S.Amdt. 2646

SA 2646. Mr. BENNET submitted an amendment intended to be proposed to
amendment SA 2360 proposed by Mr. Thune (for Mr. Graham) to the bill
H.R. 1, to provide for reconciliation pursuant to title II of H. Con.
Res. 14; which was ordered to lie on the table; as follows:

Strike section 70120 and insert the following:

SEC. 70120. LIMITATION ON INDIVIDUAL DEDUCTIONS FOR CERTAIN
STATE AND LOCAL TAXES, ETC AND ADDRESSING SALT
WORKAROUNDS.

(a) In General.--
(1) Limitation.--Section 275 is amended by redesignating
subsection (b) as subsection (c) and by inserting after
subsection (a) the following new subsection:
``(b) Limitation on Individual Deductions for Certain State
and Local Taxes, etc.--
``(1) In general.--In the case of an individual, no
deduction shall be allowed for--
``(A) any disallowed foreign real property taxes,
``(B) any specified taxes to the extent that such taxes for
such taxable year in the aggregate exceed $10,000 ($5,000 in
the case of a married individual filing a separate return),
and
``(C) any pass-through entity taxes to the extent that such
taxes for the taxable year in the aggregate exceed the sum
of--
``(i) the excess (if any) of the amount applicable to such
individual under subparagraph (B) over the amount of the
individual's specified taxes, plus
``(ii) the greater of--

``(I) $40,000 ($20,000 in the case of a married individual
filing a separate return), or
``(II) 50 percent of the pass-through entity taxes of the
taxpayer.

``(2) Disallowed foreign real property tax.--For purposes
of this subsection, the term `disallowed foreign real
property tax' means any tax which--
``(A) is a foreign real property tax described in section
164(a)(1), and
``(B) is not an excepted tax.
``(3) Specified tax.--For purposes of this subsection, the
term `specified tax' means--
``(A) any tax which--
``(i) is described in paragraph (1), (2), or (3) of section
164(a) (determined without regard to any election under
section 164(b)(5)) or is taken into account under section
164(b)(5), and
``(ii) is not an excepted tax, a pass-through entity tax,
or a disallowed foreign real property tax,
``(B) any amount which is paid or accrued by a tenant-
stockholder (as defined in section 216(b)(2)) to a
cooperative housing corporation and represents such tenant-
stockholder's proportionate share of taxes described in
section 216(a)(1) (other than an excepted tax), and
``(C) any substitute payment.
``(4) Excepted tax.--For purposes of this subsection, the
term `excepted tax' means--
``(A) any tax described in section 164(a)(3) imposed by the
authority of a foreign country or by a possession of the
United States or a political subdivision thereof, and
``(B) any tax described in paragraph (1) or (2) of section
164(a), or section 216, which is paid or accrued in carrying
on a trade or business or an activity described in section
212.
``(5) Substitute payment.--For purposes of this
subsection--
``(A) In general.--The term `substitute payment' means any
amount (other than a tax described in paragraph (3)(A)) paid,
incurred, or accrued to any jurisdiction referred to in
section 164(b)(2) (other than a possession of the United
States or a political subdivision thereof)) if, under the
laws of one or more such jurisdictions, one or more persons
would (if the assumptions described in subparagraphs (B) and
(C) applied) be entitled to specified tax benefits the
aggregate dollar value of which equals or exceeds 25 percent
of such amount.
``(B) Assumption regarding dollar value of tax benefits.--
The assumption described in this subparagraph is that the
dollar value of a specified tax benefit is--
``(i) in the case of a credit or refund, the amount of such
credit or refund,
``(ii) in the case of a deduction or exclusion, 15 percent
of the amount of such deduction or exclusion, and
``(iii) in any other case, an amount determined in such
manner as the Secretary may provide consistent with the
principles of clauses (i) and (ii).
``(C) Assumption regarding status of partners or
shareholders.--The assumption described in this subparagraph
is, in the case of any amount referred to in subparagraph (A)
which is paid, incurred, or accrued by a partnership or S
corporation, that all of the partners or shareholders of such
partnership or S corporation, respectively, are individuals
who are residents of the jurisdiction or jurisdictions
providing the specified tax benefits (and possess such other
characteristics as the laws of such jurisdictions may require
for entitlement to such benefits).
``(D) Specified tax benefit.--For purposes of subparagraph
(A), the term `specified tax benefit' means any benefit
which--
``(i) is determined with respect to the amount referred to
in subparagraph (A), and
``(ii) is allowed against, or determined by reference to, a
tax described in paragraph (3)(A) or section 164(b)(5).
``(E) Exception for non-deductible payments.--To the extent
that a deduction for an amount described in subparagraph (A)
is not allowed under this chapter (determined without regard
to this subsection, section 170(b)(1), section 703(a),
section 704(d), section 1363(b), and section 1366(d)), the
term `substitute payment' shall not include such amount.
``(F) Exception for certain withholding taxes.--To the
extent provided in regulations issued by the Secretary, the
term `substitute payment' shall not include an amount
withheld on behalf of another person if all of such amount is
included in the gross income of such person (determined under
this chapter).
``(6) Pass-through entity tax.--For purposes of this
subsection, the term `pass-through entity tax' means--
``(A) the taxpayer's distributive share of any tax
described in section 702(a)(6)(B), plus
``(B) the taxpayer's pro rata share of any such taxes taken
into account under section 1366(a)(1).
``(7) Regulations.--The Secretary shall issue such
regulations or other guidance as may be necessary or
appropriate to carry out the purposes of this subsection,
including regulations or other guidance--
``(A) to treat as a tax described in paragraph (3) of
section 164(a) any tax that is, in substance, based on
general tax principles, described in such paragraph,
``(B) to treat as a substitute payment any amount that, in
substance, substitutes for a specified tax, and
``(C) to otherwise prevent the avoidance of the purposes of
this subsection.''.
(2) Conforming amendment.--Section 216(a)(1) is amended by
inserting ``(other than disallowed foreign real property
taxes (as defined in section 275(b)(2)))'' after ``under
section 164''.

[[Page S4030]]

(b) State and Local Income Taxes Paid by Partnerships and S
Corporations Taken Into Account Separately by Partners and
Shareholders.--
(1) In general.--Section 702(a)(6) is amended to read as
follows:
``(6)(A) taxes, described in section 901, paid or accrued
to foreign countries or to possessions of the United States,
``(B) pass-through entity taxes,
``(C) specified taxes (within the meaning of section
275(b)), and
``(D) taxes described in section 275(b)(2),''.
(2) Rules relating to separately stated taxes.--Section 702
is amended by redesignating subsection (d) as subsection (e)
and by inserting after subsection (c) the following new
subsection:
``(d) Rules Relating to Taxes.--
``(1) Pass-through entity tax.--For purposes of subsection
(a)(6)(B)--
``(A) In general.--The term `pass-through entity tax' means
any tax which is described in section 164(a)(3) (other than
an excepted tax (as defined in section 275(b)(4)) to the
extent that such tax is paid or accrued in carrying on a
trade or business (other than the performance of services as
an employee) or an activity described in section 212.
``(B) Exception for jurisdictions with income taxes.--The
term `pass-through entity tax' shall not include any tax
described in subparagraph (A) if--
``(i) such tax is imposed for a taxable year beginning
after the date that is 18 months after the date of the
enactment of this subsection,
``(ii) the jurisdiction imposing the tax also imposes an
income tax on individuals, and
``(iii) the tax liability for such tax by any pass-through
entity would exceed 102 percent of the liability for the tax
described in clause (i) imposed on an unmarried individual
with net income (as determined under the rules of the
jurisdiction imposing the tax) equal to the net income of the
pass-through entity.
``(C) Exception for jurisdictions without income taxes.--
The term `pass-through entity tax' shall not include any tax
described in subparagraph (A) if--
``(i) the jurisdiction imposing the tax does not also
impose an income tax on individuals, and
``(ii) such tax would be a substitute payment (as defined
in section 275(b)(5)) if, for purposes of applying section
275(b)(5)(A), section 275(b)(3)(A) were applied--

``(I) by substituting `paragraph (1) or (2) of section
164(a)' for `paragraph (1), (2), or (3) of section 164(a)' in
clause (i) thereof, and
``(II) without regard to the phrase `, a pass-through
entity tax,' in clause (ii) thereof.

``(2) Treatment of substitute payments.--Any substitute
payment (as defined in section 275(b)(5)) shall be taken into
account under subsection (a)(6)(C) and not under any other
paragraph of subsection (a).
``(3) Regulations.--The Secretary shall issue such
regulations or other guidance as may be necessary or
appropriate to carry out, and prevent the avoidance of, the
purposes of this section, including regulations or other
guidance--
``(A) providing for whether and to what extent a tax is
described in paragraph (1)(A), and
``(B) for preventing the treatment of any tax which is
described in paragraph (1)(A) but not described in paragraph
(1)(B) as a pass-through entity tax if the principal purpose
of either such tax or the rates of such tax is to avoid the
purposes of section 275(b).''.
(3) Disallowance of deduction to partnerships.--Section
703(a)(2)(B) is amended to read as follows:
``(B) any deduction under this chapter with respect to
taxes or payments described in section 702(a)(6),''.
(4) Limitation on allowances of losses.--Section 704(d)(2)
is amended to read as follows:
``(2) Carryovers.--
``(A) In general.--Any excess of such loss over such basis
(determined after application of paragraph (3)) shall be
taken into account (including for purposes of section 705) at
the end of the partnership year in which such excess is
repaid to the partnership.
``(B) Treatment.--Any item of loss carried forward under
subparagraph (A) shall retain the character of such item.
``(C) Allocation.--The amount of the excess described in
subparagraph (A) shall be allocated to the partner's
distributive share of each item of separately stated and non-
separately stated loss taken into account under paragraph
(1), apportioned in the ratio that the amount of each item of
loss bears to the total of all such losses. For the purposes
of the preceding sentence, the total losses for the taxable
year shall be the sum of the partner's distributive share of
such losses for the current year and the partner's losses
carried forward under this paragraph from prior years.
``(D) Special rule for nondeductible specified taxes.--
``(i) In general.--Except in the case of a partnership or
corporation, the lesser of the amount described in clause
(ii)(I), or the applicable percentage of nondeductible
specified taxes, of a partner shall be separately carried
forward under subparagraph (A) and shall not be allowed as a
deduction in any taxable year.
``(ii) Applicable percentage.--For purposes of this
subparagraph, the applicable percentage with respect to any
partner of a partnership is the ratio (expressed as a
percentage) of--

``(I) the amount described in section 702(a)(6)(C) with
respect to the partner of such partnership, to
``(II) the amount described in clause (iii)(I) which is
attributable to partnerships for which there is an excess
under subparagraph (A) and to S corporations for which there
is an excess under section 1366(d)(1).

``(iii) Nondeductible specified taxes.--For purposes of
this subparagraph, the nondeductible specified taxes for any
taxable year is the excess (if any) of--

``(I) the sum of the aggregate amounts described in section
702(a)(6)(C) with respect to the partner for all partnerships
plus the aggregate amounts so described which are a
separately stated item under section 1366(a)(1)(A) with
respect to the shareholder for all S corporations, over
``(II) the amount of specified taxes (as defined in section
275(b)(3)) allowable under this chapter for the taxable year,
reduced by the amount of any such taxes taken into account
under subclause (I).

For purposes of subclause (II), the determination of the
amount of such taxes so allowable shall be made after the
application of section 275(b)(1)(B), after the application of
this subsection and 1366(d) to items of loss and deduction
other than such taxes but before their application to such
taxes, and before the application of section 68.''.
(5) S corporations.--
(A) In general.--For corresponding provisions related to S
corporations which apply by reason of the amendments made by
paragraphs (1) through (3), see sections 1366(a)(1) and
1363(b)(2) of the Internal Revenue Code of 1986.
(B) Loss carryovers.--
(i) In general.--Section 1366(d)(2) is amended by adding at
the end the following new subparagraph:
``(C) Special rule for certain specified taxes.--
``(i) In general.--Except in the case of a partnership or
corporation, the lesser of the amount described in clause
(ii)(I), or the applicable percentage of nondeductible
specified taxes, of a shareholder shall be separately carried
forward under subparagraph (A) and shall not be allowed as a
deduction in any taxable year.
``(ii) Applicable percentage.--For purposes of this
subparagraph, the applicable percentage with respect to any
shareholder of an S corporation is the ratio (expressed as a
percentage) of--

``(I) the amount taken into account under section
704(d)(2)(D)(iii)(I) which are separately stated items under
subsection (a)(1)(A) with respect to such shareholder of such
S corporation, to
``(II) the amount described in section 704(d)(2)(D)(iii)(I)
which is attributable to S corporations for which there is an
excess under subparagraph (A) and to partnerships for which
there is an excess under section 704(d)(2)(A) .

``(iii) Nondeductible specified taxes.--For purposes of
this subparagraph, the term `nondeductible specified taxes'
has the meaning given such term under section
704(d)(2)(D)(iii),''.
(ii) Conforming amendment.--Section 1366(d)(2)(A) is
amended by striking ``subparagraph (B)'' and inserting
``subparagraph (B) or (C)''.
(6) Conforming amendments.--
(A) Alternative minimum tax.--Section 56(b)(1)(A)(ii) is
amended by inserting ``or for any substitute payment (as
defined in section 275(b)(5))'' before the period at the end.
(B) Adjusted gross income.--Section 62(a)(1) is amended by
inserting ``or with respect to any specified tax (as defined
in section 275(b)(3))'' after ``this subchapter''.
(c) Addition to Tax for State and Local Tax Allocation
Mismatch.--
(1) In general.--Part I of subchapter A of chapter 68, as
amended by the preceding provisions of this Act, is amended
by adding at the end the following new section:

``SEC. 6660. STATE AND LOCAL TAX ALLOCATION MISMATCH.

``(a) In General.--In the case of any covered individual,
there shall be added to the tax imposed under section 1 for
the taxable year an amount equal to the product of--
``(1) the highest rate of tax in effect under such section
for such taxable year, multiplied by
``(2) the sum of the State and local tax allocation
mismatches for such taxable year with respect to each
partnership specified tax payment with respect to which such
individual is a covered individual.
``(b) Covered Individual.--For purposes of this section,
the term `covered individual' means, with respect to any
partnership specified tax payment, any individual (or estate
or trust) who--
``(1) is entitled (directly or indirectly) to one or more
specified tax benefits with respect to such payment, and
``(2) takes into account (directly or indirectly) any item
of income, gain, deduction, loss, or credit of the
partnership (including guaranteed payments) which made such
payment.
``(c) State and Local Tax Allocation Mismatch.--For
purposes of this section--
``(1) In general.--The term `State and local tax allocation
mismatch' means, with respect to any partnership specified
tax payment, the excess (if any) of--
``(A) the aggregate dollar value of the specified tax
benefits of the covered individual with respect to such
payment, over

[[Page S4031]]

``(B) the amount of such payment taken into account by such
individual under section 702(a) (without regard to sections
275(b) and 704(d)).
``(2) Taxable year of individual in which mismatch taken
into account.--In the case of any partnership specified tax
payment paid, incurred, or accrued in any taxable year of the
partnership, the State and local tax allocation mismatch
determined under paragraph (1) with respect to such payment
shall be taken into account under subsection (a) by the
covered individual for the taxable year of such individual in
which such individual takes into account the items referred
to in subsection (b)(2) which are determined with respect to
such partnership taxable year.
``(d) Determination of Dollar Value of Specified Tax
Benefits.--
``(1) In general.--Except in the case of a covered
individual who elects the application of paragraph (3) for
any taxable year, the dollar value of any specified tax
benefit shall be the sum of--
``(A) the aggregate increase in tax liability (and
reduction in credit or refund) for taxes described in section
275(b)(3)(A) for the taxable year and all prior taxable years
that would result if such specified tax benefit were not
taken into account with respect to such taxes, plus
``(B) the deemed value of any carryforward of such
specified tax benefit (including any tax attribute derived
from such benefit) to any subsequent taxable year.
``(2) Deemed value of carryforwards.--For purposes of
paragraph (1), the deemed value of any carryforward is--
``(A) in the case of a credit or refund, the amount of such
credit or refund,
``(B) in the case of a deduction or exclusion, the product
of--
``(i) the highest rate of tax which may be imposed on
individuals under the tax referred to in subsection (e)(4)(B)
with respect to the specified tax benefit, multiplied by
``(ii) the amount of such deduction or exclusion, and
``(C) in any other case, an amount determined in such
manner as the Secretary may provide consistent with the
principles of subparagraphs (A) and (B).
``(3) Election of simplified method.--In the case of a
covered individual who elects the application of this
paragraph for any taxable year, the dollar value of any
specified tax benefit shall be determined under the
assumptions described in section 275(b)(5)(B).
``(e) Other Definitions and Special Rules.--For purposes of
this section--
``(1) Partnership specified tax payment.--The term
`partnership specified tax payment' means any specified tax
and any pass-through entity tax paid, incurred, or accrued by
a partnership.
``(2) Pass-through entity tax.--The term `pass-through
entity tax' has the meaning given such term by section
275(b)(6).
``(3) Specified tax.--The term `specified tax' has the
meaning given such term by section 275(b)(3).
``(4) Specified tax benefit.--The term `specified tax
benefit' means any benefit which--
``(A) is determined with respect to a partnership specified
tax payment, and
``(B) is allowed against, or determined by reference to, a
tax described in section 275(b)(3)(A).
``(f) Regulations.--The Secretary shall issue such
regulations or other guidance as may be necessary or
appropriate to carry out the purposes of this section,
including regulations or other guidance preventing avoidance
of the addition to tax prescribed by this section through
partnership allocations that achieve similar tax reductions
as a State and local tax allocation mismatch.''.
(2) Clerical amendment.--The table of sections for part I
of subchapter A of chapter 68, as amended by the preceding
provisions of this Act, is amended by adding at the end the
following new item:

``Sec. 6660. State and local tax allocation mismatch.''.
(d) Limitation on Capitalization of Specified Taxes.--
Section 275, as amended by the preceding provisions of this
section, is amended by redesignating subsection (c) as
subsection (d) and by inserting after subsection (b) the
following new subsection:
``(c) Limitations on Capitalization of Specified Taxes.--
Notwithstanding any other provision of this chapter, in the
case of an individual, specified taxes, pass-through entity
taxes, and disallowed foreign real property taxes (as such
terms are defined in subsection (b)) shall not be treated as
chargeable to capital account.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2025.
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