[Congressional Record Volume 151, Number 45 (Friday, April 15, 2005)]
[Senate]
[Pages S3736-S3747]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. SPECTER:
S. 812. 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; to the Committee on Finance.
Mr. SPECTER. Mr. President, this week, American taxpayers face
another Federal income tax deadline. The date of April 15 stabs fear,
anxiety, and unease into the hearts of millions of Americans. Every
year during ``tax season,'' millions of Americans spend their evenings
poring over page after page of IRS instructions, going through their
records looking for information and struggling to find and fill out all
the appropriate forms on the Federal tax returns. Americans are
intimidated by the sheer number of different tax forms and their
instructions, many of which they may be unsure whether they need to
file. Given the approximately 325 possible forms, not to mention the
instructions that accompany them, simply trying to determine which form
to file can in itself be a daunting and overwhelming task. According to
a 2002 study conducted by the Tax Foundation, American taxpayers,
including businesses, spend more than 5.8 billion hours and $194
billion each year in complying with tax laws. That works out to more
than $2,400 per U.S. household. Much of this time is spent burrowing
through IRS laws and regulations which fill 17,000 pages and have grown
from 744,000 words in 1955 to over 6.9 million words in 2000. By
contrast, the Pledge of Allegiance has only 31 words, the Gettysburg
Address has 267 words, the Declaration of Independence has about 1,300
words, and the Bible has only about 1,773,000 words.
The majority of taxpayers still face filing tax forms that are far
too complicated and take far too long to complete. According to the
estimated preparation time listed on the forms by the IRS, the 2004
Form 1040 is estimated to take 13 hours and 35 minutes to complete.
Moreover this does not include the estimated time to complete the
accompanying schedules, such as Schedule A, for itemized deductions,
which carries an estimated preparation time of 5 hours, 37 minutes, or
Schedule D, for reporting capital gains and losses, shows an estimated
preparation time of 6 hours, 10 minutes. Moreover, this complexity is
getting worse each year. Just from 2000 to 2004 the estimated time to
prepare Form 1040 jumped 34 minutes.
It is no wonder that well over half of all taxpayers, 56 percent
according to a recent survey, now hire an outside professional to
prepare their tax returns for them. However, the fact that only about
30 percent of individuals itemize their deductions shows that a
significant percentage of our taxpaying population believes that the
tax system is too complex for them to deal with. We all understand that
paying taxes will never be something we enjoy, but neither should it be
cruel and unusual punishment. Further, the pace of change to the
Internal Revenue Code is brisk--Congress made about 9,500 tax code
changes in the past thirteen years. And we are far from being finished.
Year after year, we continue to ask the same question--isn't there a
better way?
My flat tax legislation would make filing a tax return a manageable
chore, not a seemingly endless nightmare, for most taxpayers. My flat
tax legislation will fundamentally revise the present tax code, with
its myriad rates, deductions, and instructions. This legislation would
institute a simple, flat 20 percent tax rate for all individuals and
businesses. This proposal is not cast in stone, but is intended to move
the debate forward by focusing attention on three key principles which
are critical to an effective and equitable taxation system: simplicity,
fairness and economic growth.
My flat tax plan would eliminate the kinds of frustrations I have
outlined above for millions of taxpayers. This flat tax would enable us
to scrap the great majority of the IRS rules, regulations and
instructions and delete most of the 6.9 million words in the Internal
Revenue Code. Instead of billions of hours of non-productive time spent
in compliance with, or avoidance of, the tax code, taxpayers would
spend only the small amount of time necessary to fill out a postcard-
sized form. Both business and individual taxpayers would thus find
valuable hours freed up to engage in productive business activity, or
for more time with their families, instead of poring over tax tables,
schedules and regulations.
My flat tax proposal is dramatic, but so are its advantages: a
taxation system that is simple, fair and designed to maximize
prosperity for all Americans. A summary of the key advantages are:
Simplicity: A 10-line postcard filing would replace the myriad forms
and attachments currently required, thus saving Americans up to 5.8
billion hours they currently spend every year in tax compliance.
Cuts Government: The flat tax would eliminate the lion's share of IRS
rules, regulations and requirements, which have grown from 744,000
words in 1955 to 6.9 million words and 17,000 pages currently. It would
also allow us to slash the mammoth IRS bureaucracy of approximately
117,000 employees, creating opportunities to put their expertise to use
elsewhere in the government or in private industry.
Promotes Economic Growth: Economists estimate a growth due to a flat
tax of over $2 trillion in national wealth over seven years,
representing an increase of approximately $7,500 in personal wealth for
every man, woman and child in America. This growth would also lead to
the creation of 6 million new jobs.
Increases Efficiency: Investment decisions would be made on the basis
of productivity rather than simply for tax
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avoidance, thus leading to even greater economic expansion.
Reduces Interest Rates: Economic forecasts indicate that interest
rates would fall substantially, by as much as two points, as the flat
tax removes many of the current disincentives to savings.
Lowers compliance costs: Americans would be able to save or invert up
to $194 billion they currently spend every year in tax compliance.
Decreases fraud: As tax loopholes are eliminated and the tax code is
simplified, there will be far less opportunity for tax avoidance and
fraud, which now amounts to over $120 billion in uncollected revenue
annually.
Reduces IRS costs: Simplification of the tax code will allow us to
save significantly on the $10 billion annual budget currently allocated
to the Internal Revenue Service.
The most dramatic way to illustrate the flat tax is to consider that
the income tax form for the flat tax is printed on a postcard--it will
allow all taxpayers to file their April 15 tax returns on a simple 10-
line postcard. This postcard will take 15 minutes to fill out.
At my town hall meetings across Pennsylvania, there is considerable
public support for fundamental tax reform.
This is a win-win situation for America because it lowers the tax
burden on the taxpayers in the lower brackets. For example in the 2004
tax year, the standard deduction is $4,850 for a single taxpayer,
$7,150 for a head of household and $9,700 for a married couple filing
jointly, while the personal exemption for individuals and dependents is
$3,100. Thus, under the current tax code, a family of four which does
not itemize deductions would pay taxes on all income over $22,100--that
is personal exemptions of$12,400 and a standard deduction of $9,700. By
contrast, under my flat tax bill, that same family would receive a
personal exemption of $30,000, and would pay tax on only income over
that amount.
The tax loopholes enable write-offs of some $393 billion a year. What
is eliminated under the flat tax are the loopholes, the deductions in
this complicated code which can be deciphered, interpreted, and found
really only by the $500-an-hour lawyers. That money is lost to the
taxpayers. $120 billion would be saved by the elimination of fraud
because of the simplicity of the Tax Code, the taxpayer being able to
find out exactly what they owe.
This bill is modeled after a proposal organized and written by two
very distinguished professors of law from Stanford University,
Professor Hall and Professor Rabushka. Their model was first introduced
in the Congress in the fall of 1994 by Majority Leader Richard Armey. I
introduced the flat tax bill--the first one in the Senate--on March 2,
1995, Senate bill 488. On October 27, 1995, I introduced a Sense of the
Senate Resolution calling on my colleagues to expedite Congressional
adoption of a flat tax. The Resolution, which was introduced as an
amendment to pending legislation, was not adopted. I reintroduced my
legislation in the 105th Congress with slight modifications to reflect
inflation-adjusted increases in the personal allowances and dependent
allowances. I re-reintroduced the bill on April 15, 1999--income tax
day--in a bill denominated as S. 822. I then introduced my flat tax
legislation as an amendment to S. 1429, the Tax Reconciliation bill;
the amendment was not adopted. During the 108th Congress, I introduced
my flat tax legislation once again on April 11, 2003. On May 14, 2003,
I offered an amendment to the Tax Reconciliation legislation urging the
Senate to hold hearings and consider legislation providing for a flat
tax; this amendment passed by a vote of 70 to 30 on May 15, 2003. I
then testified on this issue at a subsequent hearing held by the Joint
Economic Committee on November 5, 2003.
Over the years and prior to my legislative efforts on behalf of flat
tax reform, I have devoted considerable time and attention to analyzing
our nation's tax code and the policies which underlie it. I began the
study of the complexities of the tax code over 40 years ago as a law
student at Yale University. I included some tax law as part of my
practice in my early years as an attorney in Philadelphia. In the
spring of 1962, I published a law review article in the Villanova Law
Review, ``Pension and Profit Sharing Plans: Coverage and Operation for
Closely Held Corporations and Professional Associations,'' 7 Villanova
L. Rev. 335, which in part focused on the inequity in making tax-exempt
retirement benefits available to some kinds of businesses but not
others. It was apparent then, as it is now, that the very complexities
of the Internal Revenue Code could be used to give unfair advantage to
some. Einstein himself is quoted as saying ``the hardest thing in the
world to understand is the income tax.''
The Hall-Rabushka model envisioned a flat tax with no deductions
whatever. After considerable reflection, I decided to include in the
legislation limited deductions for home mortgage interest for up to
$100,000 in borrowing and charitable contributions up to $2,500. While
these modifications undercut the pure principle of the flat tax by
continuing the use of tax policy to promote home buying and charitable
contributions, I believe that those two deductions are so deeply
ingrained in the financial planning of American families that they
should be retained as a matter of fairness and public policy--and also
political practicality. With those two deductions maintained, passage
of a modified flat tax will be difficult, but without them, probably
impossible.
In my judgment, an indispensable prerequisite to enactment of a
modified flat tax is revenue neutrality. Professor Hall advised that
the revenue neutrality ofthe Hall-Rabushka proposal, which uses a 19
percent rate, is based on a well-documented model founded on reliable
governmental statistics. My legislation raises that rate from 19
percent to 20 percent to accommodate retaining limited home mortgage
interest and charitable deductions.
This proposal taxes business revenues fully at their source, so that
there is no personal taxation on interest, dividends, capital gains,
gifts or estates. Restructured in this way, the tax code can become a
powerful incentive for savings and investment--which translates into
economic growth and expansion, more and better jobs, and raising the
standard of living for all Americans.
The key advantages of this flat tax plan are threefold: First, it
will dramatically simplify the payment of taxes. Second, it will remove
much of the IRS regulatory morass now imposed on individual and
corporate taxpayers, and allow those taxpayers to devote more of their
energies to productive pursuits. Third, since it is a plan which
rewards savings and investment, the flat tax will spur economic growth
in all sectors of the economy as more money flows into investments and
savings accounts.
Professors Hall and Rabushka have projected that within seven years
of enactment, this type of a flat tax would produce a 6 percent
increase in output from increased total work in the U.S. economy and
increased capital formation. The economic growth would mean a $7,500
increase in the personal income of all Americans. No one likes to pay
taxes. But Americans will be much more willing to pay their taxes under
a system that they believe is fair, a system that they can understand,
and a system that they recognize promotes rather than prevents growth
and prosperity. My flat tax legislation will afford Americans such a
tax system.
I ask unanimous consent that a copy of my flat tax postcard, a
variety of specific cases that illustrate the fairness and simplicity
of this flat tax, and an example flat tax table be printed in the
Record following my statement.
I ask unanimous consent that the text of this bill be printed in the
Record.
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There being no objection, the material was ordered to be printed in
the Record, as follows:
S. 812
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 2005''.
(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. 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) $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.
``SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBUTIONS.
``(a) General Rule.--For purposes of this part, there shall
be allowed as a deduction any charitable contribution (as
defined in subsection (b)) not to exceed $2,500 ($1,250, in
the case of a married individual filing a separate return),
payment of which is made within the taxable year.
``(b) Charitable Contribution Defined.--For purposes of
this section, the term `charitable contribution' means a
contribution or gift of cash or its equivalent to or for the
use of the following:
``(1) A State, a possession of the United States, or any
political subdivision of any of the foregoing, or the United
States or the District of Columbia, but only if the
contribution or gift is made for exclusively public purposes.
``(2) A corporation, trust, or community chest, fund, or
foundation--
``(A) created or organized in the United States or in any
possession thereof, or under the law of the United States,
any State, the District of Columbia, or any possession of the
United States,
``(B) organized and operated exclusively for religious,
charitable, scientific, literary, or educational purposes, or
to foster national or international amateur sports
competition (but only if no part of its activities involve
the provision of athletic facilities or equipment), or for
the prevention of cruelty to children or animals,
``(C) no part of the net earnings of which inures to the
benefit of any private shareholder or individual, and
``(D) which is not disqualified for tax exemption under
section 501(c)(3) by reason of attempting to influence
legislation, and which does not participate in, or intervene
in (including the publishing or distributing of statements),
any political campaign on behalf of (or in opposition to) any
candidate for public office.
A contribution or gift by a corporation to a trust, chest,
fund, or foundation shall be deductible by reason of this
paragraph only if it is to be used within the United States
or any of its possessions exclusively for purposes specified
in subparagraph (B). Rules similar to the rules of section
501(j) shall apply for purposes of this paragraph.
``(3) A post or organization of war veterans, or an
auxiliary unit or society of, or trust or foundation for, any
such post or organization--
``(A) organized in the United States or any of its
possessions, and
``(B) no part of the net earnings of which inures to the
benefit of any private shareholder or individual.
``(4) In the case of a contribution or gift by an
individual, a domestic fraternal society, order, or
association, operating under the lodge system, but only if
such contribution or gift is to be used exclusively for
religious, charitable, scientific, literary, or educational
purposes, or for the prevention of cruelty to children or
animals.
``(5) A cemetery company owned and operated exclusively for
the benefit of its members, or any corporation chartered
solely for burial purposes as a cemetery corporation and not
permitted by its charter to engage in any business not
necessarily incident to that purpose, if such company or
corporation is not operated for profit and no part of the net
earnings of such company or corporation inures to the benefit
of any private shareholder or individual.
For purposes of this section, the term `charitable
contribution' also means an amount treated under subsection
(d) as paid for the use of an organization described in
paragraph (2), (3), or (4).
``(c) Disallowance of Deduction in Certain Cases and
Special Rules.--
``(1) Substantiation requirement for certain
contributions.--
``(A) General rule.--No deduction shall be allowed under
subsection (a) for any contribution of $250 or more unless
the taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the contribution by
the donee organization that meets the requirements of
subparagraph (B).
``(B) Content of acknowledgment.--An acknowledgment meets
the requirements of this subparagraph if it includes the
following information:
``(i) The amount of cash contributed.
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``(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) $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
[[Page S3744]]
``(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
[[Page S3745]]
``(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
[[Page S3746]]
``(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).
``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).
[[Page S3747]]
(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, 2005.
(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, 2005.
(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.
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