[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[S. 593 Introduced in Senate (IS)]







105th CONGRESS
  1st Session
                                 S. 593

To amend the Internal Revenue Code of 1986 to impose a flat tax only on 
 individual taxable earned income and business taxable income, and for 
                            other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             April 16, 1997

  Mr. Specter introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to impose a flat tax only on 
 individual taxable earned income and business taxable income, and for 
                            other purposes.

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

SECTION 1. SHORT TITLE; TABLE OF CONTENTS; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Flat Tax Act of 
1997''.
    (b) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; table of contents; amendment of 1986 Code.
Sec. 2. Flat tax on individual taxable earned income and business 
                            taxable income.
Sec. 3. Repeal of estate and gift taxes.
Sec. 4. Additional repeals.
Sec. 5. Effective dates.
    (c) 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.

SEC. 2. FLAT TAX ON INDIVIDUAL TAXABLE EARNED INCOME AND BUSINESS 
              TAXABLE INCOME.

    (a) In General.--Subchapter A of chapter 1 of subtitle A is amended 
to read as follows:

             ``Subchapter A--Determination of Tax Liability

                              ``Part I.   Tax on individuals.
                              ``Part II.  Tax on business activities.

                      ``PART I--TAX ON INDIVIDUALS

                              ``Sec. 1. Tax imposed.
                              ``Sec. 2. Standard deduction.
                              ``Sec. 3. Deduction for cash charitable 
                                        contributions.
                              ``Sec. 4. Deduction for home acquisition 
                                        indebtedness.
                              ``Sec. 5. Definitions and special rules.

``SECTION 1. TAX IMPOSED.

    ``(a) Imposition of Tax.--There is hereby imposed on every 
individual a tax equal to 20 percent of the taxable earned income of 
such individual.
    ``(b) Taxable Earned Income.--For purposes of this section, the 
term `taxable earned income' means the excess (if any) of--
            ``(1) the earned income received or accrued during the 
        taxable year, over
            ``(2) the sum of--
                    ``(A) the standard deduction,
                    ``(B) the deduction for cash charitable 
                contributions, and
                    ``(C) the deduction for home acquisition 
                indebtedness,
        for such taxable year.
    ``(c) Earned Income.--For purposes of this section--
            ``(1) In general.--The term `earned income' means wages, 
        salaries, or professional fees, and other amounts received from 
        sources within the United States as compensation for personal 
        services actually rendered, but does not include that part of 
        compensation derived by the taxpayer for personal services 
        rendered by the taxpayer to a corporation which represents a 
        distribution of earnings or profits rather than a reasonable 
        allowance as compensation for the personal services actually 
        rendered.
            ``(2) Taxpayer engaged in trade or business.--In the case 
        of a taxpayer engaged in a trade or business in which both 
        personal services and capital are material income-producing 
        factors, under regulations prescribed by the Secretary, a 
        reasonable allowance as compensation for the personal services 
        rendered by the taxpayer, not in excess of 30 percent of the 
        taxpayer's share of the net profits of such trade or business, 
        shall be considered as earned income.

``SEC. 2. STANDARD DEDUCTION.

    ``(a) In General.--For purposes of this subtitle, the term 
`standard deduction' means the sum of--
            ``(1) the basic standard deduction, plus
            ``(2) the additional standard deduction.
    ``(b) Basic Standard Deduction.--For purposes of subsection (a), 
the basic standard deduction is--
            ``(1) $17,500 in the case of--
                    ``(A) a joint return, and
                    ``(B) a surviving spouse (as defined in section 
                5(a)),
            ``(2) $15,000 in the case of a head of household (as 
        defined in section 5(b)), and
            ``(3) $10,000 in the case of an individual--
                    ``(A) who is not married and who is not a surviving 
                spouse or head of household, or
                    ``(B) who is a married individual filing a separate 
                return.
    ``(c) Additional Standard Deduction.--For purposes of subsection 
(a), the additional standard deduction is $5,000 for each dependent (as 
defined in section 5(d))--
            ``(1) whose earned income for the calendar year in which 
        the taxable year of the taxpayer begins is less than the basic 
        standard deduction specified in subsection (b)(3), or
            ``(2) who is a child of the taxpayer and who--
                    ``(A) has not attained the age of 19 at the close 
                of the calendar year in which the taxable year of the 
                taxpayer begins, or
                    ``(B) is a student who has not attained the age of 
                24 at the close of such calendar year.
    ``(d) Inflation Adjustment.--
            ``(1) In general.--In the case of any taxable year 
        beginning in a calendar year after 1997, each dollar amount 
        contained in subsections (b) and (c) shall be increased by an 
        amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment under section 
                1(f)(3) for the calendar year in which the taxable year 
                begins, determined by substituting `calendar year 1996' 
                for `calendar year 1992' in subparagraph (B) of such 
                section.
            ``(2) Rounding.--If any increase determined under paragraph 
        (1) is not a multiple of $50, such amount shall be rounded to 
        the next lowest multiple of $50.

``SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBUTIONS.

    ``(a) General Rule.--For purposes of this part, there shall be 
allowed as a deduction any charitable contribution (as defined in 
subsection (b)) not to exceed $2,500 ($1,250, in the case of a married 
individual filing a separate return), payment of which is made within 
the taxable year.
    ``(b) Charitable Contribution Defined.--For purposes of this 
section , the term `charitable contribution' means a contribution or 
gift of cash or its equivalent to or for the use of the following:
            ``(1) A State, a possession of the United States, or any 
        political subdivision of any of the foregoing, or the United 
        States or the District of Columbia, but only if the 
        contribution or gift is made for exclusively public purposes.
            ``(2) A corporation, trust, or community chest, fund, or 
        foundation--
                    ``(A) created or organized in the United States or 
                in any possession thereof, or under the law of the 
                United States, any State, the District of Columbia, or 
                any possession of the United States;
                    ``(B) organized and operated exclusively for 
                religious, charitable, scientific, literary, or 
                educational purposes, or to foster national or 
                international amateur sports competition (but only if 
                no part of its activities involve the provision of 
                athletic facilities or equipment), or for the 
                prevention of cruelty to children or animals;
                    ``(C) no part of the net earnings of which inures 
                to the benefit of any private shareholder or 
                individual; and
                    ``(D) which is not disqualified for tax exemption 
                under section 501(c)(3) by reason of attempting to 
                influence legislation, and which does not participate 
                in, or intervene in (including the publishing or 
                distributing of statements), any political campaign on 
                behalf of (or in opposition to) any candidate for 
                public office.
        A contribution or gift by a corporation to a trust, chest, 
        fund, or foundation shall be deductible by reason of this 
        paragraph only if it is to be used within the United States or 
        any of its possessions exclusively for purposes specified in 
        subparagraph (B). Rules similar to the rules of section 501(j) 
shall apply for purposes of this paragraph.
            ``(3) A post or organization of war veterans, or an 
        auxiliary unit or society of, or trust or foundation for, any 
        such post or organization--
                    ``(A) organized in the United States or any of its 
                possessions, and
                    ``(B) no part of the net earnings of which inures 
                to the benefit of any private shareholder or 
                individual.
            ``(4) In the case of a contribution or gift by an 
        individual, a domestic fraternal society, order, or 
        association, operating under the lodge system, but only if such 
        contribution or gift is to be used exclusively for religious, 
        charitable, scientific, literary, or educational purposes, or 
        for the prevention of cruelty to children or animals.
            ``(5) A cemetery company owned and operated exclusively for 
        the benefit of its members, or any corporation chartered solely 
        for burial purposes as a cemetery corporation and not permitted 
        by its charter to engage in any business not necessarily 
        incident to that purpose, if such company or corporation is not 
        operated for profit and no part of the net earnings of such 
        company or corporation inures to the benefit of any private 
        shareholder or individual.
For purposes of this section, the term `charitable contribution' also 
means an amount treated under subsection (d) as paid for the use of an 
organization described in paragraph (2), (3), or (4).
    ``(c) Disallowance of Deduction in Certain Cases and Special 
Rules.--
            ``(1) Substantiation requirement for certain 
        contributions.--
                    ``(A) General rule.--No deduction shall be allowed 
                under subsection (a) for any contribution of $250 or 
                more unless the taxpayer substantiates the contribution 
                by a contemporaneous written acknowledgment of the 
                contribution by the donee organization that meets the 
                requirements of subparagraph (B).
                    ``(B) Content of acknowledgment.--An acknowledgment 
                meets the requirements of this subparagraph if it 
                includes the following information:
                            ``(i) The amount of cash contributed.
                            ``(ii) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for any 
                        contribution described in clause (i).
                            ``(iii) A description and good faith 
                        estimate of the value of any goods or services 
                        referred to in clause (ii) or, if such goods or 
                        services consist solely of intangible religious 
                        benefits, a statement to that effect.
                For purposes of this subparagraph, the term `intangible 
                religious benefit' means any intangible religious 
                benefit which is provided by an organization organized 
                exclusively for religious purposes and which generally 
                is not sold in a commercial transaction outside the 
                donative context.
                    ``(C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgment shall be considered 
                to be contemporaneous if the taxpayer obtains the 
                acknowledgment on or before the earlier of--
                            ``(i) the date on which the taxpayer files 
                        a return for the taxable year in which the 
                        contribution was made, or
                            ``(ii) the due date (including extensions) 
                        for filing such return.
                    ``(D) Substantiation not required for contributions 
                reported by the donee organization.--Subparagraph (A) 
                shall not apply to a contribution if the donee 
                organization files a return, on such form and in 
                accordance with such regulations as the Secretary may 
                prescribe, which includes the information described in 
                subparagraph (B) with respect to the contribution.
                    ``(E) Regulations.--The Secretary shall prescribe 
                such regulations as may be necessary or appropriate to 
                carry out the purposes of this paragraph, including 
                regulations that may provide that some or all of the 
                requirements of this paragraph do not apply in 
                appropriate cases.
            ``(2) Denial of deduction where contribution for lobbying 
        activities.--No deduction shall be allowed under this section 
        for a contribution to an organization which conducts activities 
        to which section 11(d)(2)(C)(i) applies on matters of direct 
        financial interest to the donor's trade or business, if a 
        principal purpose of the contribution was to avoid Federal 
        income tax by securing a deduction for such activities under 
        this section which would be disallowed by reason of section 
        11(d)(2)(C) if the donor had conducted such activities 
        directly. No deduction shall be allowed under section 11(d) for 
        any amount for which a deduction is disallowed under the 
        preceding sentence.
    ``(d) Amounts Paid To Maintain Certain Students as Members of 
Taxpayer's Household.--
            ``(1) In general.--Subject to the limitations provided by 
        paragraph (2), amounts paid by the taxpayer to maintain an 
        individual (other than a dependent, as defined in section 5(d), 
        or a relative of the taxpayer) as a member of such taxpayer's 
        household during the period that such individual is--
                    ``(A) a member of the taxpayer's household under a 
                written agreement between the taxpayer and an 
                organization described in paragraph (2), (3), or (4) of 
                subsection (b) to implement a program of the 
                organization to provide educational opportunities for 
                pupils or students in private homes, and
                    ``(B) a full-time pupil or student in the twelfth 
                or any lower grade at an educational organization 
                located in the United States which normally maintains a 
                regular faculty and curriculum and normally has a 
                regularly enrolled body of pupils or students in 
                attendance at the place where its educational 
                activities are regularly carried on,
        shall be treated as amounts paid for the use of the 
        organization.
            ``(2) Limitations.--
                    ``(A) Amount.--Paragraph (1) shall apply to amounts 
                paid within the taxable year only to the extent that 
                such amounts do not exceed $50 multiplied by the number 
                of full calendar months during the taxable year which 
                fall within the period described in paragraph (1). For 
                purposes of the preceding sentence, if 15 or more days 
                of a calendar month fall within such period such month 
                shall be considered as a full calendar month.
                    ``(B) Compensation or reimbursement.--Paragraph (1) 
                shall not apply to any amount paid by the taxpayer 
                within the taxable year if the taxpayer receives any 
                money or other property as compensation or 
                reimbursement for maintaining the individual in the 
                taxpayer's household during the period described in 
                paragraph (1).
            ``(3) Relative defined.--For purposes of paragraph (1), the 
        term `relative of the taxpayer' means an individual who, with 
        respect to the taxpayer, bears any of the relationships 
        described in subparagraphs (A) through (H) of section 5(d)(1).
            ``(4) No other amount allowed as deduction.--No deduction 
        shall be allowed under subsection (a) for any amount paid by a 
        taxpayer to maintain an individual as a member of the 
        taxpayer's household under a program described in paragraph 
        (1)(A) except as provided in this subsection.
    ``(e) Denial of Deduction for Certain Travel Expenses.--No 
deduction shall be allowed under this section for traveling expenses 
(including amounts expended for meals and lodging) while away from 
home, whether paid directly or by reimbursement, unless there is no 
significant element of personal pleasure, recreation, or vacation in 
such travel.
    ``(f) Disallowance of Deductions in Certain Cases.--For 
disallowance of deductions for contributions to or for the use of 
Communist controlled organizations, see section 11(a) of the Internal 
Security Act of 1950 (50 U.S.C. 790).
    ``(g) Treatment of Certain Amounts Paid to or for the Benefit of 
Institutions of Higher Education.--
            ``(1) In general.--For purposes of this section, 80 percent 
        of any amount described in paragraph (2) shall be treated as a 
        charitable contribution.
            ``(2) Amount described.--For purposes of paragraph (1), an 
        amount is described in this paragraph if--
                    ``(A) the amount is paid by the taxpayer to or for 
                the benefit of an educational organization--
                            ``(i) which is described in subsection 
                        (d)(1)(B), and
                            ``(ii) which is an institution of higher 
                        education (as defined in section 3304(f)), and
                    ``(B) such amount would be allowable as a deduction 
                under this section but for the fact that the taxpayer 
                receives (directly or indirectly) as a result of paying 
                such amount the right to purchase tickets for seating 
                at an athletic event in an athletic stadium of such 
                institution.
        If any portion of a payment is for the purchase of such 
        tickets, such portion and the remaining portion (if any) of 
        such payment shall be treated as separate amounts for purposes 
        of this subsection.
    ``(h) Other Cross References.--
            ``(1) For treatment of certain organizations providing 
        child care, see section 501(k).
            ``(2) For charitable contributions of partners, see section 
        702.
            ``(3) For treatment of gifts for benefit of or use in 
        connection with the Naval Academy as gifts to or for the use of 
        the United States, see section 6973 of title 10, United States 
        Code.
            ``(4) For treatment of gifts accepted by the Secretary of 
        State, the Director of the International Communication Agency, 
        or the Director of the United States International Development 
        Coop- eration Agency, as gifts to or for the use of the United 
        States, see section 25 of the State Department Basic 
        Authorities Act of 1956.
            ``(5) For treatment of gifts of money accepted by the 
        Attorney General for credit to the `Commissary Funds, Federal 
        Prisons' as gifts to or for the use of the United States, see 
        section 4043 of title 18, United States Code.
            ``(6) For charitable contributions to or for the use of 
        Indian tribal governments (or subdivisions of such 
        governments), see section 7871.

``SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTEDNESS.

    ``(a) General Rule.--For purposes of this part, there shall be 
allowed as a deduction all qualified residence interest paid or accrued 
within the taxable year.
    ``(b) Qualified Residence Interest Defined.--The term `qualified 
residence interest' means any interest which is paid or accrued during 
the taxable year on acquisition indebtedness with respect to any 
qualified residence of the taxpayer. For purposes of the preceding 
sentence, the determination of whether any property is a qualified 
residence of the taxpayer shall be made as of the time the interest is 
accrued.
    ``(c) Acquisition Indebtedness.--
            ``(1) In general.--The term `acquisition indebtedness' 
        means any indebtedness which--
                    ``(A) is incurred in acquiring, constructing, or 
                substantially improving any qualified residence of the 
                taxpayer, and
                    ``(B) is secured by such residence.
        Such term also includes any indebtedness secured by such 
        residence resulting from the refinancing of indebtedness 
        meeting the requirements of the preceding sentence (or this 
        sentence); but only to the extent the amount of the 
        indebtedness resulting from such refinancing does not exceed 
        the amount of the refinanced indebtedness.
            ``(2) $100,000 limitation.--The aggregate amount treated as 
        acquisition indebtedness for any period shall not exceed 
        $100,000 ($50,000 in the case of a married individual filing a 
        separate return).
    ``(d) Treatment of Indebtedness Incurred on or Before October 13, 
1987.--
            ``(1) In general.--In the case of any pre-October 13, 1987, 
        indebtedness--
                    ``(A) such indebtedness shall be treated as 
                acquisition indebtedness, and
                    ``(B) the limitation of subsection (b)(2) shall not 
                apply.
            ``(2) Reduction in $100,000 limitation.--The limitation of 
        subsection (b)(2) shall be reduced (but not below zero) by the 
        aggregate amount of outstanding pre-October 13, 1987, 
        indebtedness.
            ``(3) Pre-october 13, 1987, indebtedness.--The term `pre-
        October 13, 1987, indebtedness' means--
                    ``(A) any indebtedness which was incurred on or 
                before October 13, 1987, and which was secured by a 
                qualified residence on October 13, 1987, and at all 
                times thereafter before the interest is paid or 
                accrued, or
                    ``(B) any indebtedness which is secured by the 
                qualified residence and was incurred after October 13, 
                1987, to refinance indebtedness described in 
                subparagraph (A) (or refinanced indebtedness meeting 
                the requirements of this subparagraph) to the extent 
                (immediately after the refinancing) the principal 
                amount of the indebtedness resulting from the 
                refinancing does not exceed the principal amount of the 
                refinanced indebtedness (immediately before the 
                refinancing).
            ``(4) Limitation on period of refinancing.--Subparagraph 
        (B) of paragraph (3) shall not apply to any indebtedness 
        after--
                    ``(A) the expiration of the term of the 
                indebtedness described in paragraph (3)(A), or
                    ``(B) if the principal of the indebtedness 
                described in paragraph (3)(A) is not amortized over its 
                term, the expiration of the term of the first 
                refinancing of such indebtedness (or if earlier, the 
                date which is 30 years after the date of such first 
                refinancing).
    ``(e) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Qualified residence.--For purposes of this 
        subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (C), the term `qualified residence' means 
                the principal residence of the taxpayer.
                    ``(B) Married individuals filing separate 
                returns.--If a married couple does not file a joint 
                return for the taxable year--
                            ``(i) such couple shall be treated as 1 
                        taxpayer for purposes of subparagraph (A), and
                            ``(ii) each individual shall be entitled to 
                        take into account \1/2\ of the principal 
                        residence unless both individuals consent in 
                        writing to 1 individual taking into account the 
                        principal residence.
                    ``(C) Pre-october 13, 1987, indebtedness.--In the 
                case of any pre-October 13, 1987, indebtedness, the 
                term `qualified residence' has the meaning given that 
                term in section 163(h)(4), as in effect on the day 
                before the date of enactment of this subparagraph.
            ``(2) Special rule for cooperative housing corporations.--
        Any indebtedness secured by stock held by the taxpayer as a 
        tenant-stockholder in a cooperative housing corporation shall 
        be treated as secured by the house or apartment which the 
        taxpayer is entitled to occupy as such a tenant-stockholder. If 
        stock described in the preceding sentence may not be used to 
        secure indebtedness, indebtedness shall be treated as so 
        secured if the taxpayer establishes to the satisfaction of the 
        Secretary that such indebtedness was incurred to acquire such 
        stock.
            ``(3) Unenforceable security interests.--Indebtedness shall 
        not fail to be treated as secured by any property solely 
        because, under any applicable State or local homestead or other 
        debtor protection law in effect on August 16, 1986, the 
        security interest is ineffective or the enforceability of the 
        security interest is restricted.
            ``(4) Special rules for estates and trusts.--For purposes 
        of determining whether any interest paid or accrued by an 
        estate or trust is qualified residence interest, any residence 
        held by such estate or trust shall be treated as a qualified 
residence of such estate or trust if such estate or trust establishes 
that such residence is a qualified residence of a beneficiary who has a 
present interest in such estate or trust or an interest in the 
residuary of such estate or trust.

``SEC. 5. DEFINITIONS AND SPECIAL RULES.

    ``(a) Definition of Surviving Spouse.--
            ``(1) In general.--For purposes of this part, the term 
        `surviving spouse' means a taxpayer--
                    ``(A) whose spouse died during either of the 
                taxpayer's 2 taxable years immediately preceding the 
                taxable year, and
                    ``(B) who maintains as the taxpayer's home a 
                household which constitutes for the taxable year the 
                principal place of abode (as a member of such 
                household) of a dependent--
                            ``(i) who (within the meaning of subsection 
                        (d)) is a son, stepson, daughter, or 
                        stepdaughter of the taxpayer, and
                            ``(ii) with respect to whom the taxpayer is 
                        entitled to a deduction for the taxable year 
                        under section 2.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over one-half of 
        the cost of maintaining the household during the taxable year 
        is furnished by such individual.
            ``(2) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this part a taxpayer shall not be considered to be 
        a surviving spouse--
                    ``(A) if the taxpayer has remarried at any time 
                before the close of the taxable year, or
                    ``(B) unless, for the taxpayer's taxable year 
                during which the taxpayer's spouse died, a joint return 
                could have been made under the provisions of section 
                6013 (without regard to subsection (a)(3) thereof).
            ``(3) Special rule where deceased spouse was in missing 
        status.--If an individual was in a missing status (within the 
        meaning of section 6013(f)(3)) as a result of service in a 
        combat zone and if such individual remains in such status until 
        the date referred to in subparagraph (A) or (B), then, for 
        purposes of paragraph (1)(A), the date on which such individual 
        dies shall be treated as the earlier of the date determined 
        under subparagraph (A) or the date determined under 
        subparagraph (B):
                    ``(A) The date on which the determination is made 
                under section 556 of title 37 of the United States Code 
                or under section 5566 of title 5 of such Code 
                (whichever is applicable) that such individual died 
                while in such missing status.
                    ``(B) Except in the case of the combat zone 
                designated for purposes of the Vietnam conflict, the 
                date which is 2 years after the date designated as the 
                date of termination of combatant activities in that 
                zone.
    ``(b) Definition of Head of Household.--
            ``(1) In general.--For purposes of this part, an individual 
        shall be considered a head of a household if, and only if, such 
        individual is not married at the close of such individual's 
        taxable year, is not a surviving spouse (as defined in 
        subsection (a)), and either--
                    ``(A) maintains as such individual's 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 son, stepson, daughter, or 
                        stepdaughter of the taxpayer, or a descendant 
                        of a son or daughter of the taxpayer, but if 
                        such son, stepson, daughter, stepdaughter, or 
                        descendant is married at the close of the 
                        taxpayer's taxable year, only if the taxpayer 
                        is entitled to a deduction for the taxable year 
                        for such person under section 2 (or would be so 
                        entitled but for subparagraph (B) or (D) of 
                        subsection (d)(5)), or
                            ``(ii) any other person who is a dependent 
                        of the taxpayer, if the taxpayer is entitled to 
                        a deduction for the taxable year for such 
                        person under section 2, or
                    ``(B) maintains a household which constitutes for 
                such taxable year the principal place of abode of the 
                father or mother of the taxpayer, if the taxpayer is 
                entitled to a deduction for the taxable year for such 
                father or mother under section 2.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over one-half of 
        the cost of maintaining the household during the taxable year 
        is furnished by such individual.
            ``(2) Determination of status.--For purposes of this 
        subsection--
                    ``(A) a legally adopted child of a person shall be 
                considered a child of such person by blood;
                    ``(B) an individual who is legally separated from 
                such individual's spouse under a decree of divorce or 
                of separate maintenance shall not be considered as 
                married;
                    ``(C) a taxpayer shall be considered as not married 
                at the close of such taxpayer's taxable year if at any 
                time during the taxable year such taxpayer's spouse is 
                a nonresident alien; and
                    ``(D) a taxpayer shall be considered as married at 
                the close of such taxpayer's taxable year if such 
                taxpayer's spouse (other than a spouse described in 
                subparagraph (C)) died during the taxable year.
            ``(3) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this part, a taxpayer shall not be considered to be 
        a head of a household--
                    ``(A) if at any time during the taxable year the 
                taxpayer is a nonresident alien; or
                    ``(B) by reason of an individual who would not be a 
                dependent for the taxable year but for--
                            ``(i) subparagraph (I) of subsection 
                        (d)(1), or
                            ``(ii) paragraph (3) of subsection (d).
    ``(c) Certain Married Individuals Living Apart.--For purposes of 
this part, an individual shall be treated as not married at the close 
of the taxable year if such individual is so treated under the 
provisions of section 7703(b).
    ``(d) Dependent Defined.--
            ``(1) General definition.--For purposes of this part, the 
        term `dependent' means any of the following individuals over 
        one-half of whose support, for the calendar year in which the 
        taxable year of the taxpayer begins, was received from the 
        taxpayer (or is treated under paragraph (3) or (5) as received 
        from the taxpayer):
                    ``(A) A son or daughter of the taxpayer, or a 
                descendant of either.
                    ``(B) A stepson or stepdaughter of the taxpayer.
                    ``(C) A brother, sister, stepbrother, or stepsister 
                of the taxpayer.
                    ``(D) The father or mother of the taxpayer, or an 
                ancestor of either.
                    ``(E) A stepfather or stepmother of the taxpayer.
                    ``(F) A son or daughter of a brother or sister of 
                the taxpayer.
                    ``(G) A brother or sister of the father or mother 
                of the taxpayer.
                    ``(H) A son-in-law, daughter-in-law, father-in-law, 
                mother-in-law, brother-in-law, or sister-in-law of the 
                taxpayer.
                    ``(I) An individual (other than an individual who 
                at any time during the taxable year was the spouse, 
                determined without regard to section 7703, of the 
                taxpayer) who, for the taxable year of the taxpayer, 
                has as such individual's principal place of abode the 
                home of the taxpayer and is a member of the taxpayer's 
                household.
            ``(2) Rules relating to general definition.--For purposes 
        of this section--
                    ``(A) Brother; sister.--The terms `brother' and 
                `sister' include a brother or sister by the halfblood.
                    ``(B) Child.--In determining whether any of the 
                relationships specified in paragraph (1) or 
                subparagraph (A) of this paragraph exists, a legally 
adopted child of an individual (and a child who is a member of an 
individual's household, if placed with such individual by an authorized 
placement agency for legal adoption by such individual), or a foster 
child of an individual (if such child satisfies the requirements of 
paragraph (1)(I) with respect to such individual), shall be treated as 
a child of such individual by blood.
                    ``(C) Citizenship.--The term `dependent' does not 
                include any individual who is not a citizen or national 
                of the United States unless such individual is a 
                resident of the United States or of a country 
                contiguous to the United States. The preceding sentence 
                shall not exclude from the definition of `dependent' 
                any child of the taxpayer legally adopted by such 
                taxpayer, if, for the taxable year of the taxpayer, the 
                child has as such child's principal place of abode the 
                home of the taxpayer and is a member of the taxpayer's 
                household, and if the taxpayer is a citizen or national 
                of the United States.
                    ``(D) Alimony, etc.--A payment to a wife which is 
                alimony or separate maintenance shall not be treated as 
                a payment by the wife's husband for the support of any 
                dependent.
                    ``(E) Unlawful arrangements.--An individual is not 
                a member of the taxpayer's household if at any time 
                during the taxable year of the taxpayer the 
                relationship between such individual and the taxpayer 
                is in violation of local law.
            ``(3) Multiple support agreements.--For purposes of 
        paragraph (1), over one-half of the support of an individual 
        for a calendar year shall be treated as received from the 
        taxpayer if--
                    ``(A) no one person contributed over one-half of 
                such support;
                    ``(B) over one-half of such support was received 
                from persons each of whom, but for the fact that such 
                person did not contribute over one-half of such 
                support, would have been entitled to claim such 
                individual as a dependent for a taxable year beginning 
                in such calendar year;
                    ``(C) the taxpayer contributed over 10 percent of 
                such support; and
                    ``(D) each person described in subparagraph (B) 
                (other than the taxpayer) who contributed over 10 
                percent of such support files a written declaration (in 
                such manner and form as the Secretary may by 
                regulations prescribe) that such person will not claim 
                such individual as a dependent for any taxable year 
                beginning in such calendar year.
            ``(4) Special support test in case of students.--For 
        purposes of paragraph (1), in the case of any individual who 
        is--
                    ``(A) a son, stepson, daughter, or stepdaughter of 
                the taxpayer (within the meaning of this subsection), 
                and
                    ``(B) a student,
        amounts received as scholarships for study at an educational 
        organization described in section 3(d)(1)(B) shall not be taken 
        into account in determining whether such individual received 
        more than one-half of such individual's support from the 
        taxpayer.
            ``(5) Support test in case of child of divorced parents, 
        etc.--
                    ``(A) Custodial parent gets exemption.--Except as 
                otherwise provided in this paragraph, if--
                            ``(i) a child receives over one-half of 
                        such child's support during the calendar year 
                        from such child's parents--
                                    ``(I) who are divorced or legally 
                                separated under a decree of divorce or 
                                separate maintenance,
                                    ``(II) who are separated under a 
                                written separation agreement, or
                                    ``(III) who live apart at all times 
                                during the last 6 months of the 
                                calendar year, and
                            ``(ii) such child is in the custody of 1 or 
                        both of such child's parents for more than one-
                        half of the calendar year,
                such child shall be treated, for purposes of paragraph 
                (1), as receiving over one-half of such child's support 
                during the calendar year from the parent having custody 
                for a greater portion of the calendar year (hereafter 
                in this paragraph referred to as the `custodial 
                parent').
                    ``(B) Exception where custodial parent releases 
                claim to exemption for the year.--A child of parents 
                described in subparagraph (A) shall be treated as 
                having received over one-half of such child's support 
                during a calendar year from the noncustodial parent 
                if--
                            ``(i) the custodial parent signs a written 
                        declaration (in such manner and form as the 
                        Secretary may by regulations prescribe) that 
                        such custodial parent will not claim such child 
                        as a dependent for any taxable year beginning 
                        in such calendar year, and
                            ``(ii) the noncustodial parent attaches 
                        such written declaration to the noncustodial 
                        parent's return for the taxable year beginning 
                        during such calendar year.
                For purposes of this paragraph, the term `noncustodial 
                parent' means the parent who is not the custodial 
                parent.
                    ``(C) Exception for multiple-support agreement.--
                This paragraph shall not apply in any case where over 
                one-half of the support of the child is treated as 
                having been received from a taxpayer under the 
                provisions of paragraph (3).
                    ``(D) Exception for certain pre-1985 instruments.--
                            ``(i) In general.--A child of parents 
                        described in subparagraph (A) shall be treated 
                        as having received over one-half such child's 
                        support during a calendar year from the 
                        noncustodial parent if--
                                    ``(I) a qualified pre-1985 
                                instrument between the parents 
                                applicable to the taxable year 
                                beginning in such calendar year 
                                provides that the noncustodial parent 
                                shall be entitled to any deduction 
                                allowable under section 2 for such 
                                child, and
                                    ``(II) the noncustodial parent 
                                provides at least $600 for the support 
                                of such child during such calendar 
                                year.
                        For purposes of this clause, 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.
                            ``(ii) Qualified pre-1985 instrument.--For 
                        purposes of this subparagraph, the term 
                        `qualified pre-1985 instrument' means any 
                        decree of divorce or separate maintenance or 
                        written agreement--
                                    ``(I) which is executed before 
                                January 1, 1985,
                                    ``(II) which on such date contains 
                                the provision described in clause 
                                (i)(I), and
                                    ``(III) which is not modified on or 
                                after such date in a modification which 
                                expressly provides that this 
                                subparagraph shall not apply to such 
                                decree or agreement.
                    ``(E) Special rule for support received from new 
                spouse of parent.--For purposes of this paragraph, 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.

                 ``PART II--TAX ON BUSINESS ACTIVITIES

                              ``Sec. 11. Tax imposed on business 
                                        activities.

``SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.

    ``(a) Tax Imposed.--There is hereby imposed on every person engaged 
in a business activity located in the United States a tax equal to 20 
percent of the business taxable income of such person.
    ``(b) Liability for Tax.--The tax imposed by this section shall be 
paid by the person engaged in the business activity, whether such 
person is an individual, partnership, corporation, or otherwise.
    ``(c) Business Taxable Income.--
            ``(1) In general.--For purposes of this section, the term 
        `business taxable income' means gross active income reduced by 
        the deductions specified in subsection (d).
            ``(2) Gross active income.--For purposes of paragraph (1), 
        the term `gross active income' means gross income other than 
        investment income.
    ``(d) Deductions.--
            ``(1) In general.--The deductions specified in this 
        subsection are--
                    ``(A) the cost of business inputs for the business 
                activity,
                    ``(B) the compensation (including contributions to 
                qualified retirement plans but not including other 
                fringe benefits) paid for employees performing services 
                in such activity, and
                    ``(C) the cost of personal and real property used 
                in such activity.
            ``(2) Business inputs.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(A), the term `cost of business inputs' means--
                            ``(i) the actual cost of goods, services, 
                        and materials, whether or not resold during the 
                        taxable year, and
                            ``(ii) the actual cost, if reasonable, of 
                        travel and entertainment expenses for business 
                        purposes.
                    ``(B) Purchases of goods and services excluded.--
                Such term shall not include purchases of goods and 
                services provided to employees or owners.
                    ``(C) Certain lobbying and political expenditures 
                excluded.--
                            ``(i) In general.--Such term shall not 
                        include any amount paid or incurred in 
                        connection with--
                                    ``(I) influencing legislation,
                                    ``(II) participation in, or 
                                intervention in, any political campaign 
                                on behalf of (or in opposition to) any 
                                candidate for public office,
                                    ``(III) any attempt to influence 
                                the general public, or segments 
                                thereof, with respect to elections, 
                                legislative matters, or referendums, or
                                    ``(IV) any direct communication 
                                with a covered executive branch 
                                official in an attempt to influence the 
                                official actions or positions of such 
                                official.
                            ``(ii) Exception for local legislation.--In 
                        the case of any legislation of any local 
                        council or similar governing body--
                                    ``(I) clause (i)(I) shall not 
                                apply, and
                                    ``(II) such term shall include all 
                                ordinary and necessary expenses 
                                (including, but not limited to, 
                                traveling expenses described in 
                                subparagraph (A)(iii) and the cost of 
                                preparing testimony) paid or incurred 
                                during the taxable year in carrying on 
                                any trade or business--
                                            ``(aa) in direct connection 
                                        with appearances before, 
                                        submission of statements to, or 
                                        sending communications to the 
                                        committees, or individual 
                                        members, of such council or 
                                        body with respect to 
                                        legislation or proposed 
                                        legislation of direct interest 
                                        to the taxpayer, or
                                            ``(bb) in direct connection 
                                        with communication of 
                                        information between the 
                                        taxpayer and an organization of 
                                        which the taxpayer is a member 
                                        with respect to any such 
                                        legislation or proposed 
                                        legislation which is of direct 
                                        interest to the taxpayer and to 
                                        such organization, and that 
                                        portion of the dues so paid or 
                                        incurred with respect to any 
                                        organization of which the 
                                        taxpayer is a member which is 
                                        attributable to the expenses of 
                                        the activities carried on by 
                                        such organization.
                            ``(iii) Application to dues of tax-exempt 
                        organizations.--Such term shall include the 
                        portion of dues or other similar amounts paid 
                        by the taxpayer to an organization which is 
                        exempt from tax under this subtitle which the 
organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is 
allocable to expenditures to which clause (i) applies.
                            ``(iv) Influencing legislation.--For 
                        purposes of this subparagraph--
                                    ``(I) In general.--The term 
                                `influencing legislation' means any 
                                attempt to influence any legislation 
                                through communication with any member 
                                or employee of a legislative body, or 
                                with any government official or 
                                employee who may participate in the 
                                formulation of legislation.
                                    ``(II) Legislation.--The term 
                                `legislation' has the meaning given 
                                that term in section 4911(e)(2).
                            ``(v) Other special rules.--
                                    ``(I) Exception for certain 
                                taxpayers.--In the case of any taxpayer 
                                engaged in the trade or business of 
                                conducting activities described in 
                                clause (i), clause (i) shall not apply 
                                to expenditures of the taxpayer in 
                                conducting such activities directly on 
                                behalf of another person (but shall 
                                apply to payments by such other person 
                                to the taxpayer for conducting such 
                                activities).
                                    ``(II) De minimis exception.--
                                            ``(aa) In general.--Clause 
                                        (i) shall not apply to any in-
                                        house expenditures for any 
                                        taxable year if such 
                                        expenditures do not exceed 
                                        $2,000. In determining whether 
                                        a taxpayer exceeds the $2,000 
                                        limit, there shall not be taken 
                                        into account overhead costs 
                                        otherwise allocable to 
                                        activities described in 
                                        subclauses (I) and (IV) of 
                                        clause (i).
                                            ``(bb) In-house 
                                        expenditures.--For purposes of 
                                        provision (aa), the term `in-
                                        house expenditures' means 
                                        expenditures described in 
                                        subclauses (I) and (IV) of 
                                        clause (i) other than payments 
                                        by the taxpayer to a person 
                                        engaged in the trade or 
                                        business of conducting 
                                        activities described in clause 
                                        (i) for the conduct of such 
                                        activities on behalf of the 
                                        taxpayer, or dues or other 
                                        similar amounts paid or 
                                        incurred by the taxpayer which 
                                        are allocable to activities 
                                        described in clause (i).
                                    ``(III) Expenses incurred in 
                                connection with lobbying and political 
                                activities.--Any amount paid or 
                                incurred for research for, or 
                                preparation, planning, or coordination 
                                of, any activity described in clause 
                                (i) shall be treated as paid or 
                                incurred in connection with such 
                                activity.
                            ``(vi) Covered executive branch official.--
                        For purposes of this subparagraph, the term 
                        `covered executive branch official' means--
                                    ``(I) the President,
                                    ``(II) the Vice President,
                                    ``(III) any officer or employee of 
                                the White House Office of the Executive 
                                Office of the President, and the 2 most 
                                senior level officers of each of the 
                                other agencies in such Executive 
                                Office, and
                                    ``(IV) any individual serving in a 
                                position in level I of the Executive 
                                Schedule under section 5312 of title 5, 
                                United States Code, any other 
                                individual designated by the President 
                                as having Cabinet level status, and any 
                                immediate deputy of such an individual.
                            ``(vii) Special rule for indian tribal 
                        governments.--For purposes of this 
                        subparagraph, an Indian tribal government shall 
                        be treated in the same manner as a local 
                        council or similar governing body.
                            ``(viii) Cross Reference.--

                                ``For reporting requirements and 
alternative taxes related to this subsection, see section 6033(e).
    ``(e) Carryover of Excess Deductions.--
            ``(1) In general.--If the aggregate deductions for any 
        taxable year exceed the gross active income for such taxable 
        year, the amount of the deductions specified in subsection (d) 
        for the succeeding taxable year (determined without regard to 
        this subsection) shall be increased by the sum of--
                    ``(A) such excess, plus
                    ``(B) the product of such excess and the 3-month 
                Treasury rate for the last month of such taxable year.
            ``(2) 3-month treasury rate.--For purposes of paragraph 
        (1), the 3-month Treasury rate is the rate determined by the 
        Secretary based on the average market yield (during any 1-month 
        period selected by the Secretary and ending in the calendar 
        month in which the determination is made) on outstanding 
        marketable obligations of the United States with remaining 
        periods to maturity of 3 months or less.''
    (b) Conforming Repeals and Redesignations.--
            (1) Repeals.--The following subchapters of chapter 1 of 
        subtitle A and the items relating to such subchapters in the 
        table of subchapters for such chapter 1 are repealed:
                    (A) Subchapter B (relating to computation of 
                taxable income).
                    (B) Subchapter C (relating to corporate 
                distributions and adjustments).
                    (C) Subchapter D (relating to deferred 
                compensation, etc.).
                    (D) Subchapter G (relating to corporations used to 
                avoid income tax on shareholders).
                    (E) Subchapter H (relating to banking 
                institutions).
                    (F) Subchapter I (relating to natural resources).
                    (G) Subchapter J (relating to estates, trusts, 
                beneficiaries, and decedents).
                    (H) Subchapter L (relating to insurance companies).
                    (I) Subchapter M (relating to regulated investment 
                companies and real estate investment trusts).
                    (J) Subchapter N (relating to tax based on income 
                from sources within or without the United States).
                    (K) Subchapter O (relating to gain or loss on 
                disposition of property).
                    (L) Subchapter P (relating to capital gains and 
                losses).
                    (M) Subchapter Q (relating to readjustment of tax 
                between years and special limitations).
                    (N) Subchapter S (relating to tax treatment of S 
                corporations and their shareholders).
                    (O) Subchapter T (relating to cooperatives and 
                their patrons).
                    (P) Subchapter U (relating to designation and 
                treatment of empowerment zones, enterprise communities, 
                and rural development investment areas).
                    (Q) Subchapter V (relating to title 11 cases).
            (2) Redesignations.--The following subchapters of chapter 1 
        of subtitle A and the items relating to such subchapters in the 
        table of subchapters for such chapter 1 are redesignated:
                    (A) Subchapter E (relating to accounting periods 
                and methods of accounting) as subchapter B.
                    (B) Subchapter F (relating to exempt organizations) 
                as subchapter C.
                    (C) Subchapter K (relating to partners and 
                partnerships) as subchapter D.

SEC. 3. REPEAL OF ESTATE AND GIFT TAXES.

    Subtitle B (relating to estate, gift, and generation-skipping 
taxes) and the item relating to such subtitle in the table of subtitles 
is repealed.

SEC. 4. ADDITIONAL REPEALS.

    Subtitles H (relating to financing of presidential election 
campaigns) and J (relating to coal industry health benefits) and the 
items relating to such subtitles in the table of subtitles are 
repealed.

SEC. 5. EFFECTIVE DATES.

    (a) In General.--Except as provided in subsection (b), the 
amendments made by this Act apply to taxable years beginning after 
December 31, 1997.
    (b) Repeal of Estate and Gift Taxes.--The repeal made by section 3 
applies to estates of decedents dying, and transfers made, after 
December 31, 1997.
    (c) Technical and Conforming Changes.--The Secretary of the 
Treasury or the Secretary's delegate shall, as soon as practicable but 
in any event not later than 90 days after the date of enactment of this 
Act, submit to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate a draft of 
any technical and conforming changes in the Internal Revenue Code of 
1986 which are necessary to reflect throughout such Code the changes in 
the substantive provisions of law made by this Act.
                                 <all>