[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[S. 741 Introduced in Senate (IS)]
111th CONGRESS
1st Session
S. 741
To amend the Internal Revenue Code of 1986 to impose a flat tax only on
individual taxable earned income and business taxable income, and for
other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
March 30, 2009
Mr. Specter introduced the following bill; which was read twice and
referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to impose a flat tax only on
individual taxable earned income and business taxable income, and for
other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS; AMENDMENT OF 1986 CODE.
(a) Short Title.--This Act may be cited as the ``Flat Tax Act of
2009''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents; amendment of 1986 Code.
Sec. 2. Flat tax on individual taxable earned income and business
taxable income.
Sec. 3. Repeal of estate and gift taxes.
Sec. 4. Additional repeals.
Sec. 5. Effective dates.
(c) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
SEC. 2. FLAT TAX ON INDIVIDUAL TAXABLE EARNED INCOME AND BUSINESS
TAXABLE INCOME.
(a) In General.--Subchapter A of chapter 1 of subtitle A is amended
to read as follows:
``Subchapter A--Determination of Tax Liability
``Part I. Tax on Individuals.
``Part II. Tax on Business Activities.
``PART I--TAX ON INDIVIDUALS
``Sec. 1. Tax imposed.
``Sec. 2. Standard deduction.
``Sec. 3. Deduction for cash charitable contributions.
``Sec. 4. Deduction for home acquisition indebtedness.
``Sec. 5. Definitions and special rules.
``Sec. 6. Dependent defined.
``Sec. 7. Inflation adjustment.
``SEC. 1. TAX IMPOSED.
``(a) Imposition of Tax.--There is hereby imposed on every
individual a tax equal to 20 percent of the taxable earned income of
such individual.
``(b) Taxable Earned Income.--For purposes of this section, the
term `taxable earned income' means the excess (if any) of--
``(1) the earned income received or accrued during the
taxable year, over
``(2) the sum of--
``(A) the standard deduction,
``(B) the deduction for cash charitable
contributions, and
``(C) the deduction for home acquisition
indebtedness, for such taxable year.
``(c) Earned Income.--For purposes of this section--
``(1) In general.--The term `earned income' means wages,
salaries, or professional fees, and other amounts received from
sources within the United States as compensation for personal
services actually rendered, but does not include that part of
compensation derived by the taxpayer for personal services
rendered by the taxpayer to a corporation which represents a
distribution of earnings or profits rather than a reasonable
allowance as compensation for the personal services actually
rendered.
``(2) Taxpayer engaged in trade or business.--In the case
of a taxpayer engaged in a trade or business in which both
personal services and capital are material income-producing
factors, under regulations prescribed by the Secretary, a
reasonable allowance as compensation for the personal services
rendered by the taxpayer, not in excess of 30 percent of the
taxpayer's share of the net profits of such trade or business,
shall be considered as earned income.
``SEC. 2. STANDARD DEDUCTION.
``(a) In General.--For purposes of this subtitle, the term
`standard deduction' means the sum of--
``(1) the basic standard deduction, plus
``(2) the additional standard deduction.
``(b) Basic Standard Deduction.--For purposes of subsection (a),
the basic standard deduction is--
``(1) 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) $18,750 in the case of a head of household (as
defined in section 5(b)), or
``(3) $12,500 in any other case.
``(c) Additional Standard Deduction.--For purposes of subsection
(a), the additional standard deduction is $6,250 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.
``SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBUTIONS.
``(a) General Rule.--For purposes of this part, there shall be
allowed as a deduction any charitable contribution (as defined in
subsection (b)) not to exceed $3,125 (50 percent of such amount 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.
``SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTEDNESS.
``(a) General Rule.--For purposes of this part, there shall be
allowed as a deduction all qualified residence interest paid or accrued
within the taxable year.
``(b) Qualified Residence Interest Defined.--The term `qualified
residence interest' means any interest which is paid or accrued during
the taxable year on acquisition indebtedness with respect to any
qualified residence of the taxpayer. For purposes of the preceding
sentence, the determination of whether any property is a qualified
residence of the taxpayer shall be made as of the time the interest is
accrued.
``(c) Acquisition Indebtedness.--
``(1) In general.--The term `acquisition indebtedness'
means any indebtedness which--
``(A) is incurred in acquiring, constructing, or
substantially improving any qualified residence of the
taxpayer, and
``(B) is secured by such residence.
Such term also includes any indebtedness secured by such residence
resulting from the refinancing of indebtedness meeting the requirements
of the preceding sentence (or this sentence); but only to the extent
the amount of the indebtedness resulting from such refinancing does not
exceed the amount of the refinanced indebtedness.
``(2) Dollar limitation.--The aggregate amount treated as
acquisition indebtedness for any period shall not exceed
$125,000 (50 percent of such amount 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 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.
``SEC. 5. DEFINITIONS AND SPECIAL RULES.
``(a) Definition of Surviving Spouse.--
``(1) In general.--For purposes of this part, the term
`surviving spouse' means a taxpayer--
``(A) whose spouse died during either of the
taxpayer's 2 taxable years immediately preceding the
taxable year, and
``(B) who maintains as the taxpayer's home a
household which constitutes for the taxable year the
principal place of abode (as a member of such
household) of a dependent--
``(i) who (within the meaning of 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.
For purposes of this paragraph, an individual shall be
considered as maintaining a household only if over one-half of
the cost of maintaining the household during the taxable year
is furnished by such individual.
``(2) Determination of status.--For purposes of this
subsection--
``(A) 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).
``SEC. 6. 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) or (3) are met.
``(2) Exception where custodial parent releases claim to
exemption for the year.--For purposes of paragraph (1), the
requirements described in this paragraph are met with respect
to any calendar year if--
``(A) the custodial parent signs a written
declaration (in such manner and form as the Secretary
may by regulations prescribe) that such custodial
parent will not claim such child as a dependent for any
taxable year beginning in such calendar year, and
``(B) the noncustodial parent attaches such written
declaration to the noncustodial parent's return for the
taxable year beginning during such calendar year.
``(3) Exception for certain pre-1985 instruments.--
``(A) In general.--For purposes of paragraph (1),
the requirements described in this paragraph are met
with respect to any calendar year if--
``(i) a qualified pre-1985 instrument
between the parents applicable to the taxable
year beginning in such calendar year provides
that the noncustodial parent shall be entitled
to any deduction allowable under section 151
for such child, and
``(ii) the noncustodial parent provides at
least $600 for the support of such child during
such calendar year.
For purposes of this subparagraph, 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.
``(B) Qualified pre-1985 instrument.--For purposes
of this paragraph, the term `qualified pre-1985
instrument' means any decree of divorce or separate
maintenance or written agreement--
``(i) which is executed before January 1,
1985,
``(ii) which on such date contains the
provision described in subparagraph (A)(i), and
``(iii) which is not modified on or after
such date in a modification which expressly
provides that this paragraph shall not apply to
such decree or agreement.
``(4) Custodial parent and noncustodial parent.--For
purposes of this subsection--
``(A) Custodial parent.--The term `custodial
parent' means the parent having custody for the greater
portion of the calendar year.
``(B) Noncustodial parent.--The term `noncustodial
parent' means the parent who is not the custodial
parent.
``(5) 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).
``(6) Special rule for support received from new spouse of
parent.--For purposes of this subsection, 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.
``(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 kidnaped 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 kidnaping 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 kidnaping, 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 kidnaped.
``(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 kidnaped 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 kidnaping, shall be
treated as a qualifying relative of the
taxpayer for all taxable years ending during
the period that the child is kidnaped.
``(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).
``SEC. 7. INFLATION ADJUSTMENT.
``(a) In General.--In the case of any taxable year beginning in a
calendar year after 2010, each dollar amount contained in sections
2(b), 2(c), 3(a), and 4(c)(2) shall be increased by an amount equal
to--
``(1) such dollar amount, multiplied by
``(2) the cost-of-living adjustment for the calendar year
in which the taxable year begins.
``(b) Cost-of-Living Adjustment.--For purposes of subsection (a),
the cost-of-living adjustment for any calendar year is the percentage
(if any) by which--
``(1) the CPI for the preceding calendar year, exceeds
``(2) the CPI for calendar year 2009.
``(c) CPI for Any Calendar Year.--For purposes of subsection (b),
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.
``(d) Consumer Price Index.--For purposes of subsection (c), 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.
``(e) Rounding.--If any increase determined under subsection (a) is
not a multiple of $50, such amount shall be rounded to the next lowest
multiple of $50.
``PART II--TAX ON BUSINESS ACTIVITIES
``Sec. 11. Tax imposed on business activities.
``SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.
``(a) Tax Imposed.--There is hereby imposed on every person engaged
in a business activity located in the United States a tax equal to 20
percent of the business taxable income of such person.
``(b) Liability for Tax.--The tax imposed by this section shall be
paid by the person engaged in the business activity, whether such
person is an individual, partnership, corporation, or otherwise.
``(c) Business Taxable Income.--
``(1) In general.--For purposes of this section, the term
`business taxable income' means gross active income reduced by
the deductions specified in subsection (d).
``(2) Gross active income.--For purposes of paragraph (1),
the term `gross active income' means gross income other than
investment income.
``(d) Deductions.--
``(1) In general.--The deductions specified in this
subsection are--
``(A) the cost of business inputs for the business
activity,
``(B) the compensation (including contributions to
qualified retirement plans but not including other
fringe benefits) paid for employees performing services
in such activity, and
``(C) the cost of personal and real property used
in such activity.
``(2) Business inputs.--
``(A) In general.--For purposes of paragraph
(1)(A), the term `cost of business inputs' means--
``(i) the actual cost of goods, services,
and materials, whether or not resold during the
taxable year, and
``(ii) the actual cost, if reasonable, of
travel and entertainment expenses for business
purposes.
``(B) Purchases of goods and services excluded.--
Such term shall not include purchases of goods and
services provided to employees or owners.
``(C) Certain lobbying and political expenditures
excluded.--
``(i) In general.--Such term shall not
include any amount paid or incurred in
connection with--
``(I) influencing legislation,
``(II) participation in, or
intervention in, any political campaign
on behalf of (or in opposition to) any
candidate for public office,
``(III) any attempt to influence
the general public, or segments
thereof, with respect to elections,
legislative matters, or referendums, or
``(IV) any direct communication
with a covered executive branch
official in an attempt to influence the
official actions or positions of such
official.
``(ii) Exception for local legislation.--In
the case of any legislation of any local
council or similar governing body--
``(I) clause (i)(I) shall not
apply, and
``(II) such term shall include all
ordinary and necessary expenses
(including, but not limited to,
traveling expenses described in
subparagraph (A)(iii) and the cost of
preparing testimony) paid or incurred
during the taxable year in carrying on
any trade or business--
``(aa) in direct connection
with appearances before,
submission of statements to, or
sending communications to the
committees, or individual
members, of such council or
body with respect to
legislation or proposed
legislation of direct interest
to the taxpayer, or
``(bb) in direct connection
with communication of
information between the
taxpayer and an organization of
which the taxpayer is a member
with respect to any such
legislation or proposed
legislation which is of direct
interest to the taxpayer and to
such organization, and that
portion of the dues so paid or
incurred with respect to any
organization of which the
taxpayer is a member which is
attributable to the expenses of
the activities carried on by
such organization.
``(iii) Application to dues of tax-exempt
organizations.--Such term shall include the
portion of dues or other similar amounts paid
by the taxpayer to an organization which is
exempt from tax under this subtitle which the
organization notifies the taxpayer under
section 6033(e)(1)(A)(ii) is allocable to
expenditures to which clause (i) applies.
``(iv) Influencing legislation.--For
purposes of this subparagraph--
``(I) In general.--The term
`influencing legislation' means any
attempt to influence any legislation
through communication with any member
or employee of a legislative body, or
with any government official or
employee who may participate in the
formulation of legislation.
``(II) Legislation.--The term
`legislation' has the meaning given
that term in section 4911(e)(2).
``(v) Other special rules.--
``(I) Exception for certain
taxpayers.--In the case of any taxpayer
engaged in the trade or business of
conducting activities described in
clause (i), clause (i) shall not apply
to expenditures of the taxpayer in
conducting such activities directly on
behalf of another person (but shall
apply to payments by such other person
to the taxpayer for conducting such
activities).
``(II) De minimis exception.--
``(aa) In general.--Clause
(i) shall not apply to any in-
house expenditures for any
taxable year if such
expenditures do not exceed
$2,000. In determining whether
a taxpayer exceeds the $2,000
limit, there shall not be taken
into account overhead costs
otherwise allocable to
activities described in
subclauses (I) and (IV) of
clause (i).
``(bb) In-house
expenditures.--For purposes of
provision (aa), the term `in-
house expenditures' means
expenditures described in
subclauses (I) and (IV) of
clause (i) other than payments
by the taxpayer to a person
engaged in the trade or
business of conducting
activities described in clause
(i) for the conduct of such
activities on behalf of the
taxpayer, or dues or other
similar amounts paid or
incurred by the taxpayer which
are allocable to activities
described in clause (i).
``(III) Expenses incurred in
connection with lobbying and political
activities.--Any amount paid or
incurred for research for, or
preparation, planning, or coordination
of, any activity described in clause
(i) shall be treated as paid or
incurred in connection with such
activity.
``(vi) Covered executive branch official.--
For purposes of this subparagraph, the term
`covered executive branch official' means--
``(I) the President,
``(II) the Vice President,
``(III) any officer or employee of
the White House Office of the Executive
Office of the President, and the 2 most
senior level officers of each of the
other agencies in such Executive
Office, and
``(IV) any individual serving in a
position in level I of the Executive
Schedule under section 5312 of title 5,
United States Code, any other
individual designated by the President
as having Cabinet level status, and any
immediate deputy of such an individual.
``(vii) Special rule for indian tribal
governments.--For purposes of this
subparagraph, an Indian tribal government shall
be treated in the same manner as a local
council or similar governing body.
``(viii) Cross reference.--
``For reporting requirements and alternative taxes related to this
subsection, see section 6033(e).
``(e) Carryover of Excess Deductions.--
``(1) In general.--If the aggregate deductions for any
taxable year exceed the gross active income for such taxable
year, the amount of the deductions specified in subsection (d)
for the succeeding taxable year (determined without regard to
this subsection) shall be increased by the sum of--
``(A) such excess, plus
``(B) the product of such excess and the 3-month
Treasury rate for the last month of such taxable year.
``(2) 3-month treasury rate.--For purposes of paragraph
(1), the 3-month Treasury rate is the rate determined by the
Secretary based on the average market yield (during any 1-month
period selected by the Secretary and ending in the calendar
month in which the determination is made) on outstanding
marketable obligations of the United States with remaining
periods to maturity of 3 months or less.''
(b) Conforming Repeals and Redesignations.--
(1) Repeals.--The following subchapters of chapter 1 of
subtitle A and the items relating to such subchapters in the
table of subchapters for such chapter 1 are repealed:
(A) Subchapter B (relating to computation of
taxable income).
(B) Subchapter C (relating to corporate
distributions and adjustments).
(C) Subchapter D (relating to deferred
compensation, etc.).
(D) Subchapter G (relating to corporations used to
avoid income tax on shareholders).
(E) Subchapter H (relating to banking
institutions).
(F) Subchapter I (relating to natural resources).
(G) Subchapter J (relating to estates, trusts,
beneficiaries, and decedents).
(H) Subchapter L (relating to insurance companies).
(I) Subchapter M (relating to regulated investment
companies and real estate investment trusts).
(J) Subchapter N (relating to tax based on income
from sources within or without the United States).
(K) Subchapter O (relating to gain or loss on
disposition of property).
(L) Subchapter P (relating to capital gains and
losses).
(M) Subchapter Q (relating to readjustment of tax
between years and special limitations).
(N) Subchapter S (relating to tax treatment of S
corporations and their shareholders).
(O) Subchapter T (relating to cooperatives and
their patrons).
(P) Subchapter U (relating to designation and
treatment of empowerment zones, enterprise communities,
and rural development investment areas).
(Q) Subchapter V (relating to title 11 cases).
(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.
SEC. 3. REPEAL OF ESTATE AND GIFT TAXES.
Subtitle B (relating to estate, gift, and generation-skipping
taxes) and the item relating to such subtitle in the table of subtitles
is repealed.
SEC. 4. ADDITIONAL REPEALS.
Subtitles H (relating to financing of presidential election
campaigns) and J (relating to coal industry health benefits) and the
items relating to such subtitles in the table of subtitles are
repealed.
SEC. 5. EFFECTIVE DATES.
(a) In General.--Except as provided in subsection (b), the
amendments made by this Act apply to taxable years beginning after
December 31, 2009.
(b) Repeal of Estate and Gift Taxes.--The repeal made by section 3
applies to estates of decedents dying, and transfers made, after
December 31, 2009.
(c) Technical and Conforming Changes.--The Secretary of the
Treasury or the Secretary's delegate shall, as soon as practicable but
in any event not later than 90 days after the date of enactment of this
Act, submit to the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the Senate a draft of
any technical and conforming changes in the Internal Revenue Code of
1986 which are necessary to reflect throughout such Code the changes in
the substantive provisions of law made by this Act.
<all>