I
109th CONGRESS
2d Session
H. R. 5176
IN THE HOUSE OF REPRESENTATIVES
April 25, 2006
Mr. Emanuel introduced the following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to make the Federal income tax system simpler, fairer, and more fiscally responsible, and for other purposes.
Short title; amendment of 1986 Code; table of contents
Short title
This Act may be cited as the Fair Flat Tax Act of 2006
.
Amendment of 1986 Code
Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.
Table of contents
The table of contents for this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code; table of contents.
Sec. 2. Purpose.
Title I—Individual income tax reforms
Sec. 101. 3 progressive individual income tax rates for all forms of income.
Sec. 102. Increase in basic standard deduction.
Sec. 103. Simplified family credit.
Sec. 104. Expanded access to college.
Sec. 105. Deduction for mortgage interest whether or not individual itemizes.
Sec. 106. Universal pension accounts.
Sec. 107. Repeal of individual alternative minimum tax.
Title II—Income tax reforms
Subtitle A—Provisions Relating to Corporate and business income tax
Sec. 201. Corporate flat tax.
Sec. 202. Treatment of travel on corporate aircraft.
Sec. 203. Valuation of employee personal use of noncommercial aircraft.
Sec. 204. Elimination of tax expenditures that subsidize inefficiencies in the health care system.
Sec. 205. Pass-through business entity transparency.
Sec. 206. Broker reporting of customer's basis in securities transactions.
Sec. 207. Repeal of lower cost or market inventory method.
Sec. 208. Imposition of withholding on certain payments made by government entities.
Subtitle B—Provisions designed to curtail tax shelters
Sec. 211. Penalty for promoting abusive tax shelters.
Sec. 212. Penalty for aiding and abetting the understatement of tax liability.
Sec. 213. Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud.
Subtitle C—Economic Substance Doctrine
Sec. 221. Clarification of economic substance doctrine.
Sec. 222. Penalty for understatements attributable to transactions lacking economic substance, etc.
Sec. 223. Denial of deduction for interest on underpayments attributable to noneconomic substance transactions.
Subtitle D—Provisions Relating to Oil and Gas
Sec. 231. Elimination of amortization of geological and geophysical expenditures for major integrated oil companies.
Sec. 232. Revaluation of lifo inventories of large integrated oil companies.
Subtitle E—Uniform Definition of Child
Sec. 241. Repeal of uniform definition of child and restoration of prior rule.
Subtitle F—Other Revenue Provisions
Sec. 251. Inflation adjustment of tax on distilled spirits, beer, wine, and tobacco.
Sec. 252. Termination of various exclusions, exemptions, deductions, and credits.
Sec. 253. Termination of various preferential treatments.
Title III—Technical and conforming amendments; sunset
Sec. 301. Technical and conforming amendments.
Sec. 302. Sunset.
Purpose
The purpose of this Act is to amend the Internal Revenue Code of 1986—
to make the Federal individual income tax system simpler, fairer, and more transparent by—
recognizing the overall tax burden on individual Americans,
repealing the individual alternative minimum tax,
increasing the basic standard deduction and maintaining itemized deductions for principal residence mortgage interest and charitable contributions,
reducing the number of exclusions, exemptions, deductions, and credits, and
treating all income equally,
to make the Federal corporate income tax rate a flat 35 percent and eliminate special tax preferences that favor particular types of businesses or activities, and
to partially offset the Federal budget deficit through the increased revenues resulting from these reforms.
Individual income tax reforms
3 progressive individual income tax rates for all forms of income
Married individuals filing joint returns and surviving spouses
The table contained in section 1(a) is amended to read as follows:
| If taxable income is: | The tax is: |
| Not over $25,000 | 15% of taxable income. |
| Over $25,000 but not over $120,000 | $3,750, plus 25% of the excess over $25,000 |
| Over $120,000 | $27,500, plus 35% of the excess over $120,000. |
.
Heads of households
The table contained in section 1(b) is amended to read as follows:
| If taxable income is: | The tax is: |
| Not over $16,000 | 15% of taxable income. |
| Over $16,000 but not over $105,000 | $2,400, plus 25% of the excess over $16,000 |
| Over $105,000 | $24,650, plus 35% of the excess over $105,000. |
.
Unmarried individuals (other than surviving spouses and heads of households)
The table contained in section 1(c) is amended to read as follows:
| If taxable income is: | The tax is: |
| Not over $15,000 | 15% of taxable income. |
| Over $15,000 but not over $70,000 | $2,250, plus 25% of the excess over $15,000 |
| Over $70,000 | $16,000, plus 35% of the excess over $70,000. |
.
Married individuals filing separate returns
The table contained in section 1(d) is amended to read as follows:
| If taxable income is: | The tax is: |
| Not over $12,500 | 15% of taxable income. |
| Over $12,500 but not over $60,000 | $1,875, plus 25% of the excess over $12,500 |
| Over $60,000 | $13,750, plus 35% of the excess over $60,000. |
.
Conforming amendments to inflation adjustment
Section 1(f) is amended—
by striking 1993
in paragraph (1) and inserting 2006
,
by striking except as provided in paragraph (8)
in paragraph (2)(A),
by striking 1992
in paragraph (3)(B) and inserting 2005
,
by striking paragraphs (7) and (8), and
by striking Phaseout of Marriage Penalty in 15–Percent Bracket;
in the heading thereof.
Repeal of rate differential for capital gains and dividends
Repeal of 2003 rate reduction
Section 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 is amended by striking December 3, 2008
and inserting December 31, 2005
.
Termination of pre-2003 capital gain rate differential
Section 1(h) is amended (after the application of paragraph (1)) by adding at the end the following new paragraph:
Termination
This section shall not apply to taxable years beginning after December 31, 2005.
.
Additional conforming amendments
Section 1 is amended by striking subsection (i).
The Internal Revenue Code of 1986 is amended by striking calendar year 1992
each place it appears and inserting calendar year 2005
.
Section 1445(e)(1) (after the application of subsection (g)(1)) is amended by striking (or, to the extent provided in regulations, 20 percent)
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Increase in basic standard deduction
In general
Paragraph (2) of section 63(c) (defining standard deduction) is amended to read as follows:
Basic standard deduction
For purposes of paragraph (1), the basic standard deduction is—
200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—
a joint return, or
a surviving spouse (as defined in section 2(a)),
$26,250 in the case of a head of household (as defined in section 2(b)), or
$15,000 in any other case.
.
Conforming amendment to inflation adjustment
Section 63(c)(4)(B)(i) is amended by striking (2)(B), (2)(C), or
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Simplified family credit
In general
Section 32 (relating to earned income credit) is amended to read as follows:
Simplified family credit
Allowance of credit
In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the lesser of—
$2,500 multiplied by the number of qualifying children of the taxpayer, or
50 percent of modified adjusted gross income.
Limitations
Limitation based on modified adjusted gross income
In general
The amount of the credit allowable under subsection (a) shall be reduced (but not below zero) by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income exceeds the threshold amount.
Threshold amount
For purposes of paragraph (1), the term threshold amount means $60,000 ($120,000 in the case of a joint return). For purposes of this paragraph, marital status shall be determined under section 7703.
Limitation on number of qualifying children taken into account
For purposes of subsection (a), not more than 3 qualifying children of the taxpayer may be taken into account.
Limitation on amount of refundable credit
In general
The amount of the credit allowed under subsection (a) for a taxable year which is allowed under this subpart shall not exceed the modified adjusted gross income of the taxpayer for such year.
Allowance of remaining amount of credit
The excess of—
the amount of the credit allowed under subsection (a), over
the amount of the credit allowed under this subpart by reason of subparagraph (A), shall be treated as a credit allowed under subpart B for such taxable year and not under this subpart.
Definitions and special rules
For purposes of this section—
Eligible individual
In general
The term eligible individual means any individual who has a qualifying child for the taxable year.
Individual who is qualifying child ineligible
If an individual is the qualifying child of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall not be treated as an eligible individual for any taxable year of such individual beginning in such calendar year.
Exception for individual claiming benefits under section 911
The term eligible individual does not include any individual who claims the benefits of section 911 (relating to citizens or residents living abroad) for the taxable year.
Limitation on eligibility of nonresident aliens
The term eligible individual shall not include any individual who is a nonresident alien individual for any portion of the taxable year unless such individual is treated for such taxable year as a resident of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.
Identification number requirement
No credit shall be allowed under this section to an eligible individual who does not include on the return of tax for the taxable year—
such individual’s taxpayer identification number, and
if the individual is married (within the meaning of section 7703), the taxpayer identification number of such individual’s spouse.
Individuals who do not include TIN, etc., of any qualifying child
No credit shall be allowed under this section to any eligible individual who has one or more qualifying children if no qualifying child of such individual is taken into account under subsection (b) by reason of paragraph (2)(B).
Qualifying child
In general
The term qualifying child has the meaning given such term by section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof.
Identification requirements
In general
A qualifying child shall not be taken into account under subsection (b) unless the taxpayer includes the name, age, and TIN of the qualifying child on the return of tax for the taxable year.
Other methods
The Secretary may prescribe other methods for providing the information described in clause (i).
Abode must be in the United States
An individual shall not be treated as a qualifying child for purposes of this section unless the principal place of abode of such individual is in the United States.
Modified adjusted gross income
The term modified adjusted gross income means adjusted gross income—
determined without regard to sections 135, 137, 221, 911, 931, and 933, and
increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.
Married individuals
In the case of an individual who is married (within the meaning of section 7703), this section shall apply only if a joint return is filed for the taxable year under section 6013.
Taxable year must be full taxable year
Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.
Inflation adjustments
In general
In the case of any taxable year beginning after 2006, each of the dollar amounts in subsection (b)(1)(B) shall be increased by an amount equal to—
such dollar amount, multiplied by
the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2005
for calendar year 1992
in subparagraph (B) thereof.
Rounding
If any dollar amount in subsection (b)(1)(B) after being increased under paragraph (1) is not a multiple of $1,000, such dollar amount shall be rounded to the nearest multiple of $1,000.
Coordination with certain means-tested programs
For purposes of—
the United States Housing Act of 1937,
title V of the Housing Act of 1949,
section 101 of the Housing and Urban Development Act of 1965,
sections 221(d)(3), 235, and 236 of the National Housing Act, and
the Food Stamp Act of 1977,
Identification numbers
Solely for purposes of subsections (c)(1)(F) and (c)(3)(D), a taxpayer identification number means a social security number issued to an individual by the Social Security Administration (other than a social security number issued pursuant to clause (II) (or that portion of clause (III) that relates to clause (II)) of section 205(c)(2)(B)(i) of the Social Security Act).
.
Repeals of other provisions
Child credit
Section 24 is hereby repealed.
Deduction for exemption for dependents disallowed to credit recipients
Subsection (c) of section 151 is amended by adding at the end the following new sentence: No exemption shall be allowed under this section for a dependent for a taxable year if a credit is allowed under section 32 with respect to such dependent for such taxable year.
.
Conforming amendments
Amendments relating to repeal of child credit
Sections 25(e)(1)(C) and 1400C(d) are both amended by striking 24,
.
Section 501(c)(26) is amended by inserting (as in effect before the enactment of the Fair Flat Tax Act of 2006)
after section 24(c)
.
Section 6213(g)(2) is amended—
by striking subparagraph (I), and
in subparagraph (L), by striking 21, 24, or 32
and inserting 21 or 32
.
Amendments relating to repeal of deduction for exemption for dependents
Section 2(a) is amended by striking a deduction for the taxable year under section 151
and inserting a credit for the taxable year under section 32
.
Section 2(b) is amended by striking a deduction for the taxable year for such person under section 151
and inserting a credit for the taxable year for such person under section 32
.
Section 21(b)(1)(A) is amended by striking a deduction under section 151(c)
and inserting a credit under section 32
.
Section 21(e)(6)(A) is amended by striking deduction under section 151(c)
and inserting credit under section 32
.
Section 25B(c)(2)(A) is amended by striking deduction under section 151
and inserting credit under section 32
.
Section 35(d)(1)(B) is amended by striking deduction under section 151(c)
and inserting credit under section 32
.
Section 35(g)(4) is amended by striking deduction under section 151
and inserting credit under section 32
.
Section 63(c)(5) is amended by striking deduction under section 151
and inserting credit under section 32
.
Section 129(c)(1) is amended by striking deduction is allowable under section 151(c) (relating to personal exemptions for dependents)
and inserting credit is allowable under section 32 (relating to simplified family credit)
.
Section 135(c)(2)(A)(iii) is amended by striking deduction under section 151
and inserting credit under section 32
.
Section 220(b)(6) is amended by striking deduction under section 151
and inserting credit under section 32
.
Section 221(c) is amended by striking deduction under section 151
and inserting credit under section 32
.
Section 2032A(c)(7)(D) is amended by striking section 151(c)(4)
and inserting section 32(c)(3)(F)
.
Section 6012(a)(1)(A) is amended by striking an exemption for such spouse under section 151(c)
and inserting a credit for such spouse under section 32
.
Section 7703(b)(1) is amended by striking deduction for the taxable year under section 151
and inserting credit for the taxable year under section 32
.
Clerical amendment
The table of sections for subpart C of part IV of subchapter A of chapter 1 is amended by striking the item relating to section 32 and inserting the following:
Sec. 32. Simplified family credit.
.
Effective date
In general
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Transitional rule for noncustodial parents
In general
If, on the last day of the taxable year, an eligible individual is the noncustodial parent of a qualifying child, the Internal Revenue Code of 1986 shall be applied to such individual without regard to the amendments made by this section.
Definitions
For purposes of subparagraph (A), the terms eligible individual and qualifying child shall have the meanings given such terms by section 32(c) of the Internal Revenue Code of 1986 (as amended by this section).
Taxpayers held harmless
In the case of a taxpayer who, for the first taxable year ending after the date of the enactment of this Act, would be allowed a deduction of the exemption amount under section 151(c) of the Internal Revenue Code of 1986 (determined without regard to the amendments made by this section) with respect to any dependent of the taxpayer, the taxpayer may elect to apply the Internal Revenue Code of 1986 with respect to such dependent as if amendments made by this section had not been enacted.
Expanded access to college
Replacement with refundable credit for higher education expenses
Subpart C of part IV of subchapter A of chapter 1 (relating to refundable credits) is amended by redesignating section 36 as section 37 and by inserting after section 35 the following new section:
Higher education expenses
Allowance of credit
In the case of an individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year the amount equal to the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year).
Limitations
Dollar limitation
The amount allowed as a credit under subsection (a) for a taxable year shall not exceed $3,000.
Academic limitations
Expenses may not be taken into account under subsection (a) with respect to an eligible student for an academic year if—
in the case of a program at the undergraduate level, expenses have been taken into account under this section in all prior taxable years with respect to such student for any program at the undergraduate level for the full-time equivalent of 4 academic years, and
in the case of a program at the graduate level, expenses have been taken into account under this section in all prior taxable years with respect to such student for any program at the graduate level for the full-time equivalent of 2 academic years.
Eligible student
For purposes of this subsection, the term eligible student means, with respect to any academic period, a student who—
meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment of this section, and
is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.
Election not to have section apply
A taxpayer may elect not to have this section apply with respect to the qualified tuition and related expenses of an individual for any taxable year.
Definitions
For purposes of this section—
Qualified tuition and related expenses
In general
The term qualified tuition and related expenses means tuition and fees required for the enrollment or attendance of—
the taxpayer,
the taxpayer's spouse, or
any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, at an eligible educational institution for courses of instruction of such individual at such institution.
Exception for education involving sports, etc
Such term does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual's degree program.
Exception for nonacademic fees
Such term does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual’s academic course of instruction.
Eligible educational institution
The term eligible educational institution means an institution—
which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and
which is eligible to participate in a program under title IV of such Act.
Academic year
The term academic year has the meaning given such term by section 481(a)(2) of the Higher Education Act of 1965 (20 U.S.C. 1088(a)(2)).
Special rules
Identification requirement
No credit shall be allowed under subsection (a) to a taxpayer with respect to the qualified tuition and related expenses of an individual unless the taxpayer includes the name and taxpayer identification number of such individual on the return of tax for the taxable year.
Adjustment for certain scholarships, etc
The amount of qualified tuition and related expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced by the sum of any amounts paid for the benefit of such individual which are allocable to such period as—
a qualified scholarship which is excludable from gross income under section 117,
an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code, and
a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a) for such individual’s educational expenses, or attributable to such individual’s enrollment at an eligible educational institution, which is excludable from gross income under any law of the United States.
Treatment of expenses paid by dependent
If a deduction under section 151 with respect to an individual is allowed to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins—
no credit shall be allowed under subsection (a) to such individual for such individual’s taxable year, and
qualified tuition and related expenses paid by such individual during such individual's taxable year shall be treated for purposes of this section as paid by such other taxpayer.
Treatment of certain prepayments
If qualified tuition and related expenses are paid by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated for purposes of this section as beginning during such taxable year.
Denial of double benefit
No credit shall be allowed under this section for any expense for which a deduction is allowed under any other provision of this chapter.
No credit for married individuals filing separate returns
If the taxpayer is a married individual (within the meaning of section 7703, this section shall apply only if the taxpayer and the taxpayer's spouse file a joint return for the taxable year.
Nonresident aliens
If the taxpayer is a nonresident alien individual for any portion of the taxable year, this section shall apply only if such individual is treated as a resident alien of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.
Regulations
The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations providing for a recapture of the credit allowed under this section in cases where there is a refund in a subsequent taxable year of any amount which was taken into account in determining the amount of such credit.
.
Repeal of certain credits, exclusions, and deductions relating to higher education expenses
The following sections of the Internal Revenue Code of 1986 are hereby repealed:
Section 25A (relating to Hope and Lifetime Learning Credits).
Section 127 (relating to educational assistance programs).
Section 222 (relating to qualified tuition and related expenses).
Section 117(d) (relating to qualified tuition reduction).
Technical and conforming amendments
Section 62(a) is amended by striking paragraph (18).
The following sections are amended by striking 222,
: 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), 199(d)(2)(A), 219(g)(3)(A)(2), 221(b)(2)(C)(i), and 469(i)(F).
Section 51A(b)(5)(B) is amended by inserting or
after clause (ii), by striking clause (iii), and by redesignating clause (iv) as clause (iii).
Sections 125(f), 221(d)(2)(A), 414(n)(3)(C), 3121(a)(18), 3401(a)(18), and 6039D(d)(1) are each amended by striking 127,
.
Section 132(j)(8) is amended by striking which are not excludable from gross income under section 127
.
Section 137(c)(2) is amended by inserting (as in effect on the date of enactment of the Fair Flat Tax Act of 2006)
after 127(b)
.
Section 1397(a)(2)(A) is amended by striking clause (i).
Section 3306(b)(13) is amended by striking 127, or
.
Subparagraph (B) of section 72(t)(7) is amended by striking section 25A(g)(2)
and inserting section 36(c)(3)(B)(2)(v)(I)
.
Subparagraph (A) of section 135(d)(2) is amended by striking section 25A
and inserting section 36
.
Section 221(e) is amended—
in paragraph (2)(B), by striking section 25A(g)(2)
and inserting section 36(c)(3)(B)(2)(v)(I)
and by striking section 25A(f)(2)
and inserting section 36(c)(3)(B)(2)(v)(I)
, and
in paragraph (3), by striking section 25A(b)(3)
and inserting section 36(c)
.
Section 529 is amended—
by amending clause (v) of subsection (c)(3)(B) to read as follows:
Coordination with scholarships and higher education refundable credit
The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced with respect to an individual for an academic period—
by the sum of any amounts paid for the benefit of such individual which are allocable to such period as—
a qualified scholarship which is excludable from gross income under section 117,
an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code, and
a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a) for such individual’s educational expenses, or attributable to such individual’s enrollment at an eligible educational institution, which is excludable from gross income under any law of the United States, and
by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 36.
, and
in subsection (e)(3)(B)(i) by striking section 25A(b)(3)
and inserting section 36(c)
.
Section 530(d) is amended—
in paragraph (2)(C)(i)(I) by striking section 25A(g)(2)
and inserting section 36(c)(3)(B)(2)(v)(I)
,
in paragraph (2)(C)(i)(II) by striking section 25A
and inserting section 36
, and
in paragraph (4)(B)(iii) by striking section 25A(g)(2)
and inserting section 36(c)(3)(B)(2)(v)(I)
.
Subsection (e) of section 6050S is amended by striking section 25A (without regard to subsection (g)(2) thereof)
and inserting section 36 (without regard to clause (v)(I) of subsection (c)(3)(B)(2) thereof)
.
Subparagraph (J) of section 6213(g)(2) is amended by striking section 25A(g)(1)
and inserting section 36(f)(1)
.
Paragraph (2) of section 1324(b) of title 31, United States Code, is amended by inserting or 36
after section 35
.
The table of sections for subpart C of part IV of subchapter A of chapter 1 is amended by redesignating the item relating to section 36 as an item relating to section 37 and by inserting after the item relating to section 35 the following new item:
.
The table of sections for subpart A of such part IV is amended by striking the item relating to section 25A.
The table of sections for part III of subchapter B of chapter 1 is amended by striking the item relating to section 127.
The table of sections for part VII of subchapter B of chapter 1 is amended by striking the item relating to section 222.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Deduction for mortgage interest whether or not individual itemizes
In general
Subsection (a) of section 62 (defining adjusted gross income) is amended by redesignating paragraph (19) (as added by section 703(a) of the American Jobs Creation Act of 2004) as paragraph (20) and by inserting after paragraph (20) (as so redesignated) the following new paragraph:
Qualified residence interest
The deduction allowed under section 163 by reason of subsection (h)(2)(D) thereof.
.
Effective date
The amendment made by subsection (a) shall apply to interest paid in taxable years beginning after the date of the enactment of this Act.
Universal pension accounts
Deduction for contributions
In general
Part VII of subchapter B of chapter 1 (relating to additional itemized deductions for individuals) is amended by inserting after section 219 the following new section:
Contributions to Universal Pension Accounts
Allowance of deduction
In the case of an individual, there shall be allowed as a deduction an amount equal to the qualified universal pension contributions of the individual for the taxable year.
Maximum amount of deduction
In general
The amount allowable as a deduction under subsection (a) to any individual for any taxable year shall not exceed the lesser of—
the deductible amount, or
an amount equal to the compensation includible in the individual’s gross income for such taxable year.
Deductible amount
For purposes of paragraph (1)(A), the deductible amount shall be determined in accordance with the following table:
| For taxable years beginning in calendar year— | The deductible amount is— |
| 2006 or 2007 | $4,000 |
| 2008 or thereafter | $5,000. |
Cost-of-living adjustment
In general
In the case of any taxable year beginning in a calendar year after 2008, the $5,000 amount in paragraph (2) shall be increased by an amount equal to—
such dollar amount, multiplied by
the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2007
for calendar year 1992
in subparagraph (B) thereof.
Rounding
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.
Limitation based on adjusted gross income
In general
The deductible amount otherwise applicable under subsection (b) for any taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2).
Amount of reduction
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—
the excess of—
the taxpayer’s adjusted gross income for such taxable year, over
the applicable dollar amount, bears to
$15,000 ($10,000 in the case of a joint return or a married individual filing a separate return).
Applicable dollar amount
For purposes of subparagraph (A), the applicable dollar amount is—
in the case of a taxpayer filing a joint return, $150,000,
in the case of any other taxpayer (other than a married individual filing a separate return), $95,000, and
in the case of a married individual filing a separate return, zero.
No reduction below $200 until complete phase-out
No dollar limitation shall be reduced below $200 under subparagraph (A) unless (without regard to this subparagraph) such limitation is reduced to zero.
Rounding
Any amount determined under this paragraph which is not a multiple of $10 shall be rounded to the next lowest $10.
Adjusted gross income
For purposes of this subsection, adjusted gross income of any taxpayer shall be determined—
after application of sections 86, 219, and 469, and
without regard to sections 135, 137, 221, and 911 or the deduction allowable under this section.
Married individuals filing separate returns
In general
In the case of a married individual filing a separate return, the amount applicable under paragraph (2)(A)(i)(II) is zero.
Special rule for married individuals filing separately and living apart
A husband and wife who—
file separate returns for any taxable year, and
live apart at all times during such taxable year,
Special rules for certain married individuals
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—
the dollar amount in effect under subsection (b)(1)(A) for the taxable year, or
the sum of—
the compensation includible in such individual’s gross income for the taxable year, plus
the compensation includible in the gross income of such individual’s spouse for the taxable year reduced by the amount allowed as a deduction under subsection (a) to such spouse for such taxable year.
Individuals to whom paragraph (1) applies
Paragraph (1) shall apply to any individual if—
such individual files a joint return for the taxable year, and
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.
Qualified universal pension contributions
For purposes of this section, the term qualified universal pension contribution means any amount paid in cash for the taxable year by or on behalf of an individual to a Universal PensionAccount for such individual’s benefit.
Other definitions and special rules
Attainment of 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.
Recontributed amounts
No deduction shall be allowed under this section with respect to a rollover contribution to a Universal Pension Account.
Denial of deduction for amount contributed to inherited accounts
No deduction shall be allowed under this section with respect to any amount paid to an inherited Universal Pension Account.
Other definitions and special rules
Compensation
For purposes of this section, the term compensation has the meaning given to such term by section 219(f)(1).
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.
Time when contributions deemed made
A taxpayer shall be deemed to have made a contribution to a Universal Pension Account 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).
Employer payments
For purposes of this title, any amount paid by an employer to a Universal Pension Account 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 the employee’s 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.
Excess contributions treated as contribution made during subsequent year for which there is an unused limitation
A rule similar to the rule of section 219(f)(5) shall apply for purposes of this section.
.
Deduction allowed whether or not taxpayer itemizes deductions
Subsection (a) of section 62 is amended by inserting after paragraph (20) the following new paragraph:
Contributions to Universal Pension Accounts
The deduction allowed by section 219A.
.
Technical amendments
Subparagraph (B) of section 135(c)(4) is amended by striking and 219
and inserting 219, and 219A
.
Subparagraph (B) of section 137(b)(3) is amended by inserting 219A,
after 219,
.
Subparagraph (A) of section 199(d)(2) is amended by inserting 219A,
after 219,
.
Clause (ii) of section 219(g)(3)(A) is amended by inserting 219A,
after 137,
.
Clause (ii) of section 221(b)(2)(C) is amended by inserting 219A,
after 219,
.
Clause (ii) of section 222(b)(2)(C) is amended by inserting 219A,
after 219,
.
Clause (iii) of section 469(i)(3)(F) is amended by inserting 219A,
after 219,
.
Clerical amendment
The table of sections for part VII of subchapter B of chapter 1 is amended by inserting after the item relating to section 219 the following new item:
.
Universal Pension Accounts
In general
Subpart A of part I of subchapter D of chapter 1 is amended by inserting after section 408A the following new section:
Universal Pension Accounts
In general
For purposes of this title, the term Universal Pension Account means a trust created or organized in the United States for the exclusive benefit of an individual or such individual’s beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:
Except in the case of a rollover contribution described in subsection (b)(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 deductible amount in effect for such taxable year under section 219A(b)(2).
The trustee is a bank (as defined in section 408(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.
No part of the trust funds will be invested in life insurance contracts.
The interest of an individual in the balance in such individual’s account is nonforfeitable.
The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
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.
Tax treatment of distributions
In general
Except as otherwise provided in this subsection, any amount distributed out of a Universal Pension Account shall be included in gross income by the distributee without regard to basis.
Exception for immediate annuities
If any distribution is a part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of such distributee and such distributee’s designated beneficiary, the amount includible in gross income under paragraph (1) shall be determined in the manner provided under section 72. The rules of section 408(d)(2) shall apply for purposes of the preceding sentence.
Exception for rollovers
In general
Paragraph (1) shall not apply to any amount distributed out of a Universal Pension Account to the individual for whose benefit the account is maintained if the entire amount received (including money and any other property) is paid into a Universal Pension Account (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which the individual receives the distribution.
Limitation
This paragraph does not apply to any amount described in subparagraph (A) received by an individual from a Universal Pension Account if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from a Universal Pension Account which was not includible in such individual’s gross income because of the application of this paragraph.
Special rules
Rules similar to the rules of subparagraphs (C), (D), (E), (F), and (I) of section 408(d)(3) shall apply for purposes of this paragraph.
Exception for qualified distributions
Distributions for higher education expenses
Paragraph (1) shall not apply to distributions to an individual to the extent such distributions do not exceed the qualified higher education expenses (as defined in section 72(t)(7)) of the taxpayer for the taxable year.
Distributions for first home purchases
Paragraph (1) shall not apply to distributions to an individual which are qualified first-time homebuyer distributions (as defined in section 72(t)(8)).
Other distributions
Rules similar to the rules of paragraphs (4) and (6) of section 408(d) shall apply for purposes of this subsection.
Tax treatment of accounts
Exemption from tax
Any Universal Pension Account is exempt from taxation under this subtitle unless such account has ceased to be a Universal Pension Account by reason of paragraph (2). 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).
Loss of exemption for prohibited transaction
Rules similar to the rules of section 408(e)(2) shall apply for purposes of this subsection.
Effect of pledging Account as security; purchase of endowment contract; commingling amounts in certain common trust funds and common investment funds
Rules similar to the rules of paragraphs (4), (5), and (6) of section 408(e) shall apply for purposes of this subsection.
Rollovers permitted from IRA’s, etc
Solely for purposes of determining whether any rollover may be made to a Universal Pension Account, a Universal Pension Account shall be treated as if it were an individual retirement plan. No amount may be distributed in a rollover other than to a Universal Pension Account.
Special rules
Community property laws
This section shall be applied without regard to any community property laws.
Custodial accounts
Rules similar to the rules of section 408(g) shall apply for purposes of this subsection.
Investment in collectibles treated as distributions
The acquisition by a Universal Pension Account of any collectible (as defined in section 408(m)) 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.
Reports
The trustee of a Universal Pension Account shall make such reports regarding such Account to the Secretary and to the individuals for whom the Account 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—
shall be filed at such time and in such manner as the Secretary prescribes, and
shall be furnished to individuals—
not later than January 31 of the calendar year following the calendar year to which such reports relate, and
in such manner as the Secretary prescribes.
.
Technical amendments
Excess contributions
In general
Subsection (a) of section 4973 is amended by redesignating paragraphs (2), (3), and (4) as paragraphs (3), (4), and (5), respectively, and by inserting after paragraph (1) the following new paragraph:
a Universal Pension Account (as defined in section 408B),
.
Determination of excess
Section 4973 is amended by adding at the end the following new subsection:
Excess Contributions to Universal Pension Accounts
Rules similar to the rules under subsection (b) shall apply to any Universal Pension Account (as defined in section 408B).
.
Early withdrawal penalty, etc
Subsection (c) of section 4974 is amended by striking or
at the end of paragraph (4), by striking the period at the end of paragraph (5) and inserting , or
, and by inserting after paragraph (5) the following new paragraph:
a Universal Pension Account described in section 408B.
.
Prohibited transactions
In general
Paragraph (1) of section 4975(e) is amended by redesignating subparagraphs (D), (E), and (F) as subparagraphs (E), (F), and (G), respectively, and by inserting after subparagraph (C) the following new subparagraph:
a Universal Pension Account described in section 408B,
.
Exception
Subsection (c) of section 4975 is amended by adding at the end the following new paragraph:
Special rule for Universal Pension Accounts
An individual for whose benefit a Universal Pension Account 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 408B(d)(2) applies with respect to such transaction.
.
Failure to provide reports
Paragraph (2) of section 6693(a) (relating to failure to provide reports on individual retirement accounts or annuities) is amended by redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively, and by inserting after subparagraph (B) the following new subparagraph:
a Universal Pension Account described in section 408B,
.
W–2 reporting
Subsection (a) of section 6051 is amended by striking and
at the end of paragraph (10), by striking the period at the end of paragraph (11) and inserting , and
, and by inserting after paragraph (11) the following new paragraph:
the total amount of elective employer contributions under section 408B(f)(2)(A).
.
Other technical amendments
The following provisions are each amended by inserting 408B(f),
after 408(p),
:
Subsections (b) and (c) of section 414.
Section 414(m)(4)(B).
Section 414(n)(3)(B).
Section 414(u)(1)(C).
Elective contributions subject to FICA and FUTA
Paragraph (5) of section 3121(a) is amended by striking or
at the end of subparagraph (H), by striking the semicolon at the end of subparagraph (I) and inserting , or
, and by adding at the end the following new subparagraph:
under an arrangement to which section 408B(f) applies, other than any elective contributions under paragraph (2)(A) thereof;
.
Paragraph (4) of section 209(a) of the Social Security Act is amended by adding at the end or (J) under an arrangement to which section 408B(f) of such Code applies, other than any elective contributions under paragraph (2)(A) thereof;
.
Paragraph (5) of section 3306(b) is amended by striking or
at the end of subparagraph (G), by striking the semicolon at the end of subparagraph (H) and inserting , or
, and by adding at the end the following new subparagraph:
under an arrangement to which section 408B(f) applies, other than any elective contributions under paragraph (2)(A) thereof;
.
Paragraph (12) of section 3401(a) is amended by adding at the end the following new subparagraph:
under an arrangement to which section 408B(f) applies; or
.
Clerical amendment
The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by inserting after the item relating to section 408A the following new item:
.
Termination of contributions to individual retirement plans, including Roth IRA’s
Subsection (a) of section 408 is amended by adding at the end the following new paragraph:
No contribution (other than a rollover contribution referred to in paragraph (1)) shall be accepted for any taxable year beginning after December 31, 2005, unless such account is a simplified employee pension or a simple retirement account.
.
Subsection (b) of section 408 is amended by inserting after paragraph (4) the following new paragraph:
No contribution shall be accepted for any taxable year beginning after December 31, 2005, unless such annuity is a simplified employee pension or a simple retirement account.
.
Credit for small employers maintaining salary reduction arrangements for Universal Pension Accounts
In general
Subpart D of part IV of subchapter A of chapter 1 (relating to business related credits) is amended by adding at the end the following new section:
Small employer Universal Pension Account costs
General rule
For purposes of section 38, in the case of an eligible employer, the small employer Universal Pension Account cost credit determined under this section for any taxable year is the aggregate of the amount determined under subsection (b) for each employee participating in an arrangement meeting the requirements of section 408B(f).
Amount of credit
The amount of the credit determined under this section for any taxable year with respect to an employee shall be—
$50 for the taxable year which includes the date that the arrangement referred to subsection (a) becomes effective,
$20 for each of the 3 taxable years following the taxable year described in paragraph (1), and
zero for any other taxable year.
Eligible employer
For purposes of this section, the term eligible employer means, with respect to any taxable year, an employer which had no more than 100 employees on a typical business day during the most recent calendar year ending before such taxable year. For purposes of the preceding sentence, all persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (n) or (o) of section 414, shall be treated as one person.
.
Credit allowed as part of general business credit
Section 38(b) (defining current year business credit) is amended by striking plus
at the end of paragraph (25), by striking the period at the end of paragraph (26) and inserting , plus
, and by adding at the end the following new paragraph:
in the case of an eligible employer (as defined in section 45J(c)), the small employer Universal Pension Account cost credit determined under section 45J(a).
.
Clerical amendment
The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Repeal of individual alternative minimum tax
In general
Section 55(a) (relating to alternative minimum tax imposed) is amended by adding at the end the following new flush sentence:
For purposes of this title, the tentative minimum tax on any taxpayer other than a corporation for any taxable year beginning after December 31, 2005, shall be zero.
.
Modification of limitation on use of credit for prior year minimum tax liability
Subsection (c) of section 53 (relating to credit for prior year minimum tax liability) is amended to read as follows:
Limitation
In general
Except as provided in paragraph (2), the credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of—
the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over
the tentative minimum tax for the taxable year.
Taxable years beginning after 2005
In the case of any taxable year beginning after 2005, the credit allowable under subsection (a) to a taxpayer other than a corporation for any taxable year shall not exceed 90 percent of the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part.
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Income tax reforms
Provisions Relating to Corporate and business income tax
Corporate flat tax
In general
Subsection (b) of section 11 (relating to tax imposed) is amended to read as follows:
Amount of tax
The amount of tax imposed by subsection (a) shall be equal to 35 percent of the taxable income.
.
Conforming amendments
Section 280C(c)(3)(B)(ii)(II) is amended by striking maximum rate of tax under section 11(b)(1)
and inserting rate of tax under section 11(b)
.
Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 1446(b)(2)(B), and 7874(e)(1)(B) are each amended by striking highest rate of tax specified in section 11(b)(1)
and inserting rate of tax specified in section 11(b)
.
Section 904(b)(3)(D)(ii) is amended by striking (determined without regard to the last sentence of section 11(b)(1))
.
Section 962 is amended by striking subsection (c) and by redesignating subsection (d) as subsection (c).
Section 1201(a) is amended by striking (determined without regard to the last 2 sentences of section 11(b)(1))
.
Section 1561(a) is amended—
by striking paragraph (1) and by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively,
by striking The amounts specified in paragraph (1), the
and inserting The
,
by striking paragraph (2)
and inserting paragraph (1)
,
by striking paragraph (3)
both places it appears and inserting paragraph (2)
,
by striking paragraph (4)
and inserting paragraph (3)
, and
by striking the fourth sentence.
Subsection (b) of section 1561 is amended to read as follows:
Certain short taxable years
If a corporation has a short taxable year which does not include a December 31 and is a component member of a controlled group of corporations with respect to such taxable year, then for purposes of this subtitle, the amount to be used in computing the accumulated earnings credit under section 535(c)(2) and (3) of such corporation for such taxable year shall be the amount specified in subsection (a)(1) divided by the number of corporations which are component members of such group on the last day of such taxable year. For purposes of the preceding sentence, section 1563(b) shall be applied as if such last day were substituted for December 31.
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Treatment of travel on corporate aircraft
In general
Section 162 (relating to trade or business expenses) is amended by redesignating subsection (q) as subsection (r) and b inserting after subsection (p) the following new subsection:
Treatment of travel on corporate aircraft
The rate at which an amount allowable as a deduction under this chapter for the use of an aircraft owned by the taxpayer is determined shall not exceed the rate at which an amount paid or included in income by an employee of such taxpayer for the personal use of such aircraft is determined.
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
Valuation of employee personal use of noncommercial aircraft
In general
For purposes of Federal income tax inclusion, the value of any employee personal use of noncommercial aircraft shall equal the excess (if any) of—
greater of—
the fair market value of such use, or
the actual cost of such use (including all fixed and variable costs), over
any amount paid by or on behalf of such employee for such use.
Effective date
Subsection (a) shall apply to use after the date of the enactment of this Act.
Elimination of tax expenditures that subsidize inefficiencies in the health care system
Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury shall report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives recommendations regarding the elimination of Federal tax incentives which subsidize inefficiencies in the health care system and if eliminated would result in Federal budget savings of not less than $10,000,000,000 annually.
Pass-through business entity transparency
Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury shall report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives regarding the implementation of additional reporting requirements with respect to any pass-through entity with the goal of the reduction of tax avoidance through the use of such entities, In addition, the Secretary shall develop procedures to share such report data with State revenue agencies under the disclosure requirements of section 6103(d) of the Internal Revenue Code of 1986.
Broker reporting of customer's basis in securities transactions
In general
Section 6045 (relating to returns of brokers) is amended by adding at the end the following new subsection:
Additional information required in the case of securities transactions
In general
If a broker is otherwise required to make a return under subsection (a) with respect to any applicable security, the broker shall include in such return the information described in paragraph (2).
Additional information required
In general
The information required under paragraph (1) to be shown on a return with respect to an applicable security of a customer shall include for each reported applicable security the customer's adjusted basis in such security.
Exemption from requirement
The Secretary shall issue such regulations or guidance as necessary concerning the application of the requirement under subparagraph (A) in cases in which a broker in making a return does not have sufficient information to meet such requirement with respect to the reported applicable security. Such regulations or guidance may—
require such other information related to such adjusted basis as the Secretary may prescribe, and
exempt classes of cases in which the broker does not have sufficient information to meet either the requirement under subparagraph (A) or the requirement under clause (i).
Information transfers
To the extent provided in regulations, there shall be such exchanges of information between brokers as such regulations may require for purposes of enabling such brokers to meet the requirements of this subsection.
Definitions
For purposes of this subsection, the term applicable security means any—
security described in subparagraph (A) or (C) of section 475(c)(2),
interest in a regulated investment company (as defined in section 851), or
other financial instrument designated in regulations prescribed by the Secretary.
.
Effective date
The amendment made by this section shall apply to returns the due date for which (determined without regard to extensions) is after December 31, 2008, with respect to securities acquired after December 31, 2007.
Repeal of lower cost or market inventory method
In general
Section 471 (relating to general rule for inventories) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:
Prohibition on use of lower cost or market method
In general
For any taxable year beginning after December 31, 2006, a taxpayer may not use any method which values inventories at cost or market, whichever is lower.
3-year averaging for increases in inventory value
In the case of a taxpayer that used a method which values inventories at cost or market, whichever is lower, for the taxable year ending with or within December 31, 2006, the beginning inventory for the first taxable year beginning after such date shall be valued both with and without the application of paragraph (1). Any change in the inventory amount resulting from the application of the preceding sentence shall be taken into account ratably in each of the 3 taxable years beginning with the first taxable year for which the method described in subsection (b) is first used.
Certain adjustments not to apply
Section 481 shall not apply with respect to any change in the method of accounting which is required by this subsection.
.
Effective date
The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2006.
Imposition of withholding on certain payments made by government entities
In general
Section 3402 is amended by adding at the end the following new subsection:
Extension of Withholding to Certain Payments Made by Government Entities
General rule
The Government of the United States, every State, every political subdivision thereof, and every instrumentality of the foregoing (including multi-State agencies) making any payment for goods and services which is subject to withholding shall deduct and withhold form such payment a tax in an amount equal to 3 percent of such payment.
Exceptions
Paragraph (1) shall not apply to any payment—
except as provided in subparagraph (B), which is subject to withholding under any other provision of this chapter or chapter 3,
which is subject to withholding under section 3406 and from which amounts are being withheld under such section,
of interest,
for real property,
to any tax-exempt entity, foreign government, or other entity subject to the requirements of paragraph (1),
made pursuant to a classified or confidential contract (as defined in section 6050M(e)(3)), and
made by a political subdivision of a State (or any instrumentality thereof) which makes less than $100,000,000 of such payments annually.
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 any payment for goods and services which is subject to withholding shall be treated as if such payments were wages paid by an employer to an employee.
.
Effective date
The amendment made by this section shall apply to payments made after December 31, 2006.
Provisions designed to curtail tax shelters
Penalty for promoting abusive tax shelters
Penalty for Promoting Abusive Tax Shelters
Section 6700 (relating to promoting abusive tax shelters, etc.) is amended—
by redesignating subsections (b) and (c) as subsections (d) and (e), respectively,
by striking a penalty
and all that follows through the period in the first sentence of subsection (a) and inserting a penalty determined under subsection (b)
, and
by inserting after subsection (a) the following new subsections:
Amount of Penalty; Calculation of Penalty; Liability for Penalty
Amount of penalty
The amount of the penalty imposed by subsection (a) shall be 100 percent of the gross income derived (or to be derived) from such activity by the person or persons subject to such penalty.
Calculation of penalty
The penalty amount determined under paragraph (1) shall be calculated with respect to each instance of an activity described in subsection (a), each instance in which income was derived by the person or persons subject to such penalty, and each person who participated in such an activity.
Liability for penalty
If more than 1 person is liable under subsection (a) with respect to such activity, all such persons shall be jointly and severally liable for the penalty under such subsection.
Penalty Not Deductible
The payment of any penalty imposed under this section or the payment of any amount to settle or avoid the imposition of such penalty shall not be considered an ordinary and necessary expense in carrying on a trade or business for purposes of this title and shall not be deductible by the person who is subject to such penalty or who makes such payment.
.
Conforming amendment
Section 6700(a) is amended by striking the last sentence.
Effective date
The amendments made by this section shall apply to the activities described in paragraphs (1) and (2) of section 6700(a) of the Internal Revenue Code of 1986 and after the date of the enactment of this Act.
Penalty for aiding and abetting the understatement of tax liability
In general
Section 6701(a) (relating to imposition of penalty) is amended—
by inserting , or tax liability reflected in,
after the preparation or presentation of
in paragraph (1),
by inserting aid, assistance, procurement, or advice with respect to such
before portion
both places it appears in paragraphs (2) and (3), and
by inserting instance of aid, assistance, procurement, or advice or each such
before document
in the matter following paragraph (3).
Amount of penalty
Subsection (b) of section 6701 (relating to penalties for aiding and abetting understatement of tax liability) is amended to read as follows:
Amount of Penalty; Calculation of Penalty; Liability for Penalty
Amount of penalty
The amount of the penalty imposed by subsection (a) shall be 100 percent of the gross income derived (or to be derived) from such aid, assistance, procurement, or advice provided by the person or persons subject to such penalty.
Calculation of penalty
The penalty amount determined under paragraph (1) shall be calculated with respect to each instance of aid, assistance, procurement, or advice described in subsection (a), each instance in which income was derived by the person or persons subject to such penalty, and each person who made such an understatement of the liability for tax.
Liability for penalty
If more than 1 person is liable under subsection (a) with respect to providing such aid, assistance, procurement, or advice, all such persons shall be jointly and severally liable for the penalty under such subsection.
.
Penalty not deductible
Section 6701 is amended by adding at the end the following new subsection:
Penalty not deductible
The payment of any penalty imposed under this section or the payment of any amount to settle or avoid the imposition of such penalty shall not be considered an ordinary and necessary expense in carrying on a trade or business for purposes of this title and shall not be deductible by the person who is subject to such penalty or who makes such payment.
.
Effective date
The amendments made by this section shall apply to the activities described in section 6701(a) of the Internal Revenue Code of 1986 after the date of the enactment of this Act.
Increase in criminal monetary penalty limitation for the underpayment or overpayment of tax due to fraud
In General
Section 7206 (relating to fraud and false statements) is amended—
by striking Any person who—
and inserting (a) In General.—Any person who—
, and
by adding at the end the following new subsection:
Increase in monetary limitation for underpayment or overpayment of tax due to fraud
If any portion of any underpayment (as defined in section 6664(a)) or overpayment (as defined in section 6401(a)) of tax required to be shown on a return is attributable to fraudulent action described in subsection (a), the applicable dollar amount under subsection (a) shall in no event be less than an amount equal to such portion. A rule similar to the rule under section 6663(b) shall apply for purposes of determining the portion so attributable.
.
Increase in penalties
Attempt to evade or defeat tax
Section 7201 is amended—
by striking $100,000
and inserting $500,000
,
by striking $500,000
and inserting $1,000,000
, and
by striking 5 years
and inserting 10 years
.
Willful failure to file return, supply information, or pay tax
Section 7203 is amended—
in the first sentence—
by striking Any person
and inserting the following:
In general
Any person
, and
by striking $25,000
and inserting $50,000
,
in the third sentence, by striking section
and inserting subsection
, and
by adding at the end the following new subsection:
Aggravated failure to file
In general
In the case of any failure described in paragraph (2), the first sentence of subsection (a) shall be applied by substituting—
felony
for misdemeanor
$500,000 ($1,000,000
for $25,000 ($100,000
, and
10 years
for 1 year
.
Failure described
A failure described in this paragraph is a failure to make a return described in subsection (a) for a period of 3 or more consecutive taxable years.
.
Fraud and false statements
Section 7206(a) (as redesignated by subsection (a)) is amended—
by striking $100,000
and inserting $500,000
,
by striking $500,000
and inserting $1,000,000
, and
by striking 3 years
and inserting 5 years
.
Effective date
The amendments made by this section shall apply to actions, and failures to act, occurring after the date of the enactment of this Act.
Economic Substance Doctrine
Clarification of economic substance doctrine
In general
Section 7701 is amended by redesignating subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection:
Clarification of economic substance doctrine; etc
General rules
In general
In any case in which a court determines that the economic substance doctrine is relevant for purposes of this title to a transaction (or series of transactions), such transaction (or series of transactions) shall have economic substance only if the requirements of this paragraph are met.
Definition of economic substance
For purposes of subparagraph (A)—
In general
A transaction has economic substance only if—
the transaction changes in a meaningful way (apart from Federal tax effects) the taxpayer’s economic position, and
the taxpayer has a substantial nontax purpose for entering into such transaction and the transaction is a reasonable means of accomplishing such purpose.
Special rule where taxpayer relies on profit potential
A transaction shall not be treated as having economic substance by reason of having a potential for profit unless—
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, and
the reasonably expected pre-tax profit from the transaction exceeds a risk-free rate of return.
Treatment of fees and foreign taxes
Fees and other transaction expenses and foreign taxes shall be taken into account as expenses in determining pre-tax profit under subparagraph (B)(ii).
Special rules for transactions with tax-indifferent parties
Special rules for financing transactions
The form of a transaction which is in substance the borrowing of money or the acquisition of financial capital directly or indirectly from a tax-indifferent party shall not be respected if the present value of the deductions to be claimed with respect to the transaction is substantially in excess of the present value of the anticipated economic returns of the person lending the money or providing the financial capital. A public offering shall be treated as a borrowing, or an acquisition of financial capital, from a tax-indifferent party if it is reasonably expected that at least 50 percent of the offering will be placed with tax-indifferent parties.
Artificial income shifting and basis adjustments
The form of a transaction with a tax-indifferent party shall not be respected if—
it results in an allocation of income or gain to the tax-indifferent party in excess of such party’s economic income or gain, or
it results in a basis adjustment or shifting of basis on account of overstating the income or gain of the tax-indifferent party.
Definitions and special rules
For purposes of this subsection—
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.
Tax-indifferent party
The term tax-indifferent party means any person or entity not subject to tax imposed by subtitle A. A person shall be treated as a tax-indifferent party with respect to a transaction if the items taken into account with respect to the transaction have no substantial impact on such person’s liability under subtitle A.
Exception for personal transactions of individuals
In the case of an individual, this subsection shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.
Treatment of lessors
In applying paragraph (1)(B)(ii) to the lessor of tangible property subject to a lease—
the expected net tax benefits with respect to the leased property shall not include the benefits of—
depreciation,
any tax credit, or
any other deduction as provided in guidance by the Secretary, and
subclause (II) of paragraph (1)(B)(ii) shall be disregarded in determining whether any of such benefits are allowable.
Other common law doctrines not affected
Except as specifically provided in this subsection, the provisions of this subsection shall not be construed as altering or supplanting any other rule of law, and the requirements of this subsection shall be construed as being in addition to any such other rule of law.
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. Such regulations may include exemptions from the application of this subsection.
.
Effective date
The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.
Penalty for understatements attributable to transactions lacking economic substance, etc
In general
Subchapter A of chapter 68 is amended by inserting after section 6662A the following new section:
Penalty for understatements attributable to Transactions lacking economic substance, etc
Imposition of penalty
If a taxpayer has an noneconomic substance transaction understatement for any taxable year, there shall be added to the tax an amount equal to 40 percent of the amount of such understatement.
Reduction of penalty for disclosed Transactions
Subsection (a) shall be applied by substituting 20 percent
for 40 percent
with respect to the portion of any noneconomic substance transaction understatement with respect to which the relevant facts affecting the tax treatment of the item are adequately disclosed in the return or a statement attached to the return.
Noneconomic substance transaction understatement
For purposes of this section—
In general
The term noneconomic substance transaction understatement means any amount which would be an understatement under section 6662A(b)(1) if section 6662A were applied by taking into account items attributable to noneconomic substance transactions rather than items to which section 6662A would apply without regard to this paragraph.
Noneconomic substance transaction
The term noneconomic substance transaction means any transaction if—
there is a lack of economic substance (within the meaning of section 7701(o)(1)) for the transaction giving rise to the claimed benefit or the transaction was not respected under section 7701(o)(2), or
the transaction fails to meet the requirements of any similar rule of law.
Rules applicable to compromise of penalty
In general
If the 1st letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals has been sent with respect to a penalty to which this section applies, only the Commissioner of Internal Revenue may compromise all or any portion of such penalty.
Applicable rules
The rules of paragraphs (2) and (3) of section 6707A(d) shall apply for purposes of paragraph (1).
Coordination with other penalties
Except as otherwise provided in this part, the penalty imposed by this section shall be in addition to any other penalty imposed by this title.
Cross references
For coordination of penalty with understatements under section 6662 and other special rules, see section 6662A(e).
For reporting of penalty imposed under this section to the Securities and Exchange Commission, see section 6707A(e).
.
Coordination with other understatements and penalties
The second sentence of section 6662(d)(2)(A) is amended by inserting and without regard to items with respect to which a penalty is imposed by section 6662B
before the period at the end.
Subsection (e) of section 6662A is amended—
in paragraph (1), by inserting and noneconomic substance transaction understatements
after reportable transaction understatements
both places it appears,
in paragraph (2)(A), by inserting and a noneconomic substance transaction understatement
after reportable transaction understatement
,
in paragraph (2)(B), by inserting 6662B or
before 6663
,
in paragraph (2)(C)(i), by inserting or section 6662B
before the period at the end,
in paragraph (2)(C)(ii), by inserting and section 6662B
after This section
,
in paragraph (3), by inserting or noneconomic substance transaction understatement
after reportable transaction understatement
, and
by adding at the end the following new paragraph:
Noneconomic substance transaction understatement
For purposes of this subsection, the term noneconomic substance transaction understatement has the meaning given such term by section 6662B(c).
.
Subsection (e) of section 6707A is amended—
by striking or
at the end of subparagraph (B), and
by striking subparagraph (C) and inserting the following new subparagraphs:
is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, or
is required to pay a penalty under section 6662(h) with respect to any transaction and would (but for section 6662A(e)(2)(C)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c) or under section 6662B,
.
Clerical amendment
The table of sections for part II of subchapter A of chapter 68 is amended by inserting after the item relating to section 6662A the following new item:
Sec. 6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.
.
Effective date
The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.
Denial of deduction for interest on underpayments attributable to noneconomic substance transactions
In general
Section 163(m) (relating to interest on unpaid taxes attributable to nondisclosed reportable transactions) is amended—
by striking “attributable” and all that follows and inserting the following: “attributable to—
the portion of any reportable transaction understatement (as defined in section 6662A(b)) with respect to which the requirement of section 6664(d)(2)(A) is not met, or
any noneconomic substance transaction understatement (as defined in section 6662B(c)).
, and
by inserting And Noneconomic Substance Transactions
in the heading thereof after Transactions
.
Effective date
The amendments made by this section shall apply to transactions after the date of the enactment of this Act in taxable years ending after such date.
Provisions Relating to Oil and Gas
Elimination of amortization of geological and geophysical expenditures for major integrated oil companies
In General
Section 167(h) is amended by adding at the end the following new paragraph:
Nonapplication to major integrated oil companies
This subsection shall not apply with respect to any expenses paid or incurred for any taxable year by any integrated oil company (as defined in section 291(b)(4)) which has an average daily worldwide production of crude oil of at least 500,000 barrels for such taxable year.
.
Effective Date
The amendment made by this section shall take effect as if included in the amendment made by section 1329(a) of the Energy Policy Act of 2005.
Revaluation of lifo inventories of large integrated oil companies
General Rule
Notwithstanding any other provision of law, if a taxpayer is an applicable integrated oil company for its last taxable year ending in calendar year 2005, the taxpayer shall—
increase, effective as of the close of such taxable year, the value of each historic LIFO layer of inventories of crude oil, natural gas, or any other petroleum product (within the meaning of section 4611) by the layer adjustment amount, and
decrease its cost of goods sold for such taxable year by the aggregate amount of the increases under paragraph (1).
Layer Adjustment Amount
For purposes of this section—
In general
The term layer adjustment amount means, with respect to any historic LIFO layer, the product of—
$18.75, and
the number of barrels of crude oil (or in the case of natural gas or other petroleum products, the number of barrel-of-oil equivalents) represented by the layer.
Barrel-of-oil equivalent
The term barrel-of-oil equivalent has the meaning given such term by section 29(d)(5) (as in effect before its redesignation by the Energy Tax Incentives Act of 2005).
Application of requirement
No change in method of accounting
Any adjustment required by this section shall not be treated as a change in method of accounting.
Underpayments of estimated tax
No addition to the tax shall be made under section 6655 of the Internal Revenue Code of 1986 (relating to failure by corporation to pay estimated tax) with respect to any underpayment of an installment required to be paid with respect to the taxable year described in subsection (a) to the extent such underpayment was created or increased by this section.
Applicable Integrated Oil Company
For purposes of this section, the term applicable integrated oil company means an integrated oil company (as defined in section 291(b)(4) of the Internal Revenue Code of 1986) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005. For purposes of this subsection, all persons treated as a single employer under subsections (a) and (b) of section 52 of the Internal Revenue Code of 1986 shall be treated as 1 person and, in the case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.
Uniform Definition of Child
Repeal of uniform definition of child and restoration of prior rule
In general
Title II of the Working Families Tax Relief Act of 2004 (relating to uniform definition of child), and the amendments made by such title, are hereby repealed.
Administration of Internal Revenue Code of 1986
The Internal Revenue Code of 1986 shall be applied and administered as if the provisions, and amendments, specified in subsection (a) had never been enacted.
Conforming amendment
Section 32(c)(2)(A), as added by section 102 of this Act, is amended to read as follows:
Qualifying child
In general
The term qualifying child means any individual if—
the taxpayer is allowed a deduction under section 151 (determined without regard to paragraphs (1)(A) and (2) of subsection (c) and subsection 152(e)), with respect to such individual for the taxable year, and
such individual bears a relationship to the taxpayer described in paragraph (1), (2), or (3) of section 152(a).
.
Effective date
This section shall apply to taxable years beginning after December 31, 2006.
Other Revenue Provisions
Inflation adjustment of tax on distilled spirits, beer, wine, and tobacco
Distilled spirits
Section 5001 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:
Adjustment of tax rates for inflation
In the case of any calendar year beginning after 2006, each of the rates of tax in subsection (a), and the dollar amount in section 5010(a)(1)(A), shall be increased by an amount equal to—
such rate of tax or dollar amount (as the case may be), multiplied by
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 2005
for calendar year 1992
in subparagraph (B) thereof.
.
Wine
Section 5041 is amended by adding at the end the following new subsection:
Adjustment of tax rates for inflation
In the case of any calendar year beginning after 2006, each of the rates of tax in subsection (b) shall be increased by an amount equal to—
such rate of tax, multiplied by
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 2005
for calendar year 1992
in subparagraph (B) thereof.
.
Beer
Section 5041 is amended by adding at the end the following new subsection:
Adjustment of tax rates for inflation
In the case of any calendar year beginning after 2006, each of the rates of tax in subsection (a) shall be increased by an amount equal to—
such rate of tax, multiplied by
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 2005
for calendar year 1992
in subparagraph (B) thereof.
.
Tobacco products
Section 5701 is amended by adding at the end the following new subsection:
Adjustment of tax rates for inflation
In the case of any calendar year beginning after 2006, each of the rates of tax in subsections (a), (b), (c), (d), (e), (f), and (g) shall be increased by an amount equal to—
such rate of tax or dollar amount (as the case may be), multiplied by
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 2005
for calendar year 1992
in subparagraph (B) thereof.
.
Effective date
The amendments made by this section shall apply to years beginning after December 31, 2006.
Termination of various exclusions, exemptions, deductions, and credits
In general
Subchapter C of chapter 90 (relating to provisions affecting more than one subtitle) is amended by adding at the end the following new section:
Termination of certain provisions
The following provisions shall not apply to taxable years beginning after December 31, 2005:
Section 44 (relating to credit for expenditures to provide access to disabled individuals).
Section 62(a)(2)(D) (relating to deduction for certain expenses of elementary and secondary school teachers).
Section 67 (relating to 2-percent floor on miscellaneous itemized deductions).
Section 74(c) (relating to exclusion of certain employee achievement awards).
Section 79 (relating to exclusion of group-term life insurance purchased for employees).
Section 104(a)(1) (relating to exclusion of workmen’s compensation).
Section 104(a)(2) (relating to exclusion of damages for physical injuries and sickness).
Section 107 (relating to exclusion of rental value of parsonages).
Section 119 (relating to exclusion of meals or lodging furnished for the convenience of the employer).
Section 125 (relating to exclusion of cafeteria plan benefits).
Section 132 (relating to certain fringe benefits), except with respect to subsection (a)(5) thereof (relating to exclusion of qualified transportation fringe).
Section 163(h)(4)(A)(i)(II) (relating to definition of qualified residence).
Section 165(d) (relating to deduction for wagering losses).
Section 217 (relating to deduction for moving expenses).
Section 454 (relating to deferral of tax on obligations issued at discount).
Section 501(c)(9) (relating to tax-exempt status of voluntary employees’ beneficiary associations).
Section 911 (relating to exclusion of earned income of citizens or residents of the United States living abroad).
Section 912 (relating to exemption for certain allowances).
.
Conforming amendment
The table of sections for subchapter C of chapter 90 is amended by adding at the end the following new item:
Sec. 7875. Termination of certain provisions.
.
Termination of various preferential treatments
In General
Section 7875, as added by section 106, is amended—
by inserting (or transactions in the case of sections referred to in paragraphs (21), (22), (23), (24), and (27))
after taxable years beginning
, and
by adding at the end the following new paragraphs:
Section 43 (relating to enhanced oil recovery credit).
Section 263(c) (relating to intangible drilling and development costs in the case of oil and gas wells and geothermal wells).
Section 382(l)(5) (relating to exception from net operating loss limitations for corporations in bankruptcy proceeding).
Section 451(i) (relating to special rules for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy).
Section 453A (relating to special rules for nondealers), but only with respect to the dollar limitation under subsection (b)(1) thereof and subsection (b)(3) thereof (relating to exception for personal use and farm property).
Section 460(e)(1) (relating to special rules for long-term home construction contracts or other short-term construction contracts).
Section 613A (relating to percentage depletion in case of oil and gas wells).
Section 616 (relating to development costs).
Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), and 865(b) (relating to inventory property sales source rule exception).
.
Full tax rate on Nuclear Decommissioning Reserve Fund
Subparagraph (B) of section 468A(e)(2) is amended to read as follows:
Rate of tax
For purposes of subparagraph (A), the rate set forth in this subparagraph is 35 percent.
.
Deferral of active income of controlled foreign corporations
Section 952 (relating to subpart F income defined) is amended by adding at the end the following new subsection:
Special application of subpart
In general
For taxable years beginning after December 31, 2005, notwithstanding any other provision of this subpart, the term subpart F income means, in the case of any controlled foreign corporation, the income of such corporation derived from any foreign country.
Applicable rules
Rules similar to the rules under the last sentence of subsection (a) and subsection (d) shall apply to this subsection.
.
Deferral of active financing income
Section 953(e)(10) is amended—
by striking 2006
and inserting 2005
, and
by striking 2007
and inserting 2006
.
Depreciation on Equipment in Excess of Alternative Depreciation System
Section 168(g)(1) (relating to alternative depreciation system) is amended by striking and
at the end of subparagraph (D), by adding and
at the end of subparagraph (E), and by inserting after subparagraph (E) the following new subparagraph:
notwithstanding subsection (a), any tangible property placed in service after December 31, 2005,
.
Effective Date
The amendments made by subsections (b), (c), and (d) shall apply to taxable years beginning after December 31, 2005.
Technical and conforming amendments; sunset
Technical and conforming amendments
The Secretary of the Treasury or the Secretary’s delegate shall not later than 90 days after the date of the enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a draft of any technical and conforming changes in the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the purposes of the provisions of, and amendments made by, this Act.
Sunset
In general
All provisions of, and amendments made by, this Act shall not apply to taxable years beginning after December 31, 2010.
Application of Code
The Internal Revenue Code of 1986 shall be applied and administered to taxable years described in subsection (a) as if the provisions of, and amendments made by, this Act had never been enacted.