependent of both parents
for purposes of this section.
(6) In the case of an insurance contract under which
amounts are payable for other than medical care
referred to in subparagraphs (A), (B), and (C) of
paragraph (1)--
(A) no amount shall be treated as paid for
insurance to which paragraph (1)(D) applies
unless the charge for such insurance is either
separately stated in the contract, or furnished
to the policyholder by the insurance company in
a separate statement,
(B) the amount taken into account as the
amount paid for such insurance shall not exceed
such charge, and
(C) no amount shall be treated as paid for
such insurance if the amount specified in the
contract (or furnished to the policyholder by
the insurance company in a separate statement)
as the charge for such insurance is
unreasonably large in relation to the total
charges under the contract.
(7) Subject to the limitations of paragraph (6),
premiums paid during the taxable year by a taxpayer
before he attains the age of 65 for insurance covering
medical care (within the meaning of subparagraphs (A),
(B), and (C) of paragraph (1)) for the taxpayer, his
spouse, or a dependent after the taxpayer attains the
age of 65 shall be treated as expenses paid during the
taxable year for insurance which constitutes medical
care if premiums for such insurance are payable (on a
level payment basis) under the contract for a period of
10 years or more or until the year in which the
taxpayer attains the age of 65 (but in no case for a
period of less than 5 years).
(8) The determination of whether an individual is
married at any time during the taxable year shall be
made in accordance with the provisions of section
6013(d) (relating to determination of status as husband
and wife).
(9) Cosmetic surgery.--
(A) In general.--The term ``medical care''
does not include cosmetic surgery or other
similar procedures, unless the surgery or
procedure is necessary to ameliorate a
deformity arising from, or directly related to,
a congenital abnormality, a personal injury
resulting from an accident or trauma, or
disfiguring disease.
(B) Cosmetic surgery defined.--For purposes
of this paragraph, the term ``cosmetic
surgery'' means any procedure which is directed
at improving the patient's appearance and does
not meaningfully promote the proper function of
the body or prevent or treat illness or
disease.
(10) Eligible long-term care premiums.--
(A) In general.--For purposes of this
section, the term ``eligible long-term care
Premiums'' means the amount paid during a
taxable year for any qualified long-term care
insurance contract (as defined in section
7702B(b)) covering an individual, to the extent
such amount does not exceed the limitation
determined under the following table:
------------------------------------------------------------------------
In the case of an individual with
an attained age before the close of The limitation is:
the taxable year of:
------------------------------------------------------------------------
40 or less $200
More than 40 but not more than 50 375
More than 50 but not more than 60 750
More than 60 but not more than 70 2,000
More than 70 2,500.
------------------------------------------------------------------------
(B) Indexing.--
(i) In general.--In the case of any
taxable year beginning in a calendar
year after 1997, each dollar amount
contained in subparagraph (A) shall be
increased by the medical care cost
adjustment of such amount for such
calendar year. If any increase
determined under the preceding sentence
is not a multiple of $10, such increase
shall be rounded to the nearest
multiple of $10.
(ii) Medical care cost adjustment.--
For purposes of clause (i), the medical
care cost adjustment for any calendar
year is the percentage (if any) by
which--
(I) the medical care
component of the C-CPI-U (as
defined in section 1(f)(6)) for
August of the preceding
calendar year, exceeds
(II) such component of the
CPI (as defined in section
1(f)(4)) for August of 1996,
multiplied by the amount
determined under section
1(f)(3)(B).
The Secretary shall, in consultation
with the Secretary of Health and Human
Services, prescribe an adjustment which
the Secretary determines is more
appropriate for purposes of this
paragraph than the adjustment described
in the preceding sentence, and the
adjustment so prescribed shall apply in
lieu of the adjustment described in the
preceding sentence.
(11) Certain payments to relatives treated as not
paid for medical care --An amount paid for a qualified
long-term care service (as defined in section 7702B(c))
provided to an individual shall be treated as not paid
for medical care if such service is provided--
(A) by the spouse of the individual or by a
relative (directly or through a partnership,
corporation, or other entity) unless the
service is provided by a licensed professional
with respect to such service, or
(B) by a corporation or partnership which is
related (within the meaning of section 267(b)
or 707(b)) to the individual.
For purposes of this paragraph, the term ``relative''
means an individual bearing a relationship to the
individual which is described in any of subparagraphs
(A) through (G) of [section 152(d)(2)] section
7706(d)(2). This paragraph shall not apply for purposes
of section 105(b) with respect to reimbursements
through insurance.
(e) Exclusion of amounts allowed for care of certain
dependents.--Any expense allowed as a credit under section 21
shall not be treated as an expense paid for medical care.
[(f) Special rules for 2013 through 2018.--In the case of any
taxable year--
[(1) beginning after December 31, 2012, and ending
before January 1, 2017, in the case of a taxpayer if
such taxpayer or such taxpayer's spouse has attained
age 65 before the close of such taxable year, and
[(2) beginning after December 31, 2016, and ending
before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by
substituting ``7.5 percent'' for ``10 percent''.]
* * * * * * *
SEC. 217. [MOVING EXPENSES] CERTAIN MOVING EXPENSES OF MEMBERS OF
ARMED FORCES.
[(a) Deduction allowed.--There shall be allowed as a
deduction moving expenses paid or incurred during the taxable
year in connection with the commencement of work by the
taxpayer as an employee or as a self-employed individual at a
new principal place of work.]
(a) Deduction Allowed.--There shall be allowed as a deduction
moving expenses paid or incurred during the taxable year by a
member of the Armed Forces of the United States on active duty
who moves pursuant to a military order and incident to a
permanent change of station.
(b) Definition of moving expenses.--
(1) In general.--For purposes of this section, the
term ``moving expenses'' means only the reasonable
expenses--
(A) of moving household goods and personal
effects from the former residence to the new
residence, and
(B) of traveling (including lodging) from the
former residence to the new place of residence.
Such term shall not include any expenses for meals.
(2) Individuals other than taxpayer.--In the case of
any individual other than the taxpayer, expenses
referred to in paragraph (1) shall be taken into
account only if such individual has both the former
residence and the new residence as his principal place
of abode and is a member of the taxpayer's household.
[(c) Conditions for allowance.--No deduction shall be allowed
under this section unless--
[(1) the taxpayer's new principal place of work--
[(A) is at least 50 miles farther from his
former residence than was his former principal
place of work, or
[(B) if he had no former principal place of
work, is at least 50 miles from his former
residence, and
[(2) either--
[(A) during the 12-month period immediately
following his arrival in the general location
of his new principal place of work, the
taxpayer is a full-time employee, in such
general location, during at least 39 weeks, or
[(B) during the 24-month period immediately
following his arrival in the general location
of his new principal place of work, the
taxpayer is a full-time employee or performs
services as a self-employed individual on a
full-time basis, in such general location,
during at least 78 weeks, of which not less
than 39 weeks are during the 12-month period
referred to in subparagraph (A).
For purposes of paragraph (1), the distance between two
points shall be the shortest of the more commonly
traveled routes between such two points.
[(d) Rules for application of subsection (c)(2).--
[(1) The condition of subsection (c)(2) shall not
apply if the taxpayer is unable to satisfy such
condition by reason of--
[(A) death or disability, or
[(B) involuntary separation (other than for
willful misconduct) from the service of, or
transfer for the benefit of, an employer after
obtaining full-time employment in which the
taxpayer could reasonably have been expected to
satisfy such condition.
[(2) If a taxpayer has not satisfied the condition of
subsection (c)(2) before the time prescribed by law
(including extensions thereof) for filing the return
for the taxable year during which he paid or incurred
moving expenses which would otherwise be deductible
under this section, but may still satisfy such
condition, then such expenses may (at the election of
the taxpayer) be deducted for such taxable year
notwithstanding subsection (c)(2).
[(3) If--
[(A) for any taxable year moving expenses
have been deducted in accordance with the rule
provided in paragraph (2), and
[(B) the condition of subsection (c)(2)
cannot be satisfied at the close of a
subsequent taxable year,
then an amount equal to the expenses which were so
deducted shall be included in gross income for the
first such subsequent taxable year.
[(f) Self-employed individual.--For purposes of this section,
the term ``self-employed individual'' means an individual who
performs personal services--
[(1) as the owner of the entire interest in an
unincorporated trade or business, or
[(2) as a partner in a partnership carrying on a
trade or business.
[(g) Rules for members of the Armed Forces of the United
States.--In the case of a member of the Armed Forces of the
United States on active duty who moves pursuant to a military
order and incident to a permanent change of station--
[(1) the limitations under subsection (c) shall not
apply;
[(2) any moving and storage expenses which are
furnished in kind (or for which reimbursement or an
allowance is provided, but only to the extent of the
expenses paid or incurred) to such member, his spouse,
or his dependents, shall not be includible in gross
income, and no reporting with respect to such expenses
shall be required by the Secretary of Defense or the
Secretary of Transportation, as the case may be; and
[(3) if moving and storage expenses are furnished in
kind (or if reimbursement or an allowance for such
expenses is provided) to such member's spouse and his
dependents with regard to moving to a location other
than the one to which such member moves (or from a
location other than the one from which such member
moves), this section shall apply with respect to the
moving expenses of his spouse and dependents--
[(A) as if his spouse commenced work as an
employee at a new principal place of work at
such location; and
[(B) without regard to the limitations under
subsection (c).]
[(h)] (c) Special rules for foreign moves.--
(1) Allowance of certain storage fees.--In the case
of a foreign move, for purposes of this section, the
moving expenses described in subsection (b)(1)(A)
include the reasonable expenses--
(A) of moving household goods and personal
effects to and from storage, and
(B) of storing such goods and effects for
part or all of the period during which the new
place of work continues to be the taxpayer's
principal place of work.
(2) Foreign move.--For purposes of this subsection,
the term ``foreign move'' means the commencement of
work by the taxpayer at a new principal place of work
located outside the United States.
(3) United States defined.--For purposes of this
subsection and subsection (i), the term ``United
States'' includes the possessions of the United States.
[(i)] (d) Allowance of deductions in case of retirees or
decedents who were working abroad.--
(1) In general.--In the case of any qualified retiree
moving expenses or qualified survivor moving expenses--
(A) this section (other than subsection (h))
shall be applied with respect to such expenses
as if they were incurred in connection with the
commencement of work by the taxpayer as an
employee at a new principal place of work
located within the United States, and
(B) the limitations of subsection (c)(2)
shall not apply.
(2) Qualified retiree moving expenses.--For purposes
of paragraph (1), the term ``qualified retiree moving
expenses'' means any moving expenses--
(A) which are incurred by an individual whose
former principal place of work and former
residence were outside the United States, and
(B) which are incurred for a move to a new
residence in the United States in connection
with the bona fide retirement of the
individual.
(3) Qualified survivor moving expenses.--For purposes
of paragraph (1), the term ``qualified survivor moving
expenses'' means moving expenses--
(A) which are paid or incurred by the spouse
or any dependent of any decedent who (as of the
time of his death) had a principal place of
work outside the United States, and
(B) which are incurred for a move which
begins within 6 months after the death of such
decedent and which is to a residence in the
United States from a former residence outside
the United States which (as of the time of the
decedent's death) was the residence of such
decedent and the individual paying or incurring
the expense.
(e) Expenses Furnished in Kind.--Any moving and storage
expenses which are furnished in kind (or for which
reimbursement or an allowance is provided, but only to the
extent of the expenses paid or incurred)--
(1) to such member, his spouse, or his dependents,
shall not be includible in gross income, and no
reporting with respect to such expenses shall be
required by the Secretary of Defense or the Secretary
of Transportation, as the case may be, and
(2) to such member's spouse and his dependents with
regard to moving to a location other than the one to
which such member moves (or from a location other than
the one from which such member moves), this section
shall apply with respect to the moving expenses of his
spouse and dependents as if his spouse commenced work
as an employee at a new principal place of work at such
location.
[(j)] (f) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
[(k)] (g) Suspension of deduction for taxable years 2018
through 2025.--Except in the case of an individual to whom
subsection (g) applies, this section shall not apply to any
taxable year beginning after December 31, 2017, and before
January 1, 2026.
* * * * * * *
SEC. 220. ARCHER MSAS.
(a) Deduction allowed.--In the case of an individual who is
an eligible individual for any month during the taxable year,
there shall be allowed as a deduction for the taxable year an
amount equal to the aggregate amount paid in cash during such
taxable year by such individual to an Archer MSA of such
individual.
(b) Limitations.--
(1) In general.--The amount allowable as a deduction
under subsection (a) to an individual for the taxable
year shall not exceed the sum of the monthly
limitations for months during such taxable year that
the individual is an eligible individual.
(2) Monthly limitation.--The monthly limitation for
any month is the amount equal to 1/12 of--
(A) in the case of an individual who has
self-only coverage under the high deductible
health plan as of the first day of such month,
65 percent of the annual deductible under such
coverage, and
(B) in the case of an individual who has
family coverage under the high deductible
health plan as of the first day of such month,
75 percent of the annual deductible under such
coverage.
(3) Special rule for married individuals.--In the
case of individuals who are married to each other, if
either spouse has family coverage--
(A) both spouses shall be treated as having
only such family coverage (and if such spouses
each have family coverage under different
plans, as having the family coverage with the
lowest annual deductible), and
(B) the limitation under paragraph (1) (after
the application of subparagraph (A) of this
paragraph) shall be divided equally between
them unless they agree on a different division.
(4) Deduction not to exceed compensation.--
(A) Employees.--The deduction allowed under
subsection (a) for contributions as an eligible
individual described in subclause (I) of
subsection (c)(1)(A)(iii) shall not exceed such
individual's wages, salaries, tips, and other
employee compensation which are attributable to
such individual's employment by the employer
referred to in such subclause.
(B) Self-employed individuals.--The deduction
allowed under subsection (a) for contributions
as an eligible individual described in
subclause (II) of subsection (c)(1)(A)(iii)
shall not exceed such individual's earned
income (as defined in section 401(c)(1))
derived by the taxpayer from the trade or
business with respect to which the high
deductible health plan is established.
(C) Community property laws not to apply.--
The limitations under this paragraph shall be
determined without regard to community property
laws.
(5) Coordination with exclusion for employer
contributions.--No deduction shall be allowed under
this section for any amount paid for any taxable year
to an Archer MSA of an individual if--
(A) any amount is contributed to any Archer
MSA of such individual for such year which is
excludable from gross income under section
106(b), or
(B) if such individual's spouse is covered
under the high deductible health plan covering
such individual, any amount is contributed for
such year to any Archer MSA of such spouse
which is so excludable.
(6) Denial of deduction to dependents.--No deduction
shall be allowed under this section to any individual
[with respect to whom a deduction under section 151 is
allowable to] who is a dependent of another taxpayer
for a taxable year beginning in the calendar year in
which such individual's taxable year begins.
(7) Medicare eligible individuals.--The limitation
under this subsection for any month with respect to an
individual shall be zero for the first month such
individual is entitled to benefits under title XVIII of
the Social Security Act and for each month thereafter.
(c) Definitions.--For purposes of this section--
(1) Eligible individual.--
(A) In general.--The term ``eligible
individual'' means, with respect to any month,
any individual if--
(i) such individual is covered under
a high deductible health plan as of the
1st day of such month,
(ii) such individual is not, while
covered under a high deductible health
plan, covered under any health plan--
(I) which is not a high
deductible health plan, and
(II) which provides coverage
for any benefit which is
covered under the high
deductible health plan, and
(iii)(I) the high deductible health
plan covering such individual is
established and maintained by the
employer of such individual or of the
spouse of such individual and such
employer is a small employer, or
(II) such individual is an
employee (within the meaning of
section 401(c)(1)) or the
spouse of such an employee and
the high deductible health plan
covering such individual is not
established or maintained by
any employer of such individual
or spouse.
(B) Certain coverage disregarded.--
Subparagraph (A)(ii) shall be applied without
regard to--
(i) coverage for any benefit provided
by permitted insurance, and
(ii) coverage (whether through
insurance or otherwise) for accidents,
disability, dental care, vision care,
or long-term care.
(C) Continued eligibility of employee and
spouse establishing Archer MSAs.--If, while an
employer is a small employer--
(i) any amount is contributed to an
Archer MSA of an individual who is an
employee of such employer or the spouse
of such an employee, and
(ii) such amount is excludable from
gross income under section 106(b) or
allowable as a deduction under this
section,
such individual shall not cease to meet the
requirement of subparagraph (A)(iii)(I) by
reason of such employer ceasing to be a small
employer so long as such employee continues to
be an employee of such employer.
(D) Limitations on eligibility.--For
limitations on number of taxpayers who are
eligible to have Archer MSAs, see subsection
(i).
(2) High deductible health plan.--
(A) In general.--The term ``high deductible
health plan'' means a health plan--
(i) in the case of self-only
coverage, which has an annual
deductible which is not less than
$1,500 and not more than $2,250,
(ii) in the case of family coverage,
which has an annual deductible which is
not less than $3,000 and not more than
$4,500, and
(iii) the annual out-of-pocket
expenses required to be paid under the
plan (other than for premiums) for
covered benefits does not exceed--
(I) $3,000 for self-only
coverage, and
(II) $5,500 for family
coverage.
(B) Special rules.--
(i) Exclusion of certain plans.--Such
term does not include a health plan if
substantially all of its coverage is
coverage described in paragraph (1)(B).
(ii) Safe harbor for absence of
preventive care deductible.--A plan
shall not fail to be treated as a high
deductible health plan by reason of
failing to have a deductible for
preventive care if the absence of a
deductible for such care is required by
State law.
(3) Permitted insurance.--The term ``permitted
insurance'' means--
(A) insurance if substantially all of the
coverage provided under such insurance relates
to--
(i) liabilities incurred under
workers' compensation laws,
(ii) tort liabilities,
(iii) liabilities relating to
ownership or use of property, or
(iv) such other similar liabilities
as the Secretary may specify by
regulations,
(B) insurance for a specified disease or
illness, and
(C) insurance paying a fixed amount per day
(or other period) of hospitalization.
(4) Small employer.--
(A) In general.--The term ``small employer''
means, with respect to any calendar year, any
employer if such employer employed an average
of 50 or fewer employees on business days
during either of the 2 preceding calendar
years. For purposes of the preceding sentence,
a preceding calendar year may be taken into
account only if the employer was in existence
throughout such year.
(B) Employers not in existence in preceding
year.--In the case of an employer which was not
in existence throughout the 1st preceding
calendar year, the determination under
subparagraph (A) shall be based on the average
number of employees that it is reasonably
expected such employer will employ on business
days in the current calendar year.
(C) Certain growing employers retain
treatment as small employer.--The term ``small
employer'' includes, with respect to any
calendar year, any employer if--
(i) such employer met the requirement
of subparagraph (A) (determined without
regard to subparagraph (B)) for any
preceding calendar year after 1996,
(ii) any amount was contributed to
the Archer MSA of any employee of such
employer with respect to coverage of
such employee under a high deductible
health plan of such employer during
such preceding calendar year and such
amount was excludable from gross income
under section 106(b) or allowable as a
deduction under this section, and
(iii) such employer employed an
average of 200 or fewer employees on
business days during each preceding
calendar year after 1996.
(D) Special rules.--
(i) Controlled groups.--For purposes
of this paragraph, all persons treated
as a single employer under subsection
(b), (c), (m), or (o) of section 414
shall be treated as 1 employer.
(ii) Predecessors.--Any reference in
this paragraph to an employer shall
include a reference to any predecessor
of such employer.
(5) Family coverage.--The term ``family coverage''
means any coverage other than self-only coverage.
(d) Archer MSA.--For purposes of this section--
(1) Archer MSA.--The term ``Archer MSA'' means a
trust created or organized in the United States as a
medical savings account exclusively for the purpose of
paying the qualified medical expenses of the account
holder, but only if the written governing instrument
creating the trust meets the following requirements:
(A) Except in the case of a rollover
contribution described in subsection (f)(5), no
contribution will be accepted--
(i) unless it is in cash, or
(ii) to the extent such contribution,
when added to previous contributions to
the trust for the calendar year,
exceeds 75 percent of the highest
annual limit deductible permitted under
subsection (c)(2)(A)(ii) for such
calendar year.
(B) The trustee is a bank (as defined in
section 408(n)), an insurance company (as
defined in section 816), or another person who
demonstrates to the satisfaction of the
Secretary that the manner in which such person
will administer the trust will be consistent
with the requirements of this section.
(C) No part of the trust assets will be
invested in life insurance contracts.
(D) The assets of the trust will not be
commingled with other property except in a
common trust fund or common investment fund.
(E) The interest of an individual in the
balance in his account is nonforfeitable.
(2) Qualified medical expenses.--
(A) In general.--The term ``qualified medical
expenses'' means, with respect to an account
holder, amounts paid by such holder for medical
care (as defined in section 213(d)) for such
individual, the spouse of such individual, and
any dependent (as defined in [section 152]
section 7706, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B)
thereof) of such individual, but only to the
extent such amounts are not compensated for by
insurance or otherwise. Such term shall include
an amount paid for medicine or a drug only if
such medicine or drug is a prescribed drug
(determined without regard to whether such drug
is available without a prescription) or is
insulin.
(B) Health insurance may not be purchased
from account.--
(i) In general.--Subparagraph (A)
shall not apply to any payment for
insurance.
(ii) Exceptions.--Clause (i) shall
not apply to any expense for coverage
under--
(I) a health plan during any
period of continuation coverage
required under any Federal law,
(II) a qualified long-term
care insurance contract (as
defined in section 7702B(b)),
or
(III) a health plan during a
period in which the individual
is receiving unemployment
compensation under any Federal
or State law.
(C) Medical expenses of individuals who are
not eligible individuals.--Subparagraph (A)
shall apply to an amount paid by an account
holder for medical care of an individual who is
not described in clauses (i) and (ii) of
subsection (c)(1)(A)for the month in which the
expense for such care is incurred only if no
amount is contributed (other than a rollover
contribution) to any Archer MSA of such account
holder for the taxable year which includes such
month. This subparagraph shall not apply to any
expense for coverage described in subclause (I)
or (III) of subparagraph (B)(ii).
(3) Account holder.--The term ``account holder''
means the individual on whose behalf the Archer MSA was
established.
(4) Certain rules to apply.--Rules similar to the
following rules shall apply for purposes of this
section:
(A) Section 219(d)(2) (relating to no
deduction for rollovers).
(B) Section 219(f)(3) (relating to time when
contributions deemed made).
(C) Except as provided in section 106(b),
section 219(f)(5) (relating to employer
payments).
(D) Section 408(g) (relating to community
property laws).
(E) Section 408(h) (relating to custodial
accounts).
(e) Tax treatment of accounts.--
(1) In general.--An Archer MSA is exempt from
taxation under this subtitle unless such account has
ceased to be an Archer MSA. Notwithstanding the
preceding sentence, any such account is subject to the
taxes imposed by section 511 (relating to imposition of
tax on unrelated business income of charitable, etc.
organizations).
(2) Account terminations.--Rules similar to the rules
of paragraphs (2) and (4) of section 408(e) shall apply
to Archer MSAs, and any amount treated as distributed
under such rules shall be treated as not used to pay
qualified medical expenses.
(f) Tax Treatment of distributions.--
(1) Amounts used for qualified medical expenses.--Any
amount paid or distributed out of an Archer MSA which
is used exclusively to pay qualified medical expenses
of any account holder shall not be includible in gross
income.
(2) Inclusion of amounts not used for qualified
medical expenses.--Any amount paid or distributed out
of an Archer MSA which is not used exclusively to pay
the qualified medical expenses of the account holder
shall be included in the gross income of such holder.
(3) Excess contributions returned before due date of
return.--
(A) In general.--If any excess contribution
is contributed for a taxable year to any Archer
MSA of an individual, paragraph (2) shall not
apply to distributions from the Archer MSAs of
such individual (to the extent such
distributions do not exceed the aggregate
excess contributions to all such accounts of
such individual for such year) if--
(i) such distribution is received by
the individual on or before the last
day prescribed by law (including
extensions of time) for filing such
individual's return for such taxable
year, and
(ii) such distribution is accompanied
by the amount of net income
attributable to such excess
contribution.
Any net income described in clause (ii) shall
be included in the gross income of the
individual for the taxable year in which it is
received.
(B) Excess contribution.--For purposes of
subparagraph (A), the term ``excess
contribution'' means any contribution (other
than a rollover contribution) which is neither
excludable from gross income under section
106(b) nor deductible under this section.
(4) Additional tax on distributions not used for
qualified medical expenses.--
(A) In general.--The tax imposed by this
chapter on the account holder for any taxable
year in which there is a payment or
distribution from an Archer MSA of such holder
which is includible in gross income under
paragraph (2) shall be increased by 20 percent
of the amount which is so includible.
(B) Exception for disability or death.--
Subparagraph (A) shall not apply if the payment
or distribution is made after the account
holder becomes disabled within the meaning of
section 72(m)(7) or dies.
(C) Exception for distributions after
medicare eligibility.--Subparagraph (A) shall
not apply to any payment or distribution after
the date on which the account holder attains
the age specified in section 1811 of the Social
Security Act.
(5) Rollover contribution.--An amount is described in
this paragraph as a rollover contribution if it meets
the requirements of subparagraphs (A) and (B).
(A) In general.--Paragraph (2) shall not
apply to any amount paid or distributed from an
Archer MSA to the account holder to the extent
the amount received is paid into an Archer MSA
or a health savings account (as defined in
section 223(d)) for the benefit of such holder
not later than the 60th day after the day on
which the holder receives the payment or
distribution.
(B) Limitation.--This paragraph shall not
apply to any amount described in subparagraph
(A) received by an individual from an Archer
MSA if, at any time during the 1-year period
ending on the day of such receipt, such
individual received any other amount described
in subparagraph (A) from an Archer MSA which
was not includible in the individual's gross
income because of the application of this
paragraph.
(6) Coordination with medical expense deduction.--For
purposes of determining the amount of the deduction
under section 213, any payment or distribution out of
an Archer MSA for qualified medical expenses shall not
be treated as an expense paid for medical care.
(7) Transfer of account incident to divorce.--The
transfer of an individual's interest in an Archer MSA
to an individual's spouse or former spouse under a
divorce or separation instrument described in clause
(i) of section 121(d)(3)(C) shall not be considered a
taxable transfer made by such individual
notwithstanding any other provision of this subtitle,
and such interest shall, after such transfer, be
treated as an Archer MSA with respect to which such
spouse is the account holder.
(8) Treatment after death of account holder.--
(A) Treatment if designated beneficiary is
spouse.--If the account holder's surviving
spouse acquires such holder's interest in an
Archer MSA by reason of being the designated
beneficiary of such account at the death of the
account holder, such Archer MSA shall be
treated as if the spouse were the account
holder.
(B) Other cases.--
(i) In general.--If, by reason of the
death of the account holder, any person
acquires the account holder's interest
in an Archer MSA in a case to which
subparagraph (A) does not apply--
(I) such account shall cease
to be an Archer MSA as of the
date of death, and
(II) an amount equal to the
fair market value of the assets
in such account on such date
shall be includible if such
person is not the estate of
such holder, in such person's
gross income for the taxable
year which includes such date,
or if such person is the estate
of such holder, in such
holder's gross income for the
last taxable year of such
holder.
(ii) Special rules.--
(I) Reduction of inclusion
for pre-death expenses.--The
amount includible in gross
income under clause (i) by any
person (other than the estate)
shall be reduced by the amount
of qualified medical expenses
which were incurred by the
decedent before the date of the
decedent's death and paid by
such person within 1 year after
such date.
(II) Deduction for estate
taxes.--An appropriate
deduction shall be allowed
under section 691(c) to any
person (other than the decedent
or the decedent's spouse) with
respect to amounts included in
gross income under clause (i)
by such person.
(g) Cost-of-living adjustment.--In the case of any taxable
year beginning in a calendar year after 1998, each dollar
amount in subsection (c)(2) shall be increased by an amount
equal to--
(1) such dollar amount, multiplied by
(2) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which such
taxable year begins by substituting ``calendar year
1997'' for ``calendar year 2016'' in subparagraph
(A)(ii) thereof.
If any increase under the preceding sentence is not a multiple
of $50, such increase shall be rounded to the nearest multiple
of $50.
(h) Reports.--The Secretary may require the trustee of an
Archer MSA to make such reports regarding such account to the
Secretary and to the account holder with respect to
contributions, distributions, and such other matters as the
Secretary determines appropriate. The reports required by this
subsection shall be filed at such time and in such manner and
furnished to such individuals at such time and in such manner
as may be required by the Secretary.
(i) Limitation on number of taxpayers having Archer MSAs.--
(1) In general.--Except as provided in paragraph (5),
no individual shall be treated as an eligible
individual for any taxable year beginning after the
cut-off year unless--
(A) such individual was an active MSA
participant for any taxable year ending on or
before the close of the cut-off year, or
(B) such individual first became an active
MSA participant for a taxable year ending after
the cut-off year by reason of coverage under a
high deductible health plan of an MSA-
participating employer.
(2) Cut-off year.--For purposes of paragraph (1), the
term ``cut-off year'' means the earlier of--
(A) calendar year 2007, or
(B) the first calendar year before 2007 for
which the Secretary determines under subsection
(j) that the numerical limitation for such year
has been exceeded.
(3) Active MSA participant.--For purposes of this
subsection--
(A) In general.--The term ``active MSA
participant'' means, with respect to any
taxable year, any individual who is the account
holder of any Archer MSA into which any
contribution was made which was excludable from
gross income under section 106(b), or allowable
as a deduction under this section, for such
taxable year.
(B) Special rule for cut-off years before
2007.--In the case of a cut-off year before
2007--
(i) an individual shall not be
treated as an eligible individual for
any month of such year or an active MSA
participant under paragraph (1)(A)
unless such individual is, on or before
the cut-off date, covered under a high
deductible health plan, and
(ii) an employer shall not be treated
as an MSA-participating employer unless
the employer, on or before the cut-off
date, offered coverage under a high
deductible health plan to any employee.
(C) Cut-off date.--For purposes of
subparagraph (B)--
(i) In general.--Except as otherwise
provided in this subparagraph, the cut-
off date is October 1 of the cut-off
year.
(ii) Employees with enrollment
periods after October 1.--In the case
of an individual described in subclause
(I) of subsection (c)(1)(A)(iii), if
the regularly scheduled enrollment
period for health plans of the
individual's employer occurs during the
last 3 months of the cut-off year, the
cut-off date is December 31 of the cut-
off year.
(iii) Self-employed individuals.--In
the case of an individual described in
subclause (II) of subsection
(c)(1)(A)(iii), the cut-off date is
November 1 of the cut-off year.
(iv) Special rules for 1997.--If 1997
is a cut-off year by reason of
subsection (j)(1)(A)--
(I) each of the cut-off dates
under clauses (i) and (iii)
shall be 1 month earlier than
the date determined without
regard to this clause, and
(II) clause (ii) shall be
applied by substituting ``4
months'' for ``3 months''.
(4) MSA-participating employer.--For purposes of this
subsection, the term ``MSA-participating employer''
means any small employer if--
(A) such employer made any contribution to
the Archer MSA of any employee during the cut-
off year or any preceding calendar year which
was excludable from gross income under section
106(b), or
(B) at least 20 percent of the employees of
such employer who are eligible individuals for
any month of the cut-off year by reason of
coverage under a high deductible health plan of
such employer each made a contribution of at
least $100 to their Archer MSAs for any taxable
year ending with or within the cut-off year
which was allowable as a deduction under this
section.
(5) Additional eligibility after cut-off year.--If
the Secretary determines under subsection (j)(2)(A)
that the numerical limit for the calendar year
following a cut-off year described in paragraph (2)(B)
has not been exceeded--
(A) this subsection shall not apply to any
otherwise eligible individual who is covered
under a high deductible health plan during the
first 6 months of the second calendar year
following the cut-off year (and such individual
shall be treated as an active MSA participant
for purposes of this subsection if a
contribution is made to any Archer MSA with
respect to such coverage), and
(B) any employer who offers coverage under a
high deductible health plan to any employee
during such 6-month period shall be treated as
an MSA-participating employer for purposes of
this subsection if the requirements of
paragraph (4) are met with respect to such
coverage.
For purposes of this paragraph, subsection (j)(2)(A)
shall be applied for 1998 by substituting ``750,000''
for ``600,000''.
(j) Determination of whether numerical limits are exceeded.--
(1) Determination of whether limit exceeded for
1997.--The numerical limitation for 1997 is exceeded
if, based on the reports required under paragraph (4),
the number of Archer MSAs established as of--
(A) April 30, 1997, exceeds 375,000, or
(B) June 30, 1997, exceeds 525,000.
(2) Determination of whether limit exceeded for 1998,
1999, 2001, 2002, 2004, 2005, or 2006.--
(A) In general.--The numerical limitation for
1998, 1999, 2001, 2002, 2004, 2005, or 2006 is
exceeded if the sum of--
(i) the number of MSA returns filed
on or before April 15 of such calendar
year for taxable years ending with or
within the preceding calendar year,
plus
(ii) the Secretary's estimate
(determined on the basis of the returns
described in clause (i)) of the number
of MSA returns for such taxable years
which will be filed after such date,
exceeds 750,000 (600,000 in the case of 1998).
For purposes of the preceding sentence, the
term ``MSA return'' means any return on which
any exclusion is claimed under section 106(b)
or any deduction is claimed under this section.
(B) Alternative computation of limitation.--
The numerical limitation for 1998, 1999, 2001,
2002, 2004, 2005, or 2006 is also exceeded if
the sum of--
(i) 90 percent of the sum determined
under subparagraph (A) for such
calendar year, plus
(ii) the product of 2.5 and the
number of Archer MSAs established
during the portion of such year
preceding July 1 (based on the reports
required under paragraph (4)) for
taxable years beginning in such year,
exceeds 750,000.
(C) No limitation for 2000 or 2003.--The
numerical limitation shall not apply for 2000
or 2003.
(3) Previously uninsured individuals not included in
determination.--
(A) In general.--The determination of whether
any calendar year is a cut-off year shall be
made by not counting the Archer MSA of any
previously uninsured individual.
(B) Previously uninsured individual.--For
purposes of this subsection, the term
``previously uninsured individual'' means, with
respect to any Archer MSA, any individual who
had no health plan coverage (other than
coverage referred to in subsection (c)(1)(B))
at any time during the 6-month period before
the date such individual's coverage under the
high deductible health plan commences.
(4) Reporting by MSA trustees.--
(A) In general.--Not later than August 1 of
1997, 1998, 1999, 2001, 2002, 2004, 2005, and
2006, each person who is the trustee of an
Archer MSA established before July 1 of such
calendar year shall make a report to the
Secretary (in such form and manner as the
Secretary shall specify) which specifies--
(i) the number of Archer MSAs
established before such July 1 (for
taxable years beginning in such
calendar year) of which such person is
the trustee,
(ii) the name and TIN of the account
holder of each such account, and
(iii) the number of such accounts
which are accounts of previously
uninsured individuals.
(B) Additional report for 1997.--Not later
than June 1, 1997, each person who is the
trustee of an Archer MSA established before May
1, 1997, shall make an additional report
described in subparagraph (A) but only with
respect to accounts established before May 1,
1997.
(C) Penalty for failure to file report.--The
penalty provided in section 6693(a) shall apply
to any report required by this paragraph,
except that--
(i) such section shall be applied by
substituting ``$25'' for ``$50'', and
(ii) the maximum penalty imposed on
any trustee shall not exceed $5,000.
(D) Aggregation of accounts.--To the extent
practicable, in determining the number of
Archer MSAs on the basis of the reports under
this paragraph, all Archer MSAs of an
individual shall be treated as 1 account and
all accounts of individuals who are married to
each other shall be treated as 1 account.
(5) Date of making determinations.--Any determination
under this subsection that a calendar year is a cut-off
year shall be made by the Secretary and shall be
published not later than October 1 of such year.
SEC. 221. INTEREST ON EDUCATION LOANS.
(a) Allowance of deduction.--In the case of an individual,
there shall be allowed as a deduction for the taxable year an
amount equal to the interest paid by the taxpayer during the
taxable year on any qualified education loan.
(b) Maximum deduction.--
(1) In general.--Except as provided in paragraph (2),
the deduction allowed by subsection (a) for the taxable
year shall not exceed $2,500.
(2) Limitation based on modified adjusted gross
income.--
(A) In general.--The amount which would (but
for this paragraph) be allowable as a deduction
under this section shall be reduced (but not
below zero) by the amount determined under
subparagraph (B).
(B) Amount of reduction.--The amount
determined under this subparagraph is the
amount which bears the same ratio to the amount
which would be so taken into account as--
(i) the excess of--
(I) the taxpayer's modified
adjusted gross income for such
taxable year, over
(II) $50,000 ($100,000 in the
case of a joint return), bears
to (ii) $15,000 ($30,000 in the
case of a joint return).
(C) Modified adjusted gross income.--The term
``modified adjusted gross income'' means
adjusted gross income determined--
(i) without regard to this section
and sections 222, 911, 931, and 933,
and
(ii) after application of sections
86, 135, 137, 219, and 469 (c)
Dependents not eligible for
deduction.--No deduction shall be
allowed by this section to an
individual for the taxable year if a
deduction under section 151 with
respect to such individual is allowed
to another taxpayer for the taxable
year beginning in the calendar year in
which such individual's taxable year
begins.
(d) Definitions.--For purposes of this section--
(1) Qualified education loan.--The term ``qualified
education loan'' means any indebtedness incurred by the
taxpayer solely to pay qualified higher education
expenses--
(A) which are incurred on behalf of the
taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer as of the time the
indebtedness was incurred,
(B) which are paid or incurred within a
reasonable period of time before or after the
indebtedness is incurred, and
(C) which are attributable to education
furnished during a period during which the
recipient was an eligible student.
Such term includes indebtedness used to refinance
indebtedness which qualifies as a qualified education
loan. The term ``qualified education loan'' shall not
include any indebtedness owed to a person who is
related (within the meaning of section 267(b) or
707(b)(1)) to the taxpayer or to any person by reason
of a loan under any qualified employer plan (as defined
in section 72(p)(4)) or under any contract referred to
in section 72(p)(5).
(2) Qualified higher education expenses.--The term
``qualified higher education expenses'' means the cost
of attendance (as defined in section 472 of the Higher
Education Act of 1965, 20 U.S.C. 1087ll, as in effect
on the day before the date of the enactment of the
Taxpayer Relief Act of 1997) at an eligible educational
institution, reduced by the sum of--
(A) the amount excluded from gross income
under section 127, 135, 529, or 530 by reason
of such expenses, and
(B) the amount of any scholarship, allowance,
or payment described in section 25A(g)(2).
For purposes of the preceding sentence, the term
``eligible educational institution'' has the same
meaning given such term by section 25A(f)(2), except
that such term shall also include an institution
conducting an internship or residency program leading
to a degree or certificate awarded by an institution of
higher education, a hospital, or a health care facility
which offers postgraduate training.
(3) Eligible student.--The term ``eligible student''
has the meaning given such term by section 25A(b)(3).
(4) Dependent.--The term ``dependent'' has the
meaning given such term by [section 152] section 7706
(determined without regard to subsections (b)(1),
(b)(2), and (d)(1)(B) thereof).
(e) Special rules.--
(1) Denial of double benefit.--No deduction shall be
allowed under this section for any amount for which a
deduction is allowable under any other provision of
this chapter.
(2) Married couples must file joint return.--If the
taxpayer is married at the close of the taxable year,
the deduction shall be allowed under subsection (a)
only if the taxpayer and the taxpayer's spouse file a
joint return for the taxable year.
(3) Marital status.--Marital status shall be
determined in accordance with section 7703.
(f) Inflation adjustments.--
(1) In general.--In the case of a taxable year
beginning after 2002, the $50,000 and $100,000 amounts
in subsection (b)(2) shall each be increased by an
amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2001'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $5,000, such amount
shall be rounded to the next lowest multiple of $5,000.
SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.
(a) Allowance of deduction.--In the case of an individual,
there shall be allowed as a deduction an amount equal to the
qualified tuition and related expenses paid by the taxpayer
during the taxable year.
(b) Dollar limitations.--
(1) In general.--The amount allowed as a deduction
under subsection (a) with respect to the taxpayer for
any taxable year shall not exceed the applicable dollar
limit.
(2) Applicable dollar limit.--
(A) 2002 and 2003.--In the case of a taxable
year beginning in 2002 or 2003, the applicable
dollar limit shall be equal to--
(i) in the case of a taxpayer whose
adjusted gross income for the taxable
year does not exceed $65,000 ($130,000
in the case of a joint return), $3,000,
and--
(ii) in the case of any other
taxpayer, zero.
(B) After 2003.--In the case of any taxable
year beginning after 2003, the applicable
dollar amount shall be equal to--
(i) in the case of a taxpayer whose
adjusted gross income for the taxable
year does not exceed $65,000 ($130,000
in the case of a joint return), $4,000,
(ii) in the case of a taxpayer not
described in clause (i) whose adjusted
gross income for the taxable year does
not exceed $80,000 ($160,000 in the
case of a joint return), $2,000, and
(iii) in the case of any other
taxpayer, zero.
(C) Adjusted gross income.--For purposes of
this paragraph, adjusted gross income shall be
determined--
(i) without regard to this section
and sections 911, 931, and 933, and
(ii) after application of sections
86, 135, 137, 219, 221, and 469.
(c) No double benefit.--
(1) In general.--No deduction shall be allowed under
subsection (a) for any expense for which a deduction is
allowed to the taxpayer under any other provision of
this chapter.
(2) Coordination with other education incentives.--
(A) Denial of deduction if credit elected.--
No deduction shall be allowed under subsection
(a) for a taxable year with respect to the
qualified tuition and related expenses with
respect to an individual if the taxpayer or any
other person elects to have section 25A apply
with respect to such individual for such year.
(B) Coordination with exclusions.--The total
amount of qualified tuition and related
expenses shall be reduced by the amount of such
expenses taken into account in determining any
amount excluded under section 135, 529(c)(1),
or 530(d)(2). For purposes of the preceding
sentence, the amount taken into account in
determining the amount excluded under section
529(c)(1) shall not include that portion of the
distribution which represents a return of any
contributions to the plan.
(3) Dependents.--No deduction shall be allowed under
subsection (a) to any individual [with respect to whom
a deduction under section 151 is allowable to] who is a
dependent of another taxpayer for a taxable year
beginning in the calendar year in which such
individual's taxable year begins.
(d) Definitions and special rules.--For purposes of this
section--
(1) Qualified tuition and related expenses.--The term
``qualified tuition and related expenses'' has the
meaning given such term by section 25A(f). Such
expenses shall be reduced in the same manner as under
section 25A(g)(2).
(2) Identification requirement.--No deduction shall
be allowed under subsection (a) to a taxpayer with
respect to the qualified tuition and related expenses
of an individual unless the taxpayer includes the name
and taxpayer identification number of the individual on
the return of tax for the taxable year.
(3) Limitation on taxable year of deduction.--
(A) In general.--A deduction shall be allowed
under subsection (a) for qualified tuition and
related expenses for any taxable year only to
the extent such expenses are in connection with
enrollment at an institution of higher
education during the taxable year.
(B) Certain prepayments allowed.--
Subparagraph (A) shall not apply to qualified
tuition and related expenses paid during a
taxable year if such expenses are in connection
with an academic term beginning during such
taxable year or during the first 3 months of
the next taxable year.
(4) No deduction for married individuals filing
separate returns.--If the taxpayer is a married
individual (within the meaning of section 7703), this
section shall apply only if the taxpayer and the
taxpayer's spouse file a joint return for the taxable
year.
(5) Nonresident aliens.--If the taxpayer is a
nonresident alien individual for any portion of the
taxable year, this section shall apply only if such
individual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
(6) Payee statement requirement.--
(A) In general.--Except as otherwise provided
by the Secretary, no deduction shall be allowed
under subsection (a) unless the taxpayer
receives a statement furnished under section
6050S(d) which contains all of the information
required by paragraph (2) thereof.
(B) Statement received by dependent.--The
receipt of the statement referred to in
subparagraph (A) by an individual described in
subsection (c)(3) shall be treated for purposes
of subparagraph (A) as received by the
taxpayer.
(7) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry
out this section, including regulations requiring
recordkeeping and information reporting.
(e) Termination.--This section shall not apply to taxable
years beginning after December 31, 2017.
SEC. 223. HEALTH SAVINGS ACCOUNTS.
(a) Deduction allowed.--In the case of an individual who is
an eligible individual for any month during the taxable year,
there shall be allowed as a deduction for the taxable year an
amount equal to the aggregate amount paid in cash during such
taxable year by or on behalf of such individual to a health
savings account of such individual.
(b) Limitations.--
(1) In general.--The amount allowable as a deduction
under subsection (a) to an individual for the taxable
year shall not exceed the sum of the monthly
limitations for months during such taxable year that
the individual is an eligible individual.
(2) Monthly limitation.--The monthly limitation for
any month is \1/12\ of--
(A) in the case of an eligible individual who
has self- only coverage under a high deductible
health plan as of the first day of such month,
$2,250.
(B) in the case of an eligible individual who
has family coverage under a high deductible
health plan as of the first day of such month,
$4,500.
(3) Additional contributions for individuals 55 or
older.--
(A) In general.--In the case of an individual
who has attained age 55 before the close of the
taxable year, the applicable limitation under
subparagraphs (A) and (B) of paragraph (2)
shall be increased by the additional
contribution amount.
(B) Additional contribution amount.--For
purposes of this section, the additional
contribution amount is the amount determined in
accordance with the following table:
------------------------------------------------------------------------
The additional contribution amount
For taxable years beginning in: is:
------------------------------------------------------------------------
2004 $500
2005 $600
2006 $700
2007 $800
2008 $900
2009 and thereafter $1,000.
------------------------------------------------------------------------
(4) Coordination with other contributions.--The
limitation which would (but for this paragraph) apply
under this subsection to an individual for any taxable
year shall be reduced (but not below zero) by the sum
of--
(A) the aggregate amount paid for such
taxable year to Archer MSAs of such individual,
(B) the aggregate amount contributed to
health savings accounts of such individual
which is excludable from the taxpayer's gross
income for such taxable year under section
106(d) (and such amount shall not be allowed as
a deduction under subsection (a)), and
(C) the aggregate amount contributed to
health savings accounts of such individual for
such taxable year under section 408(d)(9) (and
such amount shall not be allowed as a deduction
under subsection (a)).
Subparagraph (A) shall not apply with respect to any
individual to whom paragraph (5) applies.
(5) Special rule for married individuals.--In the
case of individuals who are married to each other, if
either spouse has family coverage--
(A) both spouses shall be treated as having
only such family coverage (and if such spouses
each have family coverage under different
plans, as having the family coverage with the
lowest annual deductible), and
(B) the limitation under paragraph (1) (after
the application of subparagraph (A) and without
regard to any additional contribution amount
under paragraph (3))--
(i) shall be reduced by the aggregate
amount paid to Archer MSAs of such
spouses for the taxable year, and
(ii) after such reduction, shall be
divided equally between them unless
they agree on a different division.
(6) Denial of deduction to dependents.--No deduction
shall be allowed under this section to any individual
[with respect to whom a deduction under section 151 is
allowable to] who is a dependent of another taxpayer
for a taxable year beginning in the calendar year in
which such individual's taxable year begins.
(7) Medicare eligible individuals.--The limitation
under this subsection for any month with respect to an
individual shall be zero for the first month such
individual is entitled to benefits under title XVIII of
the Social Security Act and for each month thereafter.
(8) Increase in limit for individuals becoming
eligible individuals after the beginning of the year.--
(A) In general.--For purposes of computing
the limitation under paragraph (1) for any
taxable year, an individual who is an eligible
individual during the last month of such
taxable year shall be treated--
(i) as having been an eligible
individual during each of the months in
such taxable year, and
(ii) as having been enrolled, during
each of the months such individual is
treated as an eligible individual
solely by reason of clause (i), in the
same high deductible health plan in
which the individual was enrolled for
the last month of such taxable year.
(B) Failure to maintain high deductible
health plan coverage.--
(i) In general.--If, at any time
during the testing period, the
individual is not an eligible
individual, then--
(I) gross income of the
individual for the taxable year
in which occurs the first month
in the testing period for which
such individual is not an
eligible individual is
increased by the aggregate
amount of all contributions to
the health savings account of
the individual which could not
have been made but for
subparagraph (A), and
(II) the tax imposed by this
chapter for any taxable year on
the individual shall be
increased by 10 percent of the
amount of such increase.
(ii) Exception for disability or
death.--Subclauses (I) and (II) of
clause (i) shall not apply if the
individual ceased to be an eligible
individual by reason of the death of
the individual or the individual
becoming disabled (within the meaning
of section 72(m)(7)).
(iii) Testing period.--The term
``testing period'' means the period
beginning with the last month of the
taxable year referred to in
subparagraph (A) and ending on the last
day of the 12th month following such
month.
(c) Definitions and special rules.--For purposes of this
section--
(1) Eligible individual.--
(A) In general.--The term ``eligible
individual'' means, with respect to any month,
any individual if--
(i) such individual is covered under
a high deductible health plan as of the
1st day of such month, and
(ii) such individual is not, while
covered under a high deductible health
plan, covered under any health plan--
(I) which is not a high
deductible health plan, and
(II) which provides coverage
for any benefit which is
covered under the high
deductible health plan.
(B) Certain coverage disregarded.--
Subparagraph (A)(ii) shall be applied without
regard to--
(i) coverage for any benefit provided
by permitted insurance,
(ii) coverage (whether through
insurance or otherwise) for accidents,
disability, dental care, vision care,
or long-term care, and
(iii) for taxable years beginning
after December 31, 2006, coverage under
a health flexible spending arrangement
during any period immediately following
the end of a plan year of such
arrangement during which unused
benefits or contributions remaining at
the end of such plan year may be paid
or reimbursed to plan participants for
qualified benefit expenses incurred
during such period if--
(I) the balance in such
arrangement at the end of such
plan year is zero, or
(II) the individual is making
a qualified HSA distribution
(as defined in section 106(e))
in an amount equal to the
remaining balance in such
arrangement as of the end of
such plan year, in accordance
with rules prescribed by the
Secretary.
(C) Special rule for individuals eligible for
certain veterans benefits.--An individual shall
not fail to be treated as an eligible
individual for any period merely because the
individual receives hospital care or medical
services under any law administered by the
Secretary of Veterans Affairs for a service-
connected disability (within the meaning of
section 101(16) of title 38, United States
Code).
(2) High deductible health plan.--
(A) In general.--The term ``high deductible
health plan'' means a health plan--
(i) which has an annual deductible
which is not less than--
(I) $1,000 for self-only
coverage, and
(II) twice the dollar amount
in subclause (I) for family
coverage, and
(ii) the sum of the annual deductible
and the other annual out-of-pocket
expenses required to be paid under the
plan (other than for premiums) for
covered benefits does not exceed--
(I) $5,000 for self-only
coverage, and
(II) twice the dollar amount
in subclause (I) for family
coverage.
(B) Exclusion of certain plans.--Such term
does not include a health plan if substantially
all of its coverage is coverage described in
paragraph (1)(B).
(C) Safe harbor for absence of preventive
care deductible.--A plan shall not fail to be
treated as a high deductible health plan by
reason of failing to have a deductible for
preventive care (within the meaning of section
1861 of the Social Security Act, except as
otherwise provided by the Secretary).
(D) Special rules for network plans.--In the
case of a plan using a network of providers--
(i) Annual out-of-pocket
limitation.--Such plan shall not fail
to be treated as a high deductible
health plan by reason of having an out-
of-pocket limitation for services
provided outside of such network which
exceeds the applicable limitation under
subparagraph (A)(ii).
(ii) Annual deductible.--Such plan's
annual deductible for services provided
outside of such network shall not be
taken into account for purposes of
subsection (b)(2).
(3) Permitted insurance.--The term ``permitted
insurance'' means--
(A) insurance if substantially all of the
coverage provided under such insurance relates
to--
(i) liabilities incurred under
workers' compensation laws,
(ii) tort liabilities,
(iii) liabilities relating to
ownership or use of property, or
(iv) such other similar liabilities
as the Secretary may specify by
regulations,
(B) insurance for a specified disease or
illness, and
(C) insurance paying a fixed amount per day
(or other period) of hospitalization.
(4) Family coverage.--The term ``family coverage''
means any coverage other than self-only coverage.
(5) Archer MSA.--The term ``Archer MSA'' has the
meaning given such term in section 220(d).
(d) Health savings account.--For purposes of this section--
(1) In general.--The term ``health savings account''
means a trust created or organized in the United States
as a health savings account exclusively for the purpose
of paying the qualified medical expenses of the account
beneficiary, but only if the written governing
instrument creating the trust meets the following
requirements:
(A) Except in the case of a rollover
contribution described in subsection (f)(5) or
section 220(f)(5), no contribution will be
accepted--
(i) unless it is in cash, or
(ii) to the extent such contribution,
when added to previous contributions to
the trust for the calendar year,
exceeds the sum of--
(I) the dollar amount in
effect under subsection
(b)(2)(B), and
(II) the dollar amount in
effect under subsection
(b)(3)(B).
(B) The trustee is a bank (as defined in
section 408(n)), an insurance company (as
defined in section 816), or another person who
demonstrates to the satisfaction of the
Secretary that the manner in which such person
will administer the trust will be consistent
with the requirements of this section.
(C) No part of the trust assets will be
invested in life insurance contracts.
(D) The assets of the trust will not be
commingled with other property except in a
common trust fund or common investment fund.
(E) The interest of an individual in the
balance in his account is nonforfeitable.
(2) Qualified medical expenses.--
(A) In general.--The term ``qualified medical
expenses'' means, with respect to an account
beneficiary, amounts paid by such beneficiary
for medical care (as defined in section 213(d))
for such individual, the spouse of such
individual, and any dependent (as defined in
[section 152] section 7706, determined without
regard to subsections (b)(1), (b)(2), and
(d)(1)(B) thereof) of such individual, but only
to the extent such amounts are not compensated
for by insurance or otherwise. Such term shall
include an amount paid for medicine or a drug
only if such medicine or drug is a prescribed
drug (determined without regard to whether such
drug is available without a prescription) or is
insulin.
(B) Health insurance may not be purchased
from account.--Subparagraph (A) shall not apply
to any payment for insurance.
(C) Exceptions.--Subparagraph (B) shall not
apply to any expense for coverage under--
(i) a health plan during any period
of continuation coverage required under
any Federal law,
(ii) a qualified long-term care
insurance contract (as defined in
section 7702B(b)),
(iii) a health plan during a period
in which the individual is receiving
unemployment compensation under any
Federal or State law, or
(iv) in the case of an account
beneficiary who has attained the age
specified in section 1811 of the Social
Security Act, any health insurance
other than a medicare supplemental
policy (as defined in section 1882 of
the Social Security Act).
(3) Account beneficiary.--The term ``account
beneficiary'' means the individual on whose behalf the
health savings account was established.
(4) Certain rules to apply.--Rules similar to the
following rules shall apply for purposes of this
section:
(A) Section 219(d)(2) (relating to no
deduction for rollovers).
(B) Section 219(f)(3) (relating to time when
contributions deemed made).
(C) Except as provided in section 106(d),
section 219(f)(5) (relating to employer
payments).
(D) Section 408(g) (relating to community
property laws).
(E) Section 408(h) (relating to custodial
accounts).
(e) Tax treatment of accounts.--
(1) In general.--A health savings account is exempt
from taxation under this subtitle unless such account
has ceased to be a health savings account.
Notwithstanding the preceding sentence, any such
account is subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business
income of charitable, etc. organizations).
(2) Account terminations.--Rules similar to the rules
of paragraphs (2) and (4) of section 408(e) shall apply
to health savings accounts, and any amount treated as
distributed under such rules shall be treated as not
used to pay qualified medical expenses.
(f) Tax treatment of distributions.--
(1) Amounts used for qualified medical expenses.--Any
amount paid or distributed out of a health savings
account which is used exclusively to pay qualified
medical expenses of any account beneficiary shall not
be includible in gross income.
(2) Inclusion of amounts not used for qualified
medical expenses.--Any amount paid or distributed out
of a health savings account which is not used
exclusively to pay the qualified medical expenses of
the account beneficiary shall be included in the gross
income of such beneficiary.
(3) Excess contributions returned before due date of
return.--
(A) In general.--If any excess contribution
is contributed for a taxable year to any health
savings account of an individual, paragraph (2)
shall not apply to distributions from the
health savings accounts of such individual (to
the extent such distributions do not exceed the
aggregate excess contributions to all such
accounts of such individual for such year) if--
(i) such distribution is received by
the individual on or before the last
day prescribed by law (including
extensions of time) for filing such
individual's return for such taxable
year, and
(ii) such distribution is accompanied
by the amount of net income
attributable to such excess
contribution.
Any net income described in clause (ii) shall
be included in the gross income of the
individual for the taxable year in which it is
received.
(B) Excess contribution.--For purposes of
subparagraph (A), the term ``excess
contribution'' means any contribution (other
than a rollover contribution described in
paragraph (5) or section 220(f)(5)) which is
neither excludable from gross income under
section 106(d) nor deductible under this
section.
(4) Additional tax on distributions not used for
qualified medical expenses.--
(A) In general.--The tax imposed by this
chapter on the account beneficiary for any
taxable year in which there is a payment or
distribution from a health savings account of
such beneficiary which is includible in gross
income under paragraph (2) shall be increased
by 20 percent of the amount which is so
includible.
(B) Exception for disability or death.--
Subparagraph (A) shall not apply if the payment
or distribution is made after the account
beneficiary becomes disabled within the meaning
of section 72(m)(7) or dies.
(C) Exception for distributions after
medicare eligibility.--Subparagraph (A) shall
not apply to any payment or distribution after
the date on which the account beneficiary
attains the age specified in section 1811 of
the Social Security Act.
(5) Rollover contribution.--An amount is described in
this paragraph as a rollover contribution if it meets
the requirements of subparagraphs (A) and (B).
(A) In general.--Paragraph (2) shall not
apply to any amount paid or distributed from a
health savings account to the account
beneficiary to the extent the amount received
is paid into a health savings account for the
benefit of such beneficiary not later than the
60th day after the day on which the beneficiary
receives the payment or distribution.
(B) Limitation.--This paragraph shall not
apply to any amount described in subparagraph
(A) received by an individual from a health
savings account if, at any time during the 1-
year period ending on the day of such receipt,
such individual received any other amount
described in subparagraph (A) from a health
savings account which was not includible in the
individual's gross income because of the
application of this paragraph.
(6) Coordination with medical expense deduction.--For
purposes of determining the amount of the deduction
under section 213, any payment or distribution out of a
health savings account for qualified medical expenses
shall not be treated as an expense paid for medical
care.
(7) Transfer of account incident to divorce.--The
transfer of an individual's interest in a health
savings account to an individual's spouse or former
spouse under a divorce or separation instrument
described in clause (i) of section 121(d)(3)(C) shall
not be considered a taxable transfer made by such
individual notwithstanding any other provision of this
subtitle, and such interest shall, after such transfer,
be treated as a health savings account with respect to
which such spouse is the account beneficiary.
(8) Treatment after death of account beneficiary.--
(A) Treatment if designated beneficiary is
spouse.--If the account beneficiary's surviving
spouse acquires such beneficiary's interest in
a health savings account by reason of being the
designated beneficiary of such account at the
death of the account beneficiary, such health
savings account shall be treated as if the
spouse were the account beneficiary.
(B) Other cases.--
(i) In general.--If, by reason of the
death of the account beneficiary, any
person acquires the account
beneficiary's interest in a health
savings account in a case to which
subparagraph (A) does not apply--
(I) such account shall cease
to be a health savings account
as of the date of death, and
(II) an amount equal to the
fair market value of the assets
in such account on such date
shall be includible if such
person is not the estate of
such beneficiary, in such
person's gross income for the
taxable year which includes
such date, or if such person is
the estate of such beneficiary,
in such beneficiary's gross
income for the last taxable
year of such beneficiary.
(ii) Special rules.--
(I) Reduction of inclusion
for predeath expenses.--The
amount includible in gross
income under clause (i) by any
person (other than the estate)
shall be reduced by the amount
of qualified medical expenses
which were incurred by the
decedent before the date of the
decedent's death and paid by
such person within 1 year after
such date.
(II) Deduction for estate
taxes.--An appropriate
deduction shall be allowed
under section 691(c) to any
person (other than the decedent
or the decedent's spouse) with
respect to amounts included in
gross income under clause (i)
by such person.
(g) Cost-of-living adjustment.--
(1) In general.--Each dollar amount in subsections
(b)(2) and (c)(2)(A) shall be increased by an amount
equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which such taxable year begins determined by
substituting for ``calendar year 2016'' in
subparagraph (A)(ii) thereof--
(i) except as provided in clause
(ii), ``calendar year 1997'', and
(ii) in the case of each dollar
amount in subsection (c)(2)(A),
``calendar year 2003''.
In the case of adjustments made for any taxable year
beginning after 2007, section 1(f)(4) shall be applied
for purposes of this paragraph by substituting ``March
31'' for ``August 31'', and the Secretary shall publish
the adjusted amounts under subsections (b)(2) and
(c)(2)(A) for taxable years beginning in any calendar
year no later than June 1 of the preceding calendar
year.
(2) Rounding.--If any increase under paragraph (1) is
not a multiple of $50, such increase shall be rounded
to the nearest multiple of $50.
(h) Reports.--The Secretary may require--
(1) the trustee of a health savings account to make
such reports regarding such account to the Secretary
and to the account beneficiary with respect to
contributions, distributions, the return of excess
contributions, and such other matters as the Secretary
determines appropriate, and
(2) any person who provides an individual with a high
deductible health plan to make such reports to the
Secretary and to the account beneficiary with respect
to such plan as the Secretary determines appropriate.
The reports required by this subsection shall be filed at such
time and in such manner and furnished to such individuals at
such time and in such manner as may be required by the
Secretary.
* * * * * * *
PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES.
(a) Entertainment, amusement, recreation, or qualified
transportation fringes.--
(1) In general.--No deduction otherwise allowable
under this chapter shall be allowed for any item--
(A) Activity.--With respect to an activity
which is of a type generally considered to
constitute entertainment, amusement, or
recreation, or
(B) Facility.--With respect to a facility
used in connection with an activity referred to
in subparagraph (A).
(2) Special rules.--For purposes of applying
paragraph (1)--
(A) Dues or fees to any social, athletic, or
sporting club or organization shall be treated
as items with respect to facilities.
(B) An activity described in section 212
shall be treated as a trade or business.
(3) Denial of deduction for club dues.--
Notwithstanding the preceding provisions of this
subsection, no deduction shall be allowed under this
chapter for amounts paid or incurred for membership in
any club organized for business, pleasure, recreation,
or other social purpose.
(4) Qualified transportation fringes.--No deduction
shall be allowed under this chapter for the expense of
any qualified transportation fringe (as defined in
section 132(f)) provided to an employee of the
taxpayer.
(b) Gifts.--
(1) Limitation.--No deduction shall be allowed under
section 162 or section 212 for any expense for gifts
made directly or indirectly to any individual to the
extent that such expense, when added to prior expenses
of the taxpayer for gifts made to such individual
during the same taxable year, exceeds $25. For purposes
of this section, the term ``gift'' means any item
excludable from gross income of the recipient under
section 102 which is not excludable from his gross
income under any other provision of this chapter, but
such term does not include--
(A) an item having a cost to the taxpayer not
in excess of $4.00 on which the name of the
taxpayer is clearly and permanently imprinted
and which is one of a number of identical items
distributed generally by the taxpayer, or
(B) a sign, display rack, or other
promotional material to be used on the business
premises of the recipient.
(2) Special rules.--
(A) In the case of a gift by a partnership,
the limitation contained in paragraph (1) shall
apply to the partnership as well as to each
member thereof.
(B) For purposes of paragraph (1), a husband
and wife shall be treated as one taxpayer.
(c) Certain foreign travel.--
(1) In general.--In the case of any individual who
travels outside the United States away from home in
pursuit of a trade or business or in pursuit of an
activity described in section 212, no deduction shall
be allowed under section 162, or section 212 for that
portion of the expenses of such travel otherwise
allowable under such section which, under regulations
prescribed by the Secretary, is not allocable to such
trade or business or to such activity.
(2) Exception.--Paragraph (1) shall not apply to the
expenses of any travel outside the United States away
from home if--
(A) such travel does not exceed one week, or
(B) the portion of the time of travel outside
the United States away from home which is not
attributable to the pursuit of the taxpayer's
trade or business or an activity described in
section 212 is less than 25 percent of the
total time on such travel.
(3) Domestic travel excluded.--For purposes of this
subsection, travel outside the United States does not
include any travel from one point in the United States
to another point in the United States.
(d) Substantiation required.--No deduction or credit shall be
allowed--
(1) under section 162 or 212 for any traveling
expense (including meals and lodging while away from
home),
(2) for any expense for gifts, or
(3) with respect to any listed property (as defined
in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by
sufficient evidence corroborating the taxpayer's own statement
(A) the amount of such expense or other item, (B) the time and
place of the travel or the date and description of the gift,
(C) the business purpose of the expense or other item, and (D)
the business relationship to the taxpayer of the person
receiving the benefit. The Secretary may by regulations provide
that some or all of the requirements of the preceding sentence
shall not apply in the case of an expense which does not exceed
an amount prescribed pursuant to such regulations. This
subsection shall not apply to any qualified nonpersonal use
vehicle (as defined in subsection (i)).
(e) Specific exceptions to application of subsection (a).--
Subsection (a) shall not apply to--
(1) Food and beverages for employees.--Expenses for
food and beverages (and facilities used in connection
therewith) furnished on the business premises of the
taxpayer primarily for his employees.
(2) Expenses treated as compensation.--
(A) In general.--Except as provided in
subparagraph (B), expenses for goods, services,
and facilities, to the extent that the expenses
are treated by the taxpayer, with respect to
the recipient of the entertainment, amusement,
or recreation, as compensation to an employee
on the taxpayer's return of tax under this
chapter and as wages to such employee for
purposes of chapter 24 (relating to withholding
of income tax at source on wages).
(B) Specified individuals.--
(i) In general.--In the case of a
recipient who is a specified
individual, subparagraph (A) and
paragraph (9) shall each be applied by
substituting ``to the extent that the
expenses do not exceed the amount of
the expenses which'' for ``to the
extent that the expenses''.
(ii) Specified individual.--For
purposes of clause (i), the term
``specified individual'' means any
individual who--
(I) is subject to the
requirements of section 16(a)
of the Securities Exchange Act
of 1934 with respect to the
taxpayer or a related party to
the taxpayer, or
(II) would be subject to such
requirements if the taxpayer
(or such related party) were an
issuer of equity securities
referred to in such section.
For purposes of this clause, a person
is a related party with respect to
another person if such person bears a
relationship to such other person
described in section 267(b) or 707(b).
(3) Reimbursed expenses.--Expenses paid or incurred
by the taxpayer, in connection with the performance by
him of services for another person (whether or not such
other person is his employer), under a reimbursement or
other expense allowance arrangement with such other
person, but this paragraph shall apply--
(A) where the services are performed for an
employer, only if the employer has not treated
such expenses in the manner provided in
paragraph (2), or
(B) where the services are performed for a
person other than an employer, only if the
taxpayer accounts (to the extent provided by
subsection (d)) to such person.
(4) Recreational, etc., expenses for employees.--
Expenses for recreational, social, or similar
activities (including facilities therefor) primarily
for the benefit of employees (other than employees who
are highly compensated employees (within the meaning of
section 414(q))). For purposes of this paragraph, an
individual owning less than a 10-percent interest in
the taxpayer's trade or business shall not be
considered a shareholder or other owner, and for such
purposes an individual shall be treated as owning any
interest owned by a member of his family (within the
meaning of section 267(c)(4)). This paragraph shall not
apply for purposes of subsection (a)(3).
(5) Employees, stockholder, etc., business
meetings.--Expenses incurred by a taxpayer which are
directly related to business meetings of his employees,
stockholders, agents, or directors.
(6) Meetings of business leagues, etc..--Expenses
directly related and necessary to attendance at a
business meeting or convention of any organization
described in section 501(c)(6) (relating to business
leagues, chambers of commerce, real estate boards, and
boards of trade) and exempt from taxation under section
501(a).
(7) Items available to public.--Expenses for goods,
services, and facilities made available by the taxpayer
to the general public.
(8) Entertainment sold to customers.--Expenses for
goods or services (including the use of facilities)
which are sold by the taxpayer in a bona fide
transaction for an adequate and full consideration in
money or money's worth.
(9) Expenses includible in income of persons who are
not employees.--Expenses paid or incurred by the
taxpayer for goods, services, and facilities to the
extent that the expenses are includible in the gross
income of a recipient of the entertainment, amusement,
or recreation who is not an employee of the taxpayer as
compensation for services rendered or as a prize or
award under section 74. The preceding sentence shall
not apply to any amount paid or incurred by the
taxpayer if such amount is required to be included (or
would be so required except that the amount is less
than $600) in any information return filed by such
taxpayer under part III of subchapter A of chapter 61
and is not so included.
For purposes of this subsection, any item referred to in
subsection (a) shall be treated as an expense.
(f) Interest, taxes, casualty losses, etc..--This section
shall not apply to any deduction allowable to the taxpayer
without regard to its connection with his trade or business (or
with his income-producing activity). In the case of a taxpayer
which is not an individual, the preceding sentence shall be
applied as if it were an individual.
(g) Treatment of entertainment, etc., type facility.--For
purposes of this chapter, if deductions are disallowed under
subsection (a) with respect to any portion of a facility, such
portion shall be treated as an asset which is used for
personal, living, and family purposes (and not as an asset used
in the trade or business).
(h) Attendance at conventions, etc..--
(1) In general.--In the case of any individual who
attends a convention, seminar, or similar meeting which
is held outside the North American area, no deduction
shall be allowed under section 162 for expenses
allocable to such meeting unless the taxpayer
establishes that the meeting is directly related to the
active conduct of his trade or business and that, after
taking into account in the manner provided by
regulations prescribed by the Secretary--
(A) the purpose of such meeting and the
activities taking place at such meeting,
(B) the purposes and activities of the
sponsoring organizations or groups,
(C) the residences of the active members of
the sponsoring organization and the places at
which other meetings of the sponsoring
organization or groups have been held or will
be held, and
(D) such other relevant factors as the
taxpayer may present, it is as reasonable for
the meeting to be held outside the North
American area as within the North American
area.
(2) Conventions on cruise ships.--In the case of any
individual who attends a convention, seminar, or other
meeting which is held on any cruise ship, no deduction
shall be allowed under section 162 for expenses
allocable to such meeting, unless the taxpayer meets
the requirements of paragraph (5) and establishes that
the meeting is directly related to the active conduct
of his trade or business and that--
(A) the cruise ship is a vessel registered in
the United States; and
(B) all ports of call of such cruise ship are
located in the United States or in possessions
of the United States.
With respect to cruises beginning in any calendar year,
not more than $2,000 of the expenses attributable to an
individual attending one or more meetings may be taken
into account under section 162 by reason of the
preceding sentence.
(3) Definitions.--For purposes of this subsection--
(A) North American area.--The term ``North
American area'' means the United States, its
possessions, and the Trust Territory of the
Pacific Islands, and Canada and Mexico.
(B) Cruise ship.--The term ``cruise ship''
means any vessel sailing within or without the
territorial waters of the United States.
(4) Subsection to apply to employer as well as to
traveler.--
(A) Except as provided in subparagraph (B),
this subsection shall apply to deductions
otherwise allowable under section 162 to any
person, whether or not such person is the
individual attending the convention, seminar,
or similar meeting.
(B) This subsection shall not deny a
deduction to any person other than the
individual attending the convention, seminar,
or similar meeting with respect to any amount
paid by such person to or on behalf of such
individual if includible in the gross income of
such individual. The preceding sentence shall
not apply if the amount is required to be
included in any information return filed by
such person under part III of subchapter A of
chapter 61 and is not so included.
(5) Reporting requirements.--No deduction shall be
allowed under section 162 for expenses allocable to
attendance at a convention, seminar, or similar meeting
on any cruise ship unless the taxpayer claiming the
deduction attaches to the return of tax on which the
deduction is claimed--
(A) a written statement signed by the
individual attending the meeting which
includes--
(i) information with respect to the
total days of the trip, excluding the
days of transportation to and from the
cruise ship port, and the number of
hours of each day of the trip which
such individual devoted to scheduled
business activities,
(ii) a program of the scheduled
business activities of the meeting, and
(iii) such other information as may
be required in regulations prescribed
by the Secretary; and
(B) a written statement signed by an officer
of the organization or group sponsoring the
meeting which includes--
(i) a schedule of the business
activities of each day of the meeting,
(ii) the number of hours which the
individual attending the meeting
attended such scheduled business
activities, and
(iii) such other information as may
be required in regulations prescribed
by the Secretary.
(6) Treatment of conventions in certain Caribbean
countries.--
(A) In general.--For purposes of this
subsection, the term ``North American area''
includes, with respect to any convention,
seminar, or similar meeting, any beneficiary
country if (as of the time such meeting
begins)--
(i) there is in effect a bilateral or
multilateral agreement described in
subparagraph (C) between such country
and the United States providing for the
exchange of information between the
United States and such country, and
(ii) there is not in effect a finding
by the Secretary that the tax laws of
such country discriminate against
conventions held in the United States.
(B) Beneficiary country.--For purposes of
this paragraph, the term ``beneficiary
country'' has the meaning given to such term by
section 212(a)(1)(A) of the Caribbean Basin
Economic Recovery Act; except that such term
shall include Bermuda.
(C) Authority to conclude exchange of
information agreements.--
(i) In general.--The Secretary is
authorized to negotiate and conclude an
agreement for the exchange of
information with any beneficiary
country. Except as provided in clause
(ii), an exchange of information
agreement shall provide for the
exchange of such information (not
limited to information concerning
nationals or residents of the United
States or the beneficiary country) as
may be necessary or appropriate to
carry out and enforce the tax laws of
the United States and the beneficiary
country (whether criminal or civil
proceedings), including information
which may otherwise be subject to
nondisclosure provisions of the local
law of the beneficiary country such as
provisions respecting bank secrecy and
bearer shares. The exchange of
information agreement shall be
terminable by either country on
reasonable notice and shall provide
that information received by either
country will be disclosed only to
persons or authorities (including
courts and administrative bodies)
involved in the administration or
oversight of, or in the determination
of appeals in respect of, taxes of the
United States or the beneficiary
country and will be used by such
persons or authorities only for such
purposes.
(ii) Nondisclosure of qualified
confidential information sought for
civil tax purposes.--An exchange of
information agreement need not provide
for the exchange of qualified
confidential information which is
sought only for civil tax purposes if--
(I) the Secretary of the
Treasury, after making all
reasonable efforts to negotiate
an agreement which includes the
exchange of such information,
determines that such an
agreement cannot be negotiated
but that the agreement which
was negotiated will
significantly assist in the
administration and enforcement
of the tax laws of the United
States, and
(II) the President determines
that the agreement as
negotiated is in the national
security interest of the United
States.
(iii) Qualified confidential
information defined.--For purposes of
this subparagraph, the term ``qualified
confidential information'' means
information which is subject to the
nondisclosure provisions of any local
law of the beneficiary country
regarding bank secrecy or ownership of
bearer shares.
(iv) Civil tax purposes.--For
purposes of this subparagraph, the
determination of whether information is
sought only for civil tax purposes
shall be made by the requesting party.
(D) Coordination with other provisions.--Any
exchange of information agreement negotiated
under subparagraph (C) shall be treated as an
income tax convention for purposes of section
6103(k)(4). The Secretary may exercise his
authority under subchapter A of chapter 78 to
carry out any obligation of the United States
under an agreement referred to in subparagraph
(C).
(E) Determinations published in the Federal
Register.--The following shall be published in
the Federal Register--
(i) any determination by the
President under subparagraph (C)(ii)
(including the reasons for such
determination),
(ii) any determination by the
Secretary under subparagraph (C)(ii)
(including the reasons for such
determination), and
(iii) any finding by the Secretary
under subparagraph (A)(ii) (and any
termination thereof).
(7) Seminars, etc. for section 212 purposes.--No
deduction shall be allowed under section 212 for
expenses allocable to a convention, seminar, or similar
meeting.
(i) Qualified nonpersonal use vehicle.--For purposes of
subsection (d), the term ``qualified nonpersonal use vehicle''
means any vehicle which, by reason of its nature, is not likely
to be used more than a de minimis amount for personal purposes.
(j) Employee achievement awards.--
(1) General rule.--No deduction shall be allowed
under section 162 or section 212 for the cost of an
employee achievement award except to the extent that
such cost does not exceed the deduction limitations of
paragraph (2).
(2) Deduction limitations.--The deduction for the
cost of an employee achievement award made by an
employer to an employee--
(A) which is not a qualified plan award, when
added to the cost to the employer for all other
employee achievement awards made to such
employee during the taxable year which are not
qualified plan awards, shall not exceed $400,
and
(B) which is a qualified plan award, when
added to the cost to the employer for all other
employee achievement awards made to such
employee during the taxable year (including
employee achievement awards which are not
qualified plan awards), shall not exceed
$1,600.
(3) Definitions.--For purposes of this subsection--
(A) Employee achievement award.--
(i) In general.--The term ``employee
achievement award'' means an item of
tangible personal property which is--
(I) transferred by an
employer to an employee for
length of service achievement
or safety achievement,
(II) awarded as part of a
meaningful presentation, and
(III) awarded under
conditions and circumstances
that do not create a
significant likelihood of the
payment of disguised
compensation.
(ii) Tangible personal property.--For
purposes of clause (i), the term
``tangible personal property'' shall
not include--
(I) cash, cash equivalents,
gift cards, gift coupons, or
gift certificates (other than
arrangements conferring only
the right to select and receive
tangible personal property from
a limited array of such items
pre-selected or pre-approved by
the employer), or
(II) vacations, meals,
lodging, tickets to theater or
sporting events, stocks, bonds,
other securities, and other
similar items.
(B) Qualified plan award.--
(i) In general.--The term ``qualified
plan award'' means an employee
achievement award awarded as part of an
established written plan or program of
the taxpayer which does not
discriminate in favor of highly
compensated employees (within the
meaning of section 414(q)) as to
eligibility or benefits.
(ii) Limitation.--An employee
achievement award shall not be treated
as a qualified plan award for any
taxable year if the average cost of all
employee achievement awards which are
provided by the employer during the
year, and which would be qualified plan
awards but for this subparagraph,
exceeds $400. For purposes of the
preceding sentence, average cost shall
be determined by including the entire
cost of qualified plan awards, without
taking into account employee
achievement awards of nominal value.
(4) Special rules.--For purposes of this subsection--
(A) Partnerships.--In the case of an employee
achievement award made by a partnership, the
deduction limitations contained in paragraph
(2) shall apply to the partnership as well as
to each member thereof.
(B) Length of service awards.--An item shall
not be treated as having been provided for
length of service achievement if the item is
received during the recipient's 1st 5 years of
employment or if the recipient received a
length of service achievement award (other than
an award excludable under section 132(e)(1))
during that year or any of the prior 4 years.
(C) Safety achievement awards.--An item
provided by an employer to an employee shall
not be treated as having been provided for
safety achievement if--
(i) during the taxable year, employee
achievement awards (other than awards
excludable under section 132(e)(1)) for
safety achievement have previously been
awarded by the employer to more than 10
percent of the employees of the
employer (excluding employees described
in clause (ii)), or
(ii) such item is awarded to a
manager, administrator, clerical
employee, or other professional
employee.
(k) Business meals.--
(1) In general.--No deduction shall be allowed under
this chapter for the expense of any food or beverages
unless--
(A) such expense is not lavish or extravagant
under the circumstances, and
(B) the taxpayer (or an employee of the
taxpayer) is present at the furnishing of such
food or beverages.
(2) Exceptions.--Paragraph (1) shall not apply to--
(A) any expense described in paragraph (2),
(3), (4), (7), (8), or (9) of subsection (e),
and
(B) any other expense to the extent provided
in regulations.
(l) Transportation and commuting benefits.--
(1) In general.--No deduction shall be allowed under
this chapter for any expense incurred for providing any
transportation, or any payment or reimbursement, to an
employee of the taxpayer in connection with travel
between the employee's residence and place of
employment, except as necessary for ensuring the safety
of the employee.
(2) Exception.--In the case of any qualified bicycle
commuting reimbursement (as described in section
132(f)(5)(F)), this subsection shall not apply for any
amounts paid or incurred [after December 31, 2017, and
before January 1, 2026].
(m) Additional limitations on travel expenses.--
(1) Luxury water transportation.--
(A) In general.--No deduction shall be
allowed under this chapter for expenses
incurred for transportation by water to the
extent such expenses exceed twice the aggregate
per diem amounts for days of such
transportation. For purposes of the preceding
sentence, the term ``per diem amounts'' means
the highest amount generally allowable with
respect to a day to employees of the executive
branch of the Federal Government for per diem
while away from home but serving in the United
States.
(B) Exceptions.--Subparagraph (A) shall not
apply to--
(i) any expense allocable to a
convention, seminar, or other meeting
which is held on any cruise ship, and
(ii) any expense described in
paragraph (2), (3), (4), (7), (8), or
(9) of subsection (e).
(2) Travel as form of education.--No deduction shall
be allowed under this chapter for expenses for travel
as a form of education.
(3) Travel expenses of spouse, dependent, or
others.--No deduction shall be allowed under this
chapter (other than section 217) for travel expenses
paid or incurred with respect to a spouse, dependent,
or other individual accompanying the taxpayer (or an
officer or employee of the taxpayer) on business
travel, unless--
(A) the spouse, dependent, or other
individual is an employee of the taxpayer,
(B) the travel of the spouse, dependent, or
other individual is for a bona fide business
purpose, and
(C) such expenses would otherwise be
deductible by the spouse, dependent, or other
individual.
(n) Only 50 percent of meal expenses allowed as deduction.--
(1) In general.--The amount allowable as a deduction
under this chapter for any expense for food or
beverages shall not exceed 50 percent of the amount of
such expense which would (but for this paragraph) be
allowable as a deduction under this chapter.
(2) Exceptions.--Paragraph (1) shall not apply to any
expense if--
(A) such expense is described in paragraph
(2), (3), (4), (7), (8), or (9) of subsection
(e),
(B) in the case of an employer who pays or
reimburses moving expenses of an employee, such
expenses are includible in the income of the
employee under section 82, or
(C) such expense is for food or beverages--
(i) required by any Federal law to be
provided to crew members of a
commercial vessel,
(ii) provided to crew members of a
commercial vessel--
(I) which is operating on the
Great Lakes, the Saint Lawrence
Seaway, or any inland waterway
of the United States, and
(II) which is of a kind which
would be required by Federal
law to provide food and
beverages to crew members if it
were operated at sea,
(iii) provided on an oil or gas
platform or drilling rig if the
platform or rig is located offshore, or
(iv) provided on an oil or gas
platform or drilling rig, or at a
support camp which is in proximity and
integral to such platform or rig, if
the platform or rig is located in the
United States north of 54 degrees north
latitude.
Clauses (i) and (ii) of subparagraph (C) shall not
apply to vessels primarily engaged in providing luxury
water transportation (determined under the principles
of subsection (m)). In the case of the employee, the
exception of subparagraph (A) shall not apply to
expenses described in subparagraph (B).
(3) Special rule for individuals subject to Federal
hours of service.--In the case of any expenses for food
or beverages consumed while away from home (within the
meaning of section 162(a)(2)) by an individual during,
or incident to, the period of duty subject to the hours
of service limitations of the Department of
Transportation, paragraph (1) shall be applied by
substituting ``80 percent'' for ``50 percent''.
(o) Meals provided at convenience of employer.--No deduction
shall be allowed under this chapter for--
(1) any expense for the operation of a facility
described in section 132(e)(2), and any expense for
food or beverages, including under section 132(e)(1),
associated with such facility, or
(2) any expense for meals described in section
119(a).
(p) Regulatory authority.--The Secretary shall prescribe such
regulations as he may deem necessary to carry out the purposes
of this section, including regulations prescribing whether
subsection (a) or subsection (b) applies in cases where both
such subsections would otherwise apply.
* * * * * * *
Subchapter D--Deferred Compensation, Etc
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC
* * * * * * *
Subpart A--General Rule
* * * * * * *
SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.
(a) Requirements for qualification.--A trust created or
organized in the United States and forming part of a stock
bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries shall
constitute a qualified trust under this section--
(1) if contributions are made to the trust by such
employer, or employees, or both, or by another employer
who is entitled to deduct his contributions under
section 404(a)(3)(B) (relating to deduction for
contributions to profit-sharing and stock bonus plans),
or by a charitable remainder trust pursuant to a
qualified gratuitous transfer (as defined in section
664(g)(1)), for the purpose of distributing to such
employees or their beneficiaries the corpus and income
of the fund accumulated by the trust in accordance with
such plan;
(2) if under the trust instrument it is impossible,
at any time prior to the satisfaction of all
liabilities with respect to employees and their
beneficiaries under the trust, for any part of the
corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of his employees or
their beneficiaries (but this paragraph shall not be
construed, in the case of a multiemployer plan, to
prohibit the return of a contribution within 6 months
after the plan administrator determines that the
contribution was made by a mistake of fact or law
(other than a mistake relating to whether the plan is
described in section 401(a) or the trust which is part
of such plan is exempt from taxation under section
501(a), or the return of any withdrawal liability
payment determined to be an overpayment within 6 months
of such determination));
(3) if the plan of which such trust is a part
satisfies the requirements of section 410 (relating to
minimum participation standards); and
(4) if the contributions or benefits provided under
the plan do not discriminate in favor of highly
compensated employees (within the meaning of section
414(q)). For purposes of this paragraph, there shall be
excluded from consideration employees described in
section 410(b)(3)(A) and (C).
(5) Special rules relating to nondiscrimination
requirements.--
(A) Salaried or clerical employees.--A
classification shall not be considered
discriminatory within the meaning of paragraph
(4) or section 410(b)(2)(A)(i) merely because
it is limited to salaried or clerical
employees.
(B) Contributions and benefits may bear
uniform relationship to compensation.--A plan
shall not be considered discriminatory within
the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of,
the employees under the plan bear a uniform
relationship to the compensation (within the
meaning of section 414(s)) of such employees.
(C) Certain disparity permitted.--A plan
shall not be considered discriminatory within
the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of,
the employees under the plan favor highly
compensated employees (as defined in section
414(q)) in the manner permitted under
subsection (l).
(D) Integrated defined benefit plan.--
(i) In general.--A defined benefit
plan shall not be considered
discriminatory within the meaning of
paragraph (4) merely because the plan
provides that the employer-derived
accrued retirement benefit for any
participant under the plan may not
exceed the excess (if any) of--
(I) the participant's final
pay with the employer, over
(II) the employer-derived
retirement benefit created
under Federal law attributable
to service by the participant
with the employer.
For purposes of this clause, the
employer-derived retirement benefit
created under Federal law shall be
treated as accruing ratably over 35
years.
(ii) Final pay.--For purposes of this
subparagraph, the participant's final
pay is the compensation (as defined in
section 414(q)(4)) paid to the
participant by the employer for any
year--
(I) which ends during the 5-
year period ending with the
year in which the participant
separated from service for the
employer, and
(II) for which the
participant's total
compensation from the employer
was highest.
(E) 2 or more plans treated as single plan.--
For purposes of determining whether 2 or more
plans of an employer satisfy the requirements
of paragraph (4) when considered as a single
plan--
(i) Contributions.--If the amount of
contributions on behalf of the
employees allowed as a deduction under
section 404 for the taxable year with
respect to such plans, taken together,
bears a uniform relationship to the
compensation (within the meaning of
section 414(s)) of such employees, the
plans shall not be considered
discriminatory merely because the
rights of employees to, or derived
from, the employer contributions under
the separate plans do not become
nonforfeitable at the same rate.
(ii) Benefits.--If the employees'
rights to benefits under the separate
plans do not become nonforfeitable at
the same rate, but the levels of
benefits provided by the separate plans
satisfy the requirements of regulations
prescribed by the Secretary to take
account of the differences in such
rates, the plans shall not be
considered discriminatory merely
because of the difference in such
rates.
(F) Social security retirement age.--For
purposes of testing for discrimination under
paragraph (4)--
(i) the social security retirement
age (as defined in section 415(b)(8))
shall be treated as a uniform
retirement age, and
(ii) subsidized early retirement
benefits and joint and survivor
annuities shall not be treated as being
unavailable to employees on the same
terms merely because such benefits or
annuities are based in whole or in part
on an employee's social security
retirement age (as so defined).
(G) Governmental plans.--Paragraphs (3) and
(4) shall not apply to a governmental plan
(within the meaning of section 414(d)).
(6) A plan shall be considered as meeting the
requirements of paragraph (3) during the whole of any
taxable year of the plan if on one day in each quarter
it satisfied such requirements.
(7) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part satisfies the requirements of section 411
(relating to minimum vesting standards).
(8) A trust forming part of a defined benefit plan
shall not constitute a qualified trust under this
section unless the plan provides that forfeitures must
not be applied to increase the benefits any employee
would otherwise receive under the plan.
(9) Required distributions.--
(A) In general.--A trust shall not constitute
a qualified trust under this subsection unless
the plan provides that the entire interest of
each employee--
(i) will be distributed to such
employee not later than the required
beginning date, or
(ii) will be distributed, beginning
not later than the required beginning
date, in accordance with regulations,
over the life of such employee or over
the lives of such employee and a
designated beneficiary (or over a
period not extending beyond the life
expectancy of such employee or the life
expectancy of such employee and a
designated beneficiary).
(B) Required distribution where employee dies
before entire interest is distributed.--
(i) Where distributions have begun
under subparagraph (A)(ii).--A trust
shall not constitute a qualified trust
under this section unless the plan
provides that if--
(I) the distribution of the
employee's interest has begun
in accordance with subparagraph
(A)(ii), and
(II) the employee dies before
his entire interest has been
distributed to him,
the remaining portion of such interest
will be distributed at least as rapidly
as under the method of distributions
being used under subparagraph (A)(ii)
as of the date of his death.
(ii) 5-year rule for other cases.--A
trust shall not constitute a qualified
trust under this section unless the
plan provides that, if an employee dies
before the distribution of the
employee's interest has begun in
accordance with subparagraph (A)(ii),
the entire interest of the employee
will be distributed within 5 years
after the death of such employee.
(iii) Exception to 5-year rule for
certain amounts payable over life of
beneficiary.--If--
(I) any portion of the
employee's interest is payable
to (or for the benefit of) a
designated beneficiary,
(II) 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
(III) such distributions
begin not later than 1 year
after the date of the
employee's death or such later
date as the Secretary may by
regulations prescribe,
for purposes of clause (ii), the
portion referred to in subclause (I)
shall be treated as distributed on the
date on which such distributions begin.
(iv) Special rule for surviving
spouse of employee.--If the designated
beneficiary referred to in clause
(iii)(I) is the surviving spouse of the
employee--
(I) the date on which the
distributions are required to
begin under clause (iii)(III)
shall not be earlier than the
date on which the employee
would have attained age 70 1/2,
and
(II) if the surviving spouse
dies before the distributions
to such spouse begin, this
subparagraph shall be applied
as if the surviving spouse were
the employee.
(C) Required beginning date.--For purposes of
this paragraph--
(i) In general.--The term ``required
beginning date'' means April 1 of the
calendar year following the later of--
(I) the calendar year in
which the employee attains age
70 1/2, or
(II) the calendar year in
which the employee retires.
(ii) Exception.--Subclause (II) of
clause (i) shall not apply--
(I) except as provided in
section 409(d), in the case of
an employee who is a 5-percent
owner (as defined in section
416) with respect to the plan
year ending in the calendar
year in which the employee
attains age 70 1/2, or
(II) for purposes of section
408(a)(6) or (b)(3).
(iii) Actuarial adjustment.--In the
case of an employee to whom clause
(i)(II) applies who retires in a
calendar year after the calendar year
in which the employee attains age 70 1/
2, the employee's accrued benefit shall
be actuarially increased to take into
account the period after age 70 1/2 in
which the employee was not receiving
any benefits under the plan.
(iv) Exception for governmental and
church plans.--Clauses (ii) and (iii)
shall not apply in the case of a
governmental plan or church plan. For
purposes of this clause, the term
``church plan'' means a plan maintained
by a church for church employees, and
the term ``church'' means any church
(as defined in section 3121(w)(3)(A))
or qualified church-controlled
organization (as defined in section
3121(w)(3)(B)).
(D) Life expectancy.--For purposes of this
paragraph, the life expectancy of an employee
and the employee's spouse (other than in the
case of a life annuity) may be redetermined but
not more frequently than annually.
(E) Designated beneficiary.--For purposes of
this paragraph, the term ``designated
beneficiary'' means any individual designated
as a beneficiary by the employee.
(F) Treatment of payments to children.--Under
regulations prescribed by the Secretary, for
purposes of this paragraph, any amount paid to
a child shall be treated as if it had been paid
to the surviving spouse if such amount will
become payable to the surviving spouse upon
such child reaching majority (or other
designated event permitted under regulations).
(G) Treatment of incidental death benefit
distributions.--For purposes of this title, any
distribution required under the incidental
death benefit requirements of this subsection
shall be treated as a distribution required
under this paragraph.
(10) Other requirements.--
(A) Plans benefiting owner-employees.--In the
case of any plan which provides contributions
or benefits for employees some or all of whom
are owner-employees (as defined in subsection
(c)(3)), a trust forming part of such plan
shall constitute a qualified trust under this
section only if the requirements of subsection
(d) are also met.
(B) Top-heavy plans.--
(i) In general.--In the case of any
top-heavy plan, a trust forming part of
such plan shall constitute a qualified
trust under this section only if the
requirements of section 416 are met.
(ii) Plans which may become top-
heavy.--Except to the extent provided
in regulations, a trust forming part of
a plan (whether or not a top-heavy
plan) shall constitute a qualified
trust under this section only if such
plan contains provisions--
(I) which will take effect if
such plan becomes a top-heavy
plan, and
(II) which meet the
requirements of section 416.
(iii) Exemption for governmental
plans.--This subparagraph shall not
apply to any governmental plan.
(11) Requirement of joint and survivor annuity and
preretirement survivor annuity.--
(A) In general.--In the case of any plan to
which this paragraph applies, except as
provided in section 417, a trust forming part
of such plan shall not constitute a qualified
trust under this section unless--
(i) in the case of a vested
participant who does not die before the
annuity starting date, the accrued
benefit payable to such participant is
provided in the form of a qualified
joint and survivor annuity, and
(ii) in the case of a vested
participant who dies before the annuity
starting date and who has a surviving
spouse, a qualified preretirement
survivor annuity is provided to the
surviving spouse of such participant.
(B) Plans to which paragraph applies.--This
paragraph shall apply to--
(i) any defined benefit plan,
(ii) any defined contribution plan
which is subject to the funding
standards of section 412, and
(iii) any participant under any other
defined contribution plan unless--
(I) such plan provides that
the participant's
nonforfeitable accrued benefit
(reduced by any security
interest held by the plan by
reason of a loan outstanding to
such participant) is payable in
full, on the death of the
participant, to the
participant's surviving spouse
(or, if there is no surviving
spouse or the surviving spouse
consents in the manner required
under section 417(a)(2), to a
designated beneficiary),
(II) such participant does
not elect a payment of benefits
in the form of a life annuity,
and
(III) with respect to such
participant, such plan is not a
direct or indirect transferee
(in a transfer after December
31, 1984) of a plan which is
described in clause (i) or (ii)
or to which this clause applied
with respect to the
participant.
Clause (iii)(III) shall apply only with respect
to the transferred assets (and income
therefrom) if the plan separately accounts for
such assets and any income therefrom.
(C) Exception for certain ESOP benefits.--
(i) In general.--In the case of--
(I) a tax credit employee
stock ownership plan (as
defined in section 409(a)), or
(II) an employee stock
ownership plan (as defined in
section 4975(e)(7)),
subparagraph (A) shall not apply to
that portion of the employee's accrued
benefit to which the requirements of
section 409(h) apply.
(ii) Nonforfeitable benefit must be
paid in full, etc.--In the case of any
participant, clause (i) shall apply
only if the requirements of subclauses
(I), (II), and (III) of subparagraph
(B)(iii) are met with respect to such
participant.
(D) Special rule where participant and spouse
married less than 1 year.--A plan shall not be
treated as failing to meet the requirements of
subparagraphs (B)(iii) or (C) merely because
the plan provides that benefits will not be
payable to the surviving spouse of the
participant unless the participant and such
spouse had been married throughout the 1-year
period ending on the earlier of the
participant's annuity starting date or the date
of the participant's death.
(E) Exception for plans described in section
404(c).--This paragraph shall not apply to a
plan which the Secretary has determined is a
plan described in section 404(c) (or a
continuation thereof) in which participation is
substantially limited to individuals who,
before January 1, 1976, ceased employment
covered by the plan.
(F) Cross reference.--For--
(i) provisions under which
participants may elect to waive the
requirements of this paragraph, and
(ii) other definitions and special
rules for purposes of this paragraph,
see section 417.
(12) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part provides that in the case of any merger or
consolidation with, or transfer of assets or
liabilities to, any other plan after September 2, 1974,
each participant in the plan would (if the plan then
terminated) receive a benefit immediately after the
merger, consolidation, or transfer which is equal to or
greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation,
or transfer (if the plan had then terminated). The
preceding sentence does not apply to any multiemployer
plan with respect to any transaction to the extent that
participants either before or after the transaction are
covered under a multiemployer plan to which title IV of
the Employee Retirement Income Security Act of 1974
applies.
(13) Assignment and alienation.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless the
plan of which such trust is a part provides
that benefits provided under the plan may not
be assigned or alienated. For purposes of the
preceding sentence, there shall not be taken
into account any voluntary and revocable
assignment of not to exceed 10 percent of any
benefit payment made by any participant who is
receiving benefits under the plan unless the
assignment or alienation is made for purposes
of defraying plan administration costs. For
purposes of this paragraph a loan made to a
participant or beneficiary shall not be treated
as an assignment or alienation if such loan is
secured by the participant's accrued
nonforfeitable benefit and is exempt from the
tax imposed by section 4975 (relating to tax on
prohibited transactions) by reason of section
4975(d)(1). This paragraph shall take effect on
January 1, 1976 and shall not apply to
assignments which were irrevocable on September
2, 1974.
(B) Special rules for domestic relations
orders.--Subparagraph (A) shall apply to the
creation, assignment, or recognition of a right
to any benefit payable with respect to a
participant pursuant to a domestic relations
order, except that subparagraph (A) shall not
apply if the order is determined to be a
qualified domestic relations order.
(C) Special rule for certain judgments and
settlements.--Subparagraph (A) shall not apply
to any offset of a participant's benefits
provided under a plan against an amount that
the participant is ordered or required to pay
to the plan if--
(i) the order or requirement to pay
arises--
(I) under a judgment of
conviction for a crime
involving such plan,
(II) under a civil judgment
(including a consent order or
decree) entered by a court in
an action brought in connection
with a violation (or alleged
violation) of part 4 of
subtitle B of title I of the
Employee Retirement Income
Security Act of 1974, or
(III) pursuant to a
settlement agreement between
the Secretary of Labor and the
participant, or a settlement
agreement between the Pension
Benefit Guaranty Corporation
and the participant, in
connection with a violation (or
alleged violation) of part 4 of
such subtitle by a fiduciary or
any other person,
(ii) the judgment, order, decree, or
settlement agreement expressly provides
for the offset of all or part of the
amount ordered or required to be paid
to the plan against the participant's
benefits provided under the plan, and
(iii) in a case in which the survivor
annuity requirements of section
401(a)(11) apply with respect to
distributions from the plan to the
participant, if the participant has a
spouse at the time at which the offset
is to be made--
(I) either such spouse has
consented in writing to such
offset and such consent is
witnessed by a notary public or
representative of the plan (or
it is established to the
satisfaction of a plan
representative that such
consent may not be obtained by
reason of circumstances
described in section
417(a)(2)(B)), or an election
to waive the right of the
spouse to either a qualified
joint and survivor annuity or a
qualified preretirement
survivor annuity is in effect
in accordance with the
requirements of section 417(a),
(II) such spouse is ordered
or required in such judgment,
order, decree, or settlement to
pay an amount to the plan in
connection with a violation of
part 4 of such subtitle, or
(III) in such judgment,
order, decree, or settlement,
such spouse retains the right
to receive the survivor annuity
under a qualified joint and
survivor annuity provided
pursuant to section
401(a)(11)(A)(i) and under a
qualified preretirement
survivor annuity provided
pursuant to section
401(a)(11)(A)(ii), determined
in accordance with subparagraph
(D).
A plan shall not be treated as failing
to meet the requirements of this
subsection, subsection (k), section
403(b), or section 409(d) solely by
reason of an offset described in this
subparagraph.
(D) Survivor annuity.--
(i) In general.--The survivor annuity
described in subparagraph (C)(iii)(III)
shall be determined as if--
(I) the participant
terminated employment on the
date of the offset,
(II) there was no offset,
(III) the plan permitted
commencement of benefits only
on or after normal retirement
age,
(IV) the plan provided only
the minimum-required qualified
joint and survivor annuity, and
(V) the amount of the
qualified preretirement
survivor annuity under the plan
is equal to the amount of the
survivor annuity payable under
the minimum-required qualified
joint and survivor annuity.
(ii) Definition.--For purposes of
this subparagraph, the term ``minimum-
required qualified joint and survivor
annuity'' means the qualified joint and
survivor annuity which is the actuarial
equivalent of the participant's accrued
benefit (within the meaning of section
411(a)(7)) and under which the survivor
annuity is 50 percent of the amount of
the annuity which is payable during the
joint lives of the participant and the
spouse.
(14) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part provides that, unless the participant
otherwise elects, the payment of benefits under the
plan to the participant will begin not later than the
60th day after the latest of the close of the plan year
in which--
(A) the date on which the participant attains
the earlier of age 65 or the normal retirement
age specified under the plan,
(B) occurs the 10th anniversary of the year
in which the participant commenced
participation in the plan, or
(C) the participant terminates his service
with the employer.
In the case of a plan which provides for the payment of
an early retirement benefit, a trust forming a part of
such plan shall not constitute a qualified trust under
this section unless a participant who satisfied the
service requirements for such early retirement benefit,
but separated from the service (with any nonforfeitable
right to an accrued benefit) before satisfying the age
requirement for such early retirement benefit, is
entitled upon satisfaction of such age requirement to
receive a benefit not less than the benefit to which he
would be entitled at the normal retirement age,
actuarially, reduced under regulations prescribed by
the Secretary.
(15) A trust shall not constitute a qualified trust
under this section unless under the plan of which such
trust is a part--
(A) in the case of a participant or
beneficiary who is receiving benefits under
such plan, or
(B) in the case of a participant who is
separated from the service and who has
nonforfeitable rights to benefits,
such benefits are not decreased by reason of any
increase in the benefit levels payable under title II
of the Social Security Act or any increase in the wage
base under such title II, if such increase takes place
after September 2, 1974, or (if later) the earlier of
the date of first receipt of such benefits or the date
of such separation, as the case may be.
(16) A trust shall not constitute a qualified trust
under this section if the plan of which such trust is a
part provides for benefits or contributions which
exceed the limitations of section 415.
(17) Compensation limit.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless,
under the plan of which such trust is a part,
the annual compensation of each employee taken
into account under the plan for any year does
not exceed $200,000.
(B) Cost-of-living adjustment.--The Secretary
shall adjust annually the $200,000 amount in
subparagraph (A) for increases in the cost-of-
living at the same time and in the same manner
as adjustments under section 415(d); except
that the base period shall be the calendar
quarter beginning July 1, 2001, and any
increase which is not a multiple of $5,000
shall be rounded to the next lowest multiple of
$5,000.
(19) A trust shall not constitute a qualified trust
under this section if under the plan of which such
trust is a part any part of a participant's accrued
benefit derived from employer contributions (whether or
not otherwise nonforfeitable), is forfeitable solely
because of withdrawal by such participant of any amount
attributable to the benefit derived from contributions
made by such participant. The preceding sentence shall
not apply to the accrued benefit of any participant
unless, at the time of such withdrawal, such
participant has a nonforfeitable right to at least 50
percent of such accrued benefit (as determined under
section 411). The first sentence of this paragraph
shall not apply to the extent that an accrued benefit
is permitted to be forfeited in accordance with section
411(a)(3)(D)(iii) (relating to proportional forfeitures
of benefits accrued before September 2, 1974, in the
event of withdrawal of certain mandatory
contributions).
(20) A trust forming part of a pension plan shall not
be treated as failing to constitute a qualified trust
under this section merely because the pension plan of
which such trust is a part makes 1 or more
distributions within 1 taxable year to a distributee on
account of a termination of the plan of which the trust
is a part, or in the case of a profit-sharing or stock
bonus plan, a complete discontinuance of contributions
under such plan. This paragraph shall not apply to a
defined benefit plan unless the employer maintaining
such plan files a notice with the Pension Benefit
Guaranty Corporation (at the time and in the manner
prescribed by the Pension Benefit Guaranty Corporation)
notifying the Corporation of such payment or
distribution and the Corporation has approved such
payment or distribution or, within 90 days after the
date on which such notice was filed, has failed to
disapprove such payment or distribution. For purposes
of this paragraph, rules similar to the rules of
section 402(a)(6)(B) (as in effect before its repeal by
section 521 of the Unemployment Compensation Amendments
of 1992) shall apply.
(22) If a defined contribution plan (other than a
profit-sharing plan)--
(A) is established by an employer whose stock
is not readily tradable on an established
market, and
(B) after acquiring securities of the
employer, more than 10 percent of the total
assets of the plan are securities of the
employer,
any trust forming part of such plan shall not
constitute a qualified trust under this section unless
the plan meets the requirements of subsection (e) of
section 409. The requirements of subsection (e) of
section 409 shall not apply to any employees of an
employer who are participants in any defined
contribution plan established and maintained by such
employer if the stock of such employer is not readily
tradable on an established market and the trade or
business of such employer consists of publishing on a
regular basis a newspaper for general circulation. For
purposes of the preceding sentence, subsections (b),
(c), (m), and (o) of section 414 shall not apply except
for determining whether stock of the employer is not
readily tradable on an established market.
(23) A stock bonus plan shall not be treated as
meeting the requirements of this section unless such
plan meets the requirements of subsections (h) and (o)
of section 409, except that in applying section 409(h)
for purposes of this paragraph, the term ``employer
securities'' shall include any securities of the
employer held by the plan.
(24) Any group trust which otherwise meets the
requirements of this section shall not be treated as
not meeting such requirements on account of the
participation or inclusion in such trust of the moneys
of any plan or governmental unit described in section
818(a)(6).
(25) Requirement that actuarial assumptions be
specified.--A defined benefit plan shall not be treated
as providing definitely determinable benefits unless,
whenever the amount of any benefit is to be determined
on the basis of actuarial assumptions, such assumptions
are specified in the plan in a way which precludes
employer discretion.
(26) Additional participation requirements.--
(A) In general.--In the case of a trust which
is a part of a defined benefit plan, such trust
shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser
of--
(i) 50 employees of the employer, or
(ii) the greater of--
(I) 40 percent of all
employees of the employer, or
(II) 2 employees (or if there
is only 1 employee, such
employee).
(B) Treatment of excludable employees.--
(i) In general.--A plan may exclude
from consideration under this paragraph
employees described in paragraphs (3)
and (4)(A) of section 410(b).
(ii) Separate application for certain
excludable employees.--If employees
described in section 410(b)(4)(B) are
covered under a plan which meets the
requirements of subparagraph (A)
separately with respect to such
employees, such employees may be
excluded from consideration in
determining whether any plan of the
employer meets such requirements if--
(I) the benefits for such
employees are provided under
the same plan as benefits for
other employees,
(II) the benefits provided to
such employees are not greater
than comparable benefits
provided to other employees
under the plan, and
(III) no highly compensated
employee (within the meaning of
section 414(q)) is included in
the group of such employees for
more than 1 year.
(C) Special rule for collective bargaining
units.--Except to the extent provided in
regulations, a plan covering only employees
described in section 410(b)(3)(A) may exclude
from consideration any employees who are not
included in the unit or units in which the
covered employees are included.
(D) Paragraph not to apply to multiemployer
plans.--Except to the extent provided in
regulations, this paragraph shall not apply to
employees in a multiemployer plan (within the
meaning of section 414(f)) who are covered by
collective bargaining agreements.
(E) Special rule for certain dispositions or
acquisitions.--Rules similar to the rules of
section 410(b)(6)(C) shall apply for purposes
of this paragraph.
(F) Separate lines of business.--At the
election of the employer and with the consent
of the Secretary, this paragraph may be applied
separately with respect to each separate line
of business of the employer. For purposes of
this paragraph, the term ``separate line of
business'' has the meaning given such term by
section 414(r) (without regard to paragraph
(2)(A) or (7) thereof).
(G) Exception for governmental plans.--This
paragraph shall not apply to a governmental
plan (within the meaning of section 414(d)).
(H) Regulations.--The Secretary may by
regulation provide that any separate benefit
structure, any separate trust, or any other
separate arrangement is to be treated as a
separate plan for purposes of applying this
paragraph.
(27) Determinations as to profit-sharing plans.--
(A) Contributions need not be based on
profits.--The determination of whether the plan
under which any contributions are made is a
profit-sharing plan shall be made without
regard to current or accumulated profits of the
employer and without regard to whether the
employer is a tax- exempt organization.
(B) Plan must designate type.--In the case of
a plan which is intended to be a money purchase
pension plan or a profit-sharing plan, a trust
forming part of such plan shall not constitute
a qualified trust under this subsection unless
the plan designates such intent at such time
and in such manner as the Secretary may
prescribe.
(28) Additional requirements relating to employee
stock ownership plans.--
(A) In general.--In the case of a trust which
is part of an employee stock ownership plan
(within the meaning of section 4975(e)(7)) or a
plan which meets the requirements of section
409(a), such trust shall not constitute a
qualified trust under this section unless such
plan meets the requirements of subparagraphs
(B) and (C).
(B) Diversification of investments.--
(i) In general.--A plan meets the
requirements of this subparagraph if
each qualified participant in the plan
may elect within 90 days after the
close of each plan year in the
qualified election period to direct the
plan as to the investment of at least
25 percent of the participant's account
in the plan (to the extent such portion
exceeds the amount to which a prior
election under this subparagraph
applies). In the case of the election
year in which the participant can make
his last election, the preceding
sentence shall be applied by
substituting ``50 percent'' for ``25
percent''.
(ii) Method of meeting
requirements.--A plan shall be treated
as meeting the requirements of clause
(i) if--
(I) the portion of the
participant's account covered
by the election under clause
(i) is distributed within 90
days after the period during
which the election may be made,
or
(II) the plan offers at least
3 investment options (not
inconsistent with regulations
prescribed by the Secretary) to
each participant making an
election under clause (i) and
within 90 days after the period
during which the election may
be made, the plan invests the
portion of the participant's
account covered by the election
in accordance with such
election.
(iii) Qualified participant.--For
purposes of this subparagraph, the term
``qualified participant'' means any
employee who has completed at least 10
years of participation under the plan
and has attained age 55.
(iv) Qualified election period.--For
purposes of this subparagraph, the term
``qualified election period'' means the
6-plan-year period beginning with the
later of--
(I) the 1st plan year in
which the individual first
became a qualified participant,
or
(II) the 1st plan year
beginning after December 31,
1986.
For purposes of the preceding sentence,
an employer may elect to treat an
individual first becoming a qualified
participant in the 1st plan year
beginning in 1987 as having become a
participant in the 1st plan year
beginning in 1988.
(v) Exception.--This subparagraph
shall not apply to an applicable
defined contribution plan (as defined
in paragraph (35)(E)).
(C) Use of independent appraiser.--A plan
meets the requirements of this subparagraph if
all valuations of employer securities which are
not readily tradable on an established
securities market with respect to activities
carried on by the plan are by an independent
appraiser. For purposes of the preceding
sentence, the term ``independent appraiser''
means any appraiser meeting requirements
similar to the requirements of the regulations
prescribed under section 170(a)(1).
(29) Benefit limitations.--In the case of a defined
benefit plan (other than a multiemployer plan or a CSEC
plan) to which the requirements of section 412 apply,
the trust of which the plan is a part shall not
constitute a qualified trust under this subsection
unless the plan meets the requirements of section 436.
(30) Limitations on elective deferrals.--In the case
of a trust which is part of a plan under which elective
deferrals (within the meaning of section 402(g)(3)) may
be made with respect to any individual during a
calendar year, such trust shall not constitute a
qualified trust under this subsection unless the plan
provides that the amount of such deferrals under such
plan and all other plans, contracts, or arrangements of
an employer maintaining such plan may not exceed the
amount of the limitation in effect under section
402(g)(1)(A) for taxable years beginning in such
calendar year.
(31) Direct transfer of eligible rollover
distributions.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless the
plan of which such trust is a part provides
that if the distributee of any eligible
rollover distribution--
(i) elects to have such distribution
paid directly to an eligible retirement
plan, and
(ii) specifies the eligible
retirement plan to which such
distribution is to be paid (in such
form and at such time as the plan
administrator may prescribe),
such distribution shall be made in the form of
a direct trustee-to-trustee transfer to the
eligible retirement plan so specified.
(B) Certain mandatory distributions.--
(i) In general.--In case of a trust
which is part of an eligible plan, such
trust shall not constitute a qualified
trust under this section unless the
plan of which such trust is a part
provides that if--
(I) a distribution described
in clause (ii) in excess of
$1,000 is made, and
(II) the distributee does not
make an election under
subparagraph (A) and does not
elect to receive the
distribution directly,
the plan administrator shall make such
transfer to an individual retirement
plan of a designated trustee or issuer
and shall notify the distributee in
writing (either separately or as part
of the notice under section 402(f))
that the distribution may be
transferred to another individual
retirement plan.
(ii) Eligible plan.--For purposes of
clause (i), the term ``eligible plan''
means a plan which provides that any
nonforfeitable accrued benefit for
which the present value (as determined
under section 411(a)(11)) does not
exceed $5,000 shall be immediately
distributed to the participant.
(C) Limitation.--Subparagraphs (A) and (B)
shall apply only to the extent that the
eligible rollover distribution would be
includible in gross income if not transferred
as provided in subparagraph (A) (determined
without regard to sections 402(c), 403(a)(4),
403(b)(8), and 457(e)(16)). The preceding
sentence shall not apply to such distribution
if the plan to which such distribution is
transferred--
(i) is a qualified trust which is
part of a plan which is a defined
contribution plan and agrees to
separately account for amounts so
transferred, including separately
accounting for the portion of such
distribution which is includible in
gross income and the portion of such
distribution which is not so
includible, or
(ii) is an eligible retirement plan
described in clause (i) or (ii) of
section 402(c)(8)(B).
(D) Eligible rollover distribution.--For
purposes of this paragraph, the term ``eligible
rollover distribution'' has the meaning given
such term by section 402(f)(2)(A).
(E) Eligible retirement plan.--For purposes
of this paragraph, the term ``eligible
retirement plan'' has the meaning given such
term by section 402(c)(8)(B), except that a
qualified trust shall be considered an eligible
retirement plan only if it is a defined
contribution plan, the terms of which permit
the acceptance of rollover distributions.
(32) Treatment of failure to make certain payments if
plan has liquidity shortfall.--
(A) In general.--A trust forming part of a
pension plan to which section 430(j)(4) or
433(f)(5) applies shall not be treated as
failing to constitute a qualified trust under
this section merely because such plan ceases to
make any payment described in subparagraph (B)
during any period that such plan has a
liquidity shortfall (as defined in section
430(j)(4) or 433(f)(5)).
(B) Payments described.--A payment is
described in this subparagraph if such payment
is--
(i) any payment, in excess of the
monthly amount paid under a single life
annuity (plus any social security
supplements described in the last
sentence of section 411(a)(9)), to a
participant or beneficiary whose
annuity starting date (as defined in
section 417(f)(2)) occurs during the
period referred to in subparagraph (A),
(ii) any payment for the purchase of
an irrevocable commitment from an
insurer to pay benefits, and
(iii) any other payment specified by
the Secretary by regulations.
(C) Period of shortfall.--For purposes of
this paragraph, a plan has a liquidity
shortfall during the period that there is an
underpayment of an installment under section
430(j)(3) or 433(f) by reason of section
430(j)(4)(A) or 433(f)(5), respectively.
(33) Prohibition on benefit increases while sponsor
is in bankruptcy.--
(A) In general.--A trust which is part of a
plan to which this paragraph applies shall not
constitute a qualified trust under this section
if an amendment to such plan is adopted while
the employer is a debtor in a case under title
11, United States Code, or similar Federal or
State law, if such amendment increases
liabilities of the plan by reason of
(i) any increase in benefits,
(ii) any change in the accrual of
benefits, or
(iii) any change in the rate at which
benefits become nonforfeitable under
the plan,
with respect to employees of the debtor, and
such amendment is effective prior to the
effective date of such employer's plan of
reorganization.
(B) Exceptions.--This paragraph shall not
apply to any plan amendment if--
(i) the plan, were such amendment to
take effect, would have a funding
target attainment percentage (as
defined in section 430(d)(2)) of 100
percent or more,
(ii) the Secretary determines that
such amendment is reasonable and
provides for only de minimis increases
in the liabilities of the plan with
respect to employees of the debtor,
(iii) such amendment only repeals an
amendment described in section
412(d)(2), or
(iv) such amendment is required as a
condition of qualification under this
part.
(C) Plans to which this paragraph applies.--
This paragraph shall apply only to plans (other
than multiemployer plans or CSEC plans) covered
under section 4021 of the Employee Retirement
Income Security Act of 1974.
(D) Employer.--For purposes of this
paragraph, the term ``employer'' means the
employer referred to in section 412(b)(1),
without regard to section 412(b)(2).
(34) Benefits of missing participants on plan
termination.--In the case of a plan covered by title IV
of the Employee Retirement Income Security Act of 1974,
a trust forming part of such plan shall not be treated
as failing to constitute a qualified trust under this
section merely because the pension plan of which such
trust is a part, upon its termination, transfers
benefits of missing participants to the Pension Benefit
Guaranty Corporation in accordance with section 4050 of
such Act.
(35) Diversification requirements for certain defined
contribution plans.--
(A) In general.--A trust which is part of an
applicable defined contribution plan shall not
be treated as a qualified trust unless the plan
meets the diversification requirements of
subparagraphs (B), (C), and (D).
(B) Employee contributions and elective
deferrals invested in employer securities.--In
the case of the portion of an applicable
individual's account attributable to employee
contributions and elective deferrals which is
invested in employer securities, a plan meets
the requirements of this subparagraph if the
applicable individual may elect to direct the
plan to divest any such securities and to
reinvest an equivalent amount in other
investment options meeting the requirements of
subparagraph (D).
(C) Employer contributions invested in
employer securities.--In the case of the
portion of the account attributable to employer
contributions other than elective deferrals
which is invested in employer securities, a
plan meets the requirements of this
subparagraph if each applicable individual
who--
(i) is a participant who has
completed at least 3 years of service,
or
(ii) is a beneficiary of a
participant described in clause (i) or
of a deceased participant,
may elect to direct the plan to divest any such
securities and to reinvest an equivalent amount
in other investment options meeting the
requirements of subparagraph (D).
(D) Investment options.--
(i) In general.--The requirements of
this subparagraph are met if the plan
offers not less than 3 investment
options, other than employer
securities, to which an applicable
individual may direct the proceeds from
the divestment of employer securities
pursuant to this paragraph, each of
which is diversified and has materially
different risk and return
characteristics.
(ii) Treatment of certain
restrictions and conditions.--
(I) Time for making
investment choices.--A plan
shall not be treated as failing
to meet the requirements of
this subparagraph merely
because the plan limits the
time for divestment and
reinvestment to periodic,
reasonable opportunities
occurring no less frequently
than quarterly.
(II) Certain restrictions and
conditions not allowed.--Except
as provided in regulations, a
plan shall not meet the
requirements of this
subparagraph if the plan
imposes restrictions or
conditions with respect to the
investment of employer
securities which are not
imposed on the investment of
other assets of the plan. This
subclause shall not apply to
any restrictions or conditions
imposed by reason of the
application of securities laws.
(E) Applicable defined contribution plan.--
For purposes of this paragraph--
(i) In general.--The term
``applicable defined contribution
plan'' means any defined contribution
plan which holds any publicly traded
employer securities.
(ii) Exception for certain ESOPS.--
Such term does not include an employee
stock ownership plan if--
(I) there are no
contributions to such plan (or
earnings thereunder) which are
held within such plan and are
subject to subsection (k) or
(m), and
(II) such plan is a separate
plan for purposes of section
414(l) with respect to any
other defined benefit plan or
defined contribution plan
maintained by the same employer
or employers.
(iii) Exception for one participant
plans.--Such term does not include a
one-participant retirement plan.
(iv) One-participant retirement
plan.--For purposes of clause (iii),
the term ``one-participant retirement
plan'' means a retirement plan that on
the first day of the plan year--
(I) covered only one
individual (or the individual
and the individual's spouse)
and the individual (or the
individual and the individual's
spouse) owned 100 percent of
the plan sponsor (whether or
not incorporated), or
(II) covered only one or more
partners (or partners and their
spouses) in the plan sponsor.
(F) Certain plans treated as holding publicly
traded employer securities.--
(i) In general.--Except as provided
in regulations or in clause (ii), a
plan holding employer securities which
are not publicly traded employer
securities shall be treated as holding
publicly traded employer securities if
any employer corporation, or any member
of a controlled group of corporations
which includes such employer
corporation, has issued a class of
stock which is a publicly traded
employer security.
(ii) Exception for certain controlled
groups with publicly traded
securities.--Clause (i) shall not apply
to a plan if--
(I) no employer corporation,
or parent corporation of an
employer corporation, has
issued any publicly traded
employer security, and
(II) no employer corporation,
or parent corporation of an
employer corporation, has
issued any special class of
stock which grants particular
rights to, or bears particular
risks for, the holder or issuer
with respect to any corporation
described in clause (i) which
has issued any publicly traded
employer security.
(iii) Definitions.--For purposes of
this subparagraph, the term--
(I) ``controlled group of
corporations'' has the meaning
given such term by section
1563(a), except that ``50
percent'' shall be substituted
for ``80 percent'' each place
it appears,
(II) ``employer corporation''
means a corporation which is an
employer maintaining the plan,
and
(III) ``parent corporation''
has the meaning given such term
by section 424(e).
(G) Other definitions.--For purposes of this
paragraph--
(i) Applicable individual.--The term
``applicable individual'' means--
(I) any participant in the
plan, and
(II) any beneficiary who has
an account under the plan with
respect to which the
beneficiary is entitled to
exercise the rights of a
participant.
(ii) Elective deferral.--The term
``elective deferral'' means an employer
contribution described in section
402(g)(3)(A).
(iii) Employer security.--The term
``employer security'' has the meaning
given such term by section 407(d)(1) of
the Employee Retirement Income Security
Act of 1974.
(iv) Employee stock ownership plan.--
The term ``employee stock ownership
plan'' has the meaning given such term
by section 4975(e)(7).
(v) Publicly traded employer
securities.--The term ``publicly traded
employer securities'' means employer
securities which are readily tradable
on an established securities market.
(vi) Year of service.--The term
``year of service'' has the meaning
given such term by section 411(a)(5).
(H) Transition rule for securities
attributable to employer contributions.--
(i) Rules phased in over 3 years.--
(I) In general.--In the case
of the portion of an account to
which subparagraph (C) applies
and which consists of employer
securities acquired in a plan
year beginning before January
1, 2007, subparagraph (C) shall
only apply to the applicable
percentage of such securities.
This subparagraph shall be
applied separately with respect
to each class of securities.
(II) Exception for certain
participants aged 55 or over.--
Subclause (I) shall not apply
to an applicable individual who
is a participant who has
attained age 55 and completed
at least 3 years of service
before the first plan year
beginning after December 31,
2005.
(ii) Applicable percentage.--For
purposes of clause (i), the applicable
percentage shall be determined as
follows:
------------------------------------------------------------------------
Plan year to which subparagraph (C)
applies: The applicable percentage is:
------------------------------------------------------------------------
1st.................... 33
2d..................... 66
3d and following....... 100.
------------------------------------------------------------------------
(36) Distributions during working retirement.--A
trust forming part of a pension plan shall not be
treated as failing to constitute a qualified trust
under this section solely because the plan provides
that a distribution may be made from such trust to an
employee who has attained age 62 and who is not
separated from employment at the time of such
distribution.
(37) Death benefits under USERRA-qualified active
military service.--A trust shall not constitute a
qualified trust unless the plan provides that, in the
case of a participant who dies while performing
qualified military service (as defined in section
414(u)), the survivors of the participant are entitled
to any additional benefits (other than benefit accruals
relating to the period of qualified military service)
provided under the plan had the participant resumed and
then terminated employment on account of death.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall
apply only in the case of a plan to which section 411 (relating
to minimum vesting standards) applies without regard to
subsection (e)(2) of such section.
(b) Certain retroactive changes in plan.--A stock bonus,
pension, profit-sharing, or annuity plan shall be considered as
satisfying the requirements of subsection (a) for the period
beginning with the date on which it was put into effect, or for
the period beginning with the earlier of the date on which
there was adopted or put into effect any amendment which caused
the plan to fail to satisfy such requirements, and ending with
the time prescribed by law for filing the return of the
employer for his taxable year in which such plan or amendment
was adopted (including extensions thereof) or such later time
as the Secretary may designate, if all provisions of the plan
which are necessary to satisfy such requirements are in effect
by the end of such period and have been made effective for all
purposes for the whole of such period.
(c) Definitions and rules relating to self-employed
individuals and owner-employees.--For purposes of this
section--
(1) Self-employed individual treated as employee.--
(A) In general.--The term ``employee''
includes, for any taxable year, an individual
who is a self-employed individual for such
taxable year.
(B) Self-employed individual.--The term
``self-employed individual'' means, with
respect to any taxable year, an individual who
has earned income (as defined in paragraph (2))
for such taxable year. To the extent provided
in regulations prescribed by the Secretary,
such term also includes, for any taxable year--
(i) an individual who would be a
self-employed individual within the
meaning of the preceding sentence but
for the fact that the trade or business
carried on by such individual did not
have net profits for the taxable year,
and
(ii) an individual who has been a
self-employed individual within the
meaning of the preceding sentence for
any prior taxable year.
(2) Earned income.--
(A) In general.--The term ``earned income''
means the net earnings from self-employment (as
defined in section 1402(a)), but such net
earnings shall be determined--
(i) only with respect to a trade or
business in which personal services of
the taxpayer are a material income-
producing factor,
(ii) without regard to paragraphs (4)
and (5) of section 1402(c),
(iii) in the case of any individual
who is treated as an employee under
subparagraph (A), (C), or (D) of
section 3121(d)(3), without regard to
section 1402(c)(2)
(iv) without regard to items which
are not included in gross income for
purposes of this chapter, and the
deductions properly allocable to or
chargeable against such items,
(v) with regard to the deductions
allowed by section 404 to the taxpayer,
and
(vi) with regard to the deduction
allowed to the taxpayer by section
164(f).
For purposes of this subparagraph, section
1402, as in effect for a taxable year ending on
December 31, 1962, shall be treated as having
been in effect for all taxable years ending
before such date. For purposes of this part
only (other than sections 419 and 419A), this
subparagraph shall be applied as if the term
``trade or business'' for purposes of section
1402 included service described in section
1402(c)(6).
(B) Repealed
(C) Income from disposition of certain
property.--For purposes of this section, the
term ``earned income'' includes gains (other
than any gain which is treated under any
provision of this chapter as gain from the sale
or exchange of a capital asset) and net
earnings derived from the sale or other
disposition of, the transfer of any interest
in, or the licensing of the use of property
(other than good will) by an individual whose
personal efforts created such property.
(3) Owner-employee.--The term ``owner-employee''
means an employee who--
(A) owns the entire interest in an
unincorporated trade or business, or
(B) in the case of a partnership, is a
partner who owns more than 10 percent of either
the capital interest or the profits interest in
such partnership.
To the extent provided in regulations prescribed by the
Secretary, such term also means an individual who has
been an owner-employee within the meaning of the
preceding sentence.
(4) Employer.--An individual who owns the entire
interest in an unincorporated trade or business shall
be treated as his own employer. A partnership shall be
treated as the employer of each partner who is an
employee within the meaning of paragraph (1).
(5) Contributions on behalf of owner-employees.--The
term ``contribution on behalf of an owner-employee''
includes, except as the context otherwise requires, a
contribution under a plan--
(A) by the employer for an owner-employee,
and
(B) by an owner-employee as an employee.
(6) Special rule for certain fishermen.--For purposes
of this subsection, the term ``self-employed
individual'' includes an individual described in
section 3121(b)(20) (relating to certain fishermen).
(d) Contribution limit on owner-employees.--A trust forming
part of a pension or profit-sharing plan which provides
contributions or benefits for employees some or all of whom are
owner-employees shall constitute a qualified trust under this
section only if, in addition to meeting the requirements of
subsection (a), the plan provides that contributions on behalf
of any owner-employee may be made only with respect to the
earned income of such owner-employee which is derived from the
trade or business with respect to which such plan is
established.
(f) Certain custodial accounts and contracts.--For purposes
of this title, a custodial account, an annuity contract, or a
contract (other than a life, health or accident, property,
casualty, or liability insurance contract) issued by an
insurance company qualified to do business in a State shall be
treated as a qualified trust under this section if--
(1) the custodial account or contract would, except
for the fact that it is not a trust, constitute a
qualified trust under this section, and
(2) in the case of a custodial account the assets
thereof are held by a bank (as defined in section
408(n)) or another person who demonstrates, to the
satisfaction of the Secretary, that the manner in which
he will hold the assets will be consistent with the
requirements of this section.
For purposes of this title, in the case of a custodial account
or contract treated as a qualified trust under this section by
reason of this subsection, the person holding the assets of
such account or holding such contract shall be treated as the
trustee thereof.
(g) Annuity defined.--For purposes of this section and
sections 402, 403, and 404, the term ``annuity'' 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); but
does not include any contract or certificate issued after
December 31, 1962, which is transferable, if any person other
than the trustee of a trust described in section 401(a) which
is exempt from tax under section 501(a) is the owner of such
contract or certificate.
(h) Medical, etc., benefits for retired employees and their
spouses and dependents.--Under regulations prescribed by the
Secretary, and subject to the provisions of section 420, a
pension or annuity plan may provide for the payment of benefits
for sickness, accident, hospitalization, and medical expenses
of retired employees, their spouses and their dependents, but
only if--
(1) such benefits are subordinate to the retirement
benefits provided by the plan,
(2) a separate account is established and maintained
for such benefits,
(3) the employer's contributions to such separate
account are reasonable and ascertainable,
(4) it is impossible, at any time prior to the
satisfaction of all liabilities under the plan to
provide such benefits, for any part of the corpus or
income of such separate account to be (within the
taxable year or thereafter) used for, or diverted to,
any purpose other than the providing of such benefits,
(5) notwithstanding the provisions of subsection
(a)(2), upon the satisfaction of all liabilities under
the plan to provide such benefits, any amount remaining
in such separate account must, under the terms of the
plan, be returned to the employer, and
(6) in the case of an employee who is a key employee,
a separate account is established and maintained for
such benefits payable to such employee (and his spouse
and dependents) and such benefits (to the extent
attributable to plan years beginning after March 31,
1984, for which the employee is a key employee) are
only payable to such employee (and his spouse and
dependents) from such separate account.
For purposes of paragraph (6), the term ``key employee'' means
any employee, who at any time during the plan year or any
preceding plan year during which contributions were made on
behalf of such employee, is or was a key employee as defined in
section 416(i). In no event shall the requirements of paragraph
(1) be treated as met if the aggregate actual contributions for
medical benefits, when added to actual contributions for life
insurance protection under the plan, exceed 25 percent of the
total actual contributions to the plan (other than
contributions to fund past service credits) after the date on
which the account is established. For purposes of this
subsection, the term ``dependent'' shall include any individual
who is a child (as defined in [section 152(f)(1)] section
7706(f)(1)) of a retired employee who as of the end of the
calendar year has not attained age 27.
(i) Certain union-negotiated pension plans.--In the case of a
trust forming part of a pension plan which has been determined
by the Secretary to constitute a qualified trust under
subsection (a) and to be exempt from taxation under section
501(a) for a period beginning after contributions were first
made to or for such trust, if it is shown to the satisfaction
of the Secretary that--
(1) such trust was created pursuant to a collective
bargaining agreement between employee representatives
and one or more employers,
(2) any disbursements of contributions, made to or
for such trust before the time as of which the
Secretary or his delegate determined that the trust
constituted a qualified trust, substantially complied
with the terms of the trust, and the plan of which the
trust is a part, as subsequently qualified, and
(3) before the time as of which the Secretary
determined that the trust constitutes a qualified
trust, the contributions to or for such trust were not
used in a manner which would jeopardize the interests
of its beneficiaries,
then such trust shall be considered as having constituted a
qualified trust under subsection (a) and as having been exempt
from taxation under section 501(a) for the period beginning on
the date on which contributions were first made to or for such
trust and ending on the date such trust first constituted
(without regard to this subsection) a qualified trust under
subsection (a).
(k) Cash or deferred arrangements.--
(1) General rule.--A profit-sharing or stock bonus
plan, a pre-ERISA money purchase plan, or a rural
cooperative plan shall not be considered as not
satisfying the requirements of subsection (a) merely
because the plan includes a qualified cash or deferred
arrangement.
(2) Qualified cash or deferred arrangement.--A
qualified cash or deferred arrangement is any
arrangement which is part of a profit-sharing or stock
bonus plan, a pre-ERISA money purchase plan, or a rural
cooperative plan which meets the requirements of
subsection (a)--
(A) under which a covered employee may elect
to have the employer make payments as
contributions to a trust under the plan on
behalf of the employee, or to the employee
directly in cash;
(B) under which amounts held by the trust
which are attributable to employer
contributions made pursuant to the employee's
election--
(i) may not be distributable to
participants or other beneficiaries
earlier than--
(I) severance from
employment, death, or
disability,
(II) an event described in
paragraph (10),
(III) in the case of a
profit-sharing or stock bonus
plan, the attainment of age 59
1/2,
(IV) subject to the
provisions of paragraph (14),
upon hardship of the employee,
or
(V) in the case of a
qualified reservist
distribution (as defined in
section 72(t)(2)(G)(iii)), the
date on which a period referred
to in subclause (III) of such
section begins, and
(ii) will not be distributable merely
by reason of the completion of a stated
period of participation or the lapse of
a fixed number of years;
(C) which provides that an employee's right
to his accrued benefit derived from employer
contributions made to the trust pursuant to his
election is nonforfeitable, and
(D) which does not require, as a condition of
participation in the arrangement, that an
employee complete a period of service with the
employer (or employers) maintaining the plan
extending beyond the period permitted under
section 410(a)(1) (determined without regard to
subparagraph (B)(i) thereof).
(3) Application of participation and discrimination
standards.--
(A) A cash or deferred arrangement shall not
be treated as a qualified cash or deferred
arrangement unless--
(i) those employees eligible to
benefit under the arrangement satisfy
the provisions of section 410(b)(1),
and
(ii) the actual deferral percentage
for eligible highly compensated
employees (as defined in paragraph (5))
for the plan year bears a relationship
to the actual deferral percentage for
all other eligible employees for the
preceding plan year which meets either
of the following tests:
(I) The actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 1.25.
(II) The excess of the actual
deferral percentage for the
group of eligible highly
compensated employees over that
of all other eligible employees
is not more than 2 percentage
points, and the actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 2.
If 2 or more plans which include cash
or deferred arrangements are considered
as 1 plan for purposes of section
401(a)(4) or 410(b), the cash or
deferred arrangements included in such
plans shall be treated as 1 arrangement
for purposes of this subparagraph.
If any highly compensated employee is a
participant under 2 or more cash or deferred
arrangements of the employer, for purposes of
determining the deferral percentage with
respect to such employee, all such cash or
deferred arrangements shall be treated as 1
cash or deferred arrangement. An arrangement
may apply clause (ii) by using the plan year
rather than the preceding plan year if the
employer so elects, except that if such an
election is made, it may not be changed except
as provided by the Secretary.
(B) For purposes of subparagraph (A), the
actual deferral percentage for a specified
group of employees for a plan year shall be the
average of the ratios (calculated separately
for each employee in such group) of--
(i) the amount of employer
contributions actually paid over to the
trust on behalf of each such employee
for such plan year, to
(ii) the employee's compensation for
such plan year.
(C) A cash or deferred arrangement shall be
treated as meeting the requirements of
subsection (a)(4) with respect to contributions
if the requirements of subparagraph (A)(ii) are
met.
(D) For purposes of subparagraph (B), the
employer contributions on behalf of any
employee--
(i) shall include any employer
contributions made pursuant to the
employee's election under paragraph
(2), and
(ii) under such rules as the
Secretary may prescribe, may, at the
election of the employer, include--
(I) matching contributions
(as defined in 401(m)(4)(A))
which meet the requirements of
paragraph (2)(B) and (C), and
(II) qualified nonelective
contributions (within the
meaning of section
401(m)(4)(C)).
(E) For purposes of this paragraph, in the
case of the first plan year of any plan (other
than a successor plan), the amount taken into
account as the actual deferral percentage of
nonhighly compensated employees for the
preceding plan year shall be--
(i) 3 percent, or
(ii) if the employer makes an
election under this subclause, the
actual deferral percentage of nonhighly
compensated employees determined for
such first plan year.
(F) Special rule for early participation.--If
an employer elects to apply section
410(b)(4)(B) in determining whether a cash or
deferred arrangement meets the requirements of
subparagraph (A)(i), the employer may, in
determining whether the arrangement meets the
requirements of subparagraph (A)(ii), exclude
from consideration all eligible employees
(other than highly compensated employees) who
have not met the minimum age and service
requirements of section 410(a)(1)(A).
(G) Governmental plan.--A governmental plan
(within the meaning of section 414(d)) shall be
treated as meeting the requirements of this
paragraph.
(4) Other requirements.--
(A) Benefits (other than matching
contributions) must not be contingent on
election to defer.--A cash or deferred
arrangement of any employer shall not be
treated as a qualified cash or deferred
arrangement if any other benefit is conditioned
(directly or indirectly) on the employee
electing to have the employer make or not make
contributions under the arrangement in lieu of
receiving cash. The preceding sentence shall
not apply to any matching contribution (as
defined in section 401(m)) made by reason of
such an election.
(B) Eligibility of state and local
governments and tax-exempt organizations.--
(i) Tax-exempts eligible.--Except as
provided in clause (ii), any
organization exempt from tax under this
subtitle may include a qualified cash
or deferred arrangement as part of a
plan maintained by it.
(ii) Governments ineligible.--A cash
or deferred arrangement shall not be
treated as a qualified cash or deferred
arrangement if it is part of a plan
maintained by a State or local
government or political subdivision
thereof, or any agency or
instrumentality thereof. This clause
shall not apply to a rural cooperative
plan or to a plan of an employer
described in clause (iii).
(iii) Treatment of Indian tribal
governments.--An employer which is an
Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of
an Indian tribal government (determined
in accordance with section 7871(d)), an
agency or instrumentality of an Indian
tribal government or subdivision
thereof, or a corporation chartered
under Federal, State, or tribal law
which is owned in whole or in part by
any of the foregoing may include a
qualified cash or deferred arrangement
as part of a plan maintained by the
employer.
(C) Coordination with other plans.--Except as
provided in section 401(m), any employer
contribution made pursuant to an employee's
election under a qualified cash or deferred
arrangement shall not be taken into account for
purposes of determining whether any other plan
meets the requirements of section 401(a) or
410(b). This subparagraph shall not apply for
purposes of determining whether a plan meets
the average benefit requirement of section
410(b)(2)(A)(ii).
(5) Highly compensated employee.--For purposes of
this subsection, the term ``highly compensated
employee'' has the meaning given such term by section
414(q).
(6) Pre-ERISA money purchase plan.--For purposes of
this subsection, the term ``pre-ERISA money purchase
plan'' means a pension plan--
(A) which is a defined contribution plan (as
defined in section 414(i)),
(B) which was in existence on June 27, 1974,
and which, on such date, included a salary
reduction arrangement, and
(C) under which neither the employee
contributions nor the employer contributions
may exceed the levels provided for by the
contribution formula in effect under the plan
on such date.
(7) Rural cooperative plan.--For purposes of this
subsection--
(A) In general.--The term ``rural cooperative
plan'' means any pension plan--
(i) which is a defined contribution
plan (as defined in section 414(i)),
and
(ii) which is established and
maintained by a rural cooperative.
(B) Rural cooperative defined.--For purposes
of subparagraph (A), the term ``rural
cooperative'' means--
(i) any organization which--
(I) is engaged primarily in
providing electric service on a
mutual or cooperative basis, or
(II) is engaged primarily in
providing electric service to
the public in its area of
service and which is exempt
from tax under this subtitle or
which is a State or local
government (or an agency or
instrumentality thereof), other
than a municipality (or an
agency or instrumentality
thereof),
(ii) any organization described in
paragraph (4) or (6) of section 501(c)
and at least 80 percent of the members
of which are organizations described in
clause (i),
(iii) a cooperative telephone company
described in section 501(c)(12),
(iv) any organization which--
(I) is a mutual irrigation or
ditch company described in
section 501(c)(12) (without
regard to the 85 percent
requirement thereof), or
(II) is a district organized
under the laws of a State as a
municipal corporation for the
purpose of irrigation, water
conservation, or drainage, and
(v) an organization which is a
national association of organizations
described in clause (i), (ii),, (iii),
or (iv).
(C) Special rule for certain distributions.--
A rural cooperative plan which includes a
qualified cash or deferred arrangement shall
not be treated as violating the requirements of
section 401(a) or of paragraph (2) merely by
reason of a hardship distribution or a
distribution to a participant after attainment
of age 59 1/2. For purposes of this section,
the term ``hardship distribution'' means a
distribution described in paragraph
(2)(B)(i)(IV) (without regard to the limitation
of its application to profit-sharing or stock
bonus plans).
(8) Arrangement not disqualified if excess
contributions distributed.--
(A) In general.--A cash or deferred
arrangement shall not be treated as failing to
meet the requirements of clause (ii) of
paragraph (3)(A) for any plan year if, before
the close of the following plan year--
(i) the amount of the excess
contributions for such plan year (and
any income allocable to such
contributions through the end of such
year) is distributed, or
(ii) to the extent provided in
regulations, the employee elects to
treat the amount of the excess
contributions as an amount distributed
to the employee and then contributed by
the employee to the plan.
Any distribution of excess contributions (and
income) may be made without regard to any other
provision of law.
(B) Excess contributions.--For purposes of
subparagraph (A), the term ``excess
contributions'' means, with respect to any plan
year, the excess of--
(i) the aggregate amount of employer
contributions actually paid over to the
trust on behalf of highly compensated
employees for such plan year, over
(ii) the maximum amount of such
contributions permitted under the
limitations of clause (ii) of paragraph
(3)(A) (determined by reducing
contributions made on behalf of highly
compensated employees in order of the
actual deferral percentages beginning
with the highest of such percentages).
(C) Method of distributing excess
contributions.--Any distribution of the excess
contributions for any plan year shall be made
to highly compensated employees on the basis of
the amount of contributions by, or on behalf
of, each of such employees.
(D) Additional tax under section 72(t) not to
apply.--No tax shall be imposed under section
72(t) on any amount required to be distributed
under this paragraph.
(E) Treatment of matching contributions
forfeited by reason of excess deferral or
contribution or permissible withdrawal.--For
purposes of paragraph (2)(C), a matching
contribution (within the meaning of subsection
(m)) shall not be treated as forfeitable merely
because such contribution is forfeitable if the
contribution to which the matching contribution
relates is treated as an excess contribution
under subparagraph (B), an excess deferral
under section 402(g)(2)(A), a permissible
withdrawal under section 414(w), or an excess
aggregate contribution under section
401(m)(6)(B).
(F) Cross reference.--For excise tax on
certain excess contributions, see section 4979.
(9) Compensation.--For purposes of this subsection,
the term ``compensation'' has the meaning given such
term by section 414(s).
(10) Distributions upon termination of plan.--
(A) In general.--An event described in this
subparagraph is the termination of the plan
without establishment or maintenance of another
defined contribution plan (other than an
employee stock ownership plan as defined in
section 4975(e)(7)).
(B) Distributions must be lump sum
distributions.--
(i) In general.--A termination shall
not be treated as described in
subparagraph (A) with respect to any
employee unless the employee receives a
lump sum distribution by reason of the
termination.
(ii) Lump-sum distribution.--For
purposes of this subparagraph, the term
``lump-sum distribution'' has the
meaning given such term by section
402(e)(4)(D) (without regard to
subclauses (I), (II), (III), and (IV)
of clause (i) thereof). Such term
includes a distribution of an annuity
contract from--
(I) a trust which forms a
part of a plan described in
section 401(a) and which is
exempt from tax under section
501(a), or
(II) an annuity plan
described in section 403(a).
(11) Adoption of simple plan to meet
nondiscrimination tests.--
(A) In general.--A cash or deferred
arrangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement
meets--
(i) the contribution requirements of
subparagraph (B),
(ii) the exclusive plan requirements
of subparagraph (C), and
(iii) the vesting requirements of
section 408(p)(3).
(B) Contribution requirements.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement--
(I) an employee may elect to
have the employer make elective
contributions for the year on
behalf of the employee to a
trust under the plan in an
amount which is expressed as a
percentage of compensation of
the employee but which in no
event exceeds the amount in
effect under section
408(p)(2)(A)(ii),
(II) the employer is required
to make a matching contribution
to the trust for the year in an
amount equal to so much of the
amount the employee elects
under subclause (I) as does not
exceed 3 percent of
compensation for the year, and
(III) no other contributions
may be made other than
contributions described in
subclause (I) or (II).
(ii) Employer may elect 2-percent
nonelective contribution.--An employer
shall be treated as meeting the
requirements of clause (i)(II) for any
year if, in lieu of the contributions
described in such clause, the employer
elects (pursuant to the terms of the
arrangement) to make nonelective
contributions of 2 percent of
compensation for each employee who is
eligible to participate in the
arrangement and who has at least $5,000
of compensation from the employer for
the year. If an employer makes an
election under this subparagraph for
any year, the employer shall notify
employees of such election within a
reasonable period of time before the
60th day before the beginning of such
year.
(iii) Administrative requirements.--
(I) In general.--Rules
similar to the rules of
subparagraphs (B) and (C) of
section 408(p)(5) shall apply
for purposes of this
subparagraph.
(II) Notice of election
period.--The requirements of
this subparagraph shall not be
treated as met with respect to
any year unless the employer
notifies each employee eligible
to participate, within a
reasonable period of time
before the 60th day before the
beginning of such year (and,
for the first year the employee
is so eligible, the 60th day
before the first day such
employee is so eligible), of
the rules similar to the rules
of section 408(p)(5)(C) which
apply by reason of subclause
(I).
(C) Exclusive plan requirement.--The
requirements of this subparagraph are met for
any year to which this paragraph applies if no
contributions were made, or benefits were
accrued, for services during such year under
any qualified plan of the employer on behalf of
any employee eligible to participate in the
cash or deferred arrangement, other than
contributions described in subparagraph (B).
(D) Definitions and special rule.--
(i) Definitions.--For purposes of
this paragraph, any term used in this
paragraph which is also used in section
408(p) shall have the meaning given
such term by such section.
(ii) Coordination with top-heavy
rules.--A plan meeting the requirements
of this paragraph for any year shall
not be treated as a top-heavy plan
under section 416 for such year if such
plan allows only contributions required
under this paragraph.
(12) Alternative methods of meeting nondiscrimination
requirements.--
(A) In general.--A cash or deferred
arrangement shall be treated as meeting the
requirements of paragraph (3)(A)(ii) if such
arrangement--
(i) meets the contribution
requirements of subparagraph (B) or
(C), and
(ii) meets the notice requirements of
subparagraph (D).
(B) Matching contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer makes
matching contributions on behalf of
each employee who is not a highly
compensated employee in an amount equal
to--
(I) 100 percent of the
elective contributions of the
employee to the extent such
elective contributions do not
exceed 3 percent of the
employee's compensation, and
(II) 50 percent of the
elective contributions of the
employee to the extent that
such elective contributions
exceed 3 percent but do not
exceed 5 percent of the
employee's compensation.
(ii) Rate for highly compensated
employees.--The requirements of this
subparagraph are not met if, under the
arrangement, the rate of matching
contribution with respect to any
elective contribution of a highly
compensated employee at any rate of
elective contribution is greater than
that with respect to an employee who is
not a highly compensated employee.
(iii) Alternative plan designs.--If
the rate of any matching contribution
with respect to any rate of elective
contribution is not equal to the
percentage required under clause (i),
an arrangement shall not be treated as
failing to meet the requirements of
clause (i) if--
(I) the rate of an employer's
matching contribution does not
increase as an employee's rate
of elective contributions
increase, and
(II) the aggregate amount of
matching contributions at such
rate of elective contribution
is at least equal to the
aggregate amount of matching
contributions which would be
made if matching contributions
were made on the basis of the
percentages described in clause
(i).
(C) Nonelective contributions.--The
requirements of this subparagraph are met if,
under the arrangement, the employer is
required, without regard to whether the
employee makes an elective contribution or
employee contribution, to make a contribution
to a defined contribution plan on behalf of
each employee who is not a highly compensated
employee and who is eligible to participate in
the arrangement in an amount equal to at least
3 percent of the employee's compensation.
(D) Notice requirement.--An arrangement meets
the requirements of this paragraph if, under
the arrangement, each employee eligible to
participate is, within a reasonable period
before any year, given written notice of the
employee's rights and obligations under the
arrangement which--
(i) is sufficiently accurate and
comprehensive to apprise the employee
of such rights and obligations, and
(ii) is written in a manner
calculated to be understood by the
average employee eligible to
participate.
(E) Other requirements.--
(i) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of subparagraph (B) or (C) of this
paragraph unless the requirements of
subparagraphs (B) and (C) of paragraph
(2) are met with respect to all
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of subparagraphs (B) and
(C) of this paragraph are met.
(ii) Social security and similar
contributions not taken into account.--
An arrangement shall not be treated as
meeting the requirements of
subparagraph (B) or (C) unless such
requirements are met without regard to
subsection (l), and, for purposes of
subsection (l), employer contributions
under subparagraph (B) or (C) shall not
be taken into account.
(F) Other plans.--An arrangement shall be
treated as meeting the requirements under
subparagraph (A)(i) if any other plan
maintained by the employer meets such
requirements with respect to employees eligible
under the arrangement.
(13) Alternative method for automatic contribution
arrangements to meet nondiscrimination requirements.--
(A) In general.--A qualified automatic
contribution arrangement shall be treated as
meeting the requirements of paragraph
(3)(A)(ii).
(B) Qualified automatic contribution
arrangement.--For purposes of this paragraph,
the term ``qualified automatic contribution
arrangement'' means any cash or deferred
arrangement which meets the requirements of
subparagraphs (C) through (E).
(C) Automatic deferral.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, each employee eligible to
participate in the arrangement is
treated as having elected to have the
employer make elective contributions in
an amount equal to a qualified
percentage of compensation.
(ii) Election out.--The election
treated as having been made under
clause (i) shall cease to apply with
respect to any employee if such
employee makes an affirmative
election--
(I) to not have such
contributions made, or
(II) to make elective
contributions at a level
specified in such affirmative
election.
(iii) Qualified percentage.--For
purposes of this subparagraph, the term
``qualified percentage'' means, with
respect to any employee, any percentage
determined under the arrangement if
such percentage is applied uniformly,
does not exceed 10 percent, and is at
least--
(I) 3 percent during the
period ending on the last day
of the first plan year which
begins after the date on which
the first elective contribution
described in clause (i) is made
with respect to such employee,
(II) 4 percent during the
first plan year following the
plan year described in
subclause (I),
(III) 5 percent during the
second plan year following the
plan year described in
subclause (I), and
(IV) 6 percent during any
subsequent plan year.
(iv) Automatic deferral for current
employees not required.--Clause (i) may
be applied without taking into account
any employee who--
(I) was eligible to
participate in the arrangement
(or a predecessor arrangement)
immediately before the date on
which such arrangement becomes
a qualified automatic
contribution arrangement
(determined after application
of this clause), and
(II) had an election in
effect on such date either to
participate in the arrangement
or to not participate in the
arrangement.
(D) Matching or nonelective contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer--
(I) makes matching
contributions on behalf of each
employee who is not a highly
compensated employee in an
amount equal to the sum of 100
percent of the elective
contributions of the employee
to the extent that such
contributions do not exceed 1
percent of compensation plus 50
percent of so much of such
contributions as exceed 1
percent but do not exceed 6
percent of compensation, or
(II) is required, without
regard to whether the employee
makes an elective contribution
or employee contribution, to
make a contribution to a
defined contribution plan on
behalf of each employee who is
not a highly compensated
employee and who is eligible to
participate in the arrangement
in an amount equal to at least
3 percent of the employee's
compensation.
(ii) Application of rules for
matching contributions.--The rules of
clauses (ii) and (iii) of paragraph
(12)(B) shall apply for purposes of
clause (i)(I).
(iii) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of clause (i) unless, with respect to
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of clause (i) are met--
(I) any employee who has
completed at least 2 years of
service (within the meaning of
section 411(a)) has a
nonforfeitable right to 100
percent of the employee's
accrued benefit derived from
such employer contributions,
and
(II) the requirements of
subparagraph (B) of paragraph
(2) are met with respect to all
such employer contributions.
(iv) Application of certain other
rules.--The rules of subparagraphs
(E)(ii) and (F) of paragraph (12) shall
apply for purposes of subclauses (I)
and (II) of clause (i).
(E) Notice requirements.--
(i) In general.--The requirements of
this subparagraph are met if, within a
reasonable period before each plan
year, each employee eligible to
participate in the arrangement for such
year receives written notice of the
employee's rights and obligations under
the arrangement which--
(I) is sufficiently accurate
and comprehensive to apprise
the employee of such rights and
obligations, and
(II) is written in a manner
calculated to be understood by
the average employee to whom
the arrangement applies.
(ii) Timing and content
requirements.--A notice shall not be
treated as meeting the requirements of
clause (i) with respect to an employee
unless--
(I) the notice explains the
employee's right under the
arrangement to elect not to
have elective contributions
made on the employee's behalf
(or to elect to have such
contributions made at a
different percentage),
(II) in the case of an
arrangement under which the
employee may elect among 2 or
more investment options, the
notice explains how
contributions made under the
arrangement will be invested in
the absence of any investment
election by the employee, and
(III) the employee has a
reasonable period of time after
receipt of the notice described
in subclauses (I) and (II) and
before the first elective
contribution is made to make
either such election.
(14) Special rules relating to hardship
withdrawals.--For purposes of paragraph (2)(B)(i)(IV)--
(A) Amounts which may be withdrawn.--The
following amounts may be distributed upon
hardship of the employee:
(i) Contributions to a profit-sharing
or stock bonus plan to which section
402(e)(3) applies.
(ii) Qualified nonelective
contributions (as defined in subsection
(m)(4)(C)).
(iii) Qualified matching
contributions described in paragraph
(3)(D)(ii)(I).
(iv) Earnings on any contributions
described in clause (i), (ii), or
(iii).
(B) No requirement to take available loan.--A
distribution shall not be treated as failing to
be made upon the hardship of an employee solely
because the employee does not take any
available loan under the plan.
(l) Permitted disparity in plan contributions or benefits.--
(1) In general.--The requirements of this subsection
are met with respect to a plan if--
(A) in the case of a defined contribution
plan, the requirements of paragraph (2) are
met, and
(B) in the case of a defined benefit plan,
the requirements of paragraph (3) are met.
(2) Defined contribution plan.--
(A) In general.--A defined contribution plan
meets the requirements of this paragraph if the
excess contribution percentage does not exceed
the base contribution percentage by more than
the lesser of--
(i) the base contribution percentage,
or
(ii) the greater of--
(I) 5.7 percentage points, or
(II) the percentage equal to
the portion of the rate of tax
under section 3111(a) (in
effect as of the beginning of
the year) which is attributable
to old-age insurance.
(B) Contribution percentages.--For purposes
of this paragraph--
(i) Excess contribution percentage.--
The term ``excess contribution
percentage'' means the percentage of
compensation which is contributed by
the employer under the plan with
respect to that portion of each
participant's compensation in excess of
the integration level.
(ii) Base contribution percentage.--
The term ``base contribution
percentage'' means the percentage of
compensation contributed by the
employer under the plan with respect to
that portion of each participant's
compensation not in excess of the
integration level.
(3) Defined benefit plan.--A defined benefit plan
meets the requirements of this paragraph if--
(A) Excess plans.--
(i) In general.--In the case of a
plan other than an offset plan--
(I) the excess benefit
percentage does not exceed the
base benefit percentage by more
than the maximum excess
allowance,
(II) any optional form of
benefit, preretirement benefit,
actuarial factor, or other
benefit or feature provided
with respect to compensation in
excess of the integration level
is provided with respect to
compensation not in excess of
such level, and
(III) benefits are based on
average annual compensation.
(ii) Benefit percentages.--For
purposes of this subparagraph, the
excess and base benefit percentages
shall be computed in the same manner as
the excess and base contribution
percentages under paragraph (2)(B),
except that such determination shall be
made on the basis of benefits
attributable to employer contributions
rather than contributions.
(B) Offset plans.--In the case of an offset
plan, the plan provides that--
(i) a participant's accrued benefit
attributable to employer contributions
(within the meaning of section
411(c)(1)) may not be reduced (by
reason of the offset) by more than the
maximum offset allowance, and
(ii) benefits are based on average
annual compensation.
(4) Definitions relating to paragraph (3).--For
purposes of paragraph (3)--
(A) Maximum excess allowance.--The maximum
excess allowance is equal to--
(i) in the case of benefits
attributable to any year of service
with the employer taken into account
under the plan, 3/4 of a percentage
point, and
(ii) in the case of total benefits,
3/4 of a percentage point, multiplied
by the participant's years of service
(not in excess of 35) with the employer
taken into account under the plan.
In no event shall the maximum excess allowance
exceed the base benefit percentage.
(B) Maximum offset allowance.--The maximum
offset allowance is equal to--
(i) in the case of benefits
attributable to any year of service
with the employer taken into account
under the plan, 3/4 percent of the
participant's final average
compensation, and
(ii) in the case of total benefits,
3/4 percent of the participant's final
average compensation, multiplied by the
participant's years of service (not in
excess of 35) with the employer taken
into account under the plan.
In no event shall the maximum offset allowance
exceed 50 percent of the benefit which would
have accrued without regard to the offset
reduction.
(C) Reductions.--
(i) In general.--The Secretary shall
prescribe regulations requiring the
reduction of the 3/4 percentage factor
under subparagraph (A) or (B)--
(I) in the case of a plan
other than an offset plan which
has an integration level in
excess of covered compensation,
or
(II) with respect to any
participant in an offset plan
who has final average
compensation in excess of
covered compensation.
(ii) Basis of reductions.--Any
reductions under clause (i) shall be
based on the percentages of
compensation replaced by the employer-
derived portions of primary insurance
amounts under the Social Security Act
for participants with compensation in
excess of covered compensation.
(D) Offset plan.--The term ``offset plan''
means any plan with respect to which the
benefit attributable to employer contributions
for each participant is reduced by an amount
specified in the plan.
(5) Other definitions and special rules.--For
purposes of this subsection--
(A) Integration level.--
(i) In general.--The term
``integration level'' means the amount
of compensation specified under the
plan (by dollar amount or formula) at
or below which the rate at which
contributions or benefits are provided
(expressed as a percentage) is less
than such rate above such amount.
(ii) Limitation.--The integration
level for any year may not exceed the
contribution and benefit base in effect
under section 230 of the Social
Security Act for such year.
(iii) Level to apply to all
participants.--A plan's integration
level shall apply with respect to all
participants in the plan.
(iv) Multiple integration levels.--
Under rules prescribed by the
Secretary, a defined benefit plan may
specify multiple integration levels.
(B) Compensation.--The term ``compensation''
has the meaning given such term by section
414(s).
(C) Average annual compensation.--The term
``average annual compensation'' means the
participant's highest average annual
compensation for--
(i) any period of at least 3
consecutive years, or
(ii) if shorter, the participant's
full period of service.
(D) Final average compensation.--
(i) In general.--The term ``final
average compensation'' means the
participant's average annual
compensation for--
(I) the 3-consecutive year
period ending with the current
year, or
(II) if shorter, the
participant's full period of
service.
(ii) Limitation.--A participant's
final average compensation shall be
determined by not taking into account
in any year compensation in excess of
the contribution and benefit base in
effect under section 230 of the Social
Security Act for such year.
(E) Covered compensation.--
(i) In general.--The term ``covered
compensation'' means, with respect to
an employee, the average of the
contribution and benefit bases in
effect under section 230 of the Social
Security Act for each year in the 35-
year period ending with the year in
which the employee attains the social
security retirement age.
(ii) Computation for any year.--For
purposes of clause (i), the
determination for any year preceding
the year in which the employee attains
the social security retirement age
shall be made by assuming that there is
no increase in the bases described in
clause (i) after the determination year
and before the employee attains the
social security retirement age.
(iii) Social security retirement
age.--For purposes of this
subparagraph, the term ``social
security retirement age'' has the
meaning given such term by section
415(b)(8).
(F) Regulations.--The Secretary shall
prescribe such regulations as are necessary or
appropriate to carry out the purposes of this
subsection, including--
(i) in the case of a defined benefit
plan which provides for unreduced
benefits commencing before the social
security retirement age (as defined in
section 415(b)(8)), rules providing for
the reduction of the maximum excess
allowance and the maximum offset
allowance, and
(ii) in the case of an employee
covered by 2 or more plans of the
employer which fail to meet the
requirements of subsection (a)(4)
(without regard to this subsection),
rules preventing the multiple use of
the disparity permitted under this
subsection with respect to any
employee.
For purposes of clause (i), unreduced benefits
shall not include benefits for disability
(within the meaning of section 223(d) of the
Social Security Act).
(6) Special rule for plan maintained by railroads.--
In determining whether a plan which includes employees
of a railroad employer who are entitled to benefits
under the Railroad Retirement Act of 1974 meets the
requirements of this subsection, rules similar to the
rules set forth in this subsection shall apply. Such
rules shall take into account the employer-derived
portion of the employees' tier 2 railroad retirement
benefits and any supplemental annuity under the
Railroad Retirement Act of 1974.
(m) Nondiscrimination test for matching contributions and
employee contributions.--
(1) In general.--A defined contribution plan shall be
treated as meeting the requirements of subsection
(a)(4) with respect to the amount of any matching
contribution or employee contribution for any plan year
only if the contribution percentage requirement of
paragraph (2) of this subsection is met for such plan
year.
(2) Requirements.--
(A) Contribution percentage requirement.--A
plan meets the contribution percentage
requirement of this paragraph for any plan year
only if the contribution percentage for
eligible highly compensated employees for such
plan year does not exceed the greater of--
(i) 125 percent of such percentage
for all other eligible employees for
the preceding plan year, or
(ii) the lesser of 200 percent of
such percentage for all other eligible
employees for the preceding plan year,
or such percentage for all other
eligible employees for the preceding
plan year plus 2 percentage points.
This subparagraph may be applied by using the
plan year rather than the preceding plan year
if the employer so elects, except that if such
an election is made, it may not be changed
except as provided by the Secretary.
(B) Multiple plans treated as a single
plan.--If two or more plans of an employer to
which matching contributions, employee
contributions, or elective deferrals are made
are treated as one plan for purposes of section
410(b), such plans shall be treated as one plan
for purposes of this subsection. If a highly
compensated employee participates in two or
more plans of an employer to which
contributions to which this subsection applies
are made, all such contributions shall be
aggregated for purposes of this subsection.
(3) Contribution percentage.--For purposes of
paragraph (2), the contribution percentage for a
specified group of employees for a plan year shall be
the average of the ratios (calculated separately for
each employee in such group) of--
(A) the sum of the matching contributions and
employee contributions paid under the plan on
behalf of each such employee for such plan
year, to
(B) the employee's compensation (within the
meaning of section 414(s)) for such plan year.
Under regulations, an employer may elect to take into
account (in computing the contribution percentage)
elective deferrals and qualified nonelective
contributions under the plan or any other plan of the
employer. If matching contributions are taken into
account for purposes of subsection (k)(3)(A)(ii) for
any plan year, such contributions shall not be taken
into account under subparagraph (A) for such year.
Rules similar to the rules of subsection (k)(3)(E)
shall apply for purposes of this subsection.
(4) Definitions.--For purposes of this subsection--
(A) Matching contribution.--The term
``matching contribution'' means--
(i) any employer contribution made to
a defined contribution plan on behalf
of an employee on account of an
employee contribution made by such
employee, and
(ii) any employer contribution made
to a defined contribution plan on
behalf of an employee on account of an
employee's elective deferral.
(B) Elective deferral.--The term ``elective
deferral'' means any employer contribution
described in section 402(g)(3).
(C) Qualified nonelective contributions.--The
term ``qualified nonelective contribution''
means any employer contribution (other than a
matching contribution) with respect to which--
(i) the employee may not elect to
have the contribution paid to the
employee in cash instead of being
contributed to the plan, and
(ii) the requirements of
subparagraphs (B) and (C) of subsection
(k)(2) are met.
(5) Employees taken into consideration.--
(A) In general.--Any employee who is eligible
to make an employee contribution (or, if the
employer takes elective contributions into
account, elective contributions) or to receive
a matching contribution under the plan being
tested under paragraph (1) shall be considered
an eligible employee for purposes of this
subsection.
(B) Certain nonparticipants.--If an employee
contribution is required as a condition of
participation in the plan, any employee who
would be a participant in the plan if such
employee made such a contribution shall be
treated as an eligible employee on behalf of
whom no employer contributions are made.
(C) Special rule for early participation.--If
an employer elects to apply section
410(b)(4)(B) in determining whether a plan
meets the requirements of section 410(b), the
employer may, in determining whether the plan
meets the requirements of paragraph (2),
exclude from consideration all eligible
employees (other than highly compensated
employees) who have not met the minimum age and
service requirements of section 410(a)(1)(A).
(6) Plan not disqualified if excess aggregate
contributions distributed before end of following plan
year.--
(A) In general.--A plan shall not be treated
as failing to meet the requirements of
paragraph (1) for any plan year if, before the
close of the following plan year, the amount of
the excess aggregate contributions for such
plan year (and any income allocable to such
contributions through the end of such year) is
distributed (or, if forfeitable, is forfeited).
Such contributions (and such income) may be
distributed without regard to any other
provision of law.
(B) Excess aggregate contributions.--For
purposes of subparagraph (A), the term ``excess
aggregate contributions'' means, with respect
to any plan year, the excess of--
(i) the aggregate amount of the
matching contributions and employee
contributions (and any qualified
nonelective contribution or elective
contribution taken into account in
computing the contribution percentage)
actually made on behalf of highly
compensated employees for such plan
year, over
(ii) the maximum amount of such
contributions permitted under the
limitations of paragraph (2)(A)
(determined by reducing contributions
made on behalf of highly compensated
employees in order of their
contribution percentages beginning with
the highest of such percentages).
(C) Method of distributing excess aggregate
contributions.--Any distribution of the excess
aggregate contributions for any plan year shall
be made to highly compensated employees on the
basis of the amount of contributions on behalf
of, or by, each such employee. Forfeitures of
excess aggregate contributions may not be
allocated to participants whose contributions
are reduced under this paragraph.
(D) Coordination with subsection (k) and
402(g).--The determination of the amount of
excess aggregate contributions with respect to
a plan shall be made after--
(i) first determining the excess
deferrals (within the meaning of
section 402(g)), and
(ii) then determining the excess
contributions under subsection (k).
(7) Treatment of distributions.--
(A) Additional tax of section 72(t) not
applicable.--No tax shall be imposed under
section 72(t) on any amount required to be
distributed under paragraph (6).
(B) Exclusion of employee contributions.--Any
distribution attributable to employee
contributions shall not be included in gross
income except to the extent attributable to
income on such contributions.
(8) Highly compensated employee.--For purposes of
this subsection, the term ``highly compensated
employee'' has the meaning given to such term by
section 414(q).
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
purposes of this subsection and subsection (k),
including regulations permitting appropriate
aggregation of plans and contributions.
(10) Alternative method of satisfying tests.--A
defined contribution plan shall be treated as meeting
the requirements of paragraph (2) with respect to
matching contributions if the plan--
(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
(B) meets the exclusive plan requirements of
subsection (k)(11)(C), and
(C) meets the vesting requirements of section
408(p)(3).
(11) Additional alternative method of satisfying
tests.--
(A) In general.--A defined contribution plan
shall be treated as meeting the requirements of
paragraph (2) with respect to matching
contributions if the plan--
(i) meets the contribution
requirements of subparagraph (B) or (C)
of subsection (k)(12),
(ii) meets the notice requirements of
subsection (k)(12)(D), and
(iii) meets the requirements of
subparagraph (B).
(B) Limitation on matching contributions.--
The requirements of this subparagraph are met
if--
(i) matching contributions on behalf
of any employee may not be made with
respect to an employee's contributions
or elective deferrals in excess of 6
percent of the employee's compensation,
(ii) the rate of an employer's
matching contribution does not increase
as the rate of an employee's
contributions or elective deferrals
increase, and
(iii) the matching contribution with
respect to any highly compensated
employee at any rate of an employee
contribution or rate of elective
deferral is not greater than that with
respect to an employee who is not a
highly compensated employee.
(12) Alternative method for automatic contribution
arrangements.--A defined contribution plan shall be
treated as meeting the requirements of paragraph (2)
with respect to matching contributions if the plan--
(A) is a qualified automatic contribution
arrangement (as defined in subsection (k)(13)),
and
(B) meets the requirements of paragraph
(11)(B).
(13) Cross reference.--For excise tax on certain
excess contributions, see section 4979.
(n) Coordination with qualified domestic relations orders.--
The Secretary shall prescribe such rules or regulations as may
be necessary to coordinate the requirements of subsection
(a)(13)(B) and section 414(p) (and the regulations issued by
the Secretary of Labor thereunder) with the other provisions of
this chapter.
(o) Cross reference.--For exemption from tax of a trust
qualified under this section, see section 501(a).
SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.
(a) Taxability of beneficiary of exempt trust.--Except as
otherwise provided in this section, any amount actually
distributed to any distributee by any employees' trust
described in section 401(a) which is exempt from tax under
section 501(a) shall be taxable to the distributee, in the
taxable year of the distributee in which distributed, under
section 72 (relating to annuities).
(b) Taxability of beneficiary of nonexempt trust.--
(1) Contributions.--Contributions to an employees'
trust made by an employer during a taxable year of the
employer which ends with or within a taxable year of
the trust for which the trust is not exempt from tax
under section 501(a) shall be included in the gross
income of the employee in accordance with section 83
(relating to property transferred in connection with
performance of services), except that the value of the
employee's interest in the trust shall be substituted
for the fair market value of the property for purposes
of applying such section.
(2) Distributions.--The amount actually distributed
or made available to any distributee by any trust
described in paragraph (1) shall be taxable to the
distributee, in the taxable year in which so
distributed or made available, under section 72
(relating to annuities), except that distributions of
income of such trust before the annuity starting date
(as defined in section 72(c)(4)) shall be included in
the gross income of the employee without regard to
section 72(e)(5) (relating to amounts not received as
annuities).
(3) Grantor trusts.--A beneficiary of any trust
described in paragraph (1) shall not be considered the
owner of any portion of such trust under subpart E of
part I of subchapter J (relating to grantors and others
treated as substantial owners).
(4) Failure to meet requirements of section 410(b)
(A) Highly compensated employees.--If 1 of
the reasons a trust is not exempt from tax
under section 501(a) is the failure of the plan
of which it is a part to meet the requirements
of section 401(a)(26) or 410(b), then a highly
compensated employee shall, in lieu of the
amount determined under paragraph (1) or (2)
include in gross income for the taxable year
with or within which the taxable year of the
trust ends an amount equal to the vested
accrued benefit of such employee (other than
the employee's investment in the contract) as
of the close of such taxable year of the trust.
(B) Failure to meet coverage tests.--If a
trust is not exempt from tax under section
501(a) for any taxable year solely because such
trust is part of a plan which fails to meet the
requirements of section 401(a)(26) or 410(b),
paragraphs (1) and (2) shall not apply by
reason of such failure to any employee who was
not a highly compensated employee during--
(i) such taxable year, or
(ii) any preceding period for which
service was creditable to such employee
under the plan.
(C) Highly compensated employee.--For
purposes of this paragraph, the term ``highly
compensated employee'' has the meaning given
such term by section 414(q).
(c) Rules applicable to rollovers from exempt trusts.--
(1) Exclusion from income.--If--
(A) any portion of the balance to the credit
of an employee in a qualified trust is paid to
the employee in an eligible rollover
distribution,
(B) the distributee transfers any portion of
the property received in such distribution to
an eligible retirement plan, and
(C) in the case of a distribution of property
other than money, the amount so transferred
consists of the property distributed,
then such distribution (to the extent so transferred)
shall not be includible in gross income for the taxable
year in which paid.
(2) Maximum amount which may be rolled over.--In the
case of any eligible rollover distribution, the maximum
amount transferred to which paragraph (1) applies shall
not exceed the portion of such distribution which is
includible in gross income (determined without regard
to paragraph (1)). The preceding sentence shall not
apply to such distribution to the extent--
(A) such portion is transferred in a direct
trustee-to-trustee transfer to a qualified
trust or to an annuity contract described in
section 403(b) and such trust or contract
provides for separate accounting for amounts so
transferred (and earnings thereon), including
separately accounting for the portion of such
distribution which is includible in gross
income and the portion of such distribution
which is not so includible, or
(B) such portion is transferred to an
eligible retirement plan described in clause
(i) or (ii) of paragraph (8)(B).
In the case of a transfer described in subparagraph (A)
or (B), the amount transferred shall be treated as
consisting first of the portion of such distribution
that is includible in gross income (determined without
regard to paragraph (1)).
(3) Time limit on transfers.--
(A) In general.--Except as provided in
subparagraphs (B) and (C), paragraph (1) shall
not apply to any transfer of a distribution
made after the 60th day following the day on
which the distributee received the property
distributed.
(B) Hardship exception.--The Secretary may
waive the 60-day requirement under subparagraph
(A) where the failure to waive such requirement
would be against equity or good conscience,
including casualty, disaster, or other events
beyond the reasonable control of the individual
subject to such requirement.
(C) Rollover of certain plan loan offset
amounts.--
(i) In general.--In the case of a
qualified plan loan offset amount,
paragraph (1) shall not apply to any
transfer of such amount made after the
due date (including extensions) for
filing the return of tax for the
taxable year in which such amount is
treated as distributed from a qualified
employer plan.
(ii) Qualified plan loan offset
amount.--For purposes of this
subparagraph, the term ``qualified plan
loan offset amount'' means a plan loan
offset amount which is treated as
distributed from a qualified employer
plan to a participant or beneficiary
solely by reason of--
(I) the termination of the
qualified employer plan, or
(II) the failure to meet the
repayment terms of the loan
from such plan because of the
severance from employment of
the participant.
(iii) Plan loan offset amount.--For
purposes of clause (ii), the term
``plan loan offset amount'' means the
amount by which the participant's
accrued benefit under the plan is
reduced in order to repay a loan from
the plan.
(iv) Limitation.--This subparagraph
shall not apply to any plan loan offset
amount unless such plan loan offset
amount relates to a loan to which
section 72(p)(1) does not apply by
reason of section 72(p)(2).
(v) Qualified employer plan.--For
purposes of this subsection, the term
``qualified employer plan'' has the
meaning given such term by section
72(p)(4).
(4) Eligible rollover distribution.--For purposes of
this subsection, the term ``eligible rollover
distribution'' means any distribution to an employee of
all or any portion of the balance to the credit of the
employee in a qualified trust; except that such term
shall not include--
(A) any distribution which is one of a series
of substantially equal periodic payments (not
less frequently than annually) made--
(i) for the life (or life expectancy)
of the employee or the joint lives (or
joint life expectancies) of the
employee and the employee's designated
beneficiary, or
(ii) for a specified period of 10
years or more,
(B) any distribution to the extent such
distribution is required under section
401(a)(9), and
(C) any distribution which is made upon
hardship of the employee.
If all or any portion of a distribution during 2009 is
treated as an eligible rollover distribution but would
not be so treated if the minimum distribution
requirements under section 401(a)(9) had applied during
2009, such distribution shall not be treated as an
eligible rollover distribution for purposes of section
401(a)(31) or 3405(c) or subsection (f) of this
section.
(5) Transfer treated as rollover contribution under
section 408.--For purposes of this title, a transfer to
an eligible retirement plan described in clause (i) or
(ii) of paragraph (8)(B) resulting in any portion of a
distribution being excluded from gross income under
paragraph (1) shall be treated as a rollover
contribution described in section 408(d)(3).
(6) Sales of distributed property.--For purposes of
this subsection--
(A) Transfer of proceeds from sale of
distributed property treated as transfer of
distributed property.--The transfer of an
amount equal to any portion of the proceeds
from the sale of property received in the
distribution shall be treated as the transfer
of property received in the distribution.
(B) Proceeds attributable to increase in
value.--The excess of fair market value of
property on sale over its fair market value on
distribution shall be treated as property
received in the distribution.
(C) Designation where amount of distribution
exceeds rollover contribution.--In any case
where part or all of the distribution consists
of property other than money--
(i) the portion of the money or other
property which is to be treated as
attributable to amounts not included in
gross income, and
(ii) the portion of the money or
other property which is to be treated
as included in the rollover
contribution,
shall be determined on a ratable basis unless
the taxpayer designates otherwise. Any
designation under this subparagraph for a
taxable year shall be made not later than the
time prescribed by law for filing the return
for such taxable year (including extensions
thereof). Any such designation, once made,
shall be irrevocable.
(D) Nonrecognition of gain or loss.--No gain
or loss shall be recognized on any sale
described in subparagraph (A) to the extent
that an amount equal to the proceeds is
transferred pursuant to paragraph (1).
(7) Special rule for frozen deposits.--
(A) In general.--The 60-day period described
in paragraph (3) shall not--
(i) include any period during which
the amount transferred to the employee
is a frozen deposit, or
(ii) end earlier than 10 days after
such amount ceases to be a frozen
deposit.
(B) Frozen deposits.--For purposes of this
subparagraph, the term ``frozen deposit'' means
any deposit which may not be withdrawn because
of--
(i) the bankruptcy or insolvency of
any financial institution, or
(ii) any requirement imposed by the
State in which such institution is
located by reason of the bankruptcy or
insolvency (or threat thereof) of 1 or
more financial institutions in such
State.
A deposit shall not be treated as a frozen
deposit unless on at least 1 day during the 60-
day period described in paragraph (3) (without
regard to this paragraph) such deposit is
described in the preceding sentence.
(8) Definitions.--For purposes of this subsection--
(A) Qualified trust.--The term ``qualified
trust'' means an employees' trust described in
section 401(a) which is exempt from tax under
section 501(a).
(B) Eligible retirement plan.--The term
``eligible retirement plan'' means--
(i) an individual retirement account
described in section 408(a),
(ii) an individual retirement annuity
described in section 408(b) (other than
an endowment contract),
(iii) a qualified trust,
(iv) an annuity plan described in
section 403(a),
(v) an eligible deferred compensation
plan described in section 457(b) which
is maintained by an eligible employer
described in section 457(e)(1)(A), and
(vi) an annuity contract described in
section 403(b).
If any portion of an eligible rollover
distribution is attributable to payments or
distributions from a designated Roth account
(as defined in section 402A), an eligible
retirement plan with respect to such portion
shall include only another designated Roth
account and a Roth IRA.
(9) Rollover where spouse receives distribution after
death of employee.--If any distribution attributable to
an employee is paid to the spouse of the employee after
the employee's death, the preceding provisions of this
subsection shall apply to such distribution in the same
manner as if the spouse were the employee.
(10) Separate accounting.--Unless a plan described in
clause (v) of paragraph (8)(B) agrees to separately
account for amounts rolled into such plan from eligible
retirement plans not described in such clause, the plan
described in such clause may not accept transfers or
rollovers from such retirement plans.
(11) Distributions to inherited individual retirement
plan of nonspouse beneficiary.--
(A) In general.--If, with respect to any
portion of a distribution from an eligible
retirement plan described in paragraph
(8)(B)(iii) of a deceased employee, a direct
trustee-to-trustee transfer is made to an
individual retirement plan described in clause
(i) or (ii) of paragraph (8)(B) established for
the purposes of receiving the distribution on
behalf of an individual who is a designated
beneficiary (as defined by section
401(a)(9)(E)) of the employee and who is not
the surviving spouse of the employee--
(i) the transfer shall be treated as
an eligible rollover distribution,
(ii) the individual retirement plan
shall be treated as an inherited
individual retirement account or
individual retirement annuity (within
the meaning of section 408(d)(3)(C))
for purposes of this title, and
(iii) section 401(a)(9)(B) (other
than clause (iv) thereof) shall apply
to such plan.
(B) Certain trusts treated as
beneficiaries.--For purposes of this paragraph,
to the extent provided in rules prescribed by
the Secretary, a trust maintained for the
benefit of one or more designated beneficiaries
shall be treated in the same manner as a
designated beneficiary.
(d) Taxability of beneficiary of certain foreign situs
trusts.--For purposes of subsections (a), (b), and (c), a stock
bonus, pension, or profit-sharing trust which would qualify for
exemption from tax under section 501(a) except for the fact
that it is a trust created or organized outside the United
States shall be treated as if it were a trust exempt from tax
under section 501(a).
(e) Other rules applicable to exempt trusts.--
(1) Alternate payees.--
(A) Alternate payee treated as distributee.--
For purposes of subsection (a) and section 72,
an alternate payee who is the spouse or former
spouse of the participant shall be treated as
the distributee of any distribution or payment
made to the alternate payee under a qualified
domestic relations order (as defined in section
414(p)).
(B) Rollovers.--If any amount is paid or
distributed to an alternate payee who is the
spouse or former spouse of the participant by
reason of any qualified domestic relations
order (within the meaning of section 414(p)),
subsection (c) shall apply to such distribution
in the same manner as if such alternate payee
were the employee.
(2) Distributions by United States to nonresident
aliens.--The amount includible under subsection (a) in
the gross income of a nonresident alien with respect to
a distribution made by the United States in respect of
services performed by an employee of the United States
shall not exceed an amount which bears the same ratio
to the amount includible in gross income without regard
to this paragraph as--
(A) the aggregate basic pay paid by the
United States to such employee for such
services, reduced by the amount of such basic
pay which was not includible in gross income by
reason of being from sources without the United
States, bears to
(B) the aggregate basic pay paid by the
United States to such employee for such
services.
In the case of distributions under the civil service
retirement laws, the term ``basic pay'' shall have the
meaning provided in section 8331(3) of title 5, United
States Code.
(3) Cash or deferred arrangements.--For purposes of
this title, contributions made by an employer on behalf
of an employee to a trust which is a part of a
qualified cash or deferred arrangement (as defined in
section 401(k)(2)) or which is part of a salary
reduction agreement under section 403(b) shall not be
treated as distributed or made available to the
employee nor as contributions made to the trust by the
employee merely because the arrangement includes
provisions under which the employee has an election
whether the contribution will be made to the trust or
received by the employee in cash.
(4) Net unrealized appreciation.--
(A) Amounts attributable to employee
contributions.--For purposes of subsection (a)
and section 72, in the case of a distribution
other than a lump sum distribution, the amount
actually distributed to any distributee from a
trust described in subsection (a) shall not
include any net unrealized appreciation in
securities of the employer corporation
attributable to amounts contributed by the
employee (other than deductible employee
contributions within the meaning of section
72(o)(5)). This subparagraph shall not apply to
a distribution to which subsection (c) applies.
(B) Amounts attributable to employer
contributions.--For purposes of subsection (a)
and section 72, in the case of any lump sum
distribution which includes securities of the
employer corporation, there shall be excluded
from gross income the net unrealized
appreciation attributable to that part of the
distribution which consists of securities of
the employer corporation. In accordance with
rules prescribed by the Secretary, a taxpayer
may elect, on the return of tax on which a lump
sum distribution is required to be included,
not to have this subparagraph apply to such
distribution.
(C) Determination of amounts and
adjustments.--For purposes of subparagraphs (A)
and (B), net unrealized appreciation and the
resulting adjustments to basis shall be
determined in accordance with regulations
prescribed by the Secretary.
(D) Lump-sum distribution.--For purposes of
this paragraph--
(i) In general.--The term ``lump-sum
distribution'' means the distribution
or payment within one taxable year of
the recipient of the balance to the
credit of an employee which becomes
payable to the recipient--
(I) on account of the
employee's death,
(II) after the employee
attains age 59 1/2,
(III) on account of the
employee's separation from
service, or
(IV) after the employee has
become disabled (within the
meaning of section 72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is exempt
from tax under section 501 or from a plan
described in section 403(a). Subclause (III) of
this clause shall be applied only with respect
to an individual who is an employee without
regard to section 401(c)(1), and subclause (IV)
shall be applied only with respect to an
employee within the meaning of section
401(c)(1). For purposes of this clause, a
distribution to two or more trusts shall be
treated as a distribution to one recipient. For
purposes of this paragraph, the balance to the
credit of the employee does not include the
accumulated deductible employee contributions
under the plan (within the meaning of section
72(o)(5)).
(ii) Aggregation of certain trusts
and plans.--For purposes of determining
the balance to the credit of an
employee under clause (i)--
(I) all trusts which are part
of a plan shall be treated as a
single trust, all pension plans
maintained by the employer
shall be treated as a single
plan, all profit-sharing plans
maintained by the employer
shall be treated as a single
plan, and all stock bonus plans
maintained by the employer
shall be treated as a single
plan, and
(II) trusts which are not
qualified trusts under section
401(a) and annuity contracts
which do not satisfy the
requirements of section
404(a)(2) shall not be taken
into account.
(iii) Community property laws.--The
provisions of this paragraph shall be
applied without regard to community
property laws.
(iv) Amounts subject to penalty.--
This paragraph shall not apply to
amounts described in subparagraph (A)
of section 72(m)(5) to the extent that
section 72(m)(5) applies to such
amounts.
(v) Balance to credit of employee not
to include amounts payable under
qualified domestic relations order.--
For purposes of this paragraph, the
balance to the credit of an employee
shall not include any amount payable to
an alternate payee under a qualified
domestic relations order (within the
meaning of section 414(p)).
(vi) Transfers to cost-of-living
arrangement not treated as
distribution.--For purposes of this
paragraph, the balance to the credit of
an employee under a defined
contribution plan shall not include any
amount transferred from such defined
contribution plan to a qualified cost-
of-living arrangement (within the
meaning of section 415(k)(2)) under a
defined benefit plan.
(vii) Lump-sum distributions of
alternate payees.--If any distribution
or payment of the balance to the credit
of an employee would be treated as a
lump-sum distribution, then, for
purposes of this paragraph, the payment
under a qualified domestic relations
order (within the meaning of section
414(p)) of the balance to the credit of
an alternate payee who is the spouse or
former spouse of the employee shall be
treated as a lump-sum distribution. For
purposes of this clause, the balance to
the credit of the alternate payee shall
not include any amount payable to the
employee.
(E) Definitions relating to securities.--For
purposes of this paragraph--
(i) Securities.--The term
``securities'' means only shares of
stock and bonds or debentures issued by
a corporation with interest coupons or
in registered form.
(ii) Securities of the employer.--The
term ``securities of the employer
corporation'' includes securities of a
parent or subsidiary corporation (as
defined in subsections (e) and (f) of
section 424) of the employer
corporation.
(6) Direct trustee-to-trustee transfers.--Any amount
transferred in a direct trustee-to-trustee transfer in
accordance with section 401(a)(31) shall not be
includible in gross income for the taxable year of such
transfer.
(f) Written explanation to recipients of distributions
eligible for rollover treatment.--
(1) In general.--The plan administrator of any plan
shall, within a reasonable period of time before making
an eligible rollover distribution, provide a written
explanation to the recipient--
(A) of the provisions under which the
recipient may have the distribution directly
transferred to an eligible retirement plan and
that the automatic distribution by direct
transfer applies to certain distributions in
accordance with section 401(a)(31)(B),
(B) of the provision which requires the
withholding of tax on the distribution if it is
not directly transferred to an eligible
retirement plan,
(C) of the provisions under which the
distribution will not be subject to tax if
transferred to an eligible retirement plan
within 60 days after the date on which the
recipient received the distribution,
(D) if applicable, of the provisions of
subsections (d) and (e) of this section, and
(E) of the provisions under which
distributions from the eligible retirement plan
receiving the distribution may be subject to
restrictions and tax consequences which are
different from those applicable to
distributions from the plan making such
distribution.
(2) Definitions.--For purposes of this subsection--
(A) Eligible rollover distribution.--The term
``eligible rollover distribution'' has the same
meaning as when used in subsection (c) of this
section, paragraph (4) of section 403(a),
subparagraph (A) of section 403(b)(8), or
subparagraph (A) of section 457(e)(16). Such
term shall include any distribution to a
designated beneficiary which would be treated
as an eligible rollover distribution by reason
of subsection (c)(11), or section 403(a)(4)(B),
403(b)(8)(B), or 457(e)(16)(B), if the
requirements of subsection (c)(11) were
satisfied.
(B) Eligible retirement plan.--The term
``eligible retirement plan'' has the meaning
given such term by subsection (c)(8)(B).
(g) Limitation on exclusion for elective deferrals.--
(1) In general.--
(A) Limitation.--Notwithstanding subsections
(e)(3) and (h)(1)(B), the elective deferrals of
any individual for any taxable year shall be
included in such individual's gross income to
the extent the amount of such deferrals for the
taxable year exceeds the applicable dollar
amount. The preceding sentence shall not apply
to the portion of such excess as does not
exceed the designated Roth contributions of the
individual for the taxable year.
(B) Applicable dollar amount.--For purposes
of subparagraph (A), the applicable dollar
amount is $15,000.
(C) Catch-up contributions.--In addition to
subparagraph (A), in the case of an eligible
participant (as defined in section 414(v)),
gross income shall not include elective
deferrals in excess of the applicable dollar
amount under subparagraph (B) to the extent
that the amount of such elective deferrals does
not exceed the applicable dollar amount under
section 414(v)(2)(B)(i) for the taxable year
(without regard to the treatment of the
elective deferrals by an applicable employer
plan under section 414(v)).
(2) Distribution of excess deferrals.--
(A) In general.--If any amount (hereinafter
in this paragraph referred to as ``excess
deferrals'') is included in the gross income of
an individual under paragraph (1) (or would be
included but for the last sentence thereof) for
any taxable year--
(i) not later than the 1st March 1
following the close of the taxable
year, the individual may allocate the
amount of such excess deferrals among
the plans under which the deferrals
were made and may notify each such plan
of the portion allocated to it, and
(ii) not later than the 1st April 15
following the close of the taxable
year, each such plan may distribute to
the individual the amount allocated to
it under clause (i) (and any income
allocable to such amount through the
end of such taxable year).
The distribution described in clause (ii) may
be made notwithstanding any other provision of
law.
(B) Treatment of distribution under section
401(k).--Except to the extent provided under
rules prescribed by the Secretary,
notwithstanding the distribution of any portion
of an excess deferral from a plan under
subparagraph (A)(ii), such portion shall, for
purposes of applying section 401(k)(3)(A)(ii),
be treated as an employer contribution.
(C) Taxation of distribution.--In the case of
a distribution to which subparagraph (A)
applies--
(i) except as provided in clause
(ii), such distribution shall not be
included in gross income, and
(ii) any income on the excess
deferral shall, for purposes of this
chapter, be treated as earned and
received in the taxable year in which
such income is distributed.
No tax shall be imposed under section 72(t) on
any distribution described in the preceding
sentence.
(D) Partial distributions.--If a plan
distributes only a portion of any excess
deferral and income allocable thereto, such
portion shall be treated as having been
distributed ratably from the excess deferral
and the income.
(3) Elective deferrals.--For purposes of this
subsection, the term ``elective deferrals'' means, with
respect to any taxable year, the sum of--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
includible in gross income for the taxable year
under subsection (e)(3) (determined without
regard to this subsection),
(B) any employer contribution to the extent
not includible in gross income for the taxable
year under subsection (h)(1)(B) (determined
without regard to this subsection),
(C) any employer contribution to purchase an
annuity contract under section 403(b) under a
salary reduction agreement (within the meaning
of section 3121(a)(5)(D)), and
(D) any elective employer contribution under
section 408(p)(2)(A)(i).
An employer contribution shall not be treated as an
elective deferral described in subparagraph (C) if
under the salary reduction agreement such contribution
is made pursuant to a one-time irrevocable election
made by the employee at the time of initial eligibility
to participate in the agreement or is made pursuant to
a similar arrangement involving a one-time irrevocable
election specified in regulations.
(4) Cost-of-living adjustment.--In the case of
taxable years beginning after December 31, 2006, the
Secretary shall adjust the $15,000 amount under
paragraph (1)(B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter beginning July 1,
2005, and any increase under this paragraph which is
not a multiple of $500 shall be rounded to the next
lowest multiple of $500.
(5) Disregard of community property laws.--This
subsection shall be applied without regard to community
property laws.
(6) Coordination with section 72.--For purposes of
applying section 72, any amount includible in gross
income for any taxable year under this subsection but
which is not distributed from the plan during such
taxable year shall not be treated as investment in the
contract.
(7) Special rule for certain organizations.--
(A) In general.--In the case of a qualified
employee of a qualified organization, with
respect to employer contributions described in
paragraph (3)(C) made by such organization, the
limitation of paragraph (1) for any taxable
year shall be increased by whichever of the
following is the least:
(i) $3,000,
(ii) $15,000 reduced by the sum of--
(I) the amounts not included
in gross income for prior
taxable years by reason of this
paragraph, plus
(II) the aggregate amount of
designated Roth contributions
(as defined in section 402A(c))
permitted for prior taxable
years by reason of this
paragraph, or
(iii) the excess of $5,000 multiplied
by the number of years of service of
the employee with the qualified
organization over the employer
contributions described in paragraph
(3) made by the organization on behalf
of such employee for prior taxable
years (determined in the manner
prescribed by the Secretary).
(B) Qualified organization.--For purposes of
this paragraph, the term ``qualified
organization'' means any educational
organization, hospital, home health service
agency, health and welfare service agency,
church, or convention or association of
churches. Such term includes any organization
described in section 414(e)(3)(B)(ii). Terms
used in this subparagraph shall have the same
meaning as when used in section 415(c)(4) (as
in effect before the enactment of the Economic
Growth and Tax Relief Reconciliation Act of
2001).
(C) Qualified employee.--For purposes of this
paragraph, the term ``qualified employee''
means any employee who has completed 15 years
of service with the qualified organization.
(D) Years of service.--For purposes of this
paragraph, the term ``years of service'' has
the meaning given such term by section 403(b).
(8) Matching contributions on behalf of self-employed
individuals not treated as elective employer
contributions.--Except as provided in section
401(k)(3)(D)(ii), any matching contribution described
in section 401(m)(4)(A) which is made on behalf of a
self-employed individual (as defined in section 401(c))
shall not be treated as an elective employer
contribution under a qualified cash or deferred
arrangement (as defined in section 401(k)) for purposes
of this title.
(h) Special rules for simplified employee pensions.--For
purposes of this chapter--
(1) In general.--Except as provided in paragraph (2),
contributions made by an employer on behalf of an
employee to an individual retirement plan pursuant to a
simplified employee pension (as defined in section
408(k))--
(A) shall not be treated as distributed or
made available to the employee or as
contributions made by the employee, and
(B) if such contributions are made pursuant
to an arrangement under section 408(k)(6) under
which an employee may elect to have the
employer make contributions to the simplified
employee pension on behalf of the employee,
shall not be treated as distributed or made
available or as contributions made by the
employee merely because the simplified employee
pension includes provisions for such election.
(2) Limitations on employer contributions.--
Contributions made by an employer to a simplified
employee pension with respect to an employee for any
year shall be treated as distributed or made available
to such employee and as contributions made by the
employee to the extent such contributions exceed the
lesser of--
(A) 25 percent of the compensation (within
the meaning of section 414(s)) from such
employer includible in the employee's gross
income for the year (determined without regard
to the employer contributions to the simplified
employee pension), or
(B) the limitation in effect under section
415(c)(1)(A), reduced in the case of any highly
compensated employee (within the meaning of
section 414(q)) by the amount taken into
account with respect to such employee under
section 408(k)(3)(D).
(3) Distributions.--Any amount paid or distributed
out of an individual retirement plan pursuant to a
simplified employee pension shall be included in gross
income by the payee or distributee, as the case may be,
in accordance with the provisions of section 408(d).
(i) Treatment of self-employed individuals.--For purposes of
this section, except as otherwise provided in subsection
(e)(4)(D)(i), the term ``employee'' includes a self-employed
individual (as defined in section 401(c)(1)(B)) and the
employer of such individual shall be the person treated as his
employer under section 401(c)(4).
(j) Effect of disposition of stock by plan on net unrealized
appreciation.--
(1) In general.--For purposes of subsection (e)(4),
in the case of any transaction to which this subsection
applies, the determination of net unrealized
appreciation shall be made without regard to such
transaction.
(2) Transaction to which subsection applies.--This
subsection shall apply to any transaction in which--
(A) the plan trustee exchanges the plan's
securities of the employer corporation for
other such securities, or
(B) the plan trustee disposes of securities
of the employer corporation and uses the
proceeds of such disposition to acquire
securities of the employer corporation within
90 days (or such longer period as the Secretary
may prescribe), except that this subparagraph
shall not apply to any employee with respect to
whom a distribution of money was made during
the period after such disposition and before
such acquisition.
(k) Treatment of simple retirement accounts.--Rules similar
to the rules of paragraphs (1) and (3) of subsection (h) shall
apply to contributions and distributions with respect to a
simple retirement account under section 408(p).
(l) Distributions from governmental plans for health and
long-term care insurance.--
(1) In general.--In the case of an employee who is an
eligible retired public safety officer who makes the
election described in paragraph (6) with respect to any
taxable year of such employee, gross income of such
employee for such taxable year does not include any
distribution from an eligible retirement plan
maintained by the employer described in paragraph
(4)(B) to the extent that the aggregate amount of such
distributions does not exceed the amount paid by such
employee for qualified health insurance premiums for
such taxable year.
(2) Limitation.--The amount which may be excluded
from gross income for the taxable year by reason of
paragraph (1) shall not exceed $3,000.
(3) Distributions must otherwise be includible.--
(A) In general.--An amount shall be treated
as a distribution for purposes of paragraph (1)
only to the extent that such amount would be
includible in gross income without regard to
paragraph (1).
(B) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as a
distribution for purposes of subparagraph (A),
the aggregate amounts distributed from an
eligible retirement plan in a taxable year (up
to the amount excluded under paragraph (1))
shall be treated as includible in gross income
(without regard to subparagraph (A)) to the
extent that such amount does not exceed the
aggregate amount which would have been so
includible if all amounts to the credit of the
eligible public safety officer in all eligible
retirement plans maintained by the employer
described in paragraph (4)(B) were distributed
during such taxable year and all such plans
were treated as 1 contract for purposes of
determining under section 72 the aggregate
amount which would have been so includible.
Proper adjustments shall be made in applying
section 72 to other distributions in such
taxable year and subsequent taxable years.
(4) Definitions.--For purposes of this subsection--
(A) Eligible retirement plan.--For purposes
of paragraph (1), the term ``eligible
retirement plan'' means a governmental plan
(within the meaning of section 414(d)) which is
described in clause (iii), (iv), (v), or (vi)
of subsection (c)(8)(B).
(B) Eligible retired public safety officer.--
The term ``eligible retired public safety
officer'' means an individual who, by reason of
disability or attainment of normal retirement
age, is separated from service as a public
safety officer with the employer who maintains
the eligible retirement plan from which
distributions subject to paragraph (1) are
made.
(C) Public safety officer.--The term ``public
safety officer'' shall have the same meaning
given such term by section 1204(9)(A) of the
Omnibus Crime Control and Safe Streets Act of
1968 (42 U.S.C. 3796b(9)(A)), as in effect
immediately before the enactment of the
National Defense Authorization Act for Fiscal
Year 2013.
(D) Qualified health insurance premiums.--The
term ``qualified health insurance premiums''
means premiums for coverage for the eligible
retired public safety officer, his spouse, and
dependents (as defined in [section 152] section
7706), by an accident or health plan or
qualified long-term care insurance contract (as
defined in section 7702B(b)).
(5) Special rules.--For purposes of this subsection--
(A) Direct payment to insurer required.--
Paragraph (1) shall only apply to a
distribution if payment of the premiums is made
directly to the provider of the accident or
health plan or qualified long-term care
insurance contract by deduction from a
distribution from the eligible retirement plan.
(B) Related plans treated as 1.--All eligible
retirement plans of an employer shall be
treated as a single plan.
(6) Election described.--
(A) In general.--For purposes of paragraph
(1), an election is described in this paragraph
if the election is made by an employee after
separation from service with respect to amounts
not distributed from an eligible retirement
plan to have amounts from such plan distributed
in order to pay for qualified health insurance
premiums.
(B) Special rule.--A plan shall not be
treated as violating the requirements of
section 401, or as engaging in a prohibited
transaction for purposes of section 503(b),
merely because it provides for an election with
respect to amounts that are otherwise
distributable under the plan or merely because
of a distribution made pursuant to an election
described in subparagraph (A).
(7) Coordination with medical expense deduction.--The
amounts excluded from gross income under paragraph (1)
shall not be taken into account under section 213.
(8) Coordination with deduction for health insurance
costs of self-employed individuals.--The amounts
excluded from gross income under paragraph (1) shall
not be taken into account under section 162(l).
* * * * * * *
SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER
NONQUALIFIED DEFERRED COMPENSATION PLANS.
(a) Rules relating to constructive receipt.--
(1) Plan failures.--
(A) Gross income inclusion.--
(i) In general.--If at any time
during a taxable year a nonqualified
deferred compensation plan--
(I) fails to meet the
requirements of paragraphs (2),
(3), and (4), or
(II) is not operated in
accordance with such
requirements, all compensation
deferred under the plan for the
taxable year and all preceding
taxable years shall be
includible in gross income for
the taxable year to the extent
not subject to a substantial
risk of forfeiture and not
previously included in gross
income.
(ii) Application only to affected
participants.--Clause (i) shall only
apply with respect to all compensation
deferred under the plan for
participants with respect to whom the
failure relates.
(B) Interest and additional tax payable with
respect to previously deferred compensation.--
(i) In general.--If compensation is
required to be included in gross income
under subparagraph (A) for a taxable
year, the tax imposed by this chapter
for the taxable year shall be increased
by the sum of--
(I) the amount of interest
determined under clause (ii),
and
(II) an amount equal to 20
percent of the compensation
which is required to be
included in gross income.
(ii) Interest.--For purposes of
clause (i), the interest determined
under this clause for any taxable year
is the amount of interest at the
underpayment rate plus 1 percentage
point on the underpayments that would
have occurred had the deferred
compensation been includible in gross
income for the taxable year in which
first deferred or, if later, the first
taxable year in which such deferred
compensation is not subject to a
substantial risk of forfeiture.
(2) Distributions.--
(A) In general.--The requirements of this
paragraph are met if the plan provides that
compensation deferred under the plan may not be
distributed earlier than--
(i) separation from service as
determined by the Secretary (except as
provided in subparagraph (B)(i)),
(ii) the date the participant becomes
disabled (within the meaning of
subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to
a fixed schedule) specified under the
plan at the date of the deferral of
such compensation,
(v) to the extent provided by the
Secretary, a change in the ownership or
effective control of the corporation,
or in the ownership of a substantial
portion of the assets of the
corporation, or
(vi) the occurrence of an
unforeseeable emergency.
(B) Special rules.--
(i) Specified employees.--In the case
of any specified employee, the
requirement of subparagraph (A)(i) is
met only if distributions may not be
made before the date which is 6 months
after the date of separation from
service (or, if earlier, the date of
death of the employee). For purposes of
the preceding sentence, a specified
employee is a key employee (as defined
in section 416(i) without regard to
paragraph (5) thereof) of a corporation
any stock in which is publicly traded
on an established securities market or
otherwise.
(ii) Unforeseeable emergency.--For
purposes of subparagraph (A)(vi)--
(I) In general.--The term
``unforeseeable emergency''
means a severe financial
hardship to the participant
resulting from an illness or
accident of the participant,
the participant's spouse, or a
dependent (as defined in
[section 152(a)] section
7706(a)) of the participant,
loss of the participant's
property due to casualty, or
other similar extraordinary and
unforeseeable circumstances
arising as a result of events
beyond the control of the
participant.
(II) Limitation on
distributions.--The requirement
of subparagraph (A)(vi) is met
only if, as determined under
regulations of the Secretary,
the amounts distributed with
respect to an emergency do not
exceed the amounts necessary to
satisfy such emergency plus
amounts necessary to pay taxes
reasonably anticipated as a
result of the distribution,
after taking into account the
extent to which such hardship
is or may be relieved through
reimbursement or compensation
by insurance or otherwise or by
liquidation of the
participant's assets (to the
extent the liquidation of such
assets would not itself cause
severe financial hardship).
(C) Disabled.--For purposes of subparagraph
(A)(ii), a participant shall be considered
disabled if the participant--
(i) 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 can be
expected to last for a continuous
period of not less than 12 months, or
(ii) is, by reason of any medically
determinable physical or mental
impairment which can be expected to
result in death or can be expected to
last for a continuous period of not
less than 12 months, receiving income
replacement benefits for a period of
not less than 3 months under an
accident and health plan covering
employees of the participant's
employer.
(3) Acceleration of benefits.--The requirements of
this paragraph are met if the plan does not permit the
acceleration of the time or schedule of any payment
under the plan, except as provided in regulations by
the Secretary.
(4) Elections.--
(A) In general.--The requirements of this
paragraph are met if the requirements of
subparagraphs (B) and (C) are met.
(B) Initial deferral decision.--
(i) In general.--The requirements of
this subparagraph are met if the plan
provides that compensation for services
performed during a taxable year may be
deferred at the participant's election
only if the election to defer such
compensation is made not later than the
close of the preceding taxable year or
at such other time as provided in
regulations.
(ii) First year of eligibility.--In
the case of the first year in which a
participant becomes eligible to
participate in the plan, such election
may be made with respect to services to
be performed subsequent to the election
within 30 days after the date the
participant becomes eligible to
participate in such plan.
(iii) Performance-based
compensation.--In the case of any
performance-based compensation based on
services performed over a period of at
least 12 months, such election may be
made no later than 6 months before the
end of the period.
(C) Changes in time and form of
distribution.--The requirements of this
subparagraph are met if, in the case of a plan
which permits under a subsequent election a
delay in a payment or a change in the form of
payment--
(i) the plan requires that such
election may not take effect until at
least 12 months after the date on which
the election is made,
(ii) in the case of an election
related to a payment not described in
clause (ii), (iii), or (vi) of
paragraph (2)(A), the plan requires
that the payment with respect to which
such election is made be deferred for a
period of not less than 5 years from
the date such payment would otherwise
have been made, and
(iii) the plan requires that any
election related to a payment described
in paragraph (2)(A)(iv) may not be made
less than 12 months prior to the date
of the first scheduled payment under
such paragraph.
(b) Rules relating to funding.--
(1) Offshore property in a trust.--In the case of
assets set aside (directly or indirectly) in a trust
(or other arrangement determined by the Secretary) for
purposes of paying deferred compensation under a
nonqualified deferred compensation plan, for purposes
of section 83 such assets shall be treated as property
transferred in connection with the performance of
services whether or not such assets are available to
satisfy claims of general creditors--
(A) at the time set aside if such assets (or
such trust or other arrangement) are located
outside of the United States, or
(B) at the time transferred if such assets
(or such trust or other arrangement) are
subsequently transferred outside of the United
States.
This paragraph shall not apply to assets located in a
foreign jurisdiction if substantially all of the
services to which the nonqualified deferred
compensation relates are performed in such
jurisdiction.
(2) Employer's financial health.--In the case of
compensation deferred under a nonqualified deferred
compensation plan, there is a transfer of property
within the meaning of section 83 with respect to such
compensation as of the earlier of--
(A) the date on which the plan first provides
that assets will become restricted to the
provision of benefits under the plan in
connection with a change in the employer's
financial health, or
(B) the date on which assets are so
restricted, whether or not such assets are
available to satisfy claims of general
creditors.
(3) Treatment of employer's defined benefit plan
during restricted period.--
(A) In general.--If--
(i) during any restricted period with
respect to a single-employer defined
benefit plan, assets are set aside or
reserved (directly or indirectly) in a
trust (or other arrangement as
determined by the Secretary) or
transferred to such a trust or other
arrangement for purposes of paying
deferred compensation of an applicable
covered employee under a nonqualified
deferred compensation plan of the plan
sponsor or member of a controlled group
which includes the plan sponsor, or
(ii) a nonqualified deferred
compensation plan of the plan sponsor
or member of a controlled group which
includes the plan sponsor provides that
assets will become restricted to the
provision of benefits under the plan to
an applicable covered employee in
connection with such restricted period
(or other similar financial measure
determined by the Secretary) with
respect to the defined benefit plan, or
assets are so restricted,
such assets shall, for purposes of section 83,
be treated as property transferred in
connection with the performance of services
whether or not such assets are available to
satisfy claims of general creditors. Clause (i)
shall not apply with respect to any assets
which are so set aside before the restricted
period with respect to the defined benefit
plan.
(B) Restricted period.--For purposes of this
section, the term ``restricted period'' means,
with respect to any plan described in
subparagraph (A)--
(i) any period during which the plan
is in at-risk status (as defined in
section 430(i)),
(ii) any period the plan sponsor is a
debtor in a case under title 11, United
States Code, or similar Federal or
State law, and
(iii) the 12-month period beginning
on the date which is 6 months before
the termination date of the plan if, as
of the termination date, the plan is
not sufficient for benefit liabilities
(within the meaning of section 4041 of
the Employee Retirement Income Security
Act of 1974).
(C) Special rule for payment of taxes on
deferred compensation included in income.--If
an employer provides directly or indirectly for
the payment of any Federal, State, or local
income taxes with respect to any compensation
required to be included in gross income by
reason of this paragraph--
(i) interest shall be imposed under
subsection (a)(1)(B)(i)(I) on the
amount of such payment in the same
manner as if such payment was part of
the deferred compensation to which it
relates,
(ii) such payment shall be taken into
account in determining the amount of
the additional tax under subsection
(a)(1)(B)(i)(II) in the same manner as
if such payment was part of the
deferred compensation to which it
relates, and
(iii) no deduction shall be allowed
under this title with respect to such
payment.
(D) Other definitions.--For purposes of this
section--
(i) Applicable covered employee.--The
term ``applicable covered employee''
means any--
(I) covered employee of a
plan sponsor,
(II) covered employee of a
member of a controlled group
which includes the plan
sponsor, and
(III) former employee who was
a covered employee at the time
of termination of employment
with the plan sponsor or a
member of a controlled group
which includes the plan
sponsor.
(ii) Covered employee.--The term
``covered employee'' means an
individual described in section
162(m)(3) or an individual subject to
the requirements of section 16(a) of
the Securities Exchange Act of 1934.
(4) Income inclusion for offshore trusts and
employer's financial health.--For each taxable year
that assets treated as transferred under this
subsection remain set aside in a trust or other
arrangement subject to paragraph (1), (2), or (3), any
increase in value in, or earnings with respect to, such
assets shall be treated as an additional transfer of
property under this subsection (to the extent not
previously included in income).
(5) Interest on tax liability payable with respect to
transferred property.--
(A) In general.--If amounts are required to
be included in gross income by reason of
paragraph (1), (2), or (3) for a taxable year,
the tax imposed by this chapter for such
taxable year shall be increased by the sum of--
(i) the amount of interest determined
under subparagraph (B), and
(ii) an amount equal to 20 percent of
the amounts required to be included in
gross income.
(B) Interest.--For purposes of subparagraph
(A), the interest determined under this
subparagraph for any taxable year is the amount
of interest at the underpayment rate plus 1
percentage point on the underpayments that
would have occurred had the amounts so required
to be included in gross income by paragraph
(1), (2), or (3) been includible in gross
income for the taxable year in which first
deferred or, if later, the first taxable year
in which such amounts are not subject to a
substantial risk of forfeiture.
(c) No inference on earlier income inclusion or requirement
of later inclusion.--Nothing in this section shall be construed
to prevent the inclusion of amounts in gross income under any
other provision of this chapter or any other rule of law
earlier than the time provided in this section. Any amount
included in gross income under this section shall not be
required to be included in gross income under any other
provision of this chapter or any other rule of law later than
the time provided in this section.
(d) Other definitions and special rules.--For purposes of
this section:
(1) Nonqualified deferred compensation plan.--The
term ``nonqualified deferred compensation plan'' means
any plan that provides for the deferral of
compensation, other than--
(A) a qualified employer plan, and
(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death
benefit plan.
(2) Qualified employer plan.--The term ``qualified
employer plan'' means--
(A) any plan, contract, pension, account, or
trust described in subparagraph (A) or (B) of
section 219(g)(5) (without regard to
subparagraph (A)(iii)),
(B) any eligible deferred compensation plan
(within the meaning of section 457(b)), and
(C) any plan described in section 415(m).
(3) Plan includes arrangements, etc..--The term
``plan'' includes any agreement or arrangement,
including an agreement or arrangement that includes one
person.
(4) Substantial risk of forfeiture.--The rights of a
person to compensation are subject to a substantial
risk of forfeiture if such person's rights to such
compensation are conditioned upon the future
performance of substantial services by any individual.
(5) Treatment of earnings.--References to deferred
compensation shall be treated as including references
to income (whether actual or notional) attributable to
such compensation or such income.
(6) Aggregation rules.--Except as provided by the
Secretary, rules similar to the rules of subsections
(b) and (c) of section 414 shall apply.
(7) Treatment of qualified stock.--An arrangement
under which an employee may receive qualified stock (as
defined in section 83(i)(2)) shall not be treated as a
nonqualified deferred compensation plan with respect to
such employee solely because of such employee's
election, or ability to make an election, to defer
recognition of income under section 83(i).
(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations--
(1) providing for the determination of amounts of
deferral in the case of a nonqualified deferred
compensation plan which is a defined benefit plan,
(2) relating to changes in the ownership and control
of a corporation or assets of a corporation for
purposes of subsection (a)(2)(A)(v),
(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in
an improper deferral of United States tax and will not
result in assets being effectively beyond the reach of
creditors,
(4) defining financial health for purposes of
subsection (b)(2), and
(5) disregarding a substantial risk of forfeiture in
cases where necessary to carry out the purposes of this
section.
* * * * * * *
Subchapter E--Accounting Periods and Methods of Accounting
* * * * * * *
PART I--ACCOUNTING PERIODS
* * * * * * *
SEC. 441. PERIOD FOR COMPUTATION OF TAXABLE INCOME.
(a) Computation of taxable income.--Taxable income shall be
computed on the basis of the taxpayer's taxable year.
(b) Taxable year.--For purposes of this subtitle, the term
``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;
(3) the period for which the return is made, if a
return is made for a period of less than 12 months; or
(4) in the case of a DISC filing a return for a
period of at least 12 months, the period determined
under subsection (h).
(c) Annual accounting period.--For purposes of this subtitle,
the term ``annual accounting period'' means the annual period
on the basis of which the taxpayer regularly computes his
income in keeping his books.
(d) Calendar year.--For purposes of this subtitle, the term
``calendar year'' means a period of 12 months ending on
December 31.
(e) Fiscal year.--For purposes of this subtitle, the term
``fiscal year'' means a period of 12 months ending on the last
day of any month other than December. In the case of any
taxpayer who 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 year consisting of 52-53 weeks.--
(1) General rule.--A taxpayer who, in keeping his
books, regularly computes his income on the 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 (in accordance with the regulations prescribed
under paragraph (3)) elect to compute his taxable
income for purposes of this subtitle on the basis of
such annual period. This paragraph shall apply to
taxable years ending after the date of the enactment of
this title.
(2) Special rules for 52-53-week year.--
(A) Effective dates.--In any case in which
the effective date or the applicability of any
provision of this title is expressed in terms
of taxable years beginning, including, or
ending with reference to a specified date which
is the first or last day of a month, a taxable
year described in paragraph (1) shall (except
for purposes of the computation under section
15) be treated--
(i) as beginning with the first day
of the calendar month beginning nearest
to the first day of such taxable year,
or
(ii) as ending with the last day of
the calendar month ending nearest to
the last day of such taxable year,
as the case may be.
(B) Change in accounting period.--In the case
of a change from or to a taxable year described
in paragraph (1)--
(i) if such change results in a short
period (within the meaning of section
443) of 359 days or more, or of less
than 7 days, section 443(b) (relating
to alternative tax computation) shall
not apply;
(ii) if such change results in a
short period of less than 7 days, such
short period shall, for purposes of
this subtitle, be added to and deemed a
part of the following taxable year; and
(iii) if such change results in a
short period to which subsection (b) of
section 443 applies, the taxable income
for such short period shall be placed
on an annual basis for purposes of such
subsection by multiplying the gross
income for such short period (minus the
deductions allowed by this chapter for
the short period[, but only the
adjusted amount of the deductions for
personal exemptions as described in
section 443(c)]) by 365, by dividing
the result by the number of days in the
short period, and the tax shall be the
same part of the tax computed on the
annual basis as the number of days in
the short period is of 365 days.
(3) Special rule for partnerships, S corporations,
and personal service corporations.--The Secretary may
by regulation provide terms and conditions for the
application of this subsection to a partnership, S
corporation, or personal service corporation (within
the meaning of section 441(i)(2)).
(4) Regulations.--The Secretary shall prescribe such
regulations as he deems necessary for the application
of this subsection.
(g) No books kept; no accounting period.--Except as provided
in section 443 (relating to returns for periods of less than 12
months), the taxpayer's taxable year shall be the calendar year
if--
(1) the taxpayer keeps no books;
(2) the taxpayer does not have an annual accounting
period; or
(3) the taxpayer has an annual accounting period, but
such period does not qualify as a fiscal year.
(h) Taxable year of DISC's.--
(1) In general.--For purposes of this subtitle, the
taxable year of any DISC shall be the taxable year of
that shareholder (or group of shareholders with the
same 12-month taxable year) who has the highest
percentage of voting power.
(2) Special rule where more than one shareholder (or
group) has highest percentage.--If 2 or more
shareholders (or groups) have the highest percentage of
voting power under paragraph (1), the taxable year of
the DISC shall be the same 12-month period as that of
any such shareholder (or group).
(3) Subsequent changes of ownership.--The Secretary
shall prescribe regulations under which paragraphs (1)
and (2) shall apply to a change of ownership of a
corporation after the taxable year of the corporation
has been determined under paragraph (1) or (2) only if
such change is a substantial change of ownership.
(4) Voting power determined.--For purposes of this
subsection, voting power shall be determined on the
basis of total combined voting power of all classes of
stock of the corporation entitled to vote.
(i) Taxable year of personal service corporations.--
(1) In general.--For purposes of this subtitle, the
taxable year of any personal service corporation shall
be the calendar year unless the corporation
establishes, to the satisfaction of the Secretary, a
business purpose for having a different period for its
taxable year. For purposes of this paragraph, any
deferral of income to shareholders shall not be treated
as a business purpose.
(2) Personal service corporation.--For purposes of
this subsection, the term ``personal service
corporation'' has the meaning given such term by
section 269A(b)(1), except that section 269A(b)(2)
shall be applied--
(A) by substituting ``any'' for ``more than
10 percent'', and
(B) by substituting ``any'' for ``50 percent
or more in value'' in section 318(a)(2)(C).
A corporation shall not be treated as a personal
service corporation unless more than 10 percent of the
stock (by value) in such corporation is held by
employee-owners (within the meaning of section
269A(b)(2), as modified by the preceding sentence). If
a corporation is a member of an affiliated group filing
a consolidated return, all members of such group shall
be taken into account in determining whether such
corporation is a personal service corporation.
* * * * * * *
SEC. 443. RETURNS FOR A PERIOD OF LESS THAN 12 MONTHS.
(a) Returns for short period.--A return for a period of less
than 12 months (referred to in this section as ``short
period'') shall be made under any of the following
circumstances:
(1) Change of annual accounting period.--When the
taxpayer, with the approval of the Secretary, changes
his annual accounting period. In such a case, the
return shall be made for the short period beginning on
the day after the close of the former taxable year and
ending at the close of the day before the day
designated as the first day of the new taxable year.
(2) Taxpayer not in existence for entire taxable
year.--When the taxpayer is in existence during only
part of what would otherwise be his taxable year.
(b) Computation of tax on change of annual accounting
period.--
(1) General rule.--If a return is made under
paragraph (1) of subsection (a), the taxable income for
the short period shall be placed on an annual basis by
multiplying the [modified taxable income] taxable
income for such short period by 12, dividing the result
by the number of months in the short period. The tax
shall be the same part of the tax computed on the
annual basis as the number of months in the short
period is of 12 months.
(2) Exception.--
(A) Computation based on 12-month period.--If
the taxpayer applies for the benefits of this
paragraph and establishes the amount of this
taxable income for the 12-month period
described in subparagraph (B), computed as if
that period were a taxable year and under the
law applicable to that year, then the tax for
the short period, computed under paragraph (1),
shall be reduced to the greater of the
following:
(i) an amount which bears the same
ratio to the tax computed on the
taxable income for the 12-month period
as the [modified taxable income]
taxable income computed on the basis of
the short period bears to the [modified
taxable income] taxable income for the
12-month period; or
(ii) the tax computed on the
[modified taxable income] taxable
income for the short period.
The taxpayer (other than a taxpayer to whom
subparagraph (B)(ii) applies) shall compute the
tax and file his return without the application
of this paragraph.
(B) 12-month period.--The 12-month period
referred to in subparagraph (A) shall be--
(i) the period of 12 months beginning
on the first day of the short period,
or
(ii) the period of 12 months ending
at the close of the last day of the
short period, if at the end of the 12
months referred to in clause (i) the
taxpayer is not in existence or (if a
corporation) has theretofore disposed
of substantially all of its assets.
(C) Application for benefits.--Application
for the benefits of this paragraph shall be
made in such manner and at such time as the
regulations prescribed under subparagraph (D)
may require; except that the time so prescribed
shall not be later than the time (including
extensions) for filing the return for the first
taxable year which ends on or after the day
which is 12 months after the first day of the
short period. Such application, in case the
return was filed without regard to this
paragraph, shall be considered a claim for
credit or refund with respect to the amount by
which the tax is reduced under this paragraph.
(D) Regulations.--The Secretary shall
prescribe such regulations as he deems
necessary for the application of this
paragraph.
[(3) Modified taxable income defined.--For purposes
of this subsection the term modified taxable income
means, with respect to any period, the gross income for
such period minus the deductions allowed by this
chapter for such period (but, in the case of a short
period, only the adjusted amount of the deductions for
personal exemptions).]
[(c) Adjustment in deduction for personal exemption.--In the
case of a taxpayer other than a corporation, if a return is
made for a short period by reason of subsection (a)(1) and if
the tax is not computed under subsection (b)(2), then the
exemptions allowed as a deduction under section 151 (and any
deduction in lieu thereof) shall be reduced to amounts which
bear the same ratio to the full exemptions as the number of
months in the short period bears to 12.]
[(d)] (c) Adjustment in computing minimum tax and tax
preferences.--If a return is made for a short period by reason
of subsection (a)--
(1) the alternative minimum taxable income for the
short period shall be placed on an annual basis by
multiplying such amount by 12 and dividing the result
by the number of months in the short period, and
(2) the amount computed under paragraph (1) of
section 55(a) shall bear the same relation to the tax
computed on the annual basis as the number of months in
the short period bears to 12.
[(e)] (d) Cross references.--For inapplicability of
subsection (b) in computing--
(1) Accumulated earnings tax, see section 536.
(2) Personal holding company tax, see section 546.
(3) The taxable income of a regulated investment
company, see section 852(b)(2)(E).
(4) The taxable income of a real estate investment
trust, see section 857(b)(2)(C).
For returns for a period of less than 12 months in the case
of a debtor's election to terminate a taxable year, see section
1398(d)(2)(E).
* * * * * * *
PART II--METHODS OF ACCOUNTING
* * * * * * *
Subpart C--Taxable Year for Which Deductions Taken
* * * * * * *
SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.
(a) General rule.--The amount of any deduction or credit
allowed by this subtitle shall be taken for the taxable year
which is the proper taxable year under the method of accounting
used in computing taxable income.
(b) Special rule in case of death.--In the case of the death
of a taxpayer whose taxable income is computed under an accrual
method of accounting, any amount accrued as a deduction or
credit only by reason of the death of the taxpayer shall not be
allowed in computing taxable income for the period in which
falls the date of the taxpayer's death.
(c) Accrual of real property taxes.--
(1) In general.--If the taxable income is computed
under an accrual method of accounting, then, at the
election of the taxpayer, any real property tax which
is related to a definite period of time shall be
accrued ratably over that period.
(2) When election may be made.--
(A) Without consent.--A taxpayer may, without
the consent of the Secretary, make an election
under this subsection for his first taxable
year in which he incurs real property taxes.
Such an election shall be made not later than
the time prescribed by law for filing the
return for such year (including extensions
thereof).
(B) With consent.--A taxpayer may, with the
consent of the Secretary, make an election
under this subsection at any time.
(d) Limitation on acceleration of accrual of taxes.--
(1) General rule.--In the case of a taxpayer whose
taxable income is computed under an accrual method of
accounting, to the extent that the time for accruing
taxes is earlier than it would be but for any action of
any taxing jurisdiction taken after December 31, 1960,
then, under regulations prescribed by the Secretary,
such taxes shall be treated as accruing at the time
they would have accrued but for such action by such
taxing jurisdiction.
(2) Limitation.--Under regulations prescribed by the
Secretary, paragraph (1) shall be inapplicable to any
item of tax to the extent that its application would
(but for this paragraph) prevent all persons (including
successors in interest) from ever taking such item into
account.
(e) Dividends or interest paid on certain deposits or
withdrawable accounts.--Except as provided in regulations
prescribed by the Secretary, amounts paid to, or credited to
the accounts of, depositors or holders of accounts as dividends
or interest on their deposits or withdrawable accounts (if such
amounts paid or credited are withdrawable on demand subject
only to customary notice to withdraw) by a mutual savings bank
not having capital stock represented by shares, a domestic
building and loan association, or a cooperative bank shall not
be allowed as a deduction for the taxable year to the extent
such amounts are paid or credited for periods representing more
than 12 months. Any such amount not allowed as a deduction as
the result of the application of the preceding sentence shall
be allowed as a deduction for such other taxable year as the
Secretary determines to be consistent with the preceding
sentence.
(f) Contested liabilities.--If--
(1) the taxpayer contests an asserted liability,
(2) the taxpayer transfers money or other property to
provide for the satisfaction of the asserted liability,
(3) the contest with respect to the asserted
liability exists after the time of the transfer, and
(4) but for the fact that the asserted liability is
contested, a deduction would be allowed for the taxable
year of the transfer (or for an earlier taxable year)
determined after application of subsection (h),
then the deduction shall be allowed for the taxable year of the
transfer. This subsection shall not apply in respect of the
deduction for income, war profits, and excess profits taxes
imposed by the authority of any foreign country or possession
of the United States.
(g) Prepaid interest.--
(1) In general.--If the taxable income of the
taxpayer is computed under the cash receipts and
disbursements method of accounting, interest paid by
the taxpayer which, under regulations prescribed by the
Secretary, is properly allocable to any period--
(A) with respect to which the interest
represents a charge for the use or forbearance
of money, and
(B) which is after the close of the taxable
year in which paid,
shall be charged to capital account and shall be
treated as paid in the period to which so allocable.
(2) Exception.--This subsection shall not apply to
points paid in respect of any indebtedness incurred in
connection with the purchase or improvement of, and
secured by, the principal residence of the taxpayer to
the extent that, under regulations prescribed by the
Secretary, such payment of points is an established
business practice in the area in which such
indebtedness is incurred, and the amount of such
payment does not exceed the amount generally charged in
such area.
(h) Certain liabilities not incurred before economic
performance.--
(1) In general.--For purposes of this title, in
determining whether an amount has been incurred with
respect to any item during any taxable year, the all
events test shall not be treated as met any earlier
than when economic performance with respect to such
item occurs.
(2) Time when economic performance occurs.--Except as
provided in regulations prescribed by the Secretary,
the time when economic performance occurs shall be
determined under the following principles:
(A) Services and property provided to the
taxpayer.--If the liability of the taxpayer
arises out of--
(i) the providing of services to the
taxpayer by another person, economic
performance occurs as such person
provides such services,
(ii) the providing of property to the
taxpayer by another person, economic
performance occurs as the person
provides such property, or
(iii) the use of property by the
taxpayer, economic performance occurs
as the taxpayer uses such property.
(B) Services and property provided by the
taxpayer.--If the liability of the taxpayer
requires the taxpayer to provide property or
services, economic performance occurs as the
taxpayer provides such property or services.
(C) Workers compensation and tort liabilities
of the taxpayer.--If the liability of the
taxpayer requires a payment to another person
and--
(i) arises under any workers
compensation act, or
(ii) arises out of any tort, economic
performance occurs as the payments to
such person are made. Subparagraphs (A)
and (B) shall not apply to any
liability described in the preceding
sentence.
(D) Other items.--In the case of any other
liability of the taxpayer, economic performance
occurs at the time determined under regulations
prescribed by the Secretary.
(3) Exception for certain recurring items.--
(A) In general.--Notwithstanding paragraph
(1) an item shall be treated as incurred during
any taxable year if--
(i) the all events test with respect
to such item is met during such taxable
year (determined without regard to
paragraph (1)),
(ii) economic performance with
respect to such item occurs within the
shorter of--
(I) a reasonable period after
the close of such taxable year,
or
(II) 8 1/2 months after the
close of such taxable year,
(iii) such item is recurring in
nature and the taxpayer consistently
treats items of such kind as incurred
in the taxable year in which the
requirements of clause (i) are met, and
(iv) either--
(I) such item is not a
material item, or
(II) the accrual of such item
in the taxable year in which
the requirements of clause (i)
are met results in a more
proper match against income
than accruing such item in the
taxable year in which economic
performance occurs.
(B) Financial statements considered under
subparagraph (A)(iv).--In making a
determination under subparagraph (A)(iv), the
treatment of such item on financial statements
shall be taken into account.
(C) Paragraph not to apply to workers
compensation and tort liabilities.--This
paragraph shall not apply to any item described
in subparagraph (C) of paragraph (2).
(4) All events test.--For purposes of this
subsection, the all events test is met with respect to
any item if all events have occurred which determine
the fact of liability and the amount of such liability
can be determined with reasonable accuracy.
(5) Subsection not to apply to certain items.--This
subsection shall not apply to any item for which a
deduction is allowable under a provision of this title
which specifically provides for a deduction for a
reserve for estimated expenses.
(i) Special rules for tax shelters.--
(1) Recurring item exception not to apply.--In the
case of a tax shelter, economic performance shall be
determined without regard to paragraph (3) of
subsection (h).
(2) Special rule for spudding of oil or gas wells.--
(A) In general.--In the case of a tax
shelter, economic performance with respect to
amounts paid during the taxable year for
drilling an oil or gas well shall be treated as
having occurred within a taxable year if
drilling of the well commences before the close
of the 90th day after the close of the taxable
year.
(B) Deduction limited to cash basis.--
(i) Tax shelter partnerships.--In the
case of a tax shelter which is a
partnership, in applying section 704(d)
to a deduction or loss for any taxable
year attributable to an item which is
deductible by reason of subparagraph
(A), the term ``cash basis'' shall be
substituted for the term ``adjusted
basis''.
(ii) Other tax shelters.--Under
regulations prescribed by the
Secretary, in the case of a tax shelter
other than a partnership, the aggregate
amount of the deductions allowable by
reason of subparagraph (A) for any
taxable year shall be limited in a
manner similar to the limitation under
clause (i).
(C) Cash basis defined.--For purposes of
subparagraph (B), a partner's cash basis in a
partnership shall be equal to the adjusted
basis of such partner's interest in the
partnership, determined without regard to--
(i) any liability of the partnership,
and
(ii) any amount borrowed by the
partner with respect to such
partnership which--
(I) was arranged by the
partnership or by any person
who participated in the
organization, sale, or
management of the partnership
(or any person related to such
person within the meaning of
section 465(b)(3)(C)), or
(II) was secured by any asset
of the partnership.
(3) Tax shelter defined.--For purposes of this
subsection, the term ``tax shelter'' means--
(A) any enterprise (other than a C
corporation) if at any time interests in such
enterprise have been offered for sale in any
offering required to be registered with any
Federal or State agency having the authority to
regulate the offering of securities for sale,
(B) any syndicate (within the meaning of
section 1256(e)(3)(B)), and
(C) any tax shelter (as defined in section
6662(d)(2)(C)(ii)).
(4) Special rules for farming.--In the case of the
trade or business of farming (as defined in section
464(e)), in determining whether an entity is a tax
shelter, the definition of farming syndicate in
[subsection (k)] subsection (j) shall be substituted
for subparagraphs (A) and (B) of paragraph (3).
(5) Economic performance.--For purposes of this
subsection, the term ``economic performance'' has the
meaning given such term by subsection (h).
[(j) Limitation on excess farm losses of certain taxpayers.--
[(1) Limitation.--If a taxpayer other than a C
corporation receives any applicable subsidy for any
taxable year, any excess farm loss of the taxpayer for
the taxable year shall not be allowed.
[(2) Disallowed loss carried to next taxable year.--
Any loss which is disallowed under paragraph (1) shall
be treated as a deduction of the taxpayer attributable
to farming businesses in the next taxable year.
[(3) Applicable subsidy.--For purposes of this
subsection, the term ``applicable subsidy'' means--
[(A) any direct or counter-cyclical payment
under title I of the Food, Conservation, and
Energy Act of 2008, or any payment elected to
be received in lieu of any such payment, or
[(B) any Commodity Credit Corporation loan.
[(4) Excess farm loss.--For purposes of this
subsection--
[(A) In general.--The term ``excess farm
loss'' means the excess of--
[(i) the aggregate deductions of the
taxpayer for the taxable year which are
attributable to farming businesses of
such taxpayer (determined without
regard to whether or not such
deductions are disallowed for such
taxable year under paragraph (1)), over
[(ii) the sum of--
[(I) the aggregate gross
income or gain of such taxpayer
for the taxable year which is
attributable to such farming
businesses, plus
[(II) the threshold amount
for the taxable year.
[(B) Threshold amount.--
[(i) In general.--The term
``threshold amount'' means, with
respect to any taxable year, the
greater of--
[(I) $300,000 ($150,000 in
the case of married individuals
filing separately), or
[(II) the excess (if any) of
the aggregate amounts described
in subparagraph (A)(ii)(I) for
the 5-consecutive taxable year
period preceding the taxable
year over the aggregate amounts
described in subparagraph
(A)(i) for such period.
[(ii) Special rules for determining
aggregate amounts.--For purposes of
clause (i)(II)--
[(I) notwithstanding the
disregard in subparagraph
(A)(i) of any disallowance
under paragraph (1), in the
case of any loss which is
carried forward under paragraph
(2) from any taxable year, such
loss (or any portion thereof)
shall be taken into account for
the first taxable year in which
a deduction for such loss (or
portion) is not disallowed by
reason of this subsection, and
[(II) the Secretary shall
prescribe rules for the
computation of the aggregate
amounts described in such
clause in cases where the
filing status of the taxpayer
is not the same for the taxable
year and each of the taxable
years in the period described
in such clause.
[(C) Farming business.--
[(i) In general.--The term ``farming
business'' has the meaning given such
term in section 263A(e)(4).
[(ii) Certain trades and businesses
included.--If, without regard to this
clause, a taxpayer is engaged in a
farming business with respect to any
agricultural or horticultural
commodity--
[(I) the term ``farming
business'' shall include any
trade or business of the
taxpayer of the processing of
such commodity (without regard
to whether the processing is
incidental to the growing,
raising, or harvesting of such
commodity), and
[(II) if the taxpayer is a
member of a cooperative to
which subchapter T applies, any
trade or business of the
cooperative described in
subclause (I) shall be treated
as the trade or business of the
taxpayer.
[(D) Certain losses disregarded.--For
purposes of subparagraph (A)(i), there shall
not be taken into account any deduction for any
loss arising by reason of fire, storm, or other
casualty, or by reason of disease or drought,
involving any farming business.
[(5) Application of subsection in case of
partnerships and S corporations.--In the case of a
partnership or S corporation--
[(A) this subsection shall be applied at the
partner or shareholder level, and
[(B) each partner's or shareholder's
proportionate share of the items of income,
gain, or deduction of the partnership or S
corporation for any taxable year from farming
businesses attributable to the partnership or S
corporation, and of any applicable subsidies
received by the partnership or S corporation
during the taxable year, shall be taken into
account by the partner or shareholder in
applying this subsection to the taxable year of
such partner or shareholder with or within
which the taxable year of the partnership or S
corporation ends.
The Secretary may provide rules for the application of
this paragraph to any other pass-thru entity to the
extent necessary to carry out the provisions of this
subsection.
[(6) Additional reporting.--The Secretary may
prescribe such additional reporting requirements as the
Secretary determines appropriate to carry out the
purposes of this subsection.
[(7) Coordination with section 469.--This subsection
shall be applied before the application of section
469.]
[(k)] (j) Farming syndicate defined.--
(1) In general.--For purposes of subsection (i)(4),
the term ``farming syndicate'' means--
(A) a partnership or any other enterprise
other than a corporation which is not an S
corporation engaged in the trade or business of
farming, if at any time interests in such
partnership or enterprise have been offered for
sale in any offering required to be registered
with any Federal or State agency having
authority to regulate the offering of
securities for sale, or
(B) a partnership or any other enterprise
other than a corporation which is not an S
corporation engaged in the trade or business of
farming, if more than 35 percent of the losses
during any period are allocable to limited
partners or limited entrepreneurs.
(2) Holdings attributable to active management.--For
purposes of paragraph (1)(B), the following shall be
treated as an interest which is not held by a limited
partner or a limited entrepreneur:
(A) in the case of any individual who has
actively participated (for a period of not less
than 5 years) in the management of any trade or
business of farming, any interest in a
partnership or other enterprise which is
attributable to such active participation,
(B) in the case of any individual whose
principal residence is on a farm, any
partnership or other enterprise engaged in the
trade or business of farming such farm,
(C) in the case of any individual who is
actively participating in the management of any
trade or business of farming or who is an
individual who is described in subparagraph (A)
or (B), any participation in the further
processing of livestock which was raised in
such trade or business (or in the trade or
business referred to in subparagraph (A) or
(B)),
(D) in the case of an individual whose
principal business activity involves active
participation in the management of a trade or
business of farming, any interest in any other
trade or business of farming, and,
(E) any interest held by a member of the
family (or a spouse of any such member) of a
grandparent of an individual described in
subparagraph (A), (B), (C), or (D) if the
interest in the partnership or the enterprise
is attributable to the active participation of
the individual described in subparagraph (A),
(B), (C), or (D).
For purposes of subparagraph (A), where one farm is
substituted for or added to another farm, both farms
shall be treated as one farm. For purposes of
subparagraph (E), the term ``family'' has the meaning
given to such term by section 267(c)(4).
(3) Farming.--For purposes of this subsection, the
term ``farming'' has the meaning given to such term by
section 464(e).
(4) Limited entrepreneur.--For purposes of this
subsection, the term ``limited entrepreneur'' means a
person who--
(A) has an interest in an enterprise other
than as a limited partner, and
(B) does not actively participate in the
management of such enterprise.
[(l)] (k) Limitation on excess business losses of
noncorporate taxpayers.--
[(1) Limitation.--
[(A) subsection (j) (relating to limitation
on excess farm losses of certain taxpayers)
shall not apply, and
[(B) any excess business loss of the taxpayer
for the taxable year shall not be allowed.]
(1) Limitation.--In the case of a taxpayer other than
a corporation, any excess business loss of the taxpayer
for the taxable year shall not be allowed.
(2) Disallowed loss carryover.--Any loss which is
disallowed under paragraph (1) shall be treated as a
net operating loss carryover to the following taxable
year under section 172.
(3) Excess business loss.--For purposes of this
subsection--
(A) In general.--The term ``excess business
loss'' means the excess (if any) of--
(i) the aggregate deductions of the
taxpayer for the taxable year which are
attributable to trades or businesses of
such taxpayer (determined without
regard to whether or not such
deductions are disallowed for such
taxable year under paragraph (1)), over
(ii) the sum of--
(I) the aggregate gross
income or gain of such taxpayer
for the taxable year which is
attributable to such trades or
businesses, plus
(II) $250,000 (200 percent of
such amount in the case of a
joint return).
(B) Adjustment for inflation.--In the case of
any taxable year beginning after December 31,
2018, the $250,000 amount in subparagraph
(A)(ii)(II) shall be increased by an amount
equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``2017'' for ``2016'' in subparagraph
(A)(ii) thereof.
If any amount as increased under the preceding sentence
is not a multiple of $1,000, such amount shall be
rounded to the nearest multiple of $1,000.
(4) Application of subsection in case of partnerships
and S corporations.--In the case of a partnership or S
corporation--
(A) this subsection shall be applied at the
partner or shareholder level, and
(B) each partner's or shareholder's allocable
share of the items of income, gain, deduction,
or loss of the partnership or S corporation for
any taxable year from trades or businesses
attributable to the partnership or S
corporation shall be taken into account by the
partner or shareholder in applying this
subsection to the taxable year of such partner
or shareholder with or within which the taxable
year of the partnership or S corporation ends.
For purposes of this paragraph, in the case of
an S corporation, an allocable share shall be
the shareholder's pro rata share of an item.
(5) Additional reporting.--The Secretary shall
prescribe such additional reporting requirements as the
Secretary determines necessary to carry out the
purposes of this subsection.
(6) Coordination with section 469.--This subsection
shall be applied after the application of section 469.
* * * * * * *
SEC. 464. LIMITATIONS ON DEDUCTIONS FOR CERTAIN FARMING EXPENSES.
(a) General rule.--In the case of any taxpayer to whom
subsection (d) applies, a deduction (otherwise allowable under
this chapter) for amounts paid for feed, seed, fertilizer, or
other similar farm supplies shall only be allowed for the
taxable year in which such feed, seed, fertilizer, or other
supplies are actually used or consumed, or, if later, for the
taxable year for which allowable as a deduction (determined
without regard to this section).
(b) Certain poultry expenses.--In the case of any taxpayer to
whom subsection (d) applies--
(1) the cost of poultry (including egg-laying hens
and baby chicks) purchased for use in a trade or
business (or both for use in a trade or business and
for sale) shall be capitalized and deducted ratably
over the lesser of 12 months or their useful life in
the trade or business, and
(2) the cost of poultry purchased for sale shall be
deducted for the taxable year in which the poultry is
sold or otherwise disposed of.
(c) Exception.--Subsection (a) shall not apply to any amount
paid for supplies which are on hand at the close of the taxable
year on account of fire, storm, or other casualty, or on
account of disease or drought.
(d) Certain persons prepaying 50 percent or more of certain
farming expenses.--
(1) Taxpayer to whom subsection applies.--This
subsection applies to any taxpayer for any taxable year
if such taxpayer--
(A) does not use an accrual method of
accounting,
(B) has excess prepaid farm supplies for the
taxable year, and
(C) is not a qualified farm-related taxpayer.
(2) Qualified farm-related taxpayer.--
(A) In general.--For purposes of this
subsection, the term ``qualified farm-related
taxpayer'' means any farm-related taxpayer if--
(i)(I) the aggregate prepaid farm
supplies for the 3 taxable years
preceding the taxable year are less
than 50 percent of,
(II) the aggregate deductible
farming expenses (other than
prepaid farm supplies) for such
3 taxable years, or
(ii) the taxpayer has excess prepaid
farm supplies for the taxable year by
reason of any change in business
operation directly attributable to
extraordinary circumstances.
(B) Farm-related taxpayer.--For purposes of
this paragraph, the term ``farm-related
taxpayer'' means any taxpayer--
(i) whose principal residence (within
the meaning of section 121) is on a
farm,
(ii) who has a principal occupation
of farming, or
(iii) who is a member of the family
(within the meaning of [section
461(k)(2)(E)] section 461(j)(2)(E) of a
taxpayer described in clause (i) or
(ii).
(3) Definitions.--For purposes of this subsection--
(A) Excess prepaid farm supplies.--The term
``excess prepaid farm supplies'' means the
prepaid farm supplies for the taxable year to
the extent the amount of such supplies exceeds
50 percent of the deductible farming expenses
for the taxable year (other than prepaid farm
supplies).
(B) Prepaid farm supplies.--The term
``prepaid farm supplies'' means any amounts
which are described in subsection (a) or (b)
and would be allowable for a subsequent taxable
year under the rules of subsections (a) and
(b).
(C) Deductible farming expenses.--The term
``deductible farming expenses'' means any
amount allowable as a deduction under this
chapter (including any amount allowable as a
deduction for depreciation or amortization)
which is properly allocable to the trade or
business of farming.
(e) Farming.--For purposes of this section, the term
``farming'' means the cultivation of land or the raising or
harvesting of any agricultural or horticultural commodity
including the raising, shearing, feeding, caring for, training,
and management of animals. For purposes of the preceding
sentence, trees (other than trees bearing fruit or nuts) shall
not be treated as an agricultural or horticultural commodity.
* * * * * * *
Subchapter F--Exempt Organizations
* * * * * * *
PART I--GENERAL RULE
* * * * * * *
SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.
(a) Exemption from taxation.--An organization described in
subsection (c) or (d) or section 401(a) shall be exempt from
taxation under this subtitle unless such exemption is denied
under section 502 or 503.
(b) Tax on unrelated business income and certain other
activities.--An organization exempt from taxation under
subsection (a) shall be subject to tax to the extent provided
in parts II, III, and VI of this subchapter, but
(notwithstanding parts II, III, and VI of this subchapter)
shall be considered an organization exempt from income taxes
for the purpose of any law which refers to organizations exempt
from income taxes.
(c) List of exempt organizations.--The following
organizations are referred to in subsection (a):
(1) 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 (l).
(2) 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) 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
(h)), 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)(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, agricultural, or horticultural
organizations.
(6) 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) 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) 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) 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. For purposes of
providing for the payment of sick and accident benefits
to members of such an association and their dependents,
the term ``dependent'' shall include any individual who
is a child (as defined in [section 152(f)(1)] section
7706(f)(1)) of a member who as of the end of the
calendar year has not attained age 27.
(10) 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) 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)(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 any provision or sale of
electric energy transmission services
or ancillary services if such services
are provided on a nondiscriminatory
open access basis under an open access
transmission tariff approved or
accepted by FERC or under an
independent transmission provider
agreement approved or accepted by FERC
(other than income received or accrued
directly or indirectly from a member),
(iii) from the provision or sale of
electric energy distribution services
or ancillary services if such services
are provided on a nondiscriminatory
open access basis to distribute
electric energy not owned by the mutual
or electric cooperative company--
(I) to end-users who are
served by distribution
facilities not owned by such
company or any of its members
(other than income received or
accrued directly or indirectly
from a member), or
(II) generated by a
generation facility not owned
or leased by such company or
any of its members and which is
directly connected to
distribution facilities owned
by such company or any of its
members (other than income
received or accrued directly or
indirectly from a member),
(iv) from any nuclear decommissioning
transaction, or
(v) from any asset exchange or
conversion transaction.
(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).
(E) For purposes of subparagraph (C)(ii), the
term ``FERC'' means--
(i) the Federal Energy Regulatory
Commission, or
(ii) in the case of any utility with
respect to which all of the electricity
generated, transmitted, or distributed
by such utility is generated,
transmitted, distributed, and consumed
in the same State, the State agency of
such State with the authority to
regulate electric utilities.
(F) For purposes of subparagraph (C)(iv), the
term ``nuclear decommissioning transaction''
means--
(i) any transfer into a trust, fund,
or instrument established to pay any
nuclear decommissioning costs if the
transfer is in connection with the
transfer of the mutual or cooperative
electric company's interest in a
nuclear power plant or nuclear power
plant unit,
(ii) any distribution from any trust,
fund, or instrument established to pay
any nuclear decommissioning costs, or
(iii) any earnings from any trust,
fund, or instrument established to pay
any nuclear decommissioning costs.
(G) For purposes of subparagraph (C)(v), the
term ``asset exchange or conversion
transaction'' means any voluntary exchange or
involuntary conversion of any property related
to generating, transmitting, distributing, or
selling electric energy by a mutual or
cooperative electric company, the gain from
which qualifies for deferred recognition under
section 1031 or 1033, but only if the
replacement property acquired by such company
pursuant to such section constitutes property
which is used, or to be used, for--
(i) generating, transmitting,
distributing, or selling electric
energy, or
(ii) producing, transmitting,
distributing, or selling natural gas.
(H)(i) In the case of a mutual or cooperative
electric company described in this paragraph or
an organization described in section
1381(a)(2)(C), income received or accrued from
a load loss transaction shall be treated as an
amount collected from members for the sole
purpose of meeting losses and expenses.
(ii) For purposes of clause (i), the
term ``load loss transaction'' means
any wholesale or retail sale of
electric energy (other than to members)
to the extent that the aggregate sales
during the recovery period do not
exceed the load loss mitigation sales
limit for such period.
(iii) For purposes of clause (ii),
the load loss mitigation sales limit
for the recovery period is the sum of
the annual load losses for each year of
such period.
(iv) For purposes of clause (iii), a
mutual or cooperative electric
company's annual load loss for each
year of the recovery period is the
amount (if any) by which--
(I) the megawatt hours of
electric energy sold during
such year to members of such
electric company are less than
(II) the megawatt hours of
electric energy sold during the
base year to such members.
(v) For purposes of clause (iv)(II),
the term ``base year'' means--
(I) the calendar year
preceding the start-up year, or
(II) at the election of the
mutual or cooperative electric
company, the second or third
calendar years preceding the
start-up year.
(vi) For purposes of this
subparagraph, the recovery period is
the 7-year period beginning with the
start-up year.
(vii) For purposes of this
subparagraph, the start-up year is the
first year that the mutual or
cooperative electric company offers
nondiscriminatory open access or the
calendar year which includes the date
of the enactment of this subparagraph,
if later, at the election of such
company.
(viii) A company shall not fail to be
treated as a mutual or cooperative
electric company for purposes of this
paragraph or as a corporation operating
on a cooperative basis for purposes of
section 1381(a)(2)(C) by reason of the
treatment under clause (i).
(ix) For purposes of subparagraph
(A), in the case of a mutual or
cooperative electric company, income
received, or accrued, indirectly from a
member shall be treated as an amount
collected from members for the sole
purpose of meeting losses and expenses.
(I) In the case of a mutual or cooperative
electric company described in this paragraph or
an organization described in section
1381(a)(2), income received or accrued in
connection with an election under section
45J(e)(1) shall be treated as an amount
collected from members for the sole purpose of
meeting losses and expenses.
(13) 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)(A) Credit unions without capital stock organized
and operated for mutual purposes and without profit.
(B) Corporations or associations without
capital stock organized before September 1,
1957, and operated for mutual purposes and
without profit for the purpose of providing
reserve funds for, and insurance of shares or
deposits in--
(i) domestic building and loan
associations,
(ii) cooperative banks without
capital stock organized and operated
for mutual purposes and without profit,
(iii) mutual savings banks not having
capital stock represented by shares, or
(iv) mutual savings banks described
in section 591(b). (C) Corporations or
associations organized before September
1, 1957, and operated for mutual
purposes and without profit for the
purpose of providing reserve funds for
associations or banks described in
clause (i), (ii), or (iii) of
subparagraph (B); but only if 85
percent or more of the income is
attributable to providing such reserve
funds and to investments. This
subparagraph shall not apply to any
corporation or association entitled to
exemption under subparagraph (B).
(15)(A) Insurance companies (as defined in section
816(a)) other than life (including interinsurers and
reciprocal underwriters) if--
(i)(I) the gross receipts for the
taxable year do not exceed $600,000,
and
(II) more than 50 percent of
such gross receipts consist of
premiums, or
(ii) in the case of a mutual
insurance company--
(I) the gross receipts of
which for the taxable year do
not exceed $150,000, and
(II) more than 35 percent of
such gross receipts consist of
premiums.
Clause (ii) shall not apply to a company if any
employee of the company, or a member of the employee's
family (as defined in section 2032A(e)(2)), is an
employee of another company exempt from taxation by
reason of this paragraph (or would be so exempt but for
this sentence).
(B) For purposes of subparagraph (A), in
determining whether any company or association
is described in subparagraph (A), such company
or association shall be treated as receiving
during the taxable year amounts described in
subparagraph (A) which are received during such
year by all other companies or associations
which are members of the same controlled group
as the insurance company or association for
which the determination is being made.
(C) For purposes of subparagraph (B), the
term ``controlled group'' has the meaning given
such term by section 831(b)(2)(B)(ii), except
that in applying section 831(b)(2)(B)(ii) for
purposes of this subparagraph, subparagraphs
(B) and (C) of section 1563(b)(2) shall be
disregarded.
(16) 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)(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) In determining whether a plan meets the
requirements of subparagraph (A), any benefits
provided under any other plan shall not be
taken into consideration, except that a plan
shall not be considered discriminatory--
(i) merely because the benefits under
the plan which are first determined in
a nondiscriminatory manner within the
meaning of subparagraph (A) are then
reduced by any sick, accident, or
unemployment compensation benefits
received under State or Federal law (or
reduced by a portion of such benefits
if determined in a nondiscriminatory
manner), or
(ii) merely because the plan provides
only for employees who are not eligible
to receive sick, accident, or
unemployment compensation benefits
under State or Federal law the same
benefits (or a portion of such benefits
if determined in a nondiscriminatory
manner) which such employees would
receive under such laws if such
employees were eligible for such
benefits, or
(iii) merely because the plan
provides only for employees who are not
eligible under another plan (which
meets the requirements of subparagraph
(A)) of supplemental unemployment
compensation benefits provided wholly
by the employer the same benefits (or a
portion of such benefits if determined
in a nondiscriminatory manner) which
such employees would receive under such
other plan if such employees were
eligible under such other plan, but
only if the employees eligible under
both plans would make a classification
which would be nondiscriminatory within
the meaning of subparagraph (A).
(C) A plan shall be considered to meet the
requirements of subparagraph (A) during the
whole of any year of the plan if on one day in
each quarter it satisfies such requirements.
(D) The term ``supplemental unemployment
compensation benefits'' means only--
(i) benefits which are paid to an
employee because of his involuntary
separation from the employment of the
employer (whether or not such
separation is temporary) resulting
directly from a reduction in force, the
discontinuance of a plant or operation,
or other similar conditions, and
(ii) sick and accident benefits
subordinate to the benefits described
in clause (i).
(E) Exemption shall not be denied under
subsection (a) to any organization entitled to
such exemption as an association described in
paragraph (9) of this subsection merely because
such organization provides for the payment of
supplemental unemployment benefits (as defined
in subparagraph (D)(i)).
(18) A trust or trusts created before June 25, 1959,
forming part of a plan providing for the payment of
benefits under a pension plan funded only by
contributions of employees, if--
(A) 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 benefits under the plan,
(B) 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)),
(C) 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
subparagraph 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, and
(D) in the case of a plan under which an
employee may designate certain contributions as
deductible--
(i) such contributions do not exceed
the amount with respect to which a
deduction is allowable under section
219(b)(3),
(ii) requirements similar to the
requirements of section
401(k)(3)(A)(ii) are met with respect
to such elective contributions,
(iii) such contributions are treated
as elective deferrals for purposes of
section 402(g), and
(iv) the requirements of section
401(a)(30) are met.
For purposes of subparagraph (D)(ii), rules similar to
the rules of section 401(k)(8) shall apply. For
purposes of section 4979, any excess contribution under
clause (ii) shall be treated as an excess contribution
under a cash or deferred arrangement.
(19) 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, widowers, ancestors, or lineal
descendants 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.
(21)(A) 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--
(i) 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
(ii) no part of the assets of the
trust may be used for, or diverted to,
any purpose other than--
(I) the purposes described in
clause (i),
(II) investment (but only to
the extent that the trustee
determines that a portion of
the assets is not currently
needed for the purposes
described in clause (i)) in
qualified investments, or
(III) payment into the Black
Lung Disability Trust Fund
established under section 9501,
or into the general fund of the
United States Treasury (other
than in satisfaction of any tax
or other civil or criminal
liability of the person who
established or contributed to
the trust).
(B) No deduction shall be allowed under this
chapter for any payment described in
subparagraph (A)(i)(IV) from such trust.
(C) Payments described in subparagraph
(A)(i)(IV) may be made from such trust during a
taxable year only to the extent that the
aggregate amount of such payments during such
taxable year does not exceed the excess (if
any), as of the close of the preceding taxable
year, of--
(i) the fair market value of the
assets of the trust, over
(ii) 110 percent of the present value
of the liability described in
subparagraph (A)(i)(I) of such person.
The determinations under the preceding sentence
shall be made by an independent actuary using
actuarial methods and assumptions (not
inconsistent with the regulations prescribed
under section 192(c)(1)(A)) each of which is
reasonable and which are reasonable in the
aggregate.
(D) For purposes of this paragraph:
(i) The term ``Black Lung Acts''
means part C of title IV of the Federal
Mine Safety and Health Act of 1977, and
any State law providing compensation
for disability or death due to that
pneumoconiosis.
(ii) The term ``qualified
investments'' means--
(I) public debt securities of
the United States,
(II) obligations of a State
or local government which are
not in default as to principal
or interest, and
(III) time or demand deposits
in a bank (as defined in
section 581) or an insured
credit union (within the
meaning of section 101(7) of
the Federal Credit Union Act,
12 U.S.C. 1752(7)) located in
the United States.
(iii) The term ``miner'' has the same
meaning as such term has when used in
section 402(d) of the Black Lung
Benefits Act (30 U.S.C. 902(d)).
(iv) The term ``incidental expenses''
includes legal, accounting, actuarial,
and trustee expenses.
(22) 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) the investment in securities,
obligations, or time or demand deposits
described in clause (ii) of paragraph
(21)(D),
(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) 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) 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)(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 title--
(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 (determined under the rules of section
856(d)(1)) 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) Any membership organization if--
(A) such organization is established by a
State exclusively to provide coverage for
medical care (as defined in section 213(d)) 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 (as defined in
section 24(c)) of an individual described in
subparagraph (B) (without regard to this sentence)
shall be treated as described in subparagraph (B).
(27)(A) Any membership organization if--
(i) such organization is established
before June 1, 1996, by a State
exclusively to reimburse its members
for losses arising under workmen's
compensation acts,
(ii) such State requires that the
membership of such organization consist
of--
(I) all persons who issue
insurance covering workmen's
compensation losses in such
State, and
(II) all persons and
governmental entities who self-
insure against such losses, and
(iii) such organization operates as a
non-profit organization by--
(I) returning surplus income
to its members or workmen's
compensation policyholders on a
periodic basis, and
(II) reducing initial
premiums in anticipation of
investment income.
(B) Any organization (including a mutual
insurance company) if--
(i) such organization is created by
State law and is organized and operated
under State law exclusively to--
(I) provide workmen's
compensation insurance which is
required by State law or with
respect to which State law
provides significant
disincentives if such insurance
is not purchased by an
employer, and
(II) provide related coverage
which is incidental to
workmen's compensation
insurance,
(ii) such organization must provide
workmen's compensation insurance to any
employer in the State (for employees in
the State or temporarily assigned out-
of-State) which seeks such insurance
and meets other reasonable requirements
relating thereto,
(iii)(I) the State makes a financial
commitment with respect to such
organization either by extending the
full faith and credit of the State to
the initial debt of such organization
or by providing the initial operating
capital of such organization, and (II)
in the case of periods after the date
of enactment of this subparagraph, the
assets of such organization revert to
the State upon dissolution or State law
does not permit the dissolution of such
organization, and
(iv) the majority of the board of
directors or oversight body of such
organization are appointed by the chief
executive officer or other executive
branch official of the State, by the
State legislature, or by both.
(28) The National Railroad Retirement Investment
Trust established under section 15(j) of the Railroad
Retirement Act of 1974.
(29) CO-OP health insurance issuers.--
(A) In general.--A qualified nonprofit health
insurance issuer (within the meaning of section
1322 of the Patient Protection and Affordable
Care Act) which has received a loan or grant
under the CO-OP program under such section, but
only with respect to periods for which the
issuer is in compliance with the requirements
of such section and any agreement with respect
to the loan or grant.
(B) Conditions for exemption.--Subparagraph
(A) shall apply to an organization only if--
(i) the organization has given notice
to the Secretary, in such manner as the
Secretary may by regulations prescribe,
that it is applying for recognition of
its status under this paragraph,
(ii) except as provided in section
1322(c)(4) of the Patient Protection
and Affordable Care Act, no part of the
net earnings of which inures to the
benefit of any private shareholder or
individual,
(iii) no substantial part of the
activities of which is carrying on
propaganda, or otherwise attempting, to
influence legislation, and
(iv) the organization 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.
(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 the members thereof
include (at the time of filing their returns) in their gross
income their entire pro rata shares, whether distributed or
not, of the taxable income of the association or corporation
for such year. Any amount so included in the gross income of a
member shall be treated as a dividend received.
(e) Cooperative hospital service organizations.--For purposes
of this title, 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 (including the purchase of patron
accounts receivable on a recourse basis), 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 170(b)(1)(A)(iii).
(f) Cooperative service organizations of operating
educational organizations.--For purposes of this title, 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 170(b)(1)(A)--
(A) which are exempt from taxation under
subsection (a), or
(B) the income of which is excluded from
taxation under section 115,
then such organization shall be treated as an
organization organized and operated exclusively for
charitable purposes.
(g) Definition of agricultural.--For purposes of subsection
(c)(5), the term ``agricultural'' includes the art or science
of cultivating land, harvesting crops or aquatic resources, or
raising livestock.
(h) 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.--The term
``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.--The term
``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--
(A) is described in paragraph (4), and
(B) is not a disqualified organization under
paragraph (5).
(4) Organizations permitted to elect to have this
subsection apply.--An organization is described in this
paragraph if it is described in--
(A) section 170(b)(1)(A)(ii) (relating to
educational institutions),
(B) section 170(b)(1)(A)(iii) (relating to
hospitals and medical research organizations),
(C) section 170(b)(1)(A)(iv) (relating to
organizations supporting government schools),
(D) section 170(b)(1)(A)(vi) (relating to
organizations publicly supported by charitable
contributions),
(E) section 170(b)(1)(A)(ix) (relating to
agricultural research organizations),
(F) section 509(a)(2) (relating to
organizations publicly supported by admissions,
sales, etc.), or
(G) section 509(a)(3) (relating to
organizations supporting certain types of
public charities) except that for purposes of
this subparagraph, section 509(a)(3) shall be
applied without regard to the last sentence of
section 509(a).
(5) Disqualified organizations.--For purposes of
paragraph (3) an organization is a disqualified
organization if it is--
(A) described in section 170(b)(1)(A)(i)
(relating to churches),
(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).
(6) 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).
(7) No effect on certain organizations.--With respect
to any organization for a taxable year for which--
(A) such organization is a disqualified
organization (within the meaning of 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).
(8) Affiliated organizations For rules regarding
affiliated organizations, see section 4911(f).
(i) Prohibition of discrimination by certain social clubs.--
Notwithstanding subsection (a), an organization which is
described in subsection (c)(7) shall not be exempt from
taxation under subsection (a) for any taxable year if, at any
time during such taxable year, the charter, bylaws, or other
governing instrument, of such organization or any written
policy statement of such organization contains a provision
which provides for discrimination against any person on the
basis of race, color, or religion. The preceding sentence to
the extent it relates to discrimination on the basis of
religion shall not apply to--
(1) an auxiliary of a fraternal beneficiary society
if such society--
(A) is described in subsection (c)(8) and
exempt from tax under subsection (a), and
(B) limits its membership to the members of a
particular religion, or
(2) a club which in good faith limits its membership
to the members of a particular religion in order to
further the teachings or principles of that religion,
and not to exclude individuals of a particular race or
color.
(j) Special rules for certain amateur sports organizations.--
(1) In general.--In the case of a qualified amateur
sports organization--
(A) the requirement of subsection (c)(3) that
no part of its activities involve the provision
of athletic facilities or equipment shall not
apply, and
(B) such organization shall not fail to meet
the requirements of subsection (c)(3) merely
because its membership is local or regional in
nature.
(2) Qualified amateur sports organization defined.--
For purposes of this subsection, the term ``qualified
amateur sports organization'' means any organization
organized and operated exclusively to foster national
or international amateur sports competition if such
organization is also organized and operated primarily
to conduct national or international competition in
sports or to support and develop amateur athletes for
national or international competition in sports.
(k) Treatment of certain organizations providing child
care.--For purposes of subsection (c)(3) of this section and
sections 170(c)(2), 2055(a)(2), and 2522(a)(2), the term
``educational purposes'' includes the providing of care of
children away from their homes if--
(1) substantially all of the care provided by the
organization is for purposes of enabling individuals to
be gainfully employed, and
(2) the services provided by the organization are
available to the general public.
(l) 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.
(4) The Patient-Centered Outcomes Research Institute
established under section 1181(b) of the Social
Security Act.
(m) Certain organizations providing commercial-type insurance
not exempt from tax.--
(1) Denial of tax exemption where providing
commercial-type insurance is substantial part of
activities.--An organization described in paragraph (3)
or (4) of subsection (c) shall be exempt from tax under
subsection (a) only if no substantial part of its
activities consists of providing commercial-type
insurance.
(2) Other organizations taxed as insurance companies
on insurance business.--In the case of an organization
described in paragraph (3) or (4) of subsection (c)
which is exempt from tax under subsection (a) after the
application of paragraph (1) of this subsection--
(A) the activity of providing commercial-type
insurance shall be treated as an unrelated
trade or business (as defined in section 513),
and
(B) in lieu of the tax imposed by section 511
with respect to such activity, such
organization shall be treated as an insurance
company for purposes of applying subchapter L
with respect to such activity.
(3) Commercial-type insurance.--For purposes of this
subsection, the term ``commercial-type insurance''
shall not include--
(A) insurance provided at substantially below
cost to a class of charitable recipients,
(B) incidental health insurance provided by a
health maintenance organization of a kind
customarily provided by such organizations,
(C) property or casualty insurance provided
(directly or through an organization described
in section 414(e)(3)(B)(ii)) by a church or
convention or association of churches for such
church or convention or association of
churches,
(D) providing retirement or welfare benefits
(or both) by a church or a convention or
association of churches (directly or through an
organization described in section 414(e)(3)(A)
or 414(e)(3)(B)(ii)) for the employees
(including employees described in section
414(e)(3)(B)) of such church or convention or
association of churches or the beneficiaries of
such employees, and
(E) charitable gift annuities.
(4) Insurance includes annuities.--For purposes of
this subsection, the issuance of annuity contracts
shall be treated as providing insurance.
(5) Charitable gift annuity.--For purposes of
paragraph (3)(E), the term ``charitable gift annuity''
means an annuity if--
(A) a portion of the amount paid in
connection with the issuance of the annuity is
allowable as a deduction under section 170 or
2055, and
(B) the annuity is described in section
514(c)(5) (determined as if any amount paid in
cash in connection with such issuance were
property).
(n) Charitable risk pools.--
(1) In general.--For purposes of this title--
(A) a qualified charitable risk pool shall be
treated as an organization organized and
operated exclusively for charitable purposes,
and
(B) subsection (m) shall not apply to a
qualified charitable risk pool.
(2) Qualified charitable risk pool.--For purposes of
this subsection, the term ``qualified charitable risk
pool'' means any organization--
(A) which is organized and operated solely to
pool insurable risks of its members (other than
risks related to medical malpractice) and to
provide information to its members with respect
to loss control and risk management,
(B) which is comprised solely of members that
are organizations described in subsection
(c)(3) and exempt from tax under subsection
(a), and
(C) which meets the organizational
requirements of paragraph (3).
(3) Organizational requirements.--An organization
(hereinafter in this subsection referred to as the
``risk pool'') meets the organizational requirements of
this paragraph if--
(A) such risk pool is organized as a
nonprofit organization under State law
provisions authorizing risk pooling
arrangements for charitable organizations,
(B) such risk pool is exempt from any income
tax imposed by the State (or will be so exempt
after such pool qualifies as an organization
exempt from tax under this title),
(C) such risk pool has obtained at least
$1,000,000 in startup capital from nonmember
charitable organizations,
(D) such risk pool is controlled by a board
of directors elected by its members, and
(E) the organizational documents of such risk
pool require that--
(i) each member of such pool shall at
all times be an organization described
in subsection (c)(3) and exempt from
tax under subsection (a),
(ii) any member which receives a
final determination that it no longer
qualifies as an organization described
in subsection (c)(3) shall immediately
notify the pool of such determination
and the effective date of such
determination, and
(iii) each policy of insurance issued
by the risk pool shall provide that
such policy will not cover the insured
with respect to events occurring after
the date such final determination was
issued to the insured.
An organization shall not cease to qualify as a
qualified charitable risk pool solely by reason of the
failure of any of its members to continue to be an
organization described in subsection (c)(3) if, within
a reasonable period of time after such pool is notified
as required under subparagraph (E)(ii), such pool takes
such action as may be reasonably necessary to remove
such member from such pool.
(4) Other definitions.--For purposes of this
subsection--
(A) Startup capital.--The term ``startup
capital'' means any capital contributed to, and
any program-related investments (within the
meaning of section 4944(c)) made in, the risk
pool before such pool commences operations.
(B) Nonmember charitable organization.--The
term ``nonmember charitable organization''
means any organization which is described in
subsection (c)(3) and exempt from tax under
subsection (a) and which is not a member of the
risk pool and does not benefit (directly or
indirectly) from the insurance coverage
provided by the pool to its members.
(o) Treatment of hospitals participating in provider-
sponsored organizations.--An organization shall not fail to be
treated as organized and operated exclusively for a charitable
purpose for purposes of subsection (c)(3) solely because a
hospital which is owned and operated by such organization
participates in a provider-sponsored organization (as defined
in section 1855(d) of the Social Security Act), whether or not
the provider-sponsored organization is exempt from tax. For
purposes of subsection (c)(3), any person with a material
financial interest in such a provider-sponsored organization
shall be treated as a private shareholder or individual with
respect to the hospital.
(p) Suspension of tax-exempt status of terrorist
organizations.--
(1) In general.--The exemption from tax under
subsection (a) with respect to any organization
described in paragraph (2), and the eligibility of any
organization described in paragraph (2) to apply for
recognition of exemption under subsection (a), shall be
suspended during the period described in paragraph (3).
(2) Terrorist organizations.--An organization is
described in this paragraph if such organization is
designated or otherwise individually identified--
(A) under section 212(a)(3)(B)(vi)(II) or 219
of the Immigration and Nationality Act as a
terrorist organization or foreign terrorist
organization,
(B) in or pursuant to an Executive order
which is related to terrorism and issued under
the authority of the International Emergency
Economic Powers Act or section 5 of the United
Nations Participation Act of 1945 for the
purpose of imposing on such organization an
economic or other sanction, or
(C) in or pursuant to an Executive order
issued under the authority of any Federal law
if--
(i) the organization is designated or
otherwise individually identified in or
pursuant to such Executive order as
supporting or engaging in terrorist
activity (as defined in section
212(a)(3)(B) of the Immigration and
Nationality Act) or supporting
terrorism (as defined in section
140(d)(2) of the Foreign Relations
Authorization Act, Fiscal Years 1988
and 1989); and
(ii) such Executive order refers to
this subsection.
(3) Period of suspension.--With respect to any
organization described in paragraph (2), the period of
suspension--
(A) begins on the later of--
(i) the date of the first publication
of a designation or identification
described in paragraph (2) with respect
to such organization, or
(ii) the date of the enactment of
this subsection, and (B) ends on the
first date that all designations and
identifications described in paragraph
(2) with respect to such organization
are rescinded pursuant to the law or
Executive order under which such
designation or identification was made.
(4) Denial of deduction.--No deduction shall be
allowed under any provision of this title, including
sections 170, 545(b)(2), 642(c), 2055, 2106(a)(2), and
2522, with respect to any contribution to an
organization described in paragraph (2) during the
period described in paragraph (3).
(5) Denial of administrative or judicial challenge of
suspension or denial of deduction.--Notwithstanding
section 7428 or any other provision of law, no
organization or other person may challenge a suspension
under paragraph (1), a designation or identification
described in paragraph (2), the period of suspension
described in paragraph (3), or a denial of a deduction
under paragraph (4) in any administrative or judicial
proceeding relating to the Federal tax liability of
such organization or other person.
(6) Erroneous designation.--
(A) In general.--If--
(i) the tax exemption of any
organization described in paragraph (2)
is suspended under paragraph (1),
(ii) each designation and
identification described in paragraph
(2) which has been made with respect to
such organization is determined to be
erroneous pursuant to the law or
Executive order under which such
designation or identification was made,
and
(iii) the erroneous designations and
identifications result in an
overpayment of income tax for any
taxable year by such organization,
credit or refund (with interest) with respect
to such overpayment shall be made.
(B) Waiver of limitations.--If the credit or
refund of any overpayment of tax described in
subparagraph (A)(iii) is prevented at any time
by the operation of any law or rule of law
(including res judicata), such credit or refund
may nevertheless be allowed or made if the
claim therefor is filed before the close of the
1-year period beginning on the date of the last
determination described in subparagraph
(A)(ii).
(7) Notice of suspensions.--If the tax exemption of
any organization is suspended under this subsection,
the Internal Revenue Service shall update the listings
of tax-exempt organizations and shall publish
appropriate notice to taxpayers of such suspension and
of the fact that contributions to such organization are
not deductible during the period of such suspension.
(q) Special rules for credit counseling organizations.--
(1) In general.--An organization with respect to
which the provision of credit counseling services is a
substantial purpose shall not be exempt from tax under
subsection (a) unless such organization is described in
paragraph (3) or (4) of subsection (c) and such
organization is organized and operated in accordance
with the following requirements:
(A) The organization--
(i) provides credit counseling
services tailored to the specific needs
and circumstances of consumers,
(ii) makes no loans to debtors (other
than loans with no fees or interest)
and does not negotiate the making of
loans on behalf of debtors,
(iii) provides services for the
purpose of improving a consumer's
credit record, credit history, or
credit rating only to the extent that
such services are incidental to
providing credit counseling services,
and
(iv) does not charge any separately
stated fee for services for the purpose
of improving any consumer's credit
record, credit history, or credit
rating.
(B) The organization does not refuse to
provide credit counseling services to a
consumer due to the inability of the consumer
to pay, the ineligibility of the consumer for
debt management plan enrollment, or the
unwillingness of the consumer to enroll in a
debt management plan.
(C) The organization establishes and
implements a fee policy which--
(i) requires that any fees charged to
a consumer for services are reasonable,
(ii) allows for the waiver of fees if
the consumer is unable to pay, and
(iii) except to the extent allowed by
State law, prohibits charging any fee
based in whole or in part on a
percentage of the consumer's debt, the
consumer's payments to be made pursuant
to a debt management plan, or the
projected or actual savings to the
consumer resulting from enrolling in a
debt management plan.
(D) At all times the organization has a board
of directors or other governing body--
(i) which is controlled by persons
who represent the broad interests of
the public, such as public officials
acting in their capacities as such,
persons having special knowledge or
expertise in credit or financial
education, and community leaders,
(ii) not more than 20 percent of the
voting power of which is vested in
persons who are employed by the
organization or who will benefit
financially, directly or indirectly,
from the organization's activities
(other than through the receipt of
reasonable directors' fees or the
repayment of consumer debt to creditors
other than the credit counseling
organization or its affiliates), and
(iii) not more than 49 percent of the
voting power of which is vested in
persons who are employed by the
organization or who will benefit
financially, directly or indirectly,
from the organization's activities
(other than through the receipt of
reasonable directors' fees).
(E) The organization does not own more than
35 percent of--
(i) the total combined voting power
of any corporation (other than a
corporation which is an organization
described in subsection (c)(3) and
exempt from tax under subsection (a))
which is in the trade or business of
lending money, repairing credit, or
providing debt management plan
services, payment processing, or
similar services,
(ii) the profits interest of any
partnership (other than a partnership
which is an organization described in
subsection (c)(3) and exempt from tax
under subsection (a)) which is in the
trade or business of lending money,
repairing credit, or providing debt
management plan services, payment
processing, or similar services, and
(iii) the beneficial interest of any
trust or estate (other than a trust
which is an organization described in
subsection (c)(3) and exempt from tax
under subsection (a)) which is in the
trade or business of lending money,
repairing credit, or providing debt
management plan services, payment
processing, or similar services.
(F) The organization receives no amount for
providing referrals to others for debt
management plan services, and pays no amount to
others for obtaining referrals of consumers.
(2) Additional requirements for organizations
described in subsection (c)(3)
(A) In general.--In addition to the
requirements under paragraph (1), an
organization with respect to which the
provision of credit counseling services is a
substantial purpose and which is described in
paragraph (3) of subsection (c) shall not be
exempt from tax under subsection (a) unless
such organization is organized and operated in
accordance with the following requirements:
(i) The organization does not solicit
contributions from consumers during the
initial counseling process or while the
consumer is receiving services from the
organization.
(ii) The aggregate revenues of the
organization which are from payments of
creditors of consumers of the
organization and which are attributable
to debt management plan services do not
exceed the applicable percentage of the
total revenues of the organization.
(B) Applicable percentage.--
(i) In general.--For purposes of
subparagraph (A)(ii), the applicable
percentage is 50 percent.
(ii) Transition rule.--
Notwithstanding clause (i), in the case
of an organization with respect to
which the provision of credit
counseling services is a substantial
purpose and which is described in
paragraph (3) of subsection (c) and
exempt from tax under subsection (a) on
the date of the enactment of this
subsection, the applicable percentage
is--
(I) 80 percent for the first
taxable year of such
organization beginning after
the date which is 1 year after
the date of the enactment of
this subsection, and
(II) 70 percent for the
second such taxable year
beginning after such date, and
(III) 60 percent for the
third such taxable year
beginning after such date.
(3) Additional requirement for organizations
described in subsection (c)(4).--In addition to the
requirements under paragraph (1), an organization with
respect to which the provision of credit counseling
services is a substantial purpose and which is
described in paragraph (4) of subsection (c) shall not
be exempt from tax under subsection (a) unless such
organization notifies the Secretary, in such manner as
the Secretary may by regulations prescribe, that it is
applying for recognition as a credit counseling
organization.
(4) Credit counseling services; debt management plan
services.--For purposes of this subsection--
(A) Credit counseling services.--The term
``credit counseling services'' means--
(i) the providing of educational
information to the general public on
budgeting, personal finance, financial
literacy, saving and spending
practices, and the sound use of
consumer credit,
(ii) the assisting of individuals and
families with financial problems by
providing them with counseling, or
(iii) a combination of the activities
described in clauses (i) and (ii).
(B) Debt management plan services.--The term
``debt management plan services'' means
services related to the repayment,
consolidation, or restructuring of a consumer's
debt, and includes the negotiation with
creditors of lower interest rates, the waiver
or reduction of fees, and the marketing and
processing of debt management plans.
(r) Additional requirements for certain hospitals.--
(1) In general.--A hospital organization to which
this subsection applies shall not be treated as
described in subsection (c)(3) unless the
organization--
(A) meets the community health needs
assessment requirements described in paragraph
(3),
(B) meets the financial assistance policy
requirements described in paragraph (4),
(C) meets the requirements on charges
described in paragraph (5), and
(D) meets the billing and collection
requirement described in paragraph (6).
(2) Hospital organizations to which subsection
applies.--
(A) In general.--This subsection shall apply
to--
(i) an organization which operates a
facility which is required by a State
to be licensed, registered, or
similarly recognized as a hospital, and
(ii) any other organization which the
Secretary determines has the provision
of hospital care as its principal
function or purpose constituting the
basis for its exemption under
subsection (c)(3) (determined without
regard to this subsection).
(B) Organizations with more than 1 hospital
facility.--If a hospital organization operates
more than 1 hospital facility--
(i) the organization shall meet the
requirements of this subsection
separately with respect to each such
facility, and
(ii) the organization shall not be
treated as described in subsection
(c)(3) with respect to any such
facility for which such requirements
are not separately met.
(3) Community health needs assessments.--
(A) In general.--An organization meets the
requirements of this paragraph with respect to
any taxable year only if the organization--
(i) has conducted a community health
needs assessment which meets the
requirements of subparagraph (B) in
such taxable year or in either of the 2
taxable years immediately preceding
such taxable year, and
(ii) has adopted an implementation
strategy to meet the community health
needs identified through such
assessment.
(B) Community health needs assessment.--A
community health needs assessment meets the
requirements of this paragraph if such
community health needs assessment--
(i) takes into account input from
persons who represent the broad
interests of the community served by
the hospital facility, including those
with special knowledge of or expertise
in public health, and
(ii) is made widely available to the
public.
(4) Financial assistance policy.--An organization
meets the requirements of this paragraph if the
organization establishes the following policies:
(A) Financial assistance policy.--A written
financial assistance policy which includes--
(i) eligibility criteria for
financial assistance, and whether such
assistance includes free or discounted
care,
(ii) the basis for calculating
amounts charged to patients,
(iii) the method for applying for
financial assistance,
(iv) in the case of an organization
which does not have a separate billing
and collections policy, the actions the
organization may take in the event of
non-payment, including collections
action and reporting to credit
agencies, and
(v) measures to widely publicize the
policy within the community to be
served by the organization.
(B) Policy relating to emergency medical
care.--A written policy requiring the
organization to provide, without
discrimination, care for emergency medical
conditions (within the meaning of section 1867
of the Social Security Act (42 U.S.C. 1395dd))
to individuals regardless of their eligibility
under the financial assistance policy described
in subparagraph (A).
(5) Limitation on charges.--An organization meets the
requirements of this paragraph if the organization--
(A) limits amounts charged for emergency or
other medically necessary care provided to
individuals eligible for assistance under the
financial assistance policy described in
paragraph (4)(A) to not more than the amounts
generally billed to individuals who have
insurance covering such care, and
(B) prohibits the use of gross charges.
(6) Billing and collection requirements.--An
organization meets the requirement of this paragraph
only if the organization does not engage in
extraordinary collection actions before the
organization has made reasonable efforts to determine
whether the individual is eligible for assistance under
the financial assistance policy described in paragraph
(4)(A).
(7) Regulatory authority.--The Secretary shall issue
such regulations and guidance as may be necessary to
carry out the provisions of this subsection, including
guidance relating to what constitutes reasonable
efforts to determine the eligibility of a patient under
a financial assistance policy for purposes of paragraph
(6).
* * * * * * *
PART VIII--CERTAIN SAVINGS ENTITIES
* * * * * * *
SEC. 529. QUALIFIED TUITION PROGRAMS.
(a) General rule.--A qualified tuition program shall be
exempt from taxation under this subtitle. Notwithstanding the
preceding sentence, such program shall be subject to the taxes
imposed by section 511 (relating to imposition of tax on
unrelated business income of charitable organizations).
(b) Qualified tuition program.--For purposes of this
section--
(1) In general.--The term ``qualified tuition
program'' means a program established and maintained by
a State or agency or instrumentality thereof or by 1 or
more eligible educational institutions--
(A) under which a person--
(i) may purchase tuition credits or
certificates on behalf of a designated
beneficiary which entitle the
beneficiary to the waiver or payment of
qualified higher education expenses of
the beneficiary, or
(ii) in the case of a program
established and maintained by a State
or agency or instrumentality thereof,
may make contributions to an account
which is established for the purpose of
meeting the qualified higher education
expenses of the designated beneficiary
of the account, and
(B) which meets the other requirements of
this subsection.
Except to the extent provided in regulations, a program
established and maintained by 1 or more eligible
educational institutions shall not be treated as a
qualified tuition program unless such program provides
that amounts are held in a qualified trust and such
program has received a ruling or determination that
such program meets the applicable requirements for a
qualified tuition program. For purposes of the
preceding sentence, the term ``qualified trust'' means
a trust which is created or organized in the United
States for the exclusive benefit of designated
beneficiaries and with respect to which the
requirements of paragraphs (2) and (5) of section
408(a) are met.
(2) Cash contributions.--A program shall not be
treated as a qualified tuition program unless it
provides that purchases or contributions may only be
made in cash.
(3) Separate accounting.--A program shall not be
treated as a qualified tuition program unless it
provides separate accounting for each designated
beneficiary.
(4) Limited investment direction.--A program shall
not be treated as a qualified tuition program unless it
provides that any contributor to, or designated
beneficiary under, such program may, directly or
indirectly, direct the investment of any contributions
to the program (or any earnings thereon) no more than 2
times in any calendar year.
(5) No pledging of interest as security.--A program
shall not be treated as a qualified tuition program if
it allows any interest in the program or any portion
thereof to be used as security for a loan.
(6) Prohibition on excess contributions.--A program
shall not be treated as a qualified tuition program
unless it provides adequate safeguards to prevent
contributions on behalf of a designated beneficiary in
excess of those necessary to provide for the qualified
higher education expenses of the beneficiary.
(c) Tax treatment of designated beneficiaries and
contributors.--
(1) In general.--Except as otherwise provided in this
subsection, no amount shall be includible in gross
income of--
(A) a designated beneficiary under a
qualified tuition program, or
(B) a contributor to such program on behalf
of a designated beneficiary,
with respect to any distribution or earnings under such
program.
(2) Gift tax treatment of contributions.--For
purposes of chapters 12 and 13--
(A) In general.--Any contribution to a
qualified tuition program on behalf of any
designated beneficiary--
(i) shall be treated as a completed
gift to such beneficiary which is not a
future interest in property, and
(ii) shall not be treated as a
qualified transfer under section
2503(e).
(B) Treatment of excess contributions.--If
the aggregate amount of contributions described
in subparagraph (A) during the calendar year by
a donor exceeds the limitation for such year
under section 2503(b), such aggregate amount
shall, at the election of the donor, be taken
into account for purposes of such section
ratably over the 5-year period beginning with
such calendar year.
(3) Distributions.--
(A) In general.--Any distribution under a
qualified tuition program shall be includible
in the gross income of the distributee in the
manner as provided under section 72 to the
extent not excluded from gross income under any
other provision of this chapter.
(B) Distributions for qualified higher
education expenses.--For purposes of this
paragraph--
(i) In-kind distributions.--No amount
shall be includible in gross income
under subparagraph (A) by reason of a
distribution which consists of
providing a benefit to the distributee
which, if paid for by the distributee,
would constitute payment of a qualified
higher education expense.
(ii) Cash distributions.--In the case
of distributions not described in
clause (i), if--
(I) such distributions do not
exceed the qualified higher
education expenses (reduced by
expenses described in clause
(i)), no amount shall be
includible in gross income, and
(II) in any other case, the
amount otherwise includible in
gross income shall be reduced
by an amount which bears the
same ratio to such amount as
such expenses bear to such
distributions.
(iii) Exception for institutional
programs.--In the case of any taxable
year beginning before January 1, 2004,
clauses (i) and (ii) shall not apply
with respect to any distribution during
such taxable year under a qualified
tuition program established and
maintained by 1 or more eligible
educational institutions.
(iv) Treatment as distributions.--Any
benefit furnished to a designated
beneficiary under a qualified tuition
program shall be treated as a
distribution to the beneficiary for
purposes of this paragraph.
(v) Coordination with American
Opportunity and Lifetime Learning
credits.--The total amount of qualified
higher education expenses with respect
to an individual for the taxable year
shall be reduced--
(I) as provided in section
25A(g)(2), and
(II) by the amount of such
expenses which were taken into
account in determining the
credit allowed to the taxpayer
or any other person under
section 25A.
(vi) Coordination with Coverdell
education savings accounts.--If, with
respect to an individual for any
taxable year--
(I) the aggregate
distributions to which clauses
(i) and (ii) and section
530(d)(2)(A) apply, exceed
(II) the total amount of
qualified higher education
expenses otherwise taken into
account under clauses (i) and
(ii) (after the application of
clause (v)) for such year,
the taxpayer shall allocate such
expenses among such distributions for
purposes of determining the amount of
the exclusion under clauses (i) and
(ii) and section 530(d)(2)(A).
(C) Change in beneficiaries or programs.--
(i) Rollovers.--Subparagraph (A)
shall not apply to that portion of any
distribution which, within 60 days of
such distribution, is transferred--
(I) to another qualified
tuition program for the benefit
of the designated beneficiary,
(II) to the credit of another
designated beneficiary under a
qualified tuition program who
is a member of the family of
the designated beneficiary with
respect to which the
distribution was made, or
(III) [before January 1,
2026,] to an ABLE account (as
defined in section 529A(e)(6))
of the designated beneficiary
or a member of the family of
the designated beneficiary.
Subclause (III) shall not apply to so
much of a distribution which, when
added to all other contributions made
to the ABLE account for the taxable
year, exceeds the limitation under
section 529A(b)(2)(B)(i).
(ii) Change in designated
beneficiaries.--Any change in the
designated beneficiary of an interest
in a qualified tuition program shall
not be treated as a distribution for
purposes of subparagraph (A) if the new
beneficiary is a member of the family
of the old beneficiary.
(iii) Limitation on certain
rollovers.--Clause (i)(I) shall not
apply to any transfer if such transfer
occurs within 12 months from the date
of a previous transfer to any qualified
tuition program for the benefit of the
designated beneficiary.
(D) Special rule for contributions of
refunded amounts.--In the case of a beneficiary
who receives a refund of any qualified higher
education expenses from an eligible educational
institution, subparagraph (A) shall not apply
to that portion of any distribution for the
taxable year which is recontributed to a
qualified tuition program of which such
individual is a beneficiary, but only to the
extent such recontribution is made not later
than 60 days after the date of such refund and
does not exceed the refunded amount.
(4) Estate tax treatment.--
(A) In general.--No amount shall be
includible in the gross estate of any
individual for purposes of chapter 11 by reason
of an interest in a qualified tuition program.
(B) Amounts includible in estate of
designated beneficiary in certain cases.--
Subparagraph (A) shall not apply to amounts
distributed on account of the death of a
beneficiary.
(C) Amounts includible in estate of donor
making excess contributions.--In the case of a
donor who makes the election described in
paragraph (2)(B) and who dies before the close
of the 5-year period referred to in such
paragraph, notwithstanding subparagraph (A),
the gross estate of the donor shall include the
portion of such contributions properly
allocable to periods after the date of death of
the donor.
(5) Other gift tax rules.--For purposes of chapters
12 and 13--
(A) Treatment of distributions.--Except as
provided in subparagraph (B), in no event shall
a distribution from a qualified tuition program
be treated as a taxable gift.
(B) Treatment of designation of new
beneficiary.--The taxes imposed by chapters 12
and 13 shall apply to a transfer by reason of a
change in the designated beneficiary under the
program (or a rollover to the account of a new
beneficiary) unless the new beneficiary is--
(i) assigned to the same generation
as (or a higher generation than) the
old beneficiary (determined in
accordance with section 2651), and
(ii) a member of the family of the
old beneficiary.
(6) Additional tax.--The tax imposed by section
530(d)(4) shall apply to any payment or distribution
from a qualified tuition program in the same manner as
such tax applies to a payment or distribution from a
Coverdell education savings account. This paragraph
shall not apply to any payment or distribution in any
taxable year beginning before January 1, 2004, which is
includible in gross income but used for qualified
higher education expenses of the designated
beneficiary.
(7) Treatment of elementary and secondary tuition.--
Any reference in this subsection to the term
``qualified higher education expense'' shall include a
reference to expenses for tuition in connection with
enrollment or attendance at an elementary or secondary
public, private, or religious school.
(d) Reports.--Each officer or employee having control of the
qualified tuition program or their designee shall make such
reports regarding such program to the Secretary and to
designated beneficiaries with respect to contributions,
distributions, and such other matters as the Secretary may
require. The reports required by this subsection shall be filed
at such time and in such manner and furnished to such
individuals at such time and in such manner as may be required
by the Secretary.
(e) Other definitions and special rules.--For purposes of
this section--
(1) Designated beneficiary.--The term ``designated
beneficiary'' means--
(A) the individual designated at the
commencement of participation in the qualified
tuition program as the beneficiary of amounts
paid (or to be paid) to the program,
(B) in the case of a change in beneficiaries
described in subsection (c)(3)(C), the
individual who is the new beneficiary, and
(C) in the case of an interest in a qualified
tuition program purchased by a State or local
government (or agency or instrumentality
thereof) or an organization described in
section 501(c)(3) and exempt from taxation
under section 501(a) as part of a scholarship
program operated by such government or
organization, the individual receiving such
interest as a scholarship.
(2) Member of family.--The term ``member of the
family'' means, with respect to any designated
beneficiary--
(A) the spouse of such beneficiary;
(B) an individual who bears a relationship to
such beneficiary which is described in
subparagraphs (A) through (G) of [section
152(d)(2)] section 7706(d)(2);
(C) the spouse of any individual described in
subparagraph (B); and
(D) any first cousin of such beneficiary.
(3) Qualified higher education expenses.--
(A) In general.--The term ``qualified higher
education expenses'' means--
(i) tuition, fees, books, supplies,
and equipment required for the
enrollment or attendance of a
designated beneficiary at an eligible
educational institution,
(ii) expenses for special needs
services in the case of a special needs
beneficiary which are incurred in
connection with such enrollment or
attendance, and
(iii) expenses for the purchase of
computer or peripheral equipment (as
defined in section 168(i)(2)(B)),
computer software (as defined in
section 197(e)(3)(B)), or Internet
access and related services, if such
equipment, software, or services are to
be used primarily by the beneficiary
during any of the years the beneficiary
is enrolled at an eligible educational
institution.
Clause (iii) shall not include expenses for
computer software designed for sports, games,
or hobbies unless the software is predominantly
educational in nature. The amount of cash
distributions from all qualified tuition
programs described in subsection (b)(1)(A)(ii)
with respect to a beneficiary during any
taxable year shall, in the aggregate, include
not more than $10,000 in expenses described in
subsection (c)(7) incurred during the taxable
year.
(B) Room and board included for students who
are at least half-time.--
(i) In general.--In the case of an
individual who is an eligible student
(as defined in section 25A(b)(3)) for
any academic period, such term shall
also include reasonable costs for such
period (as determined under the
qualified tuition program) incurred by
the designated beneficiary for room and
board while attending such institution.
For purposes of subsection (b)(6), a
designated beneficiary shall be treated
as meeting the requirements of this
clause.
(ii) Limitation.--The amount treated
as qualified higher education expenses
by reason of clause (i) shall not
exceed--
(I) the allowance (applicable
to the student) for room and
board included in the cost of
attendance (as defined in
section 472 of the Higher
Education Act of 1965 (20
U.S.C. 1087ll), as in effect on
the date of the enactment of
the Economic Growth and Tax
Relief Reconciliation Act of
2001) as determined by the
eligible educational
institution for such period, or
(II) if greater, the actual
invoice amount the student
residing in housing owned or
operated by the eligible
educational institution is
charged by such institution for
room and board costs for such
period.
(4) Application of section 514.--An interest in a
qualified tuition program shall not be treated as debt
for purposes of section 514.
(5) Eligible educational institution.--The term
``eligible educational institution'' means an
institution--
(A) which is described in section 481 of the
Higher Education Act of 1965 (20 U.S.C. 1088),
as in effect on the date of the enactment of
this paragraph, and
(B) which is eligible to participate in a
program under title IV of such Act.
(f) Regulations.--Notwithstanding any other provision of this
section, the Secretary shall prescribe such regulations as may
be necessary or appropriate to carry out the purposes of this
section and to prevent abuse of such purposes, including
regulations under chapters 11, 12, and 13 of this title.
SEC. 529A. QUALIFIED ABLE PROGRAMS.
(a) General rule.--A qualified ABLE program shall be exempt
from taxation under this subtitle. Notwithstanding the
preceding sentence, such program shall be subject to the taxes
imposed by section 511 (relating to imposition of tax on
unrelated business income of charitable organizations).
(b) Qualified ABLE program.--For purposes of this section--
(1) In general.--The term ``qualified ABLE program''
means a program established and maintained by a State,
or agency or instrumentality thereof--
(A) under which a person may make
contributions for a taxable year, for the
benefit of an individual who is an eligible
individual for such taxable year, to an ABLE
account which is established for the purpose of
meeting the qualified disability expenses of
the designated beneficiary of the account,
(B) which limits a designated beneficiary to
1 ABLE account for purposes of this section,
and
(C) which meets the other requirements of
this section.
(2) Cash contributions.--A program shall not be
treated as a qualified ABLE program unless it provides
that no contribution will be accepted--
(A) unless it is in cash, or
(B) except in the case of contributions under
subsection (c)(1)(C), if such contribution to
an ABLE account would result in aggregate
contributions from all contributors to the ABLE
account for the taxable year exceeding the sum
of--
(i) the amount in effect under
section 2503(b) for the calendar year
in which the taxable year begins, plus
(ii) in the case of any contribution
by a designated beneficiary described
in paragraph (7) [before January 1,
2026], the lesser of--
(I) compensation (as defined
by section 219(f)(1))
includible in the designated
beneficiary's gross income for
the taxable year, or
(II) an amount equal to the
poverty line for a one-person
household, as determined for
the calendar year preceding the
calendar year in which the
taxable year begins.
For purposes of this paragraph, rules similar to the
rules of section 408(d)(4) (determined without regard
to subparagraph (B) thereof) shall apply. A designated
beneficiary (or a person acting on behalf of such
beneficiary) shall maintain adequate records for
purposes of ensuring, and shall be responsible for
ensuring, that the requirements of subparagraph (B)(ii)
are met.
(3) Separate accounting.--A program shall not be
treated as a qualified ABLE program unless it provides
separate accounting for each designated beneficiary.
(4) Limited investment direction.--A program shall
not be treated as a qualified ABLE program unless it
provides that any designated beneficiary under such
program may, directly or indirectly, direct the
investment of any contributions to the program (or any
earnings thereon) no more than 2 times in any calendar
year.
(5) No pledging of interest as security.--A program
shall not be treated as a qualified ABLE program if it
allows any interest in the program or any portion
thereof to be used as security for a loan.
(6) Prohibition on excess contributions.--A program
shall not be treated as a qualified ABLE program unless
it provides adequate safeguards to prevent aggregate
contributions on behalf of a designated beneficiary in
excess of the limit established by the State under
section 529(b)(6). For purposes of the preceding
sentence, aggregate contributions include contributions
under any prior qualified ABLE program of any State or
agency or instrumentality thereof.
(7) Special rules related to contribution limit.--For
purposes of paragraph (2)(B)(ii)--
(A) Designated beneficiary.--A designated
beneficiary described in this paragraph is an
employee (including an employee within the
meaning of section 401(c)) with respect to
whom--
(i) no contribution is made for the
taxable year to a defined contribution
plan (within the meaning of section
414(i)) with respect to which the
requirements of section 401(a) or
403(a) are met,
(ii) no contribution is made for the
taxable year to an annuity contract
described in section 403(b), and
(iii) no contribution is made for the
taxable year to an eligible deferred
compensation plan described in section
457(b).
(B) Poverty line.--The term ``poverty line''
has the meaning given such term by section 673
of the Community Services Block Grant Act (42
U.S.C. 9902).
(c) Tax treatment.--
(1) Distributions.--
(A) In general.--Any distribution under a
qualified ABLE program shall be includible in
the gross income of the distributee in the
manner as provided under section 72 to the
extent not excluded from gross income under any
other provision of this chapter.
(B) Distributions for qualified disability
expenses.--For purposes of this paragraph, if
distributions from a qualified ABLE program--
(i) do not exceed the qualified
disability expenses of the designated
beneficiary, no amount shall be
includible in gross income, and
(ii) in any other case, the amount
otherwise includible in gross income
shall be reduced by an amount which
bears the same ratio to such amount as
such expenses bear to such
distributions.
(C) Change in designated beneficiaries or
programs.--
(i) Rollovers from ABLE accounts.--
Subparagraph (A) shall not apply to any
amount paid or distributed from an ABLE
account to the extent that the amount
received is paid, not later than the
60th day after the date of such payment
or distribution, into another ABLE
account for the benefit of the same
designated beneficiary or an eligible
individual who is a member of the
family of the designated beneficiary.
(ii) Change in designated
beneficiaries.--Any change in the
designated beneficiary of an interest
in a qualified ABLE program during a
taxable year shall not be treated as a
distribution for purposes of
subparagraph (A) if the new beneficiary
is an eligible individual for such
taxable year and a member of the family
of the former beneficiary.
(iii) Limitation on certain
rollovers.--Clause (i) shall not apply
to any transfer if such transfer occurs
within 12 months from the date of a
previous transfer to any qualified ABLE
program for the benefit of the
designated beneficiary.
(2) Gift tax rules.--For purposes of chapters 12 and
13--
(A) Contributions.--Any contribution to a
qualified ABLE program on behalf of any
designated beneficiary--
(i) shall be treated as a completed
gift to such designated beneficiary
which is not a future interest in
property, and
(ii) shall not be treated as a
qualified transfer under section
2503(e).
(B) Treatment of distributions.--In no event
shall a distribution from an ABLE account to
such account's designated beneficiary be
treated as a taxable gift.
(C) Treatment of transfer to new designated
beneficiary.--The taxes imposed by chapters 12
and 13 shall not apply to a transfer by reason
of a change in the designated beneficiary under
subsection (c)(1)(C).
(3) Additional tax for distributions not used for
disability expenses.--
(A) In general.--The tax imposed by this
chapter for any taxable year on any taxpayer
who receives a distribution from a qualified
ABLE program which is includible in gross
income shall be increased by 10 percent of the
amount which is so includible.
(B) Exception.--Subparagraph (A) shall not
apply if the payment or distribution is made to
a beneficiary (or to the estate of the
designated beneficiary) on or after the death
of the designated beneficiary.
(C) Contributions returned before certain
date.--Subparagraph (A) shall not apply to the
distribution of any contribution made during a
taxable year on behalf of the designated
beneficiary if--
(i) such distribution is received on
or before the day prescribed by law
(including extensions of time) for
filing such designated beneficiary's
return for such taxable year, and
(ii) such distribution is accompanied
by the amount of net income
attributable to such excess
contribution.
Any net income described in clause (ii) shall
be included in gross income for the taxable
year in which such excess contribution was
made.
(4) Loss of ABLE account treatment.--If an ABLE
account is established for a designated beneficiary, no
account subsequently established for such beneficiary
shall be treated as an ABLE account. The preceding
sentence shall not apply in the case of an account
established for purposes of a rollover described in
paragraph (1)(C)(i) of this section if the transferor
account is closed as of the end of the 60th day
referred to in paragraph (1)(C)(i).
(d) Reports.--
(1) In general.--Each officer or employee having
control of the qualified ABLE program or their designee
shall make such reports regarding such program to the
Secretary and to designated beneficiaries with respect
to contributions, distributions, the return of excess
contributions, and such other matters as the Secretary
may require.
(2) Certain aggregated information.--For research
purposes, the Secretary shall make available to the
public reports containing aggregate information, by
diagnosis and other relevant characteristics, on
contributions and distributions from the qualified ABLE
program. In carrying out the preceding sentence an item
may not be made available to the public if such item
can be associated with, or otherwise identify, directly
or indirectly, a particular individual.
(3) Notice of establishment of ABLE account.--A
qualified ABLE program shall submit a notice to the
Secretary upon the establishment of an ABLE account.
Such notice shall contain the name of the designated
beneficiary and such other information as the Secretary
may require.
(4) Electronic distribution statements.--For purposes
of section 103 of the Stephen Beck, Jr., ABLE Act of
2014, States shall submit electronically on a monthly
basis to the Commissioner of Social Security, in the
manner specified by the Commissioner, statements on
relevant distributions and account balances from all
ABLE accounts.
(5) Requirements.--The reports and notices required
by paragraphs (1), (2), and (3) shall be filed at such
time and in such manner and furnished to such
individuals at such time and in such manner as may be
required by the Secretary.
(e) Other definitions and special rules.--For purposes of
this section--
(1) Eligible individual.--An individual is an
eligible individual for a taxable year if during such
taxable year--
(A) the individual is entitled to benefits
based on blindness or disability under title II
or XVI of the Social Security Act, and such
blindness or disability occurred before the
date on which the individual attained age 26,
or
(B) a disability certification with respect
to such individual is filed with the Secretary
for such taxable year.
(2) Disability certification.--
(A) In general.--The term ``disability
certification'' means, with respect to an
individual, a certification to the satisfaction
of the Secretary by the individual or the
parent or guardian of the individual that--
(i) certifies that--
(I) the individual has a
medically determinable physical
or mental impairment, which
results in marked and severe
functional limitations, and
which can be expected to result
in death or which has lasted or
can be expected to last for a
continuous period of not less
than 12 months, or is blind
(within the meaning of section
1614(a)(2) of the Social
Security Act), and
(II) such blindness or
disability occurred before the
date on which the individual
attained age 26, and
(ii) includes a copy of the
individual's diagnosis relating to the
individual's relevant impairment or
impairments, signed by a physician
meeting the criteria of section
1861(r)(1) of the Social Security Act.
(B) Restriction on use of certification.--No
inference may be drawn from a disability
certification for purposes of establishing
eligibility for benefits under title II, XVI,
or XIX of the Social Security Act.
(3) Designated beneficiary.--The term ``designated
beneficiary'' in connection with an ABLE account
established under a qualified ABLE program means the
eligible individual who established an ABLE account and
is the owner of such account.
(4) Member of family.--The term ``member of the
family'' means, with respect to any designated
beneficiary, an individual who bears a relationship to
such beneficiary which is described in [section
152(d)(2)(B)] section 7706(d)(2)(B). For purposes of
the preceding sentence, a rule similar to the rule of
[section 152(f)(1)(B)] section 7706(f)(1)(B) shall
apply.
(5) Qualified disability expenses.--The term
``qualified disability expenses'' means any expenses
related to the eligible individual's blindness or
disability which are made for the benefit of an
eligible individual who is the designated beneficiary,
including the following expenses: education, housing,
transportation, employment training and support,
assistive technology and personal support services,
health, prevention and wellness, financial management
and administrative services, legal fees, expenses for
oversight and monitoring, funeral and burial expenses,
and other expenses, which are approved by the Secretary
under regulations and consistent with the purposes of
this section.
(6) ABLE account.--The term ``ABLE account'' means an
account established by an eligible individual, owned by
such eligible individual, and maintained under a
qualified ABLE program.
(f) Transfer to State.--Subject to any outstanding payments
due for qualified disability expenses, upon the death of the
designated beneficiary, all amounts remaining in the qualified
ABLE account not in excess of the amount equal to the total
medical assistance paid for the designated beneficiary after
the establishment of the account, net of any premiums paid from
the account or paid by or on behalf of the beneficiary to a
Medicaid Buy-In program under any State Medicaid plan
established under title XIX of the Social Security Act, shall
be distributed to such State upon filing of a claim for payment
by such State. For purposes of this paragraph, the State shall
be a creditor of an ABLE account and not a beneficiary.
Subsection (c)(3) shall not apply to a distribution under the
preceding sentence.
(g) Regulations.--The Secretary shall prescribe such
regulations or other guidance as the Secretary determines
necessary or appropriate to carry out the purposes of this
section, including regulations--
(1) to enforce the 1 ABLE account per eligible
individual limit,
(2) providing for the information required to be
presented to open an ABLE account,
(3) to generally define qualified disability
expenses,
(4) developed in consultation with the Commissioner
of Social Security, relating to disability
certifications and determinations of disability,
including those conditions deemed to meet the
requirements of subsection (e)(1)(B),
(5) to prevent fraud and abuse with respect to
amounts claimed as qualified disability expenses,
(6) under chapters 11, 12, and 13 of this title, and
(7) to allow for transfers from one ABLE account to
another ABLE account.
Subchapter J--Estates, Trusts, Beneficiaries, and Decedents
* * * * * * *
PART I--ESTATES, TRUSTS, AND BENEFICIARIES
* * * * * * *
Subpart A--General Rules for Taxation of Estates and Trusts
* * * * * * *
SEC. 641. IMPOSITION OF TAX.
(a) Application of tax.--The tax imposed by section 1(e)
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 part. 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) Special rules for taxation of electing small business
trusts.--
(1) In general.--For purposes of this chapter--
(A) the portion of any electing small
business trust which consists of stock in 1 or
more S corporations shall be treated as a
separate trust, and
(B) the amount of the tax imposed by this
chapter on such separate trust shall be
determined with the modifications of paragraph
(2).
(2) Modifications.--For purposes of paragraph (1),
the modifications of this paragraph are the following:
(A) Except as provided in section 1(h), the
amount of the tax imposed by section 1(e) shall
be determined by using the highest rate of tax
set forth in section 1(e).
(B) The exemption amount under section 55(d)
shall be zero.
(C) The only items of income, loss,
deduction, or credit to be taken into account
are the following:
(i) The items required to be taken
into account under section 1366.
(ii) Any gain or loss from the
disposition of stock in an S
corporation.
(iii) To the extent provided in
regulations, State or local income
taxes or administrative expenses to the
extent allocable to items described in
clauses (i) and (ii).
(iv) Any interest expense paid or
accrued on indebtedness incurred to
acquire stock in an S corporation.
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
item described in this paragraph shall be
apportioned to any beneficiary.
(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
[(E)(i) Section 642(c) shall not apply.
[(ii) For purposes of section 170(b)(1)(G),
adjusted gross income shall be computed in the
same manner as in the case of an individual,
except that the deductions for costs which are
paid or incurred in connection with the
administration of the trust and which would not
have been incurred if the property were not
held in such trust shall be treated as
allowable in arriving at adjusted gross
income.]
(E) Section 642(c) shall not apply.
(3) Treatment of remainder of trust and
distributions.--For purposes of determining--
(A) the amount of the tax imposed by this
chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
(B) the distributable net income of the
entire trust, the items referred to in
paragraph (2)(C) shall be excluded. Except as
provided in the preceding sentence, this
subsection shall not affect the taxation of any
distribution from the trust.
(4) Treatment of unused deductions where termination
of separate trust.--If a portion of an electing small
business trust ceases to be treated as a separate trust
under paragraph (1), any carryover or excess deduction
of the separate trust which is referred to in section
642(h) shall be taken into account by the entire trust.
(5) Electing small business trust.--For purposes of
this subsection, the term ``electing small business
trust'' has the meaning given such term by section
1361(e)(1).
(d) Computation of Adjusted Gross Income.--For purposes of
this title, the adjusted gross income of an estate or trust
shall be computed in the same manner as in the case of an
individual, except that--
(1) the deductions for costs which are paid or
incurred in connection with the administration of the
estate or trust and which would not have been incurred
if the property were not held in such trust or estate,
and
(2) the deductions allowable under sections 642(b),
651, and 661,
shall be treated as allowable in arriving at adjusted gross
income.
SEC. 642. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.
(a) Foreign tax credit allowed.--An estate or trust shall be
allowed the credit against tax for taxes imposed by foreign
countries and possessions of the United States, to the extent
allowed by section 901, only in respect of so much of the taxes
described in such section as is not properly allocable under
such section to the beneficiaries.
(b) [Deduction for personal exemption] Basic Deduction.--
(1) Estates.--An estate shall be allowed a deduction
of $600.
(2) Trusts.--
(A) In general.--Except as otherwise provided
in this paragraph, a trust shall be allowed a
deduction of $100.
(B) Trusts distributing income currently.--A
trust which, under its governing instrument, is
required to distribute all of its income
currently shall be allowed a deduction of $300.
(C) Disability trusts.--
(i) In general.--A qualified
disability trust shall be allowed a
deduction equal to [the exemption
amount under section 151(d),
determined--] the dollar amount in
effect under section 7706(d)(1)(B).
[(I) by treating such trust
as an individual described in
section
[(II) by applying section
67(e) (without the reference to
section 642(b)) for purposes of
determining the adjusted gross
income of the trust.]
(ii) Qualified disability trust.--For
purposes of clause (i), the term
``qualified disability trust'' means
any trust if--
(I) such trust is a
disability trust described in
subsection (c)(2)(B)(iv) of
section 1917 of the Social
Security Act (42 U.S.C. 1396p),
and
(II) all of the beneficiaries
of the trust as of the close of
the taxable year are determined
by the Commissioner of Social
Security to have been disabled
(within the meaning of section
1614(a)(3) of the Social
Security Act, 42 U.S.C.
1382c(a)(3)) for some portion
of such year.
A trust shall not fail to meet the
requirements of subclause (II) merely
because the corpus of the trust may
revert to a person who is not so
disabled after the trust ceases to have
any beneficiary who is so disabled.
[(iii) Years when personal exemption
amount is zero.--
[(I) In general.--In the case
of any taxable year in which
the exemption amount under
section 151(d) is zero, clause
(i) shall be applied by
substituting ``$4,150'' for
``the exemption amount under
section 151(d)''.
[(II) Inflation adjustment.--
In the case of any taxable year
beginning in a calendar year
after 2018, the $4,150 amount
in subparagraph (A) shall be
increased in the same manner as
provided in section
6334(d)(4)(C).]
[(3) Deductions in lieu of personal exemption.--The
deductions allowed by this subsection shall be in lieu
of the deductions allowed under section 151 (relating
to deduction for personal exemption).]
(c) Deduction for amounts paid or permanently set aside for a
charitable purpose.--
(1) General rule.--In the case of an estate or trust
(other than a trust meeting the specifications of
subpart B), there shall be allowed as a deduction in
computing its taxable income (in lieu of the deduction
allowed by section 170(a), relating to deduction for
charitable, etc., contributions and gifts) 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
170(c) (determined without regard to section
170(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) Amounts permanently set aside.--In the case of an
estate, and in the case of a trust (other than a trust
meeting the specifications of subpart B) required by
the terms of its governing instrument to set aside
amounts which was--
(A) created on or before October 9, 1969,
if--
(i) an irrevocable remainder interest
is transferred to or for the use of an
organization described in section
170(c), or
(ii) the grantor is at all times
after October 9, 1969, under a mental
disability to change the terms of the
trust; or
(B) established by a will executed on or
before October 9, 1969, if--
(i) the testator dies before October
9, 1972, without having republished the
will after October 9, 1969, by codicil
or otherwise,
(ii) the testator at no time after
October 9, 1969, had the right to
change the portions of the will which
pertain to the trust, or
(iii) the will is not republished by
codicil or otherwise before October 9,
1972, and the testator is on such date
and at all times thereafter under a
mental disability to republish the will
by codicil or otherwise,
there shall also be allowed as a deduction in computing
its taxable income any amount of the gross income,
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 170(c), or is to be used exclusively for
religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty
to children or animals, or for the establishment,
acquisition, maintenance, or operation of a public
cemetery not operated for profit. In the case of a
trust, the preceding sentence shall apply only to gross
income earned with respect to amounts transferred to
the trust before October 9, 1969, or transferred under
a will to which subparagraph (B) applies.
(3) Pooled income funds.--In the case of a pooled
income fund (as defined in paragraph (5)), 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 170(c).
(4) Adjustments.--To the extent that the amount
otherwise allowable as a deduction under this
subsection consists of gain described in section
1202(a), proper adjustment shall be made for any
exclusion allowable to the estate or trust under
section 1202. In the case of a trust, the deduction
allowed by this subsection shall be subject to section
681 (relating to unrelated business income).
(5) Definition of pooled income fund.--For purposes
of paragraph (3), 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 170(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 the 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.
(6) Taxable private foundations.--In the case of a
private foundation which is not exempt from taxation
under section 501(a) for the taxable year, the
provisions of this subsection shall not apply and the
provisions of section 170 shall apply.
(d) Net operating loss deduction.--The benefit of the
deduction for net operating losses provided by section 172
shall be allowed to estates and trusts under regulations
prescribed by the Secretary.
(e) Deduction for depreciation and depletion.--An estate or
trust shall be allowed the deduction for depreciation and
depletion only to the extent not allowable to beneficiaries
under section 167(d) and 611(b).
(f) Amortization deductions.--The benefit of the deductions
for amortization provided by sections 169 and 197 shall be
allowed to estates and trusts in the same manner as in the case
of an individual. The allowable deduction shall be apportioned
between the income beneficiaries and the fiduciary under
regulations prescribed by the Secretary.
(g) Disallowance of double deductions.--Amounts allowable
under section 2053 or 2054 as a deduction in computing the
taxable estate of a decedent shall not be allowed as a
deduction (or as an offset against the sales price of property
in determining gain or loss) in computing the taxable income of
the estate or of any other person, unless there is filed,
within the time and in the manner and form prescribed by the
Secretary, a statement that the amounts have not been allowed
as deductions under section 2053 or 2054 and a waiver of the
right to have such amounts allowed at any time as deductions
under section 2053 or 2054. Rules similar to the rules of the
preceding sentence shall apply to amounts which may be taken
into account under section 2621(a)(2) or 2622(b). This
subsection shall not apply with respect to deductions allowed
under part II (relating to income in respect of decedents).
(h) Unused loss carryovers and excess deductions on
termination available to beneficiaries.--If on the termination
of an estate or trust, the estate or trust has--
(1) a net operating loss carryover under section 172
or a capital loss carryover under section 1212, or
(2) for the last taxable year of the estate or trust
deductions (other than the deductions allowed under
subsections (b) or (c)) in excess of gross income for
such year,
then such carryover or such excess 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.
(i) 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 651 and 661, 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. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D.
(a) Distributable net income.--For purposes of this part, the
term ``distributable net income'' means, with respect to any
taxable year, the taxable income of the estate or trust
computed with the following modifications--
(1) Deduction for distributions.--No deduction shall
be taken under sections 651 and 661 (relating to
additional deductions).
(2) [Deduction for personal exemption] Basic
deduction.--No deduction shall be taken under section
642(b) [(relating to deduction for personal
exemptions)] (relating to basic deduction).
(3) Capital gains and losses.--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 642(c). 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. The exclusion under section 1202
shall not be taken into account.
(4) Extraordinary dividends and taxable stock
dividends.--For purposes only of subpart B (relating to
trusts which distribute current income only), 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) Tax-exempt interest.--There shall be included any
tax-exempt interest to which section 103 applies,
reduced by any amounts which would be deductible in
respect of disbursements allocable to such interest but
for the provisions of section 265 (relating to
disallowance of certain deductions).
(6) Income of foreign trust.--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.
(7) Abusive transactions.--The Secretary shall
prescribe such regulations as may be necessary or
appropriate to carry out the purposes of this part,
including regulations to prevent avoidance of such
purposes.
If the estate or trust is allowed a deduction under section
642(c), 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 642(c) 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.--For purposes of this subpart and subparts B, C,
and D, the term ``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.--For purposes of this part, the term
``beneficiary'' includes heir, legatee, devisee.
(d) Coordination with back-up withholding.--Except to the
extent otherwise provided in regulations, this subchapter shall
be applied with respect to payments subject to withholding
under section 3406--
(1) by allocating between the estate or trust and its
beneficiaries any credit allowable under section 31(c)
(on the basis of their respective shares of any such
payment taken into account under this subchapter),
(2) by treating each beneficiary to whom such credit
is allocated as if an amount equal to such credit has
been paid to him by the estate or trust, and
(3) by allowing the estate or trust a deduction in an
amount equal to the credit so allocated to
beneficiaries.
(e) 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 661(a)(2) and
662(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 661(a)(2) and 662(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
663(a).--This subsection shall not apply to any
distribution described in section 663(a).
(f) Treatment of multiple trusts.--For purposes of this
subchapter, under regulations prescribed by the Secretary, 2 or
more trusts shall be treated as 1 trust if--
(1) such trusts have substantially the same grantor
or grantors and substantially the same primary
beneficiary or beneficiaries, and
(2) a principal purpose of such trusts is the
avoidance of the tax imposed by this chapter.
For purposes of the preceding sentence, a husband and wife
shall be treated as 1 person.
(g) Certain payments of estimated tax treated as paid by
beneficiary.--
(1) In general.--In the case of a trust--
(A) the 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,
(B) any amount so treated shall be treated as
paid or credited to the beneficiary on the last
day of such taxable year, and
(C) for purposes of subtitle F, the amount so
treated--
(i) shall not be treated as a payment
of estimated tax made by the trust, but
(ii) shall be treated as a payment of
estimated tax made by such beneficiary
on January 15 following the taxable
year.
(2) Time for making election.--An election under
paragraph (1) shall be made on or before the 65th day
after the close of the taxable year of the trust and in
such manner as the Secretary may prescribe.
(3) Extension to last year of estate.--In the case of
a taxable year reasonably expected to be the last
taxable year of an estate--
(A) any reference in this subsection to a
trust shall be treated as including a reference
to an estate, and
(B) the fiduciary of the estate shall be
treated as the trustee.
(h) Distributions by certain foreign trusts through
nominees.--For purposes of this part, any amount paid to a
United States person which is derived directly or indirectly
from a foreign trust of which the payor is not the grantor
shall be deemed in the year of payment to have been directly
paid by the foreign trust to such United States person.
(i) Loans from foreign trusts.--For purposes of subparts B,
C, and D--
(1) General rule.--Except as provided in regulations,
if a foreign trust makes a loan of cash or marketable
securities (or permits the use of any other trust
property) directly or indirectly to or by--
(A) any grantor or beneficiary of such trust
who is a United States person, or
(B) any United States person not described in
subparagraph (A) who is related to such grantor
or beneficiary,
the amount of such loan (or the fair market value of
the use of such property) shall be treated as a
distribution by such trust to such grantor or
beneficiary (as the case may be).
(2) Definitions and special rules.--For purposes of
this subsection--
(A) Cash.--The term ``cash'' includes foreign
currencies and cash equivalents.
(B) Related person.--
(i) In general.--A person is related
to another person if the relationship
between such persons would result in a
disallowance of losses under section
267 or 707(b). In applying section 267
for purposes of the preceding sentence,
section 267(c)(4) shall be applied as
if the family of an individual includes
the spouses of the members of the
family.
(ii) Allocation.--If any person
described in paragraph (1)(B) is
related to more than one person, the
grantor or beneficiary to whom the
treatment under this subsection applies
shall be determined under regulations
prescribed by the Secretary.
(C) Exclusion of tax-exempts.--The term
``United States person'' does not include any
entity exempt from tax under this chapter.
(D) Trust not treated as simple trust.--Any
trust which is treated under this subsection as
making a distribution shall be treated as not
described in section 651.
(E) Exception for compensated use of
property.--In the case of the use of any trust
property other than a loan of cash or
marketable securities, paragraph (1) shall not
apply to the extent that the trust is paid the
fair market value of such use within a
reasonable period of time of such use.
(3) Subsequent transactions.--If any loan (or use of
property) is taken into account under paragraph (1),
any subsequent transaction between the trust and the
original borrower regarding the principal of the loan
(by way of complete or partial repayment, satisfaction,
cancellation, discharge, or otherwise) or the return of
such property shall be disregarded for purposes of this
title.
* * * * * * *
Subchapter K--Partners and Partnerships
* * * * * * *
PART I--DETERMINATION OF TAX LIABILITY
* * * * * * *
SEC. 703. PARTNERSHIP COMPUTATIONS.
(a) Income and deductions.--The taxable income of a
partnership shall be computed in the same manner as in the case
of an individual except that--
(1) the items described in section 702(a) shall be
separately stated, and
(2) the following deductions shall not be allowed to
the partnership:
[(A) the deductions for personal exemptions
provided in section 151,]
[(B)] (A) the deduction for taxes provided in
section 164(a) with respect to taxes, described
in section 901, paid or accrued to foreign
countries and to possessions of the United
States,
[(C)] (B) the deduction for charitable
contributions provided in section 170,
[(D)] (C) the net operating loss deduction
provided in section 172,
[(E)] (D) the additional itemized deductions
for individuals provided in part VII of
subchapter B (sec. 211 and following), and
[(F)] (E) the deduction for depletion under
section 611 with respect to oil and gas wells.
(b) Elections of the partnership.--Any election affecting the
computation of taxable income derived from a partnership shall
be made by the partnership, except that any election under--
(1) subsection (b)(5) or (c)(3) of section 108
(relating to income from discharge of indebtedness),
(2) section 617 (relating to deduction and recapture
of certain mining exploration expenditures), or
(3) section 901 (relating to taxes of foreign
countries and possessions of the United States),
shall be made by each partner separately.
Subchapter N--Tax Based on Income From Sources Within or Without the
United States
* * * * * * *
PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
* * * * * * *
Subpart A--Nonresident Alien Individuals
* * * * * * *
SEC. 873. DEDUCTIONS.
(a) General rule.--In the case of a nonresident alien
individual, the deductions shall be allowed only for purposes
of section 871(b) and (except as provided by subsection (b))
only if and to the extent that they are connected with income
which is effectively connected with the conduct of a trade or
business within the United States; and the proper apportionment
and allocation of the deductions for this purpose shall be
determined as provided in regulations prescribed by the
Secretary.
(b) Exceptions.--The following deductions shall be allowed
whether or not they are connected with income which is
effectively connected with the conduct of a trade or business
within the United States:
(1) Losses.--The deduction allowed by section 165 for
casualty or theft losses described in paragraph (2) or
(3) of section 165(c), but only if the loss is of
property located within the United States.
(2) Charitable contributions.--The deduction for
charitable contributions and gifts allowed by section
170.
[(3) Personal exemption.--The deduction for personal
exemptions allowed by section 151, except that only one
exemption shall be allowed under section 151 unless the
taxpayer is a resident of a contiguous country or is a
national of the United States.]
(c) Cross reference.--For rule that certain foreign taxes are
not to be taken into account in determining deduction or
credit, see section 906(b)(1).
SEC. 874. ALLOWANCE OF DEDUCTIONS AND CREDITS.
(a) Return prerequisite to allowance.--A nonresident alien
individual shall receive the benefit of the deductions and
credits allowed to him in this subtitle only by filing or
causing to be filed with the Secretary a true and accurate
return, in the manner prescribed in subtitle F (sec. 6001 and
following, relating to procedure and administration), including
therein all the information which the Secretary may deem
necessary for the calculation of such deductions and credits.
This subsection shall not be construed to deny the credits
provided by sections 31 and 33 for tax withheld at source or
the credit provided by section 34 for certain uses of gasoline
and special fuels.
[(b) Tax withheld at source.--The benefit of the deduction
for exemptions under section 151 may, in the discretion of the
Secretary, and under regulations prescribed by the Secretary,
be received by a non-resident alien individual entitled
thereto, by filing a claim therefor with the withholding
agent.]
[(c)] (b) Foreign tax credit.--Except as provided in section
906, a nonresident alien individual shall not be allowed the
credits against the tax for taxes of foreign countries and
possessions of the United States allowed by section 901.
* * * * * * *
Subpart D--Miscellaneous Provisions
* * * * * * *
SEC. 891. DOUBLING OF RATES OF TAX ON CITIZENS AND CORPORATIONS OF
CERTAIN FOREIGN COUNTRIES.
Whenever the President finds that, under the laws of any
foreign country, citizens or corporations of the United States
are being subjected to discriminatory or extraterritorial
taxes, the President shall so proclaim and the rates of tax
imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881
shall, for the taxable year during which such proclamation is
made and for each taxable year thereafter, be doubled in the
case of each citizen and corporation of such foreign country;
but the tax at such doubled rate shall be considered as imposed
by such sections as the case may be. In no case shall this
section operate to increase the taxes imposed by such sections
(computed without regard to this section) to an amount in
excess of 80 percent of the taxable income of the taxpayer
(computed without regard to the deductions allowable [under
section 151 and] under part VIII of subchapter B). Whenever the
President finds that the laws of any foreign country with
respect to which the President has made a proclamation under
the preceding provisions of this section have been modified so
that discriminatory and extraterritorial taxes applicable to
citizens and corporations of the United States have been
removed, he shall so proclaim, and the provisions of this
section providing for doubled rates of tax shall not apply to
any citizen or corporation of such foreign country with respect
to any taxable year beginning after such proclamation is made.
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
* * * * * * *
Subpart A--Foreign Tax Credit
* * * * * * *
SEC. 904. LIMITATION ON CREDIT.
(a) Limitation.--The total amount of the credit taken under
section 901(a) shall not exceed the same proportion of the tax
against which such credit is taken which the taxpayer's taxable
income from sources without the United States (but not in
excess of the taxpayer's entire taxable income) bears to his
entire taxable income for the same taxable year.
(b) Taxable income for purpose of computing limitation.--
[(1) Personal exemptions.--For purposes of subsection
(a), the taxable income in the case of an individual,
estate, or trust shall be computed without any
deduction for personal exemptions under section 151 or
642(b).]
(1) Deduction for estates and trusts.--For purposes
of subsection (a), the taxable income of an estate or
trust shall be computed without any deduction under
section 642(b).
(2) Capital gains.--For purposes of this section--
(A) In general.--Taxable income from sources
outside the United States shall include gain
from the sale or exchange of capital assets
only to the extent of foreign source capital
gain net income.
(B) Special rules where capital gain rate
differential.--In the case of any taxable year
for which there is a capital gain rate
differential--
(i) in lieu of applying subparagraph
(A), the taxable income from sources
outside the United States shall include
gain from the sale or exchange of
capital assets only in an amount equal
to foreign source capital gain net
income reduced by the rate differential
portion of foreign source net capital
gain,
(ii) the entire taxable income shall
include gain from the sale or exchange
of capital assets only in an amount
equal to capital gain net income
reduced by the rate differential
portion of net capital gain, and
(iii) for purposes of determining
taxable income from sources outside the
United States, any net capital loss
(and any amount which is a short-term
capital loss under section 1212(a))
from sources outside the United States
to the extent taken into account in
determining capital gain net income for
the taxable year shall be reduced by an
amount equal to the rate differential
portion of the excess of net capital
gain from sources within the United
States over net capital gain.
(C) Coordination with capital gains rates.--
The Secretary may by regulations modify the
application of this paragraph and paragraph (3)
to the extent necessary to properly reflect any
capital gain rate differential under section
1(h) and the computation of net capital gain.
(3) Definitions.--For purposes of this subsection--
(A) Foreign source capital gain net income.--
The term ``foreign source capital gain net
income'' means the lesser of--
(i) capital gain net income from
sources without the United States, or
(ii) capital gain net income.
(B) Foreign source net capital gain.--The
term ``foreign source net capital gain'' means
the lesser of--
(i) net capital gain from sources
without the United States, or
(ii) net capital gain.
(C) Section 1231 gains.--The term ``gain from
the sale or exchange of capital assets''
includes any gain so treated under section
1231.
(D) Capital gain rate differential.--There is
a capital gain rate differential for any year
if subsection (h) of section 1 applies to such
taxable year.
(E) Rate differential portion.--The rate
differential portion of foreign source net
capital gain, net capital gain, or the excess
of net capital gain from sources within the
United States over net capital gain, as the
case may be, is the same proportion of such
amount as--
(i) the excess of--
(I) the highest rate of tax
set forth in subsection (a),
(b), (c), (d), or (e) of
section 1 (whichever applies),
over
(II) the alternative rate of
tax determined under section
1(h), bears to
(ii) that rate referred to in
subclause (I).
(4) Treatment of dividends for which deduction is
allowed under section 245a.--For purposes of subsection
(a), in the case of a domestic corporation which is a
United States shareholder with respect to a specified
10-percent owned foreign corporation, such
shareholder's taxable income from sources without the
United States (and entire taxable income) shall be
determined without regard to--
(A) the foreign-source portion of any
dividend received from such foreign
corporation, and
(B) any deductions properly allocable or
apportioned to--
(i) income (other than amounts
includible under section 951(a)(1) or
951A(a)) with respect to stock of such
specified 10-percent owned foreign
corporation, or
(ii) such stock to the extent income
with respect to such stock is other
than amounts includible under section
951(a)(1) or 951A(a).
Any term which is used in section 245A and in this
paragraph shall have the same meaning for purposes of
this paragraph as when used in such section.
(c) Carryback and carryover of excess tax paid.--Any amount
by which all taxes paid or accrued to foreign countries or
possessions of the United States for any taxable year for which
the taxpayer chooses to have the benefits of this subpart
exceed the limitation under subsection (a) shall be deemed
taxes paid or accrued to foreign countries or possessions of
the United States in the first preceding taxable year and in
any of the first 10 succeeding taxable years, in that order and
to the extent not deemed taxes paid or accrued in a prior
taxable year, in the amount by which the limitation under
subsection (a) for such preceding or succeeding taxable year
exceeds the sum of the taxes paid or accrued to foreign
countries or possessions of the United States for such
preceding or succeeding taxable year and the amount of the
taxes for any taxable year earlier than the current taxable
year which shall be deemed to have been paid or accrued in such
preceding or subsequent taxable year (whether or not the
taxpayer chooses to have the benefits of this subpart with
respect to such earlier taxable year). Such amount deemed paid
or accrued in any year may be availed of only as a tax credit
and not as a deduction and only if the taxpayer for such year
chooses to have the benefits of this subpart as to taxes paid
or accrued for that year to foreign countries or possessions of
the United States. This subsection shall not apply to taxes
paid or accrued with respect to amounts described in subsection
(d)(1)(A).
(d) Separate application of section with respect to certain
categories of income.--
(1) In general.--The provisions of subsections (a),
(b), and (c) and sections 902, 907, and 960 shall be
applied separately with respect to--
(A) any amount includible in gross income
under section 951A (other than passive category
income),
(B) foreign branch income,
(C) passive category income, and
(D) general category income.
(2) Definitions and special rules.--For purposes of
this subsection--
(A) Categories.--
(i) Passive category income.--The
term ``passive category income'' means
passive income and specified passive
category income.
(ii) General category income.--The
term ``general category income'' means
income other than income described in
paragraph (1)(A), foreign branch
income, and passive category income.
(B) Passive income.--
(i) In general.--Except as otherwise
provided in this subparagraph, the term
``passive income'' means any income
received or accrued by any person which
is of a kind which would be foreign
personal holding company income (as
defined in section 954(c)).
(ii) Certain amounts included.--
Except as provided in clause (iii),
subparagraph (E)(ii), or paragraph
(3)(H), the term ``passive income''
includes any amount includible in gross
income under section 1293 (relating to
certain passive foreign investment
companies).
(iii) Exceptions.--The term ``passive
income'' shall not include--
(I) any export financing
interest, and
(II) any high-taxed income.
(iv) Clarification of application of
section 864(d)(6).--In determining
whether any income is of a kind which
would be foreign personal holding
company income, the rules of section
864(d)(6) shall apply only in the case
of income of a controlled foreign
corporation.
(v) Specified passive category
income.--The term ``specified passive
category income'' means--
(I) dividends from a DISC or
former DISC (as defined in
section 992(a)) to the extent
such dividends are treated as
income from sources without the
United States, and
(II) distributions from a
former FSC (as defined in
section 922) out of earnings
and profits attributable to
foreign trade income (within
the meaning of section 923(b))
or interest or carrying charges
(as defined in section
927(d)(1)) derived from a
transaction which results in
foreign trade income (as
defined in section 923(b)).
Any reference in subclause (II) to
section 922, 923, or 927 shall be
treated as a reference to such section
as in effect before its repeal by the
FSC Repeal and Extraterritorial Income
Exclusion Act of 2000.
(C) Treatment of financial services income
and companies.--
(i) In general.--Financial services
income shall be treated as general
category income in the case of--
(I) a member of a financial
services group, and
(II) any other person if such
person is predominantly engaged
in the active conduct of a
banking, insurance, financing,
or similar business.
(ii) Financial services group.--The
term ``financial services group'' means
any affiliated group (as defined in
section 1504(a) without regard to
paragraphs (2) and (3) of section
1504(b)) which is predominantly engaged
in the active conduct of a banking,
insurance, financing, or similar
business. In determining whether such a
group is so engaged, there shall be
taken into account only the income of
members of the group that are--
(I) United States
corporations, or
(II) controlled foreign
corporations in which such
United States corporations own,
directly or indirectly, at
least 80 percent of the total
voting power and value of the
stock.
(iii) Pass-thru entities.--The
Secretary shall by regulation specify
for purposes of this subparagraph the
treatment of financial services income
received or accrued by partnerships and
by other pass-thru entities which are
not members of a financial services
group.
(D) Financial services income.--
(i) In general.--Except as otherwise
provided in this subparagraph, the term
``financial services income'' means any
income which is received or accrued by
any person predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business, and
which is--
(I) described in clause (ii),
or
(II) passive income
(determined without regard to
subparagraph (B)(iii)(II)).
(ii) General description of financial
services income.--Income is described
in this clause if such income is--
(I) derived in the active
conduct of a banking,
financing, or similar business,
(II) derived from the
investment by an insurance
company of its unearned
premiums or reserves ordinary
and necessary for the proper
conduct of its insurance
business, or
(III) of a kind which would
be insurance income as defined
in section 953(a) determined
without regard to those
provisions of paragraph (1)(A)
of such section which limit
insurance income to income from
countries other than the
country in which the
corporation was created or
organized.
(E) Noncontrolled section 902 corporation.--
(i) Noncontrolled 10-percent owned
foreign corporation.--The term
``noncontrolled 10-percent owned
foreign corporation'' means any foreign
corporation which is--
(I) a specified 10-percent
owned foreign corporation (as
defined in section 245A(b)), or
(II) a passive foreign
investment company (as defined
in section 1297(a)) with
respect to which the taxpayer
meets the stock ownership
requirements of section 902(a)
(or, for purposes of applying
paragraphs (3) and (4), the
requirements of section
902(b)).
A controlled foreign corporation shall
not be treated as a noncontrolled 10-
percent owned foreign corporation with
respect to any distribution out of its
earnings and profits for periods during
which it was a controlled foreign
corporation. Any reference to section
902 in this clause shall be treated as
a reference to such section as in
effect before its repeal.
(ii) Treatment of inclusions under
section 1293.--If any foreign
corporation is a noncontrolled 10-
percent owned foreign corporation with
respect to the taxpayer, any inclusion
under section 1293 with respect to such
corporation shall be treated as a
dividend from such corporation.
(F) High-taxed income.--The term ``high-taxed
income'' means any income which (but for this
subparagraph) would be passive income if the
sum of--
(i) the foreign income taxes paid or
accrued by the taxpayer with respect to
such income, and
(ii) the foreign income taxes deemed
paid by the taxpayer with respect to
such income under section 902 or 960,
exceeds the highest rate of tax specified in
section 1 or 11 (whichever applies) multiplied
by the amount of such income (determined with
regard to section 78). For purposes of the
preceding sentence, the term ``foreign income
taxes'' means any income, war profits, or
excess profits tax imposed by any foreign
country or possession of the United States.
(G) Export financing interest.--For purposes
of this paragraph, the term ``export financing
interest'' means any interest derived from
financing the sale (or other disposition) for
use or consumption outside the United States of
any property--
(i) which is manufactured, produced,
grown, or extracted in the United
States by the taxpayer or a related
person, and
(ii) not more than 50 percent of the
fair market value of which is
attributable to products imported into
the United States.
For purposes of clause (ii), the fair market
value of any property imported into the United
States shall be its appraised value, as
determined by the Secretary under section 402
of the Tariff Act of 1930 (19 U.S.C. 1401a) in
connection with its importation.
(H) Treatment of income tax base
differences.--
(i) In general.--In the case of
taxable years beginning after December
31, 2006, tax imposed under the law of
a foreign country or possession of the
United States on an amount which does
not constitute income under United
States tax principles shall be treated
as imposed on income described in
paragraph (1)(B).
(ii) Special rule for years before
2007.--
(I) In general.--In the case
of taxes paid or accrued in
taxable years beginning after
December 31, 2004, and before
January 1, 2007, a taxpayer may
elect to treat tax imposed
under the law of a foreign
country or possession of the
United States on an amount
which does not constitute
income under United States tax
principles as tax imposed on
income described in
subparagraph (C) or (I) of
paragraph (1).
(II) Election irrevocable.--
Any such election shall apply
to the taxable year for which
made and all subsequent taxable
years described in subclause
(I) unless revoked with the
consent of the Secretary.
(I) Related person.--For purposes of this
paragraph, the term ``related person'' has the
meaning given such term by section 954(d)(3),
except that such section shall be applied by
substituting ``the person with respect to whom
the determination is being made'' for
``controlled foreign corporation'' each place
it appears.
(J) Foreign branch income.--
(i) In general.--The term ``foreign
branch income'' means the business
profits of such United States person
which are attributable to 1 or more
qualified business units (as defined in
section 989(a)) in 1 or more foreign
countries. For purposes of the
preceding sentence, the amount of
business profits attributable to a
qualified business unit shall be
determined under rules established by
the Secretary.
(ii) Exception.--Such term shall not
include any income which is passive
category income.
(K) Transitional rules for 2007 changes.--For
purposes of paragraph (1)--
(i) taxes carried from any taxable
year beginning before January 1, 2007,
to any taxable year beginning on or
after such date, with respect to any
item of income, shall be treated as
described in the subparagraph of
paragraph (1) in which such income
would be described were such taxes paid
or accrued in a taxable year beginning
on or after such date, and
(ii) the Secretary may by regulations
provide for the allocation of any
carryback of taxes with respect to
income from a taxable year beginning on
or after January 1, 2007, to a taxable
year beginning before such date for
purposes of allocating such income
among the separate categories in effect
for the taxable year to which carried.
(3) Look-thru in case of controlled foreign
corporations.--
(A) In general.--Except as otherwise provided
in this paragraph, dividends, interest, rents,
and royalties received or accrued by the
taxpayer from a controlled foreign corporation
in which the taxpayer is a United States
shareholder shall not be treated as passive
category income.
(B) Subpart F inclusions.--Any amount
included in gross income under section
951(a)(1)(A) shall be treated as passive
category income to the extent the amount so
included is attributable to passive category
income.
(C) Interest, rents, and royalties.--Any
interest, rent, or royalty which is received or
accrued from a controlled foreign corporation
in which the taxpayer is a United States
shareholder shall be treated as passive
category income to the extent it is properly
allocable (under regulations prescribed by the
Secretary) to passive category income of the
controlled foreign corporation.
(D) Dividends.--Any dividend paid out of the
earnings and profits of any controlled foreign
corporation in which the taxpayer is a United
States shareholder shall be treated as passive
category income in proportion to the ratio of--
(i) the portion of the earnings and
profits attributable to passive
category income, to
(ii) the total amount of earnings and
profits.
(E) Look-thru applies only where subpart F
applies.--If a controlled foreign corporation
meets the requirements of section 954(b)(3)(A)
(relating to de minimis rule) for any taxable
year, for purposes of this paragraph, none of
its foreign base company income (as defined in
section 954(a) without regard to section
954(b)(5)) and none of its gross insurance
income (as defined in section 954(b)(3)(C)) for
such taxable year shall be treated as passive
category income, except that this sentence
shall not apply to any income which (without
regard to this sentence) would be treated as
financial services income. Solely for purposes
of applying subparagraph (D), passive income of
a controlled foreign corporation shall not be
treated as passive category income if the
requirements of section 954(b)(4) are met with
respect to such income.
(F) Coordination with high-taxed income
provisions.--
(i) In determining whether any income
of a controlled foreign corporation is
passive category income, subclause (II)
of paragraph (2)(B)(iii) shall not
apply.
(ii) Any income of the taxpayer which
is treated as passive category income
under this paragraph shall be so
treated notwithstanding any provision
of paragraph (2); except that the
determination of whether any amount is
high-taxed income shall be made after
the application of this paragraph.
(G) Dividend.--For purposes of this
paragraph, the term ``dividend'' includes any
amount included in gross income in section
951(a)(1)(B). Any amount included in gross
income under section 78 to the extent
attributable to amounts included in gross
income in section 951(a)(1)(A) shall not be
treated as a dividend but shall be treated as
included in gross income under section
951(a)(1)(A).
(H) Look-thru applies to passive foreign
investment company inclusion.--If--
(i) a passive foreign investment
company is a controlled foreign
corporation, and
(ii) the taxpayer is a United States
shareholder in such controlled foreign
corporation,
any amount included in gross income under
section 1293 shall be treated as income in a
separate category to the extent such amount is
attributable to income in such category.
(4) Look-thru applies to dividends from noncontrolled
10-percent owned foreign corporations.--
(A) In general.--For purposes of this
subsection, any dividend from a noncontrolled
10-percent owned foreign corporation with
respect to the taxpayer shall be treated as
income described in a subparagraph of paragraph
(1) in proportion to the ratio of--
(i) the portion of earnings and
profits attributable to income
described in such subparagraph, to
(ii) the total amount of earnings and
profits.
(B) Earnings and profits of controlled
foreign corporations.--In the case of any
distribution from a controlled foreign
corporation to a United States shareholder,
rules similar to the rules of subparagraph (A)
shall apply in determining the extent to which
earnings and profits of the controlled foreign
corporation which are attributable to dividends
received from a noncontrolled 10-percent owned
foreign corporation may be treated as income in
a separate category.
(C) Special rules.--For purposes of this
paragraph--
(i) Earnings and profits.--
(I) In general.--The rules of
section 316 shall apply.
(II) Regulations.--The
Secretary may prescribe
regulations regarding the
treatment of distributions out
of earnings and profits for
periods before the taxpayer's
acquisition of the stock to
which the distributions relate.
(ii) Inadequate substantiation.--If
the Secretary determines that the
proper subparagraph of paragraph (1) in
which a dividend is described has not
been substantiated, such dividend shall
be treated as income described in
paragraph (1)(A).
(iii) Coordination with high-taxed
income provisions.--Rules similar to
the rules of paragraph (3)(F) shall
apply for purposes of this paragraph.
(iv) Look-thru with respect to
carryover of credit.--Rules similar to
subparagraph (A) also shall apply to
any carryforward under subsection (c)
from a taxable year beginning before
January 1, 2003, of tax allocable to a
dividend from a noncontrolled 10-
percent owned foreign corporation with
respect to the taxpayer. The Secretary
may by regulations provide for the
allocation of any carryback of tax
allocable to a dividend from a
noncontrolled 10-percent owned foreign
corporation from a taxable year
beginning on or after January 1, 2003,
to a taxable year beginning before such
date for purposes of allocating such
dividend among the separate categories
in effect for the taxable year to which
carried.
(5) Controlled foreign corporation; United States
shareholder.--For purposes of this subsection--
(A) Controlled foreign corporation.--The term
``controlled foreign corporation'' has the
meaning given such term by section 957 (taking
into account section 953(c)).
(B) United States shareholder.--The term
``United States shareholder'' has the meaning
given such term by section 951(b) (taking into
account section 953(c)).
(6) Separate application to items resourced under
treaties.--
(A) In general.--If--
(i) without regard to any treaty
obligation of the United States, any
item of income would be treated as
derived from sources within the United
States,
(ii) under a treaty obligation of the
United States, such item would be
treated as arising from sources outside
the United States, and
(iii) the taxpayer chooses the
benefits of such treaty obligation,
subsections (a), (b), and (c) of this section
and sections 907 and 960 shall be applied
separately with respect to each such item.
(B) Coordination with other provisions.--This
paragraph shall not apply to any item of income
to which subsection (h)(10) or section 865(h)
applies.
(C) Regulations.--The Secretary may issue
such regulations or other guidance as is
necessary or appropriate to carry out the
purposes of this paragraph, including
regulations or other guidance which provides
that related items of income may be aggregated
for purposes of this paragraph.
(7) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate for the
purposes of this subsection, including regulations--
(A) for the application of paragraph (3) and
subsection (f)(5) in the case of income paid
(or loans made) through 1 or more entities or
between 2 or more chains of entities,
(B) preventing the manipulation of the
character of income the effect of which is to
avoid the purposes of this subsection, and
(C) providing that rules similar to the rules
of paragraph (3)(C) shall apply to interest,
rents, and royalties received or accrued from
entities which would be controlled foreign
corporations if they were foreign corporations.
(f) Recapture of overall foreign loss.--
(1) General rule.--For purposes of this subpart, in
the case of any taxpayer who sustains an overall
foreign loss for any taxable year, that portion of the
taxpayer's taxable income from sources without the
United States for each succeeding taxable year which is
equal to the lesser of--
(A) the amount of such loss (to the extent
not used under this paragraph in prior taxable
years), or
(B) 50 percent (or such larger percent as the
taxpayer may choose) of the taxpayer's taxable
income from sources without the United States
for such succeeding taxable year,
shall be treated as income from sources within the
United States (and not as income from sources without
the United States).
(2) Overall foreign loss defined.--For purposes of
this subsection, the term ``overall foreign loss''
means the amount by which the gross income for the
taxable year from sources without the United States
(whether or not the taxpayer chooses the benefits of
this subpart for such taxable year) for such year is
exceeded by the sum of the deductions properly
apportioned or allocated thereto, except that there
shall not be taken into account--
(A) any net operating loss deduction
allowable for such year under section 172(a),
and
(B) any--
(i) foreign expropriation loss for
such year, as defined in section 172(h)
(as in effect on the day before the
date of the enactment of the Revenue
Reconciliation Act of 1990), or
(ii) loss for such year which arises
from fire, storm, shipwreck, or other
casualty, or from theft,
to the extent such loss is not compensated for by
insurance or otherwise.
(3) Dispositions.--
(A) In general.--For purposes of this
chapter, if property which has been used
predominantly without the United States in a
trade or business is disposed of during any
taxable year--
(i) the taxpayer, notwithstanding any
other provision of this chapter (other
than paragraph (1)), shall be deemed to
have received and recognized taxable
income from sources without the United
States in the taxable year of the
disposition, by reason of such
disposition, in an amount equal to the
lesser of the excess of the fair market
value of such property over the
taxpayer's adjusted basis in such
property or the remaining amount of the
overall foreign losses which were not
used under paragraph (1) for such
taxable year or any prior taxable year,
and
(ii) paragraph (1) shall be applied
with respect to such income by
substituting ``100 percent'' for ``50
percent''.
In determining for purposes of this
subparagraph whether the predominant use of any
property has been without the United States,
there shall be taken into account use during
the 3-year period ending on the date of the
disposition (or, if shorter, the period during
which the property has been used in the trade
or business).
(B) Disposition defined and special rules.--
(i) For purposes of this subsection,
the term ``disposition'' includes a
sale, exchange, distribution, or gift
of property whether or not gain or loss
is recognized on the transfer.
(ii) Any taxable income recognized
solely by reason of subparagraph (A)
shall have the same characterization it
would have had if the taxpayer had sold
or exchanged the property.
(iii) The Secretary shall prescribe
such regulations as he may deem
necessary to provide for adjustments to
the basis of property to reflect
taxable income recognized solely by
reason of subparagraph (A).
(C) Exceptions.--Notwithstanding subparagraph
(B), the term ``disposition'' does not
include--
(i) a disposition of property which
is not a material factor in the
realization of income by the taxpayer,
or
(ii) a disposition of property to a
domestic corporation in a distribution
or transfer described in section
381(a).
(D) Application to certain dispositions of
stock in controlled foreign corporation.--
(i) In general.--This paragraph shall
apply to an applicable disposition in
the same manner as if it were a
disposition of property described in
subparagraph (A), except that the
exception contained in subparagraph
(C)(i) shall not apply.
(ii) Applicable disposition.--For
purposes of clause (i), the term
``applicable disposition'' means any
disposition of any share of stock in a
controlled foreign corporation in a
transaction or series of transactions
if, immediately before such transaction
or series of transactions, the taxpayer
owned more than 50 percent (by vote or
value) of the stock of the controlled
foreign corporation. Such term shall
not include a disposition described in
clause (iii) or (iv), except that
clause (i) shall apply to any gain
recognized on any such disposition.
(iii) Exception for certain exchanges
where ownership percentage retained.--A
disposition shall not be treated as an
applicable disposition under clause
(ii) if it is part of a transaction or
series of transactions--
(I) to which section 351 or
721 applies, or under which the
transferor receives stock in a
foreign corporation in exchange
for the stock in the controlled
foreign corporation and the
stock received is exchanged
basis property (as defined in
section 7701(a)(44)), and
(II) immediately after which,
the transferor owns (by vote or
value) at least the same
percentage of stock in the
controlled foreign corporation
(or, if the controlled foreign
corporation is not in existence
after such transaction or
series of transactions, in
another foreign corporation
stock in which was received by
the transferor in exchange for
stock in the controlled foreign
corporation) as the percentage
of stock in the controlled
foreign corporation which the
taxpayer owned immediately
before such transaction or
series of transactions.
(iv) Exception for certain asset
acquisitions.--A disposition shall not
be treated as an applicable disposition
under clause (ii) if it is part of a
transaction or series of transactions
in which the taxpayer (or any member of
an affiliated group of corporations
filing a consolidated return under
section 1501 which includes the
taxpayer) acquires the assets of a
controlled foreign corporation in
exchange for the shares of the
controlled foreign corporation in a
liquidation described in section 332 or
a reorganization described in section
368(a)(1).
(v) Controlled foreign corporation.--
For purposes of this subparagraph, the
term ``controlled foreign corporation''
has the meaning given such term by
section 957.
(vi) Stock ownership.--For purposes
of this subparagraph, ownership of
stock shall be determined under the
rules of subsections (a) and (b) of
section 958.
(4) Accumulation distributions of foreign trust.--For
purposes of this chapter, in the case of amounts of
income from sources without the United States which are
treated under section 666 (without regard to
subsections (b) and (c) thereof if the taxpayer chose
to take a deduction with respect to the amounts
described in such subsections under section
667(d)(1)(B)) as having been distributed by a foreign
trust in a preceding taxable year, that portion of such
amounts equal to the amount of any overall foreign loss
sustained by the beneficiary in a year prior to the
taxable year of the beneficiary in which such
distribution is received from the trust shall be
treated as income from sources within the United States
(and not income from sources without the United States)
to the extent that such loss was not used under this
subsection in prior taxable years, or in the current
taxable year, against other income of the beneficiary.
(5) Treatment of separate limitation losses.--
(A) In general.--The amount of the separate
limitation losses for any taxable year shall
reduce income from sources within the United
States for such taxable year only to the extent
the aggregate amount of such losses exceeds the
aggregate amount of the separate limitation
incomes for such taxable year.
(B) Allocation of losses.--The separate
limitation losses for any taxable year (to the
extent such losses do not exceed the separate
limitation incomes for such year) shall be
allocated among (and operate to reduce) such
incomes on a proportionate basis.
(C) Recharacterization of subsequent
income.--If--
(i) a separate limitation loss from
any income category (hereinafter in
this subparagraph referred to as ``the
loss category'') was allocated to
income from any other category under
subparagraph (B), and
(ii) the loss category has income for
a subsequent taxable year,
such income (to the extent it does not exceed
the aggregate separate limitation losses from
the loss category not previously
recharacterized under this subparagraph) shall
be recharacterized as income from such other
category in proportion to the prior reductions
under subparagraph (B) in such other category
not previously taken into account under this
subparagraph. Nothing in the preceding sentence
shall be construed as recharacterizing any tax.
(D) Special rules for losses from sources in
the United States.--Any loss from sources in
the United States for any taxable year (to the
extent such loss does not exceed the separate
limitation incomes from such year) shall be
allocated among (and operate to reduce) such
incomes on a proportionate basis. This
subparagraph shall be applied after
subparagraph (B).
(E) Definitions.--For purposes of this
paragraph--
(i) Income category.--The term
``income category'' means each separate
category of income described in
subsection (d)(1).
(ii) Separate limitation income.--The
term ``separate limitation income''
means, with respect to any income
category, the taxable income from
sources outside the United States,
separately computed for such category.
(iii) Separate limitation loss.--The
term ``separate limitation loss''
means, with respect to any income
category, the loss from such category
determined under the principles of
section 907(c)(4)(B).
(F) Dispositions.--If any separate limitation
loss for any taxable year is allocated against
any separate limitation income for such taxable
year, except to the extent provided in
regulations, rules similar to the rules of
paragraph (3) shall apply to any disposition of
property if gain from such disposition would be
in the income category with respect to which
there was such separate limitation loss.
(g) Recharacterization of overall domestic loss.--
(1) General rule.--For purposes of this subpart and
section 936, in the case of any taxpayer who sustains
an overall domestic loss for any taxable year beginning
after December 31, 2006, that portion of the taxpayer's
taxable income from sources within the United States
for each succeeding taxable year which is equal to the
lesser of--
(A) the amount of such loss (to the extent
not used under this paragraph in prior taxable
years), or
(B) 50 percent of the taxpayer's taxable
income from sources within the United States
for such succeeding taxable year,
shall be treated as income from sources without the
United States (and not as income from sources within
the United States).
(2) Overall domestic loss.--For purposes of this
subsection--
(A) In general.--The term ``overall domestic
loss'' means--
(i) with respect to any qualified
taxable year, the domestic loss for
such taxable year to the extent such
loss offsets taxable income from
sources without the United States for
the taxable year or for any preceding
qualified taxable year by reason of a
carryback, and
(ii) with respect to any other
taxable year, the domestic loss for
such taxable year to the extent such
loss offsets taxable income from
sources without the United States for
any preceding qualified taxable year by
reason of a carryback.
(B) Domestic loss.--For purposes of
subparagraph (A), the term ``domestic loss''
means the amount by which the gross income for
the taxable year from sources within the United
States is exceeded by the sum of the deductions
properly apportioned or allocated thereto
(determined without regard to any carryback
from a subsequent taxable year).
(C) Qualified taxable year.--For purposes of
subparagraph (A), the term ``qualified taxable
year'' means any taxable year for which the
taxpayer chose the benefits of this subpart.
(3) Characterization of subsequent income.--
(A) In general.--Any income from sources
within the United States that is treated as
income from sources without the United States
under paragraph (1) shall be allocated among
and increase the income categories in
proportion to the loss from sources within the
United States previously allocated to those
income categories.
(B) Income category.--For purposes of this
paragraph, the term ``income category'' has the
meaning given such term by subsection
(f)(5)(E)(i).
(4) Coordination with subsection (f).--The Secretary
shall prescribe such regulations as may be necessary to
coordinate the provisions of this subsection with the
provisions of subsection (f).
(5) Election to increase percentage of taxable income
treated as foreign source.--
(A) In general.--If any pre-2018 unused
overall domestic loss is taken into account
under paragraph (1) for any applicable taxable
year, the taxpayer may elect to have such
paragraph applied to such loss by substituting
a percentage greater than 50 percent (but not
greater than 100 percent) for 50 percent in
subparagraph (B) thereof.
(B) Pre-2018 unused overall domestic loss.--
For purposes of this paragraph, the term ``pre-
2018 unused overall domestic loss'' means any
overall domestic loss which--
(i) arises in a qualified taxable
year beginning before January 1, 2018,
and
(ii) has not been used under
paragraph (1) for any taxable year
beginning before such date.
(C) Applicable taxable year.--For purposes of
this paragraph, the term ``applicable taxable
year'' means any taxable year of the taxpayer
beginning after December 31, 2017, and before
January 1, 2028.
(h) Source rules in case of United States-owned foreign
corporations.--
(1) In general.--The following amounts which are
derived from a United States-owned foreign corporation
and which would be treated as derived from sources
outside the United States without regard to this
subsection shall, for purposes of this section, be
treated as derived from sources within the United
States to the extent provided in this subsection:
(A) Any amount included in gross income
under--
(i) section 951(a) (relating to
amounts included in gross income of
United States shareholders), or
(ii) section 1293 (relating to
current taxation of income from
qualified funds).
(B) Interest.
(C) Dividends.
(2) Subpart F and passive foreign investment company
inclusions.--Any amount described in subparagraph (A)
of paragraph (1) shall be treated as derived from
sources within the United States to the extent such
amount is attributable to income of the United States-
owned foreign corporation from sources within the
United States.
(3) Certain interest allocable to United States
source income.--Any interest which--
(A) is paid or accrued by a United States-
owned foreign corporation during any taxable
year,
(B) is paid or accrued to a United States
shareholder (as defined in section 951(b)) or a
related person (within the meaning of section
267(b)) to such a shareholder, and
(C) is properly allocable (under regulations
prescribed by the Secretary) to income of such
foreign corporation for the taxable year from
sources within the United States,
shall be treated as derived from sources within the
United States.
(4) Dividends.--
(A) In general.--The United States source
ratio of any dividend paid or accrued by a
United States-owned foreign corporation shall
be treated as derived from sources within the
United States.
(B) United States source ratio.--For purposes
of subparagraph (A), the term ``United States
source ratio'' means, with respect to any
dividend paid out of the earnings and profits
for any taxable year, a fraction--
(i) the numerator of which is the
portion of the earnings and profits for
such taxable year from sources within
the United States, and
(ii) the denominator of which is the
total amount of earnings and profits
for such taxable year.
(5) Exception where United States-owned foreign
corporation has small amount of United States source
income.--Paragraph (3) shall not apply to interest paid
or accrued during any taxable year (and paragraph (4)
shall not apply to any dividends paid out of the
earnings and profits for such taxable year) if--
(A) the United States-owned foreign
corporation has earnings and profits for such
taxable year, and
(B) less than 10 percent of such earnings and
profits is attributable to sources within the
United States.
For purposes of the preceding sentence, earnings and
profits shall be determined without any reduction for
interest described in paragraph (3) (determined without
regard to subparagraph (C) thereof).
(6) United States-owned foreign corporation.--For
purposes of this subsection, the term ``United States-
owned foreign corporation'' means any foreign
corporation if 50 percent or more of--
(A) the total combined voting power of all
classes of stock of such corporation entitled
to vote, or
(B) the total value of the stock of such
corporation, is held directly (or indirectly
through applying paragraphs (2) and (3) of
section 958(a) and paragraph (4) of section
318(a)) by United States persons (as defined in
section 7701(a)(30)).
(7) Dividend.--For purposes of this subsection, the
term ``dividend'' includes any gain treated as a
dividend under section 1248.
(8) Coordination with subsection (f).--This
subsection shall be applied before subsection (f).
(9) Treatment of certain domestic corporations.--In
the case of any dividend treated as not from sources
within the United States under section 861(a)(2)(A),
the corporation paying such dividend shall be treated
for purposes of this subsection as a United States-
owned foreign corporation.
(10) Coordination with treaties.--
(A) In general.--If--
(i) any amount derived from a United
States-owned foreign corporation would
be treated as derived from sources
within the United States under this
subsection by reason of an item of
income of such United States-owned
foreign corporation,
(ii) under a treaty obligation of the
United States (applied without regard
to this subsection and by treating any
amount included in gross income under
section 951(a)(1) as a dividend), such
amount would be treated as arising from
sources outside the United States, and
(iii) the taxpayer chooses the
benefits of this paragraph, this
subsection shall not apply to such
amount to the extent attributable to
such item of income (but subsections
(a), (b), and (c) of this section and
sections 907 and 960 shall be applied
separately with respect to such amount
to the extent so attributable).
(B) Special rule.--Amounts included in gross
income under section 951(a)(1) shall be treated
as a dividend under subparagraph (A)(ii) only
if dividends paid by each corporation (the
stock in which is taken into account in
determining whether the shareholder is a United
States shareholder in the United States-owned
foreign corporation), if paid to the United
States shareholder, would be treated under a
treaty obligation of the United States as
arising from sources outside the United States
(applied without regard to this subsection).
(11) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate for
purposes of this subsection, including--
(A) regulations for the application of this
subsection in the case of interest or dividend
payments through 1 or more entities, and
(B) regulations providing that this
subsection shall apply to interest paid or
accrued to any person (whether or not a United
States shareholder).
(i) Limitation on use of deconsolidation to avoid foreign tax
credit limitations.--If 2 or more domestic corporations would
be members of the same affiliated group if--
(1) section 1504(b) were applied without regard to
the exceptions contained therein, and
(2) the constructive ownership rules of section
1563(e) applied for purposes of section 1504(a),
the Secretary may by regulations provide for resourcing the
income of any of such corporations or for modifications to the
consolidated return regulations to the extent that such
resourcing or modifications are necessary to prevent the
avoidance of the provisions of this subpart.
(j) Certain individuals exempt.--
(1) In general.--In the case of an individual to whom
this subsection applies for any taxable year--
(A) the limitation of subsection (a) shall
not apply,
(B) no taxes paid or accrued by the
individual during such taxable year may be
deemed paid or accrued under subsection (c) in
any other taxable year, and
(C) no taxes paid or accrued by the
individual during any other taxable year may be
deemed paid or accrued under subsection (c) in
such taxable year.
(2) Individuals to whom subsection applies.--This
subsection shall apply to an individual for any taxable
year if--
(A) the entire amount of such individual's
gross income for the taxable year from sources
without the United States consists of qualified
passive income,
(B) the amount of the creditable foreign
taxes paid or accrued by the individual during
the taxable year does not exceed $300 ($600 in
the case of a joint return), and
(C) such individual elects to have this
subsection apply for the taxable year.
(3) Definitions.--For purposes of this subsection--
(A) Qualified passive income.--The term
``qualified passive income'' means any item of
gross income if--
(i) such item of income is passive
income (as defined in subsection
(d)(2)(B) without regard to clause
(iii) thereof), and
(ii) such item of income is shown on
a payee statement furnished to the
individual.
(B) Creditable foreign taxes.--The term
``creditable foreign taxes'' means any taxes
for which a credit is allowable under section
901; except that such term shall not include
any tax unless such tax is shown on a payee
statement furnished to such individual.
(C) Payee statement.--The term ``payee
statement'' has the meaning given to such term
by section 6724(d)(2).
(D) Estates and trusts not eligible.--This
subsection shall not apply to any estate or
trust.
(k) Cross references.--For increase of limitation under
subsection (a) for taxes paid with respect to amounts received
which were included in the gross income of the taxpayer for a
prior taxable year as a United States shareholder with respect
to a controlled foreign corporation, see section 960(c).
* * * * * * *
Subpart D--Possessions of the United States
* * * * * * *
SEC. 931. INCOME FROM SOURCES WITHIN GUAM, AMERICAN SAMOA, OR THE
NORTHERN MARIANA ISLANDS.
(a) General rule.--In the case of an individual who is a bona
fide resident of a specified possession during the entire
taxable year, gross income shall not include--
(1) income derived from sources within any specified
possession, and
(2) income effectively connected with the conduct of
a trade or business by such individual within any
specified possession.
(b) Deductions, etc. allocable to excluded amounts not
allowable.--An individual shall not be allowed--
[(1) as a deduction from gross income any deductions
(other than the deduction under section 151, relating
to personal exemptions), or]
(1) any deduction from gross income, or
(2) any credit, properly allocable or chargeable
against amounts excluded from gross income under this
section.
(c) Specified possession.--For purposes of this section, the
term ``specified possession'' means Guam, American Samoa, and
the Northern Mariana Islands.
(d) Employees of the United States.--Amounts paid for
services performed as an employee of the United States (or any
agency thereof) shall be treated as not described in paragraph
(1) or (2) of subsection (a).
* * * * * * *
SEC. 933. INCOME FROM SOURCES WITHIN PUERTO RICO.
The following items shall not be included in gross income
and shall be exempt from taxation under this subtitle:
(1) Resident of Puerto Rico for entire taxable
year.--In the case of an individual who is a bona fide
resident of Puerto Rico during the entire taxable year,
income derived from sources within Puerto Rico (except
amounts received for services performed as an employee
of the United States or any agency thereof); but such
individual shall not be allowed [as a deduction from
his gross income any deductions (other than the
deduction under section 151, relating to personal
exemptions)] any deduction from gross income, or any
credit, properly allocable to or chargeable against
amounts excluded from gross income under this
paragraph.
(2) Taxable year of change of residence from Puerto
Rico.--In the case of an individual citizen of the
United States who has been a bona fide resident of
Puerto Rico for a period of at least 2 years before the
date on which he changes his residence from Puerto
Rico, income derived from sources therein (except
amounts received for services performed as an employee
of the United States or any agency thereof) which is
attributable to that part of such period of Puerto
Rican residence before such date; but such individual
shall not be allowed [as a deduction from his gross
income any deductions (other than the deduction for
personal exemptions under section 151)] any deduction
from gross income, or any credit, properly allocable to
or chargeable against amounts excluded from gross
income under this paragraph.
Subchapter P--Capital Gains and Losses
* * * * * * *
PART II--TREATMENT OF CAPITAL LOSSES
* * * * * * *
SEC. 1212. CAPITAL LOSS CARRYBACKS AND CARRYOVERS.
(a) Corporations.--
(1) In general.--If a corporation has a net capital
loss for any taxable year (hereinafter in this
paragraph referred to as the ``loss year''), the amount
thereof shall be--
(A) a capital loss carryback to each of the 3
taxable years preceding the loss year, but only
to the extent--
(i) such loss is not attributable to
a foreign expropriation capital loss,
and
(ii) the carryback of such loss does
not increase or produce a net operating
loss (as defined in section 172(c)) for
the taxable year to which it is being
carried back;
(B) except as provided in subparagraph (C), a
capital loss carryover to each of the 5 taxable
years succeeding the loss year; and
(C) a capital loss carryover to each of the
10 taxable years succeeding the loss year, but
only to the extent such loss is attributable to
a foreign expropriation loss,
and shall be treated as a short-term capital loss in
each such taxable year. The entire amount of the net
capital loss for any taxable year shall be carried to
the earliest of the taxable years to which such loss
may be carried, and the portion of such loss which
shall be carried to each of the other taxable years to
which such loss may be carried shall be the excess, if
any, of such loss over the total of the capital gain
net income for each of the prior taxable years to which
such loss may be carried. For purposes of the preceding
sentence, the capital gain net income for any such
prior taxable year shall be computed without regard to
the net capital loss for the loss year or for any
taxable year thereafter. In the case of any net capital
loss which cannot be carried back in full to a
preceding taxable year by reason of clause (ii) of
subparagraph (A), the capital gain net income for such
prior taxable year shall in no case be treated as
greater than the amount of such loss which can be
carried back to such preceding taxable year upon the
application of such clause (ii).
(2) Definitions and special rules.--
(A) Foreign expropriation capital loss
defined.--For purposes of this subsection, the
term ``foreign expropriation capital loss''
means, for any taxable year, the sum of the
losses taken into account in computing the net
capital loss for such year which are--
(i) losses sustained directly by
reason of the expropriation,
intervention, seizure, or similar
taking of property by the government of
any foreign country, any political
subdivision thereof, or any agency or
instrumentality of the foregoing, or
(ii) losses (treated under section
165(g)(1) as losses from the sale or
exchange of capital assets) from
securities which become worthless by
reason of the expropriation,
intervention, seizure, or similar
taking of property by the government of
any foreign country, any political
subdivision thereof, or any agency or
instrumentality of the foregoing.
(B) Portion of loss attributable to foreign
expropriation capital loss.--For purposes of
paragraph (1), the portion of any net capital
loss for any taxable year attributable to a
foreign expropriation capital loss is the
amount of the foreign expropriation capital
loss for such year (but not in excess of the
net capital loss for such year).
(C) Priority of application.--For purposes of
paragraph (1), if a portion of a net capital
loss for any taxable year is attributable to a
foreign expropriation capital loss, such
portion shall be considered to be a separate
net capital loss for such year to be applied
after the other portion of such net capital
loss.
(3) Regulated investment companies.--
(A) In general.--If a regulated investment
company has a net capital loss for any taxable
year--
(i) paragraph (1) shall not apply to
such loss,
(ii) the excess of the net short-term
capital loss over the net long-term
capital gain for such year shall be a
short-term capital loss arising on the
first day of the next taxable year, and
(iii) the excess of the net long-term
capital loss over the net short-term
capital gain for such year shall be a
long-term capital loss arising on the
first day of the next taxable year.
(B) Coordination with general rule.--If a net
capital loss to which paragraph (1) applies is
carried over to a taxable year of a regulated
investment company--
(i) Losses to which this paragraph
applies.--Clauses (ii) and (iii) of
subparagraph (A) shall be applied
without regard to any amount treated as
a short-term capital loss under
paragraph (1).
(ii) Losses to which general rule
applies.--Paragraph (1) shall be
applied by substituting ``net capital
loss for the loss year or any taxable
year thereafter (other than a net
capital loss to which paragraph (3)(A)
applies)'' for ``net capital loss for
the loss year or any taxable year
thereafter''.
(4) Special rules on carrybacks.--A net capital loss
of a corporation shall not be carried back under
paragraph (1)(A) to a taxable year--
(A) for which it is a regulated investment
company (as defined in section 851), or
(B) for which it is a real estate investment
trust (as defined in section 856).
(b) Other taxpayers.--
(1) In general.--If a taxpayer other than a
corporation has a net capital loss for any taxable
year--
(A) the excess of the net short-term capital
loss over the net long-term capital gain for
such year shall be a short-term capital loss in
the succeeding taxable year, and
(B) the excess of the net long-term capital
loss over the net short-term capital gain for
such year shall be a long-term capital loss in
the succeeding taxable year.
(2) Treatment of amounts allowed under section
1211(b)(1) or (2)
(A) In general.--For purposes of determining
the excess referred to in subparagraph (A) or
(B) of paragraph (1), there shall be treated as
a short-term capital gain in the taxable year
an amount equal to the lesser of--
(i) the amount allowed for the
taxable year under paragraph (1) or (2)
of section 1211(b), or
(ii) the adjusted taxable income for
such taxable year.
(B) Adjusted taxable income.--For purposes of
subparagraph (A), the term ``adjusted taxable
income'' means taxable income increased by the
sum of--
(i) the amount allowed for the
taxable year under paragraph (1) or (2)
of section 1211(b), and
[(ii) the deduction allowed for such
year under section 151 or any deduction
in lieu thereof.]
(ii) in the case of an estate or
trust, the deduction allowed for such
year under section 642(b).
For purposes of the preceding sentence, any
excess of the deductions allowed for the
taxable year over the gross income for such
year shall be taken into account as negative
taxable income.
(c) Carryback of losses from section 1256 contracts to offset
prior gains from such contracts.--
(1) In general.--If a taxpayer (other than a
corporation) has a net section 1256 contracts loss for
the taxable year and elects to have this subsection
apply to such taxable year, the amount of such net
section 1256 contracts loss--
(A) shall be a carryback to each of the 3
taxable years preceding the loss year, and
(B) to the extent that, after the application
of paragraphs (2) and (3), such loss is allowed
as a carryback to any such preceding taxable
year--
(i) 40 percent of the amount so
allowed shall be treated as a short-
term capital loss from section 1256
contracts, and
(ii) 60 percent of the amount so
allowed shall be treated as a long-term
capital loss from section 1256
contracts.
(2) Amount carried to each taxable year.--The entire
amount of the net section 1256 contracts loss for any
taxable year shall be carried to the earliest of the
taxable years to which such loss may be carried back
under paragraph (1). The portion of such loss which
shall be carried to each of the 2 other taxable years
to which such loss may be carried back shall be the
excess (if any) of such loss over the portion of such
loss which, after the application of paragraph (3), was
allowed as a carryback for any prior taxable year.
(3) Amount which may be used in any prior taxable
year.--An amount shall be allowed as a carryback under
paragraph (1) to any prior taxable year only to the
extent--
(A) such amount does not exceed the net
section 1256 contract gain for such year, and
(B) the allowance of such carryback does not
increase or produce a net operating loss (as
defined in section 172(c)) for such year.
(4) Net section 1256 contracts loss.--For purposes of
paragraph (1), the term ``net section 1256 contracts
loss'' means the lesser of--
(A) the net capital loss for the taxable year
determined by taking into account only gains
and losses from section 1256 contracts, or
(B) the sum of the amounts which, but for
paragraph (6)(A), would be treated as capital
losses in the succeeding taxable year under
subparagraphs (A) and (B) of subsection (b)(1).
(5) Net section 1256 contract gain.--For purposes of
paragraph (1)--
(A) In general.--The term ``net section 1256
contract gain'' means the lesser of--
(i) the capital gain net income for
the taxable year determined by taking
into account only gains and losses from
section 1256 contracts, or
(ii) the capital gain net income for
the taxable year.
(B) Special rule.--The net section 1256
contract gain for any taxable year before the
loss year shall be computed without regard to
the net section 1256 contracts loss for the
loss year or for any taxable year thereafter.
(6) Coordination with carryforward provisions of
subsection (b)(1)
(A) Carryforward amount reduced by amount
used as carryback.--For purposes of applying
subsection (b)(1), if any portion of the net
section 1256 contracts loss for any taxable
year is allowed as a carryback under paragraph
(1) to any preceding taxable year--
(i) 40 percent of the amount allowed
as a carryback shall be treated as a
short-term capital gain for the loss
year, and
(ii) 60 percent of the amount allowed
as a carryback shall be treated as a
long-term capital gain for the loss
year.
(B) Carryover loss retains character as
attributable to section 1256 contract.--Any
amount carried forward as a short-term or long-
term capital loss to any taxable year under
subsection (b)(1) (after the application of
subparagraph (A)) shall, to the extent
attributable to losses from section 1256
contracts, be treated as loss from section 1256
contracts for such taxable year.
(7) Other definitions and special rules.--For
purposes of this subsection--
(A) Section 1256 contract.--The term
``section 1256 contract'' means any section
1256 contract (as defined in section 1256(b))
to which section 1256 applies.
(B) Exclusion for estates and trusts.--This
subsection shall not apply to any estate or
trust.
* * * * * * *
PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1256. SECTION 1256 CONTRACTS MARKED TO MARKET.
(a) General rule.--For purposes of this subtitle--
(1) each section 1256 contract held by the taxpayer
at the close of the taxable year shall be treated as
sold for its fair market value on the last business day
of such taxable year (and any gain or loss shall be
taken into account for the taxable year),
(2) proper adjustment shall be made in the amount of
any gain or loss subsequently realized for gain or loss
taken into account by reason of paragraph (1),
(3) any gain or loss with respect to a section 1256
contract shall be treated as--
(A) short-term capital gain or loss, to the
extent of 40 percent of such gain or loss, and
(B) long-term capital gain or loss, to the
extent of 60 percent of such gain or loss, and
(4) if all the offsetting positions making up any
straddle consist of section 1256 contracts to which
this section applies (and such straddle is not part of
a larger straddle), sections 1092 and 263(g) shall not
apply with respect to such straddle.
(b) Section 1256 contract defined.--
(1) In general.--For purposes of this section, the
term ``section 1256 contract'' means--
(A) any regulated futures contract,
(B) any foreign currency contract,
(C) any nonequity option,
(D) any dealer equity option, and
(E) any dealer securities futures contract.
(2) Exceptions.--The term ``section 1256 contract''
shall not include--
(A) any securities futures contract or option
on such a contract unless such contract or
option is a dealer securities futures contract,
or
(B) any interest rate swap, currency swap,
basis swap, interest rate cap, interest rate
floor, commodity swap, equity swap, equity
index swap, credit default swap, or similar
agreement.
(c) Terminations, etc..--
(1) In general.--The rules of paragraphs (1), (2),
and (3) of subsection (a) shall also apply to the
termination (or transfer) during the taxable year of
the taxpayer's obligation (or rights) with respect to a
section 1256 contract by offsetting, by taking or
making delivery, by exercise or being exercised, by
assignment or being assigned, by lapse, or otherwise.
(2) Special rule where taxpayer takes delivery on or
exercises part of straddle.--If--
(A) 2 or more section 1256 contracts are part
of a straddle (as defined in section 1092(c)),
and
(B) the taxpayer takes delivery under or
exercises any of such contracts,
then, for purposes of this section, each of the other
such contracts shall be treated as terminated on the
day on which the taxpayer took delivery.
(3) Fair market value taken into account.--For
purposes of this subsection, fair market value at the
time of the termination (or transfer) shall be taken
into account.
(d) Elections with respect to mixed straddles.--
(1) Election.--The taxpayer may elect to have this
section not to apply to all section 1256 contracts
which are part of a mixed straddle.
(2) Time and manner.--An election under paragraph (1)
shall be made at such time and in such manner as the
Secretary may by regulations prescribe.
(3) Election revocable only with consent.--An
election under paragraph (1) shall apply to the
taxpayer's taxable year for which made and to all
subsequent taxable years, unless the Secretary consents
to a revocation of such election.
(4) Mixed straddle.--For purposes of this subsection,
the term ``mixed straddle'' means any straddle (as
defined in section 1092(c))--
(A) at least 1 (but not all) of the positions
of which are section 1256 contracts, and
(B) with respect to which each position
forming part of such straddle is clearly
identified, before the close of the day on
which the first section 1256 contract forming
part of the straddle is acquired (or such
earlier time as the Secretary may prescribe by
regulations), as being part of such straddle.
(e) Mark to market not to apply to hedging transactions.--
(1) Section not to apply.--Subsection (a) shall not
apply in the case of a hedging transaction.
(2) Definition of hedging transaction.--For purposes
of this subsection, the term ``hedging transaction''
means any hedging transaction (as defined in section
1221(b)(2)(A)) if, before the close of the day on which
such transaction was entered into (or such earlier time
as the Secretary may prescribe by regulations), the
taxpayer clearly identifies such transaction as being a
hedging transaction.
(3) Special rule for syndicates.--
(A) In general.--Notwithstanding paragraph
(2), the term ``hedging transaction'' shall not
include any transaction entered into by or for
a syndicate.
(B) Syndicate defined.--For purposes of
subparagraph (A), the term ``syndicate'' means
any partnership or other entity (other than a
corporation which is not an S corporation) if
more than 35 percent of the losses of such
entity during the taxable year are allocable to
limited partners or limited entrepreneurs
(within the meaning of [section 461(k)(4)]
section 461(j)(4)).
(C) Holdings attributable to active
management.--For purposes of subparagraph (B),
an interest in an entity shall not be treated
as held by a limited partner or a limited
entrepreneur (within the meaning of [section
461(k)(4)]section 461(j)(4))--
(i) for any period if during such
period such interest is held by an
individual who actively participates at
all times during such period in the
management of such entity,
(ii) for any period if during such
period such interest is held by the
spouse, children, grandchildren, and
parents of an individual who actively
participates at all times during such
period in the management of such
entity,
(iii) if such interest is held by an
individual who actively participated in
the management of such entity for a
period of not less than 5 years,
(iv) if such interest is held by the
estate of an individual who actively
participated in the management of such
entity or is held by the estate of an
individual if with respect to such
individual such interest was at any
time described in clause (ii), or
(v) if the Secretary determines (by
regulations or otherwise) that such
interest should be treated as held by
an individual who actively participates
in the management of such entity, and
that such entity and such interest are
not used (or to be used) for tax-
avoidance purposes.
For purposes of this subparagraph, a legally
adopted child of an individual shall be treated
as a child of such individual by blood.
(4) Limitation on losses from hedging transactions.--
(A) In general.--
(i) Limitation.--Any hedging loss for
a taxable year which is allocable to
any limited partner or limited
entrepreneur (within the meaning of
paragraph (3)) shall be allowed only to
the extent of the taxable income of
such limited partner or entrepreneur
for such taxable year attributable to
the trade or business in which the
hedging transactions were entered into.
For purposes of the preceding sentence,
taxable income shall be determined by
not taking into account items
attributable to hedging transactions.
(ii) Carryover of disallowed loss.--
Any hedging loss disallowed under
clause (i) shall be treated as a
deduction attributable to a hedging
transaction allowable in the first
succeeding taxable year.
(B) Exception where economic loss.--
Subparagraph (A)(i) shall not apply to any
hedging loss to the extent that such loss
exceeds the aggregate unrecognized gains from
hedging transactions as of the close of the
taxable year attributable to the trade or
business in which the hedging transactions were
entered into.
(C) Exception for certain hedging
transactions.--In the case of any hedging
transaction relating to property other than
stock or securities, this paragraph shall apply
only in the case of a taxpayer described in
section 465(a)(1).
(D) Hedging loss.--The term ``hedging loss''
means the excess of--
(i) the deductions allowable under
this chapter for the taxable year
attributable to hedging transactions
(determined without regard to
subparagraph (A)(i)), over
(ii) income received or accrued by
the taxpayer during such taxable year
from such transactions.
(E) Unrecognized gain.--The term
``unrecognized gain'' has the meaning given to
such term by section 1092(a)(3).
(f) Special rules.--
(1) Denial of capital gains treatment for property
identified as part of a hedging transaction.--For
purposes of this title, gain from any property shall in
no event be considered as gain from the sale or
exchange of a capital asset if such property was at any
time personal property (as defined in section
1092(d)(1)) identified under subsection (e)(2) by the
taxpayer as being part of a hedging transaction.
(2) Subsection (a)(3) not to apply to ordinary income
property.--Paragraph (3) of subsection (a) shall not
apply to any gain or loss which, but for such
paragraph, would be ordinary income or loss.
(3) Capital gain treatment for traders in section
1256 contracts.--
(A) In general.--For purposes of this title,
gain or loss from trading of section 1256
contracts shall be treated as gain or loss from
the sale or exchange of a capital asset.
(B) Exception for certain hedging
transactions.--Subparagraph (A) shall not apply
to any section 1256 contract to the extent such
contract is held for purposes of hedging
property if any loss with respect to such
property in the hands of the taxpayer would be
ordinary loss.
(C) Treatment of underlying property.--For
purposes of determining whether gain or loss
with respect to any property is ordinary income
or loss, the fact that the taxpayer is actively
engaged in dealing in or trading section 1256
contracts related to such property shall not be
taken into account.
(4) Special rule for dealer equity options and dealer
securities futures contracts of limited partners or
limited entrepreneurs.--In the case of any gain or loss
with respect to dealer equity options, or dealer
securities futures contracts, which are allocable to
limited partners or limited entrepreneurs (within the
meaning of subsection (e)(3))--
(A) paragraph (3) of subsection (a) shall not
apply to any such gain or loss, and
(B) all such gains or losses shall be treated
as short-term capital gains or losses, as the
case may be.
(5) Special rule related to losses.--Section 1091
(relating to loss from wash sales of stock or
securities) shall not apply to any loss taken into
account by reason of paragraph (1) of subsection (a).
(g) Definitions.--For purposes of this section--
(1) Regulated futures contracts defined.--The term
``regulated futures contract'' means a contract--
(A) with respect to which the amount required
to be deposited and the amount which may be
withdrawn depends on a system of marking to
market, and
(B) which is traded on or subject to the
rules of a qualified board or exchange.
(2) Foreign currency contract defined.--
(A) Foreign currency contract.--The term
``foreign currency contract'' means a
contract--
(i) which requires delivery of, or
the settlement of which depends on the
value of, a foreign currency which is a
currency in which positions are also
traded through regulated futures
contracts,
(ii) which is traded in the interbank
market, and
(iii) which is entered into at arm's
length at a price determined by
reference to the price in the interbank
market.
(B) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
subparagraph (A), including regulations
excluding from the application of subparagraph
(A) any contract (or type of contract) if its
application thereto would be inconsistent with
such purposes.
(3) Nonequity option.--The term ``nonequity option''
means any listed option which is not an equity option.
(4) Dealer equity option.--The term ``dealer equity
option'' means, with respect to an options dealer, any
listed option which--
(A) is an equity option,
(B) is purchased or granted by such options
dealer in the normal course of his activity of
dealing in options, and
(C) is listed on the qualified board or
exchange on which such options dealer is
registered.
(5) Listed option.--The term ``listed option'' means
any option (other than a right to acquire stock from
the issuer) which is traded on (or subject to the rules
of) a qualified board or exchange.
(6) Equity option.--The term ``equity option'' means
any option--
(A) to buy or sell stock, or
(B) the value of which is determined directly
or indirectly by reference to any stock or any
narrow-based security index (as defined in
section 3(a)(55) of the Securities Exchange Act
of 1934, as in effect on the date of the
enactment of this paragraph).
The term ``equity option'' includes such an option on a
group of stocks only if such group meets the
requirements for a narrow-based security index (as so
defined). The Secretary may prescribe regulations
regarding the status of options the values of which are
determined directly or indirectly by reference to any
index which becomes (or ceases to be) a narrow-based
security index (as so defined).
(7) Qualified board or exchange.--The term
``qualified board or exchange'' means--
(A) a national securities exchange which is
registered with the Securities and Exchange
Commission,
(B) a domestic board of trade designated as a
contract market by the Commodity Futures
Trading Commission, or
(C) any other exchange, board of trade, or
other market which the Secretary determines has
rules adequate to carry out the purposes of
this section.
(8) Options dealer.--
(A) In general.--The term ``options dealer''
means any person registered with an appropriate
national securities exchange as a market maker
or specialist in listed options.
(B) Persons trading in other markets.--In any
case in which the Secretary makes a
determination under subparagraph (C) of
paragraph (7), the term ``options dealer'' also
includes any person whom the Secretary
determines performs functions similar to the
persons described in subparagraph (A). Such
determinations shall be made to the extent
appropriate to carry out the purposes of this
section.
(9) Dealer securities futures contract.--
(A) In general.--The term ``dealer securities
futures contract'' means, with respect to any
dealer, any securities futures contract, and
any option on such a contract, which--
(i) is entered into by such dealer
(or, in the case of an option, is
purchased or granted by such dealer) in
the normal course of his activity of
dealing in such contracts or options,
as the case may be, and
(ii) is traded on a qualified board
or exchange.
(B) Dealer.--For purposes of subparagraph
(A), a person shall be treated as a dealer in
securities futures contracts or options on such
contracts if the Secretary determines that such
person performs, with respect to such contracts
or options, as the case may be, functions
similar to the functions performed by persons
described in paragraph (8)(A). Such
determination shall be made to the extent
appropriate to carry out the purposes of this
section.
(C) Securities futures contract.--The term
``securities futures contract'' has the meaning
given to such term by section 1234B.
* * * * * * *
Subchapter S--Tax Treatment of S Corporations and Their Shareholders
* * * * * * *
PART I--IN GENERAL
* * * * * * *
SEC. 1361. S CORPORATION DEFINED.
(a) S corporation defined.--
(1) In general.--For purposes of this title, the term
``S corporation'' means, with respect to any taxable
year, a small business corporation for which an
election under section 1362(a) is in effect for such
year.
(2) C corporation.--For purposes of this title, the
term ``C corporation'' means, with respect to any
taxable year, a corporation which is not an S
corporation for such year.
(b) Small business corporation.--
(1) In general.--For purposes of this subchapter, the
term ``small business corporation'' means a domestic
corporation which is not an ineligible corporation and
which does not--
(A) have more than 100 shareholders,
(B) have as a shareholder a person (other
than an estate, a trust described in subsection
(c)(2), or an organization described in
subsection (c)(6)) who is not an individual,
(C) have a nonresident alien as a
shareholder, and
(D) have more than 1 class of stock.
(2) Ineligible corporation defined.--For purposes of
paragraph (1), the term ``ineligible corporation''
means any corporation which is--
(A) a financial institution which uses the
reserve method of accounting for bad debts
described in section 585,
(B) an insurance company subject to tax under
subchapter L, or
(C) a DISC or former DISC.
(3) Treatment of certain wholly owned subsidiaries.--
(A) In general.--Except as provided in
regulations prescribed by the Secretary, for
purposes of this title--
(i) a corporation which is a
qualified subchapter S subsidiary shall
not be treated as a separate
corporation, and
(ii) all assets, liabilities, and
items of income, deduction, and credit
of a qualified subchapter S subsidiary
shall be treated as assets,
liabilities, and such items (as the
case may be) of the S corporation.
(B) Qualified subchapter S subsidiary.--For
purposes of this paragraph, the term
``qualified subchapter S subsidiary'' means any
domestic corporation which is not an ineligible
corporation (as defined in paragraph (2)), if--
(i) 100 percent of the stock of such
corporation is held by the S
corporation, and
(ii) the S corporation elects to
treat such corporation as a qualified
subchapter S subsidiary.
(C) Treatment of terminations of qualified
subchapter S subsidiary status.--
(i) In general.--For purposes of this
title, if any corporation which was a
qualified subchapter S subsidiary
ceases to meet the requirements of
subparagraph (B), 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 S corporation in exchange for its
stock.
(ii) Termination by reason of sale of
stock.--If the failure to meet the
requirements of subparagraph (B) is by
reason of the sale of stock of a
corporation which is a qualified
subchapter S subsidiary, the sale of
such stock shall be treated as if--
(I) the sale were a sale of
an undivided interest in the
assets of such corporation
(based on the percentage of the
corporation's stock sold), and
(II) the sale were followed
by an acquisition by such
corporation of all of its
assets (and the assumption by
such corporation of all of its
liabilities) in a transaction
to which section 351 applies.
(D) Election after termination.--If a
corporation's status as a qualified subchapter
S subsidiary terminates, such corporation (and
any successor corporation) shall not be
eligible to make--
(i) an election under subparagraph
(B)(ii) to be treated as a qualified
subchapter S subsidiary, or
(ii) an election under section
1362(a) to be treated as an S
corporation,
before its 5th taxable year which begins after
the 1st taxable year for which such termination
was effective, unless the Secretary consents to
such election.
(E) Information returns.--Except to the
extent provided by the Secretary, this
paragraph shall not apply to part III of
subchapter A of chapter 61 (relating to
information returns).
(c) Special rules for applying subsection (b).--
(1) Members of a family treated as 1 shareholder.--
(A) In general.--For purposes of subsection
(b)(1)(A), there shall be treated as one
shareholder--
(i) a husband and wife (and their
estates), and
(ii) all members of a family (and
their estates).
(B) Members of a family.--For purposes of
this paragraph--
(i) In general.--The term ``members
of a family'' means a common ancestor,
any lineal descendant of such common
ancestor, and any spouse or former
spouse of such common ancestor or any
such lineal descendant.
(ii) Common ancestor.--An individual
shall not be considered to be a common
ancestor if, on the applicable date,
the individual is more than 6
generations removed from the youngest
generation of shareholders who would
(but for this subparagraph) be members
of the family. For purposes of the
preceding sentence, a spouse (or former
spouse) shall be treated as being of
the same generation as the individual
to whom such spouse is (or was)
married.
(iii) Applicable date.--The term
``applicable date'' means the latest
of--
(I) the date the election
under section 1362(a) is made,
(II) the earliest date that
an individual described in
clause (i) holds stock in the S
corporation, or
(III) October 22, 2004.
(C) Effect of adoption, etc..--Any legally
adopted child of an individual, any child who
is lawfully placed with an individual for legal
adoption by the individual, and any eligible
foster child of an individual (within the
meaning of [section 152(f)(1)(C)] section
7706(f)(1)(C)), shall be treated as a child of
such individual by blood.
(2) Certain trusts permitted as shareholders.--
(A) In general.--For purposes of subsection
(b)(1)(B), the following trusts may be
shareholders:
(i) A trust all of which is treated
(under subpart E of part I of
subchapter J of this chapter) as owned
by an individual who is a citizen or
resident of the United States.
(ii) A trust which was described in
clause (i) immediately before the death
of the deemed owner and which continues
in existence after such death, but only
for the 2-year period beginning on the
day of the deemed owner's death.
(iii) A trust with respect to stock
transferred to it pursuant to the terms
of a will, but only for the 2-year
period beginning on the day on which
such stock is transferred to it.
(iv) A trust created primarily to
exercise the voting power of stock
transferred to it.
(v) An electing small business trust.
(vi) In the case of a corporation
which is a bank (as defined in section
581) or a depository institution
holding company (as defined in section
3(w)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(w)(1)), a
trust which constitutes an individual
retirement account under section
408(a), including one designated as a
Roth IRA under section 408A, but only
to the extent of the stock held by such
trust in such bank or company as of the
date of the enactment of this clause.
This subparagraph shall not apply to any
foreign trust.
(B) Treatment as shareholders.--For purposes
of subsection (b)(1)--
(i) In the case of a trust described
in clause (i) of subparagraph (A), the
deemed owner shall be treated as the
shareholder.
(ii) In the case of a trust described
in clause (ii) of subparagraph (A), the
estate of the deemed owner shall be
treated as the shareholder.
(iii) In the case of a trust
described in clause (iii) of
subparagraph (A), the estate of the
testator shall be treated as the
shareholder.
(iv) In the case of a trust described
in clause (iv) of subparagraph (A),
each beneficiary of the trust shall be
treated as a shareholder.
(v) In the case of a trust described
in clause (v) of subparagraph (A), each
potential current beneficiary of such
trust shall be treated as a
shareholder; except that, if for any
period there is no potential current
beneficiary of such trust, such trust
shall be treated as the shareholder
during such period. This clause shall
not apply for purposes of subsection
(b)(1)(C).
(vi) In the case of a trust described
in clause (vi) of subparagraph (A), the
individual for whose benefit the trust
was created shall be treated as the
shareholder.
(3) Estate of individual in bankruptcy may be
shareholder.--For purposes of subsection (b)(1)(B), the
term ``estate'' includes the estate of an individual in
a case under title 11 of the United States Code.
(4) Differences in common stock voting rights
disregarded.--For purposes of subsection (b)(1)(D), a
corporation shall not be treated as having more than 1
class of stock solely because there are differences in
voting rights among the shares of common stock.
(5) Straight debt safe harbor.--
(A) In general.--For purposes of subsection
(b)(1)(D), straight debt shall not be treated
as a second class of stock.
(B) Straight debt defined.--For purposes of
this paragraph, the term ``straight debt''
means any written unconditional promise to pay
on demand or on a specified date a sum certain
in money if--
(i) the interest rate (and interest
payment dates) are not contingent on
profits, the borrower's discretion, or
similar factors,
(ii) there is no convertibility
(directly or indirectly) into stock,
and
(iii) the creditor is an individual
(other than a nonresident alien), an
estate, a trust described in paragraph
(2), or a person which is actively and
regularly engaged in the business of
lending money.
(C) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to provide for the proper
treatment of straight debt under this
subchapter and for the coordination of such
treatment with other provisions of this title.
(6) Certain exempt organizations permitted as
shareholders.--For purposes of subsection (b)(1)(B), an
organization which is--
(A) described in section 401(a) or 501(c)(3),
and
(B) exempt from taxation under section
501(a), may be a shareholder in an S
corporation.
(d) Special rule for qualified subchapter S trust.--
(1) In general.--In the case of a qualified
subchapter S trust with respect to which a beneficiary
makes an election under paragraph (2)--
(A) such trust shall be treated as a trust
described in subsection (c)(2)(A)(i),
(B) for purposes of section 678(a), the
beneficiary of such trust shall be treated as
the owner of that portion of the trust which
consists of stock in an S corporation with
respect to which the election under paragraph
(2) is made, and
(C) for purposes of applying sections 465 and
469 to the beneficiary of the trust, the
disposition of the S corporation stock by the
trust shall be treated as a disposition by such
beneficiary.
(2) Election.--
(A) In general.--A beneficiary of a qualified
subchapter S trust (or his legal
representative) may elect to have this
subsection apply.
(B) Manner and time of election.--
(i) Separate election with respect to
each corporation.--An election under
this paragraph shall be made separately
with respect to each corporation the
stock of which is held by the trust.
(ii) Elections with respect to
successive income beneficiaries.--If
there is an election under this
paragraph with respect to any
beneficiary, an election under this
paragraph shall be treated as made by
each successive beneficiary unless such
beneficiary affirmatively refuses to
consent to such election.
(iii) Time, manner, and form of
election.--Any election, or refusal,
under this paragraph shall be made in
such manner and form, and at such time,
as the Secretary may prescribe.
(C) Election irrevocable.--An election under
this paragraph, once made, may be revoked only
with the consent of the Secretary.
(D) Grace period.--An election under this
paragraph shall be effective up to 15 days and
2 months before the date of the election.
(3) Qualified subchapter S trust.--For purposes of
this subsection, the term ``qualified subchapter S
trust'' means a trust--
(A) the terms of which require that--
(i) during the life of the current
income beneficiary, there shall be only
1 income beneficiary of the trust,
(ii) any corpus distributed during
the life of the current income
beneficiary may be distributed only to
such beneficiary,
(iii) the income interest of the
current income beneficiary in the trust
shall terminate on the earlier of such
beneficiary's death or the termination
of the trust, and
(iv) upon the termination of the
trust during the life of the current
income beneficiary, the trust shall
distribute all of its assets to such
beneficiary, and
(B) all of the income (within the meaning of
section 643(b)) of which is distributed (or
required to be distributed) currently to 1
individual who is a citizen or resident of the
United States.
A substantially separate and independent share of a
trust within the meaning of section 663(c) shall be
treated as a separate trust for purposes of this
subsection and subsection (c).
(4) Trust ceasing to be qualified.--
(A) Failure to meet requirements of paragraph
(3)(A).--If a qualified subchapter S trust
ceases to meet any requirement of paragraph
(3)(A), the provisions of this subsection shall
not apply to such trust as of the date it
ceases to meet such requirement.
(B) Failure to meet requirements of paragraph
(3)(B).--If any qualified subchapter S trust
ceases to meet any requirement of paragraph
(3)(B) but continues to meet the requirements
of paragraph (3)(A), the provisions of this
subsection shall not apply to such trust as of
the first day of the first taxable year
beginning after the first taxable year for
which it failed to meet the requirements of
paragraph (3)(B).
(e) Electing small business trust defined.--
(1) Electing small business trust.--For purposes of
this section--
(A) In general.--Except as provided in
subparagraph (B), the term ``electing small
business trust'' means any trust if--
(i) such trust does not have as a
beneficiary any person other than (I)
an individual, (II) an estate, (III) an
organization described in paragraph
(2), (3), (4), or (5) of section
170(c), or (IV) an organization
described in section 170(c)(1) which
holds a contingent interest in such
trust and is not a potential current
beneficiary,
(ii) no interest in such trust was
acquired by purchase, and
(iii) an election under this
subsection applies to such trust.
(B) Certain trusts not eligible.--The term
``electing small business trust'' shall not
include--
(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an
election under subsection (d)(2)
applies to any corporation the stock of
which is held by such trust,
(ii) any trust exempt from tax under
this subtitle, and
(iii) any charitable remainder
annuity trust or charitable remainder
unitrust (as defined in section
664(d)).
(C) Purchase.--For purposes of subparagraph
(A), the term ``purchase'' means any
acquisition if the basis of the property
acquired is determined under section 1012.
(2) Potential current beneficiary.--For purposes of
this section, the term ``potential current
beneficiary'' means, with respect to any period, any
person who at any time during such period is entitled
to, or at the discretion of any person may receive, a
distribution from the principal or income of the trust
(determined without regard to any power of appointment
to the extent such power remains unexercised at the end
of such period). If a trust disposes of all of the
stock which it holds in an S corporation, then, with
respect to such corporation, the term ``potential
current beneficiary'' does not include any person who
first met the requirements of the preceding sentence
during the 1-year period ending on the date of such
disposition.
(3) Election.--An election under this subsection
shall be made by the trustee. Any such election shall
apply to the taxable year of the trust for which made
and all subsequent taxable years of such trust unless
revoked with the consent of the Secretary.
(4) Cross reference.--For special treatment of
electing small business trusts, see section 641(c).
(f) Restricted bank director stock.--
(1) In general.--Restricted bank director stock shall
not be taken into account as outstanding stock of the S
corporation in applying this subchapter (other than
section 1368(f)).
(2) Restricted bank director stock.--For purposes of
this subsection, the term ``restricted bank director
stock'' means stock in a bank (as defined in section
581) or a depository institution holding company (as
defined in section 3(w)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(w)(1))), if such stock--
(A) is required to be held by an individual
under applicable Federal or State law in order
to permit such individual to serve as a
director, and
(B) is subject to an agreement with such bank
or company (or a corporation which controls
(within the meaning of section 368(c)) such
bank or company) pursuant to which the holder
is required to sell back such stock (at the
same price as the individual acquired such
stock) upon ceasing to hold the office of
director.
(3) Cross reference.--For treatment of certain
distributions with respect to restricted bank director
stock, see section 1368(f).
(g) Special rule for bank required to change from the reserve
method of accounting on becoming S corporation.--In the case of
a bank which changes from the reserve method of accounting for
bad debts described in section 585 or 593 for its first taxable
year for which an election under section 1362(a) is in effect,
the bank may elect to take into account any adjustments under
section 481 by reason of such change for the taxable year
immediately preceding such first taxable year.
* * * * * * *
CHAPTER 2--TAX ON SELF-EMPLOYMENT INCOME
* * * * * * *
SEC. 1402. DEFINITIONS.
(a) Net earnings from self-employment.--The term ``net
earnings from self-employment'' means the gross income derived
by an individual from any trade or business carried on by such
individual, less the deductions allowed by this subtitle which
are attributable to such trade or business, plus his
distributive share (whether or not distributed) of income or
loss described in section 702(a)(8) from any trade or business
carried on by a partnership of which he is a member; except
that in computing such gross income and deductions and such
distributive share of partnership ordinary income or loss--
(1) there shall be excluded rentals from real estate
and from personal property leased with the real estate
(including such rentals paid in crop shares, and
including payments under section 1233(a)(2) of the Food
Security Act of 1985 (16 U.S.C. 3833(a)(2)) to
individuals receiving benefits under section 202 or 223
of the Social Security Act) together with the
deductions attributable thereto, unless such rentals
are received in the course of a trade or business as a
real estate dealer; except that the preceding
provisions of this paragraph shall not apply to any
income derived by the owner or tenant of land if (A)
such income is derived under an arrangement, between
the owner or tenant and another individual, which
provides that such other individual shall produce
agricultural or horticultural commodities (including
livestock, bees, poultry, and fur-bearing animals and
wildlife) on such land, and that there shall be
material participation by the owner or tenant (as
determined without regard to any activities of an agent
of such owner or tenant) in the production or the
management of the production of such agricultural or
horticultural commodities, and (B) there is material
participation by the owner or tenant (as determined
without regard to any activities of an agent of such
owner or tenant) with respect to any such agricultural
or horticultural commodity;
(2) there shall be excluded dividends on any share of
stock, and interest on any bond, debenture, note, or
certificate, or other evidence of indebtedness, issued
with interest coupons or in registered form by any
corporation (including one issued by a government or
political subdivision thereof), unless such dividends
and interest are received in the course of a trade or
business as a dealer in stocks or securities;
(3) there shall be excluded any gain or loss--
(A) which is considered as gain or loss from
the sale or exchange of a capital asset,
(B) from the cutting of timber, or the
disposal of timber, coal, or iron ore, if
section 631 applies to such gain or loss, or
(C) from the sale, exchange, involuntary
conversion, or other disposition of property if
such property is neither--
(i) stock in trade or other property
of a kind which would properly be
includible in inventory if on hand at
the close of the taxable year, nor
(ii) property held primarily for sale
to customers in the ordinary course of
the trade or business;
(4) the deduction for net operating losses provided
in section 172 shall not be allowed;
(5) if--
(A) any of the income derived from a trade or
business (other than a trade or business
carried on by a partnership) is community
income under community property laws applicable
to such income, the gross income and deductions
attributable to such trade or business shall be
treated as the gross income and deductions of
the spouse carrying on such trade or business
or, if such trade or business is jointly
operated, treated as the gross income and
deductions of each spouse on the basis of their
respective distributive share of the gross
income and deductions; and
(B) any portion of a partner's distributive
share of the ordinary income or loss from a
trade or business carried on by a partnership
is community income or loss under the community
property laws applicable to such share, all of
such distributive share shall be included in
computing the net earnings from self-employment
of such partner, and no part of such share
shall be taken into account in computing the
net earnings from self-employment of the spouse
of such partner;
(6) a resident of Puerto Rico shall compute his net
earnings from self-employment in the same manner as a
citizen of the United States but without regard to
section 933;
[(7) the deduction for personal exemptions provided
in section 151 shall not be allowed;]
(8) an individual who is a duly ordained,
commissioned, or licensed minister of a church or a
member of a religious order shall compute his net
earnings from self-employment derived from the
performance of service described in subsection (c)(4)
without regard to section 107 (relating to rental value
of parsonages), section 119 (relating to meals and
lodging furnished for the convenience of the employer),
and section 911 (relating to citizens or residents of
the United States living abroad), but shall not include
in such net earnings from self-employment the rental
value of any parsonage or any parsonage allowance
(whether or not excludable under section 107) provided
after the individual retires, or any other retirement
benefit received by such individual from a church plan
(as defined in section 414(e)) after the individual
retires;
(9) the exclusion from gross income provided by
section 931 shall not apply;
(10) there shall be excluded amounts received by a
partner pursuant to a written plan of the partnership,
which meets such requirements as are prescribed by the
Secretary, and which provides for payments on account
of retirement, on a periodic basis, to partners
generally or to a class or classes of partners, such
payments to continue at least until such partner's
death, if--
(A) such partner rendered no services with
respect to any trade or business carried on by
such partnership (or its successors) during the
taxable year of such partnership (or its
successors), ending within or with his taxable
year, in which such amounts were received, and
(B) no obligation exists (as of the close of
the partnership's taxable year referred to in
subparagraph (A)) from the other partners to
such partner except with respect to retirement
payments under such plan, and
(C) such partner's share, if any, of the
capital of the partnership has been paid to him
in full before the close of the partnership's
taxable year referred to in subparagraph (A);
(11) the exclusion from gross income provided by
section 911(a)(1) shall not apply;
(12) in lieu of the deduction provided by section
164(f) (relating to deduction for one-half of self-
employment taxes), there shall be allowed a deduction
equal to the product of--
(A) the taxpayer's net earnings from self-
employment for the taxable year (determined
without regard to this paragraph), and
(B) one-half of the sum of the rates imposed
by subsections (a) and (b) of section 1401 for
such year (determined without regard to the
rate imposed under paragraph (2) of section
1401(b));
(13) there shall be excluded the distributive share
of any item of income or loss of a limited partner, as
such, other than guaranteed payments described in
section 707(c) to that partner for services actually
rendered to or on behalf of the partnership to the
extent that those payments are established to be in the
nature of remuneration for those services;
(14) in the case of church employee income, the
special rules of subsection (j)(1) shall apply;
(15) in the case of a member of an Indian tribe, the
special rules of section 7873 (relating to income
derived by Indians from exercise of fishing rights)
shall apply;
(16) the deduction provided by section 199 shall not
be allowed; and
(17) notwithstanding the preceding provisions of this
subsection, each spouse's share of income or loss from
a qualified joint venture shall be taken into account
as provided in section 761(f) in determining net
earnings from self-employment of such spouse.
If the taxable year of a partner is different from that of the
partnership, the distributive share which he is required to
include in computing his net earnings from self-employment
shall be based on the ordinary income or loss of the
partnership for any taxable year of the partnership ending
within or with his taxable year. In the case of any trade or
business which is carried on by an individual or by a
partnership and in which, if such trade or business were
carried on exclusively by employees, the major portion of the
services would constitute agricultural labor as defined in
section 3121(g)--
(i) in the case of an individual, if
the gross income derived by him from
such trade or business is not more than
the upper limit, the net earnings from
self-employment derived by him from
such trade or business may, at his
option, be deemed to be 66 2/3 percent
of such gross income; or
(ii) in the case of an individual, if
the gross income derived by him from
such trade or business is more than the
upper limit and the net earnings from
self-employment derived by him from
such trade or business (computed under
this subsection without regard to this
sentence) are less than the lower
limit, the net earnings from self-
employment derived by him from such
trade or business may, at his option,
be deemed to be the lower limit; and
(iii) in the case of a member of a
partnership, if his distributive share
of the gross income of the partnership
derived from such trade or business
(after such gross income has been
reduced by the sum of all payments to
which section 707(c) applies) is not
more than the upper limit, his
distributive share of income described
in section 702(a)(8) derived from such
trade or business may, at his option,
be deemed to be an amount equal to 66
2/3 percent of his distributive share
of such gross income (after such gross
income has been so reduced); or
(iv) in the case of a member of a
partnership, if his distributive share
of the gross income of the partnership
derived from such trade or business
(after such gross income has been
reduced by the sum of all payments to
which section 707(c) applies) is more
than the upper limit and his
distributive share (whether or not
distributed) of income described in
section 702(a)(8) derived from such
trade or business (computed under this
subsection without regard to this
sentence) is less than the lower limit,
his distributive share of income
described in section 702(a)(8) derived
from such trade or business may, at his
option, be deemed to be the lower
limit.
For purposes of the preceding sentence, gross income means--
(v) in the case of any such trade or
business in which the income is
computed under a cash receipts and
disbursements method, the gross
receipts from such trade or business
reduced by the cost or other basis of
property which was purchased and sold
in carrying on such trade or business,
adjusted (after such reduction) in
accordance with the provisions of
paragraphs (1) through (7) and
paragraph (9) of this subsection; and
(vi) in the case of any such trade or
business in which the income is
computed under an accrual method, the
gross income from such trade or
business, adjusted in accordance with
the provisions of paragraphs (1)
through (7) and paragraph (9) of this
subsection;
and, for purposes of such sentence, if an individual (including
a member of a partnership) derives gross income from more than
one such trade or business, such gross income (including his
distributive share of the gross income of any partnership
derived from any such trade or business) shall be deemed to
have been derived from one trade or business.
The preceding sentence and clauses (i) through (iv) of the
second preceding sentence shall also apply in the case of any
trade or business (other than a trade or business specified in
such second preceding sentence) which is carried on by an
individual who is self-employed on a regular basis as defined
in subsection (h), or by a partnership of which an individual
is a member on a regular basis as defined in subsection (h),
but only if such individual's net earnings from self-employment
as determined without regard to this sentence in the taxable
year are less than the lower limit and less than 66 2/3 percent
of the sum (in such taxable year) of such individual's gross
income derived from all trades or businesses carried on by him
and his distributive share of the income or loss from all
trades or businesses carried on by all the partnerships of
which he is a member; except that this sentence shall not apply
to more than 5 taxable years in the case of any individual, and
in no case in which an individual elects to determine the
amount of his net earnings from self-employment for a taxable
year under the provisions of the two preceding sentences with
respect to a trade or business to which the second preceding
sentence applies and with respect to a trade or business to
which this sentence applies shall such net earnings for such
year exceed the lower limit.
(b) Self-employment income.--The term ``self-employment
income'' means the net earnings from self-employment derived by
an individual (other than a nonresident alien individual,
except as provided by an agreement under section 233 of the
Social Security Act) during any taxable year; except that such
term shall not include--
(1) in the case of the tax imposed by section
1401(a), that part of the net earnings from self-
employment which is in excess of (i) an amount equal to
the contribution and benefit base (as determined under
section 230 of the Social Security Act) which is
effective for the calendar year in which such taxable
year begins, minus (ii) the amount of the wages paid to
such individual during such taxable years; or
(2) the net earnings from self-employment, if such
net earnings for the taxable year are less than $400.
For purposes of paragraph (1), the term ``wages'' (A) includes
such remuneration paid to an employee for services included
under an agreement entered into pursuant to the provisions of
section 3121(l) (relating to coverage of citizens of the United
States who are employees of foreign affiliates of American
employers), as would be wages under section 3121(a) if such
services constituted employment under section 3121(b), and (B)
includes compensation which is subject to the tax imposed by
section 3201 or 3211. An individual who is not a citizen of the
United States but who is a resident of the Commonwealth of
Puerto Rico, the Virgin Islands, Guam, or American Samoa shall
not, for purposes of this chapter be considered to be a
nonresident alien individual. In the case of church employee
income, the special rules of subsection (j)(2) shall apply for
purposes of paragraph (2).
(c) Trade or business.--The term ``trade or business'', when
used with reference to self-employment income or net earnings
from self-employment, shall have the same meaning as when used
in section 162 (relating to trade or business expenses), except
that such term shall not include--
(1) the performance of the functions of a public
office, other than the functions of a public office of
a State or a political subdivision thereof with respect
to fees received in any period in which the functions
are performed in a position compensated solely on a fee
basis and in which such functions are not covered under
an agreement entered into by such State and the
Commissioner of Social Security pursuant to section 218
of the Social Security Act;
(2) the performance of service by an individual as an
employee, other than--
(A) service described in section
3121(b)(14)(B) performed by an individual who
has attained the age of 18,
(B) service described in section 3121(b)(16),
(C) service described in section 3121(b)(11),
(12), or (15) performed in the United States
(as defined in section 3121(e)(2)) by a citizen
of the United States, except service which
constitutes ``employment'' under section
3121(y),
(D) service described in paragraph (4) of
this subsection,
(E) service performed by an individual as an
employee of a State or a political subdivision
thereof in a position compensated solely on a
fee basis with respect to fees received in any
period in which such service is not covered
under an agreement entered into by such State
and the Commissioner of Social Security
pursuant to section 218 of the Social Security
Act,
(F) service described in section 3121(b)
(20), and
(G) service described in section
3121(b)(8)(B);
(3) the performance of service by an individual as an
employee or employee representative as defined in
section 3231;
(4) the performance of service by a duly ordained,
commissioned, or licensed minister of a church in the
exercise of his ministry or by a member of a religious
order in the exercise of duties required by such order;
(5) the performance of service by an individual in
the exercise of his profession as a Christian Science
practitioner; or
(6) the performance of service by an individual
during the period for which an exemption under
subsection (g) is effective with respect to him.
The provisions of paragraph (4) or (5) shall not apply to
service (other than service performed by a member of a
religious order who has taken a vow of poverty as a member of
such order) performed by an individual unless an exemption
under subsection (e) is effective with respect to him.
(d) Employee and wages.--The term ``employee'' and the term
``wages'' shall have the same meaning as when used in chapter
21 (sec. 3101 and following, relating to Federal Insurance
Contributions Act).
(e) Ministers, members of religious orders, and Christian
Science practitioners.--
(1) Exemption.--Subject to paragraph (2), any
individual who is (A) a duly ordained, commissioned, or
licensed minister of a church or a member of a
religious order (other than a member of a religious
order who has taken a vow of poverty as a member of
such order) or (B) a Christian Science practitioner,
upon filing an application (in such form and manner,
and with such official, as may be prescribed by
regulations made under this chapter) together with a
statement that either he is conscientiously opposed to,
or because of religious principles he is opposed to,
the acceptance (with respect to services performed by
him as such minister, member, or practitioner) of any
public insurance which makes payments in the event of
death, disability, old age, or retirement or makes
payments toward the cost of, or provides services for,
medical care (including the benefits of any insurance
system established by the Social Security Act) and, in
the case of an individual described in subparagraph
(A), that he has informed the ordaining, commissioning,
or licensing body of the church or order that he is
opposed to such insurance, shall receive an exemption
from the tax imposed by this chapter with respect to
services performed by him as such minister, member, or
practitioner. Notwithstanding the preceding sentence,
an exemption may not be granted to an individual under
this subsection if he had filed an effective waiver
certificate under this section as it was in effect
before its amendment in 1967.
(2) Verification of application.--The Secretary may
approve an application for an exemption filed pursuant
to paragraph (1) only if the Secretary has verified
that the individual applying for the exemption is aware
of the grounds on which the individual may receive an
exemption pursuant to this subsection and that the
individual seeks exemption on such grounds. The
Secretary (or the Commissioner of Social Security under
an agreement with the Secretary) shall make such
verification by such means as prescribed in
regulations.
(3) Time for filing application.--Any individual who
desires to file an application pursuant to paragraph
(1) must file such application on or before the due
date of the return (including any extension thereof)
for the second taxable year for which he has net
earnings from self-employment (computed without regard
to subsections (c)(4) and (c)(5)) of $400 or more, any
part of which was derived from the performance of
service described in subsection (c)(4) or (c)(5).
(4) Effective date of exemption.--An exemption
received by an individual pursuant to this subsection
shall be effective for the first taxable year for which
he has net earnings from self-employment (computed
without regard to subsections (c)(4) and (c)(5)) of
$400 or more, any part of which was derived from the
performance of service described in subsection (c)(4)
or (c)(5), and for all succeeding taxable years. An
exemption received pursuant to this subsection shall be
irrevocable.
(f) Partner's taxable year ending as the result of death.--In
computing a partner's net earnings from self-employment for his
taxable year which ends as a result of his death (but only if
such taxable year ends within, and not with, the taxable year
of the partnership), there shall be included so much of the
deceased partner's distributive share of the partnership's
ordinary income or loss for the partnership taxable year as is
not attributable to an interest in the partnership during any
period beginning on or after the first day of the first
calendar month following the month in which such partner died.
For purposes of this subsection--
(1) in determining the portion of the distributive
share which is attributable to any period specified in
the preceding sentence, the ordinary income or loss of
the partnership shall be treated as having been
realized or sustained ratably over the partnership
taxable year; and
(2) the term ``deceased partner's distributive
share'' includes the share of his estate or of any
other person succeeding, by reason of his death, to
rights with respect to his partnership interest.
(g) Members of certain religious faiths.--
(1) Exemption.--Any individual may file an
application (in such form and manner, and with such
official, as may be prescribed by regulations under
this chapter) for an exemption from the tax imposed by
this chapter if he is a member of a recognized
religious sect or division thereof and is an adherent
of established tenets or teachings of such sect or
division by reason of which he is conscientiously
opposed to acceptance of the benefits of any private or
public insurance which makes payments in the event of
death, disability, old-age, or retirement or makes
payments toward the cost of, or provides services for,
medical care (including the benefits of any insurance
system established by the Social Security Act). Such
exemption may be granted only if the application
contains or is accompanied by--
(A) such evidence of such individual's
membership in, and adherence to the tenets or
teachings of, the sect or division thereof as
the Secretary may require for purposes of
determining such individual's compliance with
the preceding sentence, and
(B) his waiver of all benefits and other
payments under titles II and XVIII of the
Social Security Act on the basis of his wages
and self-employment income as well as all such
benefits and other payments to him on the basis
of the wages and self-employment income of any
other person,
and only if the Commissioner of Social Security finds
that--
(C) such sect or division thereof has the
established tenets or teachings referred to in
the preceding sentence,
(D) it is the practice, and has been for a
period of time which he deems to be
substantial, for members of such sect or
division thereof to make provision for their
dependent members which in his judgment is
reasonable in view of their general level of
living, and
(E) such sect or division thereof has been in
existence at all times since December 31, 1950.
An exemption may not be granted to any individual if
any benefit or other payment referred to in
subparagraph (B) became payable (or, but for section
203 or 222(b) of the Social Security Act, would have
become payable) at or before the time of the filing of
such waiver.
(2) Period for which exemption effective.--An
exemption granted to any individual pursuant to this
subsection shall apply with respect to all taxable
years beginning after December 31, 1950, except that
such exemption shall not apply for any taxable year--
(A) beginning (i) before the taxable year in
which such individual first met the
requirements of the first sentence of paragraph
(1), or (ii) before the time as of which the
Commissioner of Social Security finds that the
sect or division thereof of which such
individual is a member met the requirements of
subparagraphs (C) and (D), or
(B) ending (i) after the time such individual
ceases to meet the requirements of the first
sentence of paragraph (1), or (ii) after the
time as of which the Commissioner of Social
Security finds that the sect or division
thereof of which he is a member ceases to meet
the requirements of subparagraph (C) or (D).
(3) Subsection to apply to certain church
employees.--This subsection shall apply with respect to
services which are described in subparagraph (B) of
section 3121(b)(8) (and are not described in
subparagraph (A) of such section).
(h) Regular basis.--An individual shall be deemed to be self-
employed on a regular basis in a taxable year, or to be a
member of a partnership on a regular basis in such year, if he
had net earnings from self-employment, as defined in the first
sentence of subsection (a), of not less than $400 in at least
two of the three consecutive taxable years immediately
preceding such taxable year from trades or businesses carried
on by such individual or such partnership.
(i) Special rules for options and commodities dealers.--
(1) In general.--Notwithstanding subsection
(a)(3)(A), in determining the net earnings from self-
employment of any options dealer or commodities dealer,
there shall not be excluded any gain or loss (in the
normal course of the taxpayer's activity of dealing in
or trading section 1256 contracts) from section 1256
contracts or property related to such contracts.
(2) Definitions.--For purposes of this subsection--
(A) Options dealer.--The term ``options
dealer'' has the meaning given such term by
section 1256(g)(8).
(B) Commodities dealer.--The term
``commodities dealer'' means a person who is
actively engaged in trading section 1256
contracts and is registered with a domestic
board of trade which is designated as a
contract market by the Commodities Futures
Trading Commission.
(C) Section 1256 contracts.--The term
``section 1256 contract'' has the meaning given
to such term by section 1256(b).
(j) Special rules for certain church employee income.--
(1) Computation of net earnings.--In applying
subsection (a)--
(A) church employee income shall not be
reduced by any deduction;
(B) church employee income and deductions
attributable to such income shall not be taken
into account in determining the amount of other
net earnings from self-employment.
(2) Computation of self-employment income.--
(A) Separate application of subsection
(b)(2).--Paragraph (2) of subsection (b) shall
be applied separately--
(i) to church employee income, and
(ii) to other net earnings from self-
employment.
(B) $100 floor.--In applying paragraph (2) of
subsection (b) to church employee income,
``$100'' shall be substituted for ``$400''.
(3) Coordination with subsection (a)(12).--Paragraph
(1) shall not apply to any amount allowable as a
deduction under subsection (a)(12), and paragraph (1)
shall be applied before determining the amount so
allowable.
(4) Church employee income defined.--For purposes of
this section, the term ``church employee income'' means
gross income for services which are described in
section 3121(b)(8)(B) (and are not described in section
3121(b)(8)(A)).
(k) Codification of treatment of certain termination payments
received by former insurance salesmen.--Nothing in subsection
(a) shall be construed as including in the net earnings from
self-employment of an individual any amount received during the
taxable year from an insurance company on account of services
performed by such individual as an insurance salesman for such
company if--
(1) such amount is received after termination of such
individual's agreement to perform such services for
such company,
(2) such individual performs no services for such
company after such termination and before the close of
such taxable year,
(3) such individual enters into a covenant not to
compete against such company which applies to at least
the 1-year period beginning on the date of such
termination, and
(4) the amount of such payment--
(A) depends primarily on policies sold by or
credited to the account of such individual
during the last year of such agreement or the
extent to which such policies remain in force
for some period after such termination, or
both, and
(B) does not depend to any extent on length
of service or overall earnings from services
performed for such company (without regard to
whether eligibility for payment depends on
length of service).
(l) Upper and lower limits.--For purposes of subsection (a)--
(1) Lower limit.--The lower limit for any taxable
year is the sum of the amounts required under section
213(d) of the Social Security Act for a quarter of
coverage in effect with respect to each calendar
quarter ending with or within such taxable year.
(2) Upper limit.--The upper limit for any taxable
year is the amount equal to 150 percent of the lower
limit for such taxable year.
* * * * * * *
CHAPTER 2A--UNEARNED INCOME MEDICARE CONTRIBUTION
* * * * * * *
SEC. 1411. IMPOSITION OF TAX.
(a) In general.--Except as provided in subsection (e)--
(1) Application to individuals.--In the case of an
individual, there is hereby imposed (in addition to any
other tax imposed by this subtitle) for each taxable
year a tax equal to 3.8 percent of the lesser of--
(A) net investment income for such taxable
year, or
(B) the excess (if any) of--
(i) the modified adjusted gross
income for such taxable year, over
(ii) the threshold amount.
(2) Application to estates and trusts.--In the case
of an estate or trust, there is hereby imposed (in
addition to any other tax imposed by this subtitle) for
each taxable year a tax of 3.8 percent of the lesser
of--
(A) the undistributed net investment income
for such taxable year, or
(B) the excess (if any) of--
(i) the adjusted gross income [(as
defined in section 67(e))] for such
taxable year, over
(ii) the dollar amount at which the
highest tax bracket in section 1(e)
begins for such taxable year.
(b) Threshold amount.--For purposes of this chapter, the term
``threshold amount'' means--
(1) in the case of a taxpayer making a joint return
under section 6013 or a surviving spouse (as defined in
section 2(a)), $250,000,
(2) in the case of a married taxpayer (as defined in
section 7703) filing a separate return, \1/2\ of the
dollar amount determined under paragraph (1), and
(3) in any other case, $200,000.
(c) Net investment income.--For purposes of this chapter--
(1) In general.--The term ``net investment income''
means the excess (if any) of--
(A) the sum of--
(i) gross income from interest,
dividends, annuities, royalties, and
rents, other than such income which is
derived in the ordinary course of a
trade or business not described in
paragraph (2),
(ii) other gross income derived from
a trade or business described in
paragraph (2), and
(iii) net gain (to the extent taken
into account in computing taxable
income) attributable to the disposition
of property other than property held in
a trade or business not described in
paragraph (2), over (B) the deductions
allowed by this subtitle which are
properly allocable to such gross income
or net gain.
(2) Trades and businesses to which tax applies.--A
trade or business is described in this paragraph if
such trade or business is--
(A) a passive activity (within the meaning of
section 469) with respect to the taxpayer, or
(B) a trade or business of trading in
financial instruments or commodities (as
defined in section 475(e)(2)).
(3) Income on investment of working capital subject
to tax.--A rule similar to the rule of section
469(e)(1)(B) shall apply for purposes of this
subsection.
(4) Exception for certain active interests in
partnerships and S corporations.--In the case of a
disposition of an interest in a partnership or S
corporation--
(A) gain from such disposition shall be taken
into account under clause (iii) of paragraph
(1)(A) only to the extent of the net gain which
would be so taken into account by the
transferor if all property of the partnership
or S corporation were sold for fair market
value immediately before the disposition of
such interest, and
(B) a rule similar to the rule of
subparagraph (A) shall apply to a loss from
such disposition.
(5) Exception for distributions from qualified
plans.--The term ``net investment income'' shall not
include any distribution from a plan or arrangement
described in section 401(a), 403(a), 403(b), 408, 408A,
or 457(b).
(6) Special rule.--Net investment income shall not
include any item taken into account in determining
self-employment income for such taxable year on which a
tax is imposed by section 1401(b).
(d) Modified adjusted gross income.--For purposes of this
chapter, the term ``modified adjusted gross income'' means
adjusted gross income increased by the excess of--
(1) the amount excluded from gross income under
section 911(a)(1), over
(2) the amount of any deductions (taken into account
in computing adjusted gross income) or exclusions
disallowed under section 911(d)(6) with respect to the
amounts described in paragraph (1).
(e) Nonapplication of section.--This section shall not apply
to--
(1) a nonresident alien, or
(2) a trust all of the unexpired interests in which
are devoted to one or more of the purposes described in
section 170(c)(2)(B).
* * * * * * *
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter A--Estates of Citizens or Residents
* * * * * * *
PART I--TAX IMPOSED
* * * * * * *
SEC. 2001. IMPOSITION AND RATE OF TAX.
(a) Imposition.--A tax is hereby imposed on the transfer of
the taxable estate of every decedent who is a citizen or
resident of the United States.
(b) Computation of tax.--The tax imposed by this section
shall be the amount equal to the excess (if any) of--
(1) a tentative tax computed under subsection (c) on
the sum of--
(A) the amount of the taxable estate, and
(B) the amount of the adjusted taxable gifts,
over
(2) the aggregate amount of tax which would have been
payable under chapter 12 with respect to gifts made by
the decedent after December 31, 1976, if the
modifications described in subsection (g) had been
applicable at the time of such gifts.
For purposes of paragraph (1)(B), the term ``adjusted taxable
gifts'' means the total amount of the taxable gifts (within the
meaning of section 2503) made by the decedent after December
31, 1976, other than gifts which are includible in the gross
estate of the decedent.
(c) Rate schedule
------------------------------------------------------------------------
If the amount with respect to which
the tentative tax to be computed The tentative tax is:
is:
------------------------------------------------------------------------
Not over $10,000 18 percent of such amount.
Over $10,000 but not over $20,000 $1,800, plus 20 percent of the
excess of such amount over
$10,000.
Over $20,000 but not over $40,000 $3,800, plus 22 percent of the
excess of such amount over
$20,000.
Over $40,000 but not over $60,000 $8,200 plus 24 percent of the
excess of such amount over
$40,000.
Over $60,000 but not over $80,000 $13,000, plus 26 percent of the
excess of such amount over
$60,000.
Over $80,000 but not over $100,000 $18,200, plus 28 percent of the
excess of such amount over
$80,000.
Over $100,000 but not over $150,000 $23,800, plus 30 percent of the
excess of such amount over
$100,000.
Over $150,000 but not over $250,000 $38,800, plus 32 percent of the
excess of such amount over
$150,000.
Over $250,000 but not over $500,000 $70,800, plus 34 percent of the
excess of such amount over
$250,000.
Over $500,000 but not over $750,000 $155,800, plus 37 percent of the
excess of such amount over
$500,000.
Over $750,000 but not over $248,300, plus 39 percent of the
$1,000,000 excess of such amount over
$750,000.
Over $1,000,000 $345,800, plus 40 percent of the
excess of such amount over
$1,000,000.
------------------------------------------------------------------------
(d) Adjustment for gift tax paid by spouse.--For purposes of
subsection (b)(2), if--
(1) the decedent was the donor of any gift one-half
of which was considered under section 2513 as made by
the decedent's spouse, and
(2) the amount of such gift is includible in the
gross estate of the decedent,
any tax payable by the spouse under chapter 12 on such gift (as
determined under section 2012(d)) shall be treated as a tax
payable with respect to a gift made by the decedent.
(e) Coordination of sections 2513 and 2035.--If--
(1) the decedent's spouse was the donor of any gift
one-half of which was considered under section 2513 as
made by the decedent, and
(2) the amount of such gift is includible in the
gross estate of the decedent's spouse by reason of
section 2035,
such gift shall not be included in the adjusted taxable gifts
of the decedent for purposes of subsection (b)(1)(B), and the
aggregate amount determined under subsection (b)(2) shall be
reduced by the amount (if any) determined under subsection (d)
which was treated as a tax payable by the decedent's spouse
with respect to such gift.
(f) Valuation of gifts.--
(1) In general.--If the time has expired under
section 6501 within which a tax may be assessed under
chapter 12 (or under corresponding provisions of prior
laws) on--
(A) the transfer of property by gift made
during a preceding calendar period (as defined
in section 2502(b)); or
(B) an increase in taxable gifts required
under section 2701(d),
the value thereof shall, for purposes of computing the
tax under this chapter, be the value as finally
determined for purposes of chapter 12.
(2) Final determination.--For purposes of paragraph
(1), a value shall be treated as finally determined for
purposes of chapter 12 if--
(A) the value is shown on a return under such
chapter and such value is not contested by the
Secretary before the expiration of the time
referred to in paragraph (1) with respect to
such return;
(B) in a case not described in subparagraph
(A), the value is specified by the Secretary
and such value is not timely contested by the
taxpayer; or
(C) the value is determined by a court or
pursuant to a settlement agreement with the
Secretary.
For purposes of subparagraph (A), the value of an item
shall be treated as shown on a return if the item is
disclosed in the return, or in a statement attached to
the return, in a manner adequate to apprise the
Secretary of the nature of such item.
[(g) Modifications to tax payable.--
[(1) Modifications to gift tax payable to reflect
different tax rates.--For purposes of applying
subsection (b)(2) with respect to 1 or more gifts, the
rates of tax under subsection (c) in effect at the
decedent's death shall, in lieu of the rates of tax in
effect at the time of such gifts, be used both to
compute--
[(A) the tax imposed by chapter 12 with
respect to such gifts, and
[(B) the credit allowed against such tax
under section 2505, including in computing--
[(i) the applicable credit amount
under section 2505(a)(1), and
[(ii) the sum of the amounts allowed
as a credit for all preceding periods
under section 2505(a)(2).
[(2) Modifications to estate tax payable to reflect
different basic exclusion amounts.--The Secretary shall
prescribe such regulations as may be necessary or
appropriate to carry out this section with respect to
any difference between--
[(A) the basic exclusion amount under section
2010(c)(3) applicable at the time of the
decedent's death, and
[(B) the basic exclusion amount under such
section applicable with respect to any gifts
made by the decedent.]
(g) Modifications to Gift Tax Payable to Reflect Different
Tax Rates.--For purposes of applying subsection (b)(2) with
respect to 1 or more gifts, the rates of tax under subsection
(c) in effect at the decedent's death shall, in lieu of the
rates of tax in effect at the time of such gifts, be used both
to compute--
(1) the tax imposed by chapter 12 with respect to
such gifts, and
(2) the credit allowed against such tax under section
2505, including in computing--
(A) the applicable credit amount under
section 2505(a)(1), and
(B) the sum of the amounts allowed as a
credit for all preceding periods under section
2505(a)(2).
* * * * * * *
PART II--CREDITS AGAINST TAX
* * * * * * *
SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.
(a) General rule.--A credit of the applicable credit amount
shall be allowed to the estate of every decedent against the
tax imposed by section 2001.
(b) Adjustment to credit for certain gifts made before
1977.--The amount of the credit allowable under subsection (a)
shall be reduced by an amount equal to 20 percent of the
aggregate amount allowed as a specific exemption under section
2521 (as in effect before its repeal by the Tax Reform Act of
1976) with respect to gifts made by the decedent after
September 8, 1976.
(c) Applicable credit amount.--
(1) In general.--For purposes of this section, the
applicable credit amount is the amount of the tentative
tax which would be determined under section 2001(c) if
the amount with respect to which such tentative tax is
to be computed were equal to the applicable exclusion
amount.
(2) Applicable exclusion amount.--For purposes of
this subsection, the applicable exclusion amount is the
sum of--
(A) the basic exclusion amount, and
(B) in the case of a surviving spouse, the
deceased spousal unused exclusion amount.
(3) Basic exclusion amount.--
(A) In general.--For purposes of this
subsection, the basic exclusion amount is
[$5,000,000] $10,000,000.
(B) Inflation adjustment.--In the case of any
decedent dying in a calendar year after 2011,
the dollar amount in subparagraph (A) shall be
increased by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year by substituting
``calendar year 2010'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
If any amount as adjusted under the preceding
sentence is not a multiple of $10,000, such
amount shall be rounded to the nearest multiple
of $10,000.
[(C) Increase in basic exclusion amount.--In
the case of estates of decedents dying or gifts
made after December 31, 2017, and before
January 1, 2026, subparagraph (A) shall be
applied by substituting ``$10,000,000'' for
``$5,000,000''.]
(4) Deceased spousal unused exclusion amount.--For
purposes of this subsection, with respect to a
surviving spouse of a deceased spouse dying after
December 31, 2010, the term ``deceased spousal unused
exclusion amount'' means the lesser of--
(A) the basic exclusion amount, or
(B) the excess of--
(i) the applicable exclusion amount
of the last such deceased spouse of
such surviving spouse, over
(ii) the amount with respect to which
the tentative tax is determined under
section 2001(b)(1) on the estate of
such deceased spouse.
(5) Special rules.--
(A) Election required.--A deceased spousal
unused exclusion amount may not be taken into
account by a surviving spouse under paragraph
(2) unless the executor of the estate of the
deceased spouse files an estate tax return on
which such amount is computed and makes an
election on such return that such amount may be
so taken into account. Such election, once
made, shall be irrevocable. No election may be
made under this subparagraph if such return is
filed after the time prescribed by law
(including extensions) for filing such return.
(B) Examination of prior returns after
expiration of period of limitations with
respect to deceased spousal unused exclusion
amount.--Notwithstanding any period of
limitation in section 6501, after the time has
expired under section 6501 within which a tax
may be assessed under chapter 11 or 12 with
respect to a deceased spousal unused exclusion
amount, the Secretary may examine a return of
the deceased spouse to make determinations with
respect to such amount for purposes of carrying
out this subsection.
(6) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out this subsection.
(d) Limitation based on amount of tax.--The amount of the
credit allowed by subsection (a) shall not exceed the amount of
the tax imposed by section 2001.
* * * * * * *
PART III--GROSS ESTATE
* * * * * * *
SEC. 2032A. VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY.
(a) Value based on use under which property qualifies.--
(1) General rule.--If--
(A) the decedent was (at the time of his
death) a citizen or resident of the United
States, and
(B) the executor elects the application of
this section and files the agreement referred
to in subsection (d)(2),
then, for purposes of this chapter, the value of
qualified real property shall be its value for the use
under which it qualifies, under subsection (b), as
qualified real property.
(2) Limitation on aggregate reduction in fair market
value.--The aggregate decrease in the value of
qualified real property taken into account for purposes
of this chapter which results from the application of
paragraph (1) with respect to any decedent shall not
exceed $750,000.
(3) Inflation adjustment.--In the case of estates of
decedents dying in a calendar year after 1998, the
$750,000 amount contained in paragraph (2) shall be
increased by an amount equal to--
(A) $750,000, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be
rounded to the next lowest multiple of $10,000.
(b) Qualified real property.--
(1) In general.--For purposes of this section, the
term ``qualified real property'' means real property
located in the United States which was acquired from or
passed from the decedent to a qualified heir of the
decedent and which, on the date of the decedent's
death, was being used for a qualified use by the
decedent or a member of the decedent's family, but only
if--
(A) 50 percent or more of the adjusted value
of the gross estate consists of the adjusted
value of real or personal property which--
(i) on the date of the decedent's
death, was being used for a qualified
use by the decedent or a member of the
decedent's family, and
(ii) was acquired from or passed from
the decedent to a qualified heir of the
decedent.
(B) 25 percent or more of the adjusted value
of the gross estate consists of the adjusted
value of real property which meets the
requirements of subparagraphs (A)(ii) and (C),
(C) during the 8-year period ending on the
date of the decedent's death there have been
periods aggregating 5 years or more during
which--
(i) such real property was owned by
the decedent or a member of the
decedent's family and used for a
qualified use by the decedent or a
member of the decedent's family, and
(ii) there was material participation
by the decedent or a member of the
decedent's family in the operation of
the farm or other business, and
(D) such real property is designated in the
agreement referred to in subsection (d)(2).
(2) Qualified use.--For purposes of this section, the
term ``qualified use'' means the devotion of the
property to any of the following:
(A) use as a farm for farming purposes, or
(B) use in a trade or business other than the
trade or business of farming.
(3) Adjusted value.--For purposes of paragraph (1),
the term ``adjusted value'' means--
(A) in the case of the gross estate, the
value of the gross estate for purposes of this
chapter (determined without regard to this
section), reduced by any amounts allowable as a
deduction under paragraph (4) of section
2053(a), or
(B) in the case of any real or personal
property, the value of such property for
purposes of this chapter (determined without
regard to this section), reduced by any amounts
allowable as a deduction in respect of such
property under paragraph (4) of section
2053(a).
(4) Decedents who are retired or disabled.--
(A) In general.--If, on the date of the
decedent's death, the requirements of paragraph
(1)(C)(ii) with respect to the decedent for any
property are not met, and the decedent--
(i) was receiving old-age benefits
under title II of the Social Security
Act for a continuous period ending on
such date, or
(ii) was disabled for a continuous
period ending on such date,
then paragraph (1)(C)(ii) shall be applied with
respect to such property by substituting ``the
date on which the longer of such continuous
periods began'' for ``the date of the
decedent's death'' in paragraph (1)(C).
(B) Disabled defined.--For purposes of
subparagraph (A), an individual shall be
disabled if such individual has a mental or
physical impairment which renders him unable to
materially participate in the operation of the
farm or other business.
(C) Coordination with recapture.--For
purposes of subsection (c)(6)(B)(i), if the
requirements of paragraph (1)(C)(ii) are met
with respect to any decedent by reason of
subparagraph (A), the period ending on the date
on which the continuous period taken into
account under subparagraph (A) began shall be
treated as the period immediately before the
decedent's death.
(5) Special rules for surviving spouses.--
(A) In general.--If property is qualified
real property with respect to a decedent
(hereinafter in this paragraph referred to as
the ``first decedent'') and such property was
acquired from or passed from the first decedent
to the surviving spouse of the first decedent,
for purposes of applying this subsection and
subsection (c) in the case of the estate of
such surviving spouse, active management of the
farm or other business by the surviving spouse
shall be treated as material participation by
such surviving spouse in the operation of such
farm or business.
(B) Special rule.--For the purposes of
subparagraph (A), the determination of whether
property is qualified real property with
respect to the first decedent shall be made
without regard to subparagraph (D) of paragraph
(1) and without regard to whether an election
under this section was made.
(C) Coordination with paragraph (4).--In any
case in which to do so will enable the
requirements of paragraph (1)(C)(ii) to be met
with respect to the surviving spouse, this
subsection and subsection (c) shall be applied
by taking into account any application of
paragraph (4).
(c) Tax treatment of dispositions and failures to use for
qualified use.--
(1) Imposition of additional estate tax.--If, within
10 years after the decedent's death and before the
death of the qualified heir--
(A) the qualified heir disposes of any
interest in qualified real property (other than
by a disposition to a member of his family), or
(B) the qualified heir ceases to use for the
qualified use the qualified real property which
was acquired (or passed) from the decedent,
then, there is hereby imposed an additional estate tax.
(2) Amount of additional tax.--
(A) In general.--The amount of the additional
tax imposed by paragraph (1) with respect to
any interest shall be the amount equal to the
lesser of--
(i) the adjusted tax difference
attributable to such interest, or
(ii) the excess of the amount
realized with respect to the interest
(or, in any case other than a sale or
exchange at arm's length, the fair
market value of the interest) over the
value of the interest determined under
subsection (a).
(B) Adjusted tax difference attributable to
interest.--For purposes of subparagraph (A),
the adjusted tax difference attributable to an
interest is the amount which bears the same
ratio to the adjusted tax difference with
respect to the estate (determined under
subparagraph (C)) as--
(i) the excess of the value of such
interest for purposes of this chapter
(determined without regard to
subsection (a)) over the value of such
interest determined under subsection
(a), bears to
(ii) a similar excess determined for
all qualified real property.
(C) Adjusted tax difference with respect to
the estate.--For purposes of subparagraph (B),
the term ``adjusted tax difference with respect
to the estate'' means the excess of what would
have been the estate tax liability but for
subsection (a) over the estate tax liability.
For purposes of this subparagraph, the term
``estate tax liability'' means the tax imposed
by section 2001 reduced by the credits
allowable against such tax.
(D) Partial dispositions.--For purposes of
this paragraph, where the qualified heir
disposes of a portion of the interest acquired
by (or passing to) such heir (or a predecessor
qualified heir) or there is a cessation of use
of such a portion--
(i) the value determined under
subsection (a) taken into account under
subparagraph (A)(ii) with respect to
such portion shall be its pro rata
share of such value of such interest,
and
(ii) the adjusted tax difference
attributable to the interest taken into
account with respect to the transaction
involving the second or any succeeding
portion shall be reduced by the amount
of the tax imposed by this subsection
with respect to all prior transactions
involving portions of such interest.
(E) Special rule for disposition of timber.--
In the case of qualified woodland to which an
election under subsection (e)(13)(A) applies,
if the qualified heir disposes of (or severs)
any standing timber on such qualified
woodland--
(i) such disposition (or severance)
shall be treated as a disposition of a
portion of the interest of the
qualified heir in such property, and
(ii) the amount of the additional tax
imposed by paragraph (1) with respect
to such disposition shall be an amount
equal to the lesser of--
(I) the amount realized on
such disposition (or, in any
case other than a sale or
exchange at arm's length, the
fair market value of the
portion of the interest
disposed or severed), or
(II) the amount of additional
tax determined under this
paragraph (without regard to
this subparagraph) if the
entire interest of the
qualified heir in the qualified
woodland had been disposed of,
less the sum of the amount of
the additional tax imposed with
respect to all prior
transactions involving such
woodland to which this
subparagraph applied.
For purposes of the preceding sentence, the
disposition of a right to sever shall be
treated as the disposition of the standing
timber. The amount of additional tax imposed
under paragraph (1) in any case in which a
qualified heir disposes of his entire interest
in the qualified woodland shall be reduced by
any amount determined under this subparagraph
with respect to such woodland.
(3) Only 1 additional tax imposed with respect to any
1 portion.--In the case of an interest acquired from
(or passing from) any decedent, if subparagraph (A) or
(B) of paragraph (1) applies to any portion of an
interest, subparagraph (B) or (A), as the case may be,
of paragraph (1) shall not apply with respect to the
same portion of such interest.
(4) Due date.--The additional tax imposed by this
subsection shall become due and payable on the day
which is 6 months after the date of the disposition or
cessation referred to in paragraph (1).
(5) Liability for tax; furnishing of bond.--The
qualified heir shall be personally liable for the
additional tax imposed by this subsection with respect
to his interest unless the heir has furnished bond
which meets the requirements of subsection (e)(11).
(6) Cessation of qualified use.--For purposes of
paragraph (1)(B), real property shall cease to be used
for the qualified use if--
(A) such property ceases to be used for the
qualified use set forth in subparagraph (A) or
(B) of subsection (b)(2) under which the
property qualified under subsection (b), or
(B) during any period of 8 years ending after
the date of the decedent's death and before the
date of the death of the qualified heir, there
had been periods aggregating more than 3 years
during which--
(i) in the case of periods during
which the property was held by the
decedent, there was no material
participation by the decedent or any
member of his family in the operation
of the farm or other business, and
(ii) in the case of periods during
which the property was held by any
qualified heir, there was no material
participation by such qualified heir or
any member of his family in the
operation of the farm or other
business.
(7) Special rules.--
(A) No tax if use begins within 2 years.--If
the date on which the qualified heir begins to
use the qualified real property (hereinafter in
this subparagraph referred to as the
commencement date) is before the date 2 years
after the decedent's death--
(i) no tax shall be imposed under
paragraph (1) by reason of the failure
by the qualified heir to so use such
property before the commencement date,
and
(ii) the 10-year period under
paragraph (1) shall be extended by the
period after the decedent's death and
before the commencement date.
(B) Active management by eligible qualified
heir treated as material participation.--For
purposes of paragraph (6)(B)(ii), the active
management of a farm or other business by--
(i) an eligible qualified heir, or
(ii) a fiduciary of an eligible
qualified heir described in clause (ii)
or (iii) of subparagraph (C),
shall be treated as material participation by
such eligible qualified heir in the operation
of such farm or business. In the case of an
eligible qualified heir described in clause
(ii), (iii), or (iv) of subparagraph (C), the
preceding sentence shall apply only during
periods during which such heir meets the
requirements of such clause.
(C) Eligible qualified heir.--For purposes of
this paragraph, the term ``eligible qualified
heir'' means a qualified heir who--
(i) is the surviving spouse of the
decedent,
(ii) has not attained the age of 21,
(iii) is disabled (within the meaning
of subsection (b)(4)(B)), or
(iv) is a student.
(D) Student.--For purposes of subparagraph
(C), an individual shall be treated as a
student with respect to periods during any
calendar year if (and only if) such individual
is a student (within the meaning of [section
152(f)(2)] section 7706(f)(2)) for such
calendar year.
(E) Certain rents treated as qualified use.--
For purposes of this subsection, a surviving
spouse or lineal descendant of the decedent
shall not be treated as failing to use
qualified real property in a qualified use
solely because such spouse or descendant rents
such property to a member of the family of such
spouse or descendant on a net cash basis. For
purposes of the preceding sentence, a legally
adopted child of an individual shall be treated
as the child of such individual by blood.
(8) Qualified conservation contribution is not a
disposition.--A qualified conservation contribution (as
defined in section 170(h)) by gift or otherwise shall
not be deemed a disposition under subsection (c)(1)(A).
(d) Election; agreement.--
(1) Election.--The election under this section shall
be made on the return of the tax imposed by section
2001. Such election shall be made in such manner as the
Secretary shall by regulations prescribe. Such an
election, once made, shall be irrevocable.
(2) Agreement.--The agreement referred to in this
paragraph is a written agreement signed by each person
in being who has an interest (whether or not in
possession) in any property designated in such
agreement consenting to the application of subsection
(c) with respect to such property.
(3) Modification of election and agreement to be
permitted.--The Secretary shall prescribe procedures
which provide that in any case in which the executor
makes an election under paragraph (1) (and submits the
agreement referred to in paragraph (2)) within the time
prescribed therefor, but--
(A) the notice of election, as filed, does
not contain all required information, or
(B) signatures of 1 or more persons required
to enter into the agreement described in
paragraph (2) are not included on the agreement
as filed, or the agreement does not contain all
required information,
the executor will have a reasonable period of time (not
exceeding 90 days) after notification of such failures
to provide such information or signatures.
(e) Definitions; special rules.--For purposes of this
section--
(1) Qualified heir.--The term ``qualified heir''
means, with respect to any property, a member of the
decedent's family who acquired such property (or to
whom such property passed) from the decedent. If a
qualified heir disposes of any interest in qualified
real property to any member of his family, such member
shall thereafter be treated as the qualified heir with
respect to such interest.
(2) Member of family.--The term ``member of the
family'' means, with respect to any individual, only--
(A) an ancestor of such individual,
(B) the spouse of such individual,
(C) a lineal descendant of such individual,
of such individual's spouse, or of a parent of
such individual, or
(D) the spouse of any lineal descendant
described in subparagraph (C).
For purposes of the preceding sentence, a legally
adopted child of an individual shall be treated as the
child of such individual by blood.
(3) Certain real property included.--In the case of
real property which meets the requirements of
subparagraph (C) of subsection (b)(1), residential
buildings and related improvements on such real
property occupied on a regular basis by the owner or
lessee of such real property or by persons employed by
such owner or lessee for the purpose of operating or
maintaining such real property, and roads, buildings,
and other structures and improvements functionally
related to the qualified use shall be treated as real
property devoted to the qualified use.
(4) Farm.--The term ``farm'' includes stock, dairy,
poultry, fruit, furbearing animal, and truck farms,
plantations, ranches, nurseries, ranges, greenhouses or
other similar structures used primarily for the raising
of agricultural or horticultural commodities, and
orchards and woodlands.
(5) Farming purposes.--The term ``farming purposes''
means--
(A) cultivating the soil or raising or
harvesting any agricultural or horticultural
commodity (including the raising, shearing,
feeding, caring for, training, and management
of animals) on a farm;
(B) handling, drying, packing, grading, or
storing on a farm any agricultural or
horticultural commodity in its unmanufactured
state, but only if the owner, tenant, or
operator of the farm regularly produces more
than one-half of the commodity so treated; and
(C)
(i) the planting, cultivating, caring
for, or cutting of trees, or
(ii) the preparation (other than
milling) of trees for market.
(6) Material participation.--Material participation
shall be determined in a manner similar to the manner
used for purposes of paragraph (1) of section 1402(a)
(relating to net earnings from self-employment).
(7) Method of valuing farms.--
(A) In general.--Except as provided in
subparagraph (B), the value of a farm for
farming purposes shall be determined by
dividing--
(i) the excess of the average annual
gross cash rental for comparable land
used for farming purposes and located
in the locality of such farm over the
average annual State and local real
estate taxes for such comparable land,
by
(ii) the average annual effective
interest rate for all new Federal Land
Bank loans.
For purposes of the preceding sentence, each
average annual computation shall be made on the
basis of the 5 most recent calendar years
ending before the date of the decedent's death.
(B) Value based on net share rental in
certain cases.--
(i) In general.--If there is no
comparable land from which the average
annual gross cash rental may be
determined but there is comparable land
from which the average net share rental
may be determined, subparagraph (A)(i)
shall be applied by substituting
``average annual net share rental'' for
``average annual gross cash rental''.
(ii) Net share rental.--For purposes
of this paragraph, the term ``net share
rental'' means the excess of--
(I) the value of the produce
received by the lessor of the
land on which such produce is
grown, over
(II) the cash operating
expenses of growing such
produce which, under the lease,
are paid by the lessor.
(C) Exception.--The formula provided by
subparagraph (A) shall not be used--
(i) where it is established that
there is no comparable land from which
the average annual gross cash rental
may be determined, or
(ii) where the executor elects to
have the value of the farm for farming
purposes determined and that there is
no comparable land from which the
average net share rental may be
determined under paragraph (8).
(8) Method of valuing closely held business
interests, etc..--In any case to which paragraph (7)(A)
does not apply, the following factors shall apply in
determining the value of any qualified real property:
(A) The capitalization of income which the
property can be expected to yield for farming
or closely held business purposes over a
reasonable period of time under prudent
management using traditional cropping patterns
for the area, taking into account soil
capacity, terrain configuration, and similar
factors,
(B) The capitalization of the fair rental
value of the land for farm land or closely held
business purposes,
(C) Assessed land values in a State which
provides a differential or use value assessment
law for farmland or closely held business,
(D) Comparable sales of other farm or closely
held business land in the same geographical
area far enough removed from a metropolitan or
resort area so that nonagricultural use is not
a significant factor in the sales price, and
(E) Any other factor which fairly values the
farm or closely held business value of the
property.
(9) Property acquired from decedent.--Property shall
be considered to have been acquired from or to have
passed from the decedent if--
(A) such property is so considered under
section 1014(b) (relating to basis of property
acquired from a decedent),
(B) such property is acquired by any person
from the estate, or
(C) such property is acquired by any person
from a trust (to the extent such property is
includible in the gross estate of the
decedent).
(10) Community property.--If the decedent and his
surviving spouse at any time held qualified real
property as community property, the interest of the
surviving spouse in such property shall be taken into
account under this section to the extent necessary to
provide a result under this section with respect to
such property which is consistent with the result which
would have obtained under this section if such property
had not been community property.
(11) Bond in lieu of personal liability.--If the
qualified heir makes written application to the
Secretary for determination of the maximum amount of
the additional tax which may be imposed by subsection
(c) with respect to the qualified heir's interest, the
Secretary (as soon as possible, and in any event within
1 year after the making of such application) shall
notify the heir of such maximum amount. The qualified
heir, on furnishing a bond in such amount and for such
period as may be required, shall be discharged from
personal liability for any additional tax imposed by
subsection (c) and shall be entitled to a receipt or
writing showing such discharge.
(12) Active management.--The term ``active
management'' means the making of the management
decisions of a business (other than the daily operating
decisions).
(13) Special rules for woodlands.--
(A) In general.--In the case of any qualified
woodland with respect to which the executor
elects to have this subparagraph apply, trees
growing on such woodland shall not be treated
as a crop.
(B) Qualified woodland.--The term ``qualified
woodland'' means any real property which--
(i) is used in timber operations, and
(ii) is an identifiable area of land
such as an acre or other area for which
records are normally maintained in
conducting timber operations.
(C) Timber operations.--The term ``timber
operations'' means--
(i) the planting, cultivating, caring
for, or cutting of trees, or
(ii) the preparation (other than
milling) of trees for market.
(D) Election.--An election under subparagraph
(A) shall be made on the return of the tax
imposed by section 2001. Such election shall be
made in such manner as the Secretary shall by
regulations prescribe. Such an election, once
made, shall be irrevocable.
(14) Treatment of replacement property acquired in
section 1031 or 1033 transactions.--
(A) In general.--In the case of any qualified
replacement property, any period during which
there was ownership, qualified use, or material
participation with respect to the replaced
property by the decedent or any member of his
family shall be treated as a period during
which there was such ownership, use, or
material participation (as the case may be)
with respect to the qualified replacement
property.
(B) Limitation.--Subparagraph (A) shall not
apply to the extent that the fair market value
of the qualified replacement property (as of
the date of its acquisition) exceeds the fair
market value of the replaced property (as of
the date of its disposition).
(C) Definitions.--For purposes of this
paragraph--
(i) Qualified replacement property.--
The term ``qualified replacement
property'' means any real property
which is--
(I) acquired in an exchange
which qualifies under section
1031, or
(II) the acquisition of which
results in the nonrecognition
of gain under section 1033.
Such term shall only include property
which is used for the same qualified
use as the replaced property was being
used before the exchange.
(ii) Replaced property.--The term
"replaced property means--
(I) the property transferred
in the exchange which qualifies
under section 1031, or
(II) the property
compulsorily or involuntarily
converted (within the meaning
of section 1033).
(f) Statute of limitations.--If qualified real property is
disposed of or ceases to be used for a qualified use, then--
(1) the statutory period for the assessment of any
additional tax under subsection (c) attributable to
such disposition or cessation shall not expire before
the expiration of 3 years from the date the Secretary
is notified (in such manner as the Secretary may by
regulations prescribe) of such disposition or cessation
(or if later in the case of an involuntary conversion
or exchange to which subsection (h) or (i) applies, 3
years from the date the Secretary is notified of the
replacement of the converted property or of an
intention not to replace or of the exchange of
property), and
(2) such additional tax may be assessed before the
expiration of such 3-year period notwithstanding the
provisions of any other law or rule of law which would
otherwise prevent such assessment.
(g) Application of this section and section 6324B to
interests in partnerships, corporations, and trusts.--The
Secretary shall prescribe regulations setting forth the
application of this section and section 6324B in the case of an
interest in a partnership, corporation, or trust which, with
respect to the decedent, is an interest in a closely held
business (within the meaning of paragraph (1) of section
6166(b)). For purposes of the preceding sentence, an interest
in a discretionary trust all the beneficiaries of which are
qualified heirs shall be treated as a present interest.
(h) Special rules for involuntary conversions of qualified
real property.--
(1) Treatment of converted property.--
(A) In general.--If there is an involuntary
conversion of an interest in qualified real
property--
(i) no tax shall be imposed by
subsection (c) on such conversion if
the cost of the qualified replacement
property equals or exceeds the amount
realized on such conversion, or
(ii) if clause (i) does not apply,
the amount of the tax imposed by
subsection (c) on such conversion shall
be the amount determined under
subparagraph (B).
(B) Amount of tax where there is not complete
reinvestment.--The amount determined under this
subparagraph with respect to any involuntary
conversion is the amount of the tax which (but
for this subsection) would have been imposed on
such conversion reduced by an amount which--
(i) bears the same ratio to such tax,
as
(ii) the cost of the qualified
replacement property bears to the
amount realized on the conversion.
(2) Treatment of replacement property.--For purposes
of subsection (c)--
(A) any qualified replacement property shall
be treated in the same manner as if it were a
portion of the interest in qualified real
property which was involuntarily converted;
except that with respect to such qualified
replacement property the 10-year period under
paragraph (1) of subsection (c) shall be
extended by any period, beyond the 2-year
period referred to in section 1033(a)(2)(B)(i),
during which the qualified heir was allowed to
replace the qualified real property,
(B) any tax imposed by subsection (c) on the
involuntary conversion shall be treated as a
tax imposed on a partial disposition, and
(C) paragraph (6) of subsection (c) shall be
applied--
(i) by not taking into account
periods after the involuntary
conversion and before the acquisition
of the qualified replacement property,
and
(ii) by treating material
participation with respect to the
converted property as material
participation with respect to the
qualified replacement property.
(3) Definitions and special rules.--For purposes of
this subsection--
(A) Involuntary conversion.--The term
``involuntary conversion'' means a compulsory
or involuntary conversion within the meaning of
section 1033.
(B) Qualified replacement property.--The term
``qualified replacement property'' means--
(i) in the case of an involuntary
conversion described in section
1033(a)(1), any real property into
which the qualified real property is
converted, or
(ii) in the case of an involuntary
conversion described in section
1033(a)(2), any real property purchased
by the qualified heir during the period
specified in section 1033(a)(2)(B) for
purposes of replacing the qualified
real property.
Such term only includes property which is to be used
for the qualified use set forth in subparagraph (A) or
(B) of subsection (b)(2) under which the qualified real
property qualified under subsection (a).
(4) Certain rules made applicable.--The rules of the
last sentence of section 1033(a)(2)(A) shall apply for
purposes of paragraph (3)(B)(ii).
(i) Exchanges of qualified real property.--
(1) Treatment of property exchanged.--
(A) Exchanges solely for qualified exchange
property.--If an interest in qualified real
property is exchanged solely for an interest in
qualified exchange property in a transaction
which qualifies under section 1031, no tax
shall be imposed by subsection (c) by reason of
such exchange.
(B) Exchanges where other property
received.--If an interest in qualified real
property is exchanged for an interest in
qualified exchange property and other property
in a transaction which qualifies under section
1031, the amount of the tax imposed by
subsection (c) by reason of such exchange shall
be the amount of tax which (but for this
subparagraph) would have been imposed on such
exchange under subsection (c)(1), reduced by an
amount which--
(i) bears the same ratio to such tax,
as
(ii) the fair market value of the
qualified exchange property bears to
the fair market value of the qualified
real property exchanged.
For purposes of clause (ii) of the preceding
sentence, fair market value shall be determined
as of the time of the exchange.
(2) Treatment of qualified exchange property.--For
purposes of subsection (c)--
(A) any interest in qualified exchange
property shall be treated in the same manner as
if it were a portion of the interest in
qualified real property which was exchanged,
(B) any tax imposed by subsection (c) by
reason of the exchange shall be treated as a
tax imposed on a partial disposition, and
(C) paragraph (6) of subsection (c) shall be
applied by treating material participation with
respect to the exchanged property as material
participation with respect to the qualified
exchange property.
(3) Qualified exchange property.--For purposes of
this subsection, the term ``qualified exchange
property'' means real property which is to be used for
the qualified use set forth in subparagraph (A) or (B)
of subsection (b)(2) under which the real property
exchanged therefor originally qualified under
subsection (a).
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
* * * * * * *
SEC. 3402. INCOME TAX COLLECTED AT SOURCE.
(a) Requirement of withholding.--
(1) In general.--Except as otherwise provided in this
section, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in
accordance with tables or computational procedures
prescribed by the Secretary. Any tables or procedures
prescribed under this paragraph shall--
(A) apply with respect to the amount of wages
paid during such periods as the Secretary may
prescribe, and
(B) be in such form, and provide for such
amounts to be deducted and withheld, as the
Secretary determines to be most appropriate to
carry out the purposes of this chapter and to
reflect the provisions of chapter 1 applicable
to such periods.
(2) Amount of wages.--For purposes of applying tables
or procedures prescribed under paragraph (1), the term
``the amount of wages'' means the amount by which the
wages exceed the taxpayer's withholding allowance,
prorated to the payroll period.
(b) Percentage method of withholding.--
(1) If wages are paid with respect to a period which
is not a payroll period, the withholding allowance
allowable with respect to each payment of such wages
shall be the allowance allowed for a miscellaneous
payroll period containing a number of days (including
Sundays and holidays) equal to the number of days in
the period with respect to which such wages are paid.
(2) In any case in which wages are paid by an
employer without regard to any payroll period or other
period, the withholding allowance allowable with
respect to each payment of such wages shall be the
allowance allowed for a miscellaneous payroll period
containing a number of days equal to the number of days
(including Sundays and holidays) which have elapsed
since the date of the last payment of such wages by
such employer during the calendar year, or the date of
commencement of employment with such employer during
such year, or January 1 of such year, whichever is the
later.
(3) In any case in which the period, or the time
described in paragraph (2), in respect of any wages is
less than one week, the Secretary, under regulations
prescribed by him, may authorize an employer to compute
the tax to be deducted and withheld as if the aggregate
of the wages paid to the employee during the calendar
week were paid for a weekly payroll period.
(4) In determining the amount to be deducted and
withheld under this subsection, the wages may, at the
election of the employer, be computed to the nearest
dollar.
(c) Wage bracket withholding.--
(1) At the election of the employer with respect to
any employee, the employer shall deduct and withhold
upon the wages paid to such employee a tax (in lieu of
the tax required to be deducted and withheld under
subsection (a)) determined in accordance with tables
prescribed by the Secretary in accordance with
paragraph (6).
(2) If wages are paid with respect to a period which
is not a payroll period, the amount to be deducted and
withheld shall be that applicable in the case of a
miscellaneous payroll period containing a number of
days (including Sundays and holidays) equal to the
number of days in the period with respect to which such
wages are paid.
(3) In any case in which wages are paid by an
employer without regard to any payroll period or other
period, the amount to be deducted and withheld shall be
that applicable in the case of a miscellaneous payroll
period containing a number of days equal to the number
of days (including Sundays and holidays) which have
elapsed since the date of the last payment of such
wages by such employer during the calendar year, or the
date of commencement of employment with such employer
during such year, or January 1 of such year, whichever
is the later.
(4) In any case in which the period, or the time
described in paragraph (3), in respect of any wages is
less than one week, the Secretary, under regulations
prescribed by him, may authorize an employer to
determine the amount to be deducted and withheld under
the tables applicable in the case of a weekly payroll
period, in which case the aggregate of the wages paid
to the employee during the calendar week shall be
considered the weekly wages.
(5) If the wages exceed the highest wage bracket, in
determining the amount to be deducted and withheld
under this subsection, the wages may, at the election
of the employer, be computed to the nearest dollar.
(6) In the case of wages paid after December 31,
1969, the amount deducted and withheld under paragraph
(1) shall be determined in accordance with tables
prescribed by the Secretary. In the tables so
prescribed, the amounts set forth as amounts of wages
and amounts of income tax to be deducted and withheld
shall be computed on the basis of the table for an
annual payroll period prescribed pursuant to subsection
(a).
(d) Tax paid by recipient.--If the employer, in violation of
the provisions of this chapter, fails to deduct and withhold
the tax under this chapter, and thereafter the tax against
which such tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected from the
employer; but this subsection shall in no case relieve the
employer from liability for any penalties or additions to the
tax otherwise applicable in respect of such failure to deduct
and withhold.
(e) Included and excluded wages.--If the remuneration paid by
an employer to an employee for services performed during one-
half or more of any payroll period of not more than 31
consecutive days constitutes wages, all the remuneration paid
by such employer to such employee for such period shall be
deemed to be wages; but if the remuneration paid by an employer
to an employee for services performed during more than one-half
of any such payroll period does not constitute wages, then none
of the remuneration paid by such employer to such employee for
such period shall be deemed to be wages.
(f) Withholding allowance.--
(1) In general.--Under rules determined by the
Secretary, an employee receiving wages shall on any day
be entitled to a withholding allowance determined based
on--
(A) whether the employee is an individual for
whom a deduction is allowable with respect to
another taxpayer under section 151;
(B) if the employee is married, whether the
employee's spouse is entitled to an allowance,
or would be so entitled if such spouse were an
employee receiving wages, under subparagraph
(A) or (D), but only if such spouse does not
have in effect a withholding allowance
certificate claiming such allowance;
(C) the number of individuals with respect to
whom, on the basis of facts existing at the
beginning of such day, there may reasonably be
expected to be allowable a credit under section
24(a) for the taxable year under subtitle A in
respect of which amounts deducted and withheld
under this chapter in the calendar year in
which such day falls are allowed as a credit;
(D) any additional amounts to which the
employee elects to take into account under
subsection (m), but only if the employee's
spouse does not have in effect a withholding
allowance certificate making such an election;
(E) the standard deduction allowable to such
employee (one-half of such standard deduction
in the case of an employee who is married (as
determined under section 7703) and whose spouse
is an employee receiving wages subject to
withholding); and
(F) whether the employee has withholding
allowance certificates in effect with respect
to more than 1 employer.
(2) Allowance certificates.--
(A) On commencement of employment.--On or
before the date of the commencement of
employment with an employer, the employee shall
furnish the employer with a signed withholding
allowance certificate relating to the
withholding allowance claimed by the employee,
which shall in no event exceed the amount to
which the employee is entitled.
(B) Change of status.--If, on any day during
the calendar year, an employee's withholding
allowance is in excess of the withholding
allowance to which the employee would be
entitled had the employee submitted a true and
accurate withholding allowance certificate to
the employer on that day, the employee shall
within 10 days thereafter furnish the employer
with a new withholding allowance certificate.
If, on any day during the calendar year, an
employee's withholding allowance is greater
than the withholding allowance claimed, the
employee may furnish the employer with a new
withholding allowance certificate relating to
the withholding allowance to which the employee
is so entitled, which shall in no event exceed
the amount to which the employee is entitled on
such day.
(C) Change of status which affects next
calendar year.--If on any day during the
calendar year the withholding allowance to
which the employee will be, or may reasonably
be expected to be, entitled at the beginning of
the employee's next taxable year under subtitle
A is different from the allowance to which the
employee is entitled on such day, the employee
shall, in such cases and at such times as the
Secretary shall by regulations prescribe,
furnish the employer with a withholding
allowance certificate relating to the
withholding allowance which the employee claims
with respect to such next taxable year, which
shall in no event exceed the withholding
allowance to which the employee will be, or may
reasonably be expected to be, so entitled.
(3) When certificate takes effect.--
(A) First certificate furnished.--A
withholding allowance certificate furnished the
employer in cases in which no previous such
certificate is in effect shall take effect as
of the beginning of the first payroll period
ending, or the first payment of wages made
without regard to a payroll period, on or after
the date on which such certificate is so
furnished.
(B) Furnished to take place of existing
certificate.--
(i) In general.--Except as provided
in clauses (ii) and (iii), a
withholding allowance certificate
furnished to the employer in cases in
which a previous such certificate is in
effect shall take effect as of the
beginning of the 1st payroll period
ending (or the 1st payment of wages
made without regard to a payroll
period) on or after the 30th day after
the day on which such certificate is so
furnished.
(ii) Employer may elect earlier
effective date.--At the election of the
employer, a certificate described in
clause (i) may be made effective
beginning with any payment of wages
made on or after the day on which the
certificate is so furnished and before
the 30th day referred to in clause (i).
(iii) Change of status which affects
next year.--Any certificate furnished
pursuant to paragraph (2)(C) shall not
take effect, and may not be made
effective, with respect to any payment
of wages made in the calendar year in
which the certificate is furnished.
(4) Period during which certificate remains in
effect.--A withholding allowance certificate which
takes effect under this subsection, or which on
December 31, 1954, was in effect under the
corresponding subsection of prior law, shall continue
in effect with respect to the employer until another
such certificate takes effect under this subsection.
(5) Form and contents of certificate.--Withholding
allowance certificates shall be in such form and
contain such information as the Secretary may by
regulations prescribe.
(6) Exemption of certain nonresident aliens.--
Notwithstanding the provisions of paragraph (1), a
nonresident alien individual (other than an individual
described in section 3401(a)(6)(A) or (B)) shall be
entitled to only one withholding exemption.
(7) Allowance where certificate with another employer
is in effect.--If a withholding allowance certificate
is in effect with respect to one employer, an employee
shall not be entitled under a certificate in effect
with any other employer to any withholding allowance
which he has claimed under such first certificate.
(g) Overlapping pay periods, and payment by agent or
fiduciary.--If a payment of wages is made to an employee by an
employer--
(1) with respect to a payroll period or other period,
any part of which is included in a payroll period or
other period with respect to which wages are also paid
to such employee by such employer, or
(2) without regard to any payroll period or other
period, but on or prior to the expiration of a payroll
period or other period with respect to which wages are
also paid to such employee by such employer, or
(3) with respect to a period beginning in one and
ending in another calendar year, or
(4) through an agent, fiduciary, or other person who
also has the control, receipt, custody, or disposal of,
or pays, the wages payable by another employer to such
employee,
the manner of withholding and the amount to be deducted and
withheld under this chapter shall be determined in accordance
with regulations prescribed by the Secretary under which the
withholding allowance allowed to the employee in any calendar
year shall approximate the withholding allowance allowable with
respect to an annual payroll period.
(h) Alternative methods of computing amount to be withheld.--
The Secretary may, under regulations prescribed by him,
authorize--
(1) Withholding on basis of average wages.--An
employer--
(A) to estimate the wages which will be paid
to any employee in any quarter of the calendar
year,
(B) to determine the amount to be deducted
and withheld upon each payment of wages to such
employee during such quarter as if the
appropriate average of the wages so estimated
constituted the actual wages paid, and
(C) to deduct and withhold upon any payment
of wages to such employee during such quarter
(and, in the case of tips referred to in
subsection (k), within 30 days thereafter) such
amount as may be necessary to adjust the amount
actually deducted and withheld upon the wages
of such employee during such quarter to the
amount required to be deducted and withheld
during such quarter without regard to this
subsection.
(2) Withholding on basis of annualized wages.--An
employer to determine the amount of tax to be deducted
and withheld upon a payment of wages to an employee for
a payroll period by--
(A) multiplying the amount of an employee's
wages for a payroll period by the number of
such payroll periods in the calendar year,
(B) determining the amount of tax which would
be required to be deducted and withheld upon
the amount determined under subparagraph (A) if
such amount constituted the actual wages for
the calendar year and the payroll period of the
employee were an annual payroll period, and
(C) dividing the amount of tax determined
under subparagraph (B) by the number of payroll
periods (described in subparagraph (A)) in the
calendar year.
(3) Withholding on basis of cumulative wages.--An
employer, in the case of any employee who requests to
have the amount of tax to be withheld from his wages
computed on the basis of his cumulative wages, to--
(A) add the amount of the wages to be paid to
the employee for the payroll period to the
total amount of wages paid by the employer to
the employee during the calendar year,
(B) divide the aggregate amount of wages
computed under subparagraph (A) by the number
of payroll periods to which such aggregate
amount of wages relates,
(C) compute the total amount of tax that
would have been required to be deducted and
withheld under subsection (a) if the average
amount of wages (as computed under subparagraph
(B)) had been paid to the employee for the
number of payroll periods to which the
aggregate amount of wages (computed under
subparagraph (A)) relates,
(D) determine the excess, if any, of the
amount of tax computed under subparagraph (C)
over the total amount of tax deducted and
withheld by the employer from wages paid to the
employee during the calendar year, and
(E) deduct and withhold upon the payment of
wages (referred to in subparagraph (A)) to the
employee an amount equal to the excess (if any)
computed under subparagraph (D).
(4) Other methods.--An employer to determine the
amount of tax to be deducted and withheld upon the
wages paid to an employee by any other method which
will require the employer to deduct and withhold upon
such wages substantially the same amount as would be
required to be deducted and withheld by applying
subsection (a) or (c), either with respect to a payroll
period or with respect to the entire taxable year.
(i) Changes in withholding.--
(1) In general.--The Secretary may by regulations
provide for increases in the amount of withholding
otherwise required under this section in cases where
the employee requests such changes.
(2) Treatment as tax.--Any increased withholding
under paragraph (1) shall for all purposes be
considered tax required to be deducted and withheld
under this chapter.
(j) Noncash remuneration to retail commission salesman.--In
the case of remuneration paid in any medium other than cash for
services performed by an individual as a retail salesman for a
person, where the service performed by such individual for such
person is ordinarily performed for remuneration solely by way
of cash commission an employer shall not be required to deduct
or withhold any tax under this subchapter with respect to such
remuneration, provided that such employer files with the
Secretary such information with respect to such remuneration as
the Secretary may by regulation prescribe.
(k) Tips.--In the case of tips which constitute wages,
subsection (a) shall be applicable only to such tips as are
included in a written statement furnished to the employer
pursuant to section 6053(a), and only to the extent that the
tax can be deducted and withheld by the employer, at or after
the time such statement is so furnished and before the close of
the calendar year in which such statement is furnished, from
such wages of the employee (excluding tips, but including funds
turned over by the employee to the employer for the purpose of
such deduction and withholding) as are under the control of the
employer; and an employer who is furnished by an employee a
written statement of tips (received in a calendar month)
pursuant to section 6053(a) to which paragraph (16)(B) of
section 3401(a) is applicable may deduct and withhold the tax
with respect to such tips from any wages of the employee
(excluding tips) under his control, even though at the time
such statement is furnished the total amount of the tips
included in statements furnished to the employer as having been
received by the employee in such calendar month in the course
of his employment by such employer is less than $20. Such tax
shall not at any time be deducted and withheld in an amount
which exceeds the aggregate of such wages and funds (including
funds turned over under section 3102(c)(2) or section
3202(c)(2)) minus any tax required by section 3102(a) or
section 3202(a) to be collected from such wages and funds.
(l) Determination and disclosure of marital status.--
(1) Determination of status by employer.--For
purposes of applying the tables in subsections (a) and
(c) to a payment of wages, the employer shall treat the
employee as a single person unless there is in effect
with respect to such payment of wages a withholding
allowance certificate furnished to the employer by the
employee after the date of the enactment of this
subsection indicating that the employee is married.
(2) Disclosure of status by employee.--An employee
shall be entitled to furnish the employer with a
withholding allowance certificate indicating he is
married only if, on the day of such furnishing, he is
married (determined with the application of the rules
in paragraph (3)). An employee whose marital status
changes from married to single shall, at such time as
the Secretary may by regulations prescribe, furnish the
employer with a new withholding allowance certificate.
(3) Determination of marital status.--For purposes of
paragraph (2), an employee shall on any day be
considered--
(A) as not married, if (i) he is legally
separated from his spouse under a decree of
divorce or separate maintenance, or (ii) either
he or his spouse is, or on any preceding day
within the calendar year was, a nonresident
alien; or
(B) as married, if (i) his spouse (other than
a spouse referred to in subparagraph (A)) died
within the portion of his taxable year which
precedes such day, or (ii) his spouse died
during one of the two taxable years immediately
preceding the current taxable year and, on the
basis of facts existing at the beginning of
such day, the employee reasonably expects, at
the close of his taxable year, to be a
surviving spouse (as defined in section 2(a)).
(m) Withholding allowances.--Under regulations prescribed by
the Secretary, an employee shall be entitled to an additional
withholding allowance or additional reductions in withholding
under this subsection. In determining the additional
withholding allowance or the amount of additional reductions in
withholding under this subsection, the employee may take into
account (to the extent and in the manner provided by such
regulations)--
(1) estimated itemized deductions allowable under
chapter 1 and the estimated deduction allowed under
section 199A ([other than the deductions referred to in
section 151 and] other than the deductions required to
be taken into account in determining adjusted gross
income under section 62(a)),
(2) estimated tax credits allowable under chapter 1,
and
(3) such additional deductions (including the
additional standard deduction under section 63(c)(3)
for the aged and blind) and other items as may be
specified by the Secretary in regulations.
(n) Employees incurring no income tax liability.--
Notwithstanding any other provision of this section, an
employer shall not be required to deduct and withhold any tax
under this chapter upon a payment of wages to an employee if
there is in effect with respect to such payment a withholding
allowance certificate (in such form and containing such other
information as the Secretary may prescribe) furnished to the
employer by the employee certifying that the employee--
(1) incurred no liability for income tax imposed
under subtitle A for his preceding taxable year, and
(2) anticipates that he will incur no liability for
income tax imposed under subtitle A for his current
taxable year.
The Secretary shall by regulations provide for the coordination
of the provisions of this subsection with the provisions of
subsection (f).
(o) Extension of withholding to certain payments other than
wages.--
(1) General rule.--For purposes of this chapter (and
so much of subtitle F as relates to this chapter)--
(A) any supplemental unemployment
compensation benefit paid to an individual,
(B) any payment of an annuity to an
individual, if at the time the payment is made
a request that such annuity be subject to
withholding under this chapter is in effect,
and
(C) any payment to an individual of sick pay
which does not constitute wages (determined
without regard to this subsection), if at the
time the payment is made a request that such
sick pay be subject to withholding under this
chapter is in effect,
shall be treated as if it were a payment of wages by an
employer to an employee for a payroll period.
(2) Definitions.--
(A) Supplemental unemployment compensation
benefits.--For purposes of paragraph (1), the
term ``supplemental unemployment compensation
benefits'' means amounts which are paid to an
employee, pursuant to a plan to which the
employer is a party, because of an employee's
involuntary separation from employment (whether
or not such separation is temporary), resulting
directly from a reduction in force, the
discontinuance of a plant or operation, or
other similar conditions, but only to the
extent such benefits are includible in the
employee's gross income.
(B) Annuity.--For purposes of this
subsection, the term ``annuity'' means any
amount paid to an individual as a pension or
annuity.
(C) Sick pay.--For purposes of this
subsection, the term ``sick pay'' means any
amount which--
(i) is paid to an employee pursuant
to a plan to which the employer is a
party, and
(ii) constitutes remuneration or a
payment in lieu of remuneration for any
period during which the employee is
temporarily absent from work on account
of sickness or personal injuries.
(3) Amount withheld from annuity payments or sick
pay.--If a payee makes a request that an annuity or any
sick pay be subject to withholding under this chapter,
the amount to be deducted and withheld under this
chapter from any payment to which such request applies
shall be an amount (not less than a minimum amount
determined under regulations prescribed by the
Secretary) specified by the payee in such request. The
amount deducted and withheld with respect to a payment
which is greater or less than a full payment shall bear
the same relation to the specified amount as such
payment bears to a full payment.
(4) Request for withholding.--A request that an
annuity or any sick pay be subject to withholding under
this chapter--
(A) shall be made by the payee in writing to
the person making the payments and shall
contain the social security number of the
payee,
(B) shall specify the amount to be deducted
and withheld from each full payment, and
(C) shall take effect--
(i) in the case of sick pay, with
respect to payments made more than 7
days after the date on which such
request is furnished to the payor, or
(ii) in the case of an annuity, at
such time (after the date on which such
request is furnished to the payor) as
the Secretary shall by regulations
prescribe.
Such a request may be changed or terminated by
furnishing to the person making the payments a written
statement of change or termination which shall take
effect in the same manner as provided in subparagraph
(C). At the election of the payor, any such request (or
statement of change or revocation) may take effect
earlier than as provided in subparagraph (C).
(5) Special rule for sick pay paid pursuant to
certain collective-bargaining agreements.--In the case
of any sick pay paid pursuant to a collective-
bargaining agreement between employee representatives
and one or more employers which contains a provision
specifying that this paragraph is to apply to sick pay
paid pursuant to such agreement and contains a
provision for determining the amount to be deducted and
withheld from each payment of such sick pay--
(A) the requirement of paragraph (1)(C) that
a request for withholding be in effect shall
not apply, and
(B) except as provided in subsection (n), the
amounts to be deducted and withheld under this
chapter shall be determined in accordance with
such agreement.
The preceding sentence shall not apply with respect to
sick pay paid pursuant to any agreement to any
individual unless the social security number of such
individual is furnished to the payor and the payor is
furnished with such information as is necessary to
determine whether the payment is pursuant to the
agreement and to determine the amount to be deducted
and withheld.
(6) Coordination with withholding on designated
distributions under section 3405.--This subsection
shall not apply to any amount which is a designated
distribution (within the meaning of section
3405(e)(1)).
(p) Voluntary withholding agreements.--
(1) Certain Federal payments.--
(A) In general.--If, at the time a specified
Federal payment is made to any person, a
request by such person is in effect that such
payment be subject to withholding under this
chapter, then for purposes of this chapter and
so much of subtitle F as relates to this
chapter, such payment shall be treated as if it
were a payment of wages by an employer to an
employee.
(B) Amount withheld.--The amount to be
deducted and withheld under this chapter from
any payment to which any request under
subparagraph (A) applies shall be an amount
equal to the percentage of such payment
specified in such request. Such a request shall
apply to any payment only if the percentage
specified is 7 percent, any percentage
applicable to any of the 3 lowest income
brackets in the table under section 1(c), or
such other percentage as is permitted under
regulations prescribed by the Secretary.
(C) Specified Federal payments.--For purposes
of this paragraph, the term ``specified Federal
payment'' means--
(i) any payment of a social security
benefit (as defined in section 86(d)),
(ii) any payment referred to in the
second sentence of section 451(d) which
is treated as insurance proceeds,
(iii) any amount which is includible
in gross income under section 77(a),
and
(iv) any other payment made pursuant
to Federal law which is specified by
the Secretary for purposes of this
paragraph.
(D) Requests for withholding.--Rules similar
to the rules that apply to annuities under
subsection (o)(4) shall apply to requests under
this paragraph and paragraph (2).
(2) Voluntary withholding on unemployment benefits.--
If, at the time a payment of unemployment compensation
(as defined in section 85(b)) is made to any person, a
request by such person is in effect that such payment
be subject to withholding under this chapter, then for
purposes of this chapter and so much of subtitle F as
relates to this chapter, such payment shall be treated
as if it were a payment of wages by an employer to an
employee. The amount to be deducted and withheld under
this chapter from any payment to which any request
under this paragraph applies shall be an amount equal
to 10 percent of such payment.
(3) Authority for other voluntary withholding.--The
Secretary is authorized by regulations to provide for
withholding--
(A) from remuneration for services performed
by an employee for the employee's employer
which (without regard to this paragraph) does
not constitute wages, and
(B) from any other type of payment with
respect to which the Secretary finds that
withholding would be appropriate under the
provisions of this chapter,
if the employer and employee, or the person making and
the person receiving such other type of payment, agree
to such withholding. Such agreement shall be in such
form and manner as the Secretary may by regulations
prescribe. For purposes of this chapter (and so much of
subtitle F as relates to this chapter), remuneration or
other payments with respect to which such agreement is
made shall be treated as if they were wages paid by an
employer to an employee to the extent that such
remuneration is paid or other payments are made during
the period for which the agreement is in effect.
(q) Extension of withholding to certain gambling winnings.--
(1) General rule.--Every person, including the
Government of the United States, a State, or a
political subdivision thereof, or any instrumentalities
of the foregoing, making any payment of winnings which
are subject to withholding shall deduct and withhold
from such payment a tax in an amount equal to the
product of the [third lowest] fourth lowest rate of tax
applicable under section 1(c) and such payment.
(2) Exemption where tax otherwise withheld.--In the
case of any payment of winnings which are subject to
withholding made to a nonresident alien individual or a
foreign corporation, the tax imposed under paragraph
(1) shall not apply to any such payment subject to tax
under section 1441(a) (relating to withholding on
nonresident aliens) or tax under section 1442(a)
(relating to withholding on foreign corporations).
(3) Winnings which are subject to withholding.--For
purposes of this subsection, the term ``winnings which
are subject to withholding'' means proceeds from a
wager determined in accordance with the following:
(A) In general.--Except as provided in
subparagraphs (B) and (C), proceeds of more
than $5,000 from a wagering transaction, if the
amount of such proceeds is at least 300 times
as large as the amount wagered.
(B) State-conducted lotteries.--Proceeds of
more than $5,000 from a wager placed in a
lottery conducted by an agency of a State
acting under authority of State law, but only
if such wager is placed with the State agency
conducting such lottery, or with its authorized
employees or agents.
(C) Sweepstakes, wagering pools, certain
parimutuel pools, jai alai, and lotteries.--
Proceeds of more than $5,000 from--
(i) a wager placed in a sweepstakes,
wagering pool, or lottery (other than a
wager described in subparagraph (B)),
or
(ii) a wagering transaction in a
parimutuel pool with respect to horse
races, dog races, or jai alai if the
amount of such proceeds is at least 300
times as large as the amount wagered.
(4) Rules for determining proceeds from a wager.--For
purposes of this subsection--
(A) proceeds from a wager shall be determined
by reducing the amount received by the amount
of the wager, and
(B) proceeds which are not money shall be
taken into account at their fair market value.
(5) Exception for bingo, keno, and slot machines.--
The tax imposed under paragraph (1) shall not apply to
winnings from a slot machine, keno, and bingo.
(6) Statement by recipient.--Every person who is to
receive a payment of winnings which are subject to
withholding shall furnish the person making such
payment a statement, made under the penalties of
perjury, containing the name, address, and taxpayer
identification number of the person receiving the
payment and of each person entitled to any portion of
such payment.
(7) Coordination with other sections.--For purposes
of sections 3403 and 3404 and for purposes of so much
of subtitle F (except section 7205) as relates to this
chapter, payments to any person of winnings which are
subject to withholding shall be treated as if they were
wages paid by an employer to an employee.
(r) Extension of withholding to certain taxable payments of
Indian casino profits.--
(1) In general.--Every person, including an Indian
tribe, making a payment to a member of an Indian tribe
from the net revenues of any class II or class III
gaming activity conducted or licensed by such tribe
shall deduct and withhold from such payment a tax in an
amount equal to such payment's proportionate share of
the annualized tax.
(2) Exception.--The tax imposed by paragraph (1)
shall not apply to any payment to the extent that the
payment, when annualized, does not exceed an amount
equal to [the sum of--
[(A) the basic standard deduction (as defined
in section 63(c)) for an individual to whom
section 63(c)(2)(C) applies, and
[(B) the exemption amount (as defined in
section 151(d)).] the basic standard deduction
(as defined in section 63(c)) for an individual
to whom section 63(c)(2)(C) applies.
(3) Annualized tax.--For purposes of paragraph (1),
the term ``annualized tax'' means, with respect to any
payment, the amount of tax which would be imposed by
section 1(c) (determined without regard to any rate of
tax in excess of the fourth lowest rate of tax
applicable under section 1(c)) on an amount of taxable
income equal to the excess of--
(A) the annualized amount of such payment,
over
(B) the amount determined under paragraph
(2).
(4) Classes of gaming activities, etc..--For purposes
of this subsection, terms used in paragraph (1) which
are defined in section 4 of the Indian Gaming
Regulatory Act (25 U.S.C. 2701 et seq.), as in effect
on the date of the enactment of this subsection, shall
have the respective meanings given such terms by such
section.
(5) Annualization.--Payments shall be placed on an
annualized basis under regulations prescribed by the
Secretary.
(6) Alternate withholding procedures.--At the
election of an Indian tribe, the tax imposed by this
subsection on any payment made by such tribe shall be
determined in accordance with such tables or
computational procedures as may be specified in
regulations prescribed by the Secretary (in lieu of in
accordance with paragraphs (2) and (3)).
(7) Coordination with other sections.--For purposes
of this chapter and so much of subtitle F as relates to
this chapter, payments to any person which are subject
to withholding under this subsection shall be treated
as if they were wages paid by an employer to an
employee.
(s) Exemption from withholding for any vehicle fringe
benefit.--
(1) Employer election not to withhold.--The employer
may elect not to deduct and withhold any tax under this
chapter with respect to any vehicle fringe benefit
provided to any employee if such employee is notified
by the employer of such election (at such time and in
such manner as the Secretary shall by regulations
prescribe). The preceding sentence shall not apply to
any vehicle fringe benefit unless the amount of such
benefit is included by the employer on a statement
timely furnished under section 6051.
(2) Employer must furnish W-2.--Any vehicle fringe
benefit shall be treated as wages from which amounts
are required to be deducted and withheld under this
chapter for purposes of section 6051.
(3) Vehicle fringe benefit.--For purposes of this
subsection, the term ``vehicle fringe benefit'' means
any fringe benefit--
(A) which constitutes wages (as defined in
section 3401), and
(B) which consists of providing a highway
motor vehicle for the use of the employee.
(t) Rate of withholding for certain stock.--In the case of
any qualified stock (as defined in section 83(i)(2)) with
respect to which an election is made under section 83(i)--
(1) the rate of tax under subsection (a) shall not be
less than the maximum rate of tax in effect under
section 1, and
(2) such stock shall be treated for purposes of
section 3501(b) in the same manner as a non-cash fringe
benefit.
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 48--MAINTENANCE OF MINIMUM ESSENTIAL COVERAGE
Sec. 5000A. Requirement to maintain minimum essential coverage.
SEC. 5000A. REQUIREMENT TO MAINTAIN MINIMUM ESSENTIAL COVERAGE.
(a) Requirement to maintain minimum essential coverage.--An
applicable individual shall for each month beginning after 2013
ensure that the individual, and any dependent of the individual
who is an applicable individual, is covered under minimum
essential coverage for such month.
(b) Shared responsibility payment.--
(1) In general.--If a taxpayer who is an applicable
individual, or an applicable individual for whom the
taxpayer is liable under paragraph (3), fails to meet
the requirement of subsection (a) for 1 or more months,
then, except as provided in subsection (e), there is
hereby imposed on the taxpayer a penalty with respect
to such failures in the amount determined under
subsection (c).
(2) Inclusion with return.--Any penalty imposed by
this section with respect to any month shall be
included with a taxpayer's return under chapter 1 for
the taxable year which includes such month.
(3) Payment of penalty.--If an individual with
respect to whom a penalty is imposed by this section
for any month--
(A) is a dependent (as defined in [section
152] section 7706) of another taxpayer for the
other taxpayer's taxable year including such
month, such other taxpayer shall be liable for
such penalty, or
(B) files a joint return for the taxable year
including such month, such individual and the
spouse of such individual shall be jointly
liable for such penalty.
(c) Amount of penalty.--
(1) In general.--The amount of the penalty imposed by
this section on any taxpayer for any taxable year with
respect to failures described in subsection (b)(1)
shall be equal to the lesser of--
(A) the sum of the monthly penalty amounts
determined under paragraph (2) for months in
the taxable year during which 1 or more such
failures occurred, or
(B) an amount equal to the national average
premium for qualified health plans which have a
bronze level of coverage, provide coverage for
the applicable family size involved, and are
offered through Exchanges for plan years
beginning in the calendar year with or within
which the taxable year ends.
(2) Monthly penalty amounts.--For purposes of
paragraph (1)(A), the monthly penalty amount with
respect to any taxpayer for any month during which any
failure described in subsection (b)(1) occurred is an
amount equal to \1/12\ of the greater of the following
amounts:
(A) Flat dollar amount.--An amount equal to
the lesser of--
(i) the sum of the applicable dollar
amounts for all individuals with
respect to whom such failure occurred
during such month, or
(ii) 300 percent of the applicable
dollar amount (determined without
regard to paragraph (3)(C)) for the
calendar year with or within which the
taxable year ends.
(B) Percentage of income.--An amount equal to
the following percentage of the excess of the
taxpayer's household income for the taxable
year over the amount of gross income specified
in section 6012(a)(1) with respect to the
taxpayer for the taxable year:
(i) 1.0 percent for taxable years
beginning in 2014.
(ii) 2.0 percent for taxable years
beginning in 2015.
(iii) Zero percent for taxable years
beginning after 2015.
(3) Applicable dollar amount.--For purposes of
paragraph (1)--
(A) In general.--Except as provided in
subparagraphs (B) and (C), the applicable
dollar amount is $0.
(B) Phase in.--The applicable dollar amount
is $95 for 2014 and $325 for 2015.
(C) Special rule for individuals under age
18.--If an applicable individual has not
attained the age of 18 as of the beginning of a
month, the applicable dollar amount with
respect to such individual for the month shall
be equal to one-half of the applicable dollar
amount for the calendar year in which the month
occurs.
(4) Terms relating to income and families.--For
purposes of this section--
(A) Family size.--The family size involved
with respect to any taxpayer shall be equal to
[the number of individuals for whom the
taxpayer is allowed a deduction under section
151 (relating to allowance of deduction for
personal exemptions) for the taxable year] the
sum of 1 (2 in the case of a joint return) plus
the number of the taxpayer's dependents for the
taxable year.
(B) Household income.--The term ``household
income'' means, with respect to any taxpayer
for any taxable year, an amount equal to the
sum of--
(i) the modified adjusted gross
income of the taxpayer, plus
(ii) the aggregate modified adjusted
gross incomes of all other individuals
who--
(I) were taken into account
in determining the taxpayer's
family size under paragraph
(1), and
(II) were required to file a
return of tax imposed by
section 1 for the taxable year.
(C) Modified adjusted gross income.--The term
``modified adjusted gross income'' means
adjusted gross income increased by--
(i) any amount excluded from gross
income under section 911, and
(ii) any amount of interest received
or accrued by the taxpayer during the
taxable year which is exempt from tax.
(d) Applicable individual.--For purposes of this section--
(1) In general.--The term ``applicable individual''
means, with respect to any month, an individual other
than an individual described in paragraph (2), (3), or
(4).
(2) Religious exemptions.--
(A) Religious conscience exemption.--Such
term shall not include any individual for any
month if such individual has in effect an
exemption under section 1311(d)(4)(H) of the
Patient Protection and Affordable Care Act
which certifies that such individual is--
(i) a member of a recognized
religious sect or division thereof
which is described in section
1402(g)(1), and
(ii) an adherent of established
tenets or teachings of such sect or
division as described in such section.
(B) Health care sharing ministry.--
(i) In general.--Such term shall not
include any individual for any month if
such individual is a member of a health
care sharing ministry for the month.
(ii) Health care sharing ministry.--
The term ``health care sharing
ministry'' means an organization--
(I) which is described in
section 501(c)(3) and is exempt
from taxation under section
501(a),
(II) members of which share a
common set of ethical or
religious beliefs and share
medical expenses among members
in accordance with those
beliefs and without regard to
the State in which a member
resides or is employed,
(III) members of which retain
membership even after they
develop a medical condition,
(IV) which (or a predecessor
of which) has been in existence
at all times since December 31,
1999, and medical expenses of
its members have been shared
continuously and without
interruption since at least
December 31, 1999, and
(V) which conducts an annual
audit which is performed by an
independent certified public
accounting firm in accordance
with generally accepted
accounting principles and which
is made available to the public
upon request.
(3) Individuals not lawfully present.--Such term
shall not include an individual for any month if for
the month the individual is not a citizen or national
of the United States or an alien lawfully present in
the United States.
(4) Incarcerated individuals.--Such term shall not
include an individual for any month if for the month
the individual is incarcerated, other than
incarceration pending the disposition of charges.
(e) Exemptions.--No penalty shall be imposed under subsection
(a) with respect to--
(1) Individuals who cannot afford coverage.--
(A) In general.--Any applicable individual
for any month if the applicable individual's
required contribution (determined on an annual
basis) for coverage for the month exceeds 8
percent of such individual's household income
for the taxable year described in section
1412(b)(1)(B) of the Patient Protection and
Affordable Care Act. For purposes of applying
this subparagraph, the taxpayer's household
income shall be increased by any exclusion from
gross income for any portion of the required
contribution made through a salary reduction
arrangement.
(B) Required contribution.--For purposes of
this paragraph, the term ``required
contribution'' means--
(i) in the case of an individual
eligible to purchase minimum essential
coverage consisting of coverage through
an eligible-employer-sponsored plan,
the portion of the annual premium which
would be paid by the individual
(without regard to whether paid through
salary reduction or otherwise) for
self-only coverage, or
(ii) in the case of an individual
eligible only to purchase minimum
essential coverage described in
subsection (f)(1)(C), the annual
premium for the lowest cost bronze plan
available in the individual market
through the Exchange in the State in
the rating area in which the individual
resides (without regard to whether the
individual purchased a qualified health
plan through the Exchange), reduced by
the amount of the credit allowable
under section 36B for the taxable year
(determined as if the individual was
covered by a qualified health plan
offered through the Exchange for the
entire taxable year).
(C) Special rules for individuals related to
employees.--For purposes of subparagraph
(B)(i), if an applicable individual is eligible
for minimum essential coverage through an
employer by reason of a relationship to an
employee, the determination under subparagraph
(A) shall be made by reference to required
contribution of the employee.
(D) Indexing.--In the case of plan years
beginning in any calendar year after 2014,
subparagraph (A) shall be applied by
substituting for ``8 percent'' the percentage
the Secretary of Health and Human Services
determines reflects the excess of the rate of
premium growth between the preceding calendar
year and 2013 over the rate of income growth
for such period.
(2) Taxpayers with income below filing threshold.--
Any applicable individual for any month during a
calendar year if the individual's household income for
the taxable year described in section 1412(b)(1)(B) of
the Patient Protection and Affordable Care Act is the
amount of gross income specified in section 6012(a)(1)
with respect to the taxpayer.
(3) Members of Indian tribes.--Any applicable
individual for any month during which the individual is
a member of an Indian tribe (as defined in section
45A(c)(6)).
(4) Months during short coverage gaps.--
(A) In general.--Any month the last day of
which occurred during a period in which the
applicable individual was not covered by
minimum essential coverage for a continuous
period of less than 3 months.
(B) Special rules.--For purposes of applying
this paragraph--
(i) the length of a continuous period
shall be determined without regard to
the calendar years in which months in
such period occur,
(ii) if a continuous period is
greater than the period allowed under
subparagraph (A), no exception shall be
provided under this paragraph for any
month in the period, and
(iii) if there is more than 1
continuous period described in
subparagraph (A) covering months in a
calendar year, the exception provided
by this paragraph shall only apply to
months in the first of such periods.
The Secretary shall prescribe rules for the
collection of the penalty imposed by this
section in cases where continuous periods
include months in more than 1 taxable year.
(5) Hardships.--Any applicable individual who for any
month is determined by the Secretary of Health and
Human Services under section 1311(d)(4)(H) to have
suffered a hardship with respect to the capability to
obtain coverage under a qualified health plan.
(f) Minimum essential coverage.--For purposes of this
section--
(1) In general.--The term ``minimum essential
coverage'' means any of the following:
(A) Government sponsored programs.--Coverage
under--
(i) the Medicare program under part A
of title XVIII of the Social Security
Act,
(ii) the Medicaid program under title
XIX of the Social Security Act,
(iii) the CHIP program under title
XXI of the Social Security Act or under
a qualified CHIP look-alike program (as
defined in section 2107(g) of the
Social Security Act),
(iv) medical coverage under chapter
55 of title 10, United States Code,
including coverage under the TRICARE
program;
(v) a health care program under
chapter 17 or 18 of title 38, United
States Code, as determined by the
Secretary of Veterans Affairs, in
coordination with the Secretary of
Health and Human Services and the
Secretary,
(vi) a health plan under section
2504(e) of title 22, United States Code
(relating to Peace Corps volunteers);
or
(vii) the Nonappropriated Fund Health
Benefits Program of the Department of
Defense, established under section 349
of the National Defense Authorization
Act for Fiscal Year 1995 (Public Law
103-337; 10 U.S.C. 1587 note).
(B) Employer-sponsored plan.--Coverage under
an eligible employer-sponsored plan.
(C) Plans in the individual market.--Coverage
under a health plan offered in the individual
market within a State.
(D) Grandfathered health plan.--Coverage
under a grandfathered health plan.
(E) Other coverage.--Such other health
benefits coverage, such as a State health
benefits risk pool, as the Secretary of Health
and Human Services, in coordination with the
Secretary, recognizes for purposes of this
subsection.
(2) Eligible employer-sponsored plan.--The term
``eligible employer-sponsored plan'' means, with
respect to any employee, a group health plan or group
health insurance coverage offered by an employer to the
employee which is--
(A) a governmental plan (within the meaning
of section 2791(d)(8) of the Public Health
Service Act), or
(B) any other plan or coverage offered in the
small or large group market within a State.
Such term shall include a grandfathered health plan
described in paragraph (1)(D) offered in a group
market.
(3) Excepted benefits not treated as minimum
essential coverage.--The term ``minimum essential
coverage'' shall not include health insurance coverage
which consists of coverage of excepted benefits--
(A) described in paragraph (1) of subsection
(c) of section 2791 of the Public Health
Service Act; or
(B) described in paragraph (2), (3), or (4)
of such subsection if the benefits are provided
under a separate policy, certificate, or
contract of insurance.
(4) Individuals residing outside United States or
residents of territories.--Any applicable individual
shall be treated as having minimum essential coverage
for any month--
(A) if such month occurs during any period
described in subparagraph (A) or (B) of section
911(d)(1) which is applicable to the
individual, or
(B) if such individual is a bona fide
resident of any possession of the United States
(as determined under section 937(a)) for such
month.
(5) Insurance-related terms.--Any term used in this
section which is also used in title I of the Patient
Protection and Affordable Care Act shall have the same
meaning as when used in such title.
(g) Administration and procedure.--
(1) In general.--The penalty provided by this section
shall be paid upon notice and demand by the Secretary,
and except as provided in paragraph (2), shall be
assessed and collected in the same manner as an
assessable penalty under subchapter B of chapter 68.
(2) Special rules.--Notwithstanding any other
provision of law--
(A) Waiver of criminal penalties.--In the
case of any failure by a taxpayer to timely pay
any penalty imposed by this section, such
taxpayer shall not be subject to any criminal
prosecution or penalty with respect to such
failure.
(B) Limitations on liens and levies.--The
Secretary shall not--
(i) file notice of lien with respect
to any property of a taxpayer by reason
of any failure to pay the penalty
imposed by this section, or
(ii) levy on any such property with
respect to such failure.
* * * * * * *
Subtitle F--Procedure and Administration
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CHAPTER 61--INFORMATION AND RETURNS
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Subchapter A--Returns and Records
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PART II--TAX RETURNS OR STATEMENTS
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Subpart B--Income Tax Returns
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SEC. 6012. PERSONS REQUIRED TO MAKE RETURNS OF INCOME.
(a) General rule.--Returns with respect to income taxes under
subtitle A shall be made by the following:
[(1)(A) Every individual having for the taxable year
gross income which equals or exceeds the exemption
amount, except that a return shall not be required of
an individual--
[(i) who is not married (determined
by applying section 7703), is not a
surviving spouse (as defined in section
2(a)), is not a head of a household (as
defined in section 2(b)), and for the
taxable year has gross income of less
than the sum of the exemption amount
plus the basic standard deduction
applicable to such an individual,
[(ii) who is a head of a household
(as so defined) and for the taxable
year has gross income of less than the
sum of the exemption amount plus the
basic standard deduction applicable to
such an individual,
[(iii) who is a surviving spouse (as
so defined) and for the taxable year
has gross income of less than the sum
of the exemption amount plus the basic
standard deduction applicable to such
an individual, or
[(iv) who is entitled to make a joint
return and whose gross income, when
combined with the gross income of his
spouse, is, for the taxable year, less
than the sum of twice the exemption
amount plus the basic standard
deduction applicable to a joint return,
but only if such individual and his
spouse, at the close of the taxable
year, had the same household as their
home.
Clause (iv) shall not apply if for the taxable year
such spouse makes a separate return or any other
taxpayer is entitled to an exemption for such spouse
under section 151(c).
[(B) The amount specified in clause (i),
(ii), or (iii) of subparagraph (A) shall be
increased by the amount of 1 additional
standard deduction (within the meaning of
section 63(c)(3)) in the case of an individual
entitled to such deduction by reason of section
63(f)(1)(A) (relating to individuals age 65 or
more), and the amount specified in clause (iv)
of subparagraph (A) shall be increased by the
amount of the additional standard deduction for
each additional standard deduction to which the
individual or his spouse is entitled by reason
of section 63(f)(1).
[(C) The exception under subparagraph (A)
shall not apply to any individual--
[(i) who is described in section
63(c)(5) and who has--
[(I) income (other than
earned income) in excess of the
sum of the amount in effect
under section 63(c)(5)(A) plus
the additional standard
deduction (if any) to which the
individual is entitled, or
[(II) total gross income in
excess of the standard
deduction, or
[(ii) for whom the standard deduction
is zero under section 63(c)(6).
[(D) For purposes of this subsection--
[(i) The terms ``standard
deduction'', ``basic standard
deduction'' and ``additional standard
deduction'' have the respective
meanings given such terms by section
63(c).
[(ii) The term ``exemption amount''
has the meaning given such term by
section 151(d). In the case of an
individual described in section
151(d)(2), the exemption amount shall
be zero.]
(1) Every individual who has gross income for the
taxable year, except that a return shall not be
required of--
(A) an individual who is not married
(determined by applying section 7703) and who
has gross income for the taxable year which
does not exceed the standard deduction
applicable to such individual for such taxable
year under section 63, or
(B) an individual entitled to make a joint
return if--
(i) the gross income of such
individual, when combined with the
gross income of such individual's
spouse, for the taxable year does not
exceed the standard deduction which
would be applicable for such taxable
year under section 63 if such
individual and such individual's spouse
made a joint return,
(ii) such individual's spouse does
not make a separate return, and
(iii) neither such individual nor
such individual's spouse is an
individual described in section
63(c)(4) who has income (other than
earned income) in excess of the amount
in effect under section 63(c)(4)(A).
(2) Every corporation subject to taxation under
subtitle A;
(3) Every estate the gross income of which for the
taxable year is $600 or more;
(4) Every trust having for the taxable year any
taxable income, or having gross income of $600 or over,
regardless of the amount of taxable income;
(5) Every estate or trust of which any beneficiary is
a nonresident alien;
(6) Every political organization (within the meaning
of section 527(e)(1)), and every fund treated under
section 527(g) as if it constituted a political
organization, which has political organization taxable
income (within the meaning of section 527(c)(1)) for
the taxable year;
(7) Every homeowners association (within the meaning
of section 528(c)(1)) which has homeowners association
taxable income (within the meaning of section 528(d))
for the taxable year; and
(8) Every estate of an individual under chapter 7 or
11 of title 11 of the United States Code (relating to
bankruptcy) the gross income of which for the taxable
year is not less than [the sum of the exemption amount
plus the basic standard deduction under section
63(c)(2)(C)] the standard deduction in effect under
section 63(c)(1)(B);
except that subject to such conditions, limitations, and
exceptions and under such regulations as may be prescribed by
the Secretary, nonresident alien individuals subject to the tax
imposed by section 871 and foreign corporations subject to the
tax imposed by section 881 may be exempted from the requirement
of making returns under this section.
(b) Returns made by fiduciaries and receivers.--
(1) Returns of decedents.--If an individual is
deceased, the return of such individual required under
subsection (a) shall be made by his executor,
administrator, or other person charged with the
property of such decedent.
(2) Persons under a disability.--If an individual is
unable to make a return required under subsection (a),
the return of such individual shall be made by a duly
authorized agent, his committee, guardian, fiduciary or
other person charged with the care of the person or
property of such individual. The preceding sentence
shall not apply in the case of a receiver appointed by
authority of law in possession of only a part of the
property of an individual.
(3) Receivers, trustees and assignees for
corporations.--In a case where a receiver, trustee in a
case under title 11 of the United States Code, or
assignee, by order of a court of competent
jurisdiction, by operation of law or otherwise, has
possession of or holds title to all or substantially
all the property or business of a corporation, whether
or not such property or business is being operated,
such receiver, trustee, or assignee shall make the
return of income for such corporation in the same
manner and form as corporations are required to make
such returns.
(4) Returns of estates and trusts.--Returns of an
estate, a trust, or an estate of an individual under
chapter 7 or 11 of title 11 of the United States Code
shall be made by the fiduciary thereof.
(5) Joint fiduciaries.--Under such regulations as the
Secretary may prescribe, a return made by one of two or
more joint fiduciaries shall be sufficient compliance
with the requirements of this section. A return made
pursuant to this paragraph shall contain a statement
that the fiduciary has sufficient knowledge of the
affairs of the person for whom the return is made to
enable him to make the return, and that the return is,
to the best of his knowledge and belief, true and
correct.
(6) IRA share of partnership income.--In the case of
a trust which is exempt from taxation under section
408(e), for purposes of this section, the trust's
distributive share of items of gross income and gain of
any partnership to which subchapter C or D of chapter
63 applies shall be treated as equal to the trust's
distributive share of the taxable income of such
partnership.
(c) Certain income earned abroad or from sale of residence.--
For purposes of this section, gross income shall be computed
without regard to the exclusion provided for in section 121
(relating to gain from sale of principal residence) and without
regard to the exclusion provided for in section 911 (relating
to citizens or residents of the United States living abroad).
(d) Tax-exempt interest required to be shown on return.--
Every person required to file a return under this section for
the taxable year shall include on such return the amount of
interest received or accrued during the taxable year which is
exempt from the tax imposed by chapter 1.
(e) Consolidated returns.--For provisions relating to
consolidated returns by affiliated corporations, see chapter 6.
[(f) Special rule for taxable years 2018 through 2025.--In
the case of a taxable year beginning after December 31, 2017,
and before January 1, 2026, subsection (a)(1) shall not apply,
and every individual who has gross income for the taxable year
shall be required to make returns with respect to income taxes
under subtitle A, except that a return shall not be required
of--
[(1) an individual who is not married (determined by
applying section 7703) and who has gross income for the
taxable year which does not exceed the standard
deduction applicable to such individual for such
taxable year under section 63, or
[(2) an individual entitled to make a joint return
if--
[(A) the gross income of such individual,
when combined with the gross income of such
individual's spouse, for the taxable year does
not exceed the standard deduction which would
be applicable to the taxpayer for such taxable
year under section 63 if such individual and
such individual's spouse made a joint return,
[(B) such individual and such individual's
spouse have the same household as their home at
the close of the taxable year,
[(C) such individual's spouse does not make a
separate return, and
[(D) neither such individual nor such
individual's spouse is an individual described
in section 63(c)(5) who has income (other than
earned income) in excess of the amount in
effect under section 63(c)(5)(A).]
SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.
(a) Joint returns.--A husband and wife may make a single
return jointly of income taxes under subtitle A, even though
one of the spouses has neither gross income nor deductions,
except as provided below:
(1) no joint return shall be made if either the
husband or wife at any time during the taxable year is
a nonresident alien;
(2) no joint return shall be made if the husband and
wife have different taxable years; except that if such
taxable years begin on the same day and end on
different days because of the death of either or both,
then the joint return may be made with respect to the
taxable year of each. The above exception shall not
apply if the surviving spouse remarries before the
close of his taxable year, nor if the taxable year of
either spouse is a fractional part of a year under
section 443(a)(1);
(3) in the case of death of one spouse or both
spouses the joint return with respect to the decedent
may be made only by his executor or administrator;
except that in the case of the death of one spouse the
joint return may be made by the surviving spouse with
respect to both himself and the decedent if no return
for the taxable year has been made by the decedent, no
executor or administrator has been appointed, and no
executor or administrator is appointed before the last
day prescribed by law for filing the return of the
surviving spouse. If an executor or administrator of
the decedent is appointed after the making of the joint
return by the surviving spouse, the executor or
administrator may disaffirm such joint return by
making, within 1 year after the last day prescribed by
law for filing the return of the surviving spouse, a
separate return for the taxable year of the decedent
with respect to which the joint return was made, in
which case the return made by the survivor shall
constitute his separate return.
(b) Joint return after filing separate return.--
(1) In general.--Except as provided in paragraph (2),
if an individual has filed a separate return for a
taxable year for which a joint return could have been
made by him and his spouse under subsection (a) and the
time prescribed by law for filing the return for such
taxable year has expired, such individual and his
spouse may nevertheless make a joint return for such
taxable year. A joint return filed by the husband and
wife under this subsection shall constitute the return
of the husband and wife for such taxable year, and all
payments, credits, refunds, or other repayments made or
allowed with respect to the separate return of either
spouse for such taxable year shall be taken into
account in determining the extent to which the tax
based upon the joint return has been paid. If a joint
return is made under this subsection, any election
(other than the election to file a separate return)
made by either spouse in his separate return for such
taxable year with respect to the treatment of any
income, deduction, or credit of such spouse shall not
be changed in the making of the joint return where such
election would have been irrevocable if the joint
return had not been made. If a joint return is made
under this subsection after the death of either spouse,
such return with respect to the decedent can be made
only by his executor or administrator.
(2) Limitations for making of election.--The election
provided for in paragraph (1) may not be made--
(A) after the expiration of 3 years from the
last date prescribed by law for filing the
return for such taxable year (determined
without regard to any extension of time granted
to either spouse); or
(B) after there has been mailed to either
spouse, with respect to such taxable year, a
notice of deficiency under section 6212, if the
spouse, as to such notice, files a petition
with the Tax Court within the time prescribed
in section 6213; or
(C) after either spouse has commenced a suit
in any court for the recovery of any part of
the tax for such taxable year; or
(D) after either spouse has entered into a
closing agreement under section 7121 with
respect to such taxable year, or after any
civil or criminal case arising against either
spouse with respect to such taxable year has
been compromised under section 7122.
(3) When return deemed filed.--
(A) Assessment and collection.--For purposes
of section 6501 (relating to periods of
limitations on assessment and collection), and
for purposes of section 6651 (relating to
delinquent returns), a joint return made under
this subsection shall be deemed to have been
filed--
(i) Where both spouses filed separate
returns prior to making the joint
return - on the date the last separate
return was filed (but not earlier than
the last date prescribed by law for
filing the return of either spouse);
(ii) Where only one spouse filed a
separate return prior to the making of
the joint return, and the other spouse
[had less than the exemption amount of
gross income] had no gross income for
such taxable year - on the date of the
filing of such separate return (but not
earlier than the last date prescribed
by law for the filing of such separate
return); or
(iii) Where only one spouse filed a
separate return prior to the making of
the joint return, and the other spouse
[had gross income of the exemption
amount or more] had any gross income
for such taxable year - on the date of
the filing of such joint return.
[For purposes of this subparagraph, the term
``exemption amount'' has the meaning given to
such term by section 151(d). For purposes of
clauses (ii) and (iii), if the spouse whose
gross income is being compared to the exemption
amount is 65 or over, such clauses shall be
applied by substituting ``the sum of the
exemption amount and the additional standard
deduction under section 63(c)(2) by reason of
section 63(f)(1)(A)'' for ``the exemption
amount''.]
(B) Credit or refund.--For purposes of
section 6511, a joint return made under this
subsection shall be deemed to have been filed
on the last date prescribed by law for filing
the return for such taxable year (determined
without regard to any extension of time granted
to either spouse).
(4) Additional time for assessment.--If a joint
return is made under this subsection, the periods of
limitations provided in sections 6501 and 6502 on the
making of assessments and the beginning of levy or a
proceeding in court for collection shall with respect
to such return include one year immediately after the
date of the filing of such joint return (computed
without regard to the provisions of paragraph (3)).
(5) Additions to the tax and penalties.--
(A) Coordination with part II of subchapter A
of chapter 68.--For purposes of part II of
subchapter A of chapter 68, where the sum of
the amounts shown as tax on the separate
returns of each spouse is less than the amount
shown as tax on the joint return made under
this subsection--
(i) such sum shall be treated as the
amount shown on the joint return,
(ii) any negligence (or disregard of
rules or regulations) on either
separate return shall be treated as
negligence (or such disregard) on the
joint return, and
(iii) any fraud on either separate
return shall be treated as fraud on the
joint return.
(B) Criminal penalty.--For purposes of
section 7206(1) and (2) and section 7207
(relating to criminal penalties in the case of
fraudulent returns) the term ``return''
includes a separate return filed by a spouse
with respect to a taxable year for which a
joint return is made under this subsection
after the filing of such separate return.
(c) Treatment of joint return after death of either spouse.--
For purposes of [sections 15, 443, and 7851(a)(1)(A)] section
443, where the husband and wife have different taxable years
because of the death of either spouse, the joint return shall
be treated as if the taxable years of both spouses ended on the
date of the closing of the surviving spouse's taxable year.
(d) Special rules.--For purposes of this section--
(1) the status as husband and wife of two individuals
having taxable years beginning on the same day shall be
determined--
(A) if both have the same taxable year - as
of the close of such year; or
(B) if one dies before the close of the
taxable year of the other - as of the time of
such death;
(2) an individual who is legally separated from his
spouse under a decree of divorce or of separate
maintenance shall not be considered as married; and
(3) if a joint return is made, the tax shall be
computed on the aggregate income and the liability with
respect to the tax shall be joint and several.
(f) Joint return where individual is in missing status.--For
purposes of this section and subtitle A--
(1) Election by spouse.--If--
(A) an individual is in a missing status
(within the meaning of paragraph (3)) as a
result of service in a combat zone (as
determined for purposes of section 112), and
(B) the spouse of such individual is
otherwise entitled to file a joint return for
any taxable year which begins on or before the
day which is 2 years after the date designated
under section 112 as the date of termination of
combatant activities in such zone,
then such spouse may elect under subsection (a) to file
a joint return for such taxable year. With respect to
service in the combat zone designated for purposes of
the Vietnam conflict, such election may be made for any
taxable year while an individual is in missing status.
(2) Effect of election.--If the spouse of an
individual described in paragraph (1)(A) elects to file
a joint return under subsection (a) for a taxable year,
then, until such election is revoked--
(A) such election shall be valid even if such
individual died before the beginning of such
year, and
(B) except for purposes of section 692
(relating to income taxes of members of the
Armed Forces, astronauts, and victims of
certain terrorist attacks on death), the income
tax liability of such individual, his spouse,
and his estate shall be determined as if he
were alive throughout the taxable year.
(3) Missing status.--For purposes of this
subsection--
(A) Uniformed services.--A member of a
uniformed service (within the meaning of
section 101(3) of title 37 of the United States
Code) is in a missing status for any period for
which he is entitled to pay and allowances
under section 552 of such title 37.
(B) Civilian employees.--An employee (within
the meaning of section 5561(2) of title 5 of
the United States Code) is in a missing status
for any period for which he is entitled to pay
and allowances under section 5562 of such title
5.
(4) Making of election; revocation.--An election
described in this subsection with respect to any
taxable year may be made by filing a joint return in
accordance with subsection (a) and under such
regulations as may be prescribed by the Secretary. Such
an election may be revoked by either spouse on or
before the due date (including extensions) for such
taxable year, and, in the case of an executor or
administrator, may be revoked by disaffirming as
provided in the last sentence of subsection (a)(3).
(g) Election to treat nonresident alien individual as
resident of the United States.--
(1) In general.--A nonresident alien individual with
respect to whom this subsection is in effect for the
taxable year shall be treated as a resident of the
United States--
(A) for purposes of chapter 1 for all of such
taxable year, and
(B) for purposes of chapter 24 (relating to
wage withholding) for payments of wages made
during such taxable year.
(2) Individuals with respect to whom this subsection
is in effect.--This subsection shall be in effect with
respect to any individual who, at the close of the
taxable year for which an election under this
subsection was made, was a nonresident alien individual
married to a citizen or resident of the United States,
if both of them made such election to have the benefits
of this subsection apply to them.
(3) Duration of election.--An election under this
subsection shall apply to the taxable year for which
made and to all subsequent taxable years until
terminated under paragraph (4) or (5); except that any
such election shall not apply for any taxable year if
neither spouse is a citizen or resident of the United
States at any time during such year.
(4) Termination of election.--An election under this
subsection shall terminate at the earliest of the
following times:
(A) Revocation by taxpayers.--If either
taxpayer revokes the election, as of the first
taxable year for which the last day prescribed
by law for filing the return of tax under
chapter 1 has not yet occurred.
(B) Death.--In the case of the death of
either spouse, as of the beginning of the first
taxable year of the spouse who survives
following the taxable year in which such death
occurred; except that if the spouse who
survives is a citizen or resident of the United
States who is a surviving spouse entitled to
the benefits of section 2, the time provided by
this subparagraph shall be as of the close of
the last taxable year for which such individual
is entitled to the benefits of section 2.
(C) Legal separation.--In the case of the
legal separation of the couple under a decree
of divorce or of separate maintenance, as of
the beginning of the taxable year in which such
legal separation occurs.
(D) Termination by Secretary.--At the time
provided in paragraph (5).
(5) Termination by Secretary.--The Secretary may
terminate any election under this subsection for any
taxable year if he determines that either spouse has
failed--
(A) to keep such books and records,
(B) to grant such access to such books and
records, or
(C) to supply such other information, as may
be reasonably necessary to ascertain the amount
of liability for taxes under chapter 1 of
either spouse for such taxable year.
(6) Only one election.--If any election under this
subsection for any two individuals is terminated under
paragraph (4) or (5) for any taxable year, such two
individuals shall be ineligible to make an election
under this subsection for any subsequent taxable year.
(h) Joint return, etc., for year in which nonresident alien
becomes resident of United States.--
(1) In general.--If--
(A) any individual is a nonresident alien
individual at the beginning of any taxable year
but is a resident of the United States at the
close of such taxable year,
(B) at the close of such taxable year, such
individual is married to a citizen or resident
of the United States, and
(C) both individuals elect the benefits of
this subsection at the time and in the manner
prescribed by the Secretary by regulation,
then the individual referred to in subparagraph (A)
shall be treated as a resident of the United States for
purposes of chapter 1 for all of such taxable year, and
for purposes of chapter 24 (relating to wage
withholding) for payments of wages made during such
taxable year.
(2) Only one election.--If any election under this
subsection applies for any 2 individuals for any
taxable year, such 2 individuals shall be ineligible to
make an election under this subsection for any
subsequent taxable year.
SEC. 6014. INCOME TAX RETURN - TAX NOT COMPUTED BY TAXPAYER.
(a) Election by taxpayer.--An individual who does not itemize
his deductions and who is not described in [section
6012(a)(1)(C)(i)] section 6012(a)(1)(B)(iii), whose gross
income is less than $10,000 and includes no income other than
remuneration for services performed by him as an employee,
dividends or interest, and whose gross income other than wages,
as defined in section 3401(a), does not exceed $100, shall at
his election not be required to show on the return the tax
imposed by section 1. Such election shall be made by using the
form prescribed for purposes of this section. In such case the
tax shall be computed by the Secretary who shall mail to the
taxpayer a notice stating the amount determined as payable.
(b) Regulations.--The Secretary shall prescribe regulations
for carrying out this section, and such regulations may provide
for the application of the rules of this section--
(1) to cases where the gross income includes items
other than those enumerated by subsection (a),
(2) to cases where the gross income from sources
other than wages on which the tax has been withheld at
the source is more than $100,
(3) to cases where the gross income is $10,000 or
more, or
(4) to cases where the taxpayer itemizes his
deductions or where the taxpayer claims a reduced
standard deduction by reason of section [63(c)(5)]
63(c)(4).
Such regulations shall provide for the application of this
section in the case of husband and wife, including provisions
determining when a joint return under this section may be
permitted or required, whether the liability shall be joint and
several, and whether one spouse may make return under this
section and the other without regard to this section.
* * * * * * *
Subchapter B--Miscellaneous Provisions
* * * * * * *
SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.
(a) General rule.--Returns and return information shall be
confidential, and except as authorized by this title--
(1) no officer or employee of the United States,
(2) no officer or employee of any State, any local
law enforcement agency receiving information under
subsection (i)(1)(C) or (7)(A), any local child support
enforcement agency, or any local agency administering a
program listed in subsection (l)(7)(D) who has or had
access to returns or return information under this
section or section 6104(c), and
(3) no other person (or officer or employee thereof)
who has or had access to returns or return information
under subsection (e)(1)(D)(iii), subsection (k)(10),
paragraph (6), (10), (12), (16), (19), (20), or (21) of
subsection (l), paragraph (2) or (4)(B) of subsection
(m), or subsection (n),
shall disclose any return or return information obtained by him
in any manner in connection with his service as such an officer
or an employee or otherwise or under the provisions of this
section. For purposes of this subsection, the term ``officer or
employee'' includes a former officer or employee.
(b) Definitions.--For purposes of this section--
(1) Return.--The term ``return'' means any tax or
information return, declaration of estimated tax, or
claim for refund required by, or provided for or
permitted under, the provisions of this title which is
filed with the Secretary by, on behalf of, or with
respect to any person, and any amendment or supplement
thereto, including supporting schedules, attachments,
or lists which are supplemental to, or part of, the
return so filed.
(2) Return information.--The term ``return
information'' means--
(A) a taxpayer's identity, the nature,
source, or amount of his income, payments,
receipts, deductions, exemptions, credits,
assets, liabilities, net worth, tax liability,
tax withheld, deficiencies, overassessments, or
tax payments, whether the taxpayer's return
was, is being, or will be examined or subject
to other investigation or processing, or any
other data, received by, recorded by, prepared
by, furnished to, or collected by the Secretary
with respect to a return or with respect to the
determination of the existence, or possible
existence, of liability (or the amount thereof)
of any person under this title for any tax,
penalty, interest, fine, forfeiture, or other
imposition, or offense,
(B) any part of any written determination or
any background file document relating to such
written determination (as such terms are
defined in section 6110(b)) which is not open
to public inspection under section 6110,
(C) any advance pricing agreement entered
into by a taxpayer and the Secretary and any
background information related to such
agreement or any application for an advance
pricing agreement, and
(D) any agreement under section 7121, and any
similar agreement, and any background
information related to such an agreement or
request for such an agreement,
but such term does not include data in a form which
cannot be associated with, or otherwise identify,
directly or indirectly, a particular taxpayer. Nothing
in the preceding sentence, or in any other provision of
law, shall be construed to require the disclosure of
standards used or to be used for the selection of
returns for examination, or data used or to be used for
determining such standards, if the Secretary determines
that such disclosure will seriously impair assessment,
collection, or enforcement under the internal revenue
laws.
(3) Taxpayer return information.--The term ``taxpayer
return information'' means return information as
defined in paragraph (2) which is filed with, or
furnished to, the Secretary by or on behalf of the
taxpayer to whom such return information relates.
(4) Tax administration.--The term ``tax
administration''--
(A) means--
(i) the administration, management,
conduct, direction, and supervision of
the execution and application of the
internal revenue laws or related
statutes (or equivalent laws and
statutes of a State) and tax
conventions to which the United States
is a party, and
(ii) the development and formulation
of Federal tax policy relating to
existing or proposed internal revenue
laws, related statutes, and tax
conventions, and
(B) includes assessment, collection,
enforcement, litigation, publication, and
statistical gathering functions under such
laws, statutes, or conventions.
(5) State.--
(A) In general.--The term ``State'' means--
(i) any of the 50 States, the
District of Columbia, the Commonwealth
of Puerto Rico, the Virgin Islands,
Guam, American Samoa, and the
Commonwealth of the Northern Mariana
Islands,
(ii) for purposes of subsections
(a)(2), (b)(4), (d)(1), (h)(4), and
(p), any municipality--
(I) with a population in
excess of 250,000 (as
determined under the most
recent decennial United States
census data available),
(II) which imposes a tax on
income or wages, and
(III) with which the
Secretary (in his sole
discretion) has entered into an
agreement regarding disclosure,
and
(iii) for purposes of subsections
(a)(2), (b)(4), (d)(1), (h)(4), and
(p), any governmental entity--
(I) which is formed and
operated by a qualified group
of municipalities, and
(II) with which the Secretary
(in his sole discretion) has
entered into an agreement
regarding disclosure.
(B) Regional income tax agencies.--For
purposes of subparagraph (A)(iii)--
(i) Qualified group of
municipalities.--The term ``qualified
group of municipalities'' means, with
respect to any governmental entity, 2
or more municipalities--
(I) each of which imposes a
tax on income or wages,
(II) each of which, under the
authority of a State statute,
administers the laws relating
to the imposition of such taxes
through such entity, and
(III) which collectively have
a population in excess of
250,000 (as determined under
the most recent decennial
United States census data
available).
(ii) References to state law, etc.--
For purposes of applying subparagraph
(A)(iii) to the subsections referred to
in such subparagraph, any reference in
such subsections to State law,
proceedings, or tax returns shall be
treated as references to the law,
proceedings, or tax returns, as the
case may be, of the municipalities
which form and operate the governmental
entity referred to in such
subparagraph.
(iii) Disclosure to contractors and
other agents.--Notwithstanding any
other provision of this section, no
return or return information shall be
disclosed to any contractor or other
agent of a governmental entity referred
to in subparagraph (A)(iii) unless such
entity, to the satisfaction of the
Secretary--
(I) has requirements in
effect which require each such
contractor or other agent which
would have access to returns or
return information to provide
safeguards (within the meaning
of subsection (p)(4)) to
protect the confidentiality of
such returns or return
information,
(II) agrees to conduct an on-
site review every 3 years (or a
mid-point review in the case of
contracts or agreements of less
than 3 years in duration) of
each contractor or other agent
to determine compliance with
such requirements,
(III) submits the findings of
the most recent review
conducted under subclause (II)
to the Secretary as part of the
report required by subsection
(p)(4)(E), and
(IV) certifies to the
Secretary for the most recent
annual period that such
contractor or other agent is in
compliance with all such
requirements.
The certification required by subclause
(IV) shall include the name and address
of each contractor and other agent, a
description of the contract or
agreement with such contractor or other
agent, and the duration of such
contract or agreement. The requirements
of this clause shall not apply to
disclosures pursuant to subsection (n)
for purposes of Federal tax
administration and a rule similar to
the rule of subsection (p)(8)(B) shall
apply for purposes of this clause.
(6) Taxpayer identity.--The term ``taxpayer
identity'' means the name of a person with respect to
whom a return is filed, his mailing address, his
taxpayer identifying number (as described in section
6109), or a combination thereof.
(7) Inspection.--The terms ``inspected'' and
``inspection'' mean any examination of a return or
return information.
(8) Disclosure.--The term ``disclosure'' means the
making known to any person in any manner whatever a
return or return information.
(9) Federal agency.--The term ``Federal agency''
means an agency within the meaning of section 551(1) of
title 5, United States Code.
(10) Chief executive officer.--The term ``chief
executive officer'' means, with respect to any
municipality, any elected official and the chief
official (even if not elected) of such municipality.
(11) Terrorist incident, threat, or activity.--The
term ``terrorist incident, threat, or activity'' means
an incident, threat, or activity involving an act of
domestic terrorism (as defined in section 2331(5) of
title 18, United States Code) or international
terrorism (as defined in section 2331(1) of such
title).
(c) Disclosure of returns and return information to designee
of taxpayer.--The Secretary may, subject to such requirements
and conditions as he may prescribe by regulations, disclose the
return of any taxpayer, or return information with respect to
such taxpayer, to such person or persons as the taxpayer may
designate in a request for or consent to such disclosure, or to
any other person at the taxpayer's request to the extent
necessary to comply with a request for information or
assistance made by the taxpayer to such other person. However,
return information shall not be disclosed to such person or
persons if the Secretary determines that such disclosure would
seriously impair Federal tax administration.
(d) Disclosure to State tax officials and State and local law
enforcement agencies.--
(1) In general.--Returns and return information with
respect to taxes imposed by chapters 1, 2, 6, 11, 12,
21, 23, 24, 31, 32, 44, 51, and 52 and subchapter D of
chapter 36 shall be open to inspection by, or
disclosure to, any State agency, body, or commission,
or its legal representative, which is charged under the
laws of such State with responsibility for the
administration of State tax laws for the purpose of,
and only to the extent necessary in, the administration
of such laws, including any procedures with respect to
locating any person who may be entitled to a refund.
Such inspection shall be permitted, or such disclosure
made, only upon written request by the head of such
agency, body, or commission, and only to the
representatives of such agency, body, or commission
designated in such written request as the individuals
who are to inspect or to receive the returns or return
information on behalf of such agency, body, or
commission. Such representatives shall not include any
individual who is the chief executive officer of such
State or who is neither an employee or legal
representative of such agency, body, or commission nor
a person described in subsection (n). However, such
return information shall not be disclosed to the extent
that the Secretary determines that such disclosure
would identify a confidential informant or seriously
impair any civil or criminal tax investigation.
(2) Disclosure to State audit agencies.--
(A) In general.--Any returns or return
information obtained under paragraph (1) by any
State agency, body, or commission may be open
to inspection by, or disclosure to, officers
and employees of the State audit agency for the
purpose of, and only to the extent necessary
in, making an audit of the State agency, body,
or commission referred to in paragraph (1).
(B) State audit agency.--For purposes of
subparagraph (A), the term ``State audit
agency'' means any State agency, body, or
commission which is charged under the laws of
the State with the responsibility of auditing
State revenues and programs.
(3) Exception for reimbursement under section 7624.--
Nothing in this section shall be construed to prevent
the Secretary from disclosing to any State or local law
enforcement agency which may receive a payment under
section 7624 the amount of the recovered taxes with
respect to which such a payment may be made.
(4) Availability and use of death information.--
(A) In general.--No returns or return
information may be disclosed under paragraph
(1) to any agency, body, or commission of any
State (or any legal representative thereof)
during any period during which a contract
meeting the requirements of subparagraph (B) is
not in effect between such State and the
Secretary of Health and Human Services.
(B) Contractual requirements.--A contract
meets the requirements of this subparagraph
if--
(i) such contract requires the State
to furnish the Secretary of Health and
Human Services information concerning
individuals with respect to whom death
certificates (or equivalent documents
maintained by the State or any
subdivision thereof) have been
officially filed with it, and
(ii) such contract does not include
any restriction on the use of
information obtained by such Secretary
pursuant to such contract, except that
such contract may provide that such
information is only to be used by the
Secretary (or any other Federal agency)
for purposes of ensuring that Federal
benefits or other payments are not
erroneously paid to deceased
individuals.
Any information obtained by the Secretary of
Health and Human Services under such a contract
shall be exempt from disclosure under section
552 of title 5, United States Code, and from
the requirements of section 552a of such title
5.
(C) Special exception.--The provisions of
subparagraph (A) shall not apply to any State
which on July 1, 1993, was not, pursuant to a
contract, furnishing the Secretary of Health
and Human Services information concerning
individuals with respect to whom death
certificates (or equivalent documents
maintained by the State or any subdivision
thereof) have been officially filed with it.
(5) Disclosure for combined employment tax
reporting.--
(A) In general.--The Secretary may disclose
taxpayer identity information and signatures to
any agency, body, or commission of any State
for the purpose of carrying out with such
agency, body, or commission a combined Federal
and State employment tax reporting program
approved by the Secretary. Subsections (a)(2)
and (p)(4) and sections 7213 and 7213A shall
not apply with respect to disclosures or
inspections made pursuant to this paragraph.
(B) Termination.--The Secretary may not make
any disclosure under this paragraph after
December 31, 2007.
(6) Limitation on disclosure regarding regional
income tax agencies treated as States.--For purposes of
paragraph (1), inspection by or disclosure to an entity
described in subsection (b)(5)(A)(iii) shall be for the
purpose of, and only to the extent necessary in, the
administration of the laws of the member municipalities
in such entity relating to the imposition of a tax on
income or wages. Such entity may not redisclose any
return or return information received pursuant to
paragraph (1) to any such member municipality.
(e) Disclosure to persons having material interest.--
(1) In general.--The return of a person shall, upon
written request, be open to inspection by or disclosure
to--
(A) in the case of the return of an
individual--
(i) that individual,
(ii) the spouse of that individual if
the individual and such spouse have
signified their consent to consider a
gift reported on such return as made
one-half by him and one-half by the
spouse pursuant to the provisions of
section 2513; or
(iii) the child of that individual
(or such child's legal representative)
to the extent necessary to comply with
the provisions of section 1(g);
(B) in the case of an income tax return filed
jointly, either of the individuals with respect
to whom the return is filed;
(C) in the case of the return of a
partnership, any person who was a member of
such partnership during any part of the period
covered by the return;
(D) in the case of the return of a
corporation or a subsidiary thereof--
(i) any person designated by
resolution of its board of directors or
other similar governing body,
(ii) any officer or employee of such
corporation upon written request signed
by any principal officer and attested
to by the secretary or other officer,
(iii) any bona fide shareholder of
record owning 1 percent or more of the
outstanding stock of such corporation,
(iv) if the corporation was an S
corporation, any person who was a
shareholder during any part of the
period covered by such return during
which an election under section 1362(a)
was in effect, or
(v) if the corporation has been
dissolved, any person authorized by
applicable State law to act for the
corporation or any person who the
Secretary finds to have a material
interest which will be affected by
information contained therein;
(E) in the case of the return of an estate--
(i) the administrator, executor, or
trustee of such estate, and
(ii) any heir at law, next of kin, or
beneficiary under the will, of the
decedent, but only if the Secretary
finds that such heir at law, next of
kin, or beneficiary has a material
interest which will be affected by
information contained therein; and
(F) in the case of the return of a trust--
(i) the trustee or trustees, jointly
or separately, and
(ii) any beneficiary of such trust,
but only if the Secretary finds that
such beneficiary has a material
interest which will be affected by
information contained therein.
(2) Incompetency.--If an individual described in
paragraph (1) is legally incompetent, the applicable
return shall, upon written request, be open to
inspection by or disclosure to the committee, trustee,
or guardian of his estate.
(3) Deceased individuals.--The return of a decedent
shall, upon written request, be open to inspection by
or disclosure to--
(A) the administrator, executor, or trustee
of his estate, and
(B) any heir at law, next of kin, or
beneficiary under the will, of such decedent,
or a donee of property, but only if the
Secretary finds that such heir at law, next of
kin, beneficiary, or donee has a material
interest which will be affected by information
contained therein.
(4) Title 11 cases and receivership proceedings.--
If--
(A) there is a trustee in a title 11 case in
which the debtor is the person with respect to
whom the return is filed, or
(B) substantially all of the property of the
person with respect to whom the return is filed
is in the hands of a receiver,
such return or returns for prior years of such person
shall, upon written request, be open to inspection by
or disclosure to such trustee or receiver, but only if
the Secretary finds that such trustee or receiver, in
his fiduciary capacity, has a material interest which
will be affected by information contained therein.
(5) Individual's title 11 case.--
(A) In general.--In any case to which section
1398 applies (determined without regard to
section 1398(b)(1)), any return of the debtor
for the taxable year in which the case
commenced or any preceding taxable year shall,
upon written request, be open to inspection by
or disclosure to the trustee in such case.
(B) Return of estate available to debtor.--
Any return of an estate in a case to which
section 1398 applies shall, upon written
request, be open to inspection by or disclosure
to the debtor in such case.
(C) Special rule for involuntary cases.--In
an involuntary case, no disclosure shall be
made under subparagraph (A) until the order for
relief has been entered by the court having
jurisdiction of such case unless such court
finds that such disclosure is appropriate for
purposes of determining whether an order for
relief should be entered.
(6) Attorney in fact.--Any return to which this
subsection applies shall, upon written request, also be
open to inspection by or disclosure to the attorney in
fact duly authorized in writing by any of the persons
described in paragraph (1), (2), (3), (4), (5), (8), or
(9) to inspect the return or receive the information on
his behalf, subject to the conditions provided in such
paragraphs.
(7) Return information.--Return information with
respect to any taxpayer may be open to inspection by or
disclosure to any person authorized by this subsection
to inspect any return of such taxpayer if the Secretary
determines that such disclosure would not seriously
impair Federal tax administration.
(8) Disclosure of collection activities with respect
to joint return.--If any deficiency of tax with respect
to a joint return is assessed and the individuals
filing such return are no longer married or no longer
reside in the same household, upon request in writing
by either of such individuals, the Secretary shall
disclose in writing to the individual making the
request whether the Secretary has attempted to collect
such deficiency from such other individual, the general
nature of such collection activities, and the amount
collected. The preceding sentence shall not apply to
any deficiency which may not be collected by reason of
section 6502.
(9) Disclosure of certain information where more than
1 person subject to penalty under section 6672.--If the
Secretary determines that a person is liable for a
penalty under section 6672(a) with respect to any
failure, upon request in writing of such person, the
Secretary shall disclose in writing to such person--
(A) the name of any other person whom the
Secretary has determined to be liable for such
penalty with respect to such failure, and
(B) whether the Secretary has attempted to
collect such penalty from such other person,
the general nature of such collection
activities, and the amount collected.
(10) Limitation on certain disclosures under this
subsection.--In the case of an inspection or disclosure
under this subsection relating to the return of a
partnership, S corporation, trust, or an estate, the
information inspected or disclosed shall not include
any supporting schedule, attachment, or list which
includes the taxpayer identity information of a person
other than the entity making the return or the person
conducting the inspection or to whom the disclosure is
made.
(11) Disclosure of information regarding status of
investigation of violation of this section.--In the
case of a person who provides to the Secretary
information indicating a violation of section 7213,
7213A, or 7214 with respect to any return or return
information of such person, the Secretary may disclose
to such person (or such person's designee)--
(A) whether an investigation based on the
person's provision of such information has been
initiated and whether it is open or closed,
(B) whether any such investigation
substantiated such a violation by any
individual, and
(C) whether any action has been taken with
respect to such individual (including whether a
referral has been made for prosecution of such
individual).
(f) Disclosure to Committees of Congress.--
(1) Committee on Ways and Means, Committee on
Finance, and Joint Committee on Taxation.--Upon written
request from the chairman of the Committee on Ways and
Means of the House of Representatives, the chairman of
the Committee on Finance of the Senate, or the chairman
of the Joint Committee on Taxation, the Secretary shall
furnish such committee with any return or return
information specified in such request, except that any
return or return information which can be associated
with, or otherwise identify, directly or indirectly, a
particular taxpayer shall be furnished to such
committee only when sitting in closed executive session
unless such taxpayer otherwise consents in writing to
such disclosure.
(2) Chief of Staff of Joint Committee on Taxation.--
Upon written request by the Chief of Staff of the Joint
Committee on Taxation, the Secretary shall furnish him
with any return or return information specified in such
request. Such Chief of Staff may submit such return or
return information to any committee described in
paragraph (1), except that any return or return
information which can be associated with, or otherwise
identify, directly or indirectly, a particular taxpayer
shall be furnished to such committee only when sitting
in closed executive session unless such taxpayer
otherwise consents in writing to such disclosure.
(3) Other committees.--Pursuant to an action by, and
upon written request by the chairman of, a committee of
the Senate or the House of Representatives (other than
a committee specified in paragraph (1)) specially
authorized to inspect any return or return information
by a resolution of the Senate or the House of
Representatives or, in the case of a joint committee
(other than the joint committee specified in paragraph
(1)) by concurrent resolution, the Secretary shall
furnish such committee, or a duly authorized and
designated subcommittee thereof, sitting in closed
executive session, with any return or return
information which such resolution authorizes the
committee or subcommittee to inspect. Any resolution
described in this paragraph shall specify the purpose
for which the return or return information is to be
furnished and that such information cannot reasonably
be obtained from any other source.
(4) Agents of committees and submission of
information to Senate or House of Representatives.--
(A) Committees described in paragraph (1).--
Any committee described in paragraph (1) or the
Chief of Staff of the Joint Committee on
Taxation shall have the authority, acting
directly, or by or through such examiners or
agents as the chairman of such committee or
such chief of staff may designate or appoint,
to inspect returns and return information at
such time and in such manner as may be
determined by such chairman or chief of staff.
Any return or return information obtained by or
on behalf of such committee pursuant to the
provisions of this subsection may be submitted
by the committee to the Senate or the House of
Representatives, or to both. The Joint
Committee on Taxation may also submit such
return or return information to any other
committee described in paragraph (1), except
that any return or return information which can
be associated with, or otherwise identify,
directly or indirectly, a particular taxpayer
shall be furnished to such committee only when
sitting in closed executive session unless such
taxpayer otherwise consents in writing to such
disclosure.
(B) Other committees.--Any committee or
subcommittee described in paragraph (3) shall
have the right, acting directly, or by or
through no more than four examiners or agents,
designated or appointed in writing in equal
numbers by the chairman and ranking minority
member of such committee or subcommittee, to
inspect returns and return information at such
time and in such manner as may be determined by
such chairman and ranking minority member. Any
return or return information obtained by or on
behalf of such committee or subcommittee
pursuant to the provisions of this subsection
may be submitted by the committee to the Senate
or the House of Representatives, or to both,
except that any return or return information
which can be associated with, or otherwise
identify, directly or indirectly, a particular
taxpayer, shall be furnished to the Senate or
the House of Representatives only when sitting
in closed executive session unless such
taxpayer otherwise consents in writing to such
disclosure.
(5) Disclosure by whistleblower.--Any person who
otherwise has or had access to any return or return
information under this section may disclose such return
or return information to a committee referred to in
paragraph (1) or any individual authorized to receive
or inspect information under paragraph (4)(A) if such
person believes such return or return information may
relate to possible misconduct, maladministration, or
taxpayer abuse.
(g) Disclosure to President and certain other persons.--
(1) In general.--Upon written request by the
President, signed by him personally, the Secretary
shall furnish to the President, or to such employee or
employees of the White House Office as the President
may designate by name in such request, a return or
return information with respect to any taxpayer named
in such request. Any such request shall state--
(A) the name and address of the taxpayer
whose return or return information is to be
disclosed,
(B) the kind of return or return information
which is to be disclosed,
(C) the taxable period or periods covered by
such return or return information, and
(D) the specific reason why the inspection or
disclosure is requested.
(2) Disclosure of return information as to
Presidential appointees and certain other Federal
Government appointees.--The Secretary may disclose to a
duly authorized representative of the Executive Office
of the President or to the head of any Federal agency,
upon written request by the President or head of such
agency, or to the Federal Bureau of Investigation on
behalf of and upon written request by the President or
such head, return information with respect to an
individual who is designated as being under
consideration for appointment to a position in the
executive or judicial branch of the Federal Government.
Such return information shall be limited to whether
such individual--
(A) has filed returns with respect to the
taxes imposed under chapter 1 for not more than
the immediately preceding 3 years;
(B) has failed to pay any tax within 10 days
after notice and demand, or has been assessed
any penalty under this title for negligence, in
the current year or immediately preceding 3
years;
(C) has been or is under investigation for
possible criminal offenses under the internal
revenue laws and the results of any such
investigation; or
(D) has been assessed any civil penalty under
this title for fraud.
Within 3 days of the receipt of any request for any
return information with respect to any individual under
this paragraph, the Secretary shall notify such
individual in writing that such information has been
requested under the provisions of this paragraph.
(3) Restriction on disclosure.--The employees to whom
returns and return information are disclosed under this
subsection shall not disclose such returns and return
information to any other person except the President or
the head of such agency without the personal written
direction of the President or the head of such agency.
(4) Restriction on disclosure to certain employees.--
Disclosure of returns and return information under this
subsection shall not be made to any employee whose
annual rate of basic pay is less than the annual rate
of basic pay specified for positions subject to section
5316 of title 5, United States Code.
(5) Reporting requirements.--Within 30 days after the
close of each calendar quarter, the President and the
head of any agency requesting returns and return
information under this subsection shall each file a
report with the Joint Committee on Taxation setting
forth the taxpayers with respect to whom such requests
were made during such quarter under this subsection,
the returns or return information involved, and the
reasons for such requests. The President shall not be
required to report on any request for returns and
return information pertaining to an individual who was
an officer or employee of the executive branch of the
Federal Government at the time such request was made.
Reports filed pursuant to this paragraph shall not be
disclosed unless the Joint Committee on Taxation
determines that disclosure thereof (including
identifying details) would be in the national interest.
Such reports shall be maintained by the Joint Committee
on Taxation for a period not exceeding 2 years unless,
within such period, the Joint Committee on Taxation
determines that a disclosure to the Congress is
necessary.
(h) Disclosure to certain Federal officers and employees for
purposes of tax administration, etc..--
(1) Department of the Treasury.--Returns and return
information shall, without written request, be open to
inspection by or disclosure to officers and employees
of the Department of the Treasury whose official duties
require such inspection or disclosure for tax
administration purposes.
(2) Department of Justice.--In a matter involving tax
administration, a return or return information shall be
open to inspection by or disclosure to officers and
employees of the Department of Justice (including
United States attorneys) personally and directly
engaged in, and solely for their use in, any proceeding
before a Federal grand jury or preparation for any
proceeding (or investigation which may result in such a
proceeding) before a Federal grand jury or any Federal
or State court, but only if--
(A) the taxpayer is or may be a party to the
proceeding, or the proceeding arose out of, or
in connection with, determining the taxpayer's
civil or criminal liability, or the collection
of such civil liability in respect of any tax
imposed under this title;
(B) the treatment of an item reflected on
such return is or may be related to the
resolution of an issue in the proceeding or
investigation; or
(C) such return or return information relates
or may relate to a transactional relationship
between a person who is or may be a party to
the proceeding and the taxpayer which affects,
or may affect, the resolution of an issue in
such proceeding or investigation.
(3) Form of request.--In any case in which the
Secretary is authorized to disclose a return or return
information to the Department of Justice pursuant to
the provisions of this subsection--
(A) if the Secretary has referred the case to
the Department of Justice, or if the proceeding
is authorized by subchapter B of chapter 76,
the Secretary may make such disclosure on his
own motion, or
(B) if the Secretary receives a written
request from the Attorney General, the Deputy
Attorney General, or an Assistant Attorney
General for a return of, or return information
relating to, a person named in such request and
setting forth the need for the disclosure, the
Secretary shall disclose return or return the
information so requested.
(4) Disclosure in judicial and administrative tax
proceedings.--A return or return information may be
disclosed in a Federal or State judicial or
administrative proceeding pertaining to tax
administration, but only--
(A) if the taxpayer is a party to the
proceeding, or the proceeding arose out of, or
in connection with, determining the taxpayer's
civil or criminal liability, or the collection
of such civil liability, in respect of any tax
imposed under this title;
(B) if the treatment of an item reflected on
such return is directly related to the
resolution of an issue in the proceeding;
(C) if such return or return information
directly relates to a transactional
relationship between a person who is a party to
the proceeding and the taxpayer which directly
affects the resolution of an issue in the
proceeding; or
(D) to the extent required by order of a
court pursuant to section 3500 of title 18,
United States Code, or rule 16 of the Federal
Rules of Criminal Procedure, such court being
authorized in the issuance of such order to
give due consideration to congressional policy
favoring the confidentiality of returns and
return information as set forth in this title.
However, such return or return information shall not be
disclosed as provided in subparagraph (A), (B), or (C)
if the Secretary determines that such disclosure would
identify a confidential informant or seriously impair a
civil or criminal tax investigation.
(5) Withholding of tax from social security
benefits.--Upon written request of the payor agency,
the Secretary may disclose available return information
from the master files of the Internal Revenue Service
with respect to the address and status of an individual
as a nonresident alien or as a citizen or resident of
the United States to the Social Security Administration
or the Railroad Retirement Board (whichever is
appropriate) for purposes of carrying out its
responsibilities for withholding tax under section 1441
from social security benefits (as defined in section
86(d)).
(6) Internal Revenue Service Oversight Board.--
(A) In general.--Notwithstanding paragraph
(1), and except as provided in subparagraph
(B), no return or return information may be
disclosed to any member of the Oversight Board
described in subparagraph (A) or (D) of section
7802(b)(1) or to any employee or detailee of
such Board by reason of their service with the
Board. Any request for information not
permitted to be disclosed under the preceding
sentence, and any contact relating to a
specific taxpayer, made by any such individual
to an officer or employee of the Internal
Revenue Service shall be reported by such
officer or employee to the Secretary, the
Treasury Inspector General for Tax
Administration, and the Joint Committee on
Taxation.
(B) Exception for reports to the Board.--If--
(i) the Commissioner or the Treasury
Inspector General for Tax
Administration prepares any report or
other matter for the Oversight Board in
order to assist the Board in carrying
out its duties; and
(ii) the Commissioner or such
Inspector General determines it is
necessary to include any return or
return information in such report or
other matter to enable the Board to
carry out such duties, such return or
return information (other than
information regarding taxpayer
identity) may be disclosed to members,
employees, or detailees of the Board
solely for the purpose of carrying out
such duties.
(i) Disclosure to Federal officers or employees for
administration of Federal laws not relating to tax
administration.--
(1) Disclosure of returns and return information for
use in criminal investigations.--
(A) In general.--Except as provided in
paragraph (6), any return or return information
with respect to any specified taxable period or
periods shall, pursuant to and upon the grant
of an ex parte order by a Federal district
court judge or magistrate judge under
subparagraph (B), be open (but only to the
extent necessary as provided in such order) to
inspection by, or disclosure to, officers and
employees of any Federal agency who are
personally and directly engaged in--
(i) preparation for any judicial or
administrative proceeding pertaining to
the enforcement of a specifically
designated Federal criminal statute
(not involving tax administration) to
which the United States or such agency
is or may be a party, or pertaining to
the case of a missing or exploited
child,
(ii) any investigation which may
result in such a proceeding, or
(iii) any Federal grand jury
proceeding pertaining to enforcement of
such a criminal statute to which the
United States or such agency is or may
be a party, or to such a case of a
missing or exploited child,
solely for the use of such officers and
employees in such preparation, investigation,
or grand jury proceeding.
(B) Application for order.--The Attorney
General, the Deputy Attorney General, the
Associate Attorney General, any Assistant
Attorney General, any United States attorney,
any special prosecutor appointed under section
593 of title 28, United States Code, or any
attorney in charge of a criminal division
organized crime strike force established
pursuant to section 510 of title 28, United
States Code, may authorize an application to a
Federal district court judge or magistrate
judge for the order referred to in subparagraph
(A). Upon such application, such judge or
magistrate judge may grant such order if he
determines on the basis of the facts submitted
by the applicant that--
(i) there is reasonable cause to
believe, based upon information
believed to be reliable, that a
specific criminal act has been
committed,
(ii) there is reasonable cause to
believe that the return or return
information is or may be relevant to a
matter relating to the commission of
such act, and
(iii) the return or return
information is sought exclusively for
use in a Federal criminal investigation
or proceeding concerning such act (or
any criminal investigation or
proceeding, in the case of a matter
relating to a missing or exploited
child), and the information sought to
be disclosed cannot reasonably be
obtained, under the circumstances, from
another source.
(C) Disclosure to State and local law
enforcement agencies in the case of matters
pertaining to a missing or exploited child.--
(i) In general.--In the case of an
investigation pertaining to a missing
or exploited child, the head of any
Federal agency, or his designee, may
disclose any return or return
information obtained under subparagraph
(A) to officers and employees of any
State or local law enforcement agency,
but only if--
(I) such State or local law
enforcement agency is part of a
team with the Federal agency in
such investigation, and
(II) such information is
disclosed only to such officers
and employees who are
personally and directly engaged
in such investigation.
(ii) Limitation on use of
information.--Information disclosed
under this subparagraph shall be solely
for the use of such officers and
employees in locating the missing
child, in a grand jury proceeding, or
in any preparation for, or
investigation which may result in, a
judicial or administrative proceeding.
(iii) Missing child.--For purposes of
this subparagraph, the term ``missing
child'' shall have the meaning given
such term by section 403 of the Missing
Children's Assistance Act (42 U.S.C.
5772).
(iv) Exploited child.--For purposes
of this subparagraph, the term
``exploited child'' means a minor with
respect to whom there is reason to
believe that a specified offense
against a minor (as defined by section
111(7) of the Sex Offender Registration
and Notification Act (42 U.S.C.
16911(7))) has or is occurring.
(2) Disclosure of return information other than
taxpayer return information for use in criminal
investigations.--
(A) In general.--Except as provided in
paragraph (6), upon receipt by the Secretary of
a request which meets the requirements of
subparagraph (B) from the head of any Federal
agency or the Inspector General thereof, or, in
the case of the Department of Justice, the
Attorney General, the Deputy Attorney General,
the Associate Attorney General, any Assistant
Attorney General, the Director of the Federal
Bureau of Investigation, the Administrator of
the Drug Enforcement Administration, any United
States attorney, any special prosecutor
appointed under section 593 of title 28, United
States Code, or any attorney in charge of a
criminal division organized crime strike force
established pursuant to section 510 of title
28, United States Code, the Secretary shall
disclose return information (other than
taxpayer return information) to officers and
employees of such agency who are personally and
directly engaged in--
(i) preparation for any judicial or
administrative proceeding described in
paragraph (1)(A)(i),
(ii) any investigation which may
result in such a proceeding, or
(iii) any grand jury proceeding
described in paragraph (1)(A)(iii),
solely for the use of such officers and
employees in such preparation, investigation,
or grand jury proceeding.
(B) Requirements.--A request meets the
requirements of this subparagraph if the
request is in writing and sets forth--
(i) the name and address of the
taxpayer with respect to whom the
requested return information relates;
(ii) the taxable period or periods to
which such return information relates;
(iii) the statutory authority under
which the proceeding or investigation
described in subparagraph (A) is being
conducted; and
(iv) the specific reason or reasons
why such disclosure is, or may be,
relevant to such proceeding or
investigation.
(C) Taxpayer identity.--For purposes of this
paragraph, a taxpayer's identity shall not be
treated as taxpayer return information.
(3) Disclosure of return information to apprise
appropriate officials of criminal or terrorist
activities or emergency circumstances.--
(A) Possible violations of Federal criminal
law.--
(i) In general.--Except as provided
in paragraph (6), the Secretary may
disclose in writing return information
(other than taxpayer return
information) which may constitute
evidence of a violation of any Federal
criminal law (not involving tax
administration) to the extent necessary
to apprise the head of the appropriate
Federal agency charged with the
responsibility of enforcing such law.
The head of such agency may disclose
such return information to officers and
employees of such agency to the extent
necessary to enforce such law.
(ii) Taxpayer identity.--If there is
return information (other than taxpayer
return information) which may
constitute evidence of a violation by
any taxpayer of any Federal criminal
law (not involving tax administration),
such taxpayer's identity may also be
disclosed under clause (i).
(B) Emergency circumstances.--
(i) Danger of death or physical
injury.--Under circumstances involving
an imminent danger of death or physical
injury to any individual, the Secretary
may disclose return information to the
extent necessary to apprise appropriate
officers or employees of any Federal or
State law enforcement agency of such
circumstances.
(ii) Flight from Federal
prosecution.--Under circumstances
involving the imminent flight of any
individual from Federal prosecution,
the Secretary may disclose return
information to the extent necessary to
apprise appropriate officers or
employees of any Federal law
enforcement agency of such
circumstances.
(C) Terrorist activities, etc..--
(i) In general.--Except as provided
in paragraph (6), the Secretary may
disclose in writing return information
(other than taxpayer return
information) that may be related to a
terrorist incident, threat, or activity
to the extent necessary to apprise the
head of the appropriate Federal law
enforcement agency responsible for
investigating or responding to such
terrorist incident, threat, or
activity. The head of the agency may
disclose such return information to
officers and employees of such agency
to the extent necessary to investigate
or respond to such terrorist incident,
threat, or activity.
(ii) Disclosure to the Department of
Justice.--Returns and taxpayer return
information may also be disclosed to
the Attorney General under clause (i)
to the extent necessary for, and solely
for use in preparing, an application
under paragraph (7)(D).
(iii) Taxpayer identity.--For
purposes of this subparagraph, a
taxpayer's identity shall not be
treated as taxpayer return information.
(4) Use of certain disclosed returns and return
information in judicial or administrative
proceedings.--
(A) Returns and taxpayer return
information.--Except as provided in
subparagraph (C), any return or taxpayer return
information obtained under paragraph (1) or
(7)(C) may be disclosed in any judicial or
administrative proceeding pertaining to
enforcement of a specifically designated
Federal criminal statute or related civil
forfeiture (not involving tax administration)
to which the United States or a Federal agency
is a party--
(i) if the court finds that such
return or taxpayer return information
is probative of a matter in issue
relevant in establishing the commission
of a crime or the guilt or liability of
a party, or
(ii) to the extent required by order
of the court pursuant to section 3500
of title 18, United States Code, or
rule 16 of the Federal Rules of
Criminal Procedure.
(B) Return information (other than taxpayer
return information).--Except as provided in
subparagraph (C), any return information (other
than taxpayer return information) obtained
under paragraph (1), (2), (3)(A) or (C), or (7)
may be disclosed in any judicial or
administrative proceeding pertaining to
enforcement of a specifically designated
Federal criminal statute or related civil
forfeiture (not involving tax administration)
to which the United States or a Federal agency
is a party.
(C) Confidential informant; impairment of
investigations.--No return or return
information shall be admitted into evidence
under subparagraph (A)(i) or (B) if the
Secretary determines and notifies the Attorney
General or his delegate or the head of the
Federal agency that such admission would
identify a confidential informant or seriously
impair a civil or criminal tax investigation.
(D) Consideration of confidentiality
policy.--In ruling upon the admissibility of
returns or return information, and in the
issuance of an order under subparagraph
(A)(ii), the court shall give due consideration
to congressional policy favoring the
confidentiality of returns and return
information as set forth in this title.
(E) Reversible error.--The admission into
evidence of any return or return information
contrary to the provisions of this paragraph
shall not, as such, constitute reversible error
upon appeal of a judgment in the proceeding.
(5) Disclosure to locate fugitives from justice.--
(A) In general.--Except as provided in
paragraph (6), the return of an individual or
return information with respect to such
individual shall, pursuant to and upon the
grant of an ex parte order by a Federal
district court judge or magistrate judge under
subparagraph (B), be open (but only to the
extent necessary as provided in such order) to
inspection by, or disclosure to, officers and
employees of any Federal agency exclusively for
use in locating such individual.
(B) Application for order.--Any person
described in paragraph (1)(B) may authorize an
application to a Federal district court judge
or magistrate judge for an order referred to in
subparagraph (A). Upon such application, such
judge or magistrate judge may grant such order
if he determines on the basis of the facts
submitted by the applicant that--
(i) a Federal arrest warrant relating
to the commission of a Federal felony
offense has been issued for an
individual who is a fugitive from
justice,
(ii) the return of such individual or
return information with respect to such
individual is sought exclusively for
use in locating such individual, and
(iii) there is reasonable cause to
believe that such return or return
information may be relevant in
determining the location of such
individual.
(6) Confidential informants; impairment of
investigations.--The Secretary shall not disclose any
return or return information under paragraph (1), (2),
(3)(A) or (C), (5), (7), or (8) if the Secretary
determines (and, in the case of a request for
disclosure pursuant to a court order described in
paragraph (1)(B) or (5)(B), certifies to the court)
that such disclosure would identify a confidential
informant or seriously impair a civil or criminal tax
investigation.
(7) Disclosure upon request of information relating
to terrorist activities, etc..--
(A) Disclosure to law enforcement agencies.--
(i) In general.--Except as provided
in paragraph (6), upon receipt by the
Secretary of a written request which
meets the requirements of clause (iii),
the Secretary may disclose return
information (other than taxpayer return
information) to officers and employees
of any Federal law enforcement agency
who are personally and directly engaged
in the response to or investigation of
any terrorist incident, threat, or
activity.
(ii) Disclosure to State and local
law enforcement agencies.--The head of
any Federal law enforcement agency may
disclose return information obtained
under clause (i) to officers and
employees of any State or local law
enforcement agency but only if such
agency is part of a team with the
Federal law enforcement agency in such
response or investigation and such
information is disclosed only to
officers and employees who are
personally and directly engaged in such
response or investigation.
(iii) Requirements.--A request meets
the requirements of this clause if--
(I) the request is made by
the head of any Federal law
enforcement agency (or his
delegate) involved in the
response to or investigation of
any terrorist incident, threat,
or activity, and
(II) the request sets forth
the specific reason or reasons
why such disclosure may be
relevant to a terrorist
incident, threat, or activity.
(iv) Limitation on use of
information.--Information disclosed
under this subparagraph shall be solely
for the use of the officers and
employees to whom such information is
disclosed in such response or
investigation.
(v) Taxpayer identity.--For purposes
of this subparagraph, a taxpayer's
identity shall not be treated as
taxpayer return information.
(B) Disclosure to intelligence agencies.--
(i) In general.--Except as provided
in paragraph (6), upon receipt by the
Secretary of a written request which
meets the requirements of clause (ii),
the Secretary may disclose return
information (other than taxpayer return
information) to those officers and
employees of the Department of Justice,
the Department of the Treasury, and
other Federal intelligence agencies who
are personally and directly engaged in
the collection or analysis of
intelligence and counterintelligence
information or investigation concerning
any terrorist incident, threat, or
activity. For purposes of the preceding
sentence, the information disclosed
under the preceding sentence shall be
solely for the use of such officers and
employees in such investigation,
collection, or analysis.
(ii) Requirements.--A request meets
the requirements of this subparagraph
if the request--
(I) is made by an individual
described in clause (iii), and
(II) sets forth the specific
reason or reasons why such
disclosure may be relevant to a
terrorist incident, threat, or
activity.
(iii) Requesting individuals.--An
individual described in this
subparagraph is an individual--
(I) who is an officer or
employee of the Department of
Justice or the Department of
the Treasury who is appointed
by the President with the
advice and consent of the
Senate or who is the Director
of the United States Secret
Service, and
(II) who is responsible for
the collection and analysis of
intelligence and
counterintelligence information
concerning any terrorist
incident, threat, or activity.
(iv) Taxpayer identity.--For purposes
of this subparagraph, a taxpayer's
identity shall not be treated as
taxpayer return information.
(C) Disclosure under ex parte orders.--
(i) In general.--Except as provided
in paragraph (6), any return or return
information with respect to any
specified taxable period or periods
shall, pursuant to and upon the grant
of an ex parte order by a Federal
district court judge or magistrate
judge under clause (ii), be open (but
only to the extent necessary as
provided in such order) to inspection
by, or disclosure to, officers and
employees of any Federal law
enforcement agency or Federal
intelligence agency who are personally
and directly engaged in any
investigation, response to, or analysis
of intelligence and counterintelligence
information concerning any terrorist
incident, threat, or activity. Return
or return information opened to
inspection or disclosure pursuant to
the preceding sentence shall be solely
for the use of such officers and
employees in the investigation,
response, or analysis, and in any
judicial, administrative, or grand jury
proceedings, pertaining to such
terrorist incident, threat, or
activity.
(ii) Application for order.--The
Attorney General, the Deputy Attorney
General, the Associate Attorney
General, any Assistant Attorney
General, or any United States attorney
may authorize an application to a
Federal district court judge or
magistrate judge for the order referred
to in clause (i). Upon such
application, such judge or magistrate
judge may grant such order if he
determines on the basis of the facts
submitted by the applicant that--
(I) there is reasonable cause
to believe, based upon
information believed to be
reliable, that the return or
return information may be
relevant to a matter relating
to such terrorist incident,
threat, or activity, and
(II) the return or return
information is sought
exclusively for use in a
Federal investigation,
analysis, or proceeding
concerning any terrorist
incident, threat, or activity.
(D) Special rule for ex parte disclosure by
the IRS.--
(i) In general.--Except as provided
in paragraph (6), the Secretary may
authorize an application to a Federal
district court judge or magistrate
judge for the order referred to in
subparagraph (C)(i). Upon such
application, such judge or magistrate
judge may grant such order if he
determines on the basis of the facts
submitted by the applicant that the
requirements of subparagraph (C)(ii)(I)
are met.
(ii) Limitation on use of
information.--Information disclosed
under clause (i)--
(I) may be disclosed only to
the extent necessary to apprise
the head of the appropriate
Federal law enforcement agency
responsible for investigating
or responding to a terrorist
incident, threat, or activity,
and
(II) shall be solely for use
in a Federal investigation,
analysis, or proceeding
concerning any terrorist
incident, threat, or activity.
The head of such Federal agency may
disclose such information to officers
and employees of such agency to the
extent necessary to investigate or
respond to such terrorist incident,
threat, or activity.
(8) Comptroller General.--
(A) Returns available for inspection.--Except
as provided in subparagraph (C), upon written
request by the Comptroller General of the
United States, returns and return information
shall be open to inspection by, or disclosure
to, officers and employees of the Government
Accountability Office for the purpose of, and
to the extent necessary in, making--
(i) an audit of the Internal Revenue
Service, the Bureau of Alcohol,
Tobacco, Firearms, and Explosives,
Department of Justice, or the Tax and
Trade Bureau, Department of the
Treasury, which may be required by
section 713 of title 31, United States
Code, or
(ii) any audit authorized by
subsection (p)(6),
except that no such officer or employee shall,
except to the extent authorized by subsection
(f) or (p)(6), disclose to any person, other
than another officer or employee of such office
whose official duties require such disclosure,
any return or return information described in
section 4424(a) in a form which can be
associated with, or otherwise identify,
directly or indirectly, a particular taxpayer,
nor shall such officer or employee disclose any
other return or return information, except as
otherwise expressly provided by law, to any
person other than such other officer or
employee of such office in a form which can be
associated with, or otherwise identify,
directly or indirectly, a particular taxpayer.
(B) Audits of other agencies.--
(i) In general.--Nothing in this
section shall prohibit any return or
return information obtained under this
title by any Federal agency (other than
an agency referred to in subparagraph
(A)) or by a Trustee as defined in the
District of Columbia Retirement
Protection Act of 1997, for use in any
program or activity from being open to
inspection by, or disclosure to,
officers and employees of the
Government Accountability Office if
such inspection or disclosure is--
(I) for purposes of, and to
the extent necessary in, making
an audit authorized by law of
such program or activity, and
(II) pursuant to a written
request by the Comptroller
General of the United States to
the head of such Federal
agency.
(ii) Information from Secretary.--If
the Comptroller General of the United
States determines that the returns or
return information available under
clause (i) are not sufficient for
purposes of making an audit of any
program or activity of a Federal agency
(other than an agency referred to in
subparagraph (A)), upon written request
by the Comptroller General to the
Secretary, returns and return
information (of the type authorized by
subsection (l) or (m) to be made
available to the Federal agency for use
in such program or activity) shall be
open to inspection by, or disclosure
to, officers and employees of the
Government Accountability Office for
the purpose of, and to the extent
necessary in, making such audit.
(iii) Requirement of notification
upon completion of audit.--Within 90
days after the completion of an audit
with respect to which returns or return
information were opened to inspection
or disclosed under clause (i) or (ii),
the Comptroller General of the United
States shall notify in writing the
Joint Committee on Taxation of such
completion. Such notice shall include--
(I) a description of the use
of the returns and return
information by the Federal
agency involved,
(II) such recommendations
with respect to the use of
returns and return information
by such Federal agency as the
Comptroller General deems
appropriate, and
(III) a statement on the
impact of any such
recommendations on
confidentiality of returns and
return information and the
administration of this title.
(iv) Certain restrictions made
applicable.--The restrictions contained
in subparagraph (A) on the disclosure
of any returns or return information
open to inspection or disclosed under
such subparagraph shall also apply to
returns and return information open to
inspection or disclosed under this
subparagraph.
(C) Disapproval by Joint Committee on
Taxation.--Returns and return information shall
not be open to inspection or disclosed under
subparagraph (A) or (B) with respect to an
audit--
(i) unless the Comptroller General of
the United States notifies in writing
the Joint Committee on Taxation of such
audit, and
(ii) if the Joint Committee on
Taxation disapproves such audit by a
vote of at least two-thirds of its
members within the 30-day period
beginning on the day the Joint
Committee on Taxation receives such
notice.
(j) Statistical use.--
(1) Department of Commerce.--Upon request in writing
by the Secretary of Commerce, the Secretary shall
furnish--
(A) such returns, or return information
reflected thereon, to officers and employees of
the Bureau of the Census, and
(B) such return information reflected on
returns of corporations to officers and
employees of the Bureau of Economic Analysis,
as the Secretary may prescribe by regulation for the
purpose of, but only to the extent necessary in, the
structuring of censuses and national economic accounts
and conducting related statistical activities
authorized by law.
(2) Federal Trade Commission.--Upon request in
writing by the Chairman of the Federal Trade
Commission, the Secretary shall furnish such return
information reflected on any return of a corporation
with respect to the tax imposed by chapter 1 to
officers and employees of the Division of Financial
Statistics of the Bureau of Economics of such
commission as the Secretary may prescribe by regulation
for the purpose of, but only to the extent necessary
in, administration by such division of legally
authorized economic surveys of corporations.
(3) Department of Treasury.--Returns and return
information shall be open to inspection by or
disclosure to officers and employees of the Department
of the Treasury whose official duties require such
inspection or disclosure for the purpose of, but only
to the extent necessary in, preparing economic or
financial forecasts, projections, analyses, and
statistical studies and conducting related activities.
Such inspection or disclosure shall be permitted only
upon written request which sets forth the specific
reason or reasons why such inspection or disclosure is
necessary and which is signed by the head of the bureau
or office of the Department of the Treasury requesting
the inspection or disclosure.
(4) Anonymous form.--No person who receives a return
or return information under this subsection shall
disclose such return or return information to any
person other than the taxpayer to whom it relates
except in a form which cannot be associated with, or
otherwise identify, directly or indirectly, a
particular taxpayer.
(5) Department of Agriculture.--Upon request in
writing by the Secretary of Agriculture, the Secretary
shall furnish such returns, or return information
reflected thereon, as the Secretary may prescribe by
regulation to officers and employees of the Department
of Agriculture whose official duties require access to
such returns or information for the purpose of, but
only to the extent necessary in, structuring,
preparing, and conducting the census of agriculture
pursuant to the Census of Agriculture Act of 1997
(Public Law 105-113).
(6) Congressional Budget Office.--Upon written
request by the Director of the Congressional Budget
Office, the Secretary shall furnish to officers and
employees of the Congressional Budget Office return
information for the purpose of, but only to the extent
necessary for, long-term models of the social security
and medicare programs.
(k) Disclosure of certain returns and return information for
tax administration purposes.--
(1) Disclosure of accepted offers-in-compromise.--
Return information shall be disclosed to members of the
general public to the extent necessary to permit
inspection of any accepted offer-in-compromise under
section 7122 relating to the liability for a tax
imposed by this title.
(2) Disclosure of amount of outstanding lien.--If a
notice of lien has been filed pursuant to section
6323(f), the amount of the outstanding obligation
secured by such lien may be disclosed to any person who
furnishes satisfactory written evidence that he has a
right in the property subject to such lien or intends
to obtain a right in such property.
(3) Disclosure of return information to correct
misstatements of fact.--The Secretary may, but only
following approval by the Joint Committee on Taxation,
disclose such return information or any other
information with respect to any specific taxpayer to
the extent necessary for tax administration purposes to
correct a misstatement of fact published or disclosed
with respect to such taxpayer's return or any
transaction of the taxpayer with the Internal Revenue
Service.
(4) Disclosure of competent authority under income
tax convention.--A return or return information may be
disclosed to a competent authority of a foreign
government which has an income tax or gift and estate
tax convention, or other convention or bilateral
agreement relating to the exchange of tax information,
with the United States but only to the extent provided
in, and subject to the terms and conditions of, such
convention or bilateral agreement.
(5) State agencies regulating tax return preparers.--
Taxpayer identity information with respect to any tax
return preparer, and information as to whether or not
any penalty has been assessed against such tax return
preparer under section 6694, 6695, or 7216, may be
furnished to any agency, body, or commission lawfully
charged under any State or local law with the
licensing, registration, or regulation of tax return
preparers. Such information may be furnished only upon
written request by the head of such agency, body, or
commission designating the officers or employees to
whom such information is to be furnished. Information
may be furnished and used under this paragraph only for
purposes of the licensing, registration, or regulation
of tax return preparers.
(6) Disclosure by certain officers and employees for
investigative purposes.--An internal revenue officer or
employee and an officer or employee of the Office of
Treasury Inspector General for Tax Administration may,
in connection with his official duties relating to any
audit, collection activity, or civil or criminal tax
investigation or any other offense under the internal
revenue laws, disclose return information to the extent
that such disclosure is necessary in obtaining
information, which is not otherwise reasonably
available, with respect to the correct determination of
tax, liability for tax, or the amount to be collected
or with respect to the enforcement of any other
provision of this title. Such disclosures shall be made
only in such situations and under such conditions as
the Secretary may prescribe by regulation.
(7) Disclosure of excise tax registration
information.--To the extent the Secretary determines
that disclosure is necessary to permit the effective
administration of subtitle D, the Secretary may
disclose--
(A) the name, address, and registration
number of each person who is registered under
any provision of subtitle D (and, in the case
of a registered terminal operator, the address
of each terminal operated by such operator),
and
(B) the registration status of any person.
(8) Levies on certain government payments.--
(A) Disclosure of return information in
levies on financial management service.--In
serving a notice of levy, or release of such
levy, with respect to any applicable government
payment, the Secretary may disclose to officers
and employees of the Financial Management
Service--
(i) return information, including
taxpayer identity information,
(ii) the amount of any unpaid
liability under this title (including
penalties and interest), and
(iii) the type of tax and tax period
to which such unpaid liability relates.
(B) Restriction on use of disclosed
information.--Return information disclosed
under subparagraph (A) may be used by officers
and employees of the Financial Management
Service only for the purpose of, and to the
extent necessary in, transferring levied funds
in satisfaction of the levy, maintaining
appropriate agency records in regard to such
levy or the release thereof, notifying the
taxpayer and the agency certifying such payment
that the levy has been honored, or in the
defense of any litigation ensuing from the
honor of such levy.
(C) Applicable government payment.--For
purposes of this paragraph, the term
``applicable government payment'' means--
(i) any Federal payment (other than a
payment for which eligibility is based
on the income or assets (or both) of a
payee) certified to the Financial
Management Service for disbursement,
and
(ii) any other payment which is
certified to the Financial Management
Service for disbursement and which the
Secretary designates by published
notice.
(9) Disclosure of information to administer section
6311.--The Secretary may disclose returns or return
information to financial institutions and others to the
extent the Secretary deems necessary for the
administration of section 6311. Disclosures of
information for purposes other than to accept payments
by checks or money orders shall be made only to the
extent authorized by written procedures promulgated by
the Secretary.
(10) Disclosure of certain returns and return
information to certain prison officials.--
(A) In general.--Under such procedures as the
Secretary may prescribe, the Secretary may
disclose to officers and employees of the
Federal Bureau of Prisons and of any State
agency charged with the responsibility for
administration of prisons any returns or return
information with respect to individuals
incarcerated in Federal or State prison systems
whom the Secretary has determined may have
filed or facilitated the filing of a false or
fraudulent return to the extent that the
Secretary determines that such disclosure is
necessary to permit effective Federal tax
administration.
(B) Disclosure to contractor-run prisons.--
Under such procedures as the Secretary may
prescribe, the disclosures authorized by
subparagraph (A) may be made to contractors
responsible for the operation of a Federal or
State prison on behalf of such Bureau or
agency.
(C) Restrictions on use of disclosed
information.--Any return or return information
received under this paragraph shall be used
only for the purposes of and to the extent
necessary in taking administrative action to
prevent the filing of false and fraudulent
returns, including administrative actions to
address possible violations of administrative
rules and regulations of the prison facility
and in administrative and judicial proceedings
arising from such administrative actions.
(D) Restrictions on redisclosure and
disclosure to legal representatives.--
Notwithstanding subsection (h)--
(i) Restrictions on redisclosure.--
Except as provided in clause (ii), any
officer, employee, or contractor of the
Federal Bureau of Prisons or of any
State agency charged with the
responsibility for administration of
prisons shall not disclose any
information obtained under this
paragraph to any person other than an
officer or employee or contractor of
such Bureau or agency personally and
directly engaged in the administration
of prison facilities on behalf of such
Bureau or agency.
(ii) Disclosure to legal
representatives.--The returns and
return information disclosed under this
paragraph may be disclosed to the duly
authorized legal representative of the
Federal Bureau of Prisons, State
agency, or contractor charged with the
responsibility for administration of
prisons, or of the incarcerated
individual accused of filing the false
or fraudulent return who is a party to
an action or proceeding described in
subparagraph (C), solely in preparation
for, or for use in, such action or
proceeding.
(11) Disclosure of return information to Department
of State for purposes of passport revocation under
section 7345.--
(A) In general.--The Secretary shall, upon
receiving a certification described in section
7345, disclose to the Secretary of State return
information with respect to a taxpayer who has
a seriously delinquent tax debt described in
such section. Such return information shall be
limited to--
(i) the taxpayer identity information
with respect to such taxpayer, and
(ii) the amount of such seriously
delinquent tax debt.
(B) Restriction on disclosure.--Return
information disclosed under subparagraph (A)
may be used by officers and employees of the
Department of State for the purposes of, and to
the extent necessary in, carrying out the
requirements of section 32101 of the FAST Act.
(12) Qualified tax collection contractors.--Persons
providing services pursuant to a qualified tax
collection contract under section 6306 may, if speaking
to a person who has identified himself or herself as
having the name of the taxpayer to which a tax
receivable (within the meaning of such section)
relates, identify themselves as contractors of the
Internal Revenue Service and disclose the business name
of the contractor, and the nature, subject, and reason
for the contact. Disclosures under this paragraph shall
be made only in such situations and under such
conditions as have been approved by the Secretary.
(l) Disclosure of returns and return information for purposes
other than tax administration.--
(1) Disclosure of certain returns and return
information to Social Security Administration and
Railroad Retirement Board.--The Secretary may, upon
written request, disclose returns and return
information with respect to--
(A) taxes imposed by chapters 2, 21, and 24,
to the Social Security Administration for
purposes of its administration of the Social
Security Act;
(B) a plan to which part I of subchapter D of
chapter 1 applies, to the Social Security
Administration for purposes of carrying out its
responsibility under section 1131 of the Social
Security Act, limited, however to return
information described in section 6057(d); and
(C) taxes imposed by chapter 22, to the
Railroad Retirement Board for purposes of its
administration of the Railroad Retirement Act.
(2) Disclosure of returns and return information to
the Department of Labor and Pension Benefit Guaranty
Corporation.--The Secretary may, upon written request,
furnish returns and return information to the proper
officers and employees of the Department of Labor and
the Pension Benefit Guaranty Corporation for purposes
of, but only to the extent necessary in, the
administration of titles I and IV of the Employee
Retirement Income Security Act of 1974.
(3) Disclosure that applicant for Federal loan has
tax delinquent account.--
(A) In general.--Upon written request, the
Secretary may disclose to the head of the
Federal agency administering any included
Federal loan program whether or not an
applicant for a loan under such program has a
tax delinquent account.
(B) Restriction on disclosure.--Any
disclosure under subparagraph (A) shall be made
only for the purpose of, and to the extent
necessary in, determining the creditworthiness
of the applicant for the loan in question.
(C) Included Federal loan program defined.--
For purposes of this paragraph, the term
``included Federal loan program'' means any
program under which the United States or a
Federal agency makes, guarantees, or insures
loans.
(4) Disclosure of returns and return information for
use in personnel or claimant representative matters.--
The Secretary may disclose returns and return
information--
(A) upon written request--
(i) to an employee or former employee
of the Department of the Treasury, or
to the duly authorized legal
representative of such employee or
former employee, who is or may be a
party to any administrative action or
proceeding affecting the personnel
rights of such employee or former
employee; or
(ii) to any person, or to the duly
authorized legal representative of such
person, whose rights are or may be
affected by an administrative action or
proceeding under section 330 of title
31, United States Code,
solely for use in the action or proceeding, or
in preparation for the action or proceeding,
but only to the extent that the Secretary
determines that such returns or return
information is or may be relevant and material
to the action or proceeding; or
(B) to officers and employees of the
Department of the Treasury for use in any
action or proceeding described in subparagraph
(A), or in preparation for such action or
proceeding, to the extent necessary to advance
or protect the interests of the United States.
(5) Social Security Administration.--Upon written
request by the Commissioner of Social Security, the
Secretary may disclose information returns filed
pursuant to part III of subchapter A of chapter 61 of
this subtitle for the purpose of--
(A) carrying out, in accordance with an
agreement entered into pursuant to section 232
of the Social Security Act, an effective return
processing program; or
(B) providing information regarding the
mortality status of individuals for
epidemiological and similar research in
accordance with section 1106(d) of the Social
Security Act.
(6) Disclosure of return information to Federal,
State, and local child support enforcement agencies.--
(A) Return information from Internal Revenue
Service.--The Secretary may, upon written
request, disclose to the appropriate Federal,
State, or local child support enforcement
agency--
(i) available return information from
the master files of the Internal
Revenue Service relating to the social
security account number (or numbers, if
the individual involved has more than
one such number), address, filing
status, amounts and nature of income,
and the number of dependents reported
on any return filed by, or with respect
to, any individual with respect to whom
child support obligations are sought to
be established or enforced pursuant to
the provisions of part D of title IV of
the Social Security Act and with
respect to any individual to whom such
support obligations are owing, and
(ii) available return information
reflected on any return filed by, or
with respect to, any individual
described in clause (i) relating to the
amount of such individual's gross
income (as defined in section 61) or
consisting of the names and addresses
of payors of such income and the names
of any dependents reported on such
return, but only if such return
information is not reasonably available
from any other source.
(B) Disclosure to certain agents.--The
following information disclosed to any child
support enforcement agency under subparagraph
(A) with respect to any individual with respect
to whom child support obligations are sought to
be established or enforced may be disclosed by
such agency to any agent of such agency which
is under contract with such agency to carry out
the purposes described in subparagraph (C):
(i) The address and social security
account number (or numbers) of such
individual.
(ii) The amount of any reduction
under section 6402(c) (relating to
offset of past-due support against
overpayments) in any overpayment
otherwise payable to such individual.
(C) Restriction on disclosure.--Information
may be disclosed under this paragraph only for
purposes of, and to the extent necessary in,
establishing and collecting child support
obligations from, and locating, individuals
owing such obligations.
(7) Disclosure of return information to Federal,
State, and local agencies administering certain
programs under the Social Security Act, the Food and
Nutrition Act of 2008 or title 38, United States Code,
or certain housing assistance programs.--
(A) Return information from Social Security
Administration.--The Commissioner of Social
Security shall, upon written request, disclose
return information from returns with respect to
net earnings from self-employment (as defined
in section 1402), wages (as defined in section
3121(a) or 3401(a)), and payments of retirement
income, which have been disclosed to the Social
Security Administration as provided by
paragraph (1) or (5) of this subsection, to any
Federal, State, or local agency administering a
program listed in subparagraph (D).
(B) Return information from Internal Revenue
Service.--The Secretary shall, upon written
request, disclose current return information
from returns with respect to unearned income
from the Internal Revenue Service files to any
Federal, State, or local agency administering a
program listed in subparagraph (D).
(C) Restriction on disclosure.--The
Commissioner of Social Security and the
Secretary shall disclose return information
under subparagraphs (A) and (B) only for
purposes of, and to the extent necessary in,
determining eligibility for, or the correct
amount of, benefits under a program listed in
subparagraph (D).
(D) Programs to which rule applies.--The
programs to which this paragraph applies are:
(i) a State program funded under part
A of title IV of the Social Security
Act;
(ii) medical assistance provided
under a State plan approved under title
XIX of the Social Security Act or
subsidies provided under section 1860D-
14 of such Act;
(iii) supplemental security income
benefits provided under title XVI of
the Social Security Act, and federally
administered supplementary payments of
the type described in section 1616(a)
of such Act (including payments
pursuant to an agreement entered into
under section 212(a) of Public Law 93-
66);
(iv) any benefits provided under a
State plan approved under title I, X,
XIV, or XVI of the Social Security Act
(as those titles apply to Puerto Rico,
Guam, and the Virgin Islands);
(v) unemployment compensation
provided under a State law described in
section 3304 of this title;
(vi) assistance provided under the
Food and Nutrition Act of 2008;
(vii) State-administered
supplementary payments of the type
described in section 1616(a) of the
Social Security Act (including payments
pursuant to an agreement entered into
under section 212(a) of Public Law 93-
66);
(viii)(I) any needs-based pension
provided under chapter 15 of title 38,
United States Code, or under any other
law administered by the Secretary of
Veterans Affairs;
(II) parents' dependency and
indemnity compensation provided
under section 1315 of title 38,
United States Code;
(III) health-care services
furnished under sections
1710(a)(2)(G), 1710(a)(3), and
1710(b) of such title; and
(IV) compensation paid under
chapter 11 of title 38, United
States Code, at the 100 percent
rate based solely on
unemployability and without
regard to the fact that the
disability or disabilities are
not rated as 100 percent
disabling under the rating
schedule; and
(ix) any housing assistance program
administered by the Department of
Housing and Urban Development that
involves initial and periodic review of
an applicant's or participant's income,
except that return information may be
disclosed under this clause only on
written request by the Secretary of
Housing and Urban Development and only
for use by officers and employees of
the Department of Housing and Urban
Development with respect to applicants
for and participants in such programs.
Only return information from returns with
respect to net earnings from self-employment
and wages may be disclosed under this paragraph
for use with respect to any program described
in clause (viii)(IV).
(8) Disclosure of certain return information by
Social Security Administration to Federal, State, and
local child support enforcement agencies.--
(A) In general.--Upon written request, the
Commissioner of Social Security shall disclose
directly to officers and employees of a Federal
or State or local child support enforcement
agency return information from returns with
respect to social security account numbers, net
earnings from self-employment (as defined in
section 1402), wages (as defined in section
3121(a) or 3401(a)), and payments of retirement
income which have been disclosed to the Social
Security Administration as provided by
paragraph (1) or (5) of this subsection.
(B) Restriction on disclosure.--The
Commissioner of Social Security shall disclose
return information under subparagraph (A) only
for purposes of, and to the extent necessary
in, establishing and collecting child support
obligations from, and locating, individuals
owing such obligations. For purposes of the
preceding sentence, the term ``child support
obligations'' only includes obligations which
are being enforced pursuant to a plan described
in section 454 of the Social Security Act which
has been approved by the Secretary of Health
and Human Services under part D of title IV of
such Act.
(C) State or local child support enforcement
agency.--For purposes of this paragraph, the
term ``State or local child support enforcement
agency'' means any agency of a State or
political subdivision thereof operating
pursuant to a plan described in subparagraph
(B).
(9) Disclosure of alcohol fuel producers to
administrators of State alcohol laws.--Notwithstanding
any other provision of this section, the Secretary may
disclose--
(A) the name and address of any person who is
qualified to produce alcohol for fuel use under
section 5181, and
(B) the location of any premises to be used
by such person in producing alcohol for fuel,
to any State agency, body, or commission, or its legal
representative, which is charged under the laws of such
State with responsibility for administration of State
alcohol laws solely for use in the administration of
such laws.
(10) Disclosure of certain information to agencies
requesting a reduction under subsection (c), (d), (e),
or (f) of section 6402.--
(A) Return information from Internal Revenue
Service.--The Secretary may, upon receiving a
written request, disclose to officers and
employees of any agency seeking a reduction
under subsection (c), (d), (e), or (f) of
section 6402, to officers and employees of the
Department of Labor for purposes of
facilitating the exchange of data in connection
with a notice submitted under subsection
(f)(5)(C) of section 6402, and to officers and
employees of the Department of the Treasury in
connection with such reduction--
(i) taxpayer identity information
with respect to the taxpayer against
whom such a reduction was made or not
made and with respect to any other
person filing a joint return with such
taxpayer,
(ii) the fact that a reduction has
been made or has not been made under
such subsection with respect to such
taxpayer,
(iii) the amount of such reduction,
(iv) whether such taxpayer filed a
joint return, and
(v) the fact that a payment was made
(and the amount of the payment) to the
spouse of the taxpayer on the basis of
a joint return.
(B) Restriction on use of disclosed
information.--
(i) Any officers and employees of an
agency receiving return information
under subparagraph (A) shall use such
information only for the purposes of,
and to the extent necessary in,
establishing appropriate agency
records, locating any person with
respect to whom a reduction under
subsection (c), (d), (e), or (f) of
section 6402 is sought for purposes of
collecting the debt with respect to
which the reduction is sought, or in
the defense of any litigation or
administrative procedure ensuing from a
reduction made under subsection (c),
(d), (e), or (f) of section 6402 and to
officers and employees of the
Department of the Treasury in
connection with such reduction.
(ii) Notwithstanding clause (i),
return information disclosed to
officers and employees of the
Department of Labor may be accessed by
agents who maintain and provide
technological support to the Department
of Labor's Interstate Connection
Network (ICON) solely for the purpose
of providing such maintenance and
support.
(11) Disclosure of return information to carry out
Federal Employees' Retirement System.--
(A) In general.--The Commissioner of Social
Security shall, on written request, disclose to
the Office of Personnel Management return
information from returns with respect to net
earnings from self-employment (as defined in
section 1402), wages (as defined in section
3121(a) or 3401(a)), and payments of retirement
income, which have been disclosed to the Social
Security Administration as provided by
paragraph (1) or (5).
(B) Restriction on disclosure.--The
Commissioner of Social Security shall disclose
return information under subparagraph (A) only
for purposes of, and to the extent necessary
in, the administration of chapters 83 and 84 of
title 5, United States Code.
(12) Disclosure of certain taxpayer identity
information for verification of employment status of
medicare beneficiary and spouse of medicare
beneficiary.--
(A) Return information from Internal Revenue
Service.--The Secretary shall, upon written
request from the Commissioner of Social
Security, disclose to the Commissioner
available filing status and taxpayer identity
information from the individual master files of
the Internal Revenue Service relating to
whether any medicare beneficiary identified by
the Commissioner was a married individual (as
defined in section 7703) for any specified year
after 1986, and, if so, the name of the spouse
of such individual and such spouse's TIN.
(B) Return information from Social Security
Administration.--The Commissioner of Social
Security shall, upon written request from the
Administrator of the Centers for Medicare &
Medicaid Services, disclose to the
Administrator the following information:
(i) The name and TIN of each medicare
beneficiary who is identified as having
received wages (as defined in section
3401(a)), above an amount (if any)
specified by the Secretary of Health
and Human Services, from a qualified
employer in a previous year.
(ii) For each medicare beneficiary
who was identified as married under
subparagraph (A) and whose spouse is
identified as having received wages,
above an amount (if any) specified by
the Secretary of Health and Human
Services, from a qualified employer in
a previous year--
(I) the name and TIN of the
medicare beneficiary, and
(II) the name and TIN of the
spouse.
(iii) With respect to each such
qualified employer, the name, address,
and TIN of the employer and the number
of individuals with respect to whom
written statements were furnished under
section 6051 by the employer with
respect to such previous year.
(C) Disclosure by Centers for Medicare &
Medicaid Services.--With respect to the
information disclosed under subparagraph (B),
the Administrator of the Centers for Medicare &
Medicaid Services may disclose--
(i) to the qualified employer
referred to in such subparagraph the
name and TIN of each individual
identified under such subparagraph as
having received wages from the employer
(hereinafter in this subparagraph
referred to as the ``employee'') for
purposes of determining during what
period such employee or the employee's
spouse may be (or have been) covered
under a group health plan of the
employer and what benefits are or were
covered under the plan (including the
name, address, and identifying number
of the plan),
(ii) to any group health plan which
provides or provided coverage to such
an employee or spouse, the name of such
employee and the employee's spouse (if
the spouse is a medicare beneficiary)
and the name and address of the
employer, and, for the purpose of
presenting a claim to the plan--
(I) the TIN of such employee
if benefits were paid under
title XVIII of the Social
Security Act with respect to
the employee during a period in
which the plan was a primary
plan (as defined in section
1862(b)(2)(A) of the Social
Security Act), and
(II) the TIN of such spouse
if benefits were paid under
such title with respect to the
spouse during such period, and
(iii) to any agent of such
Administrator the information referred
to in subparagraph (B) for purposes of
carrying out clauses (i) and (ii) on
behalf of such Administrator.
(D) Special rules.--
(i) Restrictions on disclosure.--
Information may be disclosed under this
paragraph only for purposes of, and to
the extent necessary in, determining
the extent to which any medicare
beneficiary is covered under any group
health plan.
(ii) Timely response to requests.--
Any request made under subparagraph (A)
or (B) shall be complied with as soon
as possible but in no event later than
120 days after the date the request was
made.
(E) Definitions.--For purposes of this
paragraph--
(i) Medicare beneficiary.--The term
``medicare beneficiary'' means an
individual entitled to benefits under
part A, or enrolled under part B, of
title XVIII of the Social Security Act,
but does not include such an individual
enrolled in part A under section 1818.
(ii) Group health plan.--The term
``group health plan'' means any group
health plan (as defined in section
5000(b)(1)).
(iii) Qualified employer.--The term
``qualified employer'' means, for a
calendar year, an employer which has
furnished written statements under
section 6051 with respect to at least
20 individuals for wages paid in the
year.
(13) Disclosure of return information to carry out
income contingent repayment of student loans.--
(A) In general.--The Secretary may, upon
written request from the Secretary of
Education, disclose to officers and employees
of the Department of Education return
information with respect to a taxpayer who has
received an applicable student loan and whose
loan repayment amounts are based in whole or in
part on the taxpayer's income. Such return
information shall be limited to--
(i) taxpayer identity information
with respect to such taxpayer,
(ii) the filing status of such
taxpayer, and
(iii) the adjusted gross income of
such taxpayer.
(B) Restriction on use of disclosed
information.--Return information disclosed
under subparagraph (A) may be used by officers
and employees of the Department of Education
only for the purposes of, and to the extent
necessary in, establishing the appropriate
income contingent repayment amount for an
applicable student loan.
(C) Applicable student loan.--For purposes of
this paragraph, the term ``applicable student
loan'' means--
(i) any loan made under the program
authorized under part D of title IV of
the Higher Education Act of 1965, and
(ii) any loan made under part B or E
of title IV of the Higher Education Act
of 1965 which is in default and has
been assigned to the Department of
Education.
(D) Termination.--This paragraph shall not
apply to any request made after December 31,
2007.
(14) Disclosure of return information to United
States Customs Service.--The Secretary may, upon
written request from the Commissioner of the United
States Customs Service, disclose to officers and
employees of the Department of the Treasury such return
information with respect to taxes imposed by chapters 1
and 6 as the Secretary may prescribe by regulations,
solely for the purpose of, and only to the extent
necessary in--
(A) ascertaining the correctness of any entry
in audits as provided for in section 509 of the
Tariff Act of 1930 (19 U.S.C. 1509), or
(B) other actions to recover any loss of
revenue, or to collect duties, taxes, and fees,
determined to be due and owing pursuant to such
audits.
(15) Disclosure of returns filed under section
6050I.--The Secretary may, upon written request,
disclose to officers and employees of--
(A) any Federal agency,
(B) any agency of a State or local
government, or
(C) any agency of the government of a foreign
country, information contained on returns filed
under section 6050I. Any such disclosure shall
be made on the same basis, and subject to the
same conditions, as apply to disclosures of
information on reports filed under section 5313
of title 31, United States Code; except that no
disclosure under this paragraph shall be made
for purposes of the administration of any tax
law.
(16) Disclosure of return information for purposes of
administering the District of Columbia Retirement
Protection Act of 1997.--
(A) In general.--Upon written request
available return information (including such
information disclosed to the Social Security
Administration under paragraph (1) or (5) of
this subsection), relating to the amount of
wage income (as defined in section 3121(a) or
3401(a)), the name, address, and identifying
number assigned under section 6109, of payors
of wage income, taxpayer identity (as defined
in section 6103 (b)(6)), and the occupational
status reflected on any return filed by, or
with respect to, any individual with respect to
whom eligibility for, or the correct amount of,
benefits under the District of Columbia
Retirement Protection Act of 1997, is sought to
be determined, shall be disclosed by the
Commissioner of Social Security, or to the
extent not available from the Social Security
Administration, by the Secretary, to any duly
authorized officer or employee of the
Department of the Treasury, or a Trustee or any
designated officer or employee of a Trustee (as
defined in the District of Columbia Retirement
Protection Act of 1997), or any actuary engaged
by a Trustee under the terms of the District of
Columbia Retirement Protection Act of 1997,
whose official duties require such disclosure,
solely for the purpose of, and to the extent
necessary in, determining an individual's
eligibility for, or the correct amount of,
benefits under the District of Columbia
Retirement Protection Act of 1997.
(B) Disclosure for use in judicial or
administrative proceedings.--Return information
disclosed to any person under this paragraph
may be disclosed in a judicial or
administrative proceeding relating to the
determination of an individual's eligibility
for, or the correct amount of, benefits under
the District of Columbia Retirement Protection
Act of 1997.
(17) Disclosure to National Archives and Records
Administration.--The Secretary shall, upon written
request from the Archivist of the United States,
disclose or authorize the disclosure of returns and
return information to officers and employees of the
National Archives and Records Administration for
purposes of, and only to the extent necessary in, the
appraisal of records for destruction or retention. No
such officer or employee shall, except to the extent
authorized by subsection (f), (i)(8), or (p), disclose
any return or return information disclosed under the
preceding sentence to any person other than to the
Secretary, or to another officer or employee of the
National Archives and Records Administration whose
official duties require such disclosure for purposes of
such appraisal.
(18) Disclosure of return information for purposes of
carrying out a program for advance payment of credit
for health insurance costs of eligible individuals.--
The Secretary may disclose to providers of health
insurance for any certified individual (as defined in
section 7527(c)) return information with respect to
such certified individual only to the extent necessary
to carry out the program established by section 7527
(relating to advance payment of credit for health
insurance costs of eligible individuals).
(19) Disclosure of return information for purposes of
providing transitional assistance under medicare
discount card program.--
(A) In general.--The Secretary, upon written
request from the Secretary of Health and Human
Services pursuant to carrying out section
1860D-31 of the Social Security Act, shall
disclose to officers, employees, and
contractors of the Department of Health and
Human Services with respect to a taxpayer for
the applicable year--
(i)(I) whether the adjusted gross
income, as modified in accordance with
specifications of the Secretary of
Health and Human Services for purposes
of carrying out such section, of such
taxpayer and, if applicable, such
taxpayer's spouse, for the applicable
year, exceeds the amounts specified by
the Secretary of Health and Human
Services in order to apply the 100 and
135 percent of the poverty lines under
such section, (II) whether the return
was a joint return, and (III) the
applicable year, or
(ii) if applicable, the fact that
there is no return filed for such
taxpayer for the applicable year.
(B) Definition of applicable year.--For the
purposes of this subsection, the term
``applicable year'' means the most recent
taxable year for which information is available
in the Internal Revenue Service's taxpayer data
information systems, or, if there is no return
filed for such taxpayer for such year, the
prior taxable year.
(C) Restriction on use of disclosed
information.--Return information disclosed
under this paragraph may be used only for the
purposes of determining eligibility for and
administering transitional assistance under
section 1860D-31 of the Social Security Act.
(20) Disclosure of return information to carry out
Medicare part B premium subsidy adjustment and part D
base beneficiary premium increase.--
(A) In general.--The Secretary shall, upon
written request from the Commissioner of Social
Security, disclose to officers, employees, and
contractors of the Social Security
Administration return information of a taxpayer
whose premium (according to the records of the
Secretary) may be subject to adjustment under
section 1839(i) or increase under section
1860D-13(a)(7) of the Social Security Act. Such
return information shall be limited to--
(i) taxpayer identity information
with respect to such taxpayer,
(ii) the filing status of such
taxpayer,
(iii) the adjusted gross income of
such taxpayer,
(iv) the amounts excluded from such
taxpayer's gross income under sections
135 and 911 to the extent such
information is available,
(v) the interest received or accrued
during the taxable year which is exempt
from the tax imposed by chapter 1 to
the extent such information is
available,
(vi) the amounts excluded from such
taxpayer's gross income by sections 931
and 933 to the extent such information
is available,
(vii) such other information relating
to the liability of the taxpayer as is
prescribed by the Secretary by
regulation as might indicate in the
case of a taxpayer who is an individual
described in subsection (i)(4)(B)(iii)
of section 1839 of the Social Security
Act that the amount of the premium of
the taxpayer under such section may be
subject to adjustment under subsection
(i) of such section or increase under
section 1860D-13(a)(7) of such Act and
the amount of such adjustment, and
(viii) the taxable year with respect
to which the preceding information
relates.
(B) Restriction on use of disclosed
information.--
(i) In general.--Return information
disclosed under subparagraph (A) may be
used by officers, employees, and
contractors of the Social Security
Administration only for the purposes
of, and to the extent necessary in,
establishing the appropriate amount of
any premium adjustment under such
section 1839(i) or increase under such
section 1860D-13(a)(7) or for the
purpose of resolving taxpayer appeals
with respect to any such premium
adjustment or increase.
(ii) Disclosure to other agencies.--
Officers, employees, and contractors of
the Social Security Administration may
disclose--
(I) the taxpayer identity
information and the amount of
the premium subsidy adjustment
or premium increase with
respect to a taxpayer described
in subparagraph (A) to
officers, employees, and
contractors of the Centers for
Medicare and Medicaid Services,
to the extent that such
disclosure is necessary for the
collection of the premium
subsidy amount or the increased
premium amount,
(II) the taxpayer identity
information and the amount of
the premium subsidy adjustment
or the increased premium amount
with respect to a taxpayer
described in subparagraph (A)
to officers and employees of
the Office of Personnel
Management and the Railroad
Retirement Board, to the extent
that such disclosure is
necessary for the collection of
the premium subsidy amount or
the increased premium amount,
(III) return information with
respect to a taxpayer described
in subparagraph (A) to officers
and employees of the Department
of Health and Human Services to
the extent necessary to resolve
administrative appeals of such
premium subsidy adjustment or
increased premium, and
(IV) return information with
respect to a taxpayer described
in subparagraph (A) to officers
and employees of the Department
of Justice for use in judicial
proceedings to the extent
necessary to carry out the
purposes described in clause
(i).
(21) Disclosure of return information to carry out
eligibility requirements for certain programs.--
(A) In general.--The Secretary, upon written
request from the Secretary of Health and Human
Services, shall disclose to officers,
employees, and contractors of the Department of
Health and Human Services return information of
any taxpayer whose income is relevant in
determining any premium tax credit under
section 36B or any cost-sharing reduction under
section 1402 of the Patient Protection and
Affordable Care Act or eligibility for
participation in a State medicaid program under
title XIX of the Social Security Act, a State's
children's health insurance program under title
XXI of the Social Security Act, or a basic
health program under section 1331 of Patient
Protection and Affordable Care Act. Such return
information shall be limited to--
(i) taxpayer identity information
with respect to such taxpayer,
(ii) the filing status of such
taxpayer,
[(iii) the number of individuals for
whom a deduction is allowed under
section 151 with respect to the
taxpayer (including the taxpayer and
the taxpayer's spouse),]
(iii) the number of the taxpayer's
dependents,
(iv) the modified adjusted gross
income (as defined in section 36B) of
such taxpayer and each of the other
individuals included under clause (iii)
who are required to file a return of
tax imposed by chapter 1 for the
taxable year,
(v) such other information as is
prescribed by the Secretary by
regulation as might indicate whether
the taxpayer is eligible for such
credit or reduction (and the amount
thereof), and
(vi) the taxable year with respect to
which the preceding information relates
or, if applicable, the fact that such
information is not available.
(B) Information to Exchange and State
agencies.--The Secretary of Health and Human
Services may disclose to an Exchange
established under the Patient Protection and
Affordable Care Act or its contractors, or to a
State agency administering a State program
described in subparagraph (A) or its
contractors, any inconsistency between the
information provided by the Exchange or State
agency to the Secretary and the information
provided to the Secretary under subparagraph
(A).
(C) Restriction on use of disclosed
information.--Return information disclosed
under subparagraph (A) or (B) may be used by
officers, employees, and contractors of the
Department of Health and Human Services, an
Exchange, or a State agency only for the
purposes of, and to the extent necessary in--
(i) establishing eligibility for
participation in the Exchange, and
verifying the appropriate amount of,
any credit or reduction described in
subparagraph (A),
(ii) determining eligibility for
participation in the State programs
described in subparagraph (A).
(22) Disclosure of return information to Department
of Health and Human Services for purposes of enhancing
Medicare program integrity.--
(A) In general.--The Secretary shall, upon
written request from the Secretary of Health
and Human Services, disclose to officers and
employees of the Department of Health and Human
Services return information with respect to a
taxpayer who has applied to enroll, or
reenroll, as a provider of services or supplier
under the Medicare program under title XVIII of
the Social Security Act. Such return
information shall be limited to--
(i) the taxpayer identity information
with respect to such taxpayer;
(ii) the amount of the delinquent tax
debt owed by that taxpayer; and
(iii) the taxable year to which the
delinquent tax debt pertains.
(B) Restriction on disclosure.--Return
information disclosed under subparagraph (A)
may be used by officers and employees of the
Department of Health and Human Services for the
purposes of, and to the extent necessary in,
establishing the taxpayer's eligibility for
enrollment or reenrollment in the Medicare
program, or in any administrative or judicial
proceeding relating to, or arising from, a
denial of such enrollment or reenrollment, or
in determining the level of enhanced oversight
to be applied with respect to such taxpayer
pursuant to section 1866(j)(3) of the Social
Security Act.
(C) Delinquent tax debt.--For purposes of
this paragraph, the term ``delinquent tax
debt'' means an outstanding debt under this
title for which a notice of lien has been filed
pursuant to section 6323, but the term does not
include a debt that is being paid in a timely
manner pursuant to an agreement under section
6159 or 7122, or a debt with respect to which a
collection due process hearing under section
6330 is requested, pending, or completed and no
payment is required.
(m) Disclosure of taxpayer identity information.--
(1) Tax refunds.--The Secretary may disclose taxpayer
identity information to the press and other media for
purposes of notifying persons entitled to tax refunds
when the Secretary, after reasonable effort and lapse
of time, has been unable to locate such persons.
(2) Federal claims.--
(A) In general.--Except as provided in
subparagraph (B), the Secretary may, upon
written request, disclose the mailing address
of a taxpayer for use by officers, employees,
or agents of a Federal agency for purposes of
locating such taxpayer to collect or compromise
a Federal claim against the taxpayer in
accordance with sections 3711, 3717, and 3718
of title 31.
(B) Special rule for consumer reporting
agency.--In the case of an agent of a Federal
agency which is a consumer reporting agency
(within the meaning of section 603(f) of the
Fair Credit Reporting Act (15 U.S.C.
1681a(f))), the mailing address of a taxpayer
may be disclosed to such agent under
subparagraph (A) only for the purpose of
allowing such agent to prepare a commercial
credit report on the taxpayer for use by such
Federal agency in accordance with sections
3711, 3717, and 3718 of title 31.
(3) National Institute for Occupational Safety and
Health.--Upon written request, the Secretary may
disclose the mailing address of taxpayers to officers
and employees of the National Institute for
Occupational Safety and Health solely for the purpose
of locating individuals who are, or may have been,
exposed to occupational hazards in order to determine
the status of their health or to inform them of the
possible need for medical care and treatment.
(4) Individuals who owe an overpayment of Federal
Pell Grants or who have defaulted on student loans
administered by the Department of Education.--
(A) In general.--Upon written request by the
Secretary of Education, the Secretary may
disclose the mailing address of any taxpayer--
(i) who owes an overpayment of a
grant awarded to such taxpayer under
subpart 1 of part A of title IV of the
Higher Education Act of 1965, or
(ii) who has defaulted on a loan--
(I) made under part B, D, or
E of title IV of the Higher
Education Act of 1965, or
(II) made pursuant to section
3(a)(1) of the Migration and
Refugee Assistance Act of 1962
to a student at an institution
of higher education,
for use only by officers, employees, or agents
of the Department of Education for purposes of
locating such taxpayer for purposes of
collecting such overpayment or loan.
(B) Disclosure to educational institutions,
etc..--Any mailing address disclosed under
subparagraph (A)(i) may be disclosed by the
Secretary of Education to--
(i) any lender, or any State or
nonprofit guarantee agency, which is
participating under part B or D of
title IV of the Higher Education Act of
1965, or
(ii) any educational institution with
which the Secretary of Education has an
agreement under subpart 1 of part A, or
part D or E, of title IV of such Act,
for use only by officers, employees, or agents
of such lender, guarantee agency, or
institution whose duties relate to the
collection of student loans for purposes of
locating individuals who have defaulted on
student loans made under such loan programs for
purposes of collecting such loans.
(5) Individuals who have defaulted on student loans
administered by the Department of Health and Human
Services.--
(A) In general.--Upon written request by the
Secretary of Health and Human Services, the
Secretary may disclose the mailing address of
any taxpayer who has defaulted on a loan made
under part C of title VII of the Public Health
Service Act or under subpart II of part B of
title VIII of such Act, for use only by
officers, employees, or agents of the
Department of Health and Human Services for
purposes of locating such taxpayer for purposes
of collecting such loan.
(B) Disclosure to schools and eligible
lenders.--Any mailing address disclosed under
subparagraph (A) may be disclosed by the
Secretary of Health and Human Services to--
(i) any school with which the
Secretary of Health and Human Services
has an agreement under subpart II of
part C of title VII of the Public
Health Service Act or subpart II of
part B of title VIII of such Act, or
(ii) any eligible lender (within the
meaning of section 737(4) of such Act)
participating under subpart I of part C
of title VII of such Act,
for use only by officers, employees, or agents
of such school or eligible lender whose duties
relate to the collection of student loans for
purposes of locating individuals who have
defaulted on student loans made under such
subparts for the purposes of collecting such
loans.
(6) Blood Donor Locator Service.--
(A) In general.--Upon written request
pursuant to section 1141 of the Social Security
Act, the Secretary shall disclose the mailing
address of taxpayers to officers and employees
of the Blood Donor Locator Service in the
Department of Health and Human Services.
(B) Restriction on disclosure.--The Secretary
shall disclose return information under
subparagraph (A) only for purposes of, and to
the extent necessary in, assisting under the
Blood Donor Locator Service authorized persons
(as defined in section 1141(h)(1) of the Social
Security Act) in locating blood donors who, as
indicated by donated blood or products derived
therefrom or by the history of the subsequent
use of such blood or blood products, have or
may have the virus for acquired immune
deficiency syndrome, in order to inform such
donors of the possible need for medical care
and treatment.
(C) Safeguards.--The Secretary shall destroy
all related blood donor records (as defined in
section 1141(h)(2) of the Social Security Act)
in the possession of the Department of the
Treasury upon completion of their use in making
the disclosure required under subparagraph (A),
so as to make such records undisclosable.
(7) Social security account statement furnished by
Social Security Administration.--Upon written request
by the Commissioner of Social Security, the Secretary
may disclose the mailing address of any taxpayer who is
entitled to receive a social security account statement
pursuant to section 1143(c) of the Social Security Act,
for use only by officers, employees or agents of the
Social Security Administration for purposes of mailing
such statement to such taxpayer.
(n) Certain other persons.--Pursuant to regulations
prescribed by the Secretary, returns and return information may
be disclosed to any person, including any person described in
section 7513(a), to the extent necessary in connection with the
processing, storage, transmission, and reproduction of such
returns and return information, the programming, maintenance,
repair, testing, and procurement of equipment, and the
providing of other services, for purposes of tax
administration.
(o) Disclosure of returns and return information with respect
to certain taxes.--
(1) Taxes imposed by subtitle E.--
(A) In general.--Returns and return
information with respect to taxes imposed by
subtitle E (relating to taxes on alcohol,
tobacco, and firearms) shall be open to
inspection by or disclosure to officers and
employees of a Federal agency whose official
duties require such inspection or disclosure.
(B) Use in certain proceedings.--Returns and
return information disclosed to a Federal
agency under subparagraph (A) may be used in an
action or proceeding (or in preparation for
such action or proceeding) brought under
section 625 of the American Jobs Creation Act
of 2004 for the collection of any unpaid
assessment or penalty arising under such Act.
(2) Taxes imposed by chapter 35.--Returns and return
information with respect to taxes imposed by chapter 35
(relating to taxes on wagering) shall, notwithstanding
any other provision of this section, be open to
inspection by or disclosure only to such person or
persons and for such purpose or purposes as are
prescribed by section 4424.
(p) Procedure and recordkeeping.--
(1) Manner, time, and place of inspections.--Requests
for the inspection or disclosure of a return or return
information and such inspection or disclosure shall be
made in such manner and at such time and place as shall
be prescribed by the Secretary.
(2) Procedure.--
(A) Reproduction of returns.--A reproduction
or certified reproduction of a return shall,
upon written request, be furnished to any
person to whom disclosure or inspection of such
return is authorized under this section. A
reasonable fee may be prescribed for furnishing
such reproduction or certified reproduction.
(B) Disclosure of return information.--Return
information disclosed to any person under the
provisions of this title may be provided in the
form of written documents, reproductions of
such documents, films or photoimpressions, or
electronically produced tapes, disks, or
records, or by any other mode or means which
the Secretary determines necessary or
appropriate. A reasonable fee may be prescribed
for furnishing such return information.
(C) Use of reproductions.--Any reproduction
of any return, document, or other matter made
in accordance with this paragraph shall have
the same legal status as the original, and any
such reproduction shall, if properly
authenticated, be admissible in evidence in any
judicial or administrative proceeding as if it
were the original, whether or not the original
is in existence.
(3) Records of inspection and disclosure.--
(A) System of recordkeeping.--Except as
otherwise provided by this paragraph, the
Secretary shall maintain a permanent system of
standardized records or accountings of all
requests for inspection or disclosure of
returns and return information (including the
reasons for and dates of such requests) and of
returns and return information inspected or
disclosed under this section and section
6104(c). Notwithstanding the provisions of
section 552a(c) of title 5, United States Code,
the Secretary shall not be required to maintain
a record or accounting of requests for
inspection or disclosure of returns and return
information, or of returns and return
information inspected or disclosed, under the
authority of subsection (c), (e), (f)(5),
(h)(1), (3)(A), or (4), (i)(4), or
(8)(A)(ii),(k)(1), (2),(6), (8), or (9),
(l)(1), (4)(B), (5), (7), (8), (9), (10), (11),
(12), (13), (14), (15), (16), (17), or (18),
(m), or (n). The records or accountings
required to be maintained under this paragraph
shall be available for examination by the Joint
Committee on Taxation or the Chief of Staff of
such joint committee. Such record or accounting
shall also be available for examination by such
person or persons as may be, but only to the
extent, authorized to make such examination
under section 552a(c)(3) of title 5, United
States Code.
(B) Report by the Secretary.--The Secretary
shall, within 90 days after the close of each
calendar year, furnish to the Joint Committee
on Taxation a report with respect to, or
summary of, the records or accountings
described in subparagraph (A) in such form and
containing such information as such joint
committee or the Chief of Staff of such joint
committee may designate. Such report or summary
shall not, however, include a record or
accounting of any request by the President
under subsection (g) for, or the disclosure in
response to such request of, any return or
return information with respect to any
individual who, at the time of such request,
was an officer or employee of the executive
branch of the Federal Government. Such report
or summary, or any part thereof, may be
disclosed by such joint committee to such
persons and for such purposes as the joint
committee may, by record vote of a majority of
the members of the joint committee, determine.
(C) Public report on disclosures.--The
Secretary shall, within 90 days after the close
of each calendar year, furnish to the Joint
Committee on Taxation for disclosure to the
public a report with respect to the records or
accountings described in subparagraph (A)
which--
(i) provides with respect to each
Federal agency, each agency, body, or
commission described in subsection (d),
(i)(3)(B)(i) or (7)(A)(ii), or (l)(6),
and the Government Accountability
Office the number of--
(I) requests for disclosure
of returns and return
information,
(II) instances in which
returns and return information
were disclosed pursuant to such
requests or otherwise,
(III) taxpayers whose
returns, or return information
with respect to whom, were
disclosed pursuant to such
requests, and
(ii) describes the general purposes
for which such requests were made.
(4) Safeguards.--Any Federal agency described in
subsection (h)(2), (h)(5), (i)(1), (2), (3), (5), or
(7), (j)(1), (2), or (5), (k)(8), (10), or (11),
(l)(1), (2), (3), (5), (10), (11), (13), (14), (17), or
(22) or (o)(1)(A), the Government Accountability
Office, the Congressional Budget Office, or any agency,
body, or commission described in subsection (d),
(i)(1)(C), (3)(B)(i), or (7)(A)(ii), or (k)(10),
(l)(6), (7), (8), (9), (12), (15), or (16), any
appropriate State officer (as defined in section
6104(c)), or any other person described in subsection
(k)(10), subsection (l)(10), (16), (18), (19), or (20),
or any entity described in subsection (l)(21), shall,
as a condition for receiving returns or return
information--
(A) establish and maintain, to the
satisfaction of the Secretary, a permanent
system of standardized records with respect to
any request, the reason for such request, and
the date of such request made by or of it and
any disclosure of return or return information
made by or to it;
(B) establish and maintain, to the
satisfaction of the Secretary, a secure area or
place in which such returns or return
information shall be stored;
(C) restrict, to the satisfaction of the
Secretary, access to the returns or return
information only to persons whose duties or
responsibilities require access and to whom
disclosure may be made under the provisions of
this title;
(D) provide such other safeguards which the
Secretary determines (and which he prescribes
in regulations) to be necessary or appropriate
to protect the confidentiality of the returns
or return information;
(E) furnish a report to the Secretary, at
such time and containing such information as
the Secretary may prescribe, which describes
the procedures established and utilized by such
agency, body, or commission, the Government
Accountability Office, or the Congressional
Budget Office for ensuring the confidentiality
of returns and return information required by
this paragraph; and
(F) upon completion of use of such returns or
return information--
(i) in the case of an agency, body,
or commission described in subsection
(d), (i)(3)(B)(i), (k)(10), or (l)(6),
(7), (8), (9), or (16), any appropriate
State officer (as defined in section
6104(c)), or any other person described
in subsection (k)(10) or subsection
(l)(10), (16), (18), (19), or (20)
return to the Secretary such returns or
return information (along with any
copies made therefrom) or make such
returns or return information
undisclosable in any manner and furnish
a written report to the Secretary
describing such manner,
(ii) in the case of an agency
described in subsection (h)(2), (h)(5),
(i)(1), (2), (3), (5) or (7), (j)(1),
(2), or (5), (k)(8), (10), or (11),
(l)(1), (2), (3), (5), (10), (11),
(12), (13), (14), (15), (17), or (22),
or (o)(1)(A) or any entity described in
subsection (l)(21), the Government
Accountability Office, or the
Congressional Budget Office, either--
(I) return to the Secretary
such returns or return
information (along with any
copies made therefrom),
(II) otherwise make such
returns or return information
undisclosable, or
(III) to the extent not so
returned or made undisclosable,
ensure that the conditions of
subparagraphs (A), (B), (C),
(D), and (E) of this paragraph
continue to be met with respect
to such returns or return
information, and
(iii) in the case of the Department
of Health and Human Services for
purposes of subsection (m)(6), destroy
all such return information upon
completion of its use in providing the
notification for which the information
was obtained, so as to make such
information undisclosable;
except that the conditions of subparagraphs (A), (B),
(C), (D), and (E) shall cease to apply with respect to
any return or return information if, and to the extent
that, such return or return information is disclosed in
the course of any judicial or administrative proceeding
and made a part of the public record thereof. If the
Secretary determines that any such agency, body, or
commission, including an agency, an appropriate State
officer (as defined in section 6104(c)), or any other
person described in subsection (k)(10) or subsection
(l)(10), (16), (18), (19), or (20) or any entity
described in subsection (l)(21), or the Government
Accountability Office or the Congressional Budget
Office, has failed to, or does not, meet the
requirements of this paragraph, he may, after any
proceedings for review established under paragraph (7),
take such actions as are necessary to ensure such
requirements are met, including refusing to disclose
returns or return information to such agency, body, or
commission, including an agency, an appropriate State
officer (as defined in section 6104(c)), or any other
person described in subsection (k)(10) or subsection
(l)(10), (16), (18), (19), or (20) or any entity
described in subsection (l)(21), or the Government
Accountability Office or the Congressional Budget
Office, until he determines that such requirements have
been or will be met. In the case of any agency which
receives any mailing address under paragraph (2), (4),
(6), or (7) of subsection (m) and which discloses any
such mailing address to any agent or which receives any
information under paragraph (6)(A), (10), (12)(B), or
(16) of subsection (l) and which discloses any such
information to any agent, or any person including an
agent described in subsection (l)(10) or (16), this
paragraph shall apply to such agency and each such
agent or other person (except that, in the case of an
agent, or any person including an agent described in
subsection (l)(10) or (16), any report to the Secretary
or other action with respect to the Secretary shall be
made or taken through such agency). For purposes of
applying this paragraph in any case to which subsection
(m)(6) applies, the term ``return information''
includes related blood donor records (as defined in
section 1141(h)(2) of the Social Security Act).
(5) Report on procedures and safeguards.--After the
close of each calendar year, the Secretary shall
furnish to each committee described in subsection
(f)(1) a report which describes the procedures and
safeguards established and utilized by such agencies,
bodies, or commissions, the Government Accountability
Office, and the Congressional Budget Office for
ensuring the confidentiality of returns and return
information as required by this subsection. Such report
shall also describe instances of deficiencies in, and
failure to establish or utilize, such procedures.
(6) Audit of procedures and safeguards.--
(A) Audit by Comptroller General.--The
Comptroller General may audit the procedures
and safeguards established by such agencies,
bodies, or commissions and the Congressional
Budget Office pursuant to this subsection to
determine whether such safeguards and
procedures meet the requirements of this
subsection and ensure the confidentiality of
returns and return information. The Comptroller
General shall notify the Secretary before any
such audit is conducted.
(B) Records of inspection and reports by the
Comptroller General.--The Comptroller General
shall--
(i) maintain a permanent system of
standardized records and accountings of
returns and return information
inspected by officers and employees of
the Government Accountability Office
under subsection (i)(8)(A)(ii) and
shall, within 90 days after the close
of each calendar year, furnish to the
Secretary a report with respect to, or
summary of, such records or accountings
in such form and containing such
information as the Secretary may
prescribe, and
(ii) furnish an annual report to each
committee described in subsection (f)
and to the Secretary setting forth his
findings with respect to any audit
conducted pursuant to subparagraph (A).
The Secretary may disclose to the Joint
Committee any report furnished to him under
clause (i).
(7) Administrative review.--The Secretary shall by
regulations prescribe procedures which provide for
administrative review of any determination under
paragraph (4) that any agency, body, or commission
described in subsection (d) has failed to meet the
requirements of such paragraph.
(8) State law requirements.--
(A) Safeguards.--Notwithstanding any other
provision of this section, no return or return
information shall be disclosed after December
31, 1978, to any officer or employee of any
State which requires a taxpayer to attach to,
or include in, any State tax return a copy of
any portion of his Federal return, or
information reflected on such Federal return,
unless such State adopts provisions of law
which protect the confidentiality of the copy
of the Federal return (or portion thereof)
attached to, or the Federal return information
reflected on, such State tax return.
(B) Disclosure of returns or return
information in State returns.--Nothing in
subparagraph (A) shall be construed to prohibit
the disclosure by an officer or employee of any
State of any copy of any portion of a Federal
return or any information on a Federal return
which is required to be attached or included in
a State return to another officer or employee
of such State (or political subdivision of such
State) if such disclosure is specifically
authorized by State law.
(q) Regulations.--The Secretary is authorized to prescribe
such other regulations as are necessary to carry out the
provisions of this section.
* * * * * * *
CHAPTER 63--ASSESSMENT
* * * * * * *
Subchapter B--Deficiency Procedures in the Case of Income, Estate,
Gift, and Certain Excise Taxes
* * * * * * *
SEC. 6213. RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX
COURT.
(a) Time for filing petition and restriction on assessment.--
Within 90 days, or 150 days if the notice is addressed to a
person outside the United States, after the notice of
deficiency authorized in section 6212 is mailed (not counting
Saturday, Sunday, or a legal holiday in the District of
Columbia as the last day), the taxpayer may file a petition
with the Tax Court for a redetermination of the deficiency.
Except as otherwise provided in section 6851, 6852, or 6861 no
assessment of a deficiency in respect of any tax imposed by
subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or
proceeding in court for its collection shall be made, begun, or
prosecuted until such notice has been mailed to the taxpayer,
nor until the expiration of such 90-day or 150-day period, as
the case may be, nor, if a petition has been filed with the Tax
Court, until the decision of the Tax Court has become final.
Notwithstanding the provisions of section 7421(a), the making
of such assessment or the beginning of such proceeding or levy
during the time such prohibition is in force may be enjoined by
a proceeding in the proper court, including the Tax Court, and
a refund may be ordered by such court of any amount collected
within the period during which the Secretary is prohibited from
collecting by levy or through a proceeding in court under the
provisions of this subsection. The Tax Court shall have no
jurisdiction to enjoin any action or proceeding or order any
refund under this subsection unless a timely petition for a
redetermination of the deficiency has been filed and then only
in respect of the deficiency that is the subject of such
petition. Any petition filed with the Tax Court on or before
the last date specified for filing such petition by the
Secretary in the notice of deficiency shall be treated as
timely filed.
(b) Exceptions to restrictions on assessment.--
(1) Assessments arising out of mathematical or
clerical errors.--If the taxpayer is notified that, on
account of a mathematical or clerical error appearing
on the return, an amount of tax in excess of that shown
on the return is due, and that an assessment of the tax
has been or will be made on the basis of what would
have been the correct amount of tax but for the
mathematical or clerical error, such notice shall not
be considered as a notice of deficiency for the
purposes of subsection (a) (prohibiting assessment and
collection until notice of the deficiency has been
mailed), or of section 6212(c)(1) (restricting further
deficiency letters), or of section 6512(a) (prohibiting
credits or refunds after petition to the Tax Court),
and the taxpayer shall have no right to file a petition
with the Tax Court based on such notice, nor shall such
assessment or collection be prohibited by the
provisions of subsection (a) of this section. Each
notice under this paragraph shall set forth the error
alleged and an explanation thereof.
(2) Abatement of assessment of mathematical or
clerical errors.--
(A) Request for abatement.--Notwithstanding
section 6404(b), a taxpayer may file with the
Secretary within 60 days after notice is sent
under paragraph (1) a request for an abatement
of any assessment specified in such notice, and
upon receipt of such request, the Secretary
shall abate the assessment. Any reassessment of
the tax with respect to which an abatement is
made under this subparagraph shall be subject
to the deficiency procedures prescribed by this
subchapter.
(B) Stay of collection.--In the case of any
assessment referred to in paragraph (1),
notwithstanding paragraph (1), no levy or
proceeding in court for the collection of such
assessment shall be made, begun, or prosecuted
during the period in which such assessment may
be abated under this paragraph.
(3) Assessments arising out of tentative carryback or
refund adjustments.--If the Secretary determines that
the amount applied, credited, or refunded under section
6411 is in excess of the overassessment attributable to
the carryback or the amount described in section
1341(b)(1) with respect to which such amount was
applied, credited, or refunded, he may assess without
regard to the provisions of paragraph (2) the amount of
the excess as a deficiency as if it were due to a
mathematical or clerical error appearing on the return.
(4) Assessment of amount paid.--Any amount paid as a
tax or in respect of a tax may be assessed upon the
receipt of such payment notwithstanding the provisions
of subsection (a). In any case where such amount is
paid after the mailing of a notice of deficiency under
section 6212, such payment shall not deprive the Tax
Court of jurisdiction over such deficiency determined
under section 6211 without regard to such assessment.
(5) Certain orders of criminal restitution.--If the
taxpayer is notified that an assessment has been or
will be made pursuant to section 6201(a)(4)--
(A) such notice shall not be considered as a
notice of deficiency for the purposes of
subsection (a) (prohibiting assessment and
collection until notice of the deficiency has
been mailed), section 6212(c)(1) (restricting
further deficiency letters), or section 6512(a)
(prohibiting credits or refunds after petition
to the Tax Court), and
(B) subsection (a) shall not apply with
respect to the amount of such assessment.
(c) Failure to file petition.--If the taxpayer does not file
a petition with the Tax Court within the time prescribed in
subsection (a), the deficiency, notice of which has been mailed
to the taxpayer, shall be assessed, and shall be paid upon
notice and demand from the Secretary.
(d) Waiver of restrictions.--The taxpayer shall at any time
(whether or not a notice of deficiency has been issued) have
the right, by a signed notice in writing filed with the
Secretary, to waive the restrictions provided in subsection (a)
on the assessment and collection of the whole or any part of
the deficiency.
(e) Suspension of filing period for certain excise taxes.--
The running of the time prescribed by subsection (a) for filing
a petition in the Tax Court with respect to the taxes imposed
by section 4941 (relating to taxes on self-dealing), 4942
(relating to taxes on failure to distribute income), 4943
(relating to taxes on excess business holdings), 4944 (relating
to investments which jeopardize charitable purpose), 4945
(relating to taxes on taxable expenditures), 4951 (relating to
taxes on self-dealing), or 4952 (relating to taxes on taxable
expenditures), 4955 (relating to taxes on political
expenditures), 4958 (relating to private excess benefit), 4971
(relating to excise taxes on failure to meet minimum funding
standard), 4975 (relating to excise taxes on prohibited
transactions) shall be suspended for any period during which
the Secretary has extended the time allowed for making
correction under section 4963(e).
(f) Coordination with title 11.--
(1) Suspension of running of period for filing
petition in title 11 cases.--In any case under title 11
of the United States Code, the running of the time
prescribed by subsection (a) for filing a petition in
the Tax Court with respect to any deficiency shall be
suspended for the period during which the debtor is
prohibited by reason of such case from filing a
petition in the Tax Court with respect to such
deficiency, and for 60 days thereafter.
(2) Certain action not taken into account.--For
purposes of the second and third sentences of
subsection (a), the filing of a proof of claim or
request for payment (or the taking of any other action)
in a case under title 11 of the United States Code
shall not be treated as action prohibited by such
second sentence.
(g) Definitions.--For purposes of this section--
(1) Return.--The term ``return'' includes any return,
statement, schedule, or list, and any amendment or
supplement thereto, filed with respect to any tax
imposed by subtitle A or B, or chapter 41, 42, 43, or
44.
(2) Mathematical or clerical error.--The term
``mathematical or clerical error'' means--
(A) an error in addition, subtraction,
multiplication, or division shown on any
return,
(B) an incorrect use of any table provided by
the Internal Revenue Service with respect to
any return if such incorrect use is apparent
from the existence of other information on the
return,
(C) an entry on a return of an item which is
inconsistent with another entry of the same or
another item on such return,
(D) an omission of information which is
required to be supplied on the return to
substantiate an entry on the return,
(E) an entry on a return of a deduction or
credit in an amount which exceeds a statutory
limit imposed by subtitle A or B, or chapter
41, 42, 43, or 44, if such limit is expressed--
(i) as a specified monetary amount,
or
(ii) as a percentage, ratio, or
fraction, and if the items entering
into the application of such limit
appear on such return,
(F) an omission of a correct taxpayer
identification number required under section 32
(relating to the earned income credit) to be
included on a return,
(G) an entry on a return claiming the credit
under section 32 with respect to net earnings
from self- employment described in section
32(c)(2)(A) to the extent the tax imposed by
section 1401 (relating to self-employment tax)
on such net earnings has not been paid,
(H) an omission of a correct TIN required
under [section 21 (relating to expenses for
household and dependent care services necessary
for gainful employment) or section 151
(relating to allowance of deductions for
personal exemptions)] subsection (a)(1)(B),
(b)(1)(A)(ii), or (b)(1)(B) of section 2 or
section 21, 35(d)(1)(B), 36B(b)(3)(B), or
63(f)(2)(B),
(I) an omission of a correct TIN required
under section 24(e) (relating to child tax
credit) to be included on a return,
(J) an omission of a correct TIN required
under section 5A(g)(1) (relating to higher
education tuition and related expenses) to be
included on a return,
(K) an omission of information required by
section 32(k)(2) (relating to taxpayers making
improper prior claims of earned income credit)
or an entry on the return claiming the credit
under section 32 for a taxable year for which
the credit is disallowed under subsection
(k)(1) thereof,
(L) the inclusion on a return of a TIN
required to be included on the return under
section 21, 24, or 32 if--
(i) such TIN is of an individual
whose age affects the amount of the
credit under such section, and
(ii) the computation of the credit on
the return reflects the treatment of
such individual as being of an age
different from the individual's age
based on such TIN,
(M) the entry on the return claiming the
credit under section 32 with respect to a child
if, according to the Federal Case Registry of
Child Support Orders established under section
453(h) of the Social Security Act, the taxpayer
is a noncustodial parent of such child,
(N) an omission of any increase required
under section 36(f) with respect to the
recapture of a credit allowed under section 36;
(O) the inclusion on a return of an
individual taxpayer identification number
issued under section 6109(i) which has expired,
been revoked by the Secretary, or is otherwise
invalid,
(P) an omission of information required by
section 24(g)(2) or an entry on the return
claiming the credit under section 24 for a
taxable year for which the credit is disallowed
under subsection (g)(1) thereof, and
(Q) an omission of information required by
section 25A(b)(4)(B) or an entry on the return
claiming the American Opportunity Tax Credit
for a taxable year for which such credit is
disallowed under section 25A(b)(4)(A).
A taxpayer shall be treated as having omitted a correct
TIN for purposes of the preceding sentence if
information provided by the taxpayer on the return with
respect to the individual whose TIN was provided
differs from the information the Secretary obtains from
the person issuing the TIN.
(h) Cross references.--
(1) For assessment as if a mathematical error on the
return, in the case of erroneous claims for income tax
prepayment credits, see section 6201(a)(3).
(2) For assessments without regard to restrictions
imposed by this section in the case of--
(A) Recovery of foreign income taxes, see
section 905(c).
(B) Recovery of foreign estate tax, see
section 2016.
(3) For provisions relating to application of this
subchapter in the case of certain partnership items,
etc., see section 6230(a).
* * * * * * *
CHAPTER 64--COLLECTION
* * * * * * *
Subchapter D--Seizure of Property for Collection of Taxes
* * * * * * *
PART II--LEVY
* * * * * * *
SEC. 6334. PROPERTY EXEMPT FROM LEVY.
(a) Enumeration.--There shall be exempt from levy--
(1) Wearing apparel and school books.--Such items of
wearing apparel and such school books as are necessary
for the taxpayer or for members of his family;
(2) Fuel, provisions, furniture, and personal
effects.--So much of the fuel, provisions, furniture,
and personal effects in the taxpayer's household, and
of the arms for personal use, livestock, and poultry of
the taxpayer, as does not exceed $6,250 in value;
(3) Books and tools of a trade, business, or
profession.--So many of the books and tools necessary
for the trade, business, or profession of the taxpayer
as do not exceed in the aggregate $3,125 in value.
(4) Unemployment benefits.--Any amount payable to an
individual with respect to his unemployment (including
any portion thereof payable with respect to dependents)
under an unemployment compensation law of the United
States, of any State, or of the District of Columbia or
of the Commonwealth of Puerto Rico.
(5) Undelivered mail.--Mail, addressed to any person,
which has not been delivered to the addressee.
(6) Certain annuity and pension payments.--Annuity or
pension payments under the Railroad Retirement Act,
benefits under the Railroad Unemployment Insurance Act,
special pension payments received by a person whose
name has been entered on the Army, Navy, Air Force, and
Coast Guard Medal of Honor roll (38 U.S.C. 1562), and
annuities based on retired or retainer pay under
chapter 73 of title 10 of the United States Code.
(7) Workmen's compensation.--Any amount payable to an
individual as workmen's compensation (including any
portion thereof payable with respect to dependents)
under a workmen's compensation law of the United
States, any State, the District of Columbia, or the
Commonwealth of Puerto Rico.
(8) Judgments for support of minor children.--If the
taxpayer is required by judgment of a court of
competent jurisdiction, entered prior to the date of
levy, to contribute to the support of his minor
children, so much of his salary, wages, or other income
as is necessary to comply with such judgment.
(9) Minimum exemption for wages, salary, and other
income.--Any amount payable to or received by an
individual as wages or salary for personal services, or
as income derived from other sources, during any
period, to the extent that the total of such amounts
payable to or received by him during such period does
not exceed the applicable exempt amount determined
under subsection (d).
(10) Certain service-connected disability payments.--
Any amount payable to an individual as a service-
connected (within the meaning of section 101(16) of
title 38, United States Code) disability benefit
under--
(A) subchapter II, III, IV, V, or VI of
chapter 11 of such title 38, or
(B) chapter 13, 21, 23, 31, 32, 34, 35, 37,
or 39 of such title 38.
(11) Certain public assistance payments.--Any amount
payable to an individual as a recipient of public
assistance under--
(A) title IV or title XVI (relating to
supplemental security income for the aged,
blind, and disabled) of the Social Security
Act, or
(B) State or local government public
assistance or public welfare programs for which
eligibility is determined by a needs or income
test.
(12) Assistance under Job Training Partnership Act.--
Any amount payable to a participant under the Job
Training Partnership Act (29 U.S.C. 1501 et seq.) from
funds appropriated pursuant to such Act.
(13) Residences exempt in small deficiency cases and
principal residences and certain business assets exempt
in absence of certain approval or jeopardy.--
(A) Residences in small deficiency cases.--If
the amount of the levy does not exceed $5,000--
(i) any real property used as a
residence by the taxpayer; or
(ii) any real property of the
taxpayer (other than real property
which is rented) used by any other
individual as a residence.
(B) Principal residences and certain business
assets.--Except to the extent provided in
subsection (e)--
(i) the principal residence of the
taxpayer (within the meaning of section
121); and
(ii) tangible personal property or
real property (other than real property
which is rented) used in the trade or
business of an individual taxpayer.
(b) Appraisal.--The officer seizing property of the type
described in subsection (a) shall appraise and set aside to the
owner the amount of such property declared to be exempt. If the
taxpayer objects at the time of the seizure to the valuation
fixed by the officer making the seizure, the Secretary shall
summon three disinterested individuals who shall make the
valuation.
(c) No other property exempt.--Notwithstanding any other law
of the United States (including section 207 of the Social
Security Act), no property or rights to property shall be
exempt from levy other than the property specifically made
exempt by subsection (a).
(d) Exempt amount of wages, salary, or other income.--
(1) Individuals on weekly basis.--In the case of an
individual who is paid or receives all of his wages,
salary, and other income on a weekly basis, the amount
of the wages, salary, and other income payable to or
received by him during any week which is exempt from
levy under subsection (a)(9) shall be the exempt
amount.
[(2) Exempt amount.--For purposes of paragraph (1),
the term ``exempt amount'' means an amount equal to--
[(A) the sum of--
[(i) the standard deduction, and
[(ii) the aggregate amount of the
deductions for personal exemptions
allowed the taxpayer under section 151
in the taxable year in which such levy
occurs, divided by (B) 52.
Unless the taxpayer submits to the Secretary a written
and properly verified statement specifying the facts
necessary to determine the proper amount under
subparagraph (A), subparagraph (A) shall be applied as
if the taxpayer were a married individual filing a
separate return with only 1 personal exemption.]
(2) Exempt amount.--
(A) In general.--For purposes of paragraph
(1), the term ``exempt amount'' means an amount
equal to--
(i) the sum of the amount determined
under subparagraph (B) and the standard
deduction, divided by
(ii) 52.
(B) Amount determined.--For purposes of
subparagraph (A), the amount determined under
this subparagraph is--
(i) the dollar amount in effect under
section 7706(d)(1)(B), multiplied by
(ii) the number of the taxpayer's
dependents for the taxable year in
which the levy occurs.
(C) Verified statement.--Unless the taxpayer
submits to the Secretary a written and properly
verified statement specifying the facts
necessary to determine the proper amount under
subparagraph (A), subparagraph (A) shall be
applied as if the taxpayer were a married
individual filing a separate return with no
dependents.
(3) Individuals on basis other than weekly.--In the
case of any individual not described in paragraph (1),
the amount of the wages, salary, and other income
payable to or received by him during any applicable pay
period or other fiscal period (as determined under
regulations prescribed by the Secretary) which is
exempt from levy under subsection (a)(9) shall be an
amount (determined under such regulations) which as
nearly as possible will result in the same total
exemption from levy for such individual over a period
of time as he would have under paragraph (1) if (during
such period of time) he were paid or received such
wages, salary, and other income on a regular weekly
basis.
[(4) Years when personal exemption amount is zero.--
[(A) In general.--In the case of any taxable
year in which the exemption amount under
section 151(d) is zero, paragraph (2) shall not
apply and for purposes of paragraph (1) the
term ``exempt amount'' means an amount equal
to--
[(i) the sum of the amount determined
under subparagraph (B) and the standard
deduction, divided by
[(ii) 52.
[(B) Amount determined.--For purposes of
subparagraph (A), the amount determined under
this subparagraph is $4,150 multiplied by the
number of the taxpayer's dependents for the
taxable year in which the levy occurs.
[(C) Inflation adjustment.--In the case of
any taxable year beginning in a calendar year
after 2018, the $4,150 amount in subparagraph
(B) shall be increased by an amount equal to--
[(i) such dollar amount, multiplied
by
[(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``2017'' for ``2016'' in subparagraph
(A)(ii) thereof.
If any increase determined under the preceding
sentence is not a multiple of $100, such
increase shall be rounded to the next lowest
multiple of $100.
[(D) Verified statement.--Unless the taxpayer
submits to the Secretary a written and properly
verified statement specifying the facts
necessary to determine the proper amount under
subparagraph (A), subparagraph (A) shall be
applied as if the taxpayer were a married
individual filing a separate return with no
dependents.]
(e) Levy allowed on principal residences and certain business
assets in certain circumstances.--
(1) Principal residences.--
(A) Approval required.--A principal residence
shall not be exempt from levy if a judge or
magistrate of a district court of the United
States approves (in writing) the levy of such
residence.
(B) Jurisdiction.--The district courts of the
United States shall have exclusive jurisdiction
to approve a levy under subparagraph (A).
(2) Certain business assets.--Property (other than a
principal residence) described in subsection (a)(13)(B)
shall not be exempt from levy if--
(A) a district director or assistant district
director of the Internal Revenue Service
personally approves (in writing) the levy of
such property; or
(B) the Secretary finds that the collection
of tax is in jeopardy.
An official may not approve a levy under subparagraph
(A) unless the official determines that the taxpayer's
other assets subject to collection are insufficient to
pay the amount due, together with expenses of the
proceedings.
(f) Levy allowed on certain specified payments.--Any payment
described in subparagraph (B) or (C) of section 6331(h)(2)
shall not be exempt from levy if the Secretary approves the
levy thereon under section 6331(h).
(g) Inflation adjustment.--
(1) In general.--In the case of any calendar year
beginning after 1999, each dollar amount referred to in
paragraphs (2) and (3) of subsection (a) shall be
increased by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year,
by substituting ``calendar year 1998'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
(2) Rounding.--If any dollar amount after being
increased under paragraph (1) is not a multiple of $10,
such dollar amount shall be rounded to the nearest
multiple of $10.
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 6654. FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME TAX.
(a) Addition to the tax.--Except as otherwise provided in
this section, in the case of any underpayment of estimated tax
by an individual, there shall be added to the tax under chapter
1, the tax under chapter 2, and the tax under chapter 2A for
the taxable year an amount determined by applying--
(1) the underpayment rate established under section
6621,
(2) to the amount of the underpayment,
(3) for the period of the underpayment.
(b) Amount of underpayment; period of underpayment.--For
purposes of subsection (a)--
(1) Amount.--The amount of the underpayment shall be
the excess of--
(A) the required installment, over
(B) the amount (if any) of the installment
paid on or before the due date for the
installment.
(2) Period of underpayment.--The period of the
underpayment shall run from the due date for the
installment to whichever of the following dates is the
earlier--
(A) the 15th day of the 4th month following
the close of the taxable year, or
(B) with respect to any portion of the
underpayment, the date on which such portion is
paid.
(3) Order of crediting payments.--For purposes of
paragraph (2)(B), a payment of estimated tax shall be
credited against unpaid required installments in the
order in which such installments are required to be
paid.
(c) Number of required installments; due dates.--For purposes
of this section--
(1) Payable in 4 installments.--There shall be 4
required installments for each taxable year.
(2) Time for payment of installments
------------------------------------------------------------------------
In the case of the following required
installments: The due date is:
------------------------------------------------------------------------
1st April 15
2nd June 15
3rd September 15
4th January 15 of the following
taxable year.
------------------------------------------------------------------------
(d) Amount of required installments.--For purposes of this
section--
(1) Amount.--
(A) In general.--Except as provided in
paragraph (2), the amount of any required
installment shall be 25 percent of the required
annual payment.
(B) Required annual payment.--For purposes of
subparagraph (A), the term ``required annual
payment'' means the lesser of--
(i) 90 percent of the tax shown on
the return for the taxable year (or, if
no return is filed, 90 percent of the
tax for such year), or
(ii) 100 percent of the tax shown on
the return of the individual for the
preceding taxable year.
Clause (ii) shall not apply if the preceding
taxable year was not a taxable year of 12
months or if the individual did not file a
return for such preceding taxable year.
(C) Limitation on use of preceding year's
tax.--
(i) In general.--If the adjusted
gross income shown on the return of the
individual for the preceding taxable
year beginning in any calendar year
exceeds $150,000, clause (ii) of
subparagraph (B) shall be applied by
substituting ``110 percent'' for ``100
percent''.
(ii) Separate returns.--In the case
of a married individual (within the
meaning of section 7703) who files a
separate return for the taxable year
for which the amount of the installment
is being determined, clause (i) shall
be applied by substituting ``$75,000''
for ``$150,000''.
[(iii) Special rule.--In the case of
an estate or trust, adjusted gross
income shall be determined as provided
in section 67(e).]
(2) Lower required installment where annualized
income installment is less than amount determined under
paragraph (1)
(A) In general.--In the case of any required
installment, if the individual establishes that
the annualized income installment is less than
the amount determined under paragraph (1)--
(i) the amount of such required
installment shall be the annualized
income installment, and
(ii) any reduction in a required
installment resulting from the
application of this subparagraph shall
be recaptured by increasing the amount
of the next required installment
determined under paragraph (1) by the
amount of such reduction (and by
increasing subsequent required
installments to the extent that the
reduction has not previously been
recaptured under this clause).
(B) Determination of annualized income
installment.--In the case of any required
installment, the annualized income installment
is the excess (if any) of--
(i) an amount equal to the applicable
percentage of the tax for the taxable
year computed by placing on an
annualized basis the taxable income,
alternative minimum taxable income, and
adjusted self-employment income for
months in the taxable year ending
before the due date for the
installment, over
(ii) the aggregate amount of any
prior required installments for the
taxable year.
(C) Special rules.--For purposes of this
paragraph--
(i) Annualization.--The taxable
income, alternative minimum taxable
income, and adjusted self-employment
income shall be placed on an annualized
basis under regulations prescribed by
the Secretary.
(ii) Applicable percentage.--
------------------------------------------------------------------------
In the case of the following required
installments: The applicable percentage is:
------------------------------------------------------------------------
1st 22.5
2nd 45
3rd 67.5
4th 90.
------------------------------------------------------------------------
(iii) Adjusted self-employment
income.--The term ``adjusted self-
employment income'' means self-
employment income (as defined in
section 1402(b)); except that section
1402(b) shall be applied by placing
wages (within the meaning of section
1402(b)) for months in the taxable year
ending before the due date for the
installment on an annualized basis
consistent with clause (i).
(D) Treatment of subpart F income.--
(i) In general.--Any amounts required
to be included in gross income under
section 951(a) (and credits properly
allocable thereto) shall be taken into
account in computing any annualized
income installment under subparagraph
(B) in a manner similar to the manner
under which partnership income
inclusions (and credits properly
allocable thereto) are taken into
account.
(ii) Prior year safe harbor.--If a
taxpayer elects to have this clause
apply to any taxable year--
(I) clause (i) shall not
apply, and
(II) for purposes of
computing any annualized income
installment for such taxable
year, the taxpayer shall be
treated as having received
ratably during such taxable
year items of income and credit
described in clause (i) in an
amount equal to the amount of
such items shown on the return
of the taxpayer for the
preceding taxable year (the
second preceding taxable year
in the case of the first and
second required installments
for such taxable year).
(e) Exceptions.--
(1) Where tax is small amount.--No addition to tax
shall be imposed under subsection (a) for any taxable
year if the tax shown on the return for such taxable
year (or, if no return is filed, the tax), reduced by
the credit allowable under section 31, is less than
$1,000.
(2) Where no tax liability for preceding taxable
year.--No addition to tax shall be imposed under
subsection (a) for any taxable year if--
(A) the preceding taxable year was a taxable
year of 12 months,
(B) the individual did not have any liability
for tax for the preceding taxable year, and
(C) the individual was a citizen or resident
of the United States throughout the preceding
taxable year.
(3) Waiver in certain cases.--
(A) In general.--No addition to tax shall be
imposed under subsection (a) with respect to
any underpayment to the extent the Secretary
determines that by reason of casualty,
disaster, or other unusual circumstances the
imposition of such addition to tax would be
against equity and good conscience.
(B) Newly retired or disabled individuals.--
No addition to tax shall be imposed under
subsection (a) with respect to any underpayment
if the Secretary determines that--
(i) the taxpayer--
(I) retired after having
attained age 62, or
(II) became disabled,
in the taxable year for which estimated
payments were required to be made or in
the taxable year preceding such taxable
year, and
(ii) such underpayment was due to
reasonable cause and not to willful
neglect.
(f) Tax computed after application of credits against tax.--
For purposes of this section, the term ``tax'' means--
(1) the tax imposed by chapter 1 (other than any
increase in such tax by reason of section 143(m)), plus
(2) the tax imposed by chapter 2, plus
(3) the tax imposed by chapter 2A, minus
(g) Application of section in case of tax withheld on
wages.--
(1) In general.--For purposes of applying this
section, the amount of the credit allowed under section
31 for the taxable year shall be deemed a payment of
estimated tax, and an equal part of such amount shall
be deemed paid on each due date for such taxable year,
unless the taxpayer establishes the dates on which all
amounts were actually withheld, in which case the
amounts so withheld shall be deemed payments of
estimated tax on the dates on which such amounts were
actually withheld.
(2) Separate application.--The taxpayer may apply
paragraph (1) separately with respect to--
(A) wage withholding, and
(B) all other amounts withheld for which
credit is allowed under section 31.
(h) Special rule where return filed on or before January
31.--If, on or before January 31 of the following taxable year,
the taxpayer files a return for the taxable year and pays in
full the amount computed on the return as payable, then no
addition to tax shall be imposed under subsection (a) with
respect to any underpayment of the 4th required installment for
the taxable year.
(i) Special rules for farmers and fishermen.--For purposes of
this section--
(1) In general.--If an individual is a farmer or
fisherman for any taxable year--
(A) there shall be only 1 required
installment for the taxable year,
(B) the due date for such installment shall
be January 15 of the following taxable year,
(C) the amount of such installment shall be
equal to the required annual payment determined
under subsection (d)(1)(B) by substituting ``66
2/3 percent'' for ``90 percent'' and without
regard to subparagraph (C) of subsection
(d)(1), and
(D) subsection (h) shall be applied--
(i) by substituting ``March 1'' for
``January 31'', and
(ii) by treating the required
installment described in subparagraph
(A) of this paragraph as the 4th
required installment.
(2) Farmer or fisherman defined.--An individual is a
farmer or fisherman for any taxable year if--
(A) the individual's gross income from
farming or fishing (including oyster farming)
for the taxable year is at least 66 2/3 percent
of the total gross income from all sources for
the taxable year, or
(B) such individual's gross income from
farming or fishing (including oyster farming)
shown on the return of the individual for the
preceding taxable year is at least 66 2/3
percent of the total gross income from all
sources shown on such return.
(j) Special rules for nonresident aliens.--In the case of a
nonresident alien described in section 6072(c):
(1) Payable in 3 installments.--There shall be 3
required installments for the taxable year.
(2) Time for payment of installments.--The due dates
for required installments under this subsection shall
be determined under the following table:
------------------------------------------------------------------------
In the case of the following required
installments: The due date is:
------------------------------------------------------------------------
1st June 15
2nd September 15
3rd January 15 of the following
taxable year.
------------------------------------------------------------------------
(3) Amount of required installments.--
(A) First required installment.--In the case
of the first required installment, subsection
(d) shall be applied by substituting ``50
percent'' for ``25 percent'' in subsection
(d)(1)(A).
(B) Determination of applicable percentage.--
The applicable percentage for purposes of
subsection (d)(2) shall be determined under the
following table:
------------------------------------------------------------------------
In the case of the following required
installments: The applicable percentage is:
------------------------------------------------------------------------
1st 45
2nd 67.5
3rd 90.
------------------------------------------------------------------------
(k) Fiscal years and short years.--
(1) Fiscal years.--In applying this section to a
taxable year beginning on any date other than January
1, there shall be substituted, for the months specified
in this section, the months which correspond thereto.
(2) Short taxable year.--This section shall be
applied to taxable years of less than 12 months in
accordance with regulations prescribed by the
Secretary.
(l) Estates and trusts.--
(1) In general.--Except as otherwise provided in this
subsection, this section shall apply to any estate or
trust.
(2) Exception for estates and certain trusts.--With
respect to any taxable year ending before the date 2
years after the date of the decedent's death, this
section shall not apply to--
(A) the estate of such decedent, or
(B) any trust--
(i) all of which was treated (under
subpart E of part I of subchapter J of
chapter 1) as owned by the decedent,
and
(ii) to which the residue of the
decedent's estate will pass under his
will (or, if no will is admitted to
probate, which is the trust primarily
responsible for paying debts, taxes,
and expenses of administration).
(3) Exception for charitable trusts and private
foundations.--This section shall not apply to any trust
which is subject to the tax imposed by section 511 or
which is a private foundation.
(4) Special rule for annualizations.--In the case of
any estate or trust to which this section applies,
subsection (d)(2)(B)(i) shall be applied by
substituting ``ending before the date 1 month before
the due date for the installment'' for ``ending before
the due date for the installment''.
(m) Special rule for Medicare tax.--For purposes of this
section, the tax imposed under section 3101(b)(2) (to the
extent not withheld) shall be treated as a tax imposed under
chapter 2.
(n) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
* * * * * * *
CHAPTER 79--DEFINITIONS
Sec. 7701. Definitions.
* * * * * * *
Sec. 7706. Dependent defined.
* * * * * * *
SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE.
(a) In general.--For purposes of this title--
(1) a qualified long-term care insurance contract
shall be treated as an accident and health insurance
contract,
(2) amounts (other than policyholder dividends, as
defined in section 808, or premium refunds) received
under a qualified long-term care insurance contract
shall be treated as amounts received for personal
injuries and sickness and shall be treated as
reimbursement for expenses actually incurred for
medical care (as defined in section 213(d)),
(3) any plan of an employer providing coverage under
a qualified long-term care insurance contract shall be
treated as an accident and health plan with respect to
such coverage,
(4) except as provided in subsection (e)(3), amounts
paid for a qualified long-term care insurance contract
providing the benefits described in subsection
(b)(2)(A) shall be treated as payments made for
insurance for purposes of section 213(d)(1)(D), and
(5) a qualified long-term care insurance contract
shall be treated as a guaranteed renewable contract
subject to the rules of section 816(e).
(b) Qualified long-term care insurance contract.--For
purposes of this title--
(1) In general.--The term ``qualified long-term care
insurance contract'' means any insurance contract if--
(A) the only insurance protection provided
under such contract is coverage of qualified
long-term care services,
(B) such contract does not pay or reimburse
expenses incurred for services or items to the
extent that such expenses are reimbursable
under title XVIII of the Social Security Act or
would be so reimbursable but for the
application of a deductible or coinsurance
amount,
(C) such contract is guaranteed renewable,
(D) such contract does not provide for a cash
surrender value or other money that can be--
(i) paid, assigned, or pledged as
collateral for a loan, or
(ii) borrowed, other than as provided
in subparagraph (E) or paragraph
(2)(C),
(E) all refunds of premiums, and all
policyholder dividends or similar amounts,
under such contract are to be applied as a
reduction in future premiums or to increase
future benefits, and
(F) such contract meets the requirements of
subsection (g).
(2) Special rules.--
(A) Per diem, etc. payments permitted.--A
contract shall not fail to be described in
subparagraph (A) or (B) of paragraph (1) by
reason of payments being made on a per diem or
other periodic basis without regard to the
expenses incurred during the period to which
the payments relate.
(B) Special rules relating to medicare.--
(i) Paragraph (1)(B) shall not apply
to expenses which are reimbursable
under title XVIII of the Social
Security Act only as a secondary payor.
(ii) No provision of law shall be
construed or applied so as to prohibit
the offering of a qualified long-term
care insurance contract on the basis
that the contract coordinates its
benefits with those provided under such
title.
(C) Refunds of premiums.--Paragraph (1)(E)
shall not apply to any refund on the death of
the insured, or on a complete surrender or
cancellation of the contract, which cannot
exceed the aggregate premiums paid under the
contract. Any refund on a complete surrender or
cancellation of the contract shall be
includible in gross income to the extent that
any deduction or exclusion was allowable with
respect to the premiums.
(c) Qualified long-term care services.--For purposes of this
section--
(1) In general.--The term ``qualified long-term care
services'' means necessary diagnostic, preventive,
therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance or personal
care services, which--
(A) are required by a chronically ill
individual, and
(B) are provided pursuant to a plan of care
prescribed by a licensed health care
practitioner.
(2) Chronically ill individual.--
(A) In general.--The term ``chronically ill
individual'' means any individual who has been
certified by a licensed health care
practitioner as--
(i) being unable to perform (without
substantial assistance from another
individual) at least 2 activities of
daily living for a period of at least
90 days due to a loss of functional
capacity,
(ii) having a level of disability
similar (as determined under
regulations prescribed by the Secretary
in consultation with the Secretary of
Health and Human Services) to the level
of disability described in clause (i),
or
(iii) requiring substantial
supervision to protect such individual
from threats to health and safety due
to severe cognitive impairment.
Such term shall not include any individual
otherwise meeting the requirements of the
preceding sentence unless within the preceding
12-month period a licensed health care
practitioner has certified that such individual
meets such requirements.
(B) Activities of daily living.--For purposes
of subparagraph (A), each of the following is
an activity of daily living:
(i) Eating.
(ii) Toileting.
(iii) Transferring.
(iv) Bathing.
(v) Dressing.
(vi) Continence.
A contract shall not be treated as a qualified
long-term care insurance contract unless the
determination of whether an individual is a
chronically ill individual described in
subparagraph (A)(i) takes into account at least
5 of such activities.
(3) Maintenance or personal care services.--The term
``maintenance or personal care services'' means any
care the primary purpose of which is the provision of
needed assistance with any of the disabilities as a
result of which the individual is a chronically ill
individual (including the protection from threats to
health and safety due to severe cognitive impairment).
(4) Licensed health care practitioner.--The term
``licensed health care practitioner'' means any
physician (as defined in section 1861(r)(1) of the
Social Security Act) and any registered professional
nurse, licensed social worker, or other individual who
meets such requirements as may be prescribed by the
Secretary.
(d) Aggregate payments in excess of limits.--
(1) In general.--If the aggregate of--
(A) the periodic payments received for any
period under all qualified long-term care
insurance contracts which are treated as made
for qualified long-term care services for an
insured, and
(B) the periodic payments received for such
period which are treated under section 101(g)
as paid by reason of the death of such insured,
exceeds the per diem limitation for such period, such
excess shall be includible in gross income without
regard to section 72. A payment shall not be taken into
account under subparagraph (B) if the insured is a
terminally ill individual (as defined in section
101(g)) at the time the payment is received.
(2) Per diem limitation.--For purposes of paragraph
(1), the per diem limitation for any period is an
amount equal to the excess (if any) of--
(A) the greater of--
(i) the dollar amount in effect for
such period under paragraph (4), or
(ii) the costs incurred for qualified
long- term care services provided for
the insured for such period, over (B)
the aggregate payments received as
reimbursements (through insurance or
otherwise) for qualified long-term care
services provided for the insured
during such period.
(3) Aggregation rules.--For purposes of this
subsection--
(A) all persons receiving periodic payments
described in paragraph (1) with respect to the
same insured shall be treated as 1 person, and
(B) the per diem limitation determined under
paragraph (2) shall be allocated first to the
insured and any remaining limitation shall be
allocated among the other such persons in such
manner as the Secretary shall prescribe.
(4) Dollar amount.--The dollar amount in effect under
this subsection shall be $175 per day (or the
equivalent amount in the case of payments on another
periodic basis).
(5) Inflation adjustment.--In the case of a calendar
year after 1997, the dollar amount contained in
paragraph (4) shall be increased at the same time and
in the same manner as amounts are increased pursuant to
section 213(d)(10).
(6) Periodic payments.--For purposes of this
subsection, the term ``periodic payment'' means any
payment (whether on a periodic basis or otherwise) made
without regard to the extent of the costs incurred by
the payee for qualified long-term care services.
(e) Treatment of coverage provided as part of a life
insurance or annuity contract.--Except as otherwise provided in
regulations prescribed by the Secretary, in the case of any
long-term care insurance coverage (whether or not qualified)
provided by a rider on or as part of a life insurance contract
or an annuity contract--
(1) In general.--This title shall apply as if the
portion of the contract providing such coverage is a
separate contract.
(2) Denial of deduction under section 213.--No
deduction shall be allowed under section 213(a) for any
payment made for coverage under a qualified long-term
care insurance contract if such payment is made as a
charge against the cash surrender value of a life
insurance contract or the cash value of an annuity
contract.
(3) Portion defined.--For purposes of this
subsection, the term ``portion'' means only the terms
and benefits under a life insurance contract or annuity
contract that are in addition to the terms and benefits
under the contract without regard to long-term care
insurance coverage.
(4) Annuity contracts to which paragraph (1) does not
apply.--For purposes of this subsection, none of the
following shall be treated as an annuity contract:
(A) A trust described in section 401(a) which
is exempt from tax under section 501(a).
(B) A contract--
(i) purchased by a trust described in
subparagraph (A),
(ii) purchased as part of a plan
described in section 403(a),
(iii) described in section 403(b),
(iv) provided for employees of a life
insurance company under a plan
described in section 818(a)(3), or
(v) from an individual retirement
account or an individual retirement
annuity.
(C) A contract purchased by an employer for
the benefit of the employee (or the employee's
spouse).
Any dividend described in section 404(k) which is
received by a participant or beneficiary shall, for
purposes of this paragraph, be treated as paid under a
separate contract to which subparagraph (B)(i) applies.
(f) Treatment of certain state-maintained plans.--
(1) In general.--If--
(A) an individual receives coverage for
qualified long-term care services under a State
long-term care plan, and
(B) the terms of such plan would satisfy the
requirements of subsection (b) were such plan
an insurance contract,
such plan shall be treated as a qualified long-term
care insurance contract for purposes of this title.
(2) State long-term care plan.--For purposes of
paragraph (1), the term ``State long-term care plan''
means any plan--
(A) which is established and maintained by a
State or an instrumentality of a State,
(B) which provides coverage only for
qualified long-term care services, and
(C) under which such coverage is provided
only to--
(i) employees and former employees of
a State (or any political subdivision
or instrumentality of a State),
(ii) the spouses of such employees,
and
(iii) individuals bearing a
relationship to such employees or
spouses which is described in any of
subparagraphs (A) through (G) of
[section 152(d)(2)] section 7706(d)(2).
(g) Consumer protection provisions.--
(1) In general.--The requirements of this subsection
are met with respect to any contract if the contract
meets--
(A) the requirements of the model regulation
and model Act described in paragraph (2),
(B) the disclosure requirement of paragraph
(3), and
(C) the requirements relating to
nonforfeitability under paragraph (4).
(2) Requirements of model regulation and act.--
(A) In general.--The requirements of this
paragraph are met with respect to any contract
if such contract meets--
(i) Model regulation.--The following
requirements of the model regulation:
(I) Section 7A (relating to
guaranteed renewal or
noncancellability), and the
requirements of section 6B of
the model Act relating to such
section 7A.
(II) Section 7B (relating to
prohibitions on limitations and
exclusions).
(III) Section 7C (relating to
extension of benefits).
(IV) Section 7D (relating to
continuation or conversion of
coverage).
(V) Section 7E (relating to
discontinuance and replacement
of policies).
(VI) Section 8 (relating to
unintentional lapse).
(VII) Section 9 (relating to
disclosure), other than section
9F thereof.
(VIII) Section 10 (relating
to prohibitions against post-
claims underwriting).
(IX) Section 11 (relating to
minimum standards).
(X) Section 12 (relating to
requirement to offer inflation
protection), except that any
requirement for a signature on
a rejection of inflation
protection shall permit the
signature to be on an
application or on a separate
form.
(XI) Section 23 (relating to
prohibition against preexisting
conditions and probationary
periods in replacement policies
or certificates).
(ii) Model Act.--The following
requirements of the model Act:
(I) Section 6C (relating to
preexisting conditions).
(II) Section 6D (relating to
prior hospitalization).
(B) Definitions.--For purposes of this
paragraph--
(i) Model provisions.--The terms
``model regulation'' and ``model Act''
mean the long-term care insurance model
regulation, and the long-term care
insurance model Act, respectively,
promulgated by the National Association
of Insurance Commissioners (as adopted
as of January 1993).
(ii) Coordination.--Any provision of
the model regulation or model Act
listed under clause (i) or (ii) of
subparagraph (A) shall be treated as
including any other provision of such
regulation or Act necessary to
implement the provision.
(iii) Determination.--For purposes of
this section and section 4980C, the
determination of whether any
requirement of a model regulation or
the model Act has been met shall be
made by the Secretary.
(3) Disclosure requirement.--The requirement of this
paragraph is met with respect to any contract if such
contract meets the requirements of section 4980C(d).
(4) Nonforfeiture requirements.--
(A) In general.--The requirements of this
paragraph are met with respect to any level
premium contract, if the issuer of such
contract offers to the policyholder, including
any group policyholder, a nonforfeiture
provision meeting the requirements of
subparagraph (B).
(B) Requirements of provision.--The
nonforfeiture provision required under
subparagraph (A) shall meet the following
requirements:
(i) The nonforfeiture provision shall
be appropriately captioned.
(ii) The nonforfeiture provision
shall provide for a benefit available
in the event of a default in the
payment of any premiums and the mount
of the benefit may be adjusted
subsequent to being initially granted
only as necessary to reflect changes in
claims, persistency, and interest as
reflected in changes in rates for
premium paying contracts approved by
the appropriate State regulatory agency
for the same contract form.
(iii) The nonforfeiture provision
shall provide at least one of the
following:
(I) Reduced paid-up
insurance.
(II) Extended term insurance.
(III) Shortened benefit
period.
(IV) Other similar offerings
approved by the appropriate
State regulatory agency.
(5) Cross reference.--For coordination of the
requirements of this subsection with State
requirements, see section 4980C(f).
SEC. 7703. DETERMINATION OF MARITAL STATUS.
(a) General rule.--For purposes of [part V of subchapter B of
chapter 1 and] those provisions of this title which refer to
this subsection--
(1) the determination of whether an individual is
married shall be made as of the close of his taxable
year; except that if his spouse dies during his taxable
year such determination shall be made as of the time of
such death; and
(2) an individual legally separated from his spouse
under a decree of divorce or of separate maintenance
shall not be considered as married.
(b) Certain married individuals living apart.--For purposes
of those provisions of this title which refer to this
subsection, if--
(1) an individual who is married (within the meaning
of subsection (a)) and who files a separate return
maintains as his home a household which constitutes for
more than one-half of the taxable year the principal
place of abode of a child (within the meaning of
[section 152(f)(1)) with respect to whom such
individual is entitled to a deduction for the taxable
year under section 151 (or would be so entitled but for
section 152(e)),] section 7706(f)(1)) who is a
dependent of such individual for the taxable year (or
would be but for section 7706(e)),
(2) such individual furnishes over one-half of the
cost of maintaining such household during the taxable
year, and
(3) during the last 6 months of the taxable year,
such individual's spouse is not a member of such
household,
such individual shall not be considered as married.
* * * * * * *
SEC. [152.] 7706. DEPENDENT DEFINED.
(a) In general.--For purposes of [this subtitle] subtitle A,
the term ``dependent'' means--
(1) a qualifying child, or
(2) a qualifying relative.
(b) Exceptions.--For purposes of this section--
(1) Dependents ineligible.--If an individual is a
dependent of a taxpayer for any taxable year of such
taxpayer beginning in a calendar year, such individual
shall be treated as having no dependents for any
taxable year of such individual beginning in such
calendar year.
(2) Married dependents.--An individual shall not be
treated as a dependent of a taxpayer under subsection
(a) if such individual has made a joint return with the
individual's spouse under section 6013 for the taxable
year beginning in the calendar year in which the
taxable year of the taxpayer begins.
(3) Citizens or nationals of other countries.--
(A) In general.--The term ``dependent'' does
not include an individual who is not a citizen
or national of the United States unless such
individual is a resident of the United States
or a country contiguous to the United States.
(B) Exception for adopted child.--
Subparagraph (A) shall not exclude any child of
a taxpayer (within the meaning of subsection
(f)(1)(B)) from the definition of ``dependent''
if--
(i) for the taxable year of the
taxpayer, the child has the same
principal place of abode as the
taxpayer and is a member of the
taxpayer's household, and
(ii) the taxpayer is a citizen or
national of the United States.
(c) Qualifying child.--For purposes of this section--
(1) In general.--The term ``qualifying child'' means,
with respect to any taxpayer for any taxable year, an
individual--
(A) who bears a relationship to the taxpayer
described in paragraph (2),
(B) who has the same principal place of abode
as the taxpayer for more than one-half of such
taxable year,
(C) who meets the age requirements of
paragraph (3),
(D) who has not provided over one-half of
such individual's own support for the calendar
year in which the taxable year of the taxpayer
begins, and
(E) who has not filed a joint return (other
than only for a claim of refund) with the
individual's spouse under section 6013 for the
taxable year beginning in the calendar year in
which the taxable year of the taxpayer begins.
(2) Relationship.--For purposes of paragraph (1)(A),
an individual bears a relationship to the taxpayer
described in this paragraph if such individual is--
(A) a child of the taxpayer or a descendant
of such a child, or
(B) a brother, sister, stepbrother, or
stepsister of the taxpayer or a descendant of
any such relative.
(3) Age requirements.--
(A) In general.--For purposes of paragraph
(1)(C), an individual meets the requirements of
this paragraph if such individual is younger
than the taxpayer claiming such individual as a
qualifying child and--
(i) has not attained the age of 19 as
of the close of the calendar year in
which the taxable year of the taxpayer
begins, or
(ii) is a student who has not
attained the age of 24 as of the close
of such calendar year.
(B) Special rule for disabled.--In the case
of an individual who is permanently and totally
disabled (as defined in section 22(e)(3)) at
any time during such calendar year, the
requirements of subparagraph (A) shall be
treated as met with respect to such individual.
(4) Special rule relating to 2 or more who can claim
the same qualifying child.--
(A) In general.--Except as provided in
subparagraphs (B) and (C), if (but for this
paragraph) an individual may be claimed as a
qualifying child by 2 or more taxpayers for a
taxable year beginning in the same calendar
year, such individual shall be treated as the
qualifying child of the taxpayer who is--
(i) a parent of the individual, or
(ii) if clause (i) does not apply,
the taxpayer with the highest adjusted
gross income for such taxable year.
(B) More than 1 parent claiming qualifying
child.--If the parents claiming any qualifying
child do not file a joint return together, such
child shall be treated as the qualifying child
of--
(i) the parent with whom the child
resided for the longest period of time
during the taxable year, or
(ii) if the child resides with both
parents for the same amount of time
during such taxable year, the parent
with the highest adjusted gross income.
(C) No parent claiming qualifying child.--If
the parents of an individual may claim such
individual as a qualifying child but no parent
so claims the individual, such individual may
be claimed as the qualifying child of another
taxpayer but only if the adjusted gross income
of such taxpayer is higher than the highest
adjusted gross income of any parent of the
individual.
(d) Qualifying relative.--For purposes of this section--
(1) In general.--The term ``qualifying relative''
means, with respect to any taxpayer for any taxable
year, an individual--
(A) who bears a relationship to the taxpayer
described in paragraph (2),
(B) whose gross income for the calendar year
in which such taxable year begins is less than
[the exemption amount (as defined in section
151(d))] $4,150,
(C) with respect to whom the taxpayer
provides over one-half of the individual's
support for the calendar year in which such
taxable year begins, and
(D) who is not a qualifying child of such
taxpayer or of any other taxpayer for any
taxable year beginning in the calendar year in
which such taxable year begins.
(2) Relationship.--For purposes of paragraph (1)(A),
an individual bears a relationship to the taxpayer
described in this paragraph if the individual is any of
the following with respect to the taxpayer:
(A) A child or a descendant of a child.
(B) A brother, sister, stepbrother, or
stepsister.
(C) The father or mother, or an ancestor of
either.
(D) A stepfather or stepmother.
(E) A son or daughter of a brother or sister
of the taxpayer.
(F) A brother or sister of the father or
mother of the taxpayer.
(G) A son-in-law, daughter-in-law, father-in-
law, mother-in-law, brother-in-law, or sister-
in-law.
(H) An individual (other than an individual
who at any time during the taxable year was the
spouse, determined without regard to section
7703, of the taxpayer) who, for the taxable
year of the taxpayer, has the same principal
place of abode as the taxpayer and is a member
of the taxpayer's household.
(3) Special rule relating to multiple support
agreements.--For purposes of paragraph (1)(C), over
one-half of the support of an individual for a calendar
year shall be treated as received from the taxpayer
if--
(A) no one person contributed over one-half
of such support,
(B) over one-half of such support was
received from 2 or more persons each of whom,
but for the fact that any such person alone did
not contribute over one-half of such support,
would have been entitled to claim such
individual as a dependent for a taxable year
beginning in such calendar year,
(C) the taxpayer contributed over 10 percent
of such support, and
(D) each person described in subparagraph (B)
(other than the taxpayer) who contributed over
10 percent of such support files a written
declaration (in such manner and form as the
Secretary may by regulations prescribe) that
such person will not claim such individual as a
dependent for any taxable year beginning in
such calendar year.
(4) Special rule relating to income of handicapped
dependents.--
(A) In general.--For purposes of paragraph
(1)(B), the gross income of an individual who
is permanently and totally disabled (as defined
in section 22(e)(3)) at any time during the
taxable year shall not include income
attributable to services performed by the
individual at a sheltered workshop if--
(i) the availability of medical care
at such workshop is the principal
reason for the individual's presence
there, and
(ii) the income arises solely from
activities at such workshop which are
incident to such medical care.
(B) Sheltered workshop defined.--For purposes
of subparagraph (A), the term ``sheltered
workshop'' means a school--
(i) which provides special
instruction or training designed to
alleviate the disability of the
individual, and
(ii) which is operated by an
organization described in section
501(c)(3) and exempt from tax under
section 501(a), or by a State, a
possession of the United States, any
political subdivision of any of the
foregoing, the United States, or the
District of Columbia.
(5) Special rules for support.--
(A) In general.--For purposes of this
subsection--
(i) payments to a spouse of alimony
or separate maintenance payments shall
not be treated as a payment by the
payor spouse for the support of any
dependent, and
(ii) in the case of the remarriage of
a parent, support of a child received
from the parent's spouse shall be
treated as received from the parent.
(B) Alimony or separate maintenance
payment.--For purposes of subparagraph (A), the
term ``alimony or separate maintenance
payment'' means any payment in cash if--
(i) such payment is received by (or
on behalf of) a spouse under a divorce
or separation instrument (as defined in
section 121(d)(3)(C)),
(ii) in the case of an individual
legally separated from the individual's
spouse under a decree of divorce or of
separate maintenance, the payee spouse
and the payor spouse are not members of
the same household at the time such
payment is made, and
(iii) there is no liability to make
any such payment for any period after
the death of the payee spouse and there
is no liability to make any payment (in
cash or property) as a substitute for
such payments after the death of the
payee spouse.
(6) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year beginning after 2018,
the $4,150 amount in paragraph (1)(B) shall be
increased by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(c)(2)(A) for the calendar year
in which such taxable year begins, determined
by substituting ``calendar year 2017'' for
``calendar year 2016'' in clause (ii) thereof.
If any increase determined under the preceding sentence
is not a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.
(e) Special rule for divorced parents, etc..--
(1) In general.--Notwithstanding subsection
(c)(1)(B), (c)(4), or (d)(1)(C), if--
(A) a child receives over one-half of the
child's support during the calendar year from
the child's parents--
(i) who are divorced or legally
separated under a decree of divorce or
separate maintenance,
(ii) who are separated under a
written separation agreement, or
(iii) who live apart at all times
during the last 6 months of the
calendar year, and--
(B) such child is in the custody of 1 or both
of the child's parents for more than one-half
of the calendar year, such child shall be
treated as being the qualifying child or
qualifying relative of the noncustodial parent
for a calendar year if the requirements
described in paragraph (2) or (3) are met.
(2) Exception where custodial parent releases claim
to exemption for the year.--For purposes of paragraph
(1), the requirements described in this paragraph are
met with respect to any calendar year if--
(A) the custodial parent signs a written
declaration (in such manner and form as the
Secretary may by regulations prescribe) that
such custodial parent will not claim such child
as a dependent for any taxable year beginning
in such calendar year, and
(B) the noncustodial parent attaches such
written declaration to the noncustodial
parent's return for the taxable year beginning
during such calendar year.
(3) Exception for certain pre-1985 instruments.--
(A) In general.--For purposes of paragraph
(1), the requirements described in this
paragraph are met with respect to any calendar
year if--
(i) a qualified pre-1985 instrument
between the parents applicable to the
taxable year beginning in such calendar
year provides that the noncustodial
parent shall be entitled to any
deduction allowable under section 151
(as in effect before its repeal) for
such child, and
(ii) the noncustodial parent provides
at least $600 for the support of such
child during such calendar year.
For purposes of this subparagraph, amounts
expended for the support of a child or children
shall be treated as received from the
noncustodial parent to the extent that such
parent provided amounts for such support.
(B) Qualified pre-1985 instrument.--For
purposes of this paragraph, the term
``qualified pre-1985 instrument'' means any
decree of divorce or separate maintenance or
written agreement--
(i) which is executed before January
1, 1985,
(ii) which on such date contains the
provision described in subparagraph
(A)(i), and
(iii) which is not modified on or
after such date in a modification which
expressly provides that this paragraph
shall not apply to such decree or
agreement.
(4) Custodial parent and noncustodial parent.--For
purposes of this subsection--
(A) Custodial parent.--The term ``custodial
parent'' means the parent having custody for
the greater portion of the calendar year.
(B) Noncustodial parent.--The term
``noncustodial parent'' means the parent who is
not the custodial parent.
(5) Exception for multiple-support agreement.--This
subsection shall not apply in any case where over one-
half of the support of the child is treated as having
been received from a taxpayer under the provision of
subsection (d)(3).
(6) Special rule for support received from new spouse
of parent.--For purposes of this subsection, in the
case of the remarriage of a parent, support of a child
received from the parent's spouse shall be treated as
received from the parent.
(f) Other definitions and rules.--For purposes of this
section--
(1) Child defined.--
(A) In general.--The term ``child'' means an
individual who is--
(i) a son, daughter, stepson, or
stepdaughter of the taxpayer, or
(ii) an eligible foster child of the
taxpayer.
(B) Adopted child.--In determining whether
any of the relationships specified in
subparagraph (A)(i) or paragraph (4) exists, a
legally adopted individual of the taxpayer, or
an individual who is lawfully placed with the
taxpayer for legal adoption by the taxpayer,
shall be treated as a child of such individual
by blood.
(C) Eligible foster child.--For purposes of
subparagraph (A)(ii), the term ``eligible
foster child'' means an individual who is
placed with the taxpayer by an authorized
placement agency or by judgment, decree, or
other order of any court of competent
jurisdiction.
(2) Student defined.--The term ``student'' means an
individual who during each of 5 calendar months during
the calendar year in which the taxable year of the
taxpayer begins--
(A) is a full-time student at an educational
organization described in section
170(b)(1)(A)(ii), or
(B) is pursuing a full-time course of
institutional on-farm training under the
supervision of an accredited agent of an
educational organization described in section
170(b)(1)(A)(ii) or of a State or political
subdivision of a State.
(3) Determination of household status.--An individual
shall not be treated as a member of the taxpayer's
household if at any time during the taxable year of the
taxpayer the relationship between such individual and
the taxpayer is in violation of local law.
(4) Brother and sister.--The terms ``brother'' and
``sister'' include a brother or sister by the half
blood.
(5) Special support test in case of students.--For
purposes of subsections (c)(1)(D) and (d)(1)(C), in the
case of an individual who is--
(A) a child of the taxpayer, and
(B) a student, amounts received as
scholarships for study at an educational
organization described in section
170(b)(1)(A)(ii) shall not be taken into
account.
(6) Treatment of missing children.--
(A) In general.--Solely for the purposes
referred to in subparagraph (B), a child of the
taxpayer--
(i) who is presumed by law
enforcement authorities to have been
kidnapped by someone who is not a
member of the family of such child or
the taxpayer, and
(ii) who had, for the taxable year in
which the kidnapping occurred, the same
principal place of abode as the
taxpayer for more than one-half of the
portion of such year before the date of
the kidnapping,
shall be treated as meeting the requirement of
subsection (c)(1)(B) with respect to a taxpayer
for all taxable years ending during the period
that the child is kidnapped.
(B) Purposes.--Subparagraph (A) shall apply
solely for purposes of determining--
[(i) the deduction under section
151(c),]
[(ii)] (i) the credit under section
24 (relating to child tax credit),
[(iii)] (ii) whether an individual is
a surviving spouse or a head of a
household (as such terms are defined in
section 2), and
[(iv)] (iii) the earned income credit
under section 32.
(C) Comparable treatment of certain
qualifying relatives.--For purposes of this
section, a child of the taxpayer--
(i) who is presumed by law
enforcement authorities to have been
kidnapped by someone who is not a
member of the family of such child or
the taxpayer, and
(ii) who was (without regard to this
paragraph) a qualifying relative of the
taxpayer for the portion of the taxable
year before the date of the kidnapping,
shall be treated as a qualifying relative of
the taxpayer for all taxable years ending
during the period that the child is kidnapped.
(D) Termination of treatment.--Subparagraphs
(A) and (C) shall cease to apply as of the
first taxable year of the taxpayer beginning
after the calendar year in which there is a
determination that the child is dead (or, if
earlier, in which the child would have attained
age 18).
(7) Cross references.--For provision treating child
as dependent of both parents for purposes of certain
provisions, see sections 105(b), 132(h)(2)(B), and
213(d)(5).
CHAPTER 80--GENERAL RULES
* * * * * * *
Subchapter C--Provisions Affecting More Than One Subtitle
* * * * * * *
SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST RATES.
(a) Treatment of gift loans and demand loans.--
(1) In general.--For purposes of this title, in the
case of any below-market loan to which this section
applies and which is a gift loan or a demand loan, the
forgone interest shall be treated as--
(A) transferred from the lender to the
borrower, and
(B) retransferred by the borrower to the
lender as interest.
(2) Time when transfers made.--Except as otherwise
provided in regulations prescribed by the Secretary,
any forgone interest attributable to periods during any
calendar year shall be treated as transferred (and
retransferred) under paragraph (1) on the last day of
such calendar year.
(b) Treatment of other below-market loans.--
(1) In general.--For purposes of this title, in the
case of any below-market loan to which this section
applies and to which subsection (a)(1) does not apply,
the lender shall be treated as having transferred on
the date the loan was made (or, if later, on the first
day on which this section applies to such loan), and
the borrower shall be treated as having received on
such date, cash in an amount equal to the excess of--
(A) the amount loaned, over
(B) the present value of all payments which
are required to be made under the terms of the
loan.
(2) Obligation treated as having original issue
discount.--For purposes of this title--
(A) In general.--Any below-market loan to
which paragraph (1) applies shall be treated as
having original issue discount in an amount
equal to the excess described in paragraph (1).
(B) Amount in addition to other original
issue discount.--Any original issue discount
which a loan is treated as having by reason of
subparagraph (A) shall be in addition to any
other original issue discount on such loan
(determined without regard to subparagraph
(A)).
(c) Below-market loans to which section applies.--
(1) In general.--Except as otherwise provided in this
subsection and subsection (g), this section shall apply
to--
(A) Gifts.--Any below-market loan which is a
gift loan.
(B) Compensation-related loans.--Any below-
market loan directly or indirectly between--
(i) an employer and an employee, or
(ii) an independent contractor and a
person for whom such independent
contractor provides services.
(C) Corporation-shareholder loans.--Any
below-market loan directly or indirectly
between a corporation and any shareholder of
such corporation.
(D) Tax avoidance loans.--Any below-market
loan 1 of the principal purposes of the
interest arrangements of which is the avoidance
of any Federal tax.
(E) Other below-market loans.--To the extent
provided in regulations, any below-market loan
which is not described in subparagraph (A),
(B), (C), or (F) if the interest arrangements
of such loan have a significant effect on any
Federal tax liability of the lender or the
borrower.
(F) Loans to qualified continuing care
facilities.--Any loan to any qualified
continuing care facility pursuant to a
continuing care contract.
(2) $10,000 de minimis exception for gift loans
between individuals.--
(A) In general.--In the case of any gift loan
directly between individuals, this section
shall not apply to any day on which the
aggregate outstanding amount of loans between
such individuals does not exceed $10,000.
(B) De minimis exception not to apply to
loans attributable to acquisition of income-
producing assets.--Subparagraph (A) shall not
apply to any gift loan directly attributable to
the purchase or carrying of income-producing
assets.
(C) Cross reference.--For limitation on
amount treated as interest where loans do not
exceed $100,000, see subsection (d)(1).
(3) $10,000 de minimis exception for compensation-
related and corporate-shareholder loans.--
(A) In general.--In the case of any loan
described in subparagraph (B) or (C) of
paragraph (1), this section shall not apply to
any day on which the aggregate outstanding
amount of loans between the borrower and lender
does not exceed $10,000.
(B) Exception not to apply where 1 of
principal purposes is tax avoidance.--
Subparagraph (A) shall not apply to any loan
the interest arrangements of which have as 1 of
their principal purposes the avoidance of any
Federal tax.
(d) Special rules for gift loans.--
(1) Limitation on interest accrual for purposes of
income taxes where loans do not exceed $100,000.--
(A) In general.--For purposes of subtitle A,
in the case of a gift loan directly between
individuals, the amount treated as
retransferred by the borrower to the lender as
of the close of any year shall not exceed the
borrower's net investment income for such year.
(B) Limitation not to apply where 1 of
principal purposes is tax avoidance.--
Subparagraph (A) shall not apply to any loan
the interest arrangements of which have as 1 of
their principal purposes the avoidance of any
Federal tax.
(C) Special rule where more than 1 gift loan
outstanding.--For purposes of subparagraph (A),
in any case in which a borrower has outstanding
more than 1 gift loan, the net investment
income of such borrower shall be allocated
among such loans in proportion to the
respective amounts which would be treated as
retransferred by the borrower without regard to
this paragraph.
(D) Limitation not to apply where aggregate
amount of loans exceed $100,000.--This
paragraph shall not apply to any loan made by a
lender to a borrower for any day on which the
aggregate outstanding amount of loans between
the borrower and lender exceeds $100,000.
(E) Net investment income.--For purposes of
this paragraph--
(i) In general.--The term ``net
investment income'' has the meaning
given such term by section 163(d)(4).
(ii) De minimis rule.--If the net
investment income of any borrower for
any year does not exceed $1,000, the
net investment income of such borrower
for such year shall be treated as zero.
(iii) Additional amounts treated as
interest.--In determining the net
investment income of a person for any
year, any amount which would be
included in the gross income of such
person for such year by reason of
section 1272 if such section applied to
all deferred payment obligations shall
be treated as interest received by such
person for such year.
(iv) Deferred payment obligations.--
The term ``deferred payment
obligation'' includes any market
discount bond, short-term obligation,
United States savings bond, annuity, or
similar obligation.
(2) Special rule for gift tax.--In the case of any
gift loan which is a term loan, subsection (b)(1) (and
not subsection (a)) shall apply for purposes of chapter
12.
(e) Definitions of below-market loan and forgone interest.--
For purposes of this section--
(1) Below-market loan.--The term ``below-market
loan'' means any loan if--
(A) in the case of a demand loan, interest is
payable on the loan at a rate less than the
applicable Federal rate, or
(B) in the case of a term loan, the amount
loaned exceeds the present value of all
payments due under the loan.
(2) Forgone interest.--The term ``forgone interest''
means, with respect to any period during which the loan
is outstanding, the excess of--
(A) the amount of interest which would have
been payable on the loan for the period if
interest accrued on the loan at the applicable
Federal rate and were payable annually on the
day referred to in subsection (a)(2), over
(B) any interest payable on the loan properly
allocable to such period.
(f) Other definitions and special rules.--For purposes of
this section--
(1) Present value.--The present value of any payment
shall be determined in the manner provided by
regulations prescribed by the Secretary--
(A) as of the date of the loan, and
(B) by using a discount rate equal to the
applicable Federal rate.
(2) Applicable Federal rate.--
(A) Term loans.--In the case of any term
loan, the applicable Federal rate shall be the
applicable Federal rate in effect under section
1274(d) (as of the day on which the loan was
made), compounded semiannually.
(B) Demand loans.--In the case of a demand
loan, the applicable Federal rate shall be the
Federal short-term rate in effect under section
1274(d) for the period for which the amount of
forgone interest is being determined,
compounded semiannually.
(3) Gift loan.--The term ``gift loan'' means any
below-market loan where the forgoing of interest is in
the nature of a gift.
(4) Amount loaned.--The term ``amount loaned'' means
the amount received by the borrower.
(5) Demand loan.--The term ``demand loan'' means any
loan which is payable in full at any time on the demand
of the lender. Such term also includes (for purposes
other than determining the applicable Federal rate
under paragraph (2)) any loan if the benefits of the
interest arrangements of such loan are not transferable
and are conditioned on the future performance of
substantial services by an individual. To the extent
provided in regulations, such term also includes any
loan with an indefinite maturity.
(6) Term loan.--The term ``term loan'' means any loan
which is not a demand loan.
(7) Husband and wife treated as 1 person.--A husband
and wife shall be treated as 1 person.
(8) Loans to which section 483, 643(i), or 1274
applies.--This section shall not apply to any loan to
which section 483, 643(i), or 1274 applies.
(9) No withholding.--No amount shall be withheld
under chapter 24 with respect to--
(A) any amount treated as transferred or
retransferred under subsection (a), and
(B) any amount treated as received under
subsection (b).
(10) Special rule for term loans.--If this section
applies to any term loan on any day, this section shall
continue to apply to such loan notwithstanding
paragraphs (2) and (3) of subsection (c). In the case
of a gift loan, the preceding sentence shall only apply
for purposes of chapter 12.
[(11) Time for determining rate applicable to
employee relocation loans.--
[(A) In general.--In the case of any term
loan made by an employer to an employee the
proceeds of which are used by the employee to
purchase a principal residence (within the
meaning of section 121), the determination of
the applicable Federal rate shall be made as of
the date the written contract to purchase such
residence was entered into.
[(B) Paragraph only to apply to cases to
which section 217 applies.--Subparagraph (A)
shall only apply to the purchase of a principal
residence in connection with the commencement
of work by an employee or a change in the
principal place of work of an employee to which
section 217 applies.]
(g) Exception for certain loans to qualified continuing care
facilities.--
(1) In general.--This section shall not apply for any
calendar year to any below-market loan made by a lender
to a qualified continuing care facility pursuant to a
continuing care contract if the lender (or the lender's
spouse) attains age 65 before the close of such year.
(2) $90,000 limit.--Paragraph (1) shall apply only to
the extent that the aggregate outstanding amount of any
loan to which such paragraph applies (determined
without regard to this paragraph), when added to the
aggregate outstanding amount of all other previous
loans between the lender (or the lender's spouse) and
any qualified continuing care facility to which
paragraph (1) applies, does not exceed $90,000.
(3) Continuing care contract.--For purposes of this
section, the term ``continuing care contract'' means a
written contract between an individual and a qualified
continuing care facility under which--
(A) the individual or individual's spouse may
use a qualified continuing care facility for
their life or lives,
(B) the individual or individual's spouse--
(i) will first--
(I) reside in a separate,
independent living unit with
additional facilities outside
such unit for the providing of
meals and other personal care,
and
(II) not require long-term
nursing care, and (ii) then
will be provided long-term and
skilled nursing care as the
health of such individual or
individual's spouse requires,
and (C) no additional
substantial payment is required
if such individual or
individual's spouse requires
increased personal care
services or long-term and
skilled nursing care.
(4) Qualified continuing care facility.--
(A) In general.--For purposes of this
section, the term ``qualified continuing care
facility'' means 1 or more facilities--
(i) which are designed to provide
services under continuing care
contracts, and
(ii) substantially all of the
residents of which are covered by
continuing care contracts.
(B) Substantially all facilities must be
owned or operated by borrower.--A facility
shall not be treated as a qualified continuing
care facility unless substantially all
facilities which are used to provide services
which are required to be provided under a
continuing care contract are owned or operated
by the borrower.
(C) Nursing homes excluded.--The term
``qualified continuing care facility'' shall
not include any facility which is of a type
which is traditionally considered a nursing
home.
(5) Adjustment of limit for inflation.--In the case
of any loan made during any calendar year after 1986,
the dollar amount in paragraph (2) shall be increased
by an amount equal to--
(A) such amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
``calendar year 1985'' for ``calendar year
2016'' in subparagraph (A)(ii) thereof.
Any increase under the preceding sentence shall be
rounded to the nearest multiple of $100 (or, if such
increase is a multiple of $50, such increase shall be
increased to the nearest multiple of $100).
(6) Suspension of application.--Paragraph (1) shall
not apply for any calendar year to which subsection (h)
applies.
(h) Exception for loans to qualified continuing care
facilities.--
(1) In general.--This section shall not apply for any
calendar year to any below-market loan owed by a
facility which on the last day of such year is a
qualified continuing care facility, if such loan was
made pursuant to a continuing care contract and if the
lender (or the lender's spouse) attains age 62 before
the close of such year.
(2) Continuing care contract.--For purposes of this
section, the term ``continuing care contract'' means a
written contract between an individual and a qualified
continuing care facility under which--
(A) the individual or individual's spouse may
use a qualified continuing care facility for
their life or lives,
(B) the individual or individual's spouse
will be provided with housing, as appropriate
for the health of such individual or
individual's spouse--
(i) in an independent living unit
(which has additional available
facilities outside such unit for the
provision of meals and other personal
care), and
(ii) in an assisted living facility
or a nursing facility, as is available
in the continuing care facility, and
(C) the individual or individual's spouse
will be provided assisted living or nursing
care as the health of such individual or
individual's spouse requires, and as is
available in the continuing care facility.
The Secretary shall issue guidance which limits such
term to contracts which provide only facilities, care,
and services described in this paragraph.
(3) Qualified continuing care facility.--
(A) In general.--For purposes of this
section, the term ``qualified continuing care
facility'' means 1 or more facilities--
(i) which are designed to provide
services under continuing care
contracts,
(ii) which include an independent
living unit, plus an assisted living or
nursing facility, or both, and
(iii) substantially all of the
independent living unit residents of
which are covered by continuing care
contracts.
(B) Nursing homes excluded.--The term
``qualified continuing care facility'' shall
not include any facility which is of a type
which is traditionally considered a nursing
home.
(i) Regulations.--
(1) In general.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this section, including--
(A) regulations providing that where, by
reason of varying rates of interest,
conditional interest payments, waivers of
interest, disposition of the lender's or
borrower's interest in the loan, or other
circumstances, the provisions of this section
do not carry out the purposes of this section,
adjustments to the provisions of this section
will be made to the extent necessary to carry
out the purposes of this section,
(B) regulations for the purpose of assuring
that the positions of the borrower and lender
are consistent as to the application (or
nonapplication) of this section, and
(C) regulations exempting from the
application of this section any class of
transactions the interest arrangements of which
have no significant effect on any Federal tax
liability of the lender or the borrower.
(2) Estate tax coordination.--Under regulations
prescribed by the Secretary, any loan which is made
with donative intent and which is a term loan shall be
taken into account for purposes of chapter 11 in a
manner consistent with the provisions of subsection
(b).
* * * * * * *
----------
PUBLIC LAW 115-97
TITLE I
* * * * * * *
Subtitle A--Individual Tax Reform
* * * * * * *
PART III--TAX BENEFITS FOR FAMILIES AND INDIVIDUALS
* * * * * * *
[SEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN
THE SINAI PENINSULA OF EGYPT.
[(a) In general.--For purposes of the following provisions of
the Internal Revenue Code of 1986, with respect to the
applicable period, a qualified hazardous duty area shall be
treated in the same manner as if it were a combat zone (as
determined under section 112 of such Code):
[(1) Section 2(a)(3) (relating to special rule where
deceased spouse was in missing status).
[(2) Section 112 (relating to the exclusion of
certain combat pay of members of the Armed Forces).
[(3) Section 692 (relating to income taxes of members
of Armed Forces on death).
[(4) Section 2201 (relating to members of the Armed
Forces dying in combat zone or by reason of combat-
zone-incurred wounds, etc.).
[(5) Section 3401(a)(1) (defining wages relating to
combat pay for members of the Armed Forces).
[(6) Section 4253(d) (relating to the taxation of
phone service originating from a combat zone from
members of the Armed Forces).
[(7) Section 6013(f)(1) (relating to joint return
where individual is in missing status).
[(8) Section 7508 (relating to time for performing
certain acts postponed by reason of service in combat
zone).
[(b) Qualified Hazardous Duty Area.--For purposes of this
section, the term ``qualified hazardous duty area'' means the
Sinai Peninsula of Egypt, if as of the date of the enactment of
this section any member of the Armed Forces of the United
States is entitled to special pay under section 310 of title
37, United States Code (relating to special pay; duty subject
to hostile fire or imminent danger), for services performed in
such location. Such term includes such location only during the
period such entitlement is in effect.
[(c) Applicable Period.--
[(1) In general.--Except as provided in paragraph
(2), the applicable period is--
[(A) the portion of the first taxable year
ending after June 9, 2015, which begins on such
date, and
[(B) any subsequent taxable year beginning
before January 1, 2026.
[(2) Withholding.--In the case of subsection (a)(5),
the applicable period is--
[(A) the portion of the first taxable year
ending after the date of the enactment of this
Act which begins on such date, and
[(B) any subsequent taxable year beginning
before January 1, 2026.
[(d) Effective Date.--
[(1) In general.--Except as provided in paragraph
(2), the provisions of this section shall take effect
on June 9, 2015.
[(2) Withholding.--Subsection (a)(5) shall apply to
remuneration paid after the date of the enactment of
this Act.]
* * * * * * *
VII. DISSENTING VIEWS
It has been eight months since the Republicans enacted
their massive, unpaid-for tax cut law (Public Law 115-97)
without a single Democratic vote or a single hearing. At the
time, Democrats and independent experts warned that a so-called
tax reform plan that was not paid for and that was so heavily
skewed to the wealthy and big corporations would harm our
economy and damage important programs like Medicare and Social
Security. Eight months later, we are beginning to see what many
of us feared is coming true. Health insurance companies in
state after state are announcing higher premiums for next year,
while health coverage for those living with pre-existing
conditions is on the chopping block. To make matters worse, the
Medicare Trustees cut three years off the life of the Medicare
Trust Fund because of the Republican tax bill.
Despite all of this, Republicans are doubling down and
moving forward with another round of tax cuts for the well-off
and well-connected with this Tax Scam 2.0, the ``Protecting
Family and Small Business Tax Cuts Act of 2018'' (H.R. 6760).
After Republicans showered corporations with trillions of
dollars in tax cuts and promised that it would lead to more
jobs and higher wages, we are seeing that corporations across
the country are instead pocketing their money, laying off
workers, and shipping operations to other countries. In one
particularly egregious case, an executive at a well-known
company stated that the savings the company received from the
Republican tax law allowed them to restructure and lay off
hundreds of workers.
H.R. 6760 extended the section 199A pass-through deduction,
which Republicans claimed would benefit small business and spur
economic growth. Instead, section 199A is a massive giveaway to
millionaires. In fact, 58 percent of the benefit of the
Republicans' so-called small business tax benefit goes to
millionaires.
At the same time, the Republicans have doubled down on
their attack on the middle class by attempting to make
permanent the limits to the State and Local Tax deduction, the
mortgage interest deduction, and casualty loss deductions. And
by eliminating personal exemptions alone, 290 million
individuals will no longer be able to claim $1.14 trillion in
tax savings. Tax Scam 2.0 targets these and many other tax
incentives that help middle class families get ahead, while
lavishing benefits on the wealthy and well-connected
corporations.
The Republicans call themselves fiscal conservatives but
nothing could be further from the truth. History doesn't lie
and now we're seeing it again with the addition of more than $3
trillion to the nation's debt.
Tax Scam 2.0, like Tax Scam 1.0 before it, was jammed
through the Committee with no hearings and no input from
stakeholders. The rushed and lopsided process late last year
resulted in the disastrous tax law. Unsurprisingly, the
Democratic staff has identified over 100 mistakes and other
problems with the Republicans' tax law. Instead of seeking
expert opinions, high-quality data, and a reasoned review of
the performance to date of last year's law, Republicans
repeated the careless, partisan process of last year and again
aimed at partisan priorities instead of evidence-based reforms.
Furthermore, there was no reason for them to abandon regular
order, given that these bills are guaranteed to be dead-on-
arrival in the Senate.
Democrats on the Committee gave Republicans the opportunity
to demonstrate their priorities, offering seven fiscally-
responsible amendments that truly help middle-class families
and protect seniors from tax hikes and cuts to Social Security
and Medicare without adding to the deficit. In a manner
consistent with their habit of putting the wealthy and
corporations ahead of working Americans, Republicans rejected
every amendment.
Republicans rejected an amendment I offered to curb one of
the worst excesses of last year's tax scam, which is made
permanent in H.R. 6760. My amendment would have restored the
top marginal income tax rate to pre-Public Law 115-97 levels
and used the proceeds to support three key priorities that
actually help hardworking Americans: expanding the Earned
Income Tax Credit (EITC) to offer support to low-income workers
without children, making the Adoption Tax Credit refundable,
and enhancing the child and dependent care credit. Instead of
offering support to ordinary families, H.R. 6760 makes
permanent a reduction to the pre-Public Law 115-97 top marginal
income tax rate, which was already cut in half compared to the
Reagan era. A top marginal rate of 39.6 has previously won the
support not only of Presidents Obama and Clinton, but also John
Boehner and Mitch McConnell. That top rate is not too high--a
broad bipartisan group of lawmakers and presidents were all
willing to support it. There is no compelling reason why it
should be lowered. My amendment offered Republicans an
opportunity to change H.R. 6760 to provide meaningful support
to low-wage workers, adoptive parents, and those with
dependents in need of care, just by asking some of the most
affluent people in our society to give up a small part of their
tax cut--an opportunity Republicans resoundingly rejected.
Republicans also rejected an amendment offered by Rep.
Pascrell that would have removed the cap on the deduction for
state and local taxes (``SALT''), a provision that prevents
individual taxpayers from owing federal taxes on the income
they pay in taxes to state and local governments. Ironically,
Tax Scam 1.0 allowed corporations to continue deducting state
and local taxes, while eliminating much of the benefit for
individuals and families. State and local tax payments are not
disposable income, and it is unfair to treat them as such.
Currently, more than 100 million Americans in 45 million
households claim the SALT deduction. Almost 40 percent of
taxpayers earning between $50,000 and $75,000 claim SALT, and
over 70 percent of taxpayers making $100,000 to $200,000 use
it. Over one-half the value of the deduction went to households
with incomes below $200,000. In 2016, the most recent year for
which data are available, the average SALT deduction nationwide
was already above $12,500, and inflation will cause a growing
number of households to experience double taxation. In fact, in
2016, the average SALT deduction was over $10,000 in 23 states
and the District of Columbia: Michigan, Missouri, Kentucky,
Hawaii, Iowa, New Hampshire, Ohio, Nebraska, Pennsylvania,
Maine, Virginia, Wisconsin, Illinois, Rhode Island, Vermont,
Oregon, Maryland, Minnesota, Massachusetts, DC, New Jersey,
California, Connecticut, and New York. With average SALT
deductions exceeding $9,000, ten more states won't be far
behind: South Carolina, Arkansas, Georgia, Idaho, West
Virginia, Colorado, Montana, Delaware, Kansas, and North
Carolina.
People living in every congressional district in every
state in the country use the SALT deduction, and it benefits
taxpayers of all income levels, directly or indirectly. State
and local government tax revenues support essential public
services and investments, like schools, local law enforcement,
fire fighters, road construction and maintenance, and health
care. Nearly everyone who itemizes claims the SALT deduction;
therefore, repealing SALT would raise the cost of state and
local services on a wide swath of taxpayers. Because this
provision effectively raises the cost of state and local taxes,
state and local governments would be pressured to reduce
revenues and cut crucial public investments. Republicans
rejected the opportunity to restore fairness in our tax system
for more taxpayers that are now facing double taxation as a
result of Republican tax policy choices.
Republicans rejected an amendment offered by Rep. Thompson
that would have provided fairness and certainty to taxpayers
that are victims of natural disasters. The amendment would have
repealed the limitations in Public Law 115-97 that restricted
eligibility for itemized deductions related to casualty losses
to taxpayers in certain disaster areas, and extended a suite of
provisions to help victims of natural disasters nationwide,
including: penalty-free access to retirement funds, an employer
wage tax credit in core disaster areas, a suspension of the
limitations on deduction for charitable contributions
associated with disasters, a relaxation of rules associated
with the deduction for personal casualty losses, a special rule
for income calculations with respect to the EITC and Child Tax
Credit, and special rules for application of disaster tax
relief for possessions of the United States. This is nothing
more than the same relief the Chairman provided to his
constituents that were victims of Hurricane Harvey last year.
It is unconscionable for Republicans to support the notion that
only those taxpayers that are fortunate enough to reside in the
district of the Chairman are entitled to tax relief following
such a tragedy. Republicans rejected the opportunity to provide
fairness and certainty to all taxpayers facing tragedy.
Republicans rejected an amendment offered by Rep. Sanchez
that would have made permanent the reduction of the adjusted
gross income threshold for deductibility of certain medical
expenses. The deduction for medical expenses is an important
backstop for individuals with expensive health care needs. H.R.
6760 only extended this important tax relief for two years,
while making permanent all of the other individual provisions,
including billions in tax relief for millionaires. Republicans
have done nothing to lower prescription drug costs for seniors,
address long-term care needs, or stabilize the individual
market to stem the skyrocketing premiums caused by Republican
sabotage. Republicans rejected the opportunity to make
permanent tax relief for millions of Americans facing
significant health costs, choosing to shower the wealthy in tax
benefits over middle-class Americans struggling with high out-
of-pocket health care costs.
Republicans rejected an amendment offered by Rep. Doggett
that would have compelled the Chairman of the Ways and Means
Committee to submit a written request to the Secretary of the
Treasury for federal tax returns filed by or on behalf of the
President for the last ten years. There are few matters the
Ways and Means Committee could consider more important than the
integrity of our tax code, and the faith that the American
people have in our democracy. The amendment would have
contained a list of Congressional findings that raised
questions about the Trump Administration and would have
demanded Congressional oversight by the Committee on Ways and
Means.
Republicans rejected an amendment offered by Rep. Larson
that would have suspended the Republicans' misguided tax policy
until it was certified that their billions of dollars in tax
cuts for the wealthy would not do harm to the Social Security
and Medicare trust funds. When looking at the ballooning
deficit, Republicans shift blame away from the $3 trillion
their policies have added and, instead, blame programs that
people have worked their entire lives for and have planned for
in retirement--Medicare and Social Security. These programs are
the cornerstone of the American middle class, and yet the
Republicans continue to attack them. Republican actions
threaten health care for 58 million seniors and individuals
with disabilities. Since the Republican Tax Scam 1.0 was signed
into law, the Medicare Trust Fund's solvency has been slashed
by three years. The Republican's health care repeal bill would
have cut three years from Medicare's Trust Fund. In contrast,
the Affordable Care Act added 12 years to the Medicare Trust
Fund. It is clear that enactment of these tax cut giveaways are
part of the two-step Republican strategy to cut Social Security
and Medicare: First, the Republicans explode the deficit by
cutting taxes for the rich. Second, the Republicans use the
deficits created by their tax cuts as an excuse to cut Social
Security and Medicare benefits. Republicans rejected the
opportunity to demonstrate to their constituents a real
commitment to ensuring that benefits earned by hardworking
Americans would not be cut at the expense of tax cuts for the
wealthy.
Republicans rejected an amendment offered by Rep. Doggett
that would have put the American worker first--ahead of
billions in tax relief for multinational corporations. The
amendment would have suspended the preferential tax rates on
money that multinational corporations stashed offshore until
the Joint Committee on Taxation certified that Americans'
average household income had increased by $4,000, a promise
made by President Trump and Congressional Republicans. It is
clear that, consistent with their record of offering lip
service to the middle class while lavishing corporations and
wealthy individuals with tax relief, Republicans were never
going to keep that promise to American workers. Republicans
rejected this opportunity to put the American worker first.
I said it when Republicans rammed through their first
deficit-busting tax cuts, and I'll say it again: American
families should not be forced to watch as the rich get richer,
and they fall further and further behind. H.R. 6760 would do
just that.
Richard E. Neal,
Ranking Member.