H.R. 4050 (104th): Revenue Restructuring Act of 1996

104th Congress, 1995–1996. Text as of Sep 11, 1996 (Introduced).

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HR 4050 IH

104th CONGRESS

2d Session

H. R. 4050

To amend the Internal Revenue Code of 1986 to replace the current individual and corporate income taxes, and the Social Security and Medicare taxes, with a value added tax.

IN THE HOUSE OF REPRESENTATIVES

September 11, 1996

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


A BILL

To amend the Internal Revenue Code of 1986 to replace the current individual and corporate income taxes, and the Social Security and Medicare taxes, with a value added tax.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) IN GENERAL- This Act may be cited as the ‘Revenue Restructuring Act of 1996’.

    (b) FUNDAMENTAL PRINCIPLES FOR TAX RESTRUCTURING- The provisions of this Act are a substitute for the current Federal income taxes and Social Security and Medicare employment taxes and are designed to meet the following principles which should govern all proposals for fundamental tax reform:

      (1) REVENUE NEUTRALITY- The debate about the best method by which the Government raises revenue should not be confused with the issue of how much revenue the Government should raise.

      (2) FAIRNESS- Equitable distribution of the tax burden is of paramount importance. Tax reform should not be used as an opportunity to alter the current distribution of the burden of Federal taxes.

      (3) SIMPLICITY- Much of the unhappiness with the current Federal tax system arises from its perceived complexity. Tax reform should focus on the creation of a truly simpler system, thereby avoiding the ill will and skepticism generated by the current Federal tax system.

      (4) ECONOMIC EFFICIENCY- A good revenue system should minimize interference in economic markets. It should result in the least amount of distortion and bias, should encourage economic growth, and should promote the vigor and competitiveness of American companies.

      (5) INTERNATIONAL COMPETITIVENESS- The current income tax is an impediment to maximum competitiveness of American companies in international markets. Any reform proposal should be border-adjustable and promote the competitiveness of American companies.

    (c) RESPONSIBILITIES OF DEPARTMENT OF TREASURY- The rate of the value added tax and the burden adjustment provisions contained in this Act are tentative and intended to be both revenue neutral and distributionally neutral. The Secretary of the Treasury shall, within 90 days after the date of the enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives such adjustments to--

      (1) the rate of the tax imposed by title II of this Act, and

      (2) the burden adjustments established by title III of this Act,

    to ensure that the provisions of this Act do not result in a significant change in the amount of Federal revenues or in the distribution of the Federal tax burden.

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

    (e) TABLE OF CONTENTS-

      Sec. 1. Short title; amendment of 1986 Code.

TITLE I--REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES AND SOCIAL SECURITY AND MEDICARE TAXES

      Sec. 101. Repeal of individual and corporate income taxes.

      Sec. 102. Repeal of Social Security and Medicare taxes.

TITLE II--VALUE ADDED TAX

      Sec. 201. Imposition of value added tax.

‘Subtitle L--Value Added Tax

‘Chapter 100--Value Added Tax

‘SUBCHAPTER A--IMPOSITION OF TAX

‘Sec. 10001. Tax imposed.

‘SUBCHAPTER B--COMPUTATION OF TAX

‘Sec. 10011. Taxable value added.

‘Sec. 10012. Business activity.

‘Sec. 10013. Gross receipts from business activities.

‘Sec. 10014. Business purchases.

‘Sec. 10015. Exemption for certain nontaxable exchanges.

‘SUBCHAPTER C--GENERAL RULES

‘Sec. 10021. Accounting methods.

‘Sec. 10022. Governmental entities and exempt organizations.

‘Sec. 10023. Post-sale price adjustments and refunds; bad debts.

‘Sec. 10024. Source rules.

‘Sec. 10025. Conversions.

‘SUBCHAPTER D--SPECIAL RULES

‘Sec. 10031. International transportation services.

‘Sec. 10032. Financial intermediation services.

‘Sec. 10033. Nonbusiness imports of property or services.

‘Sec. 10034. Refund for certain nonbusiness purchases.

‘SUBCHAPTER E--SMALL BUSINESS EXEMPTION

‘Sec. 10041. Small business exemption.

‘SUBCHAPTER F--DEFINITIONS

‘Sec. 10051. Definitions.

‘SUBCHAPTER G--ADMINISTRATION

‘Sec. 10061. Liability for tax.

‘Sec. 10062. Time for filing return; taxable period.

‘Sec. 10063. Treatment of related businesses.

‘Sec. 10064. Secretary to be notified of certain events.

‘Sec. 10065. Regulations.

      Sec. 202. Refund authority.

      Sec. 203. Dedication of portion of VAT revenues to Social Security Trust Funds.

TITLE III--BURDEN ADJUSTMENTS

      Sec. 301. Rebate of value added tax to low-income individuals; burden assessment on high-income individuals.

‘Chapter 7--Value Added Tax Burden Adjustments

‘SUBCHAPTER A--REBATE TO LOW-INCOME INDIVIDUALS

‘Sec. 1601. Rebate to low-income individuals.

‘Sec. 1602. Advance payment of rebate.

‘SUBCHAPTER B--BURDEN ASSESSMENT ON HIGH-INCOME INDIVIDUALS

‘Sec. 1611. Assessment on high-income individuals.

‘Sec. 1612. Inclusion of undistributed income of certain corporations.

TITLE I--REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES AND SOCIAL SECURITY AND MEDICARE TAXES

SEC. 101. REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES.

    (a) IN GENERAL- Subchapter A of chapter 1 (relating to normal taxes and surtaxes) is hereby repealed.

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1997.

SEC. 102. REPEAL OF SOCIAL SECURITY AND MEDICARE TAXES.

    (a) IN GENERAL-

      (1) Chapter 21 (relating to Federal Insurance Contributions Act) is hereby repealed.

      (2) Chapter 2 (relating to self-employment tax) is hereby repealed.

    (b) REPEAL OF TIER 1 RAILROAD RETIREMENT TAXES-

      (1) Subsection (a) of section 3201 (relating to tax on employees) is hereby repealed.

      (2) Subsection (a) of section 3211 (relating to tax on employee representatives) is amended by striking paragraph (1).

      (3) Section 3221 (relating to tax on employers) is amended by striking subsections (a) and (e).

      (4) Paragraph (2) of section 3231(e) is amended--

        (A) by striking clause (iii) of subparagraph (A), and

        (B) by striking subparagraph (B) and inserting the following new subparagraph:

        ‘(B) APPLICABLE BASE- The term ‘applicable base’ means for any calendar year the contribution and benefit base determined under section 230 of the Social Security Act for such calendar year; except that--

          ‘(i) for purposes of this chapter, and

          ‘(ii) computing average monthly compensation under section 3(j) of the Railroad Retirement Act of 1974 (except with respect to annuity amounts determined under subsection (a) or (f)(3) of section 3 of such Act),

        clause (2) of the first sentence, and the second sentence, of subsection (c) of section 230 of the Social Security Act shall be disregarded.’

      (4) Subsection (e) of section 3231 is amended by striking paragraph (4).

    (c) EFFECTIVE DATE-

      (1) IN GENERAL- The amendments made by this section (other than subsection (a)(2)) shall apply to remuneration paid after December 31, 1997.

      (2) SELF-EMPLOYMENT TAX- The amendment made by subsection (a)(2) shall apply to taxable years beginning after December 31, 1997.

TITLE II--VALUE ADDED TAX

SEC. 201. IMPOSITION OF VALUE ADDED TAX.

    The Internal Revenue Code of 1986 is amended by adding at the end the following new subtitle:

‘Subtitle L--Value Added Tax

‘CHAPTER 100. Value added tax.

‘CHAPTER 100--VALUE ADDED TAX

‘SUBCHAPTER A. Imposition of tax.

‘SUBCHAPTER B. Computation of tax.

‘SUBCHAPTER C. General rules.

‘SUBCHAPTER D. Special rules.

‘SUBCHAPTER E. Small business exemption.

‘SUBCHAPTER F. Definitions.

‘SUBCHAPTER G. Administration.

‘Subchapter A--Imposition of Tax

‘Sec. 10001. Tax imposed.

‘SEC. 10001. TAX IMPOSED.

    ‘In the case of any person engaged in any business activity, there is hereby imposed for each taxable period a tax in an amount equal to 20 percent of the taxable value added.

‘Subchapter B--Computation of Tax

‘Sec. 10011. Taxable value added.

‘Sec. 10012. Business activity.

‘Sec. 10013. Gross receipts from business activities.

‘Sec. 10014. Business purchases.

‘Sec. 10015. Exemption for certain nontaxable exchanges.

‘SEC. 10011. TAXABLE VALUE ADDED.

    ‘(a) IN GENERAL- For purposes of this chapter, the term ‘taxable value added’ means the amount by which--

      ‘(1) the gross receipts of any person from business activities for a taxable period, exceed

      ‘(2) the business purchases of such person for the taxable period.

    ‘(b) REFUND IF BUSINESS PURCHASES EXCEED GROSS RECEIPTS- If the business purchases described in subsection (a)(2) exceeds the gross receipts described in subsection (a)(1) for any taxable period, an amount equal to 20 percent of such excess shall be treated as an overpayment of the tax imposed by section 10001 for such period.

‘SEC. 10012. BUSINESS ACTIVITY.

    ‘(a) IN GENERAL- For purposes of this chapter, the term ‘business activity’ means--

      ‘(1) any of the following transactions by any person in connection with a business--

        ‘(A) any sale of property in the United States,

        ‘(B) any grant of a right to use property in the United States, and

        ‘(C) the performance of services in the United States, and

      ‘(2) the export of property or services from the United States in connection with a business.

    For purposes of the preceding sentence, the term ‘property’ does not include any financial instrument (as defined in section 10051) or money.

    ‘(b) EXCEPTION FOR SERVICES PERFORMED AS EMPLOYEE- For purposes of this chapter, the term ‘business activity’ does not include the performance of services by an employee for the employee’s employer.

‘SEC. 10013. GROSS RECEIPTS FROM BUSINESS ACTIVITIES.

    ‘(a) IN GENERAL- For purposes of this chapter, the term ‘gross receipts’ means all receipts from a business activity.

    ‘(b) EXPORTS-

      ‘(1) GENERAL RULE- For purposes of this chapter, the term ‘gross receipts’ does not include amounts received by the exporter for property or services exported from the United States for use or consumption outside the United States.

      ‘(2) EXPORT THROUGH NONBUSINESS ENTITY- For purposes of paragraph (1), if property or services are sold to a governmental entity or exempt organization for export and are exported other than in a business activity of such entity or organization, then the seller of such property or services is deemed to be the exporter thereof.

      ‘(3) INTERNATIONAL TRANSPORTATION-

‘For treatment of international transportation services, see section 10031.

    ‘(c) EXCHANGES- For purposes of this chapter, the amount treated as gross receipts from an exchange is the amount of money plus the fair market value of other consideration received in the exchange.

    ‘(d) CERTAIN INSURANCE PROCEEDS- For purposes of this chapter, the term ‘gross receipts’ includes the proceeds of property and casualty insurance for losses in connection with a business activity.

    ‘(e) TAXES- For purposes of this chapter, the term ‘gross receipts’ shall not include--

      ‘(1) any separately stated excise tax, sales tax, customs duty, or other levy imposed by a Federal, State, or local government which is imposed on a business transaction and which is received or collected by the seller in connection with the sale, and

      ‘(2) any tax imposed by chapter 31, 32, 33, 34, 35, 36, 39, 51, 52, or 53.

    ‘(f) TRANSFERS TO RELATED PERSONS-

      ‘(1) IN GENERAL- For purposes of this chapter, the amount treated as the gross receipts from any transaction described in section 10012(a)(1) between related persons shall be the fair market value of the property sold, right granted, or services performed (as the case may be).

      ‘(2) RELATED PERSON- For purposes of this subsection, the term ‘related person’ means--

        ‘(A) in the case of an employment relationship, an employer and employee,

        ‘(B) in the case of any entity, an owner of the entity,

        ‘(C) any person specified in regulations, and

        ‘(D) any member of the family (within the meaning of section 267(c)(4)) of any individual described in subparagraph (A), (B), or (C).

      ‘(3) OWNER- For purposes of paragraph (2), the term ‘owner’ means--

        ‘(A) the proprietor of a sole proprietorship, and

        ‘(B) any holder of a beneficial interest in a corporation, partnership, trust, or other entity.

‘SEC. 10014. BUSINESS PURCHASES.

    ‘(a) IN GENERAL- For purposes of this chapter, the term ‘business purchase’ means any amount paid or incurred to acquire property, a right to use property, or services for use or sale in a business activity. For purposes of the preceding sentence, the term ‘property’ does not include any financial instrument or money.

    ‘(b) EXCEPTIONS- The term ‘business purchase’ does not include--

      ‘(1) any amount paid or incurred as current or deferred compensation to employees or for employee benefits,

      ‘(2) any payment which is unlawful under Federal, State, or local law, or

      ‘(3) except as provided in subsection (d)--

        ‘(A) any amount paid or incurred as a premium for insurance other than property and casualty insurance, or

        ‘(B) any other implicit intermediation fees.

    ‘(c) IMPORTS- The term ‘business purchase’ does not include--

      ‘(1) any amount paid or incurred for the import of property or services, and

      ‘(2) in the case of imported property, any amounts paid or incurred for the transportation of such property to the United States (if such costs are not included in the amount paid for the property).

    ‘(d) FINANCIAL INTERMEDIATION SERVICES-

      ‘(1) IN GENERAL- For purposes of this chapter, business purchases include implicit financial intermediation fees.

      ‘(2) IMPLICIT FINANCIAL INTERMEDIATION FEES- For purposes of paragraph (1), the term ‘implicit financial intermediation fees’ means amounts allocable to the business activity for which a person has received notice under section 10032(d) (relating to implicit financial intermediation fees) and which have otherwise not been taken into account.

      ‘(3) CROSS REFERENCE-

For additional treatment of financial intermediation services, see section 10032.

    ‘(e) EXCHANGES- For purposes of this chapter, the amount treated as paid or incurred for business purchases in connection with an exchange is the amount of money plus the fair market value of other consideration transferred in the exchange.

    ‘(f) TAXES- For purposes of this chapter, the term ‘business purchase’ does not include any excise tax, sales tax, customs duty, or other separately stated levy imposed by a Federal, State, or local government on business purchases.

    ‘(g) GAMBLING PAYMENTS- Except as provided in subsection (a), in the case of a business activity involving gambling, lotteries, or other games of chance, business purchases include amounts paid to winners.

‘SEC. 10015. EXEMPTION FOR CERTAIN NONTAXABLE EXCHANGES.

    ‘(a) GENERAL RULE- For purposes of this chapter, gross receipts shall not include gross receipts from an applicable nontaxable transaction except to the extent attributable to money or other property received in the transaction.

    ‘(b) APPLICABLE NONTAXABLE TRANSACTIONS- For purposes of this section, the term ‘applicable nontaxable transaction’ means any transaction--

      ‘(1) to which section 332, 351, 368, or 721 applies, or

      ‘(2) which is specified by the Secretary and with respect to which gain is not recognized in whole or in part under chapter 1.

‘Subchapter C--General Rules

‘Sec. 10021. Accounting methods.

‘Sec. 10022. Governmental entities and exempt organizations.

‘Sec. 10023. Post-sale price adjustments and refunds; bad debts.

‘Sec. 10024. Source rules.

‘Sec. 10025. Conversions.

‘SEC. 10021. ACCOUNTING METHODS.

    ‘(a) IN GENERAL- Except as provided in this section, a person subject to tax under this chapter may use any of the following methods of accounting for purposes of this chapter:

      ‘(1) The cash receipts and disbursements method.

      ‘(2) An accrual method.

      ‘(3) Any other method permitted by the Secretary.

    The Secretary may require a person to modify any method to clearly reflect gross receipts and business purchases.

    ‘(b) CONSISTENCY REQUIREMENT- All persons which are members of a controlled group of corporations which does not elect to be treated as one person for purposes of this chapter under section 10063(a)(2) shall use the same method of accounting for purposes of this chapter.

    ‘(c) SPECIAL RULES FOR LONG-TERM CONTRACTS-

      ‘(1) IN GENERAL- In the case of any sale pursuant to a long-term contract (as defined in section 460(f))--

        ‘(A) the seller shall use the percentage of completion method in computing gross receipts from the contract, and

        ‘(B) the purchaser shall use the cash receipts and disbursements method in computing business purchases from the contract.

      ‘(2) REPORTING- The Secretary may require taxpayers to file statements containing such information with respect to long-term contracts as the Secretary may prescribe.

    ‘(d) INSTALLMENT METHOD PROHIBITED- Gross receipts from the sale of property shall not be taken into account for purposes of this chapter under the installment method.

‘SEC. 10022. GOVERNMENTAL ENTITIES AND EXEMPT ORGANIZATIONS.

    ‘(a) IN GENERAL- For purposes of this chapter, the transfer of property, the grant of a right to use property, or the furnishing of services by a governmental entity or an exempt organization shall be treated as a business activity if there is a separately stated charge for such transfer, grant, or furnishing.

    ‘(b) SPECIAL RULES FOR GOVERNMENTAL ENTITIES- For purposes of this chapter--

      ‘(1) IN GENERAL- The transfer of property, the grant of a right to use property, or furnishing of services by a governmental entity with respect to any of the following activities shall be treated as a business activity whether or not there is a separately stated charge for such transfer or furnishing:

        ‘(A) Public utility services.

        ‘(B) Mass transit services.

        ‘(C) Postal services.

        ‘(D) Any activity not involving the exercise of any essential governmental function (within the meaning of section 115).

      ‘(2) GROSS RECEIPTS- In the case of a transfer of property, grant of a right to use property, or furnishing of services which is treated as a business activity solely by reason of paragraph (1), gross receipts shall be determined on the basis of the fair market value of such property, right, or services.

    ‘(c) BUSINESS PURCHASES REDUCED BY SUBSIDIES-

      ‘(1) IN GENERAL- For purposes of this chapter, in the case of a business activity of an exempt organization or a governmental entity (other than an activity which is treated as a business activity solely by reason of subsection (b)(1)), the business purchases for such activity shall be reduced by the amount of any subsidy provided for that activity.

      ‘(2) SUBSIDY- For purposes of paragraph (1), the term ‘subsidy’ means the portion of the cost of the transfer of property, the right to use property, or the furnishing of services, which is not borne by amounts charged therefor.

    ‘(d) ALLOCATION- The Secretary shall by regulation provide for the proper allocation of gross receipts and business purchases between business activities and other activities.

    ‘(e) SELF-CONSUMPTION OF PROPERTY OR SERVICES- Notwithstanding the provisions of this section, the Secretary may by regulation provide that property produced, or services furnished, by a governmental entity or an exempt organization for use by itself are to be treated as sold in a business activity if such treatment is necessary to carry out the purposes of this chapter. In any such case the taxable value added shall be determined by reference to the fair market value of the property or services.

‘SEC. 10023. POST-SALE PRICE ADJUSTMENTS AND REFUNDS; BAD DEBTS.

    ‘(a) PRICE ADJUSTMENTS AND REFUNDS-

      ‘(1) RECEIPT TREATED AS REDUCTION IN BUSINESS PURCHASES- If a person subject to tax under this chapter receives a post-sale price adjustment attributable to a business purchase which was taken into account in computing the taxable value added for a prior taxable period, then the amount of such adjustment shall be treated as a reduction in business purchases for the taxable period in which it is received.

      ‘(2) ISSUANCE TREATED AS REDUCTION IN GROSS RECEIPTS- If a person subject to tax under this chapter issues a post-sale price adjustment for a sale the gross receipts from which were taken into account in computing the taxable value added for a prior taxable period, then the amount of such adjustment shall be treated as a reduction in gross receipts for the taxable period in which it is issued.

      ‘(3) POST-SALE PRICE ADJUSTMENT- For purposes of this subsection, the term ‘post-sale price adjustment’ means a refund, rebate, or other price allowance attributable to a sale of property or services.

    ‘(b) BAD DEBTS-

      ‘(1) SELLER-

        ‘(A) WRITEOFFS AND WRITEDOWNS- If an amount owed to a seller of business property or services that was taken into account as gross receipts in computing the taxable value added of the seller for a prior taxable period becomes wholly or partially uncollectible during any subsequent taxable period, then the seller shall treat the amount (or part thereof that is uncollectible) as a reduction in gross receipts for the taxable period in which it becomes wholly or partially uncollectible.

        ‘(B) NOTICE- Whenever a seller treats an amount as wholly or partially uncollectible under subparagraph (A), the seller shall notify the purchaser of the amount the seller is treating as uncollectible. The notice shall set forth with specificity the purchase or purchases to which the treatment relates and shall be sent to the purchaser at the purchaser’s last known address within 10 days after close of the taxable period in which the seller treats the amount as wholly or partially uncollectible.

        ‘(C) RECOVERIES- If a seller receives payment for an amount that was treated as a reduction in gross receipts under subparagraph (A) in a prior taxable period, then the seller shall treat the payment as a gross receipt for the taxable period in which it is received.

      ‘(2) PURCHASER-

        ‘(A) WRITEOFFS AND WRITEDOWNS- If a purchaser receives notice under paragraph (1)(B) from a seller for all or a portion of the amount owed for business property or services that the purchaser treated as a business purchase in a prior taxable period, then the purchaser shall treat such amount as a reduction in business purchases for the taxable period in which the notice is received.

        ‘(B) REPAYMENTS- If a purchaser pays all or part of an amount treated as a reduction in business purchases under subparagraph (A) in a prior taxable period, then the purchaser shall treat the amount paid as a business purchase for the taxable period in which the payment is made.

‘SEC. 10024. SOURCE RULES.

    ‘(a) SALES OF PROPERTY- For purposes of this chapter, a sale of property shall be treated as occurring in the United States if the property is located in the United States at the time of the sale.

    ‘(b) RIGHT TO USE PROPERTY- For purposes of this chapter, the grant of a right to use property shall be treated as occurring in the United States to the extent such right involves the use of such property in the United States.

    ‘(c) SALES OF SERVICES-

      ‘(1) GENERAL RULE- For purposes of this chapter, a sale of services shall be treated as occurring in the United States to the extent that--

        ‘(A) the services are provided from a place of business, or with respect to property, in the United States, or

        ‘(B) the services are incidental to the provision of services within the United States.

      ‘(2) CROSS REFERENCE-

‘For treatment of international transportation services, see section 10031.

‘SEC. 10025. CONVERSIONS.

    For purposes of this chapter, any conversion of property or services from use in a business activity to use in any other activity, or from use in any other activity to use in a business activity, shall be treated as a sale of the property or services for their fair market value.

‘Subchapter D--Special Rules

‘Sec. 10031. International transportation services.

‘Sec. 10032. Financial intermediation services.

‘Sec. 10033. Nonbusiness imports of property or services.

‘Sec. 10034. Refund for certain nonbusiness purchases.

‘SEC. 10031. INTERNATIONAL TRANSPORTATION SERVICES.

    ‘(a) EXPORTS- For purposes of this chapter, in the case of property exported from the United States--

      ‘(1) GROSS RECEIPTS- The term ‘gross receipts’ does not include receipts from transportation of such property from the United States.

      ‘(2) BUSINESS PURCHASES- The term ‘business purchase’ does not include amounts paid or incurred for transportation of such property from the United States.

    ‘(b) INTERNATIONAL TRANSPORTATION OF PASSENGERS- For purposes of this chapter--

      ‘(1) GROSS RECEIPTS- Gross receipts--

        ‘(A) do not include receipts from the transportation of passengers from outside the United States to a destination in the United States, but

        ‘(B) include receipts from the transportation of passengers from the United States to a destination outside the United States.

      ‘(2) BUSINESS PURCHASES- Business purchases--

        ‘(A) do not include amounts paid or incurred in a business activity for the transportation of passengers from outside the United States to a destination in the United States, but

        ‘(B) include amounts paid or incurred in a business activity for the transportation of passengers from the United States to a destination outside the United States.

‘SEC. 10032. FINANCIAL INTERMEDIATION SERVICES.

    ‘(a) GENERAL RULE- For purposes of this chapter--

      ‘(1) the providing of financial intermediation services shall be treated as a business activity, and

      ‘(2) this chapter shall be applied to such business activity by substituting financial receipts and adjusted business purchases properly allocable to such business activity for gross receipts and business purchases.

    ‘(b) FINANCIAL RECEIPTS- For purposes of this section, the term ‘financial receipts’ means all receipts other than amounts received as contributions to capital.

    ‘(c) ADJUSTED BUSINESS PURCHASES- For purposes of this section, the term ‘adjusted business purchases’ means business purchases, adjusted as follows:

      ‘(1) PRINCIPAL AND INTEREST- Business purchases include any principal or interest payments properly allocable to the business activity described in subsection (a).

      ‘(2) FINANCIAL INSTRUMENTS- Notwithstanding any other provision of this chapter, business purchases include the cost of, and payments under, financial instruments (other than financial instruments representing equity interests in the person subject to the tax imposed by this chapter).

      ‘(3) INSURANCE CLAIMS- Business purchases include claims and cash surrender values paid in connection with insurance or reinsurance services.

      ‘(4) REINSURANCE- Business purchases include amounts paid for reinsurance.

    ‘(d) REPORTING TO CUSTOMERS-

      ‘(1) ALLOCATION AND REPORTING-

        ‘(A) IN GENERAL- A person engaged in the business activity of providing financial intermediation services shall--

          ‘(i) allocate fees received for such services (other than services for which separately stated fees are charged) among recipients of such services on a reasonable and consistent basis, and

          ‘(ii) report to each recipient the fees so allocated.

        ‘(B) TIMING- The report under subparagraph (A)(ii) shall be furnished to the recipient no later than the 45th day after the close of a taxable period.

      ‘(2) EXCEPTION- The Secretary shall establish procedures under which notice need not be given under this subsection to persons with respect to whom services are not provided in connection with a business activity.

    ‘(e) DEFINITIONS- For purposes of this section--

      ‘(1) FINANCIAL INTERMEDIATION SERVICE- The term ‘financial intermediation service’ means--

        ‘(A) lending services,

        ‘(B) insurance services,

        ‘(C) market-making and dealer services, and

        ‘(D) any other service provided as a business activity in which a person acts as an intermediary in--

          ‘(i) the transfer of property, services, or financial assets, liabilities, risks, or instruments (or income or expense derived therefrom) between two or more other persons, or

          ‘(ii) the pooling of economic risk among other persons,

        and derives all or a portion of such person’s gross receipts from streams of income or expense, discounts, or other financial flows associated with the matter with respect to which such person is acting as an intermediary.

      ‘(2) LENDING SERVICES- The term ‘lending services’ means the regular making of loans and providing credit to, or taking deposits from, customers, but does not include an installment or delayed payment arrangement provided by a seller of property or services under which additional charges or fees are imposed by the seller for late payment and for which no interest is charged.

      ‘(3) MARKET-MAKING OR DEALER SERVICES- The term ‘market-making or dealer services’ means services provided by a person who--

        ‘(A) regularly purchases financial instruments from or sells financial instruments to customers in the ordinary course of a trade or business, or

        ‘(B) regularly offers to enter into, assume, offset, assign, or otherwise terminate positions in financial instruments with customers in the ordinary course of a trade or business.

‘SEC. 10033. NONBUSINESS IMPORTS OF PROPERTY OR SERVICES.

    ‘(a) IMPOSITION OF TAX- There is hereby imposed on the taxable nonbusiness import of any property or services a tax equal to 20 percent of the sum of--

      ‘(1) the amount paid or incurred for the property or services, plus

      ‘(2) in the case of property, any amounts paid or incurred for transportation costs (if such costs are not included in the amount paid for the property).

    ‘(b) TAXABLE NONBUSINESS IMPORT- For purposes of subsection (a), the term ‘taxable nonbusiness import’ means any import of any property or services for use or consumption within the United States unless--

      ‘(1) such property or services is imported for use or sale in a business activity of the importer, or

      ‘(2) such property is imported free of duty under chapter 98 of the Harmonized Tariff Schedule of the United States.

‘SEC. 10034. REFUND FOR CERTAIN NONBUSINESS PURCHASES.

    ‘(a) REFUND ALLOWED- If the tax imposed by section 10001 was paid on any qualified nonbusiness purchase, the Secretary shall pay (without interest) to the purchaser an amount equal to such tax.

    ‘(b) QUALIFIED NONBUSINESS PURCHASE- For purposes of this section, the term ‘qualified nonbusiness purchase’ means any purchase of property or services if--

      ‘(1) such purchase is not in connection with a business,

      ‘(2) the purchaser establishes to the satisfaction of the Secretary that substantially all of the use of such property or services is outside the United States, and

      ‘(3) the amount of the tax imposed by section 10001 on such purchase is separately stated.

    ‘(c) PERIOD FOR FILING CLAIMS- No claim shall be allowed under this section with respect to any purchase unless filed by the purchaser not later than 180 days after the date of such purchase.

‘Subchapter E--Small Business Exemption

‘Sec. 10041. Small business exemption.

‘SEC. 10041. SMALL BUSINESS EXEMPTION.

    ‘(a) EXEMPTION- Except as provided in subsection (b), if the aggregate amount of gross receipts of any person for any taxable period and the 3 preceding taxable periods does not exceed the exemption amount, no tax shall be imposed under section 10001 (and no credit or refund shall be allowed under section 10011) for the taxable period.

    ‘(b) EXCEPTIONS-

      ‘(1) PERSON MUST ALWAYS BE EXEMPT- Subsection (a) shall not apply to any person for a taxable period unless the person was exempt from the tax imposed by section 10001 for all preceding taxable periods.

      ‘(2) ELECTION- Subsection (a) shall not apply to any person for a taxable period if the person elects not to have subsection (a) apply for the taxable period.

    ‘(c) STATEMENTS- A person to which this section applies for any taxable period shall file a statement containing such information as the Secretary may prescribe.

    ‘(d) DEFINITIONS AND SPECIAL RULES- For purposes of this section--

      ‘(1) EXEMPTION AMOUNT- The term ‘exemption amount’ means $12,000 (or an equivalent amount if the taxable period is not a calendar quarter).

      ‘(2) PERSONS NOT ENGAGED IN BUSINESS FOR ENTIRE PERIOD- If a person was not engaged in a business activity for the entire period referred to in subsection (a), such subsection shall be applied on the basis of the period the person was so engaged.

      ‘(3) PREDECESSORS- Any reference in this section to a person shall include a reference to any predecessor of the person.

‘Subchapter F--Definitions

‘Sec. 10051. Definitions.

‘SEC. 10051. DEFINITIONS.

    ‘For purposes of this chapter--

      ‘(1) SALE OF SERVICES- The term ‘sale of services’ means the performance of services for consideration, and includes the granting of a right to the performance of services or to reimbursement (including the granting of warranties, insurance, and similar items) for consideration.

      ‘(2) GRANT OF RIGHT TO USE PROPERTY- The term ‘grant of a right to use property’ means the granting of a right to use property for consideration.

      ‘(3) SALE OF PROPERTY- The term ‘sale of property’ means the transfer of ownership of property from a seller to a purchaser for consideration.

      ‘(4) PROPERTY- The term ‘property’ means any tangible or intangible property.

      ‘(5) BUSINESS- The term ‘business’ includes any activity carried on continuously or regularly, whether or not for profit, that involves or is intended to involve the sale of property, the grant of a right to use property, or the sale of services.

      ‘(6) BUSINESS PROPERTY OR SERVICE- The term ‘business property or service’ means any property or service the sale of which by the owner or provider thereof would be a business activity or which is used by the owner or provider in a business activity.

      ‘(7) EMPLOYEE- The term ‘employee’ has the same meaning as when such term is used for purposes of chapter 24 (relating to withholding).

      ‘(8) PERSON- The term ‘person’ has the meaning given such term by section 7701(a)(1), but also includes any governmental entity.

      ‘(9) UNITED STATES- The term ‘United States’, when used in a geographic sense, includes the customs territory of the United States (as defined in General Headnote 2 of the Harmonized Tariff Schedules of the United States) and any area seaward of the States lying within the outer boundaries of the outer continental shelf (as defined in section 1331 of title 43, United States Code).

      ‘(10) GOVERNMENTAL ENTITY- The term ‘governmental entity’ means the United States, any State or political subdivision thereof, the District of Columbia, a Commonwealth or possession of the United States, or any agency or instrumentality of any of the foregoing.

      ‘(11) EXEMPT ORGANIZATION- The term ‘exempt organization’ means any organization exempt from taxation under chapter 1.

      ‘(12) FINANCIAL INSTRUMENT DEFINED- The term ‘financial instrument’ means any--

        ‘(A) share of stock in a corporation,

        ‘(B) partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust,

        ‘(C) note, bond, debenture, or other evidence of indebtedness,

        ‘(D) interest rate, currency, or equity notional principal contract,

        ‘(E) evidence of an interest in, or a derivative financial instrument in, any financial instrument described in subparagraph (A), (B), (C), or (D), or any currency, including any option, forward contract, short position, and any similar financial instrument in such a financial instrument or currency, and

        ‘(F) position which--

          ‘(i) is not a financial instrument described in subparagraph (A), (B), (C), (D), or (E),

          ‘(ii) is a hedge with respect to such a financial instrument, and

          ‘(iii) is clearly identified in the dealer’s records as being described in this subparagraph before the close of the day on which it was acquired or entered into (or such other time as the Secretary may by regulations prescribe).

      ‘(13) USE INCLUDES HELD FOR USE- Property or services held for use by any person shall be treated as used by that person.

      ‘(14) EXCHANGES TREATED AS SALES- An exchange shall be treated as a sale.

‘Subchapter G--Administration

‘Sec. 10061. Liability for tax.

‘Sec. 10062. Time for filing return; taxable period.

‘Sec. 10063. Treatment of related businesses.

‘Sec. 10064. Secretary to be notified of certain events.

‘Sec. 10065. Regulations.

‘SEC. 10061. LIABILITY FOR TAX.

    ‘The person selling property, granting the right to use property, or selling services shall be liable for the tax imposed by section 10001.

‘SEC. 10062. TIME FOR FILING RETURN; TAXABLE PERIOD.

    ‘(a) FILING RETURN- Before the 16th day of the second calendar month beginning after the close of each taxable period, each person subject to tax under this chapter shall file a return of the tax imposed by section 10001 for such taxable period.

    ‘(b) TAXABLE PERIOD- For purposes of this chapter--

      ‘(1) IN GENERAL- The term ‘taxable period’ means a calendar quarter, except that if a taxpayer has a taxable year under chapter 1 other than the calendar year, then such term means a quarter of that taxable year.

      ‘(2) OTHER PERIODS- To the extent provided in regulations, the term ‘taxable period’ includes a period selected by a person other than a calendar quarter.

      ‘(3) AUTHORITY TO SHORTEN LENGTH OF TAX PERIOD- The Secretary may shorten the length of a person’s taxable period under this subsection to the extent the Secretary deems such action necessary to protect the revenue.

‘SEC. 10063. TREATMENT OF RELATED BUSINESSES.

    ‘(a) GENERAL RULE- For purposes of this chapter--

      ‘(1) AFFILIATED GROUPS AND BUSINESSES UNDER COMMON CONTROL- Except to the extent otherwise provided in regulations--

        ‘(A) an affiliated group of corporations (as defined in section 1504(a) without regard to paragraphs (2), (4), and (7) of section 1504(b)), or

        ‘(B) two or more businesses (whether or not incorporated) under common control within the meaning of section 52(b) and the regulations thereunder,

      shall be treated as one person.

      ‘(2) CONTROLLED GROUP- A controlled group of corporations, as defined in section 1563(a) (determined without regard to the second sentence of paragraph (4) of such section and without regard to section 1563(e)(3)(C)), may elect to be treated as one person.

    ‘(b) RELATED PARTY TRANSACTIONS- For purposes of this chapter, transactions in the United States between corporations or other businesses that are treated, or that may elect to be treated, as one person under subsection (a) shall not be taken into account in computing the gross receipts or business purchases of any such corporation or business.

‘SEC. 10064. SECRETARY TO BE NOTIFIED OF CERTAIN EVENTS.

    ‘To the extent provided in regulations, each person engaged in a business shall notify the Secretary (at such time or times as may be prescribed by regulation) of--

      ‘(1) any change in the form in which the business is conducted, and

      ‘(2) any other change that might affect--

        ‘(A) the liability for the tax imposed by section 10001,

        ‘(B) the amount of such tax or any credit against such tax, or

        ‘(C) the administration of such tax in the case of such person.

‘SEC. 10065. REGULATIONS.

    ‘The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this chapter.’

SEC. 202. REFUND AUTHORITY.

    Section 6402 (relating to authority to make credits or refunds) is amended by designating subsection (h) as subsection (j) and by inserting after subsection (g) the following new subsection:

    ‘(h) REPAYMENT OF VALUE ADDED TAX- Within 45 days after the date on which a value added tax return is filed pursuant to section 10062 showing an overpayment, the Secretary shall make, to the extent the Secretary deems practical, a limited examination of the return to discover omissions and errors of computation, and shall determine the amount of the overpayment, if any, for the taxable period to which the return relates and refund the amount of such overpayment to the person who filed the return.’

SEC. 203. DEDICATION OF PORTION OF VAT REVENUES TO SOCIAL SECURITY TRUST FUNDS.

    (a) IN GENERAL- The Secretary of the Treasury shall deposit in each Social Security Trust Fund for periods after 1997 that portion of the revenues from the tax imposed by chapter 100 of the Internal Revenue Code of 1986 which is necessary to maintain each such Fund in the same position it would be in but for the amendments made by section 102 of this Act.

    (b) SOCIAL SECURITY TRUST FUNDS- For purposes of subsection (a), the Social Security Trust Funds are--

      (1) the Federal Old-Age and Survivors Insurance Trust Fund established by section 201(a) of the Social Security Act,

      (2) the Federal Disability Insurance Trust Fund established by section 201(b) of such Act, and

      (3) the Federal Hospital Insurance Trust Fund established by section 1817(a) of such Act.

TITLE III--BURDEN ADJUSTMENTS

SEC. 301. REBATE OF VALUE ADDED TAX TO LOW-INCOME INDIVIDUALS; BURDEN ASSESSMENT ON HIGH-INCOME INDIVIDUALS.

    (a) IN GENERAL- Subtitle A is amended by adding at the end the following new chapter:

‘CHAPTER 7--VALUE ADDED TAX BURDEN ADJUSTMENTS

‘Subchapter A. Rebate to low-income individuals.

‘Subchapter B. Burden assessment on high-income individuals.

‘Subchapter A--Rebate to Low-Income Individuals

‘Sec. 1601. Rebate to low-income individuals.

‘Sec. 1602. Advance payment of rebate.

‘SEC. 1601. REBATE TO LOW-INCOME INDIVIDUALS.

    ‘(a) GENERAL RULE- The Secretary shall, for each taxable year, pay to each eligible individual an amount equal to the VAT rebate for such year.

    ‘(b) VAT REBATE- For purposes of this section--

      ‘(1) IN GENERAL- The VAT rebate for any taxable year is an amount equal to the applicable percentage of so much of the adjusted net income of the eligible individual for such year as does not exceed $30,000.

      ‘(2) APPLICABLE PERCENTAGE- For purposes of paragraph (1), the applicable percentage is 20 percent reduced (but not below zero) by 2/3 of 1 percentage point for each whole $1,000 of the individual’s adjusted net income.

      ‘(3) ADJUSTED NET INCOME- The term ‘adjusted net income’ means the sum of--

        ‘(A) the net income (as defined in section 1611(c)) for the taxable year, plus

        ‘(B) the value of specified Federal transfer payments received during the taxable year.

      ‘(4) SPECIFIED FEDERAL TRANSFER PAYMENTS- The term ‘specified Federal transfer payments’ means--

        ‘(A) aid provided under a State plan approved under part A of title IV of the Social Security Act (relating to aid to families with dependent children),

        ‘(B) assistance provided under--

          ‘(i) the food stamp program (as defined in section 3(h) of the Food Stamp Act of 1977), or

          ‘(ii) the portion of the program under sections 21 and 22 of such Act which provides food assistance, and

        ‘(C) any other Federal assistance which consists of money payments or script and which is not adjusted for changes in the cost-of-living.

    ‘(c) ELIGIBLE INDIVIDUAL- For purposes of this section, the term ‘eligible individual’ means any individual if--

      ‘(1) such individual is a citizen or resident of the United States for the entire taxable year,

      ‘(2) such individual’s principal place of abode is in the United States for more than one-half of such taxable year,

      ‘(3) such individual is not a dependent of another taxpayer for any taxable year beginning in the same calendar year as such taxable year, and

      ‘(4) such individual’s adjusted net income for the taxable year does not exceed $30,000.

    ‘(d) AMOUNT OF REBATE TO BE DETERMINED UNDER TABLES-

      ‘(1) IN GENERAL- The amount of the rebate allowed by this section shall be determined under tables prescribed by the Secretary.

      ‘(2) REQUIREMENTS FOR TABLES- The tables prescribed under paragraph (1) shall reflect the provisions of subsection (b) and shall have income brackets of not greater than $50 each.

    ‘(e) MARRIED INDIVIDUALS MUST FILE JOINT CLAIM- In the case of an individual who is married (within the meaning of section 7703), this section shall apply only if a joint claim is filed by such individual and such individual’s spouse, and such joint claim shows the combined adjusted net incomes of such individual and spouse.

    ‘(f) COORDINATION WITH PERIODIC PAYMENTS OF REBATE- If any payment is made to the individual under section 1602 during any calendar year or if periodic payments have been made to the individual under this section during any calendar year, then such individual shall pay to the Secretary an amount equal to the excess (if any) of--

      ‘(1) the aggregate amount of such payments, over

      ‘(2) the maximum amount which would be payable to such individual under this section (for such individual’s last taxable year beginning in such calendar year) without regard to such payments and on the basis of the actual adjusted net income of such individual for such taxable year.

    Any amount required to be paid under this subsection shall be assessed and collected in the same manner as tax imposed by chapter 1.

    ‘(g) CLAIM REQUIRED TO BE FILED, ETC-

      ‘(1) IN GENERAL- No payment shall be made under this section unless claim therefor is filed with the Secretary.

      ‘(2) REBATE PAYABLE WITH FEDERAL TRANSFER PAYMENTS, ETC- To the maximum extent practical, the Secretary shall arrange for the payment of the rebate under this section to be made with Federal transfer payments and payments of social security benefits.

‘SEC. 1602. ADVANCE PAYMENT OF REBATE.

    ‘(a) GENERAL RULE- Except as otherwise provided in this section, every employer making payment of wages to an employee with respect to whom a VAT rebate eligibility certificate is in effect shall, at the time of paying such wages, make an additional payment to such employee equal to such employee’s VAT rebate advance amount.

    ‘(b) VAT REBATE ELIGIBILITY CERTIFICATE- For purposes of this title, a VAT rebate eligibility certificate is a statement furnished by an employee to the employer which--

      ‘(1) certifies that the employee will be eligible to receive payments under section 1601 for the taxable year,

      ‘(2) certifies the employee’s estimate of his adjusted net income (as defined in section 1601(b)) for the taxable year other than income from wages from such employer, and

      ‘(3) certifies--

        ‘(A) that the employee does not have another VAT rebate eligibility certificate in effect for the calendar year with respect to the payment of wages by another employer, and

        ‘(B) that the spouse of the employee does not have a VAT rebate eligibility certificate in effect.

    For purposes of this section, a certificate shall be treated as being in effect with respect to a spouse if such a certificate will be in effect on the first status determination date following the date on which the employee furnishes the statement in question.

    ‘(c) VAT REBATE ADVANCE AMOUNT- -For purposes of this title, the term ‘VAT rebate advance amount’ means, with respect to any payroll period, the amount determined--

      ‘(1) on the basis of the employee’s wages from the employer for such period and the employee’s estimate under subsection (b)(2) of his adjusted net income (as defined in section 1601(b)) for the taxable year other than from such wages, and

      ‘(2) in accordance with tables prescribed by the Secretary.

    ‘(d) PAYMENTS TO BE TREATED AS PAYMENTS VALUE ADDED TAX-

      ‘(1) IN GENERAL- For purposes of this title, payments made by an employer under subsection (a) to his employees for any payroll period--

        ‘(A) shall not be treated as the payment of compensation, and

        ‘(B) shall be treated as made out of amounts of the taxes imposed for the payroll period under chapter 100 (relating to value added tax), as if the employer had paid to the Secretary, on the day on which the wages are paid to the employees, an amount equal to such payments.

      ‘(2) ADVANCE PAYMENTS EXCEED TAXES DUE- In the case of any employer, if for any payroll period the aggregate amount of VAT rebate advance payments exceeds the sum of the amounts referred to in paragraph (1)(B), each such advance payment shall be reduced by an amount which bears the same ratio to such excess as such advance payment bears to the aggregate amount of all such advance payments.

      ‘(3) EMPLOYER MAY MAKE FULL ADVANCE PAYMENTS- The Secretary shall prescribe regulations under which an employer may elect (in lieu of any application of paragraph (2))--

        ‘(A) to pay in full all VAT rebate advance amounts, and

        ‘(B) to have additional amounts paid by reason of this paragraph treated as the advance payment of taxes imposed by this title.

    ‘(e) FURNISHING AND TAKING EFFECT OF CERTIFICATES- Rules similar to the rules of section 3507(e) shall apply for purposes of this section.

‘Subchapter B--Burden Assessment on High-Income Individuals

‘Sec. 1611. Assessment on high-income individuals.

‘Sec. 1612. Inclusion of undistributed income of certain corporations.

‘SEC. 1611. ASSESSMENT ON HIGH-INCOME INDIVIDUALS.

    ‘(a) GENERAL RULE- Each assessable person whose net income for the taxable year exceeds the threshold amount shall pay an assessment for such year equal to 17 percent of the excess (if any) of such income over the threshold amount.

    ‘(b) ASSESSABLE PERSON- For purposes of this subchapter, the term ‘assessable person’ means any individual, estate, or trust other than a trust exempt from taxation under chapter 1.

    ‘(c) NET INCOME-

      ‘(1) IN GENERAL- For purposes of this section, the term ‘net income’ means adjusted gross income determined with the modifications described in the following paragraphs.

      ‘(2) CERTAIN EXCLUSIONS DISREGARDED- Net income shall be determined without regard to--

        ‘(A) sections 911, 931, and 933,

        ‘(B) section 457, and

        ‘(C) any exclusion from gross income for any elective deferral (as defined in section 402(g)(3)).

      ‘(3) CERTAIN AMOUNTS INCLUDED-

        ‘(A) TAX EXEMPT INTEREST- Net income shall be increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.

        ‘(B) NONQUALIFIED DEFERRED COMPENSATION- Deferred compensation shall be included in gross income for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation (within the meaning of section 457(f)(3)). The preceding sentence shall not apply to any plan or contract described in section 457(f)(2).

      ‘(4) ESTATES AND TRUSTS- The adjusted gross income of an estate or trust shall be determined in accordance with section 67(e).

    ‘(d) THRESHOLD AMOUNT- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘threshold amount’ means--

        ‘(A) except as provided in subparagraph (B), $75,000, and

        ‘(B) zero in the case of a taxpayer who--

          ‘(i) 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

          ‘(ii) does not live apart from his spouse at all times during the taxable year.

      ‘(2) SPECIAL RULES FOR TRUSTS-

        ‘(A) IN GENERAL- Except as otherwise provided in this paragraph, the threshold amount for any trust shall be zero.

        ‘(B) EXCEPTION FOR CURRENT DISTRIBUTION TRUSTS- Subparagraph (A) shall not apply to any trust to which section 651 applies for the taxable year.

        ‘(C) BENEFICIARY MAY ALLOCATE THRESHOLD- Any beneficiary of a trust to which subparagraph (A) applies may elect to allocate any portion of such beneficiary’s threshold amount under paragraph (1) for any taxable year to such trust. Such allocation shall apply for such trust’s taxable year beginning in the taxable year from which made and shall reduce the threshold amount otherwise available to such beneficiary.

    ‘(d) ASSESSMENT COLLECTED AS TAX- For purposes of subtitle F, the assessment imposed by this section shall be treated as if it were a tax imposed by chapter 1.

‘SEC. 1612. INCLUSION OF UNDISTRIBUTED INCOME OF CERTAIN CORPORATIONS.

    ‘(a) GENERAL RULE- Each assessable person who owns (within the meaning of section 542(a)) stock in a corporation on the last day in the taxable year of such corporation on which such corporation was an applicable corporation shall include in gross income (for such person’s taxable year in which or with which such taxable year of the corporation ends) as a dividend the amount such person would have received as a dividend if on such last day such corporation had distributed pro rata to its shareholders an amount which bears the same ratio to the undistributed income of the corporation for the taxable year as the portion of such taxable year during which such

corporation is an applicable corporation bears to the entire taxable year.

    ‘(b) APPLICABLE CORPORATION- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘applicable corporation’ means--

        ‘(A) any corporation engaged in a service-related business in which a shareholder performs substantial services, and

        ‘(B) any closely held C corporation.

      Such term shall not include any corporation exempt from taxation under chapter 1.

      ‘(2) SERVICE-RELATED BUSINESS- The term ‘service-related business’ means any trade or business described in subparagraph (A) of section 1202(e)(3).

      ‘(3) CLOSELY HELD C CORPORATION- The term ‘closely held C corporation’ means any C corporation 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 through the application of section 544, by or for not more than 10 individuals.

    ‘(c) UNDISTRIBUTED INCOME- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘undistributed income’ means the net income of the corporation for the taxable year reduced any distributions by the corporation to its shareholders with respect to its stock--

        ‘(A) which are made during the taxable year and not taken into account under subparagraph (B) for the preceding taxable year, or

        ‘(B) which--

          ‘(i) are made after the close of the taxable year and on or before the 45th day following the close of the taxable year, and

          ‘(ii) are designated, at such time and in such manner as the Secretary may prescribe, as distributions for purposes of this paragraph.

      Any distribution described in subparagraph (B) shall be included in the gross income of the shareholder for the shareholder’s taxable year which includes the last day of the taxable year of the corporation for which the reduction under this paragraph was made.

      ‘(2) NET INCOME- Net income shall be determined in the same way as taxable income under chapter 1 as in effect on the day before the date of the enactment of this section.

    ‘(d) CERTAIN RULES TO APPLY- Rules similar to the rules of subsections (d) and (e) of section 551 shall apply with respect to amounts required to be included in gross income under this section.’

    (b) CLERICAL AMENDMENT- The table of chapters for subtitle A is amended adding at the end the following new item:

‘Chapter 7. Value added tax burden adjustments.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1997.