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
`(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 $50.'.
(b) REPEAL OF HEAD OF HOUSEHOLD FILING STATUS- Subsection (b) of section 1
(relating to heads of household) is repealed.
(c) CONFORMING AMENDMENTS-
(1) Section 1(c) is amended--
(A) in the heading by striking `SPOUSES AND HEADS OF HOUSEHOLDS)- ' and
inserting `SPOUSES)- ', and
(B) by striking `or the head of a household as defined in section 2(b)'.
(2) Section 2 is amended by striking subsection (b) and by redesignating
subsections (c), (d), and (e) as subsections (b), (c), and (d), respectively.
(3) Section 25B(b) is amended by striking the portion of the table related
to head of a household.
(4) Section 63(c)(2) is amended--
(A) by striking subparagraph (B), and
(B) by redesignating subparagraphs (C) and (D) as subparagraphs (B) and
(C), respectively.
(5) Section 151(c)(6)(B)(iii) is amended by striking `or a head of a household
(as such terms are defined in section 2)' and inserting `(as defined in
section 2)'.
(6) Section 151(c)(6)(C) is amended by striking `, section 2(b)(1)(A),'.
(7) Section 151(e)(3)(C) is amended--
(A) by striking clause (ii),
(B) in clause (iii), by striking `or head of a household', and
(C) by redesignating clauses (iii) and (iv) as clauses (ii) and (iii),
respectively.
(8) Section 3402(r)(2)(A) is amended by striking `section 63(c)(2)(C)' and
inserting `section 63(c)(2)(B)'.
(9) Section 6012(a)(1)(A) is amended--
(A) in clause (i), by striking `is not a head of a household (as defined
in section 2(b)),',
(B) by striking clause (ii),
(C) by redesignating clauses (iii) and (iv) as clauses (ii) and (iii),
respectively, and
(D) in the last sentence, by striking `Clause (iv)' and inserting `Clause
(iii)' and by striking `151(c)' and inserting `151(d)'.
(10) Section 6012(a)(1)(B) is amended--
(A) by striking `clause (i), (ii), or (iii)' and inserting `clause (i)
or (ii)', and
(B) by striking `clause (iv)' and inserting `clause (iii)'.
(11)(A) Paragraph (6) of section 1(f) is amended by striking `151(d)(4)(A)'
and inserting `151(e)(4)(A)'.
(B) Subparagraph (C) of section 642(b)(2), as amended by section 105, is
amended--
(i) by striking `151(d)' and inserting `151(e)', and
(ii) by striking `151(d)(3)(C)(iii)' and inserting `151(e)(3)(C)(ii)'.
(C) Paragraph (1) of section 3402(f) is amended by striking `151(d)(2)'
and inserting `151(e)(2)'.
(D) Subparagraph (B) of section 3402(r)(2) is amended by striking `151(d)'
and inserting `151(e)'.
(E) Clause (ii) of section 6012(a)(1)(D) is amended--
(i) by striking `151(d)' and inserting `151(e)', and
(ii) by striking `151(d)(2)' and inserting `151(e)(2)'.
(F) The next to the last sentence of section 6013(b)(3)(A) is amended by
striking `151(d)' and inserting `151(e)'.
(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 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--
`(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) CONFORMING AMENDMENTS-
(A) Subparagraph (A) of section 219(g)(3) is amended--
(i) by striking `sections 86 and 469' in clause (i) and inserting `section
469', and
(ii) by inserting `86,' before `135' in clause (ii).
(B) Paragraph (4) of section 135(c) is amended--
(i) by inserting `86,' before `137' in clause (i), and
(ii) by striking `sections 86, 469,' in clause (ii) and inserting `sections
469'.
(C) Paragraph (3) of section 137(b) is amended--
(i) by inserting `86,' before `221' in clause (i), and
(ii) by striking `86,' in clause (ii).
(D) Subparagraph (C) of section 221(b)(2) is amended--
(i) by inserting `86,' before `222' in clause (i), and
(ii) by striking `86,' in clause (ii).
(E) Subparagraph (C) of section 222(b)(2) is amended--
(i) by inserting `86,' before `911' in clause (i), and
(ii) by striking `86,' in clause (ii).
(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.'.
(c) MINIMUM TAX TREATMENT-
(1) Paragraph (1) of section 56(b) is amended by adding at the end the following
new subparagraph:
`(G) CAPITAL GAIN DEDUCTION NOT APPLICABLE- Section 1203 shall not apply.'.
(2) Subsection (b) of section 55 is amended by striking paragraph (3) and
inserting the following new paragraphs:
`(3) MAXIMUM TAX ON NET CAPITAL GAIN- The amount of tax determined under
the first sentence of paragraph (1)(A)(i) shall not exceed the sum of--
`(A) the amount determined under such first sentence computed at the rates
and in the same manner as if this paragraph had not been enacted on the
taxable excess reduced by the net capital gain, plus
`(B) a tax on the net capital gain determined by using the regular tax
capital gains tax rates.
`(4) REGULAR TAX ON NET CAPITAL GAIN- For purposes of paragraph (3), the
tax on the net capital gain determined by using the regular tax capital
gains tax rates is the excess of--
`(A) the tax that would be computed under section 1 if net capital gain
were determined with the adjustments under this part, over
`(B) the tax that would be so computed under section 1 if the taxable
income were reduced by 50 percent of the net capital gain as so determined.'.
(d) TECHNICAL AND CONFORMING AMENDMENTS-
(1) Section 1 is amended by striking subsection (h).
(2) Paragraph (7) of section 57(a) is amended by striking the last sentence.
(3) Subparagraph (E) of section 163(d)(4) is amended to read as follows:
`(E) COORDINATION WITH CAPITAL GAINS DEDUCTION- The net capital gain taken
into account under section 1203 for any taxable year shall be reduced
(but not below zero) by the amount which the taxpayer takes into account
as investment income under subparagraph (B)(iii) for such year.'.
(4) Paragraph (1) of section 170(e) is amended by striking `the amount of
gain' in the material following subparagraph (B)(ii) and inserting `50 percent
(100 percent in the case of a corporation) of the amount of gain'.
(5) Subparagraph (B) of section 172(d)(2) is amended to read as follows:
`(B) the exclusion under section 1202 and the deduction under section
1203 shall not be allowed.'.
(6) The last sentence of section 453A(c)(3) is amended by striking all that
follows `long-term capital gain,' and inserting `the maximum rate on net
capital gain under section 1201 or the deduction under section 1203 (whichever
is appropriate) shall be taken into account.'.
(7)(A) Section 641(c)(2)(A) is amended by striking `Except as provided in
section 1(h), the' and inserting `The'.
(B) Section 641(c)(2)(C) is amended by inserting after clause (iii) the
following new clause:
`(iv) The deduction under section 1203.'.
(8) Paragraph (4) of section 642(c) is amended to read as follows:
`(4) ADJUSTMENTS- To the extent that the amount otherwise allowable as a
deduction under this subsection consists of gain from the sale or exchange
of capital assets held for more than 1 year, proper adjustment shall be
made for any exclusion allowable under section 1202 and any deduction allowable
under section 1203 to the estate or trust. In the case of a trust, the deduction
allowed by this subsection shall be subject to section 681 (relating to
unrelated business income).'.
(9) Section 642 is amended by adding at the end the following new subsection:
`(j) CAPITAL GAINS DEDUCTION- The deduction under section 1203 to an estate
or trust shall be computed by excluding the portion (if any) of the gains
for the taxable year which is includible by the income beneficiaries under
sections 652 and 662 (relating to inclusions of amounts in gross income of
beneficiaries of trusts) as gain derived from the sale or exchange of capital
assets.'.
(10) The last sentence of section 643(a)(3) is amended to read as follows:
`The exclusion under section 1202 and the deduction under section 1203 shall
not be taken into account.'.
(11) Subparagraph (C) of section 643(a)(6) is amended by inserting `(i)'
before `there shall' and by inserting before the period `, and (ii) the
deduction under section 1203 (relating to capital gains deduction) shall
not be taken into account'.
(12) Paragraph (4) of section 691(c) is amended by striking `1(h),' and
by inserting `1203,' after `1202,'.
(13) The second sentence of paragraph (2) of section 871(a) is amended by
striking `section 1202' and inserting `sections 1202 and 1203'.
(14)(A) Paragraph (2) of section 904(b) is amended by striking subparagraphs
(A) and (C), by redesignating subparagraph (B) as subparagraph (A), and
by inserting after subparagraph (A) (as so redesignated) the following new
subparagraph:
`(B) OTHER TAXPAYERS- In the case of a taxpayer other than a corporation,
taxable income from sources outside the United States shall include gain
from the sale or exchange of capital assets only to the extent of foreign
source capital gain net income.'.
(B) Subparagraph (A) of section 904(b)(2), as so redesignated, is amended--
(i) by striking all that precedes clause (i) and inserting the following:
`(A) CORPORATIONS- In the case of a corporation--', and
(ii) by striking in clause (i) `in lieu of applying subparagraph (A),'.
(C) Paragraph (3) of section 904(b) is amended by striking subparagraphs
(D) and (E) and inserting the following new subparagraph:
`(D) RATE DIFFERENTIAL PORTION- The rate differential portion of foreign
source net capital gain, net capital gain, or the excess of net capital
gain from sources within the United States over net capital gain, as the
case may be, is the same proportion of such amount as the excess of the
highest rate of tax specified in section 11(b) over the alternative rate
of tax under section 1201(a) bears to the highest rate of tax specified
in section 11(b).'.
(15) Paragraph (1) of section 1402(i) is amended by inserting `, and the
deduction provided by section 1203 shall not apply' before the period at
the end thereof.
(16) Paragraph (1) of section 1445(e) is amended by striking `20 percent'
and inserting `one-half of the maximum rate of tax in effect under section
1'.
(17)(A) The second sentence of section 7518(g)(6)(A) is amended--
(i) by striking `during a taxable year to which section 1(h) or 1201(a)
applies', and
(ii) by striking `20 percent' and inserting `one-half of the maximum rate
of tax in effect under section 1'.
(B) The second sentence of section 607(h)(6)(A) of the Merchant Marine Act,
1936, is amended--
(i) by striking `during a taxable year to which section 1(h) or 1201(a)
of such Code applies', and
(ii) by striking `20 percent' and inserting `one-half of the maximum rate
of tax in effect under section 1 of such Code'.
(e) CLERICAL AMENDMENT- The table of sections for part I of subchapter P of
chapter 1 is amended by adding at the end the following new item:
`Sec. 1203. Capital gains deduction.'.
(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.'
(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 2003.
SEC. 106. SIMPLIFICATION OF DEDUCTION FOR POINTS ON HOME MORTGAGE.
(a) IN GENERAL- Subsection (g) of section 461 (relating to prepaid interest)
is amended by adding at the end the following new paragraph:
`(3) EXCEPTION FOR CERTAIN REFINANCINGS-
`(A) IN GENERAL- This subsection shall not apply to points paid in respect
of indebtedness secured by such residence resulting from the refinancing
of indebtedness meeting the requirements of the preceding sentence (or
this sentence).
`(B) LIMITATION- Subparagraph (A) shall apply only to the extent the amount
of the indebtedness resulting from such refinancing does not exceed the
sum of--
`(i) the amount of the refinanced indebtedness, plus
`(ii) the lesser of $10,000 or the points paid in respect of the indebtedness
resulting from the refinancing to the extent that the indebtedness resulting
from the refinancing does not exceed the refinanced indebtedness.'.
(b) CONFORMING AMENDMENT- The heading of paragraph (2) of section 461(g) is
amended by inserting `BASED ON BUSINESS PRACTICE' after `EXCEPTION'.
(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 2003.
SEC. 107. TAXATION OF MINOR CHILDREN.
(a) APPLICATION OF TRUST RATE SCHEDULE TO NET UNEARNED INCOME OF MINOR CHILDREN-
Subsection (g) of section 1 (relating to certain unearned income of minor
children taxed as if parent's income) is amended--
(1) by striking paragraphs (1), (3) and (5),
(2) by redesignating paragraphs (4), (6), and (7) as paragraphs (3), (4),
and (5), respectively, and
(3) by inserting before paragraph (2) the following new paragraph:
`(1) IN GENERAL- In the case of a child to whom this subsection applies,
the tax imposed by this section shall be the sum of--
`(A) a tax computed at the rates and in the same manner as if this subsection
had not been enacted on taxable income reduced by net unearned income,
plus
`(B) the excess (if any) of the tax determined under subsection (e) on
total taxable income over the tax determined under subsection (e) on taxable
income reduced by net unearned income.'.
(b) EXPANSION OF PARENTAL ELECTION- Paragraph (5) of section 1(g) (as redesignated
under subsection (a)) is amended to read as follows:
`(5) ELECTION TO CLAIM INCOME OF CHILD ON PARENT'S RETURN-
`(A) IN GENERAL- If the parent of any child to whom this subsection applies
elects the application of subparagraph (B), such child--
`(i) shall be treated (other than for purposes of this paragraph)--
`(I) as having no gross income for such year, and
`(II) as not being entitled to any deductions or credits for such
year, and
`(ii) shall not be required to file a return under section 6012 for
such year.
`(B) INCOME INCLUDED ON PARENT'S RETURN- In the case of a parent making
the election under this paragraph--
`(i) the gross income of each child to whom such election applies shall
be included in such parent's gross income for the taxable year,
`(ii) the deductions to which such child would be entitled without regard
to such election shall be allowed to such parent but only to the extent
the aggregate of such deductions does not exceed the gross income of
such child,
`(iii) any estimated tax payment, and any amount which has been deducted
and withheld under chapter 24, for such year that is made in the name
and TIN of such child shall be treated as an estimated tax payment or
as an amount deducted and withheld in the name and TIN of such parent
for such year (including for purposes of section 31), and
`(iv) any interest which is an item of tax preference under section
57(a)(5) of the child shall be treated as an item of tax preference
of such parent (and not of such child).
`(C) SPECIAL RULE FOR DETERMINING WHICH PARENT MAY MAKE ELECTION- For
purposes of this paragraph, the parent of a child to whom this subsection
applies who may make an election under this paragraph shall be--
`(i) in the case of parents who are not married (within the meaning
of section 7703), the custodial parent (within the meaning of section
151(c)(7)) of the child, and
`(ii) in the case of married individuals filing separately, the individual
with the greater taxable income.
`(D) CARRYOVERS ALLOWED- Subparagraph (A)(i)(II) shall not prohibit the
carryover
of any amount that the child would be entitled to carryover without regard
to the election under this paragraph.
`(E) REGULATIONS- The Secretary shall prescribe such regulations as may
be necessary or appropriate to carry out the purposes of this paragraph.'.
(c) CONFORMING AMENDMENT- The heading for subsection (g) of section 1 is amended
to read as follows:
`(g) TREATMENT OF CERTAIN INCOME OF MINOR CHILDREN- '.
(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 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'.
(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 2003.
SEC. 109. ACCELERATION OF PHASEOUT OF PHASEOUT OF OVERALL LIMITATION ON
ITEMIZED DEDUCTIONS.
(a) IN GENERAL- Section 68 (relating to overall limitation on itemized deductions)
is hereby repealed.
(b) CONFORMING AMENDMENTS-
(1) Section 1(f)(6)(A) is amended by striking `, section 68(b)(2)'.
(2) Section 773(a)(3)(B) is amended by striking clause (i) and redesignating
clauses (ii), (iii), and (iv) as clauses (i), (ii), and (iii), respectively.
(3) The table of sections for part I of subchapter B of chapter 1 is amended
by striking the item relating to section 68.
(c) EFFECTIVE DATE- The amendments by this section shall apply to taxable
years beginning after December 31, 2003.
SEC. 110. ACCELERATION OF REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.
(a) IN GENERAL- Subsection (e) of section 151 (relating to phaseout of exemption
amount), as amended by the preceding sections of this Act, is amended by striking
paragraph (3) and redesignating paragraph (4) as paragraph (3).
(b) CONFORMING AMENDMENTS-
(1) Paragraph (3) of section 151(e), as amended by subsection (a), is amended
to read as follows:
`(3) INFLATION ADJUSTMENT- In the case of any taxable year beginning in
a calendar year after 1989, the dollar amount contained in paragraph (1)
shall be increased by an amount equal to--
`(A) such dollar amount, multiplied by
`(B) the cost-of-living adjustment determined under section 1(f)(3) for
the calendar year in which the taxable year begins, by substituting `calendar
year 1988' for `calendar year 1992' in subparagraph (B) thereof.'.
(2) Section 1(f)(6) is amended--
(A) in subparagraph (A) by striking `151(e)(4)' and inserting `151(e)(3)',
and
(B) in subparagraph (B), both as in effect on the date of the enactment
of this Act and as amended by the Economic Growth and Tax Relief Reconciliation
Act of 2001, by striking `151(e)(4)(A)' and inserting `151(e)(3)'.
(3) Subparagraph (C) of section 642(b)(2), as amended by the preceding sections
of this Act, is amended by striking `, determined by treating such trust
as an individual described in section 151(e)(3)(C)(ii)'.
(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 2003.
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.'
(C) Section 465 is amended by adding at the end the following new subsection:
`(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.
(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.
`(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.
`(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)'.
(C) Paragraph (5) of section 21(e) is amended--
(i) by striking `paragraph (2) or (4) of section 152(e)' and inserting
`section 151(c)(7)', and
(ii) by striking `section 152(e)(1)' and inserting `section 151(c)(7)'.
(D) Sections 21(e)(6) and 129(c) are each amended--
(i) by striking `151(c)' and inserting `151(d)', and
(ii) by striking `151(c)(3)' and inserting `151(d)(3)'.
(E) Sections 25(c)(2)(B), 32(c)(3)(C)(ii), 152(d)(2), and 2032A(c)(7)(D)
are each amended by striking `151(c)(4)' and inserting `151(d)(4)'.
(F) Sections 72(t)(7)(A)(iii) and 132(h)(2)(B) are each amended by striking
`151(c)(3)' and inserting `151(d)(3)'.
(G) Subparagraph (C) of section 642(b)(2), as amended by the preceding
sections of this Act, is amended by striking `151(e)' and inserting `151(f)'.
(H) Paragraph (1) of section 3402(f) is amended by striking `151(e)(2)'
and inserting `151(f)(2)'.
(I) Subparagraph (B) of section 3402(r)(2), as so amended, is amended
by striking `151(e)' and inserting `151(f)'.
(J) Clause (ii) of section 6012(a)(1)(D), as so amended, is amended--
(i) by striking `151(e)' and inserting `151(f)', and
(ii) by striking `151(e)(2)' and inserting `151(f)(2)'.
(K) The last sentence of section 6013(b)(3)(A), as so amended is amended
by striking `151(e)' and inserting `151(f)'.
(b) APPLICATION OF UNIFORM DEFINITION TO DEPENDENT CARE CREDIT- Section 21(b)(1)(A)
is amended to read as follows:
`(A) a qualifying child of the taxpayer (as defined in section 151(c))
who has not attained age 13,'.
(c) APPLICATION OF UNIFORM DEFINITION TO CHILD TAX CREDIT- Section 24(c)(1)
is amended to read as follows:
`(1) IN GENERAL- The term `qualifying child' means a qualifying child of
the taxpayer (as defined in section 151(c)) who has not attained age 17
as
of the close of the calendar year in which the taxable year of the taxpayer
begins.'.
(d) APPLICATION OF UNIFORM DEFINITION TO EARNED INCOME CREDIT-
(1) IN GENERAL- Paragraph (3) of section 32(c) is amended to read as follows:
`(A) IN GENERAL- The term `qualifying child' means a qualifying child
of the taxpayer (as defined in section 151(c)).
`(B) PLACE OF ABODE- For purposes of subparagraph (A), the requirements
of section 151(c)(2)(B) shall be met only if the principal place of abode
is in the United States.
`(C) IDENTIFICATION REQUIREMENTS-
`(i) IN GENERAL--A qualifying child shall not be taken into account
under subsection (b) unless the taxpayer includes the name, age, and
TIN of the qualifying child on the return of tax for the taxable year.
`(ii) OTHER METHODS- The Secretary may prescribe other methods for providing
the information described in clause (i).'.
(2) CONFORMING AMENDMENTS-
(A) Section 32(c)(1) is amended by striking subparagraph (C) and by redesignating
subparagraphs (D), (E), (F), and (G) as subparagraphs (C), (D), (E), and
(F), respectively.
(B) Section 32(c)(4) is amended by striking `(3)(E)' and inserting `(3)(B)'.
(C) Section 32(m) is amended by striking `subsections (c)(1)(F)' and inserting
`subsections (c)(1)(E)'.
SEC. 122. TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING SUPPORT AND COST
OF MAINTAINING HOUSEHOLD.
(a) DEPENDENCY EXEMPTION- Section 152 is amended by adding at the end the
following new subsection:
`(f) SPECIAL RULE RELATING TO TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING
SUPPORT- For purposes of this part, any means-tested benefits obtained under
programs described in section 6103(l)(7) or substantially similar government
programs shall not be taken into account for purposes of determining--
`(1) whether over half of the support of an individual for a calendar year
is received from a taxpayer, and
`(2) whether over half of the cost of maintaining a household is furnished
by a taxpayer.'.
(b) DEPENDENT CARE CREDIT- Section 21(e)(1) is amended by adding at the end
the following: `Any means-tested benefits obtained under programs described
in section 6103(l)(7) or substantially similar government programs shall not
be taken into account for purposes of determining whether over half of the
cost of maintaining a household is furnished by the individual.'.
(c) MARITAL STATUS- Section 7703 (relating to determination of marital status)
is amended by adding at the end the following new subsection:
`(c) SPECIAL RULE RELATING TO TREATMENT OF GOVERNMENT BENEFITS IN DETERMINING
COST OF MAINTAINING HOUSEHOLD- For purposes of subsection (b)(2), any means-tested
benefits obtained under programs described in section 6103(l)(7) or substantially
similar government programs shall not be taken into account for purposes of
determining whether over half of the cost of maintaining a household is furnished
by the individual.'.
SEC. 123. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to taxable years beginning
after December 31, 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))'.
(c) OTHER CONFORMING AND CLERICAL AMENDMENTS-
(1) The following provisions are each amended by striking `section 25A(g)(2)'
and inserting `section 25A(e)(2)':
(B) Section 221(d)(2)(B).
(C) Section 222(d)(1) (as amended by section 132 of this Act).
(D) Section 529(c)(3)(B)(v)(I).
(E) Section 530(b)(2)(A).
(F) Section 530(d)(2)(C)(i)(I).
(G) Section 530(d)(4)(B)(iii).
(2) Section 221(d) is amended--
(A) in paragraph (2) by striking `section 25A(f)(2)' and inserting `section
25A(d)(2)', and
(B) by amending paragraph (3) to read as follows:
`(3) ELIGIBLE STUDENT- The term `eligible student' means, with respect to
any academic period, a student who--
`(A) meets the requirements of section 484(a)(1) of the Higher Education
Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment
of this section, and
`(B) is carrying at least 1/2 the normal full-time work load for the course
of study the student is pursuing.'.
(3) Section 529(e)(3)(B)(i) is amended by striking `section 25A(b)(3)' and
inserting `section 221(d)(3)'.
(4) The heading of section 529(c)(3)(B)(v) is amended to read as follows:
`COORDINATION WITH EDUCATION CREDIT- '.
(5) The heading of section 530(d)(2)(C) is amended to read as follows: `COORDINATION
WITH EDUCATION CREDIT AND QUALIFIED TUITION PROGRAMS- '.
(6) Section 6050S(e) is amended by striking `subsection (g)(2)' and inserting
`subsection (e)(2)'.
(7) Section 6213(g)(2)(J) is amended by striking `section 25A(g)(1)' and
inserting `section 25A(e)(1)'.
(8) The item relating to section 25A in the table of sections for subpart
A of part IV of subchapter A of chapter 1 is amended to read as follows:
`Sec. 25A. Education Credit.'.
(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 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--
`(I) the allowance (applicable to the student) for room and board
included in the cost of attendance (as defined in section 472 of the
Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect
on the date of the enactment of the Economic Growth and Tax Relief
Reconciliation Act of 2001) as determined by the eligible educational
institution for such period, or
`(II) if greater, the actual invoice amount the student residing in
housing owned or operated by the eligible educational institution
is charged by such institution for room and board costs for such period.
`(iii) ELIGIBLE STUDENT- For purposes of this subparagraph, the term
`eligible student' means, with respect to any academic period, a student
who--
`(I) meets the requirements of section 484(a)(1) of the Higher Education
Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the
enactment of this section, and
`(II) is carrying at least 1/2 the normal full-time work load for
the
course of study the student is pursuing.
`(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--
`(B) the taxpayer's spouse, or
`(C) any dependent of the taxpayer with respect to whom the taxpayer is
allowed a deduction under section 151,
at an eligible educational institution for courses of instruction of such
individual at such institution.'.
(3) Section 135(c)(2) is amended--
(A) by striking `tuition and fees' and inserting `the qualified higher
education expenses (as defined by section 529(e)(3) without regard to
subparagraph (B) thereof)', and
(B) by striking subparagraph (B) and redesignating subparagraph (C) as
subparagraph (B).
(4) Section 221(d)(2) is amended by striking `the cost of attendance (as
defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll,
as in effect on the day before the date of the enactment of this Act)' and
inserting `the qualified higher education expenses (as defined by section
529(e)(3) without regard to subparagraph (B) thereof) incurred for attendance'.
(5)(A) Section 222 is amended by striking `qualified tuition and related
expenses' each place it appears and inserting `qualified higher education
expenses'.
(B) Section 222(d)(1) is amended to read as follows:
`(1) QUALIFIED HIGHER EDUCATION EXPENSES- The term `qualified higher education
expenses' has the meaning given such term by section 529(e)(3) (without
regard to subparagraph (B) thereof). Such expenses shall be reduced in the
same manner as under section 25A(g)(2).'.
(C) Section 222(d) is amended by redesignating paragraph (6) as paragraph
(7) and by inserting after paragraph (5) the following new paragraph:
`(6) ROOM AND BOARD INCLUDED FOR STUDENTS WHO ARE FULL-TIME- No amount shall
be taken into account under this section for an expense described in section
529(e)(3)(B) (relating to room and board included for students who are at
least half-time) unless such individual is an eligible student (as defined
in section 25A(b)(3), determined by substituting `the normal full-time work
load' in lieu of ` 1/2 the normal full-time work load' in subparagraph (B)
thereof.'.
(D) The heading for section 222 is amended by striking `TUITION AND RELATED'
and inserting `HIGHER EDUCATION'.
(E) The table of sections for part VII of subchapter B of chapter 1 is amended
by amending the item relating to section 222 to read as follows:
`Sec. 222. Qualified higher education expenses.'.
(6)(A) Section 6724(d) is amended--
(i) in paragraph (1)(B)(x) by striking `qualified tuition and related
expenses' and inserting `qualified higher education expenses', and
(ii) in paragraph (2)(Z) by striking `qualified tuition and related expenses'
and inserting `qualified higher education expenses'.
(c) EFFECTIVE DATE- The amendments made by this section shall apply to amounts
paid in taxable years beginning after December 31, 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.
(c) STEP TRANSACTION DOCTRINE NOT TO APPLY TO PARTNERSHIP INCORPORATION FOLLOWED
BY CORPORATE REORGANIZATION-
(1) IN GENERAL- Section 351 is amended by redesignating subsection (h) as
subsection (i) and by inserting after subsection (g) the following new subsection:
`(h) SPECIAL RULE FOR PARTNERSHIPS WHICH INCORPORATE AND SUBSEQUENTLY REORGANIZE-
The step transaction doctrine and any similar doctrine shall not apply for
purposes of determining whether the control requirement of subsection (a)
is met in any case in which--
`(1) a partnership engaged in an active trade or business transfers substantially
all of the property used in carrying on such trade or business to a corporation
which is not publicly traded, and
`(2) such corporation subsequently enters into a reorganization under this
chapter.'.
(2) EFFECTIVE DATE- The amendment made by this subsection shall apply to
transactions after December 31, 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)'.
(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable
years beginning after December 31, 2003.
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.