Flat tax on individual taxable earned income and business taxable income

(a)

In general

Subchapter A of chapter 1 of subtitle A is amended to read as follows:

Determination of tax liability

Part I. Tax on individuals.

Part II. Tax on business activities.

Tax on individuals

Sec. 1. Tax imposed.

Sec. 2. Standard deduction.

Sec. 3. Deduction for cash charitable contributions.

Sec. 4. Deduction for home acquisition indebtedness.

Sec. 5. Definitions and special rules.

Sec. 6. Dependent defined.

Tax imposed

(a)

Imposition of tax

There is hereby imposed on every individual a tax equal to 20 percent of the taxable earned income of such individual. (b)

Taxable earned income

For purposes of this section, the term taxable earned income means the excess (if any) of— (1)the earned income received or accrued during the taxable year, over (2)the sum of— (A)the standard deduction, (B)the deduction for cash charitable contributions, and (C)the deduction for home acquisition indebtedness, for such taxable year. (c)

Earned income

For purposes of this section— (1)

In general

The term earned income means wages, salaries, or professional fees, and other amounts received from sources within the United States as compensation for personal services actually rendered, but does not include that part of compensation derived by the taxpayer for personal services rendered by the taxpayer to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. (2)

Taxpayer engaged in trade or business

In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of the taxpayer’s share of the net profits of such trade or business, shall be considered as earned income.

Standard deduction

(a)

In general

For purposes of this subtitle, the term standard deduction means the sum of— (1)the basic standard deduction, plus (2)the additional standard deduction. (b)

Basic standard deduction

For purposes of subsection (a), the basic standard deduction is— (1)200 percent of the dollar amount in effect under paragraph (3) of the taxable year in the case of— (A)a joint return, or (B)a surviving spouse (as defined in section 5(a)), (2)$15,000 in the case of a head of household (as defined in section 5(b)), or (3)$10,000 in any other case. (c)

Additional standard deduction

For purposes of subsection (a), the additional standard deduction is $5,000 for each dependent (as defined in section 6)— (1)whose earned income for the calendar year in which the taxable year of the taxpayer begins is less than the basic standard deduction specified in subsection (b)(3), or (2)who is a child of the taxpayer and who— (A)has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (B)is a student who has not attained the age of 24 at the close of such calendar year. (d)

Inflation adjustment

(1)

In general

In the case of any taxable year beginning in a calendar year after 2006, each dollar amount contained in subsections (b) and (c) shall be increased by an amount equal to— (A)such dollar amount, multiplied by (B)the cost-of-living adjustment for the calendar year in which the taxable year begins. (2)

Cost-of-living adjustment

For purposes of paragraph (1), the cost-of-living adjustment for any calendar year is the percentage (if any) by which— (A)the CPI for the preceding calendar year, exceeds (B)the CPI for calendar year 2005. (3)

CPI for any calendar year

For purposes of paragraph (2), the CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year. (4)

Consumer price index

For purposes of paragraph (3), the term Consumer Price Index means the last Consumer Price Index for all-urban consumers published by the Department of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the Consumer Price Index for calendar year 1986 shall be used. (5)

Rounding

If any increase determined under paragraph (1) is not a multiple of $50, such amount shall be rounded to the next lowest multiple of $50.

Deduction for cash charitable contributions

(a)

General rule

For purposes of this part, there shall be allowed as a deduction any charitable contribution (as defined in subsection (b)) not to exceed $2,500 ($1,250, in the case of a married individual filing a separate return), payment of which is made within the taxable year. (b)

Charitable contribution defined

For purposes of this section, the term charitable contribution means a contribution or gift of cash or its equivalent to or for the use of the following: (1)A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes. (2)A corporation, trust, or community chest, fund, or foundation— (A)created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States, (B)organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, (C)no part of the net earnings of which inures to the benefit of any private shareholder or individual, and (D)which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for purposes specified in subparagraph (B). Rules similar to the rules of section 501(j) shall apply for purposes of this paragraph.

(3)A post or organization of war veterans, or an auxiliary unit or society of, or trust or foundation for, any such post or organization— (A)organized in the United States or any of its possessions, and (B)no part of the net earnings of which inures to the benefit of any private shareholder or individual. (4)In the case of a contribution or gift by an individual, a domestic fraternal society, order, or association, operating under the lodge system, but only if such contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. (5)A cemetery company owned and operated exclusively for the benefit of its members, or any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, if such company or corporation is not operated for profit and no part of the net earnings of such company or corporation inures to the benefit of any private shareholder or individual.

For purposes of this section, the term charitable contribution also means an amount treated under subsection (d) as paid for the use of an organization described in paragraph (2), (3), or (4).

(c)

Disallowance of deduction in certain cases and special rules

(1)

Substantiation requirement for certain contributions

(A)

General rule

No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B). (B)

Content of acknowledgment

An acknowledgment meets the requirements of this subparagraph if it includes the following information: (i)The amount of cash contributed. (ii)Whether the donee organization provided any goods or services in consideration, in whole or in part, for any contribution described in clause (i). (iii)A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.

For purposes of this subparagraph, the term intangible religious benefit means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.

(C)

Contemporaneous

For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of— (i)the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii)the due date (including extensions) for filing such return. (D)

Substantiation not required for contributions reported by the donee organization

Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution. (E)

Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases. (2)

Denial of deduction where contribution for lobbying activities

No deduction shall be allowed under this section for a contribution to an organization which conducts activities to which section 11(d)(2)(C)(i) applies on matters of direct financial interest to the donor’s trade or business, if a principal purpose of the contribution was to avoid Federal income tax by securing a deduction for such activities under this section which would be disallowed by reason of section 11(d)(2)(C) if the donor had conducted such activities directly. No deduction shall be allowed under section 11(d) for any amount for which a deduction is disallowed under the preceding sentence. (d)

Amounts paid to maintain certain students as members of taxpayer’s household

(1)

In general

Subject to the limitations provided by paragraph (2), amounts paid by the taxpayer to maintain an individual (other than a dependent, as defined in section 6, or a relative of the taxpayer) as a member of such taxpayer’s household during the period that such individual is— (A)a member of the taxpayer’s household under a written agreement between the taxpayer and an organization described in paragraph (2), (3), or (4) of subsection (b) to implement a program of the organization to provide educational opportunities for pupils or students in private homes, and (B)a full-time pupil or student in the twelfth or any lower grade at an educational organization located in the United States which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on, shall be treated as amounts paid for the use of the organization. (2)

Limitations

(A)

Amount

Paragraph (1) shall apply to amounts paid within the taxable year only to the extent that such amounts do not exceed $50 multiplied by the number of full calendar months during the taxable year which fall within the period described in paragraph (1). For purposes of the preceding sentence, if 15 or more days of a calendar month fall within such period such month shall be considered as a full calendar month. (B)

Compensation or reimbursement

Paragraph (1) shall not apply to any amount paid by the taxpayer within the taxable year if the taxpayer receives any money or other property as compensation or reimbursement for maintaining the individual in the taxpayer’s household during the period described in paragraph (1). (3)

Relative defined

For purposes of paragraph (1), the term relative of the taxpayer means an individual who, with respect to the taxpayer, bears any of the relationships described in subparagraphs (A) through (G) of section 6(d)(2). (4)

No other amount allowed as deduction

No deduction shall be allowed under subsection (a) for any amount paid by a taxpayer to maintain an individual as a member of the taxpayer’s household under a program described in paragraph (1)(A) except as provided in this subsection. (e)

Denial of deduction for certain travel expenses

No deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel. (f)

Disallowance of deductions in certain cases

For disallowance of deductions for contributions to or for the use of Communist controlled organizations, see section 11(a) of the Internal Security Act of 1950 (50 U.S.C. 790). (g)

Treatment of certain amounts paid to or for the benefit of institutions of higher education

(1)

In general

For purposes of this section, 80 percent of any amount described in paragraph (2) shall be treated as a charitable contribution. (2)

Amount described

For purposes of paragraph (1), an amount is described in this paragraph if— (A)the amount is paid by the taxpayer to or for the benefit of an educational organization— (i)which is described in subsection (d)(1)(B), and (ii)which is an institution of higher education (as defined in section 3304(f)), and (B)such amount would be allowable as a deduction under this section but for the fact that the taxpayer receives (directly or indirectly) as a result of paying such amount the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution.

If any portion of a payment is for the purchase of such tickets, such portion and the remaining portion (if any) of such payment shall be treated as separate amounts for purposes of this subsection.

(h)

Other cross references

(1)For treatment of certain organizations providing child care, see section 501(k). (2)For charitable contributions of partners, see section 702. (3)For treatment of gifts for benefit of or use in connection with the Naval Academy as gifts to or for the use of the United States, see section 6973 of title 10, United States Code. (4)For treatment of gifts accepted by the Secretary of State, the Director of the International Communication Agency, or the Director of the United States International Development Cooperation Agency, as gifts to or for the use of the United States, see section 25 of the State Department Basic Authorities Act of 1956. (5)For treatment of gifts of money accepted by the Attorney General for credit to the Commissary Funds, Federal Prisons as gifts to or for the use of the United States, see section 4043 of title 18, United States Code. (6)For charitable contributions to or for the use of Indian tribal governments (or subdivisions of such governments), see section 7871.

Deduction for home acquisition indebtedness

(a)

General rule

For purposes of this part, there shall be allowed as a deduction all qualified residence interest paid or accrued within the taxable year. (b)

Qualified residence interest defined

The term qualified residence interest means any interest which is paid or accrued during the taxable year on acquisition indebtedness with respect to any qualified residence of the taxpayer. For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued. (c)

Acquisition indebtedness

(1)

In general

The term acquisition indebtedness means any indebtedness which— (A)is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (B)is secured by such residence.

Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

(2)

$100,000 limitation

The aggregate amount treated as acquisition indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a married individual filing a separate return). (d)

Treatment of indebtedness incurred on or before October 13, 1987

(1)

In general

In the case of any pre-October 13, 1987, indebtedness— (A)such indebtedness shall be treated as acquisition indebtedness, and (B)the limitation of subsection (c)(2) shall not apply. (2)

Reduction in $100,000 limitation

The limitation of subsection (c)(2) shall be reduced (but not below zero) by the aggregate amount of outstanding pre-October 13, 1987, indebtedness. (3)

Pre-october 13, 1987, indebtedness

The term pre-October 13, 1987, indebtedness means— (A)any indebtedness which was incurred on or before October 13, 1987, and which was secured by a qualified residence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or (B)any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987, to refinance indebtedness described in subparagraph (A) (or refinanced indebtedness meeting the requirements of this subparagraph) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing). (4)

Limitation on period of refinancing

Subparagraph (B) of paragraph (3) shall not apply to any indebtedness after— (A)the expiration of the term of the indebtedness described in paragraph (3)(A), or (B)if the principal of the indebtedness described in paragraph (3)(A) is not amortized over its term, the expiration of the term of the first refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such first refinancing). (e)

Other definitions and special rules

For purposes of this section— (1)

Qualified residence

For purposes of this subsection— (A)

In general

Except as provided in subparagraph (C), the term qualified residence means the principal residence of the taxpayer. (B)

Married individuals filing separate returns

If a married couple does not file a joint return for the taxable year— (i)such couple shall be treated as 1 taxpayer for purposes of subparagraph (A), and (ii)each individual shall be entitled to take into account 1/2 of the principal residence unless both individuals consent in writing to 1 individual taking into account the principal residence. (C)

Pre-october 13, 1987, indebtedness

In the case of any pre-October 13, 1987, indebtedness, the term qualified residence has the meaning given that term in section 163(h)(4), as in effect on the day before the date of enactment of this subparagraph. (2)

Special rule for cooperative housing corporations

Any indebtedness secured by stock held by the taxpayer as a tenant-stockholder in a cooperative housing corporation shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebtedness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock. (3)

Unenforceable security interests

Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local homestead or other debtor protection law in effect on August 16, 1986, the security interest is ineffective or the enforceability of the security interest is restricted. (4)

Special rules for estates and trusts

For purposes of determining whether any interest paid or accrued by an estate or trust is qualified residence interest, any residence held by such estate or trust shall be treated as a qualified residence of such estate or trust if such estate or trust establishes that such residence is a qualified residence of a beneficiary who has a present interest in such estate or trust or an interest in the residuary of such estate or trust.

Definitions and special rules

(a)

Definition of surviving spouse

(1)

In general

For purposes of this part, the term surviving spouse means a taxpayer— (A)whose spouse died during either of the taxpayer’s 2 taxable years immediately preceding the taxable year, and (B)who maintains as the taxpayer’s home a household which constitutes for the taxable year the principal place of abode (as a member of such household) of a dependent— (i)who (within the meaning of section 6, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) is a son, stepson, daughter, or stepdaughter of the taxpayer, and (ii)with respect to whom the taxpayer is entitled to a deduction for the taxable year under section 2.

For purposes of this paragraph, an individual shall be considered as maintaining a household only if over one-half of the cost of maintaining the household during the taxable year is furnished by such individual.

(2)

Limitations

Notwithstanding paragraph (1), for purposes of this part a taxpayer shall not be considered to be a surviving spouse— (A)if the taxpayer has remarried at any time before the close of the taxable year, or (B)unless, for the taxpayer’s taxable year during which the taxpayer’s spouse died, a joint return could have been made under the provisions of section 6013 (without regard to subsection (a)(3) thereof). (3)

Special rule where deceased spouse was in missing status

If an individual was in a missing status (within the meaning of section 6013(f)(3)) as a result of service in a combat zone and if such individual remains in such status until the date referred to in subparagraph (A) or (B), then, for purposes of paragraph (1)(A), the date on which such individual dies shall be treated as the earlier of the date determined under subparagraph (A) or the date determined under subparagraph (B): (A)The date on which the determination is made under section 556 of title 37 of the United States Code or under section 5566 of title 5 of such Code (whichever is applicable) that such individual died while in such missing status. (B)Except in the case of the combat zone designated for purposes of the Vietnam conflict, the date which is 2 years after the date designated as the date of termination of combatant activities in that zone. (b)

Definition of head of household

(1)

In general

For purposes of this part, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of such individual’s taxable year, is not a surviving spouse (as defined in subsection (a)), and either— (A)maintains as such individual’s home a household which constitutes for more than one-half of such taxable year the principal place of abode, as a member of such household, of— (i)a qualifying child of the individual (as defined in section 6(c), determined without regard to section 6(e)), but not if such child— (I)is married at the close of the taxpayer's taxable year, and (II)is not a dependent of such individual by reason of section 6(b)(2) or 6(b)(3), or both, or (ii)any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under section 2, or (B)maintains a household which constitutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother under section 2.

(2)

Determination of status

For purposes of this subsection— (A)an individual who is legally separated from such individual’s spouse under a decree of divorce or of separate maintenance shall not be considered as married, (B)a taxpayer shall be considered as not married at the close of such taxpayer’s taxable year if at any time during the taxable year such taxpayer’s spouse is a nonresident alien, and (C)a taxpayer shall be considered as married at the close of such taxpayer’s taxable year if such taxpayer’s spouse (other than a spouse described in subparagraph (B)) died during the taxable year. (3)

Limitations

Notwithstanding paragraph (1), for purposes of this part, a taxpayer shall not be considered to be a head of a household— (A)if at any time during the taxable year the taxpayer is a nonresident alien, or (B)by reason of an individual who would not be a dependent for the taxable year but for— (i)subparagraph (H) of section 6(d)(2), or (ii)paragraph (3) of section 6(d). (c)

Certain married individuals living apart

For purposes of this part, an individual shall be treated as not married at the close of the taxable year if such individual is so treated under the provisions of section 7703(b).

Dependent defined

(a)

In general

For purposes of this subtitle, the term dependent means— (1)a qualifying child, or (2)a qualifying relative. (b)

Exceptions

For purposes of this section— (1)

Dependents ineligible

If an individual is a dependent of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall be treated as having no dependents for any taxable year of such individual beginning in such calendar year. (2)

Married dependents

An individual shall not be treated as a dependent of a taxpayer under subsection (a) if such individual has made 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. (3)

Citizens or nationals of other countries

(A)

In general

The term dependent does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a country contiguous to the United States. (B)

Exception for adopted child

Subparagraph (A) shall not exclude any child of a taxpayer (within the meaning of subsection (f)(1)(B)) from the definition of dependent if— (i)for the taxable year of the taxpayer, the child has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household, and (ii)the taxpayer is a citizen or national of the United States. (c)

Qualifying child

For purposes of this section— (1)

In general

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 (2), (B)who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, (C)who meets the age requirements of paragraph (3), and (D)who has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins. (2)

Relationship

For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if such individual is— (A)a child of the taxpayer or a descendant of such a child, or (B)a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative. (3)

Age requirements

(A)

In general

For purposes of paragraph (1)(C), an individual meets the requirements of this paragraph if such individual— (i)has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins, or (ii)is a student who has not attained the age of 24 as of the close of such calendar year. (B)

Special rule for disabled

In the case of an individual who is permanently and totally disabled at any time during such calendar year, the requirements of subparagraph (A) shall be treated as met with respect to such individual. (4)

Special rule relating to 2 or more claiming qualifying child

(A)

In general

Except as provided in subparagraph (B), if (but for this paragraph) an individual may be and is claimed as a qualifying child by 2 or more taxpayers for a taxable year 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 clause (i) does not apply, the taxpayer with the highest adjusted gross income for such taxable year. (B)

More than 1 parent claiming qualifying child

If the parents claiming any qualifying child 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 of time during the taxable year, or (ii)if the child resides with both parents for the same amount of time during such taxable year, the parent with the highest adjusted gross income. (d)

Qualifying relative

For purposes of this section— (1)

In general

The term qualifying relative means, with respect to any taxpayer for any taxable year, an individual— (A)who bears a relationship to the taxpayer described in paragraph (2), (B)with respect to whom the taxpayer provides over one-half of the individual’s support for the calendar year in which such taxable year begins, and (C)who is not a qualifying child of such taxpayer or of any other taxpayer for any taxable year beginning in the calendar year in which such taxable year begins. (2)

Relationship

For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if the individual is any of the following with respect to the taxpayer: (A)A child or a descendant of a child. (B)A brother, sister, stepbrother, or stepsister. (C)The father or mother, or an ancestor of either. (D)A stepfather or stepmother. (E)A son or daughter of a brother or sister of the taxpayer. (F)A brother or sister of the father or mother of the taxpayer. (G)A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. (H)An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household. (3)

Special rule relating to multiple support agreements

For purposes of paragraph (1)(C), over one-half of the support of an individual for a calendar year shall be treated as received from the taxpayer if— (A)no one person contributed over one-half of such support, (B)over one-half of such support was received from 2 or more persons each of whom, but for the fact that any such person alone did not contribute over one-half of such support, would have been entitled to claim such individual as a dependent for a taxable year beginning in such calendar year, (C)the taxpayer contributed over 10 percent of such support, and (D)each person described in subparagraph (B) (other than the taxpayer) who contributed over 10 percent of such support files a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such person will not claim such individual as a dependent for any taxable year beginning in such calendar year. (4)

Special rule relating to income of handicapped dependents

(A)

In general

For purposes of paragraph (1)(B), the gross income of an individual who is permanently and totally disabled at any time during the taxable year shall not include income attributable to services performed by the individual at a sheltered workshop if— (i)the availability of medical care at such workshop is the principal reason for the individual’s presence there, and (ii)the income arises solely from activities at such workshop which are incident to such medical care. (B)

Sheltered workshop defined

For purposes of subparagraph (A), the term sheltered workshop means a school— (i)which provides special instruction or training designed to alleviate the disability of the individual, and (ii)which is operated by an organization described in section 501(c)(3) and exempt from tax under section 501(a), or by a State, a possession of the United States, any political subdivision of any of the foregoing, the United States, or the District of Columbia. (5)

Special rules for support

For purposes of this subsection— (A)payments to a spouse which are includible in the gross income of such spouse shall not be treated as a payment by the payor spouse for the support of any dependent, and (B)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. (e)

Special rule for divorced parents

(1)

In general

Notwithstanding subsection (c)(1)(B), (c)(4), or (d)(1)(C), if— (A)a child receives over one-half of the child’s support during the calendar year from the child’s parents— (i)who are divorced or legally separated under a decree of divorce or separate maintenance, (ii)who are separated under a written separation agreement, or (iii)who live apart at all times during the last 6 months of the calendar year, and (B)such child is in the custody of 1 or both of the child’s parents for more than one-half of the calendar year, such child shall be treated as being the qualifying child or qualifying relative of the noncustodial parent for a calendar year if the requirements described in paragraph (2) are met. (2)

Requirements

For purposes of paragraph (1), the requirements described in this paragraph are met if— (A)a decree of divorce or separate maintenance or written separation agreement between the parents applicable to the taxable year beginning in such calendar year provides that the noncustodial parent shall be entitled to any deduction allowable under section 2 for such child, and in the case of such a decree or agreement executed before January 1, 1985, the noncustodial parent provides at least $600 for the support of such child during such calendar year, or (B)the custodial parent signs a written declaration (in such manner and form as the Secretary may prescribe) that such parent will not claim such child as a dependent for such taxable year.

For purposes of subparagraph (A), 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.

(3)

Custodial parent and noncustodial parent

For purposes of this subsection— (A)

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. (B)

Noncustodial parent

The term noncustodial parent means the parent who is not the custodial parent. (4)

Exception for multiple-support agreements

This subsection shall not apply in any case where over one-half of the support of the child is treated as having been received from a taxpayer under the provision of subsection (d)(3). (f)

Other definitions and rules

For purposes of this section— (1)

Child defined

(A)

In general

The term child means an individual who is— (i)a son, daughter, stepson, or stepdaughter of the taxpayer, or (ii)an eligible foster child of the taxpayer. (B)

Adopted child

In determining whether any of the relationships specified in subparagraph (A)(i) or paragraph (4) exists, a legally adopted individual of the taxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer, shall be treated as a child of such individual by blood. (C)

Eligible foster child

For purposes of subparagraph (A)(ii), the term eligible foster child means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. (2)

Student defined

The term student means an individual who during each of 5 calendar months during the calendar year in which the taxable year of the taxpayer begins— (A)is a full-time student at an educational organization described in section 3(d)(1)(B), or (B)is pursuing a full-time course of institutional on-farm training under the supervision of an accredited agent of an educational organization described in section 3(d)(1)(B) or of a State or political subdivision of a State. (3)

Determination of household status

An individual shall not be treated as a member of the taxpayer’s household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law. (4)

Brother and sister

The terms brother and sister include a brother or sister by the half blood. (5)

Special support test in case of students

For purposes of subsections (c)(1)(D) and (d)(1)(C), in the case of an individual who is— (A)a child of the taxpayer, and (B)a student, amounts received as scholarships for study at an educational organization described in section 3(d)(1)(B) shall not be taken into account. (6)

Treatment of missing children

(A)

In general

Solely for the purposes referred to in subparagraph (B), a child of the taxpayer— (i)who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer, and (ii)who had, for the taxable year in which the kidnapping occurred, the same principal place of abode as the taxpayer for more than one-half of the portion of such year before the date of the kidnapping, shall be treated as meeting the requirement of subsection (c)(1)(B) with respect to a taxpayer for all taxable years ending during the period that the child is kidnapped. (B)

Purposes

Subparagraph (A) shall apply solely for purposes of determining— (i)the deduction under section 2(c), and (ii)whether an individual is a surviving spouse or a head of a household (as such terms are defined in section 5). (C)

Comparable treatment of certain qualifying relatives

For purposes of this section, a child of the taxpayer— (i)who is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of such child or the taxpayer, and (ii)who was (without regard to this paragraph) a qualifying relative of the taxpayer for the portion of the taxable year before the date of the kidnapping, shall be treated as a qualifying relative of the taxpayer for all taxable years ending during the period that the child is kidnapped. (D)

Termination of treatment

Subparagraphs (A) and (C) shall cease to apply as of the first taxable year of the taxpayer beginning after the calendar year in which there is a determination that the child is dead (or, if earlier, in which the child would have attained age 18).

Tax on business activities

Sec. 11. Tax imposed on business activities.

11.

Tax imposed on business activities

(a)

Tax imposed

There is hereby imposed on every person engaged in a business activity located in the United States a tax equal to 20 percent of the business taxable income of such person. (b)

Liability for tax

The tax imposed by this section shall be paid by the person engaged in the business activity, whether such person is an individual, partnership, corporation, or otherwise. (c)

Business taxable income

(1)

In general

For purposes of this section, the term business taxable income means gross active income reduced by the deductions specified in subsection (d). (2)

Gross active income

For purposes of paragraph (1), the term gross active income means gross income other than investment income. (d)

Deductions

(1)

In general

The deductions specified in this subsection are— (A)the cost of business inputs for the business activity, (B)the compensation (including contributions to qualified retirement plans but not including other fringe benefits) paid for employees performing services in such activity, and (C)the cost of personal and real property used in such activity. (2)

Business inputs

(A)

In general

For purposes of paragraph (1)(A), the term cost of business inputs means— (i)the actual cost of goods, services, and materials, whether or not resold during the taxable year, and (ii)the actual cost, if reasonable, of travel and entertainment expenses for business purposes. (B)

Purchases of goods and services excluded

Such term shall not include purchases of goods and services provided to employees or owners. (C)

Certain lobbying and political expenditures excluded

(i)

In general

Such term shall not include any amount paid or incurred in connection with— (I)influencing legislation, (II)participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office, (III)any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or (IV)any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official. (ii)

Exception for local legislation

In the case of any legislation of any local council or similar governing body— (I)clause (i)(I) shall not apply, and (II)such term shall include all ordinary and necessary expenses (including, but not limited to, traveling expenses described in subparagraph (A)(iii) and the cost of preparing testimony) paid or incurred during the taxable year in carrying on any trade or business— (aa)in direct connection with appearances before, submission of statements to, or sending communications to the committees, or individual members, of such council or body with respect to legislation or proposed legislation of direct interest to the taxpayer, or (bb)in direct connection with communication of information between the taxpayer and an organization of which the taxpayer is a member with respect to any such legislation or proposed legislation which is of direct interest to the taxpayer and to such organization, and that portion of the dues so paid or incurred with respect to any organization of which the taxpayer is a member which is attributable to the expenses of the activities carried on by such organization. (iii)

Application to dues of tax-exempt organizations

Such term shall include the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is allocable to expenditures to which clause (i) applies. (iv)

Influencing legislation

For purposes of this subparagraph— (I)

In general

The term influencing legislation means any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation. (II)

Legislation

The term legislation has the meaning given that term in section 4911(e)(2). (v)

Other special rules

(I)

Exception for certain taxpayers

In the case of any taxpayer engaged in the trade or business of conducting activities described in clause (i), clause (i) shall not apply to expenditures of the taxpayer in conducting such activities directly on behalf of another person (but shall apply to payments by such other person to the taxpayer for conducting such activities). (II)

De minimis exception

(aa)

In general

Clause (i) shall not apply to any in-house expenditures for any taxable year if such expenditures do not exceed $2,000. In determining whether a taxpayer exceeds the $2,000 limit, there shall not be taken into account overhead costs otherwise allocable to activities described in subclauses (I) and (IV) of clause (i). (bb)

In-house expenditures

For purposes of provision (aa), the term in-house expenditures means expenditures described in subclauses (I) and (IV) of clause (i) other than payments by the taxpayer to a person engaged in the trade or business of conducting activities described in clause (i) for the conduct of such activities on behalf of the taxpayer, or dues or other similar amounts paid or incurred by the taxpayer which are allocable to activities described in clause (i). (III)

Expenses incurred in connection with lobbying and political activities

Any amount paid or incurred for research for, or preparation, planning, or coordination of, any activity described in clause (i) shall be treated as paid or incurred in connection with such activity. (vi)

Covered executive branch official

For purposes of this subparagraph, the term covered executive branch official means— (I)the President, (II)the Vice President, (III)any officer or employee of the White House Office of the Executive Office of the President, and the 2 most senior level officers of each of the other agencies in such Executive Office, and (IV)any individual serving in a position in level I of the Executive Schedule under section 5312 of title 5, United States Code, any other individual designated by the President as having Cabinet level status, and any immediate deputy of such an individual. (vii)

Special rule for Indian tribal governments

For purposes of this subparagraph, an Indian tribal government shall be treated in the same manner as a local council or similar governing body. (viii)

Cross reference

For reporting requirements and alternative taxes related to this subsection, see section 6033(e).

(e)

Carryover of excess deductions

(1)

In general

If the aggregate deductions for any taxable year exceed the gross active income for such taxable year, the amount of the deductions specified in subsection (d) for the succeeding taxable year (determined without regard to this subsection) shall be increased by the sum of— (A)such excess, plus (B)the product of such excess and the 3-month Treasury rate for the last month of such taxable year. (2)

3-month treasury rate

For purposes of paragraph (1), the 3-month Treasury rate is the rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 months or less.

(b)

Conforming repeals and redesignations

(1)

Repeals

The following subchapters of chapter 1 of subtitle A and the items relating to such subchapters in the table of subchapters for such chapter 1 are repealed: (A)Subchapter B (relating to computation of taxable income). (B)Subchapter C (relating to corporate distributions and adjustments). (C)Subchapter D (relating to deferred compensation, etc.). (D)Subchapter G (relating to corporations used to avoid income tax on shareholders). (E)Subchapter H (relating to banking institutions). (F)Subchapter I (relating to natural resources). (G)Subchapter J (relating to estates, trusts, beneficiaries, and decedents). (H)Subchapter L (relating to insurance companies). (I)Subchapter M (relating to regulated investment companies and real estate investment trusts). (J)Subchapter N (relating to tax based on income from sources within or without the United States). (K)Subchapter O (relating to gain or loss on disposition of property). (L)Subchapter P (relating to capital gains and losses). (M)Subchapter Q (relating to readjustment of tax between years and special limitations). (N)Subchapter S (relating to tax treatment of S corporations and their shareholders). (O)Subchapter T (relating to cooperatives and their patrons). (P)Subchapter U (relating to designation and treatment of empowerment zones, enterprise communities, and rural development investment areas). (Q)Subchapter V (relating to title 11 cases). (R)Subchapter W (relating to District of Columbia Enterprise Zone). (2)

Redesignations

The following subchapters of chapter 1 of subtitle A and the items relating to such subchapters in the table of subchapters for such chapter 1 are redesignated: (A)Subchapter E (relating to accounting periods and methods of accounting) as subchapter B. (B)Subchapter F (relating to exempt organizations) as subchapter C. (C)Subchapter K (relating to partners and partnerships) as subchapter D.