[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5505 Introduced in House (IH)]







107th CONGRESS
  2d Session
                                H. R. 5505

To simplify certain provisions of the Internal Revenue Code of 1986 and 
                to establish a uniform pass-thru regime.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            October 1, 2002

 Mr. Houghton introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
To simplify certain provisions of the Internal Revenue Code of 1986 and 
                to establish a uniform pass-thru regime.

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

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``Individual and 
Small Business Tax Simplification Act of 2002''.
    (b) References to Internal Revenue Code of 1986.--Except as 
otherwise expressly provided, whenever in this Act an amendment or 
repeal is expressed in terms of an amendment to, or repeal of, a 
section or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue Code of 
1986.
    (c) Table of Contents.--

Sec. 1. Short title; etc.
             TITLE I--INDIVIDUAL INCOME TAX SIMPLIFICATION

                     Subtitle A--General Provisions

Sec. 101. Alternative minimum tax reform.
Sec. 102. Head of household filing status replaced with special 
                            personal exemption.
Sec. 103. Simplification of tax on social security benefits.
Sec. 104. Simplification of capital gains tax.
Sec. 105. Repeal of 2-percent floor on miscellaneous itemized 
                            deductions.
Sec. 106. Simplification of deduction for points on home mortgage.
Sec. 107. Taxation of minor children.
Sec. 108. Simplification of dependent care tax benefits.
Sec. 109. Acceleration of phaseout of overall limitation on itemized 
                            deductions.
Sec. 110. Acceleration of repeal of phaseout of personal exemptions.
                Subtitle B--Uniform Definition of Child

Sec. 121. Uniform definition of child.
Sec. 122. Treatment of government benefits in determining support and 
                            cost of maintaining household.
Sec. 123. Effective date.
                  Subtitle C--Education Tax Incentives

Sec. 131. Hope and Lifetime Learning credits combined.
Sec. 132. Uniform definition of qualifying higher education expenses.
              TITLE II--SMALL BUSINESS TAX SIMPLIFICATION

Sec. 201. Unified pass-thru entity regime.
Sec. 202. Increase in expensing under section 179.
Sec. 203. Rollover of property held for productive use or investment.
Sec. 204. Repeal of collapsible corporations.
Sec. 205. References to general partners.
Sec. 206. References to limited partners.
Sec. 207. Partnership income attributable to capital excluded from net 
                            earnings from self-employment.
Sec. 208. Repeal of ability to elect large partnership reporting rules.

             TITLE I--INDIVIDUAL INCOME TAX SIMPLIFICATION

                     Subtitle A--General Provisions

SEC. 101. ALTERNATIVE MINIMUM TAX REFORM.

    (a) Increase in Alternative Minimum Tax Exemption Amount.--
            (1) Subparagraph (A) of section 55(d)(1) (relating to 
        exemption amount for taxpayers other than corporations) is 
        amended by striking ``$45,000'' and all that follows through 
        ``2004)'' and inserting ``$75,000''.
            (2) Subparagraph (B) of section 55(d)(1) is amended by 
        striking ``$33,750'' and all that follows through ``2004)'' and 
        inserting ``$56,000''.
    (b) Adjustment for Inflation.--Subsection (d) of section 55 is 
amended by adding at the end the following new paragraph:
            ``(4) Inflation adjustment.--
                    ``(A) In general.--In the case of a taxable year 
                beginning in a calendar year after 2003, each of the 
                dollar amounts contained in subparagraphs (A) and (B) 
                of paragraph (1) shall be increased by an amount equal 
                to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2002' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--Any increase determined under 
                subparagraph (A) shall be rounded to the nearest 
                multiple of $100.''.
    (c) Repeal of Limit on Deduction for State and Local Taxes.--
Subparagraph (A) of section 56(b)(1) is amended to read as follows:
                    ``(A) In general.--No deduction shall be allowed 
                for any miscellaneous itemized deduction (as defined in 
                section 67(b)).''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 102. HEAD OF HOUSEHOLD FILING STATUS REPLACED WITH SPECIAL 
              PERSONAL EXEMPTION.

    (a) Increased Personal Exemption for Single Parents, Etc.--Section 
151 is amended by redesignating subsections (d) and (e) as subsection 
(e) and (f) and by inserting after subsection (c) the following new 
subsection:
    ``(d) Additional Exemption for Single Parents, Etc.--
            ``(1) In general.--An exemption of $3,700 in the case of an 
        individual who--
                    ``(A) is not married at the close of the taxable 
                year,
                    ``(B) is not a surviving spouse, and
                    ``(C)(i) maintains as his home a household which 
                constitutes for more than one-half of such taxable year 
                the principal place of abode, as a member of such 
                household, of--
                            ``(I) a qualifying child (as defined in 
                        subsection (c)), or
                            ``(II) any other person who is a dependent 
                        of the taxpayer, if the taxpayer is entitled to 
                        a deduction for the taxable year for such 
                        person under subsection (c), or
                    ``(ii) maintains a household which constitutes for 
                such taxable year the principal place of abode of the 
                father or mother of the taxpayer, if the taxpayer is 
                entitled to a deduction for the taxable year for such 
                father or mother under subsection (c).
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half of the 
        cost of maintaining the household during the taxable year is 
        furnished by such individual.
            ``(2) Marital status.--Marital status shall be determined 
        in accordance with section 7703; except that an individual 
        shall be treated as not married for purposes of this subsection 
        if at any during such year the spouse of such individual is a 
        nonresident alien.
            ``(3) Limitations.--Paragraph (1) shall not apply to any 
        individual--
                    ``(A) if at any time during the taxable year he is 
                a nonresident alien, or
                    ``(B) by reason of an individual who would not be a 
                dependent for the taxable year but for--
                            ``(i) paragraph (9) of section 152(a), or
                            ``(ii) subsection (c) of section 152.
            ``(4) Inflation adjustment.--
                    ``(A) In general.--In the case of a taxable year 
                beginning in a calendar year after 2003, the dollar 
                amount contained in paragraph (1) shall be increased by 
                an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2002' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--Any increase determined under 
                subparagraph (A) shall be rounded to the nearest 
                multiple of $50.''.
    (b) Repeal of Head of Household Filing Status.--Subsection (b) of 
section 1 (relating to heads of household) is repealed.
    (c) Conforming Amendments.--
            (1) Section 1(c) is amended--
                    (A) in the heading by striking ``Spouses and Heads 
                of Households).--'' and inserting ``Spouses).--'', and
                    (B) by striking ``or the head of a household as 
                defined in section 2(b)''.
            (2) Section 2 is amended by striking subsection (b) and by 
        redesignating subsections (c), (d), and (e) as subsections (b), 
        (c), and (d), respectively.
            (3) Section 25B(b) is amended by striking the portion of 
        the table related to head of a household.
            (4) Section 63(c)(2) is amended--
                    (A) by striking subparagraph (B), and
                    (B) by redesignating subparagraphs (C) and (D) as 
                subparagraphs (B) and (C), respectively.
            (5) Section 151(c)(6)(B)(iii) is amended by striking ``or a 
        head of a household (as such terms are defined in section 2)'' 
        and inserting ``(as defined in section 2)''.
            (6) Section 151(c)(6)(C) is amended by striking ``, section 
        2(b)(1)(A),''.
            (7) Section 151(e)(3)(C) is amended--
                    (A) by striking clause (ii),
                    (B) in clause (iii), by striking ``or head of a 
                household'', and
                    (C) by redesignating clauses (iii) and (iv) as 
                clauses (ii) and (iii), respectively.
            (8) Section 3402(r)(2)(A) is amended by striking ``section 
        63(c)(2)(C)'' and inserting ``section 63(c)(2)(B)''.
            (9) Section 6012(a)(1)(A) is amended--
                    (A) in clause (i), by striking ``is not a head of a 
                household (as defined section 2(b)),'',
                    (B) by striking clause (ii),
                    (C) by redesignating clauses (iii) and (iv) as 
                clauses (ii) and (iii), respectively, and
                    (D) in the last sentence, by striking ``Clause 
                (iv)'' and inserting ``Clause (iii)'' and by striking 
                ``151(c)'' and inserting ``151(d)''.
            (10) Section 6012(a)(1)(B) is amended--
                    (A) by striking ``clause (i), (ii), or (iii)'' and 
                inserting ``clause (i) or (ii)'', and
                    (B) by striking ``clause (iv)'' and inserting 
                ``clause (iii)''.
            (11)(A) Paragraph (6) of section 1(f) is amended by 
        striking ``151(d)(4)(A)'' and inserting ``151(e)(4)(A)''.
            (B) Subparagraph (C) of section 642(b)(2), as amended by 
        section 105, is amended--
                    (i) by striking ``151(d)'' and inserting 
                ``151(e)'', and
                    (ii) by striking ``151(d)(3)(C)(iii)'' and 
                inserting ``151(e)(3)(C)(ii)''.
            (C) Paragraph (1) of section 3402(f) is amended by striking 
        ``151(d)(2)'' and inserting ``151(e)(2)''.
            (D) Subparagraph (B) of section 3402(r)(2) is amended by 
        striking ``151(d)'' and inserting ``151(e)''.
            (E) Clause (ii) of section 6012(a)(1)(D) is amended--
                    (i) by striking ``151(d)'' and inserting 
                ``151(e)'', and
                    (ii) by striking ``151(d)(2)'' and inserting 
                ``151(e)(2)''.
            (F) The next to the last sentence of section 6013(b)(3)(A) 
        is amended by striking ``151(d)'' and inserting ``151(e)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 103. SIMPLIFICATION OF TAX ON SOCIAL SECURITY BENEFITS.

    (a) Repeal of 1993 Increase.--
            (1) In general.--Subsection (a) of section 86 (relating to 
        social security and tier 1 railroad retirement benefits) is 
        amended to read as follows:
    ``(a) In General.--Gross income for the taxable year of any 
taxpayer described in subsection (b) (notwithstanding section 207 of 
the Social Security Act) includes social security benefits in an amount 
equal to the lesser of--
            ``(1) one-half of the social security benefits received 
        during the taxable year, or
            ``(2) one-half of the excess described in subsection 
        (b)(1).''
            (2) Conforming amendments.--
                    (A) Subsection (c) of section 86 is amended to read 
                as follows:
    ``(c) Base Amount.--For purposes of this section, the term `base 
amount' means--
            ``(1) except as otherwise provided in this subsection, 
        $25,000,
            ``(2) $32,000 in the case of a joint return, and
            ``(3) zero in the case of a taxpayer who--
                    ``(A) is married as of the close of the taxable 
                year (within the meaning of section 7703) but does not 
                file a joint return for such year, and
                    ``(B) does not live apart from his spouse at all 
                times during the taxable year.''
                    (B) Paragraph (3) of section 871(a) is amended by 
                striking ``85 percent'' in subparagraph (A) and 
                inserting ``50 percent''.
                    (C)(i) Subparagraph (A) of section 121(e)(1) of the 
                Social Security Amendments of 1983 (Public Law 98-21) 
                is amended--
                            (I) by striking ``(A) There'' and inserting 
                        ``There'';
                            (II) by striking ``(i)'' immediately 
                        following ``amounts equivalent to''; and
                            (III) by striking ``, less (ii)'' and all 
                        that follows and inserting a period.
                    (ii) Paragraph (1) of section 121(e) of such Act is 
                amended by striking subparagraph (B).
                    (iii) Paragraph (3) of section 121(e) of such Act 
                is amended by striking subparagraph (B) and by 
                redesignating subparagraph (C) as subparagraph (B).
                    (iv) Paragraph (2) of section 121(e) of such Act is 
                amended in the first sentence by striking ``paragraph 
                (1)(A)'' and inserting ``paragraph (1)''.
    (b) Use of Adjusted Gross Income Without Modifications.--
            (1) In general.--Subsection (b) of section 86 is amended to 
        read as follows:
    ``(b) Taxpayers to Whom Subsection (a) Applies.--A taxpayer is 
described in this subsection if--
            ``(1) the sum of--
                    ``(A) the adjusted gross income of the taxpayer for 
                the taxable year (determined without regard to this 
                section), plus
                    ``(B) one-half of the social security benefits 
                received during the taxable year, exceeds
            ``(2) the base amount.''
            (2) Conforming amendments.--
                    (A) Subparagraph (A) of section 219(g)(3) is 
                amended--
                            (i) by striking ``sections 86 and 469'' in 
                        clause (i) and inserting ``section 469'', and
                            (ii) by inserting ``86,'' before ``135'' in 
                        clause (ii).
                    (B) Paragraph (4) of section 135(c) is amended--
                            (i) by inserting ``86,'' before ``137'' in 
                        clause (i), and
                            (ii) by striking ``sections 86, 469,'' in 
                        clause (ii) and inserting ``sections 469''.
                    (C) Paragraph (3) of section 137(b) is amended--
                            (i) by inserting ``86,'' before ``221'' in 
                        clause (i), and
                            (ii) by striking ``86,'' in clause (ii).
                    (D) Subparagraph (C) of section 221(b)(2) is 
                amended--
                            (i) by inserting ``86,'' before ``222'' in 
                        clause (i), and
                            (ii) by striking ``86,'' in clause (ii).
                    (E) Subparagraph (C) of section 222(b)(2) is 
                amended--
                            (i) by inserting ``86,'' before ``911'' in 
                        clause (i), and
                            (ii) by striking ``86,'' in clause (ii).
    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraphs (2) and 
        (3), the amendments made by this section shall apply to taxable 
        years beginning after December 31, 2002.
            (2) Subsection (a)(2)(B).--The amendment made by subsection 
        (a)(2)(B) shall apply to benefits paid after December 31, 2002.
            (3) Subsection (a)(2)(C).--The amendments made by 
        subsection (a)(2)(C) shall apply to tax liabilities for taxable 
        years beginning after December 31, 2002.
    (d) Maintenance of Transfers to Hospital Insurance Trust Fund.--
There are hereby appropriated to the Hospital Insurance Trust Fund 
established under section 1817 of the Social Security Act amounts equal 
to the reduction in revenues to the Treasury by reason of the enactment 
of this Act. Amounts appropriated by the preceding sentence shall be 
transferred from the general fund at such times and in such manner so 
as to replicate to the extent possible the transfers which would have 
occurred to such Trust Fund had this Act not been enacted.

SEC. 104. SIMPLIFICATION OF CAPITAL GAINS TAX.

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

``SEC. 1203. CAPITAL GAINS DEDUCTION.

    ``If for any taxable year a taxpayer other than a corporation has a 
net capital gain, 50 percent of such gain shall be a deduction from 
gross income.''.
    (b) Deduction Allowable Whether or Not Taxpayer Itemizes Other 
Deductions.--
            (1) Subsection (b) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''.
            (2) Subsection (d) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''.
    (c) Minimum Tax Treatment.--
            (1) Paragraph (1) of section 56(b) is amended by adding at 
        the end the following new subparagraph:
                    ``(G) Capital gain deduction not applicable.--
                Section 1203 shall not apply.''.
            (2) Subsection (b) of section 55 is amended by striking 
        paragraph (3) and inserting the following new paragraphs:
            ``(3) Maximum tax on net capital gain.--The amount of tax 
        determined under the first sentence of paragraph (1)(A)(i) 
        shall not exceed the sum of--
                    ``(A) the amount determined under such first 
                sentence computed at the rates and in the same manner 
                as if this paragraph had not been enacted on the 
                taxable excess reduced by the net capital gain, plus
                    ``(B) a tax on the net capital gain determined by 
                using the regular tax capital gains tax rates.
            ``(4) Regular tax on net capital gain.--For purposes of 
        paragraph (3), the tax on the net capital gain determined by 
        using the regular tax capital gains tax rates is the excess 
        of--
                    ``(A) the tax that would be computed under section 
                1 if net capital gain were determined with the 
                adjustments under this part, over
                    ``(B) the tax that would be so computed under 
                section 1 if the taxable income were reduced by 50 
                percent of the net capital gain as so determined.''.
    (d) Technical and Conforming Amendments.--
            (1) Section 1 is amended by striking subsection (h).
            (2) Paragraph (7) of section 57(a) is amended by striking 
        the last sentence.
            (3) Subparagraph (E) of section 163(d)(4) is amended to 
        read as follows:
                    ``(E) Coordination with capital gains deduction.--
                The net capital gain taken into account under section 
                1203 for any taxable year shall be reduced (but not 
                below zero) by the amount which the taxpayer takes into 
                account as investment income under subparagraph 
                (B)(iii) for such year.''.
            (4) Paragraph (1) of section 170(e) is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``50 percent (100 percent in the case of 
        a corporation) of the amount of gain''.
            (5) Subparagraph (B) of section 172(d)(2) is amended to 
        read as follows:
                    ``(B) the exclusion under section 1202 and the 
                deduction under section 1203 shall not be allowed.''.
            (6) The last sentence of section 453A(c)(3) is amended by 
        striking all that follows ``long-term capital gain,'' and 
        inserting ``the maximum rate on net capital gain under section 
        1201 or the deduction under section 1203 (whichever is 
        appropriate) shall be taken into account.''.
            (7)(A) Section 641(c)(2)(A) is amended by striking ``Except 
        as provided in section 1(h), the'' and inserting ``The''.
            (B) Section 641(c)(2)(C) is amended by inserting after 
        clause (iii) the following new clause:
                            ``(iv) The deduction under section 1203.''.
            (8) Paragraph (4) of section 642(c) is amended to read as 
        follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any exclusion 
        allowable under section 1202 and any deduction allowable under 
        section 1203 to the estate or trust. In the case of a trust, 
        the deduction allowed by this subsection shall be subject to 
        section 681 (relating to unrelated business income).''.
            (9) Section 642 is amended by adding at the end the 
        following new subsection:
    ``(j) Capital Gains Deduction.--The deduction under section 1203 to 
an estate or trust shall be computed by excluding the portion (if any) 
of the gains for the taxable year which is includible by the income 
beneficiaries under sections 652 and 662 (relating to inclusions of 
amounts in gross income of beneficiaries of trusts) as gain derived 
from the sale or exchange of capital assets.''.
            (10) The last sentence of section 643(a)(3) is amended to 
        read as follows: ``The exclusion under section 1202 and the 
        deduction under section 1203 shall not be taken into 
        account.''.
            (11) Subparagraph (C) of section 643(a)(6) is amended by 
        inserting ``(i)'' before ``there shall'' and by inserting 
        before the period ``, and (ii) the deduction under section 1203 
        (relating to capital gains deduction) shall not be taken into 
        account''.
            (12) Paragraph (4) of section 691(c) is amended by striking 
        ``1(h),'' and by inserting ``1203,'' after ``1202,''.
            (13) The second sentence of paragraph (2) of section 871(a) 
        is amended by striking ``section 1202'' and inserting 
        ``sections 1202 and 1203''.
            (14)(A) Paragraph (2) of section 904(b) is amended by 
        striking subparagraphs (A) and (C), by redesignating 
        subparagraph (B) as subparagraph (A), and by inserting after 
        subparagraph (A) (as so redesignated) the following new 
        subparagraph:
                    ``(B) Other taxpayers.--In the case of a taxpayer 
                other than a corporation, taxable income from sources 
                outside the United States shall include gain from the 
                sale or exchange of capital assets only to the extent 
                of foreign source capital gain net income.''.
            (B) Subparagraph (A) of section 904(b)(2), as so 
        redesignated, is amended--
                    (i) by striking all that precedes clause (i) and 
                inserting the following:
                    ``(A) Corporations.--In the case of a corporation--
                '', and
                    (ii) by striking in clause (i) ``in lieu of 
                applying subparagraph (A),''.
            (C) Paragraph (3) of section 904(b) is amended by striking 
        subparagraphs (D) and (E) and inserting the following new 
        subparagraph:
                    ``(D) Rate differential portion.--The rate 
                differential portion of foreign source net capital 
                gain, net capital gain, or the excess of net capital 
                gain from sources within the United States over net 
                capital gain, as the case may be, is the same 
                proportion of such amount as the excess of the highest 
                rate of tax specified in section 11(b) over the 
                alternative rate of tax under section 1201(a) bears to 
                the highest rate of tax specified in section 11(b).''.
            (15) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1203 shall 
        not apply'' before the period at the end thereof.
            (16) Paragraph (1) of section 1445(e) is amended by 
        striking ``20 percent'' and inserting ``one-half of the maximum 
        rate of tax in effect under section 1''.
            (17)(A) The second sentence of section 7518(g)(6)(A) is 
        amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``20 percent'' and inserting 
                ``one-half of the maximum rate of tax in effect under 
                section 1''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``20 percent'' and inserting 
                ``one-half of the maximum rate of tax in effect under 
                section 1 of such Code''.
    (e) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1203. Capital gains deduction.''.
    (f) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2002.
            (2) Withholding.--The amendments made by subsection (d)(16) 
        shall apply only to amounts paid after December 31, 2002.
            (3) Coordination with prior transition rule.--Any amount 
        treated as long-term capital gain by reason of paragraph (3) of 
        section 1122(h) of the Tax Reform Act of 1986 shall not be 
        taken into account for purposes of applying section 1203 of the 
        Internal Revenue Code of 1986 (as added by this section).

SEC. 105. REPEAL OF 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED 
              DEDUCTIONS.

    (a) Termination.--Section 67 (relating to 2-percent floor on 
miscellaneous itemized deductions) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 56(b)(1), as amended by 
        section 101, is hereby repealed.
            (2) Clause (i) of section 642(b)(2)(C) is amended to read 
        as follows:
                            ``(i) In general.--A qualified disability 
                        trust shall be allowed a deduction equal to the 
                        exemption amount under section 151(d), 
                        determined by treating such trust as an 
                        individual described in section 
                        151(d)(3)(C)(iii).''
            (3) Paragraph (3) of section 772(c) is amended to read as 
        follows:
            ``(3) Income or loss from other activities.--For purposes 
        of this chapter, any partner's distributive share of any income 
        or loss described in subsection (a)(2) shall be treated as an 
        item of income or expense (as the case may be) with respect to 
        property held for investment.''
            (4) Paragraph (3) of section 773(b) is hereby repealed.
            (5) Clause (iii) of section 6654(d)(1)(C) is amended to 
        read as follows:
                            ``(iii) Determination of adjusted gross 
                        income in case of estates and trusts.--For 
                        purposes of this section, the adjusted gross 
                        income of an estate or trust shall be computed 
                        in the same manner as in the case of an 
                        individual, except that--
                                    ``(I) the deductions for costs 
                                which are paid or incurred in 
                                connection with the administration of 
                                the estate or trust and which would not 
                                have been incurred if the property were 
                                not held in such trust or estate, and
                                    ``(II) the deductions allowable 
                                under sections 642(b), 651, and 
661, shall be treated as allowable in arriving at adjusted gross 
income. Under regulations, appropriate adjustments shall be made in the 
application of part I of subchapter J of this chapter to take into 
account the provisions of this section.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 106. SIMPLIFICATION OF DEDUCTION FOR POINTS ON HOME MORTGAGE.

    (a) In General.--Subsection (g) of section 461 (relating to prepaid 
interest) is amended by adding at the end the following new paragraph:
            ``(3) Exception for certain refinancings.--
                    ``(A) In general.--This subsection shall not apply 
                to points paid in respect of indebtedness secured by 
                such residence resulting from the refinancing of 
                indebtedness meeting the requirements of the preceding 
                sentence (or this sentence).
                    ``(B) Limitation.--Subparagraph (A) shall apply 
                only to the extent the amount of the indebtedness 
                resulting from such refinancing does not exceed the sum 
                of--
                            ``(i) the amount of the refinanced 
                        indebtedness, plus
                            ``(ii) the lesser of $10,000 or the points 
                        paid in respect of the indebtedness resulting 
                        from the refinancing to the extent that the 
                        indebtedness resulting from the refinancing 
                        does not exceed the refinanced indebtedness.''.
    (b) Conforming Amendment.--The heading of paragraph (2) of section 
461(g) is amended by inserting ``based on business practice'' after 
``Exception''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 107. TAXATION OF MINOR CHILDREN.

    (a) Application of Trust Rate Schedule to Net Unearned Income of 
Minor Children.--Subsection (g) of section 1 (relating to certain 
unearned income of minor children taxed as if parent's income) is 
amended--
            (1) by striking paragraphs (1), (3) and (5),
            (2) by redesignating paragraphs (4), (6), and (7) as 
        paragraphs (3), (4), and (5), respectively, and
            (3) by inserting before paragraph (2) the following new 
        paragraph:
            ``(1) In general.--In the case of a child to whom this 
        subsection applies, the tax imposed by this section shall be 
        the sum of--
                    ``(A) a tax computed at the rates and in the same 
                manner as if this subsection had not been enacted on 
                taxable income reduced by net unearned income, plus
                    ``(B) the excess (if any) of the tax determined 
                under subsection (e) on total taxable income over the 
                tax determined under subsection (e) on taxable income 
                reduced by net unearned income.''.
    (b) Expansion of Parental Election.--Paragraph (5) of section 1(g) 
(as redesignated under subsection (a)) is amended to read as follows:
            ``(5) Election to claim income of child on parent's 
        return.--
                    ``(A) In general.--If the parent of any child to 
                whom this subsection applies elects the application of 
                subparagraph (B), such child--
                            ``(i) shall be treated (other than for 
                        purposes of this paragraph)--
                                    ``(I) as having no gross income for 
                                such year, and
                                    ``(II) as not being entitled to any 
                                deductions or credits for such year, 
                                and
                            ``(ii) shall not be required to file a 
                        return under section 6012 for such year.
                    ``(B) Income included on parent's return.--In the 
                case of a parent making the election under this 
                paragraph--
                            ``(i) the gross income of each child to 
                        whom such election applies shall be included in 
                        such parent's gross income for the taxable 
                        year,
                            ``(ii) the deductions to which such child 
                        would be entitled without regard to such 
                        election shall be allowed to such parent but 
                        only to the extent the aggregate of such 
                        deductions does not exceed the gross income of 
                        such child,
                            ``(iii) any estimated tax payment, and any 
                        amount which has been deducted and withheld 
                        under chapter 24, for such year that is made in 
                        the name and TIN of such child shall be treated 
                        as an estimated tax payment or as an amount 
                        deducted and withheld in the name and TIN of 
                        such parent for such year (including for 
                        purposes of section 31), and
                            ``(iv) any interest which is an item of tax 
                        preference under section 57(a)(5) of the child 
                        shall be treated as an item of tax preference 
                        of such parent (and not of such child).
                    ``(C) Special rule for determining which parent may 
                make election.--For purposes of this paragraph, the 
                parent of a child to whom this subsection applies who 
                may make an election under this paragraph shall be--
                            ``(i) in the case of parents who are not 
                        married (within the meaning of section 7703), 
                        the custodial parent (within the meaning of 
                        section 151(c)(7)) of the child, and
                            ``(ii) in the case of married individuals 
                        filing separately, the individual with the 
                        greater taxable income.
                    ``(D) Carryovers allowed.--Subparagraph (A)(i)(II) 
                shall not prohibit the carryover of any amount that the 
child would be entitled to carryover without regard to the election 
under this paragraph.
                    ``(E) Regulations.--The Secretary shall prescribe 
                such regulations as may be necessary or appropriate to 
                carry out the purposes of this paragraph.''.
    (c) Conforming Amendment.--The heading for subsection (g) of 
section 1 is amended to read as follows:
    ``(g) Treatment of Certain Income of Minor Children.--''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 108. SIMPLIFICATION OF DEPENDENT CARE TAX BENEFITS.

    (a) Repeal of Reduction of Credit Based on Adjusted Gross Income.--
Subsection (a) of section 21 (relating to allowance of credit) is 
amended--
            (1) in paragraph (1), by striking ``applicable percentage'' 
        and inserting ``35 percent'',
            (2) by striking paragraph (2), and
            (3) by striking ``(1) In general.--'' and moving the text 2 
        ems to the left.
    (b) Dollar Limit on Amount Creditable Made $5,500 Regardless of 
Number of Qualifying Individuals.--
            (1) In general.--Subsection (c) of section 21 (relating to 
        dollar limit on amount creditable) is amended to read as 
        follows:
    ``(c) Dollar Limit on Amount Creditable.--The amount of employment-
related expenses incurred during any taxable year which may be taken 
into account under subsection (a) shall not exceed $5,500, reduced by 
the aggregate amount excludable from gross income under section 129 for 
the taxable year.''.
            (2) Exclusion.--Subparagraph (A) of section 129(a)(2) is 
        amended by striking ``$5,000 ($2,500'' and inserting ``$5,500 
        ($2,750''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 109. ACCELERATION OF PHASEOUT OF PHASEOUT OF OVERALL LIMITATION ON 
              ITEMIZED DEDUCTIONS.

    (a) In General.--Section 68 (relating to overall limitation on 
itemized deductions) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Section 1(f)(6)(A) is amended by striking ``, section 
        68(b)(2)''.
            (2) Section 773(a)(3)(B) is amended by striking clause (i) 
        and redesignating clauses (ii), (iii), and (iv) as clauses (i), 
        (ii), and (iii), respectively.
            (3) The table of sections for part I of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        68.
    (c) Effective Date.--The amendments by this section shall apply to 
taxable years beginning after December 31, 2002.

SEC. 110. ACCELERATION OF REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

    (a) In General.--Subsection (e) of section 151 (relating to 
phaseout of exemption amount), as amended by the preceding sections of 
this Act, is amended by striking paragraph (3) and redesignating 
paragraph (4) as paragraph (3).
    (b) Conforming Amendments.--
            (1) Paragraph (3) of section 151(e), as amended by 
        subsection (a), is amended to read as follows:
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 1989, the dollar amount 
        contained in paragraph (1) shall be increased by an amount 
        equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                1988' for `calendar year 1992' in subparagraph (B) 
                thereof.''.
            (2) Section 1(f)(6) is amended--
                    (A) in subparagraph (A) by striking ``151(e)(4)'' 
                and inserting ``151(e)(3)'', and
                    (B) in subparagraph (B), both as in effect on the 
                date of the enactment of this Act and as amended by the 
                Economic Growth and Tax Relief Reconciliation Act of 
                2001, by striking ``151(e)(4)(A)'' and inserting 
                ``151(e)(3)''.
            (3) Subparagraph (C) of section 642(b)(2), as amended by 
        the preceding sections of this Act, is amended by striking ``, 
        determined by treating such trust as an individual described in 
        section 151(e)(3)(C)(ii)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

                Subtitle B--Uniform Definition of Child

SEC. 121. UNIFORM DEFINITION OF CHILD.

    (a) Personal Exemption.--
            (1) In general.--Section 151, as amended by the preceding 
        sections of this Act, is amended by redesignating subsections 
        (c), (d), (e), and (f) as subsections (d), (e), (f), and (g), 
        respectively, and by inserting after subsection (b) the 
        following new subsection:
    ``(c) Additional Exemption for Qualifying Children.--
            ``(1) In general.--An exemption of the exemption amount for 
        each qualifying child.
            ``(2) Qualifying child.--For purposes of this section, the 
        term `qualifying child' means, with respect to any taxpayer for 
        any taxable year, an individual--
                    ``(A) who bears a relationship to the taxpayer 
                described in paragraph (3),
                    ``(B) who has the same principal place of abode as 
                the taxpayer for more than \1/2\ of such taxable year, 
                and
                    ``(C) who meets the age requirements of paragraph 
                (4).
        An individual shall not be treated as failing to meet the 
        requirements of subparagraph (B) by reason of time of birth or 
        death or by reason of temporary absences or other circumstances 
        specified in the regulations prescribed by the Secretary.
            ``(3) Relationship test.--
                    ``(A) In general.--For purposes of paragraph 
                (2)(A), an individual bears a relationship to the 
                taxpayer described in this paragraph if such individual 
                is--
                            ``(i) a son, daughter, stepson, or 
                        stepdaughter of the taxpayer or a descendant of 
                        any such relative,
                            ``(ii) a brother, sister, stepbrother, or 
                        stepsister of the taxpayer or a descendant of 
                        any such relative, whom the taxpayer cares for 
                        as the taxpayer's own child, or
                            ``(iii) an eligible foster child of the 
                        taxpayer.
                    ``(B) Adopted child.--For purposes of subparagraph 
                (A), a child who is legally adopted, or who is placed 
                with the taxpayer by an authorized placement agency for 
                adoption by the taxpayer, shall be treated as a child 
                by blood.
                    ``(C) Eligible foster child.--For purposes of 
                subparagraph (A), the term `eligible foster child' 
                means an individual--
                            ``(i) who is placed with the taxpayer by an 
                        authorized placement agency or by judgment, 
                        decree, or other order of any court of 
                        competent jurisdiction, and
                            ``(ii) whom the taxpayer cares for as the 
                        taxpayer's own child.
            ``(4) Age requirements.--For purposes of paragraph (2)(C), 
        an individual meets the requirements of this paragraph if such 
        individual--
                    ``(A) has not attained the age of 19 as of the 
                close of the calendar year in which the taxable year of 
                the taxpayer begins,
                    ``(B) is a student who has not attained the age of 
                24 as of the close of such calendar year, or
                    ``(C) is permanently and totally disabled (as 
                defined in section 22(e)(3)) at any time during the 
                taxable year.
            ``(5) Special rules.--
                    ``(A) Married dependents.--An individual shall not 
                be a qualifying child of a taxpayer if such individual 
                makes a joint return with the individual's spouse under 
                section 6013 for the taxable year beginning in the 
                calendar year in which the taxable year of the taxpayer 
                begins.
                    ``(B) Individuals who support themselves.--An 
                individual shall not be a qualifying child of a 
                taxpayer if such individual provides over half of such 
                individual's own support for the calendar year in which 
                the taxable year of the taxpayer begins.
                    ``(C) Only 1 exemption amount.--An individual who 
                is a qualifying child of any taxpayer shall not be 
                treated as the dependent of any taxpayer for purposes 
                of this part.
            ``(6) Special rule relating to 2 or more claiming 
        qualifying child.--
                    ``(A) In general.--Except as provided in paragraph 
                (7), if an individual would (but for this paragraph) be 
                a qualifying child of 2 or more taxpayers for taxable 
                years beginning in the same calendar year, such 
                individual shall be treated as the qualifying child of 
                the taxpayer who is--
                            ``(i) a parent of the individual, or
                            ``(ii) if none of such taxpayers is a 
                        parent of the individual, the taxpayer with the 
                        highest adjusted gross income for such taxable 
                        year.
                    ``(B) Parents not filing joint returns.--If an 
                individual would (but for this paragraph) be a 
                qualifying child of both parents of such individual and 
                such parents do not file a joint return together, such 
                child shall be treated as the qualifying child of--
                            ``(i) the parent with whom the child 
                        resided for the longest period during the 
                        taxable year, or
                            ``(ii) if the child resides with both 
                        parents for the same length of time during such 
                        taxable year, the parent with the highest 
                        adjusted gross income.
                    ``(C) Foster children.--For purposes of this 
                paragraph, the taxpayer shall be treated as a parent of 
                any eligible foster child who has the same principal 
                place of abode as the taxpayer for more than one-half 
                of such taxable year.
            ``(7) Special rule for certain pre-2004 instruments.--
                    ``(A) In general.--Notwithstanding paragraph (6), a 
                child who has parents who--
                            ``(i) are divorced or legally separated 
                        under a decree of divorce or separate 
                        maintenance,
                            ``(ii) are separated under a written 
                        separation agreement, or
                            ``(iii) live apart at all times during the 
                        last 6 months of the calendar year,
                shall be treated as being the qualifying child of the 
                noncustodial parent for a calendar year if the 
                requirements of subparagraph (B) are met.
                    ``(B) Requirements.--For purposes of subparagraph 
                (A), the requirements of this subparagraph are met if--
                            ``(i) such child would, but for this 
                        paragraph, be the qualifying child of the 
                        custodial parent, and
                            ``(ii) a qualified pre-2004 instrument 
                        between the parents is applicable to such child 
                        for the taxable year beginning in such calendar 
                        year.
                In the case of an agreement executed before January 1, 
                1985, the requirements of this subparagraph are met 
                only if, in addition to meeting the requirements of 
                clauses (i) and (ii), the noncustodial parent provides 
                at least $600 for the support of such child during such 
                calendar year.
                    ``(C) Qualified pre-2004 instrument.--For purposes 
                of this paragraph, the term `qualified pre-2004 
                instrument' means any written declaration referred to 
                in subsection (e)(2) (as in effect on the day before 
                the date of the enactment of the Individual and Small 
                Business Tax Simplification Act of 2002)--
                            ``(i) which is executed before January 1, 
                        2004, and
                            ``(ii) which is not modified on or after 
                        such date in a modification which expressly 
                        provides that this subsection shall not apply 
                        to such declaration.
                    ``(D) Custodial parent and noncustodial parent.--
                For purposes of this subsection--
                            ``(i) Custodial parent.--The term 
                        `custodial parent' means the parent with whom a 
                        child shared the same principal place of abode 
                        for the greater portion of the calendar year.
                            ``(ii) Noncustodial parent.--The term 
                        `noncustodial parent' means the parent who is 
                        not the custodial parent.
                    ``(E) Special rules for support.--For purposes of 
                this subsection--
                            ``(i) amounts expended for the support of a 
                        child or children shall be treated as received 
                        from the noncustodial parent to the extent that 
                        such parent provided amounts for such support, 
                        and
                            ``(ii) in the case of the remarriage of a 
                        parent, support of a child received from the 
                        parent's spouse shall be treated as received 
                        from the parent.''.
            (2) Conforming amendments.--
                    (A) Section 152 is amended by striking subsection 
                (g) (relating to support test in case of child of 
                divorced parents, etc.), as redesignated by the 
                preceding sections this Act.
                    (B) Paragraph (6) of section 1(f), as amended by 
                the preceding sections of this Act, is amended by 
                striking ``151(e)(3)(A)'' and inserting 
                ``151(f)(3)(A)''.
                    (C) Paragraph (5) of section 21(e) is amended--
                            (i) by striking ``paragraph (2) or (4) of 
                        section 152(e)'' and inserting ``section 
                        151(c)(7)'', and
                            (ii) by striking ``section 152(e)(1)'' and 
                        inserting ``section 151(c)(7)''.
                    (D) Sections 21(e)(6) and 129(c) are each amended--
                            (i) by striking ``151(c)'' and inserting 
                        ``151(d)'', and
                            (ii) by striking ``151(c)(3)'' and 
                        inserting ``151(d)(3)''.
                    (E) Sections 25(c)(2)(B), 32(c)(3)(C)(ii), 
                152(d)(2), and 2032A(c)(7)(D) are each amended by 
                striking ``151(c)(4)'' and inserting ``151(d)(4)''.
                    (F) Sections 72(t)(7)(A)(iii) and 132(h)(2)(B) are 
                each amended by striking ``151(c)(3)'' and inserting 
                ``151(d)(3)''.
                    (G) Subparagraph (C) of section 642(b)(2), as 
                amended by the preceding sections of this Act, is 
                amended by striking ``151(e)'' and inserting 
                ``151(f)''.
                    (H) Paragraph (1) of section 3402(f) is amended by 
                striking ``151(e)(2)'' and inserting ``151(f)(2)''.
                    (I) Subparagraph (B) of section 3402(r)(2), as so 
                amended, is amended by striking ``151(e)'' and 
                inserting ``151(f)''.
                    (J) Clause (ii) of section 6012(a)(1)(D), as so 
                amended, is amended--
                            (i) by striking ``151(e)'' and inserting 
                        ``151(f)'', and
                            (ii) by striking ``151(e)(2)'' and 
                        inserting ``151(f)(2)''.
                    (K) The last sentence of section 6013(b)(3)(A), as 
                so amended is amended by striking ``151(e)'' and 
                inserting ``151(f)''.
    (b) Application of Uniform Definition to Dependent Care Credit.--
Section 21(b)(1)(A) is amended to read as follows:
                    ``(A) a qualifying child of the taxpayer (as 
                defined in section 151(c)) who has not attained age 
                13,''.
    (c) Application of Uniform Definition to Child Tax Credit.--Section 
24(c)(1) is amended to read as follows:
            ``(1) In general.--The term `qualifying child' means a 
        qualifying child of the taxpayer (as defined in section 151(c)) 
        who has not attained age 17 as of the close of the calendar 
year in which the taxable year of the taxpayer begins.''.
    (d) Application of Uniform Definition to Earned Income Credit.--
            (1) In general.--Paragraph (3) of section 32(c) is amended 
        to read as follows:
            ``(3) Qualifying child.--
                    ``(A) In general.--The term `qualifying child' 
                means a qualifying child of the taxpayer (as defined in 
                section 151(c)).
                    ``(B) Place of abode.--For purposes of subparagraph 
                (A), the requirements of section 151(c)(2)(B) shall be 
                met only if the principal place of abode is in the 
                United States.
                    ``(C) Identification requirements.--
                            ``(i) In general--A qualifying child shall 
                        not be taken into account under subsection (b) 
                        unless the taxpayer includes the name, age, and 
                        TIN of the qualifying child on the return of 
                        tax for the taxable year.
                            ``(ii) Other methods.--The Secretary may 
                        prescribe other methods for providing the 
                        information described in clause (i).''.
            (2) Conforming amendments.--
                    (A) Section 32(c)(1) is amended by striking 
                subparagraph (C) and by redesignating subparagraphs 
                (D), (E), (F), and (G) as subparagraphs (C), (D), (E), 
                and (F), respectively.
                    (B) Section 32(c)(4) is amended by striking 
                ``(3)(E)'' and inserting ``(3)(B)''.
                    (C) Section 32(m) is amended by striking 
                ``subsections (c)(1)(F)'' and inserting ``subsections 
                (c)(1)(E)''.

SEC. 122. TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING SUPPORT AND 
              COST OF MAINTAINING HOUSEHOLD.

    (a) Dependency Exemption.--Section 152 is amended by adding at the 
end the following new subsection:
    ``(f) Special Rule Relating to Treatment of Government Benefits in 
Determining Support.--For purposes of this part, any means-tested 
benefits obtained under programs described in section 6103(l)(7) or 
substantially similar government programs shall not be taken into 
account for purposes of determining--
            ``(1) whether over half of the support of an individual for 
        a calendar year is received from a taxpayer, and
            ``(2) whether over half of the cost of maintaining a 
        household is furnished by a taxpayer.''.
    (b) Dependent Care Credit.--Section 21(e)(1) is amended by adding 
at the end the following: ``Any means-tested benefits obtained under 
programs described in section 6103(l)(7) or substantially similar 
government programs shall not be taken into account for purposes of 
determining whether over half of the cost of maintaining a household is 
furnished by the individual.''.
    (c) Marital Status.--Section 7703 (relating to determination of 
marital status) is amended by adding at the end the following new 
subsection:
    ``(c) Special Rule Relating to Treatment of Government Benefits in 
Determining Cost of Maintaining Household.--For purposes of subsection 
(b)(2), any means-tested benefits obtained under programs described in 
section 6103(l)(7) or substantially similar government programs shall 
not be taken into account for purposes of determining whether over half 
of the cost of maintaining a household is furnished by the 
individual.''.

SEC. 123. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply to taxable years 
beginning after December 31, 2002.

                  Subtitle C--Education Tax Incentives

SEC. 131. HOPE AND LIFETIME LEARNING CREDITS COMBINED.

    (a) In General.--So much of section 25A (relating to Hope and 
Lifetime Learning Credits) as precedes subsection (d) is amended to 
read as follows:

``SEC. 25A. EDUCATION CREDIT.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year the amount equal to 50 percent of so much of the 
qualified expenses paid by the taxpayer during the taxable year (for 
education furnished to an individual during any academic period 
beginning in such taxable year) as does not exceed $3,000 for such 
taxable year with respect to such individual.
    ``(b) Qualified Expenses.--For purposes of subsection (a), the term 
`qualified expenses' means the sum of--
            ``(1) qualified higher education expenses, and
            ``(2) the expenses described in subsection (d)(1) with 
        respect to any course of instruction at an eligible educational 
        institution to acquire or improve job skills of the 
        individual.''.
    (b) Conforming Amendments to Credit.--
            (1) Section 25A is amended--
                    (A) by striking subsection (h), and
                    (B) by redesignating subsections (e), (f), (g), and 
                (i) as subsections (c), (d), (e), and (f), 
                respectively.
            (2) Subsection (e)(2) of section 25A, as so redesignated, 
        is amended by striking ``(before the application of subsections 
        (b), (c), and (d))''.
    (c) Other Conforming and Clerical Amendments.--
            (1) The following provisions are each amended by striking 
        ``section 25A(g)(2)'' and inserting ``section 25A(e)(2)'':
                    (A) Section 72(t)(7)(B).
                    (B) Section 221(d)(2)(B).
                    (C) Section 222(d)(1) (as amended by section 132 of 
                this Act).
                    (D) Section 529(c)(3)(B)(v)(I).
                    (E) Section 530(b)(2)(A).
                    (F) Section 530(d)(2)(C)(i)(I).
                    (G) Section 530(d)(4)(B)(iii).
            (2) Section 221(d) is amended--
                    (A) in paragraph (2) by striking ``section 
                25A(f)(2)'' and inserting ``section 25A(d)(2)'', and
                    (B) by amending paragraph (3) to read as follows:
            ``(3) Eligible student.--The term `eligible student' means, 
        with respect to any academic period, a student who--
                    ``(A) meets the requirements of section 484(a)(1) 
                of the Higher Education Act of 1965 (20 U.S.C. 
                1091(a)(1)), as in effect on the date of the enactment 
                of this section, and
                    ``(B) is carrying at least \1/2\ the normal full-
                time work load for the course of study the student is 
                pursuing.''.
            (3) Section 529(e)(3)(B)(i) is amended by striking 
        ``section 25A(b)(3)'' and inserting ``section 221(d)(3)''.
            (4) The heading of section 529(c)(3)(B)(v) is amended to 
        read as follows: ``Coordination with education credit.--''.
            (5) The heading of section 530(d)(2)(C) is amended to read 
        as follows: ``Coordination with education credit and qualified 
        tuition programs.--''.
            (6) Section 6050S(e) is amended by striking ``subsection 
        (g)(2)'' and inserting ``subsection (e)(2)''.
            (7) Section 6213(g)(2)(J) is amended by striking ``section 
        25A(g)(1)'' and inserting ``section 25A(e)(1)''.
            (8) The item relating to section 25A in the table of 
        sections for subpart A of part IV of subchapter A of chapter 1 
        is amended to read as follows:

                              ``Sec. 25A. Education Credit.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 132. UNIFORM DEFINITION OF QUALIFYING HIGHER EDUCATION EXPENSES.

    (a) In General.--Paragraph (3) of section 529(e) (relating to other 
definitions and special rules) is amended to read as follows:
            ``(3) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means--
                            ``(i) tuition, fees, books, supplies, and 
                        equipment required for the enrollment or 
                        attendance of a designated beneficiary at an 
                        eligible educational institution; and
                            ``(ii) expenses for special needs services 
                        in the case of a special needs beneficiary 
                        which are incurred in connection with such 
                        enrollment or attendance.
                    ``(B) Room and board included for students who are 
                at least half-time.--
                            ``(i) In general.--In the case of an 
                        individual who is an eligible student for any 
                        academic period, such term shall also include 
                        reasonable costs for such period (as determined 
                        under the qualified tuition program) incurred 
                        by the designated beneficiary for room and 
                        board while attending such institution. For 
                        purposes of subsection (b)(7), a designated 
                        beneficiary shall be treated as meeting the 
                        requirements of this clause.
                            ``(ii) Limitation.--The amount treated as 
                        qualified higher education expenses by reason 
                        of clause (i) shall not exceed--
                                    ``(I) the allowance (applicable to 
                                the student) for room and board 
                                included in the cost of attendance (as 
                                defined in section 472 of the Higher 
                                Education Act of 1965 (20 U.S.C. 
                                1087ll), as in effect on the date of 
                                the enactment of the Economic Growth 
                                and Tax Relief Reconciliation Act of 
                                2001) as determined by the eligible 
                                educational institution for such 
                                period, or
                                    ``(II) if greater, the actual 
                                invoice amount the student residing in 
                                housing owned or operated by the 
                                eligible educational institution is 
                                charged by such institution for room 
                                and board costs for such period.
                            ``(iii) Eligible student.--For purposes of 
                        this subparagraph, the term `eligible student' 
                        means, with respect to any academic period, a 
                        student who--
                                    ``(I) meets the requirements of 
                                section 484(a)(1) of the Higher 
                                Education Act of 1965 (20 U.S.C. 
                                1091(a)(1)), as in effect on the date 
                                of the enactment of this section, and
                                    ``(II) is carrying at least \1/2\ 
                                the normal full-time work load for 
the course of study the student is pursuing.
                    ``(C) Exceptions.--
                            ``(i) Exception for education involving 
                        sports, etc.--Such term does not include 
                        expenses with respect to any course or other 
                        education involving sports, games, or hobbies, 
                        unless such course or other education is part 
                        of the individual's degree program.
                            ``(ii) Exception for nonacademic fees.--
                        Such term does not include student activity 
                        fees, athletic fees, insurance expenses, or 
                        other expenses unrelated to an individual's 
                        academic course of instruction.''.
    (b) Conforming Amendments.--
            (1) Section 25A and 6050S are each amended by striking 
        ``qualified tuition and related expenses'' each place it 
        appears and inserting ``qualified higher education expenses''.
            (2) Section 25A(f)(1) is amended to read as follows:
            ``(1) Qualified higher education expenses.--The term 
        `qualified higher education expenses' means the qualified 
        higher education expenses (as defined by section 529(e)(3) 
        without regard to subparagraph (B) thereof) required for the 
        enrollment or attendance of--
                    ``(A) the taxpayer,
                    ``(B) the taxpayer's spouse, or
                    ``(C) any dependent of the taxpayer with respect to 
                whom the taxpayer is allowed a deduction under section 
                151,
        at an eligible educational institution for courses of 
        instruction of such individual at such institution.''.
            (3) Section 135(c)(2) is amended--
                    (A) by striking ``tuition and fees'' and inserting 
                ``the qualified higher education expenses (as defined 
                by section 529(e)(3) without regard to subparagraph (B) 
                thereof)'', and
                    (B) by striking subparagraph (B) and redesignating 
                subparagraph (C) as subparagraph (B).
            (4) Section 221(d)(2) is amended by striking ``the cost of 
        attendance (as defined in section 472 of the Higher Education 
        Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before 
        the date of the enactment of this Act)'' and inserting ``the 
        qualified higher education expenses (as defined by section 
        529(e)(3) without regard to subparagraph (B) thereof) incurred 
        for attendance''.
            (5)(A) Section 222 is amended by striking ``qualified 
        tuition and related expenses'' each place it appears and 
        inserting ``qualified higher education expenses''.
            (B) Section 222(d)(1) is amended to read as follows:
            ``(1) Qualified higher education expenses.--The term 
        `qualified higher education expenses' has the meaning given 
        such term by section 529(e)(3) (without regard to subparagraph 
        (B) thereof). Such expenses shall be reduced in the same manner 
        as under section 25A(g)(2).''.
            (C) Section 222(d) is amended by redesignating paragraph 
        (6) as paragraph (7) and by inserting after paragraph (5) the 
        following new paragraph:
            ``(6) Room and board included for students who are full-
        time.--No amount shall be taken into account under this section 
        for an expense described in section 529(e)(3)(B) (relating to 
        room and board included for students who are at least half-
        time) unless such individual is an eligible student (as defined 
        in section 25A(b)(3), determined by substituting `the normal 
        full-time work load' in lieu of `\1/2\ the normal full-time 
        work load' in subparagraph (B) thereof.''.
            (D) The heading for section 222 is amended by striking 
        ``TUITION AND RELATED'' and inserting ``HIGHER EDUCATION''.
            (E) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by amending the item relating to section 
        222 to read as follows:

                              ``Sec. 222. Qualified higher education 
                                        expenses.''.
            (6)(A) Section 6724(d) is amended--
                    (i) in paragraph (1)(B)(x) by striking ``qualified 
                tuition and related expenses'' and inserting 
                ``qualified higher education expenses'', and
                    (ii) in paragraph (2)(Z) by striking ``qualified 
                tuition and related expenses'' and inserting 
                ``qualified higher education expenses''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid in taxable years beginning after December 31, 
2002, for education furnished in periods beginning after such date.

              TITLE II--SMALL BUSINESS TAX SIMPLIFICATION

SEC. 201. UNIFIED PASS-THRU ENTITY REGIME.

    (a) Termination of S Corporation Status.--
            (1) No new s corporation elections.--Subsection (a) of 
        section 1362 is amended by adding at the end the following new 
        paragraph:
            ``(3) Termination of authority to make election.--No 
        election may be made under paragraph (1) for any taxable year 
        beginning after December 31, 2002.''.
            (2) Termination of status.--Subsection (d) of section 1362 
        (relating to termination) is amended by adding at the end the 
        following new paragraph:
            ``(4) Treatment as partnership after 2012.--An election 
        under subsection (a)--
                    ``(A) shall not be effective for any taxable year 
                beginning after December 31, 2012, and
                    ``(B) shall be treated as an election under section 
                7701(a)(2)(B)(iii) for taxable years beginning after 
                such date.''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 2002.
    (b) Election by Certain Corporations To Be Taxed as Partnership.--
            (1) In general.--Paragraph (2) of section 7701 (defining 
        partnership and partner) is amended to read as follows:
            ``(2) Partnership and partner.--
                    ``(A) In general.--The term `partnership` includes 
                a syndicate, group, pool, joint venture, or other 
                unincorporated organization, through or by means of 
                which any business, financial operation, or venture is 
                carried on, and which is not, within the meaning of 
                this title, a trust or estate or a corporation; and the 
                term `partner' includes a member in such a syndicate, 
                group, pool, joint venture, or organization.
                    ``(B) Election by corporation to be taxed as 
                partnership.--
                            ``(i) In general.--An eligible corporation 
                        may elect to be treated as a partnership for 
                        purposes of this title.
                            ``(ii) Eligible corporation.--For purposes 
                        of clause (i), the term `eligible corporation' 
                        means an entity--
                                    ``(I) which, without regard to this 
                                subparagraph, is a domestic corporation 
                                no stock of which is readily tradable 
                                on an established securities market or 
                                otherwise, and
                                    ``(II) which is not an ineligible 
                                corporation (as defined by section 
                                1361(b)(2)).
                            ``(iii) Election and termination.--For 
                        purposes of this subparagraph, rules similar to 
                        the rules of section 1362 (other than 
                        subsections (a)(3), (d)(3) and (4), and (e) 
                        thereof) shall apply.
                            ``(iv) Effect of election.--No gain or loss 
                        shall be recognized by the shareholders or the 
                        corporation by reason of an election under this 
                        subparagraph, and rules similar to the rules of 
                        sections 1366(f)(2) and 1374 shall apply.
                            ``(v) Distributions, etc.--Each partner 
                        shall include in gross income as a dividend, 
                        any amount that would have been so includible 
                        had the entity been an S corporation during the 
                        period the entity was treated as a partnership. 
                        Notwithstanding the preceding sentence, the 
                        provisions of subchapter K of chapter 1 shall 
                        apply to determine the basis of any property 
                        distributed and the basis of any interest in 
                        the partnership.''
            (2) Modification to treatment of section 1374 tax for 
        earnings and profits purposes.--Paragraph (2) of section 
        1366(f) is amended to read as follows:
            ``(2) Treatment of tax imposed on build-in gains.--
                    ``(A) In general.--The amount of the items of the 
                net recognized built-in-gain taken into account under 
                section 1374(b)(1) (reduced by any deduction allowed 
                under section 1374(b)(2)) shall not be taken into 
                account under this section.
                    ``(B) Earnings and profits.--The accumulated 
                earnings and profits of the corporation shall be 
                increased at the beginning of the taxable year by the 
                amount not taken into account under this section by 
                reason of subparagraph (A) (determined without regard 
                to section 1374(b)(2)) reduced by the tax imposed by 
                section 1374 (net of credits allowed).''
            (3) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 2002.
    (c) Step Transaction Doctrine Not To Apply to Partnership 
Incorporation Followed by Corporate Reorganization.--
            (1) In general.--Section 351 is amended by redesignating 
        subsection (h) as subsection (i) and by inserting after 
        subsection (g) the following new subsection:
    ``(h) Special Rule For Partnerships Which Incorporate and 
Subsequently Reorganize.--The step transaction doctrine and any similar 
doctrine shall not apply for purposes of determining whether the 
control requirement of subsection (a) is met in any case in which--
            ``(1) a partnership engaged in an active trade or business 
        transfers substantially all of the property used in carrying on 
        such trade or business to a corporation which is not publicly 
        traded, and
            ``(2) such corporation subsequently enters into a 
        reorganization under this chapter.''.
            (2) Effective date.--The amendment made by this subsection 
        shall apply to transactions after December 31, 2002.

SEC. 202. INCREASE IN EXPENSING UNDER SECTION 179.

    (a) Increase in Dollar Limitations.--
            (1) In general.--Paragraph (1) of section 179(b) (relating 
        to dollar limitation) is amended to read as follows:
            ``(1) Dollar limitation.--The aggregate cost which may be 
        taken into account under subsection (a) for any taxable year 
        shall not exceed $25,000 ($40,000 in the case of taxable years 
        beginning after December 31, 2012).''
            (2) Increase in phaseout threshold.--Paragraph (2) of 
        section 179(b) is amended by inserting before the period 
        ``($325,000 in the case of taxable years beginning after 
        December 31, 2012).''.
    (b) Inflation Adjustments.--
            (1) In general.--Subsection (b) of section 179 is amended 
        by redesignating paragraphs (3) and (4) as paragraphs (4) and 
        (5), respectively, and by inserting after paragraph (2) the 
        following new paragraph:
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2004, the dollar 
        amounts contained in paragraphs (1) and (2) which would (but 
        for this paragraph) apply to such taxable year shall be 
        increased by an amount equal to the product of--
                    ``(A) such dollar amount, and
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting in 
                subparagraph (B) thereof--
                            ``(i) `calendar year 2003' for `calendar 
                        year 1992' with respect to the $25,000 and 
                        $200,000 amounts, and
                            ``(ii) `calendar year 2011' for `calendar 
                        year 1992' with respect to the $40,000 and 
                        $325,000 amounts.
        If any amount after adjustment under the preceding sentence is 
        not a multiple of $1,000, such amount shall be rounded to the 
        next lowest multiple of $1,000.''
            (2) Conforming amendment.--Subparagraph (B) of section 
        179(b)(5), as redesignated by paragraph (1), is amended by 
        striking ``paragraph (3)'' and inserting ``paragraph (4)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 203. ROLLOVER OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.

    (a) In General.--Section 1031 (relating to exchange of property 
held for productive use or investment) is amended to read as follows:

``SEC. 1031. ROLLOVER OF PROPERTY HELD FOR PRODUCTIVE USE OR 
              INVESTMENT.

    ``(a) Nonrecognition of Gain.--In the case of the sale of section 
1031 property with respect to which the taxpayer elects the application 
of this section, gain from such sale shall be recognized only to the 
extent that the amount realized on such sale exceeds--
            ``(1) the cost of replacement section 1031 property 
        purchased during the rollover period, reduced by
            ``(2) any portion of such cost previously taken into 
        account under this section.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Section 1031 property.--
                    ``(A) In general.--The term `section 1031 property' 
                means any property held for productive use in a trade 
                or business or for investment.
                    ``(B) Exceptions.--The term `section 1031 property' 
                shall not include the following:
                            ``(i) Stock in trade or other property held 
                        primarily for sale.
                            ``(ii) Stocks, bonds, or notes.
                            ``(iii) Other securities or evidences of 
                        indebtedness or interest.
                            ``(iv) Interests in a partnership.
                            ``(v) Certificates of trust or beneficial 
                        interests.
                            ``(vi) Choses in action.
            ``(2) Replacement section 1031 property.--The term 
        `replacement section 1031 property' means, with respect to the 
        sale of any section 1031 property, other section 1031 property 
        which is of a like kind to the section 1031 property sold.
            ``(3) Rollover period.--The term `rollover period' means, 
        with respect to the sale of any property, the period which 
        begins 180 days before the date of such sale and ends on the 
        earlier of--
                    ``(A) the date which is 180 days after the date of 
                such sale, or
                    ``(B) the due date (determined with regard to 
                extension) for the taxpayer's return of the tax imposed 
                by this chapter for the taxable year which includes the 
                date of such sale.
    ``(c) Basis Adjustments.--If gain from any sale is not recognized 
by reason of subsection (a), such gain shall be applied to reduce the 
basis for determining the gain or loss of replacement section 1031 
property purchased during the rollover period. If more than one 
replacement section 1031 property is purchased during the rollover 
period, such reduction shall be allocated among such properties in such 
amounts as the taxpayer elects.
    ``(d) Special Rules for Transactions Between Related Persons.--
            ``(1) Sale by taxpayer.--If--
                    ``(A) the taxpayer sells property to a related 
                person,
                    ``(B) there is nonrecognition of gain under this 
                section with respect to such sale (determined without 
                regard to this subsection), and
                    ``(C) before the date 2 years after the date of 
                such sale the related person disposes of such property,
        there shall be no nonrecognition of gain under this section to 
        the taxpayer with respect to such sale, and any gain recognized 
        by the taxpayer by reason of this subsection shall be taken 
        into account as of the date on which the disposition referred 
        to in subparagraph (C) occurs.
            ``(2) Purchase by taxpayer.--If the taxpayer--
                    ``(A) purchases property from a related person 
                which is taken into account under subsection (a)(1) 
                (determined without regard to this subsection), and
                    ``(B) disposes of such property before the date 2 
                years after the date of such purchase,
        such property shall not be taken into account under subsection 
        (a)(1), and any gain recognized by reason of this subsection 
        shall be taken into account on the date on which the 
        disposition referred to in subparagraph (B) occurs.
            ``(3) Certain dispositions not taken into account.-- For 
        purposes of paragraphs (1)(C) and (2)(B), there shall not be 
        taken into account any disposition--
                    ``(A) after the earlier of the death of the 
                taxpayer or the death of the related person,
                    ``(B) in a compulsory or involuntary conversion 
                (within the meaning of section 1033) if the transaction 
                occurred before the threat or imminence of such 
                conversion, or
                    ``(C) with respect to which it is established to 
                the satisfaction of the Secretary that neither the 
transaction nor such disposition had as one of its principal purposes 
the avoidance of Federal income tax.
            ``(4) Related person.-- For purposes of this subsection, 
        the term `related person' means any person bearing a 
        relationship to the taxpayer described in section 267(b) or 
        707(b)(1).
            ``(5) Special rule where substantial diminution of risk.--
                    ``(A) In general.--If subparagraph (B) applies to 
                any property for any period, the running of the period 
                set forth in paragraph (1)(C) with respect to such 
                property shall be suspended during such period.
                    ``(B) Property to which paragraph applies.--This 
                subparagraph shall apply to any property for any period 
                during which the holder's risk of loss with respect to 
                the property is substantially diminished by--
                            ``(i) the holding of a put with respect to 
                        such property,
                            ``(ii) the holding by another person of a 
                        right to acquire such property, or
                            ``(iii) a short sale or any other 
                        transaction.
            ``(6) Treatment of certain transactions.--This section 
        shall not apply to any transaction which is part of a series of 
        transactions structured to avoid the purposes of this 
        subsection.
    ``(e) Special Rules.--For purposes of this section--
            ``(1) Exchanges.--A contemporaneous exchange by the 
        taxpayer of section 1031 property for replacement section 1031 
        property shall be treated as a sale of such section 1031 
        property and a purchase of such replacement section 1031 
        property without regard to whether the taxpayer makes the 
        election described in subsection (a). In the case of such an 
        exchange, no loss shall be recognized.
            ``(2) Certain partnerships.--An interest in a partnership 
        which has in effect a valid election under section 761(a) to be 
        excluded from the application of all of subchapter K shall be 
        treated as an interest in each of the assets of such 
        partnership and not as an interest in a partnership.
            ``(3) Livestock of different sexes.--Livestock of different 
        sexes are not property of a like kind.
            ``(4) Foreign real property.--Real property located in the 
        United States and real property located outside the United 
        States are not property of a like kind.
            ``(5) Foreign personal property.--
                    ``(A) In general.--Personal property used 
                predominantly within the United States and personal 
                property used predominantly outside the United States 
                are not property of a like kind.
                    ``(B) Predominant use.--Except as provided in 
                subparagraphs (C) and (D), the predominant use of any 
                property shall be determined based on--
                            ``(i) in the case of the sale of any 
                        property by the taxpayer, the 2-year period 
                        ending on the date of such sale, and
                            ``(ii) in the case of the purchase of any 
                        property by the taxpayer, the 2-year period 
                        beginning on the date of such purchase.
                    ``(C) Property held for less than 2 years.--Except 
                in the case of a sale or purchase which is part of a 
                transaction (or series of transactions) structured to 
                avoid the purposes of this subsection, only the periods 
                the property was held by the taxpayer (or any related 
                person) shall be taken into account under subparagraph 
                (B).
                    ``(D) Special rule for certain property.--Property 
                described in any subparagraph of section 168(g)(4) 
                shall be treated as used predominantly in the United 
                States.''.
    (b) Preservation of Certain Gain, Loss, and Basis Rules for 
Exchanges.--
            (1) Section 1035 (relating to certain exchanges of 
        insurance policies) is amended--
                    (A) by striking subsection (d),
                    (B) by redesignating subsections (b) and (c) as 
                subsections (e) and (f), respectively, and
                    (C) by inserting after subsection (a) the following 
                new subsections:
    ``(b) Gain From Exchanges Not Solely in Kind.--If an exchange would 
be within the provisions of subsection (a), of section 1036(a), or of 
section 1037(a), if it were not for the fact that the property received 
in exchange consists not only of property permitted by such provisions 
to be received without the recognition of gain, but also of other 
property or money, then the gain, if any, to the recipient shall be 
recognized, but in an amount not in excess of the sum of such money and 
the fair market value of such other property.
    ``(c) Loss From Exchanges Not Solely in Kind.--If an exchange would 
be within the provisions of subsection (a), of section 1036(a), or of 
section 1037(a), if it were not for the fact that the property received 
in exchange consists not only of property permitted by such provisions 
to be received without the recognition of gain or loss, but also of 
other property or money, then no loss from the exchange shall be 
recognized.
    ``(d) Basis.--If property was acquired on an exchange described in 
subsection (a), section 1036(a), or section 1037(a), then the basis 
shall be the same as that of the property exchanged, decreased in the 
amount of any money received by the taxpayer and increased in the 
amount of gain or decreased in the amount of loss to the taxpayer that 
was recognized on such exchange. If the property so acquired consisted 
in part of the type of property permitted by subsection (a), section 
1036(a), or section 1037(a), to be received without the recognition of 
gain or loss, and in part of other property, the basis provided in this 
subsection shall be allocated between the properties (other than money) 
received, and for the purpose of the allocation there shall be assigned 
to such other property an amount equivalent to its fair market value at 
the date of the exchange. For purposes of subsection (a) and section 
1036(a), where as part of the consideration to the taxpayer another 
party to the exchange assumed (as determined under section 357(d)) a 
liability of the taxpayer, such assumption shall be considered as money 
received by the taxpayer on the exchange.''.
            (2) Section 83(g), section 424(b), section 424(c)(1)(B), 
        section 454(c)(2), paragraphs (1) and (2) of section 1036(c), 
        and paragraphs (1) and (2) of section 1037(c) are each amended 
        by striking ``section 1031'' and inserting ``section 1035''.
            (3) Paragraphs (1) and (2) of section 1037(b) are each 
        amended by striking ``section 1031(b)'' and inserting ``section 
        1035(b)''.
    (c) Conforming Amendments.--
            (1) Clause (i) of section 197(f)(2)(B) is amended by 
        inserting ``(including any purchase taken into account under 
        subsection (a)(1) thereof)'' after ``1031''.
            (2) Paragraph (6) of section 453(f) is amended to read as 
        follows:
            ``(6) Like-kind exchanges.--In the case of any sale or 
        exchange to which section 1031 applies, the total contract 
        price, the gross profit from such sale, and the amount of any 
        payment (other than for purposes of subsection (b)(1)) shall be 
        reduced to take into account any amount not recognized by 
        reason of section 1031. Similar rules shall apply in the case 
        of an exchange which is described in section 356(a) and is not 
        treated as a dividend.''.
            (3) Basis limitation for player contracts transferred in 
        connection with the sale of a franchise.--Paragraph (1) of 
        section 1056(b) is amended to read as follows:
            ``(1) to any sale or exchange to which section 1031 
        applies, and''.
            (4) Valuation of certain farm, etc., real property.--
                    (A) Clause (i) of section 2032A(e)(14)(C) is 
                amended to read as follows:
                            ``(i) Qualified replacement property.--The 
                        term `qualified replacement property' means any 
                        real property the acquisition of which results 
                        in the nonrecognition of gain under section 
                        1031 or 1033.''.
                    (B) Subclause (I) of section 2032A(e)(14)(C)(ii) is 
                amended by inserting ``sale or'' before ``exchange''.
                    (C) Subsection (i) of section 2032A is amended to 
                read as follows:
    ``(i) Replacement of Qualified Real Property.--
            ``(1) Treatment of property sold or exchanged.--
                    ``(A) Sales and exchanges with no recognition of 
                gain.--If an interest in qualified real property is 
                sold or exchanged and no gain is recognized under 
                section 1031 by reason of the acquisition of qualified 
                replacement property, no tax shall be imposed by 
                subsection (c) by reason of such sale or exchange.
                    ``(B) Sales and exchanges with partial recognition 
                of gain.--Except as provided in paragraph (1), if an 
                interest in qualified real property is sold or 
                exchanged and a portion of the gain is not recognized 
                under section 1031 by reason of the acquisition of 
                qualified replacement property, the amount of the tax 
                imposed by subsection (c) by reason such sale or 
                exchange shall be the amount of tax which (but for this 
                paragraph) would have been imposed on such sale or 
                exchange under subsection (c)(1), reduced by an amount 
                which--
                            ``(i) bears the same ratio to such tax, as
                            ``(ii) the fair market value of the 
                        qualified replacement property (determined as 
                        of the time or acquisition) bears to the fair 
                        market value of the qualified real property 
                        sold or exchanged (determined as of the time of 
                        disposition).
            ``(2) Treatment of qualified replacement property.--For 
        purposes of subsection (c)--
                    ``(A) any interest in qualified replacement 
                property shall be treated in the same manner as if it 
                were a portion of the interest in the qualified real 
                property which was sold or exchanged,
                    ``(B) any tax imposed by subsection (c) by reason 
                of the sale or exchange shall be treated as a tax 
                imposed on a partial disposition, and
                    ``(C) paragraph (6) of subsection (c) shall be 
                applied by treating material participation with respect 
                to the sold or exchanged property as material 
                participation with respect to the qualified replacement 
                property.
            ``(3) Qualified replacement property.--For purposes of this 
        subsection, the term `qualified replacement property' means 
        real property which is to be used for the qualified use set 
        forth in subparagraph (A) or (B) of subsection (b)(2) under 
        which the qualified real property sold in the qualified sale 
        originally qualified under subsection (a).''.
    (d) Clerical Amendment.--The table of sections for part III of 
subchapter O of chapter 1 is amended by striking the item relating to 
section 1031 and inserting the following new item:

                              ``Sec. 1031. Rollover of property held 
                                        for productive use or 
                                        investment.''.

    (e) Effective Date.--The amendments made by this section shall 
apply to transfers made after December 31, 2002, in tax years ending 
after such date.

SEC. 204. REPEAL OF COLLAPSIBLE CORPORATIONS.

    (a) In General.--Subpart C of part II of subchapter C of chapter 1 
(relating to collapsible corporations) is hereby repealed.
    (b) Clerical Amendment.--The table of subparts for part II of 
subchapter C of chapter 1 is amended by striking the item relating to 
subpart C.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales, exchanges, and distributions made after the date of the 
enactment of this Act.

SEC. 205. REFERENCES TO GENERAL PARTNERS.

    (a) Exclusion of Certain Active Businesses From At Risk Rules.--
Subclause (I) of section 465(c)(7)(D)(ii) (defining qualified corporate 
partner) is amended to read as follows:
                                    ``(I) such corporation is not 
                                prohibited or limited under State law 
                                from participation in the management or 
                                business of the partnership.''.
    (b) Payments to Retiring Partners.--Subparagraph (B) of section 
736(b)(3) (relating to limitation on application of paragraph (2)) is 
amended to read as follows:
                    ``(B) any portion of the retiring or deceased 
                partner's distributive share of partnership income was 
                subject to tax under section 1401.
    (c) Foreign Currency Transactions.--Subclause (I) of section 
988(c)(1)(E)(v) is amended to read as follows:
                                    ``(I) Certain general partners.--
                                The interest of a partner in the 
                                partnership shall not be treated as 
                                failing to meet the 20-percent 
                                ownership requirements of clause 
                                (iii)(I) for any taxable year of the 
                                partnership if for the taxable year of 
                                the partner in which such partnership 
                                taxable year ends--
                                            ``(aa) the partner is not 
                                        limited as to participation in 
                                        the management or activity of 
                                        the qualified fund, and
                                            `(bb) such partner (and 
                                        each corporation filing a 
                                        consolidated return with such 
                                        partner) had no ordinary income 
                                        or loss from a section 988 
                                        transaction which is foreign 
                                        currency gain or loss (as the 
                                        case may be).''.
    (d) Special Valuation Rules For Generation-Skipping Tax.--Clause 
(ii) of section 2701(b)(2)(B) (relating to partnerships) is amended to 
read as follows:
                            ``(ii) in the case of a limited 
                        partnership, the holding of any interest as a 
                        partner who is not limited as to participation 
                        in management or activity of the 
                        partnership.''.
    (e) Tax Matters Partner.--Paragraph (7) of section 6231(a) 
(defining tax matters partner) is amended to read as follows:
            ``(7) Tax matters partner.--
                    ``(A) In general.--The tax matters partner of any 
                partnership is--
                            ``(i) the partner designated as the tax 
                        matters partner as provided in regulations, or
                            ``(ii) if there is no partner who has been 
                        so designated, the partner having the largest 
                        profits interest in the partnership at the 
                        close of the taxable year involved (or, where 
                        there is more than 1 such partner, the 1 of 
                        such partners whose name would appear first in 
                        an alphabetical listing).
                    ``(B) Selection by secretary.--If there is no 
                partner designated under subparagraph (A)(i) and the 
                Secretary determines that it is impracticable to apply 
                subparagraph (A)(ii), the partner selected by the 
                Secretary shall be treated as the tax matters partner. 
                The Secretary shall, within 30 days of selecting a tax 
                matters partner under the preceding sentence, notify 
                all partners required to receive notice under section 
                6223(a) of the name and address of the person selected.
                    ``(C) Restriction on designation of partner.--A 
                partner may not be designated as a tax matters partner 
                under subparagraph (A)(i) unless such partner is not 
                limited as to participation in management or activity 
                of the partnership.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 206. REFERENCES TO LIMITED PARTNERS.

    (a) Limited Entrepreneur.--
            (1) In general.--Subparagraph (A) of section 464(e)(2) 
        (defining limited entrepreneur) is amended by striking ``than 
        as a limited partner''.
            (2) Conforming amendments.--
                    (A) Section 464(c) is amended--
                            (i) by striking ``limited partners or'' in 
                        paragraph (1)(B),
                            (ii) by striking ``a limited partner or'' 
                        in paragraph (2).
                    (B) Section 1256 is amended--
                            (i) by striking ``limited partners or'' 
                        each place it appears in subsections (e)(3)(B) 
                        and (f)(4),
                            (ii) by striking ``a limited partner or'' 
                        in subsection (e)(3)(C), and
                            (iii) by striking ``limited partner or'' 
                        both places it appears in subsection 
                        (e)(4)(A)(i).
                    (C) Section 1258(d)(5)(C) is amended--
                            (i) by striking ``limited partner or'' in 
                        the matter preceding subclause (i),
                            (ii) by striking ``limited partner's (or 
                        limited entrepreneur's) in subclause (i) and 
                        inserting ``limited entrepreneur's'', and
                            (iii) by striking ``partners and limited'' 
                        in the heading.
    (b) Passive Loss Rules.--
            (1) Subsection (h) of section 469 is amended by striking 
        paragraph (2) and by redesignating paragraphs (3), (4), and (5) 
        as paragraphs (2), (3), and (4), respectively.
            (2) Subparagraph (A) of section 469(c)(7) is amended by 
        striking the last sentence.
            (3) Paragraph (6) of section 469(i) is amended by striking 
        subparagraph (C) and by redesignating subparagraph (D) as 
        subparagraph (C).
            (4) Subsection (f) of section 772 (relating to special 
        rules for applying passive loss limitations) is amended to read 
        as follows:
    ``(f) Special Rules for Applying Passive Loss Limitations.--
            ``(1) In general.--If any person holds an interest in an 
        electing large partnership other than as a partner described in 
        paragraph (3)--
                    ``(A) paragraph (2) of subsection (c) shall not 
                apply to such partner, and
                    ``(B) such partner's distributive share of the 
                partnership items allocable to passive loss limitation 
                activities shall be taken into account separately to 
                the extent necessary to comply with the provisions of 
                section 469.
            ``(2) Exception.--Paragraph (1) shall not apply to any 
        items allocable to an interest held as a partner described in 
        paragraph (3).
            ``(3) Partner described.--For purposes of this subsection, 
        a partner is described in this paragraph if the partner is a 
        person whose participation in the management or business 
        activity of the partnership is limited under applicable State 
        law.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 207. PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL EXCLUDED FROM NET 
              EARNINGS FROM SELF-EMPLOYMENT.

    (a) In General.--Paragraph (13) of section 1402(a) is amended to 
read as follows:
            ``(13) there shall be excluded the distributive share of 
        net income of a partner attributable to capital;''.
    (b) Partnership Income Attributable to Capital.--Section 1402 is 
amended by adding at the end the following new subsection:
    ``(l) Partnership Income Attributable to Capital.--
            ``(1) In general.--For purposes of subsection (a)(13), the 
        following amounts shall be treated as income attributable to 
        capital--
                    ``(A) the amount, if any, in excess of what would 
                constitute reasonable compensation for services 
                rendered by such partner to the partnership, and
                    ``(B) an amount equal to a reasonable rate of 
                return on unreturned capital of the partner determined 
                as of the beginning of the taxable year.
            ``(2) Definitions.--For purposes of paragraph (1)--
                    ``(A) Unreturned capital.--The term `unreturned 
                capital' means the excess of the aggregate amount of 
                money and the fair market value as of the date of 
                contribution of other consideration (net of 
                liabilities) contributed by the partner over the 
                aggregate amount of money and the fair market value as 
                of the date of distribution of other consideration (net 
                of liabilities) distributed by the partnership to the 
                partner, increased or decreased for the partner's 
                distributive share of all reportable items as 
                determined in section 702. If the partner acquires a 
                partnership interest and the partnership makes an 
                election under section 754, the partner's unreturned 
                capital shall take into account appropriate adjustments 
                under section 743.
                    ``(B) Reasonable rate of return.--A reasonable rate 
                of return on unreturned capital shall equal 150 percent 
                (or such higher rate as is established in regulations) 
                of the highest applicable Federal rate, as determined 
                under section 1274(d)(1), at the beginning of the 
                partnership's taxable year.
            ``(3) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection.''.
    (c) Effective Date.--The amendments made by this section shall 
apply with respect to services performed in taxable years beginning 
after December 31, 2002.

SEC. 208. REPEAL OF ABILITY TO ELECT LARGE PARTNERSHIP REPORTING RULES.

    (a) In General.--Paragraph (2) of section 775(a) (relating to 
election) is amended by adding at the end the following: ``No election 
under this subsection shall be made after December 31, 2002.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to partnership taxable years beginning after December 31, 2002.
                                 <all>