[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[S. 2642 Introduced in Senate (IS)]







106th CONGRESS
  2d Session
                                S. 2642

    To amend the Internal Revenue Code of 1986 to provide major tax 
                            simplification.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                              May 25, 2000

   Mr. Hatch 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 provide major tax 
                            simplification.

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

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``Tax Ease and 
Modernization Act--Part I''.
    (b) 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.
    (c) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; etc.
                    TITLE I--ALTERNATIVE MINIMUM TAX

Sec. 101. Repeal of alternative minimum tax on individuals.
             TITLE II--SIMPLIFICATION OF CAPITAL GAINS TAX

Sec. 201. Capital gains deduction.
Sec. 202. Indexing of exclusion for capital gains on sale of principal 
                            residence.
TITLE III--SIMPLIFICATION AND EXPANSION OF THE EARNED INCOME TAX CREDIT

Sec. 301. Modification of definition of earned income.
Sec. 302. Simplification of definition of child dependent.
Sec. 303. Credit allowed for taxpayers who reside with other eligible 
                            individuals.
Sec. 304. Expansion of credit.
  TITLE IV--LIMITATIONS ON ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS

Sec. 401. Repeal of overall limitation on itemized deductions.
Sec. 402. Repeal of phaseout of personal exemptions.
            TITLE V--BUSINESS TAX SIMPLIFICATION PROVISIONS

Sec. 501. Single rate of interest on corporate and individual 
                            overpayments and underpayments.
Sec. 502. Clarification of interest netting.
Sec. 503. Expensing allowed for certain computer software.
           TITLE VI--MISCELLANEOUS SIMPLIFICATION PROVISIONS

              Subtitle A--Penalty and Interest Provisions

Sec. 601. Failure by individual to pay estimated tax penalty converted 
                            to interest charge on accumulated unpaid 
                            balance.
Sec. 602. Exclusion from gross income for interest on overpayments of 
                            income tax by individuals.
Sec. 603. Reductions of penalty for failure to pay tax.
Sec. 604. Abatement of interest.
Sec. 605. Annual report on abatement of penalties.
                   Subtitle B--Procedural Provisions

Sec. 611. Authority to correct errors by the IRS with respect to 
                            taxpayer.
Sec. 612. Modification of filing date.
Sec. 613. Waiver of addition to tax for early withdrawal from IRA.
Sec. 614. Fixed rate of interest for installment agreement.
Sec. 615. Exception to tax on early withdrawal from IRA.
           Subtitle C--Small Investors Tax Simplification Act

Sec. 621. Election to use simplified method for qualified investment 
                            clubs.
                      Subtitle D--Other Provisions

Sec. 631. Above-the-line deduction for unreimbursed business expenses.
Sec. 632. Expensing of certain personal property used in connection 
                            with residential rental property.
Sec. 633. Inclusion of certain older foster children in definition of 
                            dependent.
Sec. 634. Exclusion for foster care payments to apply to payments by 
                            qualified placement agencies.
Sec. 635. Simplification and increase in standard deduction for 
                            dependents.
Sec. 636. 2-percent floor on miscellaneous itemized deductions not to 
                            apply to qualified professional development 
                            expenses of elementary and secondary school 
                            teachers.

                    TITLE I--ALTERNATIVE MINIMUM TAX

SEC. 101. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDIVIDUALS.

    (a) In General.--Subsection (a) of section 55 (relating to 
alternative minimum tax imposed) is amended by adding at the end the 
following new flush sentence:
``Except in the case of a corporation, no tax shall be imposed by this 
section for any taxable year beginning after December 31, 2000, and the 
tentative minimum tax of any taxpayer other than a corporation shall be 
zero for purposes of this title.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (B) of section 1(g)(7) is amended by 
        adding ``and'' at the end of clause (i), by striking ``, and'' 
        at the end of clause (ii) and inserting a period, and by 
        striking clause (iii).
            (2) Section 2(d) is amended by striking ``sections 1 and 
        55'' and inserting ``section 1''.
            (3) Section 5(a) is amended by striking paragraph (4).
            (4) Subsection (c) of section 26 is amended by inserting 
        before the period ``; except that such amount shall be treated 
        as being zero in the case of a taxpayer other than a 
        corporation.''
            (5) Paragraph (6) of section 29(b) is amended to read as 
        follows:
            ``(6) Application with other credits.--The credit allowed 
        by subsection (a) for any taxable year shall not exceed the 
        regular tax for the taxable year reduced by the sum of the 
        credits allowable under subpart A and section 27. In the case 
        of a corporation, the limitation under the preceding sentence 
        shall be reduced (but not below zero) by the tentative minimum 
        tax for the taxable year.''.
            (6) Paragraph (3) of section 30(b) is amended to read as 
        follows:
            ``(3) Application with other credits.--The credit allowed 
        by subsection (a) for any taxable year shall not exceed the 
        regular tax for the taxable year reduced by the sum of the 
        credits allowable under subpart A and sections 27 and 29. In 
        the case of a corporation, the limitation under the preceding 
        sentence shall be reduced (but not below zero) by the tentative 
        minimum tax for the taxable year.''.
            (7) Section 32 is amended by striking subsection (h).
            (8) Subsection (d) of section 53 is amended to read as 
        follows:
    ``(d) Definitions.--For purposes of this section--
            ``(1) Net minimum tax.--The term `net minimum tax' means 
        the tax imposed by section 55 increased by the amount of the 
        credit not allowed under section 29 (relating to credit for 
        producing fuel from a nonconventional source) solely by reason 
        of the application of the last sentence of section 29(b)(6), or 
        not allowed under section 30 solely by reason of the 
        application of the last sentence of section 30(b)(3).
            ``(2) Tentative minimum tax.--The term `tentative minimum 
        tax' has the meaning given to such term by section 55(b); 
        except that such tax shall be treated as being zero in the case 
        of a taxpayer other than a corporation.''.
            (9)(A) Subsection (b) of section 55 (relating to 
        alternative minimum tax imposed) is amended to read as follows:
    ``(b) Tentative Minimum Tax.--For purposes of this part--
            ``(1) Amount of tentative tax.--The tentative minimum tax 
        for the taxable year is--
                    ``(A) 20 percent of so much of the alternative 
                minimum taxable income for the taxable year as exceeds 
                the exemption amount, reduced by
                    ``(B) the alternative minimum tax foreign tax 
                credit for the taxable year.
            ``(2) Alternative minimum taxable income.--The term 
        `alternative minimum taxable income' means the taxable income 
        of the taxpayer for the taxable year--
                    ``(A) determined with the adjustments provided in 
                section 56, and
                    ``(B) increased by the amount of the items of tax 
                preference described in section 57.
        If a taxpayer is subject to the regular tax, such taxpayer 
        shall be subject to the tax imposed by this section (and, if 
        the regular tax is determined by reference to an amount other 
        than taxable income, such amount shall be treated as the 
        taxable income of such taxpayer for purposes of the preceding 
        sentence).''.
            (B) Subsection (d) of section 55 is amended to read as 
        follows:
    ``(d) Exemption Amount.--For purposes of this section--
            ``(1) In general.--The term `exemption amount' means 
        $40,000.
            ``(2) Phase-out of exemption amount.--The exemption amount 
        of any taxpayer shall be reduced (but not below zero) by an 
        amount equal to 25 percent of the amount by which the 
        alternative minimum taxable income of the taxpayer exceeds 
        $150,000.''.
            (10)(A) Paragraph (6) of section 56(a) is amended to read 
        as follows:
            ``(6) Adjusted basis.--The adjusted basis of any property 
        to which paragraph (1) or (5) applies (or with respect to which 
        there are any expenditures to which paragraph (2) applies) 
        shall be determined on the basis of the treatment prescribed in 
        paragraph (1), (2), or (5), whichever applies.''.
            (B) Section 56 is amended by striking subsection (b).
            (C) Subsection (c) of section 56 is amended by striking so 
        much of the subsection as precedes paragraph (1), by 
        redesignating paragraphs (1), (2), and (3) as paragraphs (8), 
        (9), and (10), respectively, and moving them to the end of 
        subsection (a).
            (D) Paragraph (8) of section 56(a), as redesignating by 
        subparagraph (C), is amended by striking ``subsection (g)'' and 
        inserting ``subsection (c)''.
            (E) Section 56 is amended by striking subsection (e) and by 
        redesignating subsections (d) and (g) as subsections (b) and 
        (c), respectively.
            (11)(A) Section 58 is repealed.
            (B) Clause (i) of section 56(b)(2)(A) (as redesignated by 
        paragraph (10)(E), is amended by inserting ``, in the case of 
        taxable years beginning before January 1, 2001,'' before 
        ``section 58''.
            (C) Subsection (h) of section 59 is amended--
                    (i) by striking ``, 465, and 1366(d)'' and 
                inserting ``and 465'', and
                    (ii) by striking ``56, 57, and 58'' and inserting 
                ``56 and 57''.
            (12)(A) Subparagraph (C) of section 59(a)(1) is amended by 
        striking ``subparagraph (A)(i) or (B)(i) of section 55(b)(1) 
        (whichever applies)'' and inserting ``section 55(b)(1)(A)''.
            (B) Paragraph (3) of section 59(a) is amended to read as 
        follows:
            ``(3) Pre-credit tentative minimum tax.--For purposes of 
        this subsection, the term `pre-credit tentative minimum tax' 
        means the amount determined under section 55(b)(1)(A).''.
            (C) Section 59 is amended by striking subsection (c).
            (D) Section 59 is amended by striking subsection (j).
            (13) Paragraph (7) of section 382(l) is amended by striking 
        ``section 56(d)'' and inserting ``section 56(b)''.
            (14) Paragraph (2) of section 641(c) is amended by striking 
        subparagraph (B) and by redesignating subparagraphs (C) and (D) 
        as subparagraphs (B) and (C), respectively.
            (15) Subsections (b) and (c) of section 666 are each 
        amended by striking ``(other than the tax imposed by section 
        55)''.
            (16) Subsections (c)(5) and (d)(3)(B) of section 772 are 
        each amended by striking ``56, 57, and 58'' and inserting ``56 
        and 57''.
            (17) Sections 847 and 848(i) are each amended by striking 
        ``section 56(g)'' and inserting ``section 56(c)''.
            (18) Sections 871(b)(1) and 877(b) are each amended by 
        striking ``or 55''.
            (19) Subsection (a) of section 897 is amended to read as 
        follows:
    ``(a) General Rule.--For purposes of this title, gain or loss of a 
nonresident alien individual or a foreign corporation from the 
disposition of a United States real property interest shall be taken 
into account--
            ``(1) in the case of a nonresident alien individual, under 
        section 871(b)(1), or
            ``(2) in the case of a foreign corporation, under section 
        882(a)(1),
as if the taxpayer were engaged in a trade or business within the 
United States during the taxable year and as if such gain or loss were 
effectively connected with such trade or business.''.
            (20) Paragraph (1) of section 962(a) is amended by striking 
        ``sections 1 and 55'' and inserting ``section 1''.
            (21) Paragraph (1) of section 1397E(c) is amended to read 
        as follows:
            ``(1) the regular tax liability (as defined in section 
        26(b), over''
            (22) The last sentence of section 1563(a) is amended by 
        striking ``section 55(d)(3)'' and inserting ``section 
        55(d)(2)''.
            (23) Subparagraph (B) of section 6015(d)(2) is amended by 
        striking ``or 55''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.
    (d) Transitional Rule Relating to Minimum Tax Credit.--
            (1) In general.--The pre-effective date minimum tax credit 
        of a taxpayer other than a corporation shall not be allowed 
        under section 53 of the Internal Revenue Code of 1986 but shall 
        be allowed under this subsection.
            (2) Pre-effective date minimum tax credit.--For purposes of 
        this subsection, the term ``pre-effective date minimum tax 
        credit'' means the amount determined under section 53(b) of 
        such Code for the first taxable year beginning after December 
        31, 2000.
            (3) Amount of credit.--
                    (A) In general.--The pre-effective date minimum tax 
                credit of a taxpayer other than a corporation shall be 
                allowed ratably over the period of 10 taxable years 
                beginning with the first taxable year beginning after 
                December 31, 2000.
                    (B) Limitation.--The credit allowable by this 
                subsection for any taxable year shall not exceed the 
                regular tax liability of the taxpayer for such taxable 
                year reduced by the sum of the credits allowable under 
                subparts A, B, D, E, and F of part IV of subchapter A 
                of chapter 1 of the Internal Revenue Code of 1986.
                    (C) Carryforward.--If the credit allowable by this 
                subsection exceeds the limitation imposed by 
                subparagraph (B), such excess shall be carried to the 
                succeeding taxable year and added to the credit 
                allowable under this subsection for such succeeding 
                taxable year.
            (4) Acceleration of credit where previously taxed income.--
                    (A) In general.--The credit allowed under this 
                subsection for any taxable year shall not be less than 
                so much of the limitation described in paragraph (3)(B) 
                for the taxable year as is attributable to previously 
                taxed incentive stock option gain. Proper adjustments 
                shall be made in the amount allowed under this 
                subsection for subsequent taxable years to take into 
                account any increased credit allowed by reason of this 
                paragraph.
                    (B) Incentive stock option gain.--For purposes of 
                subparagraph (A), the term ``previously taxed incentive 
                stock option gain'' means the amount of gain recognized 
                during the taxable year on account of the disposition 
                of stock acquired by exercising an incentive stock 
                option (as defined in section 422 of such Code) to the 
                extent such gain does not exceed the amount of gain 
                previously taken into account by reason of section 
                56(b)(3) of such Code (as in effect on the day before 
                the date of the enactment of this Act) with respect to 
                such option.
            (5) Definitions.--Terms used in this subsection which are 
        also used in section 53 of such Code shall have the respective 
        meanings given to such terms by such section 53.

             TITLE II--SIMPLIFICATION OF CAPITAL GAINS TAX

SEC. 201. CAPITAL GAINS DEDUCTION.

    (a) In General.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended by adding at the end the 
following new section:

``SEC. 1203. CAPITAL GAINS DEDUCTION.

    ``If for any taxable year a taxpayer other than a corporation has a 
net capital gain, 50 percent of such gain shall be a deduction from 
gross income.''.
    (b) Deduction Allowable Whether or Not Taxpayer Itemizes Other 
Deductions.--
            (1) Subsection (b) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''.
            (2) Subsection (d) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''.
    (c) Repeal of Tax Preference for Exclusion on Small Business 
Stock.--Subsection (a) of section 57 is amended by striking paragraph 
(7).
    (d) Technical and Conforming Amendments.--
            (1) Section 1 is amended by striking subsection (h).
            (2) Subparagraph (E) of section 163(d)(4) is amended to 
        read as follows:
                    ``(E) Coordination with capital gains deduction.--
                The net capital gain taken into account under section 
                1203 for any taxable year shall be reduced (but not 
                below zero) by the amount which the taxpayer takes into 
                account as investment income under subparagraph 
                (B)(iii) for such year.''.
            (3) Paragraph (1) of section 170(e) is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``50 percent (100 percent in the case of 
        a corporation) of the amount of gain''.
            (4) Subparagraph (B) of section 172(d)(2) is amended to 
        read as follows:
                    ``(B) the exclusion under section 1202 and the 
                deduction under section 1203 shall not be allowed.''.
            (5) The last sentence of section 453A(c)(3) is amended by 
        striking all that follows ``long-term capital gain,'' and 
        inserting ``the maximum rate on net capital gain under section 
        1201 or the deduction under section 1203 (whichever is 
        appropriate) shall be taken into account.''.
            (6)(A) Section 641(c)(2)(B), as redesignated by section 
        101(b)(14), is amended by striking ``Except as provided in 
        section 1(h), the'' and inserting ``The''.
            (B) Section 641(c)(2)(B), as redesignated by section 
        101(b)(14), is amended by inserting after clause (iii) the 
        following new clause:
                            ``(iv) The deduction under section 1203.''.
            (7) Paragraph (4) of section 642(c) is amended to read as 
        follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any exclusion 
        allowable under section 1202 and any deduction allowable under 
        section 1203 to the estate or trust. In the case of a trust, 
        the deduction allowed by this subsection shall be subject to 
        section 681 (relating to unrelated business income).''.
            (8) Section 642 is amended by adding at the end the 
        following new subsection:
    ``(j) Capital Gains Deduction.--The deduction under section 1203 to 
an estate or trust shall be computed by excluding the portion (if any) 
of the gains for the taxable year which is includible by the income 
beneficiaries under sections 652 and 662 (relating to inclusions of 
amounts in gross income of beneficiaries of trusts) as gain derived 
from the sale or exchange of capital assets.''.
            (9) The last sentence of section 643(a)(3) is amended to 
        read as follows: ``The exclusion under section 1202 and the 
        deduction under section 1203 shall not be taken into 
        account.''.
            (10) Subparagraph (C) of section 643(a)(6) is amended by 
        inserting ``(i)'' before ``there shall'' and by inserting 
        before the period ``, and (ii) the deduction under section 1203 
        (relating to capital gains deduction) shall not be taken into 
        account''.
            (11) Paragraph (4) of section 691(c) is amended by striking 
        ``1(h),'' and by inserting ``1203,'' after ``1202,''.
            (12) The second sentence of paragraph (2) of section 871(a) 
        is amended by striking ``section 1202'' and inserting 
        ``sections 1202 and 1203''.
            (13)(A) Paragraph (2) of section 904(b) is amended by 
        striking subparagraphs (A) and (C), by redesignating 
        subparagraph (B) as subparagraph (A), and by inserting after 
        subparagraph (A) (as so redesignated) the following new 
        subparagraph:
                    ``(B) Other taxpayers.--In the case of a taxpayer 
                other than a corporation, taxable income from sources 
                outside the United States shall include gain from the 
                sale or exchange of capital assets only to the extent 
                of foreign source capital gain net income.''.
            (B) Subparagraph (A) of section 904(b)(2), as so 
        redesignated, is amended--
                    (i) by striking all that precedes clause (i) and 
                inserting the following:
                    ``(A) Corporations.--In the case of a corporation--
                '', and
                    (ii) by striking in clause (i) ``in lieu of 
                applying subparagraph (A),''.
            (C) Paragraph (3) of section 904(b) is amended by striking 
        subparagraphs (D) and (E) and inserting the following new 
        subparagraph:
                    ``(D) Rate differential portion.--The rate 
                differential portion of foreign source net capital 
                gain, net capital gain, or the excess of net capital 
                gain from sources within the United States over net 
                capital gain, as the case may be, is the same 
                proportion of such amount as the excess of the highest 
                rate of tax specified in section 11(b) over the 
                alternative rate of tax under section 1201(a) bears to 
                the highest rate of tax specified in section 11(b).''.
            (14) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1203 shall 
        not apply'' before the period at the end thereof.
            (15) Paragraph (1) of section 1445(e) is amended by 
        striking ``20 percent'' and inserting ``19.8 percent''.
            (16)(A) The second sentence of section 7518(g)(6)(A) is 
        amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``20 percent'' and inserting 
                ``19.8 percent''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``20 percent'' and inserting 
                ``19.8 percent''.
    (e) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1203. Capital gains deduction.''.
    (f) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2000.
            (2) Withholding.--The amendments made by subsection (e)(14) 
        shall apply only to amounts paid after December 31, 2000.
            (3) Repeal of election.--Section 311 of the Taxpayer Relief 
        Act of 1997 is amended by striking subsection (e).
            (4) Coordination with prior transition rule.--Any amount 
        treated as long-term capital gain by reason of paragraph (3) of 
        section 1122(h) of the Tax Reform Act of 1986 shall not be 
taken into account for purposes of applying section 1203 of the 
Internal Revenue Code of 1986 (as added by this section).

SEC. 202. INDEXING OF EXCLUSION FOR CAPITAL GAINS ON SALE OF PRINCIPAL 
              RESIDENCE.

    (a) In General.--Section 121(b)(1) (relating to limitations) is 
amended by striking ``$250,000'' and inserting ``applicable amount''.
    (b) Applicable Amount.--Section 121(b) is amended by adding at the 
end the following new paragraph:
            ``(4) Applicable amount.--
                    ``(A) In general.--For purposes of this section, 
                the term `applicable amount' means $250,000.
                    ``(B) Inflation adjustment.--
                            ``(i) In general.--In the case of a taxable 
                        year beginning in any calendar year after 2000, 
                        the $250,000 amount under subparagraph (a) 
                        shall be increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                the taxable year begins, determined by 
                                substituting `calendar year 1999' for 
                                `calendar year 1992' in subparagraph 
                                (B) thereof.
                            ``(ii) Rounding.--If any amount as adjusted 
                        under clause (i) is not a multiple of $1,000, 
                        such amount shall be rounded to the next lowest 
                        multiple of $1,000.''.
    (b) Conforming Amendments.--Section 121(b)(2)(A) (relating to 
$500,000 limitation for certain joint returns) is amended--
            (1) by striking ``substituting'' and all that follows 
        through ``if'' and inserting ``substituting an amount equal to 
        200 percent of the applicable amount in effect under such 
        paragraph for the taxable year for `the applicable amount' 
        if'', and
            (2) by striking ``$500,000'' in the heading and inserting 
        ``Increased''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

TITLE III--SIMPLIFICATION AND EXPANSION OF THE EARNED INCOME TAX CREDIT

SEC. 301. MODIFICATION OF DEFINITION OF EARNED INCOME.

    (a) In General.--Section 32(c)(2)(A)(i) (defining earned income) is 
amended by striking ``tips, and other employee compensation'' and 
inserting ``and tips, and other employee compensation includible in 
gross income for the taxable year''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to amounts received in taxable years beginning after December 31, 
2000.

SEC. 302. SIMPLIFICATION OF DEFINITION OF CHILD DEPENDENT.

    (a) Removal of Support Test for Certain Individuals.--Section 
152(a) (relating to definition of dependent) is amended to read as 
follows:
    ``(a) General Definition.--For purposes of this subtitle--
            ``(1) Dependent.--The term `dependent' means--
                    ``(A) any individual described in paragraph (2) 
                over 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 
                subsection (c) as received from the taxpayer), and
                    ``(B) any individual described in subsection (d).
            ``(2) Individuals.--An individual is described in this 
        paragraph if such individual is--
                    ``(A) a brother, sister, stepbrother, or stepsister 
                of the taxpayer,
                    ``(B) the father or mother of the taxpayer, or an 
                ancestor of either,
                    ``(C) a stepfather or stepmother of the taxpayer,
                    ``(D) a son or daughter of a brother or sister of 
                the taxpayer,
                    ``(E) a brother or sister of the father or mother 
                of the taxpayer,
                    ``(F) a son-in-law, daughter-in-law, father-in-law, 
                mother-in-law, brother-in-law, or sister-in-law of the 
                taxpayer, or
                    ``(G) 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 their principal place of abode the home of the 
                taxpayer and is a member of the taxpayer's 
                household.''.
    (b) Other Modifications.--Section 152(d) is amended to read as 
follows:
    ``(d) Subsection (d) Dependents.--
            ``(1) In general.--An individual is described in this 
        subsection for the taxable year if such individual--
                    ``(A) bears a relationship to the taxpayer 
                described in paragraph (2), and
                    ``(B) except in the case of an eligible foster 
                child or as provided in subsection (e), has the same 
                principal place of abode as the taxpayer for more than 
                one-half of such taxable year.
            ``(2) Relationship test.--An individual bears a 
        relationship to the taxpayer described in this paragraph if 
        such individual is--
                    ``(A) a son or daughter of the taxpayer, or a 
                descendant of either, or
                    ``(B) a stepson or stepdaughter of the taxpayer.
            ``(3) Special rules.--
                    ``(A) 2 or more claiming dependent.--Except as 
                provided in subparagraph (B), if an individual may be 
                claimed as a dependent by 2 or more taxpayers (but for 
this subparagraph) for a taxable year beginning in the same calendar 
year, only the taxpayer with the highest modified adjusted gross income 
for such taxable year shall be allowed the deduction with respect to 
such individual.
                    ``(B) Release of claim to exemption.--Subparagraph 
                (A) shall not apply with respect to an individual if--
                            ``(i) the taxpayer with the highest 
                        modified adjusted gross income under 
                        subparagraph (A), for any calendar year signs a 
                        written declaration (in such manner and form as 
                        the Secretary may by regulations prescribe) 
                        that such taxpayer will not claim such 
                        individual as a dependent for any taxable year 
                        beginning in such calendar year, and
                            ``(ii) such other taxpayer attaches such 
                        written declaration to such taxpayer's return 
                        for the taxable year beginning during such 
                        calendar year.''.
    (c) Rules Relating to Foster Child.--Section 152(b)(2) (relating to 
rules relating to general definition) is amended by striking ``a foster 
child'' and all that follows through ``individual)'' and inserting ``an 
eligible foster child (as defined in section 32(c)(3)(B)(iii)) of an 
individual''.
    (d) Exemption From Gross Income Test.--Section 151(c)(3) (relating 
to definition of child) is amended by striking ``or stepdaughter'' and 
inserting ``stepdaughter, or a descendant of such individual''.
    (e) Waiver of Deduction for Divorced Parents.--
            (1) In general.--So much of section 152(e) as precedes 
        paragraph (4) (relating to support test in case of child of 
        divorced parents, etc.) is amended to read as follows:
    ``(e) Special Rules for Child of Divorced Parents.--
            ``(1) Release of claim to exemption.--In the case of a 
        child (as defined in section 151(c)(3)) of parents--
                    ``(A) who are divorced or legally separated under a 
                decree of divorce or separate maintenance,
                    ``(B) who are separated under a written separation 
                agreement, or
                    ``(C) who live apart at all times during the last 6 
                months of the calendar year,
        the custodial parent who is entitled to the deduction under 
        section 151 for a taxable year with respect to such child may 
        release such deduction to such other parent.
            ``(2) Procedure.--Such other parent may claim a child 
        described in paragraph (1) as a dependent for the taxable year 
        if--
                    ``(A) the custodial parent signs a written 
                declaration (in such manner and form as the Secretary 
                may by regulations prescribe) that such parent will not 
                claim such child as a dependent for any taxable year 
                beginning in such calendar year, and
                    ``(B) such other parent attaches such written 
                declaration to such taxpayer's return for the taxable 
                year beginning during such calendar year.
                    ``(C) Custodial parent.--For purposes of this 
                subsection, the term `custodial parent' means, with 
                regard to an individual, a parent who has custody of 
                such individual for a greater portion of the calendar 
                year than such other parent.''.
            (2) Pre-1985 instruments.--Section 152(e) is amended by 
        striking paragraph (5), by redesignating paragraphs (4) and (6) 
        as paragraphs (3) and (4), respectively, and by striking ``A 
        child'' and all that follows through ``noncustodial parent'' in 
        paragraph (3)(A), as so redesignated, and inserting ``A 
        noncustodial parent described in paragraph (1) shall be 
        entitled to the deduction under section 151 for a taxable year 
        with respect to a child if''.
            (3) Noncustodial parent.--Section 152(e)(3)(A), as 
        redesignated in paragraph (2), is amended by adding at the end 
        the following new sentence: ``For purposes of this subsection, 
        the term `noncustodial parent' means the parent who is not the 
        custodial parent.''.
    (f) Conforming Amendments.--
            (1) Section 1(g)(5)(A) is amended by inserting ``as in 
        effect on the day before the date of the enactment of the Tax 
        Ease and Modernization Act-Part I'' after ``152(e)''.
            (2) Section 2(b)(1)(A)(i) is amended by striking 
        ``paragraph (2) or (4) of''.
            (3) Section 2(b)(3)(B)(i) is amended by striking 
        ``paragraph (9)'' and inserting ``paragraph (2)(G)''.
            (4) Section 21(e)(5)(A) is amended by striking ``paragraph 
        (2) or (4) of''.
            (5) Section 21(e)(5) is amended in the matter following 
        subclause (B) by inserting ``as in effect on the day before the 
        date of the enactment of the Tax Ease and Modernization Act-
        Part I'' after ``152(e)(1)''.
            (6) Section 32(c)(3)(B)(ii) is amended by striking 
        ``paragraph (2) or (4) of''.
            (7) Section 51(i)(1)(C) is amended by striking 
        ``152(a)(9)'' and inserting ``152(a)(2)(G)''.
            (8) Section 152(b) is amended by striking ``specified in 
        subsection (a)'' and inserting ``specified in subsection (a)(2) 
        or (d)(2)''.
            (9) Section 152(c) is amended by striking ``(a)'' and 
        inserting ``(a)(1)''.
            (10) Section 7703(b)(1) is amended by striking ``paragraph 
        (2) or (4) of''.
            (11) The following provisions are each amended by striking 
        ``paragraphs (1) through (8) of section 152(a)'' and inserting 
        ``subparagraphs (A) through (F) of subsection (a)(2) or 
        subsection (d)(2) of section 152'':
                    (A) Section 170(g)(3).
                    (B) Subparagraphs (A) and (B) of section 51(i)(1).
                    (C) The second sentence of section 213(d)(11).
                    (D) Section 529(e)(2)(B).
                    (E) Section 7702B(f)(2)(C)(iii).
    (g) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 303. CREDIT ALLOWED FOR TAXPAYERS WHO RESIDE WITH OTHER ELIGIBLE 
              INDIVIDUALS.

    (a) In General.--Section 32(c)(3)(A) (relating to definition of 
qualifying child) is amended by striking ``and'' at the end of clause 
(ii), by striking the period at the end of clause (iii) and inserting 
``, and'', and by adding at the end the following new clause:
                            ``(iv) in the case of an individual 
                        described in subclause (I) or (II) of 
                        subparagraph (B)(i), with respect to whom the 
                        taxpayer meets the identification requirements 
                        of subparagraph (D).''.
    (b) Conforming Amendment.--Section 32(c)(1)(C) (relating to 2 or 
more eligible individuals) is amended by inserting ``and the 
requirement of paragraph (3)(A)(iv)'' after ``subparagraph (B)''.
    (c) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2000.

SEC. 304. EXPANSION OF CREDIT.

    (a) Increased Credit Percentage for 3 or More Qualifying 
Children.--The table in section 32(b)(1)(A) is amended--
            (1) in the second item, by striking ``or more'', and
            (2) by inserting after the second item the following new 
        item:


 
 
 
``3 or more qualifying children....  43..................................                 21.06''
 

      
    (b) Increase in Phaseout Amounts.--
            (1) In general.--The table in section 32(b)(2) is amended 
        to read as follows:


 
    ``In the case of an eligible
          individual with:               The earned income amount is:             The phaseout amount is:
 
1 qualifying child.................  $6,920..............................                 $15,000
2 or more qualifying children......  $9,720..............................                 $15,000
No qualifying children.............  $4,610..............................                $5,770.''.
 

      
            (2) Reduction in marriage penalty.--Paragraph (2) of 
        section 32(b) is amended--
                    (A) by striking ``Amounts.--The earned'' and 
                inserting ``Amounts.--
                    ``(A) In general.--Subject to subparagraph (B), the 
                earned'', and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(B) Joint returns.--In the case of a joint 
                return, the phaseout amount determined under 
                subparagraph (A) shall be increased by $5,000.''.
            (3) Inflation Adjustment.--Section 32(j)(1) (relating to 
        inflation adjustments) is amended--
                    (A) by striking ``subsections (b)(2)'' and 
                inserting ``subsections (b)(2)(A)'', and
                    (B) by striking ```calendar year 1995''' in 
                subparagraph (A) and inserting ```calendar year 
                1999'''.
            (4) Rounding.--Section 32(j)(2)(A) (relating to rounding) 
        is amended by striking ``subsection (b)(2)'' and inserting 
        ``subsection (b)(2)(A) (after being increased under 
        subparagraph (B) thereof)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

  TITLE IV--LIMITATIONS ON ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS

SEC. 401. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

    (a) In General.--Section 68 (relating to overall limitation on 
itemized deductions) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 1(f)(6) is amended by 
        striking ``section 68(b)(2)''.
            (2) Subparagraph (B) of section 773(a)(3) is amended by 
        striking clause (i) and by redesignating clauses (ii), (iii), 
        and (iv), as clauses (i), (ii), and (iii), respectively.
            (3) The table of sections for subchapter B of chapter 1 is 
        amended by striking the item relating to section 68.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 402. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

    (a) In General.--Subsection (d) of section 151 (relating to 
allowance of deductions for personal exemptions) is amended by striking 
paragraph (3) and by redesignating paragraph (4) as paragraph (3).
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 1(f) is amended--
                    (A) by striking ``section 151(d)(4)'' in 
                subparagraph (A) and inserting ``section 151(d)(3)'', 
                and
                    (B) by striking ``section 151(d)(4)(A)'' in 
                subparagraph (B) and inserting ``section 151(d)(3)''.
            (2) Paragraph (3) of section 151(d), as redesignated by 
        subsection (a), is amended to read as follows:
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 1989, the dollar amount 
        contained in paragraph (1) shall be increased by an amount 
        equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                1988' for `calendar year 1992' in subparagraph (B) 
                thereof.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

            TITLE V--BUSINESS TAX SIMPLIFICATION PROVISIONS

SEC. 501. SINGLE RATE OF INTEREST ON CORPORATE AND INDIVIDUAL 
              OVERPAYMENTS AND UNDERPAYMENTS.

    (a) Overpayment Rate.--Section 6621(a)(1) (relating to overpayment 
rate) is amended--
            (1) by striking ``(2 percentage points in the case of a 
        corporation)'' in subparagraph (B), and
            (2) by striking the second sentence.
    (b) Underpayment Rate for Large Corporate Underpayments.--Section 
6621 (relating to determination of rate of interest) is amended by 
striking subsection (c) and redesignating subsection (d) as subsection 
(c).
    (c) Conforming Amendment.--Section 6601(f) is amended by striking 
``6621(d)'' and inserting ``6621(c)''.
    (d) Effective Date.--The amendments made by this section shall 
apply for purposes of determining interest for periods after December 
31, 2000.

SEC. 502. CLARIFICATION OF INTEREST NETTING.

    (a) In General.--Section 6621(c) (relating to elimination of 
interest on overlapping periods of tax overpayments and underpayments), 
as redesignated by section 501(b), is amended to read as follows:
    ``(c) Elimination of Interest on Overlapping Periods of Tax 
Overpayments and Underpayments.--To the extent that, for any period, 
there exist equivalent overpayments and underpayments by the same 
taxpayer of the tax imposed under this title, the net rate of interest 
under this section on such amounts shall be zero for such period, 
whether or not such overpayments or underpayments are currently 
outstanding.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect as if included in section 3301 of the Internal Revenue 
Service Restructuring and Reform Act of 1998.

SEC. 503. EXPENSING ALLOWED FOR CERTAIN COMPUTER SOFTWARE.

    (a) In General.--Part VI of subchapter B of chapter 1 is amended by 
adding at the end the following new section:

``SEC. 199. EXPENSING OF COMPUTER SOFTWARE.

    ``(a) Treatment as Expenses.--
            ``(1) In general.--A taxpayer may elect to treat any 
        computer software expenditure which is paid or incurred by the 
        taxpayer as an expense which is not chargeable to capital 
        account. Any expenditure which is so treated shall be allowed 
        as a deduction for the taxable year in which it is paid or 
        incurred.
            ``(2) Election.--An election under paragraph (1) shall be 
        made at such time and in such manner as the Secretary 
        prescribes by regulation.
    ``(b) Computer Software Expenditure.--For purposes of this section, 
the term `computer software expenditure' means an expenditure--
            ``(1) for computer software (within the meaning of section 
        197(e)(3),
            ``(2) for which depreciation would otherwise be allowable 
        under section 167(f), and
            ``(3) which is not deductible under any provision of this 
        title other than section 167(f) or 197.
    ``(c) Limitation.--The deduction allowed under subsection (a) for 
any taxable year shall not exceed $20,000.
    ``(d) No Other Depreciation or Amortization Deduction Allowed.--
Except as provided in subsection (a), no depreciation or amortization 
deduction shall be allowable with respect to any computer software.
    ``(e) Inflation Adjustment.--
            ``(1) In general.--In the case of a taxable year beginning 
        after 2001, the $20,000 amount under subsection (c) shall be 
        increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 2000' for `calendar year 1992' in 
                subparagraph (B) thereof.
            ``(2) Rounding.--If any amount as adjusted under paragraph 
        (1) is not a multiple of $100, such amount shall be rounded to 
        the next lowest multiple of $100.''.
    (b) Conforming Amendment.--The table of sections for part IV of 
subchapter B of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 199. Expensing of computer 
                                        software.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

           TITLE VI--MISCELLANEOUS SIMPLIFICATION PROVISIONS

              Subtitle A--Penalty and Interest Provisions

SEC. 601. FAILURE BY INDIVIDUAL TO PAY ESTIMATED TAX PENALTY CONVERTED 
              TO INTEREST CHARGE ON ACCUMULATED UNPAID BALANCE.

    (a) Penalty Moved to Interest Chapter of Code.--The Internal 
Revenue Code of 1986 is amended by redesignating section 6654 as 
section 6641 and by moving section 6641 (as so redesignated) from part 
I of subchapter A of chapter 68 to the end of subchapter E of chapter 
67 (as added by subsection (e)(1) of this section).
    (b) Penalty Converted to Interest Charge.--The heading and 
subsections (a) and (b) of section 6641 (as so redesignated) are 
amended to read as follows:

``SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME 
              TAX.

    ``(a) In General.--Interest shall be paid on any underpayment of 
estimated tax by an individual for a taxable year for each day of such 
underpayment. The amount of such interest for any day shall be the 
product of the underpayment rate established under subsection (b)(2) 
multiplied by the amount of the underpayment.
    ``(b) Amount of Underpayment; Interest Rate.--For purposes of 
subsection (a)--
            ``(1) Amount.--The amount of the underpayment on any day 
        shall be the excess of--
                    ``(A) the sum of the required installments for the 
                taxable year the due dates for which are on or before 
                such day, over
                    ``(B) the sum of the amounts (if any) of estimated 
                tax payments made on or before such day on such 
                required installments.
            ``(2) Determination of interest rate.--
                    ``(A) In general.--The underpayment rate with 
                respect to any day in an installment underpayment 
                period shall be the underpayment rate established under 
                section 6621 for the first day of the calendar quarter 
                in which such installment underpayment period begins.
                    ``(B) Installment underpayment period.--For 
                purposes of subparagraph (A), the term `installment 
                underpayment period' means the period beginning on the 
                day after the due date for a required installment and 
                ending on the due date for the subsequent required 
installment (or in the case of the 4th required installment, the 15th 
day of the 4th month following the close of a taxable year).
                    ``(C) Daily rate.--The rate determined under 
                subparagraph (A) shall be applied on a daily basis and 
                shall be based on the assumption of 365 days in a 
                calendar year.
            ``(3) Termination of estimated tax interest.--No day after 
        the end of the installment underpayment period for the 4th 
        required installment specified in paragraph (2)(B) for a 
        taxable year shall be treated as a day of underpayment with 
        respect to such taxable year.''.
    (c) Increase in Safe Harbor Where Tax is Small.--
            (1) In general.--Clause (i) of section 6641(d)(1)(B) (as so 
        redesignated) is amended to read as follows:
                            ``(i) the lesser of--
                                    ``(I) 90 percent of the tax shown 
                                on the return for the taxable year (or, 
                                if no return is filed, 90 percent of 
                                the tax for such year), or
                                    ``(II) the tax shown on the return 
                                for the taxable year (or, if no return 
                                is filed, the tax for such year) 
                                reduced (but not below zero) by $2,000, 
                                or''.
            (2) Conforming amendment.--Subsection (e) of section 6641 
        (as so redesignated) is amended by striking paragraph (1) and 
        redesignating paragraphs (2) and (3) as paragraphs (1) and (2), 
        respectively.
    (d) Conforming Amendments.--
            (1) Paragraphs (1) and (2) of subsection (e) (as 
        redesignated by subsection (c)(2)) and subsection (h) of 
        section 6641 (as so designated) are each amended by striking 
        ``addition to tax'' each place it occurs and inserting 
        ``interest''.
            (2) Section 167(g)(5)(D) is amended by striking ``6654'' 
        and inserting ``6641''.
            (3) Section 460(b)(1) is amended by striking ``6654'' and 
        inserting ``6641''.
            (4) Section 3510(b) is amended--
                    (A) by striking ``section 6654'' in paragraph (1) 
                and inserting ``section 6641'',
                    (B) by amending paragraph (2)(B) to read as 
                follows:
                    ``(B) no interest would be required to be paid (but 
                for this section) under 6641 for such taxable year by 
                reason of the $2,000 amount specified in section 
                6641(d)(1)(B)(i)(II).'',
                    (C) by striking ``section 6654(d)(2)'' in paragraph 
                (3) and inserting ``section 6641(d)(2)'', and
                    (D) by striking paragraph (4).
            (5) Section 6201(b)(1) is amended by striking ``6654'' and 
        inserting ``6641''.
            (6) Section 6601(h) is amended by striking ``6654'' and 
        inserting ``6641''.
            (7) Section 6621(b)(2)(B) is amended by striking ``addition 
        to tax under section 6654'' and inserting ``interest required 
        to be paid under section 6641''.
            (8) Section 6622(b) is amended--
                    (A) by striking ``Penalty for'' in the heading, and
                    (B) by striking ``addition to tax under section 
                6654 or 6655'' and inserting ``interest required to be 
                paid under section 6641 or addition to tax under 
                section 6655''.
            (9) Section 6658(a) is amended--
                    (A) by striking ``6654, or 6655'' and inserting 
                ``or 6655, and no interest shall be required to be paid 
                under section 6641,'', and
                    (B) by inserting ``or paying interest'' after ``the 
                tax'' in paragraph (2)(B)(ii).
            (10) Section 6665(b) is amended--
                    (A) in the matter preceding paragraph (1) by 
                striking ``, 6654,'', and
                    (B) in paragraph (2) by striking ``6654 or''.
            (11) Section 7203 is amended by striking ``section 6654 or 
        6655'' and inserting ``section 6655 or interest required to be 
        paid under section 6641''.
    (e) Clerical Amendments.--
            (1) Chapter 67 is amended by inserting after subchapter D 
        the following:

  ``Subchapter E--Interest on Failure by Individual to Pay Estimated 
                               Income Tax

                              ``Sec. 6641. Interest on failure by 
                                        individual to pay estimated 
                                        income tax.''.
            (2) The table of subchapters for chapter 67 is amended by 
        adding at the end the following new items:

                              ``Subchapter D. Notice requirements.
                              ``Subchapter E. Interest on failure by 
                                        individual to pay estimated 
                                        income tax.''.
            (3) The table of sections for part I of subchapter A of 
        chapter 68 is amended by striking the item relating to section 
        6654.
    (f) Effective Date.--The amendments made by this section shall 
apply to installment payments for taxable years beginning after 
December 31, 2000.

SEC. 602. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF 
              INCOME TAX BY INDIVIDUALS.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by 
redesignating section 139 as section 139A and by inserting after 
section 138 the following new section:

``SEC. 139. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF 
              INCOME TAX BY INDIVIDUALS.

    ``(a) In General.--In the case of an individual, gross income shall 
not include interest paid under section 6611 on any overpayment of tax 
imposed by this subtitle.
    ``(b) Exception.--Subsection (a) shall not apply in the case of a 
failure to claim items resulting in the overpayment on the original 
return if the Secretary determines that the principal purpose of such 
failure is to take advantage of subsection (a).
    ``(c) Special Rule for Determining Modified Adjusted Gross 
Income.--For purposes of this title, interest not included in gross 
income under subsection (a) shall not be treated as interest which is 
exempt from tax for purposes of sections 32(i)(2)(B) and 6012(d) or any 
computation in which interest exempt from tax under this title is added 
to adjusted gross income.''.
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by striking the item relating to 
section 139 and inserting the following new items:

                              ``Sec. 139. Exclusion from gross income 
                                        for interest on overpayments of 
                                        income tax by individuals.
                              ``Sec. 139A. Cross references to other 
                                        Acts.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to interest received in calendar years beginning after the date 
of the enactment of this Act.

SEC. 603. REDUCTIONS OF PENALTY FOR FAILURE TO PAY TAX.

    (a) Reductions of Penalty for Failure To Pay Tax.--
            (1) Reduction of penalty by 50 percent.--
                    (A) In general.--Paragraphs (2) and (3) of section 
                6651(a) are each amended by striking ``0.5'' each place 
                it appears and inserting ``0.25''.
                    (B) Conforming amendment.--Paragraph (1) of section 
                6651(d) is amended by striking ``by substituting `1 
                percent' for `0.5 percent''' and inserting ``by 
                substituting `0.5 percent' for `0.25 percent'''.
            (2) Reduction of penalty to zero during period of 
        installment agreement.--Subsection (h) of section 6651 is 
        amended by striking ``by substituting `0.25' for `0.5''' and 
        inserting ``by substituting `zero' for `0.25'''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply for purposes of determining additions to tax for 
        months beginning after December 31, 2000.
    (b) Prohibition of Fee for Installment Agreements Using Automated 
Withdrawals.--
            (1) In general.--Section 6159 (relating to agreements for 
        payment of tax liability in installments) is amended by 
        redesignating subsection (e) as subsection (f) and by inserting 
        after subsection (d) the following new subsection:
    ``(e) Prohibition of Fee for Installment Agreements Using Automated 
Withdrawals.--The Secretary may not charge a taxpayer a fee for 
entering into an agreement with the Secretary under this section only 
for so long as payments under such agreement are made by means of 
electronic transfer or by similar automated means.''.
            (2) Effective date.--The amendments made by this subsection 
        shall apply to installment agreements entered into more than 30 
        days after the date of the enactment of this Act.

SEC. 604. ABATEMENT OF INTEREST.

    (a) Abatement of Interest if Gross Injustice Would Otherwise 
Result.--Section 6404 is amended by redesignating subsection (i) as 
subsection (j) and by inserting after subsection (h) the following new 
subsection:
    ``(i) Abatement of Interest if Gross Injustice Would Otherwise 
Result.--The Secretary may abate the assessment of all or any part of 
interest on any amount of tax imposed by this title for any period if 
the Secretary determines that--
            ``(1) a gross injustice would otherwise result if interest 
        were to be charged, and
            ``(2) no significant aspect of the events giving rise to 
        the accrual of the interest can be attributed to the taxpayer 
        involved.''.
    (b) Abatement of Interest for Periods Attributable to Any 
Unreasonable IRS Error or Delay.--Subparagraphs (A) and (B) of section 
6404(e)(1) are each amended by striking ``in performing a ministerial 
or managerial act''.
    (c) Abatement of Interest With Respect to Erroneous Refund Check 
Without Regard to Size of Refund.--Paragraph (2) of section 6404(e) is 
amended by striking ``unless--'' and all that follows and inserting 
``unless the taxpayer (or a related party) has in any way caused such 
erroneous refund.''
    (d) Abatement of Interest to Extent Interest is Attributable to 
Taxpayer Reliance on Written Statements of the IRS.--Subsection (f) of 
section 6404 is amended--
            (1) in the subsection heading, by striking ``Penalty or 
        Addition'' and inserting ``Interest, Penalty, or Addition'', 
        and
            (2) in paragraph (1) and in subparagraph (B) of paragraph 
        (2), by striking ``penalty or addition'' and inserting 
        ``interest, penalty, or addition''.
    (e) Effective Date.--The amendments made by this section shall 
apply with respect to interest accruing on or after the date of the 
enactment of this Act.

SEC. 605. ANNUAL REPORT ON ABATEMENT OF PENALTIES.

    Not later than 6 months after the close of each Federal fiscal year 
after fiscal year 1999, the Treasury Inspector General for Tax 
Administration shall submit a report to Congress on abatements of 
penalties under the Internal Revenue Code of 1986 during such year, 
including information on the reasons and criteria for such abatements.

                   Subtitle B--Procedural Provisions

SEC. 611. AUTHORITY TO CORRECT ERRORS BY THE IRS WITH RESPECT TO 
              TAXPAYER.

    (a) In General.--The Secretary of the Treasury shall promulgate 
regulations to allow the Secretary or the Secretary's delegate to 
provide appropriate relief to any individual taxpayer if the Secretary 
or delegate determines that--
            (1) any action taken by an officer or employee of the 
        Internal Revenue Service (acting in an official capacity) in 
        connection with an assessment or collection of tax liability of 
        a taxpayer was in error at the time of such action,
            (2) no significant aspect of such error can be attributed 
        to the taxpayer involved,
            (3) with the consent of the taxpayer, such relief would be 
        in the best interests of the taxpayer and the United States, 
        and
            (4) such action results in substantially less favorable 
        treatment of the taxpayer with respect to the assessment or 
        collection.
    (b) Appropriate Relief.--For purposes of subsection (a), the term 
``appropriate relief'' means any relief intended to return the taxpayer 
to the same position in which such taxpayer was prior to the action 
taken under subsection (a)(1).
    (c) Relief Otherwise Available.--Subsection (a) shall not apply to 
any action for which relief is otherwise provided under internal 
revenue laws.
    (d) Regulations.--The Secretary of the Treasury shall promulgate 
such regulations as necessary to carry out the purposes of this 
section.
    (e) Effective Date.--This section shall apply with respect to 
actions taken after the date of the enactment of this Act.

SEC. 612. MODIFICATION OF FILING DATE.

    (a) In General.--Section 7502(a)(2) (relating to mailing 
requirements) is amended by--
            (1) striking subparagraph (A) and inserting the following 
        new subparagraph:
                    ``(A) in the case of a payment, the postmark date 
                falls within the prescribed period or on or before the 
                prescribed date for making the payment (including any 
                extension granted for making such payment), and'', and
            (2) striking ``or other document, or'' in subparagraph (B) 
        and inserting ``or other document was, or''.
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to deposits required to be made after December 31, 2000.

SEC. 613. WAIVER OF ADDITION TO TAX FOR EARLY WITHDRAWAL FROM IRA.

    (a) In General.--Section 72(t) (relating to 10-percent additional 
tax on early distributions from qualified retirement plans) is amended 
by adding at the end the following new paragraph:
            ``(9) Hardship Exception.--The Secretary may waive part or 
        all of the tax imposed under paragraph (1) to any distribution 
        if the Secretary determines that--
                    ``(A) adequate notice is not received by the 
                taxpayer as required under section 402(f)(1) with 
                respect to an eligible rollover distribution,
                    ``(B) the taxpayer has no reason to know the 
                information required to be contained in such notice, 
                and
                    ``(C) the application of such tax would result in 
                undue hardship due to the financial condition of the 
                taxpayer.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions made in taxable years beginning after December 
31, 2000.

SEC. 614. FIXED RATE OF INTEREST FOR INSTALLMENT AGREEMENT.

    (a) In General.--Section 6621(b)(2) (relating to period during 
which rate applies) is amended by adding at the end the following new 
subparagraph:
                    ``(C) Special rule for installment agreements.--In 
                the case of an installment agreement under section 
                6159, the Federal short-term rate which applies with 
                respect to any day of the installment agreement period 
                shall be the rate determined under paragraph (1) for 
                the first day of the calendar quarter in which such 
                installment agreement is entered into.''.
    (b) Adjustment for Changing Rates.--Section 6159(b) (relating to 
extent to which agreements remain in effect) is amended by adding at 
the end the following new paragraph:
            ``(6) Change in interest rate.--Notwithstanding section 
        6621(b)(2)(C), the Secretary may alter or modify such agreement 
        with respect to the rate of interest in effect for such 
        agreement if the Secretary determines that such rate is higher 
        than the rate determined under section 6621(b) for the current 
        calendar quarter.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to installment agreements entered into after December 31, 2000.

SEC. 615. EXCEPTION TO TAX ON EARLY WITHDRAWAL FROM IRA.

    (a) In General.--Subparagraph (A) of section 72(t)(2) (relating to 
subsection not to apply to certain distributions) is amended by 
striking ``, or'' at the end of clause (vi), by striking the period at 
the end of clause (vii) and inserting ``, or'', and by adding at the 
end the following new clause:
                            ``(viii) used to satisfy part or all of any 
                        liability for tax imposed under this subtitle 
                        of the person receiving such distribution.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions made in taxable years beginning after December 
31, 2000.

           Subtitle C--Small Investors Tax Simplification Act

SEC. 621. ELECTION TO USE SIMPLIFIED METHOD FOR QUALIFIED INVESTMENT 
              CLUBS.

    (a) In General.--Part I of subchapter K of chapter 1 (relating to 
determination of tax liability of partners and partnerships) is amended 
by inserting after section 704 the following new section:

``SEC. 704A. ELECTION TO USE SIMPLIFIED METHOD FOR QUALIFIED INVESTMENT 
              CLUBS.

    ``(a) In General.--Notwithstanding any other provision of this 
subchapter, a partner's distributive share of all items of income, 
gain, loss, deduction, or credit of a qualified investment club shall 
be determined under the simplified method.
    ``(b) Simplified Method.--For purposes of this section--
            ``(1) In general.--The term `simplified method' means a 
        method pursuant to which a partnership allocates each of the 
        items of income, gain, loss, deduction, and credit for its 
        taxable year to its partners based on their proportionate 
        interests on the last day of such taxable year in partnership 
        profits.
            ``(2) Exception for distributions during year.--The 
        partnership may take into account the partners' varying 
        interests in partnership profits resulting from distributions 
        during the taxable year in determining the partners' interests 
        in partnership profits for purposes of paragraph (1).
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified investment club.--The term `qualified 
        investment club' means, with respect to any taxable year, any 
        partnership--
                    ``(A) which is not required to be registered under 
                the Investment Company Act of 1940,
                    ``(B) for which no person who is registered as an 
                investment adviser under the Investment Advisers Act of 
                1940 substantially participates in the management or 
                investment decisions thereof,
                    ``(C) all of the partners of which are qualified 
                partners for the calendar year in which the taxable 
                year of the partnership ends,
                    ``(D) at least 90 percent of the gross income of 
                which is derived from items described in section 
                851(b)(2),
                    ``(E) at least 90 percent of the value of the total 
                assets of which, at the end of each quarter of such 
                year, consists of cash, cash items (including 
                receivables), and securities,
                    ``(F) the taxable year of which is the calendar 
                year, and
                    ``(G) for which an election under subsection (e) is 
                in effect.
            ``(2) Qualified partner.--
                    ``(A) In general.--The term `qualified partner' 
                means--
                            ``(i) any individual other than a 
                        nonresident alien,
                            ``(ii) any individual retirement plan, and
                            ``(iii) any education individual retirement 
                        account (as defined in section 530).
                    ``(B) Limitation on contributions by individuals.--
                An individual shall not be a qualified partner for any 
                calendar year if the aggregate contributions by such 
                individual to qualified investment clubs (determined 
                without regard to paragraph (1)(C)) during such 
                calendar year exceeds $3,000 or exceeds $3,000 during 
                any of the 5 preceding calendar years.
                    ``(C) Limitation on contributions by trusts.--
                            ``(i) In general.--A plan or account 
                        referred to in subparagraph (A) (hereafter in 
                        this subparagraph referred to as a `trust') 
                        shall not be a qualified partner for any 
calendar year if the aggregate contributions to qualified investment 
clubs (determined without regard to paragraph (1)(C)) during such 
calendar year by such trust exceeds the excess of--
                                    ``(I) the product of $3,000 and the 
                                number of years before such calendar 
                                year that such trust held any asset, 
                                over
                                    ``(II) the aggregate contributions 
                                made to qualified investment clubs (as 
                                so determined) by such trust during all 
                                prior calendar years.
                            ``(ii) Aggregation of related trusts.--For 
                        purposes of this subparagraph--
                                    ``(I) all trusts having the same 
                                beneficiary shall be treated as 1 
                                trust, and
                                    ``(II) only the trust having the 
                                longest period described in clause 
                                (i)(I) shall be taken into account 
                                thereunder.
                            ``(iii) Fractions of a year.--For purposes 
                        of clause (i)(I), a fraction of a year shall be 
                        counted as a whole year.
                    ``(D) No attribution between individuals and 
                trusts.--Notwithstanding any other provision of this 
                title, there shall be no attribution of contributions 
                between a trust and an individual.
            ``(3) Securities.--
                    ``(A) Definition.--The term `security' has the 
                meaning given to such term by section 475(c)(2) 
                (determined without regard to subparagraph (F) 
                thereof).
                    ``(B) Certain rules to apply.--For purposes of 
                paragraph (1)(E), rules similar to the rules of 
                paragraphs (4) and (5) of section 851(c), shall apply.
    ``(d) Inflation Adjustment.--In the case of calendar years after 
2000, the $3,000 amounts contained in subsection (c)(2) shall each be 
increased for any calendar year after 2001 by an amount equal to--
            ``(1) $3,000, multiplied by
            ``(2) the cost-of-living adjustment under section 1(f)(3) 
        for such calendar year, determined by substituting `calendar 
        year 2000' for `calendar year 1992' in subparagraph (B) 
        thereof.
Any increase under this subsection which is not a multiple of $50 shall 
be rounded to the nearest multiple of $50.
    ``(e) Election.--An election under this subsection shall be made on 
the return for the taxable year for which it is made and shall apply to 
such taxable year and all subsequent taxable years for which the 
partnership is a qualified investment club, unless the election is 
revoked with the consent of the Secretary.
    ``(f) Termination of Qualified Investment Club Status.--An election 
under subsection (e) shall terminate as of the 1st day of any taxable 
year during which the partnership ceases to be a qualified investment 
club and, solely for purposes of section 704(c), each partner shall be 
treated as contributing on such first day such partner's pro rata share 
of the partnership's assets and liabilities on such first day to a new 
partnership.
    ``(g) Inadvertent Invalid Elections or Terminations.--The Secretary 
shall provide a relief mechanism for treating a partnership as a 
qualified investment club in circumstances where--
            ``(1) an election under subsection (e) was not effective 
        for the taxable year for which made by reason of an inadvertent 
        failure to satisfy any requirement of subsection (c), or
            ``(2) there is an inadvertent termination under subsection 
        (f) of such an election.
    ``(h) Election After Termination.--If an election under subsection 
(e) by a partnership is terminated or revoked, such partnership shall 
not be eligible to make an election under subsection (e) for any 
taxable year before its 5th taxable year which begins after the 1st 
taxable year for which such termination or revocation is effective, 
unless the Secretary consents to such election.
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary to carry out the purposes of this section, 
including regulations regarding the status of an individual or trust as 
a qualified partner.''.
    (b) Clerical Amendment.--The table of sections for part I of 
subchapter K of chapter 1 is amended by inserting after the item 
relating to section 704 the following new item:

                              ``Sec. 704A. Election to use simplified 
                                        method for qualified investment 
                                        clubs.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

                      Subtitle D--Other Provisions

SEC. 631. ABOVE-THE-LINE DEDUCTION FOR UNREIMBURSED BUSINESS EXPENSES.

    (a) In General.--Section 62(a)(2) (relating to certain trade and 
business deductions of employees) is amended to read as follows:
            ``(2) Trade and business deductions of employees.--The 
        deductions allowed by part VI (section 161 and following) which 
        consist of expenses paid or incurred by the taxpayer, whether 
        or not such expenses are reimbursed, in connection with the 
        performance by the taxpayer of services as an employee.''.
    (b) Conforming Amendments.--
            (1) Section 62 is amended--
                    (A) by striking ``(a) General Rule.--For purposes'' 
                and inserting the following:
    ``For purposes'', and
                    (B) by striking subsections (b) and (c).
            (2) Section 67 is amended by striking subsection (f).
            (3) Section 162(o)(1) is amended by striking ``such 
        services'' the first place it occurs and all that follows and 
        inserting ``such services, the amount allowable as a deduction 
        under this chapter for the use of a vehicle in performing such 
        services shall be equal to the amount of such qualified 
        reimbursements.''.
            (4) Section 3402(m)(1) is amended by striking ``62(a)'' and 
        inserting ``62''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 632. EXPENSING OF CERTAIN PERSONAL PROPERTY USED IN CONNECTION 
              WITH RESIDENTIAL RENTAL PROPERTY.

    (a) In General.--Section 179(d)(1) (defining section 179 property) 
is amended by inserting ``(without regard to paragraph (2) thereof)'' 
after ``50(b)''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to property placed in service in taxable years beginning after 
December 31, 2000.

SEC. 633. INCLUSION OF CERTAIN OLDER FOSTER CHILDREN IN DEFINITION OF 
              DEPENDENT.

    (a) In General.--Section 151(c)(1)(B)(ii) (relating to additional 
exemption for dependents) is amended by inserting ``or a foster child'' 
after ``student''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2000.

SEC. 634. EXCLUSION FOR FOSTER CARE PAYMENTS TO APPLY TO PAYMENTS BY 
              QUALIFIED PLACEMENT AGENCIES.

    (a) In General.--The matter preceding subparagraph (B) of section 
131(b)(1) (defining qualified foster care payment) is amended to read 
as follows:
            ``(1) In general.--The term `qualified foster care payment' 
        means any payment made pursuant to a foster care program of a 
        State or political subdivision thereof--
                    ``(A) which is paid by--
                            ``(i) the State or political subdivision 
                        thereof, or
                            ``(ii) a qualified foster care placement 
                        agency, and''.
    (b) Qualified Foster Individuals To Include Individuals Placed by 
Qualified Placement Agencies.--Subparagraph (B) of section 131(b)(2) 
(defining qualified foster individual) is amended to read as follows:
                    ``(B) a qualified foster care placement agency.''.
    (c) Qualified Foster Care Placement Agency Defined.--Subsection (b) 
of section 131 is amended by redesignating paragraph (3) as paragraph 
(4) and by inserting after paragraph (2) the following new paragraph:
            ``(3) Qualified foster care placement agency.--The term 
        `qualified foster care placement agency' means any placement 
        agency which is licensed or certified by--
                    ``(A) a State or political subdivision thereof, or
                    ``(B) an entity designated by a State or political 
                subdivision thereof,
        for the foster care program of such State or political 
        subdivision to make foster care payments to providers of foster 
        care.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 635. SIMPLIFICATION AND INCREASE IN STANDARD DEDUCTION FOR 
              DEPENDENTS.

    (a) In General.--Section 63(c)(5) (relating to limitation on basic 
standard deduction in the case of certain dependents) is amended by 
striking ``exceed the greater'' and all that follows through the period 
and inserting the following: ``exceed the lesser of--
                    ``(A) the basic standard deduction under paragraph 
                (2) applicable to such individual for such individual's 
                taxable year (determined without regard to this 
                paragraph), or
                    ``(B) the sum of $1,000 and such individual's 
                earned income.''.
    (b) Adjustments for Inflation.--Section 63(c)(4)(B) (relating to 
adjustments for inflation) is amended--
            (1) by striking ``or 5(A)'' in clause (i), and
            (2) by amending clause (ii) to read as follows:
                            ``(ii) `calendar year 1999' in the case of 
                        the dollar amount contained in paragraph 
                        (5)(B).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 636. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS NOT TO 
              APPLY TO QUALIFIED PROFESSIONAL DEVELOPMENT EXPENSES OF 
              ELEMENTARY AND SECONDARY SCHOOL TEACHERS.

    (a) In General.--Section 67(b) (defining miscellaneous itemized 
deductions) is amended by striking ``and'' at the end of paragraph 
(11), by striking the period at the end of paragraph (12) and inserting 
``, and'', and by adding at the end the following new paragraph:
            ``(13) any deduction allowable for the qualified 
        professional development expenses paid or incurred by an 
        eligible teacher.''.
    (b) Definitions.--Section 67 (relating to 2-percent floor on 
miscellaneous itemized deductions) is amended by adding at the end the 
following new subsection:
    ``(g) Qualified Professional Development Expenses of Eligible 
Teachers.--For purposes of subsection (b)(13)--
            ``(1) Qualified professional development expenses.--
                    ``(A) In general.--The term `qualified professional 
                development expenses' means expenses--
                            ``(i) for tuition, fees, books, supplies, 
                        equipment, and transportation required for the 
                        enrollment or attendance of an individual in a 
                        qualified course of instruction, and
                            ``(ii) with respect to which a deduction is 
                        allowable under section 162 (determined without 
                        regard to this section).
                    ``(B) Qualified course of instruction.--The term 
                `qualified course of instruction' means a course of 
                instruction which--
                            ``(i) is--
                                    ``(I) directly related to the 
                                curriculum and academic subjects in 
                                which an eligible teacher provides 
                                instruction, or
                                    ``(II) designed to enhance the 
                                ability of an eligible teacher to 
                                understand and use State standards for 
                                the academic subjects in which such 
                                teacher provides instruction,
                            ``(ii) may--
                                    ``(I) provide instruction in how to 
                                teach children with different learning 
                                styles, particularly children with 
                                disabilities and children with special 
                                learning needs (including children who 
                                are gifted and talented), or
                                    ``(II) provide instruction in how 
                                best to discipline children in the 
                                classroom and identify early and 
                                appropriate interventions to help 
                                children described in subclause (I) to 
                                learn,
                            ``(iii) is tied to challenging State or 
                        local content standards and student performance 
                        standards,
                            ``(iv) is tied to strategies and programs 
                        that demonstrate effectiveness in increasing 
                        student academic achievement and student 
                        performance, or substantially increasing the 
                        knowledge and teaching skills of an eligible 
                        teacher,
                            ``(v) is of sufficient intensity and 
                        duration to have a positive and lasting impact 
                        on the performance of an eligible teacher in 
                        the classroom (which shall not include 1-day or 
                        short-term workshops and conferences), except 
                        that this clause shall not apply to an activity 
                        if such activity is 1 component described in a 
                        long-term comprehensive professional 
                        development plan established by an eligible 
                        teacher and the teacher's supervisor based upon 
                        an assessment of the needs of the teacher, the 
                        students of the teacher, and the local 
                        educational agency involved, and
                            ``(vi) is part of a program of professional 
                        development which is approved and certified by 
                        the appropriate local educational agency as 
                        furthering the goals of the preceding clauses.
                    ``(C) Local educational agency.--The term `local 
                educational agency' has the meaning given such term by 
                section 14101 of the Elementary and Secondary Education 
                Act of 1965, as in effect on the date of the enactment 
                of this subsection.
            ``(2) Eligible teacher.--
                    ``(A) In general.--The term `eligible teacher' 
                means an individual who is a kindergarten through grade 
                12 classroom teacher in an elementary or secondary 
                school.
                    ``(B) Elementary or secondary school.--The terms 
                `elementary school' and `secondary school' have the 
                meanings given such terms by section 14101 of the 
                Elementary and Secondary Education Act of 1965 (20 
                U.S.C. 8801), as so in effect.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.
                                 <all>