Individual and Small Business Tax Simplification Act of 2003

108th CONGRESS
1st Session

H. R. 22

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

IN THE HOUSE OF REPRESENTATIVES

January 7, 2003

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

A BILL

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

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

SECTION 1. SHORT TITLE; ETC.

(a) SHORT TITLE- This Act may be cited as the `Individual and Small Business Tax Simplification Act of 2003'.

(b) REFERENCES TO INTERNAL REVENUE CODE OF 1986- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

Sec. 1. Short title; etc.

TITLE I--INDIVIDUAL INCOME TAX SIMPLIFICATION

Subtitle A--General Provisions

Sec. 101. Alternative minimum tax reform.

Sec. 102. Head of household filing status replaced with special personal exemption.

Sec. 103. Simplification of tax on social security benefits.

Sec. 104. Simplification of capital gains tax.

Sec. 105. Repeal of 2-percent floor on miscellaneous itemized deductions.

Sec. 106. Simplification of deduction for points on home mortgage.

Sec. 107. Taxation of minor children.

Sec. 108. Simplification of dependent care tax benefits.

Sec. 109. Acceleration of phaseout of overall limitation on itemized deductions.

Sec. 110. Acceleration of repeal of phaseout of personal exemptions.

Sec. 111. Repeal of personal holding company tax.

Subtitle B--Uniform Definition of Child

Sec. 121. Uniform definition of child.

Sec. 122. Treatment of government benefits in determining support and cost of maintaining household.

Sec. 123. Effective date.

Subtitle C--Education Tax Incentives

Sec. 131. Hope and Lifetime Learning credits combined.

Sec. 132. Uniform definition of qualifying higher education expenses.

TITLE II--SMALL BUSINESS TAX SIMPLIFICATION

Sec. 201. Unified pass-thru entity regime.

Sec. 202. Increase in expensing under section 179.

Sec. 203. Rollover of property held for productive use or investment.

Sec. 204. Repeal of collapsible corporations.

Sec. 205. References to general partners.

Sec. 206. References to limited partners.

Sec. 207. Partnership income attributable to capital excluded from net earnings from self-employment.

Sec. 208. Repeal of ability to elect large partnership reporting rules.

TITLE I--INDIVIDUAL INCOME TAX SIMPLIFICATION

Subtitle A--General Provisions

SEC. 101. ALTERNATIVE MINIMUM TAX REFORM.

(a) INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION AMOUNT-

(1) Subparagraph (A) of section 55(d)(1) (relating to exemption amount for taxpayers other than corporations) is amended by striking `$45,000' and all that follows through `2004)' and inserting `$75,000'.

(2) Subparagraph (B) of section 55(d)(1) is amended by striking `$33,750' and all that follows through `2004)' and inserting `$56,000'.

(b) ADJUSTMENT FOR INFLATION- Subsection (d) of section 55 is amended by adding at the end the following new paragraph:

`(4) INFLATION ADJUSTMENT-

`(A) IN GENERAL- In the case of a taxable year beginning in a calendar year after 2004, each of the dollar amounts contained in subparagraphs (A) and (B) of paragraph (1) shall be increased by an amount equal to--

`(i) such dollar amount, multiplied by

`(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting `calendar year 2003' for `calendar year 1992' in subparagraph (B) thereof.

`(B) ROUNDING- Any increase determined under subparagraph (A) shall be rounded to the nearest multiple of $100.'.

(c) REPEAL OF LIMIT ON DEDUCTION FOR STATE AND LOCAL TAXES- Subparagraph (A) of section 56(b)(1) is amended to read as follows:

`(A) IN GENERAL- No deduction shall be allowed for any miscellaneous itemized deduction (as defined in section 67(b)).'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

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

(a) INCREASED PERSONAL EXEMPTION FOR SINGLE PARENTS, ETC- Section 151 is amended by redesignating subsections (d) and (e) as subsection (e) and (f) and by inserting after subsection (c) the following new subsection:

`(d) ADDITIONAL EXEMPTION FOR SINGLE PARENTS, ETC-

`(1) IN GENERAL- An exemption of $3,700 in the case of an individual who--

`(A) is not married at the close of the taxable year,

`(B) is not a surviving spouse, and

`(C)(i) maintains as his home a household which constitutes for more than one-half of such taxable year the principal place of abode, as a member of such household, of--

`(I) a qualifying child (as defined in subsection (c)), or

`(II) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under subsection (c), or

`(ii) maintains a household which constitutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother under subsection (c).

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

`(2) MARITAL STATUS- Marital status shall be determined in accordance with section 7703; except that an individual shall be treated as not married for purposes of this subsection if at any during such year the spouse of such individual is a nonresident alien.

`(3) LIMITATIONS- Paragraph (1) shall not apply to any individual--

`(A) if at any time during the taxable year he is a nonresident alien, or

`(B) by reason of an individual who would not be a dependent for the taxable year but for--

`(i) paragraph (9) of section 152(a), or

`(ii) subsection (c) of section 152.

`(4) INFLATION ADJUSTMENT-

`(A) IN GENERAL- In the case of a taxable year beginning in a calendar year after 2004, the dollar amount contained in paragraph (1) shall be increased by an amount equal to--

`(i) such dollar amount, multiplied by

`(B) ROUNDING- Any increase determined under subparagraph (A) shall be rounded to the nearest multiple of $50.'.

(b) REPEAL OF HEAD OF HOUSEHOLD FILING STATUS- Subsection (b) of section 1 (relating to heads of household) is repealed.

(1) Section 1(c) is amended--

(A) in the heading by striking `SPOUSES AND HEADS OF HOUSEHOLDS)- ' and inserting `SPOUSES)- ', and

(B) by striking `or the head of a household as defined in section 2(b)'.

(2) Section 2 is amended by striking subsection (b) and by redesignating subsections (c), (d), and (e) as subsections (b), (c), and (d), respectively.

(3) Section 25B(b) is amended by striking the portion of the table related to head of a household.

(4) Section 63(c)(2) is amended--

(A) by striking subparagraph (B), and

(B) by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.

(5) Section 151(c)(6)(B)(iii) is amended by striking `or a head of a household (as such terms are defined in section 2)' and inserting `(as defined in section 2)'.

(6) Section 151(c)(6)(C) is amended by striking `, section 2(b)(1)(A),'.

(7) Section 151(e)(3)(C) is amended--

(A) by striking clause (ii),

(B) in clause (iii), by striking `or head of a household', and

(8) Section 3402(r)(2)(A) is amended by striking `section 63(c)(2)(C)' and inserting `section 63(c)(2)(B)'.

(9) Section 6012(a)(1)(A) is amended--

(A) in clause (i), by striking `is not a head of a household (as defined in section 2(b)),',

(B) by striking clause (ii),

(D) in the last sentence, by striking `Clause (iv)' and inserting `Clause (iii)' and by striking `151(c)' and inserting `151(d)'.

(10) Section 6012(a)(1)(B) is amended--

(A) by striking `clause (i), (ii), or (iii)' and inserting `clause (i) or (ii)', and

(B) by striking `clause (iv)' and inserting `clause (iii)'.

(11)(A) Paragraph (6) of section 1(f) is amended by striking `151(d)(4)(A)' and inserting `151(e)(4)(A)'.

(B) Subparagraph (C) of section 642(b)(2), as amended by section 105, is amended--

(i) by striking `151(d)' and inserting `151(e)', and

(ii) by striking `151(d)(3)(C)(iii)' and inserting `151(e)(3)(C)(ii)'.

(D) Subparagraph (B) of section 3402(r)(2) is amended by striking `151(d)' and inserting `151(e)'.

(E) Clause (ii) of section 6012(a)(1)(D) is amended--

(i) by striking `151(d)' and inserting `151(e)', and

(ii) by striking `151(d)(2)' and inserting `151(e)(2)'.

(F) The next to the last sentence of section 6013(b)(3)(A) is amended by striking `151(d)' and inserting `151(e)'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

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

(a) Repeal of 1993 Increase-

(1) IN GENERAL- Subsection (a) of section 86 (relating to social security and tier 1 railroad retirement benefits) is amended to read as follows:

`(a) IN GENERAL- Gross income for the taxable year of any taxpayer described in subsection (b) (notwithstanding section 207 of the Social Security Act) includes social security benefits in an amount equal to the lesser of--

`(1) one-half of the social security benefits received during the taxable year, or

`(2) one-half of the excess described in subsection (b)(1).'

(2) CONFORMING AMENDMENTS-

(A) Subsection (c) of section 86 is amended to read as follows:

`(c) BASE AMOUNT- For purposes of this section, the term `base amount' means--

`(1) except as otherwise provided in this subsection, $25,000,

`(2) $32,000 in the case of a joint return, and

`(3) zero in the case of a taxpayer who--

`(A) is married as of the close of the taxable year (within the meaning of section 7703) but does not file a joint return for such year, and

`(B) does not live apart from his spouse at all times during the taxable year.'

(B) Paragraph (3) of section 871(a) is amended by striking `85 percent' in subparagraph (A) and inserting `50 percent'.

(C)(i) Subparagraph (A) of section 121(e)(1) of the Social Security Amendments of 1983 (Public Law 98-21) is amended--

(I) by striking `(A) There' and inserting `There';

(II) by striking `(i)' immediately following `amounts equivalent to'; and

(III) by striking `, less (ii)' and all that follows and inserting a period.

(ii) Paragraph (1) of section 121(e) of such Act is amended by striking subparagraph (B).

(iii) Paragraph (3) of section 121(e) of such Act is amended by striking subparagraph (B) and by redesignating subparagraph (C) as subparagraph (B).

(iv) Paragraph (2) of section 121(e) of such Act is amended in the first sentence by striking `paragraph (1)(A)' and inserting `paragraph (1)'.

(b) USE OF ADJUSTED GROSS INCOME WITHOUT MODIFICATIONS-

(1) IN GENERAL- Subsection (b) of section 86 is amended to read as follows:

`(b) TAXPAYERS TO WHOM SUBSECTION (a) APPLIES- A taxpayer is described in this subsection if--

`(1) the sum of--

`(A) the adjusted gross income of the taxpayer for the taxable year (determined without regard to this section), plus

`(B) one-half of the social security benefits received during the taxable year, exceeds

`(2) the base amount.'

(2) CONFORMING AMENDMENTS-

(A) Subparagraph (A) of section 219(g)(3) is amended--

(i) by striking `sections 86 and 469' in clause (i) and inserting `section 469', and

(ii) by inserting `86,' before `135' in clause (ii).

(B) Paragraph (4) of section 135(c) is amended--

(i) by inserting `86,' before `137' in clause (i), and

(ii) by striking `sections 86, 469,' in clause (ii) and inserting `sections 469'.

(i) by inserting `86,' before `221' in clause (i), and

(ii) by striking `86,' in clause (ii).

(D) Subparagraph (C) of section 221(b)(2) is amended--

(i) by inserting `86,' before `222' in clause (i), and

(ii) by striking `86,' in clause (ii).

(E) Subparagraph (C) of section 222(b)(2) is amended--

(i) by inserting `86,' before `911' in clause (i), and

(ii) by striking `86,' in clause (ii).

(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to taxable years beginning after December 31, 2003.

(2) SUBSECTION (a)(2)(B)- The amendment made by subsection (a)(2)(B) shall apply to benefits paid after December 31, 2003.

(3) SUBSECTION (a)(2)(C)- The amendments made by subsection (a)(2)(C) shall apply to tax liabilities for taxable years beginning after December 31, 2003.

(d) MAINTENANCE OF TRANSFERS TO TRUST FUNDS- There are hereby appropriated to the trust funds established under the Social Security Act amounts equal to the reduction in revenues to the Treasury by reason of the enactment of this section. Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner so as to replicate

to the extent possible the transfers which would have occurred to such Trust Funds had this section not been enacted.

SEC. 104. SIMPLIFICATION OF CAPITAL GAINS TAX.

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

`SEC. 1203. CAPITAL GAINS DEDUCTION.

`If for any taxable year a taxpayer other than a corporation has a net capital gain, 50 percent of such gain shall be a deduction from gross income.'.

(b) DEDUCTION ALLOWABLE WHETHER OR NOT TAXPAYER ITEMIZES OTHER DEDUCTIONS-

(1) Subsection (b) of section 63 is amended by striking `and' at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting `, and', and by adding at the end the following new paragraph:

`(3) the deduction allowed by section 1203.'.

(2) Subsection (d) of section 63 is amended by striking `and' at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting `, and', and by adding at the end the following new paragraph:

`(3) the deduction allowed by section 1203.'.

(1) Paragraph (1) of section 56(b) is amended by adding at the end the following new subparagraph:

`(G) CAPITAL GAIN DEDUCTION NOT APPLICABLE- Section 1203 shall not apply.'.

(2) Subsection (b) of section 55 is amended by striking paragraph (3) and inserting the following new paragraphs:

`(3) MAXIMUM TAX ON NET CAPITAL GAIN- The amount of tax determined under the first sentence of paragraph (1)(A)(i) shall not exceed the sum of--

`(A) the amount determined under such first sentence computed at the rates and in the same manner as if this paragraph had not been enacted on the taxable excess reduced by the net capital gain, plus

`(B) a tax on the net capital gain determined by using the regular tax capital gains tax rates.

`(4) REGULAR TAX ON NET CAPITAL GAIN- For purposes of paragraph (3), the tax on the net capital gain determined by using the regular tax capital gains tax rates is the excess of--

`(A) the tax that would be computed under section 1 if net capital gain were determined with the adjustments under this part, over

`(B) the tax that would be so computed under section 1 if the taxable income were reduced by 50 percent of the net capital gain as so determined.'.

(d) TECHNICAL AND CONFORMING AMENDMENTS-

(1) Section 1 is amended by striking subsection (h).

(2) Paragraph (7) of section 57(a) is amended by striking the last sentence.

(3) Subparagraph (E) of section 163(d)(4) is amended to read as follows:

`(E) COORDINATION WITH CAPITAL GAINS DEDUCTION- The net capital gain taken into account under section 1203 for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under subparagraph (B)(iii) for such year.'.

(4) Paragraph (1) of section 170(e) is amended by striking `the amount of gain' in the material following subparagraph (B)(ii) and inserting `50 percent (100 percent in the case of a corporation) of the amount of gain'.

(5) Subparagraph (B) of section 172(d)(2) is amended to read as follows:

`(B) the exclusion under section 1202 and the deduction under section 1203 shall not be allowed.'.

(6) The last sentence of section 453A(c)(3) is amended by striking all that follows `long-term capital gain,' and inserting `the maximum rate on net capital gain under section 1201 or the deduction under section 1203 (whichever is appropriate) shall be taken into account.'.

(7)(A) Section 641(c)(2)(A) is amended by striking `Except as provided in section 1(h), the' and inserting `The'.

(B) Section 641(c)(2)(C) is amended by inserting after clause (iii) the following new clause:

`(iv) The deduction under section 1203.'.

(8) Paragraph (4) of section 642(c) is amended to read as follows:

`(4) ADJUSTMENTS- To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain from the sale or exchange of capital assets held for more than 1 year, proper adjustment shall be made for any exclusion allowable under section 1202 and any deduction allowable under section 1203 to the estate or trust. In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income).'.

(9) Section 642 is amended by adding at the end the following new subsection:

`(j) CAPITAL GAINS DEDUCTION- The deduction under section 1203 to an estate or trust shall be computed by excluding the portion (if any) of the gains for the taxable year which is includible by the income beneficiaries under sections 652 and 662 (relating to inclusions of amounts in gross income of beneficiaries of trusts) as gain derived from the sale or exchange of capital assets.'.

(10) The last sentence of section 643(a)(3) is amended to read as follows: `The exclusion under section 1202 and the deduction under section 1203 shall not be taken into account.'.

(11) Subparagraph (C) of section 643(a)(6) is amended by inserting `(i)' before `there shall' and by inserting before the period `, and (ii) the deduction under section 1203 (relating to capital gains deduction) shall not be taken into account'.

(12) Paragraph (4) of section 691(c) is amended by striking `1(h),' and by inserting `1203,' after `1202,'.

(13) The second sentence of paragraph (2) of section 871(a) is amended by striking `section 1202' and inserting `sections 1202 and 1203'.

(14)(A) Paragraph (2) of section 904(b) is amended by striking subparagraphs (A) and (C), by redesignating subparagraph (B) as subparagraph (A), and by inserting after subparagraph (A) (as so redesignated) the following new subparagraph:

`(B) OTHER TAXPAYERS- In the case of a taxpayer other than a corporation, taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.'.

(B) Subparagraph (A) of section 904(b)(2), as so redesignated, is amended--

(i) by striking all that precedes clause (i) and inserting the following:

`(A) CORPORATIONS- In the case of a corporation--', and

(ii) by striking in clause (i) `in lieu of applying subparagraph (A),'.

(C) Paragraph (3) of section 904(b) is amended by striking subparagraphs (D) and (E) and inserting the following new subparagraph:

`(D) RATE DIFFERENTIAL PORTION- The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as the excess of the highest rate of tax specified in section 11(b) over the alternative rate of tax under section 1201(a) bears to the highest rate of tax specified in section 11(b).'.

(15) Paragraph (1) of section 1402(i) is amended by inserting `, and the deduction provided by section 1203 shall not apply' before the period at the end thereof.

(16) Paragraph (1) of section 1445(e) is amended by striking `20 percent' and inserting `one-half of the maximum rate of tax in effect under section 1'.

(17)(A) The second sentence of section 7518(g)(6)(A) is amended--

(i) by striking `during a taxable year to which section 1(h) or 1201(a) applies', and

(ii) by striking `20 percent' and inserting `one-half of the maximum rate of tax in effect under section 1'.

(B) The second sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936, is amended--

(i) by striking `during a taxable year to which section 1(h) or 1201(a) of such Code applies', and

(ii) by striking `20 percent' and inserting `one-half of the maximum rate of tax in effect under section 1 of such Code'.

(e) CLERICAL AMENDMENT- The table of sections for part I of subchapter P of chapter 1 is amended by adding at the end the following new item:

`Sec. 1203. Capital gains deduction.'.

(f) EFFECTIVE DATES-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2003.

(2) WITHHOLDING- The amendments made by subsection (d)(16) shall apply only to amounts paid after December 31, 2003.

(3) COORDINATION WITH PRIOR TRANSITION RULE- Any amount treated as long-term capital gain by reason of paragraph (3) of section 1122(h) of the Tax Reform Act of 1986 shall not be taken into account for purposes of applying section 1203 of the Internal Revenue Code of 1986 (as added by this section).

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

(a) TERMINATION- Section 67 (relating to 2-percent floor on miscellaneous itemized deductions) is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Subparagraph (A) of section 56(b)(1), as amended by section 101, is hereby repealed.

(2) Clause (i) of section 642(b)(2)(C) is amended to read as follows:

`(i) IN GENERAL- A qualified disability trust shall be allowed a deduction equal to the exemption amount under section 151(d), determined by treating such trust as an individual described in section 151(d)(3)(C)(iii).'

(3) Paragraph (3) of section 772(c) is amended to read as follows:

`(3) INCOME OR LOSS FROM OTHER ACTIVITIES- For purposes of this chapter, any partner's distributive share of any income or loss described in subsection (a)(2) shall be treated as an item of income or expense (as the case may be) with respect to property held for investment.'

(4) Paragraph (3) of section 773(b) is hereby repealed.

(5) Clause (iii) of section 6654(d)(1)(C) is amended to read as follows:

`(iii) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ESTATES AND TRUSTS- For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that--

`(I) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and

`(II) the deductions allowable under sections 642(b), 651, and 661,

shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.'

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

(a) IN GENERAL- Subsection (g) of section 461 (relating to prepaid interest) is amended by adding at the end the following new paragraph:

`(3) EXCEPTION FOR CERTAIN REFINANCINGS-

`(A) IN GENERAL- This subsection shall not apply to points paid in respect of indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence).

`(B) LIMITATION- Subparagraph (A) shall apply only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the sum of--

`(i) the amount of the refinanced indebtedness, plus

`(ii) the lesser of $10,000 or the points paid in respect of the indebtedness resulting from the refinancing to the extent that the indebtedness resulting from the refinancing does not exceed the refinanced indebtedness.'.

(b) CONFORMING AMENDMENT- The heading of paragraph (2) of section 461(g) is amended by inserting `BASED ON BUSINESS PRACTICE' after `EXCEPTION'.

SEC. 107. TAXATION OF MINOR CHILDREN.

(a) APPLICATION OF TRUST RATE SCHEDULE TO NET UNEARNED INCOME OF MINOR CHILDREN- Subsection (g) of section 1 (relating to certain unearned income of minor children taxed as if parent's income) is amended--

(1) by striking paragraphs (1), (3) and (5),

(2) by redesignating paragraphs (4), (6), and (7) as paragraphs (3), (4), and (5), respectively, and

(3) by inserting before paragraph (2) the following new paragraph:

`(1) IN GENERAL- In the case of a child to whom this subsection applies, the tax imposed by this section shall be the sum of--

`(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on taxable income reduced by net unearned income, plus

`(B) the excess (if any) of the tax determined under subsection (e) on total taxable income over the tax determined under subsection (e) on taxable income reduced by net unearned income.'.

(b) EXPANSION OF PARENTAL ELECTION- Paragraph (5) of section 1(g) (as redesignated under subsection (a)) is amended to read as follows:

`(5) ELECTION TO CLAIM INCOME OF CHILD ON PARENT'S RETURN-

`(A) IN GENERAL- If the parent of any child to whom this subsection applies elects the application of subparagraph (B), such child--

`(i) shall be treated (other than for purposes of this paragraph)--

`(I) as having no gross income for such year, and

`(II) as not being entitled to any deductions or credits for such year, and

`(ii) shall not be required to file a return under section 6012 for such year.

`(B) INCOME INCLUDED ON PARENT'S RETURN- In the case of a parent making the election under this paragraph--

`(i) the gross income of each child to whom such election applies shall be included in such parent's gross income for the taxable year,

`(ii) the deductions to which such child would be entitled without regard to such election shall be allowed to such parent but only to the extent the aggregate of such deductions does not exceed the gross income of such child,

`(iii) any estimated tax payment, and any amount which has been deducted and withheld under chapter 24, for such year that is made in the name and TIN of such child shall be treated as an estimated tax payment or as an amount deducted and withheld in the name and TIN of such parent for such year (including for purposes of section 31), and

`(iv) any interest which is an item of tax preference under section 57(a)(5) of the child shall be treated as an item of tax preference of such parent (and not of such child).

`(C) SPECIAL RULE FOR DETERMINING WHICH PARENT MAY MAKE ELECTION- For purposes of this paragraph, the parent of a child to whom this subsection applies who may make an election under this paragraph shall be--

`(i) in the case of parents who are not married (within the meaning of section 7703), the custodial parent (within the meaning of section 151(c)(7)) of the child, and

`(ii) in the case of married individuals filing separately, the individual with the greater taxable income.

`(D) CARRYOVERS ALLOWED- Subparagraph (A)(i)(II) shall not prohibit the carryover

of any amount that the child would be entitled to carryover without regard to the election under this paragraph.

`(E) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph.'.

`(g) TREATMENT OF CERTAIN INCOME OF MINOR CHILDREN- '.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 108. SIMPLIFICATION OF DEPENDENT CARE TAX BENEFITS.

(a) REPEAL OF REDUCTION OF CREDIT BASED ON ADJUSTED GROSS INCOME- Subsection (a) of section 21 (relating to allowance of credit) is amended--

(1) in paragraph (1), by striking `applicable percentage' and inserting `35 percent',

(2) by striking paragraph (2), and

(3) by striking `(1) IN GENERAL- ' and moving the text 2 ems to the left.

(b) DOLLAR LIMIT ON AMOUNT CREDITABLE MADE $5,500 REGARDLESS OF NUMBER OF QUALIFYING INDIVIDUALS-

(1) IN GENERAL- Subsection (c) of section 21 (relating to dollar limit on amount creditable) is amended to read as follows:

`(c) DOLLAR LIMIT ON AMOUNT CREDITABLE- The amount of employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed $5,500, reduced by the aggregate amount excludable from gross income under section 129 for the taxable year.'.

(2) EXCLUSION- Subparagraph (A) of section 129(a)(2) is amended by striking `$5,000 ($2,500' and inserting `$5,500 ($2,750'.

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

(a) IN GENERAL- Section 68 (relating to overall limitation on itemized deductions) is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Section 1(f)(6)(A) is amended by striking `, section 68(b)(2)'.

(2) Section 773(a)(3)(B) is amended by striking clause (i) and redesignating clauses (ii), (iii), and (iv) as clauses (i), (ii), and (iii), respectively.

(3) The table of sections for part I of subchapter B of chapter 1 is amended by striking the item relating to section 68.

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

(a) IN GENERAL- Subsection (e) of section 151 (relating to phaseout of exemption amount), as amended by the preceding sections of this Act, is amended by striking paragraph (3) and redesignating paragraph (4) as paragraph (3).

(b) CONFORMING AMENDMENTS-

(1) Paragraph (3) of section 151(e), as amended by subsection (a), is amended to read as follows:

`(3) INFLATION ADJUSTMENT- In the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1) shall be increased by an amount equal to--

`(A) such dollar amount, multiplied by

`(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting `calendar year 1988' for `calendar year 1992' in subparagraph (B) thereof.'.

(2) Section 1(f)(6) is amended--

(A) in subparagraph (A) by striking `151(e)(4)' and inserting `151(e)(3)', and

(B) in subparagraph (B), both as in effect on the date of the enactment of this Act and as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001, by striking `151(e)(4)(A)' and inserting `151(e)(3)'.

(3) Subparagraph (C) of section 642(b)(2), as amended by the preceding sections of this Act, is amended by striking `, determined by treating such trust as an individual described in section 151(e)(3)(C)(ii)'.

SEC. 111. REPEAL OF PERSONAL HOLDING COMPANY TAX.

(a) IN GENERAL- Part II of subchapter G of chapter 1 (relating to personal holding companies) is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Section 12(2) is amended to read as follows:

`(2) For accumulated earnings tax, see part I of subchapter G (sec. 531 and following).'.

(2) Section 26(b)(2) is amended by striking subparagraph (G) and by redesignating the succeeding subparagraphs accordingly.

(3) Section 30A(c) is amended by striking paragraph (3) and by redesignating paragraph (4) as paragraph (3).

(4) Section 41(e)(7)(E) is amended by adding `and' at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

(5) Section 56(b)(2) is amended by striking subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C).

(6) Section 170(e)(4)(D) is amended by adding `and' at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

(7) Section 111(d) is amended to read as follows:

`(d) SPECIAL RULES FOR ACCUMULATED EARNINGS TAX- In applying subsection (a) for the purpose of determining the accumulated earnings tax under section 531--

`(1) any excluded amount under subsection (a) allowed for purposes of this subtitle (other than section 531) shall be allowed whether or not such amount resulted in a reduction of the tax under section 531 for the prior taxable year, and

`(2) where any excluded amount under subsection (a) was not allowed as a deduction for the prior taxable year for purposes of this subtitle other than section 531 but was allowable for the same taxable year under section 531, then such excluded amount shall be allowable if it did not result in a reduction of the tax under section 531.'.

(8)(A) Section 316(b) is amended by striking paragraph (2) and by redesignating paragraph (3) as paragraph (2).

(B) Section 331(b) is amended by striking `(other than a distribution referred to in paragraph (2)(B) of section 316(b))'.

(9) Section 341(d) is amended--

(A) by striking `section 544(a)' and inserting `section 465(f)', and

(B) by inserting before the period at the end of the next to the last sentence `and such paragraph (2) shall be applied by inserting `by or for his partner' after `his family' '.

(10) Section 381(c) is amended by striking paragraphs (14) and (17).

(11) Section 443(e) is amended by striking paragraph (2) and by redesignating paragraphs (3), (4), and (5) as paragraphs (2), (3), and (4), respectively.

(12) Section 447(g)(4)(A) is amended by striking `other than--' and all that follows and inserting `other than an S corporation.'

(13)(A) Section 465(a)(1)(B) is amended to read as follows:

`(B) a C corporation which is closely held,'.

(B) Section 465(a)(3) is amended to read as follows:

`(3) CLOSELY HELD DETERMINATION- For purposes of paragraph (1), a corporation is closely held if, at any time during the last half of the taxable year, more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. For purposes of this

paragraph, an organization described in section 401(a), 501(c)(17), or 509(a) or a portion of a trust permanently set aside or to be used exclusively for the purposes described in section 642(c) shall be considered an individual.'

`(f) CONSTRUCTIVE OWNERSHIP RULES- For purposes of subsection (a)(3)--

`(1) STOCK NOT OWNED BY INDIVIDUAL- Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries.

`(2) FAMILY OWNERSHIP- An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family. For purposes of this paragraph, the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

`(3) OPTIONS- If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

`(4) APPLICATION OF FAMILY AND OPTION RULES- Paragraphs (2) and (3) shall be applied if, but only if, the effect is to make the corporation closely held under subsection (a)(3).

`(5) CONSTRUCTIVE OWNERSHIP AS ACTUAL OWNERSHIP- Stock constructively owned by a person by reason of the application of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock.

`(6) OPTION RULE IN LIEU OF FAMILY RULE- If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3).

`(7) CONVERTIBLE SECURITIES- Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock if the effect of the inclusion of all such securities is to make the corporation closely held under subsection (a)(3). The requirement under the preceding sentence that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included.'

(D) Section 465(c)(7)(B) is amended by striking clause (i) and by redesignating clauses (ii) and (iii) as clauses (i) and (ii), respectively.

(E) Section 465(c)(7)(G) is amended to read as follows:

`(G) LOSS OF 1 MEMBER OF AFFILIATED GROUP MAY NOT OFFSET INCOME OF PERSONAL SERVICE CORPORATION- Nothing in this paragraph shall permit any loss of a member of an affiliated group to be used as an offset against the income of any other member of such group which is a personal service corporation (as defined in section 269A(b) but determined by substituting `5 percent' for `10 percent' in section 269A(b)(2)).'

(14) Sections 508(d), 4947, and 4948(c)(4) are each amended by striking `545(b)(2),' each place it appears.

(15) Section 532(b) is amended by striking paragraph (1) and by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively.

(16) Sections 535(b)(1) and 556(b)(1) are each amended by striking `section 541' and inserting `section 541 (as in effect before its repeal)'.

(17)(A) Section 553(a)(1) is amended by striking `section 543(d)' and inserting `subsection (c)'.

(B) Section 553 is amended by adding at the end the following new subsection:

`(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES-

`(1) IN GENERAL- For purposes of subsection (a), the term `active business computer software royalties' means any royalties--

`(A) received by any corporation during the taxable year in connection with the licensing of computer software, and

`(B) with respect to which the requirements of paragraphs (2), (3), (4), and (5) are met.

`(2) ROYALTIES MUST BE RECEIVED BY CORPORATION ACTIVELY ENGAGED IN COMPUTER SOFTWARE BUSINESS- The requirements of this paragraph are met if the royalties described in paragraph (1)--

`(A) are received by a corporation engaged in the active conduct of the trade or business of developing, manufacturing, or producing computer software, and

`(B) are attributable to computer software which--

`(i) is developed, manufactured, or produced by such corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or

`(ii) is directly related to such trade or business.

`(3) ROYALTIES MUST CONSTITUTE AT LEAST 50 PERCENT OF INCOME- The requirements of this paragraph are met if the royalties described in paragraph (1) constitute at least 50 percent of the ordinary gross income of the corporation for the taxable year.

`(4) DEDUCTIONS UNDER SECTIONS 162 AND 174 RELATING TO ROYALTIES MUST EQUAL OR EXCEED 25 PERCENT OF ORDINARY GROSS INCOME-

`(A) IN GENERAL- The requirements of this paragraph are met if--

`(i) the sum of the deductions allowable to the corporation under sections 162, 174, and 195 for the taxable year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds 25 percent of the ordinary gross income of such corporation for such taxable year, or

`(ii) the average of such deductions for the 5-taxable year period ending with such taxable year equals or exceeds 25 percent of the average ordinary gross income of such corporation for such period.

If a corporation has not been in existence during the 5-taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for such 5-taxable year period.

`(B) DEDUCTIONS ALLOWABLE UNDER SECTION 162- For purposes of subparagraph

(A), a deduction shall not be treated as allowable under section 162 if it is specifically allowable under another section.

`(C) LIMITATION ON ALLOWABLE DEDUCTIONS- For purposes of subparagraph (A), no deduction shall be taken into account with respect to compensation for personal services rendered by the 5 individual shareholders holding the largest percentage (by value) of the outstanding stock of the corporation. For purposes of the preceding sentence individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into account.'

(18) Section 561(a) is amended by striking paragraph (3), by inserting `and' at the end of paragraph (1), and by striking ', and' at the end of paragraph (2) and inserting a period.

(19) Section 562(b) is amended to read as follows:

`(b) DISTRIBUTIONS IN LIQUIDATION- Except in the case of a foreign personal holding company described in section 552--

`(1) in the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for purposes of computing the dividends paid deduction, and

`(2) in the case of a complete liquidation occurring within 24 months after the adoption of a plan of liquidation, any distribution within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made, be treated as a dividend for purposes of computing the dividends paid deduction.

For purposes of paragraph (1), a liquidation includes a redemption of stock to which section 302 applies. Except to the extent provided in regulations, the preceding sentence shall not apply in the case of any mere holding or investment company which is not a regulated investment company.'

(20) Section 563 is amended by striking subsection (b).

(21) Section 564 is hereby repealed.

(22) Section 631(c) is amended by striking `or section 545(b)(5)'.

(23) Section 852(b)(1) is amended by striking `which is a personal holding company (as defined in section 542) or'.

(24)(A) Section 856(h)(1) is amended to read as follows:

`(1) IN GENERAL- For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 465(a)(3) is met.'

(B) Section 856(h)(3)(A)(i) is amended by striking `section 542(a)(2)' and inserting `section 465(a)(3)'.

(C) Paragraph (3) of section 856(h) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.

(D) Subparagraph (C) of section 856(h)(3), as redesignating by the preceding subparagraph, is amended by striking `subparagraph (C)' and inserting `subparagraph (B)'.

(25) The last sentence of section 882(c)(2) is amended to read as follows:

`The preceding sentence shall not be construed to deny the credit provided by section 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline.'.

(26) Section 936(a)(3) is amended by striking subparagraph (C), by inserting `or' at the end of subparagraph (B), and by redesignating subparagraph (D) as subparagraph (C).

(27) Section 992(d) is amended by striking paragraph (2) and by redesignating succeeding paragraphs accordingly.

(28) Section 992(e) is amended by striking `and section 541 (relating to personal holding company tax)'.

(29) Section 1202(e)(8) is amended by striking `section 543(d)(1)' and inserting `section 553(c)(1)'.

(30) Section 1362(d)(3)(C)(iii) is amended by adding at the end the following new sentence: `References to section 542 in the preceding sentence shall be treated as references to such section as in effect on the day before its repeal.'

(31) Section 1504(c)(2)(B) is amended by adding `and' at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).

(32) Section 2057(e)(2)(C) is amended by adding at the end the following new sentence:

`References to sections 542 and 543 in the preceding sentence shall be treated as references to such sections as in effect on the day before their repeal.'

(33) Sections 6422 is amended by striking paragraph (3) and by redesignating paragraphs (4) through (12) and paragraphs (3) through (11), respectively.

(34) Section 6501 is amended by striking subsection (f).

(35) Section 6503(k) is amended by striking paragraph (1) and by redesignating paragraphs (2) through (5) as paragraphs (1) through (4), respectively.

(36) Section 6515 is amended by striking paragraph (1) and by redesignating paragraphs (2) through (6) as paragraphs (1) through (5), respectively.

(37) Subsections (d)(1)(B) and (e)(2) of section 6662 are each amended by striking `or a personal holding company (as defined in section 542)'.

(38) Section 6683 is hereby repealed.

(1) The table of parts for subchapter G of chapter 1 is amended by striking the item relating to part II.

(2) The table of sections for part IV of such subchapter G is amended by striking the item relating to section 564.

(3) The table of sections for part I of subchapter B of chapter 68 is amended by striking the item relating to section 6683.

(d) EFFECTIVE DATE- The amendments made by this Act shall apply to taxable years beginning after December 31, 2003.

Subtitle B--Uniform Definition of Child

SEC. 121. UNIFORM DEFINITION OF CHILD.

(a) PERSONAL EXEMPTION-

(1) IN GENERAL- Section 151, as amended by the preceding sections of this Act, is amended by redesignating subsections (c), (d), (e), and (f) as subsections (d), (e), (f), and (g), respectively, and by inserting after subsection (b) the following new subsection:

`(c) ADDITIONAL EXEMPTION FOR QUALIFYING CHILDREN-

`(1) IN GENERAL- An exemption of the exemption amount for each qualifying child.

`(2) QUALIFYING CHILD- For purposes of this section, the term `qualifying child' means, with respect to any taxpayer for any taxable year, an individual--

`(A) who bears a relationship to the taxpayer described in paragraph (3),

`(B) who has the same principal place of abode as the taxpayer for more than 1/2 of such taxable year, and

`(C) who meets the age requirements of paragraph (4).

An individual shall not be treated as failing to meet the requirements of subparagraph (B) by reason of time of birth or death or by reason of temporary absences or other circumstances specified in the regulations prescribed by the Secretary.

`(3) RELATIONSHIP TEST-

`(A) IN GENERAL- For purposes of paragraph (2)(A), an individual bears a relationship to the taxpayer described in this paragraph if such individual is--

`(i) a son, daughter, stepson, or stepdaughter of the taxpayer or a descendant of any such relative,

`(ii) a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative, whom the taxpayer cares for as the taxpayer's own child, or

`(iii) an eligible foster child of the taxpayer.

`(B) ADOPTED CHILD- For purposes of subparagraph (A), a child who is legally adopted, or who is placed with the taxpayer by an authorized placement agency for adoption by the taxpayer, shall be treated as a child by blood.

`(C) ELIGIBLE FOSTER CHILD- For purposes of subparagraph (A), the term `eligible foster child' means an individual--

`(i) who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction, and

`(ii) whom the taxpayer cares for as the taxpayer's own child.

`(4) AGE REQUIREMENTS- For purposes of paragraph (2)(C), an individual meets the requirements of this paragraph if such individual--

`(A) has not attained the age of 19 as of the close of the calendar year in which the taxable year of the taxpayer begins,

`(B) is a student who has not attained the age of 24 as of the close of such calendar year, or

`(C) is permanently and totally disabled (as defined in section 22(e)(3)) at any time during the taxable year.

`(5) SPECIAL RULES-

`(A) MARRIED DEPENDENTS- An individual shall not be a qualifying child of a taxpayer if such individual makes a joint return with the individual's spouse under section 6013 for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

`(B) INDIVIDUALS WHO SUPPORT THEMSELVES- An individual shall not be a qualifying child of a taxpayer if such individual provides over half of such individual's own support for the calendar year in which the taxable year of the taxpayer begins.

`(C) ONLY 1 EXEMPTION AMOUNT- An individual who is a qualifying child of any taxpayer shall not be treated as the dependent of any taxpayer for purposes of this part.

`(6) SPECIAL RULE RELATING TO 2 OR MORE CLAIMING QUALIFYING CHILD-

`(A) IN GENERAL- Except as provided in paragraph (7), if an individual would (but for this paragraph) be a qualifying child of 2 or more taxpayers for taxable years beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is--

`(i) a parent of the individual, or

`(ii) if none of such taxpayers is a parent of the individual, the taxpayer with the highest adjusted gross income for such taxable year.

`(B) PARENTS NOT FILING JOINT RETURNS- If an individual would (but for this paragraph) be a qualifying child of both parents of such individual and such parents do not file a joint return together, such child shall be treated as the qualifying child of--

`(i) the parent with whom the child resided for the longest period during the taxable year, or

`(ii) if the child resides with both parents for the same length of time during such taxable year, the parent with the highest adjusted gross income.

`(C) FOSTER CHILDREN- For purposes of this paragraph, the taxpayer shall be treated as a parent of any eligible foster child who has the same principal place of abode as the taxpayer for more than one-half of such taxable year.

`(7) SPECIAL RULE FOR CERTAIN PRE-2005 INSTRUMENTS-

`(A) IN GENERAL- Notwithstanding paragraph (6), a child who has parents who--

`(i) are divorced or legally separated under a decree of divorce or separate maintenance,

`(ii) are separated under a written separation agreement, or

`(iii) live apart at all times during the last 6 months of the calendar year,

shall be treated as being the qualifying child of the noncustodial parent for a calendar year if the requirements of subparagraph (B) are met.

`(B) REQUIREMENTS- For purposes of subparagraph (A), the requirements of this subparagraph are met if--

`(i) such child would, but for this paragraph, be the qualifying child of the custodial parent, and

`(ii) a qualified pre-2005 instrument between the parents is applicable to such child for the taxable year beginning in such calendar year.

In the case of an agreement executed before January 1, 1985, the requirements of this subparagraph are met only if, in addition to meeting the requirements of clauses (i) and (ii), the noncustodial parent provides at least $600 for the support of such child during such calendar year.

`(C) QUALIFIED PRE-2005 INSTRUMENT- For purposes of this paragraph, the term `qualified pre-2005 instrument' means any written declaration referred to in subsection (e)(2) (as in effect on the day before the date of the enactment of the Individual and Small Business Tax Simplification Act of 2003)--

`(i) which is executed before January 1, 2005, and

`(ii) which is not modified on or after such date in a modification which expressly provides that this subsection shall not apply to such declaration.

`(D) CUSTODIAL PARENT AND NONCUSTODIAL PARENT- For purposes of this subsection--

`(i) CUSTODIAL PARENT- The term `custodial parent' means the parent with whom a child shared the same principal place of abode for the greater portion of the calendar year.

`(ii) NONCUSTODIAL PARENT- The term `noncustodial parent' means the parent who is not the custodial parent.

`(E) SPECIAL RULES FOR SUPPORT- For purposes of this subsection--

`(i) amounts expended for the support of a child or children shall be treated as received from the noncustodial parent to the extent that such parent provided amounts for such support, and

`(ii) in the case of the remarriage of a parent, support of a child received from the parent's spouse shall be treated as received from the parent.'.

(2) CONFORMING AMENDMENTS-

(A) Section 152 is amended by striking subsection (g) (relating to support test in case of child of divorced parents, etc.), as redesignated by the preceding sections this Act.

(B) Paragraph (6) of section 1(f), as amended by the preceding sections of this Act, is amended by striking `151(e)(3)(A)' and inserting `151(f)(3)(A)'.

(i) by striking `paragraph (2) or (4) of section 152(e)' and inserting `section 151(c)(7)', and

(ii) by striking `section 152(e)(1)' and inserting `section 151(c)(7)'.

(D) Sections 21(e)(6) and 129(c) are each amended--

(i) by striking `151(c)' and inserting `151(d)', and

(ii) by striking `151(c)(3)' and inserting `151(d)(3)'.

(E) Sections 25(c)(2)(B), 32(c)(3)(C)(ii), 152(d)(2), and 2032A(c)(7)(D) are each amended by striking `151(c)(4)' and inserting `151(d)(4)'.

(F) Sections 72(t)(7)(A)(iii) and 132(h)(2)(B) are each amended by striking `151(c)(3)' and inserting `151(d)(3)'.

(G) Subparagraph (C) of section 642(b)(2), as amended by the preceding sections of this Act, is amended by striking `151(e)' and inserting `151(f)'.

(H) Paragraph (1) of section 3402(f) is amended by striking `151(e)(2)' and inserting `151(f)(2)'.

(I) Subparagraph (B) of section 3402(r)(2), as so amended, is amended by striking `151(e)' and inserting `151(f)'.

(J) Clause (ii) of section 6012(a)(1)(D), as so amended, is amended--

(i) by striking `151(e)' and inserting `151(f)', and

(ii) by striking `151(e)(2)' and inserting `151(f)(2)'.

(K) The last sentence of section 6013(b)(3)(A), as so amended is amended by striking `151(e)' and inserting `151(f)'.

(b) APPLICATION OF UNIFORM DEFINITION TO DEPENDENT CARE CREDIT- Section 21(b)(1)(A) is amended to read as follows:

`(A) a qualifying child of the taxpayer (as defined in section 151(c)) who has not attained age 13,'.

`(1) IN GENERAL- The term `qualifying child' means a qualifying child of the taxpayer (as defined in section 151(c)) who has not attained age 17 as

of the close of the calendar year in which the taxable year of the taxpayer begins.'.

(d) APPLICATION OF UNIFORM DEFINITION TO EARNED INCOME CREDIT-

(1) IN GENERAL- Paragraph (3) of section 32(c) is amended to read as follows:

`(3) QUALIFYING CHILD-

`(A) IN GENERAL- The term `qualifying child' means a qualifying child of the taxpayer (as defined in section 151(c)).

`(B) PLACE OF ABODE- For purposes of subparagraph (A), the requirements of section 151(c)(2)(B) shall be met only if the principal place of abode is in the United States.

`(C) IDENTIFICATION REQUIREMENTS-

`(i) IN GENERAL--A qualifying child shall not be taken into account under subsection (b) unless the taxpayer includes the name, age, and TIN of the qualifying child on the return of tax for the taxable year.

`(ii) OTHER METHODS- The Secretary may prescribe other methods for providing the information described in clause (i).'.

(2) CONFORMING AMENDMENTS-

(A) Section 32(c)(1) is amended by striking subparagraph (C) and by redesignating subparagraphs (D), (E), (F), and (G) as subparagraphs (C), (D), (E), and (F), respectively.

(B) Section 32(c)(4) is amended by striking `(3)(E)' and inserting `(3)(B)'.

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

(a) DEPENDENCY EXEMPTION- Section 152 is amended by adding at the end the following new subsection:

`(f) SPECIAL RULE RELATING TO TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING SUPPORT- For purposes of this part, any means-tested benefits obtained under programs described in section 6103(l)(7) or substantially similar government programs shall not be taken into account for purposes of determining--

`(1) whether over half of the support of an individual for a calendar year is received from a taxpayer, and

`(2) whether over half of the cost of maintaining a household is furnished by a taxpayer.'.

(b) DEPENDENT CARE CREDIT- Section 21(e)(1) is amended by adding at the end the following: `Any means-tested benefits obtained under programs described in section 6103(l)(7) or substantially similar government programs shall not be taken into account for purposes of determining whether over half of the cost of maintaining a household is furnished by the individual.'.

(c) MARITAL STATUS- Section 7703 (relating to determination of marital status) is amended by adding at the end the following new subsection:

`(c) SPECIAL RULE RELATING TO TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING COST OF MAINTAINING HOUSEHOLD- For purposes of subsection (b)(2), any means-tested benefits obtained under programs described in section 6103(l)(7) or substantially similar government programs shall not be taken into account for purposes of determining whether over half of the cost of maintaining a household is furnished by the individual.'.

SEC. 123. EFFECTIVE DATE.

The amendments made by this subtitle shall apply to taxable years beginning after December 31, 2003.

Subtitle C--Education Tax Incentives

SEC. 131. HOPE AND LIFETIME LEARNING CREDITS COMBINED.

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

`SEC. 25A. EDUCATION CREDIT.

`(a) ALLOWANCE OF CREDIT- In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the amount equal to 50 percent of so much of the qualified expenses paid by the taxpayer during the taxable year (for education furnished to an individual during any academic period beginning in such taxable year) as does not exceed $3,000 for such taxable year with respect to such individual.

`(b) QUALIFIED EXPENSES- For purposes of subsection (a), the term `qualified expenses' means the sum of--

`(1) qualified higher education expenses, and

`(2) the expenses described in subsection (d)(1) with respect to any course of instruction at an eligible educational institution to acquire or improve job skills of the individual.'.

(b) CONFORMING AMENDMENTS TO CREDIT-

(1) Section 25A is amended--

(A) by striking subsection (h), and

(B) by redesignating subsections (e), (f), (g), and (i) as subsections (c), (d), (e), and (f), respectively.

(2) Subsection (e)(2) of section 25A, as so redesignated, is amended by striking `(before the application of subsections (b), (c), and (d))'.

(1) The following provisions are each amended by striking `section 25A(g)(2)' and inserting `section 25A(e)(2)':

(A) Section 72(t)(7)(B).

(B) Section 221(d)(2)(B).

(D) Section 529(c)(3)(B)(v)(I).

(E) Section 530(b)(2)(A).

(F) Section 530(d)(2)(C)(i)(I).

(G) Section 530(d)(4)(B)(iii).

(2) Section 221(d) is amended--

(A) in paragraph (2) by striking `section 25A(f)(2)' and inserting `section 25A(d)(2)', and

(B) by amending paragraph (3) to read as follows:

`(3) ELIGIBLE STUDENT- The term `eligible student' means, with respect to any academic period, a student who--

`(A) meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment of this section, and

`(B) is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.'.

(3) Section 529(e)(3)(B)(i) is amended by striking `section 25A(b)(3)' and inserting `section 221(d)(3)'.

(4) The heading of section 529(c)(3)(B)(v) is amended to read as follows: `COORDINATION WITH EDUCATION CREDIT- '.

(5) The heading of section 530(d)(2)(C) is amended to read as follows: `COORDINATION WITH EDUCATION CREDIT AND QUALIFIED TUITION PROGRAMS- '.

(6) Section 6050S(e) is amended by striking `subsection (g)(2)' and inserting `subsection (e)(2)'.

(7) Section 6213(g)(2)(J) is amended by striking `section 25A(g)(1)' and inserting `section 25A(e)(1)'.

(8) The item relating to section 25A in the table of sections for subpart A of part IV of subchapter A of chapter 1 is amended to read as follows:

`Sec. 25A. Education Credit.'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

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

(a) IN GENERAL- Paragraph (3) of section 529(e) (relating to other definitions and special rules) is amended to read as follows:

`(3) QUALIFIED HIGHER EDUCATION EXPENSES-

`(A) IN GENERAL- The term `qualified higher education expenses' means--

`(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and

`(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.

`(B) ROOM AND BOARD INCLUDED FOR STUDENTS WHO ARE AT LEAST HALF-TIME-

`(i) IN GENERAL- In the case of an individual who is an eligible student for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(7), a designated beneficiary shall be treated as meeting the requirements of this clause.

`(ii) LIMITATION- The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed--

`(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period.

`(iii) ELIGIBLE STUDENT- For purposes of this subparagraph, the term `eligible student' means, with respect to any academic period, a student who--

`(I) meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment of this section, and

`(II) is carrying at least 1/2 the normal full-time work load for the

course of study the student is pursuing.

`(C) EXCEPTIONS-

`(i) EXCEPTION FOR EDUCATION INVOLVING SPORTS, ETC- Such term does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual's degree program.

`(ii) EXCEPTION FOR NONACADEMIC FEES- Such term does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual's academic course of instruction.'.

(b) CONFORMING AMENDMENTS-

(1) Section 25A and 6050S are each amended by striking `qualified tuition and related expenses' each place it appears and inserting `qualified higher education expenses'.

(2) Section 25A(f)(1) is amended to read as follows:

`(1) QUALIFIED HIGHER EDUCATION EXPENSES- The term `qualified higher education expenses' means the qualified higher education expenses (as defined by section 529(e)(3) without regard to subparagraph (B) thereof) required for the enrollment or attendance of--

`(A) the taxpayer,

`(B) the taxpayer's spouse, or

`(C) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151,

at an eligible educational institution for courses of instruction of such individual at such institution.'.

(3) Section 135(c)(2) is amended--

(A) by striking `tuition and fees' and inserting `the qualified higher education expenses (as defined by section 529(e)(3) without regard to subparagraph (B) thereof)', and

(B) by striking subparagraph (B) and redesignating subparagraph (C) as subparagraph (B).

(4) Section 221(d)(2) is amended by striking `the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of this Act)' and inserting `the qualified higher education expenses (as defined by section 529(e)(3) without regard to subparagraph (B) thereof) incurred for attendance'.

(5)(A) Section 222 is amended by striking `qualified tuition and related expenses' each place it appears and inserting `qualified higher education expenses'.

(B) Section 222(d)(1) is amended to read as follows:

`(1) QUALIFIED HIGHER EDUCATION EXPENSES- The term `qualified higher education expenses' has the meaning given such term by section 529(e)(3) (without regard to subparagraph (B) thereof). Such expenses shall be reduced in the same manner as under section 25A(g)(2).'.

(C) Section 222(d) is amended by redesignating paragraph (6) as paragraph (7) and by inserting after paragraph (5) the following new paragraph:

`(6) ROOM AND BOARD INCLUDED FOR STUDENTS WHO ARE FULL-TIME- No amount shall be taken into account under this section for an expense described in section 529(e)(3)(B) (relating to room and board included for students who are at least half-time) unless such individual is an eligible student (as defined in section 25A(b)(3), determined by substituting `the normal full-time work load' in lieu of ` 1/2 the normal full-time work load' in subparagraph (B) thereof.'.

TUITION AND RELATED

HIGHER EDUCATION

(E) The table of sections for part VII of subchapter B of chapter 1 is amended by amending the item relating to section 222 to read as follows:

`Sec. 222. Qualified higher education expenses.'.

(6)(A) Section 6724(d) is amended--

(i) in paragraph (1)(B)(x) by striking `qualified tuition and related expenses' and inserting `qualified higher education expenses', and

(ii) in paragraph (2)(Z) by striking `qualified tuition and related expenses' and inserting `qualified higher education expenses'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to amounts paid in taxable years beginning after December 31, 2003, for education furnished in periods beginning after such date.

TITLE II--SMALL BUSINESS TAX SIMPLIFICATION

SEC. 201. UNIFIED PASS-THRU ENTITY REGIME.

(a) TERMINATION OF S CORPORATION STATUS-

(1) NO NEW S CORPORATION ELECTIONS- Subsection (a) of section 1362 is amended by adding at the end the following new paragraph:

`(3) TERMINATION OF AUTHORITY TO MAKE ELECTION- No election may be made under paragraph (1) for any taxable year beginning after December 31, 2003.'.

(2) TERMINATION OF STATUS- Subsection (d) of section 1362 (relating to termination) is amended by adding at the end the following new paragraph:

`(4) TREATMENT AS PARTNERSHIP AFTER 2012- An election under subsection (a)--

`(A) shall not be effective for any taxable year beginning after December 31, 2012, and

`(B) shall be treated as an election under section 7701(a)(2)(B)(iii) for taxable years beginning after such date.'.

(3) EFFECTIVE DATE- The amendments made by this subsection shall apply to taxable years beginning after December 31, 2003.

(b) ELECTION BY CERTAIN CORPORATIONS TO BE TAXED AS PARTNERSHIP-

(1) IN GENERAL- Paragraph (2) of section 7701 (defining partnership and partner) is amended to read as follows:

`(2) PARTNERSHIP AND PARTNER-

`(A) IN GENERAL- The term `partnership' includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term `partner' includes a member in such a syndicate, group, pool, joint venture, or organization.

`(B) ELECTION BY CORPORATION TO BE TAXED AS PARTNERSHIP-

`(i) IN GENERAL- An eligible corporation may elect to be treated as a partnership for purposes of this title.

`(ii) ELIGIBLE CORPORATION- For purposes of clause (i), the term `eligible corporation' means an entity--

`(I) which, without regard to this subparagraph, is a domestic corporation no stock of which is readily tradable on an established securities market or otherwise, and

`(II) which is not an ineligible corporation (as defined by section 1361(b)(2)).

`(iii) ELECTION AND TERMINATION- For purposes of this subparagraph, rules similar to the rules of section 1362 (other than subsections (a)(3), (d)(3) and (4), and (e) thereof) shall apply.

`(iv) EFFECT OF ELECTION- No gain or loss shall be recognized by the shareholders or the corporation by reason of an election under this subparagraph, and rules similar to the rules of sections 1366(f)(2) and 1374 shall apply.

`(v) DISTRIBUTIONS, ETC- Each partner shall include in gross income as a dividend, any amount that would have been so includible had the entity been an S corporation during the period the entity was treated as a partnership. Notwithstanding the preceding sentence, the provisions of subchapter K of chapter 1 shall apply to determine the basis of any property distributed and the basis of any interest in the partnership.'.

(2) MODIFICATION TO TREATMENT OF SECTION 1374 TAX FOR EARNINGS AND PROFITS PURPOSES- Paragraph (2) of section 1366(f) is amended to read as follows:

`(2) TREATMENT OF TAX IMPOSED ON BUILD-IN GAINS-

`(A) IN GENERAL- The amount of the items of the net recognized built-in-gain taken into account under section 1374(b)(1) (reduced by any deduction allowed under section 1374(b)(2)) shall not be taken into account under this section.

`(B) EARNINGS AND PROFITS- The accumulated earnings and profits of the corporation

shall be increased at the beginning of the taxable year by the amount not taken into account under this section by reason of subparagraph (A) (determined without regard to section 1374(b)(2)) reduced by the tax imposed by section 1374 (net of credits allowed).'.

(3) EFFECTIVE DATE- The amendments made by this subsection shall apply to taxable years beginning after December 31, 2003.

(1) IN GENERAL- Section 351 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection:

`(h) SPECIAL RULE FOR PARTNERSHIPS WHICH INCORPORATE AND SUBSEQUENTLY REORGANIZE- The step transaction doctrine and any similar doctrine shall not apply for purposes of determining whether the control requirement of subsection (a) is met in any case in which--

`(1) a partnership engaged in an active trade or business transfers substantially all of the property used in carrying on such trade or business to a corporation which is not publicly traded, and

`(2) such corporation subsequently enters into a reorganization under this chapter.'.

(2) EFFECTIVE DATE- The amendment made by this subsection shall apply to transactions after December 31, 2003.

SEC. 202. INCREASE IN EXPENSING UNDER SECTION 179.

(a) INCREASE IN DOLLAR LIMITATIONS-

(1) IN GENERAL- Paragraph (1) of section 179(b) (relating to dollar limitation) is amended to read as follows:

`(1) DOLLAR LIMITATION- The aggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $25,000 ($40,000 in the case of taxable years beginning after December 31, 2013).'.

(2) INCREASE IN PHASEOUT THRESHOLD- Paragraph (2) of section 179(b) is amended by inserting before the period `($325,000 in the case of taxable years beginning after December 31, 2013).'.

(b) INFLATION ADJUSTMENTS-

(1) IN GENERAL- Subsection (b) of section 179 is amended by redesignating paragraphs (3) and (4) as paragraphs (4) and (5), respectively, and by inserting after paragraph (2) the following new paragraph:

`(3) INFLATION ADJUSTMENT- In the case of any taxable year beginning in a calendar year after 2005, the dollar amounts contained in paragraphs (1) and (2) which would (but for this paragraph) apply to such taxable year shall be increased by an amount equal to the product of--

`(A) such dollar amount, and

`(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting in subparagraph (B) thereof--

`(i) `calendar year 2004' for `calendar year 1992' with respect to the $25,000 and $200,000 amounts, and

`(ii) `calendar year 2012' for `calendar year 1992' with respect to the $40,000 and $325,000 amounts.

If any amount after adjustment under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000.'.

(2) CONFORMING AMENDMENT- Subparagraph (B) of section 179(b)(5), as redesignated by paragraph (1), is amended by striking `paragraph (3)' and inserting `paragraph (4)'.

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

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

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

`(a) NONRECOGNITION OF GAIN- In the case of the sale of section 1031 property with respect to which the taxpayer elects the application of this section, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds--

`(1) the cost of replacement section 1031 property purchased during the rollover period, reduced by

`(2) any portion of such cost previously taken into account under this section.

`(b) DEFINITIONS- For purposes of this section--

`(1) SECTION 1031 PROPERTY-

`(A) IN GENERAL- The term `section 1031 property' means any property held for productive use in a trade or business or for investment.

`(B) EXCEPTIONS- The term `section 1031 property' shall not include the following:

`(i) Stock in trade or other property held primarily for sale.

`(ii) Stocks, bonds, or notes.

`(iii) Other securities or evidences of indebtedness or interest.

`(iv) Interests in a partnership.

`(v) Certificates of trust or beneficial interests.

`(vi) Choses in action.

`(2) REPLACEMENT SECTION 1031 PROPERTY- The term `replacement section 1031 property' means, with respect to the sale of any section 1031 property, other section 1031 property which is of a like kind to the section 1031 property sold.

`(3) ROLLOVER PERIOD- The term `rollover period' means, with respect to the sale of any property, the period which begins 180 days before the date of such sale and ends on the earlier of--

`(A) the date which is 180 days after the date of such sale, or

`(B) the due date (determined with regard to extension) for the taxpayer's return of the tax imposed by this chapter for the taxable year which includes the date of such sale.

`(c) BASIS ADJUSTMENTS- If gain from any sale is not recognized by reason of subsection (a), such gain shall be applied to reduce the basis for determining the gain or loss of replacement section 1031 property purchased during the rollover period. If more than one replacement section 1031 property is purchased during the rollover period, such reduction shall be allocated among such properties in such amounts as the taxpayer elects.

`(d) SPECIAL RULES FOR TRANSACTIONS BETWEEN RELATED PERSONS-

`(1) SALE BY TAXPAYER- If--

`(A) the taxpayer sells property to a related person,

`(B) there is nonrecognition of gain under this section with respect to such sale (determined without regard to this subsection), and

`(C) before the date 2 years after the date of such sale the related person disposes of such property,

there shall be no nonrecognition of gain under this section to the taxpayer with respect to such sale, and any gain recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which the disposition referred to in subparagraph (C) occurs.

`(2) PURCHASE BY TAXPAYER- If the taxpayer--

`(A) purchases property from a related person which is taken into account under subsection (a)(1) (determined without regard to this subsection), and

`(B) disposes of such property before the date 2 years after the date of such purchase,

such property shall not be taken into account under subsection (a)(1), and any gain recognized by reason of this subsection shall be taken into account on the date on which the disposition referred to in subparagraph (B) occurs.

`(3) CERTAIN DISPOSITIONS NOT TAKEN INTO ACCOUNT- For purposes of paragraphs (1)(C) and (2)(B), there shall not be taken into account any disposition--

`(A) after the earlier of the death of the taxpayer or the death of the related person,

`(B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the transaction occurred before the threat or imminence of such conversion, or

`(C) with respect to which it is established to the satisfaction of the Secretary that neither

the transaction nor such disposition had as one of its principal purposes the avoidance of Federal income tax.

`(4) RELATED PERSON- For purposes of this subsection, the term `related person' means any person bearing a relationship to the taxpayer described in section 267(b) or 707(b)(1).

`(5) SPECIAL RULE WHERE SUBSTANTIAL DIMINUTION OF RISK-

`(A) IN GENERAL- If subparagraph (B) applies to any property for any period, the running of the period set forth in paragraph (1)(C) with respect to such property shall be suspended during such period.

`(B) PROPERTY TO WHICH PARAGRAPH APPLIES- This subparagraph shall apply to any property for any period during which the holder's risk of loss with respect to the property is substantially diminished by--

`(i) the holding of a put with respect to such property,

`(ii) the holding by another person of a right to acquire such property, or

`(iii) a short sale or any other transaction.

`(6) TREATMENT OF CERTAIN TRANSACTIONS- This section shall not apply to any transaction which is part of a series of transactions structured to avoid the purposes of this subsection.

`(e) SPECIAL RULES- For purposes of this section--

`(1) EXCHANGES- A contemporaneous exchange by the taxpayer of section 1031 property for replacement section 1031 property shall be treated as a sale of such section 1031 property and a purchase of such replacement section 1031 property without regard to whether the taxpayer makes the election described in subsection (a). In the case of such an exchange, no loss shall be recognized.

`(2) CERTAIN PARTNERSHIPS- An interest in a partnership which has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.

`(3) LIVESTOCK OF DIFFERENT SEXES- Livestock of different sexes are not property of a like kind.

`(4) FOREIGN REAL PROPERTY- Real property located in the United States and real property located outside the United States are not property of a like kind.

`(5) FOREIGN PERSONAL PROPERTY-

`(A) IN GENERAL- Personal property used predominantly within the United States and personal property used predominantly outside the United States are not property of a like kind.

`(B) PREDOMINANT USE- Except as provided in subparagraphs (C) and (D), the predominant use of any property shall be determined based on--

`(i) in the case of the sale of any property by the taxpayer, the 2-year period ending on the date of such sale, and

`(ii) in the case of the purchase of any property by the taxpayer, the 2-year period beginning on the date of such purchase.

`(C) PROPERTY HELD FOR LESS THAN 2 YEARS- Except in the case of a sale or purchase which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection, only the periods the property was held by the taxpayer (or any related person) shall be taken into account under subparagraph (B).

`(D) SPECIAL RULE FOR CERTAIN PROPERTY- Property described in any subparagraph of section 168(g)(4) shall be treated as used predominantly in the United States.'.

(b) PRESERVATION OF CERTAIN GAIN, LOSS, AND BASIS RULES FOR EXCHANGES-

(1) Section 1035 (relating to certain exchanges of insurance policies) is amended--

(A) by striking subsection (d),

(B) by redesignating subsections (b) and (c) as subsections (e) and (f), respectively, and

`(b) GAIN FROM EXCHANGES NOT SOLELY IN KIND- If an exchange would be within the provisions of subsection (a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

`(c) LOSS FROM EXCHANGES NOT SOLELY IN KIND- If an exchange would be within the provisions of subsection (a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

`(d) BASIS- If property was acquired on an exchange described in subsection (a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by subsection (a), section 1036(a), or

section 1037(a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of subsection (a) and section 1036(a), where as part of the consideration

to the taxpayer another party to the exchange assumed (as determined under section 357(d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange.'.

(2) Section 83(g), section 424(b), section 424(c)(1)(B), section 454(c)(2), paragraphs (1) and (2) of section 1036(c), and paragraphs (1) and (2) of section 1037(c) are each amended by striking `section 1031' and inserting `section 1035'.

(3) Paragraphs (1) and (2) of section 1037(b) are each amended by striking `section 1031(b)' and inserting `section 1035(b)'.

(1) Clause (i) of section 197(f)(2)(B) is amended by inserting `(including any purchase taken into account under subsection (a)(1) thereof)' after `1031'.

(2) Paragraph (6) of section 453(f) is amended to read as follows:

`(6) LIKE-KIND EXCHANGES- In the case of any sale or exchange to which section 1031 applies, the total contract price, the gross profit from such sale, and the amount of any payment (other than for purposes of subsection (b)(1)) shall be reduced to take into account any amount not recognized by reason of section 1031. Similar rules shall apply in the case of an exchange which is described in section 356(a) and is not treated as a dividend.'.

(3) BASIS LIMITATION FOR PLAYER CONTRACTS TRANSFERRED IN CONNECTION WITH THE SALE OF A FRANCHISE- Paragraph (1) of section 1056(b) is amended to read as follows:

`(1) to any sale or exchange to which section 1031 applies, and'.

(4) VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY-

(A) Clause (i) of section 2032A(e)(14)(C) is amended to read as follows:

`(i) QUALIFIED REPLACEMENT PROPERTY- The term `qualified replacement property' means any real property the acquisition of which results in the nonrecognition of gain under section 1031 or 1033.'.

(B) Subclause (I) of section 2032A(e)(14)(C)(ii) is amended by inserting `sale or' before `exchange'.

`(i) REPLACEMENT OF QUALIFIED REAL PROPERTY-

`(1) TREATMENT OF PROPERTY SOLD OR EXCHANGED-

`(A) SALES AND EXCHANGES WITH NO RECOGNITION OF GAIN- If an interest in qualified real property is sold or exchanged and no gain is recognized under section 1031 by reason of the acquisition of qualified replacement property, no tax shall be imposed by subsection (c) by reason of such sale or exchange.

`(B) SALES AND EXCHANGES WITH PARTIAL RECOGNITION OF GAIN- Except as provided in paragraph (1), if an interest in qualified real property is sold or exchanged and a portion of the gain is not recognized under section 1031 by reason of the acquisition of qualified replacement property, the amount of the tax imposed by subsection (c) by reason such sale or exchange shall be the amount of tax which (but for this paragraph) would have been imposed on such sale or exchange under subsection (c)(1), reduced by an amount which--

`(i) bears the same ratio to such tax, as

`(ii) the fair market value of the qualified replacement property (determined as of the time or acquisition) bears to the fair market value of the qualified real property sold or exchanged (determined as of the time of disposition).

`(2) TREATMENT OF QUALIFIED REPLACEMENT PROPERTY- For purposes of subsection (c)--

`(A) any interest in qualified replacement property shall be treated in the same manner as if it were a portion of the interest in the qualified real property which was sold or exchanged,

`(B) any tax imposed by subsection (c) by reason of the sale or exchange shall be treated as a tax imposed on a partial disposition, and

`(C) paragraph (6) of subsection (c) shall be applied by treating material participation with respect to the sold or exchanged property as material participation with respect to the qualified replacement property.

`(3) QUALIFIED REPLACEMENT PROPERTY- For purposes of this subsection, the term `qualified replacement property' means real property which is to be used for the qualified use set forth in subparagraph (A) or (B) of subsection (b)(2) under which the qualified real property sold in the qualified sale originally qualified under subsection (a).'.

(d) CLERICAL AMENDMENT- The table of sections for part III of subchapter O of chapter 1 is amended by striking the item relating to section 1031 and inserting the following new item:

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

(e) EFFECTIVE DATE- The amendments made by this section shall apply to transfers made after December 31, 2003, in tax years ending after such date.

SEC. 204. REPEAL OF COLLAPSIBLE CORPORATIONS.

(a) IN GENERAL- Subpart C of part II of subchapter C of chapter 1 (relating to collapsible corporations) is hereby repealed.

(b) CLERICAL AMENDMENT- The table of subparts for part II of subchapter C of chapter 1 is amended by striking the item relating to subpart C.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to sales, exchanges, and distributions made after the date of the enactment of this Act.

SEC. 205. REFERENCES TO GENERAL PARTNERS.

(a) EXCLUSION OF CERTAIN ACTIVE BUSINESSES FROM AT RISK RULES- Subclause (I) of section 465(c)(7)(D)(ii) (defining qualified corporate partner) is amended to read as follows:

`(I) such corporation is not prohibited or limited under State law from participation in the management or business of the partnership.'.

(b) PAYMENTS TO RETIRING PARTNERS- Subparagraph (B) of section 736(b)(3) (relating to limitation on application of paragraph (2)) is amended to read as follows:

`(B) any portion of the retiring or deceased partner's distributive share of partnership income was subject to tax under section 1401.'.

`(I) CERTAIN GENERAL PARTNERS- The interest of a partner in

the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) for any taxable year of the partnership if for the taxable year of the partner in which such partnership taxable year ends--

`(aa) the partner is not limited as to participation in the management or activity of the qualified fund, and

`(bb) such partner (and each corporation filing a consolidated return with such partner) had no ordinary income or loss from a section 988 transaction which is foreign currency gain or loss (as the case may be).'.

(d) SPECIAL VALUATION RULES FOR GENERATION-SKIPPING TAX- Clause (ii) of section 2701(b)(2)(B) (relating to partnerships) is amended to read as follows:

`(ii) in the case of a limited partnership, the holding of any interest as a partner who is not limited as to participation in management or activity of the partnership.'.

(e) TAX MATTERS PARTNER- Paragraph (7) of section 6231(a) (defining tax matters partner) is amended to read as follows:

`(7) TAX MATTERS PARTNER-

`(A) IN GENERAL- The tax matters partner of any partnership is--

`(i) the partner designated as the tax matters partner as provided in regulations, or

`(ii) if there is no partner who has been so designated, the partner having the largest profits interest in the partnership at the close of the taxable year involved (or, where there is more than 1 such partner, the 1 of such partners whose name would appear first in an alphabetical listing).

`(B) SELECTION BY SECRETARY- If there is no partner designated under subparagraph (A)(i) and the Secretary determines that it is impracticable to apply subparagraph (A)(ii), the partner selected by the Secretary shall be treated as the tax matters partner. The Secretary shall, within 30 days of selecting a tax matters partner under the preceding sentence, notify all partners required to receive notice under section 6223(a) of the name and address of the person selected.

`(C) RESTRICTION ON DESIGNATION OF PARTNER- A partner may not be designated as a tax matters partner under subparagraph (A)(i) unless such partner is not limited as to participation in management or activity of the partnership.'.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

SEC. 206. REFERENCES TO LIMITED PARTNERS.

(a) LIMITED ENTREPRENEUR-

(1) IN GENERAL- Subparagraph (A) of section 464(e)(2) (defining limited entrepreneur) is amended by striking `than as a limited partner'.

(2) CONFORMING AMENDMENTS-

(A) Section 464(c) is amended--

(i) by striking `limited partners or' in paragraph (1)(B),

(ii) by striking `a limited partner or' in paragraph (2).

(B) Section 1256 is amended--

(i) by striking `limited partners or' each place it appears in subsections (e)(3)(B) and (f)(4),

(ii) by striking `a limited partner or' in subsection (e)(3)(C), and

(iii) by striking `limited partner or' both places it appears in subsection (e)(4)(A)(i).

(i) by striking `limited partner or' in the matter preceding subclause (i),

(ii) by striking `limited partner's (or limited entrepreneur's) in subclause (i) and inserting `limited entrepreneur's', and

(iii) by striking `PARTNERS AND LIMITED' in the heading.

(b) PASSIVE LOSS RULES-

(1) Subsection (h) of section 469 is amended by striking paragraph (2) and by redesignating paragraphs (3), (4), and (5) as paragraphs (2), (3), and (4), respectively.

(2) Subparagraph (A) of section 469(c)(7) is amended by striking the last sentence.

(3) Paragraph (6) of section 469(i) is amended by striking subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C).

(4) Subsection (f) of section 772 (relating to special rules for applying passive loss limitations) is amended to read as follows:

`(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS LIMITATIONS-

`(1) IN GENERAL- If any person holds an interest in an electing large partnership other than as a partner described in paragraph (3)--

`(A) paragraph (2) of subsection (c) shall not apply to such partner, and

`(B) such partner's distributive share of the partnership items allocable to passive loss limitation activities shall be taken into account separately to the extent necessary to comply with the provisions of section 469.

`(2) EXCEPTION- Paragraph (1) shall not apply to any items allocable to an interest held as a partner described in paragraph (3).

`(3) PARTNER DESCRIBED- For purposes of this subsection, a partner is described in this paragraph if the partner is a person whose participation in the management or business activity of the partnership is limited under applicable State law.'.

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

(a) IN GENERAL- Paragraph (13) of section 1402(a) is amended to read as follows:

`(13) there shall be excluded the distributive share of net income of a partner attributable to capital;'.

(b) PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL- Section 1402 is amended by adding at the end the following new subsection:

`(l) PARTNERSHIP INCOME ATTRIBUTABLE TO CAPITAL-

`(1) IN GENERAL- For purposes of subsection (a)(13), the following amounts shall be treated as income attributable to capital--

`(A) the amount, if any, in excess of what would constitute reasonable compensation for services rendered by such partner to the partnership, and

`(B) an amount equal to a reasonable rate of return on unreturned capital of the partner determined as of the beginning of the taxable year.

`(2) DEFINITIONS- For purposes of paragraph (1)--

`(A) UNRETURNED CAPITAL- The term `unreturned capital' means the excess of the aggregate amount of money and the fair market value as of the date of contribution of other consideration (net of liabilities) contributed by the partner over the aggregate amount of money and the fair market value as of the date of distribution of other consideration (net of liabilities) distributed by the partnership to the partner, increased or decreased for the partner's distributive share of all reportable items as determined in section 702. If the partner acquires a partnership interest and the partnership makes an election under section 754, the partner's unreturned capital shall take into account appropriate adjustments under section 743.

`(B) REASONABLE RATE OF RETURN- A reasonable rate of return on unreturned capital shall equal 150 percent (or such higher rate as is established in regulations) of the highest applicable Federal rate, as determined under section 1274(d)(1), at the beginning of the partnership's taxable year.

`(3) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply with respect to services performed in taxable years beginning after December 31, 2003.

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

(a) IN GENERAL- Paragraph (2) of section 775(a) (relating to election) is amended by adding at the end the following: `No election under this subsection shall be made after December 31, 2003.'.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to partnership taxable years beginning after December 31, 2003.

END