[House Report 116-161]
[From the U.S. Government Publishing Office]
116th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 116-161
_______________________________________________________________________
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
EQUALITY ACT OF 2019
----------
R E P O R T
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 3299
[Including cost estimate of the Congressional Budget Office]
together with
MINORITY VIEWS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
July 18, 2019.--Ordered to be printed
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
EQUALITY ACT OF 2019
116th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 116-161
_______________________________________________________________________
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
EQUALITY ACT OF 2019
__________
R E P O R T
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 3299
[Including cost estimate of the Congressional Budget Office]
together with
MINORITY VIEWS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
July 18, 2019.--Ordered to be printed
________
U.S. GOVERNMENT PUBLISHING OFFICE
37-115 WASHINGTON : 2019
C O N T E N T S
Page
I. SUMMARY AND BACKGROUND........................................ 7
A. Purpose and Summary....................................... 7
B. Background and Need for Legislation....................... 8
C. Legislative History....................................... 8
II. EXPLANATION OF THE BILL...................................... 9
A. Extension of period of limitation for certain legally
married couples (sec. 2 of the bill and sec. 6511 of the
Code)...................................................... 9
B. Rules relating to all legally married couples, and rules
relating to the gender of spouses, etc. (secs. 3 and 4 of
the bill).................................................. 11
III. VOTES OF THE COMMITTEE...................................... 12
IV. BUDGET EFFECTS OF THE BILL................................... 12
A. Committee Estimate of Budgetary Effects................... 12
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority.............................. 14
C. Cost Estimate Prepared by the Congressional Budget Office. 14
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.... 15
A. Committee Oversight Findings and Recommendations.......... 15
B. Statement of General Performance Goals and Objectives..... 16
C. Information Relating to Unfunded Mandates................. 16
D. Applicability of House Rule XXI, Clause 5(b).............. 16
E. Tax Complexity Analysis................................... 16
F. Congressional Earmarks, Limited Tax Benefits, and Limited
Tariff Benefits............................................ 16
G. Duplication of Federal Programs........................... 17
H. Hearings.................................................. 17
VI. CHANGES IN EXISTING LAW MADE BY THE BILL..................... 17
A. Changes in Existing Law Proposed by the Bill.............. 17
VII. MINORITY VIEWS.............................................. 588
116th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 116-161
======================================================================
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019
_______
July 18, 2019.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Neal, from the Committee on Ways and Means, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 3299]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 3299) to permit legally married same-sex couples to
amend their filing status for income tax returns outside the
statute of limitations, to amend the Internal Revenue Code of
1986 to clarify that all provisions shall apply to legally
married same-sex couples in the same manner as other married
couples, and for other purposes, 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.
This Act may be cited as the ``Promoting Respect for Individuals'
Dignity and Equality Act of 2019'' or as the ``PRIDE Act of 2019''.
SEC. 2. EXTENSION OF PERIOD OF LIMITATION FOR CERTAIN LEGALLY MARRIED
COUPLES.
(a) In General.--In the case of an individual first treated as
married for purposes of the Internal Revenue Code of 1986 by the
application of the holdings of Revenue Ruling 2013-17--
(1) if such individual filed a return (other than a joint
return) for a taxable year ending before September 16, 2013,
for which a joint return could have been made by the individual
and the individual's spouse but for the fact that such holdings
were not effective at the time of filing, such return shall be
treated as a separate return within the meaning of section
6013(b) of such Code and the time prescribed by section
6013(b)(2)(A) of such Code for filing a joint return after
filing a separate return shall not expire before the date
prescribed by law (including extensions) for filing the return
of tax for the taxable year that includes the date of the
enactment of this Act, and
(2) in the case of a joint return filed pursuant to paragraph
(1)--
(A) the period of limitation prescribed by section
6511(a) of such Code for any such taxable year shall be
extended until the date prescribed by law (including
extensions) for filing the return of tax for the
taxable year that includes the date of the enactment of
this Act, and
(B) section 6511(b)(2) of such Code shall not apply
to any claim of credit or refund with respect to such
return.
(b) Amendments, etc. Restricted to Change in Marital Status.--
Subsection (a) shall apply only with respect to amendments to the
return of tax, and claims for credit or refund, relating to a change in
the marital status for purposes of the Internal Revenue Code of 1986 of
the individual.
SEC. 3. RULES RELATING TO ALL LEGALLY MARRIED COUPLES.
(a) In General.--The Internal Revenue Code of 1986 is amended--
(1) in section 21(d)(2)--
(A) by striking ``himself'' in the heading and
inserting ``self''; and
(B) by striking ``any husband and wife'' and
inserting ``any married couple'';
(2) in section 22(e)(1)--
(A) by striking ``husband and wife who live'' and
inserting ``married couple who lives''; and
(B) by striking ``the taxpayer and his spouse'' and
inserting ``the taxpayer and the spouse of the
taxpayer'';
(3) in section 38(c)(6)(A), by striking ``husband or wife who
files'' and inserting ``married individual who files'';
(4) in section 42(j)(5)(C), by striking clause (i) and
inserting the following new clause:
``(i) Married couple treated as 1 partner.--
For purposes of subparagraph (B), individuals
married to one another (and their estates)
shall be treated as 1 partner.'';
(5) in section 62(b)(3)--
(A) in subparagraph (A)--
(i) by striking ``husband and wife who lived
apart'' and inserting ``married couple who
lived apart''; and
(ii) by striking ``the taxpayer and his
spouse'' and inserting ``the taxpayer and the
spouse of the taxpayer''; and
(B) in subparagraph (D), by striking ``husband and
wife'' and inserting ``married couple'';
(6) in section 121--
(A) in subsection (b)(2), by striking ``husband and
wife who make'' and inserting ``married couple who
makes''; and
(B) in subsection (d)(1), by striking ``husband and
wife make'' and inserting ``married couple makes'';
(7) in section 165(h)(4)(B), by striking ``husband and wife''
and inserting ``married couple'';
(8) in section 179(b)(4), by striking ``a husband and wife
filing'' and inserting ``individuals married to one another who
file'';
(9) in section 213(d)(8), by striking ``status as husband and
wife'' and inserting ``marital status'';
(10) in section 219(g)(4), in the matter preceding
subparagraph (A), by striking ``A husband and wife'' and
inserting ``Married individuals'';
(11) in section 274(b)(2)(B), by striking ``husband and
wife'' and inserting ``married couple'';
(12) in section 643(f), by striking ``husband and wife'' in
the second sentence and inserting ``married couple'';
(13) in section 761(f)--
(A) in paragraph (1), by striking ``husband and
wife'' and inserting ``married couple''; and
(B) in paragraph (2)(A), by striking ``husband and
wife'' and inserting ``married couple'';
(14) in section 911--
(A) in subsection (b)(2), by striking subparagraph
(C) and inserting the following new subparagraph:
``(C) Treatment of community income.--In applying
subparagraph (A) with respect to amounts received from
services performed by a married individual which are
community income under community property laws
applicable to such income, the aggregate amount which
may be excludable from the gross income of such
individual and such individual's spouse under
subsection (a)(1) for any taxable year shall equal the
amount which would be so excludable if such amounts did
not constitute community income.''; and
(B) in subsection (d)(9)(A), by striking ``where a
husband and wife each have'' and inserting ``where both
spouses have'';
(15) in section 1244(b)(2), by striking ``a husband and wife
filing'';
(16) in section 1272(a)(2)(D), by striking clause (iii) and
inserting the following new clause:
``(iii) Treatment of a married couple.--For
purposes of this subparagraph, a married couple
shall be treated as 1 person. The preceding
sentence shall not apply where the spouses
lived apart at all times during the taxable
year in which the loan is made.'';
(17) in section 1313(c)(1), by striking ``husband and wife''
and inserting ``spouses'';
(18) in section 1361(c)(1)(A)(i), by striking ``a husband and
wife'' and inserting ``a married couple'';
(19) in section 2040(b), by striking ``Certain Joint
Interests of Husband and Wife'' in the heading and inserting
``Certain Joint Interests of Married Couple'';
(20) in section 2513--
(A) by striking ``gift by husband
or wife to third party''
in the heading and inserting ``gift by
spouse to third party''; and
(B) by striking paragraph (1) of subsection (a) and
inserting the following new paragraph:
``(1) In general.--A gift made by one individual to any
person other than such individual's spouse shall, for the
purposes of this chapter, be considered as made one-half by the
individual and one-half by such individual's spouse, but only
if at the time of the gift each spouse is a citizen or resident
of the United States. This paragraph shall not apply with
respect to a gift by an individual of an interest in property
if such individual creates in the individual's spouse a general
power of appointment, as defined in section 2514(c), over such
interest. For purposes of this section, an individual shall be
considered as the spouse of another only if the individual is
married to the individual's spouse at the time of the gift and
does not remarry during the remainder of the calendar year.'';
(21) in section 2516--
(A) by striking ``Where a husband and wife enter''
and inserting the following:
``(a) In General.--Where a married couple enters''; and
(B) by adding at the end the following new
subsection:
``(b) Spouse.--For purposes of this section, if the spouses referred
to are divorced, wherever appropriate to the meaning of this section,
the term `spouse' shall read `former spouse'.'';
(22) in section 5733(d)(2), by striking ``husband or wife''
and inserting ``married individual'';
(23) in section 6013--
(A) by striking ``joint returns of
income tax by husband and
wife'' in the heading and inserting ``joint
returns of income tax by
a married couple'';
(B) in subsection (a), in the matter preceding
paragraph (1), by striking ``husband and wife'' and
inserting ``married couple'';
(C) in subsection (a)(1), by striking ``either the
husband or wife'' and inserting ``either spouse'';
(D) in subsection (a)(2)--
(i) by striking ``husband and wife'' and
inserting ``spouses''; and
(ii) by striking ``his taxable year'' and
inserting ``such spouse's taxable year'';
(E) in subsection (a)(3)--
(i) by striking ``his executor or
administrator'' and inserting ``the decedent's
executor or administrator'';
(ii) by striking ``with respect to both
himself and the decedent'' and inserting ``with
respect to both the surviving spouse and the
decedent''; and
(iii) by striking ``constitute his separate
return'' and inserting ``constitute the
survivor's separate return'';
(F) in subsection (b), by striking paragraph (1) and
inserting the following new paragraph:
``(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 the individual and
the individual's spouse under subsection (a) and the time
prescribed by law for filing the return for such taxable year
has expired, such individual and such spouse may nevertheless
make a joint return for such taxable year. A joint return filed
under this subsection shall constitute the return of the
individual and the individual's spouse 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 a 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 the decedent's executor or administrator.'';
(G) in subsection (c), by striking ``husband and
wife'' and inserting ``spouses'';
(H) in subsection (d)(1), by striking ``status as
husband and wife'' and inserting ``the marital status
with respect to each other'';
(I) in subsection (d)(2), by striking ``his spouse''
and inserting ``the spouse of the individual'';
(J) in subsection (f)(2)(B), by striking ``such
individual, his spouse, and his estate shall be
determined as if he were alive'' and inserting ``such
individual, the individual's spouse, and the
individual's estate shall be determined as if the
individual were alive''; and
(K) in subsection (f)(3)--
(i) in subparagraph (A), by striking ``for
which he is entitled'' and inserting ``for
which such member is entitled''; and
(ii) in subparagraph (B), by striking ``for
which he is entitled'' and inserting ``for
which such employee is entitled'';
(24) in section 6014(b), by striking ``husband and wife'' in
the second sentence and inserting ``a married couple'';
(25) in section 6017, by striking ``husband and wife'' and
inserting ``married couple'';
(26) in section 6096(a), by striking ``of husband and wife
having'' and inserting ``reporting'';
(27) in section 6166(b)(2), by striking subparagraph (B) and
inserting the following new subparagraph:
``(B) Certain interests held by married couple.--
Stock or a partnership interest which--
``(i) is community property of a married
couple (or the income from which is community
income) under the applicable community property
law of a State, or
``(ii) is held by a married couple as joint
tenants, tenants by the entirety, or tenants in
common,
shall be treated as owned by 1 shareholder or 1
partner, as the case may be.'';
(28) in section 6212(b)(2)--
(A) by striking ``return filed by husband and wife''
and inserting ``return''; and
(B) by striking ``his last known address'' and
inserting ``the last known address of such spouse'';
(29) in section 7428(c)(2)(A), by striking ``husband and
wife'' and inserting ``married couple'';
(30) in section 7701(a)--
(A) by striking paragraph (17); and
(B) in paragraph (38), by striking ``husband and
wife'' and inserting ``married couple''; and
(31) in section 7872(f), by striking paragraph (7) and
inserting the following new paragraph:
``(7) Married couple treated as 1 person.--A married couple
shall be treated as 1 person.''.
(b) Conforming Amendments.--
(1) The table of sections for subchapter B of chapter 12 of
the Internal Revenue Code of 1986 is amended by striking the
item relating to section 2513 and inserting the following new
item:
``Sec. 2513. Gift by spouse to third party.''.
(2) The table of sections for subpart B of part II of
subchapter A of chapter 61 of such Code is amended by striking
the item relating to section 6013 and inserting the following
new item:
``Sec. 6013. Joint returns of income tax by a married couple.''.
SEC. 4. RULES RELATING TO THE GENDER OF SPOUSES, ETC.
(a) In General.--The following provisions of the Internal Revenue
Code of 1986 are each amended by striking ``his spouse'' each place it
appears and inserting ``the individual's spouse'':
(1) Subsections (a)(1) and (d) of section 1.
(2) Section 2(b)(2)(A).
(3) Subsections (d)(1)(B) and (e)(3) of section 21.
(4) Section 36(c)(5).
(5) Section 179(d)(2)(A).
(6) Section 318(a)(1)(A)(i).
(7) Section 408(d)(6).
(8) Section 469(i)(5)(B)(ii).
(9) Section 507(d)(2)(B)(iii).
(10) Clauses (ii) and (iii) of section 613A(c)(8)(D).
(11) Section 672(e)(2).
(12) Section 704(e)(2).
(13) Subparagraphs (A) and (B)(ii) of section 911(c)(3).
(14) Section 1235(c)(2).
(15) Section 1563(e)(5).
(16) Section 3121(b)(3)(B).
(17) Section 4946(d).
(18) Section 4975(e)(6).
(19) Subparagraphs (A)(iv) and (B) of section 6012(a)(1).
(20) Section 7703(a).
(b) Conforming Amendments.--
(1) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his spouse'' each place it
appears and inserting ``the taxpayer's spouse'':
(A) Section 2(a)(2)(B).
(B) Subparagraphs (B) and (C) of section 2(b)(2).
(C) Paragraphs (2) and (6)(A) of section 21(e).
(D) Section 36B(e)(1).
(E) Section 63(e)(3)(B).
(F) Section 86(c)(1)(C)(ii).
(G) Section 105(c)(1).
(H) Section 135(d)(3).
(I) Section 151(b).
(J) Subsections (a) and (d)(7) of section 213.
(K) Section 1233(e)(2)(C).
(L) Section 1239(b)(2).
(M) Section 6504(2).
(2) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his spouse'' each place it
appears and inserting ``the employee's spouse'':
(A) Section 132(m)(1).
(B) Section 401(h)(6).
(C) Section 3402(l)(3).
(3) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his taxable year'' each
place it appears and inserting ``the individual's taxable
year'':
(A) Section 2(b)(1).
(B) Section 7703(a)(1).
(4) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his taxable year'' each
place it appears and inserting ``the taxpayer's taxable year'':
(A) Subparagraphs (B) and (C) of section 2(b)(2) (as
amended by paragraph (1)(B)).
(B) Section 63(f)(1)(A).
(5) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his home'' and inserting
``the individual's home'':
(A) Section 2(b)(1)(A).
(B) Section 21(e)(4)(A)(i).
(C) Section 7703(b)(1).
(6) The Internal Revenue Code of 1986, as amended by this
section, is amended--
(A) in section 2(a)(1)(A), by striking ``his two
taxable years'' and inserting ``the taxpayer's two
taxable years'';
(B) in section 2(a)(1)(B), by striking ``his home''
and inserting ``the taxpayer's home'';
(C) in paragraphs (1)(A) and (2)(A) of section 63(f),
by striking ``for himself if he'' both places it
appears and inserting ``for the taxpayer if the
taxpayer'';
(D) in section 63(f)(4), by striking ``his'' both
places it appears and inserting ``the individual's'';
(E) in section 105(b)--
(i) by striking ``his spouse, his
dependents'' and inserting ``the taxpayer's
spouse, the taxpayer's dependents''; and
(ii) by striking ``by him'';
(F) in the heading of section 119(a), by striking ``,
His Spouse, and His Dependents'' and inserting ``and
the Employee's Spouse and Dependents'';
(G) in section 119(a), by striking ``him, his spouse,
or any of his dependents by or on behalf of his
employer'' and inserting ``the employee or the
employee's spouse or dependents by or on behalf of the
employer of the employee'';
(H) in section 119(a)(2), by striking ``his'' both
places it appears and inserting ``the employee's'';
(I) in section 119(d)(3)(B), by striking ``his
spouse, and any of his dependents'' and inserting ``the
employee's spouse, and any of the employee's
dependents'';
(J) in section 129(b)(2), by striking ``himself'' and
inserting ``the spouse's self'';
(K) in section 170(b)(1)(F)(iii)--
(i) by striking ``his spouse'' and inserting
``the spouse of such donor''; and
(ii) by striking ``his death or after the
death of his surviving spouse if she'' and
inserting ``the death of the donor or after the
death of the donor's surviving spouse if such
surviving spouse'';
(L) in section 213(c)(1)--
(i) by striking ``his estate'' and inserting
``the estate of the taxpayer''; and
(ii) by striking ``his death'' and inserting
``the death of the taxpayer'';
(M) in section 213(d)(7), by striking ``he'' and
inserting ``the taxpayer'';
(N) in section 217(g)--
(i) by striking ``, his spouse, or his
dependents'' in paragraph (2) and inserting
``or the spouse or dependents of such member'';
(ii) by striking ``his dependents'' in
paragraph (3) and inserting ``dependents''; and
(iii) by striking ``his spouse'' each place
it appears in paragraph (3) and inserting ``the
member's spouse'';
(O) in section 217(i)(3)(A), by striking ``his'';
(P) in section 267(c), by striking ``his'' each place
it appears and inserting ``the individual's'';
(Q) in section 318(a)(1)(A)(ii), by striking ``his''
and inserting ``the individual's'';
(R) in section 402(l)(4)(D), by striking ``, his
spouse, and dependents'' and inserting ``and the spouse
and dependents of such officer'';
(S) in section 415(l)(2)(B), by striking ``, his
spouse, or his dependents'' and inserting ``or the
participant's spouse or dependents'';
(T) in section 420(f)(6)(A), by striking ``his
covered spouse and dependents'' each place it appears
and inserting ``the covered spouse and dependents of
such retiree'';
(U) in section 424(d)(1), by striking ``his'' and
inserting ``the individual's'';
(V) in section 544(a)(2), by striking ``his'' each
place it appears and inserting ``the individual's'';
(W) in section 911(c)(3), by striking ``him'' each
place it appears in subparagraphs (A) and (B)(ii) and
inserting ``the individual'';
(X) in section 1015(d)(3), by striking ``his spouse''
and inserting ``the donor's spouse'';
(Y) in section 1563(e)--
(i) by striking ``his children'' both places
it appears in paragraphs (5)(D) and (6)(A) and
inserting ``the individual's children''; and
(ii) by striking ``his parents'' both places
it appears in subparagraphs (A) and (B) of
paragraph (6) and inserting ``the individual's
parents'';
(Z) in section 1563(f)(2)(B), by striking ``him'' and
inserting ``the individual'';
(AA) in section 2012(c), by striking ``his spouse''
and inserting ``the decedent's spouse'';
(BB) in section 2032A(e)(10), by striking ``his
surviving spouse'' and inserting ``the decedent's
surviving spouse'';
(CC) in section 2035(b)--
(i) by striking ``his estate'' and inserting
``the decedent's estate''; and
(ii) by striking ``his spouse'' and inserting
``the decedent's spouse'';
(DD) in subsections (a) and (b)(5) of section 2056,
by striking ``his'';
(EE) in section 2523(b)--
(i) by striking ``(or his heirs or assigns)
or such person (or his heirs or assigns)'' in
paragraph (1) and inserting ``(or the donor's
heirs or assigns) or such person (or such
person's heirs or assigns)'';
(ii) by striking ``himself'' in paragraph (1)
and inserting ``the donor's self'';
(iii) by striking ``he'' in paragraph (2) and
inserting ``the donor''; and
(iv) by striking ``him'' each place it
appears in the matter following paragraph (2)
and inserting ``the donor'';
(FF) in section 2523(d), by striking ``himself'' and
inserting ``the donor's self'';
(GG) in section 2523(e), by striking ``his spouse''
and inserting ``the donor's spouse'';
(HH) in section 3121(b)(3)--
(i) by striking ``his father'' in
subparagraph (A) and inserting ``the child's
father'';
(ii) by striking ``his father'' in
subparagraph (B) and inserting ``the
individual's father''; and
(iii) by striking ``his son'' in subparagraph
(B) and inserting ``the individual's son'';
(II) in section 3306(c)(5)--
(i) by striking ``his son'' and inserting
``the individual's son''; and
(ii) by striking ``his father'' and inserting
``the child's father'';
(JJ) in section 3402(l)--
(i) by striking ``he'' each place it appears
in paragraphs (2) and (3)(A) and inserting
``the employee''; and
(ii) by striking ``his taxable year'' both
places it appears in paragraph (3)(B) and
inserting ``the employee's taxable year'';
(KK) in section 4905(a), by striking ``his spouse''
and inserting ``such person's spouse'';
(LL) in section 6046(c), by striking ``his'' both
places it appears and inserting ``the individual's'';
(MM) in section 6103(e)(1)(A)(ii), by striking
``him'' and inserting ``the individual'';
(NN) in section 7448(a)(8), by striking ``his death''
and inserting ``the individual's death'';
(OO) in subsections (d), (m), and (n) of section
7448, by striking ``his'' each place it appears and
inserting ``the individual's'';
(PP) in subsection (m) of section 7448, as so
amended, by striking ``he'' each place it appears and
inserting ``such judge or special trial judge''; and
(QQ) in section 7448(q)--
(i) by striking ``his'' both places it
appears and inserting ``such judge's''; and
(ii) by striking ``to bring himself'' and
inserting ``to come''.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill H.R. 3999, the Promoting Respect for Individuals'
Dignity and Equality (PRIDE) Act of 2019, as ordered reported
by the Committee on Ways and Means on June 20, 2019, amends the
Internal Revenue Code of 1986 so as to provide lawfully married
same-sex couples with the ability to file claims for credits
and refunds related to a change in marital status back to their
year of marriage, and to amend such code so that provisions
that apply to married couples use gender-neutral language.
B. Background and Need for Legislation
The Promoting Respect for Individuals' Dignity and Equality
(PRIDE) Act of 2019 makes long-overdue changes to the tax code
for same-sex married couples. June 28, 2019 is the 50th
anniversary of the Stonewall riots. To commemorate that moment
in the LGBTQ+ movement, the PRIDE Act scrubs the tax code of
any gendered language related to married couples.
Additionally, the legislation resolves a problem related to
the mismatched timing of IRS guidance changes and state-level
same-sex marriage legalization. Specifically, after the 2013
Supreme Court ruling in United States v. Windsor, 570 U.S. 744
(2013), the IRS updated its procedures to allow same-sex
couples to amend old returns from 2010 onwards to reflect their
marital status and claim overpayment credits for years they
were married but unable to file jointly. H.R. 3299 allows same-
sex couples to file federal income tax adjustments back to the
date of marriage providing additional relief for those couples
who were lawfully married under state law before 2010.
C. Legislative History
Background
H.R. 3299, the ``Promoting Respect for Individuals' Dignity
and Equality Act of 2019,'' was introduced on June 18, 2019,
and was referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 3299 on June
20, 2019, and ordered the bill, as amended, favorably reported
(with a quorum being present).
Committee hearings
The Committee on Ways and Means heard testimony from Rep.
Andy Levin on June 4, 2019 regarding H.R. 1244, the Equal
Dignity for Married Taxpayers Act of 2019. Additionally, on
June 4, 2019, the Committee heard testimony from Rep. Judy Chu
regarding H.R. 3294, the Refund Equality Act of 2019.
Provisions substantially similar to both H.R. 1244 and H.R.
3294 are included in H.R. 3299.
II. EXPLANATION OF THE BILL
A. Extension of Period of Limitation for Certain Legally Married
Couples (Sec. 2 of the Bill and Sec. 6511 of the Code)
PRESENT LAW
Statute of limitations on credit or refund
In general, a taxpayer must file a claim for credit or
refund within three years of the filing of the tax return or
within two years of the payment of the tax, whichever expires
later (if no tax return is filed, the two-year limit
applies).\1\ A claim for credit or refund that is not filed
within these time periods is rejected as untimely. In addition,
the amount of credit or refund is limited to the portion of tax
paid within the three-year period (plus any filing extension)
or the two-year period, as applicable, immediately preceding
the filing of the claim.\2\
---------------------------------------------------------------------------
\1\Sec. 6511(a).
\2\Sec. 6511(b)(2).
---------------------------------------------------------------------------
Limitation on filing a joint return after filing a separate return
An individual filing a separate return for a tax year for
which the individual and the individual's spouse could have
filed a joint return may file a joint return amending the prior
separate return for the tax year after the due date for filing
the return has passed.\3\ However, an individual cannot elect
to file a joint return after having filed a separate return
more than three years after the due date of the return (without
regard to any extensions) for the applicable tax year.\4\
---------------------------------------------------------------------------
\3\Sec. 6013(b)(1).
\4\Sec. 6013(b)(2).
---------------------------------------------------------------------------
Federal tax treatment of same-sex marriage
Prior to the Supreme Court's decision in United States v.
Windsor,\5\ section 3 of the Defense of Marriage Act (DOMA)\6\
prohibited the IRS from recognizing same-sex marriages for
purposes of the provisions of the Code that refer to the
marital status of the taxpayer and convey benefits upon such
status. In Windsor, the Supreme Court held that section 3 of
DOMA was unconstitutional because it violated principles of
equal protection.
---------------------------------------------------------------------------
\5\570 U.S. 744 (2013).
\6\1 U.S.C. sec. 7.
---------------------------------------------------------------------------
Following the Windsor decision, the IRS issued Revenue
Ruling 2013-17\7\ (the ``Revenue Ruling''), which provided
guidance on the effect of the Windsor decision on the IRS's
interpretation of the provisions of the Code that refer to a
taxpayer's marital status. In the Revenue Ruling, the IRS
recognized the validity of same-sex marriages that were lawful
in the State where they occurred. In particular, the Revenue
Ruling made three specific holdings for Federal tax purposes:
---------------------------------------------------------------------------
\7\2013-38 I.R.B. 201.
---------------------------------------------------------------------------
1. The terms ``spouse,'' ``husband and wife,''
``husband,'' and ``wife'' include an individual married
to a person of the same sex if the individuals are
lawfully married under State law, and the term
``marriage'' includes such a marriage between
individuals of the same sex.
2. The IRS adopts a general rule recognizing a
marriage of same-sex individuals that was validly
entered into in a State whose laws authorize the
marriage of two individuals of the same sex even if the
married couple is domiciled in a State that does not
recognize the validity of same-sex marriages.
3. The terms ``spouse,'' ``husband and wife,''
``husband,'' and ``wife'' do not include individuals
(whether of the opposite sex or the same sex) who have
entered into a registered domestic partnership, civil
union, or other similar formal relationship recognized
under State law that is not denominated as a marriage
under the laws of that State, and the term ``marriage''
does not include such formal relationships.
The holdings of Revenue Ruling 2013-17 were applied
prospectively as of September 16, 2013. The Revenue Ruling
allowed affected taxpayers to rely on the ruling for purposes
of filing original returns, amended returns, adjusted returns,
or claims for credit or refund resulting from its holdings but
only if the applicable limitations period for filing such
claims had not expired. Thus, taxpayers lawfully married under
State law during tax years for which the statute of limitations
was closed as of September 16, 2013, could not claim the tax
benefits of Federal recognition of same-sex marriage. Among
those that were affected were residents of Massachusetts and
several other States that recognized same-sex marriage during
years for which the statute of limitations generally was closed
as of September 16, 2013.\8\ Accordingly, some lawfully married
same-sex couples were not able to claim Federal tax benefits
associated with their marital status for all tax years for
which they were lawfully married.
---------------------------------------------------------------------------
\8\The States that recognized same-sex marriage prior to 2010 (the
years for which the statute of limitations would generally be closed
for taxpayers amending their returns in calendar year 2013) are
Massachusetts, California (during a portion of 2008), Connecticut, Iowa
and Vermont.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that lawfully married same-sex
couples should be entitled to the Federal tax benefits of their
marital status for all years for which their marriages are
recognized under State law. Although the Revenue Ruling
provided limited relief for married same-sex couples, the IRS
does not have the authority to allow claims for years for which
the statute of limitations was closed. This provision provides
full relief to married same-sex couples and ensures equal
Federal tax treatment between same-sex married couples and
other married couples for all applicable years.
EXPLANATION OF PROVISION
Under the provision, lawfully married same-sex couples may
file an amended return (including a joint return after filing a
return other than a joint return\9\) and a claim for credit or
refund relating to a change in marital status as a result of
the holdings in Revenue Ruling 2013-17 for taxable years ending
before September 16, 2013. The period for filing an amended
return or claim for refund under the provision expires on the
filing date (including extensions) of the return for the tax
year that includes the date of enactment of the provision. In
addition, the limitation on the dollar amounts recoverable is
made inapplicable for newly-filed joint returns.
---------------------------------------------------------------------------
\9\Because this legislation involves the novel situation of a
retroactive change in the marital status of an individual for purpose
of the Code, the provision clarifies that in applying section 6013(b)
in this situation, the term ``separate return'' means any return other
than a joint return. No inference is intended as the application of
section 6013(b) in any other situation.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision is effective on the date of enactment.
B. Rules Relating to All Legally Married Couples, and Rules Relating to
the Gender of Spouses, Etc. (Secs. 3 and 4 of the Bill)
PRESENT LAW
The Code contains a number of provisions that apply to
married couples. While these provisions apply to both opposite-
sex and same-sex married couples,\10\ they generally refer to
``husband and wife'' or otherwise use gendered language in
describing the couple or one or both spouses.
---------------------------------------------------------------------------
\10\Rev. Rul. 2013-17. For a full description of Revenue Ruling
2013-17, see discussion above.
---------------------------------------------------------------------------
For example, the Code allows taxpayers to claim a
nonrefundable child and dependent care credit, for which the
allowable credit is an applicable percentage of employment-
related expenses. For purposes of this credit, qualifying
expenses are limited by the earned income of the taxpayer. A
special rule applies in the case of married couples:
Section 21(d)(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 the
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.
REASONS FOR CHANGE
The Committee believes that the Code should be modernized
to remove outdated references relating to marriage and replace
them with gender-neutral terms. This provision ensures equal
dignity for all taxpayers.
EXPLANATION OF PROVISIONS
The provisions amend the Code so that provisions that apply
to married couples use gender-neutral language, by changing
terms such as ``husband and wife'' or other gendered language.
For example, with respect to section 21(d)(2), quoted
above, the provisions change ``himself'' to ``self'' and
``husband and wife'' to ``any married couple.''
EFFECTIVE DATE
The provisions are effective on the date of enactment.
III. VOTES OF THE COMMITTEE
Pursuant to clause 3(b) of rule XIII of 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. 3299, the ``Promoting Respect
for Individuals' Dignity and Equality Act of 2019'' on June 20,
2019.
The amendment in the nature of a substitute was agreed to
by voice vote (with a quorum being present).
The bill, H.R. 3299, as amended, was ordered favorably
reported to the House of Representatives by voice vote (with a
quorum being present).
IV. 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. 3299, as
ordered reported.
The bill is estimated to decrease Federal fiscal year
budget receipts by $57 million dollars for the period 2019
through 2029.
ESTIMATED BUDGET EFFECTS OF H.R. 3299, THE ``PROMPTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS--Fiscal Years 2019-2029
[Millions of Dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2019- 24 2019- 29
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Extension of period of limitation DOE.................... [1] -57 [1] - - - - - - - - - - - - - - - - - - - - - - - - -57 -57
for certain legally married couples.
2. Rules relating to all legally DOE.................... ........ No Revenue Effect
married couples.
3. Rules relating to the gender of ....................... No Revenue Effect
spouses, etc..
----------------------------------------------------------------------------------------------------------------------------------------------------------
NET TOTAL........................ ....................... [1] -57 [1] [2] [2] [2] [2] [2] [2] [2] [2] -57 -57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation
----------------------
NOTE: Details may not add to totals due to rounding.
Legend for "Effective" column: DOE = date of enactment
[1]Loss of less than $500,000.
[2]No revenue effect.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
Pursuant to 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 bill involves no new tax expenditure.
C. Cost Estimate Prepared by the Congressional Budget Office
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, requiring a cost estimate prepared by
CBO, the following statement by CBO is provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 25, 2019.
Hon. Richard Neal,
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. 3299, the
Promoting Respect for Individuals' Dignity and Equality Act of
2019.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Shannon Mok.
Sincerely,
Mark P. Hadley
(For Phillip L. Swagel, Director).
Enclosure.
The bill would
Extend the statute of limitations for
certain lawfully married same-sex couples to file
amended tax returns and claims for credit or refund
Amend the Internal Revenue Code to use
gender-neutral language
Estimated budgetary effects would primarily stem from
A reduction in tax liability from filing a
joint return
The Congressional Budget Act of 1974, as amended,
stipulates that revenue estimates provided by the staff of the
Joint Committee on Taxation (JCT) are the official estimates
for all tax legislation considered by the Congress. CBO
therefore incorporates such estimates into its cost estimates
of the effects of legislation. All of the estimates for the
provisions of H.R. 3299 were provided by JCT.
Bill summary: H.R. 3299 would extend the statute of
limitations for filing amended returns or claims for credit or
refund for same-sex couples who were married prior to the
federal recognition of same-sex marriage and for whom the
statute of limitations had closed as of September 16, 2013. The
extended statute of limitations would expire on the filing date
(including extensions) of the return for the tax year in which
the proposal is enacted. In addition, it would amend the
Internal Revenue Code to use gender-neutral language in
describing couples and spouses.
Estimated Federal cost: The estimated budgetary effect of
H.R. 3299 is shown in Table 1.
TABLE 1.--ESTIMATED BUDGETARY EFFECTS OF H.R. 3299
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, millions of dollars--
-------------------------------------------------------------------------------------------------------------
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2019-2024 2019-2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Decreases (-) in Revenues
Estimated Revenues........................ * -57 * 0 0 0 0 0 0 0 0 -57 -57
Increases in the Deficit From Changes in Revenues
Effect on the Deficit..................... * 57 * 0 0 0 0 0 0 0 0 57 57
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not sum to totals because of rounding; * = between -$500,000 and $500,000.
Basis of estimate: The Congressional Budget Act of 1974, as
amended, stipulates that revenue estimates provided by the
staff of the Joint Committee on Taxation (JCT) are the official
estimates for all tax legislation considered by the Congress.
CBO therefore incorporates such estimates into its cost
estimates of the effects of legislation. All of the estimates
for the provisions of H.R. 3299 were provided by JCT.\1\
---------------------------------------------------------------------------
\1\For JCT's estimates of the provisions, which include detail
beyond the summary presented below, see Joint Committee on Taxation,
Estimated Revenue Effects of H.R. 3299, The ``Promoting Respect for
Individuals' Dignity and Equality Act of 2019,'' JCX-27-19 (June 18,
2019) https://go.usa.gov/xyCgv
---------------------------------------------------------------------------
Revenues: On net, JCT estimates, enacting the bill would
decrease revenues by $57 million over the 2019-2029 period.
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 explanations of the provisions in this report.
B. Statement of General Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that, because
the bill contains no measure that authorizes funding, no
statement of general performance goals and objectives is
required.
C. Information Relating to Unfunded Mandates
Pursuant to section 423 of Public Law 104-4, the Unfunded
Mandates Reform Act of 1995, the Committee has determined that
the bill does not contain Federal mandates on the private
sector. Further, 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, Clause 5(b)
Clause 5(b) of rule XXI of the Rules of the House of
Representatives provides, in part, that ``It shall not be in
order to consider a bill, joint resolution, amendment, or
conference report carrying a retroactive Federal income tax
rate increase.'' The Committee, after careful review, states
that the bill does not involve any retroactive Federal income
tax rate increase within the meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of Public Law 105-206, the Internal Revenue
Service Restructuring and Reform Act of 1998 (the ``RRA''),
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, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the RRA because the bill
contains no provision that amends the Internal Revenue Code of
1986 and has ``widespread applicability'' to individuals or
small businesses within the meaning of the rule.
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, after careful review,
states that no provision of the bill contains any congressional
earmark, limited tax benefit, or limited tariff benefit within
the meaning of the rule.
G. Duplication of Federal Programs
Pursuant to clause 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. Hearings
In compliance with Sec. 103(i) of H. Res. 6 (116th
Congress) the following hearing was used to develop or consider
H.R. 3299: House Ways and Means Committee Member Day Hearing
held on June 4, 2019 during which Representative Andy Levin (D-
MI) and Representative Judy Chu (D-CA) testified regarding
legislation that is incorporated into H.R. 3299.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL
A. Changes in Existing Law Proposed by the Bill
Pursuant to clause 3(e)(1)(B) of rule XIII of the Rules of
the House of Representatives, changes in existing law proposed
by the bill are shown as follows (existing law proposed to be
omitted is enclosed in black brackets, new matter is printed in
italics, 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 italics, 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] the individual's spouse under section 6013, and
(2) every surviving spouse (as defined in section
2(a)),
a tax determined in accordance with the following table:
(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:
(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:
(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] the individual's spouse
under section 6013, a tax determined in accordance with the
following table:
(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:
(f) Phaseout of marriage penalty in 15-percent bracket;
adjustments in tax tables so that inflation will not result in
tax increases.--
(1) In general.--Not later than December 15 of 1993,
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),
(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 a
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) (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.
(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.
(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.--For purposes of this subsection,
the parent whose taxable income shall be taken into
account shall be--
(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)) 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, 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, 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.
(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):
(B) Heads of households.--The following table
shall be applied in lieu of the table contained
in subsection (b):
(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):
(D) Married individuals filing separate
returns.--The following table shall be applied
in lieu of the table contained in subsection
(d):
(E) Estates and trusts.--The following table
shall be applied in lieu of the table contained
in subsection (e):
(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] the taxpayer's two taxable
years immediately preceding the taxable year,
and
(B) who maintains as [his home] the
taxpayer's home a household which constitutes
for the taxable year the principal place of
abode (as a member of such household) of a
dependent (i) who (within the meaning of
section 152, 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.
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] the taxpayer's spouse
died, a joint return could have been made under
the provisions of section 6013 (without regard
to subsection (a)(3) thereof).
(3) Special rule where deceased spouse was in missing
status.--If an individual was in a missing status
(within the meaning of section 6013(f)(3)) as a result
of service in a combat zone (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), determined without regard to
section 152(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),
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, 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.
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] the individual's 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] the
taxpayer's taxable year if at any time during
the taxable year [his spouse] the taxpayer's
spouse is a nonresident alien; and
(C) a taxpayer shall be considered as married
at the close of [his taxable year] the
taxpayer's taxable year if [his spouse] the
taxpayer's 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), or
(ii) paragraph (3) of section 152(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 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)) who has not attained age
13,
(B) a dependent of the taxpayer (as defined
in section 152, 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] the individual's
spouse for such year.
(2) Special rule for spouse who is a student or
incapable of caring for [himself] self.--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] any married
couple, 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] the taxpayer's spouse
file a joint return for the taxable year.
(3) Marital status.--An individual legally separated
from [his spouse] the individual's 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] the
individual's 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) 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)), 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] the taxpayer's spouse,
or
(B) who is a child of the taxpayer (within
the meaning of section 152(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. 22. CREDIT FOR THE ELDERLY AND THE PERMANENTLY AND TOTALLY
DISABLED.
(a) General rule.--In the case of a qualified individual,
there shall be allowed as a credit against the tax imposed by
this chapter for the taxable year an amount equal to 15 percent
of such individual's section 22 amount for such taxable year.
(b) Qualified individual.--For purposes of this section, the
term ``qualified individual'' means any individual--
(1) who has attained age 65 before the close of the
taxable year, or
(2) who retired on disability before the close of the
taxable year and who, when he retired, was permanently
and totally disabled.
(c) Section 22 amount.--For purposes of subsection (a)--
(1) In general.--An individual's section 22 amount
for the taxable year shall be the applicable initial
amount determined under paragraph (2), reduced as
provided in paragraph (3) and in subsection (d).
(2) Initial amount.--
(A) In general.--Except as provided in
subparagraph (B), the initial amount shall be--
(i) $5,000 in the case of a single
individual, or a joint return where
only one spouse is a qualified
individual,
(ii) $7,500 in the case of a joint
return where both spouses are qualified
individuals, or
(iii) $3,750 in the case of a married
individual filing a separate return.
(B) Limitation in case of individuals who
have not attained age 65.--
(i) In general.--In the case of a
qualified individual who has not
attained age 65 before the close of the
taxable year, except as provided in
clause (ii), the initial amount shall
not exceed the disability income for
the taxable year.
(ii) Special rules in case of joint
return.--In the case of a joint return
where both spouses are qualified
individuals and at least one spouse has
not attained age 65 before the close of
the taxable year--
(I) if both spouses have not
attained age 65 before the
close of the taxable year, the
initial amount shall not exceed
the sum of such spouses'
disability income, or
(II) if one spouse has
attained age 65 before the
close of the taxable year, the
initial amount shall not exceed
the sum of $5,000 plus the
disability income for the
taxable year of the spouse who
has not attained age 65 before
the close of the taxable year.
(iii) Disability income.--For
purposes of this subparagraph, the term
``disability income'' means the
aggregate amount includable in the
gross income of the individual for the
taxable year under section 72 or 105(a)
to the extent such amount constitutes
wages (or payments in lieu of wages)
for the period during which the
individual is absent from work on
account of permanent and total
disability.
(3) Reduction.--
(A) In general.--The reduction under this
paragraph is an amount equal to the sum of the
amounts received by the individual (or, in the
case of a joint return, by either spouse) as a
pension or annuity or as a disability benefit--
(i) which is excluded from gross
income and payable under--
(I) title II of the Social
Security Act,
(II) the Railroad Retirement
Act of 1974, or
(III) a law administered by
the Department of Veterans
Affairs, or
(ii) which is excluded from gross
income under any provision of law not
contained in this title.
No reduction shall be made under clause
(i)(III) for any amount described in section
104(a)(4).
(B) Treatment of certain workmen's
compensation benefits.--For purposes of
subparagraph (A), any amount treated as a
social security benefit under section 86(d)(3)
shall be treated as a disability benefit
received under title II of the Social Security
Act.
(d) Adjusted gross income limitation.--If the adjusted gross
income of the taxpayer exceeds--
(1) $7,500 in the case of a single individual,
(2) $10,000 in the case of a joint return, or
(3) $5,000 in the case of a married individual filing
a separate return,
the section 22 amount shall be reduced by one-half of the
excess of the adjusted gross income over $7,500, $10,000, or
$5,000, as the case may be.
(e) Definitions and special rules.--For purposes of this
section--
(1) Married couple must file joint return.--Except in
the case of a [husband and wife who live] married
couple who lives apart at all times during the taxable
year, if the taxpayer is married at the close of the
taxable year, the credit provided by this section shall
be allowed only if [the taxpayer and his spouse] the
taxpayer and the spouse of the taxpayer file a joint
return for the taxable year.
(2) Marital status.--Marital status shall be
determined under section 7703.
(3) Permanent and total disability defined.--An
individual is permanently and totally 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
which has lasted or can be expected to last for a
continuous period of not less than 12 months. An
individual shall not be considered to be permanently
and totally disabled unless he furnishes proof of the
existence thereof in such form and manner, and at such
times, as the Secretary may require.
(f) Nonresident alien ineligible for credit.--No credit shall
be allowed under this section to any nonresident alien.
* * * * * * *
Subpart C--REFUNDABLE CREDITS
* * * * * * *
SEC. 36. FIRST-TIME HOMEBUYER CREDIT.
(a) Allowance of credit.--In the case of an individual who is
a first-time homebuyer of a principal residence in the United
States during a taxable year, there shall be allowed as a
credit against the tax imposed by this subtitle for such
taxable year an amount equal to 10 percent of the purchase
price of the residence.
(b) Limitations.--
(1) Dollar limitation.--
(A) In general.--Except as otherwise provided
in this paragraph, the credit allowed under
subsection (a) shall not exceed $8,000.
(B) Married individuals filing separately.--
In the case of a married individual filing a
separate return, subparagraph (A) shall be
applied by substituting ``$4,000'' for
``$8,000''.
(C) Other individuals.--If two or more
individuals who are not married purchase a
principal residence, the amount of the credit
allowed under subsection (a) shall be allocated
among such individuals in such manner as the
Secretary may prescribe, except that the total
amount of the credits allowed to all such
individuals shall not exceed $8,000.
(D) Special rule for long-time residents of
same principal residence.--In the case of a
taxpayer to whom a credit under subsection (a)
is allowed by reason of subsection (c)(6),
subparagraphs (A), (B), and (C) shall be
applied by substituting ``$6,500'' for
``$8,000'' and ``$3,250'' for ``$4,000''.
(2) Limitation based on modified adjusted gross
income.--
(A) In general.--The amount allowable as a
credit under subsection (a) (determined without
regard to this paragraph) for the taxable year
shall be reduced (but not below zero) by the
amount which bears the same ratio to the amount
which is so allowable as--
(i) the excess (if any) of--
(I) the taxpayer's modified
adjusted gross income for such
taxable year, over
(II) $125,000 ($225,000 in
the case of a joint return),
bears to
(ii) $20,000.
(B) Modified adjusted gross income.--For
purposes of subparagraph (A), 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.
(3) Limitation based on purchase price.--No credit
shall be allowed under subsection (a) for the purchase
of any residence if the purchase price of such
residence exceeds $800,000.
(4) Age limitation.--No credit shall be allowed under
subsection (a) with respect to the purchase of any
residence unless the taxpayer has attained age 18 as of
the date of such purchase. In the case of any taxpayer
who is married (within the meaning of section 7703),
the taxpayer shall be treated as meeting the age
requirement of the preceding sentence if the taxpayer
or the taxpayer's spouse meets such age requirement.
(c) Definitions.--For purposes of this section--
(1) First-time homebuyer.--The term ``first-time
homebuyer'' means any individual if such individual
(and if married, such individual's spouse) had no
present ownership interest in a principal residence
during the 3-year period ending on the date of the
purchase of the principal residence to which this
section applies.
(2) Principal residence.--The term ``principal
residence'' has the same meaning as when used in
section 121.
(3) Purchase.--
(A) In general.--The term ``purchase'' means
any acquisition, but only if--
(i) the property is not acquired from
a person related to the person
acquiring such property (or, if
married, such individual's spouse), and
(ii) the basis of the property in the
hands of the person acquiring such
property is not determined--
(I) in whole or in part by
reference to the adjusted basis
of such property in the hands
of the person from whom
acquired, or
(II) under section 1014(a)
(relating to property acquired
from a decedent).
(B) Construction.--A residence which is
constructed by the taxpayer shall be treated as
purchased by the taxpayer on the date the
taxpayer first occupies such residence.
(4) Purchase price.--The term ``purchase price''
means the adjusted basis of the principal residence on
the date such residence is purchased.
(5) Related persons.--A person shall be treated as
related to another person if the relationship between
such persons would result in the disallowance of losses
under section 267 or 707(b) (but, in applying section
267(b) and (c) for purposes of this section, paragraph
(4) of section 267(c) shall be treated as providing
that the family of an individual shall include only
[his spouse] the individual's spouse , ancestors, and
lineal descendants).
(6) Exception for long-time residents of same
principal residence.--In the case of an individual
(and, if married, such individual's spouse) who has
owned and used the same residence as such individual's
principal residence for any 5-consecutive-year period
during the 8-year period ending on the date of the
purchase of a subsequent principal residence, such
individual shall be treated as a first-time homebuyer
for purposes of this section with respect to the
purchase of such subsequent residence.
(d) Exceptions.--No credit under subsection (a) shall be
allowed to any taxpayer for any taxable year with respect to
the purchase of a residence if--
(1) the taxpayer is a nonresident alien,
(2) the taxpayer disposes of such residence (or such
residence ceases to be the principal residence of the
taxpayer (and, if married, the taxpayer's spouse))
before the close of such taxable year,
(3) a deduction under section 151 with respect to
such taxpayer is allowable to another taxpayer for such
taxable year, or
(4) the taxpayer fails to attach to the return of tax
for such taxable year a properly executed copy of the
settlement statement used to complete such purchase.
(e) Reporting.--If the Secretary requires information
reporting under section 6045 by a person described in
subsection (e)(2) thereof to verify the eligibility of
taxpayers for the credit allowable by this section, the
exception provided by section 6045(e) shall not apply.
(f) Recapture of credit.--
(1) In general.--Except as otherwise provided in this
subsection, if a credit under subsection (a) is allowed
to a taxpayer, the tax imposed by this chapter shall be
increased by 62/3 percent of the amount of such credit
for each taxable year in the recapture period.
(2) Acceleration of recapture.--If a taxpayer
disposes of the principal residence with respect to
which a credit was allowed under subsection (a) (or
such residence ceases to be the principal residence of
the taxpayer (and, if married, the taxpayer's spouse))
before the end of the recapture period--
(A) the tax imposed by this chapter for the
taxable year of such disposition or cessation
shall be increased by the excess of the amount
of the credit allowed over the amounts of tax
imposed by paragraph (1) for preceding taxable
years, and
(B) paragraph (1) shall not apply with
respect to such credit for such taxable year or
any subsequent taxable year.
(3) Limitation based on gain.--In the case of the
sale of the principal residence to a person who is not
related to the taxpayer, the increase in tax determined
under paragraph (2) shall not exceed the amount of gain
(if any) on such sale. Solely for purposes of the
preceding sentence, the adjusted basis of such
residence shall be reduced by the amount of the credit
allowed under subsection (a) to the extent not
previously recaptured under paragraph (1).
(4) Exceptions.--
(A) Death of taxpayer.--Paragraphs (1) and
(2) shall not apply to any taxable year ending
after the date of the taxpayer's death.
(B) Involuntary conversion.--Paragraph (2)
shall not apply in the case of a residence
which is compulsorily or involuntarily
converted (within the meaning of section
1033(a)) if the taxpayer acquires a new
principal residence during the 2-year period
beginning on the date of the disposition or
cessation referred to in paragraph (2).
Paragraph (2) shall apply to such new principal
residence during the recapture period in the
same manner as if such new principal residence
were the converted residence.
(C) Transfers between spouses or incident to
divorce.--In the case of a transfer of a
residence to which section 1041(a) applies--
(i) paragraph (2) shall not apply to
such transfer, and
(ii) in the case of taxable years
ending after such transfer, paragraphs
(1) and (2) shall apply to the
transferee in the same manner as if
such transferee were the transferor
(and shall not apply to the
transferor).
(D) Waiver of recapture for purchases in 2009
and 2010.--In the case of any credit allowed
with respect to the purchase of a principal
residence after December 31, 2008--
(i) paragraph (1) shall not apply,
and
(ii) paragraph (2) shall apply only
if the disposition or cessation
described in paragraph (2) with respect
to such residence occurs during the 36-
month period beginning on the date of
the purchase of such residence by the
taxpayer.
(E) Special rule for members of the armed
forces, etc..--
(i) In general.--In the case of the
disposition of a principal residence by
an individual (or a cessation referred
to in paragraph (2)) after December 31,
2008, in connection with Government
orders received by such individual, or
such individual's spouse, for qualified
official extended duty service--
(I) paragraph (2) and
subsection (d)(2) shall not
apply to such disposition (or
cessation), and
(II) if such residence was
acquired before January 1,
2009, paragraph (1) shall not
apply to the taxable year in
which such disposition (or
cessation) occurs or any
subsequent taxable year.
(ii) Qualified official extended duty
service.--For purposes of this section,
the term ``qualified official extended
duty service'' means service on
qualified official extended duty as--
(I) a member of the uniformed
services,
(II) a member of the Foreign
Service of the United States,
or
(III) an employee of the
intelligence community.
(iii) Definitions.--Any term used in
this subparagraph which is also used in
paragraph (9) of section 121(d) shall
have the same meaning as when used in
such paragraph.
(5) Joint returns.--In the case of a credit allowed
under subsection (a) with respect to a joint return,
half of such credit shall be treated as having been
allowed to each individual filing such return for
purposes of this subsection.
(6) Return requirement.--If the tax imposed by this
chapter for the taxable year is increased under this
subsection, the taxpayer shall, notwithstanding section
6012, be required to file a return with respect to the
taxes imposed under this subtitle.
(7) Recapture period.--For purposes of this
subsection, the term ``recapture period'' means the 15
taxable years beginning with the second taxable year
following the taxable year in which the purchase of the
principal residence for which a credit is allowed under
subsection (a) was made.
(g) Election to treat purchase in prior year.--In the case of
a purchase of a principal residence after December 31, 2008, a
taxpayer may elect to treat such purchase as made on December
31 of the calendar year preceding such purchase for purposes of
this section (other than subsections (b)(4), (c), (f)(4)(D),
and (h)).
(h) Application of section.--
(1) In general.--This section shall only apply to a
principal residence purchased by the taxpayer on or
after April 9, 2008, and before May 1, 2010.
(2) Exception in case of binding contract.--In the
case of any taxpayer who enters into a written binding
contract before May 1, 2010, to close on the purchase
of a principal residence before July 1, 2010, and who
purchases such residence before October 1, 2010,
paragraph (1) shall be applied by substituting
``October 1, 2010'' for ``May 1, 2010''.
(3) Special rule for individuals on qualified
official extended duty outside the United States.--In
the case of any individual who serves on qualified
official extended duty service (as defined in section
121(d)(9)(C)(i)) outside the United States for at least
90 days during the period beginning after December 31,
2008, and ending before May 1, 2010, and, if married,
such individual's spouse--
(A) paragraphs (1) and (2) shall each be
applied by substituting ``May 1, 2011'' for
``May 1, 2010'', and
(B) paragraph (2) shall be applied by
substituting ``July 1, 2011'' for ``July 1,
2010'', and for ``October 1, 2010''.
* * * * * * *
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) 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:
(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 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 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.
(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] the taxpayer's spouse ) 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):
(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. 38. GENERAL BUSINESS CREDIT.
(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) the business credit carryforwards carried to such
taxable year,
(2) the amount of the current year business credit,
plus
(3) the business credit carrybacks carried to such
taxable year.
(b) Current year business credit.--For purposes of this
subpart, the amount of the current year business credit is the
sum of the following credits determined for the taxable year:
(1) the investment credit determined under section
46,
(2) the work opportunity credit determined under
section 51(a),
(3) the alcohol fuels credit determined under section
40(a),
(4) the research credit determined under section
41(a),
(5) the low-income housing credit determined under
section 42(a),
(6) the enhanced oil recovery credit under section
43(a),
(7) in the case of an eligible small business (as
defined in section 44(b)), the disabled access credit
determined under section 44(a),
(8) the renewable electricity production credit under
section 45(a),
(9) the empowerment zone employment credit determined
under section 1396(a),
(10) the Indian employment credit as determined under
section 45A(a),
(11) the employer social security credit determined
under section 45B(a),
(12) the orphan drug credit determined under section
45C(a),
(13) the new markets tax credit determined under
section 45D(a),
(14) in the case of an eligible employer (as defined
in section 45E(c)), the small employer pension plan
startup cost credit determined under section 45E(a),
(15) the employer-provided child care credit
determined under section 45F(a),
(16) the railroad track maintenance credit determined
under section 45G(a),
(17) the biodiesel fuels credit determined under
section 40A(a),
(18) the low sulfur diesel fuel production credit
determined under section 45H(a),
(19) the marginal oil and gas well production credit
determined under section 45I(a),
(20) the distilled spirits credit determined under
section 5011(a),
(21) the advanced nuclear power facility production
credit determined under section 45J(a),
(22) the nonconventional source production credit
determined under section 45K(a),
(23) the new energy efficient home credit determined
under section 45L(a),
(24) the portion of the alternative motor vehicle
credit to which section 30B(g)(1) applies,
(25) the portion of the alternative fuel vehicle
refueling property credit to which section 30C(d)(1)
applies,
(26) the mine rescue team training credit determined
under section 45N(a),
(27) in the case of an eligible agricultural business
(as defined in section 45O(e)), the agricultural
chemicals security credit determined under section
45O(a),
(28) the differential wage payment credit determined
under section 45P(a),
(29) the carbon dioxide sequestration credit
determined under section 45Q(a),
(30) the portion of the new qualified plug-in
electric drive motor vehicle credit to which section
30D(c)(1) applies,
(31) the small employer health insurance credit
determined under section 45R, plus
(32) in the case of an eligible employer (as defined
in section 45S(c)), the paid family and medical leave
credit determined under section 45S(a).
(c) Limitation based on amount of tax.--
(1) In general.--The credit allowed under subsection
(a) for any taxable year shall not exceed the excess
(if any) of the taxpayer's net income tax over the
greater of--
(A) the tentative minimum tax for the taxable
year, or
(B) 25 percent of so much of the taxpayer's
net regular tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term ``net
income tax'' means the sum of the regular tax liability
and the tax imposed by section 55, reduced by the
credits allowable under subparts A and B of this part,
and the term ``net regular tax liability'' means the
regular tax liability reduced by the sum of the credits
allowable under subparts A and B of this part.
(2) Empowerment zone employment credit may offset 25
percent of minimum tax.--
(A) In general.--In the case of the
empowerment zone employment credit--
(i) this section and section 39 shall
be applied separately with respect to
such credit, and
(ii) for purposes of applying
paragraph (1) to such credit--
(I) 75 percent of the
tentative minimum tax shall be
substituted for the tentative
minimum tax under subparagraph
(A) thereof, and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the
empowerment zone employment
credit and the specified
credits).
(B) Empowerment zone employment credit.--For
purposes of this paragraph, the term
``empowerment zone employment credit'' means
the portion of the credit under subsection (a)
which is attributable to the credit determined
under section 1396 (relating to empowerment
zone employment credit).
(4) Special rules for specified credits.--
(A) In general.--In the case of specified
credits--
(i) this section and section 39 shall
be applied separately with respect to
such credits, and
(ii) in applying paragraph (1) to
such credits--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the specified
credits).
(B) Specified credits.--For purposes of this
subsection, the term ``specified credits''
means--
(i) for taxable years beginning after
December 31, 2004, the credit
determined under section 40,
(ii) the credit determined under
section 41 for the taxable year with
respect to an eligible small business
(as defined in paragraph (5)(A) after
application of the rules of paragraph
(5)(B)),
(iii) the credit determined under
section 42 to the extent attributable
to buildings placed in service after
December 31, 2007,
(iv) the credit determined under
section 45 to the extent that such
credit is attributable to electricity
or refined coal produced--
(I) at a facility which is
originally placed in service
after the date of the enactment
of this paragraph, and
(II) during the 4-year period
beginning on the date that such
facility was originally placed
in service,
(v) the credit determined under
section 45 to the extent that such
credit is attributable to section
45(e)(10) (relating to Indian coal
production facilities),
(vi) the credit determined under
section 45B,
(vii) the credit determined under
section 45G,
(viii) the credit determined under
section 45R,
(ix) the credit determined under
section 45S,
(x) the credit determined under
section 46 to the extent that such
credit is attributable to the energy
credit determined under section 48,
(xi) the credit determined under
section 46 to the extent that such
credit is attributable to the
rehabilitation credit under section 47,
but only with respect to qualified
rehabilitation expenditures properly
taken into account for periods after
December 31, 2007, and
(xii) the credit determined under
section 51.
(5) Rules related to eligible small businesses.--
(A) Eligible small business.--For purposes of
this subsection, the term ``eligible small
business'' means, with respect to any taxable
year--
(i) a corporation the stock of which
is not publicly traded,
(ii) a partnership, or
(iii) a sole proprietorship,
if the average annual gross receipts of such
corporation, partnership, or sole
proprietorship for the 3-taxable-year period
preceding such taxable year does not exceed
$50,000,000. For purposes of applying the test
under the preceding sentence, rules similar to
the rules of paragraphs (2) and (3) of section
448(c) shall apply.
(B) Treatment of partners and S corporation
shareholders.--For purposes of paragraph
(4)(B)(ii), any credit determined under section
41 with respect to a partnership or S
corporation shall not be treated as a specified
credit by any partner or shareholder unless
such partner or shareholder meets the gross
receipts test under subparagraph (A) for the
taxable year in which such credit is treated as
a current year business credit.
(6) Special rules.--
(A) Married individuals.--In the case of a
[husband or wife who files] married individual
who files a separate return, the amount
specified under subparagraph (B) of paragraph
(1) shall be $12,500 in lieu of $25,000. This
subparagraph shall not apply if the spouse of
the taxpayer has no business credit
carryforward or carryback to, and has no
current year business credit for, the taxable
year of such spouse which ends within or with
the taxpayer's taxable year.
(B) Controlled groups.--In the case of a
controlled group, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced for each component member of such
group by apportioning $25,000 among the
component members of such group in such manner
as the Secretary shall by regulations
prescribe. For purposes of the preceding
sentence, the term ``controlled group'' has the
meaning given to such term by section 1563(a).
(C) Limitations with respect to certain
persons.--In the case of a person described in
subparagraph (A) or (B) of section 46(e)(1) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990), the $25,000 amount specified under
subparagraph (B) of paragraph (1) shall equal
such person's ratable share (as determined
under section 46(e)(2) (as so in effect) of
such amount.
(D) Estates and trusts.--In the case of an
estate or trust, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced to an amount which bears the same
ratio to $25,000 as the portion of the income
of the estate or trust which is not allocated
to beneficiaries bears to the total income of
the estate or trust.
(E) Corporations.--In the case of a
corporation, this subsection shall be applied
by treating the corporation as having a
tentative minimum tax of zero.
(d) Ordering rules.--For purposes of any provision of this
title where it is necessary to ascertain the extent to which
the credits determined under any section referred to in
subsection (b) are used in a taxable year or as a carryback or
carryforward--
(1) In general.--The order in which such credits are
used shall be determined on the basis of the order in
which they are listed in subsection (b) as of the close
of the taxable year in which the credit is used.
(2) Components of investment credit.--The order in
which the credits listed in section 46 are used shall
be determined on the basis of the order in which such
credits are listed in section 46 as of the close of the
taxable year in which the credit is used.
* * * * * * *
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, 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.]
(i) Married couple treated as 1
partner.--For purposes of subparagraph
(B), individuals married to one another
(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.
Subchapter B--COMPUTATION OF TAXABLE INCOME
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General rule.--For purposes of this subtitle, 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. 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] married
couple 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] the taxpayer and the spouse of the
taxpayer 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] married
couple 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,
(2) the deduction for personal exemptions provided in
section 151, and
(3) 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 in the case of a head of household
(as defined in section 2(b)), or
(C) $3,000 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).
(5) 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 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) 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,
(2) the deduction for personal exemptions provided by
section 151, and
(3) 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] the
taxpayer's 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] for the taxpayer if
the taxpayer has attained age 65 before the
close of [his taxable year] the taxpayer's
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] for the taxpayer if
the taxpayer 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.
(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) shall be applied by substituting ``$750'' for
``$600''.
(4) Blindness defined.--For purposes of this
subsection, an individual is blind only if [his] the
individual's central visual acuity does not exceed 20/
200 in the better eye with correcting lenses, or if
[his] the individual's 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.
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.
(a) In general.--
(1) In general.--Except as provided in paragraph (2),
gross income for the taxable year of any taxpayer
described in subsection (b) (notwithstanding section
207 of the Social Security Act) includes social
security benefits in an amount equal to the lesser of--
(A) one-half of the social security benefits
received during the taxable year, or
(B) one-half of the excess described in
subsection (b)(1).
(2) Additional amount.--In the case of a taxpayer
with respect to whom the amount determined under
subsection (b)(1)(A) exceeds the adjusted base amount,
the amount included in gross income under this section
shall be equal to the lesser of--
(A) the sum of--
(i) 85 percent of such excess, plus
(ii) the lesser of the amount
determined under paragraph (1) or an
amount equal to one-half of the
difference between the adjusted base
amount and the base amount of the
taxpayer, or
(B) 85 percent of the social security
benefits received during the taxable year.
(b) Taxpayers to whom subsection (a) applies.--
(1) In general.--A taxpayer is described in this
subsection if--
(A) the sum of--
(i) the modified adjusted gross
income of the taxpayer for the taxable
year, plus
(ii) one-half of the social security
benefits received during the taxable
year, exceeds
(B) the base amount.
(2) Modified adjusted gross income.--For purposes of
this subsection, the term ``modified adjusted gross
income'' means adjusted gross income--
(A) determined without regard to this section
and sections 135, 137, 221, 222, 911, 931, and
933, and
(B) increased by the amount of interest
received or accrued by the taxpayer during the
taxable year which is exempt from tax.
(c) Base amount and adjusted base amount.--For purposes of
this section--
(1) Base amount.--The term ``base amount'' means--
(A) except as otherwise provided in this
paragraph, $25,000,
(B) $32,000 in the case of a joint return,
and
(C) zero in the case of a taxpayer who--
(i) is married as of the close of the
taxable year (within the meaning of
section 7703) but does not file a joint
return for such year, and
(ii) does not live apart from [his
spouse] the taxpayer's spouse at all
times during the taxable year.
(2) Adjusted base amount.--The term ``adjusted base
amount'' means--
(A) except as otherwise provided in this
paragraph, $34,000,
(B) $44,000 in the case of a joint return,
and
(C) zero in the case of a taxpayer described
in paragraph (1)(C).
(d) Social security benefit.--
(1) In general.--For purposes of this section, the
term ``social security benefit'' means any amount
received by the taxpayer by reason of entitlement to--
(A) a monthly benefit under title II of the
Social Security Act, or
(B) a tier 1 railroad retirement benefit.
(2) Adjustment for repayments during year.--
(A) In general.--For purposes of this
section, the amount of social security benefits
received during any taxable year shall be
reduced by any repayment made by the taxpayer
during the taxable year of a social security
benefit previously received by the taxpayer
(whether or not such benefit was received
during the taxable year).
(B) Denial of deduction.--If (but for this
subparagraph) any portion of the repayments
referred to in subparagraph (A) would have been
allowable as a deduction for the taxable year
under section 165, such portion shall be
allowable as a deduction only to the extent it
exceeds the social security benefits received
by the taxpayer during the taxable year (and
not repaid during such taxable year).
(3) Workmen's compensation benefits substituted for
social security benefits.--For purposes of this
section, if, by reason of section 224 of the Social
Security Act (or by reason of section 3(a)(1) of the
Railroad Retirement Act of 1974), any social security
benefit is reduced by reason of the receipt of a
benefit under a workmen's compensation act, the term
``social security benefit'' includes that portion of
such benefit received under the workmen's compensation
act which equals such reduction.
(4) Tier 1 railroad retirement benefit.--For purposes
of paragraph (1), the term ``tier 1 railroad retirement
benefit'' means--
(A) the amount of the annuity under the
Railroad Retirement Act of 1974 equal to the
amount of the benefit to which the taxpayer
would have been entitled under the Social
Security Act if all of the service after
December 31, 1936, of the employee (on whose
employment record the annuity is being paid)
had been included in the term ``employment'' as
defined in the Social Security Act, and
(B) a monthly annuity amount under section
3(f)(3) of the Railroad Retirement Act of 1974.
(5) Effect of early delivery of benefit checks.--For
purposes of subsection (a), in any case where section
708 of the Social Security Act causes social security
benefit checks to be delivered before the end of the
calendar month for which they are issued, the benefits
involved shall be deemed to have been received in the
succeeding calendar month.
(e) Limitation on amount included where taxpayer receives
lump-sum payment.--
(1) Limitation.--If--
(A) any portion of a lump-sum payment of
social security benefits received during the
taxable year is attributable to prior taxable
years, and
(B) the taxpayer makes an election under this
subsection for the taxable year,
then the amount included in gross income under this
section for the taxable year by reason of the receipt
of such portion shall not exceed the sum of the
increases in gross income under this chapter for prior
taxable years which would result solely from taking
into account such portion in the taxable years to which
it is attributable.
(2) Special rules.--
(A) Year to which benefit attributable.--For
purposes of this subsection, a social security
benefit is attributable to a taxable year if
the generally applicable payment date for such
benefit occurred during such taxable year.
(B) Election.--An election under this
subsection shall be made at such time and in
such manner as the Secretary shall by
regulations prescribe. Such election, once
made, may be revoked only with the consent of
the Secretary.
(f) Treatment as pension or annuity for certain purposes.--
For purposes of--
(1) section 22(c)(3)(A) (relating to reduction for
amounts received as pension or annuity),
(2) section 32(c)(2) (defining earned income),
(3) section 219(f)(1) (defining compensation), and
(4) section 911(b)(1) (defining foreign earned
income),
any social security benefit shall be treated as an amount
received as a pension or annuity.
* * * * * * *
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] the taxpayer's spouse, the taxpayer's
dependents (as defined in section 152, determined without
regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof),
and any child (as defined in section 152(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) 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]
the taxpayer's spouse , or a dependent (as defined in
section 152, 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. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE
EMPLOYER.
(a) Meals and Lodging Furnished to Employee[, His Spouse, and
His Dependents] and the Employee's Spouse and Dependents,
Pursuant to Employment.--There shall be excluded from gross
income of an employee the value of any meals or lodging
furnished to [him, his spouse, or any of his dependents by or
on behalf of his employer] the employee or the employee's
spouse or dependents by or on behalf of the employer of the
employee for the convenience of the employer, but only if--
(1) in the case of meals, the meals are furnished on
the business premises of the employer, or
(2) in the case of lodging, the employee is required
to accept such lodging on the business premises of
[his] the employee's employer as a condition of [his]
the employee's employment.
(b) Special rules.--For purposes of subsection (a)--
(1) Provisions of employment contract or State
statute not to be determinative.--In determining
whether meals or lodging are furnished for the
convenience of the employer, the provisions of an
employment contract or of a State statute fixing terms
of employment shall not be determinative of whether the
meals or lodging are intended as compensation.
(2) Certain factors not taken into account with
respect to meals.--In determining whether meals are
furnished for the convenience of the employer, the fact
that a charge is made for such meals, and the fact that
the employee may accept or decline such meals, shall
not be taken into account.
(3) Certain fixed charges for meals.--
(A) In general.--If--
(i) an employee is required to pay on
a periodic basis a fixed charge for his
meals, and
(ii) such meals are furnished by the
employer for the convenience of the
employer,
there shall be excluded from the employee's
gross income an amount equal to such fixed
charge.
(B) Application of subparagraph (A).--
Subparagraph (A) shall apply--
(i) whether the employee pays the
fixed charge out of his stated
compensation or out of his own funds,
and
(ii) only if the employee is required
to make the payment whether he accepts
or declines the meals.
(4) Meals furnished to employees on business premises
where meals of most employees are otherwise
excludable.--All meals furnished on the business
premises of an employer to such employer's employees
shall be treated as furnished for the convenience of
the employer if, without regard to this paragraph, more
than half of the employees to whom such meals are
furnished on such premises are furnished such meals for
the convenience of the employer.
(c) Employees living in certain camps.--
(1) In general.--In the case of an individual who is
furnished lodging in a camp located in a foreign
country by or on behalf of his employer, such camp
shall be considered to be part of the business premises
of the employer.
(2) Camp.--For purposes of this section, a camp
constitutes lodging which is--
(A) provided by or on behalf of the employer
for the convenience of the employer because the
place at which such individual renders services
is in a remote area where satisfactory housing
is not available on the open market,
(B) located, as near as practicable, in the
vicinity of the place at which such individual
renders services, and
(C) furnished in a common area (or enclave)
which is not available to the public and which
normally accommodates 10 or more employees.
(d) Lodging furnished by certain educational institutions to
employees.--
(1) In general.--In the case of an employee of an
educational institution, gross income shall not include
the value of qualified campus lodging furnished to such
employee during the taxable year.
(2) Exception in cases of inadequate rent.--Paragraph
(1) shall not apply to the extent of the excess of--
(A) the lesser of--
(i) 5 percent of the appraised value
of the qualified campus lodging, or
(ii) the average of the rentals paid
by individuals (other than employees or
students of the educational
institution) during such calendar year
for lodging provided by the educational
institution which is comparable to the
qualified campus lodging provided to
the employee, over
(B) the rent paid by the employee for the
qualified campus lodging during such calendar
year.
The appraised value under subparagraph (A)(i) shall be
determined as of the close of the calendar year in
which the taxable year begins, or, in the case of a
rental period not greater than 1 year, at any time
during the calendar year in which such period begins.
(3) Qualified campus lodging.--For purposes of this
subsection, the term ``qualified campus lodging'' means
lodging to which subsection (a) does not apply and
which is--
(A) located on, or in the proximity of, a
campus of the educational institution, and
(B) furnished to the employee, [his spouse,
and any of his dependents] the employee's
spouse, and any of the employee's dependents by
or on behalf of such institution for use as a
residence.
(4) Educational institution, etc..--For purposes of
this subsection--
(A) In general.--The term ``educational
institution'' means--
(i) an institution described in
section 170(b)(1)(A)(ii) (or an entity
organized under State law and composed
of public institutions so described),
or
(ii) an academic health center.
(B) Academic health center.--For purposes of
subparagraph (A), the term ``academic health
center'' means an entity--
(i) which is described in section
170(b)(1)(A)(iii),
(ii) which receives (during the
calendar year in which the taxable year
of the taxpayer begins) payments under
subsection (d)(5)(B) or (h) of section
1886 of the Social Security Act
(relating to graduate medical
education), and
(iii) which has as one of its
principal purposes or functions the
providing and teaching of basic and
clinical medical science and research
with the entity's own faculty.
* * * * * * *
SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
(a) Exclusion.--Gross income shall not include gain from the
sale or exchange of property if, during the 5-year period
ending on the date of the sale or exchange, such property has
been owned and used by the taxpayer as the taxpayer's principal
residence for periods aggregating 2 years or more.
(b) Limitations.--
(1) In general.--The amount of gain excluded from
gross income under subsection (a) with respect to any
sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns.--In the case of
a [husband and wife who make] married couple who makes
a joint return for the taxable year of the sale or
exchange of the property--
(A) $500,000 Limitation for certain joint
returns.--Paragraph (1) shall be applied by
substituting ``$500,000'' for ``$250,000'' if--
(i) either spouse meets the ownership
requirements of subsection (a) with
respect to such property;
(ii) both spouses meet the use
requirements of subsection (a) with
respect to such property; and
(iii) neither spouse is ineligible
for the benefits of subsection (a) with
respect to such property by reason of
paragraph (3).
(B) Other joint returns.--If such spouses do
not meet the requirements of subparagraph (A),
the limitation under paragraph (1) shall be the
sum of the limitations under paragraph (1) to
which each spouse would be entitled if such
spouses had not been married. For purposes of
the preceding sentence, each spouse shall be
treated as owning the property during the
period that either spouse owned the property.
(3) Application to only 1 sale or exchange every 2
years.--Subsection (a) shall not apply to any sale or
exchange by the taxpayer if, during the 2-year period
ending on the date of such sale or exchange, there was
any other sale or exchange by the taxpayer to which
subsection (a) applied.
(4) Special rule for certain sales by surviving
spouses.--In the case of a sale or exchange of property
by an unmarried individual whose spouse is deceased on
the date of such sale, paragraph (1) shall be applied
by substituting ``$500,000'' for ``$250,000'' if such
sale occurs not later than 2 years after the date of
death of such spouse and the requirements of paragraph
(2)(A) were met immediately before such date of death.
(5) Exclusion of gain allocated to nonqualified
use.--
(A) In general.--Subsection (a) shall not
apply to so much of the gain from the sale or
exchange of property as is allocated to periods
of nonqualified use.
(B) Gain allocated to periods of nonqualified
use.--For purposes of subparagraph (A), gain
shall be allocated to periods of nonqualified
use based on the ratio which--
(i) the aggregate periods of
nonqualified use during the period such
property was owned by the taxpayer,
bears to
(ii) the period such property was
owned by the taxpayer.
(C) Period of nonqualified use.--For purposes
of this paragraph--
(i) In general.--The term ``period of
nonqualified use'' means any period
(other than the portion of any period
preceding January 1, 2009) during which
the property is not used as the
principal residence of the taxpayer or
the taxpayer's spouse or former spouse.
(ii) Exceptions.--The term ``period
of nonqualified use'' does not
include--
(I) any portion of the 5-year
period described in subsection
(a) which is after the last
date that such property is used
as the principal residence of
the taxpayer or the taxpayer's
spouse,
(II) any period (not to
exceed an aggregate period of
10 years) during which the
taxpayer or the taxpayer's
spouse is serving on qualified
official extended duty (as
defined in subsection
(d)(9)(C)) described in clause
(i), (ii), or (iii) of
subsection (d)(9)(A), and
(III) any other period of
temporary absence (not to
exceed an aggregate period of 2
years) due to change of
employment, health conditions,
or such other unforeseen
circumstances as may be
specified by the Secretary.
(D) Coordination with recognition of gain
attributable to depreciation.--For purposes of
this paragraph--
(i) subparagraph (A) shall be applied
after the application of subsection
(d)(6), and
(ii) subparagraph (B) shall be
applied without regard to any gain to
which subsection (d)(6) applies.
(c) Exclusion for taxpayers failing to meet certain
requirements.--
(1) In general.--In the case of a sale or exchange to
which this subsection applies, the ownership and use
requirements of subsection (a), and subsection (b)(3),
shall not apply; but the dollar limitation under
paragraph (1) or (2) of subsection (b), whichever is
applicable, shall be equal to--
(A) the amount which bears the same ratio to
such limitation (determined without regard to
this paragraph) as
(B)(i) the shorter of--
(I) the aggregate periods, during the
5-year period ending on the date of
such sale or exchange, such property
has been owned and used by the taxpayer
as the taxpayer's principal residence;
or
(II) the period after the date of the
most recent prior sale or exchange by
the taxpayer to which subsection (a)
applied and before the date of such
sale or exchange, bears to
(ii) 2 years.
(2) Sales and exchanges to which subsection
applies.--This subsection shall apply to any sale or
exchange if--
(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of--
(i) a failure to meet the ownership
and use requirements of subsection (a),
or
(ii) subsection (b)(3), and
(B) such sale or exchange is by reason of a
change in place of employment, health, or, to
the extent provided in regulations, unforeseen
circumstances.
(d) Special rules.--
(1) Joint returns.--If a [husband and wife make]
married couple makes a joint return for the taxable
year of the sale or exchange of the property,
subsections (a) and (c) shall apply if either spouse
meets the ownership and use requirements of subsection
(a) with respect to such property.
(2) Property of deceased spouse.--For purposes of
this section, in the case of an unmarried individual
whose spouse is deceased on the date of the sale or
exchange of property, the period such unmarried
individual owned and used such property shall include
the period such deceased spouse owned and used such
property before death.
(3) Property owned by spouse or former spouse.--For
purposes of this section--
(A) Property transferred to individual from
spouse or former spouse.--In the case of an
individual holding property transferred to such
individual in a transaction described in
section 1041(a), the period such individual
owns such property shall include the period the
transferor owned the property.
(B) Property used by former spouse pursuant
to divorce decree, etc..--Solely for purposes
of this section, an individual shall be treated
as using property as such individual's
principal residence during any period of
ownership while such individual's spouse or
former spouse is granted use of the property
under a divorce or separation instrument.
(C) Divorce or separation instrument.--For
purposes of this paragraph, the term ``divorce
or separation instrument'' means--
(i) a decree of divorce or separate
maintenance or a written instrument
incident to such a decree,
(ii) a written separation agreement,
or
(iii) a decree (not described in
clause (i)) requiring a spouse to make
payments for the support or maintenance
of the other spouse.
(4) Tenant-stockholder in cooperative housing
corporation.--For purposes of this section, if the
taxpayer holds stock as a tenant-stockholder (as
defined in section 216) in a cooperative housing
corporation (as defined in such section), then--
(A) the holding requirements of subsection
(a) shall be applied to the holding of such
stock, and
(B) the use requirements of subsection (a)
shall be applied to the house or apartment
which the taxpayer was entitled to occupy as
such stockholder.
(5) Involuntary conversions.--
(A) In general.--For purposes of this
section, the destruction, theft, seizure,
requisition, or condemnation of property shall
be treated as the sale of such property.
(B) Application of section 1033.--In applying
section 1033 (relating to involuntary
conversions), the amount realized from the sale
or exchange of property shall be treated as
being the amount determined without regard to
this section, reduced by the amount of gain not
included in gross income pursuant to this
section.
(C) Property acquired after involuntary
conversion.--If the basis of the property sold
or exchanged is determined (in whole or in
part) under section 1033(b) (relating to basis
of property acquired through involuntary
conversion), then the holding and use by the
taxpayer of the converted property shall be
treated as holding and use by the taxpayer of
the property sold or exchanged.
(6) Recognition of gain attributable to
depreciation.--Subsection (a) shall not apply to so
much of the gain from the sale of any property as does
not exceed the portion of the depreciation adjustments
(as defined in section 1250(b)(3)) attributable to
periods after May 6, 1997, in respect of such property.
(7) Determination of use during periods of out-of-
residence care.--In the case of a taxpayer who--
(A) becomes physically or mentally incapable
of self-care, and
(B) owns property and uses such property as
the taxpayer's principal residence during the
5-year period described in subsection (a) for
periods aggregating at least 1 year,
then the taxpayer shall be treated as using such
property as the taxpayer's principal residence during
any time during such 5-year period in which the
taxpayer owns the property and resides in any facility
(including a nursing home) licensed by a State or
political subdivision to care for an individual in the
taxpayer's condition.
(8) Sales of remainder interests.--For purposes of
this section--
(A) In general.--At the election of the
taxpayer, this section shall not fail to apply
to the sale or exchange of an interest in a
principal residence by reason of such interest
being a remainder interest in such residence,
but this section shall not apply to any other
interest in such residence which is sold or
exchanged separately.
(B) Exception for sales to related parties.--
Subparagraph (A) shall not apply to any sale
to, or exchange with, any person who bears a
relationship to the taxpayer which is described
in section 267(b) or 707(b).
(9) Uniformed services, Foreign Service, and
intelligence community.--
(A) In general.--At the election of an
individual with respect to a property, the
running of the 5-year period described in
subsections (a) and (c)(1)(B) and paragraph (7)
of this subsection with respect to such
property shall be suspended during any period
that such individual or such individual's
spouse is serving on qualified official
extended duty--
(i) as a member of the uniformed
services,
(ii) as a member of the Foreign
Service of the United States, or
(iii) as an employee of the
intelligence community.
(B) Maximum period of suspension.--The 5-year
period described in subsection (a) shall not be
extended more than 10 years by reason of
subparagraph (A).
(C) Qualified official extended duty.--For
purposes of this paragraph--
(i) In general.--The term ``qualified
official extended duty'' means any
extended duty while serving at a duty
station which is at least 50 miles from
such property or while residing under
Government orders in Government
quarters.
(ii) Uniformed services.--The term
``uniformed services'' has the meaning
given such term by section 101(a)(5) of
title 10, United States Code, as in
effect on the date of the enactment of
this paragraph.
(iii) Foreign Service of the United
States.--The term ``member of the
Foreign Service of the United States''
has the meaning given the term ``member
of the Service'' by paragraph (1), (2),
(3), (4), or (5) of section 103 of the
Foreign Service Act of 1980, as in
effect on the date of the enactment of
this paragraph.
(iv) Employee of intelligence
community.--The term ``employee of the
intelligence community'' means an
employee (as defined by section 2105 of
title 5, United States Code) of--
(I) the Office of the
Director of National
Intelligence,
(II) the Central Intelligence
Agency,
(III) the National Security
Agency,
(IV) the Defense Intelligence
Agency,
(V) the National Geospatial-
Intelligence Agency,
(VI) the National
Reconnaissance Office,
(VII) any other office within
the Department of Defense for
the collection of specialized
national intelligence through
reconnaissance programs,
(VIII) any of the
intelligence elements of the
Army, the Navy, the Air Force,
the Marine Corps, the Federal
Bureau of Investigation, the
Department of Treasury, the
Department of Energy, and the
Coast Guard,
(IX) the Bureau of
Intelligence and Research of
the Department of State, or
(X) any of the elements of
the Department of Homeland
Security concerned with the
analyses of foreign
intelligence information.
(v) Extended duty.--The term
``extended 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) Special rules relating to election.--
(i) Election limited to 1 property at
a time.--An election under subparagraph
(A) with respect to any property may
not be made if such an election is in
effect with respect to any other
property.
(ii) Revocation of election.--An
election under subparagraph (A) may be
revoked at any time.
(10) Property acquired in like-kind exchange.--If a
taxpayer acquires property in an exchange with respect
to which gain is not recognized (in whole or in part)
to the taxpayer under subsection (a) or (b) of section
1031, subsection (a) shall not apply to the sale or
exchange of such property by such taxpayer (or by any
person whose basis in such property is determined, in
whole or in part, by reference to the basis in the
hands of such taxpayer) during the 5-year period
beginning with the date of such acquisition.
(12) Peace Corps.--
(A) In general.--At the election of an
individual with respect to a property, the
running of the 5-year period described in
subsections (a) and (c)(1)(B) and paragraph (7)
of this subsection with respect to such
property shall be suspended during any period
that such individual or such individual's
spouse is serving outside the United States--
(i) on qualified official extended
duty (as defined in paragraph (9)(C))
as an employee of the Peace Corps, or
(ii) as an enrolled volunteer or
volunteer leader under section 5 or 6
(as the case may be) of the Peace Corps
Act (22 U.S.C. 2504, 2505).
(B) Applicable rules.--For purposes of
subparagraph (A), rules similar to the rules of
subparagraphs (B) and (D) of paragraph (9)
shall apply.
(e) Denial of exclusion for expatriates.--This section shall
not apply to any sale or exchange by an individual if the
treatment provided by section 877(a)(1) applies to such
individual.
(f) Election to have section not apply.--This section shall
not apply to any sale or exchange with respect to which the
taxpayer elects not to have this section apply.
(g) Residences acquired in rollovers under section 1034.--For
purposes of this section, in the case of property the
acquisition of which by the taxpayer resulted under section
1034 (as in effect on the day before the date of the enactment
of this section) in the nonrecognition of any part of the gain
realized on the sale or exchange of another residence, in
determining the period for which the taxpayer has owned and
used such property as the taxpayer's principal residence, there
shall be included the aggregate periods for which such other
residence (and each prior residence taken into account under
section 1223(6) in determining the holding period of such
property) had been so owned and used.
* * * * * * *
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] the spouse's self .
(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
(2) who is a child of such employee (within the
meaning of section 152(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),
(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.
(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 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.
(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)) 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) 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] the employee's 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. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER
EDUCATION TUITION AND FEES.
(a) General rule.--In the case of an individual who pays
qualified higher education expenses during the taxable year, no
amount shall be includible in gross income by reason of the
redemption during such year of any qualified United States
savings bond.
(b) Limitations.--
(1) Limitation where redemption proceeds exceed
higher education expenses.--
(A) In general.--If--
(i) the aggregate proceeds of
qualified United States savings bonds
redeemed by the taxpayer during the
taxable year exceed
(ii) the qualified higher education
expenses paid by the taxpayer during
such taxable year,
the amount excludable from gross income under
subsection (a) shall not exceed the applicable
fraction of the amount excludable from gross
income under subsection (a) without regard to
this subsection.
(B) Applicable fraction.--For purposes of
subparagraph (A), the term ``applicable
fraction'' means the fraction the numerator of
which is the amount described in subparagraph
(A)(ii) and the denominator of which is the
amount described in subparagraph (A)(i).
(2) Limitation based on modified adjusted gross
income.--
(A) In general.--If the modified adjusted
gross income of the taxpayer for the taxable
year exceeds $40,000 ($60,000 in the case of a
joint return), the amount which would (but for
this paragraph) be excludable from gross income
under subsection (a) shall be reduced (but not
below zero) by the amount which bears the same
ratio to the amount which would be so
excludable as such excess bears to $15,000
($30,000 in the case of a joint return).
(B) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after
1990, the $40,000 and $60,000 amounts contained
in subparagraph (A) shall be increased by an
amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
under section 1(f)(3) for the calendar
year in which the taxable year begins,
determined by substituting ``calendar
year 1989'' for ``calendar year 2016''
in subparagraph (A)(ii) thereof.
(C) Rounding.--If any amount as adjusted
under subparagraph (B) is not a multiple of
$50, such amount shall be rounded to the
nearest multiple of $50 (or if such amount is a
multiple of $25, such amount shall be rounded
to the next highest multiple of $50).
(c) Definitions.--For purposes of this section--
(1) Qualified United States savings bond.--The term
``qualified United States savings bond'' means any
United States savings bond issued--
(A) after December 31, 1989,
(B) to an individual who has attained age 24
before the date of issuance, and
(C) at discount under section 3105 of title
31, United States Code.
(2) Qualified higher education expenses.--
(A) In general.--The term ``qualified higher
education 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.
(B) Exception for education involving sports,
etc..--Such term shall not include expenses
with respect to any course or other education
involving sports, games, or hobbies other than
as part of a degree program.
(C) Contributions to qualified tuition
program and Coverdell education savings
accounts.--Such term shall include any
contribution to a qualified tuition program (as
defined in section 529) on behalf of a
designated beneficiary (as defined in such
section), or to a Coverdell education savings
account (as defined in section 530) on behalf
of an account beneficiary, who is an individual
described in subparagraph (A); but there shall
be no increase in the investment in the
contract for purposes of applying section 72 by
reason of any portion of such contribution
which is not includible in gross income by
reason of this subparagraph.
(3) Eligible educational institution.--The term
``eligible educational institution'' has the meaning
given such term by section 529(e)(5).
(4) Modified adjusted gross income.--The term
``modified adjusted gross income'' means the adjusted
gross income of the taxpayer for the taxable year
determined--
(A) without regard to this section and
sections 137, 221, 222, 911, 931, and 933, and
(B) after the application of sections 86,
469, and 219.
(d) Special rules.--
(1) Adjustment for certain scholarships and veterans
benefits.--The amount of qualified higher education
expenses otherwise taken into account under subsection
(a) with respect to the education of an individual
shall be reduced (before the application of subsection
(b)) by the sum of the amounts received with respect to
such individual for the taxable year as--
(A) a qualified scholarship which under
section 117 is not includable in gross income,
(B) an educational assistance allowance under
chapter 30, 31, 32, 34, or 35 of title 38,
United States Code,
(C) a payment (other than a gift, bequest,
devise, or inheritance within the meaning of
section 102(a)) for educational expenses, or
attributable to attendance at an eligible
educational institution, which is exempt from
income taxation by any law of the United
States, or
(D) a payment, waiver, or reimbursement of
qualified higher education expenses under a
qualified tuition program (within the meaning
of section 529(b)).
(2) Coordination with other higher education
benefits.--The amount of the qualified higher education
expenses otherwise taken into account under subsection
(a) with respect to the education of an individual
shall be reduced (before the application of subsection
(b)) by--
(A) the amount of such expenses which are
taken into account in determining the credit
allowed to the taxpayer or any other person
under section 25A with respect to such
expenses; and
(B) the amount of such expenses which are
taken into account in determining the
exclusions under sections 529(c)(3)(B) and
530(d)(2).
(3) No exclusion 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 [his
spouse] the taxpayer's spouse file a joint return for
the taxable year.
(4) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry
out this section, including regulations requiring
record keeping and information reporting.
* * * * * * *
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] the
taxpayer's 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.
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
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] married couple
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.--
(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 ``Federally
declared 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 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
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)).
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) 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] the
spouse of such donor 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] the death of the donor or after
the death of the donor's surviving
spouse if such surviving spouse 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.
(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 (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).
(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:
(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 8473 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. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) Treatment as expenses.--A taxpayer may elect to treat the
cost of any section 179 property as an expense which is not
chargeable to capital account. Any cost so treated shall be
allowed as a deduction for the taxable year in which the
section 179 property is placed in service.
(b) Limitations.--
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $1,000,000.
(2) Reduction in limitation.--The limitation under
paragraph (1) for any taxable year shall be reduced
(but not below zero) by the amount by which the cost of
section 179 property placed in service during such
taxable year exceeds $2,500,000.
(3) Limitation based on income from trade or
business.--
(A) In general.--The amount allowed as a
deduction under subsection (a) for any taxable
year (determined after the application of
paragraphs (1) and (2)) shall not exceed the
aggregate amount of taxable income of the
taxpayer for such taxable year which is derived
from the active conduct by the taxpayer of any
trade or business during such taxable year.
(B) Carryover of disallowed deduction.--The
amount allowable as a deduction under
subsection (a) for any taxable year shall be
increased by the lesser of--
(i) the aggregate amount disallowed
under subparagraph (A) for all prior
taxable years (to the extent not
previously allowed as a deduction by
reason of this subparagraph), or
(ii) the excess (if any) of--
(I) the limitation of
paragraphs (1) and (2) (or if
lesser, the aggregate amount of
taxable income referred to in
subparagraph (A)), over
(II) the amount allowable as
a deduction under subsection
(a) for such taxable year
without regard to this
subparagraph.
(C) Computation of taxable income.--For
purposes of this paragraph, taxable income
derived from the conduct of a trade or business
shall be computed without regard to the
deduction allowable under this section.
(4) Married individuals filing separately.--In the
case of [a husband and wife filing] individuals married
to one another who file separate returns for the
taxable year--
(A) such individuals shall be treated as 1
taxpayer for purposes of paragraphs (1) and
(2), and
(B) unless such individuals elect otherwise,
50 percent of the cost which may be taken into
account under subsection (a) for such taxable
year (before application of paragraph (3))
shall be allocated to each such individual.
(5) Limitation on cost taken into account for certain
passenger vehicles.--
(A) In general.--The cost of any sport
utility vehicle for any taxable year which may
be taken into account under this section shall
not exceed $25,000.
(B) Sport utility vehicle.--For purposes of
subparagraph (A)--
(i) In general.--The term ``sport
utility vehicle'' means any 4-wheeled
vehicle--
(I) which is primarily
designed or which can be used
to carry passengers over public
streets, roads, or highways
(except any vehicle operated
exclusively on a rail or
rails),
(II) which is not subject to
section 280F, and
(III) which is rated at not
more than 14,000 pounds gross
vehicle weight.
(ii) Certain vehicles excluded.--Such
term does not include any vehicle
which--
(I) is designed to have a
seating capacity of more than 9
persons behind the driver's
seat,
(II) is equipped with a cargo
area of at least 6 feet in
interior length which is an
open area or is designed for
use as an open area but is
enclosed by a cap and is not
readily accessible directly
from the passenger compartment,
or
(III) has an integral
enclosure, fully enclosing the
driver compartment and load
carrying device, does not have
seating rearward of the
driver's seat, and has no body
section protruding more than 30
inches ahead of the leading
edge of the windshield.
(6) Inflation adjustment.--
(A) In general.--In the case of any taxable
year beginning after 2018, the dollar amounts
in paragraphs (1), (2), and (5)(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
``calendar year 2017'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
(B) Rounding.--The amount of any increase
under subparagraph (A) shall be rounded to the
nearest multiple of $10,000 ($100 in the case
of any increase in the amount under paragraph
(5)(A)).
(c) Election.--
(1) In general.--An election under this section for
any taxable year shall--
(A) specify the items of section 179 property
to which the election applies and the portion
of the cost of each of such items which is to
be taken into account under subsection (a), and
(B) be made on the taxpayer's return of the
tax imposed by this chapter for the taxable
year.
Such election shall be made in such manner as the
Secretary may by regulations prescribe.
(2) Election.--Any election made under this section,
and any specification contained in any such election,
may be revoked by the taxpayer with respect to any
property, and such revocation, once made, shall be
irrevocable.
(d) Definitions and special rules.--
(1) Section 179 property.--For purposes of this
section, the term ``section 179 property'' means
property--
(A) which is--
(i) tangible property (to which
section 168 applies), or
(ii) computer software (as defined in
section 197(e)(3)(B)) which is
described in section 197(e)(3)(A)(i)
and to which section 167 applies,
(B) which is--
(i) section 1245 property (as defined
in section 1245(a)(3)), or
(ii) at the election of the taxpayer,
qualified real property (as defined in
subsection (e)), and
(C) which is acquired by purchase for use in
the active conduct of a trade or business.
Such term shall not include any property described in
section 50(b) (other than paragraph (2) thereof).
(2) Purchase defined.--For purposes of paragraph (1),
the term ``purchase'' means any acquisition of
property, but only if--
(A) the property is not acquired from a
person whose relationship to the person
acquiring it would result in the disallowance
of losses under section 267 or 707(b) (but, in
applying section 267(b) and (c) for purposes of
this section, paragraph (4) of section 267(c)
shall be treated as providing that the family
of an individual shall include only [his
spouse] the individual's spouse, ancestors, and
lineal descendants),
(B) the property is not acquired by one
component member of a controlled group from
another component member of the same controlled
group, and
(C) the basis of the property in the hands of
the person acquiring it is not determined--
(i) in whole or in part by reference
to the adjusted basis of such property
in the hands of the person from whom
acquired, or
(ii) under section 1014(a) (relating
to property acquired from a decedent).
(3) Cost.--For purposes of this section, the cost of
property does not include so much of the basis of such
property as is determined by reference to the basis of
other property held at any time by the person acquiring
such property.
(4) Section not to apply to estates and trusts.--This
section shall not apply to estates and trusts.
(5) Section not to apply to certain noncorporate
lessors.--This section shall not apply to any section
179 property which is purchased by a person who is not
a corporation and with respect to which such person is
the lessor unless--
(A) the property subject to the lease has
been manufactured or produced by the lessor, or
(B) the term of the lease (taking into
account options to renew) is less than 50
percent of the class life of the property (as
defined in section 168(i)(1)), and for the
period consisting of the first 12 months after
the date on which the property is transferred
to the lessee the sum of the deductions with
respect to such property which are allowable to
the lessor solely by reason of section 162
(other than rents and reimbursed amounts with
respect to such property) exceeds 15 percent of
the rental income produced by such property.
(6) Dollar limitation of controlled group.--For
purposes of subsection (b) of this section--
(A) all component members of a controlled
group shall be treated as one taxpayer, and
(B) the Secretary shall apportion the dollar
limitation contained in subsection (b)(1) among
the component members of such controlled group
in such manner as he shall by regulations
prescribe.
(7) Controlled group defined.--For purposes of
paragraphs (2) and (6), the term ``controlled group''
has the meaning assigned to it by section 1563(a),
except that, for such purposes, the phrase ``more than
50 percent'' shall be substituted for the phrase ``at
least 80 percent'' each place it appears in section
1563(a)(1).
(8) Treatment of partnerships and S corporations.--In
the case of a partnership, the limitations of
subsection (b) shall apply with respect to the
partnership and with respect to each partner. A similar
rule shall apply in the case of an S corporation and
its shareholders.
(9) Coordination with section 38.--No credit shall be
allowed under section 38 with respect to any amount for
which a deduction is allowed under subsection (a).
(10) Recapture in certain cases.--The Secretary
shall, by regulations, provide for recapturing the
benefit under any deduction allowable under subsection
(a) with respect to any property which is not used
predominantly in a trade or business at any time.
(e) Qualified real property.--For purposes of this section,
the term ``qualified real property'' means--
(1) any qualified improvement property described in
section 168(e)(6), and
(2) any of the following improvements to
nonresidential real property placed in service after
the date such property was first placed in service:
(A) Roofs.
(B) Heating, ventilation, and air-
conditioning property.
(C) Fire protection and alarm systems.
(D) Security systems.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
* * * * * * *
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] the taxpayer's spouse, or a
dependent (as defined in section 152, determined without regard
to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the
extent that such expenses exceed 10 percent 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]
the estate of the taxpayer during the 1-year period
beginning with the day after the date of [his death]
the death of the taxpayer 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) 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] the taxpayer 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] the taxpayer's 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] marital status).
(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:
(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). 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.
(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.
(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] or the spouse or dependents of such
member, 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] 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] the member's spouse
and dependents--
(A) as if [his spouse] the member's 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) 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) 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.
(j) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
(k) 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. 219. RETIREMENT SAVINGS.
(a) Allowance of deduction.--In the case of an individual,
there shall be allowed as a deduction an amount equal to the
qualified retirement contributions of the individual for the
taxable year.
(b) Maximum amount of deduction.--
(1) In general.--The amount allowable as a deduction
under subsection (a) to any individual for any taxable
year shall not exceed the lesser of--
(A) the deductible amount, or
(B) an amount equal to the compensation
includible in the individual's gross income for
such taxable year.
(2) Special rule for employer contributions under
simplified employee pensions.--This section shall not
apply with respect to an employer contribution to a
simplified employee pension.
(3) Plans under section 501(c)(18).--Notwithstanding
paragraph (1), the amount allowable as a deduction
under subsection (a) with respect to any contributions
on behalf of an employee to a plan described in section
501(c)(18) shall not exceed the lesser of--
(A) $7,000, or
(B) an amount equal to 25 percent of the
compensation (as defined in section 415(c)(3))
includible in the individual's gross income for
such taxable year.
(4) Special rule for simple retirement accounts.--
This section shall not apply with respect to any amount
contributed to a simple retirement account established
under section 408(p).
(5) Deductible amount.--For purposes of paragraph
(1)(A)--
(A) In general.--The deductible amount is
$5,000.
(B) Catch-up contributions for individuals 50
or older.--
(i) In general.--In the case of an
individual who has attained the age of
50 before the close of the taxable
year, the deductible amount for such
taxable year shall be increased by the
applicable amount.
(ii) Applicable amount.--For purposes
of clause (i), the applicable amount is
$1,000.
(C) Cost-of-living adjustment.--
(i) In general.--In the case of any
taxable year beginning in a calendar
year after 2008, the $5,000 amount
under subparagraph (A) shall be
increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting ``calendar year
2007'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
(ii) Rounding rules.--If any amount
after adjustment under clause (i) is
not a multiple of $500, such amount
shall be rounded to the next lower
multiple of $500.
(c) Kay Bailey Hutchison Spousal IRA.--
(1) In general.--In the case of an individual to whom
this paragraph applies for the taxable year, the
limitation of paragraph (1) of subsection (b) shall be
equal to the lesser of--
(A) the dollar amount in effect under
subsection (b)(1)(A) for the taxable year, or
(B) the sum of--
(i) the compensation includible in
such individual's gross income for the
taxable year, plus
(ii) the compensation includible in
the gross income of such individual's
spouse for the taxable year reduced
by--
(I) the amount allowed as a
deduction under subsection (a)
to such spouse for such taxable
year,
(II) the amount of any
designated nondeductible
contribution (as defined in
section 408(o)) on behalf of
such spouse for such taxable
year, and
(III) the amount of any
contribution on behalf of such
spouse to a Roth IRA under
section 408A for such taxable
year.
(2) Individuals to whom paragraph (1) applies.--
Paragraph (1) shall apply to any individual if--
(A) such individual files a joint return for
the taxable year, and
(B) the amount of compensation (if any)
includible in such individual's gross income
for the taxable year is less than the
compensation includible in the gross income of
such individual's spouse for the taxable year.
(d) Other limitations and restrictions.--
(1) Beneficiary must be under age 701/2.--No
deduction shall be allowed under this section with
respect to any qualified retirement contribution for
the benefit of an individual if such individual has
attained age 701/2 before the close of such
individual's taxable year for which the contribution
was made.
(2) Recontributed amounts.--No deduction shall be
allowed under this section with respect to a rollover
contribution described in section 402(c), 403(a)(4),
403(b)(8), 408(d)(3), or 457(e)(16).
(3) Amounts contributed under endowment contract.--In
the case of an endowment contract described in section
408(b), no deduction shall be allowed under this
section for that portion of the amounts paid under the
contract for the taxable year which is properly
allocable, under regulations prescribed by the
Secretary, to the cost of life insurance.
(4) Denial of deduction for amount contributed to
inherited annuities or accounts.--No deduction shall be
allowed under this section with respect to any amount
paid to an inherited individual retirement account or
individual retirement annuity (within the meaning of
section 408(d)(3)(C)(ii)).
(e) Qualified retirement contribution.--For purposes of this
section, the term ``qualified retirement contribution'' means--
(1) any amount paid in cash for the taxable year by
or on behalf of an individual to an individual
retirement plan for such individual's benefit, and
(2) any amount contributed on behalf of any
individual to a plan described in section 501(c)(18).
(f) Other definitions and special rules.--
(1) Compensation.--For purposes of this section, the
term ``compensation'' includes earned income (as
defined in section 401(c)(2)). The term
``compensation'' does not include any amount received
as a pension or annuity and does not include any amount
received as deferred compensation. For purposes of this
paragraph, section 401(c)(2) shall be applied as if the
term trade or business for purposes of section 1402
included service described in subsection (c)(6). The
term ``compensation'' includes any differential wage
payment (as defined in section 3401(h)(2)).
(2) Married individuals.--The maximum deduction under
subsection (b) shall be computed separately for each
individual, and this section shall be applied without
regard to any community property laws.
(3) Time when contributions deemed made.--For
purposes of this section, a taxpayer shall be deemed to
have made a contribution to an individual retirement
plan on the last day of the preceding taxable year if
the contribution is made on account of such taxable
year and is made not later than the time prescribed by
law for filing the return for such taxable year (not
including extensions thereof).
(5) Employer payments.--For purposes of this title,
any amount paid by an employer to an individual
retirement plan shall be treated as payment of
compensation to the employee (other than a self-
employed individual who is an employee within the
meaning of section 401(c)(1)) includible in his gross
income in the taxable year for which the amount was
contributed, whether or not a deduction for such
payment is allowable under this section to the
employee.
(6) Excess contributions treated as contribution made
during subsequent year for which there is an unused
limitation.--
(A) In general.--If for the taxable year the
maximum amount allowable as a deduction under
this section for contributions to an individual
retirement plan exceeds the amount contributed,
then the taxpayer shall be treated as having
made an additional contribution for the taxable
year in an amount equal to the lesser of--
(i) the amount of such excess, or
(ii) the amount of the excess
contributions for such taxable year
(determined under section 4973(b)(2)
without regard to subparagraph (C)
thereof).
(B) Amount contributed.--For purposes of this
paragraph, the amount contributed--
(i) shall be determined without
regard to this paragraph, and
(ii) shall not include any rollover
contribution.
(C) Special rule where excess deduction was
allowed for closed year.--Proper reduction
shall be made in the amount allowable as a
deduction by reason of this paragraph for any
amount allowed as a deduction under this
section for a prior taxable year for which the
period for assessing deficiency has expired if
the amount so allowed exceeds the amount which
should have been allowed for such prior taxable
year.
(7) Special rule for compensation earned by members
of the Armed Forces for service in a combat zone..--For
purposes of subsections (b)(1)(B) and (c), the amount
of compensation includible in an individual's gross
income shall be determined without regard to section
112.
(8) Election not to deduct contributions.--For
election not to deduct contributions to individual
retirement plans, see section 408(o)(2)(B)(ii).
(g) Limitation on deduction for active participants in
certain pension plans.--
(1) In general.--If (for any part of any plan year
ending with or within a taxable year) an individual or
the individual's spouse is an active participant, each
of the dollar limitations contained in subsections
(b)(1)(A) and (c)(1)(A) for such taxable year shall be
reduced (but not below zero) by the amount determined
under paragraph (2).
(2) Amount of reduction.--
(A) In general.--The amount determined under
this paragraph with respect to any dollar
limitation shall be the amount which bears the
same ratio to such limitation as--
(i) the excess of--
(I) the taxpayer's adjusted
gross income for such taxable
year, over
(II) the applicable dollar
amount, bears to
(ii) $10,000 ($20,000 in the case of
a joint return).
(B) No reduction below $200 until complete
phase-out.--No dollar limitation shall be
reduced below $200 under paragraph (1) unless
(without regard to this subparagraph) such
limitation is reduced to zero.
(C) Rounding.--Any amount determined under
this paragraph which is not a multiple of $10
shall be rounded to the next lowest $10.
(3) Adjusted gross income; applicable dollar
amount.--For purposes of this subsection--
(A) Adjusted gross income.--Adjusted gross
income of any taxpayer shall be determined--
(i) after application of sections 86
and 469, and
(ii) without regard to sections 135,
137, 221, 222, and 911 or the deduction
allowable under this section.
(B) Applicable dollar amount.--The term
``applicable dollar amount'' means the
following:
(i) In the case of a taxpayer filing
a joint return, $80,000.
(ii) In the case of any other
taxpayer (other than a married
individual filing a separate return),
$50,000.
(iii) In the case of a married
individual filing a separate return,
zero.
(4) Special rule for married individuals filing
separately and living apart.-- [A husband and wife]
Married individuals who--
(A) file separate returns for any taxable
year, and
(B) live apart at all times during such
taxable year,
shall not be treated as married individuals for
purposes of this subsection.
(5) Active participant.--For purposes of this
subsection, the term ``active participant'' means, with
respect to any plan year, an individual--
(A) who is an active participant in--
(i) a plan described in section
401(a) which includes a trust exempt
from tax under section 501(a),
(ii) an annuity plan described in
section 403(a),
(iii) a plan established for its
employees by the United States, by a
State or political subdivision thereof,
or by an agency or instrumentality of
any of the foregoing,
(iv) an annuity contract described in
section 403(b),
(v) a simplified employee pension
(within the meaning of section 408(k)),
or
(vi) any simple retirement account
(within the meaning of section 408(p)),
or
(B) who makes deductible contributions to a
trust described in section 501(c)(18).
The determination of whether an individual is an active
participant shall be made without regard to whether or
not such individual's rights under a plan, trust, or
contract are nonforfeitable. An eligible deferred
compensation plan (within the meaning of section
457(b)) shall not be treated as a plan described in
subparagraph (A)(iii).
(6) Certain individuals not treated as active
participants.--For purposes of this subsection, any
individual described in any of the following
subparagraphs shall not be treated as an active
participant for any taxable year solely because of any
participation so described:
(A) Members of reserve components.--
Participation in a plan described in
subparagraph (A)(iii) of paragraph (5) by
reason of service as a member of a reserve
component of the Armed Forces (as defined in
section 10101 of title 10), unless such
individual has served in excess of 90 days on
active duty (other than active duty for
training) during the year.
(B) Volunteer firefighters.--A volunteer
firefighter--
(i) who is a participant in a plan
described in subparagraph (A)(iii) of
paragraph (5) based on his activity as
a volunteer firefighter, and
(ii) whose accrued benefit as of the
beginning of the taxable year is not
more than an annual benefit of $1,800
(when expressed as a single life
annuity commencing at age 65).
(7) Special rule for spouses who are not active
participants.--If this subsection applies to an
individual for any taxable year solely because their
spouse is an active participant, then, in applying this
subsection to the individual (but not their spouse)--
(A) the applicable dollar amount under
paragraph (3)(B)(i) shall be $150,000; and
(B) the amount applicable under paragraph
(2)(A)(ii) shall be $10,000.
(8) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 2006, each of
the dollar amounts in paragraphs (3)(B)(i), (3)(B)(ii),
and (7)(A) shall be 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 $1,000.
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS
BETWEEN RELATED TAXPAYERS.
(a) In general.--
(1) Deduction for losses disallowed.--No deduction
shall be allowed in respect of any loss from the sale
or exchange of property, directly or indirectly,
between persons specified in any of the paragraphs of
subsection (b). The preceding sentence shall not apply
to any loss of the distributing corporation (or the
distributee) in the case of a distribution in complete
liquidation.
(2) Matching of deduction and payee income item in
the case of expenses and interest.--If--
(A) by reason of the method of accounting of
the person to whom the payment is to be made,
the amount thereof is not (unless paid)
includible in the gross income of such person,
and
(B) at the close of the taxable year of the
taxpayer for which (but for this paragraph) the
amount would be deductible under this chapter,
both the taxpayer and the person to whom the
payment is to be made are persons specified in
any of the paragraphs of subsection (b),
then any deduction allowable under this chapter in
respect of such amount shall be allowable as of the day
as of which such amount is includible in the gross
income of the person to whom the payment is made (or,
if later, as of the day on which it would be so
allowable but for this paragraph). For purposes of this
paragraph, in the case of a personal service
corporation (within the meaning of section 441(i)(2)),
such corporation and any employee-owner (within the
meaning of section 269A(b)(2), as modified by section
441(i)(2)) shall be treated as persons specified in
subsection (b).
(3) Payments to foreign persons.--
(A) In general.--The Secretary shall by
regulations apply the matching principle of
paragraph (2) in cases in which the person to
whom the payment is to be made is not a United
States person.
(B) Special rule for certain foreign
entities.--
(i) In general.--Notwithstanding
subparagraph (A), in the case of any
item payable to 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
payor with respect to such amount for
any taxable year before the taxable
year in which paid only to the extent
that an amount attributable to such
item 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 and in which the payment of the
accrued amounts occurs within 81/2
months after accrual or within such
other period as the Secretary may
prescribe.
(b) Relationships.--The persons referred to in subsection (a)
are:
(1) Members of a family, as defined in subsection
(c)(4);
(2) An individual and a corporation more than 50
percent in value of the outstanding stock of which is
owned, directly or indirectly, by or for such
individual;
(3) Two corporations which are members of the same
controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another
trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such
trust;
(7) A fiduciary of a trust and a beneficiary of
another trust, if the same person is a grantor of both
trusts;
(8) A fiduciary of a trust and a corporation more
than 50 percent in value of the outstanding stock of
which is owned, directly or indirectly, by or for the
trust or by or for a person who is a grantor of the
trust;
(9) A person and an organization to which section 501
(relating to certain educational and charitable
organizations which are exempt from tax) applies and
which is controlled directly or indirectly by such
person or (if such person is an individual) by members
of the family of such individual;
(10) A corporation and a partnership if the same
persons own--
(A) more than 50 percent in value of the
outstanding stock of the corporation, and
(B) more than 50 percent of the capital
interest, or the profits interest, in the
partnership;
(11) An S corporation and another S corporation if
the same persons own more than 50 percent in value of
the outstanding stock of each corporation;
(12) An S corporation and a C corporation, if the
same persons own more than 50 percent in value of the
outstanding stock of each corporation; or
(13) Except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.
(c) Constructive ownership of stock.--For purposes of
determining, in applying subsection (b), the ownership of
stock--
(1) Stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust shall be
considered as being owned proportionately by or for its
shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the
stock owned, directly or indirectly, by or for [his]
the individual's family;
(3) An individual owning (otherwise than by the
application of paragraph (2)) any stock in a
corporation shall be considered as owning the stock
owned, directly or indirectly, by or for [his] the
individual's partner;
(4) The family of an individual shall include only
[his] the individual's brothers and sisters (whether by
the whole or half blood), spouse, ancestors, and lineal
descendants; and
(5) Stock constructively owned by a person by reason
of the application of paragraph (1) shall, for the
purpose of applying paragraph (1), (2), or (3), be
treated as actually owned by such person, but stock
constructively owned by an individual by reason of the
application of paragraph (2) or (3) shall not be
treated as owned by him for the purpose of again
applying either of such paragraphs in order to make
another the constructive owner of such stock.
(d) Amount of gain where loss previously disallowed.--
(1) In general.--If--
(A) in the case of a sale or exchange of
property to the taxpayer a loss sustained by
the transferor is not allowable to the
transferor as a deduction by reason of
subsection (a)(1), and
(B) the taxpayer sells or otherwise disposes
of such property (or of other property the
basis of which in the taxpayer's hands is
determined directly or indirectly by reference
to such property) at a gain,
then such gain shall be recognized only to the extent
that it exceeds so much of such loss as is properly
allocable to the property sold or otherwise disposed of
by the taxpayer.
(2) Exception for wash sales.--Paragraph (1) shall
not apply if the loss sustained by the transferor is
not allowable to the transferor as a deduction by
reason of section 1091 (relating to wash sales).
(3) Exception for transfers from tax indifferent
parties.--Paragraph (1) shall not apply to the extent
any loss sustained by the transferor (if allowed) would
not be taken into account in determining a tax imposed
under section 1 or 11 or a tax computed as provided by
either of such sections.
(e) Special rules for pass-thru entities.--
(1) In general.--In the case of any amount paid or
incurred by, to, or on behalf of, a pass-thru entity,
for purposes of applying subsection (a)(2)--
(A) such entity,
(B) in the case of--
(i) a partnership, any person who
owns (directly or indirectly) any
capital interest or profits interest of
such partnership, or
(ii) an S corporation, any person who
owns (directly or indirectly) any of
the stock of such corporation,
(C) any person who owns (directly or
indirectly) any capital interest or profits
interest of a partnership in which such entity
owns (directly or indirectly) any capital
interest or profits interest, and
(D) any person related (within the meaning of
subsection (b) of this section or section
707(b)(1)) to a person described in
subparagraph (B) or (C),
shall be treated as persons specified in a paragraph of
subsection (b). Subparagraph (C) shall apply to a
transaction only if such transaction is related either
to the operations of the partnership described in such
subparagraph or to an interest in such partnership.
(2) Pass-thru entity.--For purposes of this section,
the term ``pass-thru entity'' means--
(A) a partnership, and
(B) an S corporation.
(3) Constructive ownership in the case of
partnerships.--For purposes of determining ownership of
a capital interest or profits interest of a
partnership, the principles of subsection (c) shall
apply, except that--
(A) paragraph (3) of subsection (c) shall not
apply, and
(B) interests owned (directly or indirectly)
by or for a C corporation shall be considered
as owned by or for any shareholder only if such
shareholder owns (directly or indirectly) 5
percent or more in value of the stock of such
corporation.
(4) Subsection (a)(2) not to apply to certain
guaranteed payments of partnerships.--In the case of
any amount paid or incurred by a partnership,
subsection (a)(2) shall not apply to the extent that
section 707(c) applies to such amount.
(5) Exception for certain expenses and interest of
partnerships owning low-income housing.--
(A) In general.--This subsection shall not
apply with respect to qualified expenses and
interest paid or incurred by a partnership
owning low-income housing to--
(i) any qualified 5-percent or less
partner of such partnership, or
(ii) any person related (within the
meaning of subsection (b) of this
section or section 707(b)(1)) to any
qualified 5-percent or less partner of
such partnership.
(B) Qualified 5-percent or less partner.--For
purposes of this paragraph, the term
``qualified 5-percent or less partner'' means
any partner who has (directly or indirectly) an
interest of 5 percent or less in the aggregate
capital and profits interests of the
partnership but only if--
(i) such partner owned the low-income
housing at all times during the 2-year
period ending on the date such housing
was transferred to the partnership, or
(ii) such partnership acquired the
low-income housing pursuant to a
purchase, assignment, or other transfer
from the Department of Housing and
Urban Development or any State or local
housing authority.
For purposes of the preceding sentence, a
partner shall be treated as holding any
interest in the partnership which is held
(directly or indirectly) by any person related
(within the meaning of subsection (b) of this
section or section 707(b)(1)) to such partner.
(C) Qualified expenses and interest.--For
purpose of this paragraph, the term ``qualified
expenses and interest'' means any expense or
interest incurred by the partnership with
respect to low-income housing held by the
partnership but--
(i) only if the amount of such
expense or interest (as the case may
be) is unconditionally required to be
paid by the partnership not later than
10 years after the date such amount was
incurred, and
(ii) in the case of such interest,
only if such interest is incurred at an
annual rate not in excess of 12
percent.
(D) Low-income housing.--For purposes of this
paragraph, the term ``low-income housing''
means--
(i) any interest in property
described in clause (i), (ii), (iii),
or (iv) of section 1250(a)(1)(B), and
(ii) any interest in a partnership
owning such property.
(6) Cross reference.--For additional rules relating
to partnerships, see section 707(b).
(f) Controlled group defined; special rules applicable to
controlled groups.--
(1) Controlled group defined.--For purposes of this
section, the term ``controlled group'' has the meaning
given to such term by section 1563(a), except that--
(A) ``more than 50 percent'' shall be
substituted for ``at least 80 percent'' each
place it appears in section 1563(a), and
(B) the determination shall be made without
regard to subsections (a)(4) and (e)(3)(C) of
section 1563.
(2) Deferral (rather than denial) of loss from sale
or exchange between members.--In the case of any loss
from the sale or exchange of property which is between
members of the same controlled group and to which
subsection (a)(1) applies (determined without regard to
this paragraph but with regard to paragraph (3))--
(A) subsections (a)(1) and (d) shall not
apply to such loss, but
(B) such loss shall be deferred until the
property is transferred outside such controlled
group and there would be recognition of loss
under consolidated return principles or until
such other time as may be prescribed in
regulations.
(3) Loss deferral rules not to apply in certain
cases.--
(A) Transfer to DISC.--For purposes of
applying subsection (a)(1), the term
``controlled group'' shall not include a DISC.
(B) Certain sales of inventory.--Except to
the extent provided in regulations prescribed
by the Secretary, subsection (a)(1) shall not
apply to the sale or exchange of property
between members of the same controlled group
(or persons described in subsection (b)(10))
if--
(i) such property in the hands of the
transferor is property described in
section 1221(a)(1),
(ii) such sale or exchange is in the
ordinary course of the transferor's
trade or business,
(iii) such property in the hands of
the transferee is property described in
section 1221(a)(1), and
(iv) the transferee or the transferor
is a foreign corporation.
(C) Certain foreign currency losses.--To the
extent provided in regulations, subsection
(a)(1) shall not apply to any loss sustained by
a member of a controlled group on the repayment
of a loan made to another member of such group
if such loan is payable in a foreign currency
or is denominated in such a currency and such
loss is attributable to a reduction in value of
such foreign currency.
(D) Redemptions by fund-of-funds regulated
investment companies.--Except to the extent
provided in regulations prescribed by the
Secretary, subsection (a)(1) shall not apply to
any distribution in redemption of stock of a
regulated investment company if--
(i) such company issues only stock
which is redeemable upon the demand of
the stockholder, and
(ii) such redemption is upon the
demand of another regulated investment
company.
(4) Determination of relationship resulting in
disallowance of loss, for purposes of other
provisions.--For purposes of any other section of this
title which refers to a relationship which would result
in a disallowance of losses under this section,
deferral under paragraph (2) shall be treated as
disallowance.
(g) Coordination with section 1041.--Subsection (a)(1) shall
not apply to any transfer described in section 1041(a)
(relating to transfers of property between spouses or incident
to divorce).
* * * * * * *
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] married couple 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) 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 C--CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
* * * * * * *
PART I--DISTRIBUTIONS BY CORPORATIONS
* * * * * * *
Subpart C--DEFINITIONS; CONSTRUCTIVE OWNERSHIP OF STOCK
* * * * * * *
SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.
(a) General rule.--For purposes of those provisions of this
subchapter to which the rules contained in this section are
expressly made applicable--
(1) Members of family.--
(A) In general.--An individual shall be
considered as owning the stock owned, directly
or indirectly, by or for--
(i) [his spouse] the individual's
spouse (other than a spouse who is
legally separated from the individual
under a decree of divorce or separate
maintenance), and
(ii) [his] the individual's children,
grandchildren, and parents.
(B) Effect of adoption.--For purposes of
subparagraph (A)(ii), a legally adopted child
of an individual shall be treated as a child of
such individual by blood.
(2) Attribution from partnerships, estates, trusts,
and corporations.--
(A) From partnerships and estates.--Stock
owned, directly or indirectly, by or for a
partnership or estate shall be considered as
owned proportionately by its partners or
beneficiaries.
(B) From trusts.--
(i) Stock owned, directly or
indirectly, by or for a trust (other
than an employees' trust described in
section 401(a) which is exempt from tax
under section 501(a)) shall be
considered as owned by its
beneficiaries in proportion to the
actuarial interest of such
beneficiaries in such trust.
(ii) Stock owned, directly or
indirectly, by or for any portion of a
trust of which a person is considered
the owner under subpart E of part I of
subchapter J (relating to grantors and
others treated as substantial owners)
shall be considered as owned by such
person.
(C) From corporations.--If 50 percent or more
in value of the stock in a corporation is
owned, directly or indirectly, by or for any
person, such person shall be considered as
owning the stock owned, directly or indirectly,
by or for such corporation, in that proportion
which the value of the stock which such person
so owns bears to the value of all the stock in
such corporation.
(3) Attribution to partnerships, estates, trusts, and
corporations.--
(A) To partnerships and estates.--Stock
owned, directly or indirectly, by or for a
partner or a beneficiary of an estate shall be
considered as owned by the partnership or
estate.
(B) To trusts.--
(i) Stock owned, directly or
indirectly, by or for a beneficiary of
a trust (other than an employees' trust
described in section 401(a) which is
exempt from tax under section 501(a))
shall be considered as owned by the
trust, unless such beneficiary's
interest in the trust is a remote
contingent interest. For purposes of
this clause, a contingent interest of a
beneficiary in a trust shall be
considered remote if, under the maximum
exercise of discretion by the trustee
in favor of such beneficiary, the value
of such interest, computed actuarially,
is 5 percent or less of the value of
the trust property.
(ii) Stock owned, directly or
indirectly, by or for a person who is
considered the owner of any portion of
a trust under subpart E of part I of
subchapter J (relating to grantors and
others treated as substantial owners)
shall be considered as owned by the
trust.
(C) To corporations.--If 50 percent or more
in value of the stock in a corporation is
owned, directly or indirectly, by or for any
person, such corporation shall be considered as
owning the stock owned, directly or indirectly,
by or for such person.
(4) Options.--If any person has an option to acquire
stock, such stock shall be considered as owned by such
person. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to
acquire such stock.
(5) Operating rules.--
(A) In general.--Except as provided in
subparagraphs (B) and (C), stock constructively
owned by a person by reason of the application
of paragraph (1), (2), (3), or (4), shall, for
purposes of applying paragraphs (1), (2), (3),
and (4), be considered as actually owned by
such person.
(B) Members of family.--Stock constructively
owned by an individual by reason of the
application of paragraph (1) shall not be
considered as owned by him for purposes of
again applying paragraph (1) in order to make
another the constructive owner of such stock.
(C) Partnerships, estates, trusts, and
corporations.--Stock constructively owned by a
partnership, estate, trust, or corporation by
reason of the application of paragraph (3)
shall not be considered as owned by it for
purposes of applying paragraph (2) in order to
make another the constructive owner of such
stock.
(D) Option rule in lieu of family rule.--For
purposes of this paragraph, if stock may be
considered as owned by an individual under
paragraph (1) or (4), it shall be considered as
owned by him under paragraph (4).
(E) S corporation treated as partnership.--
For purposes of this subsection--
(i) an S corporation shall be treated
as a partnership, and
(ii) any shareholder of the S
corporation shall be treated as a
partner of such partnership.
The preceding sentence shall not apply for
purposes of determining whether stock in the S
corporation is constructively owned by any
person.
(b) Cross references.--For provisions to which the rules
contained in subsection (a) apply, see--
(1) section 302 (relating to redemption of
stock);
(2) section 304 (relating to redemption by
related corporations);
(3) section 306(b)(1)(A) (relating to
disposition of section 306 stock);
(4) section 338(h)(3) (defining purchase);
(5) section 382(l)(3) (relating to special
limitations on net operating loss carryovers);
(6) section 856(d) (relating to definition of
rents from real property in the case of real
estate investment trusts);
(7) section 958(b) (relating to constructive
ownership rules with respect to controlled
foreign corporations); and
(8) section 6038(e)(2) (relating to
information with respect to certain foreign
corporations).
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 701/2,
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
701/2, 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 701/2, 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 701/
2, the employee's accrued benefit shall
be actuarially increased to take into
account the period after age 701/2 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:
(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).
(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] the employee's 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] the employee's 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)) 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 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
591/2,
(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 591/2. 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 591/2,
(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] and the spouse and dependents of
such officer (as defined in section 152), 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. 408. INDIVIDUAL RETIREMENT ACCOUNTS.
(a) Individual retirement account.--For purposes of this
section, the term ``individual retirement account'' means a
trust created or organized in the United States for the
exclusive benefit of an individual or his beneficiaries, but
only if the written governing instrument creating the trust
meets the following requirements:
(1) Except in the case of a rollover contribution
described in subsection (d)(3) or in section 402(c),
403(a)(4), 403(b)(8), or 457(e)(16), no contribution
will be accepted unless it is in cash, and
contributions will not be accepted for the taxable year
on behalf of any individual in excess of the amount in
effect for such taxable year under section
219(b)(1)(A).
(2) The trustee is a bank (as defined in subsection
(n)) or such other person who demonstrates to the
satisfaction of the Secretary that the manner in which
such other person will administer the trust will be
consistent with the requirements of this section.
(3) No part of the trust funds will be invested in
life insurance contracts.
(4) The interest of an individual in the balance in
his account is nonforfeitable.
(5) The assets of the trust will not be commingled
with other property except in a common trust fund or
common investment fund.
(6) Under regulations prescribed by the Secretary,
rules similar to the rules of section 401(a)(9) and the
incidental death benefit requirements of section 401(a)
shall apply to the distribution of the entire interest
of an individual for whose benefit the trust is
maintained.
(b) Individual retirement annuity.--For purposes of this
section, the term ``individual retirement annuity'' means an
annuity contract, or an endowment contract (as determined under
regulations prescribed by the Secretary), issued by an
insurance company which meets the following requirements:
(1) The contract is not transferable by the owner.
(2) Under the contract--
(A) the premiums are not fixed,
(B) the annual premium on behalf of any
individual will not exceed the dollar amount in
effect under section 219(b)(1)(A), and
(C) any refund of premiums will be applied
before the close of the calendar year following
the year of the refund toward the payment of
future premiums or the purchase of additional
benefits.
(3) Under regulations prescribed by the Secretary,
rules similar to the rules of section 401(a)(9) and the
incidental death benefit requirements of section 401(a)
shall apply to the distribution of the entire interest
of the owner.
(4) The entire interest of the owner is
nonforfeitable.
Such term does not include such an annuity contract for any
taxable year of the owner in which it is disqualified on the
application of subsection (e) or for any subsequent taxable
year. For purposes of this subsection, no contract shall be
treated as an endowment contract if it matures later than the
taxable year in which the individual in whose name such
contract is purchased attains age 701/2; if it is not for the
exclusive benefit of the individual in whose name it is
purchased or his beneficiaries; or if the aggregate annual
premiums under all such contracts purchased in the name of such
individual for any taxable year exceed the dollar amount in
effect under section 219(b)(1)(A).
(c) Accounts established by employers and certain
associations of employees.--A trust created or organized in the
United States by an employer for the exclusive benefit of his
employees or their beneficiaries, or by an association of
employees (which may include employees within the meaning of
section 401(c)(1)) for the exclusive benefit of its members or
their beneficiaries, shall be treated as an individual
retirement account (described in subsection (a)), but only if
the written governing instrument creating the trust meets the
following requirements:
(1) The trust satisfies the requirements of
paragraphs (1) through (6) of subsection (a).
(2) There is a separate accounting for the interest
of each employee or member (or spouse of an employee or
member).
The assets of the trust may be held in a common fund for the
account of all individuals who have an interest in the trust.
(d) Tax treatment of distributions.--
(1) In general.--Except as otherwise provided in this
subsection, any amount paid or distributed out of an
individual retirement plan shall be included in gross
income by the payee or distributee, as the case may be,
in the manner provided under section 72.
(2) Special rules for applying section 72.--For
purposes of applying section 72 to any amount described
in paragraph (1)--
(A) all individual retirement plans shall be
treated as 1 contract,
(B) all distributions during any taxable year
shall be treated as 1 distribution, and
(C) the value of the contract, income on the
contract, and investment in the contract shall
be computed as of the close of the calendar
year in which the taxable year begins.
For purposes of subparagraph (C), the value of the
contract shall be increased by the amount of any
distributions during the calendar year.
(3) 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 (1) does not apply
to any amount paid or distributed out of an
individual retirement account or individual
retirement annuity to the individual for whose
benefit the account or annuity is maintained
if--
(i) the entire amount received
(including money and any other
property) is paid into an individual
retirement account or individual
retirement annuity (other than an
endowment contract) for the benefit of
such individual not later than the 60th
day after the day on which he receives
the payment or distribution; or
(ii) the entire amount received
(including money and any other
property) is paid into an eligible
retirement plan for the benefit of such
individual not later than the 60th day
after the date on which the payment or
distribution is received, except that
the maximum amount which may be paid
into such plan may not exceed the
portion of the amount received which is
includible in gross income (determined
without regard to this paragraph).
For purposes of clause (ii), the term
``eligible retirement plan'' means an eligible
retirement plan described in clause (iii),
(iv), (v), or (vi) of section 402(c)(8)(B).
(B) Limitation.--This paragraph does not
apply to any amount described in subparagraph
(A)(i) received by an individual from an
individual retirement account or individual
retirement annuity if at any time during the 1-
year period ending on the day of such receipt
such individual received any other amount
described in that subparagraph from an
individual retirement account or an individual
retirement annuity which was not includible in
his gross income because of the application of
this paragraph.
(C) Denial of rollover treatment for
inherited accounts, etc..--
(i) In general.--In the case of an
inherited individual retirement account
or individual retirement annuity--
(I) this paragraph shall not
apply to any amount received by
an individual from such an
account or annuity (and no
amount transferred from such
account or annuity to another
individual retirement account
or annuity shall be excluded
from gross income by reason of
such transfer), and
(II) such inherited account
or annuity shall not be treated
as an individual retirement
account or annuity for purposes
of determining whether any
other amount is a rollover
contribution.
(ii) Inherited individual retirement
account or annuity.--An individual
retirement account or individual
retirement annuity shall be treated as
inherited if--
(I) the individual for whose
benefit the account or annuity
is maintained acquired such
account by reason of the death
of another individual, and
(II) such individual was not
the surviving spouse of such
other individual.
(D) Partial rollovers permitted.--
(i) In general.--If any amount paid
or distributed out of an individual
retirement account or individual
retirement annuity would meet the
requirements of subparagraph (A) but
for the fact that the entire amount was
not paid into an eligible plan as
required by clause (i) or (ii) of
subparagraph (A), such amount shall be
treated as meeting the requirements of
subparagraph (A) to the extent it is
paid into an eligible plan referred to
in such clause not later than the 60th
day referred to in such clause.
(ii) Eligible plan.--For purposes of
clause (i), the term ``eligible plan''
means any account, annuity, contract,
or plan referred to in subparagraph
(A).
(E) Denial of rollover treatment for required
distributions.--This paragraph shall not apply
to any amount to the extent such amount is
required to be distributed under subsection
(a)(6) or (b)(3).
(F) Frozen deposits.--For purposes of this
paragraph, rules similar to the rules of
section 402(c)(7) (relating to frozen deposits)
shall apply.
(G) Simple retirement accounts.--In the case
of any payment or distribution out of a simple
retirement account (as defined in subsection
(p)) to which section 72(t)(6) applies, this
paragraph shall not apply unless such payment
or distribution is paid into another simple
retirement account.
(H) Application of section 72.--
(i) In general.--If--
(I) a distribution is made
from an individual retirement
plan, and
(II) a rollover contribution
is made to an eligible
retirement plan described in
section 402(c)(8)(B)(iii),
(iv), (v), or (vi) with respect
to all or part of such
distribution,
then, notwithstanding paragraph (2), the rules
of clause (ii) shall apply for purposes of
applying section 72.
(ii) Applicable rules.--In the case
of a distribution described in clause
(i)--
(I) section 72 shall be
applied separately to such
distribution,
(II) notwithstanding the pro
rata allocation of income on,
and investment in, the contract
to distributions under section
72, the portion of such
distribution rolled over to an
eligible retirement plan
described in clause (i) shall
be treated as from income on
the contract (to the extent of
the aggregate income on the
contract from all individual
retirement plans of the
distributee), and
(III) appropriate adjustments
shall be made in applying
section 72 to other
distributions in such taxable
year and subsequent taxable
years.
(I) Waiver of 60-day requirement.--The
Secretary may waive the 60-day requirement
under subparagraphs (A) and (D) 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.
(4) Contributions returned before due date of
return.--Paragraph (1) does not apply to the
distribution of any contribution paid during a taxable
year to an individual retirement account or for an
individual retirement annuity if--
(A) such distribution is received on or
before the day prescribed by law (including
extensions of time) for filing such
individual's return for such taxable year,
(B) no deduction is allowed under section 219
with respect to such contribution, and
(C) such distribution is accompanied by the
amount of net income attributable to such
contribution.
In the case of such a distribution, for purposes of
section 61, any net income described in subparagraph
(C) shall be deemed to have been earned and receivable
in the taxable year in which such contribution is made.
(5) Distributions of excess contributions after due
date for taxable year and certain excess rollover
contributions.--
(A) In general.--In the case of any
individual, if the aggregate contributions
(other than rollover contributions) paid for
any taxable year to an individual retirement
account or for an individual retirement annuity
do not exceed the dollar amount in effect under
section 219(b)(1)(A), paragraph (1) shall not
apply to the distribution of any such
contribution to the extent that such
contribution exceeds the amount allowable as a
deduction under section 219 for the taxable
year for which the contribution was paid--
(i) if such distribution is received
after the date described in paragraph
(4),
(ii) but only to the extent that no
deduction has been allowed under
section 219 with respect to such excess
contribution.
If employer contributions on behalf of the
individual are paid for the taxable year to a
simplified employee pension, the dollar
limitation of the preceding sentence shall be
increased by the lesser of the amount of such
contributions or the dollar limitation in
effect under section 415(c)(1)(A) for such
taxable year.
(B) Excess rollover contributions
attributable to erroneous information.--If--
(i) the taxpayer reasonably relies on
information supplied pursuant to
subtitle F for determining the amount
of a rollover contribution, but
(ii) the information was erroneous,
subparagraph (A) shall be applied by increasing
the dollar limit set forth therein by that
portion of the excess contribution which was
attributable to such information.
For purposes of this paragraph, the amount allowable as
a deduction under section 219 shall be computed without
regard to section 219(g).
(6) Transfer of account incident to divorce.--The
transfer of an individual's interest in an individual
retirement account or an individual retirement annuity
to [his spouse] the individual's spouse or former
spouse under a divorce or separation instrument
described in clause (i) of section 121(d)(3)(C) is not
to be considered a taxable transfer made by such
individual notwithstanding any other provision of this
subtitle, and such interest at the time of the transfer
is to be treated as an individual retirement account of
such spouse, and not of such individual. Thereafter
such account or annuity for purposes of this subtitle
is to be treated as maintained for the benefit of such
spouse.
(7) Special rules for simplified employee pensions or
simple retirement accounts.--
(A) Transfer or rollover of contributions
prohibited until deferral test met.--
Notwithstanding any other provision of this
subsection or section 72(t), paragraph (1) and
section 72(t)(1) shall apply to the transfer or
distribution from a simplified employee pension
of any contribution under a salary reduction
arrangement described in subsection (k)(6) (or
any income allocable thereto) before a
determination as to whether the requirements of
subsection (k)(6)(A)(iii) are met with respect
to such contribution.
(B) Certain exclusions treated as
deductions.--For purposes of paragraphs (4) and
(5) and section 4973, any amount excludable or
excluded from gross income under section 402(h)
or 402(k) shall be treated as an amount
allowable or allowed as a deduction under
section 219.
(8) Distributions for charitable purposes.--
(A) In general.--So much of the aggregate
amount of qualified charitable distributions
with respect to a taxpayer made during any
taxable year which does not exceed $100,000
shall not be includible in gross income of such
taxpayer for such taxable year.
(B) Qualified charitable distribution.--For
purposes of this paragraph, the term
``qualified charitable distribution'' means any
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p))--
(i) which is made directly by the
trustee to an organization described in
section 170(b)(1)(A) (other than any
organization described in section
509(a)(3) or any fund or account
described in section 4966(d)(2)), and
(ii) which is made on or after the
date that the individual for whose
benefit the plan is maintained has
attained age 701/2.
A distribution shall be treated as a qualified
charitable distribution only to the extent that
the distribution would be includible in gross
income without regard to subparagraph (A).
(C) Contributions must be otherwise
deductible.--For purposes of this paragraph, a
distribution to an organization described in
subparagraph (B)(i) shall be treated as a
qualified charitable distribution only if a
deduction for the entire distribution would be
allowable under section 170 (determined without
regard to subsection (b) thereof and this
paragraph).
(D) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which a distribution is a qualified
charitable distribution, the entire amount of
the distribution 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 in all
individual retirement plans of the individual
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.
(E) Denial of deduction.--Qualified
charitable distributions which are not
includible in gross income pursuant to
subparagraph (A) shall not be taken into
account in determining the deduction under
section 170.
(9) Distribution for health savings account
funding.--
(A) In general.--In the case of an individual
who is an eligible individual (as defined in
section 223(c)) and who elects the application
of this paragraph for a taxable year, gross
income of the individual for the taxable year
does not include a qualified HSA funding
distribution to the extent such distribution is
otherwise includible in gross income.
(B) Qualified HSA funding distribution.--For
purposes of this paragraph, the term
``qualified HSA funding distribution'' means a
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p)) of the employee to the extent that such
distribution is contributed to the health
savings account of the individual in a direct
trustee-to-trustee transfer.
(C) Limitations.--
(i) Maximum dollar limitation.--The
amount excluded from gross income by
subparagraph (A) shall not exceed the
excess of--
(I) the annual limitation
under section 223(b) computed
on the basis of the type of
coverage under the high
deductible health plan covering
the individual at the time of
the qualified HSA funding
distribution, over
(II) in the case of a
distribution described in
clause (ii)(II), the amount of
the earlier qualified HSA
funding distribution.
(ii) One-time transfer.--
(I) In general.--Except as
provided in subclause (II), an
individual may make an election
under subparagraph (A) only for
one qualified HSA funding
distribution during the
lifetime of the individual.
Such an election, once made,
shall be irrevocable.
(II) Conversion from self-
only to family coverage.--If a
qualified HSA funding
distribution is made during a
month in a taxable year during
which an individual has self-
only coverage under a high
deductible health plan as of
the first day of the month, the
individual may elect to make an
additional qualified HSA
funding distribution during a
subsequent month in such
taxable year during which the
individual has family coverage
under a high deductible health
plan as of the first day of the
subsequent month.
(D) 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 the aggregate amount
of all contributions to the health
savings account of the individual made
under subparagraph (A)--
(I) shall be includible in
the 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, and
(II) the tax imposed by this
chapter for any taxable year on
the individual shall be
increased by 10 percent of the
amount which is so includible.
(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 month in which the
qualified HSA funding distribution is
contributed to a health savings account
and ending on the last day of the 12th
month following such month.
(E) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as
otherwise includible in gross income for
purposes of subparagraph (A), the aggregate
amount distributed from an individual
retirement plan shall be treated as includible
in gross income to the extent that such amount
does not exceed the aggregate amount which
would have been so includible if all amounts
from all individual retirement plans were
distributed. Proper adjustments shall be made
in applying section 72 to other distributions
in such taxable year and subsequent taxable
years.
(e) Tax treatment of accounts and annuities.--
(1) Exemption from tax.--Any individual retirement
account is exempt from taxation under this subtitle
unless such account has ceased to be an individual
retirement account by reason of paragraph (2) or (3).
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) Loss of exemption of account where employee
engages in prohibited transaction.--
(A) In general.--If, during any taxable year
of the individual for whose benefit any
individual retirement account is established,
that individual or his beneficiary engages in
any transaction prohibited by section 4975 with
respect to such account, such account ceases to
be an individual retirement account as of the
first day of such taxable year. For purposes of
this paragraph--
(i) the individual for whose benefit
any account was established is treated
as the creator of such account, and
(ii) the separate account for any
individual within an individual
retirement account maintained by an
employer or association of employees is
treated as a separate individual
retirement account.
(B) Account treated as distributing all its
assets.--In any case in which any account
ceases to be an individual retirement account
by reason of subparagraph (A) as of the first
day of any taxable year, paragraph (1) of
subsection (d) applies as if there were a
distribution on such first day in an amount
equal to the fair market value (on such first
day) of all assets in the account (on such
first day).
(3) Effect of borrowing on annuity contract.--If
during any taxable year the owner of an individual
retirement annuity borrows any money under or by use of
such contract, the contract ceases to be an individual
retirement annuity as of the first day of such taxable
year. Such owner shall include in gross income for such
year an amount equal to the fair market value of such
contract as of such first day.
(4) Effect of pledging account as security.--If,
during any taxable year of the individual for whose
benefit an individual retirement account is
established, that individual uses the account or any
portion thereof as security for a loan, the portion so
used is treated as distributed to that individual.
(5) Purchase of endowment contract by individual
retirement account.--If the assets of an individual
retirement account or any part of such assets are used
to purchase an endowment contract for the benefit of
the individual for whose benefit the account is
established--
(A) to the extent that the amount of the
assets involved in the purchase are not
attributable to the purchase of life insurance,
the purchase is treated as a rollover
contribution described in subsection (d)(3),
and
(B) to the extent that the amount of the
assets involved in the purchase are
attributable to the purchase of life, health,
accident, or other insurance, such amounts are
treated as distributed to that individual (but
the provisions of subsection (f) do not apply).
(6) Commingling individual retirement account amounts
in certain common trust funds and common investment
funds.--Any common trust fund or common investment fund
of individual retirement account assets which is exempt
from taxation under this subtitle does not cease to be
exempt on account of the participation or inclusion of
assets of a trust exempt from taxation under section
501(a) which is described in section 401(a).
(g) Community property laws.--This section shall be applied
without regard to any community property laws.
(h) Custodial accounts.--For purposes of this section, a
custodial account shall be treated as a trust if the assets of
such account are held by a bank (as defined in subsection (n))
or another person who demonstrates, to the satisfaction of the
Secretary, that the manner in which he will administer the
account will be consistent with the requirements of this
section, and if the custodial account would, except for the
fact that it is not a trust, constitute an individual
retirement account described in subsection (a). For purposes of
this title, in the case of a custodial account treated as a
trust by reason of the preceding sentence, the custodian of
such account shall be treated as the trustee thereof.
(i) Reports.--The trustee of an individual retirement account
and the issuer of an endowment contract described in subsection
(b) or an individual retirement annuity shall make such reports
regarding such account, contract, or annuity to the Secretary
and to the individuals for whom the account, contract, or
annuity is, or is to be, maintained with respect to
contributions (and the years to which they relate),
distributions aggregating $10 or more in any calendar year, and
such other matters as the Secretary may require. The reports
required by this subsection--
(1) shall be filed at such time and in such manner as
the Secretary prescribes, and
(2) shall be furnished to individuals--
(A) not later than January 31 of the calendar
year following the calendar year to which such
reports relate, and
(B) in such manner as the Secretary
prescribes.
In the case of a simple retirement account under subsection
(p), only one report under this subsection shall be required to
be submitted each calendar year to the Secretary (at the time
provided under paragraph (2)) but, in addition to the report
under this subsection, there shall be furnished, within 31 days
after each calendar year, to the individual on whose behalf the
account is maintained a statement with respect to the account
balance as of the close of, and the account activity during,
such calendar year.
(j) Increase in maximum limitations for simplified employee
pensions.--In the case of any simplified employee pension,
subsections (a)(1) and (b)(2) of this section shall be applied
by increasing the amounts contained therein by the amount of
the limitation in effect under section 415(c)(1)(A).
(k) Simplified employee pension defined.--
(1) In general.--For purposes of this title, the term
``simplified employee pension'' means an individual
retirement account or individual retirement annuity--
(A) with respect to which the requirements of
paragraphs (2), (3), (4), and (5) of this
subsection are met, and
(B) if such account or annuity is part of a
top-heavy plan (as defined in section 416),
with respect to which the requirements of
section 416(c)(2) are met.
(2) Participation requirements.--This paragraph is
satisfied with respect to a simplified employee pension
for a year only if for such year the employer
contributes to the simplified employee pension of each
employee who--
(A) has attained age 21,
(B) has performed service for the employer
during at least 3 of the immediately preceding
5 years, and
(C) received at least $450 in compensation
(within the meaning of section 414(q)(4)) from
the employer for the year.
For purposes of this paragraph, there shall be excluded
from consideration employees described in subparagraph
(A) or (C) of section 410(b)(3). For purposes of any
arrangement described in subsection (k)(6), any
employee who is eligible to have employer contributions
made on the employee's behalf under such arrangement
shall be treated as if such a contribution was made.
(3) Contributions may not discriminate in favor of
the highly compensated, etc..--
(A) In general.--The requirements of this
paragraph are met with respect to a simplified
employee pension for a year if for such year
the contributions made by the employer to
simplified employee pensions for his employees
do not discriminate in favor of any highly
compensated employee (within the meaning of
section 414(q)).
(B) Special rules.--For purposes of
subparagraph (A), there shall be excluded from
consideration employees described in
subparagraph (A) or (C) of section 410(b)(3).
(C) Contributions must bear uniform
relationship to total compensation.--For
purposes of subparagraph (A), and except as
provided in subparagraph (D), employer
contributions to simplified employee pensions
(other than contributions under an arrangement
described in paragraph (6)) shall be considered
discriminatory unless contributions thereto
bear a uniform relationship to the compensation
(not in excess of the first $200,000) of each
employee maintaining a simplified employee
pension.
(D) Permitted disparity.--For purposes of
subparagraph (C), the rules of section
401(l)(2) shall apply to contributions to
simplified employee pensions (other than
contributions under an arrangement described in
paragraph (6)).
(4) Withdrawals must be permitted.--A simplified
employee pension meets the requirements of this
paragraph only if--
(A) employer contributions thereto are not
conditioned on the retention in such pension of
any portion of the amount contributed, and
(B) there is no prohibition imposed by the
employer on withdrawals from the simplified
employee pension.
(5) Contributions must be made under written
allocation formula.--The requirements of this paragraph
are met with respect to a simplified employee pension
only if employer contributions to such pension are
determined under a definite written allocation formula
which specifies--
(A) the requirements which an employee must
satisfy to share in an allocation, and
(B) the manner in which the amount allocated
is computed.
(6) Employee may elect salary reduction
arrangement.--
(A) Arrangements which qualify.--
(i) In general.--A simplified
employee pension shall not fail to meet
the requirements of this subsection for
a year merely because, under the terms
of the pension, an employee may elect
to have the employer make payments--
(I) as elective employer
contributions to the simplified
employee pension on behalf of
the employee, or
(II) to the employee directly
in cash.
(ii) 50 percent of eligible employees
must elect.--Clause (i) shall not apply
to a simplified employee pension unless
an election described in clause (i)(I)
is made or is in effect with respect to
not less than 50 percent of the
employees of the employer eligible to
participate.
(iii) Requirements relating to
deferral percentage.--Clause (i) shall
not apply to a simplified employee
pension for any year unless the
deferral percentage for such year of
each highly compensated employee
eligible to participate is not more
than the product of--
(I) the average of the
deferral percentages for such
year of all employees (other
than highly compensated
employees) eligible to
participate, multiplied by
(II) 1.25.
(iv) Limitations on elective
deferrals.--Clause (i) shall not apply
to a simplified employee pension unless
the requirements of section 401(a)(30)
are met.
(B) Exception where more than 25 employees.--
This paragraph shall not apply with respect to
any year in the case of a simplified employee
pension maintained by an employer with more
than 25 employees who were eligible to
participate (or would have been required to be
eligible to participate if a pension was
maintained) at any time during the preceding
year.
(C) Distributions of excess contributions.--
(i) In general.--Rules similar to the
rules of section 401(k)(8) shall apply
to any excess contribution under this
paragraph. Any excess contribution
under a simplified employee pension
shall be treated as an excess
contribution for purposes of section
4979.
(ii) Excess contribution.--For
purposes of clause (i), the term
``excess contribution'' means, with
respect to a highly compensated
employee, the excess of elective
employer contributions under this
paragraph over the maximum amount of
such contributions allowable under
subparagraph (A)(iii).
(D) Deferral percentage.--For purposes of
this paragraph, the deferral percentage for an
employee for a year shall be the ratio of--
(i) the amount of elective employer
contributions actually paid over to the
simplified employee pension on behalf
of the employee for the year, to
(ii) the employee's compensation (not
in excess of the first $200,000) for
the year.
(E) Exception for State and local and tax-
exempt pensions.--This paragraph shall not
apply to a simplified employee pension
maintained by--
(i) a State or local government or
political subdivision thereof, or any
agency or instrumentality thereof, or
(ii) an organization exempt from tax
under this title.
(F) Exception where pension does not meet
requirements necessary to insure distribution
of excess contributions.--This paragraph shall
not apply with respect to any year for which
the simplified employee pension does not meet
such requirements as the Secretary may
prescribe as are necessary to insure that
excess contributions are distributed in
accordance with subparagraph (C), including--
(i) reporting requirements, and
(ii) requirements which,
notwithstanding paragraph (4), provide
that contributions (and any income
allocable thereto) may not be withdrawn
from a simplified employee pension
until a determination has been made
that the requirements of subparagraph
(A)(iii) have been met with respect to
such contributions.
(G) Highly compensated employee.--For
purposes of this paragraph, the term ``highly
compensated employee'' has the meaning given
such term by section 414(q).
(H) Termination.--This paragraph shall not
apply to years beginning after December 31,
1996. The preceding sentence shall not apply to
a simplified employee pension of an employer if
the terms of simplified employee pensions of
such employer, as in effect on December 31,
1996, provide that an employee may make the
election described in subparagraph (A).
(7) Definitions.--For purposes of this subsection and
subsection (l)--
(A) Employee, employer, or owner-employee.--
The terms ``employee'', ``employer'', and
``owner-employee'' shall have the respective
meanings given such terms by section 401(c).
(B) Compensation.--Except as provided in
paragraph (2)(C), the term ``compensation'' has
the meaning given such term by section 414(s).
(C) Year.--The term ``year'' means--
(i) the calendar year, or
(ii) if the employer elects, subject
to such terms and conditions as the
Secretary may prescribe, to maintain
the simplified employee pension on the
basis of the employer's taxable year.
(8) Cost-of-living adjustment.--The Secretary shall
adjust the $450 amount in paragraph (2)(C) at the same
time and in the same manner as under section 415(d) and
shall adjust the $200,000 amount in paragraphs (3)(C)
and (6)(D)(ii) at the same time, and by the same
amount, as any adjustment under section 401(a)(17)(B);
except that any increase in the $450 amount which is
not a multiple of $50 shall be rounded to the next
lowest multiple of $50.
(9) Cross reference.--For excise tax on certain
excess contributions, see section 4979.
(l) Simplified employer reports.--
(1) In general.--An employer who makes a contribution
on behalf of an employee to a simplified employee
pension shall provide such simplified reports with
respect to such contributions as the Secretary may
require by regulations. The reports required by this
subsection shall be filed at such time and in such
manner, and information with respect to such
contributions shall be furnished to the employee at
such time and in such manner, as may be required by
regulations.
(2) Simple retirement accounts.--
(A) No employer reports.--Except as provided
in this paragraph, no report shall be required
under this section by an employer maintaining a
qualified salary reduction arrangement under
subsection (p).
(B) Summary description.--The trustee of any
simple retirement account established pursuant
to a qualified salary reduction arrangement
under subsection (p) and the issuer of an
annuity established under such an arrangement
shall provide to the employer maintaining the
arrangement, each year a description containing
the following information:
(i) The name and address of the
employer and the trustee or issuer.
(ii) The requirements for eligibility
for participation.
(iii) The benefits provided with
respect to the arrangement.
(iv) The time and method of making
elections with respect to the
arrangement.
(v) The procedures for, and effects
of, withdrawals (including rollovers)
from the arrangement.
(C) Employee notification.--The employer
shall notify each employee immediately before
the period for which an election described in
subsection (p)(5)(C) may be made of the
employee's opportunity to make such election.
Such notice shall include a copy of the
description described in subparagraph (B).
(m) Investment in collectibles treated as distributions.--
(1) In general.--The acquisition by an individual
retirement account or by an individually-directed
account under a plan described in section 401(a) of any
collectible shall be treated (for purposes of this
section and section 402) as a distribution from such
account in an amount equal to the cost to such account
of such collectible.
(2) Collectible defined.--For purposes of this
subsection, the term ``collectible'' means--
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property
specified by the Secretary for purposes of this
subsection.
(3) Exception for certain coins and bullion.--For
purposes of this subsection, the term ``collectible''
shall not include--
(A) any coin which is--
(i) a gold coin described in
paragraph (7), (8), (9), or (10) of
section 5112(a) of title 31, United
States Code,
(ii) a silver coin described in
section 5112(e) of title 31, United
States Code,
(iii) a platinum coin described in
section 5112(k) of title 31, United
States Code, or
(iv) a coin issued under the laws of
any State, or
(B) any gold, silver, platinum, or palladium
bullion of a fineness equal to or exceeding the
minimum fineness that a contract market (as
described in section 5 of the Commodity
Exchange Act, 7 U.S.C. 7) requires for metals
which may be delivered in satisfaction of a
regulated futures contract,
if such bullion is in the physical possession of a
trustee described under subsection (a) of this section.
(n) Bank.--For purposes of subsection (a)(2), the term
``bank'' means--
(1) any bank (as defined in section 581),
(2) an insured credit union (within the meaning of
paragraph (6) or (7) of section 101 of the Federal
Credit Union Act), and
(3) a corporation which, under the laws of the State
of its incorporation, is subject to supervision and
examination by the Commissioner of Banking or other
officer of such State in charge of the administration
of the banking laws of such State.
(o) Definitions and rules relating to nondeductible
contributions to individual retirement plans.--
(1) In general.--Subject to the provisions of this
subsection, designated nondeductible contributions may
be made on behalf of an individual to an individual
retirement plan.
(2) Limits on amounts which may be contributed.--
(A) In general.--The amount of the designated
nondeductible contributions made on behalf of
any individual for any taxable year shall not
exceed the nondeductible limit for such taxable
year.
(B) Nondeductible limit.--For purposes of
this paragraph--
(i) In general.--The term
``nondeductible limit'' means the
excess of--
(I) the amount allowable as a
deduction under section 219
(determined without regard to
section 219(g)), over
(II) the amount allowable as
a deduction under section 219
(determined with regard to
section 219(g)).
(ii) Taxpayer may elect to treat
deductible contributions as
nondeductible.--If a taxpayer elects
not to deduct an amount which (without
regard to this clause) is allowable as
a deduction under section 219 for any
taxable year, the nondeductible limit
for such taxable year shall be
increased by such amount.
(C) Designated nondeductible contributions.--
(i) In general.--For purposes of this
paragraph, the term ``designated
nondeductible contribution'' means any
contribution to an individual
retirement plan for the taxable year
which is designated (in such manner as
the Secretary may prescribe) as a
contribution for which a deduction is
not allowable under section 219.
(ii) Designation.--Any designation
under clause (i) shall be made on the
return of tax imposed by chapter 1 for
the taxable year.
(3) Time when contributions made.--In determining for
which taxable year a designated nondeductible
contribution is made, the rule of section 219(f)(3)
shall apply.
(4) Individual required to report amount of
designated nondeductible contributions.--
(A) In general.--Any individual who--
(i) makes a designated nondeductible
contribution to any individual
retirement plan for any taxable year,
or
(ii) receives any amount from any
individual retirement plan for any
taxable year,
shall include on his return of the tax imposed
by chapter 1 for such taxable year and any
succeeding taxable year (or on such other form
as the Secretary may prescribe for any such
taxable year) information described in
subparagraph (B).
(B) Information required to be supplied.--The
following information is described in this
subparagraph:
(i) The amount of designated
nondeductible contributions for the
taxable year.
(ii) The amount of distributions from
individual retirement plans for the
taxable year.
(iii) The excess (if any) of--
(I) the aggregate amount of
designated nondeductible
contributions for all preceding
taxable years, over
(II) the aggregate amount of
distributions from individual
retirement plans which was
excludable from gross income
for such taxable years.
(iv) The aggregate balance of all
individual retirement plans of the
individual as of the close of the
calendar year in which the taxable year
begins.
(v) Such other information as the
Secretary may prescribe.
(C) Penalty for reporting contributions not
made.--For penalty where individual reports
designated nondeductible contributions not
made, see section 6693(b).
(p) Simple retirement accounts.--
(1) In general.--For purposes of this title, the term
``simple retirement account'' means an individual
retirement plan (as defined in section 7701(a)(37))--
(A) with respect to which the requirements of
paragraphs (3), (4), and (5) are met; and
(B) except in the case of a rollover
contribution described in subsection (d)(3)(G)
or a rollover contribution otherwise described
in subsection (d)(3) or in section 402(c),
403(a)(4), 403(b)(8), or 457(e)(16), which is
made after the 2-year period described in
section 72(t)(6), with respect to which the
only contributions allowed are contributions
under a qualified salary reduction arrangement.
(2) Qualified salary reduction arrangement.--
(A) In general.--For purposes of this
subsection, the term ``qualified salary
reduction arrangement'' means a written
arrangement of an eligible employer under
which--
(i) an employee eligible to
participate in the arrangement may
elect to have the employer make
payments--
(I) as elective employer
contributions to a simple
retirement account on behalf of
the employee, or
(II) to the employee directly
in cash,
(ii) the amount which an employee may
elect under clause (i) for any year is
required to be expressed as a
percentage of compensation and may not
exceed a total of the applicable dollar
amount for any year,
(iii) the employer is required to
make a matching contribution to the
simple retirement account for any year
in an amount equal to so much of the
amount the employee elects under clause
(i)(I) as does not exceed the
applicable percentage of compensation
for the year, and
(iv) no contributions may be made
other than contributions described in
clause (i) or (iii).
(B) Employer may elect 2-percent nonelective
contribution.--
(i) In general.--An employer shall be
treated as meeting the requirements of
subparagraph (A)(iii) for any year if,
in lieu of the contributions described
in such clause, the employer elects 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 60-day period for such year
under paragraph (5)(C).
(ii) Compensation limitation.--The
compensation taken into account under
clause (i) for any year shall not
exceed the limitation in effect for
such year under section 401(a)(17).
(C) Definitions.--For purposes of this
subsection--
(i) Eligible employer.--
(I) In general.--The term
``eligible employer'' means,
with respect to any year, an
employer which had no more than
100 employees who received at
least $5,000 of compensation
from the employer for the
preceding year.
(II) 2-year grace period.--An
eligible employer who
establishes and maintains a
plan under this subsection for
1 or more years and who fails
to be an eligible employer for
any subsequent year shall be
treated as an eligible employer
for the 2 years following the
last year the employer was an
eligible employer. If such
failure is due to any
acquisition, disposition, or
similar transaction involving
an eligible employer, the
preceding sentence shall not
apply.
(ii) Applicable percentage.--
(I) In general.--The term
``applicable percentage'' means
3 percent.
(II) Election of lower
percentage.--An employer may
elect to apply a lower
percentage (not less than 1
percent) for any year for all
employees eligible to
participate in the plan for
such year if the employer
notifies the employees of such
lower percentage within a
reasonable period of time
before the 60-day election
period for such year under
paragraph (5)(C). An employer
may not elect a lower
percentage under this subclause
for any year if that election
would result in the applicable
percentage being lower than 3
percent in more than 2 of the
years in the 5-year period
ending with such year.
(III) Special rule for years
arrangement not in effect.--If
any year in the 5-year period
described in subclause (II) is
a year prior to the first year
for which any qualified salary
reduction arrangement is in
effect with respect to the
employer (or any predecessor),
the employer shall be treated
as if the level of the employer
matching contribution was at 3
percent of compensation for
such prior year.
(D) Arrangement may be only plan of
employer.--
(i) In general.--An arrangement shall
not be treated as a qualified salary
reduction arrangement for any year if
the employer (or any predecessor
employer) maintained a qualified plan
with respect to which contributions
were made, or benefits were accrued,
for service in any year in the period
beginning with the year such
arrangement became effective and ending
with the year for which the
determination is being made. If only
individuals other than employees
described in subparagraph (A) of
section 410(b)(3) are eligible to
participate in such arrangement, then
the preceding sentence shall be applied
without regard to any qualified plan in
which only employees so described are
eligible to participate.
(ii) Qualified plan.--For purposes of
this subparagraph, the term ``qualified
plan'' means a plan, contract, pension,
or trust described in subparagraph (A)
or (B) of section 219(g)(5).
(E) Applicable dollar amount; cost-of-living
adjustment.--
(i) In general.--For purposes of
subparagraph (A)(ii), the applicable
amount is $10,000.
(ii) Cost-of-living adjustment.--In
the case of a year beginning after
December 31, 2005, the Secretary shall
adjust the $10,000 amount under clause
(i) at the same time and in the same
manner as under section 415(d), except
that the base period taken into account
shall be the calendar quarter beginning
July 1, 2004, and any increase under
this subparagraph which is not a
multiple of $500 shall be rounded to
the next lower multiple of $500.
(3) Vesting requirements.--The requirements of this
paragraph are met with respect to a simple retirement
account if the employee's rights to any contribution to
the simple retirement account are nonforfeitable. For
purposes of this paragraph, rules similar to the rules
of subsection (k)(4) shall apply.
(4) Participation requirements.--
(A) In general.--The requirements of this
paragraph are met with respect to any simple
retirement account for a year only if, under
the qualified salary reduction arrangement, all
employees of the employer who--
(i) received at least $5,000 in
compensation from the employer during
any 2 preceding years, and
(ii) are reasonably expected to
receive at least $5,000 in compensation
during the year,
are eligible to make the election under
paragraph (2)(A)(i) or receive the nonelective
contribution described in paragraph (2)(B).
(B) Excludable employees.--An employer may
elect to exclude from the requirement under
subparagraph (A) employees described in section
410(b)(3).
(5) Administrative requirements.--The requirements of
this paragraph are met with respect to any simple
retirement account if, under the qualified salary
reduction arrangement--
(A) an employer must--
(i) make the elective employer
contributions under paragraph (2)(A)(i)
not later than the close of the 30-day
period following the last day of the
month with respect to which the
contributions are to be made, and
(ii) make the matching contributions
under paragraph (2)(A)(iii) or the
nonelective contributions under
paragraph (2)(B) not later than the
date described in section 404(m)(2)(B),
(B) an employee may elect to terminate
participation in such arrangement at any time
during the year, except that if an employee so
terminates, the arrangement may provide that
the employee may not elect to resume
participation until the beginning of the next
year, and
(C) each employee eligible to participate may
elect, during the 60-day period before the
beginning of any year (and the 60-day period
before the first day such employee is eligible
to participate), to participate in the
arrangement, or to modify the amounts subject
to such arrangement, for such year.
(6) Definitions.--For purposes of this subsection--
(A) Compensation.--
(i) In general.--The term
``compensation'' means amounts
described in paragraphs (3) and (8) of
section 6051(a). For purposes of the
preceding sentence, amounts described
in section 6051(a)(3) shall be
determined without regard to section
3401(a)(3).
(ii) Self-employed.--In the case of
an employee described in subparagraph
(B), the term ``compensation'' means
net earnings from self-employment
determined under section 1402(a)
without regard to any contribution
under this subsection. The preceding
sentence shall be applied as if the
term ``trade or business'' for purposes
of section 1402 included service
described in section 1402(c)(6).
(B) Employee.--The term ``employee'' includes
an employee as defined in section 401(c)(1).
(C) Year.--The term ``year'' means the
calendar year.
(7) Use of designated financial institution.--A plan
shall not be treated as failing to satisfy the
requirements of this subsection or any other provision
of this title merely because the employer makes all
contributions to the individual retirement accounts or
annuities of a designated trustee or issuer. The
preceding sentence shall not apply unless each plan
participant is notified in writing (either separately
or as part of the notice under subsection (l)(2)(C))
that the participant's balance may be transferred
without cost or penalty to another individual account
or annuity in accordance with subsection (d)(3)(G).
(8) Coordination with maximum limitation under
subsection (a).--In the case of any simple retirement
account, subsections (a)(1) and (b)(2) shall be applied
by substituting ``the sum of the dollar amount in
effect under paragraph (2)(A)(ii) of this subsection
and the employer contribution required under
subparagraph (A)(iii) or (B)(i) of paragraph (2) of
this subsection, whichever is applicable'' for ``the
dollar amount in effect under section 219(b)(1)(A)''.
(9) Matching contributions on behalf of self-employed
individuals not treated as elective employer
contributions.--Any matching contribution described in
paragraph (2)(A)(iii) 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 to a simple retirement account for
purposes of this title.
(10) Special rules for acquisitions, dispositions,
and similar transactions.--
(A) In general.--An employer which fails to
meet any applicable requirement by reason of an
acquisition, disposition, or similar
transaction shall not be treated as failing to
meet such requirement during the transition
period if--
(i) the employer satisfies
requirements similar to the
requirements of section
410(b)(6)(C)(i)(II); and
(ii) the qualified salary reduction
arrangement maintained by the employer
would satisfy the requirements of this
subsection after the transaction if the
employer which maintained the
arrangement before the transaction had
remained a separate employer.
(B) Applicable requirement.--For purposes of
this paragraph, the term ``applicable
requirement'' means--
(i) the requirement under paragraph
(2)(A)(i) that an employer be an
eligible employer;
(ii) the requirement under paragraph
(2)(D) that an arrangement be the only
plan of an employer; and
(iii) the participation requirements
under paragraph (4).
(C) Transition period.--For purposes of this
paragraph, the term ``transition period'' means
the period beginning on the date of any
transaction described in subparagraph (A) and
ending on the last day of the second calendar
year following the calendar year in which such
transaction occurs.
(q) Deemed IRAs under qualified employer plans.--
(1) General rule.--If--
(A) a qualified employer plan elects to allow
employees to make voluntary employee
contributions to a separate account or annuity
established under the plan, and
(B) under the terms of the qualified employer
plan, such account or annuity meets the
applicable requirements of this section or
section 408A for an individual retirement
account or annuity,
then such account or annuity shall be treated for
purposes of this title in the same manner as an
individual retirement plan and not as a qualified
employer plan (and contributions to such account or
annuity as contributions to an individual retirement
plan and not to the qualified employer plan). For
purposes of subparagraph (B), the requirements of
subsection (a)(5) shall not apply.
(2) Special rules for qualified employer plans.--For
purposes of this title, a qualified employer plan shall
not fail to meet any requirement of this title solely
by reason of establishing and maintaining a program
described in paragraph (1).
(3) Definitions.--For purposes of this subsection--
(A) Qualified employer plan.--The term
``qualified employer plan'' has the meaning
given such term by section 72(p)(4)(A)(i);
except that such term shall also include an
eligible deferred compensation plan (as defined
in section 457(b)) of an eligible employer
described in section 457(e)(1)(A).
(B) Voluntary employee contribution.--The
term ``voluntary employee contribution'' means
any contribution (other than a mandatory
contribution within the meaning of section
411(c)(2)(C))--
(i) which is made by an individual as
an employee under a qualified employer
plan which allows employees to elect to
make contributions described in
paragraph (1), and
(ii) with respect to which the
individual has designated the
contribution as a contribution to which
this subsection applies.
(r) Cross references.--
(1) For tax on excess contributions in
individual retirement accounts or annuities,
see section 4973.
(2) For tax on certain accumulations in
individual retirement accounts or annuities,
see section 4974.
* * * * * * *
Subpart B--SPECIAL RULES
* * * * * * *
SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED
PLANS.
(a) General rule.--
(1) Trusts.--A trust which is a part of a pension,
profitsharing, or stock bonus plan shall not constitute
a qualified trust under section 401(a) if--
(A) in the case of a defined benefit plan,
the plan provides for the payment of benefits
with respect to a participant which exceed the
limitation of subsection (b), or
(B) in the case of a defined contribution
plan, contributions and other additions under
the plan with respect to any participant for
any taxable year exceed the limitation of
subsection (c).
(2) Section applies to certain annuities and
accounts.--In the case of--
(A) an employee annuity plan described in
section 403(a),
(B) an annuity contract described in section
403(b), or
(C) a simplified employee pension described
in section 408(k),
such a contract, plan, or pension shall not be
considered to be described in section 403(a), 403(b),
or 408(k), as the case may be, unless it satisfies the
requirements of subparagraph (A) or subparagraph (B) of
paragraph (1), whichever is appropriate, and has not
been disqualified under subsection (g). In the case of
an annuity contract described in section 403(b), the
preceding sentence shall apply only to the portion of
the annuity contract which exceeds the limitation of
subsection (b) or the limitation of subsection (c),
whichever is appropriate.
(b) Limitation for defined benefit plans.--
(1) In general.--Benefits with respect to a
participant exceed the limitation of this subsection
if, when expressed as an annual benefit (within the
meaning of paragraph (2)), such annual benefit is
greater than the lesser of--
(A) $160,000, or
(B) 100 percent of the participant's average
compensation for his high 3 years.
(2) Annual benefit.--
(A) In general.--For purposes of paragraph
(1), the term ``annual benefit'' means a
benefit payable annually in the form of a
straight life annuity (with no ancillary
benefits) under a plan to which employees do
not contribute and under which no rollover
contributions (as defined in sections 402(c),
403(a)(4), 403(b)(8), 408(d)(3), and
457(e)(16)) are made.
(B) Adjustment for certain other forms of
benefit.--If the benefit under the plan is
payable in any form other than the form
described in subparagraph (A), or if the
employees contribute to the plan or make
rollover contributions (as defined in sections
402(c), 403(a)(4), 403(b)(8), 408(d)(3), and
457(e)(16)), the determinations as to whether
the limitation described in paragraph (1) has
been satisfied shall be made, in accordance
with regulations prescribed by the Secretary by
adjusting such benefit so that it is equivalent
to the benefit described in subparagraph (A).
For purposes of this subparagraph, any
ancillary benefit which is not directly related
to retirement income benefits shall not be
taken into account; and that portion of any
joint and survivor annuity which constitutes a
qualified joint and survivor annuity (as
defined in section 417) shall not be taken into
account.
(C) Adjustment to $160,000 limit where
benefit begins before age 62.--If the
retirement income benefit under the plan begins
before age 62, the determination as to whether
the $160,000 limitation set forth in paragraph
(1)(A) has been satisfied shall be made, in
accordance with regulations prescribed by the
Secretary, by reducing the limitation of
paragraph (1)(A) so that such limitation (as so
reduced) equals an annual benefit (beginning
when such retirement income benefit begins)
which is equivalent to a $160,000 annual
benefit beginning at age 62.
(D) Adjustment to $160,000 limit where
benefit begins after age 65.--If the retirement
income benefit under the plan begins after age
65, the determination as to whether the
$160,000 limitation set forth in paragraph
(1)(A) has been satisfied shall be made, in
accordance with regulations prescribed by the
Secretary, by increasing the limitation of
paragraph (1)(A) so that such limitation (as so
increased) equals an annual benefit (beginning
when such retirement income benefit begins)
which is equivalent to a $160,000 annual
benefit beginning at age 65.
(E) Limitation on certain assumptions.--(i)
For purposes of adjusting any limitation under
subparagraph (C) and, except as provided in
clause (ii), for purposes of adjusting any
benefit under subparagraph (B), the interest
rate assumption shall not be less than the
greater of 5 percent or the rate specified in
the plan.
(ii) For purposes of adjusting any benefit
under subparagraph (B) for any form of benefit
subject to section 417(e)(3), the interest rate
assumption shall not be less than the greatest
of--
(I) 5.5 percent,
(II) the rate that provides a benefit
of not more than 105 percent of the
benefit that would be provided if the
applicable interest rate (as defined in
section 417(e)(3)) were the interest
rate assumption, or
(III) the rate specified under the
plan.
(iii) For purposes of adjusting any
limitation under subparagraph (D), the interest
rate assumption shall not be greater than the
lesser of 5 percent or the rate specified in
the plan.
(iv) For purposes of this subsection, no
adjustments under subsection (d)(1) shall be
taken into account before the year for which
such adjustment first takes effect.
(v) For purposes of adjusting any benefit or
limitation under subparagraph (B), (C), or (D),
the mortality table used shall be the
applicable mortality table (within the meaning
of section 417(e)(3)(B)).
(vi) In the case of a plan maintained by an
eligible employer (as defined in section
408(p)(2)(C)(i)), clause (ii) shall be applied
without regard to subclause (II) thereof.
(G) Special limitation for qualified police
or firefighters.--In the case of a qualified
participant, subparagraph (C) of this paragraph
shall not apply.
(H) Qualified participant defined.--For
purposes of subparagraph (G), the term
``qualified participant'' means a participant--
(i) in a defined benefit plan which
is maintained by a State, Indian tribal
government (as defined in section
7701(a)(40)), or any political
subdivision thereof,
(ii) with respect to whom the period
of service taken into account in
determining the amount of the benefit
under such defined benefit plan
includes at least 15 years of service
of the participant--
(I) as a full-time employee
of any police department or
fire department which is
organized and operated by the
State, Indian tribal government
(as so defined), or any
political subdivision
maintaining such defined
benefit plan to provide police
protection, firefighting
services, or emergency medical
services for any area within
the jurisdiction of such State,
Indian tribal government (as so
defined), or any political
subdivision, or
(II) as a member of the Armed
Forces of the United States.
(I) Exemption for survivor and disability
benefits provided under governmental plans.--
Subparagraph (C) of this paragraph and
paragraph (5) shall not apply to--
(i) income received from a
governmental plan (as defined in
section 414(d)) as a pension, annuity,
or similar allowance as the result of
the recipient becoming disabled by
reason of personal injuries or
sickness, or
(ii) amounts received from a
governmental plan by the beneficiaries,
survivors, or the estate of an employee
as the result of the death of the
employee.
(3) Average compensation for high 3 years.--For
purposes of paragraph (1), a participant's high 3 years
shall be the period of consecutive calendar years (not
more than 3) during which the participant had the
greatest aggregate compensation from the employer. In
the case of an employee within the meaning of section
401(c)(1), the preceding sentence shall be applied by
substituting for ``compensation from the employer'' the
following: ``the participant's earned income (within
the meaning of section 401(c)(2) but determined without
regard to any exclusion under section 911)''.
(4) Total annual benefits not in excess of $10,000.--
Notwithstanding the preceding provisions of this
subsection, the benefits payable with respect to a
participant under any defined benefit plan shall be
deemed not to exceed the limitation of this subsection
if--
(A) the retirement benefits payable with
respect to such participant under such plan and
under all other defined benefit plans of the
employer do not exceed $10,000 for the plan
year, or for any prior plan year, and
(B) the employer has not at any time
maintained a defined contribution plan in which
the participant participated.
(5) Reduction for participation or service of less
than 10 years.--
(A) Dollar limitation.--In the case of an
employee who has less than 10 years of
participation in a defined benefit plan, the
limitation referred to in paragraph (1)(A)
shall be the limitation determined under such
paragraph (without regard to this paragraph)
multiplied by a fraction--
(i) the numerator of which is the
number of years (or part thereof) of
participation in the defined benefit
plan of the employer, and
(ii) the denominator of which is 10.
(B) Compensation and benefits limitations.--
The provisions of subparagraph (A) shall apply
to the limitations under paragraphs (1)(B) and
(4), except that such subparagraph shall be
applied with respect to years of service with
an employer rather than years of participation
in a plan.
(C) Limitation on reduction.--In no event
shall subparagraph (A) or (B) reduce the
limitations referred to in paragraphs (1) and
(4) to an amount less than ? of such limitation
(determined without regard to this paragraph).
(D) Application to changes in benefit
structure.--To the extent provided in
regulations, subparagraph (A) shall be applied
separately with respect to each change in the
benefit structure of a plan.
(6) Computation of benefits and contributions.--The
computation of--
(A) benefits under a defined contribution
plan, for purposes of section 401(a)(4),
(B) contributions made on behalf of a
participant in a defined benefit plan, for
purposes of section 401(a)(4), and
(C) contributions and benefits provided for a
participant in a plan described in section
414(k), for purposes of this section
shall not be made on a basis inconsistent with
regulations prescribed by the Secretary.
(7) Benefits under certain collectively bargained
plans.--For a year, the limitation referred to in
paragraph (1)(B) shall not apply to benefits with
respect to a participant under a defined benefit plan
(other than a multiemployer plan)--
(A) which is maintained for such year
pursuant to a collective bargaining agreement
between employee representatives and one or
more employers,
(B) which, at all times during such year, has
at least 100 participants,
(C) under which benefits are determined
solely by reference to length of service, the
particular years during which service was
rendered, age at retirement, and date of
retirement,
(D) which provides that an employee who has
at least 4 years of service has a
nonforfeitable right to 100 percent of his
accrued benefit derived from employer
contributions, and
(E) which requires, as a condition of
participation in the plan, that an employee
complete a period of not more than 60
consecutive days of service with the employer
or employers maintaining the plan.
This paragraph shall not apply to a participant whose
compensation for any 3 years during the 10-year period
immediately preceding the year in which he separates
from service exceeded the average compensation for such
3 years of all participants in such plan. This
paragraph shall not apply to a participant for any
period for which he is a participant under another plan
to which this section applies which is maintained by an
employer maintaining this plan. For any year for which
the paragraph applies to benefits with respect to a
participant, paragraph (1)(A) and subsection (d)(1)(A)
shall be applied with respect to such participant by
substituting one-half the amount otherwise applicable
for such year under paragraph (1)(A) for ``$160,000''.
(8) Social security retirement age defined.--For
purposes of this subsection, the term ``social security
retirement age'' means the age used as the retirement
age under section 216(l) of the Social Security Act,
except that such section shall be applied--
(A) without regard to the age increase
factor, and
(B) as if the early retirement age under
section 216(l)(2) of such Act were 62.
(9) Special rule for commercial airline pilots.--
(A) In general.--Except as provided in
subparagraph (B), in the case of any
participant who is a commercial airline pilot,
if, as of the time of the participant's
retirement, regulations prescribed by the
Federal Aviation Administration require an
individual to separate from service as a
commercial airline pilot after attaining any
age occurring on or after age 60 and before age
62, paragraph (2)(C) shall be applied by
substituting such age for age 62.
(B) Individuals who separate from service
before age 60.--If a participant described in
subparagraph (A) separates from service before
age 60, the rules of paragraph (2)(C) shall
apply.
(10) Special rule for State, Indian tribal, and local
government plans.--
(A) Limitation to equal accrued benefit.--In
the case of a plan maintained for its employees
by any State or political subdivision thereof,
or by any agency or instrumentality of the
foregoing, or a governmental plan described in
the last sentence of section 414(d) (relating
to plans of Indian tribal governments), the
limitation with respect to a qualified
participant under this subsection shall not be
less than the accrued benefit of the
participant under the plan (determined without
regard to any amendment of the plan made after
October 14, 1987).
(B) Qualified participant.--For purposes of
this paragraph, the term ``qualified
participant'' means a participant who first
became a participant in the plan maintained by
the employer before January 1, 1990.
(C) Election.--
(i) In general.--This paragraph shall
not apply to any plan unless each
employer maintaining the plan elects
before the close of the 1st plan year
beginning after December 31, 1989, to
have this subsection (other than
paragraph (2)(G)).
(ii) Revocation of election.--An
election under clause (i) may be
revoked not later than the last day of
the third plan year beginning after the
date of the enactment of this clause.
The revocation shall apply to all plan
years to which the election applied and
to all subsequent plan years. Any
amount paid by a plan in a taxable year
ending after the revocation shall be
includible in income in such taxable
year under the rules of this chapter in
effect for such taxable year, except
that, for purposes of applying the
limitations imposed by this section,
any portion of such amount which is
attributable to any taxable year during
which the election was in effect shall
be treated as received in such taxable
year.
(11) Special limitation rule for governmental and
multiemployer plans.--In the case of a governmental
plan (as defined in section 414(d)) or a multiemployer
plan (as defined in section 414(f)), subparagraph (B)
of paragraph (1) shall not apply. Subparagraph (B) of
paragraph (1) shall not apply to a plan maintained by
an organization described in section 3121(w)(3)(A)
except with respect to highly compensated benefits. For
purposes of this paragraph, the term ``highly
compensated benefits'' means any benefits accrued for
an employee in any year on or after the first year in
which such employee is a highly compensated employee
(as defined in section 414(q)) of the organization
described in section 3121(w)(3)(A). For purposes of
applying paragraph (1)(B) to highly compensated
benefits, all benefits of the employee otherwise taken
into account (without regard to this paragraph) shall
be taken into account.
(c) Limitation for defined contribution plans.--
(1) In general.--Contributions and other additions
with respect to a participant exceed the limitation of
this subsection if, when expressed as an annual
addition (within the meaning of paragraph (2)) to the
participant's account, such annual addition is greater
than the lesser of--
(A) $40,000, or
(B) 100 percent of the participant's
compensation.
(2) Annual addition.--For purposes of paragraph (1),
the term ``annual addition'' means the sum of any year
of--
(A) employer contributions,
(B) the employee contributions, and
(C) forfeitures.
For the purposes of this paragraph, employee
contributions under subparagraph (B) are determined
without regard to any rollover contributions (as
defined in sections 402(c), 403(a)(4), 403(b)(8),
408(d)(3), and 457(e)(16)) without regard to employee
contributions to a simplified employee pension which
are excludable from gross income under section
408(k)(6). Subparagraph (B) of paragraph (1) shall not
apply to any contribution for medical benefits (within
the meaning of section 419A(f)(2)) after separation
from service which is treated as an annual addition.
(3) Participant's compensation.--For purposes of
paragraph (1)--
(A) In general.--The term ``participant's
compensation'' means the compensation of the
participant from the employer for the year.
(B) Special rule for self-employed
individuals.--In the case of an employee within
the meaning of section 401(c)(1), subparagraph
(A) shall be applied by substituting ``the
participant's earned income (within the meaning
of section 401(c)(2) but determined without
regard to any exclusion under section 911)''
for ``compensation of the participant from the
employer''.
(C) Special rules for permanent and total
disability.--In the case of a participant in
any defined contribution plan--
(i) who is permanently and totally
disabled (as defined in section
22(e)(3)),
(ii) who is not a highly compensated
employee (within the meaning of section
414(q)), and
(iii) with respect to whom the
employer elects, at such time and in
such manner as the Secretary may
prescribe, to have this subparagraph
apply,
the term ``participant's compensation'' means
the compensation the participant would have
received for the year if the participant was
paid at the rate of compensation paid
immediately before becoming permanently and
totally disabled. This subparagraph shall apply
only if contributions made with respect to
amounts treated as compensation under this
subparagraph are nonforfeitable when made. If a
defined contribution plan provides for the
continuation of contributions on behalf of all
participants described in clause (i) for a
fixed or determinable period, this subparagraph
shall be applied without regard to clauses (ii)
and (iii).
(D) Certain deferrals included.--The term
``participant's compensation'' shall include--
(i) any elective deferral (as defined
in section 402(g)(3)), and
(ii) any amount which is contributed
or deferred by the employer at the
election of the employee and which is
not includible in the gross income of
the employee by reason of section 125,
132(f)(4), or 457.
(E) Annuity contracts.--In the case of an
annuity contract described in section 403(b),
the term ``participant's compensation'' means
the participant's includible compensation
determined under section 403(b)(3).
(6) Special rule for employee stock ownership
plans.--If no more than one-third of the employer
contributions to an employee stock ownership plan (as
described in section 4975(e)(7)) for a year which are
deductible under paragraph (9) of section 404(a) are
allocated to highly compensated employees (within the
meaning of section 414(q)), the limitations imposed by
this section shall not apply to--
(A) forfeitures of employer securities
(within the meaning of section 409) under such
an employee stock ownership plan if such
securities were acquired with the proceeds of a
loan (as described in section 404(a)(9)(A)), or
(B) employer contributions to such an
employee stock ownership plan which are
deductible under section 404(a)(9)(B) and
charged against the participant's account.
The amount of any qualified gratuitous transfer (as
defined in section 664(g)(1)) allocated to a
participant for any limitation year shall not exceed
the limitations imposed by this section, but such
amount shall not be taken into account in determining
whether any other amount exceeds the limitations
imposed by this section.
(7) Special rules relating to church plans.--
(A) Alternative contribution limitation.--
(i) In general.--Notwithstanding any
other provision of this subsection, at
the election of a participant who is an
employee of a church or a convention or
association of churches, including an
organization described in section
414(e)(3)(B)(ii), contributions and
other additions for an annuity contract
or retirement income account described
in section 403(b) with respect to such
participant, when expressed as an
annual addition to such participant's
account, shall be treated as not
exceeding the limitation of paragraph
(1) if such annual addition is not in
excess of $10,000.
(ii) $40,000 aggregate limitation.--
The total amount of additions with
respect to any participant which may be
taken into account for purposes of this
subparagraph for all years may not
exceed $40,000.
(B) Number of years of service for duly
ordained, commissioned, or licensed ministers
or lay employees.--For purposes of this
paragraph--
(i) all years of service by--
(I) a duly ordained,
commissioned, or licensed
minister of a church, or
(II) a lay person,
as an employee of a church, a convention or
association of churches, including an
organization described in section
414(e)(3)(B)(ii), shall be considered as years
of service for 1 employer, and
(ii) all amounts contributed for
annuity contracts by each such church
(or convention or association of
churches) or such organization during
such years for such minister or lay
person shall be considered to have been
contributed by 1 employer.
(C) Foreign missionaries.--In the case of any
individual described in subparagraph (B)
performing services outside the United States,
contributions and other additions for an
annuity contract or retirement income account
described in section 403(b) with respect to
such employee, when expressed as an annual
addition to such employee's account, shall not
be treated as exceeding the limitation of
paragraph (1) if such annual addition is not in
excess of $3,000. This subparagraph shall not
apply with respect to any taxable year to any
individual whose adjusted gross income for such
taxable year (determined separately and without
regard to community property laws) exceeds
$17,000.
(D) Annual addition.--For purposes of this
paragraph, the term ``annual addition'' has the
meaning given such term by paragraph (2).
(E) Church, convention or association of
churches.--For purposes of this paragraph, the
terms ``church'' and ``convention or
association of churches'' have the same meaning
as when used in section 414(e).
(d) Cost-of-living adjustments.--
(1) In general.--The Secretary shall adjust
annually--
(A) the $160,000 amount in subsection
(b)(1)(A),
(B) in the case of a participant who is
separated from service, the amount taken into
account under subsection (b)(1)(B), and
(C) the $40,000 amount in subsection
(c)(1)(A),
for increases in the cost-of-living in accordance with
regulations prescribed by the Secretary.
(2) Method.--The regulations prescribed under
paragraph (1) shall provide for--
(A) an adjustment with respect to any
calendar year based on the increase in the
applicable index for the calendar quarter
ending September 30 of the preceding calendar
year over such index for the base period, and
(B) adjustment procedures which are similar
to the procedures used to adjust benefit
amounts under section 215(i)(2)(A) of the
Social Security Act.
(3) Base period.--For purposes of paragraph (2)--
(A) $160,000 amount.--The base period taken
into account for purposes of paragraph (1)(A)
is the calendar quarter beginning July 1, 2001.
(B) Separations after December 31, 1994.--The
base period taken into account for purposes of
paragraph (1)(B) with respect to individuals
separating from service with the employer after
December 31, 1994, is the calendar quarter
beginning July 1 of the calendar year preceding
the calendar year in which such separation
occurs.
(C) Separations before January 1, 1995.--The
base period taken into account for purposes of
paragraph (1)(B) with respect to individuals
separating from service with the employer
before January 1, 1995, is the calendar quarter
beginning October 1 of the calendar year
preceding the calendar year in which such
separation occurs.
(D) $40,000 amount.--The base period taken
into account for purposes of paragraph (1)(C)
is the calendar quarter beginning July 1, 2001.
(4) Rounding.--
(A) $160,000 amount.--Any increase under
subparagraph (A) of paragraph (1) which is not
a multiple of $5,000 shall be rounded to the
next lowest multiple of $5,000. This
subparagraph shall also apply for purposes of
any provision of this title that provides for
adjustments in accordance with the method
contained in this subsection, except to the
extent provided in such provision.
(B) $40,000 amount.--Any increase under
subparagraph (C) of paragraph (1) which is not
a multiple of $1,000 shall be rounded to the
next lowest multiple of $1,000.
(f) Combining of plans.--
(1) In general.--For purposes of applying the
limitations of subsections (b) and (c)--
(A) all defined benefit plans (whether or not
terminated) of an employer are to be treated as
one defined benefit plan, and
(B) all defined contribution plans (whether
or not terminated) of an employer are to be
treated as one defined contribution plan.
(2) Exception for multiemployer plans.--
Notwithstanding paragraph (1) and subsection (g), a
multiemployer plan (as defined in section 414(f)) shall
not be combined or aggregated--
(A) with any other plan which is not a
multiemployer plan for purposes of applying
subsection (b)(1)(B) to such other plan, or
(B) with any other multiemployer plan for
purposes of applying the limitations
established in this section.
(g) Aggregation of plans.--Except as provided in subsection
(f)(2), the Secretary, in applying the provisions of this
section to benefits or contributions under more than one plan
maintained by the same employer, and to any trusts, contracts,
accounts, or bonds referred to in subsection (a)(2), with
respect to which the participant has the control required under
section 414(b) or (c), as modified by subsection (h), shall,
under regulations prescribed by the Secretary, disqualify one
or more trusts, plans, contracts, accounts, or bonds, or any
combination thereof until such benefits or contributions do not
exceed the limitations contained in this section. In addition
to taking into account such other factors as may be necessary
to carry out the purposes of subsection (f), the regulations
prescribed under this paragraph shall provide that no plan
which has been terminated shall be disqualified until all other
trusts, plans, contracts, accounts, or bonds have been
disqualified.
(h) 50 percent control.--For purposes of applying subsections
(b) and (c) of section 414 to this section, the phrase ``more
than 50 percent'' shall be substituted for the phrase ``at
least 80 percent'' each place it appears in section 1563(a)(1).
(i) Records not available for past periods.--Where for the
period before January 1, 1976, or (if later) the first day of
the first plan year of the plan, the records necessary for the
application of this section are not available, the Secretary
may by regulations prescribe alternate methods for determining
the amounts to be taken into account for such period.
(j) Regulations; definition of year.--The Secretary shall
prescribe such regulations as may be necessary to carry out the
purposes of this section, including, but not limited to,
regulations defining the term ``year'' for purposes of any
provision of this section.
(k) Special rules.--
(1) Defined benefit plan and defined contribution
plan.--For purposes of this title, the term ``defined
contribution plan'' or ``defined benefit plan'' means a
defined contribution plan (within the meaning of
section 414(i)) or a defined benefit plan (within the
meaning of section 414(j)), whichever applies, which
is--
(A) a plan described in section 401(a) which
includes a trust which is exempt from tax under
section 501(a),
(B) an annuity plan described in section
403(a),
(C) an annuity contract described in section
403(b), or
(D) a simplified employee pension.
(2) Contributions to provide cost-of-living
protection under defined benefit plans.--
(A) In general.--In the case of a defined
benefit plan which maintains a qualified cost-
of-living arrangement--
(i) any contribution made directly by
an employee under such an arrangement
shall not be treated as an annual
addition for purposes of subsection
(c), and
(ii) any benefit under such
arrangement which is allocable to an
employer contribution which was
transferred from a defined contribution
plan and to which the requirements of
subsection (c) were applied shall, for
purposes of subsection (b), be treated
as a benefit derived from an employee
contribution (and subsection (c) shall
not again apply to such contribution by
reason of such transfer).
(B) Qualified cost-of-living arrangement
defined.--For purposes of this paragraph, the
term ``qualified cost-of-living arrangement''
means an arrangement under a defined benefit
plan which--
(i) provides a cost-of-living
adjustment to a benefit provided under
such plan or a separate plan subject to
the requirements of section 412, and
(ii) meets the requirements of
subparagraphs (C), (D), (E), and (F)
and such other requirements as the
Secretary may prescribe.
(C) Determination of amount of benefit.--An
arrangement meets the requirement of this
subparagraph only if the cost-of-living
adjustment of participants is based--
(i) on increases in the cost-of-
living after the annuity starting date,
and
(ii) on average cost-of-living
increases determined by reference to 1
or more indexes prescribed by the
Secretary, except that the arrangement
may provide that the increase for any
year will not be less than 3 percent of
the retirement benefit (determined
without regard to such increase).
(D) Arrangement elective; time for
election.--An arrangement meets the
requirements of this subparagraph only if it is
elective, it is available under the same terms
to all participants, and it provides that such
election may at least be made in the year in
which the participant--
(i) attains the earliest retirement
age under the defined benefit plan
(determined without regard to any
requirement of separation from
service), or
(ii) separates from service.
(E) Nondiscrimination requirements.--An
arrangement shall not meet the requirements of
this subparagraph if the Secretary finds that a
pattern of discrimination exists with respect
to participation.
(F) Special rules for key employees.--
(i) In general.--An arrangement shall
not meet the requirements of this
paragraph if any key employee is
eligible to participate.
(ii) Key employee.--For purposes of
this subparagraph, the term ``key
employee'' has the meaning given such
term by section 416(i)(1), except that
in the case of a plan other than a top-
heavy plan (within the meaning of
section 416(g)), such term shall not
include an individual who is a key
employee solely by reason of section
416(i)(1)(A)(i).
(3) Repayments of cashouts under governmental
plans.--In the case of any repayment of contributions
(including interest thereon) to the governmental plan
with respect to an amount previously refunded upon a
forfeiture of service credit under the plan or under
another governmental plan maintained by a State or
local government employer within the same State, any
such repayment shall not be taken into account for
purposes of this section.
(4) Special rules for sections 403(b) and 408.--For
purposes of this section, any annuity contract
described in section 403(b) for the benefit of a
participant shall be treated as a defined contribution
plan maintained by each employer with respect to which
the participant has the control required under
subsection (b) or (c) of section 414 (as modified by
subsection (h)). For purposes of this section, any
contribution by an employer to a simplified employee
pension plan for an individual for a taxable year shall
be treated as an employer contribution to a defined
contribution plan for such individual for such year.
(l) Treatment of certain medical benefits.--
(1) In general.--For purposes of this section,
contributions allocated to any individual medical
benefit account which is part of a pension or annuity
plan shall be treated as an annual addition to a
defined contribution plan for purposes of subsection
(c). Subparagraph (B) of subsection (c)(1) shall not
apply to any amount treated as an annual addition under
the preceding sentence.
(2) Individual medical benefit account.--For purposes
of paragraph (1), the term ``individual medical benefit
account'' means any separate account--
(A) which is established for a participant
under a pension or annuity plan, and
(B) from which benefits described in section
401(h) are payable solely to such participant[,
his spouse, or his dependents] or the
participant's spouse or dependents.
(m) Treatment of qualified governmental excess benefit
arrangements.--
(1) Governmental plan not affected.--In determining
whether a governmental plan (as defined in section
414(d)) meets the requirements of this section,
benefits provided under a qualified governmental excess
benefit arrangement shall not be taken into account.
Income accruing to a governmental plan (or to a trust
that is maintained solely for the purpose of providing
benefits under a qualified governmental excess benefit
arrangement) in respect of a qualified governmental
excess benefit arrangement shall constitute income
derived from the exercise of an essential governmental
function upon which such governmental plan (or trust)
shall be exempt from tax under section 115.
(2) Taxation of participant.--For purposes of this
chapter--
(A) the taxable year or years for which
amounts in respect of a qualified governmental
excess benefit arrangement are includible in
gross income by a participant, and
(B) the treatment of such amounts when so
includible by the participant,
shall be determined as if such qualified governmental
excess benefit arrangement were treated as a plan for
the deferral of compensation which is maintained by a
corporation not exempt from tax under this chapter and
which does not meet the requirements for qualification
under section 401.
(3) Qualified governmental excess benefit
arrangement.--For purposes of this subsection, the term
``qualified governmental excess benefit arrangement''
means a portion of a governmental plan if--
(A) such portion is maintained solely for the
purpose of providing to participants in the
plan that part of the participant's annual
benefit otherwise payable under the terms of
the plan that exceeds the limitations on
benefits imposed by this section,
(B) under such portion no election is
provided at any time to the participant
(directly or indirectly) to defer compensation,
and
(C) benefits described in subparagraph (A)
are not paid from a trust forming a part of
such governmental plan unless such trust is
maintained solely for the purpose of providing
such benefits.
(n) Special rules relating to purchase of permissive service
credit.--
(1) In general.--If a participant makes 1 or more
contributions to a defined benefit governmental plan
(within the meaning of section 414(d)) to purchase
permissive service credit under such plan, then the
requirements of this section shall be treated as met
only if--
(A) the requirements of subsection (b) are
met, determined by treating the accrued benefit
derived from all such contributions as an
annual benefit for purposes of subsection (b),
or
(B) the requirements of subsection (c) are
met, determined by treating all such
contributions as annual additions for purposes
of subsection (c).
(2) Application of limit.--For purposes of--
(A) applying paragraph (1)(A), the plan shall
not fail to meet the reduced limit under
subsection (b)(2)(C) solely by reason of this
subsection, and
(B) applying paragraph (1)(B), the plan shall
not fail to meet the percentage limitation
under subsection (c)(1)(B) solely by reason of
this subsection.
(3) Permissive service credit.--For purposes of this
subsection--
(A) In general.--The term ``permissive
service credit'' means service credit--
(i) recognized by the governmental
plan for purposes of calculating a
participant's benefit under the plan,
(ii) which such participant has not
received under such governmental plan,
and
(iii) which such participant may
receive only by making a voluntary
additional contribution, in an amount
determined under such governmental
plan, which does not exceed the amount
necessary to fund the benefit
attributable to such service credit.
Such term may include service credit for
periods for which there is no performance of
service, and, notwithstanding clause (ii), may
include service credited in order to provide an
increased benefit for service credit which a
participant is receiving under the plan.
(B) Limitation on nonqualified service
credit.--A plan shall fail to meet the
requirements of this section if--
(i) more than 5 years of nonqualified
service credit are taken into account
for purposes of this subsection, or
(ii) any nonqualified service credit
is taken into account under this
subsection before the employee has at
least 5 years of participation under
the plan.
(C) Nonqualified service credit.--For
purposes of subparagraph (B), the term
``nonqualified service credit'' means
permissive service credit other than that
allowed with respect to--
(i) service (including parental,
medical, sabbatical, and similar leave)
as an employee of the Government of the
United States, any State or political
subdivision thereof, or any agency or
instrumentality of any of the foregoing
(other than military service or service
for credit which was obtained as a
result of a repayment described in
subsection (k)(3)),
(ii) service (including parental,
medical, sabbatical, and similar leave)
as an employee (other than as an
employee described in clause (i)) of an
educational organization described in
section 170(b)(1)(A)(ii) which is a
public, private, or sectarian school
which provides elementary or secondary
education (through grade 12), or a
comparable level of education, as
determined under the applicable law of
the jurisdiction in which the service
was performed,
(iii) service as an employee of an
association of employees who are
described in clause (i), or
(iv) military service (other than
qualified military service under
section 414(u)) recognized by such
governmental plan.
In the case of service described in clause (i),
(ii), or (iii), such service will be
nonqualified service if recognition of such
service would cause a participant to receive a
retirement benefit for the same service under
more than one plan.
(D) Special rules for trustee-to-trustee
transfers.--In the case of a trustee-to-trustee
transfer to which section 403(b)(13)(A) or
457(e)(17)(A) applies (without regard to
whether the transfer is made between plans
maintained by the same employer)--
(i) the limitations of subparagraph
(B) shall not apply in determining
whether the transfer is for the
purchase of permissive service credit,
and
(ii) the distribution rules
applicable under this title to the
defined benefit governmental plan to
which any amounts are so transferred
shall apply to such amounts and any
benefits attributable to such amounts.
* * * * * * *
Subpart E--TREATMENT OF TRANSFERS TO RETIREE HEALTH ACCOUNTS
* * * * * * *
SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH
ACCOUNTS.
(a) General rule.--If there is a qualified transfer of any
excess pension assets of a defined benefit plan to a health
benefits account, or an applicable life insurance account,
which is part of such plan--
(1) a trust which is part of such plan shall not be
treated as failing to meet the requirements of
subsection (a) or (h) of section 401 solely by reason
of such transfer (or any other action authorized under
this section),
(2) no amount shall be includible in the gross income
of the employer maintaining the plan solely by reason
of such transfer,
(3) such transfer shall not be treated--
(A) as an employer reversion for purposes of
section 4980, or
(B) as a prohibited transaction for purposes
of section 4975, and
(4) the limitations of subsection (d) shall apply to
such employer.
(b) Qualified transfer.--For purposes of this section--
(1) In general.--The term ``qualified transfer''
means a transfer--
(A) of excess pension assets of a defined
benefit plan to a health benefits account, or
an applicable life insurance account, which is
part of such plan,
(B) which does not contravene any other
provision of law, and
(C) with respect to which the following
requirements are met in connection with the
plan--
(i) the use requirements of
subsection (c)(1),
(ii) the vesting requirements of
subsection (c)(2), and
(iii) the minimum cost requirements
of subsection (c)(3).
(2) Only 1 transfer per year.--No more than 1
transfer with respect to any plan during a taxable year
may be treated as a qualified transfer for purposes of
this section. If there is a transfer from a defined
benefit plan to both a health benefits account and an
applicable life insurance account during any taxable
year, such transfers shall be treated as 1 transfer for
purposes of this paragraph.
(3) Limitation on amount transferred.--The amount of
excess pension assets which may be transferred to an
account in a qualified transfer shall not exceed the
amount which is reasonably estimated to be the amount
the employer maintaining the plan will pay (whether
directly or through reimbursement) out of such account
during the taxable year of the transfer for qualified
current retiree liabilities.
(4) Expiration.--No transfer made after December 31,
2025, shall be treated as a qualified transfer.
(c) Requirements of plans transferring assets.--
(1) Use of transferred assets.--
(A) In general.--Any assets transferred to a
health benefits account, or an applicable life
insurance account, in a qualified transfer (and
any income allocable thereto) shall be used
only to pay qualified current retiree
liabilities (other than liabilities of key
employees not taken into account under
subsection (e)(1)(E)) for the taxable year of
the transfer (whether directly or through
reimbursement). In the case of a qualified
future transfer or collectively bargained
transfer to which subsection (f) applies, any
assets so transferred may also be used to pay
liabilities described in subsection (f)(2)(C).
(B) Amounts not used to pay for health
benefits or life insurance.--
(i) In general.--Any assets
transferred to a health benefits
account, or an applicable life
insurance account, in a qualified
transfer (and any income allocable
thereto) which are not used as provided
in subparagraph (A) shall be
transferred out of the account to the
transferor plan.
(ii) Tax treatment of amounts.--Any
amount transferred out of an account
under clause (i)--
(I) shall not be includible
in the gross income of the
employer for such taxable year,
but
(II) shall be treated as an
employer reversion for purposes
of section 4980 (without regard
to subsection (d) thereof).
(C) Ordering rule.--For purposes of this
section, any amount paid out of a health
benefits account, or an applicable life
insurance account, shall be treated as paid
first out of the assets and income described in
subparagraph (A).
(2) Requirements relating to pension benefits
accruing before transfer.--The requirements of this
paragraph are met if the plan provides that the accrued
pension benefits of any participant or beneficiary
under the plan become nonforfeitable in the same manner
which would be required if the plan had terminated
immediately before the qualified transfer (or in the
case of a participant who separated during the 1-year
period ending on the date of the transfer, immediately
before such separation).
(3) Minimum cost requirements.--
(A) In general.--The requirements of this
paragraph are met if each group health plan or
arrangement under which applicable health
benefits are provided, and each group-term life
insurance plan under which applicable life
insurance benefits are provided, provides that
the applicable employer cost for each taxable
year during the cost maintenance period shall
not be less than the higher of the applicable
employer costs for each of the 2 taxable years
immediately preceding the taxable year of the
qualified transfer or, in the case of a
transfer which involves a plan maintained by an
employer described in subsection
(f)(2)(E)(i)(III), if the plan meets the
requirements of subsection (f)(2)(D)(i)(II).
(B) Applicable employer cost.--For purposes
of this paragraph, the term ``applicable
employer cost'' means, with respect to any
taxable year, the amount determined by
dividing--
(i) the qualified current retiree
liabilities of the employer for such
taxable year determined--
(I) separately with respect
to applicable health benefits
and applicable life insurance
benefits,
(II) without regard to any
reduction under subsection
(e)(1)(B), and
(III) in the case of a
taxable year in which there was
no qualified transfer, in the
same manner as if there had
been such a transfer at the end
of the taxable year, by
(ii) the number of individuals to
whom coverage was provided during such
taxable year for the benefits with
respect to which the determination
under clause (i) is made.
(C) Election to compute cost separately.--An
employer may elect to have this paragraph
applied separately for applicable health
benefits with respect to individuals eligible
for benefits under title XVIII of the Social
Security Act at any time during the taxable
year and with respect to individuals not so
eligible, and separately for applicable life
insurance benefits with respect to individuals
age 65 or older at any time during the taxable
year and with respect to individuals under age
65 during the taxable year.
(D) Cost maintenance period.--For purposes of
this paragraph, the term ``cost maintenance
period'' means the period of 5 taxable years
beginning with the taxable year in which the
qualified transfer occurs. If a taxable year is
in two or more overlapping cost maintenance
periods, this paragraph shall be applied by
taking into account the highest applicable
employer cost required to be provided under
subparagraph (A) for such taxable year.
(E) Regulations.--
(i) In general.--The Secretary shall
prescribe such regulations as may be
necessary to prevent an employer who
significantly reduces retiree health
coverage or retiree life insurance
coverage, as the case may be, during
the cost maintenance period from being
treated as satisfying the minimum cost
requirement of this subsection.
(ii) Insignificant cost reductions
for retiree health coverage
permitted.--
(I) In general.--An eligible
employer shall not be treated
as failing to meet the
requirements of this paragraph
for any taxable year if, in
lieu of any reduction of
retiree health coverage
permitted under the regulations
prescribed under clause (i),
the employer reduces applicable
employer cost by an amount not
in excess of the reduction in
costs which would have occurred
if the employer had made the
maximum permissible reduction
in retiree health coverage
under such regulations. In
applying such regulations to
any subsequent taxable year,
any reduction in applicable
employer cost under this clause
shall be treated as if it were
an equivalent reduction in
retiree health coverage.
(II) Eligible employer.--For
purposes of subclause (I), an
employer shall be treated as an
eligible employer for any
taxable year if, for the
preceding taxable year, the
qualified current retiree
liabilities of the employer
with respect to applicable
health benefits were at least 5
percent of the gross receipts
of the employer. For purposes
of this subclause, the rules of
paragraphs (2), (3)(B), and
(3)(C) of section 448(c) shall
apply in determining the amount
of an employer's gross
receipts.
(d) Limitations on employer.--For purposes of this title--
(1) Deduction limitations.--No deduction shall be
allowed--
(A) for the transfer of any amount to a
health benefits account, or an applicable life
insurance account, in a qualified transfer (or
any retransfer to the plan under subsection
(c)(1)(B)),
(B) for qualified current retiree liabilities
paid out of the assets (and income) described
in subsection (c)(1), or
(C) for any amounts to which subparagraph (B)
does not apply and which are paid for qualified
current retiree liabilities for the taxable
year to the extent such amounts are not greater
than the excess (if any) of--
(i) the amount determined under
subparagraph (A) (and income allocable
thereto), over
(ii) the amount determined under
subparagraph (B).
(2) No contributions allowed.--An employer may not
contribute any amount to a health benefits account or
welfare benefit fund (as defined in section 419(e)(1))
with respect to qualified current retiree liabilities
for which transferred assets are required to be used
under subsection (c)(1).
(e) Definition and special rules.--For purposes of this
section--
(1) Qualified current retiree liabilities.--For
purposes of this section--
(A) In general.--The term ``qualified current
retiree liabilities'' means, with respect to
any taxable year, the aggregate amounts
(including administrative expenses) which would
have been allowable as a deduction to the
employer for such taxable year with respect to
applicable health benefits and applicable life
insurance benefits provided during such taxable
year if--
(i) such benefits were provided
directly by the employer, and
(ii) the employer used the cash
receipts and disbursements method of
accounting.
For purposes of the preceding sentence, the
rule of section 419(c)(3)(B) shall apply.
(B) Reductions for amounts previously set
aside.--The amount determined under
subparagraph (A) shall be reduced by the amount
(determined separately for applicable health
benefits and applicable life insurance
benefits) which bears the same ratio to such
amount as--
(i) the value (as of the close of the
plan year preceding the year of the
qualified transfer) of the assets in
all health benefits accounts or
applicable life insurance accounts or
welfare benefit funds (as defined in
section 419(e)(1)) set aside to pay for
the qualified current retiree
liability, bears to
(ii) the present value of the
qualified current retiree liabilities
for all plan years (determined without
regard to this subparagraph).
(C) Applicable health benefits.--The term
``applicable health benefits'' means health
benefits or coverage which are provided to--
(i) retired employees who,
immediately before the qualified
transfer, are entitled to receive such
benefits by reason of retirement and
who are entitled to pension benefits
under the plan, and
(ii) their spouses and dependents.
(D) Applicable life insurance benefits.--The
term ``applicable life insurance benefits''
means group-term life insurance coverage
provided to retired employees who, immediately
before the qualified transfer, are entitled to
receive such coverage by reason of retirement
and who are entitled to pension benefits under
the plan, but only to the extent that such
coverage is provided under a policy for retired
employees and the cost of such coverage is
excludable from the retired employee's gross
income under section 79.
(E) Key employees excluded.--If an employee
is a key employee (within the meaning of
section 416(i)(1)) with respect to any plan
year ending in a taxable year, such employee
shall not be taken into account in computing
qualified current retiree liabilities for such
taxable year or in calculating applicable
employer cost under subsection (c)(3)(B).
(2) Excess pension assets.--The term ``excess pension
assets'' means the excess (if any) of--
(A) the lesser of--
(i) the fair market value of the
plan's assets (reduced by the
prefunding balance and funding standard
carryover balance determined under
section 430(f)), or
(ii) the value of plan assets as
determined under section 430(g)(3)
after reduction under section 430(f),
over
(B) 125 percent of the sum of the funding
target and the target normal cost determined
under section 430 for such plan year.
(3) Health benefits account.--The term ``health
benefits account'' means an account established and
maintained under section 401(h).
(4) Applicable life insurance account.--The term
``applicable life insurance account'' means a separate
account established and maintained for amounts
transferred under this section for qualified current
retiree liabilities based on premiums for applicable
life insurance benefits.
(5) Coordination with sections 430 and 433.--In the
case of a qualified transfer, any assets so transferred
shall not, for purposes of this section and sections
430 and 433, be treated as assets in the plan.
(6) Application to multiemployer plans.--In the case
of a multiemployer plan, this section shall be applied
to any such plan--
(A) by treating any reference in this section
to an employer as a reference to all employers
maintaining the plan (or, if appropriate, the
plan sponsor), and
(B) in accordance with such modifications of
this section (and the provisions of this title
relating to this section) as the Secretary
determines appropriate to reflect the fact the
plan is not maintained by a single employer.
(f) Qualified transfers to cover future retiree costs and
collectively bargained retiree benefits.--
(1) In general.--An employer maintaining a defined
benefit plan (other than a multiemployer plan) may, in
lieu of a qualified transfer, elect for any taxable
year to have the plan make--
(A) a qualified future transfer, or
(B) a collectively bargained transfer.
Except as provided in this subsection, a qualified
future transfer and a collectively bargained transfer
shall be treated for purposes of this title and the
Employee Retirement Income Security Act of 1974 as if
it were a qualified transfer.
(2) Qualified future and collectively bargained
transfers.--For purposes of this subsection--
(A) In general.--The terms ``qualified future
transfer'' and ``collectively bargained
transfer'' mean a transfer which meets all of
the requirements for a qualified transfer,
except that--
(i) the determination of excess
pension assets shall be made under
subparagraph (B),
(ii) the limitation on the amount
transferred shall be determined under
subparagraph (C),
(iii) the minimum cost requirements
of subsection (c)(3) shall be modified
as provided under subparagraph (D), and
(iv) in the case of a collectively
bargained transfer, the requirements of
subparagraph (E) shall be met with
respect to the transfer.
(B) Excess pension assets.--
(i) In general.--In determining
excess pension assets for purposes of
this subsection, subsection (e)(2)
shall be applied by substituting ``120
percent'' for ``125 percent''.
(ii) Requirement to maintain funded
status.--If, as of any valuation date
of any plan year in the transfer
period, the amount determined under
subsection (e)(2)(B) (after application
of clause (i)) exceeds the amount
determined under subsection (e)(2)(A),
either--
(I) the employer maintaining
the plan shall make
contributions to the plan in an
amount not less than the amount
required to reduce such excess
to zero as of such date, or
(II) there is transferred
from the health benefits
account or applicable life
insurance account, as the case
may be, to the plan an amount
not less than the amount
required to reduce such excess
to zero as of such date.
(C) Limitation on amount transferred.--
Notwithstanding subsection (b)(3), the amount
of the excess pension assets which may be
transferred--
(i) in the case of a qualified future
transfer shall be equal to the sum of--
(I) if the transfer period
includes the taxable year of
the transfer, the amount
determined under subsection
(b)(3) for such taxable year,
plus
(II) in the case of all other
taxable years in the transfer
period, the sum of the
qualified current retiree
liabilities which the plan
reasonably estimates, in
accordance with guidance issued
by the Secretary, will be
incurred for each of such
years, and
(ii) in the case of a collectively
bargained transfer, shall not exceed
the amount which is reasonably
estimated, in accordance with the
provisions of the collective bargaining
agreement and generally accepted
accounting principles, to be the amount
the employer maintaining the plan will
pay (whether directly or through
reimbursement) out of such account
during the collectively bargained cost
maintenance period for collectively
bargained retiree liabilities.
(D) Minimum cost requirements.--
(i) In general.--The requirements of
subsection (c)(3) shall be treated as
met if--
(I) in the case of a
qualified future transfer, each
group health plan or
arrangement under which
applicable health benefits are
provided, and each group-term
life insurance plan or
arrangement under which
applicable life insurance
benefits are provided, provides
applicable health benefits or
applicable life insurance
benefits, as the case may be,
during the period beginning
with the first year of the
transfer period and ending with
the last day of the 4th year
following the transfer period
such that the annual average
amount of the applicable
employer cost during such
period is not less than the
applicable employer cost
determined under subsection
(c)(3)(A) with respect to the
transfer, and
(II) in the case of a
collectively bargained
transfer, each collectively
bargained plan under which
collectively bargained health
benefits or collectively
bargained life insurance
benefits are provided provides
that the collectively bargained
employer cost for each taxable
year during the collectively
bargained cost maintenance
period shall not be less than
the amount specified by the
collective bargaining
agreement.
(ii) Election to maintain benefits
for future transfers.--An employer may
elect, in lieu of the requirements of
clause (i)(I), to meet the requirements
of subsection (c)(3) with respect to
applicable health benefits or
applicable life insurance benefits by
meeting the requirements of such
subsection (as in effect before the
amendments made by section 535 of the
Tax Relief Extension Act of 1999) for
each of the years described in the
period under clause (i)(I). Such
election may be made separately with
respect to applicable health benefits
and applicable life insurance benefits.
In the case of an election with respect
to applicable life insurance benefits,
the first sentence of this clause shall
be applied as if subsection (c)(3) as
in effect before the amendments made by
such Act applied to such benefits.
(iii) Collectively bargained employer
cost.--For purposes of this
subparagraph, the term ``collectively
bargained employer cost'' means the
average cost per covered individual of
providing collectively bargained health
benefits, collectively bargained life
insurance benefits, or both, as the
case may be, as determined in
accordance with the applicable
collective bargaining agreement. Such
agreement may provide for an
appropriate reduction in the
collectively bargained employer cost to
take into account any portion of the
collectively bargained health benefits,
collectively bargained life insurance
benefits, or both, as the case may be,
that is provided or financed by a
government program or other source.
(E) Special rules for collectively bargained
transfers.--
(i) In general.--A collectively
bargained transfer shall only include a
transfer which--
(I) is made in accordance
with a collective bargaining
agreement,
(II) before the transfer, the
employer designates, in a
written notice delivered to
each employee organization that
is a party to the collective
bargaining agreement, as a
collectively bargained transfer
in accordance with this
section, and
(III) involves a defined
benefit plan maintained by an
employer which, in its taxable
year ending in 2005, provided
health benefits or coverage to
retirees and their spouses and
dependents under all of the
health benefit plans maintained
by the employer, but only if
the aggregate cost (including
administrative expenses) of
such benefits or coverage which
would have been allowable as a
deduction to the employer (if
such benefits or coverage had
been provided directly by the
employer and the employer used
the cash receipts and
disbursements method of
accounting) is at least 5
percent of the gross receipts
of the employer (determined in
accordance with the last
sentence of subsection
(c)(3)(E)(ii)(II)) for such
taxable year, or a plan
maintained by a successor to
such employer.
(ii) Use of assets.--Any assets
transferred to a health benefits
account, or an applicable life
insurance account, in a collectively
bargained transfer (and any income
allocable thereto) shall be used only
to pay collectively bargained retiree
liabilities (other than liabilities of
key employees not taken into account
under paragraph (6)(B)(iii)) for the
taxable year of the transfer or for any
subsequent taxable year during the
collectively bargained cost maintenance
period (whether directly or through
reimbursement).
(3) Coordination with other transfers.--In applying
subsection (b)(3) to any subsequent transfer during a
taxable year in a transfer period or collectively
bargained cost maintenance period, qualified current
retiree liabilities shall be reduced by any such
liabilities taken into account with respect to the
qualified future transfer or collectively bargained
transfer to which such period relates.
(4) Special deduction rules for collectively
bargained transfers.--In the case of a collectively
bargained transfer--
(A) the limitation under subsection (d)(1)(C)
shall not apply, and
(B) notwithstanding subsection (d)(2), an
employer may contribute an amount to a health
benefits account or welfare benefit fund (as
defined in section 419(e)(1)) with respect to
collectively bargained retiree liabilities for
which transferred assets are required to be
used under subsection (c)(1)(B), and the
deductibility of any such contribution shall be
governed by the limits applicable to the
deductibility of contributions to a welfare
benefit fund under a collective bargaining
agreement (as determined under section
419A(f)(5)(A)) without regard to whether such
contributions are made to a health benefits
account or welfare benefit fund and without
regard to the provisions of section 404 or the
other provisions of this section.
The Secretary shall provide rules to ensure that the
application of this paragraph does not result in a
deduction being allowed more than once for the same
contribution or for 2 or more contributions or
expenditures relating to the same collectively
bargained retiree liabilities.
(5) Transfer period.--For purposes of this
subsection, the term ``transfer period'' means, with
respect to any transfer, a period of consecutive
taxable years (not less than 2) specified in the
election under paragraph (1) which begins and ends
during the 10-taxable-year period beginning with the
taxable year of the transfer.
(6) Terms relating to collectively bargained
transfers.--For purposes of this subsection--
(A) Collectively bargained cost maintenance
period.--The term ``collectively bargained cost
maintenance period'' means, with respect to
each covered retiree and [his covered spouse
and dependents] the covered spouse and
dependents of such retiree, the shorter of--
(i) the remaining lifetime of such
covered retiree and, in the case of a
transfer to a health benefits account,
[his covered spouse and dependents] the
covered spouse and dependents of such
retiree, or
(ii) the period of coverage provided
by the collectively bargained plan
(determined as of the date of the
collectively bargained transfer) with
respect to such covered retiree and, in
the case of a transfer to a health
benefits account, [his covered spouse
and dependents] the covered spouse and
dependents of such retiree.
(B) Collectively bargained retiree
liabilities.--
(i) In general.--The term
``collectively bargained retiree
liabilities'' means the present value,
as of the beginning of a taxable year
and determined in accordance with the
applicable collective bargaining
agreement, of all collectively
bargained health benefits, and
collectively bargained life insurance
benefits, (including administrative
expenses) for such taxable year and all
subsequent taxable years during the
collectively bargained cost maintenance
period.
(ii) Reduction for amounts previously
set aside.--The amount determined under
clause (i) shall be reduced by the
value (as of the close of the plan year
preceding the year of the collectively
bargained transfer) of the assets in
all health benefits accounts,
applicable life insurance accounts, or
welfare benefit funds (as defined in
section 419(e)(1)) set aside to pay for
the collectively bargained retiree
liabilities. The preceding sentence
shall be applied separately for
collectively bargained health benefits
and collectively bargained life
insurance benefits.
(iii) Key employees excluded.--If an
employee is a key employee (within the
meaning of section 416(i)(1)) with
respect to any plan year ending in a
taxable year, such employee shall not
be taken into account in computing
collectively bargained retiree
liabilities for such taxable year or in
calculating collectively bargained
employer cost under subsection
(c)(3)(C).
(C) Collectively bargained health benefits.--
The term ``collectively bargained health
benefits'' means health benefits or coverage--
(i) which are provided to retired
employees who, immediately before the
collectively bargained transfer, are
entitled to receive such benefits by
reason of retirement and who are
entitled to pension benefits under the
plan, and their spouses and dependents,
and
(ii) if specified by the provisions
of the collective bargaining agreement
governing the collectively bargained
transfer, which will be provided at
retirement to employees who are not
retired employees at the time of the
transfer and who are entitled to
receive such benefits and who are
entitled to pension benefits under the
plan, and their spouses and dependents.
(D) Collectively bargained life insurance
benefits.--The term ``collectively bargained
life insurance benefits'' means, with respect
to any collectively bargained transfer--
(i) applicable life insurance
benefits which are provided to retired
employees who, immediately before the
transfer, are entitled to receive such
benefits by reason of retirement, and
(ii) if specified by the provisions
of the collective bargaining agreement
governing the transfer, applicable life
insurance benefits which will be
provided at retirement to employees who
are not retired employees at the time
of the transfer.
(E) Collectively bargained plan.--The term
``collectively bargained plan'' means a group
health plan or arrangement for retired
employees and their spouses and dependents, or
a group-term life insurance plan or arrangement
for retired employees, that is maintained
pursuant to 1 or more collective bargaining
agreements.
(g) Segment rates determined without pension stabilization.--
For purposes of this section, section 430 shall be applied
without regard to subsection (h)(2)(C)(iv) thereof.
PART II--CERTAIN STOCK OPTIONS
* * * * * * *
SEC. 424. DEFINITIONS AND SPECIAL RULES.
(a) Corporate reorganizations, liquidations, etc..--For
purposes of this part, the term ``issuing or assuming a stock
option in a transaction to which section 424(a) applies'' means
a substitution of a new option for the old option, or an
assumption of the old option, by an employer corporation, or a
parent or subsidiary of such corporation, by reason of a
corporate merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation, if--
(1) the excess of the aggregate fair market value of
the shares subject to the option immediately after the
substitution or assumption over the aggregate option
price of such shares is not more than the excess of the
aggregate fair market value of all shares subject to
the option immediately before such substitution or
assumption over the aggregate option price of such
shares, and
(2) the new option or the assumption of the old
option does not give the employee additional benefits
which he did not have under the old option.
For purposes of this subsection, the parent-subsidiary
relationship shall be determined at the time of any such
transaction under this subsection.
(b) Acquisition of new stock.--For purposes of this part, if
stock is received by an individual in a distribution to which
section 305, 354, 355, 356, or 1036 (or so much of section 1031
as relates to section 1036) applies, and such distribution was
made with respect to stock transferred to him upon his exercise
of the option, such stock shall be considered as having been
transferred to him on his exercise of such option. A similar
rule shall be applied in the case of a series of such
distributions.
(c) Disposition.--
(1) In general.--Except as provided in paragraphs
(2), (3), and (4), for purposes of this part, the term
``disposition'' includes a sale, exchange, gift, or a
transfer of legal title, but does not include--
(A) a transfer from a decedent to an estate
or a transfer by bequest or inheritance;
(B) an exchange to which section 354, 355,
356, or 1036 (or so much of section 1031 as
relates to section 1036) applies; or
(C) a mere pledge or hypothecation.
(2) Joint tenancy.--The acquisition of a share of
stock in the name of the employee and another jointly
with the right of survivorship or a subsequent transfer
of a share of stock into such joint ownership shall not
be deemed a disposition, but a termination of such
joint tenancy (except to the extent such employee
acquires ownership of such stock) shall be treated as a
disposition by him occurring at the time such joint
tenancy is terminated.
(3) Special rule where incentive stock is acquired
through use of other statutory option stock.--
(A) Nonrecognition sections not to apply.--
If--
(i) there is a transfer of statutory
option stock in connection with the
exercise of any incentive stock option,
and
(ii) the applicable holding period
requirements (under section 422(a)(1)
or 423(a)(1)) are not met before such
transfer,
then no section referred to in subparagraph (B)
of paragraph (1) shall apply to such transfer.
(B) Statutory option stock.--For purpose of
subparagraph (A), the term ``statutory option
stock'' means any stock acquired through the
exercise of an incentive stock option or an
option granted under an employee stock purchase
plan.
(4) Transfers between spouses or incident to
divorce.--In the case of any transfer described in
subsection (a) of section 1041--
(A) such transfer shall not be treated as a
disposition for purposes of this part, and
(B) the same tax treatment under this part
with respect to the transferred property shall
apply to the transferee as would have applied
to the transferor.
(d) Attribution of stock ownership.--For purposes of this
part, in applying the percentage limitations of sections
422(b)(6) and 423(b)(3)--
(1) the individual with respect to whom such
limitation is being determined shall be considered as
owning the stock owned, directly or indirectly, by or
for [his] the individual's brothers and sisters
(whether by the whole or half blood), spouse,
ancestors, and lineal descendants; and
(2) stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust, shall be
considered as being owned proportionately by or for its
shareholders, partners, or beneficiaries.
(e) Parent corporation.--For purposes of this part, the term
``parent corporation'' means any corporation (other than the
employer corporation) in an unbroken chain of corporations
ending with the employer corporation if, at the time of the
granting of the option, each of the corporations other than the
employer corporation owns stock possessing 50 percent or more
of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
(f) Subsidiary corporation.--For purposes of this part, the
term ``subsidiary corporation'' means any corporation (other
than the employer corporation) in an unbroken chain of
corporations beginning with the employer corporation if, at the
time of the granting of the option, each of the corporations
other than the last corporation in the unbroken chain owns
stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain.
(g) Special rule for applying subsections (e) and (f).--In
applying subsections (e) and (f) for purposes of sections
422(a)(2) and 423(a)(2), there shall be substituted for the
term ``employer corporation'' wherever it appears in
subsections (e) and (f) the term ``grantor corporation'' or the
term ``corporation issuing or assuming a stock option in a
transaction to which section 424(a) applies'', as the case may
be.
(h) Modification, extension, or renewal of option.--
(1) In general.--For purposes of this part, if the
terms of any option to purchase stock are modified,
extended, or renewed, such modification, extension, or
renewal shall be considered as the granting of a new
option.
(2) Special rule for section 423 options.--In the
case of the transfer of stock pursuant to the exercise
of an option to which section 423 applies and which has
been so modified, extended, or renewed, the fair market
value of such stock at the time of the granting of the
option shall be considered as whichever of the
following is the highest--
(A) the fair market value of such stock on
the date of the original granting of the
option,
(B) the fair market value of such stock on
the date of the making of such modification,
extension, or renewal, or
(C) the fair market value of such stock at
the time of the making of any intervening
modification, extension, or renewal.
(3) Definition of modification.--The term
``modification'' means any change in the terms of the
option which gives the employee additional benefits
under the option, but such term shall not include a
change in the terms of the option--
(A) attributable to the issuance or
assumption of an option under subsection (a);
(B) to permit the option to qualify under
section 423(b)(9); or
(C) in the case of an option not immediately
exercisable in full, to accelerate the time at
which the option may be exercised.
(i) Stockholder approval.--For purposes of this part, if the
grant of an option is subject to approval by stockholders, the
date of grant of the option shall be determined as if the
option had not been subject to such approval.
(j) Cross references.--For provisions requiring the reporting
of certain acts with respect to a qualified stock option, an
incentive stock option, options granted under employer stock
purchase plans, or a restricted stock option, see section 6039.
Subchapter E--ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
* * * * * * *
PART II--METHODS OF ACCOUNTING
* * * * * * *
Subpart C--TAXABLE YEAR FOR WHICH DEDUCTIONS TAKEN
* * * * * * *
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
(a) Disallowance.--
(1) In general.--If for any taxable year the taxpayer
is described in paragraph (2), neither--
(A) the passive activity loss, nor
(B) the passive activity credit,
for the taxable year shall be allowed.
(2) Persons described.--The following are described
in this paragraph:
(A) any individual, estate, or trust,
(B) any closely held C corporation, and
(C) any personal service corporation.
(b) Disallowed loss or credit carried to next year.--Except
as otherwise provided in this section, any loss or credit from
an activity which is disallowed under subsection (a) shall be
treated as a deduction or credit allocable to such activity in
the next taxable year.
(c) Passive activity defined.--For purposes of this section--
(1) In general.--The term ``passive activity'' means
any activity--
(A) which involves the conduct of any trade
or business, and
(B) in which the taxpayer does not materially
participate.
(2) Passive activity includes any rental activity.--
Except as provided in paragraph (7), the term ``passive
activity'' includes any rental activity.
(3) Working interests in oil and gas property.--
(A) In general.--The term ``passive
activity'' shall not include any working
interest in any oil or gas property which the
taxpayer holds directly or through an entity
which does not limit the liability of the
taxpayer with respect to such interest.
(B) Income in subsequent years.--If any
taxpayer has any loss for any taxable year from
a working interest in any oil or gas property
which is treated as a loss which is not from a
passive activity, then any net income from such
property (or any property the basis of which is
determined in whole or in part by reference to
the basis of such property) for any succeeding
taxable year shall be treated as income of the
taxpayer which is not from a passive activity.
If the preceding sentence applies to the net
income from any property for any taxable year,
any credits allowable under subpart B (other
than section 27) or D of part IV of subchapter
A for such taxable year which are attributable
to such property shall be treated as credits
not from a passive activity to the extent the
amount of such credits does not exceed the
regular tax liability of the taxpayer for the
taxable year which is allocable to such net
income.
(4) Material participation not required for
paragraphs (2) and (3).--Paragraphs (2) and (3) shall
be applied without regard to whether or not the
taxpayer materially participates in the activity.
(5) Trade or business includes research and
experimentation activity.--For purposes of paragraph
(1)(A), the term ``trade or business'' includes any
activity involving research or experimentation (within
the meaning of section 174).
(6) Activity in connection with trade or business or
production of income.--To the extent provided in
regulations, for purposes of paragraph (1)(A), the term
``trade or business'' includes--
(A) any activity in connection with a trade
or business, or
(B) any activity with respect to which
expenses are allowable as a deduction under
section 212.
(7) Special rules for taxpayers in real property
business.--
(A) In general.--If this paragraph applies to
any taxpayer for a taxable year--
(i) paragraph (2) shall not apply to
any rental real estate activity of such
taxpayer for such taxable year, and
(ii) this section shall be applied as
if each interest of the taxpayer in
rental real estate were a separate
activity.
Notwithstanding clause (ii), a taxpayer may
elect to treat all interests in rental real
estate as one activity. Nothing in the
preceding provisions of this subparagraph shall
be construed as affecting the determination of
whether the taxpayer materially participates
with respect to any interest in a limited
partnership as a limited partner.
(B) Taxpayers to whom paragraph applies.--
This paragraph shall apply to a taxpayer for a
taxable year if--
(i) more than one-half of the
personal services performed in trades
or businesses by the taxpayer during
such taxable year are performed in real
property trades or businesses in which
the taxpayer materially participates,
and
(ii) such taxpayer performs more than
750 hours of services during the
taxable year in real property trades or
businesses in which the taxpayer
materially participates.
In the case of a joint return, the requirements
of the preceding sentence are satisfied if and
only if either spouse separately satisfies such
requirements. For purposes of the preceding
sentence, activities in which a spouse
materially participates shall be determined
under subsection (h).
(C) Real property trade or business.--For
purposes of this paragraph, the term ``real
property trade or business'' means any real
property development, redevelopment,
construction, reconstruction, acquisition,
conversion, rental, operation, management,
leasing, or brokerage trade or business.
(D) Special rules for subparagraph (B).--
(i) Closely held C corporations.--In
the case of a closely held C
corporation, the requirements of
subparagraph (B) shall be treated as
met for any taxable year if more than
50 percent of the gross receipts of
such corporation for such taxable year
are derived from real property trades
or businesses in which the corporation
materially participates.
(ii) Personal services as an
employee.--For purposes of subparagraph
(B), personal services performed as an
employee shall not be treated as
performed in real property trades or
businesses. The preceding sentence
shall not apply if such employee is a
5-percent owner (as defined in section
416(i)(1)(B)) in the employer.
(d) Passive activity loss and credit defined.--For purposes
of this section--
(1) Passive activity loss.--The term ``passive
activity loss'' means the amount (if any) by which--
(A) the aggregate losses from all passive
activities for the taxable year, exceed
(B) the aggregate income from all passive
activities for such year.
(2) Passive activity credit.--The term ``passive
activity credit'' means the amount (if any) by which--
(A) the sum of the credits from all passive
activities allowable for the taxable year
under--
(i) subpart D of part IV of
subchapter A, or
(ii) subpart B (other than section
27) of such part IV, exceeds
(B) the regular tax liability of the taxpayer
for the taxable year allocable to all passive
activities.
(e) Special rules for determining income or loss from a
passive activity.--For purposes of this section--
(1) Certain income not treated as income from passive
activity.--In determining the income or loss from any
activity--
(A) In general.--There shall not be taken
into account--
(i) any--
(I) gross income from
interest, dividends, annuities,
or royalties not derived in the
ordinary course of a trade or
business,
(II) expenses (other than
interest) which are clearly and
directly allocable to such
gross income, and
(III) interest expense
properly allocable to such
gross income, and
(ii) gain or loss not derived in the
ordinary course of a trade or business
which is attributable to the
disposition of property--
(I) producing income of a
type described in clause (i),
or
(II) held for investment.
For purposes of clause (ii), any interest in a
passive activity shall not be treated as
property held for investment.
(B) Return on working capital.--For purposes
of subparagraph (A), any income, gain, or loss
which is attributable to an investment of
working capital shall be treated as not derived
in the ordinary course of a trade or business.
(2) Passive losses of certain closely held
corporations may offset active income.--
(A) In general.--If a closely held C
corporation (other than a personal service
corporation) has net active income for any
taxable year, the passive activity loss of such
taxpayer for such taxable year (determined
without regard to this paragraph)--
(i) shall be allowable as a deduction
against net active income, and
(ii) shall not be taken into account
under subsection (a) to the extent so
allowable as a deduction.
A similar rule shall apply in the case of any
passive activity credit of the taxpayer.
(B) Net active income.--For purposes of this
paragraph, the term ``net active income'' means
the taxable income of the taxpayer for the
taxable year determined without regard to--
(i) any income or loss from a passive
activity, and
(ii) any item of gross income,
expense, gain, or loss described in
paragraph (1)(A).
(3) Compensation for personal services.--Earned
income (within the meaning of section 911(d)(2)(A))
shall not be taken into account in computing the income
or loss from a passive activity for any taxable year.
(4) Dividends reduced by dividends received
deduction.--For purposes of paragraphs (1) and (2),
income from dividends shall be reduced by the amount of
any dividends received deduction under section 243 or
245.
(f) Treatment of former passive activities.--For purposes of
this section--
(1) In general.--If an activity is a former passive
activity for any taxable year--
(A) any unused deduction allocable to such
activity under subsection (b) shall be offset
against the income from such activity for the
taxable year,
(B) any unused credit allocable to such
activity under subsection (b) shall be offset
against the regular tax liability (computed
after the application of paragraph (1))
allocable to such activity for the taxable
year, and
(C) any such deduction or credit remaining
after the application of subparagraphs (A) and
(B) shall continue to be treated as arising
from a passive activity.
(2) Change in status of closely held C corporation or
personal service corporation.--If a taxpayer ceases for
any taxable year to be a closely held C corporation or
personal service corporation, this section shall
continue to apply to losses and credits to which this
section applied for any preceding taxable year in the
same manner as if such taxpayer continued to be a
closely held C corporation or personal service
corporation, whichever is applicable.
(3) Former passive activity.--The term ``former
passive activity'' means any activity which, with
respect to the taxpayer--
(A) is not a passive activity for the taxable
year, but
(B) was a passive activity for any prior
taxable year.
(g) Dispositions of entire interest in passive activity.--If
during the taxable year a taxpayer disposes of his entire
interest in any passive activity (or former passive activity),
the following rules shall apply:
(1) Fully taxable transaction.--
(A) In general.--If all gain or loss realized
on such disposition is recognized, the excess
of--
(i) any loss from such activity for
such taxable year (determined after the
application of subsection (b)), over
(ii) any net income or gain for such
taxable year from all other passive
activities (determined after the
application of subsection (b)),
shall be treated as a loss which is not from a
passive activity.
(B) Subparagraph (A) not to apply to
disposition involving related party.--If the
taxpayer and the person acquiring the interest
bear a relationship to each other described in
section 267(b) or section 707(b)(1), then
subparagraph (A) shall not apply to any loss of
the taxpayer until the taxable year in which
such interest is acquired (in a transaction
described in subparagraph (A)) by another
person who does not bear such a relationship to
the taxpayer.
(C) Income from prior years.--To the extent
provided in regulations, income or gain from
the activity for preceding taxable years shall
be taken into account under subparagraph
(A)(ii) for the taxable year to the extent
necessary to prevent the avoidance of this
section.
(2) Disposition by death.--If an interest in the
activity is transferred by reason of the death of the
taxpayer--
(A) paragraph (1)(A) shall apply to losses
described in paragraph (1)(A) to the extent
such losses are greater than the excess (if
any) of--
(i) the basis of such property in the
hands of the transferee, over
(ii) the adjusted basis of such
property immediately before the death
of the taxpayer, and
(B) any losses to the extent of the excess
described in subparagraph (A) shall not be
allowed as a deduction for any taxable year.
(3) Installment sale of entire interest.--In the case
of an installment sale of an entire interest in an
activity to which section 453 applies, paragraph (1)
shall apply to the portion of such losses for each
taxable year which bears the same ratio to all such
losses as the gain recognized on such sale during such
taxable year bears to the gross profit from such sale
(realized or to be realized when payment is completed).
(h) Material participation defined.--For purposes of this
section--
(1) In general.--A taxpayer shall be treated as
materially participating in an activity only if the
taxpayer is involved in the operations of the activity
on a basis which is--
(A) regular,
(B) continuous, and
(C) substantial.
(2) Interests in limited partnerships.--Except as
provided in regulations, no interest in a limited
partnership as a limited partner shall be treated as an
interest with respect to which a taxpayer materially
participates.
(3) Treatment of certain retired individuals and
surviving spouses.--A taxpayer shall be treated as
materially participating in any farming activity for a
taxable year if paragraph (4) or (5) of section
2032A(b) would cause the requirements of section
2032A(b)(1)(C)(ii) to be met with respect to real
property used in such activity if such taxpayer had
died during the taxable year.
(4) Certain closely held C corporations and personal
service corporations.--A closely held C corporation or
personal service corporation shall be treated as
materially participating in an activity only if--
(A) 1 or more shareholders holding stock
representing more than 50 percent (by value) of
the outstanding stock of such corporation
materially participate in such activity, or
(B) in the case of a closely held C
corporation (other than a personal service
corporation), the requirements of section
465(c)(7)(C) (without regard to clause (iv))
are met with respect to such activity.
(5) Participation by spouse.--In determining whether
a taxpayer materially participates, the participation
of the spouse of the taxpayer shall be taken into
account.
(i) $25,000 offset for rental real estate activities.--
(1) In general.--In the case of any natural person,
subsection (a) shall not apply to that portion of the
passive activity loss or the deduction equivalent
(within the meaning of subsection (j)(5)) of the
passive activity credit for any taxable year which is
attributable to all rental real estate activities with
respect to which such individual actively participated
in such taxable year (and if any portion of such loss
or credit arose in another taxable year, in such other
taxable year).
(2) Dollar limitation.--The aggregate amount to which
paragraph (1) applies for any taxable year shall not
exceed $25,000.
(3) Phase-out of exemption.--
(A) In general.--In the case of any taxpayer,
the $25,000 amount under paragraph (2) shall be
reduced (but not below zero) by 50 percent of
the amount by which the adjusted gross income
of the taxpayer for the taxable year exceeds
$100,000.
(B) Special phase-out of rehabilitation
credit.--In the case of any portion of the
passive activity credit for any taxable year
which is attributable to the rehabilitation
credit determined under section 47,
subparagraph (A) shall be applied by
substituting ``$200,000'' for ``$100,000''.
(C) Exception for low-income housing
credit.--Subparagraph (A) shall not apply to
any portion of the passive activity credit for
any taxable year which is attributable to any
credit determined under section 42.
(D) Ordering rule.--Paragraph (1) shall be
applied for any taxable year--
(i) first, to the passive activity
loss,
(ii) second, to the portion of the
passive activity credit to which
subparagraph (B) and (C) does not
apply,
(iii) third, to the portion of such
credit to which subparagraph (B)
applies, and
(iv) then, to the portion of such
credit to which subparagraph (C)
applies.
(E) Adjusted gross income.--For purposes of
this paragraph, adjusted gross income shall be
determined without regard to--
(i) any amount includible in gross
income under section 86,
(ii) the amounts excludable from
gross income under sections 135 and
137,
(iii) the amounts allowable as a
deduction under sections 219, 221, 222,
and 250, and
(iv) any passive activity loss or any
loss allowable by reason of subsection
(c)(7).
(4) Special rule for estates.--
(A) In general.--In the case of taxable years
of an estate ending less than 2 years after the
date of the death of the decedent, this
subsection shall apply to all rental real
estate activities with respect to which such
decedent actively participated before his
death.
(B) Reduction for surviving spouse's
exemption.--For purposes of subparagraph (A),
the $25,000 amount under paragraph (2) shall be
reduced by the amount of the exemption under
paragraph (1) (without regard to paragraph (3))
allowable to the surviving spouse of the
decedent for the taxable year ending with or
within the taxable year of the estate.
(5) Married individuals filing separately.--
(A) In general.--Except as provided in
subparagraph (B), in the case of any married
individual filing a separate return, this
subsection shall be applied by substituting--
(i) ``$12,500'' for ``$25,000'' each
place it appears,
(ii) ``$50,000'' for ``$100,000'' in
paragraph (3)(A), and
(iii) ``$100,000'' for ``$200,000''
in paragraph (3)(B).
(B) Taxpayers not living apart.--This
subsection shall not apply to a taxpayer who--
(i) is a married individual filing a
separate return for any taxable year,
and
(ii) does not live apart from [his
spouse] the individual's spouse at all
times during such taxable year.
(6) Active participation.--
(A) In general.--An individual shall not be
treated as actively participating with respect
to any interest in any rental real estate
activity for any period if, at any time during
such period, such interest (including any
interest of the spouse of the individual) is
less than 10 percent (by value) of all
interests in such activity.
(B) No participation requirement for low-
income housing or rehabilitation credit.--
Paragraphs (1) and (4)(A) shall be applied
without regard to the active participation
requirement in the case of--
(i) any credit determined under
section 42 for any taxable year, or
(ii) any rehabilitation credit
determined under section 47,
(C) Interest as a limited partner.--Except as
provided in regulations, no interest as a
limited partner in a limited partnership shall
be treated as an interest with respect to which
the taxpayer actively participates.
(D) Participation by spouse.--In determining
whether a taxpayer actively participates, the
participation of the spouse of the taxpayer
shall be taken into account.
(j) Other definitions and special rules.--For purposes of
this section--
(1) Closely held C corporation.--The term ``closely
held C corporation'' means any C corporation described
in section 465(a)(1)(B).
(2) Personal service corporation.--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).
(3) Regular tax liability.--The term ``regular tax
liability'' has the meaning given such term by section
26(b).
(4) Allocation of passive activity loss and credit.--
The passive activity loss and the passive activity
credit (and the $25,000 amount under subsection (i))
shall be allocated to activities, and within
activities, on a pro rata basis in such manner as the
Secretary may prescribe.
(5) Deduction equivalent.--The deduction equivalent
of credits from a passive activity for any taxable year
is the amount which (if allowed as a deduction) would
reduce the regular tax liability for such taxable year
by an amount equal to such credits.
(6) Special rule for gifts.--In the case of a
disposition of any interest in a passive activity by
gift--
(A) the basis of such interest immediately
before the transfer shall be increased by the
amount of any passive activity losses allocable
to such interest with respect to which a
deduction has not been allowed by reason of
subsection (a), and
(B) such losses shall not be allowable as a
deduction for any taxable year.
(7) Qualified residence interest.--The passive
activity loss of a taxpayer shall be computed without
regard to qualified residence interest (within the
meaning of section 163(h)(3)).
(8) Rental activity.--The term ``rental activity''
means any activity where payments are principally for
the use of tangible property.
(9) Election to increase basis of property by amount
of disallowed credit.--For purposes of determining gain
or loss from a disposition of any property to which
subsection (g)(1) applies, the transferor may elect to
increase the basis of such property immediately before
the transfer by an amount equal to the portion of any
unused credit allowable under this chapter which
reduced the basis of such property for the taxable year
in which such credit arose. If the taxpayer elects the
application of this paragraph, such portion of the
passive activity credit of such taxpayer shall not be
allowed for any taxable year.
(10) Coordination with section 280A.--If a passive
activity involves the use of a dwelling unit to which
section 280A(c)(5) applies for any taxable year, any
income, deduction, gain, or loss allocable to such use
shall not be taken into account for purposes of this
section for such taxable year.
(11) Aggregation of members of affiliated groups.--
Except as provided in regulations, all members of an
affiliated group which files a consolidated return
shall be treated as 1 corporation.
(12) Special rule for distributions by estates or
trusts.--If any interest in a passive activity is
distributed by an estate or trust--
(A) the basis of such interest immediately
before such distribution shall be increased by
the amount of any passive activity losses
allocable to such interest, and
(B) such losses shall not be allowable as a
deduction for any taxable year.
(k) Separate application of section in case of publicly
traded partnerships.--
(1) In general.--This section shall be applied
separately with respect to items attributable to each
publicly traded partnership (and subsection (i) shall
not apply with respect to items attributable to any
such partnership). The preceding sentence shall not
apply to any credit determined under section 42, or any
rehabilitation credit determined under section 47,
attributable to a publicly traded partnership to the
extent the amount of any such credits exceeds the
regular tax liability attributable to income from such
partnership.
(2) Publicly traded partnership.--For purposes of
this section, the term ``publicly traded partnership''
means any partnership if--
(A) interests in such partnership are traded
on an established securities market, or
(B) interests in such partnership are readily
tradable on a secondary market (or the
substantial equivalent thereof).
(3) Coordination with subsection (g).--For purposes
of subsection (g), a taxpayer shall not be treated as
having disposed of his entire interest in an activity
of a publicly traded partnership until he disposes of
his entire interest in such partnership.
(4) Application to regulated investment companies.--
For purposes of this section, a regulated investment
company (as defined in section 851) holding an interest
in a qualified publicly traded partnership (as defined
in section 851(h)) shall be treated as a taxpayer
described in subsection (a)(2) with respect to items
attributable to such interest.
(l) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
provisions of this section, including regulations--
(1) which specify what constitutes an activity,
material participation, or active participation for
purposes of this section,
(2) which provide that certain items of gross income
will not be taken into account in determining income or
loss from any activity (and the treatment of expenses
allocable to such income),
(3) requiring net income or gain from a limited
partnership or other passive activity to be treated as
not from a passive activity,
(4) which provide for the determination of the
allocation of interest expense for purposes of this
section, and
(5) which deal with changes in marital status and
changes between joint returns and separate returns.
Subchapter F--EXEMPT ORGANIZATIONS
* * * * * * *
PART II--PRIVATE FOUNDATIONS
* * * * * * *
SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS.
(a) General rule.--Except as provided in subsection (b), the
status of any organization as a private foundation shall be
terminated only if--
(1) such organization notifies the Secretary (at such
time and in such manner as the Secretary may by
regulations prescribe) of its intent to accomplish such
termination, or
(2)(A) with respect to such organization, there have
been either willful repeated acts (or failures to act),
or a willful and flagrant act (or failure to act),
giving rise to liability for tax under chapter 42, and
(B) the Secretary notifies such organization that, by
reason of subparagraph (A), such organization is liable
for the tax imposed by subsection (c),
and either such organization pays the tax imposed by subsection
(c) (or any portion not abated under subsection (g)) or the
entire amount of such tax is abated under subsection (g).
(b) Special rules.--
(1) Transfer to, or operation as, public charity.--
The status as a private foundation of any organization,
with respect to which there have not been either
willful repeated acts (or failures to act) or a willful
and flagrant act (or failure to act) giving rise to
liability for tax under chapter 42, shall be terminated
if--
(A) such organization distributes all of its
net assets to one or more organizations
described in section 170(b)(1)(A) (other than
in clauses (vii) and (viii)) each of which has
been in existence and so described for a
continuous period of at least 60 calendar
months immediately preceding such distribution,
or
(B)(i) such organization meets the
requirements of paragraph (1), (2), or (3) of
section 509(a) by the end of the 12-month
period beginning with its first taxable year
which begins after December 31, 1969, or for a
continuous period of 60 calendar months
beginning with the first day of any taxable
year which begins after December 31, 1969,
(ii) such organization notifies the Secretary
(in such manner as the Secretary may by
regulations prescribe) before the commencement
of such 12-month or 60-month period (or before
the 90th day after the day on which regulations
first prescribed under this subsection become
final) that it is terminating its private
foundation status, and
(iii) such organization establishes to the
satisfaction of the Secretary (in such manner
as the Secretary may by regulations prescribe)
immediately after the expiration of such 12-
month or 60-month period that such organization
has complied with clause (i).
If an organization gives notice under subparagraph
(B)(ii) of the commencement of a 60-month period and
such organization fails to meet the requirements of
paragraph (1), (2), or (3) of section 509(a) for the
entire 60-month period, this part and chapter 42 shall
not apply to such organization for any taxable year
within such 60-month period for which it does meet such
requirements.
(2) Transferee foundations.--For purposes of this
part, in the case of a transfer of assets of any
private foundation to another private foundation
pursuant to any liquidation, merger, redemption,
recapitalization, or other adjustment, organization, or
reorganization, the transferee foundation shall not be
treated as a newly created organization.
(c) Imposition of tax.--There is hereby imposed on each
organization which is referred to in subsection (a) a tax equal
to the lower of--
(1) the amount which the private foundation
substantiates by adequate records or other
corroborating evidence as the aggregate tax benefit
resulting from the section 501(c)(3) status of such
foundation, or
(2) the value of the net assets of such foundation.
(d) Aggregate tax benefit.--
(1) In general.--For purposes of subsection (c), the
aggregate tax benefit resulting from the section
501(c)(3) status of any private foundation is the sum
of--
(A) the aggregate increases in tax under
chapters 1, 11, and 12 (or the corresponding
provisions of prior law) which would have been
imposed with respect to all substantial
contributors to the foundation if deductions
for all contributions made by such contributors
to the foundation after February 28, 1913, had
been disallowed, and
(B) the aggregate increases in tax under
chapter 1 (or the corresponding provisions of
prior law) which would have been imposed with
respect to the income of the private foundation
for taxable years beginning after December 31,
1912, if (i) it had not been exempt from tax
under section 501(a) (or the corresponding
provisions of prior law), and (ii) in the case
of a trust, deductions under section 642(c) (or
the corresponding provisions of prior law) had
been limited to 20 percent of the taxable
income of the trust (computed without the
benefit of section 642(c) but with the benefit
of section 170(b)(1)(A)), and
(C) interest on the increases in tax
determined under subparagraphs (A) and (B) from
the first date on which each such increase
would have been due and payable to the date on
which the organization ceases to be a private
foundation.
(2) Substantial contributor.--
(A) Definition.--For purposes of paragraph
(1), the term ``substantial contributor'' means
any person who contributed or bequeathed an
aggregate amount of more than $5,000 to the
private foundation, if such amount is more than
2 percent of the total contributions and
bequests received by the foundation before the
close of the taxable year of the foundation in
which the contribution or bequest is received
by the foundation from such person. In the case
of a trust, the term ``substantial
contributor'' also means the creator of the
trust.
(B) Special rules.--For purposes of
subparagraph (A)--
(i) each contribution or bequest
shall be valued at fair market value on
the date it was received,
(ii) in the case of a foundation
which is in existence on October 9,
1969, all contributions and bequests
received on or before such date shall
be treated (except for purposes of
clause (i)) as if received on such
date,
(iii) an individual shall be treated
as making all contributions and
bequests made by [his spouse] the
individual's spouse, and
(iv) any person who is a substantial
contributor on any date shall remain a
substantial contributor for all
subsequent periods.
(C) Person ceases to be substantial
contributor in certain cases.--
(i) In general.--A person shall cease
to be treated as a substantial
contributor with respect to any private
foundation as of the close of any
taxable year of such foundation if--
(I) during the 10-year period
ending at the close of such
taxable year such person (and
all related persons) have not
made any contribution to such
private foundation,
(II) at no time during such
10-year period was such person
(or any related person) a
foundation manager of such
private foundation, and
(III) the aggregate
contributions made by such
person (and related persons)
are determined by the Secretary
to be insignificant when
compared to the aggregate
amount of contributions to such
foundation by one other person.
For purposes of subclause (III), appreciation
on contributions while held by the foundation
shall be taken into account.
(ii) Related person.--For purposes of
clause (i), the term ``related person''
means, with respect to any person, any
other person who would be a
disqualified person (within the meaning
of section 4946) by reason of his
relationship to such person. In the
case of a contributor which is a
corporation, the term also includes any
officer or director of such
corporation.
(3) Regulations.--For purposes of this section, the
determination as to whether and to what extent there
would have been any increase in tax shall be made in
accordance with regulations prescribed by the
Secretary.
(e) Value of assets.--For purposes of subsection (c), the
value of the net assets shall be determined at whichever time
such value is higher: (1) the first day on which action is
taken by the organization which culminates in its ceasing to be
a private foundation, or (2) the date on which it ceases to be
a private foundation.
(f) Liability in case of transfers of assets from private
foundation.--For purposes of determining liability for the tax
imposed by subsection (c) in the case of assets transferred by
the private foundation, such tax shall be deemed to have been
imposed on the first day on which action is taken by the
organization which culminates in its ceasing to be a private
foundation.
(g) Abatement of taxes.--The Secretary may abate the unpaid
portion of the assessment of any tax imposed by subsection (c),
or any liability in respect thereof, if--
(1) the private foundation distributes all of its net
assets to one or more organizations described in
section 170(b)(1)(A) (other than in clauses (vii) and
(viii)) each of which has been in existence and so
described for a continuous period of at least 60
calendar months, or
(2) following the notification prescribed in section
6104(c) to the appropriate State officer, such State
officer within one year notifies the Secretary, in such
manner as the Secretary may by regulations prescribe,
that corrective action has been initiated pursuant to
State law to insure that the assets of such private
foundation are preserved for such charitable or other
purposes specified in section 501(c)(3) as may be
ordered or approved by a court of competent
jurisdiction, and upon completion of the corrective
action, the Secretary receives certification from the
appropriate State officer that such action has resulted
in such preservation of assets.
Subchapter G--CORPORATIONS USED TO AVOID INCOME TAX ON SHAREHOLDERS
* * * * * * *
PART II--PERSONAL HOLDING COMPANIES
* * * * * * *
SEC. 544. RULES FOR DETERMINING STOCK OWNERSHIP.
(a) Constructive ownership.--For purposes of determining
whether a corporation is a personal holding company, insofar as
such determination is based on stock ownership under section
542(a)(2), section 543(a)(7), section 543(a)(6), or section
543(a)(4)--
(1) Stock not owned by individual.--Stock owned,
directly or indirectly, by or for a corporation,
partnership, estate, or trust shall be considered as
being owned proportionately by its shareholders,
partners, or beneficiaries.
(2) Family and partnership ownership.--An individual
shall be considered as owning the stock owned, directly
or indirectly, by or for [his] the individual's family
or by or for [his] the individual's partner. For
purposes of this paragraph, the family of an individual
includes only [his] the individual's brothers and
sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendants.
(3) Options.--If any person has an option to acquire
stock, such stock shall be considered as owned by such
person. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to
acquire such stock.
(4) Application of family-partnership and option
rules.--Paragraphs (2) and (3) shall be applied--
(A) for purposes of the stock ownership
requirement provided in section 542(a)(2), if,
but only if, the effect is to make the
corporation a personal holding company;
(B) for purposes of section 543(a)(7)
(relating to personal service contracts), of
section 543(a)(6) (relating to use of property
by shareholders), or of section 543(a)(4)
(relating to copyright royalties), if, but only
if, the effect is to make the amounts therein
referred to includible under such paragraph as
personal holding company income.
(5) Constructive ownership as actual ownership.--
Stock constructively owned by a person by reason of the
application of paragraph (1) or (3), shall, for
purposes of applying paragraph (1) or (2), be treated
as actually owned by such person; but stock
constructively owned by an individual by reason of the
application of paragraph (2) shall not be treated as
owned by him for purposes of again applying such
paragraph in order to make another the constructive
owner of such stock.
(6) Option rule in lieu of family and partnership
rule.--If stock may be considered as owned by an
individual under either paragraph (2) or (3) it shall
be considered as owned by him under paragraph (3).
(b) Convertible securities.--Outstanding securities
convertible into stock (whether or not convertible during the
taxable year) shall be considered as outstanding stock--
(1) for purposes of the stock ownership requirement
provided in section 542(a)(2), but only if the effect
of the inclusion of all such securities is to make the
corporation a personal holding company;
(2) for purposes of section 543(a)(7) (relating to
personal service contracts), but only if the effect of
the inclusion of all such securities is to make the
amounts therein referred to includible under such
paragraph as personal holding company income;
(3) for purposes of section 543(a)(6) (relating to
the use of property by shareholders), but only if the
effect of the inclusion of all such securities is to
make the amounts therein referred to includible under
such paragraph as personal holding company income; and
(4) for purposes of section 543(a)(4) (relating to
copyright royalties), but only if the effect of the
inclusion of all such securities is to make the amounts
therein referred to includible under such paragraph as
personal holding company income.
The requirement in paragraphs (1), (2), (3), and (4) that all
convertible securities must be included if any are to be
included shall be subject to the exception that, where some of
the outstanding securities are convertible only after a later
date than in the case of others, the class having the earlier
conversion date may be included although the others are not
included, but no convertible securities shall be included
unless all outstanding securities having a prior conversion
date are also included.
Subchapter I--NATURAL RESOURCES
* * * * * * *
PART I--DEDUCTIONS
* * * * * * *
SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS
WELLS.
(a) General rule.--Except as otherwise provided in this
section, the allowance for depletion under section 611 with
respect to any oil or gas well shall be computed without regard
to section 613.
(b) Exemption for certain domestic gas wells.--
(1) In general.--The allowance for depletion under
section 611 shall be computed in accordance with
section 613 with respect to--
(A) regulated natural gas, and
(B) natural gas sold under a fixed contract,
and 22 percent shall be deemed to be specified in
subsection (b) of section 613 for purposes of
subsection (a) of that section.
(2) Natural gas from geopressured brine.--The
allowance for depletion under section 611 shall be
computed in accordance with section 613 with respect to
any qualified natural gas from geopressured brine, and
10 percent shall be deemed to be specified in
subsection (b) of section 613 for purposes of
subsection (a) of such section.
(3) Definitions.--For purposes of this subsection--
(A) Natural gas sold under a fixed
contract.--The term ``natural gas sold under a
fixed contract'' means domestic natural gas
sold by the producer under a contract, in
effect on February 1, 1975, and at all times
thereafter before such sale, under which the
price for such gas cannot be adjusted to
reflect to any extent the increase in
liabilities of the seller for tax under this
chapter by reason of the repeal of percentage
depletion for gas. Price increases after
February 1, 1975, shall be presumed to take
increases in tax liabilities into account
unless the taxpayer demonstrates to the
contrary by clear and convincing evidence.
(B) Regulated natural gas.--The term
``regulated natural gas'' means domestic
natural gas produced and sold by the producer,
before July 1, 1976, subject to the
jurisdiction of the Federal Power Commission,
the price for which has not been adjusted to
reflect to any extent the increase in liability
of the seller for tax under this chapter by
reason of the repeal of percentage depletion
for gas. Price increases after February 1,
1975, shall be presumed to take increases in
tax liabilities into account unless the
taxpayer demonstrates the contrary by clear and
convincing evidence.
(C) Qualified natural gas from geopressured
brine.--The term ``qualified natural gas from
geopressured brine'' means any natural gas--
(i) which is determined in accordance
with section 503 of the Natural Gas
Policy Act of 1978 to be produced from
geopressured brine, and
(ii) which is produced from any well
the drilling of which began after
September 30, 1978, and before January
1, 1984.
(c) Exemption for independent producers and royalty owners.--
(1) In general.--Except as provided in subsection
(d), the allowance for depletion under section 611
shall be computed in accordance with section 613 with
respect to--
(A) so much of the taxpayer's average daily
production of domestic crude oil as does not
exceed the taxpayer's depletable oil quantity;
and
(B) so much of the taxpayer's average daily
production of domestic natural gas as does not
exceed the taxpayer's depletable natural gas
quantity;
and 15 percent shall be deemed to be specified in
subsection (b) of section 613 for purposes of
subsection (a) of that section.
(2) Average daily production.--For purposes of
paragraph (1)--
(A) the taxpayer's average daily production
of domestic crude oil or natural gas for any
taxable year, shall be determined by dividing
his aggregate production of domestic crude oil
or natural gas, as the case may be, during the
taxable year by the number of days in such
taxable year, and
(B) in the case of a taxpayer holding a
partial interest in the production from any
property (including an interest held in a
partnership) such taxpayer's production shall
be considered to be that amount of such
production determined by multiplying the total
production of such property by the taxpayer's
percentage participation in the revenues from
such property.
(3) Depletable oil quantity.--
(A) In general.--For purposes of paragraph
(1), the taxpayer's depletable oil quantity
shall be equal to--
(i) the tentative quantity determined
under subparagraph (B), reduced (but
not below zero) by
(ii) except in the case of a taxpayer
making an election under paragraph
(6)(B), the taxpayer's average daily
marginal production for the taxable
year.
(B) Tentative quantity.--For purposes of
subparagraph (A), the tentative quantity is
1,000 barrels.
(4) Daily depletable natural gas quantity.--For
purposes of paragraph (1), the depletable natural gas
quantity of any taxpayer for any taxable year shall be
equal to 6,000 cubic feet multiplied by the number of
barrels of the taxpayer's depletable oil quantity to
which the taxpayer elects to have this paragraph apply.
The taxpayer's depletable oil quantity for any taxable
year shall be reduced by the number of barrels with
respect to which an election under this paragraph
applies. Such election shall be made at such time and
in such manner as the Secretary shall by regulations
prescribe.
(6) Oil and natural gas produced from marginal
properties.--
(A) In general.--Except as provided in
subsection (d) and subparagraph (B), the
allowance for depletion under section 611 shall
be computed in accordance with section 613 with
respect to--
(i) so much of the taxpayer's average
daily marginal production of domestic
crude oil as does not exceed the
taxpayer's depletable oil quantity
(determined without regard to paragraph
(3)(A)(ii)), and
(ii) so much of the taxpayer's
average daily marginal production of
domestic natural gas as does not exceed
the taxpayer's depletable natural gas
quantity (determined without regard to
paragraph (3)(A)(ii)),
and the applicable percentage shall be deemed
to be specified in subsection (b) of section
613 for purposes of subsection (a) of that
section.
(B) Election to have paragraph apply to pro
rata portion of marginal production.--If the
taxpayer elects to have this subparagraph apply
for any taxable year, the rules of subparagraph
(A) shall apply to the average daily marginal
production of domestic crude oil or domestic
natural gas of the taxpayer to which paragraph
(1) would have applied without regard to this
paragraph.
(C) Applicable percentage.--For purposes of
subparagraph (A), the term ``applicable
percentage'' means the percentage (not greater
than 25 percent) equal to the sum of--
(i) 15 percent, plus
(ii) 1 percentage point for each
whole dollar by which $20 exceeds the
reference price for crude oil for the
calendar year preceding the calendar
year in which the taxable year begins.
For purposes of this paragraph, the term
``reference price'' means, with respect to any
calendar year, the reference price determined
for such calendar year under section
45K(d)(2)(C).
(D) Marginal production.--The term ``marginal
production'' means domestic crude oil or
domestic natural gas which is produced during
any taxable year from a property which--
(i) is a stripper well property for
the calendar year in which the taxable
year begins, or
(ii) is a property substantially all
of the production of which during such
calendar year is heavy oil.
(E) Stripper well property.--For purposes of
this paragraph, the term ``stripper well
property'' means, with respect to any calendar
year, any property with respect to which the
amount determined by dividing--
(i) the average daily production of
domestic crude oil and domestic natural
gas from producing wells on such
property for such calendar year, by
(ii) the number of such wells,
is 15 barrel equivalents or less.
(F) Heavy oil.--For purposes of this
paragraph, the term ``heavy oil'' means
domestic crude oil produced from any property
if such crude oil had a weighted average
gravity of 20 degrees API or less (corrected to
60 degrees Fahrenheit).
(G) Average daily marginal production.--For
purposes of this subsection--
(i) the taxpayer's average daily
marginal production of domestic crude
oil or natural gas for any taxable year
shall be determined by dividing the
taxpayer's aggregate marginal
production of domestic crude oil or
natural gas, as the case may be, during
the taxable year by the number of days
in such taxable year, and
(ii) in the case of a taxpayer
holding a partial interest in the
production from any property (including
any interest held in any partnership),
such taxpayer's production shall be
considered to be that amount of such
production determined by multiplying
the total production of such property
by the taxpayer's percentage
participation in the revenues from such
property.
(7) Special rules.--
(A) Production of crude oil in excess of
depletable oil quantity.--If the taxpayer's
average daily production of domestic crude oil
exceeds his depletable oil quantity, the
allowance under paragraph (1)(A) with respect
to oil produced during the taxable year from
each property in the United States shall be
that amount which bears the same ratio to the
amount of depletion which would have been
allowable under section 613(a) for all of the
taxpayer's oil produced from such property
during the taxable year (computed as if section
613 applied to all of such production at the
rate specified in paragraph (1) or (6), as the
case may be) as his depletable oil quantity
bears to the aggregate number of barrels
representing the average daily production of
domestic crude oil of the taxpayer for such
year.
(B) Production of natural gas in excess of
depletable natural gas quantity.--If the
taxpayer's average daily production of domestic
natural gas exceeds his depletable natural gas
quantity, the allowance under paragraph (1)(B)
with respect to natural gas produced during the
taxable year from each property in the United
States shall be that amount which bears the
same ratio to the amount of depletion which
would have been allowable under section 613(a)
for all of the taxpayer's natural gas produced
from such property during the taxable year
(computed as if section 613 applied to all of
such production at the rate specified in
paragraph (1) or (6), as the case may be) as
the amount of his depletable natural gas
quantity in cubic feet bears to the aggregate
number of cubic feet representing the average
daily production of domestic natural gas of the
taxpayer for such year.
(C) Taxable income from the property.--If
both oil and gas are produced from the property
during the taxable year, for purposes of
subparagraphs (A) and (B) the taxable income
from the property, in applying the taxable
income limitation in section 613(a), shall be
allocated between the oil production and the
gas production in proportion to the gross
income during the taxable year from each.
(D) Partnerships.--In the case of a
partnership, the depletion allowance shall be
computed separately by the partners and not by
the partnership. The partnership shall allocate
to each partner his proportionate share of the
adjusted basis of each partnership oil or gas
property. The allocation is to be made as of
the later of the date of acquisition of the oil
or gas property by the partnership, or January
1, 1975. A partner's proportionate share of the
adjusted basis of partnership property shall be
determined in accordance with his interest in
partnership capital or income and, in the case
of property contributed to the partnership by a
partner, section 704(c) (relating to
contributed property) shall apply in
determining such share. Each partner shall
separately keep records of his share of the
adjusted basis in each oil and gas property of
the partnership, adjust such share of the
adjusted basis for any depletion taken on such
property, and use such adjusted basis each year
in the computation of his cost depletion or in
the computation of his gain or loss on the
disposition of such property by the
partnership. For purposes of section 732
(relating to basis of distributed property
other than money), the partnership's adjusted
basis in mineral property shall be an amount
equal to the sum of the partners' adjusted
basis in such property as determined under this
paragraph.
(8) Business under common control; members of the
same family.--
(A) Component members of controlled group
treated as one taxpayer.--For purposes of this
subsection, persons who are members of the same
controlled group of corporations shall be
treated as one taxpayer.
(B) Aggregation of business entities under
common control.--If 50 percent or more of the
beneficial interest in two or more
corporations, trusts, or estates is owned by
the same or related persons (taking into
account only persons who own at least 5 percent
of such beneficial interest), the tentative
quantity determined under paragraph (3)(B)
shall be allocated among all such entities in
proportion to the respective production of
domestic crude oil during the period in
question by such entities.
(C) Allocation among members of the same
family.--In the case of individuals who are
members of the same family, the tentative
quantity determined under paragraph (3)(B)
shall be allocated among such individuals in
proportion to the respective production of
domestic crude oil during the period in
question by such individuals.
(D) Definition and special rules.--For
purposes of this paragraph--
(i) the term ``controlled group of
corporations'' has the meaning given to
such term by section 1563(a), except
that section 1563(b)(2) shall not apply
and except that ``more than 50
percent'' shall be substituted for ``at
least 80 percent'' each place it
appears in section 1563(a),
(ii) a person is a related person to
another person if such persons are
members of the same controlled group of
corporations or if the relationship
between such persons would result in a
disallowance of losses under section
267 or 707(b), except that for this
purpose the family of an individual
includes only [his spouse] the
individual's spouse and minor children.
(iii) the family of an individual
includes only [his spouse] the
individual's spouse and minor children,
and
(iv) each 6,000 cubic feet of
domestic natural gas shall be treated
as 1 barrel of domestic crude oil.
(9) Special rule for fiscal year taxpayers.--In
applying this subsection to a taxable year which is not
a calendar year, each portion of such taxable year
which occurs during a single calendar year shall be
treated as if it were a short taxable year.
(10) Certain production not taken into account.--In
applying this subsection, there shall not be taken into
account the production of natural gas with respect to
which subsection (b) applies.
(11) Subchapter S corporations.--
(A) Computation of depletion allowance at
shareholder level.--In the case of an S
corporation, the allowance for depletion with
respect to any oil or gas property shall be
computed separately by each shareholder.
(B) Allocation of basis.--The S corporation
shall allocate to each shareholder his pro rata
share of the adjusted basis of the S
corporation in each oil or gas property held by
the S corporation. The allocation shall be made
as of the later of the date of acquisition of
the property by the S corporation, or the first
day of the first taxable year of the S
corporation to which the Subchapter S Revision
Act of 1982 applies. Each shareholder shall
separately keep records of his share of the
adjusted basis in each oil and gas property of
the S corporation, adjust such share of the
adjusted basis for any depletion taken on such
property, and use such adjusted basis each year
in the computation of his cost depletion or in
the computation of his gain or loss on the
disposition of such property by the S
corporation. In the case of any distribution of
oil or gas property to its shareholders by the
S corporation, the corporation's adjusted basis
in the property shall be an amount equal to the
sum of the shareholders' adjusted bases in such
property, as determined under this
subparagraph.
(d) Limitations on application of subsection (c).--
(1) Limitation based on taxable income.--The
deduction for the taxable year attributable to the
application of subsection (c) shall not exceed 65
percent of the taxpayer's taxable income for the year
computed without regard to--
(A) any depletion on production from an oil
or gas property which is subject to the
provisions of subsection (c),
(B) any deduction allowable under section
199A,
(C) any net operating loss carryback to the
taxable year under section 172,
(D) any capital loss carryback to the taxable
year under section 1212, and
(E) in the case of a trust, any distributions
to its beneficiary, except in the case of any
trust where any beneficiary of such trust is a
member of the family (as defined in section
267(c)(4)) of a settlor who created inter vivos
and testamentary trusts for members of the
family and such settlor died within the last
six days of the fifth month in 1970, and the
law in the jurisdiction in which such trust was
created requires all or a portion of the gross
or net proceeds of any royalty or other
interest in oil, gas, or other mineral
representing any percentage depletion allowance
to be allocated to the principal of the trust.
If an amount is disallowed as a deduction for the
taxable year by reason of application of the preceding
sentence, the disallowed amount shall be treated as an
amount allowable as a deduction under subsection (c)
for the following taxable year, subject to the
application of the preceding sentence to such taxable
year. For purposes of basis adjustments and determining
whether cost depletion exceeds percentage depletion
with respect to the production from a property, any
amount disallowed as a deduction on the application of
this paragraph shall be allocated to the respective
properties from which the oil or gas was produced in
proportion to the percentage depletion otherwise
allowable to such properties under subsection (c).
(2) Retailers excluded.--Subsection (c) shall not
apply in the case of any taxpayer who directly, or
through a related person, sells oil or natural gas
(excluding bulk sales of such items to commercial or
industrial users), or any product derived from oil or
natural gas (excluding bulk sales of aviation fuels to
the Department of Defense)--
(A) through any retail outlet operated by the
taxpayer or a related person, or
(B) to any person--
(i) obligated under an agreement or
contract with the taxpayer or a related
person to use a trademark, trade name,
or service mark or name owned by such
taxpayer or a related person, in
marketing or distributing oil or
natural gas or any product derived from
oil or natural gas, or
(ii) given authority, pursuant to an
agreement or contract with the taxpayer
or a related person, to occupy any
retail outlet owned, leased, or in any
way controlled by the taxpayer or a
related person.
Notwithstanding the preceding sentence this paragraph
shall not apply in any case where the combined gross
receipts from the sale of such oil, natural gas, or any
product derived therefrom, for the taxable year of all
retail outlets taken into account for purposes of this
paragraph do not exceed $5,000,000. For purposes of
this paragraph, sales of oil, natural gas, or any
product derived from oil or natural gas shall not
include sales made of such items outside the United
States, if no domestic production of the taxpayer or a
related person is exported during the taxable year or
the immediately preceding taxable year.
(3) Related person.--For purposes of this subsection,
a person is a related person with respect to the
taxpayer if a significant ownership interest in either
the taxpayer or such person is held by the other, or if
a third person has a significant ownership interest in
both the taxpayer and such person. For purposes of the
preceding sentence, the term ``significant ownership
interest'' means--
(A) with respect to any corporation, 5
percent or more in value of the outstanding
stock of such corporation,
(B) with respect to a partnership, 5 percent
or more interest in the profits or capital of
such partnership, and
(C) with respect to an estate or trust, 5
percent or more of the beneficial interests in
such estate or trust.
For purposes of determining a significant ownership
interest, an interest owned by or for a corporation,
partnership, trust, or estate shall be considered as
owned directly both by itself and proportionately by
its shareholders, partners, or beneficiaries, as the
case may be.
(4) Certain refiners excluded.--If the taxpayer or
one or more related persons engages in the refining of
crude oil, subsection (c) shall not apply to the
taxpayer for a taxable year if the average daily
refinery runs of the taxpayer and such persons for the
taxable year exceed 75,000 barrels. For purposes of
this paragraph, the average daily refinery runs for any
taxable year shall be determined by dividing the
aggregate refinery runs for the taxable year by the
number of days in the taxable year.
(5) Percentage depletion not allowed for lease
bonuses, etc..--In the case of any oil or gas property
to which subsection (c) applies, for purposes of
section 613, the term ``gross income from the
property'' shall not include any lease bonus, advance
royalty, or other amount payable without regard to
production from property.
(e) Definitions.--For purposes of this section--
(1) Crude oil.--The term ``crude oil'' includes a
natural gas liquid recovered from a gas well in lease
separators or field facilities.
(2) Natural gas.--The term ``natural gas'' means any
product (other than crude oil) of an oil or gas well if
a deduction for depletion is allowable under section
611 with respect to such product.
(3) Domestic.--The term ``domestic'' refers to
production from an oil or gas well located in the
United States or in a possession of the United States.
(4) Barrel.--The term ``barrel'' means 42 United
States gallons.
Subchapter J--ESTATES, TRUSTS, BENEFICIARIES, AND DECEDENTS
* * * * * * *
PART I--ESTATES, TRUSTS, AND BENEFICIARIES
* * * * * * *
Subpart A--GENERAL RULES FOR TAXATION OF ESTATES AND TRUSTS
* * * * * * *
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.--No deduction
shall be taken under section 642(b) (relating to
deduction for personal exemptions).
(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]
married couple 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.
* * * * * * *
Subpart E--GRANTORS AND OTHERS TREATED AS SUBSTANTIAL OWNERS
* * * * * * *
SEC. 672. DEFINITIONS AND RULES.
(a) Adverse party.--For purposes of this subpart, the term
``adverse party'' means any person having a substantial
beneficial interest in the trust which would be adversely
affected by the exercise or nonexercise of the power which he
possesses respecting the trust. A person having a general power
of appointment over the trust property shall be deemed to have
a beneficial interest in the trust.
(b) Nonadverse party.--For purposes of this subpart, the term
``nonadverse party'' means any person who is not an adverse
party.
(c) Related or subordinate party.--For purposes of this
subpart, the term ``related or subordinate party'' means any
nonadverse party who is--
(1) the grantor's spouse if living with the grantor;
(2) any one of the following: The grantor's father,
mother, issue, brother or sister; an employee of the
grantor; a corporation or any employee of a corporation
in which the stock holdings of the grantor and the
trust are significant from the viewpoint of voting
control; a subordinate employee of a corporation in
which the grantor is an executive.
For purposes of subsection (f) and sections 674 and 675, a
related or subordinate party shall be presumed to be
subservient to the grantor in respect of the exercise or
nonexercise of the powers conferred on him unless such party is
shown not to be subservient by a preponderance of the evidence.
(d) Rule where power is subject to condition precedent.--A
person shall be considered to have a power described in this
subpart even though the exercise of the power is subject to a
precedent giving of notice or takes effect only on the
expiration of a certain period after the exercise of the power.
(e) Grantor treated as holding any power or interest of
grantor's spouse.--
(1) In general.--For purposes of this subpart, a
grantor shall be treated as holding any power or
interest held by--
(A) any individual who was the spouse of the
grantor at the time of the creation of such
power or interest, or
(B) any individual who became the spouse of
the grantor after the creation of such power or
interest, but only with respect to periods
after such individual became the spouse of the
grantor.
(2) Marital status.--For purposes of paragraph
(1)(A), an individual legally separated from [his
spouse] the individual's spouse under a decree of
divorce or of separate maintenance shall not be
considered as married.
(f) Subpart not to result in foreign ownership.--
(1) In general.--Notwithstanding any other provision
of this subpart, this subpart shall apply only to the
extent such application results in an amount (if any)
being currently taken into account (directly or through
1 or more entities) under this chapter in computing the
income of a citizen or resident of the United States or
a domestic corporation.
(2) Exceptions.--
(A) Certain revocable and irrevocable
trusts.--Paragraph (1) shall not apply to any
portion of a trust if--
(i) the power to revest absolutely in
the grantor title to the trust property
to which such portion is attributable
is exercisable solely by the grantor
without the approval or consent of any
other person or with the consent of a
related or subordinate party who is
subservient to the grantor, or
(ii) the only amounts distributable
from such portion (whether income or
corpus) during the lifetime of the
grantor are amounts distributable to
the grantor or the spouse of the
grantor.
(B) Compensatory trusts.--Except as provided
in regulations, paragraph (1) shall not apply
to any portion of a trust distributions from
which are taxable as compensation for services
rendered.
(3) Special rules.--Except as otherwise provided in
regulations prescribed by the Secretary--
(A) a controlled foreign corporation (as
defined in section 957) shall be treated as a
domestic corporation for purposes of paragraph
(1), and
(B) paragraph (1) shall not apply for
purposes of applying section 1297.
(4) Recharacterization of purported gifts.--In the
case of any transfer directly or indirectly from a
partnership or foreign corporation which the transferee
treats as a gift or bequest, the Secretary may
recharacterize such transfer in such circumstances as
the Secretary determines to be appropriate to prevent
the avoidance of the purposes of this subsection.
(5) Special rule where grantor is foreign person.--
If--
(A) but for this subsection, a foreign person
would be treated as the owner of any portion of
a trust, and
(B) such trust has a beneficiary who is a
United States person,
such beneficiary shall be treated as the grantor of
such portion to the extent such beneficiary has made
(directly or indirectly) transfers of property (other
than in a sale for full and adequate consideration) to
such foreign person. For purposes of the preceding
sentence, any gift shall not be taken into account to
the extent such gift would be excluded from taxable
gifts under section 2503(b).
(6) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection, including
regulations providing that paragraph (1) shall not
apply in appropriate cases.
Subchapter K--PARTNERS AND PARTNERSHIPS
* * * * * * *
PART I--DETERMINATION OF TAX LIABILITY
* * * * * * *
SEC. 704. PARTNER'S DISTRIBUTIVE SHARE.
(a) Effect of partnership agreement.--A partner's
distributive share of income, gain, loss, deduction, or credit
shall, except as otherwise provided in this chapter, be
determined by the partnership agreement.
(b) Determination of distributive share.--A partner's
distributive share of income, gain, loss, deduction, or credit
(or item thereof) shall be determined in accordance with the
partner's interest in the partnership (determined by taking
into account all facts and circumstances), if--
(1) the partnership agreement does not provide as to
the partner's distributive share of income, gain, loss,
deduction, or credit (or item thereof), or
(2) the allocation to a partner under the agreement
of income, gain, loss, deduction, or credit (or item
thereof) does not have substantial economic effect.
(c) Contributed property.--
(1) In general.--Under regulations prescribed by the
Secretary--
(A) income, gain, loss, and deduction with
respect to property contributed to the
partnership by a partner shall be shared among
the partners so as to take account of the
variation between the basis of the property to
the partnership and its fair market value at
the time of contribution,
(B) if any property so contributed is
distributed (directly or indirectly) by the
partnership (other than to the contributing
partner) within 7 years of being contributed--
(i) the contributing partner shall be
treated as recognizing gain or loss (as
the case may be) from the sale of such
property in an amount equal to the gain
or loss which would have been allocated
to such partner under subparagraph (A)
by reason of the variation described in
subparagraph (A) if the property had
been sold at its fair market value at
the time of the distribution,
(ii) the character of such gain or
loss shall be determined by reference
to the character of the gain or loss
which would have resulted if such
property had been sold by the
partnership to the distributee, and
(iii) appropriate adjustments shall
be made to the adjusted basis of the
contributing partner's interest in the
partnership and to the adjusted basis
of the property distributed to reflect
any gain or loss recognized under this
subparagraph, and
(C) if any property so contributed has a
built-in loss--
(i) such built-in loss shall be taken
into account only in determining the
amount of items allocated to the
contributing partner, and
(ii) except as provided in
regulations, in determining the amount
of items allocated to other partners,
the basis of the contributed property
in the hands of the partnership shall
be treated as being equal to its fair
market value at the time of
contribution.
For purposes of subparagraph (C), the term ``built-in
loss'' means the excess of the adjusted basis of the
property (determined without regard to subparagraph
(C)(ii)) over its fair market value at the time of
contribution.
(2) Special rule for distributions where gain or loss
would not be recognized outside partnerships.--Under
regulations prescribed by the Secretary, if--
(A) property contributed by a partner
(hereinafter referred to as the ``contributing
partner'') is distributed by the partnership to
another partner, and
(B) other property of a like kind (within the
meaning of section 1031) is distributed by the
partnership to the contributing partner not
later than the earlier of--
(i) the 180th day after the date of
the distribution described in
subparagraph (A), or
(ii) the due date (determined with
regard to extensions) for the
contributing partner's return of the
tax imposed by this chapter for the
taxable year in which the distribution
described in subparagraph (A) occurs,
then to the extent of the value of the property
described in subparagraph (B), paragraph (1)(B) shall
be applied as if the contributing partner had
contributed to the partnership the property described
in subparagraph (B).
(3) Other rules.--Under regulations prescribed by the
Secretary, rules similar to the rules of paragraph (1)
shall apply to contributions by a partner (using the
cash receipts and disbursements method of accounting)
of accounts payable and other accrued but unpaid items.
Any reference in paragraph (1) or (2) to the
contributing partner shall be treated as including a
reference to any successor of such partner.
(d) Limitation on allowance of losses.--
(1) In general.--A partner's distributive share of
partnership loss (including capital loss) shall be
allowed only to the extent of the adjusted basis of
such partner's interest in the partnership at the end
of the partnership year in which such loss occurred.
(2) Carryover.--Any excess of such loss over such
basis shall be allowed as a deduction at the end of the
partnership year in which such excess is repaid to the
partnership.
(3) Special rules.--
(A) In general.--In determining the amount of
any loss under paragraph (1), there shall be
taken into account the partner's distributive
share of amounts described in paragraphs (4)
and (6) of section 702(a).
(B) Exception.--In the case of a charitable
contribution of property whose fair market
value exceeds its adjusted basis, subparagraph
(A) shall not apply to the extent of the
partner's distributive share of such excess.
(e) Partnership interests created by gift.--
(1) Distributive share of donee includible in gross
income.--In the case of any partnership interest
created by gift, the distributive share of the donee
under the partnership agreement shall be includible in
his gross income, except to the extent that such share
is determined without allowance of reasonable
compensation for services rendered to the partnership
by the donor, and except to the extent that the portion
of such share attributable to donated capital is
proportionately greater than the share of the donor
attributable to the donor's capital. The distributive
share of a partner in the earnings of the partnership
shall not be diminished because of absence due to
military service.
(2) Purchase of interest by member of family.--For
purposes of this subsection, an interest purchased by
one member of a family from another shall be considered
to be created by gift from the seller, and the fair
market value of the purchased interest shall be
considered to be donated capital. The ``family'' of any
individual shall include only [his spouse] the
individual's spouse, ancestors, and lineal descendants,
and any trusts for the primary benefit of such persons.
(f) Cross reference.--For rules in the case of the sale,
exchange, liquidation, or reduction of a partner's interest,
see section 706(c)(2).
* * * * * * *
PART III--DEFINITIONS
* * * * * * *
SEC. 761. TERMS DEFINED.
(a) Partnership.--For purposes of this subtitle, the term
``partnership'' includes a syndicate, group, pool, joint
venture, or other unincorporated organization through or by
means of which any business, financial operation, or venture is
carried on, and which is not, within the meaning of this title,
a corporation or a trust or estate. Under regulations the
Secretary may, at the election of all the members of an
unincorporated organization, exclude such organization from the
application of all or part of this subchapter, if it is availed
of--
(1) for investment purposes only and not for the
active conduct of a business,
(2) for the joint production, extraction, or use of
property, but not for the purpose of selling services
or property produced or extracted, or
(3) by dealers in securities for a short period for
the purpose of underwriting, selling, or distributing a
particular issue of securities,
if the income of the members of the organization may be
adequately determined without the computation of partnership
taxable income.
(b) Partner.--For purposes of this subtitle, the term
``partner'' means a member of a partnership. In the case of a
capital interest in a partnership in which capital is a
material income-producing factor, whether a person is a partner
with respect to such interest shall be determined without
regard to whether such interest was derived by gift from any
other person.
(c) Partnership agreement.--For purposes of this subchapter,
a partnership agreement includes any modifications of the
partnership agreement made prior to, or at, the time prescribed
by law for the filing of the partnership return for the taxable
year (not including extensions) which are agreed to by all the
partners, or which are adopted in such other manner as may be
provided by the partnership agreement.
(d) Liquidation of a partner's interest.--For purposes of
this subchapter, the term ``liquidation of a partner's
interest'' means the termination of a partner's entire interest
in a partnership by means of a distribution, or a series of
distributions, to the partner by the partnership.
(e) Distributions of partnership interests treated as
exchanges.--Except as otherwise provided in regulations, for
purposes of--
(1) section 708 (relating to continuation of
partnership),
(2) section 743 (relating to optional adjustment to
basis of partnership property), and
(3) any other provision of this subchapter specified
in regulations prescribed by the Secretary,
any distribution of an interest in a partnership (not otherwise
treated as an exchange) shall be treated as an exchange.
(f) Qualified joint venture.--
(1) In general.--In the case of a qualified joint
venture conducted by a [husband and wife] married
couple who file a joint return for the taxable year,
for purposes of this title--
(A) such joint venture shall not be treated
as a partnership,
(B) all items of income, gain, loss,
deduction, and credit shall be divided between
the spouses in accordance with their respective
interests in the venture, and
(C) each spouse shall take into account such
spouse's respective share of such items as if
they were attributable to a trade or business
conducted by such spouse as a sole proprietor.
(2) Qualified joint venture.--For purposes of
paragraph (1), the term ``qualified joint venture''
means any joint venture involving the conduct of a
trade or business if--
(A) the only members of such joint venture
are a [husband and wife] married couple,
(B) both spouses materially participate
(within the meaning of section 469(h) without
regard to paragraph (5) thereof) in such trade
or business, and
(C) both spouses elect the application of
this subsection.
(g) Cross reference.--For rules in the case of the sale,
exchange, liquidation, or reduction of a partner's interest,
see sections 704(b) and 706(c)(2).
* * * * * * *
Subchapter N--TAX BASED ON INCOME FROM SOURCES WITHIN OR WITHOUT THE
UNITED STATES
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
* * * * * * *
Subpart B--EARNED INCOME OF CITIZENS OR RESIDENTS OF UNITED STATES
* * * * * * *
SEC. 911. CITIZENS OR RESIDENTS OF THE UNITED STATES LIVING ABROAD.
(a) Exclusion from gross income.--At the election of a
qualified individual (made separately with respect to
paragraphs (1) and (2)), there shall be excluded from the gross
income of such individual, and exempt from taxation under this
subtitle, for any taxable year--
(1) the foreign earned income of such individual, and
(2) the housing cost amount of such individual.
(b) Foreign earned income.--
(1) Definition.--For purposes of this section--
(A) In general.--The term ``foreign earned
income'' with respect to any individual means
the amount received by such individual from
sources within a foreign country or countries
which constitute earned income attributable to
services performed by such individual during
the period described in subparagraph (A) or (B)
of subsection (d)(1), whichever is applicable.
(B) Certain amounts not included in foreign
earned income.--The foreign earned income for
an individual shall not include amounts--
(i) received as a pension or annuity,
(ii) paid by the United States or an
agency thereof to an employee of the
United States or an agency thereof,
(iii) included in gross income by
reason of section 402(b) (relating to
taxability of beneficiary of nonexempt
trust) or section 403(c) (relating to
taxability of beneficiary under a
nonqualified annuity), or
(iv) received after the close of the
taxable year following the taxable year
in which the services to which the
amounts are attributable are performed.
(2) Limitation on foreign earned income.--
(A) In general.--The foreign earned income of
an individual which may be excluded under
subsection (a)(1) for any taxable year shall
not exceed the amount of foreign earned income
computed on a daily basis at an annual rate
equal to the exclusion amount for the calendar
year in which such taxable year begins.
(B) Attribution to year in which services are
performed.--For purposes of applying
subparagraph (A), amounts received shall be
considered received in the taxable year in
which the services to which the amounts are
attributable are performed.
[(C) Treatment of community income.--In
applying subparagraph (A) with respect to
amounts received from services performed by a
husband or wife which are community income
under community property laws applicable to
such income, the aggregate amount which may be
excludable from the gross income of such
husband and wife under subsection (a)(1) for
any taxable year shall equal the amount which
would be so excludable if such amounts did not
constitute community income.]
(C) Treatment of community income.--In
applying subparagraph (A) with respect to
amounts received from services performed by a
married individual which are community income
under community property laws applicable to
such income, the aggregate amount which may be
excludable from the gross income of such
individual and such individual's spouse under
subsection (a)(1) for any taxable year shall
equal the amount which would be so excludable
if such amounts did not constitute community
income.
(D) Exclusion amount.--
(i) In general.--The exclusion amount
for any calendar year is $80,000.
(ii) Inflation adjustment.--In the
case of any taxable year beginning in a
calendar year after 2005, the $80,000
amount in clause (i) shall be increased
by an amount equal to the product of--
(I) such dollar amount, and
(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 ``2004'' 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.
(c) Housing cost amount.--For purposes of this section--
(1) In general.--The term ``housing cost amount''
means an amount equal to the excess of--
(A) the housing expenses of an individual for
the taxable year to the extent such expenses do
not exceed the amount determined under
paragraph (2), over
(B) an amount equal to the product of--
(i) 16 percent of the amount
(computed on a daily basis) in effect
under subsection (b)(2)(D) for the
calendar year in which such taxable
year begins, multiplied by
(ii) the number of days of such
taxable year within the applicable
period described in subparagraph (A) or
(B) of subsection (d)(1).
(2) Limitation.--
(A) In general.--The amount determined under
this paragraph is an amount equal to the
product of--
(i) 30 percent (adjusted as may be
provided under subparagraph (B)) of the
amount (computed on a daily basis) in
effect under subsection (b)(2)(D) for
the calendar year in which the taxable
year of the individual begins,
multiplied by
(ii) the number of days of such
taxable year within the applicable
period described in subparagraph (A) or
(B) of subsection (d)(1).
(B) Regulations.--The Secretary may issue
regulations or other guidance providing for the
adjustment of the percentage under subparagraph
(A)(i) on the basis of geographic differences
in housing costs relative to housing costs in
the United States.
(3) Housing expenses.--
(A) In general.--The term ``housing
expenses'' means the reasonable expenses paid
or incurred during the taxable year by or on
behalf of an individual for housing for the
individual (and, if they reside with [him] the
individual, for [his spouse] the individual's
spouse and dependents) in a foreign country.
The term--
(i) includes expenses attributable to
the housing (such as utilities and
insurance), but
(ii) does not include interest and
taxes of the kind deductible under
section 163 or 164 or any amount
allowable as a deduction under section
216(a).
Housing expenses shall not be treated as
reasonable to the extent such expenses are
lavish or extravagant under the circumstances.
(B) Second foreign household.--
(i) In general.--Except as provided
in clause (ii), only housing expenses
incurred with respect to that abode
which bears the closest relationship to
the tax home of the individual shall be
taken into account under paragraph (1).
(ii) Separate household for spouse
and dependents.--If an individual
maintains a separate abode outside the
United States for [his spouse] the
individual's spouse and dependents and
they do not reside with [him] the
individual because of living conditions
which are dangerous, unhealthful, or
otherwise adverse, then--
(I) the words ``if they
reside with [him] the
individual'' in subparagraph
(A) shall be disregarded, and
(II) the housing expenses
incurred with respect to such
abode shall be taken into
account under paragraph (1).
(4) Special rules where housing expenses not provided
by employer.--
(A) In general.--To the extent the housing
cost amount of any individual for any taxable
year is not attributable to employer provided
amounts, such amount shall be treated as a
deduction allowable in computing adjusted gross
income to the extent of the limitation of
subparagraph (B).
(B) Limitation.--For purposes of subparagraph
(A), the limitation of this subparagraph is the
excess of--
(i) the foreign earned income of the
individual for the taxable year, over
(ii) the amount of such income
excluded from gross income under
subsection (a) for the taxable year.
(C) 1-year carryover of housing amounts not
allowed by reason of subparagraph (B).--
(i) In general.--The amount not
allowable as a deduction for any
taxable year under subparagraph (A) by
reason of the limitation of
subparagraph (B) shall be treated as a
deduction allowable in computing
adjusted gross income for the
succeeding taxable year (and only for
the succeeding taxable year) to the
extent of the limitation of clause (ii)
for such succeeding taxable year.
(ii) Limitation.--For purposes of
clause (i), the limitation of this
clause for any taxable year is the
excess of--
(I) the limitation of
subparagraph (B) for such
taxable year, over
(II) amounts treated as a
deduction under subparagraph
(A) for such taxable year.
(D) Employer provided amounts.--For purposes
of this paragraph, the term ``employer provided
amounts'' means any amount paid or incurred on
behalf of the individual by the individual's
employer which is foreign earned income
included in the individual's gross income for
the taxable year (without regard to this
section).
(E) Foreign earned income.--For purposes of
this paragraph, an individual's foreign earned
income for any taxable year shall be determined
without regard to the limitation of
subparagraph (A) of subsection (b)(2).
(d) Definitions and special rules.--For purposes of this
section--
(1) Qualified individual.--The term ``qualified
individual'' means an individual whose tax home is in a
foreign country and who is--
(A) a citizen of the United States and
establishes to the satisfaction of the
Secretary that he has been a bona fide resident
of a foreign country or countries for an
uninterrupted period which includes an entire
taxable year, or
(B) a citizen or resident of the United
States and who, during any period of 12
consecutive months, is present in a foreign
country or countries during at least 330 full
days in such period.
(2) Earned income.--
(A) In general.--The term ``earned income''
means wages, salaries, or professional fees,
and other amounts received as compensation for
personal services actually rendered, but does
not include that part of the compensation
derived by the taxpayer for personal services
rendered by him to a corporation which
represents a distribution of earnings or
profits rather than a reasonable allowance as
compensation for the personal services actually
rendered.
(B) Taxpayer engaged in trade or business.--
In the case of a taxpayer engaged in a trade or
business in which both personal services and
capital are material income-producing factors,
under regulations prescribed by the Secretary,
a reasonable allowance as compensation for the
personal services rendered by the taxpayer, not
in excess of 30 percent of his share of the net
profits of such trade or business, shall be
considered as earned income.
(3) Tax home.--The term ``tax home'' means, with
respect to any individual, such individual's home for
purposes of section 162(a)(2) (relating to traveling
expenses while away from home). An individual shall not
be treated as having a tax home in a foreign country
for any period for which his abode is within the United
States, unless such individual is serving in an area
designated by the President of the United States by
Executive order as a combat zone for purposes of
section 112 in support of the Armed Forces of the
United States.
(4) Waiver of period of stay in foreign country.--
Notwithstanding paragraph (1), an individual who--
(A) is a bona fide resident of, or is present
in, a foreign country for any period,
(B) leaves such foreign country after August
31, 1978--
(i) during any period during which
the Secretary determines, after
consultation with the Secretary of
State or his delegate, that individuals
were required to leave such foreign
country because of war, civil unrest,
or similar adverse conditions in such
foreign country which precluded the
normal conduct of business by such
individuals, and
(ii) before meeting the requirements
of such paragraph (1), and
(C) establishes to the satisfaction of the
Secretary that such individual could reasonably
have been expected to have met such
requirements but for the conditions referred to
in clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect
to the period described in subparagraph (A) during
which he was a bona fide resident of, or was present
in, the foreign country, and in applying subsections
(b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with
respect to such individual, only the days within such
period shall be taken into account.
(5) Test of bona fide residence.--If--
(A) an individual who has earned income from
sources within a foreign country submits a
statement to the authorities of that country
that he is not a resident of that country, and
(B) such individual is held not subject as a
resident of that country to the income tax of
that country by its authorities with respect to
such earnings,
then such individual shall not be considered a bona
fide resident of that country for purposes of paragraph
(1)(A).
(6) Denial of double benefits.--No deduction or
exclusion from gross income under this subtitle or
credit against the tax imposed by this chapter
(including any credit or deduction for the amount of
taxes paid or accrued to a foreign country or
possession of the United States) shall be allowed to
the extent such deduction, exclusion, or credit is
properly allocable to or chargeable against amounts
excluded from gross income under subsection (a).
(7) Aggregate benefit cannot exceed foreign earned
income.--The sum of the amount excluded under
subsection (a) and the amount deducted under subsection
(c)(4)(A) for the taxable year shall not exceed the
individual's foreign earned income for such year.
(8) Limitation on income earned in restricted
country.--
(A) In general.--If travel (or any
transaction in connection with such travel)
with respect to any foreign country is subject
to the regulations described in subparagraph
(B) during any period--
(i) the term ``foreign earned
income'' shall not include any income
from sources within such country
attributable to services performed
during such period,
(ii) the term ``housing expenses''
shall not include any expenses
allocable to such period for housing in
such country or for housing of the
spouse or dependents of the taxpayer in
another country while the taxpayer is
present in such country, and
(iii) an individual shall not be
treated as a bona fide resident of, or
as present in, a foreign country for
any day during which such individual
was present in such country during such
period.
(B) Regulations.--For purposes of this
paragraph, regulations are described in this
subparagraph if such regulations--
(i) have been adopted pursuant to the
Trading With the Enemy Act (50 U.S.C.
4301 et seq.) or the International
Emergency Economic Powers Act (50
U.S.C. 1701 et seq.), and
(ii) include provisions generally
prohibiting citizens and residents of
the United States from engaging in
transactions related to travel to,
from, or within a foreign country.
(C) Exception.--Subparagraph (A) shall not
apply to any individual during any period in
which such individual's activities are not in
violation of the regulations described in
subparagraph (B).
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this section, including regulations
providing rules--
(A) for cases [where a husband and wife each
have] where both spouses have earned income
from sources outside the United States, and
(B) for married individuals filing separate
returns.
(e) Election.--
(1) In general.--An election under subsection (a)
shall apply to the taxable year for which made and to
all subsequent taxable years unless revoked under
paragraph (2).
(2) Revocation.--A taxpayer may revoke an election
made under paragraph (1) for any taxable year after the
taxable year for which such election was made. Except
with the consent of the Secretary, any taxpayer who
makes such a revocation for any taxable year may not
make another election under this section for any
subsequent taxable year before the 6th taxable year
after the taxable year for which such revocation was
made.
(f) Determination of tax liability.--
(1) In general.--If, for any taxable year, any amount
is excluded from gross income of a taxpayer under
subsection (a), then, notwithstanding sections 1 and
55--
(A) if such taxpayer has taxable income for
such taxable year, the tax imposed by section 1
for such taxable year shall be equal to the
excess (if any) of--
(i) the tax which would be imposed by
section 1 for such taxable year if the
taxpayer's taxable income were
increased by the amount excluded under
subsection (a) for such taxable year,
over
(ii) the tax which would be imposed
by section 1 for such taxable year if
the taxpayer's taxable income were
equal to the amount excluded under
subsection (a) for such taxable year,
and
(B) if such taxpayer has a taxable excess (as
defined in section 55(b)(1)(B)) for such
taxable year, the amount determined under the
first sentence of section 55(b)(1)(A) for such
taxable year shall be equal to the excess (if
any) of--
(i) the amount which would be
determined under such sentence for such
taxable year (subject to the limitation
of section 55(b)(3)) if the taxpayer's
taxable excess (as so defined) were
increased by the amount excluded under
subsection (a) for such taxable year,
over
(ii) the amount which would be
determined under such sentence for such
taxable year if the taxpayer's taxable
excess (as so defined) were equal to
the amount excluded under subsection
(a) for such taxable year.
For purposes of this paragraph, the amount excluded
under subsection (a) shall be reduced by the aggregate
amount of any deductions or exclusions disallowed under
subsection (d)(6) with respect to such excluded amount.
(2) Special rules.--
(A) Regular tax.--In applying section 1(h)
for purposes of determining the tax under
paragraph (1)(A)(i) for any taxable year in
which, without regard to this subsection, the
taxpayer's net capital gain exceeds taxable
income (hereafter in this subparagraph referred
to as the capital gain excess)--
(i) the taxpayer's net capital gain
(determined without regard to section
1(h)(11)) shall be reduced (but not
below zero) by such capital gain
excess,
(ii) the taxpayer's qualified
dividend income shall be reduced by so
much of such capital gain excess as
exceeds the taxpayer's net capital gain
(determined without regard to section
1(h)(11) and the reduction under clause
(i)), and
(iii) adjusted net capital gain,
unrecaptured section 1250 gain, and 28-
percent rate gain shall each be
determined after increasing the amount
described in section 1(h)(4)(B) by such
capital gain excess.
(B) Alternative minimum tax.--In applying
section 55(b)(3) for purposes of determining
the tax under paragraph (1)(B)(i) for any
taxable year in which, without regard to this
subsection, the taxpayer's net capital gain
exceeds the taxable excess (as defined in
section 55(b)(1)(B))--
(i) the rules of subparagraph (A)
shall apply, except that such
subparagraph shall be applied by
substituting ``the taxable excess (as
defined in section 55(b)(1)(B))'' for
``taxable income'', and
(ii) the reference in section
55(b)(3)(B) to the excess described in
section 1(h)(1)(B), and the reference
in section 55(b)(3)(C)(ii) to the
excess described in section
1(h)(1)(C)(ii), shall each be treated
as a reference to each such excess as
determined under the rules of
subparagraph (A) for purposes of
determining the tax under paragraph
(1)(A)(i).
(C) Definitions.--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), except that in applying
subparagraph (B) the adjustments under part VI
of subchapter A shall be taken into account.
(g) Cross references.--For administrative and penal
provisions relating to the exclusions provided for in this
section, see sections 6001, 6011, 6012(c), and the other
provisions of subtitle F.
* * * * * * *
Subchapter O--GAIN OR LOSS ON DISPOSITION OF PROPERTY
* * * * * * *
PART II--BASIS RULES OF GENERAL APPLICATION
* * * * * * *
SEC. 1015. BASIS OF PROPERTY ACQUIRED BY GIFTS AND TRANSFERS IN TRUST.
(a) Gifts after December 31, 1920.--If the property was
acquired by gift after December 31, 1920, the basis shall be
the same as it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except
that if such basis (adjusted for the period before the date of
the gift as provided in section 1016) is greater than the fair
market value of the property at the time of the gift, then for
the purpose of determining loss the basis shall be such fair
market value. If the facts necessary to determine the basis in
the hands of the donor or the last preceding owner are unknown
to the donee, the Secretary shall, if possible, obtain such
facts from such donor or last preceding owner, or any other
person cognizant thereof. If the Secretary finds it impossible
to obtain such facts, the basis in the hands of such donor or
last preceding owner shall be the fair market value of such
property as found by the Secretary as of the date or
approximate date at which, according to the best information
that the Secretary is able to obtain, such property was
acquired by such donor or last preceding owner.
(b) Transfer in trust after December 31, 1920.--If the
property was acquired after December 31, 1920, by a transfer in
trust (other than by a transfer in trust by a gift, bequest, or
devise), the basis shall be the same as it would be in the
hands of the grantor increased in the amount of gain or
decreased in the amount of loss recognized to the grantor on
such transfer under the law applicable to the year in which the
transfer was made.
(c) Gift or transfer in trust before January 1, 1921.--If the
property was acquired by gift or transfer in trust on or before
December 31, 1920, the basis shall be the fair market value of
such property at the time of such acquisition.
(d) Increased basis for gift tax paid.--
(1) In general.--If--
(A) the property is acquired by gift on or
after September 2, 1958, the basis shall be the
basis determined under subsection (a),
increased (but not above the fair market value
of the property at the time of the gift) by the
amount of gift tax paid with respect to such
gift, or
(B) the property was acquired by gift before
September 2, 1958, and has not been sold,
exchanged, or otherwise disposed of before such
date, the basis of the property shall be
increased on such date by the amount of gift
tax paid with respect to such gift, but such
increase shall not exceed an amount equal to
the amount by which the fair market value of
the property at the time of the gift exceeded
the basis of the property in the hands of the
donor at the time of the gift.
(2) Amount of tax paid with respect to gift.--For
purposes of paragraph (1), the amount of gift tax paid
with respect to any gift is an amount which bears the
same ratio to the amount of gift tax paid under chapter
12 with respect to all gifts made by the donor for the
calendar year (or preceding calendar period) in which
such gift is made as the amount of such gift bears to
the taxable gifts (as defined in section 2503(a) but
computed without the deduction allowed by section 2521)
made by the donor during such calendar year or period.
For purposes of the preceding sentence, the amount of
any gift shall be the amount included with respect to
such gift in determining (for the purposes of section
2503(a)) the total amount of gifts made during the
calendar year or period, reduced by the amount of any
deduction allowed with respect to such gift under
section 2522 (relating to charitable deduction) or
under section 2523 (relating to marital deduction).
(3) Gifts treated as made one-half by each spouse.--
For purposes of paragraph (1), where the donor and [his
spouse] the donor's spouse elected, under section 2513
to have the gift considered as made one-half by each,
the amount of gift tax paid with respect to such gift
under chapter 12 shall be the sum of the amounts of tax
paid with respect to each half of such gift (computed
in the manner provided in paragraph (2)).
(4) Treatment as adjustment to basis.--For purposes
of section 1016(b), an increase in basis under
paragraph (1) shall be treated as an adjustment under
section 1016(a).
(5) Application to gifts before 1955.--With respect
to any property acquired by gift before 1955,
references in this subsection to any provision of this
title shall be deemed to refer to the corresponding
provision of the Internal Revenue Code of 1939 or prior
revenue laws which was effective for the year in which
such gift was made.
(6) Special rule for gifts made after December 31,
1976.--
(A) In general.--In the case of any gift made
after December 31, 1976, the increase in basis
provided by this subsection with respect to any
gift for the gift tax paid under chapter 12
shall be an amount (not in excess of the amount
of tax so paid) which bears the same ratio to
the amount of tax so paid as--
(i) the net appreciation in value of
the gift, bears to
(ii) the amount of the gift.
(B) Net appreciation.--For purposes of
paragraph (1), the net appreciation in value of
any gift is the amount by which the fair market
value of the gift exceeds the donor's adjusted
basis immediately before the gift.
(e) Gifts between spouses.--In the case of any property
acquired by gift in a transfer described in section 1041(a),
the basis of such property in the hands of the transferee shall
be determined under section 1041(b)(2) and not this section.
Subchapter P--CAPITAL GAINS AND LOSSES
* * * * * * *
PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1233. GAINS AND LOSSES FROM SHORT SALES.
(a) Capital assets.--For purposes of this subtitle, gain or
loss from the short sale of property shall be considered as
gain or loss from the sale or exchange of a capital asset to
the extent that the property, including a commodity future,
used to close the short sale constitutes a capital asset in the
hands of the taxpayer.
(b) Short-term gains and holding periods.--If gain or loss
from a short sale is considered as gain or loss from the sale
or exchange of a capital asset under subsection (a) and if on
the date of such short sale substantially identical property
has been held by the taxpayer for not more than 1 year
(determined without regard to the effect, under paragraph (2)
of this subsection, of such short sale on the holding period),
or if substantially identical property is acquired by the
taxpayer after such short sale and on or before the date of the
closing thereof--
(1) any gain on the closing of such short sale shall
be considered as a gain on the sale or exchange of a
capital asset held for not more than 1 year
(notwithstanding the period of time any property used
to close such short sale has been held); and
(2) the holding period of such substantially
identical property shall be considered to begin
(notwithstanding section 1223, relating to the holding
period of property) on the date of the closing of the
short sale, or on the date of a sale, gift, or other
disposition of such property, whichever date occurs
first. This paragraph shall apply to such substantially
identical property in the order of the dates of the
acquisition of such property, but only to so much of
such property as does not exceed the quantity sold
short.
For purposes of this subsection, the acquisition of an option
to sell property at a fixed price shall be considered as a
short sale, and the exercise or failure to exercise such option
shall be considered as a closing of such short sale.
(c) Certain options to sell.--Subsection (b) shall not
include an option to sell property at a fixed price acquired on
the same day on which the property identified as intended to be
used in exercising such option is acquired and which, if
exercised, is exercised through the sale of the property so
identified. If the option is not exercised, the cost of the
option shall be added to the basis of the property with which
the option is identified. This subsection shall apply only to
options acquired after August 16, 1954.
(d) Long-term losses.--If on the date of such short sale
substantially identical property has been held by the taxpayer
for more than 1 year, any loss on the closing of such short
sale shall be considered as a loss on the sale or exchange of a
capital asset held for more than 1 year (notwithstanding the
period of time any property used to close such short sale has
been held, and notwithstanding section 1234).
(e) Rules for application of section.--(1) Subsection (b)(1)
or (d) shall not apply to the gain or loss, respectively, on
any quantity of property used to close such short sale which is
in excess of the quantity of the substantially identical
property referred to in the applicable subsection.
(2) For purposes of subsections (b) and (d)--
(A) the term ``property'' includes only stocks and
securities (including stocks and securities dealt with
on a ``when issued'' basis), and commodity futures,
which are capital assets in the hands of the taxpayer,
but does not include any position to which section
1092(b) applies;
(B) in the case of futures transactions in any
commodity on or subject to the rules of a board of
trade or commodity exchange, a commodity future
requiring delivery in 1 calendar month shall not be
considered as property substantially identical to
another commodity future requiring delivery in a
different calendar month;
(C) in the case of a short sale of property by an
individual, the term ``taxpayer'', in the application
of this subsection and subsections (b) and (d), shall
be read as ``taxpayer or [his spouse] the taxpayer's
spouse''; but an individual who is legally separated
from the taxpayer under a decree of divorce or of
separate maintenance shall not be considered as the
spouse of the taxpayer;
(D) a securities futures contract (as defined in
section 1234B) to acquire substantially identical
property shall be treated as substantially identical
property; and
(E) entering into a securities futures contract (as
so defined) to sell shall be considered to be a short
sale, and the settlement of such contract shall be
considered to be the closing of such short sale.
(3) Where the taxpayer enters into 2 commodity futures
transactions on the same day, one requiring delivery by him in
one market and the other requiring delivery to him of the same
(or substantially identical) commodity in the same calendar
month in a different market, and the taxpayer subsequently
closes both such transactions on the same day, subsections (b)
and (d) shall have no application to so much of the commodity
involved in either such transaction as does not exceed in
quantity the commodity involved in the other.
(4)(A) In the case of a taxpayer who is a dealer in
securities (within the meaning of section 1236)--
(i) if, on the date of a short sale of stock,
substantially identical property which is a capital
asset in the hands of the taxpayer has been held for
not more than 1 year, and
(ii) if such short sale is closed more than 20 days
after the date on which it was made,
subsection (b)(2) shall apply in respect of the holding period
of such substantially identical property.
(B) For purposes of subparagraph (A)--
(i) the last sentence of subsection (b) applies; and
(ii) the term ``stock'' means any share or
certificate of stock in a corporation, any bond or
other evidence of indebtedness which is convertible
into any such share or certificate, or any evidence of
an interest in, or right to subscribe to or purchase,
any of the foregoing.
(f) Arbitrage operations in securities.--In the case of a
short sale which had been entered into as an arbitrage
operation, to which sale the rule of subsection (b)(2) would
apply except as otherwise provided in this subsection--
(1) subsection (b)(2) shall apply first to
substantially identical assets acquired for arbitrage
operations held at the close of business on the day
such sale is made, and only to the extent that the
quantity sold short exceeds the substantially identical
assets acquired for arbitrage operations held at the
close of business on the day such sale is made, shall
the holding period of any other such identical assets
held by the taxpayer be affected;
(2) in the event that assets acquired for arbitrage
operations are disposed of in such manner as to create
a net short position in assets acquired for arbitrage
operations, such net short position shall be deemed to
constitute a short sale made on that day;
(3) for the purpose of paragraphs (1) and (2) of this
subsection the taxpayer will be deemed as of the close
of any business day to hold property which he is or
will be entitled to receive or acquire by virtue of any
other asset acquired for arbitrage operations or by
virtue of any contract he has entered into in an
arbitrage operation; and
(4) for the purpose of this subsection arbitrage
operations are transactions involving the purchase and
sale of assets for the purpose of profiting from a
current difference between the price of the asset
purchased and the price of the asset sold, and in which
the asset purchased, if not identical to the asset
sold, is such that by virtue thereof the taxpayer is,
or will be, entitled to acquire assets identical to the
assets sold. Such operations must be clearly identified
by the taxpayer in his records as arbitrage operations
on the day of the transaction or as soon thereafter as
may be practicable. Assets acquired for arbitrage
operations will include stocks and securities and the
right to acquire stocks and securities.
(g) Hedging transactions.--This section shall not apply in
the case of a hedging transaction in commodity futures.
(h) Short sales of property which becomes substantially
worthless.--
(1) In general.--If--
(A) the taxpayer enters into a short sale of
property, and
(B) such property becomes substantially
worthless,
the taxpayer shall recognize gain in the same manner as
if the short sale were closed when the property becomes
substantially worthless. To the extent provided in
regulations prescribed by the Secretary, the preceding
sentence also shall apply with respect to any option
with respect to property, any offsetting notional
principal contract with respect to property, any
futures or forward contract to deliver any property,
and any other similar transaction.
(2) Statute of limitations.--If property becomes
substantially worthless during a taxable year and any
short sale of such property remains open at the time
such property becomes substantially worthless, then--
(A) the statutory period for the assessment
of any deficiency attributable to any part of
the gain on such transaction shall not expire
before the earlier of--
(i) the date which is 3 years after
the date the Secretary is notified by
the taxpayer (in such manner as the
Secretary may by regulations prescribe)
of the substantial worthlessness of
such property, or
(ii) the date which is 6 years after
the date the return for such taxable
year is filed, and
(B) such deficiency may be assessed before
the date applicable under subparagraph (A)
notwithstanding the provisions of any other law
or rule of law which would otherwise prevent
such assessment.
* * * * * * *
SEC. 1235. SALE OR EXCHANGE OF PATENTS.
(a) General.--A transfer (other than by gift, inheritance, or
devise) of property consisting of all substantial rights to a
patent, or an undivided interest therein which includes a part
of all such rights, by any holder shall be considered the sale
or exchange of a capital asset held for more than 1 year,
regardless of whether or not payments in consideration of such
transfer are--
(1) payable periodically over a period generally
coterminous with the transferee's use of the patent, or
(2) contingent on the productivity, use, or
disposition of the property transferred.
(b) ``Holder'' defined.--For purposes of this section, the
term ``holder'' means--
(1) any individual whose efforts created such
property, or
(2) any other individual who has acquired his
interest in such property in exchange for consideration
in money or money's worth paid to such creator prior to
actual reduction to practice of the invention covered
by the patent, if such individual is neither--
(A) the employer of such creator, nor
(B) related to such creator (within the
meaning of subsection (c)).
(c) Related persons.--Subsection (a) shall not apply to any
transfer, directly or indirectly, between persons specified
within any one of the paragraphs of section 267(b) or persons
described in section 707(b); except that, in applying section
267(b) and (c) and section 707(b) for purposes of this
section--
(1) the phrase ``25 percent or more'' shall be
substituted for the phrase ``more than 50 percent''
each place it appears in section 267(b) or 707(b), and
(2) paragraph (4) of section 267(c) shall be treated
as providing that the family of an individual shall
include only [his spouse] the individual's spouse,
ancestors, and lineal descendants.
(d) Cross reference.--For special rule relating to
nonresident aliens, see section 871(a).
* * * * * * *
SEC. 1239. GAIN FROM SALE OF DEPRECIABLE PROPERTY BETWEEN CERTAIN
RELATED TAXPAYERS.
(a) Treatment of gain as ordinary income.--In the case of a
sale or exchange of property, directly or indirectly, between
related persons, any gain recognized to the transferor shall be
treated as ordinary income if such property is, in the hands of
the transferee, of a character which is subject to the
allowance for depreciation provided in section 167.
(b) Related persons.--For purposes of subsection (a), the
term ``related persons'' means--
(1) a person and all entities which are controlled
entities with respect to such person,
(2) a taxpayer and any trust in which such taxpayer
(or [his spouse] the taxpayer's spouse) is a
beneficiary, unless such beneficiary's interest in the
trust is a remote contingent interest (within the
meaning of section 318(a)(3)(B)(i)), and
(3) except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.
(c) Controlled entity defined.--
(1) General rule.--For purposes of this section, the
term ``controlled entity'' means, with respect to any
person--
(A) a corporation more than 50 percent of the
value of the outstanding stock of which is
owned (directly or indirectly) by or for such
person,
(B) a partnership more than 50 percent of the
capital interest or profits interest in which
is owned (directly or indirectly) by or for
such person, and
(C) any entity which is a related person to
such person under paragraph (3), (10), (11), or
(12) of section 267(b).
(2) Constructive ownership.--For purposes of this
section, ownership shall be determined in accordance
with rules similar to the rules under section 267(c)
(other than paragraph (3) thereof).
(d) Employer and related employee association.--For purposes
of subsection (a), the term ``related person'' also includes--
(1) an employer and any person related to the
employer (within the meaning of subsection (b)), and
(2) a welfare benefit fund (within the meaning of
section 419(e)) which is controlled directly or
indirectly by persons referred to in paragraph (1).
(e) Patent applications treated as depreciable property.--For
purposes of this section, a patent application shall be treated
as property which, in the hands of the transferee, is of a
character which is subject to the allowance for depreciation
provided in section 167.
* * * * * * *
SEC. 1244. LOSSES ON SMALL BUSINESS STOCK.
(a) General rule.--In the case of an individual, a loss on
section 1244 stock issued to such individual or to a
partnership which would (but for this section) be treated as a
loss from the sale or exchange of a capital asset shall, to the
extent provided in this section, be treated as an ordinary
loss.
(b) Maximum amount for any taxable year.--For any taxable
year the aggregate amount treated by the taxpayer by reason of
this section as an ordinary loss shall not exceed--
(1) $50,000, or
(2) $100,000, in the case of [a husband and wife
filing] a joint return for such year under section
6013.
(c) Section 1244 stock defined.--
(1) In general.--For purposes of this section, the
term ``section 1244 stock'' means stock in a domestic
corporation if--
(A) at the time such stock is issued, such
corporation was a small business corporation,
(B) such stock was issued by such corporation
for money or other property (other than stock
and securities), and
(C) such corporation, during the period of
its 5 most recent taxable years ending before
the date the loss on such stock was sustained,
derived more than 50 percent of its aggregate
gross receipts from sources other than
royalties, rents, dividends, interests,
annuities, and sales or exchanges of stocks or
securities.
(2) Rules for application of paragraph (1)(C).--
(A) Period taken into account with respect to
new corporations.--For purposes of paragraph
(1)(C), if the corporation has not been in
existence for 5 taxable years ending before the
date the loss on the stock was sustained, there
shall be substituted for such 5-year period--
(i) the period of the corporation's
taxable years ending before such date,
or
(ii) if the corporation has not been
in existence for 1 taxable year ending
before such date, the period such
corporation has been in existence
before such date.
(B) Gross receipts from sales of
securities.--For purposes of paragraph (1)(C),
gross receipts from the sales or exchanges of
stock or securities shall be taken into account
only to the extent of gains therefrom.
(C) Nonapplication where deductions exceed
gross income.--Paragraph (1)(C) shall not apply
with respect to any corporation if, for the
period taken into account for purposes of
paragraph (1)(C), the amount of the deductions
allowed by this chapter (other than by sections
172, 243, and 245) exceeds the amount of gross
income.
(3) Small business corporation defined.--
(A) In general.--For purposes of this
section, a corporation shall be treated as a
small business corporation if the aggregate
amount of money and other property received by
the corporation for stock, as a contribution to
capital, and as paid-in surplus, does not
exceed $1,000,000. The determination under the
preceding sentence shall be made as of the time
of the issuance of the stock in question but
shall include amounts received for such stock
and for all stock theretofore issued.
(B) Amount taken into account with respect to
property.--For purposes of subparagraph (A),
the amount taken into account with respect to
any property other than money shall be the
amount equal to the adjusted basis to the
corporation of such property for determining
gain, reduced by any liability to which the
property was subject or which was assumed by
the corporation. The determination under the
preceding sentence shall be made as of the time
the property was received by the corporation.
(d) Special rules.--
(1) Limitations on amount of ordinary loss.--
(A) Contributions of property having basis in
excess of value.--If--
(i) section 1244 stock was issued in
exchange for property,
(ii) the basis of such stock in the
hands of the taxpayer is determined by
reference to the basis in his hands of
such property, and
(iii) the adjusted basis (for
determining loss) of such property
immediately before the exchange
exceeded its fair market value at such
time,
then in computing the amount of the loss on
such stock for purposes of this section the
basis of such stock shall be reduced by an
amount equal to the excess described in clause
(iii).
(B) Increases in basis.--In computing the
amount of the loss on stock for purposes of
this section, any increase in the basis of such
stock (through contributions to the capital of
the corporation, or otherwise) shall be treated
as allocable to stock which is not section 1244
stock.
(2) Recapitalizations, changes in name, etc..--To the
extent provided in regulations prescribed by the
Secretary, stock in a corporation, the basis of which
(in the hands of a taxpayer) is determined in whole or
in part by reference to the basis in his hands of stock
in such corporation which meets the requirements of
subsection (c)(1) (other than subparagraph (C)
thereof), or which is received in a reorganization
described in section 368(a)(1)(F) in exchange for stock
which meets such requirements, shall be treated as
meeting such requirements. For purposes of paragraphs
(1)(C) and (3)(A) of subsection (c), a successor
corporation in a reorganization described in section
368(a)(1)(F) shall be treated as the same corporation
as its predecessor.
(3) Relationship to net operating loss deduction.--
For purposes of section 172 (relating to the net
operating loss deduction), any amount of loss treated
by reason of this section as an ordinary loss shall be
treated as attributable to a trade or business of the
taxpayer.
(4) Individual defined.--For purposes of this
section, the term ``individual'' does not include a
trust or estate.
(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
* * * * * * *
PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS
* * * * * * *
Subpart A--ORIGINAL ISSUE DISCOUNT
* * * * * * *
SEC. 1272. CURRENT INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT.
(a) Original issue discount included in income on basis of
constant interest rate.--
(1) General rule.--For purposes of this title, there
shall be included in the gross income of the holder of
any debt instrument having original issue discount, an
amount equal to the sum of the daily portions of the
original issue discount for each day during the taxable
year on which such holder held such debt instrument.
(2) Exceptions.--Paragraph (1) shall not apply to--
(A) Tax-exempt obligations.--Any tax-exempt
obligation.
(B) United States savings bonds.--Any United
States savings bond.
(C) Short-term obligations.--Any debt
instrument which has a fixed maturity date not
more than 1 year from the date of issue.
(D) Loans between natural persons.--
(i) In general.--Any loan made by a
natural person to another natural
person if--
(I) such loan is not made in
the course of a trade or
business of the lender, and
(II) the amount of such loan
(when increased by the
outstanding amount of prior
loans by such natural person to
such other natural person) does
not exceed $10,000.
(ii) Clause (i) not to apply where
tax avoidance a principal purpose.--
Clause (i) shall not apply if the loan
has as 1 of its principal purposes the
avoidance of any Federal tax.
[(iii) Treatment of husband and
wife.--For purposes of this
subparagraph, a husband and wife shall
be treated as 1 person. The preceding
sentence shall not apply where the
spouses lived apart at all times during
the taxable year in which the loan is
made.]
(iii) Treatment of a married
couple.--For purposes of this
subparagraph, a married couple shall be
treated as 1 person. The preceding
sentence shall not apply where the
spouses lived apart at all times during
the taxable year in which the loan is
made.
(3) Determination of daily portions.--For purposes of
paragraph (1), the daily portion of the original issue
discount on any debt instrument shall be determined by
allocating to each day in any accrual period its
ratable portion of the increase during such accrual
period in the adjusted issue price of the debt
instrument. For purposes of the preceding sentence, the
increase in the adjusted issue price for any accrual
period shall be an amount equal to the excess (if any)
of--
(A) the product of--
(i) the adjusted issue price of the
debt instrument at the beginning of
such accrual period, and
(ii) the yield to maturity
(determined on the basis of compounding
at the close of each accrual period and
properly adjusted for the length of the
accrual period), over
(B) the sum of the amounts payable as
interest on such debt instrument during such
accrual period.
(4) Adjusted issue price.--For purposes of this
subsection, the adjusted issue price of any debt
instrument at the beginning of any accrual period is
the sum of--
(A) the issue price of such debt instrument,
plus
(B) the adjustments under this subsection to
such issue price for all periods before the
first day of such accrual period.
(5) Accrual period.--Except as otherwise provided in
regulations prescribed by the Secretary, the term
``accrual period'' means a 6-month period (or shorter
period from the date of original issue of the debt
instrument) which ends on a day in the calendar year
corresponding to the maturity date of the debt
instrument or the date 6 months before such maturity
date.
(6) Determination of daily portions where principal
subject to acceleration.--
(A) In general.--In the case of any debt
instrument to which this paragraph applies, the
daily portion of the original issue discount
shall be determined by allocating to each day
in any accrual period its ratable portion of
the excess (if any) of--
(i) the sum of (I) the present value
determined under subparagraph (B) of
all remaining payments under the debt
instrument as of the close of such
period, and (II) the payments during
the accrual period of amounts included
in the stated redemption price of the
debt instrument, over
(ii) the adjusted issue price of such
debt instrument at the beginning of
such period.
(B) Determination of present value.--For
purposes of subparagraph (A), the present value
shall be determined on the basis of--
(i) the original yield to maturity
(determined on the basis of compounding
at the close of each accrual period and
properly adjusted for the length of the
accrual period),
(ii) events which have occurred
before the close of the accrual period,
and
(iii) a prepayment assumption
determined in the manner prescribed by
regulations.
(C) Debt instruments to which paragraph
applies.--This paragraph applies to--
(i) any regular interest in a REMIC
or qualified mortgage held by a REMIC,
(ii) any other debt instrument if
payments under such debt instrument may
be accelerated by reason of prepayments
of other obligations securing such debt
instrument (or, to the extent provided
in regulations, by reason of other
events), or
(iii) any pool of debt instruments
the yield on which may be affected by
reason of prepayments (or to the extent
provided in regulations, by reason of
other events).
To the extent provided in regulations
prescribed by the Secretary, in the case of a
small business engaged in the trade or business
of selling tangible personal property at
retail, clause (iii) shall not apply to debt
instruments incurred in the ordinary course of
such trade or business while held by such
business.
(7) Reduction where subsequent holder pays
acquisition premium.--
(A) Reduction.--For purposes of this
subsection, in the case of any purchase after
its original issue of a debt instrument to
which this subsection applies, the daily
portion for any day shall be reduced by an
amount equal to the amount which would be the
daily portion for such day (without regard to
this paragraph) multiplied by the fraction
determined under subparagraph (B).
(B) Determination of fraction.--For purposes
of subparagraph (A), the fraction determined
under this subparagraph is a fraction--
(i) the numerator of which is the
excess (if any) of--
(I) the cost of such debt
instrument incurred by the
purchaser, over
(II) the issue price of such
debt instrument, increased by
the portion of original issue
discount previously includible
in the gross income of any
holder (computed without regard
to this paragraph), and
(ii) the denominator of which is the
sum of the daily portions for such debt
instrument for all days after the date
of such purchase and ending on the
stated maturity date (computed without
regard to this paragraph).
(b) Exceptions.--This section shall not apply to any holder--
(1) who has purchased the debt instrument at a
premium, or
(2) which is a life insurance company to which
section 811(b) applies.
(c) Definition and special rule.--
(1) Purchase defined.--For purposes of this section,
the term ``purchase'' means--
(A) any acquisition of a debt instrument,
where
(B) the basis of the debt instrument is not
determined in whole or in part by reference to
the adjusted basis of such debt instrument in
the hands of the person from whom acquired.
(2) Basis adjustment.--The basis of any debt
instrument in the hands of the holder thereof shall be
increased by the amount included in his gross income
pursuant to this section.
Subchapter Q--READJUSTMENT OF TAX BETWEEN YEARS AND SPECIAL LIMITATIONS
* * * * * * *
PART II--MITIGATION OF EFFECT OF LIMITATIONS AND OTHER PROVISIONS
* * * * * * *
SEC. 1313. DEFINITIONS.
(a) Determination.--For purposes of this part, the term
``determination'' means--
(1) a decision by the Tax Court or a judgment,
decree, or other order by any court of competent
jurisdiction, which has become final;
(2) a closing agreement made under section 7121;
(3) a final disposition by the Secretary of a claim
for refund. For purposes of this part, a claim for
refund shall be deemed finally disposed of by the
Secretary--
(A) as to items with respect to which the
claim was allowed, on the date of allowance of
refund or credit or on the date of mailing
notice of disallowance (by reason of offsetting
items) of the claim for refund, and
(B) as to items with respect to which the
claim was disallowed, in whole or in part, or
as to items applied by the Secretary in
reduction of the refund or credit, on
expiration of the time for instituting suit
with respect thereto (unless suit is instituted
before the expiration of such time); or
(4) under regulations prescribed by the Secretary, an
agreement for purposes of this part, signed by the
Secretary and by any person, relating to the liability
of such person (or the person for whom he acts) in
respect of a tax under this subtitle for any taxable
period.
(b) Taxpayer.--Notwithstanding section 7701(a)(14), the term
``taxpayer'' means any person subject to a tax under the
applicable revenue law.
(c) Related taxpayer.--For purposes of this part, the term
``related taxpayer'' means a taxpayer who, with the taxpayer
with respect to whom a determination is made, stood, in the
taxable year with respect to which the erroneous inclusion,
exclusion, omission, allowance, or disallowance was made, in
one of the following relationships:
(1) [husband and wife] spouses ,
(2) grantor and fiduciary,
(3) grantor and beneficiary,
(4) fiduciary and beneficiary, legatee, or heir,
(5) decedent and decedent's estate,
(6) partner, or
(7) member of an affiliated group of corporations (as
defined in section 1504).
* * * * * * *
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] a married
couple (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)), 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 6--CONSOLIDATED RETURNS
* * * * * * *
Subchapter B--RELATED RULES
* * * * * * *
PART II--CERTAIN CONTROLLED CORPORATIONS
* * * * * * *
SEC. 1563. DEFINITIONS AND SPECIAL RULES.
(a) Controlled group of corporations.--For purposes of this
part, the term ``controlled group of corporations'' means any
group of--
(1) Parent-subsidiary controlled group.--One or more
chains of corporations connected through stock
ownership with a common parent corporation if--
(A) stock possessing at least 80 percent of
the total combined voting power of all classes
of stock entitled to vote or at least 80
percent of the total value of shares of all
classes of stock of each of the corporations,
except the common parent corporation, is owned
(within the meaning of subsection (d)(1)) by
one or more of the other corporations; and
(B) the common parent corporation owns
(within the meaning of subsection (d)(1)) stock
possessing at least 80 percent of the total
combined voting power of all classes of stock
entitled to vote or at least 80 percent of the
total value of shares of all classes of stock
of at least one of the other corporations,
excluding, in computing such voting power or
value, stock owned directly by such other
corporations.
(2) Brother-sister controlled group.--Two or more
corporations if 5 or fewer persons who are individuals,
estates, or trusts own (within the meaning of
subsection (d)(2)) stock possessing more than 50
percent of the total combined voting power of all
classes of stock entitled to vote or more than 50
percent of the total value of shares of all classes of
stock of each corporation, taking into account the
stock ownership of each such person only to the extent
such stock ownership is identical with respect to each
such corporation.
(3) Combined group.--Three or more corporations each
of which is a member of a group of corporations
described in paragraph (1) or (2), and one of which--
(A) is a common parent corporation included
in a group of corporations described in
paragraph (1), and also
(B) is included in a group of corporations
described in paragraph (2).
(4) Certain insurance companies.--Two or more
insurance companies subject to taxation under section
801 which are members of a controlled group of
corporations described in paragraph (1), (2), or (3).
Such insurance companies shall be treated as a
controlled group of corporations separate from any
other corporations which are members of the controlled
group of corporations described in paragraph (1), (2),
or (3).
(b) Component member.--
(1) General rule.--For purposes of this part, a
corporation is a component member of a controlled group
of corporations on a December 31 of any taxable year
(and with respect to the taxable year which includes
such December 31) if such corporation--
(A) is a member of such controlled group of
corporations on the December 31 included in
such year and is not treated as an excluded
member under paragraph (2), or
(B) is not a member of such controlled group
of corporations on the December 31 included in
such year but is treated as an additional
member under paragraph (3).
(2) Excluded members.--A corporation which is a
member of a controlled group of corporations on
December 31 of any taxable year shall be treated as an
excluded member of such group for the taxable year
including such December 31 if such corporation--
(A) is a member of such group for less than
one-half the number of days in such taxable
year which precede such December 31,
(B) is exempt from taxation under section
501(a) (except a corporation which is subject
to tax on its unrelated business taxable income
under section 511) for such taxable year,
(C) is a foreign corporation subject to tax
under section 881 for such taxable year,
(D) is an insurance company subject to
taxation under section 801 (other than an
insurance company which is a member of a
controlled group described in subsection
(a)(4)), or
(E) is a franchised corporation, as defined
in subsection (f)(4).
(3) Additional members.--A corporation which--
(A) was a member of a controlled group of
corporations at any time during a calendar
year,
(B) is not a member of such group on December
31 of such calendar year, and
(C) is not described, with respect to such
group, in subparagraph (B), (C), (D), or (E) of
paragraph (2),
shall be treated as an additional member of such group
on December 31 for its taxable year including such
December 31 if it was a member of such group for one-
half (or more) of the number of days in such taxable
year which precede such December 31.
(4) Overlapping groups.--If a corporation is a
component member of more than one controlled group of
corporations with respect to any taxable year, such
corporation shall be treated as a component member of
only one controlled group. The determination as to the
group of which such corporation is a component member
shall be made under regulations prescribed by the
Secretary which are consistent with the purposes of
this part.
(c) Certain stock excluded.--
(1) General rule.--For purposes of this part, the
term ``stock'' does not include--
(A) nonvoting stock which is limited and
preferred as to dividends,
(B) treasury stock, and
(C) stock which is treated as ``excluded
stock'' under paragraph (2).
(2) Stock treated as ``excluded stock''.--
(A) Parent-subsidiary controlled group.--For
purposes of subsection (a)(1), if a corporation
(referred to in this paragraph as ``parent
corporation'') owns (within the meaning of
subsections (d)(1) and (e)(4)), 50 percent or
more of the total combined voting power of all
classes of stock entitled to vote or 50 percent
or more of the total value of shares of all
classes of stock in another corporation
(referred to in this paragraph as ``subsidiary
corporation''), the following stock of the
subsidiary corporation shall be treated as
excluded stock--
(i) stock in the subsidiary
corporation held by a trust which is
part of a plan of deferred compensation
for the benefit of the employees of the
parent corporation or the subsidiary
corporation,
(ii) stock in the subsidiary
corporation owned by an individual
(within the meaning of subsection
(d)(2)) who is a principal stockholder
or officer of the parent corporation.
For purposes of this clause, the term
``principal stockholder'' of a
corporation means an individual who
owns (within the meaning of subsection
(d)(2)) 5 percent or more of the total
combined voting power of all classes of
stock entitled to vote or 5 percent or
more of the total value of shares of
all classes of stock in such
corporation,
(iii) stock in the subsidiary
corporation owned (within the meaning
of subsection (d)(2)) by an employee of
the subsidiary corporation if such
stock is subject to conditions which
run in favor of such parent (or
subsidiary) corporation and which
substantially restrict or limit the
employee's right (or if the employee
constructively owns such stock, the
direct owner's right) to dispose of
such stock, or
(iv) stock in the subsidiary
corporation owned (within the meaning
of subsection (d)(2)) by an
organization (other than the parent
corporation) to which section 501
(relating to certain educational and
charitable organizations which are
exempt from tax) applies and which is
controlled directly or indirectly by
the parent corporation or subsidiary
corporation, by an individual, estate,
or trust that is a principal
stockholder (within the meaning of
clause (ii)) of the parent corporation,
by an officer of the parent
corporation, or by any combination
thereof.
(B) Brother-sister controlled group.--For
purposes of subsection (a)(2), if 5 or fewer
persons who are individuals, estates, or trusts
(referred to in this subparagraph as ``common
owners'') own (within the meaning of subsection
(d)(2)), 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
in a corporation, the following stock of such
corporation shall be treated as excluded
stock--
(i) stock in such corporation held by
an employees' trust described in
section 401(a) which is exempt from tax
under section 501(a), if such trust is
for the benefit of the employees of
such corporation,
(ii) stock in such corporation owned
(within the meaning of subsection
(d)(2)) by an employee of the
corporation if such stock is subject to
conditions which run in favor of any of
such common owners (or such
corporation) and which substantially
restrict or limit the employee's right
(or if the employee constructively owns
such stock, the direct owner's right)
to dispose of such stock. If a
condition which limits or restricts the
employee's right (or the direct owner's
right) to dispose of such stock also
applies to the stock held by any of the
common owners pursuant to a bona fide
reciprocal stock purchase arrangement,
such condition shall not be treated as
one which restricts or limits the
employee's right to dispose of such
stock, or
(iii) stock in such corporation owned
(within the meaning of subsection
(d)(2)) by an organization to which
section 501 (relating to certain
educational and charitable
organizations which are exempt from
tax) applies and which is controlled
directly or indirectly by such
corporation, by an individual, estate,
or trust that is a principal
stockholder (within the meaning of
subparagraph (A)(ii)) of such
corporation, by an officer of such
corporation, or by any combination
thereof.
(d) Rules for determining stock ownership.--
(1) Parent-subsidiary controlled group.--For purposes
of determining whether a corporation is a member of a
parent-subsidiary controlled group of corporations
(within the meaning of subsection (a)(1)), stock owned
by a corporation means--
(A) stock owned directly by such corporation,
and
(B) stock owned with the application of
paragraphs (1), (2), and (3) of subsection (e).
(2) Brother-sister controlled group.--For purposes of
determining whether a corporation is a member of a
brother-sister controlled group of corporations (within
the meaning of subsection (a)(2)), stock owned by a
person who is an individual, estate, or trust means--
(A) stock owned directly by such person, and
(B) stock owned with the application of
subsection (e).
(e) Constructive ownership.--
(1) Options.--If any person has an option to acquire
stock, such stock shall be considered as owned by such
person. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to
acquire such stock.
(2) Attribution from partnerships.--Stock owned,
directly or indirectly, by or for a partnership shall
be considered as owned by any partner having an
interest of 5 percent or more in either the capital or
profits of the partnership in proportion to his
interest in capital or profits, whichever such
proportion is the greater.
(3) Attribution from estates or trusts.--(A) Stock
owned, directly or indirectly, by or for an estate or
trust shall be considered as owned by any beneficiary
who has an actuarial interest of 5 percent or more in
such stock, to the extent of such actuarial interest.
For purposes of this subparagraph, the actuarial
interest of each beneficiary shall be determined by
assuming the maximum exercise of discretion by the
fiduciary in favor of such beneficiary and the maximum
use of such stock to satisfy his rights as a
beneficiary.
(B) Stock owned, directly or indirectly, by or for
any portion of a trust of which a person is considered
the owner under subpart E of part I of subchapter J
(relating to grantors and others treated as substantial
owners) shall be considered as owned by such person.
(C) This paragraph shall not apply to stock owned by
any employees' trust described in section 401(a) which
is exempt from tax under section 501(a).
(4) Attribution from corporations.--Stock owned,
directly or indirectly, by or for a corporation shall
be considered as owned by any person who owns (within
the meaning of subsection (d)) 5 percent or more in
value of its stock in that proportion which the value
of the stock which such person so owns bears to the
value of all the stock in such corporation.
(5) Spouse.--An individual shall be considered as
owning stock in a corporation owned, directly or
indirectly, by or for [his spouse] the individual's
spouse (other than a spouse who is legally separated
from the individual under a decree of divorce whether
interlocutory or final, or a decree of separate
maintenance), except in the case of a corporation with
respect to which each of the following conditions is
satisfied for its taxable year--
(A) The individual does not, at any time
during such taxable year, own directly any
stock in such corporation;
(B) The individual is not a director or
employee and does not participate in the
management of such corporation at any time
during such taxable year;
(C) Not more than 50 percent of such
corporation's gross income for such taxable
year was derived from royalties, rents,
dividends, interest, and annuities; and
(D) Such stock in such corporation is not, at
any time during such taxable year, subject to
conditions which substantially restrict or
limit the spouse's right to dispose of such
stock and which run in favor of the individual
or [his children] the individual's children who
have not attained the age of 21 years.
(6) Children, grandchildren, parents, and
grandparents.--
(A) Minor children.--An individual shall be
considered as owning stock owned, directly or
indirectly, by or for [his children] the
individual's children who have not attained the
age of 21 years, and, if the individual has not
attained the age of 21 years, the stock owned,
directly or indirectly, by or for [his parents]
the individual's parents .
(B) Adult children and grandchildren.--An
individual who owns (within the meaning of
subsection (d)(2), but without regard to this
subparagraph) more than 50 percent of the total
combined voting power of all classes of stock
entitled to vote or more than 50 percent of the
total value of shares of all classes of stock
in a corporation shall be considered as owning
the stock in such corporation owned, directly
or indirectly, by or for [his parents] the
individual's parents , grandparents,
grandchildren, and children who have attained
the age of 21 years.
(C) Adopted child.--For purposes of this
section, a legally adopted child of an
individual shall be treated as a child of such
individual by blood.
(f) Other definitions and rules.--
(1) Employee defined.--For purposes of this section
the term ``employee'' has the same meaning such term is
given by paragraphs (1) and (2) of section 3121(d).
(2) Operating rules.--
(A) In general.--Except as provided in
subparagraph (B), stock constructively owned by
a person by reason of the application of
paragraph (1), (2), (3), (4), (5), or (6) of
subsection (e) shall, for purposes of applying
such paragraphs, be treated as actually owned
by such person.
(B) Members of family.--Stock constructively
owned by an individual by reason of the
application of paragraph (5) or (6) of
subsection (e) shall not be treated as owned by
[him] the individual for purposes of again
applying such paragraphs in order to make
another the constructive owner of such stock.
(3) Special rules.--For purposes of this section--
(A) If stock may be considered as owned by a
person under subsection (e)(1) and under any
other paragraph of subsection (e), it shall be
considered as owned by him under subsection
(e)(1).
(B) If stock is owned (within the meaning of
subsection (d)) by two or more persons, such
stock shall be considered as owned by the
person whose ownership of such stock results in
the corporation being a component member of a
controlled group. If by reason of the preceding
sentence, a corporation would (but for this
sentence) become a component member of two
controlled groups, it shall be treated as a
component member of one controlled group. The
determination as to the group of which such
corporation is a component member shall be made
under regulations prescribed by the Secretary
which are consistent with the purposes of this
part.
(C) If stock is owned by a person within the
meaning of subsection (d) and such ownership
results in the corporation being a component
member of a controlled group, such stock shall
not be treated as excluded stock under
subsection (c)(2), if by reason of treating
such stock as excluded stock the result is that
such corporation is not a component member of a
controlled group of corporations.
(4) Franchised corporation.--If--
(A) a parent corporation (as defined in
subsection (c)(2)(A)), or a common owner (as
defined in subsection (c)(2)(B)), of a
corporation which is a member of a controlled
group of corporations is under a duty (arising
out of a written agreement) to sell stock of
such corporation (referred to in this paragraph
as ``franchised corporation'') which is
franchised to sell the products of another
member, or the common owner, of such controlled
group;
(B) such stock is to be sold to an employee
(or employees) of such franchised corporation
pursuant to a bona fide plan designed to
eliminate the stock ownership of the parent
corporation or of the common owner in the
franchised corporation;
(C) such plan--
(i) provides a reasonable selling
price for such stock, and
(ii) requires that a portion of the
employee's share of the profits of such
corporation (whether received as
compensation or as a dividend) be
applied to the purchase of such stock
(or the purchase of notes, bonds,
debentures or other similar evidence of
indebtedness of such franchised
corporation held by such parent
corporation or common owner);
(D) such employee (or employees) owns
directly more than 20 percent of the total
value of shares of all classes of stock in such
franchised corporation;
(E) more than 50 percent of the inventory of
such franchised corporation is acquired from
members of the controlled group, the common
owner, or both; and
(F) all of the conditions contained in
subparagraphs (A), (B), (C), (D), and (E) have
been met for one-half (or more) of the number
of days preceding the December 31 included
within the taxable year (or if the taxable year
does not include December 31, the last day of
such year) of the franchised corporation,
then such franchised corporation shall be treated as an
excluded member of such group, under subsection (b)(2),
for such taxable year.
(5) Brother-sister controlled group definition for
provisions other than this part.--
(A) In general.--Except as specifically
provided in an applicable provision, subsection
(a)(2) shall be applied to an applicable
provision as if it read as follows:
``(2) Brother-sister controlled group.--``Two or more
corporations if 5 or fewer persons who are individuals,
estates, or trusts own (within the meaning of
subsection (d)(2) stock possessing--
``(A) at least 80 percent of the total
combined voting power of all classes of stock
entitled to vote, or at least 80 percent of the
total value of shares of all classes of stock,
of each corporation, and
``(B) more than 50 percent of the total
combined voting power of all classes of stock
entitled to vote or more than 50 percent of the
total value of shares of all classes of stock
of each corporation, taking into account the
stock ownership of each such person only to the
extent such stock ownership is identical with
respect to each such corporation.''
(B) Applicable provision.--For purposes of
this paragraph, an applicable provision is any
provision of law (other than this part) which
incorporates the definition of controlled group
of corporations under subsection (a).
* * * * * * *
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter A--ESTATES OF CITIZENS OR RESIDENTS
* * * * * * *
PART II--CREDITS AGAINST TAX
* * * * * * *
SEC. 2012. CREDIT FOR GIFT TAX.
(a) In general.--If a tax on a gift has been paid under
chapter 12 (sec. 2501 and following), or under corresponding
provisions of prior laws, and thereafter on the death of the
donor any amount in respect of such gift is required to be
included in the value of the gross estate of the decedent for
purposes of this chapter, then there shall be credited against
the tax imposed by section 2001 the amount of the tax paid on a
gift under chapter 12, or under corresponding provisions of
prior laws, with respect to so much of the property which
constituted the gift as is included in the gross estate, except
that the amount of such credit shall not exceed an amount which
bears the same ratio to the tax imposed by section 2001 (after
deducting from such tax the unified credit provided by section
2010) as the value (at the time of the gift or at the time of
the death, whichever is lower) of so much of the property which
constituted the gift as is included in the gross estate bears
to the value of the entire gross estate reduced by the
aggregate amount of the charitable and marital deductions
allowed under sections 2055, 2056, and 2106(a)(2).
(b) Valuation reductions.--In applying, with respect to any
gift, the ratio stated in subsection (a), the value at the time
of the gift or at the time of the death, referred to in such
ratio, shall be reduced--
(1) by such amount as will properly reflect the
amount of such gift which was excluded in determining
(for purposes of section 2503(a)), or of corresponding
provisions of prior laws, the total amount of gifts
made during the calendar quarter (or calendar year if
the gift was made before January 1, 1971) in which the
gift was made;
(2) if a deduction with respect to such gift is
allowed under section 2056(a) (relating to marital
deduction), then by the amount of such value, reduced
as provided in paragraph (1); and
(3) if a deduction with respect to such gift is
allowed under sections 2055 or 2106(a)(2) (relating to
charitable deduction), then by the amount of such
value, reduced as provided in paragraph (1) of this
subsection.
(c) Where gift considered made one-half by spouse.--Where the
decedent was the donor of the gift but, under the provisions of
section 2513, or corresponding provisions of prior laws, the
gift was considered as made one-half by [his spouse] the
decedent's spouse --
(1) the term ``the amount of the tax paid on a gift
under chapter 12'', as used in subsection (a), includes
the amounts paid with respect to each half of such
gift, the amount paid with respect to each being
computed in the manner provided in subsection (d); and
(2) in applying, with respect to such gift, the ratio
stated in subsection (a), the value at the time of the
gift or at the time of the death, referred to in such
ratio, includes such value with respect to each half of
such gift, each such value being reduced as provided in
paragraph (1) of subsection (b).
(d) Computation of amount of gift tax paid.--
(1) Amount of tax.--For purposes of subsection (a),
the amount of tax paid on a gift under chapter 12, or
under corresponding provisions of prior laws, with
respect to any gift shall be an amount which bears the
same ratio to the total tax paid for the calendar
quarter (or calendar year if the gift was made before
January 1, 1971) in which the gift was made as the
amount of such gift bears to the total amount of
taxable gifts (computed without deduction of the
specific exemption) for such quarter or year.
(2) Amount of gift.--For purposes of paragraph (1),
the ``amount of such gift'' shall be the amount
included with respect to such gift in determining (for
the purposes of section 2503(a), or of corresponding
provisions of prior laws) the total amount of gifts
made during such quarter or year, reduced by the amount
of any deduction allowed with respect to such gift
under section 2522, or under corresponding provisions
of prior laws (relating to charitable deduction), or
under section 2523 (relating to marital deduction).
(e) Section inapplicable to gifts made after December 31,
1976.--No credit shall be allowed under this section with
respect to the amount of any tax paid under chapter 12 on any
gift made after December 31, 1976.
* * * * * * *
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)) 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] the decedent's 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).
* * * * * * *
SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS OF
DECEDENT'S DEATH.
(a) Inclusion of certain property in gross estate.--If--
(1) the decedent made a transfer (by trust or
otherwise) of an interest in any property, or
relinquished a power with respect to any property,
during the 3-year period ending on the date of the
decedent's death, and
(2) the value of such property (or an interest
therein) would have been included in the decedent's
gross estate under section 2036, 2037, 2038, or 2042 if
such transferred interest or relinquished power had
been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any
property (or interest therein) which would have been so
included.
(b) Inclusion of gift tax on gifts made during 3 years before
decedent's death.--The amount of the gross estate (determined
without regard to this subsection) shall be increased by the
amount of any tax paid under chapter 12 by the decedent or [his
estate] the decedent's estate on any gift made by the decedent
or [his spouse] the decedent's spouse during the 3-year period
ending on the date of the decedent's death.
(c) Other rules relating to transfers within 3 years of
death.--
(1) In general.--For purposes of--
(A) section 303(b) (relating to distributions
in redemption of stock to pay death taxes),
(B) section 2032A (relating to special
valuation of certain farms, etc., real
property), and
(C) subchapter C of chapter 64 (relating to
lien for taxes),
the value of the gross estate shall include the value
of all property to the extent of any interest therein
of which the decedent has at any time made a transfer,
by trust or otherwise, during the 3-year period ending
on the date of the decedent's death.
(2) Coordination with section 6166.--An estate shall
be treated as meeting the 35 percent of adjusted gross
estate requirement of section 6166(a)(1) only if the
estate meets such requirement both with and without the
application of subsection (a).
(3) Marital and small transfers.--Paragraph (1) shall
not apply to any transfer (other than a transfer with
respect to a life insurance policy) made during a
calendar year to any donee if the decedent was not
required by section 6019 (other than by reason of
section 6019(2)) to file any gift tax return for such
year with respect to transfers to such donee.
(d) Exception.--Subsection (a) and paragraph (1) of
subsection (c) shall not apply to any bona fide sale for an
adequate and full consideration in money or money's worth.
(e) Treatment of certain transfers from revocable trusts.--
For purposes of this section and section 2038, any transfer
from any portion of a trust during any period that such portion
was treated under section 676 as owned by the decedent by
reason of a power in the grantor (determined without regard to
section 672(e)) shall be treated as a transfer made directly by
the decedent.
* * * * * * *
SEC. 2040. JOINT INTERESTS.
(a) General rule.--The value of the gross estate shall
include the value of all property to the extent of the interest
therein held as joint tenants with right of survivorship by the
decedent and any other person, or as tenants by the entirety by
the decedent and spouse, or deposited, with any person carrying
on the banking business, in their joint names and payable to
either or the survivor, except such part thereof as may be
shown to have originally belonged to such other person and
never to have been received or acquired by the latter from the
decedent for less than an adequate and full consideration in
money or money's worth: Provided, That where such property or
any part thereof, or part of the consideration with which such
property was acquired, is shown to have been at any time
acquired by such other person from the decedent for less than
an adequate and full consideration in money or money's worth,
there shall be excepted only such part of the value of such
property as is proportionate to the consideration furnished by
such other person: Provided further, That where any property
has been acquired by gift, bequest, devise, or inheritance, as
a tenancy by the entirety by the decedent and spouse, then to
the extent of one-half of the value thereof, or, where so
acquired by the decedent and any other person as joint tenants
with right of survivorship and their interests are not
otherwise specified or fixed by law, then to the extent of the
value of a fractional part to be determined by dividing the
value of the property by the number of joint tenants with right
of survivorship.
(b) [Certain Joint Interests of Husband and Wife] Certain
Joint Interests of Married Couple.--
(1) Interests of spouse excluded from gross estate.--
Notwithstanding subsection (a), in the case of any
qualified joint interest, the value included in the
gross estate with respect to such interest by reason of
this section is one-half of the value of such qualified
joint interest.
(2) Qualified joint interest defined.--For purposes
of paragraph (1), the term ``qualified joint interest''
means any interest in property held by the decedent and
the decedent's spouse as--
(A) tenants by the entirety, or
(B) joint tenants with right of survivorship,
but only if the decedent and the spouse of the
decedent are the only joint tenants.
* * * * * * *
PART IV--TAXABLE ESTATE
* * * * * * *
SEC. 2056. BEQUESTS, ETC., TO SURVIVING SPOUSE.
(a) Allowance of marital deduction.--For purposes of the tax
imposed by section 2001, the value of the taxable estate shall,
except as limited by subsection (b), be determined by deducting
from the value of the gross estate an amount equal to the value
of any interest in property which passes or has passed from the
decedent to [his] surviving spouse, but only to the extent that
such interest is included in determining the value of the gross
estate.
(b) Limitation in the case of life estate or other terminable
interest.--
(1) General rule.--Where, on the lapse of time, on
the occurrence of an event or contingency, or on the
failure of an event or contingency to occur, an
interest passing to the surviving spouse will terminate
or fail, no deduction shall be allowed under this
section with respect to such interest--
(A) if an interest in such property passes or
has passed (for less than an adequate and full
consideration in money or money's worth) from
the decedent to any person other than such
surviving spouse (or the estate of such
spouse); and
(B) if by reason of such passing such person
(or his heirs or assigns) may possess or enjoy
any part of such property after such
termination or failure of the interest so
passing to the surviving spouse;
and no deduction shall be allowed with respect to such
interest (even if such deduction is not disallowed
under subparagraphs (A) and (B))--
(C) if such interest is to be acquired for
the surviving spouse, pursuant to directions of
the decedent, by his executor or by the trustee
of a trust.
For purposes of this paragraph, an interest shall not
be considered as an interest which will terminate or
fail merely because it is the ownership of a bond,
note, or similar contractual obligation, the discharge
of which would not have the effect of an annuity for
life or for a term.
(2) Interest in unidentified assets.--Where the
assets (included in the decedent's gross estate) out of
which, or the proceeds of which, an interest passing to
the surviving spouse may be satisfied include a
particular asset or assets with respect to which no
deduction would be allowed if such asset or assets
passed from the decedent to such spouse, then the value
of such interest passing to such spouse shall, for
purposes of subsection (a), be reduced by the aggregate
value of such particular assets.
(3) Interest of spouse conditional on survival for
limited period.--For purposes of this subsection, an
interest passing to the surviving spouse shall not be
considered as an interest which will terminate or fail
on the death of such spouse if--
(A) such death will cause a termination or
failure of such interest only if it occurs
within a period not exceeding 6 months after
the decedent's death, or only if it occurs as a
result of a common disaster resulting in the
death of the decedent and the surviving spouse,
or only if it occurs in the case of either such
event; and
(B) such termination or failure does not in
fact occur.
(4) Valuation of interest passing to surviving
spouse.--In determining for purposes of subsection (a)
the value of any interest in property passing to the
surviving spouse for which a deduction is allowed by
this section--
(A) there shall be taken into account the
effect which the tax imposed by section 2001,
or any estate, succession, legacy, or
inheritance tax, has on the net value to the
surviving spouse of such interest; and
(B) where such interest or property is
encumbered in any manner, or where the
surviving spouse incurs any obligation imposed
by the decedent with respect to the passing of
such interest, such encumbrance or obligation
shall be taken into account in the same manner
as if the amount of a gift to such spouse of
such interest were being determined.
(5) Life estate with power of appointment in
surviving spouse.--In the case of an interest in
property passing from the decedent, if [his] surviving
spouse is entitled for life to all the income from the
entire interest, or all the income from a specific
portion thereof, payable annually or at more frequent
intervals, with power in the surviving spouse to
appoint the entire interest, or such specific portion
(exercisable in favor of such surviving spouse, or of
the estate of such surviving spouse, or in favor of
either, whether or not in each case the power is
exercisable in favor of others), and with no power in
any other person to appoint any part of the interest,
or such specific portion, to any person other than the
surviving spouse--
(A) the interest or such portion thereof so
passing shall, for purposes of subsection (a),
be considered as passing to the surviving
spouse, and
(B) no part of the interest so passing shall,
for purposes of paragraph (1)(A), be considered
as passing to any person other than the
surviving spouse.
This paragraph shall apply only if such power in the
surviving spouse to appoint the entire interest, or
such specific portion thereof, whether exercisable by
will or during life, is exercisable by such spouse
alone and in all events.
(6) Life insurance or annuity payments with power of
appointment in surviving spouse.--In the case of an
interest in property passing from the decedent
consisting of proceeds under a life insurance,
endowment, or annuity contract, if under the terms of
the contract such proceeds are payable in installments
or are held by the insurer subject to an agreement to
pay interest thereon (whether the proceeds, on the
termination of any interest payments, are payable in a
lump sum or in annual or more frequent installments),
and such installment or interest payments are payable
annually or at more frequent intervals, commencing not
later than 13 months after the decedent's death, and
all amounts, or a specific portion of all such amounts,
payable during the life of the surviving spouse are
payable only to such spouse, and such spouse has the
power to appoint all amounts, or such specific portion,
payable under such contract (exercisable in favor of
such surviving spouse, or of the estate of such
surviving spouse, or in favor of either, whether or not
in each case the power is exercisable in favor of
others), with no power in any other person to appoint
such amounts to any person other than the surviving
spouse--
(A) such amounts shall, for purposes of
subsection (a), be considered as passing to the
surviving spouse, and
(B) no part of such amounts shall, for
purposes of paragraph (1)(A), be considered as
passing to any person other than the surviving
spouse.
This paragraph shall apply only if, under the terms of
the contract, such power in the surviving spouse to
appoint such amounts, whether exercisable by will or
during life, is exercisable by such spouse alone and in
all events.
(7) Election with respect to life estate for
surviving spouse.--
(A) In general.--In the case of qualified
terminable interest property--
(i) for purposes of subsection (a),
such property shall be treated as
passing to the surviving spouse, and
(ii) for purposes of paragraph
(1)(A), no part of such property shall
be treated as passing to any person
other than the surviving spouse.
(B) Qualified terminable interest property
defined.--For purposes of this paragraph--
(i) In general.--The term ``qualified
terminable interest property'' means
property--
(I) which passes from the
decedent,
(II) in which the surviving
spouse has a qualifying income
interest for life, and
(III) to which an election
under this paragraph applies.
(ii) Qualifying income interest for
life.--The surviving spouse has a
qualifying income interest for life
if--
(I) the surviving spouse is
entitled to all the income from
the property, payable annually
or at more frequent intervals,
or has a usufruct interest for
life in the property, and
(II) no person has a power to
appoint any part of the
property to any person other
than the surviving spouse.
Subclause (II) shall not apply to a power
exercisable only at or after the death of the
surviving spouse. To the extent provided in
regulations, an annuity shall be treated in a
manner similar to an income interest in
property (regardless of whether the property
from which the annuity is payable can be
separately identified).
(iii) Property includes interest
therein.--The term ``property''
includes an interest in property.
(iv) Specific portion treated as
separate property.--A specific portion
of property shall be treated as
separate property.
(v) Election.--An election under this
paragraph with respect to any property
shall be made by the executor on the
return of tax imposed by section 2001.
Such an election, once made, shall be
irrevocable.
(C) Treatment of survivor annuities.--In the
case of an annuity included in the gross estate
of the decedent under section 2039 (or, in the
case of an interest in an annuity arising under
the community property laws of a State,
included in the gross estate of the decedent
under section 2033) where only the surviving
spouse has the right to receive payments before
the death of such surviving spouse--
(i) the interest of such surviving
spouse shall be treated as a qualifying
income interest for life, and
(ii) the executor shall be treated as
having made an election under this
subsection with respect to such annuity
unless the executor otherwise elects on
the return of tax imposed by section
2001.
An election under clause (ii), once made, shall
be irrevocable.
(8) Special rule for charitable remainder trusts.--
(A) In general.--If the surviving spouse of
the decedent is the only beneficiary of a
qualified charitable remainder trust who is not
a charitable beneficiary nor an ESOP
beneficiary, paragraph (1) shall not apply to
any interest in such trust which passes or has
passed from the decedent to such surviving
spouse.
(B) Definitions.--For purposes of
subparagraph (A)--
(i) Charitable beneficiary.--The term
``charitable beneficiary'' means any
beneficiary which is an organization
described in section 170(c).
(ii) ESOP beneficiary.--The term
``ESOP beneficiary'' means any
beneficiary which is an employee stock
ownership plan (as defined in section
4975(e)(7)) that holds a remainder
interest in qualified employer
securities (as defined in section
664(g)(4)) to be transferred to such
plan in a qualified gratuitous transfer
(as defined in section 664(g)(1)).
(iii) Qualified charitable remainder
trust.--The term ``qualified charitable
remainder trust'' means a charitable
remainder annuity trust or a charitable
remainder unitrust (described in
section 664).
(9) Denial of double deduction.--Nothing in this
section or any other provision of this chapter shall
allow the value of any interest in property to be
deducted under this chapter more than once with respect
to the same decedent.
(10) Specific portion.--For purposes of paragraphs
(5), (6), and (7)(B)(iv), the term ``specific portion''
only includes a portion determined on a fractional or
percentage basis.
(c) Definition.--For purposes of this section, an interest in
property shall be considered as passing from the decedent to
any person if and only if--
(1) such interest is bequeathed or devised to such
person by the decedent;
(2) such interest is inherited by such person from
the decedent;
(3) such interest is the dower or curtesy interest
(or statutory interest in lieu thereof) of such person
as surviving spouse of the decedent;
(4) such interest has been transferred to such person
by the decedent at any time;
(5) such interest was, at the time of the decedent's
death, held by such person and the decedent (or by them
and any other person) in joint ownership with right of
survivorship;
(6) the decedent had a power (either alone or in
conjunction with any person) to appoint such interest
and if he appoints or has appointed such interest to
such person, or if such person takes such interest in
default on the release or nonexercise of such power; or
(7) such interest consists of proceeds of insurance
on the life of the decedent receivable by such person.
Except as provided in paragraph (5) or (6) of subsection (b),
where at the time of the decedent's death it is not possible to
ascertain the particular person or persons to whom an interest
in property may pass from the decedent, such interest shall,
for purposes of subparagraphs (A) and (B) of subsection (b)(1),
be considered as passing from the decedent to a person other
than the surviving spouse.
(d) Disallowance of marital deduction where surviving spouse
not United States citizen.--
(1) In general.--Except as provided in paragraph (2),
if the surviving spouse of the decedent is not a
citizen of the United States--
(A) no deduction shall be allowed under
subsection (a), and
(B) section 2040(b) shall not apply.
(2) Marital deduction allowed for certain transfers
in trust.--
(A) In general.--Paragraph (1) shall not
apply to any property passing to the surviving
spouse in a qualified domestic trust.
(B) Special rule.--If any property passes
from the decedent to the surviving spouse of
the decedent, for purposes of subparagraph (A),
such property shall be treated as passing to
such spouse in a qualified domestic trust if--
(i) such property is transferred to
such a trust before the date on which
the return of the tax imposed by this
chapter is made, or
(ii) such property is irrevocably
assigned to such a trust under an
irrevocable assignment made on or
before such date which is enforceable
under local law.
(3) Allowance of credit to certain spouses.--If--
(A) property passes to the surviving spouse
of the decedent (hereinafter in this paragraph
referred to as the ``first decedent''),
(B) without regard to this subsection, a
deduction would be allowable under subsection
(a) with respect to such property, and
(C) such surviving spouse dies and the estate
of such surviving spouse is subject to the tax
imposed by this chapter,
the Federal estate tax paid (or treated as paid under
section 2056A(b)(7)) by the first decedent with respect
to such property shall be allowed as a credit under
section 2013 to the estate of such surviving spouse and
the amount of such credit shall be determined under
such section without regard to when the first decedent
died and without regard to subsection (d)(3) of such
section.
(4) Special rule where resident spouse becomes
citizen.--Paragraph (1) shall not apply if--
(A) the surviving spouse of the decedent
becomes a citizen of the United States before
the day on which the return of the tax imposed
by this chapter is made, and
(B) such spouse was a resident of the United
States at all times after the date of the death
of the decedent and before becoming a citizen
of the United States.
(5) Reformations permitted.--
(A) In general.--In the case of any property
with respect to which a deduction would be
allowable under subsection (a) but for this
subsection, the determination of whether a
trust is a qualified domestic trust shall be
made--
(i) as of the date on which the
return of the tax imposed by this
chapter is made, or
(ii) if a judicial proceeding is
commenced on or before the due date
(determined with regard to extensions)
for filing such return to change such
trust into a trust which is a qualified
domestic trust, as of the time when the
changes pursuant to such proceeding are
made.
(B) Statute of limitations.--If a judicial
proceeding described in subparagraph (A)(ii) is
commenced with respect to any trust, the period
for assessing any deficiency of tax
attributable to any failure of such trust to be
a qualified domestic trust shall not expire
before the date 1 year after the date on which
the Secretary is notified that the trust has
been changed pursuant to such judicial
proceeding or that such proceeding has been
terminated.
* * * * * * *
CHAPTER 12--GIFT TAX
* * * * * * *
Subchapter B--TRANSFERS
Sec. 2511. Transfers in general.
* * * * * * *
[Sec. 2513. Gift by husband or wife to third party.]
Sec. 2513. Gift by spouse to third party.
* * * * * * *
SEC. 2513. [GIFT BY HUSBAND OR WIFE TO THIRD PARTY] GIFT BY SPOUSE TO
THIRD PARTY.
(a) Considered as made one-half by each.--
[(1) In general.--A gift made by one spouse to any
person other than his spouse shall, for the purposes of
this chapter, be considered as made one-half by him and
one-half by his spouse, but only if at the time of the
gift each spouse is a citizen or resident of the United
States. This paragraph shall not apply with respect to
a gift by a spouse of an interest in property if he
creates in his spouse a general power of appointment,
as defined in section 2514(c), over such interest. For
purposes of this section, an individual shall be
considered as the spouse of another individual only if
he is married to such individual at the time of the
gift and does not remarry during the remainder of the
calendar year.]
(1) In general.--A gift made by one individual to any
person other than such individual's spouse shall, for
the purposes of this chapter, be considered as made
one-half by the individual and one-half by such
individual's spouse, but only if at the time of the
gift each spouse is a citizen or resident of the United
States. This paragraph shall not apply with respect to
a gift by an individual of an interest in property if
such individual creates in the individual's spouse a
general power of appointment, as defined in section
2514(c), over such interest. For purposes of this
section, an individual shall be considered as the
spouse of another only if the individual is married to
the individual's spouse at the time of the gift and
does not remarry during the remainder of the calendar
year.
(2) Consent of both spouses.--Paragraph (1) shall
apply only if both spouses have signified (under the
regulations provided for in subsection (b)) their
consent to the application of paragraph (1) in the case
of all such gifts made during the calendar year by
either while married to the other.
(b) Manner and time of signifying consent.--
(1) Manner.-- A consent under this section shall be
signified in such manner as is provided under
regulations prescribed by the Secretary.
(2) Time.--Such consent may be so signified at any
time after the close of the calendar year in which the
gift was made, subject to the following limitations--
(A) The consent may not be signified after
the 15th day of April following the close of
such year, unless before such 15th day no
return has been filed for such year by either
spouse, in which case the consent may not be
signified after a return for such year is filed
by either spouse.
(B) The consent may not be signified after a
notice of deficiency with respect to the tax
for such year has been sent to either spouse in
accordance with section 6212(a).
(c) Revocation of consent.--Revocation of a consent
previously signified shall be made in such manner as in
provided under regulations prescribed by the Secretary, but the
right to revoke a consent previously signified with respect to
a calendar year--
(1) shall not exist after the 15th day of April
following the close of such year if the consent was
signified on or before such 15th day; and
(2) shall not exist if the consent was not signified
until after such 15th day.
(d) Joint and several liability for tax.--If the consent
required by subsection (a)(2) is signified with respect to a
gift made in any calendar year, the liability with respect to
the entire tax imposed by this chapter of each spouse for such
year shall be joint and several.
* * * * * * *
SEC. 2516. CERTAIN PROPERTY SETTLEMENTS.
[Where a husband and wife enter] (a) In General._ Where a
married couple enters into a written agreement relative to
their marital and property rights and divorce occurs within the
3-year period beginning on the date 1 year before such
agreement is entered into (whether or not such agreement is
approved by the divorce decree), any transfers of property or
interests in property made pursuant to such agreement--
(1) to either spouse in settlement of his or her
marital or property rights, or
(2) to provide a reasonable allowance for the support
of issue of the marriage during minority,
shall be deemed to be transfers made for a full and adequate
consideration in money or money's worth.
(b) Spouse.--For purposes of this section, if the spouses
referred to are divorced, wherever appropriate to the meaning
of this section, the term ``spouse'' shall read ``former
spouse''.
* * * * * * *
Subchapter C--DEDUCTIONS
* * * * * * *
SEC. 2523. GIFT TO SPOUSE.
(a) Allowance of deduction.--Where a donor transfers during
the calendar year by gift an interest in property to a donee
who at the time of the gift is the donor's spouse, there shall
be allowed as a deduction in computing taxable gifts for the
calendar year an amount with respect to such interest equal to
its value.
(b) Life estate or other terminable interest.--Where, on the
lapse of time, on the occurrence of an event or contingency, or
on the failure of an event or contingency to occur, such
interest transferred to the spouse will terminate or fail, no
deduction shall be allowed with respect to such interest--
(1) if the donor retains in [himself] the donor's
self , or transfers or has transferred (for less than
an adequate and full consideration in money or money's
worth) to any person other than such donee spouse (or
the estate of such spouse), an interest in such
property, and if by reason of such retention or
transfer the donor [(or his heirs or assigns) or such
person (or his heirs or assigns)] (or the donor's heirs
or assigns) or such person (or such person's heirs or
assigns) may possess or enjoy any part of such property
after such termination or failure of the interest
transferred to the donee spouse; or
(2) if the donor immediately after the transfer to
the donee spouse has a power to appoint an interest in
such property which [he] the donor can exercise (either
alone or in conjunction with any person) in such manner
that the appointee may possess or enjoy any part of
such property after such termination or failure of the
interest transferred to the donee spouse. For purposes
of this paragraph, the donor shall be considered as
having immediately after the transfer to the donee
spouse such power to appoint even though such power
cannot be exercised until after the lapse of time, upon
the occurrence of an event or contingency, or on the
failure of an event or contingency to occur.
An exercise or release at any time by the donor, either alone
or in conjunction with any person, of a power to appoint an
interest in property, even though not otherwise a transfer,
shall, for purposes of paragraph (1), be considered as a
transfer by [him] the donor . Except as provided in subsection
(e), where at the time of the transfer it is impossible to
ascertain the particular person or persons who may receive from
the donor an interest in property so transferred by [him] the
donor , such interest shall, for purposes of paragraph (1), be
considered as transferred to a person other than the donee
spouse.
(c) Interest in unidentified assets.--Where the assets out of
which, or the proceeds of which, the interest transferred to
the donee spouse may be satisfied include a particular asset or
assets with respect to which no deduction would be allowed if
such asset or assets were transferred from the donor to such
spouse, then the value of the interest transferred to such
spouse shall, for purposes of subsection (a), be reduced by the
aggregate value of such particular assets.
(d) Joint interests.--If the interest is transferred to the
donee spouse as sole joint tenant with the donor or as tenant
by the entirety, the interest of the donor in the property
which exists solely by reason of the possibility that the donor
may survive the donee spouse, or that there may occur a
severance of the tenancy, shall not be considered for purposes
of subsection (b) as an interest retained by the donor in
[himself] the donor's self .
(e) Life estate with power of appointment in donee spouse.--
Where the donor transfers an interest in property, if by such
transfer [his spouse] the donor's spouse is entitled for life
to all of the income from the entire interest, or all the
income from a specific portion thereof, payable annually or at
more frequent intervals, with power in the donee spouse to
appoint the entire interest, or such specific portion
(exercisable in favor of such donee spouse, or of the estate of
such donee spouse, or in favor of either, whether or not in
each case the power is exercisable in favor of others), and
with no power in any other person to appoint any part of such
interest, or such portion, to any person other than the donee
spouse--
(1) the interest, or such portion, so transferred
shall, for purposes of subsection (a) be considered as
transferred to the donee spouse, and
(2) no part of the interest, or such portion, so
transferred shall, for purposes of subsection (b)(1),
be considered as retained in the donor or transferred
to any person other than the donee spouse.
This subsection shall apply only if, by such transfer, such
power in the donee spouse to appoint the interest, or such
portion, whether exercisable by will or during life, is
exercisable by such spouse alone and in all events. For
purposes of this subsection, the term ``specific portion'' only
includes a portion determined on a fractional or percentage
basis.
(f) Election with respect to life estate for donee spouse.--
(1) In general.--In the case of qualified terminable
interest property--
(A) for purposes of subsection (a), such
property shall be treated as transferred to the
donee spouse, and
(B) for purposes of subsection (b)(1), no
part of such property shall be considered as
retained in the donor or transferred to any
person other than the donee spouse.
(2) Qualified terminable interest property.--For
purposes of this subsection, the term ``qualified
terminable interest property'' means any property--
(A) which is transferred by the donor spouse,
(B) in which the donee spouse has a
qualifying income interest for life, and
(C) to which an election under this
subsection applies.
(3) Certain rules made applicable.--For purposes of
this subsection, rules similar to the rules of clauses
(ii), (iii), and (iv) of section 2056(b)(7)(B) shall
apply and the rules of section 2056(b)(10) shall apply.
(4) Election.--
(A) Time and manner.--An election under this
subsection with respect to any property shall
be made on or before the date prescribed by
section 6075(b) for filing a gift tax return
with respect to the transfer (determined
without regard to section 6019(2)) and shall be
made in such manner as the Secretary shall by
regulations prescribe.
(B) Election irrevocable.--An election under
this subsection, once made, shall be
irrevocable.
(5) Treatment of interest retained by donor spouse.--
(A) In general.--In the case of any qualified
terminable interest property--
(i) such property shall not be
includible in the gross estate of the
donor spouse, and
(ii) any subsequent transfer by the
donor spouse of an interest in such
property shall not be treated as a
transfer for purposes of this chapter.
(B) Subparagraph (A) not to apply after
transfer by donee spouse.--Subparagraph (A)
shall not apply with respect to any property
after the donee spouse is treated as having
transferred such property under section 2519,
or such property is includible in the donee
spouse's gross estate under section 2044.
(6) Treatment of joint and survivor annuities.--In
the case of a joint and survivor annuity where only the
donor spouse and donee spouse have the right to receive
payments before the death of the last spouse to die--
(A) the donee spouse's interest shall be
treated as a qualifying income interest for
life,
(B) the donor spouse shall be treated as
having made an election under this subsection
with respect to such annuity unless the donor
spouse otherwise elects on or before the date
specified in paragraph (4)(A),
(C) paragraph (5) and section 2519 shall not
apply to the donor spouse's interest in the
annuity, and
(D) if the donee spouse dies before the donor
spouse, no amount shall be includible in the
gross estate of the donee spouse under section
2044 with respect to such annuity.
An election under subparagraph (B), once made, shall be
irrevocable.
(g) Special rule for charitable remainder trusts.--
(1) In general.--If, after the transfer, the donee
spouse is the only beneficiary who is not a charitable
beneficiary (other than the donor) of a qualified
charitable remainder trust, subsection (b) shall not
apply to the interest in such trust which is
transferred to the donee spouse.
(2) Definitions.--For purposes of paragraph (1), the
term ``charitable beneficiary'' and ``qualified
charitable remainder trust'' have the meanings given to
such terms by section 2056(b)(8)(B).
(h) Denial of double deduction.--Nothing in this section or
any other provision of this chapter shall allow the value of
any interest in property to be deducted under this chapter more
than once with respect to the same donor.
(i) Disallowance of marital deduction where spouse not
citizen.--If the spouse of the donor is not a citizen of the
United States--
(1) no deduction shall be allowed under this section,
(2) section 2503(b) shall be applied with respect to
gifts which are made by the donor to such spouse and
with respect to which a deduction would be allowable
under this section but for paragraph (1) by
substituting ``$100,000'' for ``$10,000'', and
(3) the principles of sections 2515 and 2515A (as
such sections were in effect before their repeal by the
Economic Recovery Tax Act of 1981) shall apply, except
that the provisions of such section 2515 providing for
an election shall not apply.
This subsection shall not apply to any transfer resulting from
the acquisition of rights under a joint and survivor annuity
described in subsection (f)(6).
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT
* * * * * * *
Subchapter C--GENERAL PROVISIONS
* * * * * * *
SEC. 3121. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration for employment, including the cash value
of all remuneration (including benefits) paid in any medium
other than cash; except that such term shall not include--
(1) in the case of the taxes imposed by sections
3101(a) and 3111(a) that part of the remuneration
which, after remuneration (other than remuneration
referred to in the succeeding paragraphs of this
subsection) equal to the contribution and benefit base
(as determined under section 230 of the Social Security
Act) with respect to employment has been paid to an
individual by an employer during the calendar year with
respect to which such contribution and benefit base is
effective, is paid to such individual by such employer
during such calendar year. If an employer (hereinafter
referred to as successor employer) during any calendar
year acquires substantially all the property used in a
trade or business of another employer (hereinafter
referred to as a predecessor), or used in a separate
unit of a trade or business of a predecessor, and
immediately after the acquisition employs in his trade
or business an individual who immediately prior to the
acquisition was employed in the trade or business of
such predecessor, then, for the purpose of determining
whether the successor employer has paid remuneration
(other than remuneration referred to in the succeeding
paragraphs of this subsection) with respect to
employment equal to the contribution and benefit base
(as determined under section 230 of the Social Security
Act) to such individual during such calendar year, any
remuneration (other than remuneration referred to in
the succeeding paragraphs of this subsection) with
respect to employment paid (or considered under this
paragraph as having been paid) to such individual by
such predecessor during such calendar year and prior to
such acquisition shall be considered as having been
paid by such successor employer;
(2) the amount of any payment (including any amount
paid by an employer for insurance or annuities, or into
a fund, to provide for any such payment) made to, or on
behalf of, an employee or any of his dependents under a
plan or system established by an employer which makes
provision for his employees generally (or for his
employees generally and their dependents) or for a
class or classes of his employees (or for a class or
classes of his employees and their dependents), on
account of--
(A) sickness or accident disability (but, in
the case of payments made to an employee or any
of his dependents, this subparagraph shall
exclude from the term ``wages'' only payments
which are received under a workman's
compensation law), or
(B) medical or hospitalization expenses in
connection with sickness or accident
disability, or
(C) death, except that this paragraph does
not apply to a payment for group-term life
insurance to the extent that such payment is
includible in the gross income of the employee;
(4) any payment on account of sickness or accident
disability, or medical or hospitalization expenses in
connection with sickness or accident disability, made
by an employer to, or on behalf of, an employee after
the expiration of 6 calendar months following the last
calendar month in which the employee worked for such
employer;
(5) any payment made to, or on behalf of, an employee
or his beneficiary--
(A) from or to a trust described in section
401(a) which is exempt from tax under section
501(a) at the time of such payment unless such
payment is made to an employee of the trust as
remuneration for services rendered as such
employee and not as a beneficiary of the trust,
(B) under or to an annuity plan which, at the
time of such payment, is a plan described in
section 403(a),
(C) under a simplified employee pension (as
defined in section 408(k)(1)), other than any
contributions described in section 408(k)(6),
(D) under or to an annuity contract described
in section 403(b), other than a payment for the
purchase of such contract which is made by
reason of a salary reduction agreement (whether
evidenced by a written instrument or
otherwise),
(E) under or to an exempt governmental
deferred compensation plan (as defined in
subsection (v)(3)),
(F) to supplement pension benefits under a
plan or trust described in any of the foregoing
provisions of this paragraph to take into
account some portion or all of the increase in
the cost of living (as determined by the
Secretary of Labor) since retirement but only
if such supplemental payments are under a plan
which is treated as a welfare plan under
section 3(2)(B)(ii) of the Employee Retirement
Income Security Act of 1974,
(G) under a cafeteria plan (within the
meaning of section 125) if such payment would
not be treated as wages without regard to such
plan and it is reasonable to believe that (if
section 125 applied for purposes of this
section) section 125 would not treat any wages
as constructively received,
(H) under an arrangement to which section
408(p) applies, other than any elective
contributions under paragraph (2)(A)(i)
thereof, or
(I) under a plan described in section
457(e)(11)(A)(ii) and maintained by an eligible
employer (as defined in section 457(e)(1));
(6) the payment by an employer (without deduction
from the remuneration of the employee)--
(A) of the tax imposed upon an employee under
section 3101, or
(B) of any payment required from an employee
under a State unemployment compensation law,
with respect to remuneration paid to an employee for
domestic service in a private home of the employer or
for agricultural labor;
(7)(A) remuneration paid in any medium other than
cash to an employee for service not in the course of
the employer's trade or business or for domestic
service in a private home of the employer;
(B) cash remuneration paid by an employer in any
calendar year to an employee for domestic service in a
private home of the employer (including domestic
service on a farm operated for profit), if the cash
remuneration paid in such year by the employer to the
employee for such service is less than the applicable
dollar threshold (as defined in subsection (x)) for
such year;
(C) cash remuneration paid by an employer in any
calendar year to an employee for service not in the
course of the employer's trade or business, if the cash
remuneration paid in such year by the employer to the
employee for such service is less than $100. As used in
this subparagraph, the term ``service not in the course
of the employer's trade or business'' does not include
domestic service in a private home of the employer and
does not include service described in subsection
(g)(5);
(8)(A) remuneration paid in any medium other than
cash for agricultural labor;
(B) cash remuneration paid by an employer in any
calendar year to an employee for agricultural labor
unless--
(i) the cash remuneration paid in such year
by the employer to the employee for such labor
is $150 or more, or
(ii) the employer's expenditures for
agricultural labor in such year equal or exceed
$2,500,
except that clause (ii) shall not apply in determining whether
remuneration paid to an employee constitutes ``wages'' under
this section if such employee (I) is employed as a hand harvest
laborer and is paid on a piece rate basis in an operation which
has been, and is customarily and generally recognized as having
been, paid on a piece rate basis in the region of employment,
(II) commutes daily from his permanent residence to the farm on
which he is so employed, and (III) has been employed in
agriculture less than 13 weeks during the preceding calendar
year;
(10) remuneration paid by an employer in any calendar
year to an employee for service described in subsection
(d)(3)(C) (relating to home workers), if the cash
remuneration paid in such year by the employer to the
employee for such service is less than $100;
(11) remuneration paid to or on behalf of an employee
if (and to the extent that) at the time of the payment
of such remuneration it is reasonable to believe that a
corresponding deduction is allowable under section 217
(determined without regard to section 274(n));
(12)(A) tips paid in any medium other than cash;
(B) cash tips received by an employee in any calendar
month in the course of his employment by an employer
unless the amount of such cash tips is $20 or more;
(13) any payment or series of payments by an employer
to an employee or any of his dependents which is paid--
(A) upon or after the termination of an
employee's employment relationship because of
(i) death, or (ii) retirement for disability,
and
(B) under a plan established by the employer
which makes provision for his employees
generally or a class or classes of his
employees (or for such employees or class or
classes of employees and their dependents),
other than any such payment or series of payments which
would have been paid if the employee's employment
relationship had not been so terminated;
(14) any payment made by an employer to a survivor or
the estate of a former employee after the calendar year
in which such employee died;
(15) any payment made by an employer to an employee,
if at the time such payment is made such employee is
entitled to disability insurance benefits under section
223(a) of the Social Security Act and such entitlement
commenced prior to the calendar year in which such
payment is made, and if such employee did not perform
any services for such employer during the period for
which such payment is made;
(16) remuneration paid by an organization exempt from
income tax under section 501(a) (other than an
organization described in section 401(a)) or under
section 521 in any calendar year to an employee for
service rendered in the employ of such organization, if
the remuneration paid in such year by the organization
to the employee for such service is less than $100;
(18) any payment made, or benefit furnished, to or
for the benefit of an employee if at the time of such
payment or such furnishing it is reasonable to believe
that the employee will be able to exclude such payment
or benefit from income under section 127, 129,
134(b)(4), or 134(b)(5);
(19) the value of any meals or lodging furnished by
or on behalf of the employer if at the time of such
furnishing it is reasonable to believe that the
employee will be able to exclude such items from income
under section 119;
(20) 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 income under section 74(c),
108(f)(4), 117, or 132;
(21) in the case of a member of an Indian tribe, any
remuneration on which no tax is imposed by this chapter
by reason of section 7873 (relating to income derived
by Indians from exercise of fishing rights);
(22) remuneration on account of--
(A) a transfer of a share of stock to any
individual pursuant to an exercise of an
incentive stock option (as defined in section
422(b)) or under an employee stock purchase
plan (as defined in section 423(b)), or
(B) any disposition by the individual of such
stock; or
(23) any benefit or payment which is excludable from
the gross income of the employee under section 139B(b).
Nothing in the regulations prescribed for purposes of chapter
24 (relating to income tax withholding) which provides an
exclusion from ``wages'' as used in such chapter shall be
construed to require a similar exclusion from ``wages'' in the
regulations prescribed for purposes of this chapter. Except as
otherwise provided in regulations prescribed by the Secretary,
any third party which makes a payment included in wages solely
by reason of the parenthetical matter contained in subparagraph
(A) of paragraph (2) shall be treated for purposes of this
chapter and chapter 22 as the employer with respect to such
wages.
(b) Employment.--For purposes of this chapter, the term
``employment'' means any service, of whatever nature, performed
(A) by an employee for the person employing him, irrespective
of the citizenship or residence of either, (i) within the
United States, or (ii) on or in connection with an American
vessel or American aircraft under a contract of service which
is entered into within the United States or during the
performance of which and while the employee is employed on the
vessel or aircraft it touches at a port in the United States,
if the employee is employed on and in connection with such
vessel or aircraft when outside the United States, or (B)
outside the United States by a citizen or resident of the
United States as an employee for an American employer (as
defined in subsection (h)), or (C) if it is service, regardless
of where or by whom performed, which is designated as
employment or recognized as equivalent to employment under an
agreement entered into under section 233 of the Social Security
Act; except that such term shall not include--
(1) service performed by foreign agricultural workers
lawfully admitted to the United States from the
Bahamas, Jamaica, and the other British West Indies, or
from any other foreign country or possession thereof,
on a temporary basis to perform agricultural labor;
(2) domestic service performed in a local college
club, or local chapter of a college fraternity or
sorority, by a student who is enrolled and is regularly
attending classes at a school, college, or university;
(3)(A) service performed by a child under the age of
18 in the employ of [his father] the child's father or
mother;
(B) service not in the course of the employer's trade
or business, or domestic service in a private home of
the employer, performed by an individual under the age
of 21 in the employ of [his father] the individual's
father or mother, or performed by an individual in the
employ of [his spouse] the individual's spouse or son
or daughter; except that the provisions of this
subparagraph shall not be applicable to such domestic
service performed by an individual in the employ of
[his son] the individual's son or daughter if--
(i) the employer is a surviving spouse or a
divorced individual and has not remarried, or
has a spouse living in the home who has a
mental or physical condition which results in
such spouse's being incapable of caring for a
son, daughter, stepson, or stepdaughter
(referred to in clause (ii)) for at least 4
continuous weeks in the calendar quarter in
which the service is rendered, and
(ii) a son, daughter, stepson, or
stepdaughter of such employer is living in the
home, and
(iii) the son, daughter, stepson, or
stepdaughter (referred to in clause (ii)) has
not attained age 18 or has a mental or physical
condition which requires the personal care and
supervision of an adult for at least 4
continuous weeks in the calendar quarter in
which the service is rendered;
(4) service performed by an individual on or in
connection with a vessel not an American vessel, or on
or in connection with an aircraft not an American
aircraft, if (A) the individual is employed on and in
connection with such vessel or aircraft, when outside
the United States and (B)(i) such individual is not a
citizen of the United States or (ii) the employer is
not an American employer;
(5) service performed in the employ of the United
States or any instrumentality of the United States, if
such service--
(A) would be excluded from the term
``employment'' for purposes of this title if
the provisions of paragraphs (5) and (6) of
this subsection as in effect in January 1983
had remained in effect, and
(B) is performed by an individual who--
(i) has been continuously performing
service described in subparagraph (A)
since December 31, 1983, and for
purposes of this clause--
(I) if an individual
performing service described in
subparagraph (A) returns to the
performance of such service
after being separated therefrom
for a period of less than 366
consecutive days, regardless of
whether the period began
before, on, or after December
31, 1983, then such service
shall be considered continuous,
(II) if an individual
performing service described in
subparagraph (A) returns to the
performance of such service
after being detailed or
transferred to an international
organization as described under
section 3343 of subchapter III
of chapter 33 of title 5,
United States Code, or under
section 3581 of chapter 35 of
such title, then the service
performed for that organization
shall be considered service
described in subparagraph (A),
(III) if an individual
performing service described in
subparagraph (A) is reemployed
or reinstated after being
separated from such service for
the purpose of accepting
employment with the American
Institute in Taiwan as provided
under section 3310 of chapter
48 of title 22, United States
Code, then the service
performed for that Institute
shall be considered service
described in subparagraph (A),
(IV) if an individual
performing service described in
subparagraph (A) returns to the
performance of such service
after performing service as a
member of a uniformed service
(including, for purposes of
this clause, service in the
National Guard and temporary
service in the Coast Guard
Reserve) and after exercising
restoration or reemployment
rights as provided under
chapter 43 of title 38, United
States Code, then the service
so performed as a member of a
uniformed service shall be
considered service described in
subparagraph (A), and
(V) if an individual
performing service described in
subparagraph (A) returns to the
performance of such service
after employment (by a tribal
organization) to which section
104(e)(2) of the Indian Self-
Determination Act applies, then
the service performed for that
tribal organization shall be
considered service described in
subparagraph (A); or
(ii) is receiving an annuity from the
Civil Service Retirement and Disability
Fund, or benefits (for service as an
employee) under another retirement
system established by a law of the
United States for employees of the
Federal Government (other than for
members of the uniformed service);
except that this paragraph shall not apply with respect
to any such service performed on or after any date on
which such individual performs--
(C) service performed as the President or
Vice President of the United States,
(D) service performed--
(i) in a position placed in the
Executive Schedule under sections 5312
through 5317 of title 5, United States
Code,
(ii) as a noncareer appointee in the
Senior Executive Service or a noncareer
member of the Senior Foreign Service,
or
(iii) in a position to which the
individual is appointed by the
President (or his designee) or the Vice
President under section 105(a)(1),
106(a)(1), or 107 (a)(1) or (b)(1) of
title 3, United States Code, if the
maximum rate of basic pay for such
position is at or above the rate for
level V of the Executive Schedule,
(E) service performed as the Chief Justice of
the United States, an Associate Justice of the
Supreme Court, a judge of a United States court
of appeals, a judge of a United States district
court (including the district court of a
territory), a judge of the United States Court
of Federal Claims, a judge of the United States
Court of International Trade, a judge of the
United States Tax Court, a United States
magistrate judge, or a referee in bankruptcy or
United States bankruptcy judge,
(F) service performed as a Member, Delegate,
or Resident Commissioner of or to the Congress,
(G) any other service in the legislative
branch of the Federal Government if such
service--
(i) is performed by an individual who
was not subject to subchapter III of
chapter 83 of title 5, United States
Code, or to another retirement system
established by a law of the United
States for employees of the Federal
Government (other than for members of
the uniformed services), on December
31, 1983, or
(ii) is performed by an individual
who has, at any time after December 31,
1983, received a lump-sum payment under
section 8342(a) of title 5, United
States Code, or under the corresponding
provision of the law establishing the
other retirement system described in
clause (i), or
(iii) is performed by an individual
after such individual has otherwise
ceased to be subject to subchapter III
of chapter 83 of title 5, United States
Code (without having an application
pending for coverage under such
subchapter), while performing service
in the legislative branch (determined
without regard to the provisions of
subparagraph (B) relating to continuity
of employment), for any period of time
after December 31, 1983,
and for purposes of this subparagraph (G) an
individual is subject to such subchapter III or
to any such other retirement system at any time
only if (a) such individual's pay is subject to
deductions, contributions, or similar payments
(concurrent with the service being performed at
that time) under section 8334(a) of such title
5 or the corresponding provision of the law
establishing such other system, or (in a case
to which section 8332(k)(1) of such title
applies) such individual is making payments of
amounts equivalent to such deductions,
contributions, or similar payments while on
leave without pay, or (b) such individual is
receiving an annuity from the Civil Service
Retirement and Disability Fund, or is receiving
benefits (for service as an employee) under
another retirement system established by a law
of the United States for employees of the
Federal Government (other than for members of
the uniformed services), or
(H) service performed by an individual--
(i) on or after the effective date of
an election by such individual, under
section 301 of the Federal Employees'
Retirement System Act of 1986, section
307 of the Central Intelligence Agency
Retirement Act (50 U.S.C. 2157), or the
Federal Employees' Retirement System
Open Enrollment Act of 1997, to become
subject to the Federal Employees'
Retirement System provided in chapter
84 of title 5, United States Code, or
(ii) on or after the effective date
of an election by such individual,
under regulations issued under section
860 of the Foreign Service Act of 1980,
to become subject to the Foreign
Service Pension System provided in
subchapter II of chapter 8 of title I
of such Act;
(6) service performed in the employ of the United
States or any instrumentality of the United States if
such service is performed--
(A) in a penal institution of the United
States by an inmate thereof;
(B) by any individual as an employee included
under section 5351(2) of title 5, United States
Code (relating to certain interns, student
nurses, and other student employees of
hospitals of the Federal Government), other
than as a medical or dental intern or a medical
or dental resident in training; or
(C) by any individual as an employee serving
on a temporary basis in case of fire, storm,
earthquake, flood, or other similar emergency;
(7) service performed in the employ of a State, or
any political subdivision thereof, or any
instrumentality of any one or more of the foregoing
which is wholly owned thereby, except that this
paragraph shall not apply in the case of--
(A) service which, under subsection (j),
constitutes covered transportation service,
(B) service in the employ of the Government
of Guam or the Government of American Samoa or
any political subdivision thereof, or of any
instrumentality of any one or more of the
foregoing which is wholly owned thereby,
performed by an officer or employee thereof
(including a member of the legislature of any
such Government or political subdivision), and,
for purposes of this title with respect to the
taxes imposed by this chapter--
(i) any person whose service as such
an officer or employee is not covered
by a retirement system established by a
law of the United States shall not,
with respect to such service, be
regarded as an employee of the United
States or any agency or instrumentality
thereof, and
(ii) the remuneration for service
described in clause (i) (including fees
paid to a public official) shall be
deemed to have been paid by the
Government of Guam or the Government of
American Samoa or by a political
subdivision thereof or an
instrumentality of any one or more of
the foregoing which is wholly owned
thereby, whichever is appropriate,
(C) service performed in the employ of the
District of Columbia or any instrumentality
which is wholly owned thereby, if such service
is not covered by a retirement system
established by a law of the United States
(other than the Federal Employees Retirement
System provided in chapter 84 of title 5,
United States Code); except that the provisions
of this subparagraph shall not be applicable to
service performed--
(i) in a hospital or penal
institution by a patient or inmate
thereof;
(ii) by any individual as an employee
included under section 5351(2) of title
5, United States Code (relating to
certain interns, student nurses, and
other student employees of hospitals of
the District of Columbia Government),
other than as a medical or dental
intern or as a medical or dental
resident in training;
(iii) by any individual as an
employee serving on a temporary basis
in case of fire, storm, snow,
earthquake, flood or other similar
emergency; or
(iv) by a member of a board,
committee, or council of the District
of Columbia, paid on a per diem,
meeting, or other fee basis,
(D) service performed in the employ of the
Government of Guam (or any instrumentality
which is wholly owned by such Government) by an
employee properly classified as a temporary or
intermittent employee, if such service is not
covered by a retirement system established by a
law of Guam; except that (i) the provisions of
this subparagraph shall not be applicable to
services performed by an elected official or a
member of the legislature or in a hospital or
penal institution by a patient or inmate
thereof, and (ii) for purposes of this
subparagraph, clauses (i) and (ii) of
subparagraph (B) shall apply,
(E) service included under an agreement
entered into pursuant to section 218 of the
Social Security Act, or
(F) service in the employ of a State (other
than the District of Columbia, Guam, or
American Samoa), of any political subdivision
thereof, or of any instrumentality of any one
or more of the foregoing which is wholly owned
thereby, by an individual who is not a member
of a retirement system of such State, political
subdivision, or instrumentality, except that
the provisions of this subparagraph shall not
be applicable to service performed--
(i) by an individual who is employed
to relieve such individual from
unemployment;
(ii) in a hospital, home, or other
institution by a patient or inmate
thereof;
(iii) by any individual as an
employee serving on a temporary basis
in case of fire, storm, snow,
earthquake, flood, or other similar
emergency;
(iv) by an election official or
election worker if the remuneration
paid in a calendar year for such
service is less than $1,000 with
respect to service performed during any
calendar year commencing on or after
January 1, 1995, ending on or before
December 31, 1999, and the adjusted
amount determined under section
218(c)(8)(B) of the Social Security Act
for any calendar year commencing on or
after January 1, 2000, with respect to
service performed during such calendar
year; or
(v) by an employee in a position
compensated solely on a fee basis which
is treated pursuant to section
1402(c)(2)(E) as a trade or business
for purposes of inclusion of such fees
in net earnings from self-employment;
for purposes of this subparagraph, except as
provided in regulations prescribed by the
Secretary, the term ``retirement system'' has
the meaning given such term by section
218(b)(4) of the Social Security Act;
(8)(A) service performed 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,
except that this subparagraph shall not apply to
service performed by a member of such an order in the
exercise of such duties, if an election of coverage
under subsection (r) is in effect with respect to such
order, or with respect to the autonomous subdivision
thereof to which such member belongs;
(B) service performed in the employ of a church or
qualified church-controlled organization if such church
or organization has in effect an election under
subsection (w), other than service in an unrelated
trade or business (within the meaning of section
513(a));
(9) service performed by an individual as an employee
or employee representative as defined in section 3231;
(10) service performed in the employ of--
(A) a school, college, or university, or
(B) an organization described in section
509(a)(3) if the organization is organized, and
at all times thereafter is operated,
exclusively for the benefit of, to perform the
functions of, or to carry out the purposes of a
school, college, or university and is operated,
supervised, or controlled by or in connection
with such school, college, or university,
unless it is a school, college, or university
of a State or a political subdivision thereof
and the services performed in its employ by a
student referred to in section 218(c)(5) of the
Social Security Act are covered under the
agreement between the Commissioner of Social
Security and such State entered into pursuant
to section 218 of such Act;
if such service is performed by a student who is
enrolled and regularly attending classes at such
school, college, or university;
(11) service performed in the employ of a foreign
government (including service as a consular or other
officer or employee or a nondiplomatic representative);
(12) service performed in the employ of an
instrumentality wholly owned by a foreign government--
(A) if the service is of a character similar
to that performed in foreign countries by
employees of the United States Government or of
an instrumentality thereof; and
(B) if the Secretary of State shall certify
to the Secretary of the Treasury that the
foreign government, with respect to whose
instrumentality and employees thereof exemption
is claimed, grants an equivalent exemption with
respect to similar service performed in the
foreign country by employees of the United
States Government and of instrumentalities
thereof;
(13) service performed as a student nurse in the
employ of a hospital or a nurses' training school by an
individual who is enrolled and is regularly attending
classes in a nurses' training school chartered or
approved pursuant to State law;
(14)(A) service performed by an individual under the
age of 18 in the delivery or distribution of newspapers
or shopping news, not including delivery or
distribution to any point for subsequent delivery or
distribution;
(B) service performed by an individual in, and at the
time of, the sale of newspapers or magazines to
ultimate consumers, under an arrangement under which
the newspapers or magazines are to be sold by him at a
fixed price, his compensation being based on the
retention of the excess of such price over the amount
at which the newspapers or magazines are charged to
him, whether or not he is guaranteed a minimum amount
of compensation for such service, or is entitled to be
credited with the unsold newspapers or magazines turned
back;
(15) service performed in the employ of an
international organization, except service which
constitutes ``employment'' under subsection (y);
(16) service performed by an individual under an
arrangement with the owner or tenant of land pursuant
to which--
(A) such individual undertakes to produce
agricultural or horticultural commodities
(including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
(B) the agricultural or horticultural
commodities produced by such individual, or the
proceeds therefrom, are to be divided between
such individual and such owner or tenant, and
(C) the amount of such individual's share
depends on the amount of the agricultural or
horticultural commodities produced;
(18) service performed in Guam by a resident of the
Republic of the Philippines while in Guam on a
temporary basis as a nonimmigrant alien admitted to
Guam pursuant to section 101(a)(15)(H)(ii) of the
Immigration and Nationality Act (8 U.S.C.
1101(a)(15)(H)(ii));
(19) Service which is performed by a nonresident
alien individual for the period he is temporarily
present in the United States as a nonimmigrant under
subparagraph (F), (J), (M), or (Q) of section
101(a)(15) of the Immigration and Nationality Act, as
amended, and which is performed to carry out the
purpose specified in subparagraph (F), (J), (M), or
(Q), as the case may be;
(20) service (other than service described in
paragraph (3)(A)) performed by an individual on a boat
engaged in catching fish or other forms of aquatic
animal life under an arrangement with the owner or
operator of such boat pursuant to which--
(A) such individual does not receive any cash
remuneration other than as provided in
subparagraph (B) and other than cash
remuneration--
(i) which does not exceed $100 per
trip;
(ii) which is contingent on a minimum
catch; and
(iii) which is paid solely for
additional duties (such as mate,
engineer, or cook) for which additional
cash remuneration is traditional in the
industry,
(B) such individual receives a share of the
boat's (or the boats' in the case of a fishing
operation involving more than one boat) catch
of fish or other forms of aquatic animal life
or a share of the proceeds from the sale of
such catch, and
(C) the amount of such individual's share
depends on the amount of the boat's (or the
boats' in the case of a fishing operation
involving more than one boat) catch of fish or
other forms of aquatic animal life,
but only if the operating crew of such boat (or each
boat from which the individual receives a share in the
case of a fishing operation involving more than one
boat) is normally made up of fewer than 10 individuals;
(21) domestic service in a private home of the
employer which--
(A) is performed in any year by an individual
under the age of 18 during any portion of such
year; and
(B) is not the principal occupation of such
employee; or
(22) service performed by members of Indian tribal
councils as tribal council members in the employ of an
Indian tribal government, except that this paragraph
shall not apply in the case of service included under
an agreement under section 218A of the Social Security
Act.
For purposes of paragraph (20), the operating crew of a boat
shall be treated as normally made up of fewer than 10
individuals if the average size of the operating crew on trips
made during the preceding 4 calendar quarters consisted of
fewer than 10 individuals.
(c) Included and excluded service.--For purposes of this
chapter, if the services performed during one-half or more of
any pay period by an employee for the person employing him
constitute employment, all the services of such employee for
such period shall be deemed to be employment; but if the
services performed during more than one-half of any such pay
period by an employee for the person employing him do not
constitute employment, then none of the services of such
employee for such period shall be deemed to be employment. As
used in this subsection, the term ``pay period'' means a period
(of not more than 31 consecutive days) for which a payment of
remuneration is ordinarily made to the employee by the person
employing him. This subsection shall not be applicable with
respect to services performed in a pay period by an employee
for the person employing him, where any of such service is
excepted by subsection (b)(9).
(d) Employee.--For purposes of this chapter, the term
``employee'' means--
(1) any officer of a corporation; or
(2) any individual who, under the usual common law
rules applicable in determining the employer-employee
relationship, has the status of an employee; or
(3) any individual (other than an individual who is
an employee under paragraph (1) or (2)) who performs
services for remuneration for any person--
(A) as an agent-driver or commission-driver
engaged in distributing meat products,
vegetable products, fruit products, bakery
products, beverages (other than milk), or
laundry or dry-cleaning services, for his
principal;
(B) as a full-time life insurance salesman;
(C) as a home worker performing work,
according to specifications furnished by the
person for whom the services are performed, on
materials or goods furnished by such person
which are required to be returned to such
person or a person designated by him; or
(D) as a traveling or city salesman, other
than as an agent-driver or commission-driver,
engaged upon a full-time basis in the
solicitation on behalf of, and the transmission
to, his principal (except for side-line sales
activities on behalf of some other person) of
orders from wholesalers, retailers,
contractors, or operators of hotels,
restaurants, or other similar establishments
for merchandise for resale or supplies for use
in their business operations;
if the contract of service contemplates that
substantially all of such services are to be performed
personally by such individual; except that an
individual shall not be included in the term
``employee'' under the provisions of this paragraph if
such individual has a substantial investment in
facilities used in connection with the performance of
such services (other than in facilities for
transportation), or if the services are in the nature
of a single transaction not part of a continuing
relationship with the person for whom the services are
performed; or
(4) any individual who performs services that are
included under an agreement entered into pursuant to
section 218 or 218A of the Social Security Act.
(e) State, United States, and citizen.--For purposes of this
chapter--
(1) State.--The term ``State'' includes the District
of Columbia, the Commonwealth of Puerto Rico, the
Virgin Islands, Guam, and American Samoa.
(2) United States.--The term ``United States'' when
used in a geographical sense includes the Commonwealth
of Puerto Rico, the Virgin Islands, Guam, and American
Samoa.
An individual who is a citizen of the Commonwealth of Puerto
Rico (but not otherwise a citizen of the United States) shall
be considered, for purposes of this section, as a citizen of
the United States.
(f) American vessel and aircraft.--For purposes of this
chapter, the term ``American vessel'' means any vessel
documented or numbered under the laws of the United States; and
includes any vessel which is neither documented or numbered
under the laws of the United States nor documented under the
laws of any foreign country, if its crew is employed solely by
one or more citizens or residents of the United States or
corporations organized under the laws of the United States or
of any State; and the term ``American aircraft'' means an
aircraft registered under the laws of the United States.
(g) Agricultural labor.--For purposes of this chapter, the
term ``agricultural labor'' includes all service performed--
(1) on a farm, in the employ of any person, in
connection with cultivating the soil, or in connection
with raising or harvesting any agricultural or
horticultural commodity, including the raising,
shearing, feeding, caring for, training, and management
of livestock, bees, poultry, and fur-bearing animals
and wildlife;
(2) in the employ of the owner or tenant or other
operator of a farm, in connection with the operation,
management, conservation, improvement, or maintenance
of such farm and its tools and equipment, or in
salvaging timber or clearing land of brush and other
debris left by a hurricane, if the major part of such
service is performed on a farm;
(3) in connection with the production or harvesting
of any commodity defined as an agricultural commodity
in section 15(g) of the Agricultural Marketing Act, as
amended (12 U.S.C. 1141j), or in connection with the
ginning of cotton, or in connection with the operation
or maintenance of ditches, canals, reservoirs, or
waterways, not owned or operated for profit, used
exclusively for supplying and storing water for farming
purposes;
(4)(A) in the employ of the operator of a farm in
handling, planting, drying, packing, packaging,
processing, freezing, grading, storing, or delivering
to storage or to market or to a carrier for
transportation to market, in its unmanufactured state,
any agricultural or horticultural commodity; but only
if such operator produced more than one-half of the
commodity with respect to which such service is
performed;
(B) in the employ of a group of operators of farms
(other than a cooperative organization) in the
performance of service described in subparagraph (A),
but only if such operators produced all of the
commodity with respect to which such service is
performed. For purposes of this subparagraph, any
unincorporated group of operators shall be deemed a
cooperative organization if the number of operators
comprising such group is more than 20 at any time
during the calendar year in which such service is
performed;
(C) the provisions of subparagraphs (A) and (B) shall
not be deemed to be applicable with respect to service
performed in connection with commercial canning or
commercial freezing or in connection with any
agricultural or horticultural commodity after its
delivery to a terminal market for distribution for
consumption; or
(5) on a farm operated for profit if such service is
not in the course of the employer's trade or business.
As used in this subsection, the term ``farm'' includes stock,
dairy, poultry, fruit, fur-bearing 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.
(h) American employer.--For purposes of this chapter, the
term ``American employer'' means an employer which is--
(1) the United States or any instrumentality thereof,
(2) an individual who is a resident of the United
States,
(3) a partnership, if two-thirds or more of the
partners are residents of the United States,
(4) a trust, if all of the trustees are residents of
the United States, or
(5) a corporation organized under the laws of the
United States or of any State.
(i) Computation of wages in certain cases.--
(1) Domestic service.--For purposes of this chapter,
in the case of domestic service described in subsection
(a)(7)(B), any payment of cash remuneration for such
service which is more or less than a whole-dollar
amount shall, under such conditions and to such extent
as may be prescribed by regulations made under this
chapter, be computed to the nearest dollar. For the
purpose of the computation to the nearest dollar, the
payment of a fractional part of a dollar shall be
disregarded unless it amounts to one-half dollar or
more, in which case it shall be increased to $1. The
amount of any payment of cash remuneration so computed
to the nearest dollar shall, in lieu of the amount
actually paid, be deemed to constitute the amount of
cash remuneration for purposes of subsection (a)(7)(B).
(2) Service in the uniformed services.--For purposes
of this chapter, in the case of an individual
performing service, as a member of a uniformed service,
to which the provisions of subsection (m)(1) are
applicable, the term ``wages'' shall, subject to the
provisions of subsection (a)(1) of this section,
include as such individual's remuneration for such
service only (A) his basic pay as described in chapter
3 and section 1009 of title 37, United States Code, in
the case of an individual performing service to which
subparagraph (A) of such subsection (m)(1) applies, or
(B) his compensation for such service as determined
under section 206(a) of title 37, United States Code,
in the case of an individual performing service to
which subparagraph (B) of such subsection (m)(1)
applies.
(3) Peace Corps volunteer service.--For purposes of
this chapter, in the case of an individual performing
service, as a volunteer or volunteer leader within the
meaning of the Peace Corps Act, to which the provisions
of section 3121(p) are applicable, the term ``wages''
shall, subject to the provisions of subsection (a)(1)
of this section, include as such individual's
remuneration for such service only amounts paid
pursuant to section 5(c) or 6(1) of the Peace Corps
Act.
(4) Service performed by certain members of religious
orders.--For purposes of this chapter, in any case
where an individual is a member of a religious order
(as defined in subsection (r)(2)) performing service in
the exercise of duties required by such order, and an
election of coverage under subsection (r) is in effect
with respect to such order or with respect to the
autonomous subdivision thereof to which such member
belongs, the term ``wages'' shall, subject to the
provisions of subsection (a)(1), include as such
individual's remuneration for such service the fair
market value of any board, lodging, clothing, and other
perquisites furnished to such member by such order or
subdivision thereof or by any other person or
organization pursuant to an agreement with such order
or subdivision, except that the amount included as such
individual's remuneration under this paragraph shall
not be less than $100 a month.
(5) Service performed by certain retired justices and
judges.--For purposes of this chapter, in the case of
an individual performing service under the provisions
of section 294 of title 28, United States Code
(relating to assignment of retired justices and judges
to active duty), the term ``wages'' shall not include
any payment under section 371(b) of such title 28 which
is received during the period of such service.
(j) Covered transportation service.--For purposes of this
chapter--
(1) Existing transportation systems--General rule.--
Except as provided in paragraph (2), all service
performed in the employ of a State or political
subdivision in connection with its operation of a
public transportation system shall constitute covered
transportation service if any part of the
transportation system was acquired from private
ownership after 1936 and prior to 1951.
(2) Existing transportation systems--Cases in which
no transportation employees, or only certain employees,
are covered.--Service performed in the employ of a
State or political subdivision in connection with the
operation of its public transportation system shall not
constitute covered transportation service if--
(A) any part of the transportation system was
acquired from private ownership after 1936 and
prior to 1951, and substantially all service in
connection with the operation of the
transportation system was, on December 31,
1950, covered under a general retirement system
providing benefits which, by reason of a
provision of the State constitution dealing
specifically with retirement systems of the
State or political subdivisions thereof, cannot
be diminished or impaired; or
(B) no part of the transportation system
operated by the State or political subdivision
on December 31, 1950, was acquired from private
ownership after 1936 and prior to 1951;
except that if such State or political subdivision
makes an acquisition after 1950 from private ownership
of any part of its transportation system, then, in the
case of any employee who--
(C) became an employee of such State or
political subdivision in connection with and at
the time of its acquisition after 1950 of such
part, and
(D) prior to such acquisition rendered
service in employment (including as employment
service covered by an agreement under section
218 of the Social Security Act) in connection
with the operation of such part of the
transportation system acquired by the State or
political subdivision,
the service of such employee in connection with the
operation of the transportation system shall constitute
covered transportation service, commencing with the
first day of the third calendar quarter following the
calendar quarter in which the acquisition of such part
took place, unless on such first day such service of
such employee is covered by a general retirement system
which does not, with respect to such employee, contain
special provisions applicable only to employees
described in subparagraph (C).
(3) Transportation systems acquired after 1950.--All
service performed in the employ of a State or political
subdivision thereof in connection with its operation of
a public transportation system shall constitute covered
transportation service if the transportation system was
not operated by the State or political subdivision
prior to 1951 and, at the time of its first acquisition
(after 1950) from private ownership of any part of its
transportation system, the State or political
subdivision did not have a general retirement system
covering substantially all service performed in
connection with the operation of the transportation
system.
(4) Definitions.--For purposes of this subsection--
(A) The term ``general retirement system''
means any pension, annuity, retirement, or
similar fund or system established by a State
or by a political subdivision thereof for
employees of the State, political subdivision,
or both; but such term shall not include such a
fund or system which covers only service
performed in positions connected with the
operation of its public transportation system.
(B) A transportation system or a part thereof
shall be considered to have been acquired by a
State or political subdivision from private
ownership if prior to the acquisition service
performed by employees in connection with the
operation of the system or part thereof
acquired constituted employment under this
chapter or subchapter A of chapter 9 of the
Internal Revenue Code of 1939 or was covered by
an agreement made pursuant to section 218 of
the Social Security Act and some of such
employees became employees of the State or
political subdivision in connection with and at
the time of such acquisition.
(C) The term ``political subdivision''
includes an instrumentality of--
(i) a State,
(ii) one or more political
subdivisions of a State, or
(iii) a State and one or more of its
political subdivisions.
(l) Agreements entered into by American employers with
respect to foreign affiliates.--
(1) Agreement with respect to certain employees of
foreign affiliate.--The Secretary shall, at the
American employer's request, enter into an agreement
(in such manner and form as may be prescribed by the
Secretary) with any American employer (as defined in
subsection (h)) who desires to have the insurance
system established by title II of the Social Security
Act extended to service performed outside the United
States in the employ of any 1 or more of such
employer's foreign affiliates (as defined in paragraph
(6)) by all employees who are citizens or residents of
the United States, except that the agreement shall not
apply to any service performed by, or remuneration paid
to, an employee if such service or remuneration would
be excluded from the term ``employment'' or ``wages'',
as defined in this section, had the service been
performed in the United States. Such agreement may be
amended at any time so as to be made applicable, in the
same manner and under the same conditions, with respect
to any other foreign affiliate of such American
employer. Such agreement shall be applicable with
respect to citizens or residents of the United States
who, on or after the effective date of the agreement,
are employees of and perform services outside the
United States for any foreign affiliate specified in
the agreement. Such agreement shall provide--
(A) that the American employer shall pay to
the Secretary, at such time or times as the
Secretary may by regulations prescribe, amounts
equivalent to the sum of the taxes which would
be imposed by sections 3101 and 3111 (including
amounts equivalent to the interest, additions
to the taxes, additional amounts, and penalties
which would be applicable) with respect to the
remuneration which would be wages if the
services covered by the agreement constituted
employment as defined in this section; and
(B) that the American employer will comply
with such regulations relating to payments and
reports as the Secretary may prescribe to carry
out the purposes of this subsection.
(2) Effective period of agreement.--An agreement
entered into pursuant to paragraph (1) shall be in
effect for the period beginning with the first day of
the calendar quarter in which such agreement is entered
into or the first day of the succeeding calendar
quarter, as may be specified in the agreement; except
that in case such agreement is amended to include the
services performed for any other affiliate and such
amendment is executed after the first month following
the first calendar quarter for which the agreement is
in effect, the agreement shall be in effect with
respect to service performed for such other affiliate
only after the calendar quarter in which such amendment
is executed. Notwithstanding any other provision of
this subsection, the period for which any such
agreement is effective with respect to any foreign
entity shall terminate at the end of any calendar
quarter in which the foreign entity, at any time in
such quarter, ceases to be a foreign affiliate as
defined in paragraph (6).
(3) No termination of agreement.--No agreement under
this subsection may be terminated, either in its
entirety or with respect to any foreign affiliate, on
or after June 15, 1989.
(4) Deposits in trust funds.--For purposes of section
201 of the Social Security Act, relating to
appropriations to the Federal Old-Age and Survivors
Insurance Trust Fund and the Federal Disability
Insurance Trust Fund, such remuneration--
(A) paid for services covered by an agreement
entered into pursuant to paragraph (1) as would
be wages if the services constituted
employment, and
(B) as is reported to the Secretary pursuant
to the provisions of such agreement or of the
regulations issued under this subsection,
shall be considered wages subject to the taxes imposed
by this chapter.
(5) Overpayments and underpayments.--(A) If more or
less than the correct amount due under an agreement
entered into pursuant to this subsection is paid with
respect to any payment of remuneration, proper
adjustments with respect to the amounts due under such
agreement shall be made, without interest, in such
manner and at such times as may be required by
regulations prescribed by the Secretary.
(B) If an overpayment cannot be adjusted under
subparagraph (A), the amount thereof shall be paid by
the Secretary, through the Fiscal Service of the
Treasury Department, but only if a claim for such
overpayment is filed with the Secretary within two
years from the time such overpayment was made.
(6) Foreign affiliate defined.--For purposes of this
subsection and section 210(a) of the Social Security
Act--
(A) In general.--A foreign affiliate of an
American employer is any foreign entity in
which such American employer has not less than
a 10-percent interest.
(B) Determination of 10-percent interest.--
For purposes of subparagraph (A), an American
employer has a 10-percent interest in any
entity if such employer has such an interest
directly (or through one or more entities)--
(i) in the case of a corporation, in
the voting stock thereof, and
(ii) in the case of any other entity,
in the profits thereof.
(7) American employer as separate entity.--Each
American employer which enters into an agreement
pursuant to paragraph (1) of this subsection shall, for
purposes of this subsection and section 6413(c)(2)(C),
relating to special refunds in the case of employees of
certain foreign entities, be considered an employer in
its capacity as a party to such agreement separate and
distinct from its identity as a person employing
individuals on its own account.
(8) Regulations.--Regulations of the Secretary to
carry out the purposes of this subsection shall be
designed to make the requirements imposed on American
employers with respect to services covered by an
agreement entered into pursuant to this subsection the
same, so far as practicable, as those imposed upon
employers pursuant to this title with respect to the
taxes imposed by this chapter.
(m) Service in the uniformed services.--For purposes of this
chapter--
(1) Inclusion of service.--The term ``employment''
shall, notwithstanding the provisions of subsection (b)
of this section, include--
(A) service performed by an individual as a
member of a uniformed service on active duty,
but such term shall not include any such
service which is performed while on leave
without pay, and
(B) service performed by an individual as a
member of a uniformed service on inactive duty
training.
(2) Active duty.--The term ``active duty'' means
``active duty'' as described in paragraph (21) of
section 101 of title 38, United States Code, except
that it shall also include ``active duty for training''
as described in paragraph (22) of such section.
(3) Inactive duty training.--The term ``inactive duty
training'' means ``inactive duty training'' as
described in paragraph (23) of such section 101.
(n) Member of a uniformed service.--For purposes of this
chapter, the term ``member of a uniformed service'' means any
person appointed, enlisted, or inducted in a component of the
Army, Navy, Air Force, Marine Corps, or Coast Guard (including
a reserve component as defined in section 101(27) of title 38,
United States Code), or in one of those services without
specification of component, or as a commissioned officer of the
Coast and Geodetic Survey, the National Oceanic and Atmospheric
Administration Corps, or the Regular or Reserve Corps of the
Public Health Service, and any person serving in the Army or
Air Force under call or conscription. The term includes--
(1) a retired member of any of those services;
(2) a member of the Fleet Reserve or Fleet Marine
Corps Reserve;
(3) a cadet at the United States Military Academy, a
midshipman at the United States Naval Academy, and a
cadet at the United States Coast Guard Academy or
United States Air Force Academy;
(4) a member of the Reserve Officers' Training Corps,
the Naval Reserve Officers' Training Corps, or the Air
Force Reserve Officers' Training Corps, when ordered to
annual training duty for fourteen days or more, and
while performing authorized travel to and from that
duty; and
(5) any person while en route to or from, or at, a
place for final acceptance or for entry upon active
duty in the military, naval, or air service--
(A) who has been provisionally accepted for
such duty; or
(B) who, under the Military Selective Service
Act, has been selected for active military,
naval, or air service;
and has been ordered or directed to proceed to such
place.
The term does not include a temporary member of the Coast Guard
Reserve.
(o) Crew leader.--For purposes of this chapter, the term
``crew leader'' means an individual who furnishes individuals
to perform agricultural labor for another person, if such
individual pays (either on his own behalf or on behalf of such
person) the individuals so furnished by him for the
agricultural labor performed by them and if such individual has
not entered into a written agreement with such person whereby
such individual has been designated as an employee of such
person; and such individuals furnished by the crew leader to
perform agricultural labor for another person shall be deemed
to be the employees of such crew leader. For purposes of this
chapter and chapter 2, a crew leader shall, with respect to
service performed in furnishing individuals to perform
agricultural labor for another person and service performed as
a member of the crew, be deemed not to be an employee of such
other person.
(p) Peace Corps volunteer service.--For purposes of this
chapter, the term ``employment'' shall, notwithstanding the
provisions of subsection (b) of this section, include service
performed by an individual as a volunteer or volunteer leader
within the meaning of the Peace Corps Act.
(q) Tips included for both employee and employer taxes.--For
purposes of this chapter, tips received by an employee in the
course of his employment shall be considered remuneration for
such employment (and deemed to have been paid by the employer
for purposes of subsections (a) and (b) of section 3111). Such
remuneration shall be deemed to be paid at the time a written
statement including such tips is furnished to the employer
pursuant to section 6053(a) or (if no statement including such
tips is so furnished) at the time received; except that, in
determining the employer's liability in connection with the
taxes imposed by section 3111 with respect to such tips in any
case where no statement including such tips was so furnished
(or to the extent that the statement so furnished was
inaccurate or incomplete), such remuneration shall be deemed
for purposes of subtitle F to be paid on the date on which
notice and demand for such taxes is made to the employer by the
Secretary.
(r) Election of coverage by religious orders.--
(1) Certificate of election by order.--A religious
order whose members are required to take a vow of
poverty, or any autonomous subdivision of such order,
may file a certificate (in such form and manner, and
with such official, as may be prescribed by regulations
under this chapter) electing to have the insurance
system established by title II of the Social Security
Act extended to services performed by its members in
the exercise of duties required by such order or such
subdivision thereof. Such certificate of election shall
provide that--
(A) such election of coverage by such order
or subdivision shall be irrevocable;
(B) such election shall apply to all current
and future members of such order, or in the
case of a subdivision thereof to all current
and future members of such order who belong to
such subdivision;
(C) all services performed by a member of
such an order or subdivision in the exercise of
duties required by such order or subdivision
shall be deemed to have been performed by such
member as an employee of such order or
subdivision; and
(D) the wages of each member, upon which such
order or subdivision shall pay the taxes
imposed by sections 3101 and 3111, will be
determined as provided in subsection (i)(4).
(2) Definition of member.--For purposes of this
subsection, a member of a religious order means any
individual who is subject to a vow of poverty as a
member of such order and who performs tasks usually
required (and to the extent usually required) of an
active member of such order and who is not considered
retired because of old age or total disability.
(3) Effective date for election.--(A) A certificate
of election of coverage shall be in effect, for
purposes of subsection (b)(8) and for purposes of
section 210(a)(8) of the Social Security Act, for the
period beginning with whichever of the following may be
designated by the order or subdivision thereof:
(i) the first day of the calendar quarter in
which the certificate is filed,
(ii) the first day of the calendar quarter
succeeding such quarter, or
(iii) the first day of any calendar quarter
preceding the calendar quarter in which the
certificate is filed, except that such date may
not be earlier than the first day of the
twentieth calendar quarter preceding the
quarter in which such certificate is filed.
Whenever a date is designated under clause (iii), the
election shall apply to services performed before the
quarter in which the certificate is filed only if the
member performing such services was a member at the
time such services were performed and is living on the
first day of the quarter in which such certificate is
filed.
(B) If a certificate of election filed pursuant to
this subsection is effective for one or more calendar
quarters prior to the quarter in which such certificate
is filed, then--
(i) for purposes of computing interest and
for purposes of section 6651 (relating to
addition to tax for failure to file tax
return), the due date for the return and
payment of the tax for such prior calendar
quarters resulting from the filing of such
certificate shall be the last day of the
calendar month following the calendar quarter
in which the certificate is filed; and
(ii) the statutory period for the assessment
of such tax shall not expire before the
expiration of 3 years from such due date.
(s) Concurrent employment by two or more employers.--For
purposes of sections 3102, 3111, and 3121(a)(1), if two or more
related corporations concurrently employ the same individual
and compensate such individual through a common paymaster which
is one of such corporations, each such corporation shall be
considered to have paid as remuneration to such individual only
the amounts actually disbursed by it to such individual and
shall not be considered to have paid as remuneration to such
individual amounts actually disbursed to such individual by
another of such corporations.
(u) Application of hospital insurance tax to Federal, State,
and local employment.--
(1) Federal employment.--For purposes of the taxes
imposed by sections 3101(b) and 3111(b), subsection (b)
shall be applied without regard to paragraph (5)
thereof.
(2) State and local employment.--For purposes of the
taxes imposed by sections 3101(b) and 3111(b)--
(A) In general.--Except as provided in
subparagraphs (B) and (C), subsection (b) shall
be applied without regard to paragraph (7)
thereof.
(B) Exception for certain services.--Service
shall not be treated as employment by reason of
subparagraph (A) if--
(i) the service is included under an
agreement under section 218 of the
Social Security Act, or
(ii) the service is performed--
(I) by an individual who is
employed by a State or
political subdivision thereof
to relieve him from
unemployment,
(II) in a hospital, home, or
other institution by a patient
or inmate thereof as an
employee of a State or
political subdivision thereof
or of the District of Columbia,
(III) by an individual, as an
employee of a State or
political subdivision thereof
or of the District of Columbia,
serving on a temporary basis in
case of fire, storm, snow,
earthquake, flood or other
similar emergency,
(IV) by any individual as an
employee included under section
5351(2) of title 5, United
States Code (relating to
certain interns, student
nurses, and other student
employees of hospitals of the
District of Columbia
Government), other than as a
medical or dental intern or a
medical or dental resident in
training,
(V) by an election official
or election worker if the
remuneration paid in a calendar
year for such service is less
than $1,000 with respect to
service performed during any
calendar year commencing on or
after January 1, 1995, ending
on or before December 31, 1999,
and the adjusted amount
determined under section
218(c)(8)(B) of the Social
Security Act for any calendar
year commencing on or after
January 1, 2000, with respect
to service performed during
such calendar year, or
(VI) by an individual in a
position described in section
1402(c)(2)(E).
As used in this subparagraph, the terms
``State'' and ``political subdivision'' have
the meanings given those terms in section
218(b) of the Social Security Act.
(C) Exception for current employment which
continues.--Service performed for an employer
shall not be treated as employment by reason of
subparagraph (A) if--
(i) such service would be excluded
from the term ``employment'' for
purposes of this chapter if
subparagraph (A) did not apply;
(ii) such service is performed by an
individual--
(I) who was performing
substantial and regular service
for remuneration for that
employer before April 1, 1986,
(II) who is a bona fide
employee of that employer on
March 31, 1986, and
(III) whose employment
relationship with that employer
was not entered into for
purposes of meeting the
requirements of this
subparagraph; and
(iii) the employment relationship
with that employer has not been
terminated after March 31, 1986.
(D) Treatment of agencies and
instrumentalities.--For purposes of
subparagraph (C), under regulations--
(i) All agencies and
instrumentalities of a State (as
defined in section 218(b) of the Social
Security Act) or of the District of
Columbia shall be treated as a single
employer.
(ii) All agencies and
instrumentalities of a political
subdivision of a State (as so defined)
shall be treated as a single employer
and shall not be treated as described
in clause (i).
(3) Medicare qualified government employment.--For
purposes of this chapter, the term ``medicare qualified
government employment'' means service which--
(A) is employment (as defined in subsection
(b)) with the application of paragraphs (1) and
(2), but
(B) would not be employment (as so defined)
without the application of such paragraphs.
(v) Treatment of certain deferred compensation and salary
reduction arrangements.--
(1) Certain employer contributions treated as
wages.--Nothing in any paragraph of subsection (a)
(other than paragraph (1)) shall exclude from the term
``wages''--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
included in gross income by reason of section
402(e)(3) or consisting of designated Roth
contributions (as defined in section 402A(c)),
or
(B) any amount treated as an employer
contribution under section 414(h)(2) where the
pickup referred to in such section is pursuant
to a salary reduction agreement (whether
evidenced by a written instrument or
otherwise).
(2) Treatment of certain nonqualified deferred
compensation plans.--
(A) In general.--Any amount deferred under a
nonqualified deferred compensation plan shall
be taken into account for purposes of this
chapter as of the later of--
(i) when the services are performed,
or
(ii) when there is no substantial
risk of forfeiture of the rights to
such amount.
The preceding sentence shall not apply to any
excess parachute payment (as defined in section
280G(b)) or to any specified stock compensation
(as defined in section 4985) on which tax is
imposed by section 4985.
(B) Taxed only once.--Any amount taken into
account as wages by reason of subparagraph (A)
(and the income attributable thereto) shall not
thereafter be treated as wages for purposes of
this chapter.
(C) Nonqualified deferred compensation
plan.--For purposes of this paragraph, the term
``nonqualified deferred compensation plan''
means any plan or other arrangement for
deferral of compensation other than a plan
described in subsection (a)(5).
(3) Exempt governmental deferred compensation plan.--
For purposes of subsection (a)(5), the term ``exempt
governmental deferred compensation plan'' means any
plan providing for deferral of compensation 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. Such
term shall not include--
(A) any plan to which section 83, 402(b),
403(c), 457(a), or 457(f)(1) applies,
(B) any annuity contract described in section
403(b), and
(C) the Thrift Savings Fund (within the
meaning of subchapter III of chapter 84 of
title 5, United States Code).
(w) Exemption of churches and qualified church-controlled
organizations.--
(1) General rule.--Any church or qualified church-
controlled organization (as defined in paragraph (3))
may make an election within the time period described
in paragraph (2), in accordance with such procedures as
the Secretary determines to be appropriate, that
services performed in the employ of such church or
organization shall be excluded from employment for
purposes of title II of the Social Security Act and
this chapter. An election may be made under this
subsection only if the church or qualified church-
controlled organization states that such church or
organization is opposed for religious reasons to the
payment of the tax imposed under section 3111.
(2) Timing and duration of election.--An election
under this subsection must be made prior to the first
date, more than 90 days after July 18, 1984, on which a
quarterly employment tax return for the tax imposed
under section 3111 is due, or would be due but for the
election, from such church or organization. An election
under this subsection shall apply to current and future
employees, and shall apply to service performed after
December 31, 1983. The election may be revoked by the
church or organization under regulations prescribed by
the Secretary. The election shall be revoked by the
Secretary if such church or organization fails to
furnish the information required under section 6051 to
the Secretary for a period of 2 years or more with
respect to remuneration paid for such services by such
church or organization, and, upon request by the
Secretary, fails to furnish all such previously
unfurnished information for the period covered by the
election. Any revocation under the preceding sentence
shall apply retroactively to the beginning of the 2-
year period for which the information was not
furnished.
(3) Definitions.--(A) For purposes of this
subsection, the term ``church'' means a church, a
convention or association of churches, or an elementary
or secondary school which is controlled, operated, or
principally supported by a church or by a convention or
association of churches.
(B) For purposes of this subsection, the term
``qualified church-controlled organization'' means any
church-controlled tax-exempt organization described in
section 501(c)(3), other than an organization which--
(i) offers goods, services, or facilities for
sale, other than on an incidental basis, to the
general public, other than goods, services, or
facilities which are sold at a nominal charge
which is substantially less than the cost of
providing such goods, services, or facilities;
and
(ii) normally receives more than 25 percent
of its support from either (I) governmental
sources, or (II) receipts from admissions,
sales of merchandise, performance of services,
or furnishing of facilities, in activities
which are not unrelated trades or businesses,
or both.
(x) Applicable dollar threshold.--For purposes of subsection
(a)(7)(B), the term ``applicable dollar threshold'' means
$1,000. In the case of calendar years after 1995, the
Commissioner of Social Security shall adjust such $1,000 amount
at the same time and in the same manner as under section
215(a)(1)(B)(ii) of the Social Security Act with respect to the
amounts referred to in section 215(a)(1)(B)(i) of such Act,
except that, for purposes of this paragraph, 1993 shall be
substituted for the calendar year referred to in section
215(a)(1)(B)(ii)(II) of such Act. If any amount as adjusted
under the preceding sentence is not a multiple of $100, such
amount shall be rounded to the next lowest multiple of $100.
(y) Service in the employ of international organizations by
certain transferred Federal employees.--
(1) In general.--For purposes of this chapter,
service performed in the employ of an international
organization by an individual pursuant to a transfer of
such individual to such international organization
pursuant to section 3582 of title 5, United States
Code, shall constitute ``employment'' if--
(A) immediately before such transfer, such
individual performed service with a Federal
agency which constituted ``employment'' under
subsection (b) for purposes of the taxes
imposed by sections 3101(a) and 3111(a), and
(B) such individual would be entitled, upon
separation from such international organization
and proper application, to reemployment with
such Federal agency under such section 3582.
(2) Definitions.--For purposes of this subsection--
(A) Federal agency.--The term ``Federal
agency'' means an agency, as defined in section
3581(1) of title 5, United States Code.
(B) International organization.--The term
``international organization'' has the meaning
provided such term by section 3581(3) of title
5, United States Code.
(z) Treatment of certain foreign persons as American
employers.--
(1) In general.--If any employee of a foreign person
is performing services in connection with a contract
between the United States Government (or any
instrumentality thereof) and any member of any
domestically controlled group of entities which
includes such foreign person, such foreign person shall
be treated for purposes of this chapter as an American
employer with respect to such services performed by
such employee.
(2) Domestically controlled group of entities.--For
purposes of this subsection--
(A) In general.--The term ``domestically
controlled group of entities'' means a
controlled group of entities the common parent
of which is a domestic corporation.
(B) Controlled group of entities.--The term
``controlled group of entities'' means a
controlled group of corporations as defined in
section 1563(a)(1), except that--
(i) ``more than 50 percent'' shall be
substituted for ``at least 80 percent''
each place it appears therein, and
(ii) the determination shall be made
without regard to subsections (a)(4)
and (b)(2) of section 1563.
A partnership or any other entity (other than a
corporation) shall be treated as a member of a
controlled group of entities 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 sentence).
(3) Liability of common parent.--In the case of a
foreign person who is a member of any domestically
controlled group of entities, the common parent of such
group shall be jointly and severally liable for any tax
under this chapter for which such foreign person is
liable by reason of this subsection, and for any
penalty imposed on such person by this title with
respect to any failure to pay such tax or to file any
return or statement with respect to such tax or wages
subject to such tax. No deduction shall be allowed
under this title for any liability imposed by the
preceding sentence.
(4) Provisions preventing double taxation.--
(A) Agreements.--Paragraph (1) shall not
apply to any services which are covered by an
agreement under subsection (l).
(B) Equivalent foreign taxation.--Paragraph
(1) shall not apply to any services if the
employer establishes to the satisfaction of the
Secretary that the remuneration paid by such
employer for such services is subject to a tax
imposed by a foreign country which is
substantially equivalent to the taxes imposed
by this chapter.
(5) Cross reference.--For relief from taxes in cases
covered by certain international agreements, see
sections 3101(c) and 3111(c).
* * * * * * *
CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT
* * * * * * *
SEC. 3306. DEFINITIONS.
(a) Employer.--For purposes of this chapter--
(1) In general.--The term ``employer'' means, with
respect to any calendar year, any person who--
(A) during any calendar quarter in the
calendar year or the preceding calendar year
paid wages of $1,500 or more, or
(B) on each of some 20 days during the
calendar year or during the preceding calendar
year, each day being in a different calendar
week, employed at least one individual in
employment for some portion of the day.
For purposes of this paragraph, there shall not be
taken into account any wages paid to, or employment of,
an employee performing domestic services referred to in
paragraph (3).
(2) Agricultural labor.--In the case of agricultural
labor, the term ``employer'' means, with respect to any
calendar year, any person who--
(A) during any calendar quarter in the
calendar year or the preceding calendar year
paid wages of $20,000 or more for agricultural
labor, or
(B) on each of some 20 days during the
calendar year or during the preceding calendar
year, each day being in a different calendar
week, employed at least 10 individuals in
employment in agricultural labor for some
portion of the day.
(3) Domestic service.--In the case of domestic
service in a private home, local college club, or local
chapter of a college fraternity or sorority, the term
``employer'' means, with respect to any calendar year,
any person who during any calendar quarter in the
calendar year or the preceding calendar year paid wages
in cash of $1,000 or more for such service.
(4) Special rule.--A person treated as an employer
under paragraph (3) shall not be treated as an employer
with respect to wages paid for any service other than
domestic service referred to in paragraph (3) unless
such person is treated as an employer under paragraph
(1) or (2) with respect to such other service.
(b) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration for employment, including the cash value
of all remuneration (including benefits) paid in any medium
other than cash; except that such term shall not include--
(1) that part of the remuneration which, after
remuneration (other than remuneration referred to in
the succeeding paragraphs of this subsection) equal to
$7,000 with respect to employment has been paid to an
individual by an employer during any calendar year, is
paid to such individual by such employer during such
calendar year. If an employer (hereinafter referred to
as successor employer) during any calendar year
acquires substantially all the property used in a trade
or business of another employer (hereinafter referred
to as a predecessor), or used in a separate unit of a
trade or business of a predecessor, and immediately
after the acquisition employs in his trade or business
an individual who immediately prior to the acquisition
was employed in the trade or business of such
predecessor, then, for the purpose of determining
whether the successor employer has paid remuneration
(other than remuneration referred to in the succeeding
paragraphs of this subsection) with respect to
employment equal to $7,000 to such individual during
such calendar year, any remuneration (other than
remuneration referred to in the succeeding paragraphs
of this subsection) with respect to employment paid (or
considered under this paragraph as having been paid) to
such individual by such predecessor during such
calendar year and prior to such acquisition shall be
considered as having been paid by such successor
employer;
(2) the amount of any payment (including any amount
paid by an employer for insurance or annuities, or into
a fund, to provide for any such payment) made to, or on
behalf of, an employee or any of his dependents under a
plan or system established by an employer which makes
provision for his employees generally (or for his
employees generally and their dependents) or for a
class or classes of his employees (or for a class or
classes of his employees and their dependents), on
account of--
(A) sickness or accident disability (but, in
the case of payments made to an employee or any
of his dependents, this subparagraph shall
exclude from the term ``wages'' only payments
which are received under a workmen's
compensation law), or
(B) medical or hospitalization expenses in
connection with sickness or accident
disability, or
(C) death;
(4) any payment on account of sickness or accident
disability, or medical or hospitalization expenses in
connection with sickness or accident disability, made
by an employer to, or on behalf of, an employee after
the expiration of 6 calendar months following the last
calendar month in which the employee worked for such
employer;
(5) any payment made to, or on behalf of, an employee
or his beneficiary--
(A) from or to a trust described in section
401(a) which is exempt from tax under section
501(a) at the time of such payment unless such
payment is made to an employee of the trust as
remuneration for services rendered as such
employee and not as a beneficiary of the trust,
or
(B) under or to an annuity plan which, at the
time of such payment, is a plan described in
section 403(a),
(C) under a simplified employee pension (as
defined in section 408(k)(1)), other than any
contributions described in section 408(k)(6),
(D) under or to an annuity contract described
in section 403(b), other than a payment for the
purchase of such contract which is made by
reason of a salary reduction agreement (whether
evidenced by a written instrument or
otherwise),
(E) under or to an exempt governmental
deferred compensation plan (as defined in
section 3121(v)(3)),
(F) to supplement pension benefits under a
plan or trust described in any of the foregoing
provisions of this paragraph to take into
account some portion or all of the increase in
the cost of living (as determined by the
Secretary of Labor) since retirement but only
if such supplemental payments are under a plan
which is treated as a welfare plan under
section 3(2)(B)(ii) of the Employee Retirement
Income Security Act of 1974,
(G) under a cafeteria plan (within the
meaning of section 125) if such payment would
not be treated as wages without regard to such
plan and it is reasonable to believe that (if
section 125 applied for purposes of this
section) section 125 would not treat any wages
as constructively received, or
(H) under an arrangement to which section
408(p) applies, other than any elective
contributions under paragraph (2)(A)(i)
thereof,
(6) the payment by an employer (without deduction
from the remuneration of the employee)--
(A) of the tax imposed upon an employee under
section 3101, or
(B) of any payment required from an employee
under a State unemployment compensation law,
with respect to remuneration paid to an employee for
domestic service in a private home of the employer or
for agricultural labor;
(7) remuneration paid in any medium other than cash
to an employee for service not in the course of the
employer's trade or business;
(9) remuneration paid to or on behalf of an employee
if (and to the extent that) at the time of the payment
of such remuneration it is reasonable to believe that a
corresponding deduction is allowable under section 217
(determined without regard to section 274(n));
(10) any payment or series of payments by an employer
to an employee or any of his dependents which is paid--
(A) upon or after the termination of an
employee's employment relationship because of
(i) death, or (ii) retirement for disability,
and
(B) under a plan established by the employer
which makes provision for his employees
generally or a class or classes of his
employees (or for such employees or class or
classes of employees and their dependents),
other than any such payment or series of payments which
would have been paid if the employee's employment
relationship had not been so terminated;
(11) remuneration for agricultural labor paid in any
medium other than cash;
(13) any payment made, or benefit furnished, to or
for the benefit of an employee if at the time of such
payment or such furnishing it is reasonable to believe
that the employee will be able to exclude such payment
or benefit from income under section 127, 129,
134(b)(4), or 134(b)(5);
(14) the value of any meals or lodging furnished by
or on behalf of the employer if at the time of such
furnishing it is reasonable to believe that the
employee will be able to exclude such items from income
under section 119;
(15) any payment made by an employer to a survivor or
the estate of a former employee after the calendar year
in which such employee died;
(16) 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 income under section 74(c),
108(f)(4), 117, or 132;
(17) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section 106(b);
(18) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section 106(d);
(19) remuneration on account of--
(A) a transfer of a share of stock to any
individual pursuant to an exercise of an
incentive stock option (as defined in section
422(b)) or under an employee stock purchase
plan (as defined in section 423(b)), or
(B) any disposition by the individual of such
stock; or
(20) any benefit or payment which is excludable from
the gross income of the employee under section 139B(b).
Except as otherwise provided in regulations prescribed by the
Secretary, any third party which makes a payment included in
wages solely by reason of the parenthetical matter contained in
subparagraph (A) of paragraph (2) shall be treated for purposes
of this chapter and chapter 22 as the employer with respect to
such wages. Nothing in the regulations prescribed for purposes
of chapter 24 (relating to income tax withholding) which
provides an exclusion from ``wages'' as used in such chapter
shall be construed to require a similar exclusion from
``wages'' in the regulations prescribed for purposes of this
chapter.
(c) Employment.--For purposes of this chapter, the term
``employment'' means any service performed prior to 1955, which
was employment for purposes of subchapter C of chapter 9 of the
Internal Revenue Code of 1939 under the law applicable to the
period in which such service was performed, and (A) any
service, of whatever nature, performed after 1954 by an
employee for the person employing him, irrespective of the
citizenship or residence of either, (i) within the United
States, or (ii) on or in connection with an American vessel or
American aircraft under a contract of service which is entered
into within the United States or during the performance of
which and while the employee is employed on the vessel or
aircraft it touches at a port in the United States, if the
employee is employed on and in connection with such vessel or
aircraft when outside the United States, and (B) any service,
of whatever nature, performed after 1971 outside the United
States (except in a contiguous country with which the United
States has an agreement relating to unemployment compensation)
by a citizen of the United States as an employee of an American
employer (as defined in subsection (j)(3)), except--
(1) agricultural labor (as defined in subsection (k))
unless--
(A) such labor is performed for a person
who--
(i) during any calendar quarter in
the calendar year or the preceding
calendar year paid remuneration in cash
of $20,000 or more to individuals
employed in agricultural labor
(including labor performed by an alien
referred to in subparagraph (B)), or
(ii) on each of some 20 days during
the calendar year or the preceding
calendar year, each day being in a
different calendar week, employed in
agricultural labor (including labor
performed by an alien referred to in
subparagraph (B)) for some portion of
the day (whether or not at the same
moment of time) 10 or more individuals;
and
(B) such labor is not agricultural labor
performed by an individual who is an alien
admitted to the United States to perform
agricultural labor pursuant to sections 214(c)
and 101(a)(15)(H) of the Immigration and
Nationality Act;
(2) domestic service in a private home, local college
club, or local chapter of a college fraternity or
sorority unless performed for a person who paid cash
remuneration of $1,000 or more to individuals employed
in such domestic service in any calendar quarter in the
calendar year or the preceding calendar year;
(3) service not in the course of the employer's trade
or business performed in any calendar quarter by an
employee, unless the cash remuneration paid for such
service is $50 or more and such service is performed by
an individual who is regularly employed by such
employer to perform such service. For purposes of this
paragraph, an individual shall be deemed to be
regularly employed by an employer during a calendar
quarter only if--
(A) on each of some 24 days during such
quarter such individual performs for such
employer for some portion of the day service
not in the course of the employer's trade or
business, or
(B) such individual was regularly employed
(as determined under subparagraph (A)) by such
employer in the performance of such service
during the preceding calendar quarter;
(4) service performed on or in connection with a
vessel or aircraft not an American vessel or American
aircraft, if the employee is employed on and in
connection with such vessel or aircraft when outside
the United States;
(5) service performed by an individual in the employ
of [his son] the individual's son , daughter, or
spouse, and service performed by a child under the age
of 21 in the employ of [his father] the child's father
or mother;
(6) service performed in the employ of the United
States Government or of an instrumentality of the
United States which is--
(A) wholly or partially owned by the United
States, or
(B) exempt from the tax imposed by section
3301 by virtue of any provision of law which
specifically refers to such section (or the
corresponding section of prior law) in granting
such exemption;
(7) service performed in the employ of a State, or
any political subdivision thereof, or in the employ of
an Indian tribe, or any instrumentality of any one or
more of the foregoing which is wholly owned by one or
more States or political subdivisions or Indian tribes;
and any service performed in the employ of any
instrumentality of one or more States or political
subdivisions to the extent that the instrumentality is,
with respect to such service, immune under the
Constitution of the United States from the tax imposed
by section 3301;
(8) service performed in the employ of a religious,
charitable, educational, or other organization
described in section 501(c)(3) which is exempt from
income tax under section 501(a);
(9) service performed by an individual as an employee
or employee representative as defined in section 1 of
the Railroad Unemployment Insurance Act (45 U.S.C.
351);
(10)(A) service performed in any calendar quarter in
the employ of any organization exempt from income tax
under section 501(a) (other than an organization
described in section 401(a)) or under section 521, if
the remuneration for such service is less than $50, or
(B) service performed in the employ of a school,
college, or university, if such service is performed
(i) by a student who is enrolled and is regularly
attending classes at such school, college, or
university, or (ii) by the spouse of such a student, if
such spouse is advised, at the time such spouse
commences to perform such service, that (I) the
employment of such spouse to perform such service is
provided under a program to provide financial
assistance to such student by such school, college, or
university, and (II) such employment will not be
covered by any program of unemployment insurance, or
(C) service performed by an individual who is
enrolled at a nonprofit or public educational
institution which normally maintains a regular faculty
and curriculum and normally has a regularly organized
body of students in attendance at the place where its
educational activities are carried on as a student in a
full-time program, taken for credit at such
institution, which combines academic instruction with
work experience, if such service is an integral part of
such program, and such institution has so certified to
the employer, except that this subparagraph shall not
apply to service performed in a program established for
or on behalf of an employer or group of employers, or
(D) service performed in the employ of a hospital, if
such service is performed by a patient of such
hospital;
(11) service performed in the employ of a foreign
government (including service as a consular or other
officer or employee or a nondiplomatic representative);
(12) service performed in the employ of an
instrumentality wholly owned by a foreign government--
(A) if the service is of a character similar
to that performed in foreign countries by
employees of the United States Government or of
an instrumentality thereof; and
(B) if the Secretary of State shall certify
to the Secretary of the Treasury that the
foreign government, with respect to whose
instrumentality exemption is claimed, grants an
equivalent exemption with respect to similar
service performed in the foreign country by
employees of the United States Government and
of instrumentalities thereof;
(13) service performed as a student nurse in the
employ of a hospital or a nurses' training school by an
individual who is enrolled and is regularly attending
classes in a nurses' training school chartered or
approved pursuant to State law; and service performed
as an intern in the employ of a hospital by an
individual who has completed a 4 years' course in a
medical school chartered or approved pursuant to State
law;
(14) service performed by an individual for a person
as an insurance agent or as an insurance solicitor, if
all such service performed by such individual for such
person is performed for remuneration solely by way of
commission;
(15)(A) service performed by an individual under the
age of 18 in the delivery or distribution of newspapers
or shopping news, not including delivery or
distribution to any point for subsequent delivery or
distribution;
(B) service performed by an individual in, and at the
time of, the sale of newspapers or magazines to
ultimate consumers, under an arrangement under which
the newspapers or magazines are to be sold by him at a
fixed price, his compensation being based on the
retention of the excess of such price over the amount
at which the newspapers or magazines are charged to
him, whether or not he is guaranteed a minimum amount
of compensation for such service, or is entitled to be
credited with the unsold newspapers or magazines turned
back;
(16) service performed in the employ of an
international organization;
(17) service performed by an individual in (or as an
officer or member of the crew of a vessel while it is
engaged in) the catching, taking, harvesting,
cultivating, or farming of any kind of fish, shellfish,
crustacea, sponges, seaweeds, or other aquatic forms of
animal and vegetable life (including service performed
by any such individual as an ordinary incident to any
such activity), except--
(A) service performed in connection with the
catching or taking of salmon or halibut, for
commercial purposes, and
(B) service performed on or in connection
with a vessel of more than 10 net tons
(determined in the manner provided for
determining the register tonnage of merchant
vessels under the laws of the United States);
(18) service described in section 3121(b)(20);
(19) service which is performed by a nonresident
alien individual for the period he is temporarily
present in the United States as a nonimmigrant under
subparagraph (F), (J), (M), or (Q) of section
101(a)(15) of the Immigration and Nationality Act, as
amended (8 U.S.C. 1101(a)(15)(F), (J), (M), or (Q)),
and which is performed to carry out the purpose
specified in subparagraph (F), (J), (M), or (Q), as the
case may be;
(20) service performed by a full time student (as
defined in subsection (q)) in the employ of an
organized camp--
(A) if such camp--
(i) did not operate for more than 7
months in the calendar year and did not
operate for more than 7 months in the
preceding calendar year, or
(ii) had average gross receipts for
any 6 months in the preceding calendar
year which were not more than 331/3
percent of its average gross receipts
for the other 6 months in the preceding
calendar year; and
(B) if such full time student performed
services in the employ of such camp for less
than 13 calendar weeks in such calendar year;
or
(21) service performed by a person committed to a
penal institution.
(d) Included and excluded service.--For purposes of this
chapter, if the services performed during one-half or more of
any pay period by an employee for the person employing him
constitute employment, all the services of such employee for
such period shall be deemed to be employment; but if the
services performed during more than one-half of any such pay
period by an employee for the person employing him do not
constitute employment, then none of the services of such
employee for such period shall be deemed to be employment. As
used in this subsection, the term ``pay period'' means a period
(of not more than 31 consecutive days) for which a payment of
remuneration is ordinarily made to the employee by the person
employing him. This subsection shall not be applicable with
respect to services performed in a pay period by an employee
for the person employing him, where any of such service is
excepted by subsection (c)(9).
(e) State agency.--For purposes of this chapter, the term
``State agency'' means any State officer, board, or other
authority, designated under a State law to administer the
unemployment fund in such State.
(f) Unemployment fund.--For purposes of this chapter, the
term ``unemployment fund'' means a special fund, established
under a State law and administered by a State agency, for the
payment of compensation. Any sums standing to the account of
the State agency in the Unemployment Trust Fund established by
section 904 of the Social Security Act, as amended (42 U.S.C.
1104), shall be deemed to be a part of the unemployment fund of
the State, and no sums paid out of the Unemployment Trust Fund
to such State agency shall cease to be a part of the
unemployment fund of the State until expended by such State
agency. An unemployment fund shall be deemed to be maintained
during a taxable year only if throughout such year, or such
portion of the year as the unemployment fund was in existence,
no part of the moneys of such fund was expended for any purpose
other than the payment of compensation (exclusive of expenses
of administration) and for refunds of sums erroneously paid
into such fund and refunds paid in accordance with the
provisions of section 3305(b); except that--
(1) an amount equal to the amount of employee
payments into the unemployment fund of a State may be
used in the payment of cash benefits to individuals
with respect to their disability, exclusive of expenses
of administration;
(2) the amounts specified by section 903(c)(2) or
903(d)(4) of the Social Security Act may, subject to
the conditions prescribed in such section, be used for
expenses incurred by the State for administration of
its unemployment compensation law and public employment
offices,
(3) nothing in this subsection shall be construed to
prohibit deducting any amount from unemployment
compensation otherwise payable to an individual and
using the amount so deducted to pay for health
insurance, or the withholding of Federal, State, or
local individual income tax, if the individual elected
to have such deduction made and such deduction was made
under a program approved by the Secretary of Labor;
(4) amounts may be deducted from unemployment
benefits and used to repay overpayments as provided in
section 303(g) of the Social Security Act;
(5) amounts may be withdrawn for the payment of
short-time compensation under a short-time compensation
program (as defined in subsection (v)); and
(6) amounts may be withdrawn for the payment of
allowances under a self-employment assistance program
(as defined in subsection (t)).
(g) Contributions.--For purposes of this chapter, the term
``contributions'' means payments required by a State law to be
made into an unemployment fund by any person on account of
having individuals in his employ, to the extent that such
payments are made by him without being deducted or deductible
from the remuneration of individuals in his employ.
(h) Compensation.--For purposes of this chapter, the term
``compensation'' means cash benefits payable to individuals
with respect to their unemployment.
(i) Employee.--For purposes of this chapter, the term
``employee'' has the meaning assigned to such term by section
3121(d), except that paragraph (4) and subparagraphs (B) and
(C) of paragraph (3) shall not apply.
(j) State, United States, and American employer.--For
purposes of this chapter--
(1) State.--The term ``State'' includes the District
of Columbia, the Commonwealth of Puerto Rico, and the
Virgin Islands.
(2) United States.--The term ``United States'' when
used in a geographical sense includes the States, the
District of Columbia, the Commonwealth of Puerto Rico,
and the Virgin Islands.
(3) American employer.--The term ``American
employer'' means a person who is--
(A) an individual who is a resident of the
United States,
(B) a partnership, if two-thirds or more of
the partners are residents of the United
States,
(C) a trust, if all of the trustees are
residents of the United States, or
(D) a corporation organized under the laws of
the United States or of any State.
An individual who is a citizen of the Commonwealth of Puerto
Rico or the Virgin Islands (but not otherwise a citizen of the
United States) shall be considered, for purposes of this
section, as a citizen of the United States.
(k) Agricultural labor.--For purposes of this chapter, the
term ``agricultural labor'' has the meaning assigned to such
term by subsection (g) of section 3121, except that for
purposes of this chapter subparagraph (B) of paragraph (4) of
such subsection (g) shall be treated as reading:
``(B) in the employ of a group of operators
of farms (or a cooperative organization of
which such operators are members) in the
performance of service described in
subparagraph (A), but only if such operators
produced more than one-half of the commodity
with respect to which such service is
performed;''.
(m) American vessel and aircraft.--For purposes of this
chapter, the term ``American vessel'' means any vessel
documented or numbered under the laws of the United States; and
includes any vessel which is neither documented or numbered
under the laws of the United States nor documented under the
laws of any foreign country, if its crew is employed solely by
one or more citizens or residents of the United States or
corporations organized under the laws of the United States or
of any State; and the term ``American aircraft'' means an
aircraft registered under the laws of the United States.
(n) Vessels operated by general agents of United States.--
Notwithstanding the provisions of subsection (c)(6), service
performed by officers and members of the crew of a vessel which
would otherwise be included as employment under subsection (c)
shall not be excluded by reason of the fact that it is
performed on or in connection with an American vessel--
(1) owned by or bareboat chartered to the United
States and
(2) whose business is conducted by a general agent of
the Secretary of Transportation.
For purposes of this chapter, each such general agent shall be
considered a legal entity in his capacity as such general
agent, separate and distinct from his identity as a person
employing individuals on his own account, and the officers and
members of the crew of such an American vessel whose business
is conducted by a general agent of the Secretary of
Transportation shall be deemed to be performing services for
such general agent rather than the United States. Each such
general agent who in his capacity as such is an employer within
the meaning of subsection (a) shall be subject to all the
requirements imposed upon an employer under this chapter with
respect to service which constitutes employment by reason of
this subsection.
(o) Special rule in case of certain agricultural workers.--
(1) Crew leaders who are registered or provide
specialized agricultural labor.--For purposes of this
chapter, any individual who is a member of a crew
furnished by a crew leader to perform agricultural
labor for any other person shall be treated as an
employee of such crew leader--
(A) if--
(i) such crew leader holds a valid
certificate of registration under the
Migrant and Seasonal Agricultural
Worker Protection Act; or
(ii) substantially all the members of
such crew operate or maintain tractors,
mechanized harvesting or crop-dusting
equipment, or any other mechanized
equipment, which is provided by such
crew leader; and
(B) if such individual is not an employee of
such other person within the meaning of
subsection (i).
(2) Other crew leaders.--For purposes of this
chapter, in the case of any individual who is furnished
by a crew leader to perform agricultural labor for any
other person and who is not treated as an employee of
such crew leader under paragraph (1)--
(A) such other person and not the crew leader
shall be treated as the employer of such
individual; and
(B) such other person shall be treated as
having paid cash remuneration to such
individual in an amount equal to the amount of
cash remuneration paid to such individual by
the crew leader (either on his behalf or on
behalf of such other person) for the
agricultural labor performed for such other
person.
(3) Crew leader.--For purposes of this subsection,
the term ``crew leader'' means an individual who--
(A) furnishes individuals to perform
agricultural labor for any other person,
(B) pays (either on his behalf or on behalf
of such other person) the individuals so
furnished by him for the agricultural labor
performed by them, and
(C) has not entered into a written agreement
with such other person under which such
individual is designated as an employee of such
other person.
(p) Concurrent employment by two or more employers.--For
purposes of sections 3301, 3302, and 3306(b)(1), if two or more
related corporations concurrently employ the same individual
and compensate such individual through a common paymaster which
is one of such corporations, each such corporation shall be
considered to have paid as remuneration to such individual only
the amounts actually disbursed by it to such individual and
shall not be considered to have paid as remuneration to such
individual amounts actually disbursed to such individual by
another of such corporations.
(q) Full time student.--For purposes of subsection (c)(20),
an individual shall be treated as a full time student for any
period--
(1) during which the individual is enrolled as a full
time student at an educational institution, or
(2) which is between academic years or terms if--
(A) the individual was enrolled as a full
time student at an educational institution for
the immediately preceding academic year or
term, and
(B) there is a reasonable assurance that the
individual will be so enrolled for the
immediately succeeding academic year or term
after the period described in subparagraph (A).
(r) Treatment of certain deferred compensation and salary
reduction arrangements.--
(1) Certain employer contributions treated as
wages.--Nothing in any paragraph of subsection (b)
(other than paragraph (1)) shall exclude from the term
``wages''--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
included in gross income by reason of section
402(e)(3), or
(B) any amount treated as an employer
contribution under section 414(h)(2) where the
pickup referred to in such section is pursuant
to a salary reduction agreement (whether
evidenced by a written instrument or
otherwise).
(2) Treatment of certain nonqualified deferred
compensation plans.--
(A) In general.--Any amount deferred under a
nonqualified deferred compensation plan shall
be taken into account for purposes of this
chapter as of the later of--
(i) when the services are performed,
or
(ii) when there is no substantial
risk of forfeiture of the rights to
such amount.
(B) Taxed only once.--Any amount taken into
account as wages by reason of subparagraph (A)
(and the income attributable thereto) shall not
thereafter be treated as wages for purposes of
this chapter.
(C) Nonqualified deferred compensation
plan.--For purposes of this paragraph, the term
``nonqualified deferred compensation plan''
means any plan or other arrangement for
deferral of compensation other than a plan
described in subsection (b)(5).
(s) Tips treated as wages.--For purposes of this chapter, the
term ``wages'' includes tips which are--
(1) received while performing services which
constitute employment, and
(2) included in a written statement furnished to the
employer pursuant to section 6053(a).
(t) Self-employment assistance program.--For the purposes of
this chapter, the term ``self-employment assistance program''
means a program under which--
(1) individuals who meet the requirements described
in paragraph (3) are eligible to receive an allowance
in lieu of regular unemployment compensation under the
State law for the purpose of assisting such individuals
in establishing a business and becoming self-employed;
(2) the allowance payable to individuals pursuant to
paragraph (1) is payable in the same amount, at the
same interval, on the same terms, and subject to the
same conditions, as regular unemployment compensation
under the State law, except that--
(A) State requirements relating to
availability for work, active search for work,
and refusal to accept work are not applicable
to such individuals;
(B) State requirements relating to
disqualifying income are not applicable to
income earned from self-employment by such
individuals; and
(C) such individuals are considered to be
unemployed for the purposes of Federal and
State laws applicable to unemployment
compensation,
as long as such individuals meet the requirements
applicable under this subsection;
(3) individuals may receive the allowance described
in paragraph (1) if such individuals--
(A) are eligible to receive regular
unemployment compensation under the State law,
or would be eligible to receive such
compensation except for the requirements
described in subparagraph (A) or (B) of
paragraph (2);
(B) are identified pursuant to a State worker
profiling system as individuals likely to
exhaust regular unemployment compensation; and
(C) are participating in self-employment
assistance activities which--
(i) include entrepreneurial training,
business counseling, and technical
assistance; and
(ii) are approved by the State
agency; and
(D) are actively engaged on a full-time basis
in activities (which may include training)
relating to the establishment of a business and
becoming self-employed;
(4) the aggregate number of individuals receiving the
allowance under the program does not at any time exceed
5 percent of the number of individuals receiving
regular unemployment compensation under the State law
at such time;
(5) the program does not result in any cost to the
Unemployment Trust Fund (established by section 904(a)
of the Social Security Act) in excess of the cost that
would be incurred by such State and charged to such
Fund if the State had not participated in such program;
and
(6) the program meets such other requirements as the
Secretary of Labor determines to be appropriate.
(u) Indian tribe.--For purposes of this chapter, the term
``Indian tribe'' has the meaning given to such term by section
4(e) of the Indian Self-Determination and Education Assistance
Act (25 U.S.C. 5304(e)), and includes any subdivision,
subsidiary, or business enterprise wholly owned by such an
Indian tribe.
(v) Short-time compensation program.--For purposes of this
section, the term ``short-time compensation program'' means a
program under which--
(1) the participation of an employer is voluntary;
(2) an employer reduces the number of hours worked by
employees in lieu of layoffs;
(3) such employees whose workweeks have been reduced
by at least 10 percent, and by not more than the
percentage, if any, that is determined by the State to
be appropriate (but in no case more than 60 percent),
are not disqualified from unemployment compensation;
(4) the amount of unemployment compensation payable
to any such employee is a pro rata portion of the
unemployment compensation which would otherwise be
payable to the employee if such employee were
unemployed;
(5) such employees meet the availability for work and
work search test requirements while collecting short-
time compensation benefits, by being available for
their workweek as required by the State agency;
(6) eligible employees may participate, as
appropriate, in training (including employer-sponsored
training or worker training funded under the Workforce
Investment Act of 1998) to enhance job skills if such
program has been approved by the State agency;
(7) the State agency shall require employers to
certify that if the employer provides health benefits
and retirement benefits under a defined benefit plan
(as defined in section 414(j)) or contributions under a
defined contribution plan (as defined in section
414(i)) to any employee whose workweek is reduced under
the program that such benefits will continue to be
provided to employees participating in the short-time
compensation program under the same terms and
conditions as though the workweek of such employee had
not been reduced or to the same extent as other
employees not participating in the short-time
compensation program;
(8) the State agency shall require an employer to
submit a written plan describing the manner in which
the requirements of this subsection will be implemented
(including a plan for giving advance notice, where
feasible, to an employee whose workweek is to be
reduced) together with an estimate of the number of
layoffs that would have occurred absent the ability to
participate in short-time compensation and such other
information as the Secretary of Labor determines is
appropriate;
(9) the terms of the employer's written plan and
implementation shall be consistent with employer
obligations under applicable Federal and State laws;
and
(10) upon request by the State and approval by the
Secretary of Labor, only such other provisions are
included in the State law that are determined to be
appropriate for purposes of a short-time compensation
program.
* * * * * * *
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] the
employee is married only if, on the day of such
furnishing, [he] the employee 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] the employee
is legally separated from [his spouse] the
employee's spouse under a decree of divorce or
separate maintenance, or (ii) either [he] the
employee or [his spouse] the employee's spouse
is, or on any preceding day within the calendar
year was, a nonresident alien; or
(B) as married, if (i) [his spouse] the
employee's spouse (other than a spouse referred
to in subparagraph (A)) died within the portion
of [his taxable year] the employee's taxable
year which precedes such day, or (ii) [his
spouse] the employee's 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] the employee's 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 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) Exemption 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)).
(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 40--GENERAL PROVISIONS RELATING TO OCCUPATIONAL TAXES
* * * * * * *
SEC. 4905. LIABILITY IN CASE OF DEATH OR CHANGE OF LOCATION.
(a) Requirements.--When any person who has paid the special
tax for any trade or business dies, [his spouse] such person's
spouse or child, or executors or administrators or other legal
representatives, may occupy the house or premises, and in like
manner carry on, for the residue of the term for which the tax
is paid, the same trade or business as the deceased before
carried on, in the same house and upon the same premises,
without the payment of any additional tax. When any person
removes from the house or premises for which any trade or
business was taxed to any other place, he may carry on the
trade or business specified in the register kept in the office
of the official in charge of the internal revenue district at
the place to which he removes, without the payment of any
additional tax: Provided, That all cases of death, change, or
removal, as aforesaid, with the name of the successor to any
person deceased, or of the person making such change or
removal, shall be registered with the Secretary, under
regulations to be prescribed by the Secretary.
(b) Registration.--For registration in case of wagering, see
section 4412.
* * * * * * *
CHAPTER 42--PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT
ORGANIZATIONS
* * * * * * *
Subchapter A--PRIVATE FOUNDATIONS
* * * * * * *
SEC. 4946. DEFINITIONS AND SPECIAL RULES.
(a) Disqualified person.--
(1) In general.--For purposes of this subchapter, the
term ``disqualified person'' means, with respect to a
private foundation, a person who is--
(A) a substantial contributor to the
foundation,
(B) a foundation manager (within the meaning
of subsection (b)(1)),
(C) an owner of more than 20 percent of--
(i) the total combined voting power
of a corporation,
(ii) the profits interest of a
partnership, or
(iii) the beneficial interest of a
trust or unincorporated enterprise,
which is a substantial contributor to the
foundation,
(D) a member of the family (as defined in
subsection (d)) of any individual described in
subparagraph (A), (B), or (C),
(E) a corporation of which persons described
in subparagraph (A), (B), (C), or (D) own more
than 35 percent of the total combined voting
power,
(F) a partnership in which persons described
in subparagraph (A), (B), (C), or (D) own more
than 35 percent of the profits interest,
(G) a trust or estate in which persons
described in subparagraph (A), (B), (C), or (D)
hold more than 35 percent of the beneficial
interest,
(H) only for purposes of section 4943, a
private foundation--
(i) which is effectively controlled
(directly or indirectly) by the same
person or persons who control the
private foundation in question, or
(ii) substantially all of the
contributions to which were made
(directly or indirectly) by the same
person or persons described in
subparagraph (A), (B), or (C), or
members of their families (within the
meaning of subsection (d)), who made
(directly or indirectly) substantially
all of the contributions to the private
foundation in question, and
(I) only for purposes of section 4941, a
government official (as defined in subsection
(c)).
(2) Substantial contributors.--For purposes of
paragraph (1), the term ``substantial contributor''
means a person who is described in section 507(d)(2).
(3) Stockholdings.--For purposes of paragraphs
(1)(C)(i) and (1)(E), there shall be taken into account
indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes
of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an
individual are the members within the meaning of
subsection (d).
(4) Partnerships; trusts.--For purposes of paragraphs
(1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership
of profits or beneficial interests shall be determined
in accordance with the rules for constructive ownership
of stock provided in section 267(c) (other than
paragraph (3) thereof), except that section 267(c)(4)
shall be treated as providing that the members of the
family of an individual are the members within the
meaning of subsection (d).
(b) Foundation manager.--For purposes of this subchapter, the
term ``foundation manager'' means, with respect to any private
foundation--
(1) an officer, director, or trustee of a foundation
(or an individual having powers or responsibilities
similar to those of officers, directors, or trustees of
the foundation), and
(2) with respect to any act (or failure to act), the
employees of the foundation having authority or
responsibility with respect to such act (or failure to
act).
(c) Government official.--For purposes of subsection
(a)(1)(I) and section 4941, the term ``government official''
means, with respect to an act of self-dealing described in
section 4941, an individual who, at the time of such act, holds
any of the following offices or positions (other than as a
``special Government employee'', as defined in section 202(a)
of title 18, United States Code):
(1) an elective public office in the executive or
legislative branch of the Government of the United
States,
(2) an office in the executive or judicial branch of
the Government of the United States, appointment to
which was made by the President,
(3) a position in the executive, legislative, or
judicial branch of the Government of the United
States--
(A) which is listed in schedule C of rule VI
of the Civil Service Rules, or
(B) the compensation for which is equal to or
greater than the lowest rate of basic pay for
the Senior Executive Service under section 5382
of title 5, United States Code,
(4) a position under the House of Representatives or
the Senate of the United States held by an individual
receiving gross compensation at an annual rate of
$15,000 or more,
(5) an elective or appointive public office in the
executive, legislative, or judicial branch of the
government of a State, possession of the United States,
or political subdivision or other area of any of the
foregoing, or of the District of Columbia, held by an
individual receiving gross compensation at an annual
rate of $20,000 or more,
(6) a position as personal or executive assistant or
secretary to any of the foregoing, or
(7) a member of the Internal Revenue Service
Oversight Board.
(d) Members of family.--For purposes of subsection (a)(1),
the family of any individual shall include only [his spouse]
the individual's spouse , ancestors, children, grandchildren,
great grandchildren, and the spouses of children,
grandchildren, and great grandchildren.
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) Initial taxes on disqualified person.--There is hereby
imposed a tax on each prohibited transaction. The rate of tax
shall be equal to 15 percent of the amount involved with
respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by this
subsection shall be paid by any disqualified person who
participates in the prohibited transaction (other than a
fiduciary acting only as such).
(b) Additional taxes on disqualified person.--In any case in
which an initial tax is imposed by subsection (a) on a
prohibited transaction and the transaction is not corrected
within the taxable period, there is hereby imposed a tax equal
to 100 percent of the amount involved. The tax imposed by this
subsection shall be paid by any disqualified person who
participated in the prohibited transaction (other than a
fiduciary acting only as such).
(c) Prohibited transaction.--
(1) General rule.--For purposes of this section, the
term ``prohibited transaction'' means any direct or
indirect--
(A) sale or exchange, or leasing, of any
property between a plan and a disqualified
person;
(B) lending of money or other extension of
credit between a plan and a disqualified
person;
(C) furnishing of goods, services, or
facilities between a plan and a disqualified
person;
(D) transfer to, or use by or for the benefit
of, a disqualified person of the income or
assets of a plan;
(E) act by a disqualified person who is a
fiduciary whereby he deals with the income or
assets of a plan in his own interest or for his
own account; or
(F) receipt of any consideration for his own
personal account by any disqualified person who
is a fiduciary from any party dealing with the
plan in connection with a transaction involving
the income or assets of the plan.
(2) Special exemption.--The Secretary shall establish
an exemption procedure for purposes of this subsection.
Pursuant to such procedure, he may grant a conditional
or unconditional exemption of any disqualified person
or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions
imposed by paragraph (1) of this subsection. Action
under this subparagraph may be taken only after
consultation and coordination with the Secretary of
Labor. The Secretary may not grant an exemption under
this paragraph unless he finds that such exemption is--
(A) administratively feasible,
(B) in the interests of the plan and of its
participants and beneficiaries, and
(C) protective of the rights of participants
and beneficiaries of the plan.
Before granting an exemption under this paragraph, the
Secretary shall require adequate notice to be given to
interested persons and shall publish notice in the
Federal Register of the pendency of such exemption and
shall afford interested persons an opportunity to
present views. No exemption may be granted under this
paragraph with respect to a transaction described in
subparagraph (E) or (F) of paragraph (1) unless the
Secretary affords an opportunity for a hearing and
makes a determination on the record with respect to the
findings required under subparagraphs (A), (B), and (C)
of this paragraph, except that in lieu of such hearing
the Secretary may accept any record made by the
Secretary of Labor with respect to an application for
exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
(3) Special rule for individual retirement
accounts.--An individual for whose benefit an
individual retirement account is established and his
beneficiaries shall be exempt from the tax imposed by
this section with respect to any transaction concerning
such account (which would otherwise be taxable under
this section) if, with respect to such transaction, the
account ceases to be an individual retirement account
by reason of the application of section 408(e)(2)(A) or
if section 408(e)(4) applies to such account.
(4) Special rule for Archer MSAs.--An individual for
whose benefit an Archer MSA (within the meaning of
section 220(d)) is established shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings
accounts.--An individual for whose benefit a Coverdell
education savings account is established and any
contributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
530(d) applies with respect to such transaction.
(6) Special rule for health savings accounts.--An
individual for whose benefit a health savings account
(within the meaning of section 223(d)) is established
shall be exempt from the tax imposed by this section
with respect to any transaction concerning such account
(which would otherwise be taxable under this section)
if, with respect to such transaction, the account
ceases to be a health savings account by reason of the
application of section 223(e)(2) to such account.
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified
person who is a participant or beneficiary of the plan
if such loan--
(A) is available to all such participants or
beneficiaries on a reasonably equivalent basis,
(B) is not made available to highly
compensated employees (within the meaning of
section 414(q)) in an amount greater than the
amount made available to other employees,
(C) is made in accordance with specific
provisions regarding such loans set forth in
the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made
with a disqualified person for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor;
(3) any loan to a leveraged employee stock ownership
plan (as defined in subsection (e)(7)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of
interest, and any collateral which is given to
a disqualified person by the plan consists only
of qualifying employer securities (as defined
in subsection (e)(8));
(4) the investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliates thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment;
(5) any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly
owned (directly or indirectly) by the employer
establishing the plan, or by any person which
is a disqualified person with respect to the
plan, but only if the total premiums and
annuity considerations written by such insurers
for life insurance, health insurance, or
annuities for all plans (and their employers)
with respect to which such insurers are
disqualified persons (not including premiums or
annuity considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan);
(6) the provision of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such service is provided
at not more than reasonable compensation, if such bank
or other institution is a fiduciary of such plan, and
if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the provision of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and under such
guidelines the bank or similar financial
institution does not provide such ancillary
service--
(i) in an excessive or unreasonable
manner, and
(ii) in a manner that would be
inconsistent with the best interests of
participants and beneficiaries of
employee benefit plans;
(7) the exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary, but only if the plan receives no less
than adequate consideration pursuant to such
conversion;
(8) any transaction between a plan and a common or
collective trust fund or pooled investment fund
maintained by a disqualified person which is a bank or
trust company supervised by a State or Federal agency
or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State
if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than a reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan;
(9) receipt by a disqualified person of any benefit
to which he may be entitled as a participant or
beneficiary in the plan, so long as the benefit is
computed and paid on a basis which is consistent with
the terms of the plan as applied to all other
participants and beneficiaries;
(10) receipt by a disqualified person of any
reasonable compensation for services rendered, or for
the reimbursement of expenses properly and actually
incurred, in the performance of his duties with the
plan, but no person so serving who already receives
full-time pay from an employer or an association of
employers, whose employees are participants in the plan
or from an employee organization whose members are
participants in such plan shall receive compensation
from such fund, except for reimbursement of expenses
properly and actually incurred;
(11) service by a disqualified person as a fiduciary
in addition to being an officer, employee, agent, or
other representative of a disqualified person;
(12) the making by a fiduciary of a distribution of
the assets of the trust in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of title IV of
the Employee Retirement Income Security Act of 1974
(relating to allocation of assets);
(13) any transaction which is exempt from section 406
of such Act by reason of section 408(e) of such Act (or
which would be so exempt if such section 406 applied to
such transaction) or which is exempt from section 406
of such Act by reason of section 408(b)(12) of such
Act;
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1)(E) or (F);
(16) a sale of stock held by a trust which
constitutes an individual retirement account under
section 408(a) to the individual for whose benefit such
account is established if--
(A) such stock is 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))),
(B) such stock is held by such trust as of
the date of the enactment of this paragraph,
(C) such sale is pursuant to an election
under section 1362(a) by such bank or company,
(D) such sale is for fair market value at the
time of sale (as established by an independent
appraiser) and the terms of the sale are
otherwise at least as favorable to such trust
as the terms that would apply on a sale to an
unrelated party,
(E) such trust does not pay any commissions,
costs, or other expenses in connection with the
sale, and
(F) the stock is sold in a single transaction
for cash not later than 120 days after the S
corporation election is made;
(17) any transaction in connection with the provision
of investment advice described in subsection (e)(3)(B)
to a participant or beneficiary in a plan that permits
such participant or beneficiary to direct the
investment of plan assets in an individual account,
if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (f)(8) are
met,
(18) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person (other than a fiduciary described in subsection
(e)(3)) with respect to a plan if--
(A) the transaction involves a block trade,
(B) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(C) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(D) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party,
(19) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary of Labor may determine
by regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the disqualified person has an
ownership interest in the system or venue
described in subparagraph (A), the system or
venue has been authorized by the plan sponsor
or other independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue,
(20) transactions described in subparagraphs (A),
(B), and (D) of subsection (c)(1) between a plan and a
person that is a disqualified person other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of subsection (e)(3)(B)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of subsection (e)(2), or both, but only if
in connection with such transaction the plan receives
no less, nor pays no more, than adequate consideration,
(21) any foreign exchange transactions, between a
bank or broker-dealer (or any affiliate of either) and
a plan (as defined in this section) with respect to
which such bank or broker-dealer (or affiliate) is a
trustee, custodian, fiduciary, or other disqualified
person, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction,
(22) any transaction described in subsection
(c)(1)(A) involving the purchase and sale of a security
between a plan and any other account managed by the
same investment manager, if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7) of the Employee Retirement
Income Security Act of 1974), the master trust
has assets of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report shall also notify the plan fiduciary
of the plan's right to terminate participation in the
investment manager's cross-trading program at any time,
or
(23) except as provided in subsection (f)(11), a
transaction described in subparagraph (A), (B), (C), or
(D) of subsection (c)(1) in connection with the
acquisition, holding, or disposition of any security or
commodity, if the transaction is corrected before the
end of the correction period.
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) a trust described in section 401(a) which
forms a part of a plan, or a plan described in
section 403(a), which trust or plan is exempt
from tax under section 501(a),
(B) an individual retirement account
described in section 408(a),
(C) an individual retirement annuity
described in section 408(b),
(D) an Archer MSA described in section
220(d),
(E) a health savings account described in
section 223(d),
(F) a Coverdell education savings account
described in section 530, or
(G) a trust, plan, account, or annuity which,
at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.
(2) Disqualified person.--For purposes of this
section, the term ``disqualified person'' means a
person who is--
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are
covered by the plan;
(D) an employee organization any of whose
members are covered by the plan;
(E) an owner, direct or indirect, of 50
percent or more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of a corporation,
(ii) the capital interest or the
profits interest of a partnership, or
(iii) the beneficial interest of a
trust or unincorporated enterprise,
which is an employer or an employee
organization described in subparagraph (C) or
(D);
(F) a member of the family (as defined in
paragraph (6)) of any individual described in
subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or
estate of which (or in which) 50 percent or
more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of such corporation,
(ii) the capital interest or profits
interest of such partnership, or
(iii) the beneficial interest of such
trust or estate,
is owned directly or indirectly, or held by
persons described in subparagraph (A), (B),
(C), (D), or (E);
(H) an officer, director (or an individual
having powers or responsibilities similar to
those of officers or directors), a 10 percent
or more shareholder, or a highly compensated
employee (earning 10 percent or more of the
yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or
(G); or
(I) a 10 percent or more (in capital or
profits) partner or joint venturer of a person
described in subparagraph (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with
the Secretary of Labor or his delegate, may by
regulation prescribe a percentage lower than 50 percent
for subparagraphs (E) and (G) and lower than 10 percent
for subparagraphs (H) and (I).
(3) Fiduciary.--For purposes of this section, the
term ``fiduciary'' means any person who--
(A) exercises any discretionary authority or
discretionary control respecting management of
such plan or exercises any authority or control
respecting management or disposition of its
assets,
(B) renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of such
plan, or has any authority or responsibility to
do so, or
(C) has any discretionary authority or
discretionary responsibility in the
administration of such plan.
Such term includes any person designated under section
405(c)(1)(B) of the Employee Retirement Income Security
Act of 1974.
(4) Stockholdings.--For purposes of paragraphs
(2)(E)(i) and (G)(i) there shall be taken into account
indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes
of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an
individual are the members within the meaning of
paragraph (6).
(5) Partnerships; trusts.--For purposes of paragraphs
(2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the
ownership of profits or beneficial interests shall be
determined in accordance with the rules for
constructive ownership of stock provided in section
267(c) (other than paragraph (3) thereof), except that
section 267(c)(4) shall be treated as providing that
the members of the family of an individual are the
members within the meaning of paragraph (6).
(6) Member of family.--For purposes of paragraph
(2)(F), the family of any individual shall include [his
spouse] the individual's spouse , ancestor, lineal
descendant, and any spouse of a lineal descendant.
(7) Employee stock ownership plan.--The term
``employee stock ownership plan'' means a defined
contribution plan--
(A) which is a stock bonus plan which is
qualified, or a stock bonus and a money
purchase plan both of which are qualified under
section 401(a), and which are designed to
invest primarily in qualifying employer
securities; and
(B) which is otherwise defined in regulations
prescribed by the Secretary.
A plan shall not be treated as an employee stock
ownership plan unless it meets the requirements of
section 409(h), section 409(o), and, if applicable,
section 409(n), section 409(p), and section 664(g) and,
if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets
the requirements of section 409(e).
(8) Qualifying employer security.--The term
``qualifying employer security'' means any employer
security within the meaning of section 409(l). If any
moneys or other property of a plan are invested in
shares of an investment company registered under the
Investment Company Act of 1940, the investment shall
not cause that investment company or that investment
company's investment adviser or principal underwriter
to be treated as a fiduciary or a disqualified person
for purposes of this section, except when an investment
company or its investment adviser or principal
underwriter acts in connection with a plan covering
employees of the investment company, its investment
adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability
payment funds.--For purposes of this section--
(A) In general.--The term ``plan'' includes a
trust described in section 501(c)(22).
(B) Disqualified person.--In the case of any
trust to which this section applies by reason
of subparagraph (A), the term ``disqualified
person'' includes any person who is a
disqualified person with respect to any plan to
which such trust is permitted to make payments
under section 4223 of the Employee Retirement
Income Security Act of 1974.
(f) Other definitions and special rules.--For purposes of
this section--
(1) Joint and several liability.--If more than one
person is liable under subsection (a) or (b) with
respect to any one prohibited transaction, all such
persons shall be jointly and severally liable under
such subsection with respect to such transaction.
(2) Taxable period.--The term ``taxable period''
means, with respect to any prohibited transaction, the
period beginning with the date on which the prohibited
transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of
deficiency with respect to the tax imposed by
subsection (a) under section 6212,
(B) the date on which the tax imposed by
subsection (a) is assessed, or
(C) the date on which correction of the
prohibited transaction is completed.
(3) Sale or exchange; encumbered property.--A
transfer or real or personal property by a disqualified
person to a plan shall be treated as a sale or exchange
if the property is subject to a mortgage or similar
lien which the plan assumes or if it is subject to a
mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending
on the date of the transfer.
(4) Amount involved.--The term ``amount involved''
means, with respect to a prohibited transaction, the
greater of the amount of money and the fair market
value of the other property given or the amount of
money and the fair market value of the other property
received; except that, in the case of services
described in paragraphs (2) and (10) of subsection (d)
the amount involved shall be only the excess
compensation. For purposes of the preceding sentence,
the fair market value--
(A) in the case of the tax imposed by
subsection (a), shall be determined as of the
date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by
subsection (b), shall be the highest fair
market value during the taxable period.
(5) Correction.--The terms ``correction'' and
``correct'' mean, with respect to a prohibited
transaction, undoing the transaction to the extent
possible, but in any case placing the plan in a
financial position not worse than that in which it
would be if the disqualified person were acting under
the highest fiduciary standards.
(6) Exemptions not to apply to certain
transactions.--
(A) In general.--In the case of a trust
described in section 401(a) which is part of a
plan providing contributions or benefits for
employees some or all of whom are owner-
employees (as defined in section 401(c)(3)),
the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not
apply to a transaction in which the plan
directly or indirectly--
(i) lends any part of the corpus or
income of the plan to,
(ii) pays any compensation for
personal services rendered to the plan
to, or
(iii) acquires for the plan any
property from, or sells any property
to,
any such owner-employee, a member of the family
(as defined in section 267(c)(4)) of any such
owner-employee, or any corporation in which any
such owner-employee owns, directly or
indirectly, 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
of the corporation.
(B) Special rules for shareholder-employees,
etc..--
(i) In general.--For purposes of
subparagraph (A), the following shall
be treated as owner-employees:
(I) A shareholder-employee.
(II) A participant or
beneficiary of an individual
retirement plan (as defined in
section 7701(a)(37)).
(III) An employer or
association of employees which
establishes such an individual
retirement plan under section
408(c).
(ii) Exception for certain
transactions involving shareholder-
employees.--Subparagraph (A)(iii) shall
not apply to a transaction which
consists of a sale of employer
securities to an employee stock
ownership plan (as defined in
subsection (e)(7)) by a shareholder-
employee, a member of the family (as
defined in section 267(c)(4)) of such
shareholder-employee, or a corporation
in which such a shareholder-employee
owns stock representing a 50 percent or
greater interest described in
subparagraph (A).
(iii) Loan exception.--For purposes
of subparagraph (A)(i), the term
``owner-employee'' shall only include a
person described in subclause (II) or
(III) of clause (i).
(C) Shareholder-employee.--For purposes of
subparagraph (B), the term ``shareholder-
employee'' means an employee or officer of an S
corporation who owns (or is considered as
owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of
the corporation on any day during the taxable
year of such corporation.
(7) S corporation repayment of loans for qualifying
employer securities.--A plan shall not be treated as
violating the requirements of section 401 or 409 or
subsection (e)(7), or as engaging in a prohibited
transaction for purposes of subsection (d)(3), merely
by reason of any distribution (as described in section
1368(a)) with respect to S corporation stock that
constitutes qualifying employer securities, which in
accordance with the plan provisions is used to make
payments on a loan described in subsection (d)(3) the
proceeds of which were used to acquire such qualifying
employer securities (whether or not allocated to
participants). The preceding sentence shall not apply
in the case of a distribution which is paid with
respect to any employer security which is allocated to
a participant unless the plan provides that employer
securities with a fair market value of not less than
the amount of such distribution are allocated to such
participant for the year which (but for the preceding
sentence) such distribution would have been allocated
to such participant.
(8) Provision of investment advice to participant and
beneficiaries.--
(A) In general.--The prohibitions provided in
subsection (c) shall not apply to transactions
described in subsection (d)(17) if the
investment advice provided by a fiduciary
adviser is provided under an eligible
investment advice arrangement.
(B) Eligible investment advice arrangement.--
For purposes of this paragraph, the term
``eligible investment advice arrangement''
means an arrangement--
(i) which either--
(I) provides that any fees
(including any commission or
other compensation) received by
the fiduciary adviser for
investment advice or with
respect to the sale, holding,
or acquisition of any security
or other property for purposes
of investment of plan assets do
not vary depending on the basis
of any investment option
selected, or
(II) uses a computer model
under an investment advice
program meeting the
requirements of subparagraph
(C) in connection with the
provision of investment advice
by a fiduciary adviser to a
participant or beneficiary, and
(ii) with respect to which the
requirements of subparagraphs (D), (E),
(F), (G), (H), and (I) are met.
(C) Investment advice program using computer
model.--
(i) In general.--An investment advice
program meets the requirements of this
subparagraph if the requirements of
clauses (ii), (iii), and (iv) are met.
(ii) Computer model.--The
requirements of this clause are met if
the investment advice provided under
the investment advice program is
provided pursuant to a computer model
that--
(I) applies generally
accepted investment theories
that take into account the
historic returns of different
asset classes over defined
periods of time,
(II) utilizes relevant
information about the
participant, which may include
age, life expectancy,
retirement age, risk tolerance,
other assets or sources of
income, and preferences as to
certain types of investments,
(III) utilizes prescribed
objective criteria to provide
asset allocation portfolios
comprised of investment options
available under the plan,
(IV) operates in a manner
that is not biased in favor of
investments offered by the
fiduciary adviser or a person
with a material affiliation or
contractual relationship with
the fiduciary adviser, and
(V) takes into account all
investment options under the
plan in specifying how a
participant's account balance
should be invested and is not
inappropriately weighted with
respect to any investment
option.
(iii) Certification.--
(I) In general.--The
requirements of this clause are
met with respect to any
investment advice program if an
eligible investment expert
certifies, prior to the
utilization of the computer
model and in accordance with
rules prescribed by the
Secretary of Labor, that the
computer model meets the
requirements of clause (ii).
(II) Renewal of
certifications.--If, as
determined under regulations
prescribed by the Secretary of
Labor, there are material
modifications to a computer
model, the requirements of this
clause are met only if a
certification described in
subclause (I) is obtained with
respect to the computer model
as so modified.
(III) Eligible investment
expert.--The term ``eligible
investment expert'' means any
person which meets such
requirements as the Secretary
of Labor may provide and which
does not bear any material
affiliation or contractual
relationship with any
investment adviser or a related
person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(iv) Exclusivity of recommendation.--
The requirements of this clause are met
with respect to any investment advice
program if--
(I) the only investment
advice provided under the
program is the advice generated
by the computer model described
in clause (ii), and
(II) any transaction
described in subsection
(d)(17)(A)(ii) occurs solely at
the direction of the
participant or beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary from
requesting investment advice other than that
described in clause (i), but only if such
request has not been solicited by any person
connected with carrying out the arrangement.
(D) Express authorization by separate
fiduciary.--The requirements of this
subparagraph are met with respect to an
arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the
person offering the investment advice program,
any person providing investment options under
the plan, or any affiliate of either.
(E) Audits.--
(i) In general.--The requirements of
this subparagraph are met if an
independent auditor, who has
appropriate technical training or
experience and proficiency and so
represents in writing--
(I) conducts an annual audit
of the arrangement for
compliance with the
requirements of this paragraph,
and
(II) following completion of
the annual audit, issues a
written report to the fiduciary
who authorized use of the
arrangement which presents its
specific findings regarding
compliance of the arrangement
with the requirements of this
paragraph.
(ii) Special rule for individual
retirement and similar plans.--In the
case of a plan described in
subparagraphs (B) through (F) (and so
much of subparagraph (G) as relates to
such subparagraphs) of subsection
(e)(1), in lieu of the requirements of
clause (i), audits of the arrangement
shall be conducted at such times and in
such manner as the Secretary of Labor
may prescribe.
(iii) Independent auditor.--For
purposes of this subparagraph, an
auditor is considered independent if it
is not related to the person offering
the arrangement to the plan and is not
related to any person providing
investment options under the plan.
(F) Disclosure.--The requirements of this
subparagraph are met if--
(i) the fiduciary adviser provides to
a participant or a beneficiary before
the initial provision of the investment
advice with regard to any security or
other property offered as an investment
option, a written notification (which
may consist of notification by means of
electronic communication)--
(I) of the role of any party
that has a material affiliation
or contractual relationship
with the fiduciary adviser in
the development of the
investment advice program and
in the selection of investment
options available under the
plan,
(II) of the past performance
and historical rates of return
of the investment options
available under the plan,
(III) of all fees or other
compensation relating to the
advice that the fiduciary
adviser or any affiliate
thereof is to receive
(including compensation
provided by any third party) in
connection with the provision
of the advice or in connection
with the sale, acquisition, or
holding of the security or
other property,
(IV) of any material
affiliation or contractual
relationship of the fiduciary
adviser or affiliates thereof
in the security or other
property,
(V) of the manner, and under
what circumstances, any
participant or beneficiary
information provided under the
arrangement will be used or
disclosed,
(VI) of the types of services
provided by the fiduciary
adviser in connection with the
provision of investment advice
by the fiduciary adviser,
(VII) that the adviser is
acting as a fiduciary of the
plan in connection with the
provision of the advice, and
(VIII) that a recipient of
the advice may separately
arrange for the provision of
advice by another adviser, that
could have no material
affiliation with and receive no
fees or other compensation in
connection with the security or
other property, and
(ii) at all times during the
provision of advisory services to the
participant or beneficiary, the
fiduciary adviser--
(I) maintains the information
described in clause (i) in
accurate form and in the manner
described in subparagraph (H),
(II) provides, without
charge, accurate information to
the recipient of the advice no
less frequently than annually,
(III) provides, without
charge, accurate information to
the recipient of the advice
upon request of the recipient,
and
(IV) provides, without
charge, accurate information to
the recipient of the advice
concerning any material change
to the information required to
be provided to the recipient of
the advice at a time reasonably
contemporaneous to the change
in information.
(G) Other conditions.--The requirements of
this subparagraph are met if--
(i) the fiduciary adviser provides
appropriate disclosure, in connection
with the sale, acquisition, or holding
of the security or other property, in
accordance with all applicable
securities laws,
(ii) the sale, acquisition, or
holding occurs solely at the direction
of the recipient of the advice,
(iii) the compensation received by
the fiduciary adviser and affiliates
thereof in connection with the sale,
acquisition, or holding of the security
or other property is reasonable, and
(iv) the terms of the sale,
acquisition, or holding of the security
or other property are at least as
favorable to the plan as an arm's
length transaction would be.
(H) Standards for presentation of
information.--
(i) In general.--The requirements of
this subparagraph are met if the
notification required to be provided to
participants and beneficiaries under
subparagraph (F)(i) is written in a
clear and conspicuous manner and in a
manner calculated to be understood by
the average plan participant and is
sufficiently accurate and comprehensive
to reasonably apprise such participants
and beneficiaries of the information
required to be provided in the
notification.
(ii) Model form for disclosure of
fees and other compensation.--The
Secretary of Labor shall issue a model
form for the disclosure of fees and
other compensation required in
subparagraph (F)(i)(III) which meets
the requirements of clause (i).
(I) Maintenance for 6 years of evidence of
compliance.--The requirements of this
subparagraph are met if a fiduciary adviser who
has provided advice referred to in subparagraph
(A) maintains, for a period of not less than 6
years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of
this paragraph and of subsection (d)(17) have
been met. A transaction prohibited under
subsection (c) shall not be considered to have
occurred solely because the records are lost or
destroyed prior to the end of the 6-year period
due to circumstances beyond the control of the
fiduciary adviser.
(J) Definitions.--For purposes of this
paragraph and subsection (d)(17)--
(i) Fiduciary adviser.--The term
``fiduciary adviser'' means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice referred
to in subsection (e)(3)(B) by the
person to a participant or beneficiary
of the plan and who is--
(I) registered as an
investment adviser under the
Investment Advisers Act of 1940
(15 U.S.C. 80b-1 et seq.) or
under the laws of the State in
which the fiduciary maintains
its principal office and place
of business,
(II) a bank or similar
financial institution referred
to in subsection (d)(4) or a
savings association (as defined
in section 3(b)(1) of the
Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)), but
only if the advice is provided
through a trust department of
the bank or similar financial
institution or savings
association which is subject to
periodic examination and review
by Federal or State banking
authorities,
(III) an insurance company
qualified to do business under
the laws of a State,
(IV) a person registered as a
broker or dealer under the
Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.),
(V) an affiliate of a person
described in any of subclauses
(I) through (IV), or
(VI) an employee, agent, or
registered representative of a
person described in subclauses
(I) through (V) who satisfies
the requirements of applicable
insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this title, a person who
develops the computer model described in
subparagraph (C)(ii) or markets the investment
advice program or computer model shall be
treated as a person who is a fiduciary of the
plan by reason of the provision of investment
advice referred to in subsection (e)(3)(B) to a
participant or beneficiary and shall be treated
as a fiduciary adviser for purposes of this
paragraph and subsection (d)(17), except that
the Secretary of Labor may prescribe rules
under which only 1 fiduciary adviser may elect
to be treated as a fiduciary with respect to
the plan.
(ii) Affiliate.--The term
``affiliate'' of another entity means
an affiliated person of the entity (as
defined in section 2(a)(3) of the
Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(3))).
(iii) Registered representative.--The
term ``registered representative'' of
another entity means a person described
in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity
for the broker or dealer referred to in
such section) or a person described in
section 202(a)(17) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)) (substituting the entity for
the investment adviser referred to in
such section).
(9) Block trade.--The term ``block trade'' means any
trade of at least 10,000 shares or with a market value
of at least $200,000 which will be allocated across two
or more unrelated client accounts of a fiduciary.
(10) Adequate consideration.--The term ``adequate
consideration'' means--
(A) in the case of a security for which there
is a generally recognized market--
(i) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(ii) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(B) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary of
Labor.
(11) Correction period.--
(A) In general.--For purposes of subsection
(d)(23), the term ``correction period'' means
the 14-day period beginning on the date on
which the disqualified person discovers, or
reasonably should have discovered, that the
transaction would (without regard to this
paragraph and subsection (d)(23)) constitute a
prohibited transaction.
(B) Exceptions.--
(i) Employer securities.--Subsection
(d)(23) does not apply to any
transaction between a plan and a plan
sponsor or its affiliates that involves
the acquisition or sale of an employer
security (as defined in section
407(d)(1) of the Employee Retirement
Income Security Act of 1974) or the
acquisition, sale, or lease of employer
real property (as defined in section
407(d)(2) of such Act).
(ii) Knowing prohibited
transaction.--In the case of any
disqualified person, subsection (d)(23)
does not apply to a transaction if, at
the time the transaction is entered
into, the disqualified person knew (or
reasonably should have known) that the
transaction would (without regard to
this paragraph) constitute a prohibited
transaction.
(C) Abatement of tax where there is a
correction.--If a transaction is not treated as
a prohibited transaction by reason of
subsection (d)(23), then no tax under
subsections (a) and (b) shall be assessed with
respect to such transaction, and if assessed
the assessment shall be abated, and if
collected shall be credited or refunded as an
overpayment.
(D) Definitions.--For purposes of this
paragraph and subsection (d)(23)--
(i) Security.--The term ``security''
has the meaning given such term by
section 475(c)(2) (without regard to
subparagraph (F)(iii) and the last
sentence thereof).
(ii) Commodity.--The term
``commodity'' has the meaning given
such term by section 475(e)(2) (without
regard to subparagraph (D)(iii)
thereof).
(iii) Correct.--The term ``correct''
means, with respect to a transaction--
(I) to undo the transaction
to the extent possible and in
any case to make good to the
plan or affected account any
losses resulting from the
transaction, and
(II) to restore to the plan
or affected account any profits
made through the use of assets
of the plan.
(g) Application of section.--This section shall not apply--
(1) in the case of a plan to which a guaranteed
benefit policy (as defined in section 401(b)(2)(B) of
the Employee Retirement Income Security Act of 1974) is
issued, to any assets of the insurance company,
insurance service, or insurance organization merely
because of its issuance of such policy;
(2) to a governmental plan (within the meaning of
section 414(d)); or
(3) to a church plan (within the meaning of section
414(e)) with respect to which the election provided by
section 410(d) has not been made.
In the case of a plan which invests in any security issued by
an investment company registered under the Investment Company
Act of 1940, the assets of such plan shall be deemed to include
such security but shall not, by reason of such investment, be
deemed to include any assets of such company.
(h) Notification of Secretary of Labor.--Before sending a
notice of deficiency with respect to the tax imposed by
subsection (a) or (b), the Secretary shall notify the Secretary
of Labor and provide him a reasonable opportunity to obtain a
correction of the prohibited transaction or to comment on the
imposition of such tax.
(i) Cross reference.--For provisions concerning coordination
procedures between Secretary of Labor and Secretary of the
Treasury with respect to application of tax imposed by this
section and for authority to waive imposition of the tax
imposed by subsection (b), see section 3003 of the Employee
Retirement Income Security Act of 1974.
* * * * * * *
Subtitle E--Alcohol, Tobacco, and Certain Other Excise Taxes
* * * * * * *
CHAPTER 52--TOBACCO PRODUCTS AND CIGARETTE PAPERS AND TUBES
* * * * * * *
Subchapter D--OCCUPATIONAL TAX
* * * * * * *
SEC. 5733. PROVISIONS RELATING TO LIABILITY FOR OCCUPATIONAL TAXES.
(a) Partners.--Any number of persons doing business in
partnership at any one place shall be required to pay but one
special tax.
(b) Different businesses of same ownership and location.--
Whenever more than one of the pursuits or occupations described
in this subchapter are carried on in the same place by the same
person at the same time, except as otherwise provided in this
subchapter, the tax shall be paid for each according to the
rates severally prescribed.
(c) Businesses in more than one location.--
(1) Liability for tax.--The payment of a special tax
imposed by this subchapter shall not exempt from an
additional special tax the person carrying on a trade
or business in any other place than that stated in the
register kept in the office of the official in charge
of the internal revenue district.
(2) Storage.--Nothing contained in paragraph (1)
shall require a special tax for the storage of tobacco
products and cigarette papers and tubes at a location
other than the place where tobacco products and
cigarette papers and tubes are sold or offered for
sale.
(3) Definition of place.--The term ``place'' as used
in this section means the entire office, plant or area
of the business in any one location under the same
proprietorship; and passageways, streets, highways,
rail crossings, waterways, or partitions dividing the
premises, shall not be deemed sufficient separation to
require additional special tax, if the various
divisions are otherwise contiguous.
(d) Death or change of location.--Certain persons, other than
the person who has paid the special tax under this subchapter
for the carrying on of any business at any place, may secure
the right to carry on, without incurring additional special
tax, the same business at the same place for the remainder of
the taxable period for which the special tax was paid. The
persons who may secure such right are:
(1) the surviving spouse or child, or executor or
administrator or other legal representative, of a
deceased taxpayer;
(2) a [husband or wife] married individual succeeding
to the business of his or her living spouse;
(3) a receiver or trustee in bankruptcy, or an
assignee for benefit of creditors; and
(4) the partner or partners remaining after death or
withdrawal of a member of a partnership.
When any person moves to any place other than the place for
which special tax was paid for the carrying on of any business,
he may secure the right to carry on, without incurring
additional special tax, the same business at his new location
for the remainder of the taxable period for which the special
tax was paid. To secure the right to carry on the business
without incurring additional special tax, the successor, or the
person relocating his business, must register the succession or
relocation with the Secretary in accordance with regulations
prescribed by the Secretary.
(e) Federal agencies or instrumentalities.--Any tax imposed
by this subchapter shall apply to any agency or instrumentality
of the United States unless such agency or instrumentality is
granted by statute a specific exemption from such tax.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--RETURNS AND RECORDS
* * * * * * *
PART II--TAX RETURNS OR STATEMENTS
* * * * * * *
Subpart B--INCOME TAX RETURNS
Sec 6012. Persons required to make returns of income.
[Sec. 6013. Joint returns of income tax by husband and wife.]
Sec. 6013. Joint returns of income tax by a married couple.
* * * * * * *
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] the individual's
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] the individual's 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] the individual's 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.
(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);
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] JOINT
RETURNS OF INCOME TAX BY A MARRIED COUPLE .
(a) Joint returns.--A [husband and wife] married couple 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] either spouse at any time during the
taxable year is a nonresident alien;
(2) no joint return shall be made if the [husband and
wife] spouses 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] such spouse's 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] the
decedent's 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] with respect to both the
surviving spouse 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] constitute the
survivor's 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.]
(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 the individual and the individual's spouse
under subsection (a) and the time prescribed by law for
filing the return for such taxable year has expired,
such individual and such spouse may nevertheless make a
joint return for such taxable year. A joint return
filed under this subsection shall constitute the return
of the individual and the individual's spouse 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 a 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 the decedent's 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 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 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), where the
[husband and wife] spouses 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] the marital
status with respect to each other 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] the spouse of the individual 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] such individual, the individual's
spouse, and the individual's estate shall be
determined as if the individual 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] for which such
member 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] for
which such employee 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), 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).
Such regulations shall provide for the application of this
section in the case of [husband and wife] a married couple ,
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.
* * * * * * *
SEC. 6017. SELF-EMPLOYMENT TAX RETURNS.
Every individual (other than a nonresident alien individual)
having net earnings from self-employment of $400 or more for
the taxable year shall make a return with respect to the self-
employment tax imposed by chapter 2. In the case of a [husband
and wife] married couple filing a joint return under section
6013, the tax imposed by chapter 2 shall not be computed on the
aggregate income but shall be the sum of the taxes computed
under such chapter on the separate self-employment income of
each spouse.
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart B--INFORMATION CONCERNING TRANSACTIONS WITH OTHER PERSONS
* * * * * * *
SEC. 6046. RETURNS AS TO ORGANIZATION OR REORGANIZATION OF FOREIGN
CORPORATIONS AND AS TO ACQUISITIONS OF THEIR STOCK.
(a) Requirement of return.--
(1) In general.--A return complying with the
requirements of subsection (b) shall be made by--
(A) each United States citizen or resident
who becomes an officer or director of a foreign
corporation if a United States person (as
defined in section 7701(a)(30)) meets the stock
ownership requirements of paragraph (2) with
respect to such corporation,
(B) each United States person--
(i) who acquires stock which, when
added to any stock owned on the date of
such acquisition, meets the stock
ownership requirements of paragraph (2)
with respect to a foreign corporation,
or
(ii) who acquires stock which,
without regard to stock owned on the
date of such acquisition, meets the
stock ownership requirements of
paragraph (2) with respect to a foreign
corporation,
(C) each person (not described in
subparagraph (B)) who is treated as a United
States shareholder under section 953(c) with
respect to a foreign corporation, and
(D) each person who becomes a United States
person while meeting the stock ownership
requirements of paragraph (2) with respect to
stock of a foreign corporation.
In the case of a foreign corporation with respect to
which any person is treated as a United States
shareholder under section 953(c), subparagraph (A)
shall be treated as including a reference to each
United States person who is an officer or director of
such corporation.
(2) Stock ownership requirements.--A person meets the
stock ownership requirements of this paragraph with
respect to any corporation if such person owns 10
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.
(b) Form and contents of returns.--The returns required by
subsection (a) shall be in such form and shall set forth, in
respect of the foreign corporation, such information as the
Secretary prescribes by forms or regulations as necessary for
carrying out the provisions of the income tax laws, except that
in the case of persons described only in subsection (a)(1)(A)
the information required shall be limited to the names and
addresses of persons described in subparagraph (B) or (C) of
subsection (a)(1).
(c) Ownership of stock.--For purposes of subsection (a),
stock owned directly or indirectly by a person (including, in
the case of an individual, stock owned by members of [his] the
individual's family) shall be taken into account. For purposes
of the preceding sentence, the family of an individual shall be
considered as including only [his] the individual's brothers
and sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendants.
(d) Time for filing.--Any return required by subsection (a)
shall be filed on or before the 90th day after the day on
which, under any provision of subsection (a), the United States
citizen, resident, or person becomes liable to file such return
(or on or before such later day as the Secretary may by forms
or regulations prescribe).
(e) Limitation.--No information shall be required to be
furnished under this section with respect to any foreign
corporation unless such information was required to be
furnished under regulations which have been in effect for at
least 90 days before the date on which the United States
citizen, resident, or person becomes liable to file a return
required under subsection (a).
(f) Cross reference.--For provisions relating to penalties
for violations of this section, sections 6679 and 7203.
* * * * * * *
PART VIII--DESIGNATION OF INCOME TAX PAYMENTS TO PRESIDENTIAL ELECTION
CAMPAIGN FUND
* * * * * * *
SEC. 6096. DESIGNATION BY INDIVIDUALS.
(a) In general.--Every individual (other than a nonresident
alien) whose income tax liability for the taxable year is $3 or
more may designate that $3 shall be paid over to the
Presidential Election Campaign Fund in accordance with the
provisions of section 9006(a). In the case of a joint return
[of husband and wife having] reporting an income tax liability
of $6 or more, each spouse may designate that $3 shall be paid
to the fund.
(b) Income tax liability.--For purposes of subsection (a),
the income tax liability of an individual for any taxable year
is the amount of the tax imposed by chapter 1 on such
individual for such taxable year (as shown on his return),
reduced by the sum of the credits (as shown in his return)
allowable under part IV of subchapter A of chapter 1 (other
than subpart C thereof).
(c) Manner and time of designation.--A designation under
subsection (a) may be made with respect to any taxable year--
(1) at the time of filing the return of the tax
imposed by chapter 1 for such taxable year, or
(2) at any other time (after the time of filing the
return of the tax imposed by chapter 1 for such taxable
year) specified in regulations prescribed by the
Secretary.
Such designation shall be made in such manner as the Secretary
prescribes by regulations except that, if such designation is
made at the time of filing the return of the tax imposed by
chapter 1 for such taxable year, such designation shall be made
either on the first page of the return or on the page bearing
the taxpayer's signature.
* * * * * * *
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] the individual 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
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 for the order referred to in
clause (i). Upon such application, such
judge or magistrate 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 for
the order referred to in subparagraph
(C)(i). Upon such application, such
judge or magistrate 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 to competent authority under 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.
(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),
(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 62--TIME AND PLACE FOR PAYING TAX
* * * * * * *
Subchapter B--EXTENSIONS OF TIME FOR PAYMENT
* * * * * * *
SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSELY HELD
BUSINESS.
(a) 5-year deferral; 10-year installment payment.--
(1) In general.--If the value of an interest in a
closely held business which is included in determining
the gross estate of a decedent who was (at the date of
his death) a citizen or resident of the United States
exceeds 35 percent of the adjusted gross estate, the
executor may elect to pay part or all of the tax
imposed by section 2001 in 2 or more (but not exceeding
10) equal installments.
(2) Limitation.--The maximum amount of tax which may
be paid in installments under this subsection shall be
an amount which bears the same ratio to the tax imposed
by section 2001 (reduced by the credits against such
tax) as--
(A) the closely held business amount, bears
to
(B) the amount of the adjusted gross estate.
(3) Date for payment of installments.--If an election
is made under paragraph (1), the first installment
shall be paid on or before the date selected by the
executor which is not more than 5 years after the date
prescribed by section 6151(a) for payment of the tax,
and each succeeding installment shall be paid on or
before the date which is 1 year after the date
prescribed by this paragraph for payment of the
preceding installment.
(b) Definitions and special rules.--
(1) Interest in closely held business.--For purposes
of this section, the term ``interest in a closely held
business'' means--
(A) an interest as a proprietor in a trade or
business carried on as a proprietorship;
(B) an interest as a partner in a partnership
carrying on a trade or business, if--
(i) 20 percent or more of the total
capital interest in such partnership is
included in determining the gross
estate of the decedent, or
(ii) such partnership had 45 or fewer
partners; or
(C) stock in a corporation carrying on a
trade or business if--
(i) 20 percent or more in value of
the voting stock of such corporation is
included in determining the gross
estate of the decedent, or
(ii) such corporation had 45 or fewer
shareholders.
(2) Rules for applying paragraph (1).--For purposes
of paragraph (1)--
(A) Time for testing.--Determinations shall
be made as of the time immediately before the
decedent's death.
[(B) Certain interests held by husband and
wife.--Stock or a partnership interest which--
[(i) is community property of a
husband and wife (or the income from
which is community income) under the
applicable community property law of a
State, or
[(ii) is held by a husband and wife
as joint tenants, tenants by the
entirety, or tenants in common,
shall be treated as owned by one shareholder or
one partner, as the case may be.]
(B) Certain interests held by married
couple.--Stock or a partnership interest
which--
(i) is community property of a
married couple (or the income from
which is community income) under the
applicable community property law of a
State, or
(ii) is held by a married couple as
joint tenants, tenants by the entirety,
or tenants in common,
shall be treated as owned by 1 shareholder or 1
partner, as the case may be.
(C) Indirect ownership.--Property owned,
directly or indirectly, by or for a
corporation, partnership, estate, or trust
shall be considered as being owned
proportionately by or for its shareholders,
partners, or beneficiaries. For purposes of the
preceding sentence, a person shall be treated
as a beneficiary of any trust only if such
person has a present interest in the trust.
(D) Certain interests held by members of
decedent's family.--All stock and all
partnership interests held by the decedent or
by any member of his family (within the meaning
of section 267(c)(4)) shall be treated as owned
by the decedent.
(3) Farmhouses and certain other structures taken
into account.--For purposes of the 35-percent
requirement of subsection (a)(1), an interest in a
closely held business which is the business of farming
includes an interest in residential buildings and
related improvements on the farm which are occupied on
a regular basis by the owner or lessee of the farm or
by persons employed by such owner or lessee for
purposes of operating or maintaining the farm.
(4) Value.--For purposes of this section, value shall
be value determined for purposes of chapter 11
(relating to estate tax).
(5) Closely held business amount.--For purposes of
this section, the term ``closely held business amount''
means the value of the interest in a closely held
business which qualifies under subsection (a)(1).
(6) Adjusted gross estate.--For purposes of this
section, the term, ``adjusted gross estate'' means the
value of the gross estate reduced by the sum of the
amounts allowable as a deduction under section 2053 or
2054. Such sum shall be determined on the basis of the
facts and circumstances in existence on the date
(including extensions) for filing the return of tax
imposed by section 2001 (or, if earlier, the date on
which such return is filed).
(7) Partnership interests and stock which is not
readily tradable.--
(A) In general.--If the executor elects the
benefits of this paragraph (at such time and in
such manner as the Secretary shall by
regulations prescribe), then--
(i) for purposes of paragraph
(1)(B)(i) or (1)(C)(i) (whichever is
appropriate) and for purposes of
subsection (c), any capital interest in
a partnership and any non-readily-
tradable stock which (after the
application of paragraph (2)) is
treated as owned by the decedent shall
be treated as included in determining
the value of the decedent's gross
estate,
(ii) the executor shall be treated as
having selected under subsection (a)(3)
the date prescribed by section 6151(a),
and
(iii) for purposes of applying
section 6601(j), the 2-percent portion
(as defined in such section) shall be
treated as being zero.
(B) Non-readily-tradable stock defined.--For
purposes of this paragraph, the term ``non-
readily-tradable stock'' means stock for which,
at the time of the decedent's death, there was
no market on a stock exchange or in an over-
the-counter market.
(8) Stock in holding company treated as business
company stock in certain cases.--
(A) In general.--If the executor elects the
benefits of this paragraph, then--
(i) Holding company stock treated as
business company stock.--For purposes
of this section, the portion of the
stock of any holding company which
represents direct ownership (or
indirect ownership through 1 or more
other holding companies) by such
company in a business company shall be
deemed to be stock in such business
company.
(ii) 5-year deferral for principal
not to apply.--The executor shall be
treated as having selected under
subsection (a)(3) the date prescribed
by section 6151(a).
(iii) 2-percent interest rate not to
apply.--For purposes of applying
section 6601(j), the 2-percent portion
(as defined in such section) shall be
treated as being zero.
(B) All stock must be non-readily-tradable
stock.--
(i) In general.--No stock shall be
taken into account for purposes of
applying this paragraph unless it is
non-readily-tradable stock (within the
meaning of paragraph (7)(B)).
(ii) Special application where only
holding company stock is non-readily-
tradable stock.--If the requirements of
clause (i) are not met, but all of the
stock of each holding company taken
into account is non-readily-tradable,
then this paragraph shall apply, but
subsection (a)(1) shall be applied by
substituting ``5'' for ``10''.
(C) Application of voting stock requirement
of paragraph (1)(C)(i).--For purposes of clause
(i) of paragraph (1)(C), the deemed stock
resulting from the application of subparagraph
(A) shall be treated as voting stock to the
extent that voting stock in the holding company
owns directly (or through the voting stock of 1
or more other holding companies) voting stock
in the business company.
(D) Definitions.--For purposes of this
paragraph--
(i) Holding company.--The term
``holding company'' means any
corporation holding stock in another
corporation.
(ii) Business company.--The term
``business company'' means any
corporation carrying on a trade or
business.
(9) Deferral not available for passive assets.--
(A) In general.--For purposes of subsection
(a)(1) and determining the closely held
business amount (but not for purposes of
subsection (g)), the value of any interest in a
closely held business shall not include the
value of that portion of such interest which is
attributable to passive assets held by the
business.
(B) Passive asset defined.--For purposes of
this paragraph--
(i) In general.--The term ``passive
asset'' means any asset other than an
asset used in carrying on a trade or
business.
(ii) Stock treated as passive
asset.--The term ``passive asset''
includes any stock in another
corporation unless--
(I) such stock is treated as
held by the decedent by reason
of an election under paragraph
(8), and
(II) such stock qualified
under subsection (a)(1).
(iii) Exception for active
corporations.--If--
(I) a corporation owns 20
percent or more in value of the
voting stock of another
corporation, or such other
corporation has 45 or fewer
shareholders, and
(II) 80 percent or more of
the value of the assets of each
such corporation is
attributable to assets used in
carrying on a trade or
business,
then such corporations shall be treated as 1
corporation for purposes of clause (ii). For
purposes of applying subclause (II) to the
corporation holding the stock of the other
corporation, such stock shall not be taken into
account.
(10) Stock in qualifying lending and finance business
treated as stock in an active trade or business
company.--
(A) In general.--If the executor elects the
benefits of this paragraph, then--
(i) Stock in qualifying lending and
finance business treated as stock in an
active trade or business company.--For
purposes of this section, any asset
used in a qualifying lending and
finance business shall be treated as an
asset which is used in carrying on a
trade or business.
(ii) 5-year deferral for principal
not to apply.--The executor shall be
treated as having selected under
subsection (a)(3) the date prescribed
by section 6151(a).
(iii) 5 equal installments allowed.--
For purposes of applying subsection
(a)(1), ``5'' shall be substituted for
``10''.
(B) Definitions.--For purposes of this
paragraph--
(i) Qualifying lending and finance
business.--The term ``qualifying
lending and finance business'' means a
lending and finance business, if--
(I) based on all the facts
and circumstances immediately
before the date of the
decedent's death, there was
substantial activity with
respect to the lending and
finance business, or
(II) during at least 3 of the
5 taxable years ending before
the date of the decedent's
death, such business had at
least 1 full-time employee
substantially all of whose
services were the active
management of such business, 10
full-time, nonowner employees
substantially all of whose
services were directly related
to such business, and
$5,000,000 in gross receipts
from activities described in
clause (ii).
(ii) Lending and finance business.--
The term ``lending and finance
business'' means a trade or business
of--
(I) making loans,
(II) purchasing or
discounting accounts
receivable, notes, or
installment obligations,
(III) engaging in rental and
leasing of real and tangible
personal property, including
entering into leases and
purchasing, servicing, and
disposing of leases and leased
assets,
(IV) rendering services or
making facilities available in
the ordinary course of a
lending or finance business,
and
(V) rendering services or
making facilities available in
connection with activities
described in subclauses (I)
through (IV) carried on by the
corporation rendering services
or making facilities available,
or another corporation which is
a member of the same affiliated
group (as defined in section
1504 without regard to section
1504(b)(3)).
(iii) Limitation.--The term
``qualifying lending and finance
business'' shall not include any
interest in an entity, if the stock or
debt of such entity or a controlled
group (as defined in section 267(f)(1))
of which such entity was a member was
readily tradable on an established
securities market or secondary market
(as defined by the Secretary) at any
time within 3 years before the date of
the decedent's death.
(c) Special rule for interest in 2 or more closely held
businesses.--For purposes of this section, interest in 2 or
more closely held businesses, with respect to each of which
there is included in determining the value of the decedent's
gross estate 20 percent or more of the total value of each such
business, shall be treated as an interest in a single closely
held business. For purposes of the 20-percent requirement of
the preceding sentence, an interest in a closely held business
which represents the surviving spouse's interest in property
held by the decedent and the surviving spouse as community
property or as joint tenants, tenants by the entirety, or
tenants in common shall be treated as having been included in
determining the value of the decedent's gross estate.
(d) Election.--Any election under subsection (a) shall be
made not later than the time prescribed by section 6075(a) for
filing the return of tax imposed by section 2001 (including
extensions thereof), and shall be made in such manner as the
Secretary shall by regulations prescribe. If an election under
subsection (a) is made, the provisions of this subtitle shall
apply as though the Secretary were extending the time for
payment of the tax.
(e) Proration of deficiency to installments.--If an election
is made under subsection (a) to pay any part of the tax imposed
by section 2001 in installments and a deficiency has been
assessed, the deficiency shall (subject to the limitation
provided by subsection (a)(2)) be prorated to the installments
payable under subsection (a). The part of the deficiency so
prorated to any installment the date for payment of which has
not arrived shall be collected at the same time as, and as a
part of, such installment. The part of the deficiency so
prorated to any installment the date for payment of which has
arrived shall be paid upon notice and demand from the
Secretary. This subsection shall not apply if the deficiency is
due to negligence, to intentional disregard of rules and
regulations, or to fraud with intent to evade tax.
(f) Time for payment of interest.--If the time for payment of
any amount of tax has been extended under this section--
(1) Interest for first 5 years.--Interest payable
under section 6601 of any unpaid portion of such amount
attributable to the first 5 years after the date
prescribed by section 6151(a) for payment of the tax
shall be paid annually.
(2) Interest for periods after first 5 years.--
Interest payable under section 6601 on any unpaid
portion of such amount attributable to any period after
the 5-year period referred to in paragraph (1) shall be
paid annually at the same time as, and as a part of,
each installment payment of the tax.
(3) Interest in the case of certain deficiencies.--In
the case of a deficiency to which subsection (e)
applies which is assessed after the close of the 5-year
period referred to in paragraph (1), interest
attributable to such 5-year period, and interest
assigned under paragraph (2) to any installment the
date for payment of which has arrived on or before the
date of the assessment of the deficiency, shall be paid
upon notice and demand from the Secretary.
(4) Selection of shorter period.--If the executor has
selected a period shorter than 5 years under subsection
(a)(3), such shorter period shall be substituted for 5
years in paragraphs (1), (2), and (3) of this
subsection.
(g) Acceleration of payment.--
(1) Disposition of interest; withdrawal of funds from
business.--
(A) If--
(i)(I) any portion of an interest in
a closely held business which qualifies
under subsection (a)(1) is distributed,
sold, exchanged, or otherwise disposed
of, or
(II) money and other property
attributable to such an interest is
withdrawn from such trade or business,
and
(ii) the aggregate of such
distributions, sales, exchanges, or
other dispositions and withdrawals
equals or exceeds 50 percent of the
value of such interest,
then the extension of time for payment of tax
provided in subsection (a) shall cease to
apply, and the unpaid portion of the tax
payable in installments shall be paid upon
notice and demand from the Secretary.
(B) In the case of a distribution in
redemption of stock to which section 303 (or so
much of section 304 as relates to section 303)
applies--
(i) the redemption of such stock, and
the withdrawal of money and other
property distributed in such
redemption, shall not be treated as a
distribution or withdrawal for purposes
of subparagraph (A), and
(ii) for purposes of subparagraph
(A), the value of the interest in the
closely held business shall be
considered to be such value reduced by
the value of the stock redeemed.
This subparagraph shall apply only if, on or
before the date prescribed by subsection (a)(3)
for the payment of the first installment which
becomes due after the date of the distribution
(or, if earlier, on or before the day which is
1 year after the date of the distribution),
there is paid an amount of the tax imposed by
section 2001 not less than the amount of money
and other property distributed.
(C) Subparagraph (A)(i) does not apply to an
exchange of stock pursuant to a plan of
reorganization described in subparagraph (D),
(E), or (F) of section 368(a)(1) nor to an
exchange to which section 355 (or so much of
section 356 as relates to section 355) applies;
but any stock received in such an exchange
shall be treated for purposes of subparagraph
(A)(i) as an interest qualifying under
subsection (a)(1).
(D) Subparagraph (A)(i) does not apply to a
transfer of property of the decedent to a
person entitled by reason of the decedent's
death to receive such property under the
decedent's will, the applicable law of descent
and distribution, or a trust created by the
decedent. A similar rule shall apply in the
case of a series of subsequent transfers of the
property by reason of death so long as each
transfer is to a member of the family (within
the meaning of section 267(c)(4)) of the
transferor in such transfer.
(E) Changes in interest in holding company.--
If any stock in a holding company is treated as
stock in a business company by reason of
subsection (b)(8)(A)--
(i) any disposition of any interest
in such stock in such holding company
which was included in determining the
gross estate of the decedent, or
(ii) any withdrawal of any money or
other property from such holding
company attributable to any interest
included in determining the gross
estate of the decedent,
shall be treated for purposes of subparagraph
(A) as a disposition of (or a withdrawal with
respect to) the stock qualifying under
subsection (a)(1).
(F) Changes in interest in business
company.--If any stock in a holding company is
treated as stock in a business company by
reason of subsection (b)(8)(A)--
(i) any disposition of any interest
in such stock in the business company
by such holding company, or
(ii) any withdrawal of any money or
other property from such business
company attributable to such stock by
such holding company owning such stock,
shall be treated for purposes of subparagraph
(A) as a disposition of (or a withdrawal with
respect to) the stock qualifying under
subsection (a)(1).
(2) Undistributed income of estate.--
(A) If an election is made under this section
and the estate has undistributed net income for
any taxable year ending on or after the due
date for the first installment, the executor
shall, on or before the date prescribed by law
for filing the income tax return for such
taxable year (including extensions thereof),
pay an amount equal to such undistributed net
income in liquidation of the unpaid portion of
the tax payable in installments.
(B) For purposes of subparagraph (A), the
undistributed net income of the estate for any
taxable year is the amount by which the
distributable net income of the estate for such
taxable year (as defined in section 643)
exceeds the sum of--
(i) the amounts for such taxable year
specified in paragraphs (1) and (2) of
section 661(a) (relating to deductions
for distributions, etc.);
(ii) the amount of tax imposed for
the taxable year on the estate under
chapter 1; and
(iii) the amount of the tax imposed
by section 2001 (including interest)
paid by the executor during the taxable
year (other than any amount paid
pursuant to this paragraph).
(C) For purposes of this paragraph, if any
stock in a corporation is treated as stock in
another corporation by reason of subsection
(b)(8)(A), any dividends paid by such other
corporation to the corporation shall be treated
as paid to the estate of the decedent to the
extent attributable to the stock qualifying
under subsection (a)(1).
(3) Failure to make payment of principal or
interest.--
(A) In general.--Except as provided in
subparagraph (B), if any payment of principal
or interest under this section is not paid on
or before the date fixed for its payment by
this section (including any extension of time),
the unpaid portion of the tax payable in
installments shall be paid upon notice and
demand from the Secretary.
(B) Payment within 6 months.--If any payment
of principal or interest under this section is
not paid on or before the date determined under
subparagraph (A) but is paid within 6 months of
such date--
(i) the provisions of subparagraph
(A) shall not apply with respect to
such payment,
(ii) the provisions of section
6601(j) shall not apply with respect to
the determination of interest on such
payment, and
(iii) there is imposed a penalty in
an amount equal to the product of--
(I) 5 percent of the amount
of such payment, multiplied by
(II) the number of months (or
fractions thereof) after such
date and before payment is
made.
The penalty imposed under clause (iii) shall be
treated in the same manner as a penalty imposed
under subchapter B of chapter 68.
(h) Election in case of certain deficiencies.--
(1) In general.--If--
(A) a deficiency in the tax imposed by
section 2001 is assessed,
(B) the estate qualifies under subsection
(a)(1), and
(C) the executor has not made an election
under subsection (a),
the executor may elect to pay the deficiency in
installments. This subsection shall not apply if the
deficiency is due to negligence, to intentional
disregard of rules and regulations, or to fraud with
intent to evade tax.
(2) Time of election.--An election under this
subsection shall be made not later than 60 days after
issuance of notice and demand by the Secretary for the
payment of the deficiency, and shall be made in such
manner as the Secretary shall by regulations prescribe.
(3) Effect of election on payment.--If an election is
made under this subsection, the deficiency shall
(subject to the limitation provided by subsection
(a)(2)) be prorated to the installments which would
have been due if an election had been timely made under
subsection (a) at the time the estate tax return was
filed. The part of the deficiency so prorated to any
installment the date for payment of which would have
arrived shall be paid at the time of the making of the
election under this subsection. The portion of the
deficiency so prorated to installments the date for
payment of which would not have so arrived shall be
paid at the time such installments would have been due
if such an election had been made.
(i) Special rule for certain direct skips.--To the extent
that an interest in a closely held business is the subject of a
direct skip (within the meaning of section 2612(c)) occurring
at the same time as and as a result of the decedent's death,
then for purposes of this section any tax imposed by section
2601 on the transfer of such interest shall be treated as if it
were additional tax imposed by section 2001.
(j) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to the application of this
section.
(k) Cross references.--
(1) Security.--For authority of the Secretary to
require security in the case of an extension under this
section, see section 6165.
(2) Lien.--For special lien (in lieu of bond) in the
case of an extension under this section, see section
6324A.
(3) Period of limitation.--For extension of the
period of limitation in the case of an extension under
this section, see section 6503(d).
(4) Interest.--For provisions relating to interest on
tax payable in installments under this section, see
subsection (j) of section 6601.
(5) Transfers within 3 years of death.--For special
rule for qualifying an estate under this section where
property has been transferred within 3 years of
decedent's death, see section 2035(c)(2).
* * * * * * *
CHAPTER 63--ASSESSMENT
* * * * * * *
Subchapter B--DEFICIENCY PROCEDURES IN THE CASE OF INCOME, ESTATE,
GIFT, AND CERTAIN EXCISE TAXES
* * * * * * *
SEC. 6212. NOTICE OF DEFICIENCY.
(a) In general.--If the Secretary determines that there is a
deficiency in respect of any tax imposed by subtitles A or B or
chapter 41, 42, 43, or 44 he is authorized to send notice of
such deficiency to the taxpayer by certified mail or registered
mail. Such notice shall include a notice to the taxpayer of the
taxpayer's right to contact a local office of the taxpayer
advocate and the location and phone number of the appropriate
office.
(b) Address for notice of deficiency.--
(1) Income and gift taxes and certain excise taxes.--
In the absence of notice to the Secretary under section
6903 of the existence of a fiduciary relationship,
notice of a deficiency in respect of a tax imposed by
subtitle A, chapter 12, chapter 41, chapter 42, chapter
43, or chapter 44 if mailed to the taxpayer at his last
known address, shall be sufficient for purposes of
subtitle A, chapter 12, chapter 41, chapter 42, chapter
43, chapter 44, and this chapter even if such taxpayer
is deceased, or is under a legal disability, or, in the
case of a corporation, has terminated its existence.
(2) Joint income tax return.--In the case of a joint
income tax [return filed by husband and wife] return ,
such notice of deficiency may be a single joint notice,
except that if the Secretary has been notified by
either spouse that separate residences have been
established, then, in lieu of the single joint notice,
a duplicate original of the joint notice shall be sent
by certified mail or registered mail to each spouse at
[his last known address] the last known address of such
spouse .
(3) Estate tax.--In the absence of notice to the
Secretary under section 6903 of the existence of a
fiduciary relationship, notice of a deficiency in
respect of a tax imposed by chapter 11, if addressed in
the name of the decedent or other person subject to
liability and mailed to his last known address, shall
be sufficient for purposes of chapter 11 and of this
chapter.
(c) Further deficiency letters restricted.--
(1) General rule.--If the Secretary has mailed to the
taxpayer a notice of deficiency as provided in
subsection (a), and the taxpayer files a petition with
the Tax Court within the time prescribed in section
6213(a), the Secretary shall have no right to determine
any additional deficiency of income tax for the same
taxable year, of gift tax for the same calendar year,
of estate tax in respect of the taxable estate of the
same decedent, of chapter 41 tax for the same taxable
year, of chapter 43 tax for the same taxable year, of
chapter 44 tax for the same taxable year, of section
4940 tax for the same taxable year, or of chapter 42
tax, (other than under section 4940) with respect to
any act (or failure to act) to which such petition
relates, except in the case of fraud, and except as
provided in section 6214(a) (relating to assertion of
greater deficiencies before the Tax Court), in section
6213(b)(1) (relating to mathematical or clerical
errors), in section 6851 or 6852 (relating to
termination assessments), or in section 6861(c)
(relating to the making of jeopardy assessments).
(2) Cross references.--For assessment as a deficiency
notwithstanding the prohibition of further deficiency
letters, in the case of--
(A) Deficiency attributable to change
of treatment with respect to itemized
deductions, see section 63(e)(3).
(B) Deficiency attributable to gain
on involuntary conversion, see section
1033(a)(2)(C) and (D).
(C) Deficiency attributable to
activities not engaged in for profit,
see section 183(e)(4).
For provisions allowing determination of tax in title
11 cases, see section 505(a) of title 11 of the United
States Code.
(d) Authority to rescind notice of deficiency with taxpayer's
consent.--The Secretary may, with the consent of the taxpayer,
rescind any notice of deficiency mailed to the taxpayer. Any
notice so rescinded shall not be treated as a notice of
deficiency for purposes of subsection (c)(1) (relating to
further deficiency letters restricted), section 6213(a)
(relating to restrictions applicable to deficiencies; petition
to Tax Court), and section 6512(a) (relating to limitations in
case of petition to Tax Court), and the taxpayer shall have no
right to file a petition with the Tax Court based on such
notice. Nothing in this subsection shall affect any suspension
of the running of any period of limitations during any period
during which the rescinded notice was outstanding.
* * * * * * *
CHAPTER 66--LIMITATIONS
* * * * * * *
Subchapter A--LIMITATIONS ON ASSESSMENT AND COLLECTION
* * * * * * *
SEC. 6504. CROSS REFERENCES.
For limitation period in case of--
(1) Adjustments to accrued foreign taxes, see section
905(c).
(2) Change of treatment with respect to itemized
deductions where taxpayer and [his spouse] the
taxpayer's spouse make separate returns, see section
63(e)(3).
(3) Involuntary conversion of property, see section
1033(a)(2)(C) and (D).
(4) Application by fiduciary for discharge from
personal liability for estate tax, see section 2204.
(5) Insolvent banks and trust companies, see section
7507.
(6) Service in a combat zone, etc., see section 7508.
(7) Claims against transferees and fiduciaries, see
chapter 71.
(8) Assessments to recover excessive amounts paid
under section 6420 (relating to gasoline used on
farms), 6421 (relating to gasoline used for certain
nonhighway purposes or by local transit systems), or
6427 (relating to fuels not used for taxable purposes)
and assessments of civil penalties under section 6675
for excessive claims under section 6420, 6421, or 6427,
see section 6206.
(9) Assessment and collection of interest, see
section 6601(g).
(10) Assessment of civil penalties under section 6694
or 6695, see section 6696(d)(1).
* * * * * * *
CHAPTER 76--JUDICIAL PROCEEDINGS
* * * * * * *
Subchapter B--PROCEEDINGS BY TAXPAYERS AND THIRD PARTIES
* * * * * * *
SEC. 7428. DECLARATORY JUDGMENTS RELATING TO STATUS AND CLASSIFICATION
OF ORGANIZATIONS UNDER SECTION 501(C)(3), ETC.
(a) Creation of remedy.--In a case of actual controversy
involving--
(1) a determination by the Secretary--
(A) with respect to the initial qualification
or continuing qualification of an organization
as an organization described in section
501(c)(3) which is exempt from tax under
section 501(a) or as an organization described
in section 170(c)(2),
(B) with respect to the initial
classification or continuing classification of
an organization as a private foundation (as
defined in section 509(a)),
(C) with respect to the initial
classification or continuing classification of
an organization as a private operating
foundation (as defined in section 4942(j)(3)),
(D) with respect to the initial
classification or continuing classification of
a cooperative as an organization described in
section 521(b) which is exempt from tax under
section 521(a), or
(E) with respect to the initial qualification
or continuing qualification of an organization
as an organization described in section 501(c)
(other than paragraph (3)) or 501(d) and exempt
from tax under section 501(a), or
(2) a failure by the Secretary to make a
determination with respect to an issue referred to in
paragraph (1),
upon the filing of an appropriate pleading, the United States
Tax Court, the United States Court of Federal Claims, or the
district court of the United States for the District of
Columbia may make a declaration with respect to such initial
qualification or continuing qualification or with respect to
such initial classification or continuing classification. Any
such declaration shall have the force and effect of a decision
of the Tax Court or a final judgment or decree of the district
court or the Court of Federal Claims, as the case may be, and
shall be reviewable as such. For purposes of this section, a
determination with respect to a continuing qualification or
continuing classification includes any revocation of or other
change in a qualification or classification.
(b) Limitations.--
(1) Petitioner.--A pleading may be filed under this
section only by the organization the qualification or
classification of which is at issue.
(2) Exhaustion of administrative remedies.--A
declaratory judgment or decree under this section shall
not be issued in any proceeding unless the Tax Court,
the Court of Federal Claims, or the district court of
the United States for the District of Columbia
determines that the organization involved has exhausted
administrative remedies available to it within the
Internal Revenue Service. An organization requesting
the determination of an issue referred to in subsection
(a)(1) shall be deemed to have exhausted its
administrative remedies with respect to a failure by
the Secretary to make a determination with respect to
such issue at the expiration of 270 days after the date
on which the request for such determination was made if
the organization has taken, in a timely manner, all
reasonable steps to secure such determination.
(3) Time for bringing action.--If the Secretary sends
by certified or registered mail notice of his
determination with respect to an issue referred to in
subsection (a)(1) to the organization referred to in
paragraph (1), no proceeding may be initiated under
this section by such organization unless the pleading
is filed before the 91st day after the date of such
mailing.
(4) Nonapplication for certain revocations.--No
action may be brought under this section with respect
to any revocation of status described in section
6033(j)(1).
(c) Validation of certain contributions made during pendency
of proceedings.--
(1) In general.--If--
(A) the issue referred to in subsection
(a)(1) involves the revocation of a
determination that the organization is
described in section 170(c)(2),
(B) a proceeding under this section is
initiated within the time provided by
subsection (b)(3), and
(C) either--
(i) a decision of the Tax Court has
become final (within the meaning of
section 7481), or
(ii) a judgment of the district court
of the United States for the District
of Columbia has been entered, or
(iii) a judgment of the Court of
Federal Claims has been entered,
and such decision or judgment, as the case may
be, determines that the organization was not
described in section 170(c)(2),
then, notwithstanding such decision or judgment, such
organization shall be treated as having been described
in section 170(c)(2) for purposes of section 170 for
the period beginning on the date on which the notice of
the revocation was published and ending on the date on
which the court first determined in such proceeding
that the organization was not described in section
170(c)(2).
(2) Limitation.--Paragraph (1) shall apply only--
(A) with respect to individuals, and only to
the extent that the aggregate of the
contributions made by any individual to or for
the use of the organization during the period
specified in paragraph (1) does not exceed
$1,000 (for this purpose treating a [husband
and wife] married couple as one contributor),
and
(B) with respect to organizations described
in section 170(c)(2) which are exempt from tax
under section 501(a) (for this purpose
excluding any such organization with respect to
which there is pending a proceeding to revoke
the determination under section 170(c)(2)).
(3) Exception.--This subsection shall not apply to
any individual who was responsible, in whole or in
part, for the activities (or failures to act) on the
part of the organization which were the basis for the
revocation.
(d) Subpoena power for district court for District of
Columbia.--In any action brought under this section in the
district court of the United States for the District of
Columbia, a subpoena requiring the attendance of a witness at a
trial or hearing may be served at any place in the United
States.
* * * * * * *
Subchapter C--THE TAX COURT
* * * * * * *
PART I--ORGANIZATION AND JURISDICTION
* * * * * * *
SEC. 7448. ANNUITIES TO SURVIVING SPOUSES AND DEPENDENT CHILDREN OF
JUDGES AND SPECIAL TRIAL JUDGES.
(a) Definitions.--For purposes of this section--
(1) The term ``Tax Court'' means the United States
Tax Court.
(2) The term ``judge'' means the chief judge or a
judge of the Tax Court, including any individual
receiving retired pay (or compensation in lieu of
retired pay) under section 7447 whether or not
performing judicial duties pursuant to section 7447(c).
(3) The term ``chief judge'' means the chief judge of
the Tax Court.
(4) The term ``judge's salary'' means the salary of a
judge received under section 7443(c), retired pay
received under section 7447(d), and compensation (in
lieu of retired pay) received under section 7447(c).
(5) The term ``special trial judge'' means a judicial
officer appointed pursuant to section 7443A, including
any individual receiving an annuity under chapter 83 or
84 of title 5, United States Code.
(6) The term ``special trial judge's salary'' means
the salary of a special trial judge received under
section 7443A(d), any amount received as an annuity
under chapter 83 or 84 of title 5, United States Code.
(7) The term ``survivors annuity fund'' means the Tax
Court judges survivors annuity fund established by this
section.
(8) The term ``surviving spouse'' means a surviving
spouse of an individual, who either (A) shall have been
married to such individual for at least 2 years
immediately preceding [his death] the individual's
death or (B) is a parent of issue by such marriage, and
who has not remarried.
(9) The term ``dependent child'' means an unmarried
child, including a dependent stepchild or an adopted
child, who is under the age of 18 years or who because
of physical or mental disability is incapable of self-
support.
(b) Election.--
(1) Judges.--Any judge may by written election filed
while he is a judge (except that in the case of an
individual who is not reappointed following expiration
of his term of office, it may be made at any time
before the day after the day on which his successor
takes office) bring himself within the purview of this
section. In the case of any judge other than the chief
judge the election shall be filed with the chief judge;
in the case of the chief judge the election shall be
filed as prescribed by the Tax Court.
(2) Special trial judges.--Any special trial judge
may by written election filed with the chief judge
bring himself or herself within the purview of this
section. Such election shall be filed not later than
the later of 6 months after--
(A) 6 months after the date of the enactment
of this paragraph,
(B) the date the judge takes office, or
(C) the date the judge marries.
(c) Survivors annuity fund.--
(1) Salary deductions.--There shall be deducted and
withheld from the salary of each judge or special trial
judge electing under subsection (b) a sum equal to 3.5
percent of such judge's or special trial judge's
salary. The amounts so deducted and withheld from such
judge's or special trial judge's salary shall, in
accordance with such procedure as may be prescribed by
the Comptroller General of the United States, be
deposited in the Treasury of the United States to the
credit of a fund to be known as the ``Tax Court
judicial officers survivors annuity fund'' and said
fund is appropriated for the payment of annuities,
refunds, and allowances as provided by this section.
Each judge or special trial judge electing under
subsection (b) shall be deemed thereby to consent and
agree to the deductions from his salary as provided in
this subsection, and payment less such deductions shall
be a full and complete discharge and acquittance of all
claims and demands whatsoever for all judicial services
rendered by such judge or special trial judge during
the period covered by such payment, except the right to
the benefits to which he or his survivors shall be
entitled under the provisions of this section.
(2) Appropriations where unfunded liability.--
(A) In general.--Not later than the close of
each fiscal year, there shall be deposited in
the Treasury of the United States to the credit
of the survivors annuity fund, in accordance
with such procedures as may be prescribed by
the Comptroller General of the United States,
amounts required to reduce to zero the unfunded
liability (if any) of such fund. Subject to
appropriation Acts, such deposits shall be
taken from sums available for such fiscal year
for the payment of amounts described in
subsection (a)(4) and section 7443A(d), and
shall immediately become an integrated part of
such fund.
(B) Exception.--The amount required by
subparagraph (A) to be deposited in any fiscal
year shall not exceed an amount equal to 11
percent of the aggregate amounts described in
subsection (a)(4) and (a)(6) paid during such
fiscal year.
(C) Unfunded liability defined.--For purposes
of subparagraph (A), the term ``unfunded
liability'' means the amount estimated by the
Secretary to be equal to the excess (as of the
close of the fiscal year involved) of--
(i) the present value of all benefits
payable from the survivors annuity fund
(determined on an annual basis in
accordance with section 9503 of title
31, United States Code), over
(ii) the sum of--
(I) the present values of
future deductions under
subsection (c) and future
deposits under subsection (d),
plus
(II) the balance in such fund
as of the close of such fiscal
year.
(D) Amounts not credited to individual
accounts.--Amounts appropriated pursuant to
this paragraph shall not be credited to the
account of any individual for purposes of
subsection (g).
(d) Deposits in survivors annuity fund.--Each judge or
special trial judge electing under subsection (b) shall
deposit, with interest at 3 percent per annum, compounded on
December 31 of each year, to the credit of the survivors
annuity fund, a sum equal to 3.5 percent of [his] the
individual's judge's or special trial judge's salary and of
[his] the individual's basic salary, pay, or compensation for
service as a Senator, Representative, Delegate, or Resident
Commissioner in Congress, and for any other civilian service
within the purview of section 8332 of title 5 of the United
States Code. Each such judge or special trial judge may elect
to make such deposits in installments during the continuance of
[his] the individual's service as a judge or special trial
judge in such amount and under such conditions as may be
determined in each instance by the chief judge. Notwithstanding
the failure of a judge or special trial judge to make such
deposit, credit shall be allowed for the service rendered, but
the annuity of the surviving spouse of such judge or special
trial judge shall be reduced by an amount equal to 10 percent
of the amount of such deposit, computed as of the date of the
death of such judge or special trial judge, unless such
surviving spouse shall elect to eliminate such service entirely
from credit under subsection (n), except that no deposit shall
be required from a judge or special trial judge for any year
with respect to which deductions from [his] the individual's
salary were actually made under the civil service retirement
laws and no deposit shall be required for any honorable service
in the Army, Navy, Air Force, Marine Corps, or Coast Guard of
the United States.
(e) Investment of survivors annuity fund.--The Secretary of
the Treasury shall invest from time to time, in interest-
bearing securities of the United States or Federal farm loan
bonds, such portions of the survivors annuity fund as in his
judgment may not be immediately required for the payment of the
annuities, refunds, and allowances as provided in this section.
The income derived from such investments shall constitute a
part of said fund for the purpose of paying annuities and of
carrying out the provisions of subsections (g), (h), and (j).
(f) Crediting of deposits.--The amount deposited by or
deducted and withheld from the salary of each judge or special
trial judge electing to bring himself within the purview of
this section for credit to the survivors annuity fund shall be
credited to an individual account of such judge or special
trial judge.
(g) Termination.--If the service of any judge or special
trial judge electing under subsection (b) terminates other than
pursuant to the provisions of section 7447 or if any judge or
special trial judge ceases to be married after making the
election under subsection (b) and revokes (in a writing filed
as provided in subsection (b)) such election, the amount
credited to his individual account, together with interest at 3
percent per annum, compounded on December 31 of each year, to
the date of his relinquishment of office, shall be returned to
him. For the purpose of this section, the service of any judge
or special trial judge electing under subsection (b) who is not
reappointed following expiration of his term but who, at the
time of such expiration, is eligible for and elects to receive
retired pay under section 7447 shall be deemed to have
terminated pursuant to said section.
(h) Entitlement to annuity.--In case any judge or special
trial judge electing under subsection (b) shall die while a
judge or special trial judge after having rendered at least 5
years of civilian service computed as prescribed in subsection
(n), for the last 5 years of which the salary deductions
provided for by subsection (c)(1) or the deposits required by
subsection (d) have actually been made or the salary deductions
required by the civil service retirement laws have actually
been made--
(1) if such judge or special trial judge is survived
by a surviving spouse but not by a dependent child,
there shall be paid to such surviving spouse an annuity
beginning with the day of the death of the judge or
special trial judge or following the surviving spouse's
attainment of the age of 50 years, whichever is the
later, in an amount computed as provided in subsection
(m); or
(2) if such judge or special trial judge is survived
by a surviving spouse and a dependent child or
children, there shall be paid to such surviving spouse
an immediate annuity in an amount computed as provided
in subsection (m), and there shall also be paid to or
on behalf of each such child an immediate annuity equal
to the lesser of--
(A) 10 percent of the average annual salary
of such judge or special trial judge
(determined in accordance with subsection (m)),
or
(B) 20 percent of such average annual salary,
divided by the number of such children; or
(3) if such judge or special trial judge leaves no
surviving spouse but leaves a surviving dependent child
or children, there shall be paid to or on behalf of
each such child an immediate annuity equal to the
lesser of--
(A) 20 percent of the average annual salary
of such judge or special trial judge
(determined in accordance with subsection (m)),
or
(B) 40 percent of such average annual salary,
divided by the number of such children.
The annuity payable to a surviving spouse under this subsection
shall be terminable upon such surviving spouse's death or such
surviving spouse's remarriage before attaining age 55. The
annuity payable to a child under this subsection shall be
terminable upon (A) his attaining the age of 18 years, (B) his
marriage, or (C) his death, whichever first occurs, except that
if such child is incapable of self-support by reason of mental
or physical disability his annuity shall be terminable only
upon death, marriage, or recovery from such disability. In case
of the death of a surviving spouse of a judge or special trial
judge leaving a dependent child or children of the judge or
special trial judge surviving such spouse, the annuity of such
child or children shall be recomputed and paid as provided in
paragraph (3) of this subsection. In any case in which the
annuity of a dependent child is terminated under this
subsection, the annuities of any remaining dependent child or
children, based upon the service of the same judge or special
trial judge, shall be recomputed and paid as though the child
whose annuity was so terminated had not survived such judge or
special trial judge.
(i) Determination of dependency and disability.--Questions of
dependency and disability arising under this section shall be
determined by the chief judge subject to review only by the Tax
Court, the decision of which shall be final and conclusive. The
chief judge may order or direct at any time such medical or
other examinations as he shall deem necessary to determine the
facts relative to the nature and degree of disability of any
dependent child who is an annuitant or applicant for annuity
under this section, and may suspend or deny any such annuity
for failure to submit to any examination so ordered or
directed.
(j) Payments in certain cases.--(1) In any case in which--
(A) a judge or special trial judge electing under
subsection (b) shall die while in office (whether in
regular active service, retired from such service under
section 7447, or receiving any annuity under chapter 83
or 84 of title 5, United States Code), before having
rendered 5 years of civilian service computed as
prescribed in subsection (n), or after having rendered
5 years of such civilian service but without a survivor
or survivors entitled to annuity benefits provided by
subsection (h), or
(B) the right of all persons entitled to annuity
under subsection (h) based on the service of such judge
or special trial judge shall terminate before a valid
claim therefor shall have been established,
the total amount credited to the individual account of such
judge or special trial judge, with interest at 3 percent per
annum, compounded on December 31 of each year, to the date of
the death of such judge or special trial judge, shall be paid,
upon the establishment of a valid claim therefor, to the person
or persons surviving at the date title to the payment arises,
in the following order of precedence, and such payment shall be
a bar to recovery by any other person:
(i) to the beneficiary or beneficiaries whom the
judge or special trial judge may have designated by a
writing filed prior to his death with the chief judge,
except that in the case of the chief judge such
designation shall be by a writing filed by him, prior
to his death, as prescribed by the Tax Court;
(ii) if there be no such beneficiary, to the
surviving spouse of such judge or special trial judge;
(iii) if none of the above, to the child or children
of such judge or special trial judge and the
descendants of any deceased children by representation;
(iv) if none of the above, to the parents of such
judge or special trial judge or the survivor of them;
(v) if none of the above, to the duly appointed
executor or administrator of the estate of such judge
or special trial judge; and
(vi) if none of the above, to such other next of kin
of such judge or special trial judge as may be
determined by the chief judge to be entitled under the
laws of the domicile of such judge or special trial
judge at the time of his death.
Determination as to the surviving spouse, child, or parent of a
judge or special trial judge for the purposes of this paragraph
shall be made by the chief judge without regard to the
definitions in paragraphs (8) and (9) of subsection (a).
(2) In any case in which the annuities of all persons
entitled to annuity based upon the service of a judge or
special trial judge shall terminate before the aggregate amount
of annuity paid equals the total amount credited to the
individual account of such judge or special trial judge, with
interest at 3 percent per annum, compounded on December 31 of
each year, to the date of the death of such judge or special
trial judge, the difference shall be paid, upon establishment
of a valid claim therefor, in the order of precedence
prescribed in paragraph (1).
(3) Any accrued annuity remaining unpaid upon the termination
(other than by death) of the annuity of any person based upon
the service of a judge or special trial judge shall be paid to
such person. Any accrued annuity remaining unpaid upon the
death of any person receiving annuity based upon the service of
a judge or special trial judge shall be paid, upon the
establishment of a valid claim therefor, in the following order
of precedence:
(A) to the duly appointed executor or administrator
of the estate of such person;
(B) if there is no such executor or administrator
payment may be made, after the expiration of thirty
days from the date of the death of such person, to such
individual or individuals as may appear in the judgment
of the chief judge to be legally entitled thereto, and
such payment shall be a bar to recovery by any other
individual.
(k) Payments to persons under legal disability.--Where any
payment under this section is to be made to a minor, or to a
person mentally incompetent or under other legal disability
adjudged by a court of competent jurisdiction, such payment may
be made to the person who is constituted guardian or other
fiduciary by the law of the State of residence of such claimant
or is otherwise legally vested with the care of the claimant or
his estate. Where no guardian or other fiduciary of the person
under legal disability has been appointed under the laws of the
State of residence of the claimant, the chief judge shall
determine the person who is otherwise legally vested with the
care of the claimant or his estate.
(l) Method of payment of annuities.--Annuities granted under
the terms of this section shall accrue monthly and shall be due
and payable in monthly installments on the first business day
of the month following the month or other period for which the
annuity shall have accrued. None of the moneys mentioned in
this section shall be assignable, either in law or in equity,
or subject to execution, levy, attachment, garnishment, or
other legal process.
(m) Computation of annuities.--The annuity of the surviving
spouse of a judge or special trial judge electing under
subsection (b) shall be an amount equal to the sum of (1) 1.5
percent of the average annual salary (whether judge's or
special trial judge's salary or compensation for other
allowable service) received by such judge or special trial
judge for judicial service (including periods in which [he]
such judge or special trial judge received retired pay under
section 7447(d) or any annuity under chapter 83 or 84 of title
5, United States Code) or for any other prior allowable service
during the period of 3 consecutive years in which [he] such
judge or special trial judge received the largest such average
annual salary, multiplied by the sum of [his] the individual's
years of such judicial service, [his] the individual's years of
prior allowable service as a Senator, Representative, Delegate,
or Resident Commissioner in Congress, [his] the individual's
years of prior allowable service performed as a member of the
Armed Forces of the United States, and [his] the individual's
years, not exceeding 15, of prior allowable service performed
as a congressional employee (as defined in section 2107 of
title 5 of the United States Code), and (2) three-fourths of 1
percent of such average annual salary multiplied by [his] the
individual's years of any other prior allowable service, except
that such annuity shall not exceed an amount equal to 50
percent of such average annual salary, nor be less than an
amount equal to 25 percent of such average annual salary, and
shall be further reduced in accordance with subsection (d) (if
applicable). In determining the period of 3 consecutive years
referred to in the preceding sentence, there may not be taken
into account any period for which an election under section
7447(f)(4) is in effect.
(n) Includible service.--Subject to the provisions of
subsection (d), the years of service of a judge or special
trial judge which are allowable as the basis for calculating
the amount of the annuity of [his] the individual's surviving
spouse shall include [his] the individual's years of service as
a member of the United States Board of Tax Appeals, as a judge
or special trial judge of the Tax Court of the United States,
and as a judge or special trial judge of the Tax Court, [his]
the individual's years of service pursuant to any appointment
under section 7443A, [his] the individual's years of service as
a Senator, Representative, Delegate, or Resident Commissioner
in Congress, [his] the individual's years of active service as
a member of the Armed Forces of the United States not exceeding
5 years in the aggregate and not including any such service for
which credit is allowed for the purposes of retirement or
retired pay under any other provision of law, and [his] the
individual's years of any other civilian service within the
purview of section 8332 of title 5 of the United States Code.
(o) Simultaneous entitlement.--Nothing contained in this
section shall be construed to prevent a surviving spouse
eligible therefor from simultaneously receiving an annuity
under this section and any annuity to which such spouse would
otherwise be entitled under any other law without regard to
this section, but in computing such other annuity service used
in the computation of such spouse's annuity under this section
shall not be credited.
(p) Estimates of expenditures.--The chief judge shall submit
to the President annual estimates of the expenditures and
appropriations necessary for the maintenance and operation of
the survivors annuity fund, and such supplemental and
deficiency estimates as may be required from time to time for
the same purposes, according to law. The chief judge shall
cause periodic examinations of the survivors annuity fund to be
made by an actuary, who may be an actuary employed by another
department of the Government temporarily assigned for the
purpose, and whose findings and recommendations shall be
transmitted by the chief judge to the Tax Court.
(q) Transitional provision.--In the case of a judge who dies
within 6 months after the date of enactment of this section
after having rendered at least 5 years of civilian service
computed as prescribed in subsection (n), but without having
made an election as provided in subsection (b), an annuity
shall be paid to [his] such judge's surviving spouse and
surviving dependents as is provided in this section, as if such
judge had elected on the day of [his] such judge's death [to
bring himself] to come within the purview of this section but
had not made the deposit provided for by subsection (d). An
annuity shall be payable under this section computed upon the
basis of the actual length of service as a judge and other
allowable service of the judge and subject to the reduction
required by subsection (d) even though no deposit has been
made, as required by subsection (h) with respect to any of such
service.
(r) Waiver of civil service benefits.--Any judge electing
under subsection (b) shall, at the time of such election, waive
all benefits under the civil service retirement laws. Such a
waiver shall be made in the same manner and shall have the same
force and effect as an election filed under section 7447(e).
(s) Increases in survivor annuities.--Each time that an
increase is made under section 8340(b) of title 5, United
States Code, in annuities payable under subchapter III of
chapter 83 of that title, each annuity payable from the
survivors annuity fund under this section shall be increased at
the same time by the same percentage by which annuities are
increased under such section 8340(b).
(t) Authorization of appropriation.--Funds necessary to carry
out the provisions of this section may be appropriated out of
any money in the Treasury not otherwise appropriated.
* * * * * * *
CHAPTER 79--DEFINITIONS
* * * * * * *
SEC. 7701. DEFINITIONS.
(a) When used in this title, where not otherwise distinctly
expressed or manifestly incompatible with the intent thereof--
(1) Person.--The term ``person'' shall be construed
to mean and include an individual, a trust, estate,
partnership, association, company or corporation.
(2) Partnership and partner.--The term
``partnership'' includes a syndicate, group, pool,
joint venture, or other unincorporated organization,
through or by means of which any business, financial
operation, or venture is carried on, and which is not,
within the meaning of this title, a trust or estate or
a corporation; and the term ``partner'' includes a
member in such a syndicate, group, pool, joint venture,
or organization.
(3) Corporation.--The term ``corporation'' includes
associations, joint-stock companies, and insurance
companies.
(4) Domestic.--The term ``domestic'' when applied to
a corporation or partnership means created or organized
in the United States or under the law of the United
States or of any State unless, in the case of a
partnership, the Secretary provides otherwise by
regulations.
(5) Foreign.--The term ``foreign'' when applied to a
corporation or partnership means a corporation or
partnership which is not domestic.
(6) Fiduciary.--The term ``fiduciary'' means a
guardian, trustee, executor, administrator, receiver,
conservator, or any person acting in any fiduciary
capacity for any person.
(7) Stock.--The term ``stock'' includes shares in an
association, joint-stock company, or insurance company.
(8) Shareholder.--The term ``shareholder'' includes a
member in an association, joint-stock company, or
insurance company.
(9) United States.--The term ``United States'' when
used in a geographical sense includes only the States
and the District of Columbia.
(10) State.--The term ``State'' shall be construed to
include the District of Columbia, where such
construction is necessary to carry out provisions of
this title.
(11) Secretary of the Treasury and Secretary.--
(A) Secretary of the Treasury.--The term
``Secretary of the Treasury'' means the
Secretary of the Treasury, personally, and
shall not include any delegate of his.
(B) Secretary.--The term ``Secretary'' means
the Secretary of the Treasury or his delegate.
(12) Delegate.--
(A) In general.--The term ``or his
delegate''--
(i) when used with reference to the
Secretary of the Treasury, means any
officer, employee, or agency of the
Treasury Department duly authorized by
the Secretary of the Treasury directly,
or indirectly by one or more
redelegations of authority, to perform
the function mentioned or described in
the context; and
(ii) when used with reference to any
other official of the United States,
shall be similarly construed.
(B) Performance of certain functions in Guam
or American Samoa.--The term ``delegate,'' in
relation to the performance of functions in
Guam or American Samoa with respect to the
taxes imposed by chapters 1, 2, and 21, also
includes any officer or employee of any other
department or agency of the United States, or
of any possession thereof, duly authorized by
the Secretary (directly, or indirectly by one
or more redelegations of authority) to perform
such functions.
(13) Commissioner.--The term ``Commissioner'' means
the Commissioner of Internal Revenue.
(14) Taxpayer.--The term ``taxpayer'' means any
person subject to any internal revenue tax.
(15) Military or naval forces and armed forces of the
United States.--The term ``military or naval forces of
the United States'' and the term ``Armed Forces of the
United States'' each includes all regular and reserve
components of the uniformed services which are subject
to the jurisdiction of the Secretary of Defense, the
Secretary of the Army, the Secretary of the Navy, or
the Secretary of the Air Force, and each term also
includes the Coast Guard. The members of such forces
include commissioned officers and personnel below the
grade of commissioned officers in such forces.
(16) Withholding agent.--The term ``withholding
agent'' means any person required to deduct and
withhold any tax under the provisions of section 1441,
1442, 1443, or 1461.
[(17) Husband and wife.--As used in section 2516, if
the husband and wife therein referred to are divorced,
wherever appropriate to the meaning of such section,
the term ``wife'' shall be read ``former wife'' and the
term ``husband'' shall be read ``former husband''; and,
if the payments described in such section are made by
or on behalf of the wife or former wife to the husband
or former husband instead of vice versa, wherever
appropriate to the meaning of such section, the term
``husband'' shall be read ``wife'' and the term
``wife'' shall be read ``husband.'']
(18) International organization.--The term
``international organization'' means a public
international organization entitled to enjoy
privileges, exemptions, and immunities as an
international organization under the International
Organizations Immunities Act (22 U.S.C. 288-288f).
(19) Domestic building and loan association.--The
term ``domestic building and loan association'' means a
domestic building and loan association, a domestic
savings and loan association, and a Federal savings and
loan association--
(A) which is subject by law to supervision
and examination by State or Federal authority
having supervision over such associations;
(B) the business of which consists
principally of acquiring the savings of the
public and investing in loans; and
(C) at least 60 percent of the amount of the
total assets of which (at the close of the
taxable year) consists of--
(i) cash,
(ii) obligations of the United States
or of a State or political subdivision
thereof, and stock or obligations of a
corporation which is an instrumentality
of the United States or of a State or
political subdivision thereof, but not
including obligations the interest on
which is excludable from gross income
under section 103,
(iii) certificates of deposit in, or
obligations of, a corporation organized
under a State law which specifically
authorizes such corporation to insure
the deposits or share accounts of
member associations,
(iv) loans secured by a deposit or
share of a member,
(v) loans (including redeemable
ground rents, as defined in section
1055) secured by an interest in real
property which is (or, from the
proceeds of the loan, will become)
residential real property or real
property used primarily for church
purposes, loans made for the
improvement of residential real
property or real property used
primarily for church purposes, provided
that for purposes of this clause,
residential real property shall include
single or multifamily dwellings,
facilities in residential developments
dedicated to public use or property
used on a nonprofit basis for
residents, and mobile homes not used on
a transient basis,
(vi) loans secured by an interest in
real property located within an urban
renewal area to be developed for
predominantly residential use under an
urban renewal plan approved by the
Secretary of Housing and Urban
Development under part A or part B of
title I of the Housing Act of 1949, as
amended, or located within any area
covered by a program eligible for
assistance under section 103 of the
Demonstration Cities and Metropolitan
Development Act of 1966, as amended,
and loans made for the improvement of
any such real property,
(vii) loans secured by an interest in
educational, health, or welfare
institutions or facilities, including
structures designed or used primarily
for residential purposes for students,
residents, and persons under care,
employees, or members of the staff of
such institutions or facilities,
(viii) property acquired through the
liquidation of defaulted loans
described in clause (v), (vi), or
(vii),
(ix) loans made for the payment of
expenses of college or university
education or vocational training, in
accordance with such regulations as may
be prescribed by the Secretary,
(x) property used by the association
in the conduct of the business
described in subparagraph (B), and
(xi) any regular or residual interest
in a REMIC, but only in the proportion
which the assets of such REMIC consist
of property described in any of the
preceding clauses of this subparagraph;
except that if 95 percent or more of
the assets of such REMIC are assets
described in clauses (i) through (x),
the entire interest in the REMIC shall
qualify.
At the election of the taxpayer, the percentage
specified in this subparagraph shall be applied
on the basis of the average assets outstanding
during the taxable year, in lieu of the close
of the taxable year, computed under regulations
prescribed by the Secretary. For purposes of
clause (v), if a multifamily structure securing
a loan is used in part for nonresidential
purposes, the entire loan is deemed a
residential real property loan if the planned
residential use exceeds 80 percent of the
property's planned use (determined as of the
time the loan is made). For purposes of clause
(v), loans made to finance the acquisition or
development of land shall be deemed to be loans
secured by an interest in residential real
property if, under regulations prescribed by
the Secretary, there is reasonable assurance
that the property will become residential real
property within a period of 3 years from the
date of acquisition of such land; but this
sentence shall not apply for any taxable year
unless, within such 3-year period, such land
becomes residential real property. For purposes
of determining whether any interest in a REMIC
qualifies under clause (xi), any regular
interest in another REMIC held by such REMIC
shall be treated as a loan described in a
preceding clause under principles similar to
the principles of clause (xi); except that, if
such REMIC's are part of a tiered structure,
they shall be treated as 1 REMIC for purposes
of clause (xi).
(20) Employee.--For the purpose of applying the
provisions of section 79 with respect to group-term
life insurance purchased for employees, for the purpose
of applying the provisions of sections 104, 105, and
106 with respect to accident and health insurance or
accident and health plans, and for the purpose of
applying the provisions of subtitle A with respect to
contributions to or under a stock bonus, pension,
profit-sharing, or annuity plan, and with respect to
distributions under such a plan, or by a trust forming
part of such a plan, and for purposes of applying
section 125 with respect to cafeteria plans, the term
``employee'' shall include a full-time life insurance
salesman who is considered an employee for the purpose
of chapter 21.
(21) Levy.--The term ``levy'' includes the power of
distraint and seizure by any means.
(22) Attorney General.--The term ``Attorney General''
means the Attorney General of the United States.
(23) Taxable year.--The term ``taxable year'' means
the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the taxable
income is computed under subtitle A. ``Taxable year''
means, in the case of a return made for a fractional
part of a year under the provisions of subtitle A or
under regulations prescribed by the Secretary, the
period for which such return is made.
(24) Fiscal year.--The term ``fiscal year'' means an
accounting period of 12 months ending on the last day
of any month other than December.
(25) Paid or incurred, paid or accrued.--The terms
``paid or incurred'' and ``paid or accrued'' shall be
construed according to the method of accounting upon
the basis of which the taxable income is computed under
subtitle A.
(26) Trade or business.--The term ``trade or
business'' includes the performance of the functions of
a public office.
(27) Tax Court.--The term ``Tax Court'' means the
United States Tax Court.
(28) Other terms.--Any term used in this subtitle
with respect to the application of, or in connection
with, the provisions of any other subtitle of this
title shall have the same meaning as in such
provisions.
(29) Internal Revenue Code.--The term ``Internal
Revenue Code of 1986'' means this title, and the term
``Internal Revenue Code of 1939'' means the Internal
Revenue Code enacted February 10, 1939, as amended.
(30) United States person.--The term ``United States
person'' means--
(A) a citizen or resident of the United
States,
(B) a domestic partnership,
(C) a domestic corporation,
(D) any estate (other than a foreign estate,
within the meaning of paragraph (31)), and
(E) any trust if--
(i) a court within the United States
is able to exercise primary supervision
over the administration of the trust,
and
(ii) one or more United States
persons have the authority to control
all substantial decisions of the trust.
(31) Foreign estate or trust.--
(A) Foreign estate.--The term ``foreign
estate'' means an estate the income of which,
from sources without the United States which is
not effectively connected with the conduct of a
trade or business within the United States, is
not includible in gross income under subtitle
A.
(B) Foreign trust.--The term ``foreign
trust'' means any trust other than a trust
described in subparagraph (E) of paragraph
(30).
(32) Cooperative bank.--The term ``cooperative bank''
means an institution without capital stock organized
and operated for mutual purposes and without profit,
which--
(A) is subject by law to supervision and
examination by State or Federal authority
having supervision over such institutions, and
(B) meets the requirements of subparagraphs
(B) and (C) of paragraph (19) of this
subsection (relating to definition of domestic
building and loan association).
In determining whether an institution meets the
requirements referred to in subparagraph (B) of this
paragraph, any reference to an association or to a
domestic building and loan association contained in
paragraph (19) shall be deemed to be a reference to
such institution.
(33) Regulated public utility.--The term ``regulated
public utility'' means--
(A) A corporation engaged in the furnishing
or sale of--
(i) electric energy, gas, water, or
sewerage disposal services, or
(ii) transportation (not included in
subparagraph (C)) on an intrastate,
suburban, municipal, or interurban
electric railroad, on an intrastate,
municipal, or suburban trackless
trolley system, or on a municipal or
suburban bus system, or
(iii) transportation (not included in
clause (ii)) by motor vehicle--
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 an agency or instrumentality of the
United States, by a public service or public
utility commission or other similar body of the
District of Columbia or of any State or
political subdivision thereof, or by a foreign
country or an agency or instrumentality or
political subdivision thereof.
(B) A corporation engaged as a common carrier
in the furnishing or sale of transportation of
gas by pipe line, if subject to the
jurisdiction of the Federal Energy Regulatory
Commission.
(C) A corporation engaged as a common carrier
(i) in the furnishing or sale of transportation
by railroad, if subject to the jurisdiction of
the Surface Transportation Board, or (ii) in
the furnishing or sale of transportation of oil
or other petroleum products (including shale
oil) by pipe line, if subject to the
jurisdiction of the Federal Energy Regulatory
Commission or if the rates for such furnishing
or sale are subject to the jurisdiction of a
public service or public utility commission or
other similar body of the District of Columbia
or of any State.
(D) A corporation engaged in the furnishing
or sale of telephone or telegraph service, if
the rates for such furnishing or sale meet the
requirements of subparagraph (A).
(E) A corporation engaged in the furnishing
or sale of transportation as a common carrier
by air, subject to the jurisdiction of the
Secretary of Transportation.
(F) A corporation engaged in the furnishing
or sale of transportation by a water carrier
subject to jurisdiction under subchapter II of
chapter 135 of title 49.
(G) A rail carrier subject to part A of
subtitle IV of title 49, if (i) substantially
all of its railroad properties have been leased
to another such railroad corporation or
corporations by an agreement or agreements
entered into before January 1, 1954, (ii) each
lease is for a term of more than 20 years, and
(iii) at least 80 percent or more of its gross
income (computed without regard to dividends
and capital gains and losses) for the taxable
year is derived from such leases and from
sources described in subparagraphs (A) through
(F), inclusive. For purposes of the preceding
sentence, an agreement for lease of railroad
properties entered into before January 1, 1954,
shall be considered to be a lease including
such term as the total number of years of such
agreement may, unless sooner terminated, be
renewed or continued under the terms of the
agreement, and any such renewal or continuance
under such agreement shall be considered part
of the lease entered into before January 1,
1954.
(H) A common parent corporation which is a
common carrier by railroad subject to part A of
subtitle IV of title 49 if at least 80 percent
of its gross income (computed without regard to
capital gains or losses) is derived directly or
indirectly from sources described in
subparagraphs (A) through (F), inclusive. For
purposes of the preceding sentence, dividends
and interest, and income from leases described
in subparagraph (G), received from a regulated
public utility shall be considered as derived
from sources described in subparagraphs (A)
through (F), inclusive, if the regulated public
utility is a member of an affiliated group (as
defined in section 1504) which includes the
common parent corporation.
The term ``regulated public utility'' does not (except
as provided in subparagraphs (G) and (H)) include a
corporation described in subparagraphs (A) through (F),
inclusive, unless 80 percent or more of its gross
income (computed without regard to dividends and
capital gains and losses) for the taxable year is
derived from sources described in subparagraphs (A)
through (F), inclusive. If the taxpayer establishes to
the satisfaction of the Secretary that (i) its revenue
from regulated rates described in subparagraph (A) or
(D) and its revenue derived from unregulated rates are
derived from the operation of a single interconnected
and coordinated system or from the operation of more
than one such system, and (ii) the unregulated rates
have been and are substantially as favorable to users
and consumers as are the regulated rates, then such
revenue from such unregulated rates shall be
considered, for purposes of the preceding sentence, as
income derived from sources described in subparagraph
(A) or (D).
(35) Enrolled actuary.--The term ``enrolled actuary''
means a person who is enrolled by the Joint Board for
the Enrollment of Actuaries established under subtitle
C of the title III of the Employee Retirement Income
Security Act of 1974.
(36) Tax return preparer.--
(A) In general.--The term ``tax return
preparer'' means any person who prepares for
compensation, or who employs one or more
persons to prepare for compensation, any return
of tax imposed by this title or any claim for
refund of tax imposed by this title. For
purposes of the preceding sentence, the
preparation of a substantial portion of a
return or claim for refund shall be treated as
if it were the preparation of such return or
claim for refund.
(B) Exceptions.--A person shall not be a
``tax return preparer'' merely because such
person--
(i) furnishes typing, reproducing, or
other mechanical assistance,
(ii) prepares a return or claim for
refund of the employer (or of an
officer or employee of the employer) by
whom he is regularly and continuously
employed,
(iii) prepares as a fiduciary a
return or claim for refund for any
person, or
(iv) prepares a claim for refund for
a taxpayer in response to any notice of
deficiency issued to such taxpayer or
in response to any waiver of
restriction after the commencement of
an audit of such taxpayer or another
taxpayer if a determination in such
audit of such other taxpayer directly
or indirectly affects the tax liability
of such taxpayer.
(37) Individual retirement plan.--The term
``individual retirement plan'' means--
(A) an individual retirement account
described in section 408(a), and
(B) an individual retirement annuity
described in section 408(b).
(38) Joint return.--The term ``joint return'' means a
single return made jointly under section 6013 by a
[husband and wife] married couple .
(39) Persons residing outside United States.--If any
citizen or resident of the United States does not
reside in (and is not found in) any United States
judicial district, such citizen or resident shall be
treated as residing in the District of Columbia for
purposes of any provision of this title relating to--
(A) jurisdiction of courts, or
(B) enforcement of summons.
(40) Indian tribal government.--
(A) In general.--The term ``Indian tribal
government'' means the governing body of any
tribe, band, community, village, or group of
Indians, or (if applicable) Alaska Natives,
which is determined by the Secretary, after
consultation with the Secretary of the
Interior, to exercise governmental functions.
(B) Special rule for Alaska Natives.--No
determination under subparagraph (A) with
respect to Alaska Natives shall grant or defer
any status or powers other than those
enumerated in section 7871. Nothing in the
Indian Tribal Governmental Tax Status Act of
1982, or in the amendments made thereby, shall
validate or invalidate any claim by Alaska
Natives of sovereign authority over lands or
people.
(41) TIN.--The term ``TIN'' means the identifying
number assigned to a person under section 6109.
(42) Substituted basis property.--The term
``substituted basis property'' means property which
is--
(A) transferred basis property, or
(B) exchanged basis property.
(43) Transferred basis property.--The term
``transferred basis property'' means property having a
basis determined under any provision of subtitle A (or
under any corresponding provision of prior income tax
law) providing that the basis shall be determined in
whole or in part by reference to the basis in the hands
of the donor, grantor, or other transferor.
(44) Exchanged basis property.--The term ``exchanged
basis property'' means property having a basis
determined under any provision of subtitle A (or under
any corresponding provision of prior income tax law)
providing that the basis shall be determined in whole
or in part by reference to other property held at any
time by the person for whom the basis is to be
determined.
(45) Nonrecognition transaction.--The term
``nonrecognition transaction'' means any disposition of
property in a transaction in which gain or loss is not
recognized in whole or in part for purposes of subtitle
A.
(46) Determination of whether there is a collective
bargaining agreement.--In determining whether there is
a collective bargaining agreement between employee
representatives and 1 or more employers, the term
``employee representatives'' shall not include any
organization more than one-half of the members of which
are employees who are owners, officers, or executives
of the employer. An agreement shall not be treated as a
collective bargaining agreement unless it is a bona
fide agreement between bona fide employee
representatives and 1 or more employers.
(48) Off-highway vehicles.--
(A) Off-highway transportation vehicles.--
(i) In general.--A vehicle shall not
be treated as a highway vehicle if such
vehicle is specially designed for the
primary function of transporting a
particular type of load other than over
the public highway and because of this
special design such vehicle's
capability to transport a load over the
public highway is substantially limited
or impaired.
(ii) Determination of vehicle's
design.--For purposes of clause (i), a
vehicle's design is determined solely
on the basis of its physical
characteristics.
(iii) Determination of substantial
limitation or impairment.--For purposes
of clause (i), in determining whether
substantial limitation or impairment
exists, account may be taken of factors
such as the size of the vehicle,
whether such vehicle is subject to the
licensing, safety, and other
requirements applicable to highway
vehicles, and whether such vehicle can
transport a load at a sustained speed
of at least 25 miles per hour. It is
immaterial that a vehicle can transport
a greater load off the public highway
than such vehicle is permitted to
transport over the public highway.
(B) Nontransportation trailers and
semitrailers.--A trailer or semitrailer shall
not be treated as a highway vehicle if it is
specially designed to function only as an
enclosed stationary shelter for the carrying on
of an off-highway function at an off-highway
site.
(49) Qualified blood collector organization.--The
term ``qualified blood collector organization'' means
an organization which is--
(A) described in section 501(c)(3) and exempt
from tax under section 501(a),
(B) primarily engaged in the activity of the
collection of human blood,
(C) registered with the Secretary for
purposes of excise tax exemptions, and
(D) registered by the Food and Drug
Administration to collect blood.
(50) Termination of United States citizenship.--
(A) In general.--An individual shall not
cease to be treated as a United States citizen
before the date on which the individual's
citizenship is treated as relinquished under
section 877A(g)(4).
(B) Dual citizens.--Under regulations
prescribed by the Secretary, subparagraph (A)
shall not apply to an individual who became at
birth a citizen of the United States and a
citizen of another country.
(b) Definition of resident alien and nonresident alien.--
(1) In general.--For purposes of this title (other
than subtitle B)--
(A) Resident alien.--An alien individual
shall be treated as a resident of the United
States with respect to any calendar year if
(and only if) such individual meets the
requirements of clause (i), (ii), or (iii):
(i) Lawfully admitted for permanent
residence.--Such individual is a lawful
permanent resident of the United States
at any time during such calendar year.
(ii) Substantial presence test.--Such
individual meets the substantial
presence test of paragraph (3).
(iii) First year election.--Such
individual makes the election provided
in paragraph (4).
(B) Nonresident alien.--An individual is a
nonresident alien if such individual is neither
a citizen of the United States nor a resident
of the United States (within the meaning of
subparagraph (A)).
(2) Special rules for first and last year of
residency.--
(A) First year of residency.--
(i) In general.--If an alien
individual is a resident of the United
States under paragraph (1)(A) with
respect to any calendar year, but was
not a resident of the United States at
any time during the preceding calendar
year, such alien individual shall be
treated as a resident of the United
States only for the portion of such
calendar year which begins on the
residency starting date.
(ii) Residency starting date for
individuals lawfully admitted for
permanent residence.--In the case of an
individual who is a lawfully permanent
resident of the United States at any
time during the calendar year, but does
not meet the substantial presence test
of paragraph (3), the residency
starting date shall be the first day in
such calendar year on which he was
present in the United States while a
lawful permanent resident of the United
States.
(iii) Residency starting date for
individuals meeting substantial
presence test.--In the case of an
individual who meets the substantial
presence test of paragraph (3) with
respect to any calendar year, the
residency starting date shall be the
first day during such calendar year on
which the individual is present in the
United States.
(iv) Residency starting date for
individuals making first year
election.--In the case of an individual
who makes the election provided by
paragraph (4) with respect to any
calendar year, the residency starting
date shall be the 1st day during such
calendar year on which the individual
is treated as a resident of the United
States under that paragraph.
(B) Last year of residency.--An alien
individual shall not be treated as a resident
of the United States during a portion of any
calendar year if--
(i) such portion is after the last
day in such calendar year on which the
individual was present in the United
States (or, in the case of an
individual described in paragraph
(1)(A)(i), the last day on which he was
so described),
(ii) during such portion the
individual has a closer connection to a
foreign country than to the United
States, and
(iii) the individual is not a
resident of the United States at any
time during the next calendar year.
(C) Certain nominal presence disregarded.--
(i) In general.--For purposes of
subparagraphs (A)(iii) and (B), an
individual shall not be treated as
present in the United States during any
period for which the individual
establishes that he has a closer
connection to a foreign country than to
the United States.
(ii) Not more than 10 days
disregarded.--Clause (i) shall not
apply to more than 10 days on which the
individual is present in the United
States.
(3) Substantial presence test.--
(A) In general.--Except as otherwise provided
in this paragraph, an individual meets the
substantial presence test of this paragraph
with respect to any calendar year (hereinafter
in this subsection referred to as the ``current
year'') if--
(i) such individual was present in
the United States on at least 31 days
during the calendar year, and
(ii) the sum of the number of days on
which such individual was present in
the United States during the current
year and the 2 preceding calendar years
(when multiplied by the applicable
multiplier determined under the
following table) equals or exceeds 183
days:
(B) Exception where individual is present in
the United States during less than one-half of
current year and closer connection to foreign
country is established.--An individual shall
not be treated as meeting the substantial
presence test of this paragraph with respect to
any current year if--
(i) such individual is present in the
United States on fewer than 183 days
during the current year, and
(ii) it is established that for the
current year such individual has a tax
home (as defined in section 911(d)(3)
without regard to the second sentence
thereof) in a foreign country and has a
closer connection to such foreign
country than to the United States.
(C) Subparagraph (B) not to apply in certain
cases.--Subparagraph (B) shall not apply to any
individual with respect to any current year if
at any time during such year--
(i) such individual had an
application for adjustment of status
pending, or
(ii) such individual took other steps
to apply for status as a lawful
permanent resident of the United
States.
(D) Exception for exempt individuals or for
certain medical conditions.--An individual
shall not be treated as being present in the
United States on any day if--
(i) such individual is an exempt
individual for such day, or
(ii) such individual was unable to
leave the United States on such day
because of a medical condition which
arose while such individual was present
in the United States.
(4) First-year election.--(A) An alien individual
shall be deemed to meet the requirements of this
subparagraph if such individual--
(i) is not a resident of the United States
under clause (i) or (ii) of paragraph (1)(A)
with respect to a calendar year (hereinafter
referred to as the ``election year''),
(ii) was not a resident of the United States
under paragraph (1)(A) with respect to the
calendar year immediately preceding the
election year,
(iii) is a resident of the United States
under clause (ii) of paragraph (1)(A) with
respect to the calendar year immediately
following the election year, and
(iv) is both--
(I) present in the United States for
a period of at least 31 consecutive
days in the election year, and
(II) present in the United States
during the period beginning with the
first day of such 31-day period and
ending with the last day of the
election year (hereinafter referred to
as the ``testing period'') for a number
of days equal to or exceeding 75
percent of the number of days in the
testing period (provided that an
individual shall be treated for
purposes of this subclause as present
in the United States for a number of
days during the testing period not
exceeding 5 days in the aggregate,
notwithstanding his absence from the
United States on such days).
(B) An alien individual who meets the requirements of
subparagraph (A) shall, if he so elects, be treated as
a resident of the United States with respect to the
election year.
(C) An alien individual who makes the election
provided by subparagraph (B) shall be treated as a
resident of the United States for the portion of the
election year which begins on the 1st day of the
earliest testing period during such year with respect
to which the individual meets the requirements of
clause (iv) of subparagraph (A).
(D) The rules of subparagraph (D)(i) of paragraph (3)
shall apply for purposes of determining an individual's
presence in the United States under this paragraph.
(E) An election under subparagraph (B) shall be made
on the individual's tax return for the election year,
provided that such election may not be made before the
individual has met the substantial presence test of
paragraph (3) with respect to the calendar year
immediately following the election year.
(F) An election once made under subparagraph (B)
remains in effect for the election year, unless revoked
with the consent of the Secretary.
(5) Exempt individual defined.--For purposes of this
subsection--
(A) In general.--An individual is an exempt
individual for any day if, for such day, such
individual is--
(i) a foreign government-related
individual,
(ii) a teacher or trainee,
(iii) a student, or
(iv) a professional athlete who is
temporarily in the United States to
compete in a sports event--
(I) which is organized for
the primary purpose of
benefiting an organization
which is described in section
501(c)(3) and exempt from tax
under section 501(a),
(II) all of the net proceeds
of which are contributed to
such organization, and,
(III) which utilizes
volunteers for substantially
all of the work performed in
carrying out such event.
(B) Foreign government-related individual.--
The term ``foreign government-related
individual'' means any individual temporarily
present in the United States by reason of--
(i) diplomatic status, or a visa
which the Secretary (after consultation
with the Secretary of State) determines
represents full-time diplomatic or
consular status for purposes of this
subsection,
(ii) being a full-time employee of an
international organization, or
(iii) being a member of the immediate
family of an individual described in
clause (i) or (ii).
(C) Teacher or trainee.--The term ``teacher
or trainee'' means any individual--
(i) who is temporarily present in the
United States under subparagraph (J) or
(Q) of section 101(15) of the
Immigration and Nationality Act (other
than as a student), and
(ii) who substantially complies with
the requirements for being so present.
(D) Student.--The term ``student'' means any
individual--
(i) who is temporarily present in the
United States--
(I) under subparagraph (F) or
(M) of section 101(15) of the
Immigration and Nationality
Act, or
(II) as a student under
subparagraph (J) or (Q) of such
section 101(15), and
(ii) who substantially complies with
the requirements for being so present.
(E) Special rules for teachers, trainees, and
students.--
(i) Limitation on teachers and
trainees.--An individual shall not be
treated as an exempt individual by
reason of clause (ii) of subparagraph
(A) for the current year if, for any 2
calendar years during the preceding 6
calendar years, such person was an
exempt person under clause (ii) or
(iii) of subparagraph (A). In the case
of an individual all of whose
compensation is described in section
872(b)(3), the preceding sentence shall
be applied by substituting ``4 calendar
years'' for ``2 calendar years''.
(ii) Limitation on students.--For any
calendar year after the 5th calendar
year for which an individual was an
exempt individual under clause (ii) or
(iii) of subparagraph (A), such
individual shall not be treated as an
exempt individual by reason of clause
(iii) of subparagraph (A), unless such
individual establishes to the
satisfaction of the Secretary that such
individual does not intend to
permanently reside in the United States
and that such individual meets the
requirements of subparagraph (D)(ii).
(6) Lawful permanent resident.--For purposes of this
subsection, an individual is a lawful permanent
resident of the United States at any time if--
(A) such individual has the status of having
been lawfully accorded the privilege of
residing permanently in the United States as an
immigrant in accordance with the immigration
laws, and
(B) such status has not been revoked (and has
not been administratively or judicially
determined to have been abandoned).
An individual shall cease to be treated as a lawful
permanent resident of the United States if such
individual commences to be treated as a resident of a
foreign country under the provisions of a tax treaty
between the United States and the foreign country, does
not waive the benefits of such treaty applicable to
residents of the foreign country, and notifies the
Secretary of the commencement of such treatment.
(7) Presence in the United States.--For purposes of
this subsection--
(A) In general.--Except as provided in
subparagraph (B), (C), or (D), an individual
shall be treated as present in the United
States on any day if such individual is
physically present in the United States at any
time during such day.
(B) Commuters from Canada or Mexico.--If an
individual regularly commutes to employment (or
self-employment) in the United States from a
place of residence in Canada or Mexico, such
individual shall not be treated as present in
the United States on any day during which he so
commutes.
(C) Transit between 2 foreign points.--If an
individual, who is in transit between 2 points
outside the United States, is physically
present in the United States for less than 24
hours, such individual shall not be treated as
present in the United States on any day during
such transit.
(D) Crew members temporarily present.--An
individual who is temporarily present in the
United States on any day as a regular member of
the crew of a foreign vessel engaged in
transportation between the United States and a
foreign country or a possession of the United
States shall not be treated as present in the
United States on such day unless such
individual otherwise engages in any trade or
business in the United States on such day.
(8) Annual statements.--The Secretary may prescribe
regulations under which an individual who (but for
subparagraph (B) or (D) of paragraph (3)) would meet
the substantial presence test of paragraph (3) is
required to submit an annual statement setting forth
the basis on which such individual claims the benefits
of subparagraph (B) or (D) of paragraph (3), as the
case may be.
(9) Taxable year.--
(A) In general.--For purposes of this title,
an alien individual who has not established a
taxable year for any prior period shall be
treated as having a taxable year which is the
calendar year.
(B) Fiscal year taxpayer.--If--
(i) an individual is treated under
paragraph (1) as a resident of the
United States for any calendar year,
and
(ii) after the application of
subparagraph (A), such individual has a
taxable year other than a calendar
year,
he shall be treated as a resident of the United
States with respect to any portion of a taxable
year which is within such calendar year.
(10) Coordination with section 877.--If--
(A) an alien individual was treated as a
resident of the United States during any period
which includes at least 3 consecutive calendar
years (hereinafter referred to as the ``initial
residency period''), and
(B) such individual ceases to be treated as a
resident of the United States but subsequently
becomes a resident of the United States before
the close of the 3rd calendar year beginning
after the close of the initial residency
period,
such individual shall be taxable for the period after
the close of the initial residency period and before
the day on which he subsequently became a resident of
the United States in the manner provided in section
877(b). The preceding sentence shall apply only if the
tax imposed pursuant to section 877(b) exceeds the tax
which, without regard to this paragraph, is imposed
pursuant to section 871.
(11) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this subsection.
(c) Includes and including.--The terms ``includes'' and
``including'' when used in a definition contained in this title
shall not be deemed to exclude other things otherwise within
the meaning of the term defined.
(d) Commonwealth of Puerto Rico.--Where not otherwise
distinctly expressed or manifestly incompatible with the intent
thereof, references in this title to possessions of the United
States shall be treated as also referring to the Commonwealth
of Puerto Rico.
(e) Treatment of certain contracts for providing services,
etc..--For purposes of chapter 1--
(1) In general.--A contract which purports to be a
service contract shall be treated as a lease of
property if such contract is properly treated as a
lease of property, taking into account all relevant
factors including whether or not--
(A) the service recipient is in physical
possession of the property,
(B) the service recipient controls the
property,
(C) the service recipient has a significant
economic or possessory interest in the
property,
(D) the service provider does not bear any
risk of substantially diminished receipts or
substantially increased expenditures if there
is nonperformance under the contract,
(E) the service provider does not use the
property concurrently to provide significant
services to entities unrelated to the service
recipient, and
(F) the total contract price does not
substantially exceed the rental value of the
property for the contract period.
(2) Other arrangements.--An arrangement (including a
partnership or other pass-thru entity) which is not
described in paragraph (1) shall be treated as a lease
if such arrangement is properly treated as a lease,
taking into account all relevant factors including
factors similar to those set forth in paragraph (1).
(3) Special rules for contracts or arrangements
involving solid waste disposal, energy, and clean water
facilities.--
(A) In general.--Notwithstanding paragraphs
(1) and (2), and except as provided in
paragraph (4), any contract or arrangement
between a service provider and a service
recipient--
(i) with respect to--
(I) the operation of a
qualified solid waste disposal
facility,
(II) the sale to the service
recipient of electrical or
thermal energy produced at a
cogeneration or alternative
energy facility, or
(III) the operation of a
water treatment works facility,
and
(ii) which purports to be a service
contract,
shall be treated as a service contract.
(B) Qualified solid waste disposal
facility.--For purposes of subparagraph (A),
the term ``qualified solid waste disposal
facility'' means any facility if such facility
provides solid waste disposal services for
residents of part or all of 1 or more
governmental units and substantially all of the
solid waste processed at such facility is
collected from the general public.
(C) Cogeneration facility.--For purposes of
subparagraph (A), the term ``cogeneration
facility'' means a facility which uses the same
energy source for the sequential generation of
electrical or mechanical power in combination
with steam, heat, or other forms of useful
energy.
(D) Alternative energy facility.--For
purposes of subparagraph (A), the term
``alternative energy facility'' means a
facility for producing electrical or thermal
energy if the primary energy source for the
facility is not oil, natural gas, coal, or
nuclear power.
(E) Water treatment works facility.--For
purposes of subparagraph (A), the term ``water
treatment works facility'' means any treatment
works within the meaning of section 212(2) of
the Federal Water Pollution Control Act.
(4) Paragraph (3) not to apply in certain cases.--
(A) In general.--Paragraph (3) shall not
apply to any qualified solid waste disposal
facility, cogeneration facility, alternative
energy facility, or water treatment works
facility used under a contract or arrangement
if--
(i) the service recipient (or a
related entity) operates such facility,
(ii) the service recipient (or a
related entity) bears any significant
financial burden if there is
nonperformance under the contract or
arrangement (other than for reasons
beyond the control of the service
provider),
(iii) the service recipient (or a
related entity) receives any
significant financial benefit if the
operating costs of such facility are
less than the standards of performance
or operation under the contract or
arrangement, or
(iv) the service recipient (or a
related entity) has an option to
purchase, or may be required to
purchase, all or a part of such
facility at a fixed and determinable
price (other than for fair market
value).
For purposes of this paragraph, the term
``related entity'' has the same meaning as when
used in section 168(h).
(B) Special rules for application of
subparagraph (A) with respect to certain rights
and allocations under the contract.--For
purposes of subparagraph (A), there shall not
be taken into account--
(i) any right of a service recipient
to inspect any facility, to exercise
any sovereign power the service
recipient may possess, or to act in the
event of a breach of contract by the
service provider, or
(ii) any allocation of any financial
burden or benefits in the event of any
change in any law.
(C) Special rules for application of
subparagraph (A) in the case of certain
events.--
(i) Temporary shut-downs, etc..--For
purposes of clause (ii) of subparagraph
(A), there shall not be taken into
account any temporary shut-down of the
facility for repairs, maintenance, or
capital improvements, or any financial
burden caused by the bankruptcy or
similar financial difficulty of the
service provider.
(ii) Reduced costs.--For purposes of
clause (iii) of subparagraph (A), there
shall not be taken into account any
significant financial benefit merely
because payments by the service
recipient under the contract or
arrangement are decreased by reason of
increased production or efficiency or
the recovery of energy or other
products.
(5) Exception for certain low-income housing.--This
subsection shall not apply to any property described in
clause (i), (ii), (iii), or (iv) of section
1250(a)(1)(B) (relating to low-income housing) if--
(A) such property is operated by or for an
organization described in paragraph (3) or (4)
of section 501(c), and
(B) at least 80 percent of the units in such
property are leased to low-income tenants
(within the meaning of section 167(k)(3)(B))
(as in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990).
(6) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry
out the provisions of this subsection.
(f) Use of related persons or pass-thru entities.--The
Secretary shall prescribe such regulations as may be necessary
or appropriate to prevent the avoidance of those provisions of
this title which deal with--
(1) the linking of borrowing to investment, or
(2) diminishing risks,
through the use of related persons, pass-thru entities, or
other intermediaries.
(g) Clarification of fair market value in the case of
nonrecourse indebtedness.--For purposes of subtitle A, in
determining the amount of gain or loss (or deemed gain or loss)
with respect to any property, the fair market value of such
property shall be treated as being not less than the amount of
any nonrecourse indebtedness to which such property is subject.
(h) Motor vehicle operating leases.--
(1) In general.--For purposes of this title, in the
case of a qualified motor vehicle operating agreement
which contains a terminal rental adjustment clause--
(A) such agreement shall be treated as a
lease if (but for such terminal rental
adjustment clause) such agreement would be
treated as a lease under this title, and
(B) the lessee shall not be treated as the
owner of the property subject to an agreement
during any period such agreement is in effect.
(2) Qualified motor vehicle operating agreement
defined.--For purposes of this subsection--
(A) In general.--The term ``qualified motor
vehicle operating agreement'' means any
agreement with respect to a motor vehicle
(including a trailer) which meets the
requirements of subparagraphs (B), (C), and (D)
of this paragraph.
(B) Minimum liability of lessor.--An
agreement meets the requirements of this
subparagraph if under such agreement the sum
of--
(i) the amount the lessor is
personally liable to repay, and
(ii) the net fair market value of the
lessor's interest in any property
pledged as security for property
subject to the agreement,
equals or exceeds all amounts borrowed to
finance the acquisition of property subject to
the agreement. There shall not be taken into
account under clause (ii) any property pledged
which is property subject to the agreement or
property directly or indirectly financed by
indebtedness secured by property subject to the
agreement.
(C) Certification by lessee; notice of tax
ownership.--An agreement meets the requirements
of this subparagraph if such agreement contains
a separate written statement separately signed
by the lessee--
(i) under which the lessee certifies,
under penalty of perjury, that it
intends that more than 50 percent of
the use of the property subject to such
agreement is to be in a trade or
business of the lessee, and
(ii) which clearly and legibly states
that the lessee has been advised that
it will not be treated as the owner of
the property subject to the agreement
for Federal income tax purposes.
(D) Lessor must have no knowledge that
certification is false.--An agreement meets the
requirements of this subparagraph if the lessor
does not know that the certification described
in subparagraph (C)(i) is false.
(3) Terminal rental adjustment clause defined.--
(A) In general.--For purposes of this
subsection, the term ``terminal rental
adjustment clause'' means a provision of an
agreement which permits or requires the rental
price to be adjusted upward or downward by
reference to the amount realized by the lessor
under the agreement upon sale or other
disposition of such property.
(B) Special rule for lessee dealers.--The
term ``terminal rental adjustment clause'' also
includes a provision of an agreement which
requires a lessee who is a dealer in motor
vehicles to purchase the motor vehicle for a
predetermined price and then resell such
vehicle where such provision achieves
substantially the same results as a provision
described in subparagraph (A).
(i) Taxable mortgage pools.--
(1) Treated as separate corporations.--A taxable
mortgage pool shall be treated as a separate
corporation which may not be treated as an includible
corporation with any other corporation for purposes of
section 1501.
(2) Taxable mortgage pool defined.--For purposes of
this title--
(A) In general.--Except as otherwise provided
in this paragraph, a taxable mortgage pool is
any entity (other than a REMIC) if--
(i) substantially all of the assets
of such entity consists of debt
obligations (or interests therein) and
more than 50 percent of such debt
obligations (or interests) consists of
real estate mortgages (or interests
therein),
(ii) such entity is the obligor under
debt obligations with 2 or more
maturities, and
(iii) under the terms of the debt
obligations referred to in clause (ii)
(or underlying arrangement), payments
on such debt obligations bear a
relationship to payments on the debt
obligations (or interests) referred to
in clause (i).
(B) Portion of entities treated as pools.--
Any portion of an entity which meets the
definition of subparagraph (A) shall be treated
as a taxable mortgage pool.
(C) Exception for domestic building and
loan.--Nothing in this subsection shall be
construed to treat any domestic building and
loan association (or portion thereof) as a
taxable mortgage pool.
(D) Treatment of certain equity interests.--
To the extent provided in regulations, equity
interest of varying classes which correspond to
maturity classes of debt shall be treated as
debt for purposes of this subsection.
(3) Treatment of certain REIT's.--If--
(A) a real estate investment trust is a
taxable mortgage pool, or
(B) a qualified REIT subsidiary (as defined
in section 856(i)(2)) of a real estate
investment trust is a taxable mortgage pool,
under regulations prescribed by the Secretary,
adjustments similar to the adjustments provided in
section 860E(d) shall apply to the shareholders of such
real estate investment trust.
(j) Tax treatment of Federal Thrift Savings Fund.--
(1) In general.--For purposes of this title--
(A) the Thrift Savings Fund shall be treated
as a trust described in section 401(a) which is
exempt from taxation under section 501(a);
(B) any contribution to, or distribution
from, the Thrift Savings Fund shall be treated
in the same manner as contributions to or
distributions from such a trust; and
(C) subject to section 401(k)(4)(B) and any
dollar limitation on the application of section
402(e)(3), contributions to the Thrift Savings
Fund shall not be treated as distributed or
made available to an employee or Member nor as
a contribution made to the Fund by an employee
or Member merely because the employee or Member
has, under the provisions of subchapter III of
chapter 84 of title 5, United States Code, and
section 8351 of such title 5, an election
whether the contribution will be made to the
Thrift Savings Fund or received by the employee
or Member in cash.
(2) Nondiscrimination requirements.--Notwithstanding
any other provision of law, the Thrift Savings Fund is
not subject to the nondiscrimination requirements
applicable to arrangements described in section 401(k)
or to matching contributions (as described in section
401(m)), so long as it meets the requirements of this
section.
(3) Coordination with Social Security Act.--Paragraph
(1) shall not be construed to provide that any amount
of the employee's or Member's basic pay which is
contributed to the Thrift Savings Fund shall not be
included in the term ``wages'' for the purposes of
section 209 of the Social Security Act or section
3121(a) of this title.
(4) Definitions.--For purposes of this subsection,
the terms ``Member'', ``employee'', and ``Thrift
Savings Fund'' shall have the same respective meanings
as when used in subchapter III of chapter 84 of title
5, United States Code.
(5) Coordination with other provisions of law.--No
provision of law not contained in this title shall
apply for purposes of determining the treatment under
this title of the Thrift Savings Fund or any
contribution to, or distribution from, such Fund.
(k) Treatment of certain amounts paid to charity.--In the
case of any payment which, except for section 501(b) of the
Ethics in Government Act of 1978, might be made to any officer
or employee of the Federal Government but which is made instead
on behalf of such officer or employee to an organization
described in section 170(c)--
(1) such payment shall not be treated as received by
such officer or employee for all purposes of this title
and for all purposes of any tax law of a State or
political subdivision thereof, and
(2) no deduction shall be allowed under any provision
of this title (or of any tax law of a State or
political subdivision thereof) to such officer or
employee by reason of having such payment made to such
organization.
For purposes of this subsection, a Senator, a Representative
in, or a Delegate or Resident Commissioner to, the Congress
shall be treated as an officer or employee of the Federal
Government.
(l) Regulations relating to conduit arrangements.--The
Secretary may prescribe regulations recharacterizing any
multiple-party financing transaction as a transaction directly
among any 2 or more of such parties where the Secretary
determines that such recharacterization is appropriate to
prevent avoidance of any tax imposed by this title.
(m) Designation of contract markets.--Any designation by the
Commodity Futures Trading Commission of a contract market which
could not have been made under the law in effect on the day
before the date of the enactment of the Commodity Futures
Modernization Act of 2000 shall apply for purposes of this
title except to the extent provided in regulations prescribed
by the Secretary.
(n) Convention or association of churches.--For purposes of
this title, any organization which is otherwise a convention or
association of churches shall not fail to so qualify merely
because the membership of such organization includes
individuals as well as churches or because individuals have
voting rights in such organization.
(o) Clarification of economic substance doctrine.--
(1) Application of doctrine.--In the case of any
transaction to which the economic substance doctrine is
relevant, such transaction shall be treated as having
economic substance only if--
(A) the transaction changes in a meaningful
way (apart from Federal income tax effects) the
taxpayer's economic position, and
(B) the taxpayer has a substantial purpose
(apart from Federal income tax effects) for
entering into such transaction.
(2) Special rule where taxpayer relies on profit
potential.--
(A) In general.--The potential for profit of
a transaction shall be taken into account in
determining whether the requirements of
subparagraphs (A) and (B) of paragraph (1) are
met with respect to the transaction only if the
present value of the reasonably expected pre-
tax profit from the transaction is substantial
in relation to the present value of the
expected net tax benefits that would be allowed
if the transaction were respected.
(B) Treatment of fees and foreign taxes.--
Fees and other transaction expenses shall be
taken into account as expenses in determining
pre-tax profit under subparagraph (A). The
Secretary shall issue regulations requiring
foreign taxes to be treated as expenses in
determining pre-tax profit in appropriate
cases.
(3) State and local tax benefits.--For purposes of
paragraph (1), any State or local income tax effect
which is related to a Federal income tax effect shall
be treated in the same manner as a Federal income tax
effect.
(4) Financial accounting benefits.--For purposes of
paragraph (1)(B), achieving a financial accounting
benefit shall not be taken into account as a purpose
for entering into a transaction if the origin of such
financial accounting benefit is a reduction of Federal
income tax.
(5) Definitions and special rules.--For purposes of
this subsection--
(A) Economic substance doctrine.--The term
``economic substance doctrine'' means the
common law doctrine under which tax benefits
under subtitle A with respect to a transaction
are not allowable if the transaction does not
have economic substance or lacks a business
purpose.
(B) Exception for personal transactions of
individuals.--In the case of an individual,
paragraph (1) shall apply only to transactions
entered into in connection with a trade or
business or an activity engaged in for the
production of income.
(C) Determination of application of doctrine
not affected.--The determination of whether the
economic substance doctrine is relevant to a
transaction shall be made in the same manner as
if this subsection had never been enacted.
(D) Transaction.--The term ``transaction''
includes a series of transactions.
(p) Cross references.--
(1) Other definitions.--For other definitions, see
the following sections of Title 1 of the United States
Code:
(1) Singular as including plural,
section 1.
(2) Plural as including singular,
section 1.
(3) Masculine as including feminine,
section 1.
(4) Officer, section 1.
(5) Oath as including affirmation,
section 1.
(6) County as including parish,
section 2.
(7) Vessel as including all means of
water transportation, section 3.
(8) Vehicle as including all means of
land transportation, section 4.
(9) Company or association as
including successors and assigns,
section 5.
(2) Effect of cross references.--For effect of cross
references in this title, see section 7806(a).
* * * * * * *
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] the individual's taxable year ; except that if
[his spouse] the individual's spouse dies during [his
taxable year] the individual's taxable year such
determination shall be made as of the time of such
death; and
(2) an individual legally separated from [his spouse]
the individual's 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] the individual's 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)),
(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.
* * * * * * *
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.]
(7) Married couple treated as 1 person.--A married
couple 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).
* * * * * * *
VII. MINORITY VIEWS
Committee Republicans would like to point out a few
administrative concerns with this legislation in its current
form.
In 2013, the Supreme Court in United States v. Windsor, 570
U.S. 744 (2013) ruled that same-sex married couples cannot be
denied Federal benefits, including tax benefits, available to
other married couples. Previously, the Defense of Marriage Act
had prohibited Government entities, including the Internal
Revenue Service (the ``IRS''), from recognizing or extending
Federal benefits based on a same-sex marriage. After the
Windsor holding, the Obama Treasury Department issued guidance
in 2013 that clarified that the IRS will recognize same-sex
marriage for federal tax purposes and allowed taxpayers to file
amended returns to claim credits or refunds based on marital
status. The Internal Revenue Code, however, generally limits
the time period for filing amended returns to three years after
the original return was filed. Generally, at the time this
allowed taxpayers to file amended returns based on marital
status back to the 2010 tax year, as long as the couple was
married in a State that recognized the marriage.
There are sound policy reasons for the current three-year
limitation for filing amended returns. In particular, as time
passes, it becomes increasingly difficult for both taxpayers
and the IRS to locate all the records that can substantiate a
taxpayer's claims. This challenge is only exacerbated by the
IRS's policy of routinely destroying taxpayer information. This
legislation would allow certain taxpayers to file amended
returns dating back to the 2004 tax year. These amended returns
filed by taxpayers under this legislation would be subject to
IRS audits; however, the ability of the IRS to conduct
accurate, thorough audits of amended returns for taxable years
of more than 10 years ago is questionable.
Additionally, the IRS would find calculating credit
interest a challenge under the legislation in its current form.
The legislation does not specify which date should be used for
the purposes of calculating interest--the date of the original
filing, the date of enactment, etc.--nor does it specify which
date from the two original tax returns should be used under
that calculation method.
Unfortunately, this bill does not adequately address these
significant administrative concerns.
Kevin Brady,
Republican Leader, Committee
on Ways and Means.