[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4050 Introduced in House (IH)]







104th CONGRESS
  2d Session
                                H. R. 4050

   To amend the Internal Revenue Code of 1986 to replace the current 
  individual and corporate income taxes, and the Social Security and 
                Medicare taxes, with a value added tax.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                           September 11, 1996

 Mr. Gibbons 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 replace the current 
  individual and corporate income taxes, and the Social Security and 
                Medicare taxes, with a value added tax.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) In General.--This Act may be cited as the ``Revenue 
Restructuring Act of 1996''.
    (b) Fundamental Principles for Tax Restructuring.--The provisions 
of this Act are a substitute for the current Federal income taxes and 
Social Security and Medicare employment taxes and are designed to meet 
the following principles which should govern all proposals for 
fundamental tax reform:
            (1) Revenue neutrality.--The debate about the best method 
        by which the Government raises revenue should not be confused 
        with the issue of how much revenue the Government should raise.
            (2) Fairness.--Equitable distribution of the tax burden is 
        of paramount importance. Tax reform should not be used as an 
        opportunity to alter the current distribution of the burden of 
        Federal taxes.
            (3) Simplicity.--Much of the unhappiness with the current 
        Federal tax system arises from its perceived complexity. Tax 
        reform should focus on the creation of a truly simpler system, 
        thereby avoiding the ill will and skepticism generated by the 
        current Federal tax system.
            (4) Economic efficiency.--A good revenue system should 
        minimize interference in economic markets. It should result in 
        the least amount of distortion and bias, should encourage 
        economic growth, and should promote the vigor and 
        competitiveness of American companies.
            (5) International competitiveness.--The current income tax 
        is an impediment to maximum competitiveness of American 
        companies in international markets. Any reform proposal should 
        be border-adjustable and promote the competitiveness of 
        American companies.
    (c) Responsibilities of Department of Treasury.--The rate of the 
value added tax and the burden adjustment provisions contained in this 
Act are tentative and intended to be both revenue neutral and 
distributionally neutral. The Secretary of the Treasury shall, within 
90 days after the date of the enactment of this Act, submit to the 
Committee on Ways and Means of the House of Representatives such 
adjustments to--
            (1) the rate of the tax imposed by title II of this Act, 
        and
            (2) the burden adjustments established by title III of this 
        Act,
to ensure that the provisions of this Act do not result in a 
significant change in the amount of Federal revenues or in the 
distribution of the Federal tax burden.
    (d) 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.
    (e) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code.
  TITLE I--REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES AND SOCIAL 
                      SECURITY AND MEDICARE TAXES

Sec. 101. Repeal of individual and corporate income taxes.
Sec. 102. Repeal of Social Security and Medicare taxes.
                       TITLE II--VALUE ADDED TAX

Sec. 201. Imposition of value added tax.
                     ``Subtitle L--Value Added Tax

                   ``subchapter a--imposition of tax
        ``Sec. 1000``subchapter b--computation of tax
        ``Sec. 10011. Taxable value added.
        ``Sec. 10012. Business activity.
        ``Sec. 10013. Gross receipts from business activities.
        ``Sec. 10014. Business purchases.
        ``Sec. 10015.``subchapter c--general rulesable exchanges.
        ``Sec. 10021. Accounting methods.
        ``Sec. 10022. Governmental entities and exempt organizations.
        ``Sec. 10023. Post-sale price adjustments and refunds; bad 
                            debts.
        ``Sec. 10024. Source rules.
        ``Sec. 10025.``subchapter d--special rules
        ``Sec. 10031. International transportation services.
        ``Sec. 10032. Financial intermediation services.
        ``Sec. 10033. Nonbusiness imports of property or services.
        ``Sec. 1``subchapter e--small business exemptionchases.
        ``Sec. 10041. ``subchapter f--definitions
        ``Sec. 10051.``subchapter g--administration
        ``Sec. 10061. Liability for tax.
        ``Sec. 10062. Time for filing return; taxable period.
        ``Sec. 10063. Treatment of related businesses.
        ``Sec. 10064. Secretary to be notified of certain events.
        ``Sec. 10065. Regulations.
Sec. 202. Refund authority.
Sec. 203. Dedication of portion of VAT revenues to Social Security 
                            Trust Funds.
                     TITLE III--BURDEN ADJUSTMENTS

Sec. 301. Rebate of value added tax to low-income individuals; burden 
                            assessment on high-income individuals.
            ``subchapter a--rebate to low-income individuals
        ``Sec. 1601. Rebate to low-income individuals.
      ``subchapter b--burden assessment on high-income individuals
        ``Sec. 1611. Assessment on high-income individuals.
        ``Sec. 1612. Inclusion of undistributed income of certain 
                            corporations.

  TITLE I--REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES AND SOCIAL 
                      SECURITY AND MEDICARE TAXES

SEC. 101. REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES.

    (a) In General.--Subchapter A of chapter 1 (relating to normal 
taxes and surtaxes) is hereby repealed.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1997.

SEC. 102. REPEAL OF SOCIAL SECURITY AND MEDICARE TAXES.

    (a) In General.--
            (1) Chapter 21 (relating to Federal Insurance Contributions 
        Act) is hereby repealed.
            (2) Chapter 2 (relating to self-employment tax) is hereby 
        repealed.
    (b) Repeal of Tier 1 Railroad Retirement Taxes.--
            (1) Subsection (a) of section 3201 (relating to tax on 
        employees) is hereby repealed.
            (2) Subsection (a) of section 3211 (relating to tax on 
        employee representatives) is amended by striking paragraph (1).
            (3) Section 3221 (relating to tax on employers) is amended 
        by striking subsections (a) and (e).
            (4) Paragraph (2) of section 3231(e) is amended--
                    (A) by striking clause (iii) of subparagraph (A), 
                and
                    (B) by striking subparagraph (B) and inserting the 
                following new subparagraph:
                    ``(B) Applicable base.--The term `applicable base' 
                means for any calendar year the contribution and 
                benefit base determined under section 230 of the Social 
                Security Act for such calendar year; except that--
                            ``(i) for purposes of this chapter, and
                            ``(ii) computing average monthly 
                        compensation under section 3(j) of the Railroad 
                        Retirement Act of 1974 (except with respect to 
                        annuity amounts determined under subsection (a) 
                        or (f)(3) of section 3 of such Act),
                clause (2) of the first sentence, and the second 
                sentence, of subsection (c) of section 230 of the 
                Social Security Act shall be disregarded.''
            (4) Subsection (e) of section 3231 is amended by striking 
        paragraph (4).
    (c) Effective Date.--
            (1) In general.--The amendments made by this section (other 
        than subsection (a)(2)) shall apply to remuneration paid after 
        December 31, 1997.
            (2) Self-employment tax.--The amendment made by subsection 
        (a)(2) shall apply to taxable years beginning after December 
        31, 1997.

                       TITLE II--VALUE ADDED TAX

SEC. 201. IMPOSITION OF VALUE ADDED TAX.

    The Internal Revenue Code of 1986 is amended by adding at the end 
the following new subtitle:

                     ``Subtitle L--Value Added Tax

                              ``Chapter 100. Value added tax.

                     ``CHAPTER 100--VALUE ADDED TAX

                              ``Subchapter A. Imposition of tax.
                              ``Subchapter B. Computation of tax.
                              ``Subchapter C. General rules.
                              ``Subchapter D. Special rules.
                              ``Subchapter E. Small business exemption.
                              ``Subchapter F. Definitions.
                              ``Subchapter G. Administration.

                   ``Subchapter A--Imposition of Tax

                              ``Sec. 10001. Tax imposed.

``SEC. 10001. TAX IMPOSED.

    ``In the case of any person engaged in any business activity, there 
is hereby imposed for each taxable period a tax in an amount equal to 
20 percent of the taxable value added.

                   ``Subchapter B--Computation of Tax

                              ``Sec. 10011. Taxable value added.
                              ``Sec. 10012. Business activity.
                              ``Sec. 10013. Gross receipts from 
                                        business activities.
                              ``Sec. 10014. Business purchases.
                              ``Sec. 10015. Exemption for certain 
                                        nontaxable exchanges.

``SEC. 10011. TAXABLE VALUE ADDED.

    ``(a) In General.--For purposes of this chapter, the term `taxable 
value added' means the amount by which--
            ``(1) the gross receipts of any person from business 
        activities for a taxable period, exceed
            ``(2) the business purchases of such person for the taxable 
        period.
    ``(b) Refund If Business Purchases Exceed Gross Receipts.--If the 
business purchases described in subsection (a)(2) exceeds the gross 
receipts described in subsection (a)(1) for any taxable period, an 
amount equal to 20 percent of such excess shall be treated as an 
overpayment of the tax imposed by section 10001 for such period.

``SEC. 10012. BUSINESS ACTIVITY.

    ``(a) In General.--For purposes of this chapter, the term `business 
activity' means--
            ``(1) any of the following transactions by any person in 
        connection with a business--
                    ``(A) any sale of property in the United States,
                    ``(B) any grant of a right to use property in the 
                United States, and
                    ``(C) the performance of services in the United 
                States, and
            ``(2) the export of property or services from the United 
        States in connection with a business.
For purposes of the preceding sentence, the term `property' does not 
include any financial instrument (as defined in section 10051) or 
money.
    ``(b) Exception for Services Performed as Employee.--For purposes 
of this chapter, the term `business activity' does not include the 
performance of services by an employee for the employee's employer.

``SEC. 10013. GROSS RECEIPTS FROM BUSINESS ACTIVITIES.

    ``(a) In General.--For purposes of this chapter, the term `gross 
receipts' means all receipts from a business activity.
    ``(b) Exports.--
            ``(1) General rule.--For purposes of this chapter, the term 
        `gross receipts' does not include amounts received by the 
        exporter for property or services exported from the United 
        States for use or consumption outside the United States.
            ``(2) Export through nonbusiness entity.--For purposes of 
        paragraph (1), if property or services are sold to a 
        governmental entity or exempt organization for export and are 
        exported other than in a business activity of such entity or 
        organization, then the seller of such property or services is 
        deemed to be the exporter thereof.
            ``(3) International transportation.--

                                ``For treatment of international 
transportation services, see section 10031.
    ``(c) Exchanges.--For purposes of this chapter, the amount treated 
as gross receipts from an exchange is the amount of money plus the fair 
market value of other consideration received in the exchange.
    ``(d) Certain Insurance Proceeds.--For purposes of this chapter, 
the term `gross receipts' includes the proceeds of property and 
casualty insurance for losses in connection with a business activity.
    ``(e) Taxes.--For purposes of this chapter, the term `gross 
receipts' shall not include--
            ``(1) any separately stated excise tax, sales tax, customs 
        duty, or other levy imposed by a Federal, State, or local 
        government which is imposed on a business transaction and which 
        is received or collected by the seller in connection with the 
        sale, and
            ``(2) any tax imposed by chapter 31, 32, 33, 34, 35, 36, 
        39, 51, 52, or 53.
    ``(f) Transfers to Related Persons.--
            ``(1) In general.--For purposes of this chapter, the amount 
        treated as the gross receipts from any transaction described in 
        section 10012(a)(1) between related persons shall be the fair 
        market value of the property sold, right granted, or services 
        performed (as the case may be).
            ``(2) Related person.--For purposes of this subsection, the 
        term `related person' means--
                    ``(A) in the case of an employment relationship, an 
                employer and employee,
                    ``(B) in the case of any entity, an owner of the 
                entity,
                    ``(C) any person specified in regulations, and
                    ``(D) any member of the family (within the meaning 
                of section 267(c)(4)) of any individual described in 
                subparagraph (A), (B), or (C).
            ``(3) Owner.--For purposes of paragraph (2), the term 
        `owner' means--
                    ``(A) the proprietor of a sole proprietorship, and
                    ``(B) any holder of a beneficial interest in a 
                corporation, partnership, trust, or other entity.

``SEC. 10014. BUSINESS PURCHASES.

    ``(a) In General.--For purposes of this chapter, the term `business 
purchase' means any amount paid or incurred to acquire property, a 
right to use property, or services for use or sale in a business 
activity. For purposes of the preceding sentence, the term `property' 
does not include any financial instrument or money.
    ``(b) Exceptions.--The term `business purchase' does not include--
            ``(1) any amount paid or incurred as current or deferred 
        compensation to employees or for employee benefits,
            ``(2) any payment which is unlawful under Federal, State, 
        or local law, or
            ``(3) except as provided in subsection (d)--
                    ``(A) any amount paid or incurred as a premium for 
                insurance other than property and casualty insurance, 
                or
                    ``(B) any other implicit intermediation fees.
    ``(c) Imports.--The term `business purchase' does not include--
            ``(1) any amount paid or incurred for the import of 
        property or services, and
            ``(2) in the case of imported property, any amounts paid or 
        incurred for the transportation of such property to the United 
        States (if such costs are not included in the amount paid for 
        the property).
    ``(d) Financial Intermediation Services.--
            ``(1) In general.--For purposes of this chapter, business 
        purchases include implicit financial intermediation fees.
            ``(2) Implicit financial intermediation fees.--For purposes 
        of paragraph (1), the term `implicit financial intermediation 
        fees' means amounts allocable to the business activity for 
        which a person has received notice under section 10032(d) 
        (relating to implicit financial intermediation fees) and which 
        have otherwise not been taken into account.
            ``(3) Cross reference.--

                                For additional treatment of financial 
intermediation services, see section 10032.
    ``(e) Exchanges.--For purposes of this chapter, the amount treated 
as paid or incurred for business purchases in connection with an 
exchange is the amount of money plus the fair market value of other 
consideration transferred in the exchange.
    ``(f) Taxes.--For purposes of this chapter, the term `business 
purchase' does not include any excise tax, sales tax, customs duty, or 
other separately stated levy imposed by a Federal, State, or local 
government on business purchases.
    ``(g) Gambling Payments.--Except as provided in subsection (a), in 
the case of a business activity involving gambling, lotteries, or other 
games of chance, business purchases include amounts paid to winners.

``SEC. 10015. EXEMPTION FOR CERTAIN NONTAXABLE EXCHANGES.

    ``(a) General Rule.--For purposes of this chapter, gross receipts 
shall not include gross receipts from an applicable nontaxable 
transaction except to the extent attributable to money or other 
property received in the transaction.
    ``(b) Applicable Nontaxable Transactions.--For purposes of this 
section, the term `applicable nontaxable transaction' means any 
transaction--
            ``(1) to which section 332, 351, 368, or 721 applies, or
            ``(2) which is specified by the Secretary and with respect 
        to which gain is not recognized in whole or in part under 
        chapter 1.

                     ``Subchapter C--General Rules

                              ``Sec. 10021. Accounting methods.
                              ``Sec. 10022. Governmental entities and 
                                        exempt organizations.
                              ``Sec. 10023. Post-sale price adjustments 
                                        and refunds; bad debts.
                              ``Sec. 10024. Source rules.
                              ``Sec. 10025. Conversions.

``SEC. 10021. ACCOUNTING METHODS.

    ``(a) In General.--Except as provided in this section, a person 
subject to tax under this chapter may use any of the following methods 
of accounting for purposes of this chapter:
            ``(1) The cash receipts and disbursements method.
            ``(2) An accrual method.
            ``(3) Any other method permitted by the Secretary.
The Secretary may require a person to modify any method to clearly 
reflect gross receipts and business purchases.
    ``(b) Consistency Requirement.--All persons which are members of a 
controlled group of corporations which does not elect to be treated as 
one person for purposes of this chapter under section 10063(a)(2) shall 
use the same method of accounting for purposes of this chapter.
    ``(c) Special Rules for Long-Term Contracts.--
            ``(1) In general.--In the case of any sale pursuant to a 
        long-term contract (as defined in section 460(f))--
                    ``(A) the seller shall use the percentage of 
                completion method in computing gross receipts from the 
                contract, and
                    ``(B) the purchaser shall use the cash receipts and 
                disbursements method in computing business purchases 
                from the contract.
            ``(2) Reporting.--The Secretary may require taxpayers to 
        file statements containing such information with respect to 
        long-term contracts as the Secretary may prescribe.
    ``(d) Installment Method Prohibited.--Gross receipts from the sale 
of property shall not be taken into account for purposes of this 
chapter under the installment method.

``SEC. 10022. GOVERNMENTAL ENTITIES AND EXEMPT ORGANIZATIONS.

    ``(a) In General.--For purposes of this chapter, the transfer of 
property, the grant of a right to use property, or the furnishing of 
services by a governmental entity or an exempt organization shall be 
treated as a business activity if there is a separately stated charge 
for such transfer, grant, or furnishing.
    ``(b) Special Rules for Governmental Entities.--For purposes of 
this chapter--
            ``(1) In general.--The transfer of property, the grant of a 
        right to use property, or furnishing of services by a 
        governmental entity with respect to any of the following 
        activities shall be treated as a business activity whether or 
        not there is a separately stated charge for such transfer or 
        furnishing:
                    ``(A) Public utility services.
                    ``(B) Mass transit services.
                    ``(C) Postal services.
                    ``(D) Any activity not involving the exercise of 
                any essential governmental function (within the meaning 
                of section 115).
            ``(2) Gross receipts.--In the case of a transfer of 
        property, grant of a right to use property, or furnishing of 
        services which is treated as a business activity solely by 
        reason of paragraph (1), gross receipts shall be determined on 
        the basis of the fair market value of such property, right, or 
        services.
    ``(c) Business Purchases Reduced By Subsidies.--
            ``(1) In general.--For purposes of this chapter, in the 
        case of a business activity of an exempt organization or a 
        governmental entity (other than an activity which is treated as 
        a business activity solely by reason of subsection (b)(1)), the 
        business purchases for such activity shall be reduced by the 
        amount of any subsidy provided for that activity.
            ``(2) Subsidy.--For purposes of paragraph (1), the term 
        `subsidy' means the portion of the cost of the transfer of 
        property, the right to use property, or the furnishing of 
        services, which is not borne by amounts charged therefor.
    ``(d) Allocation.--The Secretary shall by regulation provide for 
the proper allocation of gross receipts and business purchases between 
business activities and other activities.
    ``(e) Self-Consumption of Property or Services.--Notwithstanding 
the provisions of this section, the Secretary may by regulation provide 
that property produced, or services furnished, by a governmental entity 
or an exempt organization for use by itself are to be treated as sold 
in a business activity if such treatment is necessary to carry out the 
purposes of this chapter. In any such case the taxable value added 
shall be determined by reference to the fair market value of the 
property or services.

``SEC. 10023. POST-SALE PRICE ADJUSTMENTS AND REFUNDS; BAD DEBTS.

    ``(a) Price Adjustments and Refunds.--
            ``(1) Receipt treated as reduction in business purchases.--
        If a person subject to tax under this chapter receives a post-
        sale price adjustment attributable to a business purchase which 
        was taken into account in computing the taxable value added for 
        a prior taxable period, then the amount of such adjustment 
        shall be treated as a reduction in business purchases for the 
        taxable period in which it is received.
            ``(2) Issuance treated as reduction in gross receipts.--If 
        a person subject to tax under this chapter issues a post-sale 
        price adjustment for a sale the gross receipts from which were 
        taken into account in computing the taxable value added for a 
        prior taxable period, then the amount of such adjustment shall 
        be treated as a reduction in gross receipts for the taxable 
        period in which it is issued.
            ``(3) Post-sale price adjustment.--For purposes of this 
        subsection, the term `post-sale price adjustment' means a 
        refund, rebate, or other price allowance attributable to a sale 
        of property or services.
    ``(b) Bad Debts.--
            ``(1) Seller.--
                    ``(A) Writeoffs and writedowns.--If an amount owed 
                to a seller of business property or services that was 
                taken into account as gross receipts in computing the 
                taxable value added of the seller for a prior taxable 
                period becomes wholly or partially uncollectible during 
                any subsequent taxable period, then the seller shall 
                treat the amount (or part thereof that is 
                uncollectible) as a reduction in gross receipts for the 
                taxable period in which it becomes wholly or partially 
                uncollectible.
                    ``(B) Notice.--Whenever a seller treats an amount 
                as wholly or partially uncollectible under subparagraph 
                (A), the seller shall notify the purchaser of the 
                amount the seller is treating as uncollectible. The 
                notice shall set forth with specificity the purchase or 
                purchases to which the treatment relates and shall be 
                sent to the purchaser at the purchaser's last known 
                address within 10 days after close of the taxable 
                period in which the seller treats the amount as wholly 
                or partially uncollectible.
                    ``(C) Recoveries.--If a seller receives payment for 
                an amount that was treated as a reduction in gross 
                receipts under subparagraph (A) in a prior taxable 
                period, then the seller shall treat the payment as a 
                gross receipt for the taxable period in which it is 
                received.
            ``(2) Purchaser.--
                    ``(A) Writeoffs and writedowns.--If a purchaser 
                receives notice under paragraph (1)(B) from a seller 
                for all or a portion of the amount owed for business 
                property or services that the purchaser treated as a 
                business purchase in a prior taxable period, then the 
                purchaser shall treat such amount as a reduction in 
                business purchases for the taxable period in which the 
                notice is received.
                    ``(B) Repayments.--If a purchaser pays all or part 
                of an amount treated as a reduction in business 
                purchases under subparagraph (A) in a prior taxable 
                period, then the purchaser shall treat the amount paid 
                as a business purchase for the taxable period in which 
                the payment is made.

``SEC. 10024. SOURCE RULES.

    ``(a) Sales of Property.--For purposes of this chapter, a sale of 
property shall be treated as occurring in the United States if the 
property is located in the United States at the time of the sale.
    ``(b) Right To Use Property.--For purposes of this chapter, the 
grant of a right to use property shall be treated as occurring in the 
United States to the extent such right involves the use of such 
property in the United States.
    ``(c) Sales of Services.--
            ``(1) General rule.--For purposes of this chapter, a sale 
        of services shall be treated as occurring in the United States 
        to the extent that--
                    ``(A) the services are provided from a place of 
                business, or with respect to property, in the United 
                States, or
                    ``(B) the services are incidental to the provision 
                of services within the United States.
            ``(2) Cross reference.--

                                ``For treatment of international 
transportation services, see section 10031.

``SEC. 10025. CONVERSIONS.

    For purposes of this chapter, any conversion of property or 
services from use in a business activity to use in any other activity, 
or from use in any other activity to use in a business activity, shall 
be treated as a sale of the property or services for their fair market 
value.

                     ``Subchapter D--Special Rules

                              ``Sec. 10031. International 
                                        transportation services.
                              ``Sec. 10032. Financial intermediation 
                                        services.
                              ``Sec. 10033. Nonbusiness imports of 
                                        property or services.
                              ``Sec. 10034. Refund for certain 
                                        nonbusiness purchases.

``SEC. 10031. INTERNATIONAL TRANSPORTATION SERVICES.

    ``(a) Exports.--For purposes of this chapter, in the case of 
property exported from the United States--
            ``(1) Gross receipts.--The term `gross receipts' does not 
        include receipts from transportation of such property from the 
        United States.
            ``(2) Business purchases.--The term `business purchase' 
        does not include amounts paid or incurred for transportation of 
        such property from the United States.
    ``(b) International Transportation of Passengers.--For purposes of 
this chapter--
            ``(1) Gross receipts.--Gross receipts--
                    ``(A) do not include receipts from the 
                transportation of passengers from outside the United 
                States to a destination in the United States, but
                    ``(B) include receipts from the transportation of 
                passengers from the United States to a destination 
                outside the United States.
            ``(2) Business purchases.--Business purchases--
                    ``(A) do not include amounts paid or incurred in a 
                business activity for the transportation of passengers 
                from outside the United States to a destination in the 
                United States, but
                    ``(B) include amounts paid or incurred in a 
                business activity for the transportation of passengers 
                from the United States to a destination outside the 
                United States.

``SEC. 10032. FINANCIAL INTERMEDIATION SERVICES.

    ``(a) General Rule.--For purposes of this chapter--
            ``(1) the providing of financial intermediation services 
        shall be treated as a business activity, and
            ``(2) this chapter shall be applied to such business 
        activity by substituting financial receipts and adjusted 
        business purchases properly allocable to such business activity 
        for gross receipts and business purchases.
    ``(b) Financial Receipts.--For purposes of this section, the term 
`financial receipts' means all receipts other than amounts received as 
contributions to capital.
    ``(c) Adjusted Business Purchases.--For purposes of this section, 
the term `adjusted business purchases' means business purchases, 
adjusted as follows:
            ``(1) Principal and interest.--Business purchases include 
        any principal or interest payments properly allocable to the 
        business activity described in subsection (a).
            ``(2) Financial instruments.--Notwithstanding any other 
        provision of this chapter, business purchases include the cost 
        of, and payments under, financial instruments (other than 
        financial instruments representing equity interests in the 
        person subject to the tax imposed by this chapter).
            ``(3) Insurance claims.--Business purchases include claims 
        and cash surrender values paid in connection with insurance or 
        reinsurance services.
            ``(4) Reinsurance.--Business purchases include amounts paid 
        for reinsurance.
    ``(d) Reporting to Customers.--
            ``(1) Allocation and reporting.--
                    ``(A) In general.--A person engaged in the business 
                activity of providing financial intermediation services 
                shall--
                            ``(i) allocate fees received for such 
                        services (other than services for which 
                        separately stated fees are charged) among 
                        recipients of such services on a reasonable and 
                        consistent basis, and
                            ``(ii) report to each recipient the fees so 
                        allocated.
                    ``(B) Timing.--The report under subparagraph 
                (A)(ii) shall be furnished to the recipient no later 
                than the 45th day after the close of a taxable period.
            ``(2) Exception.--The Secretary shall establish procedures 
        under which notice need not be given under this subsection to 
        persons with respect to whom services are not provided in 
        connection with a business activity.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Financial intermediation service.--The term 
        `financial intermediation service' means--
                    ``(A) lending services,
                    ``(B) insurance services,
                    ``(C) market-making and dealer services, and
                    ``(D) any other service provided as a business 
                activity in which a person acts as an intermediary in--
                            ``(i) the transfer of property, services, 
                        or financial assets, liabilities, risks, or 
                        instruments (or income or expense derived 
                        therefrom) between two or more other persons, 
                        or
                            ``(ii) the pooling of economic risk among 
                        other persons,
                and derives all or a portion of such person's gross 
                receipts from streams of income or expense, discounts, 
                or other financial flows associated with the matter 
                with respect to which such person is acting as an 
                intermediary.
            ``(2) Lending services.--The term `lending services' means 
        the regular making of loans and providing credit to, or taking 
        deposits from, customers, but does not include an installment 
        or delayed payment arrangement provided by a seller of property 
        or services under which additional charges or fees are imposed 
        by the seller for late payment and for which no interest is 
        charged.
            ``(3) Market-making or dealer services.--The term `market-
        making or dealer services' means services provided by a person 
        who--
                    ``(A) regularly purchases financial instruments 
                from or sells financial instruments to customers in the 
                ordinary course of a trade or business, or
                    ``(B) regularly offers to enter into, assume, 
                offset, assign, or otherwise terminate positions in 
                financial instruments with customers in the ordinary 
                course of a trade or business.

``SEC. 10033. NONBUSINESS IMPORTS OF PROPERTY OR SERVICES.

    ``(a) Imposition of Tax.--There is hereby imposed on the taxable 
nonbusiness import of any property or services a tax equal to 20 
percent of the sum of--
            ``(1) the amount paid or incurred for the property or 
        services, plus
            ``(2) in the case of property, any amounts paid or incurred 
        for transportation costs (if such costs are not included in the 
        amount paid for the property).
    ``(b) Taxable Nonbusiness Import.--For purposes of subsection (a), 
the term `taxable nonbusiness import' means any import of any property 
or services for use or consumption within the United States unless--
            ``(1) such property or services is imported for use or sale 
        in a business activity of the importer, or
            ``(2) such property is imported free of duty under chapter 
        98 of the Harmonized Tariff Schedule of the United States.

``SEC. 10034. REFUND FOR CERTAIN NONBUSINESS PURCHASES.

    ``(a) Refund Allowed.--If the tax imposed by section 10001 was paid 
on any qualified nonbusiness purchase, the Secretary shall pay (without 
interest) to the purchaser an amount equal to such tax.
    ``(b) Qualified Nonbusiness Purchase.--For purposes of this 
section, the term `qualified nonbusiness purchase' means any purchase 
of property or services if--
            ``(1) such purchase is not in connection with a business,
            ``(2) the purchaser establishes to the satisfaction of the 
        Secretary that substantially all of the use of such property or 
        services is outside the United States, and
            ``(3) the amount of the tax imposed by section 10001 on 
        such purchase is separately stated.
    ``(c) Period for Filing Claims.--No claim shall be allowed under 
this section with respect to any purchase unless filed by the purchaser 
not later than 180 days after the date of such purchase.

                ``Subchapter E--Small Business Exemption

                              ``Sec. 10041. Small business exemption.

``SEC. 10041. SMALL BUSINESS EXEMPTION.

    ``(a) Exemption.--Except as provided in subsection (b), if the 
aggregate amount of gross receipts of any person for any taxable period 
and the 3 preceding taxable periods does not exceed the exemption 
amount, no tax shall be imposed under section 10001 (and no credit or 
refund shall be allowed under section 10011) for the taxable period.
    ``(b) Exceptions.--
            ``(1) Person must always be exempt.--Subsection (a) shall 
        not apply to any person for a taxable period unless the person 
        was exempt from the tax imposed by section 10001 for all 
        preceding taxable periods.
            ``(2) Election.--Subsection (a) shall not apply to any 
        person for a taxable period if the person elects not to have 
        subsection (a) apply for the taxable period.
    ``(c) Statements.--A person to which this section applies for any 
taxable period shall file a statement containing such information as 
the Secretary may prescribe.
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Exemption amount.--The term `exemption amount' means 
        $12,000 (or an equivalent amount if the taxable period is not a 
        calendar quarter).
            ``(2) Persons not engaged in business for entire period.--
        If a person was not engaged in a business activity for the 
        entire period referred to in subsection (a), such subsection 
        shall be applied on the basis of the period the person was so 
        engaged.
            ``(3) Predecessors.--Any reference in this section to a 
        person shall include a reference to any predecessor of the 
        person.

                      ``Subchapter F--Definitions

                              ``Sec. 10051. Definitions.

``SEC. 10051. DEFINITIONS.

    ``For purposes of this chapter--
            ``(1) Sale of services.--The term `sale of services' means 
        the performance of services for consideration, and includes the 
        granting of a right to the performance of services or to 
        reimbursement (including the granting of warranties, insurance, 
        and similar items) for consideration.
            ``(2) Grant of right to use property.--The term `grant of a 
        right to use property' means the granting of a right to use 
        property for consideration.
            ``(3) Sale of property.--The term `sale of property' means 
        the transfer of ownership of property from a seller to a 
        purchaser for consideration.
            ``(4) Property.--The term `property' means any tangible or 
        intangible property.
            ``(5) Business.--The term `business' includes any activity 
        carried on continuously or regularly, whether or not for 
        profit, that involves or is intended to involve the sale of 
        property, the grant of a right to use property, or the sale of 
        services.
            ``(6) Business property or service.--The term `business 
        property or service' means any property or service the sale of 
        which by the owner or provider thereof would be a business 
        activity or which is used by the owner or provider in a 
        business activity.
            ``(7) Employee.--The term `employee' has the same meaning 
        as when such term is used for purposes of chapter 24 (relating 
        to withholding).
            ``(8) Person.--The term `person' has the meaning given such 
        term by section 7701(a)(1), but also includes any governmental 
        entity.
            ``(9) United states.--The term `United States', when used 
        in a geographic sense, includes the customs territory of the 
        United States (as defined in General Headnote 2 of the 
        Harmonized Tariff Schedules of the United States) and any area 
        seaward of the States lying within the outer boundaries of the 
        outer continental shelf (as defined in section 1331 of title 
        43, United States Code).
            ``(10) Governmental entity.--The term `governmental entity' 
        means the United States, any State or political subdivision 
        thereof, the District of Columbia, a Commonwealth or possession 
        of the United States, or any agency or instrumentality of any 
        of the foregoing.
            ``(11) Exempt organization.--The term `exempt organization' 
        means any organization exempt from taxation under chapter 1.
            ``(12) Financial instrument defined.--The term `financial 
        instrument' means any--
                    ``(A) share of stock in a corporation,
                    ``(B) partnership or beneficial ownership interest 
                in a widely held or publicly traded partnership or 
                trust,
                    ``(C) note, bond, debenture, or other evidence of 
                indebtedness,
                    ``(D) interest rate, currency, or equity notional 
                principal contract,
                    ``(E) evidence of an interest in, or a derivative 
                financial instrument in, any financial instrument 
                described in subparagraph (A), (B), (C), or (D), or any 
                currency, including any option, forward contract, short 
                position, and any similar financial instrument in such 
                a financial instrument or currency, and
                    ``(F) position which--
                            ``(i) is not a financial instrument 
                        described in subparagraph (A), (B), (C), (D), 
                        or (E),
                            ``(ii) is a hedge with respect to such a 
                        financial instrument, and
                            ``(iii) is clearly identified in the 
                        dealer's records as being described in this 
                        subparagraph before the close of the day on 
                        which it was acquired or entered into (or such 
                        other time as the Secretary may by regulations 
                        prescribe).
            ``(13) Use includes held for use.--Property or services 
        held for use by any person shall be treated as used by that 
        person.
            ``(14) Exchanges treated as sales.--An exchange shall be 
        treated as a sale.

                     ``Subchapter G--Administration

                              ``Sec. 10061. Liability for tax.
                              ``Sec. 10062. Time for filing return; 
                                        taxable period.
                              ``Sec. 10063. Treatment of related 
                                        businesses.
                              ``Sec. 10064. Secretary to be notified of 
                                        certain events.
                              ``Sec. 10065. Regulations.

``SEC. 10061. LIABILITY FOR TAX.

    ``The person selling property, granting the right to use property, 
or selling services shall be liable for the tax imposed by section 
10001.

``SEC. 10062. TIME FOR FILING RETURN; TAXABLE PERIOD.

    ``(a) Filing Return.--Before the 16th day of the second calendar 
month beginning after the close of each taxable period, each person 
subject to tax under this chapter shall file a return of the tax 
imposed by section 10001 for such taxable period.
    ``(b) Taxable Period.--For purposes of this chapter--
            ``(1) In general.--The term `taxable period' means a 
        calendar quarter, except that if a taxpayer has a taxable year 
        under chapter 1 other than the calendar year, then such term 
        means a quarter of that taxable year.
            ``(2) Other periods.--To the extent provided in 
        regulations, the term `taxable period' includes a period 
        selected by a person other than a calendar quarter.
            ``(3) Authority to shorten length of tax period.--The 
        Secretary may shorten the length of a person's taxable period 
        under this subsection to the extent the Secretary deems such 
        action necessary to protect the revenue.

``SEC. 10063. TREATMENT OF RELATED BUSINESSES.

    ``(a) General Rule.--For purposes of this chapter--
            ``(1) Affiliated groups and businesses under common 
        control.--Except to the extent otherwise provided in 
        regulations--
                    ``(A) an affiliated group of corporations (as 
                defined in section 1504(a) without regard to paragraphs 
                (2), (4), and (7) of section 1504(b)), or
                    ``(B) two or more businesses (whether or not 
                incorporated) under common control within the meaning 
                of section 52(b) and the regulations thereunder,
        shall be treated as one person.
            ``(2) Controlled group.--A controlled group of 
        corporations, as defined in section 1563(a) (determined without 
        regard to the second sentence of paragraph (4) of such section 
        and without regard to section 1563(e)(3)(C)), may elect to be 
        treated as one person.
    ``(b) Related Party Transactions.--For purposes of this chapter, 
transactions in the United States between corporations or other 
businesses that are treated, or that may elect to be treated, as one 
person under subsection (a) shall not be taken into account in 
computing the gross receipts or business purchases of any such 
corporation or business.

``SEC. 10064. SECRETARY TO BE NOTIFIED OF CERTAIN EVENTS.

    ``To the extent provided in regulations, each person engaged in a 
business shall notify the Secretary (at such time or times as may be 
prescribed by regulation) of--
            ``(1) any change in the form in which the business is 
        conducted, and
            ``(2) any other change that might affect--
                    ``(A) the liability for the tax imposed by section 
                10001,
                    ``(B) the amount of such tax or any credit against 
                such tax, or
                    ``(C) the administration of such tax in the case of 
                such person.

``SEC. 10065. REGULATIONS.

    ``The Secretary shall prescribe such regulations as may be 
necessary to carry out the provisions of this chapter.''

SEC. 202. REFUND AUTHORITY.

    Section 6402 (relating to authority to make credits or refunds) is 
amended by designating subsection (h) as subsection (j) and by 
inserting after subsection (g) the following new subsection:
    ``(h) Repayment of Value Added Tax.--Within 45 days after the date 
on which a value added tax return is filed pursuant to section 10062 
showing an overpayment, the Secretary shall make, to the extent the 
Secretary deems practical, a limited examination of the return to 
discover omissions and errors of computation, and shall determine the 
amount of the overpayment, if any, for the taxable period to which the 
return relates and refund the amount of such overpayment to the person 
who filed the return.''

SEC. 203. DEDICATION OF PORTION OF VAT REVENUES TO SOCIAL SECURITY 
              TRUST FUNDS.

    (a) In General.--The Secretary of the Treasury shall deposit in 
each Social Security Trust Fund for periods after 1997 that portion of 
the revenues from the tax imposed by chapter 100 of the Internal 
Revenue Code of 1986 which is necessary to maintain each such Fund in 
the same position it would be in but for the amendments made by section 
102 of this Act.
    (b) Social Security Trust Funds.--For purposes of subsection (a), 
the Social Security Trust Funds are--
            (1) the Federal Old-Age and Survivors Insurance Trust Fund 
        established by section 201(a) of the Social Security Act,
            (2) the Federal Disability Insurance Trust Fund established 
        by section 201(b) of such Act, and
            (3) the Federal Hospital Insurance Trust Fund established 
        by section 1817(a) of such Act.

                     TITLE III--BURDEN ADJUSTMENTS

SEC. 301. REBATE OF VALUE ADDED TAX TO LOW-INCOME INDIVIDUALS; BURDEN 
              ASSESSMENT ON HIGH-INCOME INDIVIDUALS.

    (a) In General.--Subtitle A is amended by adding at the end the 
following new chapter:

            ``CHAPTER 7--VALUE ADDED TAX BURDEN ADJUSTMENTS

                              ``Subchapter A. Rebate to low-income 
                                        individuals.
                              ``Subchapter B. Burden assessment on 
                                        high-income individuals.

            ``Subchapter A--Rebate to Low-Income Individuals

                              ``Sec. 1601. Rebate to low-income 
                                        individuals.
                              ``Sec. 1602. Advance payment of rebate.

``SEC. 1601. REBATE TO LOW-INCOME INDIVIDUALS.

    ``(a) General Rule.--The Secretary shall, for each taxable year, 
pay to each eligible individual an amount equal to the VAT rebate for 
such year.
    ``(b) VAT Rebate.--For purposes of this section--
            ``(1) In general.--The VAT rebate for any taxable year is 
        an amount equal to the applicable percentage of so much of the 
        adjusted net income of the eligible individual for such year as 
        does not exceed $30,000.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage is 20 percent reduced (but not 
        below zero) by \2/3\ of 1 percentage point for each whole 
        $1,000 of the individual's adjusted net income.
            ``(3) Adjusted net income.--The term `adjusted net income' 
        means the sum of--
                    ``(A) the net income (as defined in section 
                1611(c)) for the taxable year, plus
                    ``(B) the value of specified Federal transfer 
                payments received during the taxable year.
            ``(4) Specified federal transfer payments.--The term 
        `specified Federal transfer payments' means--
                    ``(A) aid provided under a State plan approved 
                under part A of title IV of the Social Security Act 
                (relating to aid to families with dependent children),
                    ``(B) assistance provided under--
                            ``(i) the food stamp program (as defined in 
                        section 3(h) of the Food Stamp Act of 1977), or
                            ``(ii) the portion of the program under 
                        sections 21 and 22 of such Act which provides 
                        food assistance, and
                    ``(C) any other Federal assistance which consists 
                of money payments or script and which is not adjusted 
                for changes in the cost-of-living.
    ``(c) Eligible Individual.--For purposes of this section, the term 
`eligible individual' means any individual if--
            ``(1) such individual is a citizen or resident of the 
        United States for the entire taxable year,
            ``(2) such individual's principal place of abode is in the 
        United States for more than one-half of such taxable year,
            ``(3) such individual is not a dependent of another 
        taxpayer for any taxable year beginning in the same calendar 
        year as such taxable year, and
            ``(4) such individual's adjusted net income for the taxable 
        year does not exceed $30,000.
    ``(d) Amount of Rebate To Be Determined Under Tables.--
            ``(1) In general.--The amount of the rebate allowed by this 
        section shall be determined under tables prescribed by the 
        Secretary.
            ``(2) Requirements for tables.--The tables prescribed under 
        paragraph (1) shall reflect the provisions of subsection (b) 
        and shall have income brackets of not greater than $50 each.
    ``(e) Married Individuals Must File Joint Claim.--In the case of an 
individual who is married (within the meaning of section 7703), this 
section shall apply only if a joint claim is filed by such individual 
and such individual's spouse, and such joint claim shows the combined 
adjusted net incomes of such individual and spouse.
    ``(f) Coordination With Periodic Payments of Rebate.--If any 
payment is made to the individual under section 1602 during any 
calendar year or if periodic payments have been made to the individual 
under this section during any calendar year, then such individual shall 
pay to the Secretary an amount equal to the excess (if any) of--
            ``(1) the aggregate amount of such payments, over
            ``(2) the maximum amount which would be payable to such 
        individual under this section (for such individual's last 
        taxable year beginning in such calendar year) without regard to 
        such payments and on the basis of the actual adjusted net 
        income of such individual for such taxable year.
Any amount required to be paid under this subsection shall be assessed 
and collected in the same manner as tax imposed by chapter 1.
    ``(g) Claim Required To Be Filed, Etc.--
            ``(1) In general.--No payment shall be made under this 
        section unless claim therefor is filed with the Secretary.
            ``(2) Rebate payable with federal transfer payments, etc.--
        To the maximum extent practical, the Secretary shall arrange 
        for the payment of the rebate under this section to be made 
        with Federal transfer payments and payments of social security 
        benefits.

``SEC. 1602. ADVANCE PAYMENT OF REBATE.

    ``(a) General Rule.--Except as otherwise provided in this section, 
every employer making payment of wages to an employee with respect to 
whom a VAT rebate eligibility certificate is in effect shall, at the 
time of paying such wages, make an additional payment to such employee 
equal to such employee's VAT rebate advance amount.
    ``(b) VAT Rebate Eligibility Certificate.--For purposes of this 
title, a VAT rebate eligibility certificate is a statement furnished by 
an employee to the employer which--
            ``(1) certifies that the employee will be eligible to 
        receive payments under section 1601 for the taxable year,
            ``(2) certifies the employee's estimate of his adjusted net 
        income (as defined in section 1601(b)) for the taxable year 
        other than income from wages from such employer, and
            ``(3) certifies--
                    ``(A) that the employee does not have another VAT 
                rebate eligibility certificate in effect for the 
                calendar year with respect to the payment of wages by 
                another employer, and
                    ``(B) that the spouse of the employee does not have 
                a VAT rebate eligibility certificate in effect.
For purposes of this section, a certificate shall be treated as being 
in effect with respect to a spouse if such a certificate will be in 
effect on the first status determination date following the date on 
which the employee furnishes the statement in question.
    ``(c) VAT Rebate Advance Amount.---For purposes of this title, the 
term `VAT rebate advance amount' means, with respect to any payroll 
period, the amount determined--
            ``(1) on the basis of the employee's wages from the 
        employer for such period and the employee's estimate under 
        subsection (b)(2) of his adjusted net income (as defined in 
        section 1601(b)) for the taxable year other than from such 
        wages, and
            ``(2) in accordance with tables prescribed by the 
        Secretary.
    ``(d) Payments To Be Treated As Payments Value Added Tax.--
            ``(1) In general.--For purposes of this title, payments 
        made by an employer under subsection (a) to his employees for 
        any payroll period--
                    ``(A) shall not be treated as the payment of 
                compensation, and
                    ``(B) shall be treated as made out of amounts of 
                the taxes imposed for the payroll period under chapter 
                100 (relating to value added tax), as if the employer 
                had paid to the Secretary, on the day on which the 
                wages are paid to the employees, an amount equal to 
                such payments.
            ``(2) Advance payments exceed taxes due.--In the case of 
        any employer, if for any payroll period the aggregate amount of 
        VAT rebate advance payments exceeds the sum of the amounts 
        referred to in paragraph (1)(B), each such advance payment 
        shall be reduced by an amount which bears the same ratio to 
        such excess as such advance payment bears to the aggregate 
        amount of all such advance payments.
            ``(3) Employer may make full advance payments.--The 
        Secretary shall prescribe regulations under which an employer 
        may elect (in lieu of any application of paragraph (2))--
                    ``(A) to pay in full all VAT rebate advance 
                amounts, and
                    ``(B) to have additional amounts paid by reason of 
                this paragraph treated as the advance payment of taxes 
                imposed by this title.
    ``(e) Furnishing and Taking Effect of Certificates.--Rules similar 
to the rules of section 3507(e) shall apply for purposes of this 
section.

      ``Subchapter B--Burden Assessment on High-Income Individuals

                              ``Sec. 1611. Assessment on high-income 
                                        individuals.
                              ``Sec. 1612. Inclusion of undistributed 
                                        income of certain corporations.

``SEC. 1611. ASSESSMENT ON HIGH-INCOME INDIVIDUALS.

    ``(a) General Rule.--Each assessable person whose net income for 
the taxable year exceeds the threshold amount shall pay an assessment 
for such year equal to 17 percent of the excess (if any) of such income 
over the threshold amount.
    ``(b) Assessable Person.--For purposes of this subchapter, the term 
`assessable person' means any individual, estate, or trust other than a 
trust exempt from taxation under chapter 1.
    ``(c) Net Income.--
            ``(1) In general.--For purposes of this section, the term 
        `net income' means adjusted gross income determined with the 
        modifications described in the following paragraphs.
            ``(2) Certain exclusions disregarded.--Net income shall be 
        determined without regard to--
                    ``(A) sections 911, 931, and 933,
                    ``(B) section 457, and
                    ``(C) any exclusion from gross income for any 
                elective deferral (as defined in section 402(g)(3)).
            ``(3) Certain amounts included.--
                    ``(A) Tax exempt interest.--Net income shall be 
                increased by the amount of interest received or accrued 
                by the taxpayer during the taxable year which is exempt 
                from tax.
                    ``(B) Nonqualified deferred compensation.--Deferred 
                compensation shall be included in gross income for the 
                1st taxable year in which there is no substantial risk 
                of forfeiture of the rights to such compensation 
                (within the meaning of section 457(f)(3)). The 
                preceding sentence shall not apply to any plan or 
                contract described in section 457(f)(2).
            ``(4) Estates and trusts.--The adjusted gross income of an 
        estate or trust shall be determined in accordance with section 
        67(e).
    ``(d) Threshold Amount.--For purposes of this section--
            ``(1) In general.--The term `threshold amount' means--
                    ``(A) except as provided in subparagraph (B), 
                $75,000, and
                    ``(B) zero in the case of a taxpayer who--
                            ``(i) is married as of the close of the 
                        taxable year (within the meaning of section 
                        7703) but does not file a joint return for such 
                        year, and
                            ``(ii) does not live apart from his spouse 
                        at all times during the taxable year.
            ``(2) Special rules for trusts.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, the threshold amount for any trust 
                shall be zero.
                    ``(B) Exception for current distribution trusts.--
                Subparagraph (A) shall not apply to any trust to which 
                section 651 applies for the taxable year.
                    ``(C) Beneficiary may allocate threshold.--Any 
                beneficiary of a trust to which subparagraph (A) 
                applies may elect to allocate any portion of such 
                beneficiary's threshold amount under paragraph (1) for 
                any taxable year to such trust. Such allocation shall 
                apply for such trust's taxable year beginning in the 
                taxable year from which made and shall reduce the 
                threshold amount otherwise available to such 
                beneficiary.
    ``(d) Assessment Collected As Tax.--For purposes of subtitle F, the 
assessment imposed by this section shall be treated as if it were a tax 
imposed by chapter 1.

``SEC. 1612. INCLUSION OF UNDISTRIBUTED INCOME OF CERTAIN CORPORATIONS.

    ``(a) General Rule.--Each assessable person who owns (within the 
meaning of section 542(a)) stock in a corporation on the last day in 
the taxable year of such corporation on which such corporation was an 
applicable corporation shall include in gross income (for such person's 
taxable year in which or with which such taxable year of the 
corporation ends) as a dividend the amount such person would have 
received as a dividend if on such last day such corporation had 
distributed pro rata to its shareholders an amount which bears the same 
ratio to the undistributed income of the corporation for the taxable 
year as the portion of such taxable year during which such corporation 
is an applicable corporation bears to the entire taxable year.
    ``(b) Applicable Corporation.--For purposes of this section--
            ``(1) In general.--The term `applicable corporation' 
        means--
                    ``(A) any corporation engaged in a service-related 
                business in which a shareholder performs substantial 
                services, and
                    ``(B) any closely held C corporation.
        Such term shall not include any corporation exempt from 
        taxation under chapter 1.
            ``(2) Service-related business.--The term `service-related 
        business' means any trade or business described in subparagraph 
        (A) of section 1202(e)(3).
            ``(3) Closely held c corporation.--The term `closely held C 
        corporation' means any C corporation if, at any time during the 
        last half of the taxable year, more than 50 percent in value of 
        its outstanding stock is owned, directly or indirectly through 
        the application of section 544, by or for not more than 10 
        individuals.
    ``(c) Undistributed Income.--For purposes of this section--
            ``(1) In general.--The term `undistributed income' means 
        the net income of the corporation for the taxable year reduced 
        any distributions by the corporation to its shareholders with 
        respect to its stock--
                    ``(A) which are made during the taxable year and 
                not taken into account under subparagraph (B) for the 
                preceding taxable year, or
                    ``(B) which--
                            ``(i) are made after the close of the 
                        taxable year and on or before the 45th day 
                        following the close of the taxable year, and
                            ``(ii) are designated, at such time and in 
                        such manner as the Secretary may prescribe, as 
                        distributions for purposes of this paragraph.
        Any distribution described in subparagraph (B) shall be 
        included in the gross income of the shareholder for the 
        shareholder's taxable year which includes the last day of the 
        taxable year of the corporation for which the reduction under 
        this paragraph was made.
            ``(2) Net income.--Net income shall be determined in the 
        same way as taxable income under chapter 1 as in effect on the 
        day before the date of the enactment of this section.
    ``(d) Certain Rules To Apply.--Rules similar to the rules of 
subsections (d) and (e) of section 551 shall apply with respect to 
amounts required to be included in gross income under this section.''
    (b) Clerical Amendment.--The table of chapters for subtitle A is 
amended adding at the end the following new item:

                              ``Chapter 7. Value added tax burden 
                                        adjustments.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1997.
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