Revises provisions concerning small business taxation to: (1) eliminate the S corporation filing category and permit eligible corporations that are not publicly traded to be treated as a partnership; (2) increase expensing under section 179; (3) repeal provisions concerning collapsible corporations; (4) exclude from net earnings from self-employment partnership income attributable to capital; (5) repeal the ability to elect large partnership reporting rules; and (6) revise provisions concerning the exchange of property held for productive use, the definition of qualified corporate partners for purposes of the at risk rules, payments to retiring partners, foreign currency transactions, and a limited entrepreneur with respect to farming.
[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5505 Introduced in House (IH)]
107th CONGRESS
2d Session
H. R. 5505
To simplify certain provisions of the Internal Revenue Code of 1986 and
to establish a uniform pass-thru regime.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
October 1, 2002
Mr. Houghton introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To simplify certain provisions of the Internal Revenue Code of 1986 and
to establish a uniform pass-thru regime.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Individual and
Small Business Tax Simplification Act of 2002''.
(b) References to Internal Revenue Code of 1986.--Except as
otherwise expressly provided, whenever in this Act an amendment or
repeal is expressed in terms of an amendment to, or repeal of, a
section or other provision, the reference shall be considered to be
made to a section or other provision of the Internal Revenue Code of
1986.
(c) Table of Contents.--
Sec. 1. Short title; etc.
TITLE I--INDIVIDUAL INCOME TAX SIMPLIFICATION
Subtitle A--General Provisions
Sec. 101. Alternative minimum tax reform.
Sec. 102. Head of household filing status replaced with special
personal exemption.
Sec. 103. Simplification of tax on social security benefits.
Sec. 104. Simplification of capital gains tax.
Sec. 105. Repeal of 2-percent floor on miscellaneous itemized
deductions.
Sec. 106. Simplification of deduction for points on home mortgage.
Sec. 107. Taxation of minor children.
Sec. 108. Simplification of dependent care tax benefits.
Sec. 109. Acceleration of phaseout of overall limitation on itemized
deductions.
Sec. 110. Acceleration of repeal of phaseout of personal exemptions.
Subtitle B--Uniform Definition of Child
Sec. 121. Uniform definition of child.
Sec. 122. Treatment of government benefits in determining support and
cost of maintaining household.
Sec. 123. Effective date.
Subtitle C--Education Tax Incentives
Sec. 131. Hope and Lifetime Learning credits combined.
Sec. 132. Uniform definition of qualifying higher education expenses.
TITLE II--SMALL BUSINESS TAX SIMPLIFICATION
Sec. 201. Unified pass-thru entity regime.
Sec. 202. Increase in expensing under section 179.
Sec. 203. Rollover of property held for productive use or investment.
Sec. 204. Repeal of collapsible corporations.
Sec. 205. References to general partners.
Sec. 206. References to limited partners.
Sec. 207. Partnership income attributable to capital excluded from net
earnings from self-employment.
Sec. 208. Repeal of ability to elect large partnership reporting rules.
TITLE I--INDIVIDUAL INCOME TAX SIMPLIFICATION
Subtitle A--General Provisions
SEC. 101. ALTERNATIVE MINIMUM TAX REFORM.
(a) Increase in Alternative Minimum Tax Exemption Amount.--
(1) Subparagraph (A) of section 55(d)(1) (relating to
exemption amount for taxpayers other than corporations) is
amended by striking ``$45,000'' and all that follows through
``2004)'' and inserting ``$75,000''.
(2) Subparagraph (B) of section 55(d)(1) is amended by
striking ``$33,750'' and all that follows through ``2004)'' and
inserting ``$56,000''.
(b) Adjustment for Inflation.--Subsection (d) of section 55 is
amended by adding at the end the following new paragraph:
``(4) Inflation adjustment.--
``(A) In general.--In the case of a taxable year
beginning in a calendar year after 2003, each of the
dollar amounts contained in subparagraphs (A) and (B)
of paragraph (1) shall be increased by an amount equal
to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2002'
for `calendar year 1992' in subparagraph (B)
thereof.
``(B) Rounding.--Any increase determined under
subparagraph (A) shall be rounded to the nearest
multiple of $100.''.
(c) Repeal of Limit on Deduction for State and Local Taxes.--
Subparagraph (A) of section 56(b)(1) is amended to read as follows:
``(A) In general.--No deduction shall be allowed
for any miscellaneous itemized deduction (as defined in
section 67(b)).''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 102. HEAD OF HOUSEHOLD FILING STATUS REPLACED WITH SPECIAL
PERSONAL EXEMPTION.
(a) Increased Personal Exemption for Single Parents, Etc.--Section
151 is amended by redesignating subsections (d) and (e) as subsection
(e) and (f) and by inserting after subsection (c) the following new
subsection:
``(d) Additional Exemption for Single Parents, Etc.--
``(1) In general.--An exemption of $3,700 in the case of an
individual who--
``(A) is not married at the close of the taxable
year,
``(B) is not a surviving spouse, and
``(C)(i) maintains as his home a household which
constitutes for more than one-half of such taxable year
the principal place of abode, as a member of such
household, of--
``(I) a qualifying child (as defined in
subsection (c)), or
``(II) any other person who is a dependent
of the taxpayer, if the taxpayer is entitled to
a deduction for the taxable year for such
person under subsection (c), or
``(ii) maintains a household which constitutes for
such taxable year the principal place of abode of the
father or mother of the taxpayer, if the taxpayer is
entitled to a deduction for the taxable year for such
father or mother under subsection (c).
For purposes of this paragraph, an individual shall be
considered as maintaining a household only if over half of the
cost of maintaining the household during the taxable year is
furnished by such individual.
``(2) Marital status.--Marital status shall be determined
in accordance with section 7703; except that an individual
shall be treated as not married for purposes of this subsection
if at any during such year the spouse of such individual is a
nonresident alien.
``(3) Limitations.--Paragraph (1) shall not apply to any
individual--
``(A) if at any time during the taxable year he is
a nonresident alien, or
``(B) by reason of an individual who would not be a
dependent for the taxable year but for--
``(i) paragraph (9) of section 152(a), or
``(ii) subsection (c) of section 152.
``(4) Inflation adjustment.--
``(A) In general.--In the case of a taxable year
beginning in a calendar year after 2003, the dollar
amount contained in paragraph (1) shall be increased by
an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2002'
for `calendar year 1992' in subparagraph (B)
thereof.
``(B) Rounding.--Any increase determined under
subparagraph (A) shall be rounded to the nearest
multiple of $50.''.
(b) Repeal of Head of Household Filing Status.--Subsection (b) of
section 1 (relating to heads of household) is repealed.
(c) Conforming Amendments.--
(1) Section 1(c) is amended--
(A) in the heading by striking ``Spouses and Heads
of Households).--'' and inserting ``Spouses).--'', and
(B) by striking ``or the head of a household as
defined in section 2(b)''.
(2) Section 2 is amended by striking subsection (b) and by
redesignating subsections (c), (d), and (e) as subsections (b),
(c), and (d), respectively.
(3) Section 25B(b) is amended by striking the portion of
the table related to head of a household.
(4) Section 63(c)(2) is amended--
(A) by striking subparagraph (B), and
(B) by redesignating subparagraphs (C) and (D) as
subparagraphs (B) and (C), respectively.
(5) Section 151(c)(6)(B)(iii) is amended by striking ``or a
head of a household (as such terms are defined in section 2)''
and inserting ``(as defined in section 2)''.
(6) Section 151(c)(6)(C) is amended by striking ``, section
2(b)(1)(A),''.
(7) Section 151(e)(3)(C) is amended--
(A) by striking clause (ii),
(B) in clause (iii), by striking ``or head of a
household'', and
(C) by redesignating clauses (iii) and (iv) as
clauses (ii) and (iii), respectively.
(8) Section 3402(r)(2)(A) is amended by striking ``section
63(c)(2)(C)'' and inserting ``section 63(c)(2)(B)''.
(9) Section 6012(a)(1)(A) is amended--
(A) in clause (i), by striking ``is not a head of a
household (as defined section 2(b)),'',
(B) by striking clause (ii),
(C) by redesignating clauses (iii) and (iv) as
clauses (ii) and (iii), respectively, and
(D) in the last sentence, by striking ``Clause
(iv)'' and inserting ``Clause (iii)'' and by striking
``151(c)'' and inserting ``151(d)''.
(10) Section 6012(a)(1)(B) is amended--
(A) by striking ``clause (i), (ii), or (iii)'' and
inserting ``clause (i) or (ii)'', and
(B) by striking ``clause (iv)'' and inserting
``clause (iii)''.
(11)(A) Paragraph (6) of section 1(f) is amended by
striking ``151(d)(4)(A)'' and inserting ``151(e)(4)(A)''.
(B) Subparagraph (C) of section 642(b)(2), as amended by
section 105, is amended--
(i) by striking ``151(d)'' and inserting
``151(e)'', and
(ii) by striking ``151(d)(3)(C)(iii)'' and
inserting ``151(e)(3)(C)(ii)''.
(C) Paragraph (1) of section 3402(f) is amended by striking
``151(d)(2)'' and inserting ``151(e)(2)''.
(D) Subparagraph (B) of section 3402(r)(2) is amended by
striking ``151(d)'' and inserting ``151(e)''.
(E) Clause (ii) of section 6012(a)(1)(D) is amended--
(i) by striking ``151(d)'' and inserting
``151(e)'', and
(ii) by striking ``151(d)(2)'' and inserting
``151(e)(2)''.
(F) The next to the last sentence of section 6013(b)(3)(A)
is amended by striking ``151(d)'' and inserting ``151(e)''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 103. SIMPLIFICATION OF TAX ON SOCIAL SECURITY BENEFITS.
(a) Repeal of 1993 Increase.--
(1) In general.--Subsection (a) of section 86 (relating to
social security and tier 1 railroad retirement benefits) is
amended to read as follows:
``(a) In General.--Gross income for the taxable year of any
taxpayer described in subsection (b) (notwithstanding section 207 of
the Social Security Act) includes social security benefits in an amount
equal to the lesser of--
``(1) one-half of the social security benefits received
during the taxable year, or
``(2) one-half of the excess described in subsection
(b)(1).''
(2) Conforming amendments.--
(A) Subsection (c) of section 86 is amended to read
as follows:
``(c) Base Amount.--For purposes of this section, the term `base
amount' means--
``(1) except as otherwise provided in this subsection,
$25,000,
``(2) $32,000 in the case of a joint return, and
``(3) zero in the case of a taxpayer who--
``(A) is married as of the close of the taxable
year (within the meaning of section 7703) but does not
file a joint return for such year, and
``(B) does not live apart from his spouse at all
times during the taxable year.''
(B) Paragraph (3) of section 871(a) is amended by
striking ``85 percent'' in subparagraph (A) and
inserting ``50 percent''.
(C)(i) Subparagraph (A) of section 121(e)(1) of the
Social Security Amendments of 1983 (Public Law 98-21)
is amended--
(I) by striking ``(A) There'' and inserting
``There'';
(II) by striking ``(i)'' immediately
following ``amounts equivalent to''; and
(III) by striking ``, less (ii)'' and all
that follows and inserting a period.
(ii) Paragraph (1) of section 121(e) of such Act is
amended by striking subparagraph (B).
(iii) Paragraph (3) of section 121(e) of such Act
is amended by striking subparagraph (B) and by
redesignating subparagraph (C) as subparagraph (B).
(iv) Paragraph (2) of section 121(e) of such Act is
amended in the first sentence by striking ``paragraph
(1)(A)'' and inserting ``paragraph (1)''.
(b) Use of Adjusted Gross Income Without Modifications.--
(1) In general.--Subsection (b) of section 86 is amended to
read as follows:
``(b) Taxpayers to Whom Subsection (a) Applies.--A taxpayer is
described in this subsection if--
``(1) the sum of--
``(A) the adjusted gross income of the taxpayer for
the taxable year (determined without regard to this
section), plus
``(B) one-half of the social security benefits
received during the taxable year, exceeds
``(2) the base amount.''
(2) Conforming amendments.--
(A) Subparagraph (A) of section 219(g)(3) is
amended--
(i) by striking ``sections 86 and 469'' in
clause (i) and inserting ``section 469'', and
(ii) by inserting ``86,'' before ``135'' in
clause (ii).
(B) Paragraph (4) of section 135(c) is amended--
(i) by inserting ``86,'' before ``137'' in
clause (i), and
(ii) by striking ``sections 86, 469,'' in
clause (ii) and inserting ``sections 469''.
(C) Paragraph (3) of section 137(b) is amended--
(i) by inserting ``86,'' before ``221'' in
clause (i), and
(ii) by striking ``86,'' in clause (ii).
(D) Subparagraph (C) of section 221(b)(2) is
amended--
(i) by inserting ``86,'' before ``222'' in
clause (i), and
(ii) by striking ``86,'' in clause (ii).
(E) Subparagraph (C) of section 222(b)(2) is
amended--
(i) by inserting ``86,'' before ``911'' in
clause (i), and
(ii) by striking ``86,'' in clause (ii).
(c) Effective Dates.--
(1) In general.--Except as provided in paragraphs (2) and
(3), the amendments made by this section shall apply to taxable
years beginning after December 31, 2002.
(2) Subsection (a)(2)(B).--The amendment made by subsection
(a)(2)(B) shall apply to benefits paid after December 31, 2002.
(3) Subsection (a)(2)(C).--The amendments made by
subsection (a)(2)(C) shall apply to tax liabilities for taxable
years beginning after December 31, 2002.
(d) Maintenance of Transfers to Hospital Insurance Trust Fund.--
There are hereby appropriated to the Hospital Insurance Trust Fund
established under section 1817 of the Social Security Act amounts equal
to the reduction in revenues to the Treasury by reason of the enactment
of this Act. Amounts appropriated by the preceding sentence shall be
transferred from the general fund at such times and in such manner so
as to replicate to the extent possible the transfers which would have
occurred to such Trust Fund had this Act not been enacted.
SEC. 104. SIMPLIFICATION OF CAPITAL GAINS TAX.
(a) In General.--Part I of subchapter P of chapter 1 (relating to
treatment of capital gains) is amended by adding at the end the
following new section:
``SEC. 1203. CAPITAL GAINS DEDUCTION.
``If for any taxable year a taxpayer other than a corporation has a
net capital gain, 50 percent of such gain shall be a deduction from
gross income.''.
(b) Deduction Allowable Whether or Not Taxpayer Itemizes Other
Deductions.--
(1) Subsection (b) of section 63 is amended by striking
``and'' at the end of paragraph (1), by striking the period at
the end of paragraph (2) and inserting ``, and'', and by adding
at the end the following new paragraph:
``(3) the deduction allowed by section 1203.''.
(2) Subsection (d) of section 63 is amended by striking
``and'' at the end of paragraph (1), by striking the period at
the end of paragraph (2) and inserting ``, and'', and by adding
at the end the following new paragraph:
``(3) the deduction allowed by section 1203.''.
(c) Minimum Tax Treatment.--
(1) Paragraph (1) of section 56(b) is amended by adding at
the end the following new subparagraph:
``(G) Capital gain deduction not applicable.--
Section 1203 shall not apply.''.
(2) Subsection (b) of section 55 is amended by striking
paragraph (3) and inserting the following new paragraphs:
``(3) Maximum tax on net capital gain.--The amount of tax
determined under the first sentence of paragraph (1)(A)(i)
shall not exceed the sum of--
``(A) the amount determined under such first
sentence computed at the rates and in the same manner
as if this paragraph had not been enacted on the
taxable excess reduced by the net capital gain, plus
``(B) a tax on the net capital gain determined by
using the regular tax capital gains tax rates.
``(4) Regular tax on net capital gain.--For purposes of
paragraph (3), the tax on the net capital gain determined by
using the regular tax capital gains tax rates is the excess
of--
``(A) the tax that would be computed under section
1 if net capital gain were determined with the
adjustments under this part, over
``(B) the tax that would be so computed under
section 1 if the taxable income were reduced by 50
percent of the net capital gain as so determined.''.
(d) Technical and Conforming Amendments.--
(1) Section 1 is amended by striking subsection (h).
(2) Paragraph (7) of section 57(a) is amended by striking
the last sentence.
(3) Subparagraph (E) of section 163(d)(4) is amended to
read as follows:
``(E) Coordination with capital gains deduction.--
The net capital gain taken into account under section
1203 for any taxable year shall be reduced (but not
below zero) by the amount which the taxpayer takes into
account as investment income under subparagraph
(B)(iii) for such year.''.
(4) Paragraph (1) of section 170(e) is amended by striking
``the amount of gain'' in the material following subparagraph
(B)(ii) and inserting ``50 percent (100 percent in the case of
a corporation) of the amount of gain''.
(5) Subparagraph (B) of section 172(d)(2) is amended to
read as follows:
``(B) the exclusion under section 1202 and the
deduction under section 1203 shall not be allowed.''.
(6) The last sentence of section 453A(c)(3) is amended by
striking all that follows ``long-term capital gain,'' and
inserting ``the maximum rate on net capital gain under section
1201 or the deduction under section 1203 (whichever is
appropriate) shall be taken into account.''.
(7)(A) Section 641(c)(2)(A) is amended by striking ``Except
as provided in section 1(h), the'' and inserting ``The''.
(B) Section 641(c)(2)(C) is amended by inserting after
clause (iii) the following new clause:
``(iv) The deduction under section 1203.''.
(8) Paragraph (4) of section 642(c) is amended to read as
follows:
``(4) Adjustments.--To the extent that the amount otherwise
allowable as a deduction under this subsection consists of gain
from the sale or exchange of capital assets held for more than
1 year, proper adjustment shall be made for any exclusion
allowable under section 1202 and any deduction allowable under
section 1203 to the estate or trust. In the case of a trust,
the deduction allowed by this subsection shall be subject to
section 681 (relating to unrelated business income).''.
(9) Section 642 is amended by adding at the end the
following new subsection:
``(j) Capital Gains Deduction.--The deduction under section 1203 to
an estate or trust shall be computed by excluding the portion (if any)
of the gains for the taxable year which is includible by the income
beneficiaries under sections 652 and 662 (relating to inclusions of
amounts in gross income of beneficiaries of trusts) as gain derived
from the sale or exchange of capital assets.''.
(10) The last sentence of section 643(a)(3) is amended to
read as follows: ``The exclusion under section 1202 and the
deduction under section 1203 shall not be taken into
account.''.
(11) Subparagraph (C) of section 643(a)(6) is amended by
inserting ``(i)'' before ``there shall'' and by inserting
before the period ``, and (ii) the deduction under section 1203
(relating to capital gains deduction) shall not be taken into
account''.
(12) Paragraph (4) of section 691(c) is amended by striking
``1(h),'' and by inserting ``1203,'' after ``1202,''.
(13) The second sentence of paragraph (2) of section 871(a)
is amended by striking ``section 1202'' and inserting
``sections 1202 and 1203''.
(14)(A) Paragraph (2) of section 904(b) is amended by
striking subparagraphs (A) and (C), by redesignating
subparagraph (B) as subparagraph (A), and by inserting after
subparagraph (A) (as so redesignated) the following new
subparagraph:
``(B) Other taxpayers.--In the case of a taxpayer
other than a corporation, taxable income from sources
outside the United States shall include gain from the
sale or exchange of capital assets only to the extent
of foreign source capital gain net income.''.
(B) Subparagraph (A) of section 904(b)(2), as so
redesignated, is amended--
(i) by striking all that precedes clause (i) and
inserting the following:
``(A) Corporations.--In the case of a corporation--
'', and
(ii) by striking in clause (i) ``in lieu of
applying subparagraph (A),''.
(C) Paragraph (3) of section 904(b) is amended by striking
subparagraphs (D) and (E) and inserting the following new
subparagraph:
``(D) Rate differential portion.--The rate
differential portion of foreign source net capital
gain, net capital gain, or the excess of net capital
gain from sources within the United States over net
capital gain, as the case may be, is the same
proportion of such amount as the excess of the highest
rate of tax specified in section 11(b) over the
alternative rate of tax under section 1201(a) bears to
the highest rate of tax specified in section 11(b).''.
(15) Paragraph (1) of section 1402(i) is amended by
inserting ``, and the deduction provided by section 1203 shall
not apply'' before the period at the end thereof.
(16) Paragraph (1) of section 1445(e) is amended by
striking ``20 percent'' and inserting ``one-half of the maximum
rate of tax in effect under section 1''.
(17)(A) The second sentence of section 7518(g)(6)(A) is
amended--
(i) by striking ``during a taxable year to which
section 1(h) or 1201(a) applies'', and
(ii) by striking ``20 percent'' and inserting
``one-half of the maximum rate of tax in effect under
section 1''.
(B) The second sentence of section 607(h)(6)(A) of the
Merchant Marine Act, 1936, is amended--
(i) by striking ``during a taxable year to which
section 1(h) or 1201(a) of such Code applies'', and
(ii) by striking ``20 percent'' and inserting
``one-half of the maximum rate of tax in effect under
section 1 of such Code''.
(e) Clerical Amendment.--The table of sections for part I of
subchapter P of chapter 1 is amended by adding at the end the following
new item:
``Sec. 1203. Capital gains deduction.''.
(f) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2002.
(2) Withholding.--The amendments made by subsection (d)(16)
shall apply only to amounts paid after December 31, 2002.
(3) Coordination with prior transition rule.--Any amount
treated as long-term capital gain by reason of paragraph (3) of
section 1122(h) of the Tax Reform Act of 1986 shall not be
taken into account for purposes of applying section 1203 of the
Internal Revenue Code of 1986 (as added by this section).
SEC. 105. REPEAL OF 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED
DEDUCTIONS.
(a) Termination.--Section 67 (relating to 2-percent floor on
miscellaneous itemized deductions) is hereby repealed.
(b) Conforming Amendments.--
(1) Subparagraph (A) of section 56(b)(1), as amended by
section 101, is hereby repealed.
(2) Clause (i) of section 642(b)(2)(C) is amended to read
as follows:
``(i) In general.--A qualified disability
trust shall be allowed a deduction equal to the
exemption amount under section 151(d),
determined by treating such trust as an
individual described in section
151(d)(3)(C)(iii).''
(3) Paragraph (3) of section 772(c) is amended to read as
follows:
``(3) Income or loss from other activities.--For purposes
of this chapter, any partner's distributive share of any income
or loss described in subsection (a)(2) shall be treated as an
item of income or expense (as the case may be) with respect to
property held for investment.''
(4) Paragraph (3) of section 773(b) is hereby repealed.
(5) Clause (iii) of section 6654(d)(1)(C) is amended to
read as follows:
``(iii) Determination of adjusted gross
income in case of estates and trusts.--For
purposes of this section, the adjusted gross
income of an estate or trust shall be computed
in the same manner as in the case of an
individual, except that--
``(I) the deductions for costs
which are paid or incurred in
connection with the administration of
the estate or trust and which would not
have been incurred if the property were
not held in such trust or estate, and
``(II) the deductions allowable
under sections 642(b), 651, and
661, shall be treated as allowable in arriving at adjusted gross
income. Under regulations, appropriate adjustments shall be made in the
application of part I of subchapter J of this chapter to take into
account the provisions of this section.''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 106. SIMPLIFICATION OF DEDUCTION FOR POINTS ON HOME MORTGAGE.
(a) In General.--Subsection (g) of section 461 (relating to prepaid
interest) is amended by adding at the end the following new paragraph:
``(3) Exception for certain refinancings.--
``(A) In general.--This subsection shall not apply
to points paid in respect of indebtedness secured by
such residence resulting from the refinancing of
indebtedness meeting the requirements of the preceding
sentence (or this sentence).
``(B) Limitation.--Subparagraph (A) shall apply
only to the extent the amount of the indebtedness
resulting from such refinancing does not exceed the sum
of--
``(i) the amount of the refinanced
indebtedness, plus
``(ii) the lesser of $10,000 or the points
paid in respect of the indebtedness resulting
from the refinancing to the extent that the
indebtedness resulting from the refinancing
does not exceed the refinanced indebtedness.''.
(b) Conforming Amendment.--The heading of paragraph (2) of section
461(g) is amended by inserting ``based on business practice'' after
``Exception''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 107. TAXATION OF MINOR CHILDREN.
(a) Application of Trust Rate Schedule to Net Unearned Income of
Minor Children.--Subsection (g) of section 1 (relating to certain
unearned income of minor children taxed as if parent's income) is
amended--
(1) by striking paragraphs (1), (3) and (5),
(2) by redesignating paragraphs (4), (6), and (7) as
paragraphs (3), (4), and (5), respectively, and
(3) by inserting before paragraph (2) the following new
paragraph:
``(1) In general.--In the case of a child to whom this
subsection applies, the tax imposed by this section shall be
the sum of--
``(A) a tax computed at the rates and in the same
manner as if this subsection had not been enacted on
taxable income reduced by net unearned income, plus
``(B) the excess (if any) of the tax determined
under subsection (e) on total taxable income over the
tax determined under subsection (e) on taxable income
reduced by net unearned income.''.
(b) Expansion of Parental Election.--Paragraph (5) of section 1(g)
(as redesignated under subsection (a)) is amended to read as follows:
``(5) Election to claim income of child on parent's
return.--
``(A) In general.--If the parent of any child to
whom this subsection applies elects the application of
subparagraph (B), such child--
``(i) shall be treated (other than for
purposes of this paragraph)--
``(I) as having no gross income for
such year, and
``(II) as not being entitled to any
deductions or credits for such year,
and
``(ii) shall not be required to file a
return under section 6012 for such year.
``(B) Income included on parent's return.--In the
case of a parent making the election under this
paragraph--
``(i) the gross income of each child to
whom such election applies shall be included in
such parent's gross income for the taxable
year,
``(ii) the deductions to which such child
would be entitled without regard to such
election shall be allowed to such parent but
only to the extent the aggregate of such
deductions does not exceed the gross income of
such child,
``(iii) any estimated tax payment, and any
amount which has been deducted and withheld
under chapter 24, for such year that is made in
the name and TIN of such child shall be treated
as an estimated tax payment or as an amount
deducted and withheld in the name and TIN of
such parent for such year (including for
purposes of section 31), and
``(iv) any interest which is an item of tax
preference under section 57(a)(5) of the child
shall be treated as an item of tax preference
of such parent (and not of such child).
``(C) Special rule for determining which parent may
make election.--For purposes of this paragraph, the
parent of a child to whom this subsection applies who
may make an election under this paragraph shall be--
``(i) in the case of parents who are not
married (within the meaning of section 7703),
the custodial parent (within the meaning of
section 151(c)(7)) of the child, and
``(ii) in the case of married individuals
filing separately, the individual with the
greater taxable income.
``(D) Carryovers allowed.--Subparagraph (A)(i)(II)
shall not prohibit the carryover of any amount that the
child would be entitled to carryover without regard to the election
under this paragraph.
``(E) Regulations.--The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this paragraph.''.
(c) Conforming Amendment.--The heading for subsection (g) of
section 1 is amended to read as follows:
``(g) Treatment of Certain Income of Minor Children.--''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 108. SIMPLIFICATION OF DEPENDENT CARE TAX BENEFITS.
(a) Repeal of Reduction of Credit Based on Adjusted Gross Income.--
Subsection (a) of section 21 (relating to allowance of credit) is
amended--
(1) in paragraph (1), by striking ``applicable percentage''
and inserting ``35 percent'',
(2) by striking paragraph (2), and
(3) by striking ``(1) In general.--'' and moving the text 2
ems to the left.
(b) Dollar Limit on Amount Creditable Made $5,500 Regardless of
Number of Qualifying Individuals.--
(1) In general.--Subsection (c) of section 21 (relating to
dollar limit on amount creditable) is amended to read as
follows:
``(c) Dollar Limit on Amount Creditable.--The amount of employment-
related expenses incurred during any taxable year which may be taken
into account under subsection (a) shall not exceed $5,500, reduced by
the aggregate amount excludable from gross income under section 129 for
the taxable year.''.
(2) Exclusion.--Subparagraph (A) of section 129(a)(2) is
amended by striking ``$5,000 ($2,500'' and inserting ``$5,500
($2,750''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 109. ACCELERATION OF PHASEOUT OF PHASEOUT OF OVERALL LIMITATION ON
ITEMIZED DEDUCTIONS.
(a) In General.--Section 68 (relating to overall limitation on
itemized deductions) is hereby repealed.
(b) Conforming Amendments.--
(1) Section 1(f)(6)(A) is amended by striking ``, section
68(b)(2)''.
(2) Section 773(a)(3)(B) is amended by striking clause (i)
and redesignating clauses (ii), (iii), and (iv) as clauses (i),
(ii), and (iii), respectively.
(3) The table of sections for part I of subchapter B of
chapter 1 is amended by striking the item relating to section
68.
(c) Effective Date.--The amendments by this section shall apply to
taxable years beginning after December 31, 2002.
SEC. 110. ACCELERATION OF REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.
(a) In General.--Subsection (e) of section 151 (relating to
phaseout of exemption amount), as amended by the preceding sections of
this Act, is amended by striking paragraph (3) and redesignating
paragraph (4) as paragraph (3).
(b) Conforming Amendments.--
(1) Paragraph (3) of section 151(e), as amended by
subsection (a), is amended to read as follows:
``(3) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 1989, the dollar amount
contained in paragraph (1) shall be increased by an amount
equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, by substituting `calendar year
1988' for `calendar year 1992' in subparagraph (B)
thereof.''.
(2) Section 1(f)(6) is amended--
(A) in subparagraph (A) by striking ``151(e)(4)''
and inserting ``151(e)(3)'', and
(B) in subparagraph (B), both as in effect on the
date of the enactment of this Act and as amended by the
Economic Growth and Tax Relief Reconciliation Act of
2001, by striking ``151(e)(4)(A)'' and inserting
``151(e)(3)''.
(3) Subparagraph (C) of section 642(b)(2), as amended by
the preceding sections of this Act, is amended by striking ``,
determined by treating such trust as an individual described in
section 151(e)(3)(C)(ii)''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
Subtitle B--Uniform Definition of Child
SEC. 121. UNIFORM DEFINITION OF CHILD.
(a) Personal Exemption.--
(1) In general.--Section 151, as amended by the preceding
sections of this Act, is amended by redesignating subsections
(c), (d), (e), and (f) as subsections (d), (e), (f), and (g),
respectively, and by inserting after subsection (b) the
following new subsection:
``(c) Additional Exemption for Qualifying Children.--
``(1) In general.--An exemption of the exemption amount for
each qualifying child.
``(2) Qualifying child.--For purposes of this section, the
term `qualifying child' means, with respect to any taxpayer for
any taxable year, an individual--
``(A) who bears a relationship to the taxpayer
described in paragraph (3),
``(B) who has the same principal place of abode as
the taxpayer for more than \1/2\ of such taxable year,
and
``(C) who meets the age requirements of paragraph
(4).
An individual shall not be treated as failing to meet the
requirements of subparagraph (B) by reason of time of birth or
death or by reason of temporary absences or other circumstances
specified in the regulations prescribed by the Secretary.
``(3) Relationship test.--
``(A) In general.--For purposes of paragraph
(2)(A), an individual bears a relationship to the
taxpayer described in this paragraph if such individual
is--
``(i) a son, daughter, stepson, or
stepdaughter of the taxpayer or a descendant of
any such relative,
``(ii) a brother, sister, stepbrother, or
stepsister of the taxpayer or a descendant of
any such relative, whom the taxpayer cares for
as the taxpayer's own child, or
``(iii) an eligible foster child of the
taxpayer.
``(B) Adopted child.--For purposes of subparagraph
(A), a child who is legally adopted, or who is placed
with the taxpayer by an authorized placement agency for
adoption by the taxpayer, shall be treated as a child
by blood.
``(C) Eligible foster child.--For purposes of
subparagraph (A), the term `eligible foster child'
means an individual--
``(i) who is placed with the taxpayer by an
authorized placement agency or by judgment,
decree, or other order of any court of
competent jurisdiction, and
``(ii) whom the taxpayer cares for as the
taxpayer's own child.
``(4) Age requirements.--For purposes of paragraph (2)(C),
an individual meets the requirements of this paragraph if such
individual--
``(A) has not attained the age of 19 as of the
close of the calendar year in which the taxable year of
the taxpayer begins,
``(B) is a student who has not attained the age of
24 as of the close of such calendar year, or
``(C) is permanently and totally disabled (as
defined in section 22(e)(3)) at any time during the
taxable year.
``(5) Special rules.--
``(A) Married dependents.--An individual shall not
be a qualifying child of a taxpayer if such individual
makes a joint return with the individual's spouse under
section 6013 for the taxable year beginning in the
calendar year in which the taxable year of the taxpayer
begins.
``(B) Individuals who support themselves.--An
individual shall not be a qualifying child of a
taxpayer if such individual provides over half of such
individual's own support for the calendar year in which
the taxable year of the taxpayer begins.
``(C) Only 1 exemption amount.--An individual who
is a qualifying child of any taxpayer shall not be
treated as the dependent of any taxpayer for purposes
of this part.
``(6) Special rule relating to 2 or more claiming
qualifying child.--
``(A) In general.--Except as provided in paragraph
(7), if an individual would (but for this paragraph) be
a qualifying child of 2 or more taxpayers for taxable
years beginning in the same calendar year, such
individual shall be treated as the qualifying child of
the taxpayer who is--
``(i) a parent of the individual, or
``(ii) if none of such taxpayers is a
parent of the individual, the taxpayer with the
highest adjusted gross income for such taxable
year.
``(B) Parents not filing joint returns.--If an
individual would (but for this paragraph) be a
qualifying child of both parents of such individual and
such parents do not file a joint return together, such
child shall be treated as the qualifying child of--
``(i) the parent with whom the child
resided for the longest period during the
taxable year, or
``(ii) if the child resides with both
parents for the same length of time during such
taxable year, the parent with the highest
adjusted gross income.
``(C) Foster children.--For purposes of this
paragraph, the taxpayer shall be treated as a parent of
any eligible foster child who has the same principal
place of abode as the taxpayer for more than one-half
of such taxable year.
``(7) Special rule for certain pre-2004 instruments.--
``(A) In general.--Notwithstanding paragraph (6), a
child who has parents who--
``(i) are divorced or legally separated
under a decree of divorce or separate
maintenance,
``(ii) are separated under a written
separation agreement, or
``(iii) live apart at all times during the
last 6 months of the calendar year,
shall be treated as being the qualifying child of the
noncustodial parent for a calendar year if the
requirements of subparagraph (B) are met.
``(B) Requirements.--For purposes of subparagraph
(A), the requirements of this subparagraph are met if--
``(i) such child would, but for this
paragraph, be the qualifying child of the
custodial parent, and
``(ii) a qualified pre-2004 instrument
between the parents is applicable to such child
for the taxable year beginning in such calendar
year.
In the case of an agreement executed before January 1,
1985, the requirements of this subparagraph are met
only if, in addition to meeting the requirements of
clauses (i) and (ii), the noncustodial parent provides
at least $600 for the support of such child during such
calendar year.
``(C) Qualified pre-2004 instrument.--For purposes
of this paragraph, the term `qualified pre-2004
instrument' means any written declaration referred to
in subsection (e)(2) (as in effect on the day before
the date of the enactment of the Individual and Small
Business Tax Simplification Act of 2002)--
``(i) which is executed before January 1,
2004, and
``(ii) which is not modified on or after
such date in a modification which expressly
provides that this subsection shall not apply
to such declaration.
``(D) Custodial parent and noncustodial parent.--
For purposes of this subsection--
``(i) Custodial parent.--The term
`custodial parent' means the parent with whom a
child shared the same principal place of abode
for the greater portion of the calendar year.
``(ii) Noncustodial parent.--The term
`noncustodial parent' means the parent who is
not the custodial parent.
``(E) Special rules for support.--For purposes of
this subsection--
``(i) amounts expended for the support of a
child or children shall be treated as received
from the noncustodial parent to the extent that
such parent provided amounts for such support,
and
``(ii) in the case of the remarriage of a
parent, support of a child received from the
parent's spouse shall be treated as received
from the parent.''.
(2) Conforming amendments.--
(A) Section 152 is amended by striking subsection
(g) (relating to support test in case of child of
divorced parents, etc.), as redesignated by the
preceding sections this Act.
(B) Paragraph (6) of section 1(f), as amended by
the preceding sections of this Act, is amended by
striking ``151(e)(3)(A)'' and inserting
``151(f)(3)(A)''.
(C) Paragraph (5) of section 21(e) is amended--
(i) by striking ``paragraph (2) or (4) of
section 152(e)'' and inserting ``section
151(c)(7)'', and
(ii) by striking ``section 152(e)(1)'' and
inserting ``section 151(c)(7)''.
(D) Sections 21(e)(6) and 129(c) are each amended--
(i) by striking ``151(c)'' and inserting
``151(d)'', and
(ii) by striking ``151(c)(3)'' and
inserting ``151(d)(3)''.
(E) Sections 25(c)(2)(B), 32(c)(3)(C)(ii),
152(d)(2), and 2032A(c)(7)(D) are each amended by
striking ``151(c)(4)'' and inserting ``151(d)(4)''.
(F) Sections 72(t)(7)(A)(iii) and 132(h)(2)(B) are
each amended by striking ``151(c)(3)'' and inserting
``151(d)(3)''.
(G) Subparagraph (C) of section 642(b)(2), as
amended by the preceding sections of this Act, is
amended by striking ``151(e)'' and inserting
``151(f)''.
(H) Paragraph (1) of section 3402(f) is amended by
striking ``151(e)(2)'' and inserting ``151(f)(2)''.
(I) Subparagraph (B) of section 3402(r)(2), as so
amended, is amended by striking ``151(e)'' and
inserting ``151(f)''.
(J) Clause (ii) of section 6012(a)(1)(D), as so
amended, is amended--
(i) by striking ``151(e)'' and inserting
``151(f)'', and
(ii) by striking ``151(e)(2)'' and
inserting ``151(f)(2)''.
(K) The last sentence of section 6013(b)(3)(A), as
so amended is amended by striking ``151(e)'' and
inserting ``151(f)''.
(b) Application of Uniform Definition to Dependent Care Credit.--
Section 21(b)(1)(A) is amended to read as follows:
``(A) a qualifying child of the taxpayer (as
defined in section 151(c)) who has not attained age
13,''.
(c) Application of Uniform Definition to Child Tax Credit.--Section
24(c)(1) is amended to read as follows:
``(1) In general.--The term `qualifying child' means a
qualifying child of the taxpayer (as defined in section 151(c))
who has not attained age 17 as of the close of the calendar
year in which the taxable year of the taxpayer begins.''.
(d) Application of Uniform Definition to Earned Income Credit.--
(1) In general.--Paragraph (3) of section 32(c) is amended
to read as follows:
``(3) Qualifying child.--
``(A) In general.--The term `qualifying child'
means a qualifying child of the taxpayer (as defined in
section 151(c)).
``(B) Place of abode.--For purposes of subparagraph
(A), the requirements of section 151(c)(2)(B) shall be
met only if the principal place of abode is in the
United States.
``(C) Identification requirements.--
``(i) In general--A qualifying child shall
not be taken into account under subsection (b)
unless the taxpayer includes the name, age, and
TIN of the qualifying child on the return of
tax for the taxable year.
``(ii) Other methods.--The Secretary may
prescribe other methods for providing the
information described in clause (i).''.
(2) Conforming amendments.--
(A) Section 32(c)(1) is amended by striking
subparagraph (C) and by redesignating subparagraphs
(D), (E), (F), and (G) as subparagraphs (C), (D), (E),
and (F), respectively.
(B) Section 32(c)(4) is amended by striking
``(3)(E)'' and inserting ``(3)(B)''.
(C) Section 32(m) is amended by striking
``subsections (c)(1)(F)'' and inserting ``subsections
(c)(1)(E)''.
SEC. 122. TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING SUPPORT AND
COST OF MAINTAINING HOUSEHOLD.
(a) Dependency Exemption.--Section 152 is amended by adding at the
end the following new subsection:
``(f) Special Rule Relating to Treatment of Government Benefits in
Determining Support.--For purposes of this part, any means-tested
benefits obtained under programs described in section 6103(l)(7) or
substantially similar government programs shall not be taken into
account for purposes of determining--
``(1) whether over half of the support of an individual for
a calendar year is received from a taxpayer, and
``(2) whether over half of the cost of maintaining a
household is furnished by a taxpayer.''.
(b) Dependent Care Credit.--Section 21(e)(1) is amended by adding
at the end the following: ``Any means-tested benefits obtained under
programs described in section 6103(l)(7) or substantially similar
government programs shall not be taken into account for purposes of
determining whether over half of the cost of maintaining a household is
furnished by the individual.''.
(c) Marital Status.--Section 7703 (relating to determination of
marital status) is amended by adding at the end the following new
subsection:
``(c) Special Rule Relating to Treatment of Government Benefits in
Determining Cost of Maintaining Household.--For purposes of subsection
(b)(2), any means-tested benefits obtained under programs described in
section 6103(l)(7) or substantially similar government programs shall
not be taken into account for purposes of determining whether over half
of the cost of maintaining a household is furnished by the
individual.''.
SEC. 123. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to taxable years
beginning after December 31, 2002.
Subtitle C--Education Tax Incentives
SEC. 131. HOPE AND LIFETIME LEARNING CREDITS COMBINED.
(a) In General.--So much of section 25A (relating to Hope and
Lifetime Learning Credits) as precedes subsection (d) is amended to
read as follows:
``SEC. 25A. EDUCATION CREDIT.
``(a) Allowance of Credit.--In the case of an individual, there
shall be allowed as a credit against the tax imposed by this chapter
for the taxable year the amount equal to 50 percent of so much of the
qualified expenses paid by the taxpayer during the taxable year (for
education furnished to an individual during any academic period
beginning in such taxable year) as does not exceed $3,000 for such
taxable year with respect to such individual.
``(b) Qualified Expenses.--For purposes of subsection (a), the term
`qualified expenses' means the sum of--
``(1) qualified higher education expenses, and
``(2) the expenses described in subsection (d)(1) with
respect to any course of instruction at an eligible educational
institution to acquire or improve job skills of the
individual.''.
(b) Conforming Amendments to Credit.--
(1) Section 25A is amended--
(A) by striking subsection (h), and
(B) by redesignating subsections (e), (f), (g), and
(i) as subsections (c), (d), (e), and (f),
respectively.
(2) Subsection (e)(2) of section 25A, as so redesignated,
is amended by striking ``(before the application of subsections
(b), (c), and (d))''.
(c) Other Conforming and Clerical Amendments.--
(1) The following provisions are each amended by striking
``section 25A(g)(2)'' and inserting ``section 25A(e)(2)'':
(A) Section 72(t)(7)(B).
(B) Section 221(d)(2)(B).
(C) Section 222(d)(1) (as amended by section 132 of
this Act).
(D) Section 529(c)(3)(B)(v)(I).
(E) Section 530(b)(2)(A).
(F) Section 530(d)(2)(C)(i)(I).
(G) Section 530(d)(4)(B)(iii).
(2) Section 221(d) is amended--
(A) in paragraph (2) by striking ``section
25A(f)(2)'' and inserting ``section 25A(d)(2)'', and
(B) by amending paragraph (3) to read as follows:
``(3) Eligible student.--The term `eligible student' means,
with respect to any academic period, a student who--
``(A) meets the requirements of section 484(a)(1)
of the Higher Education Act of 1965 (20 U.S.C.
1091(a)(1)), as in effect on the date of the enactment
of this section, and
``(B) is carrying at least \1/2\ the normal full-
time work load for the course of study the student is
pursuing.''.
(3) Section 529(e)(3)(B)(i) is amended by striking
``section 25A(b)(3)'' and inserting ``section 221(d)(3)''.
(4) The heading of section 529(c)(3)(B)(v) is amended to
read as follows: ``Coordination with education credit.--''.
(5) The heading of section 530(d)(2)(C) is amended to read
as follows: ``Coordination with education credit and qualified
tuition programs.--''.
(6) Section 6050S(e) is amended by striking ``subsection
(g)(2)'' and inserting ``subsection (e)(2)''.
(7) Section 6213(g)(2)(J) is amended by striking ``section
25A(g)(1)'' and inserting ``section 25A(e)(1)''.
(8) The item relating to section 25A in the table of
sections for subpart A of part IV of subchapter A of chapter 1
is amended to read as follows:
``Sec. 25A. Education Credit.''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 132. UNIFORM DEFINITION OF QUALIFYING HIGHER EDUCATION EXPENSES.
(a) In General.--Paragraph (3) of section 529(e) (relating to other
definitions and special rules) is amended to read as follows:
``(3) Qualified higher education expenses.--
``(A) In general.--The term `qualified higher
education expenses' means--
``(i) tuition, fees, books, supplies, and
equipment required for the enrollment or
attendance of a designated beneficiary at an
eligible educational institution; and
``(ii) expenses for special needs services
in the case of a special needs beneficiary
which are incurred in connection with such
enrollment or attendance.
``(B) Room and board included for students who are
at least half-time.--
``(i) In general.--In the case of an
individual who is an eligible student for any
academic period, such term shall also include
reasonable costs for such period (as determined
under the qualified tuition program) incurred
by the designated beneficiary for room and
board while attending such institution. For
purposes of subsection (b)(7), a designated
beneficiary shall be treated as meeting the
requirements of this clause.
``(ii) Limitation.--The amount treated as
qualified higher education expenses by reason
of clause (i) shall not exceed--
``(I) the allowance (applicable to
the student) for room and board
included in the cost of attendance (as
defined in section 472 of the Higher
Education Act of 1965 (20 U.S.C.
1087ll), as in effect on the date of
the enactment of the Economic Growth
and Tax Relief Reconciliation Act of
2001) as determined by the eligible
educational institution for such
period, or
``(II) if greater, the actual
invoice amount the student residing in
housing owned or operated by the
eligible educational institution is
charged by such institution for room
and board costs for such period.
``(iii) Eligible student.--For purposes of
this subparagraph, the term `eligible student'
means, with respect to any academic period, a
student who--
``(I) 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
``(II) is carrying at least \1/2\
the normal full-time work load for
the course of study the student is pursuing.
``(C) Exceptions.--
``(i) 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.
``(ii) 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.''.
(b) Conforming Amendments.--
(1) Section 25A and 6050S are each amended by striking
``qualified tuition and related expenses'' each place it
appears and inserting ``qualified higher education expenses''.
(2) Section 25A(f)(1) is amended to read as follows:
``(1) Qualified higher education expenses.--The term
`qualified higher education expenses' means the qualified
higher education expenses (as defined by section 529(e)(3)
without regard to subparagraph (B) thereof) required for the
enrollment or attendance of--
``(A) the taxpayer,
``(B) the taxpayer's spouse, or
``(C) 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.''.
(3) Section 135(c)(2) is amended--
(A) by striking ``tuition and fees'' and inserting
``the qualified higher education expenses (as defined
by section 529(e)(3) without regard to subparagraph (B)
thereof)'', and
(B) by striking subparagraph (B) and redesignating
subparagraph (C) as subparagraph (B).
(4) Section 221(d)(2) is amended by striking ``the cost of
attendance (as defined in section 472 of the Higher Education
Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before
the date of the enactment of this Act)'' and inserting ``the
qualified higher education expenses (as defined by section
529(e)(3) without regard to subparagraph (B) thereof) incurred
for attendance''.
(5)(A) Section 222 is amended by striking ``qualified
tuition and related expenses'' each place it appears and
inserting ``qualified higher education expenses''.
(B) Section 222(d)(1) is amended to read as follows:
``(1) Qualified higher education expenses.--The term
`qualified higher education expenses' has the meaning given
such term by section 529(e)(3) (without regard to subparagraph
(B) thereof). Such expenses shall be reduced in the same manner
as under section 25A(g)(2).''.
(C) Section 222(d) is amended by redesignating paragraph
(6) as paragraph (7) and by inserting after paragraph (5) the
following new paragraph:
``(6) Room and board included for students who are full-
time.--No amount shall be taken into account under this section
for an expense described in section 529(e)(3)(B) (relating to
room and board included for students who are at least half-
time) unless such individual is an eligible student (as defined
in section 25A(b)(3), determined by substituting `the normal
full-time work load' in lieu of `\1/2\ the normal full-time
work load' in subparagraph (B) thereof.''.
(D) The heading for section 222 is amended by striking
``TUITION AND RELATED'' and inserting ``HIGHER EDUCATION''.
(E) The table of sections for part VII of subchapter B of
chapter 1 is amended by amending the item relating to section
222 to read as follows:
``Sec. 222. Qualified higher education
expenses.''.
(6)(A) Section 6724(d) is amended--
(i) in paragraph (1)(B)(x) by striking ``qualified
tuition and related expenses'' and inserting
``qualified higher education expenses'', and
(ii) in paragraph (2)(Z) by striking ``qualified
tuition and related expenses'' and inserting
``qualified higher education expenses''.
(c) Effective Date.--The amendments made by this section shall
apply to amounts paid in taxable years beginning after December 31,
2002, for education furnished in periods beginning after such date.
TITLE II--SMALL BUSINESS TAX SIMPLIFICATION
SEC. 201. UNIFIED PASS-THRU ENTITY REGIME.
(a) Termination of S Corporation Status.--
(1) No new s corporation elections.--Subsection (a) of
section 1362 is amended by adding at the end the following new
paragraph:
``(3) Termination of authority to make election.--No
election may be made under paragraph (1) for any taxable year
beginning after December 31, 2002.''.
(2) Termination of status.--Subsection (d) of section 1362
(relating to termination) is amended by adding at the end the
following new paragraph:
``(4) Treatment as partnership after 2012.--An election
under subsection (a)--
``(A) shall not be effective for any taxable year
beginning after December 31, 2012, and
``(B) shall be treated as an election under section
7701(a)(2)(B)(iii) for taxable years beginning after
such date.''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after December 31, 2002.
(b) Election by Certain Corporations To Be Taxed as Partnership.--
(1) In general.--Paragraph (2) of section 7701 (defining
partnership and partner) is amended to read as follows:
``(2) Partnership and partner.--
``(A) In general.--The term `partnership` includes
a syndicate, group, pool, joint venture, or other
unincorporated organization, through or by means of
which any business, financial operation, or venture is
carried on, and which is not, within the meaning of
this title, a trust or estate or a corporation; and the
term `partner' includes a member in such a syndicate,
group, pool, joint venture, or organization.
``(B) Election by corporation to be taxed as
partnership.--
``(i) In general.--An eligible corporation
may elect to be treated as a partnership for
purposes of this title.
``(ii) Eligible corporation.--For purposes
of clause (i), the term `eligible corporation'
means an entity--
``(I) which, without regard to this
subparagraph, is a domestic corporation
no stock of which is readily tradable
on an established securities market or
otherwise, and
``(II) which is not an ineligible
corporation (as defined by section
1361(b)(2)).
``(iii) Election and termination.--For
purposes of this subparagraph, rules similar to
the rules of section 1362 (other than
subsections (a)(3), (d)(3) and (4), and (e)
thereof) shall apply.
``(iv) Effect of election.--No gain or loss
shall be recognized by the shareholders or the
corporation by reason of an election under this
subparagraph, and rules similar to the rules of
sections 1366(f)(2) and 1374 shall apply.
``(v) Distributions, etc.--Each partner
shall include in gross income as a dividend,
any amount that would have been so includible
had the entity been an S corporation during the
period the entity was treated as a partnership.
Notwithstanding the preceding sentence, the
provisions of subchapter K of chapter 1 shall
apply to determine the basis of any property
distributed and the basis of any interest in
the partnership.''
(2) Modification to treatment of section 1374 tax for
earnings and profits purposes.--Paragraph (2) of section
1366(f) is amended to read as follows:
``(2) Treatment of tax imposed on build-in gains.--
``(A) In general.--The amount of the items of the
net recognized built-in-gain taken into account under
section 1374(b)(1) (reduced by any deduction allowed
under section 1374(b)(2)) shall not be taken into
account under this section.
``(B) Earnings and profits.--The accumulated
earnings and profits of the corporation shall be
increased at the beginning of the taxable year by the
amount not taken into account under this section by
reason of subparagraph (A) (determined without regard
to section 1374(b)(2)) reduced by the tax imposed by
section 1374 (net of credits allowed).''
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after December 31, 2002.
(c) Step Transaction Doctrine Not To Apply to Partnership
Incorporation Followed by Corporate Reorganization.--
(1) In general.--Section 351 is amended by redesignating
subsection (h) as subsection (i) and by inserting after
subsection (g) the following new subsection:
``(h) Special Rule For Partnerships Which Incorporate and
Subsequently Reorganize.--The step transaction doctrine and any similar
doctrine shall not apply for purposes of determining whether the
control requirement of subsection (a) is met in any case in which--
``(1) a partnership engaged in an active trade or business
transfers substantially all of the property used in carrying on
such trade or business to a corporation which is not publicly
traded, and
``(2) such corporation subsequently enters into a
reorganization under this chapter.''.
(2) Effective date.--The amendment made by this subsection
shall apply to transactions after December 31, 2002.
SEC. 202. INCREASE IN EXPENSING UNDER SECTION 179.
(a) Increase in Dollar Limitations.--
(1) In general.--Paragraph (1) of section 179(b) (relating
to dollar limitation) is amended to read as follows:
``(1) Dollar limitation.--The aggregate cost which may be
taken into account under subsection (a) for any taxable year
shall not exceed $25,000 ($40,000 in the case of taxable years
beginning after December 31, 2012).''
(2) Increase in phaseout threshold.--Paragraph (2) of
section 179(b) is amended by inserting before the period
``($325,000 in the case of taxable years beginning after
December 31, 2012).''.
(b) Inflation Adjustments.--
(1) In general.--Subsection (b) of section 179 is amended
by redesignating paragraphs (3) and (4) as paragraphs (4) and
(5), respectively, and by inserting after paragraph (2) the
following new paragraph:
``(3) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 2004, the dollar
amounts contained in paragraphs (1) and (2) which would (but
for this paragraph) apply to such taxable year shall be
increased by an amount equal to the product of--
``(A) such dollar amount, and
``(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in which
the taxable year begins, determined by substituting in
subparagraph (B) thereof--
``(i) `calendar year 2003' for `calendar
year 1992' with respect to the $25,000 and
$200,000 amounts, and
``(ii) `calendar year 2011' for `calendar
year 1992' with respect to the $40,000 and
$325,000 amounts.
If any amount after adjustment under the preceding sentence is
not a multiple of $1,000, such amount shall be rounded to the
next lowest multiple of $1,000.''
(2) Conforming amendment.--Subparagraph (B) of section
179(b)(5), as redesignated by paragraph (1), is amended by
striking ``paragraph (3)'' and inserting ``paragraph (4)''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 203. ROLLOVER OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.
(a) In General.--Section 1031 (relating to exchange of property
held for productive use or investment) is amended to read as follows:
``SEC. 1031. ROLLOVER OF PROPERTY HELD FOR PRODUCTIVE USE OR
INVESTMENT.
``(a) Nonrecognition of Gain.--In the case of the sale of section
1031 property with respect to which the taxpayer elects the application
of this section, gain from such sale shall be recognized only to the
extent that the amount realized on such sale exceeds--
``(1) the cost of replacement section 1031 property
purchased during the rollover period, reduced by
``(2) any portion of such cost previously taken into
account under this section.
``(b) Definitions.--For purposes of this section--
``(1) Section 1031 property.--
``(A) In general.--The term `section 1031 property'
means any property held for productive use in a trade
or business or for investment.
``(B) Exceptions.--The term `section 1031 property'
shall not include the following:
``(i) Stock in trade or other property held
primarily for sale.
``(ii) Stocks, bonds, or notes.
``(iii) Other securities or evidences of
indebtedness or interest.
``(iv) Interests in a partnership.
``(v) Certificates of trust or beneficial
interests.
``(vi) Choses in action.
``(2) Replacement section 1031 property.--The term
`replacement section 1031 property' means, with respect to the
sale of any section 1031 property, other section 1031 property
which is of a like kind to the section 1031 property sold.
``(3) Rollover period.--The term `rollover period' means,
with respect to the sale of any property, the period which
begins 180 days before the date of such sale and ends on the
earlier of--
``(A) the date which is 180 days after the date of
such sale, or
``(B) the due date (determined with regard to
extension) for the taxpayer's return of the tax imposed
by this chapter for the taxable year which includes the
date of such sale.
``(c) Basis Adjustments.--If gain from any sale is not recognized
by reason of subsection (a), such gain shall be applied to reduce the
basis for determining the gain or loss of replacement section 1031
property purchased during the rollover period. If more than one
replacement section 1031 property is purchased during the rollover
period, such reduction shall be allocated among such properties in such
amounts as the taxpayer elects.
``(d) Special Rules for Transactions Between Related Persons.--
``(1) Sale by taxpayer.--If--
``(A) the taxpayer sells property to a related
person,
``(B) there is nonrecognition of gain under this
section with respect to such sale (determined without
regard to this subsection), and
``(C) before the date 2 years after the date of
such sale the related person disposes of such property,
there shall be no nonrecognition of gain under this section to
the taxpayer with respect to such sale, and any gain recognized
by the taxpayer by reason of this subsection shall be taken
into account as of the date on which the disposition referred
to in subparagraph (C) occurs.
``(2) Purchase by taxpayer.--If the taxpayer--
``(A) purchases property from a related person
which is taken into account under subsection (a)(1)
(determined without regard to this subsection), and
``(B) disposes of such property before the date 2
years after the date of such purchase,
such property shall not be taken into account under subsection
(a)(1), and any gain recognized by reason of this subsection
shall be taken into account on the date on which the
disposition referred to in subparagraph (B) occurs.
``(3) Certain dispositions not taken into account.-- For
purposes of paragraphs (1)(C) and (2)(B), there shall not be
taken into account any disposition--
``(A) after the earlier of the death of the
taxpayer or the death of the related person,
``(B) in a compulsory or involuntary conversion
(within the meaning of section 1033) if the transaction
occurred before the threat or imminence of such
conversion, or
``(C) with respect to which it is established to
the satisfaction of the Secretary that neither the
transaction nor such disposition had as one of its principal purposes
the avoidance of Federal income tax.
``(4) Related person.-- For purposes of this subsection,
the term `related person' means any person bearing a
relationship to the taxpayer described in section 267(b) or
707(b)(1).
``(5) Special rule where substantial diminution of risk.--
``(A) In general.--If subparagraph (B) applies to
any property for any period, the running of the period
set forth in paragraph (1)(C) with respect to such
property shall be suspended during such period.
``(B) Property to which paragraph applies.--This
subparagraph shall apply to any property for any period
during which the holder's risk of loss with respect to
the property is substantially diminished by--
``(i) the holding of a put with respect to
such property,
``(ii) the holding by another person of a
right to acquire such property, or
``(iii) a short sale or any other
transaction.
``(6) Treatment of certain transactions.--This section
shall not apply to any transaction which is part of a series of
transactions structured to avoid the purposes of this
subsection.
``(e) Special Rules.--For purposes of this section--
``(1) Exchanges.--A contemporaneous exchange by the
taxpayer of section 1031 property for replacement section 1031
property shall be treated as a sale of such section 1031
property and a purchase of such replacement section 1031
property without regard to whether the taxpayer makes the
election described in subsection (a). In the case of such an
exchange, no loss shall be recognized.
``(2) Certain partnerships.--An interest in a partnership
which has in effect a valid election under section 761(a) to be
excluded from the application of all of subchapter K shall be
treated as an interest in each of the assets of such
partnership and not as an interest in a partnership.
``(3) Livestock of different sexes.--Livestock of different
sexes are not property of a like kind.
``(4) Foreign real property.--Real property located in the
United States and real property located outside the United
States are not property of a like kind.
``(5) Foreign personal property.--
``(A) In general.--Personal property used
predominantly within the United States and personal
property used predominantly outside the United States
are not property of a like kind.
``(B) Predominant use.--Except as provided in
subparagraphs (C) and (D), the predominant use of any
property shall be determined based on--
``(i) in the case of the sale of any
property by the taxpayer, the 2-year period
ending on the date of such sale, and
``(ii) in the case of the purchase of any
property by the taxpayer, the 2-year period
beginning on the date of such purchase.
``(C) Property held for less than 2 years.--Except
in the case of a sale or purchase which is part of a
transaction (or series of transactions) structured to
avoid the purposes of this subsection, only the periods
the property was held by the taxpayer (or any related
person) shall be taken into account under subparagraph
(B).
``(D) Special rule for certain property.--Property
described in any subparagraph of section 168(g)(4)
shall be treated as used predominantly in the United
States.''.
(b) Preservation of Certain Gain, Loss, and Basis Rules for
Exchanges.--
(1) Section 1035 (relating to certain exchanges of
insurance policies) is amended--
(A) by striking subsection (d),
(B) by redesignating subsections (b) and (c) as
subsections (e) and (f), respectively, and
(C) by inserting after subsection (a) the following
new subsections:
``(b) Gain From Exchanges Not Solely in Kind.--If an exchange would
be within the provisions of subsection (a), of section 1036(a), or of
section 1037(a), if it were not for the fact that the property received
in exchange consists not only of property permitted by such provisions
to be received without the recognition of gain, but also of other
property or money, then the gain, if any, to the recipient shall be
recognized, but in an amount not in excess of the sum of such money and
the fair market value of such other property.
``(c) Loss From Exchanges Not Solely in Kind.--If an exchange would
be within the provisions of subsection (a), of section 1036(a), or of
section 1037(a), if it were not for the fact that the property received
in exchange consists not only of property permitted by such provisions
to be received without the recognition of gain or loss, but also of
other property or money, then no loss from the exchange shall be
recognized.
``(d) Basis.--If property was acquired on an exchange described in
subsection (a), section 1036(a), or section 1037(a), then the basis
shall be the same as that of the property exchanged, decreased in the
amount of any money received by the taxpayer and increased in the
amount of gain or decreased in the amount of loss to the taxpayer that
was recognized on such exchange. If the property so acquired consisted
in part of the type of property permitted by subsection (a), section
1036(a), or section 1037(a), to be received without the recognition of
gain or loss, and in part of other property, the basis provided in this
subsection shall be allocated between the properties (other than money)
received, and for the purpose of the allocation there shall be assigned
to such other property an amount equivalent to its fair market value at
the date of the exchange. For purposes of subsection (a) and section
1036(a), where as part of the consideration to the taxpayer another
party to the exchange assumed (as determined under section 357(d)) a
liability of the taxpayer, such assumption shall be considered as money
received by the taxpayer on the exchange.''.
(2) Section 83(g), section 424(b), section 424(c)(1)(B),
section 454(c)(2), paragraphs (1) and (2) of section 1036(c),
and paragraphs (1) and (2) of section 1037(c) are each amended
by striking ``section 1031'' and inserting ``section 1035''.
(3) Paragraphs (1) and (2) of section 1037(b) are each
amended by striking ``section 1031(b)'' and inserting ``section
1035(b)''.
(c) Conforming Amendments.--
(1) Clause (i) of section 197(f)(2)(B) is amended by
inserting ``(including any purchase taken into account under
subsection (a)(1) thereof)'' after ``1031''.
(2) Paragraph (6) of section 453(f) is amended to read as
follows:
``(6) Like-kind exchanges.--In the case of any sale or
exchange to which section 1031 applies, the total contract
price, the gross profit from such sale, and the amount of any
payment (other than for purposes of subsection (b)(1)) shall be
reduced to take into account any amount not recognized by
reason of section 1031. Similar rules shall apply in the case
of an exchange which is described in section 356(a) and is not
treated as a dividend.''.
(3) Basis limitation for player contracts transferred in
connection with the sale of a franchise.--Paragraph (1) of
section 1056(b) is amended to read as follows:
``(1) to any sale or exchange to which section 1031
applies, and''.
(4) Valuation of certain farm, etc., real property.--
(A) Clause (i) of section 2032A(e)(14)(C) is
amended to read as follows:
``(i) Qualified replacement property.--The
term `qualified replacement property' means any
real property the acquisition of which results
in the nonrecognition of gain under section
1031 or 1033.''.
(B) Subclause (I) of section 2032A(e)(14)(C)(ii) is
amended by inserting ``sale or'' before ``exchange''.
(C) Subsection (i) of section 2032A is amended to
read as follows:
``(i) Replacement of Qualified Real Property.--
``(1) Treatment of property sold or exchanged.--
``(A) Sales and exchanges with no recognition of
gain.--If an interest in qualified real property is
sold or exchanged and no gain is recognized under
section 1031 by reason of the acquisition of qualified
replacement property, no tax shall be imposed by
subsection (c) by reason of such sale or exchange.
``(B) Sales and exchanges with partial recognition
of gain.--Except as provided in paragraph (1), if an
interest in qualified real property is sold or
exchanged and a portion of the gain is not recognized
under section 1031 by reason of the acquisition of
qualified replacement property, the amount of the tax
imposed by subsection (c) by reason such sale or
exchange shall be the amount of tax which (but for this
paragraph) would have been imposed on such sale or
exchange under subsection (c)(1), reduced by an amount
which--
``(i) bears the same ratio to such tax, as
``(ii) the fair market value of the
qualified replacement property (determined as
of the time or acquisition) bears to the fair
market value of the qualified real property
sold or exchanged (determined as of the time of
disposition).
``(2) Treatment of qualified replacement property.--For
purposes of subsection (c)--
``(A) any interest in qualified replacement
property shall be treated in the same manner as if it
were a portion of the interest in the qualified real
property which was sold or exchanged,
``(B) any tax imposed by subsection (c) by reason
of the sale or exchange shall be treated as a tax
imposed on a partial disposition, and
``(C) paragraph (6) of subsection (c) shall be
applied by treating material participation with respect
to the sold or exchanged property as material
participation with respect to the qualified replacement
property.
``(3) Qualified replacement property.--For purposes of this
subsection, the term `qualified replacement property' means
real property which is to be used for the qualified use set
forth in subparagraph (A) or (B) of subsection (b)(2) under
which the qualified real property sold in the qualified sale
originally qualified under subsection (a).''.
(d) Clerical Amendment.--The table of sections for part III of
subchapter O of chapter 1 is amended by striking the item relating to
section 1031 and inserting the following new item:
``Sec. 1031. Rollover of property held
for productive use or
investment.''.
(e) Effective Date.--The amendments made by this section shall
apply to transfers made after December 31, 2002, in tax years ending
after such date.
SEC. 204. REPEAL OF COLLAPSIBLE CORPORATIONS.
(a) In General.--Subpart C of part II of subchapter C of chapter 1
(relating to collapsible corporations) is hereby repealed.
(b) Clerical Amendment.--The table of subparts for part II of
subchapter C of chapter 1 is amended by striking the item relating to
subpart C.
(c) Effective Date.--The amendments made by this section shall
apply to sales, exchanges, and distributions made after the date of the
enactment of this Act.
SEC. 205. REFERENCES TO GENERAL PARTNERS.
(a) Exclusion of Certain Active Businesses From At Risk Rules.--
Subclause (I) of section 465(c)(7)(D)(ii) (defining qualified corporate
partner) is amended to read as follows:
``(I) such corporation is not
prohibited or limited under State law
from participation in the management or
business of the partnership.''.
(b) Payments to Retiring Partners.--Subparagraph (B) of section
736(b)(3) (relating to limitation on application of paragraph (2)) is
amended to read as follows:
``(B) any portion of the retiring or deceased
partner's distributive share of partnership income was
subject to tax under section 1401.
(c) Foreign Currency Transactions.--Subclause (I) of section
988(c)(1)(E)(v) is amended to read as follows:
``(I) Certain general partners.--
The interest of a partner in the
partnership shall not be treated as
failing to meet the 20-percent
ownership requirements of clause
(iii)(I) for any taxable year of the
partnership if for the taxable year of
the partner in which such partnership
taxable year ends--
``(aa) the partner is not
limited as to participation in
the management or activity of
the qualified fund, and
`(bb) such partner (and
each corporation filing a
consolidated return with such
partner) had no ordinary income
or loss from a section 988
transaction which is foreign
currency gain or loss (as the
case may be).''.
(d) Special Valuation Rules For Generation-Skipping Tax.--Clause
(ii) of section 2701(b)(2)(B) (relating to partnerships) is amended to
read as follows:
``(ii) in the case of a limited
partnership, the holding of any interest as a
partner who is not limited as to participation
in management or activity of the
partnership.''.
(e) Tax Matters Partner.--Paragraph (7) of section 6231(a)
(defining tax matters partner) is amended to read as follows:
``(7) Tax matters partner.--
``(A) In general.--The tax matters partner of any
partnership is--
``(i) the partner designated as the tax
matters partner as provided in regulations, or
``(ii) if there is no partner who has been
so designated, the partner having the largest
profits interest in the partnership at the
close of the taxable year involved (or, where
there is more than 1 such partner, the 1 of
such partners whose name would appear first in
an alphabetical listing).
``(B) Selection by secretary.--If there is no
partner designated under subparagraph (A)(i) and the
Secretary determines that it is impracticable to apply
subparagraph (A)(ii), the partner selected by the
Secretary shall be treated as the tax matters partner.
The Secretary shall, within 30 days of selecting a tax
matters partner under the preceding sentence, notify
all partners required to receive notice under section
6223(a) of the name and address of the person selected.
``(C) Restriction on designation of partner.--A
partner may not be designated as a tax matters partner
under subparagraph (A)(i) unless such partner is not
limited as to participation in management or activity
of the partnership.''.
(f) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 206. REFERENCES TO LIMITED PARTNERS.
(a) Limited Entrepreneur.--
(1) In general.--Subparagraph (A) of section 464(e)(2)
(defining limited entrepreneur) is amended by striking ``than
as a limited partner''.
(2) Conforming amendments.--
(A) Section 464(c) is amended--
(i) by striking ``limited partners or'' in
paragraph (1)(B),
(ii) by striking ``a limited partner or''
in paragraph (2).
(B) Section 1256 is amended--
(i) by striking ``limited partners or''
each place it appears in subsections (e)(3)(B)
and (f)(4),
(ii) by striking ``a limited partner or''
in subsection (e)(3)(C), and
(iii) by striking ``limited partner or''
both places it appears in subsection
(e)(4)(A)(i).
(C) Section 1258(d)(5)(C) is amended--
(i) by striking ``limited partner or'' in
the matter preceding subclause (i),
(ii) by striking ``limited partner's (or
limited entrepreneur's) in subclause (i) and
inserting ``limited entrepreneur's'', and
(iii) by striking ``partners and limited''
in the heading.
(b) Passive Loss Rules.--
(1) Subsection (h) of section 469 is amended by striking
paragraph (2) and by redesignating paragraphs (3), (4), and (5)
as paragraphs (2), (3), and (4), respectively.
(2) Subparagraph (A) of section 469(c)(7) is amended by
striking the last sentence.
(3) Paragraph (6) of section 469(i) is amended by striking
subparagraph (C) and by redesignating subparagraph (D) as
subparagraph (C).
(4) Subsection (f) of section 772 (relating to special
rules for applying passive loss limitations) is amended to read
as follows:
``(f) Special Rules for Applying Passive Loss Limitations.--
``(1) In general.--If any person holds an interest in an
electing large partnership other than as a partner described in
paragraph (3)--
``(A) paragraph (2) of subsection (c) shall not
apply to such partner, and
``(B) such partner's distributive share of the
partnership items allocable to passive loss limitation
activities shall be taken into account separately to
the extent necessary to comply with the provisions of
section 469.
``(2) Exception.--Paragraph (1) shall not apply to any
items allocable to an interest held as a partner described in
paragraph (3).
``(3) Partner described.--For purposes of this subsection,
a partner is described in this paragraph if the partner is a
person whose participation in the management or business
activity of the partnership is limited under applicable State
law.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.
SEC. 207. PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL EXCLUDED FROM NET
EARNINGS FROM SELF-EMPLOYMENT.
(a) In General.--Paragraph (13) of section 1402(a) is amended to
read as follows:
``(13) there shall be excluded the distributive share of
net income of a partner attributable to capital;''.
(b) Partnership Income Attributable to Capital.--Section 1402 is
amended by adding at the end the following new subsection:
``(l) Partnership Income Attributable to Capital.--
``(1) In general.--For purposes of subsection (a)(13), the
following amounts shall be treated as income attributable to
capital--
``(A) the amount, if any, in excess of what would
constitute reasonable compensation for services
rendered by such partner to the partnership, and
``(B) an amount equal to a reasonable rate of
return on unreturned capital of the partner determined
as of the beginning of the taxable year.
``(2) Definitions.--For purposes of paragraph (1)--
``(A) Unreturned capital.--The term `unreturned
capital' means the excess of the aggregate amount of
money and the fair market value as of the date of
contribution of other consideration (net of
liabilities) contributed by the partner over the
aggregate amount of money and the fair market value as
of the date of distribution of other consideration (net
of liabilities) distributed by the partnership to the
partner, increased or decreased for the partner's
distributive share of all reportable items as
determined in section 702. If the partner acquires a
partnership interest and the partnership makes an
election under section 754, the partner's unreturned
capital shall take into account appropriate adjustments
under section 743.
``(B) Reasonable rate of return.--A reasonable rate
of return on unreturned capital shall equal 150 percent
(or such higher rate as is established in regulations)
of the highest applicable Federal rate, as determined
under section 1274(d)(1), at the beginning of the
partnership's taxable year.
``(3) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this subsection.''.
(c) Effective Date.--The amendments made by this section shall
apply with respect to services performed in taxable years beginning
after December 31, 2002.
SEC. 208. REPEAL OF ABILITY TO ELECT LARGE PARTNERSHIP REPORTING RULES.
(a) In General.--Paragraph (2) of section 775(a) (relating to
election) is amended by adding at the end the following: ``No election
under this subsection shall be made after December 31, 2002.''.
(b) Effective Date.--The amendment made by this section shall apply
to partnership taxable years beginning after December 31, 2002.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
Sponsor introductory remarks on measure. (CR E1722-1723)
Llama 3.2 · runs locally in your browser
Ask anything about this bill. The AI reads the full text to answer.
Enter to send · Shift+Enter for new line