< Back to S. 3018 (111th Congress, 2009–2010)

Text of the Bipartisan Tax Fairness and Simplification Act of 2010

This bill was introduced on February 23, 2010, in a previous session of Congress, but was not enacted. The text of the bill below is as of Feb 23, 2010 (Introduced).

Source: GPO

II

111th CONGRESS

2d Session

S. 3018

IN THE SENATE OF THE UNITED STATES

February 23, 2010

(for himself and Mr. Gregg) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to make the Federal income tax system simpler, fairer, and more fiscally responsible, and for other purposes.

1.

Short title; amendment of 1986 Code; table of contents

(a)

Short Title

This Act may be cited as the Bipartisan Tax Fairness and Simplification Act of 2010.

(b)

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.

(c)

Table of Contents

The table of contents for this Act is as follows:

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

Sec. 2. Purpose.

TITLE I—Individual income tax reforms

Sec. 101. 3 progressive individual income tax rates.

Sec. 102. Increase in basic standard deduction.

Sec. 103. Permanent extension of expansion of earned income credit.

Sec. 104. Permanent extension of expansion of dependent care credit.

Sec. 105. Permanent extension of child tax credit.

Sec. 106. Permanent repeal of limitations on personal exemptions and itemized deductions.

Sec. 107. Elimination of individual miscellaneous itemized deductions.

Sec. 108. Treatment of capital gains.

Sec. 109. Partial exclusion of dividends received by individuals.

Sec. 110. Nonrefundable personal credit for interest on State and local bonds.

Sec. 111. Retirement savings accounts.

Sec. 112. Lifetime Savings Accounts.

Sec. 113. Consolidation of tax credits and deductions for education expenses.

Sec. 114. Termination of various exclusions, exemptions, deductions, and credits.

Sec. 115. Simplified tax return preparation.

TITLE II—Corporate and business income tax reforms

Sec. 201. Corporate flat tax.

Sec. 202. Treatment of travel on corporate aircraft.

Sec. 203. Unlimited expensing of depreciable assets and inventories for certain small businesses.

Sec. 204. Termination of various preferential treatments.

Sec. 205. Pass-through business entity transparency.

Sec. 206. Modification of effective date of leasing provisions of the American Jobs Creation Act of 2004.

Sec. 207. Revaluation of LIFO inventories of large integrated oil companies.

Sec. 208. Modifications of foreign tax credit rules applicable to large integrated oil companies which are dual capacity taxpayers.

Sec. 209. Repeal of lower of cost or market value of inventory rule.

Sec. 210. Reinstitution of per country foreign tax credit.

Sec. 211. Application of rules treating inverted corporations as domestic corporations to certain transactions occurring after March 20, 2002.

Sec. 212. Indexing corporate interest deduction for inflation.

Sec. 213. Prohibition of advance refunding of bonds.

Sec. 214. CBO study on government spending on businesses.

TITLE III—Repeal of alternative minimum tax

Sec. 301. Repeal of alternative minimum tax.

TITLE IV—Other provisions

Subtitle A—Improvements in tax compliance

Sec. 401. Information reporting on payments to corporations.

Sec. 402. Additional reporting requirements by regulation.

Sec. 403. Increase in information return penalties.

Sec. 404. E-filing requirement for certain large organizations.

Sec. 405. Implementation of standards clarifying when employee leasing companies can be held liable for their clients' Federal employment taxes.

Sec. 406. Expansion of IRS access to information in National Directory of New Hires for tax administration purposes.

Sec. 407. Modification of criminal penalties for willful failures involving tax payments and filing requirements.

Sec. 408. Penalties for failure to file certain returns electronically.

Sec. 409. Reporting on identification of beneficial owners of certain foreign financial accounts.

Subtitle B—Requiring economic substance

Sec. 411. Clarification of economic substance doctrine.

Sec. 412. Penalty for understatements attributable to transactions lacking economic substance, etc.

Sec. 413. Denial of deduction for interest on underpayments attributable to noneconomic substance transactions.

Subtitle C—Internet gambling taxation and regulation

Sec. 421. Tax on Internet gambling; licensee information reporting.

Sec. 422. Withholding from certain gambling winnings.

Sec. 423. Withholding of tax on nonresident aliens.

Sec. 424. Territorial extent.

Sec. 425. Federal licensing requirement for Internet gambling operators.

Sec. 426. Report required.

Sec. 427. Effective date.

Subtitle D—Miscellaneous

Sec. 431. Denial of deduction for punitive damages.

Sec. 432. Application of medicare payroll tax to all State and local government employees.

Sec. 433. Corrections for CPI overstatement in cost-of-living indexation.

TITLE V—Technical and conforming amendments

Sec. 501. Technical and conforming amendments.

2.

Purpose

The purpose of this Act is to amend the Internal Revenue Code of 1986—

(1)

to make the Federal individual income tax system simpler, fairer, and more transparent by, among other reforms—

(A)

repealing the individual alternative minimum tax,

(B)

increasing the basic standard deduction and maintaining itemized deductions for mortgage interest and charitable contributions, and

(C)

reducing the number of exclusions, exemptions, deductions, and credits,

(2)

to make the Federal corporate income tax rate a flat 24 percent, repeal the corporate alternative minimum tax, and eliminate special tax preferences that favor particular types of businesses or activities, and

(3)

to partially offset the Federal budget deficit through the increased fiscal responsibility resulting from these reforms.

I

Individual income tax reforms

101.

3 progressive individual income tax rates

(a)

Married Individuals Filing Joint Returns and Surviving Spouses

The table contained in section 1(a) is amended to read as follows:

If taxable income is:The tax is:
Not over $75,00015% of taxable income.
Over $75,000 but not over $140,000$11,250, plus 25% of the excess over $75,000.
Over $140,000$27,500, plus 35% of the excess over $140,000

.

(b)

Heads of Households

The table contained in section 1(b) is amended to read as follows:

If taxable income is:The tax is:
Not over $56,25015% of taxable income.
Over $56,250 but not over $105,000$8,437.50, plus 25% of the excess over $56,250.
Over $105,000$20,625, plus 35% of the excess over $105,000

.

(c)

Unmarried Individuals (Other Than Surviving Spouses and Heads of Households)

The table contained in section 1(c) is amended to read as follows:

If taxable income is:The tax is:
Not over $37,50015% of taxable income.
Over $37,500 but not over $70,000$5,625, plus 25% of the excess over $37,500.
Over $70,000$13,750, plus 35% of the excess over $70,000

.

(d)

Married Individuals Filing Separate Returns

The table contained in section 1(d) is amended to read as follows:

If taxable income is:The tax is:
Not over $37,50015% of taxable income.
Over $37,500 but not over $70,000$5,625, plus 25% of the excess over $37,500.
Over $70,000$13,750, plus 35% of the excess over $70,000

.

(e)

Conforming Amendments to Inflation Adjustment

Section 1(f) is amended—

(1)

by striking 1993 in paragraph (1) and inserting 2011,

(2)

by striking except as provided in paragraph (8) in paragraph (2)(A),

(3)

by striking 1992 in paragraph (3)(B) and inserting 2010,

(4)

by striking paragraphs (7) and (8), and

(5)

by striking Phaseout of Marriage Penalty in 15-Percent Bracket; in the heading thereof.

(f)

Additional Conforming Amendments

(1)

Section 1 is amended by striking subsection (i).

(2)

The Internal Revenue Code of 1986 is amended by striking calendar year 1992 each place it appears and inserting calendar year 2010.

(g)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

102.

Increase in basic standard deduction

(a)

In General

Paragraph (2) of section 63(c) (defining standard deduction) is amended to read as follows:

(2)

Basic standard deduction

For purposes of paragraph (1), the basic standard deduction is—

(A)

200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—

(i)

a joint return, or

(ii)

a surviving spouse (as defined in section 2(a)),

(B)

$22,500 in the case of a head of household (as defined in section 2(b)), or

(C)

$15,000 in any other case, reduced by any deduction allowed under section 62(a)(22) for such taxable year.

.

(b)

Conforming Amendment to Inflation Adjustment

Section 63(c)(4)(B)(i) is amended by striking (2)(B), (2)(C), or.

(c)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

103.

Permanent extension of expansion of earned income credit

(a)

Repeal of EGTRRA sunset

Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 (relating to sunset of provisions of such Act) shall not apply to section 303 of such Act (relating to earned income tax credit).

(b)

Effective Date

Subsection (a) shall apply to taxable years beginning after December 31, 2010.

104.

Permanent extension of expansion of dependent care credit

(a)

Repeal of EGTRRA sunset

Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 (relating to sunset of provisions of such Act) shall not apply to section 204 of such Act (relating to dependent care credit).

(b)

Effective date

Subsection (a) shall apply to taxable years beginning after December 31, 2010.

105.

Permanent extension of child tax credit

(a)

Repeal of EGTRRA sunset

Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 (relating to sunset of provisions of such Act) shall not apply to section 201 (relating to modifications to child tax credit) and 203 (relating to refunds disregarded in the administration of federal programs and federally assisted programs) of such Act.

(b)

Effective date

Subsection (a) shall apply to taxable years beginning after December 31, 2010.

106.

Permanent repeal of limitations on personal exemptions and itemized deductions

(a)

Repeal of EGTRRA sunset

Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 (relating to sunset of provisions of such Act) shall not apply to section 102 (relating to repeal of phaseout of personal exemptions) and 103 (relating to phaseout of overall limitation on itemized deductions) of such Act.

(b)

Effective Date

Subsection (a) shall apply to taxable years beginning after December 31, 2010.

107.

Elimination of individual miscellaneous itemized deductions

(a)

In general

Subsection (a) of section 67 is amended to read as follows:

(a)

General rule

In the case of an individual, miscellaneous deductions shall not be allowed for any taxable year beginning after December 31, 2010.

.

(b)

Conforming amendments

(1)

The heading for section 67 is amended by striking 2-percent floor on and inserting Treatment of.

(2)

The item relating to section 67 in the table of sections for part I of subchapter B of chapter 1 is amended by striking 2-percent floor on and inserting Treatment of.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

108.

Treatment of capital gains

(a)

Partial exclusion

Part III of subchapter B of chapter 1 (relating to items specifically excluded from gross income) is amended by inserting after section 139B the following new section:

139C.

Capital gains partial exclusion

For any taxable year, gross income shall not include—

(1)

35 percent of so much of any gain from the sale or exchange during such taxable year of capital assets held for more than 6 months but not more than 1 year as does not exceed $500,000, plus

(2)

35 percent of any long-term capital gain for such taxable year (determined after the application of section 1202).

.

(b)

Clerical amendment

The table of sections for part III of subchapter B of chapter 1 is amended by inserting after the item relating to section 139B the following new item:

Sec. 139C. Capital gains partial exclusion.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

109.

Partial exclusion of dividends received by individuals

(a)

General rule

Part III of subchapter B of chapter 1 is amended by inserting after section 115 the following new section:

116.

Partial exclusion of dividends received by individuals

(a)

Exclusion from gross income

Gross income does not include 35 percent of the qualified dividend income received during the taxable year by an individual.

(b)

Qualified dividend income

For purposes of this subsection—

(1)

In general

The term qualified dividend income means dividends received with respect to any share of stock of—

(A)

any domestic corporation, or

(B)

any foreign corporation but only if such share of stock is readily tradable on an established securities market.

(2)

Certain dividends excluded

Such term shall not include—

(A)

any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,

(B)

any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and

(C)

any dividend described in section 404(k).

(3)

Exclusion of dividends of certain foreign corporations

Such term shall not include any dividend from a foreign corporation which for the taxable year of the corporation in which the distribution was made, or the preceding taxable year, is a foreign personal holding company (as defined in section 552), a foreign investment company (as defined in section 1246(b)), or a passive foreign investment company (as defined in section 1297).

(4)

Coordination with Section 246(c)

Such term shall not include any dividend on any share of stock—

(A)

with respect to which the holding period requirements of section 246(c) are not met, or

(B)

to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

(c)

Special rules

(1)

Amounts taken into account as investment income

Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).

(2)

Coordination with foreign tax credit and deduction

No credit shall be allowed under section 901, and no deduction shall be allowed under this chapter, for any taxes paid or accrued with respect to any income excludable under this section.

(3)

Extraordinary dividends

If an individual receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.

(4)

Certain nonresident aliens ineligible for exclusion

In the case of a nonresident alien individual, subsection (a) shall apply only in determining the tax imposed for the taxable year by sections 871(b)(1) and 877(b).

(5)

Exclusion disregarded in determining income for certain purposes

Subsection (a) shall not apply for purposes of determining amounts of income under sections 32(i), 86(b), 135(b), 137(b), 219(g), 221(b), 222(b), 408A(c)(3), 469(i), and 530(c), or subpart A of part IV of subchapter A.

(6)

Treatment of dividends from regulated investment companies and real estate investment trusts

A dividend from a regulated investment company or real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857.

.

(b)

Exclusion of dividends from investment income

Subparagraph (B) of section 163(d)(4) (defining net investment income) is amended by adding at the end the following flush sentence:

Such term shall include qualified dividend income (as defined in section 116(b)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.

.

(c)

Treatment of dividends from regulated investment companies

(1)

Subsection (a) of section 854 (relating to dividends received from regulated investment companies) is amended by inserting section 116 (relating to partial exclusion of dividends received by individuals) and after For purposes of.

(2)

Paragraph (1) of section 854(b) (relating to other dividends) is amended by redesignating subparagraph (B) as subparagraph (C) and by inserting after subparagraph (A) the following new subparagraph:

(B)

Exclusion under Section 116

(i)

In general

If the aggregate dividends received by a regulated investment company during any taxable year are less than 95 percent of its gross income, then, in computing the exclusion under section 116, rules similar to the rules of subparagraph (A) shall apply.

(ii)

Gross income

For purposes of clause (i), in the case of 1 or more sales or other dispositions of stock or securities, the term gross income includes only the excess of—

(I)

the net short-term capital gain from such sales or dispositions, over

(II)

the net long-term capital loss from such sales or dispositions.

.

(3)

Subparagraph (C) of section 854(b)(1), as redesignated by paragraph (2), is amended by striking subparagraph (A) and inserting subparagraph (A) or (B).

(4)

Paragraph (2) of section 854(b) is amended by inserting the exclusion under section 116 and after for purposes of.

(5)

Subsection (b) of section 854 is amended by adding at the end the following new paragraph:

(5)

Coordination with Section 116

For purposes of paragraph (1)(B), an amount shall be treated as a dividend only if the amount is qualified dividend income (within the meaning of section 116(b)).

.

(d)

Treatment of dividends received from real estate investment trusts

Section 857(c) (relating to restrictions applicable to dividends received from real estate investment trusts) is amended to read as follows:

(c)

Restrictions applicable to dividends received from real estate investment trusts

(1)

Section 243

For purposes of section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered a dividend.

(2)

Section 116

For purposes of section 116 (relating to exclusion of dividends), rules similar to the rules of section 854(b)(1)(B) shall apply to dividends received from a real estate trust which meets the requirements of this part.

.

(e)

Conforming amendments

(1)

Subsection (f) of section 301 is amended adding at the end the following new paragraph:

(4)

For partial exclusion from gross income of dividends received by individuals, see section 116.

.

(2)

Paragraph (1) of section 306(a) is amended by adding at the end the following new subparagraph:

(D)

Treatment as dividend

For purposes of section 116, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.

.

(3)
(A)

Subpart C of part II of subchapter C of chapter 1 (relating to collapsible corporations) is repealed.

(B)
(i)

Section 338(h) is amended by striking paragraph (14).

(ii)

Sections 467(c)(5)(C), 1255(b)(2), and 1257(d) are each amended by striking , 341(e)(12),.

(iii)

The table of subparts for part II of subchapter C of chapter 1 is amended by striking the item related to subpart C.

(4)

Section 531(a) is amended by inserting 90 percent (80 percent in the case of taxable years beginning after 2007) of after equal to.

(5)

Section 541(a) is amended by inserting 90 percent (80 percent in the case of taxable years beginning after 2007) of after equal to.

(6)

Section 584(c) is amended by adding at the end the following new flush sentence:

The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 116 applies shall be considered for purposes of such paragraph as having been received by such participant.

.

(7)

Section 643(a) is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) the following new paragraph:

(7)

Excluded dividends

There shall be included the amount of any dividends excluded from gross income under section 116 (relating to partial exclusion of dividends).

.

(8)

Paragraph (5) of section 702(a) is amended to read as follows:

(5)

dividends with respect to which section 116 or part VII of subchapter B applies,

.

(f)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

110.

Nonrefundable personal credit for interest on State and local bonds

(a)

In general

Subpart A of part IV of subchapter A of chapter 1 is amended by adding at the end the following new section:

25E.

Interest on State and local bonds

(a)

In general

If a taxpayer other than a corporation holds a State or local bond on one or more interest payment dates of the bond during any taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credits determined under subsection (b) with respect to such dates.

(b)

Amount of credit

The amount of the credit determined under this subsection with respect to any interest payment date for a State or local bond is 25 percent of the amount of interest payable by the issuer with respect to such date.

(c)

State or local bond

(1)

In general

For purposes of this section, the term State or local bond means any bond issued as part of an issue if the interest on such bond would (but for this section) be excludable from gross income under section 103.

(2)

Applicable rules

For purposes of applying paragraph (1)—

(A)

for purposes of section 149(b), a State or local bond shall not be treated as federally guaranteed by reason of the credit allowed under subsection (a), and

(B)

for purposes of section 148, the yield on a State or local bond shall be determined without regard to the credit allowed under subsection (a).

(d)

Interest payment date

For purposes of this section, the term interest payment date means any date on which the holder of record of the State or local bond is entitled to a payment of interest under such bond.

(e)

Special rules

(1)

Interest on State or local bonds includible in gross income for federal income tax purposes

For purposes of this title, interest on any State or local bond shall be includible in gross income.

(2)

Application of certain rules

Rules similar to the rules of subsections (f), (g), (h), and (i) of section 54A shall apply for purposes of the credit allowed under subsection (a).

(f)

Regulations

The Secretary may prescribe such regulations and other guidance as may be necessary or appropriate to carry out this section.

.

(b)

Conforming amendments

(1)

Section 103(b) is amended by adding at the end the following new paragraph:

(4)

Interest for which credit is allowable

The interest on any State or local bond for which a credit under seciton 25E is allowable.

.

(2)

The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:

Sec. 25E. Interest on State and local bonds.

.

(c)

Transitional coordination with state law

Except as otherwise provided by a State after the date of the enactment of this Act, the interest on any State or local bond (as defined in section 25E of the Internal Revenue Code of 1986, as added by this section) and the amount of any credit determined under such section with respect to such bond shall be treated for purposes of the income tax laws of such State as being exempt from Federal income tax.

(d)

Effective date

The amendments made by this section shall apply to obligations issued after December 31, 2010.

111.

Retirement savings accounts

(a)

In General

Section 408A (relating to Roth IRAs) is amended to read as follows:

408A.

Retirement savings accounts

(a)

In General

Except as provided in this section, a retirement savings account shall be treated for purposes of this title in the same manner as an individual retirement plan.

(b)

Retirement Savings Account

For purposes of this title, the term retirement savings account means an individual retirement plan (as defined in section 7701(a)(37)) which—

(1)

is designated (in such manner as the Secretary may prescribe) at the time of establishment of the plan as a retirement savings account, and

(2)

does not accept any contribution (other than a qualified rollover contribution) which is not in cash.

(c)

Treatment of Contributions

(1)

Contribution limit

Notwithstanding subsections (a)(1) and (b)(2)(A) of section 408, the aggregate amount of contributions for any taxable year to all retirement savings accounts maintained for the benefit of an individual shall not exceed the lesser of—

(A)

$5,000, or

(B)

the amount of compensation includible in the individual’s gross income for such taxable year.

(2)

Special rule for certain married individuals

In the case of any individual who files a joint return for the taxable year, the amount taken into account under paragraph (1)(B) shall be increased by the excess (if any) of—

(A)

the compensation includible in the gross income of such individual’s spouse for the taxable year, over

(B)

the aggregate amount of contributions for the taxable year to all retirement savings accounts maintained for the benefit of such spouse.

(3)

Contributions permitted after age 70½

Contributions to a retirement savings account may be made even after the individual for whom the account is maintained has attained age 70½.

(4)

Mandatory distribution rules not to apply before death

Notwithstanding subsections (a)(6) and (b)(3) of section 408 (relating to required distributions), the following provisions shall not apply to any retirement savings account:

(A)

Section 401(a)(9)(A).

(B)

The incidental death benefit requirements of section 401(a).

(5)

Rollover contributions

(A)

In general

No rollover contribution may be made to a retirement savings account unless it is a qualified rollover contribution.

(B)

Coordination with limit

A qualified rollover contribution shall not be taken into account for purposes of paragraph (1).

(6)

Rollovers from plans with taxable distributions

(A)

In general

Notwithstanding sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16), in the case of any contribution to which this paragraph applies—

(i)

there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution,

(ii)

section 72(t) shall not apply, and

(iii)

unless the taxpayer elects not to have this clause apply for any taxable year, any amount required to be included in gross income for such taxable year by reason of this paragraph for any contribution before January 1, 2011, shall be so included ratably over the 4-taxable year period beginning with such taxable year.

Any election under clause (iii) for any contributions during a taxable year may not be changed after the due date (including extensions of time) for filing the taxpayer’s return for such taxable year.
(B)

Contributions to which paragraph applies

This paragraph shall apply to any qualified rollover contribution to a retirement savings account (other than a rollover contribution from another such account).

(C)

Conversions of iras

The conversion of an individual retirement plan (other than a retirement savings account) to a retirement savings account shall be treated for purposes of this paragraph as a contribution to which this paragraph applies.

(D)

Additional reporting requirements

Trustees and plan administrators of eligible retirement plans (as defined in section 402(c)(8)(B)) and retirement savings accounts shall report such information as the Secretary may require to ensure that amounts required to be included in gross income under subparagraph (A) are so included. Such reports shall be made at such time and in such form and manner as the Secretary may require. The Secretary may provide that such information be included as additional information in reports required under section 408(i) or 6047.

(E)

Special rules for contributions to which a 4-year averaging applies

In the case of a qualified rollover contribution to which subparagraph (A)(iii) applied, the following rules shall apply:

(i)

Acceleration of inclusion

(I)

In general

The amount required to be included in gross income for each of the first 3 taxable years in the 4-year period under subparagraph (A)(iii) shall be increased by the aggregate distributions from retirement savings accounts for such taxable year which are allocable under subsection (d)(3) to the portion of such qualified rollover contribution required to be included in gross income under subparagraph (A)(i).

(II)

Limitation on aggregate amount included

The amount required to be included in gross income for any taxable year under subparagraph (A)(iii) shall not exceed the aggregate amount required to be included in gross income under subparagraph (A)(iii) for all taxable years in the 4-year period (without regard to subclause (I)) reduced by amounts included for all preceding taxable years.

(ii)

Death of distributee

(I)

In general

If the individual required to include amounts in gross income under such subparagraph dies before all of such amounts are included, all remaining amounts shall be included in gross income for the taxable year which includes the date of death.

(II)

Special rule for surviving spouse

If the spouse of the individual described in subclause (I) acquires the individual’s entire interest in any retirement savings account to which such qualified rollover contribution is properly allocable, the spouse may elect to treat the remaining amounts described in subclause (I) as includible in the spouse’s gross income in the taxable years of the spouse ending with or within the taxable years of such individual in which such amounts would otherwise have been includible. Any such election may not be made or changed after the due date (including extensions of time) for filing the spouse’s return for the taxable year which includes the date of death.

(F)

5-year holding period rules

If—

(i)

any portion of a distribution from a retirement savings account is properly allocable to a qualified rollover contribution with respect to which an amount is includible in gross income under subparagraph (A)(i),

(ii)

such distribution is made during the 5-taxable year period beginning with the taxable year for which such contribution was made, and

(iii)

such distribution is not described in clause (i), (ii), or (iii) of subsection (d)(2)(A),

then section 72(t) shall be applied as if such portion were includible in gross income.
(7)

Time when contributions made

For purposes of this section, a taxpayer shall be deemed to have made a contribution to a retirement savings account on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

(8)

Cost-of-living adjustment

(A)

In general

In the case of any taxable year beginning in a calendar year after 2011, the $5,000 amount under paragraph (1)(A) 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 2010 for calendar year 1992 in subparagraph (B) thereof.

(B)

Rounding rules

If any amount after adjustment under subparagraph (A) is not a multiple of $500, such amount shall be rounded to the next lower multiple of $500.

(d)

Distribution Rules

For purposes of this title—

(1)

Exclusion

Any qualified distribution from a retirement savings account shall not be includible in gross income.

(2)

Qualified distribution

For purposes of this subsection—

(A)

In general

The term qualified distribution means any payment or distribution—

(i)

made on or after the date on which the individual attains age 58,

(ii)

made to a beneficiary (or to the estate of the individual) on or after the death of the individual,

(iii)

attributable to the individual’s being disabled (within the meaning of section 72(m)(7)), or

(iv)

to which section 72(t)(2)(F) applies (if such payment or distribution is made before January 1, 2014).

(B)

Distributions of excess contributions and earnings

The term qualified distribution shall not include any distribution of any contribution described in section 408(d)(4) and any net income allocable to the contribution.

(3)

Ordering rules

For purposes of applying this section and section 72 to any distribution from a retirement savings account, such distribution shall be treated as made—

(A)

from contributions to the extent that the amount of such distribution, when added to all previous distributions from the retirement savings account, does not exceed the aggregate contributions to the retirement savings account, and

(B)

from such contributions in the following order:

(i)

Contributions other than qualified rollover contributions with respect to which an amount is includible in gross income under subsection (c)(6)(A)(i).

(ii)

Qualified rollover contributions with respect to which an amount is includible in gross income under subsection (c)(6)(A)(i) on a first-in, first-out basis.

Any distribution allocated to a qualified rollover contribution under subparagraph (B)(ii) shall be allocated first to the portion of such contribution required to be included in gross income.
(4)

Aggregation rules

Section 408(d)(2) shall be applied separately with respect to retirement savings accounts and other individual retirement plans.

(e)

Qualified Rollover Contribution

(1)

In general

For purposes of this section, the term qualified rollover contribution means—

(A)

a rollover contribution to a retirement savings account of an individual from another such account of such individual or such individual’s spouse, or from an individual retirement plan of such individual, but only if such rollover contribution meets the requirements of section 408(d)(3), and

(B)

a rollover contribution described in section 402(c), 402A(c)(3)(A), 403(a)(4), 403(b)(8), or 457(e)(16).

(2)

Coordination with limitation on ira rollovers

For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a retirement savings account) to a retirement savings account.

(f)

Individual Retirement Plan

For purposes of this section—

(1)

a simplified employee pension or a simple retirement account may not be designated as a retirement savings account, and

(2)

contributions to any such pension or account shall not be taken into account for purposes of subsection (c)(1).

(g)

Compensation

For purposes of this section, the term compensation includes earned income (as defined in section 401(c)(2)). Such term does not include any amount received as a pension or annuity and does not include any amount received as deferred compensation. Such term shall include any amount includible in the individual’s gross income under section 71 with respect to a divorce or separation instrument described in section 71(b)(2)(A). For purposes of this subsection, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in section 1402(c)(6).

.

(b)

Roth IRAs Treated as Retirement Savings Accounts

In the case of any taxable year beginning after December 31, 2010, any Roth IRA (as defined in section 408A(b) of the Internal Revenue Code of 1986, as in effect on the day before the date of the enactment of this Act) shall be treated for purposes of such Code as having been designated at the time of the establishment of the plan as a retirement savings account under section 408A(b) of such Code (as amended by this section).

(c)

Contributions to Other Individual Retirement Plans Prohibited

(1)

Individual retirement accounts

Paragraph (1) of section 408(a) is amended to read as follows:

(1)

Except in the case of a simplified employee pension, a simple retirement account, or a rollover contribution described in subsection (d)(3) or in section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), no contribution will be accepted on behalf of any individual for any taxable year beginning after December 31, 2010. In the case of any simplified employee pension or simple retirement account, no contribution will be accepted unless it is in cash and contributions will not be accepted for the taxable year on behalf of any individual in excess of—

(A)

in the case of a simplified employee pension, the amount of the limitation in effect under section 415(c)(1)(A), and

(B)

in the case of a simple retirement account, the sum of the dollar amount in effect under subsection (p)(2)(A)(ii) and the employer contribution required under subparagraph (A)(iii) or (B)(i) of subsection (p)(2).

.

(2)

Individual retirement annuities

Paragraph (2) of section 408(b) is amended—

(A)

by redesignating subparagraphs (A), (B), and (C) as subparagraphs (B), (C), and (D), respectively, and by inserting before subparagraph (B), as so redesignated, the following new subparagraph:

(A)

except in the case of a simplified employee pension, a simple retirement account, or a rollover contribution described in subsection (d)(3) or in section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), a premium shall not be accepted on behalf of any individual for any taxable year beginning after December 31, 2010,

, and

(B)

by amending subparagraph (C), as redesignated by subparagraph (A), to read as follows:

(C)

the annual premium on behalf of any individual will not exceed—

(i)

in the case of a simplified employee pension, the amount of the limitation in effect under section 415(c)(1)(A), and

(ii)

in the case of a simple retirement account, the sum of the dollar amount in effect under subsection (p)(2)(A)(ii) and the employer contribution required under subparagraph (A)(iii) or (B)(i) of subsection (p)(2), and

.

(d)

Conforming Amendments

(1)
(A)

Section 219 is amended to read as follows:

219.

Contributions to certain retirement plans allowing only employee contributions

(a)

Allowance of Deduction

In the case of an individual, there shall be allowed as a deduction the amount contributed on behalf of such individual to a plan described in section 501(c)(18).

(b)

Maximum Amount of Deduction

The amount allowable as a deduction under subsection (a) to any individual for any taxable year shall not exceed the lesser of—

(1)

$7,000, or

(2)

an amount equal to 25 percent of the compensation (as defined in section 415(c)(3)) includible in the individual’s gross income for such taxable year.

(c)

Beneficiary Must Be Under Age 70½

No deduction shall be allowed under this section with respect to any contribution on behalf of an individual if such individual has attained age 70½ before the close of such individual’s taxable year for which the contribution was made.

(d)

Special Rules

(1)

Married individuals

The maximum deduction under subsection (b) shall be computed separately for each individual, and this section shall be applied without regard to any community property laws.

(2)

Reports

The Secretary shall prescribe regulations which prescribe the time and the manner in which reports to the Secretary and plan participants shall be made by the plan administrator of a qualified employer or government plan receiving qualified voluntary employee contributions.

(e)

Cross Reference

For failure to provide required reports, see section 6652(g).

.

(B)

Section 25B(d) is amended—

(i)

in paragraph (1)(A), by striking (as defined in section 219(e)), and

(ii)

by adding at the end the following new paragraph:

(3)

Qualified retirement contribution

The term qualified retirement contribution means—

(A)

any amount paid in cash for the taxable year by or on behalf of an individual to an individual retirement plan for such individual’s benefit, and

(B)

any amount contributed on behalf of any individual to a plan described in section 501(c)(18).

.

(C)

Section 86(f)(3) is amended by striking section 219(f)(1) and inserting section 408A(g).

(D)

Section 132(m)(3) is amended by inserting (as in effect on the day before the date of the enactment of the Retirement Savings Account Act) after section 219(g)(5).

(E)

Subparagraphs (A), (B), and (C) of section 220(d)(4) are each amended by inserting , as in effect on the day before the date of the enactment of the Retirement Savings Account Act at the end.

(F)

Section 408(b) is amended in the last sentence by striking section 219(b)(1)(A) and inserting paragraph (2)(C).

(G)

Section 408(p)(2)(D)(ii) is amended by inserting (as in effect on the day before the date of the enactment of the Retirement Savings Account Act) after section 219(g)(5).

(H)

Section 409A(d)(2) is amended by inserting (as in effect on the day before the date of the enactment of the Retirement Savings Account Act) after subparagraph (A)(iii)).

(I)

Section 501(c)(18)(D)(i) is amended by striking section 219(b)(3) and inserting section 219(b).

(J)

Section 6652(g) is amended by striking section 219(f)(4) and inserting section 219(d)(2).

(K)

The table of sections for part VII of subchapter B of chapter 1 is amended by striking the item relating to section 219 and inserting the following new item:

Sec. 219. Contributions to certain retirement plans allowing only employee contributions.

.

(2)
(A)

Section 408(d)(4)(B) is amended to read as follows:

(B)

no amount is excludable from gross income under subsection (h) or (k) of section 402 with respect to such contribution, and

.

(B)

Section 408(d)(5)(A) is amended to read as follows:

(A)

In general

In the case of any individual, if the aggregate contributions (other than rollover contributions) paid for any taxable year to an individual retirement account or for an individual retirement annuity do not exceed the dollar amount in effect under subsection (a)(1) or (b)(2)(C), as the case may be, paragraph (1) shall not apply to the distribution of any such contribution to the extent that such contribution exceeds the amount which is excludable from gross income under subsection (h) or (k) of section 402, as the case may be, for the taxable year for which the contribution was paid—

(i)

if such distribution is received after the date described in paragraph (4),

(ii)

but only to the extent that such excess contribution has not been excluded from gross income under subsection (h) or (k) of section 402.

.

(C)

Section 408(d)(5) is amended by striking the last sentence.

(D)

Section 408(d)(7) is amended to read as follows:

(7)

Certain transfers from simplified employee pensions prohibited until deferral test met

Notwithstanding any other provision of this subsection or section 72(t), paragraph (1) and section 72(t)(1) shall apply to the transfer or distribution from a simplified employee pension of any contribution under a salary reduction arrangement described in subsection (k)(6) (or any income allocable thereto) before a determination as to whether the requirements of subsection (k)(6)(A)(iii) are met with respect to such contribution.

.

(E)

Section 408 is amended by striking subsection (j).

(F)
(i)

Section 408 is amended by striking subsection (o).

(ii)

Section 6693 is amended by striking subsection (b) and by redesignating subsections (c) and (d) as subsections (b) and (c), respectively.

(G)

Section 408(p) is amended by striking paragraph (8) and by redesignating paragraphs (9) and (10) as paragraphs (8) and (9), respectively.

(3)
(A)

Section 4973(a)(1) is amended to read as follows:

(1)

an individual retirement plan,

.

(B)

Section 4973(b) is amended to read as follows:

(b)

Excess Contributions to Simplified Employee Pensions and Simple Retirement Accounts

For purposes of this section, in the case of simplified employee pensions or simple retirement accounts, the term excess contributions means the sum of—

(1)

the excess (if any) of—

(A)

the amount contributed for the taxable year to the pension or account, over

(B)

the amount applicable to the pension or account under subsection (a)(1) or (b)(2) of section 408, and

(2)

the amount determined under this subsection for the preceding taxable year, reduced by the sum of—

(A)

the distributions out of the account for the taxable year which were included in the gross income of the payee under section 408(d)(1),

(B)

the distributions out of the account for the taxable year to which section 408(d)(5) applies, and

(C)

the excess (if any) of the maximum amount excludable from gross income for the taxable year under subsection (h) or (k) of section 402 over the amount contributed to the pension or account for the taxable year.

For purposes of this subsection, any contribution which is distributed from a simplified employee pension or simple retirement account in a distribution to which section 408(d)(4) applies shall be treated as an amount not contributed.

.

(C)

Section 4973 is amended by adding at the end the following new subsection:

(h)

Excess Contributions to Certain Individual Retirement Plans

For purposes of this section, in the case of individual retirement plans (other than retirement savings accounts, simplified employee pensions, and simple retirement accounts), the term excess contribution means the sum of—

(1)

the aggregate amount contributed for the taxable year to the individual retirement plans, and

(2)

the amount determined under this subsection for the preceding taxable year, reduced by the sum of—

(A)

the distributions out of the plans which were included in gross income under section 408(d)(1), and

(B)

the distributions out of the plans for the taxable year to which section 408(d)(5) applies.

For purposes of this subsection, any contribution which is distributed from the plan in a distribution to which section 408(d)(4) applies shall be treated as an amount not contributed.

.

(4)
(A)

Sections 402(c)(8)(B), 402A(c)(3)(A)(ii), 1361(c)(2)(A), 3405(e)(1)(B), and 4973(f) are each amended by striking Roth IRA each place it appears and inserting retirement savings account.

(B)

Section 4973(f)(1)(A) is amended by striking Roth IRAs and inserting retirement savings accounts.

(C)

Paragraphs (1)(B) and (2)(B) of section 4973(f) are each amended by striking sections 408A(c)(2) and (c)(3) and inserting section 408A(c)(1).

(D)

Subsection (f) of section 4973 is amended in the heading by striking Roth IRAs and inserting Retirement Savings Accounts.

(e)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

112.

Lifetime Savings Accounts

(a)

In general

Subchapter F of Chapter 1 (relating to exempt organizations) is amended by adding at the end the following new part:

IX

Lifetime Savings Accounts

530A.

Lifetime Savings Accounts

(a)

General rule

A Lifetime Savings Account shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations).

(b)

Lifetime Savings Account

For purposes of this section, the term Lifetime Savings Account means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries and which is designated (in such manner as the Secretary shall prescribe) at the time of the establishment of the trust as a Lifetime Savings Account, but only if the written governing instrument creating the trust meets the following requirements:

(1)

Except in the case of a qualified rollover contribution described in subsection (d)—

(A)

no contribution will be accepted unless it is in cash, and

(B)

contributions will not be accepted for the calendar year in excess of the contribution limit specified in subsection (c)(1).

(2)

The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which that person will administer the trust will be consistent with the requirements of this section or who has so demonstrated with respect to any individual retirement plan.

(3)

No part of the trust assets will be invested in life insurance contracts.

(4)

The interest of an individual in the balance of his account is nonforfeitable.

(5)

The assets of the trust shall not be commingled with other property except in a common trust fund or common investment fund.

(c)

Treatment of contributions and distributions

(1)

Contribution limit

(A)

In general

The aggregate amount of contributions (other than qualified rollover contributions described in subsection (d)) for any calendar year to all Lifetime Savings Accounts maintained for the benefit of an individual shall not exceed $2,000.

(B)

Cost-of-living adjustment

(i)

In general

In the case of any calendar year after 2011, the $2,000 amount under subparagraph (A) 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, determined by substituting calendar year 2010 for calendar year 1992 in subparagraph (B) thereof.

(ii)

Rounding rules

If any amount after adjustment under clause (i) is not a multiple of $500, such amount shall be rounded to the next lower multiple of $500.

(2)

Distributions

Any distribution from a Lifetime Savings Account shall not be includible in gross income.

(d)

Qualified rollover contribution

For purposes of this section, the term qualified rollover contribution means a contribution to a Lifetime Savings Account—

(1)

from another such account of the same beneficiary, but only if such amount is contributed not later than the 60th day after the distribution from such other account,

(2)

from a Lifetime Savings Account of a spouse of the beneficiary of the account to which the contribution is made, but only if such amount is contributed not later than the 60th day after the distribution from such other account, and

(3)

before January 1, 2011, from—

(A)

a qualified tuition program pursuant to section 529(c)(3)(E), or

(B)

a Coverdell education savings account pursuant to section 530(d)(9).

(e)

Loss of taxation exemption of account where beneficiary engages in prohibited transaction

Rules similar to the rules of paragraph (2) of section 408(e) shall apply to any Lifetime Savings Account.

(f)

Custodial accounts

For purposes of this section, a custodial account or an annuity contract issued by an insurance company qualified to do business in a State shall be treated as a trust under this section if—

(1)

the custodial account or annuity contract would, except for the fact that it is not a trust, constitute a trust which meets the requirements of subsection (b), and

(2)

in the case of a custodial account, the assets of such account are held by a bank (as defined in section 408(n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section.

For purposes of this title, in the case of a custodial account or annuity contract treated as a trust by reason of the preceding sentence, the person holding the assets of such account or holding such annuity contract shall be treated as the trustee thereof.
(g)

Reports

The trustee of a Lifetime Savings Account shall make such reports regarding such account to the Secretary and to the beneficiary of the account with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required.

.

(b)

Tax on excess contributions

(1)

In general

Subsection (a) of section 4973 (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by striking or at the end of paragraph (4), by inserting or at the end of paragraph (5), and by inserting after paragraph (5) the following new paragraph:

(6)

a Lifetime Savings Account (as defined in section 530A),

.

(2)

Excess contribution

Section 4973 is amended by adding at the end the following new subsection:

(h)

Excess contributions to Lifetime Savings Accounts

For purposes of this section—

(1)

In general

In the case of Lifetime Savings Accounts (within the meaning of section 530A), the term excess contributions means the sum of—

(A)

the amount by which the amount contributed for the calendar year to such accounts (other than qualified rollover contributions (as defined in section 530A(d))) exceeds the contribution limit under section 530A(c)(1), and

(B)

the amount determined under this subsection for the preceding calendar year, reduced by the excess (if any) of the maximum amount allowable as a contribution under section 530A(c)(1) for the calendar year over the amount contributed to the accounts for the calendar year.

(2)

Special rule

A contribution shall not be taken into account under paragraph (1) if such contribution (together with the amount of net income attributable to such contribution) is returned to the beneficiary before July 1 of the year following the year in which the contribution is made.

.

(c)

Failure To provide reports on Lifetime Savings Accounts

Paragraph (2) of section 6693(a) (relating to failure to provide reports on individual retirement accounts or annuities) is amended by striking and at the end of subparagraph (D), by striking the period at the end of subparagraph (E) and inserting , and, and by adding at the end the following new subparagraph:

(F)

section 530A(g) (relating to Lifetime Savings Accounts).

.

(d)

Rollovers from certain other Tax-Free accounts

(1)

Qualified State tuition plans

Paragraph (3) of section 529(c) (relating to distributions) is amended by adding at the end the following new subparagraph:

(E)

Rollovers to Lifetime Savings Accounts

(i)

In general

Subparagraph (A) shall not apply to the qualified portion of any distribution which, before January 1, 2012, and within 60 days of such distribution, is transferred to a Lifetime Savings Account (within the meaning of section 530A) of the designated beneficiary. This subparagraph shall only apply to distributions in accordance with the previous sentence from an account which was in existence with respect to such designated beneficiary on December 31, 2009.

(ii)

Qualified portion

For purposes of this subparagraph, the term qualified portion means the amount equal to the sum of—

(I)

the lesser of $50,000 or the amount which is in the account of the designated beneficiary on December 31, 2009,

(II)

any contributions to such account for the taxable year beginning after December 31, 2009, and before January 1, 2011, and

(III)

any earnings of such account for such year.

(iii)

Limitation

The sum of the amounts taken into account under clause (ii)(II) with respect to all accounts of the designated beneficiary plus any amounts with respect to such designated beneficiary taken into account under section 530(d)(9)(B)(ii) shall not exceed the sum of $2,000 plus the earnings attributable to such amounts.

.

(2)

Coverdell education savings accounts

Subsection (d) of section 530 (relating to tax treatment of distributions) is amended by inserting at the end the following new paragraph:

(9)

Rollovers to Lifetime Savings Accounts

(A)

In general

Paragraph (1) shall not apply to the qualified portion of any amount paid or distributed from a Coverdell education savings account to the extent that the amount received is paid, before January 1, 2012, and not later than the 60th day after the date of such payment or distribution, into a Lifetime Savings Account (within the meaning of section 530A) for the benefit of the same beneficiary. This paragraph shall only apply to amounts paid or distributed in accordance with the preceding sentence from an account which was in existence with respect to such beneficiary on December 31, 2009.

(B)

Qualified portion

For purposes of this paragraph, the term qualified portion means the amount equal to the sum of—

(i)

the amount which is in the account of the beneficiary on December 31, 2009,

(ii)

any contributions to such account for the taxable year beginning after December 31, 2009, and before January 1, 2011, and

(iii)

any earnings of such account for such year.

(C)

Limitation

The sum of the amounts taken into account under subparagraph (B)(ii) with respect to all accounts of the beneficiary plus any amounts with respect to such beneficiary taken into account under section 529(c)(3)(E)(ii)(II) shall not exceed the sum of $2,000 plus the earnings attributable to such amounts.

.

(e)

Conforming amendment

The table of parts for subchapter F of chapter 1 is amended by adding at the end the following new item:

Part IX. Lifetime Savings Accounts

.

(f)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

113.

Consolidation of tax credits and deductions for education expenses

(a)

In general

Section 25A of the Internal Revenue Code of 1986 (relating to Hope and Lifetime Learning Credits) is amended to read as follows:

25A.

Qualified tuition and related expenses credit

(a)

Allowance of Credit

(1)

In general

In the case of any eligible individual for whom an election is in effect under this section, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the applicable percentage of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible individual during any academic period beginning in such taxable year) as does not exceed $10,000.

(2)

Applicable percentage

For purposes of subsection (a), the applicable percentage is—

(A)

for the first 2 taxable years such an election is in effect with respect to an eligible individual, 20 percent,

(B)

for the next 2 such taxable years, 15 percent, and

(C)

notwithstanding subparagraph (A), for any taxable year such eligible individual attends or is enrolled in only one academic period, 15 percent.

(b)

Limitations

(1)

Modified adjusted gross income limitation

(A)

In general

The amount which would (but for this paragraph) be taken into account under subsection (a) for the taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2).

(B)

Amount of reduction

The amount determined under this paragraph is the amount which bears the same ratio to the amount which would be so taken into account as—

(i)

the excess of—

(I)

the taxpayer's modified adjusted gross income for such taxable year, over

(II)

$50,000 (twice such amount in the case of a joint return), bears to

(ii)

$40,000 (twice such amount in the case of a joint return).

(C)

Modified adjusted gross income

The term modified adjusted gross income means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

(2)

Credit allowed for only 4 taxable years

An election to have this section apply with respect to any eligible individual may not be made for any taxable year if such an election (by the taxpayer or any other individual) is in effect with respect to such individual for any 4 prior taxable years.

(c)

Definitions

For purposes of this section—

(1)

Eligible individual

The term eligible individual means any individual described in paragraph (2).

(2)

Qualified tuition and related expenses

(A)

In general

The term qualified tuition and related expenses means tuition and fees required for the enrollment or attendance of—

(i)

taxpayer,

(ii)

the taxpayer's spouse, or

(iii)

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.
(B)

Student loan interest

(i)

In general

Such term shall include so much of the interest paid on any qualified education loan of such individual as does not exceed $2,500, reduced by any amount taken into account under this section for any preceding taxable year.

(ii)

Qualified education loan

For purposes of clause (i), the term qualified education loan means any indebtedness incurred by the taxpayer solely to pay qualified tuition and related expenses—

(I)

which are incurred on behalf of an eligible individual as of the time the indebtedness was incurred,

(II)

which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(III)

which are attributable to education furnished during a period during which the recipient was an eligible individual.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. Such term shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the eligible individual or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).
(C)

Books

Such term shall include books required for such individual's academic courses of instruction at the eligible educational institution.

(D)

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.

(E)

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.

(3)

Eligible educational institution

The term eligible educational institution means an institution—

(A)

which is described in section 481 of the Higher Education Act of 1965, as in effect on the date of the enactment of the Taxpayer Relief Act of 1997, and

(B)

which is eligible to participate in a program under title IV of the Higher Education Act of 1965.

(d)

Special Rules

(1)

Identification requirement

No credit shall be allowed under subsection (a) to a taxpayer with respect to an eligible student unless the taxpayer includes the name and taxpayer identification number of such student on the return of tax for the taxable year.

(2)

Adjustment for certain scholarships

The amount of qualified tuition and related expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced (before the application of subsections (a) and (b)) by the sum of any amounts paid for the benefit of such individual which are allocable to such period as—

(A)

a qualified scholarship which is excludable from gross income under section 117,

(B)

an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code, and

(C)

a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for such student's educational expenses, or attributable to such individual's enrollment at an eligible educational institution, which is excludable from gross income under any law of the United States.

(3)

Treatment of expenses paid by dependent

If a deduction under section 151 with respect to an individual is allowed to another taxpayer for a taxable year beginning in the calendar year in which such individual's taxable year begins—

(A)

no credit shall be allowed under subsection (a) to such individual for such individual's taxable year, and

(B)

qualified tuition and related expenses paid by such individual during such individual's taxable year shall be treated for purposes of this section as paid by such other taxpayer.

(4)

Treatment of certain prepayments

If qualified tuition and related expenses are paid by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated for purposes of this section as beginning during such taxable year.

(5)

Denial of double benefit

No credit shall be allowed under this section for any expense for which deduction is allowed under any other provision of this chapter.

(6)

No credit for married individuals filing separate returns

If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer's spouse file a joint return for the taxable year.

(7)

Nonresident aliens

If the taxpayer is a nonresident alien individual for any portion of the taxable year, this section shall apply only if such individual is treated as a resident alien of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.

(e)

Inflation Adjustment

(1)

In general

In the case of any taxable year beginning after 2011, the $50,000 amount in subsection (b)(1)(B)(i)(II) 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, determined by substituting calendar year 2010 for calendar year 1992 in subparagraph (B) thereof.

(2)

Rounding

If any amount as adjusted under paragraph (1) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000.

(f)

Regulations

The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations providing for a recapture of the credit allowed under this section in cases where there is a refund in a subsequent taxable year of any expense which was taken into account in determining the amount of such credit.

.

(b)

Repeal of deduction for interest on education loans

Part VII of subchapter B of chapter 1 (relating to additional itemized deductions for individuals) is amended by striking section 221.

(c)

Conforming Amendments

(1)

Section 62(a) is amended by striking paragraph (17).

(2)

Subparagraph (A) of section 86(b)(2) is amended by striking , 221.

(3)

Subparagraph (B) of section 72(t)(7) is amended by striking section 25A(g)(2) and inserting section 25A(d)(2).

(4)

Subparagraph (A) of section 135(c)(4) is amended by striking , 221.

(5)

Subparagraph (A) of section 137(b)(3) is amended by striking , 221.

(6)

Paragraph (2) of section 163(h) is amended by adding and at the end of subparagraph (D), by striking , and at the end of subparagraph (E) and inserting a period, and by striking subparagraph (F).

(7)

Subparagraph (A) of section 199(d)(2) is amended by striking , 221.

(8)

Clause (ii) of section 219(g)(3)(A) is amended by striking , 221.

(9)

Clause (iii) of section 469(i)(3)(F) is amended by striking , 221.

(10)

Subclause (I) of section 529(c)(3)(B)(v) is amended by striking section 25A(g)(2) and inserting section 25A(d)(2).

(11)

Paragraph (3) of section 529(e) is amended—

(A)

by striking (as defined in section 25A(b)(3)) in subparagraph (A), and

(B)

by adding at the end the following new subparagraph:

(C)

Eligible student

For purposes of this paragraph, 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 the Taxpayer Relief Act of 1997, and

(ii)

is carrying at least ½ the normal full-time workload for the course of study the student is pursuing.

.

(12)

Subclause (I) of section 530(d)(2)(C)(i) is amended by striking section 25A(g)(2) and inserting section 25A(d)(2).

(13)

Clause (iii) of section 530(d)(4)(B) is amended by striking section 25A(g)(2) and inserting section 25A(d)(2).

(14)

Section 1400O is amended by adding at the end the following flush sentence:

For purposes of this section, any reference to section 25A shall be treated as a reference to such section as in effect on the day before the date of the enactment of this sentence.

.

(15)

Subparagraph (J) of section 6213(g)(2) is amended by striking section 25A(g)(1) and inserting section 25A(d)(1).

(d)

Clerical Amendments

(1)

The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by striking the item relating to section 25A and inserting the following:

25A. Qualified tuition and related expenses credit.

.

(2)

The table of sections for part VII of subchapter B of chapter 1 is amended by striking the item relating to section 221.

(e)

Effective Date

The amendments made by this section shall apply to expenses paid after December 31, 2010, for education furnished in academic periods beginning after such date.

114.

Termination of various exclusions, exemptions, deductions, and credits

(a)

In General

Subchapter C of chapter 90 (relating to provisions affecting more than one subtitle) is amended by adding at the end the following new section:

7875.

Termination of certain provisions

The following provisions shall not apply to taxable years beginning after December 31, 2010:

(1)

Section 74(c) (relating to exclusion of certain employee achievement awards).

(2)

Section 79 (relating to exclusion of group-term life insurance purchased for employees).

(3)

Section 119 (relating to exclusion of meals or lodging furnished for the convenience of the employer).

(4)

Section 125 (relating to exclusion of cafeteria plan benefits).

(5)

Section 132 (relating to certain fringe benefits), except with respect to subsection (a)(5) thereof (relating to exclusion of qualified transportation fringe).

(6)

Section 217 (relating to deduction for moving expenses).

(7)

Section 454 (relating to deferral of tax on obligations issued at discount).

(8)

Section 501(c)(9) (relating to tax-exempt status of voluntary employees’ beneficiary associations).

(9)

Section 911 (relating to exclusion of earned income of citizens or residents of the United States living abroad).

(10)

Section 912 (relating to exemption for certain allowances).

.

(b)

Conforming Amendment

The table of sections for subchapter C of chapter 90 is amended by adding at the end the following new item:

Sec. 7875. Termination of certain provisions.

.

115.

Simplified tax return preparation

Beginning on January 1, 2011, the Internal Revenue Service shall provide to any taxpayer who requests it a simplified Easyfile pre-prepared income tax return, on paper, compact disc, or through the Internet, based on data the Internal Revenue Service receives with respect to such taxpayer (including wages, self-employment income, and dividend, capital gains, and interest income). The Internal Revenue Service shall provide with every Easyfile a one-page summary of how the most recently available fiscal year's tax revenue was spent, including spending on Social Security, Medicare, Medicaid, defense, and interest on the Federal debt.

II

Corporate and business income tax reforms

201.

Corporate flat tax

(a)

In General

Subsection (b) of section 11 (relating to tax imposed) is amended to read as follows:

(b)

Amount of Tax

The amount of tax imposed by subsection (a) shall be equal to 24 percent of the taxable income.

.

(b)

Conforming Amendments

(1)

Section 280C(c)(3)(B)(ii)(II) is amended by striking maximum rate of tax under section 11(b)(1) and inserting rate of tax under section 11(b).

(2)

Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 1446(b)(2)(B), and 7874(e)(1)(B) are each amended by striking highest rate of tax specified in section 11(b)(1) and inserting rate of tax specified in section 11(b).

(3)

Section 904(b)(3)(D)(ii) is amended by striking (determined without regard to the last sentence of section 11(b)(1)).

(4)

Section 962 is amended by striking subsection (c) and by redesignating subsection (d) as subsection (c).

(5)

Section 1201(a) is amended by striking (determined without regard to the last 2 sentences of section 11(b)(1)).

(6)

Section 1561(a) is amended—

(A)

by striking paragraph (1) and by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively,

(B)

by striking The amounts specified in paragraph (1), the and inserting The,

(C)

by striking paragraph (2) and inserting paragraph (1),

(D)

by striking paragraph (3) both places it appears and inserting paragraph (2),

(E)

by striking paragraph (4) and inserting paragraph (3), and

(F)

by striking the fourth sentence.

(7)

Subsection (b) of section 1561 is amended to read as follows:

(b)

Certain Short Taxable Years

If a corporation has a short taxable year which does not include a December 31 and is a component member of a controlled group of corporations with respect to such taxable year, then for purposes of this subtitle, the amount to be used in computing the accumulated earnings credit under section 535(c) (2) and (3) of such corporation for such taxable year shall be the amount specified in subsection (a)(1) divided by the number of corporations which are component members of such group on the last day of such taxable year. For purposes of the preceding sentence, section 1563(b) shall be applied as if such last day were substituted for December 31.

.

(c)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

202.

Treatment of travel on corporate aircraft

(a)

In General

Section 162 (relating to trade or business expenses) is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

(q)

Treatment of Travel on Corporate Aircraft

The rate at which an amount allowable as a deduction under this chapter for the use of an aircraft owned by the taxpayer is determined shall not exceed the rate at which an amount paid or included in income by an employee of such taxpayer for the personal use of such aircraft is determined.

.

(b)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

203.

Unlimited expensing of depreciable assets and inventories for certain small businesses

(a)

Unlimited expensing

Section 179 (relating to election to expense certain depreciable business assets) is amended by adding at the end the following new subsection:

(f)

Unlimited expensing for certain small business taxpayers

(1)

In general

In the case of any eligible taxpayer, this section shall be applied with respect to any taxable year without regard to subsection (b).

(2)

Eligible taxpayer

For purposes of this subsection, a taxpayer is an eligible taxpayer with respect to any taxable year if for all prior taxable years beginning after December 31, 2010, the taxpayer (or any predecessor) met the gross receipts test of section 448(c) (determined by substituting $1,000,000 for $5,000,000 each place it appears).

.

(b)

Clarification of inventory rules for small business

Section 471 (relating to general rule for inventories) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

(c)

Small business taxpayers not required to use inventories

(1)

In general

An eligible taxpayer (as determined under section 179(f)(2)) shall not be required to use inventories under this section for a taxable year.

(2)

Treatment of taxpayers not using inventories

If an eligible taxpayer does not use inventories with respect to any property for any taxable year beginning after December 31, 2010, such property shall be treated as a material or supply which is not incidental.

.

(c)

Effective date and special rules

(1)

In general

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

(2)

Change in method of accounting

In the case of any taxpayer changing the taxpayer’s method of accounting for any taxable year under the amendments made by this section—

(A)

such change shall be treated as initiated by the taxpayer,

(B)

such change shall be treated as made with the consent of the Secretary of the Treasury, and

(C)

the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account over a period (not greater than 4 taxable years) beginning with such taxable year.

204.

Termination of various preferential treatments

(a)

In General

Section 7875, as added by this Act, is amended—

(1)

by inserting (or transactions in the case of sections referred to in paragraphs (14), (15), (16), (17), and (20)) after taxable years beginning, and

(2)

by adding at the end the following new paragraphs:

(11)

Section 43 (relating to enhanced oil recovery credit).

(12)

Section 199 (relating to income attributable to domestic production activities).

(13)

Section 263(c) (relating to intangible drilling and development costs in the case of oil and gas wells and geothermal wells).

(14)

Section 382(l)(5) (relating to exception from net operating loss limitations for corporations in bankruptcy proceeding).

(15)

Section 451(i) (relating to special rules for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy).

(16)

Section 453A (relating to special rules for nondealers), but only with respect to the dollar limitation under subsection (b)(1) thereof and subsection (b)(3) thereof (relating to exception for personal use and farm property).

(17)

Section 460(e)(1) (relating to special rules for long-term home construction contracts or other short-term construction contracts).

(18)

Section 613A (relating to percentage depletion in case of oil and gas wells).

(19)

Section 616 (relating to development costs).

(20)

Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), and 865(b) (relating to inventory property sales source rule exception).

.

(b)

Full Tax Rate on Nuclear Decommissioning Reserve Fund

Subparagraph (B) of section 468A(e)(2) is amended to read as follows:

(B)

Rate of tax

For purposes of subparagraph (A), the rate set forth in this subparagraph is 25 percent.

.

(c)

Deferral of Active Income of Controlled Foreign Corporations

Section 952 (relating to subpart F income defined) is amended by adding at the end the following new subsection:

(e)

Special Application of Subpart

(1)

In general

For taxable years beginning after December 31, 2010, notwithstanding any other provision of this subpart, the term subpart F income means, in the case of any controlled foreign corporation, the income of such corporation derived from any foreign country.

(2)

Applicable rules

Rules similar to the rules under the last sentence of subsection (a) and subsection (d) shall apply to this subsection.

.

(d)

Depreciation on Equipment in Excess of Alternative Depreciation System

Section 168(g)(1) (relating to alternative depreciation system) is amended by striking and at the end of subparagraph (D), by adding and at the end of subparagraph (E), and by inserting after subparagraph (E) the following new subparagraph:

(F)

notwithstanding subsection (a), any tangible property placed in service after December 31, 2010,

.

(e)

Effective Date

The amendments made by subsections (b) and (c) shall apply to taxable years beginning after December 31, 2010.

205.

Pass-through business entity transparency

Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury shall report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives regarding the implementation of additional reporting requirements with respect to any pass-through entity with the goal of the reduction of tax avoidance through the use of such entities. In addition, the Secretary shall develop procedures to share such report data with State revenue agencies under the disclosure requirements of section 6103(d) of the Internal Revenue Code of 1986.

206.

Modification of effective date of leasing provisions of the American Jobs Creation Act of 2004

(a)

Leases to Foreign Entities

Section 849(b) of the American Jobs Creation Act of 2004 is amended by adding at the end the following new paragraph:

(5)

Leases to foreign entities

In the case of tax-exempt use property leased to a tax-exempt entity which is a foreign person or entity, the amendments made by this part shall apply to taxable years beginning after December 31, 2010, with respect to leases entered into on or before March 12, 2004.

.

(b)

Effective Date

The amendment made by this section shall take effect as if included in the enactment of the American Jobs Creation Act of 2004.

207.

Revaluation of LIFO inventories of large integrated oil companies

(a)

General rule

Notwithstanding any other provision of law, if a taxpayer is an applicable integrated oil company for its last taxable year ending in calendar year 2010, the taxpayer shall—

(1)

increase, effective as of the close of such taxable year, the value of each historic LIFO layer of inventories of crude oil, natural gas, or any other petroleum product (within the meaning of section 4611) by the layer adjustment amount, and

(2)

decrease its cost of goods sold for such taxable year by the aggregate amount of the increases under paragraph (1).

If the aggregate amount of the increases under paragraph (1) exceed the taxpayer’s cost of goods sold for such taxable year, the taxpayer’s gross income for such taxable year shall be increased by the amount of such excess.
(b)

Layer adjustment amount

For purposes of this section—

(1)

In general

The term layer adjustment amount means, with respect to any historic LIFO layer, the product of—

(A)

$18.75, and

(B)

the number of barrels of crude oil (or in the case of natural gas or other petroleum products, the number of barrel-of-oil equivalents) represented by the layer.

(2)

Barrel-of-oil equivalent

The term barrel-of-oil equivalent has the meaning given such term by section 29(d)(5) (as in effect before its redesignation by the Energy Tax Incentives Act of 2005).

(c)

Application of requirement

(1)

No change in method of accounting

Any adjustment required by this section shall not be treated as a change in method of accounting.

(2)

Underpayments of estimated tax

No addition to the tax shall be made under section 6655 of the Internal Revenue Code of 1986 (relating to failure by corporation to pay estimated tax) with respect to any underpayment of an installment required to be paid with respect to the taxable year described in subsection (a) to the extent such underpayment was created or increased by this section.

(d)

Applicable integrated oil company

For purposes of this section, the term applicable integrated oil company means an integrated oil company (as defined in section 291(b)(4) of the Internal Revenue Code of 1986) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year and which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2008. For purposes of this subsection all persons treated as a single employer under subsections (a) and (b) of section 52 of the Internal Revenue Code of 1986 shall be treated as 1 person and, in the case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.

208.

Modifications of foreign tax credit rules applicable to large integrated oil companies which are dual capacity taxpayers

(a)

In general

Section 901 (relating to credit for taxes of foreign countries and of possessions of the United States) is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (l) the following new subsection:

(m)

Special rules relating to large integrated oil companies which are dual capacity taxpayers

(1)

General rule

Notwithstanding any other provision of this chapter, any amount paid or accrued by a dual capacity taxpayer which is a large integrated oil company to a foreign country or possession of the United States for any period shall not be considered a tax—

(A)

if, for such period, the foreign country or possession does not impose a generally applicable income tax, or

(B)

to the extent such amount exceeds the amount (determined in accordance with regulations) which—

(i)

is paid by such dual capacity taxpayer pursuant to the generally applicable income tax imposed by the country or possession, or

(ii)

would be paid if the generally applicable income tax imposed by the country or possession were applicable to such dual capacity taxpayer.

Nothing in this paragraph shall be construed to imply the proper treatment of any such amount not in excess of the amount determined under subparagraph (B).
(2)

Dual capacity taxpayer

For purposes of this subsection, the term dual capacity taxpayer means, with respect to any foreign country or possession of the United States, a person who—

(A)

is subject to a levy of such country or possession, and

(B)

receives (or will receive) directly or indirectly a specific economic benefit (as determined in accordance with regulations) from such country or possession.

(3)

Generally applicable income tax

For purposes of this subsection—

(A)

In general

The term generally applicable income tax means an income tax (or a series of income taxes) which is generally imposed under the laws of a foreign country or possession on income derived from the conduct of a trade or business within such country or possession.

(B)

Exceptions

Such term shall not include a tax unless it has substantial application, by its terms and in practice, to—

(i)

persons who are not dual capacity taxpayers, and

(ii)

persons who are citizens or residents of the foreign country or possession.

(4)

Large integrated oil company

For purposes of this subsection, the term large integrated oil company means, with respect to any taxable year, an integrated oil company (as defined in section 291(b)(4)) which—

(A)

had gross receipts in excess of $1,000,000,000 for such taxable year, and

(B)

has an average daily worldwide production of crude oil of at least 500,000 barrels for such taxable year.

(b)

Effective date

(1)

In general

The amendments made by this section shall apply to taxes paid or accrued in taxable years beginning after the date of the enactment of this Act.

(2)

Contrary treaty obligations upheld

The amendments made by this section shall not apply to the extent contrary to any treaty obligation of the United States.

209.

Repeal of lower of cost or market value of inventory rule

(a)

In general

Subsection (a) of section 471 (relating to general rules for inventories) is amended to read as follows:

(a)

General rule

Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of the taxpayer, inventories shall be valued at cost.

.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

210.

Reinstitution of per country foreign tax credit

(a)

In general

Subsection (a) of section 904 (relating to limitation on credit) is amended to read as follows:

(a)

Limitation

The amount of the credit in respect of the tax paid or accrued to any foreign country or possession of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country or possession (but not in excess of the taxpayer's entire taxable income) bears to such taxpayer's entire taxable income for the same taxable year.

.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after December 31, 2010.

211.

Application of rules treating inverted corporations as domestic corporations to certain transactions occurring after March 20, 2002

(a)

In General

Section 7874(b) (relating to inverted corporations treated as domestic corporations) is amended to read as follows:

(b)

Inverted Corporations Treated as Domestic Corporations

(1)

In general

Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting 80 percent for 60 percent.

(2)

Special rule for certain transactions occurring after march 20, 2002

(A)

In general

If—

(i)

paragraph (1) does not apply to a foreign corporation, but

(ii)

paragraph (1) would apply to such corporation if, in addition to the substitution under paragraph (1), subsection (a)(2) were applied by substituting March 20, 2002 for March 4, 2003 each place it appears,

then paragraph (1) shall apply to such corporation but only with respect to taxable years of such corporation beginning after December 31, 2010.
(B)

Special rules

Subject to such rules as the Secretary may prescribe, in the case of a corporation to which paragraph (1) applies by reason of this paragraph—

(i)

the corporation shall be treated, as of the close of its last taxable year beginning before January 1, 2011, as having transferred all of its assets, liabilities, and earnings and profits to a domestic corporation in a transaction with respect to which no tax is imposed under this title,

(ii)

the bases of the assets transferred in the transaction to the domestic corporation shall be the same as the bases of the assets in the hands of the foreign corporation, subject to any adjustments under this title for built-in losses,

(iii)

the basis of the stock of any shareholder in the domestic corporation shall be the same as the basis of the stock of the shareholder in the foreign corporation for which it is treated as exchanged, and

(iv)

the transfer of any earnings and profits by reason of clause (i) shall be disregarded in determining any deemed dividend or foreign tax creditable to the domestic corporation with respect to such transfer.

(C)

Regulations

The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including regulations to prevent the avoidance of the purposes of this paragraph.

.

(b)

Effective Date

The amendment made by this section shall apply to taxable years beginning after December 31, 2010.

212.

Indexing corporate interest deduction for inflation

(a)

In general

Section 163 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

(n)

Indexing corporate interest deduction for inflation

(1)

In general

In the case of a corporation, the deduction allowed under this chapter for interest paid for any taxable year with respect to any obligation shall be adjusted by multiplying the amount otherwise so allowed by 1 minus the fractional exclusion rate for such taxable year.

(2)

Fractional exclusion rate

For any taxable year, the Secretary shall determine the fractional exclusion rate using—

(A)

a fraction—

(i)

the numerator of which is the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins by substituting the second preceding calendar year for calendar year 1992 in subparagraph (B) thereof, and

(ii)

the denominator of which is the nominal interest rate for such obligation, and

(B)

a constant real before tax rate of return of 6 percent.

.

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

213.

Prohibition of advance refunding of bonds

(a)

In general

Subsection (d) of section 149 is amended—

(1)

by striking paragraphs (1), (2), (3), (4), and (6),

(2)

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

(3)

by inserting before paragraph (2) (as redesignated by paragraph (2) the following new paragraph:

(1)

Prohibition

Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond issued as part of an issue to advance refund a bond.

.

(b)

Effective date

The amendments made by this section shall apply to refunding bonds issued on or after the date of the enactment of this Act.

214.

CBO study on government spending on businesses

(a)

Study

The Congressional Budget Office shall identify the Federal Government’s direct and indirect spending on businesses, using among other sources, the corporate welfare lists produced by the Cato Institute and the Bureau of Economic Analysis of the Department of Commerce, and, from that pool of spending, identify the least economically justifiable and suggest options for how Congress could potentially reduce Federal spending on the least justifiable programs by at least $230,000,000,000 during a 10-year period.

(b)

Report

The Congressional Budget Office shall report not later than one year after the date of the enactment of this Act on the results of the study required under subsection (a) and shall submit such report for the purpose of hearing by the Committee on the Budget of the House of Representatives and the Committee on the Budget of the Senate.

III

Repeal of alternative minimum tax

301.

Repeal of alternative minimum tax

(a)

In general

Section 55(a) (relating to alternative minimum tax imposed) is amended by adding at the end the following new flush sentence:

For purposes of this title, the tentative minimum tax on any taxpayer for any taxable year beginning after December 31, 2010, shall be zero.

.

(b)

Modification of limitation on use of credit for prior year minimum tax liability

Subsection (c) of section 53 (relating to credit for prior year minimum tax liability) is amended to read as follows:

(c)

Limitation

(1)

In general

Except as provided in paragraph (2), the credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of—

(A)

the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over

(B)

the tentative minimum tax for the taxable year.

(2)

Taxable years beginning after 2010

In the case of any taxable year beginning after December 31, 2010, the credit allowable under subsection (a) to a taxpayer other than a corporation for any taxable year shall not exceed 90 percent of the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

IV

Other provisions

A

Improvements in tax compliance

401.

Information reporting on payments to corporations

(a)

In general

Section 6041 is amended by adding at the end the following new subsections:

(h)

Application to corporations

Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term person includes any corporation that is not an organization exempt from tax under section 501(a).

(i)

Regulations

The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.

.

(b)

Effective date

The amendments made by this section shall apply to payments made after December 31, 2010.

402.

Additional reporting requirements by regulation

The Secretary of the Treasury is authorized to issue regulations under which with respect to payments made after December 31, 2010—

(1)

any merchant acquiring bank is required to annually report to the Secretary the gross reimbursement payments made to merchants in a calendar year, unless the benefit of such reporting does not justify the cost of compliance, as determined by the Secretary,

(2)

any contractor receiving payments of $600 or more in a calendar year from a particular business is required to furnish such business the contractor's certified taxpayer identification number or be subject to withholding on such payments at a flat rate percentage selected by the contractor, and

(3)

any Federal, State, or local government is required to report to the Secretary any non-wage payment to procure property and services, other than payments of interest, payments for real property, payments to tax-exempt entities or foreign governments, intergovernmental payments, and payments made pursuant to a classified or confidential contract.

403.

Increase in information return penalties

(a)

Failure To file correct information returns

(1)

In general

Section 6721(a)(1) is amended—

(A)

by striking $50 and inserting $250, and

(B)

by striking $250,000 and inserting $3,000,000.

(2)

Reduction where correction in specified period

(A)

Correction within 30 days

Section 6721(b)(1) is amended—

(i)

by striking $15 and inserting $50,

(ii)

by striking $50 and inserting $250, and

(iii)

by striking $75,000 and inserting $500,000.

(B)

Failures corrected on or before August 1

Section 6721(b)(2) is amended—

(i)

by striking $30 and inserting $100,

(ii)

by striking $50 and inserting $250, and

(iii)

by striking $150,000 and inserting $1,500,000.

(3)

Lower limitation for persons with gross receipts of not more than $5,000,000

Section 6721(d)(1) is amended—

(A)

in subparagraph (A)—

(i)

by striking $100,000 and inserting $1,000,000, and

(ii)

by striking $250,000 and inserting $3,000,000,

(B)

in subparagraph (B)—

(i)

by striking $25,000 and inserting $175,000, and

(ii)

by striking $75,000 and inserting $500,000, and

(C)

in subparagraph (C)—

(i)

by striking $50,000 and inserting $500,000, and

(ii)

by striking $150,000 and inserting $1,500,000.

(4)

Penalty in case of intentional disregard

Section 6721(e) is amended—

(A)

by striking $100 in paragraph (2) and inserting $500, and

(B)

by striking $250,000 in paragraph (3)(A) and inserting $3,000,000.

(b)

Failure To furnish correct payee statements

(1)

In general

Section 6722(a) is amended—

(A)

by striking $50 and inserting $250, and

(B)

by striking $100,000 and inserting $1,000,000.

(2)

Penalty in case of intentional disregard

Section 6722(c) is amended—

(A)

by striking $100 in paragraph (1) and inserting $500, and

(B)

by striking $100,000 in paragraph (2)(A) and inserting $1,000,000.

(c)

Failure To comply with other information reporting requirements

Section 6723 is amended—

(1)

by striking $50 and inserting $250, and

(2)

by striking $100,000 and inserting $1,000,000.

(d)

Effective date

The amendments made by this section shall apply with respect to information returns required to be filed on or after January 1, 2011.

404.

E-filing requirement for certain large organizations

(a)

In general

The first sentence of section 6011(e)(2) is amended to read as follows: In prescribing regulations under paragraph (1), the Secretary shall take into account (among other relevant factors) the ability of the taxpayer to comply at reasonable cost with the requirements of such regulations..

(b)

Conforming amendment

Section 6724 is amended by striking subsection (c).

(c)

Effective date

The amendments made by this section shall apply to taxable years ending on or after December 31, 2010.

405.

Implementation of standards clarifying when employee leasing companies can be held liable for their clients' Federal employment taxes

With respect to employment tax returns required to be filed with respect to wages paid on or after January 1, 2011, the Secretary of the Treasury shall issue regulations establishing—

(1)

standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes under chapters 21, 22, 23, and 24 of the Internal Revenue Code of 1986, and

(2)

standards for holding such companies solely liable for such taxes.

406.

Expansion of IRS access to information in National Directory of New Hires for tax administration purposes

(a)

In general

Paragraph (3) of section 453(j) of the Social Security Act (42 U.S.C. 653(j)) is amended to read as follows:

(3)

Administration of Federal tax laws

The Secretary of the Treasury shall have access to the information in the National Directory of New Hires for purposes of administering the Internal Revenue Code of 1986.

.

(b)

Effective date

The amendment made by this section shall take effect on the date of the enactment of this Act.

407.

Modification of criminal penalties for willful failures involving tax payments and filing requirements

(a)

Increase in penalty for attempt To evade or defeat tax

Section 7201 (relating to attempt to evade or defeat tax) is amended—

(1)

by striking $100,000 and inserting $500,000,

(2)

by striking $500,000 and inserting $1,000,000, and

(3)

by striking 5 years and inserting 10 years.

(b)

Modification of penalties for willful failure To file return, supply information, or pay tax

(1)

In general

Section 7203 (relating to willful failure to file return, supply information, or pay tax) is amended—

(A)

in the first sentence—

(i)

by striking Any person and inserting the following:

(a)

In General

Any person

, and

(ii)

by striking $25,000 and inserting $50,000,

(B)

in the third sentence, by striking section and inserting subsection, and

(C)

by adding at the end the following new subsection:

(b)

Aggravated Failure To File

(1)

In general

In the case of any failure described in paragraph (2), the first sentence of subsection (a) shall be applied by substituting—

(A)

felony for misdemeanor,

(B)

$250,000 ($500,000 for $50,000 ($100,000, and

(C)

5 years for 1 year.

(2)

Failure described

A failure described in this paragraph is—

(A)

a failure to make a return described in subsection (a) for any 3 taxable years occurring during any period of 5 consecutive taxable years if the aggregate tax liability for such period is not less than $50,000, or

(B)

a failure to make a return if the tax liability giving rise to the requirement to make such return is attributable to an activity which is a felony under any State or Federal law.

.

(2)

Penalty may be applied in addition to other penalties

Section 7204 (relating to fraudulent statement or failure to make statement to employees) is amended by striking the penalty provided in section 6674 and inserting the penalties provided in sections 6674 and 7203(b).

(c)

Fraud and false statements

Section 7206 (relating to fraud and false statements) is amended—

(1)

by striking $100,000 and inserting $500,000,

(2)

by striking $500,000 and inserting $1,000,000, and

(3)

by striking 3 years and inserting 5 years.

(d)

Increase in monetary limitation for underpayment or overpayment of tax due to fraud

Section 7206 (relating to fraud and false statements), as amended by subsection (a)(3), is amended—

(1)

by striking Any person who— and inserting (a) In General.—Any person who—, and

(2)

by adding at the end the following new subsection:

(b)

Increase in monetary limitation for underpayment or overpayment of tax due to fraud

If any portion of any underpayment (as defined in section 6664(a)) or overpayment (as defined in section 6401(a)) of tax required to be shown on a return is attributable to fraudulent action described in subsection (a), the applicable dollar amount under subsection (a) shall in no event be less than an amount equal to such portion. A rule similar to the rule under section 6663(b) shall apply for purposes of determining the portion so attributable.

.

(e)

Effective Date

The amendments made by this section shall apply to actions, and failures to act, occurring after the date of the enactment of this Act.

408.

Penalties for failure to file certain returns electronically

(a)

In general

Part I of subchapter A of chapter 68 (relating to additions to the tax, additional amounts, and assessable penalties) is amended by inserting after section 6652 the following new section:

6652A.

Failure to file certain returns electronically

(a)

In general

If a person fails to file a return described in section 6651 or 6652(c)(1) in electronic form as required under section 6011(e)—

(1)

such failure shall be treated as a failure to file such return (even if filed in a form other than electronic form), and

(2)

the penalty imposed under section 6651 or 6652(c), whichever is appropriate, shall be equal to the greater of—

(A)

the amount of the penalty under such section, determined without regard to this section, or

(B)

the amount determined under subsection (b).

(b)

Amount of penalty

(1)

In general

Except as provided in paragraphs (2) and (3), the penalty determined under this subsection is equal to $40 for each day during which a failure described under subsection (a) continues. The maximum penalty under this paragraph on failures with respect to any 1 return shall not exceed the lesser of $20,000 or 10 percent of the gross receipts of the taxpayer for the year.

(2)

Increased penalties for taxpayers with gross receipts between $1,000,000 and $100,000,000

(A)

Taxpayers with gross receipts between $1,000,000 and $25,000,000

In the case of a taxpayer having gross receipts exceeding $1,000,000 but not exceeding $25,000,000 for any year—

(i)

the first sentence of paragraph (1) shall be applied by substituting $200 for $40, and

(ii)

in lieu of applying the second sentence of paragraph (1), the maximum penalty under paragraph (1) shall not exceed $100,000.

(B)

Taxpayers with gross receipts over $25,000,000

Except as provided in paragraph (3), in the case of a taxpayer having gross receipts exceeding $25,000,000 for any year—

(i)

the first sentence of paragraph (1) shall be applied by substituting $500 for $40, and

(ii)

in lieu of applying the second sentence of paragraph (1), the maximum penalty under paragraph (1) shall not exceed $250,000.

(3)

Increased penalties for certain taxpayers with gross receipts exceeding $100,000,000

In the case of a return described in section 6651—

(A)

Taxpayers with gross receipts between $100,000,000 and $250,000,000

In the case of a taxpayer having gross receipts exceeding $100,000,000 but not exceeding $250,000,000 for any year—

(i)

the amount of the penalty determined under this subsection shall equal the sum of—

(I)

$50,000, plus

(II)

$1,000 for each day during which such failure continues (twice such amount for each day such failure continues after the first such 60 days), and

(ii)

the maximum amount under clause (i)(II) on failures with respect to any 1 return shall not exceed $200,000.

(B)

Taxpayers with gross receipts over $250,000,000

In the case of a taxpayer having gross receipts exceeding $250,000,000 for any year—

(i)

the amount of the penalty determined under this subsection shall equal the sum of—

(I)

$250,000, plus

(II)

$2,500 for each day during which such failure continues (twice such amount for each day such failure continues after the first such 60 days), and

(ii)

the maximum amount under clause (i)(II) on failures with respect to any 1 return shall not exceed $250,000.

(C)

Exception for certain returns

Subparagraphs (A) and (B) shall not apply to any return of tax imposed under section 511.

.

(b)

Clerical amendment

The table of sections for part I of subchapter A of chapter 68 is amended by inserting after the item relating to section 6652 the following new item:

Sec. 6652A. Failure to file certain returns electronically.

.

(c)

Effective date

The amendments made by this section shall apply to returns required to be filed on or after January 1, 2011.

409.

Reporting on identification of beneficial owners of certain foreign financial accounts

(a)

In general

Subchapter A of chapter 3 is amended by adding at the end the following new section:

1447.

Withholdable payments to certain foreign financial accounts

(a)

In general

In the case of any withholdable payment to a foreign financial account, the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment if such agent does not meet the reporting requirements under subsection (b) with respect to such payment.

(b)

Reporting requirements

The requirements of this subsection are met with respect to any withholdable payment to a foreign financial account if the withholding agent with respect to such payment—

(1)

identifies—

(A)

the beneficial owner or owners of such account by name, address, TIN (if any), and

(B)

the account number,

(2)

obtains evidence of the nationality of such owner or owners,

(3)

complies with such verification and due diligence procedures as the Secretary may require with respect to such identification and obtaining of such evidence, and

(4)

reports such identification and evidence to the Secretary in such manner as the Secretary requires.

(c)

Definitions

For purposes of this section—

(1)

Withholdable payment

Except as otherwise provided by the Secretary, the term withholdable payment means—

(A)

any payment of interest (including any original issue discount), dividends, rents, and other fixed or determinable annual or periodical gains and profits, if such payment is from sources within the United States, and

(B)

any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.

(2)

Withholding agent

The term withholding agent means all persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment.

(3)

Foreign financial account

(A)

In general

The term foreign financial account means any financial account maintained by a foreign financial institution.

(B)

Financial account

Except as otherwise provided by the Secretary, the term financial account means, with respect to any foreign financial institution—

(i)

any depository account maintained by such financial institution, and

(ii)

any custodial account maintained by such financial institution.

(4)

Foreign financial institution

(A)

In general

The term foreign financial institution means any financial institution which is a foreign entity. Except as otherwise provided by the Secretary, such term shall not include a financial institution which is organized under the laws of any possession of the United States.

(B)

Financial institution

Except as otherwise provided by the Secretary, the term financial institution means any entity that—

(i)

accepts deposits in the ordinary course of a banking or similar business,

(ii)

is engaged primarily in the business of holding financial assets for the account of others, or

(iii)

is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.

(C)

Foreign entity

The term foreign entity means any entity which is not a United States person.

(d)

Exception for certain payments

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—

(1)

any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing,

(2)

any international organization or any wholly owned agency or instrumentality thereof,

(3)

any foreign central bank of issue, or

(4)

any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.

(e)

Confidentiality of information

For purposes of this section, rules similar to the rules of section 3406(f) shall apply.

(f)

Coordination with other withholding provisions

The Secretary shall provide for the coordination of this section with other withholding provisions under this title, including providing for the proper crediting of amounts deducted and withheld under this section against amounts required to be deducted and withheld under such other provisions.

(g)

Regulations

The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this section.

.

(b)

Conforming amendment

The table of sections for subchapter A of chapter 3 is amended by adding at the end the following new item:

Sec. 1447. Withholdable payments to certain foreign financial accounts.

.

(c)

Effective date

The amendments made by this section shall apply to payments made after December 31, 2010.

B

Requiring economic substance

411.

Clarification of economic substance doctrine

(a)

In General

Section 7701 is amended by redesignating subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection:

(o)

Clarification of Economic Substance Doctrine; etc

(1)

General rules

(A)

In general

In any case in which a court determines that the economic substance doctrine is relevant for purposes of this title to a transaction (or series of transactions), such transaction (or series of transactions) shall have economic substance only if the requirements of this paragraph are met.

(B)

Definition of economic substance

For purposes of subparagraph (A)—

(i)

In general

A transaction has economic substance only if—

(I)

the transaction changes in a meaningful way (apart from Federal tax effects) the taxpayer's economic position, and

(II)

subject to clause (iii), the taxpayer has a substantial purpose (other than a Federal tax purpose) for entering into such transaction.

(ii)

Special rule where taxpayer relies on profit potential

A transaction shall not be treated as having economic substance solely by reason of having a potential for profit unless the present value of the reasonably expected pre-Federal tax profit from the transaction is substantial in relation to the present value of the expected net Federal tax benefits that would be allowed if the transaction were respected. In determining pre-Federal tax profit, there shall be taken into account fees and other transaction expenses and to the extent provided by the Secretary, foreign taxes.

(iii)

Special rules for determining whether non-federal tax purpose

For purposes of clause (i)(II)—

(I)

a purpose of achieving a financial accounting benefit shall not be taken into account in determining whether a transaction has a substantial purpose (other than a Federal tax purpose) if the origin of such financial accounting benefit is a reduction of Federal tax, and

(II)

the taxpayer shall not be treated as having a substantial purpose (other than a Federal tax purpose) with respect to a transaction if the only such purpose is the reduction of non-Federal taxes and the transaction will result in a reduction of Federal taxes substantially equal to, or greater than, the reduction in non-Federal taxes because of similarities between the laws imposing the taxes.

(2)

Definitions and special rules

For purposes of this subsection—

(A)

Economic substance doctrine

The term economic substance doctrine means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

(B)

Exception for personal transactions of individuals

In the case of an individual, this subsection shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.

(3)

Other provisions not affected

Except as specifically provided in this subsection, the provisions of this subsection shall not be construed as altering or supplanting any other rule of law or provision of this title, and the requirements of this subsection shall be construed as being in addition to any such other rule of law or provision of this title.

(4)

Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. Such regulations may include exemptions from the application of this subsection.

.

(b)

Effective Date

The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

412.

Penalty for understatements attributable to transactions lacking economic substance, etc

(a)

In General

Subchapter A of chapter 68 is amended by inserting after section 6662A the following new section:

6662B.

Penalty for understatements attributable to transactions lacking economic substance, etc

(a)

Imposition of Penalty

If a taxpayer has an noneconomic substance transaction understatement for any taxable year, there shall be added to the tax an amount equal to 30 percent of the amount of such understatement.

(b)

Reduction of Penalty for Disclosed Transactions

Subsection (a) shall be applied by substituting 20 percent for 30 percent with respect to the portion of any noneconomic substance transaction understatement with respect to which the relevant facts affecting the tax treatment of the item are adequately disclosed in the return or a statement attached to the return.

(c)

Noneconomic Substance Transaction Understatement

For purposes of this section—

(1)

In general

The term noneconomic substance transaction understatement means any amount which would be an understatement under section 6662A(b)(1) if section 6662A were applied by taking into account items attributable to noneconomic substance transactions rather than items to which section 6662A would apply without regard to this paragraph.

(2)

Noneconomic substance transaction

The term noneconomic substance transaction means any transaction if there is a lack of economic substance (within the meaning of section 7701(o)(1)(B)) for the transaction giving rise to the claimed benefit.

(d)

Rules Applicable To Assertion, Compromise, and Collection of Penalty

(1)

In general

Only the Chief Counsel for the Internal Revenue Service may assert a penalty imposed under this section or may compromise all or any portion of such penalty. The Chief Counsel may delegate the authority under this paragraph only to an individual holding the position of chief of a branch within the Office of the Chief Counsel for the Internal Revenue Service.

(2)

Specific requirements

(A)

Assertion of penalty

The Chief Counsel for the Internal Revenue Service (or the Chief Counsel's delegate under paragraph (1)) shall not assert a penalty imposed under this section unless, before the assertion of the penalty, the taxpayer is provided—

(i)

a notice of intent to assert the penalty, and

(ii)

an opportunity to provide to the Commissioner (or the Chief Counsel's delegate under paragraph (1)) a written response to the proposed penalty within a reasonable period of time after such notice.

(B)

Compromise of penalty

A compromise shall not result in a reduction in the penalty imposed by this section in an amount greater than the amount which bears the same ratio to the amount of the penalty determined without regard to the compromise as—

(i)

the reduction under the compromise in the noneconomic substance transaction understatement to which the penalty relates, bears to

(ii)

the amount of the noneconomic substance transaction understatement determined without regard to the compromise.

(3)

Rules relating to relevancy requirement

(A)

Determination of relevance by chief counsel

The Chief Counsel for the Internal Revenue Service (or the Chief Counsel's delegate under paragraph (1)) may assert, compromise, or collect a penalty imposed by this section with respect to a noneconomic substance transaction even if there has not been a court determination that the economic substance doctrine was relevant for purposes of this title to the transaction if the Chief Counsel (or delegate) determines that either was so relevant.

(B)

Final order of court

If there is a final order of a court that determines that the economic substance doctrine was not relevant for purposes of this title to a transaction (or series of transactions), any penalty imposed under this section with respect to the transaction (or series of transactions) shall be rescinded.

(4)

Applicable rules

The rules of paragraphs (2) and (3) of section 6707A(d) shall apply to a compromise under paragraph (1).

(e)

Coordination With Other Penalties

Except as otherwise provided in this part, the penalty imposed by this section shall be in addition to any other penalty imposed by this title.

(f)

Cross References

(1)

For coordination of penalty with understatements under section 6662 and other special rules, see section 6662A(e).

(2)

For reporting of penalty imposed under this section to the Securities and Exchange Commission, see section 6707A(e).

.

(b)

Coordination With Other Understatements and Penalties

(1)

The second sentence of section 6662(d)(2)(A) is amended by inserting and without regard to items with respect to which a penalty is imposed by section 6662B before the period at the end.

(2)

Subsection (e) of section 6662A is amended—

(A)

in paragraph (1), by inserting and noneconomic substance transaction understatements after reportable transaction understatements both places it appears,

(B)

in paragraph (2)(A)—

(i)

by inserting 6662B or before 6663 in the text, and

(ii)

by striking penalty in the heading and inserting and economic substance penalties,

(C)

in paragraph (2)(B)—

(i)

by inserting and section 6662B after This section, and

(ii)

by striking penalty in the heading and inserting and economic substance penalties,

(D)

in paragraph (3), by inserting or noneconomic substance transaction understatement after reportable transaction understatement, and

(E)

by adding at the end the following new paragraph:

(4)

Noneconomic substance transaction understatement

For purposes of this subsection, the term noneconomic substance transaction understatement has the meaning given such term by section 6662B(c).

.

(3)

Subsection (e) of section 6707A is amended—

(A)

by striking or at the end of subparagraph (B), and

(B)

by striking subparagraph (C) and inserting the following new subparagraphs:

(C)

is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, or

(D)

is required to pay a penalty under section 6662(h) with respect to any transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c) or to penalty under section 6662B,

.

(c)

Clerical Amendment

The table of sections for part II of subchapter A of chapter 68 is amended by inserting after the item relating to section 6662A the following new item:

Sec. 6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.

.

(d)

Effective Date

The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

413.

Denial of deduction for interest on underpayments attributable to noneconomic substance transactions

(a)

In General

Section 163(m) (relating to interest on unpaid taxes attributable to nondisclosed reportable transactions) is amended—

(1)

by striking attributable and all that follows and inserting the following:

attributable to—

(1)

the portion of any reportable transaction understatement (as defined in section 6662A(b)) with respect to which the requirement of section 6664(d)(2)(A) is not met, or

(2)

any noneconomic substance transaction understatement (as defined in section 6662B(c)).

, and

(2)

by inserting and Noneconomic Substance Transactions in the heading thereof after Transactions.

(b)

Effective Date

The amendments made by this section shall apply to transactions after the date of the enactment of this Act in taxable years ending after such date.

C

Internet gambling taxation and regulation

421.

Tax on Internet gambling; licensee information reporting

(a)

In general

Chapter 36 (relating to certain other excise taxes) is amended by adding at the end the following new subchapter:

E

Internet Gambling

Sec. 4491. Imposition of Internet gambling license fee.

Sec. 4492. Record requirements.

4491.

Imposition of Internet gambling license fee

(a)

Federal fee

Each licensee within the meaning of section 5382 of title 31, United States Code, shall be required to pay an Internet gambling license fee by the end of each calendar month in an amount equal to two percent of all funds deposited by customers during the preceding month into an account maintained by that licensee or any agent of that licensee that can be used for the purpose of placing a bet or wager as defined in section 5362(1) of title 31, United States Code.

(b)

Deposits

Deposits made by or on behalf of a licensee of Internet gambling winnings or returns of funds by or on behalf of a licensee to the account of a customer shall not be treated as a deposit for purposes of this section.

(c)

Persons liable for fee

The Internet gambling license fee shall be the direct and exclusive obligation of the Internet gambling operator and may not be deducted from the amounts available as deposits to the person placing a bet. Notwithstanding the foregoing, any person making a deposit for the purpose of placing a bet or wager with a person who is required but has failed to obtain a license pursuant to subchapter V of chapter 53 of title 31, United States Code, shall be liable for and pay the fee under this subchapter on all such deposits, but such liability shall not excuse any failure to pay the fee on the part of the person who is required but has failed to obtain such license.

(d)

Unauthorized bets or wagers

There is hereby imposed a fee in an amount equal to 50 percent of all funds deposited into an account that can be used for placing a bet or wager within the meaning of Section 5362(1) of title 31, United States Code, with any person that is not authorized pursuant to section 5382 of that title. Such tax is due by the end of each calendar month with respect to deposits during the preceding month.

(e)

Disposition

Amounts paid as Internet gambling license fees or on unauthorized bets or wagers under this section shall be deposited in the general fund of the Treasury and treated as revenue.

(f)

Administrative provisions

Except to the extent the Secretary shall by regulations prescribe, the fees imposed by this section shall be subject to the administrative provisions of this title applicable to excise taxes imposed by chapter 35.

4492.

Record requirements

Each person liable for fees under this subchapter, except for a person making a deposit who is liable for fees pursuant to section 4491(e), shall keep a daily record showing deposits as defined in this subchapter, in addition to all other records required pursuant to section 6001(a).

.

(b)

Information returns

Subpart A of part III of subchapter A of chapter 61 (relating to information concerning persons subject to special provisions) is amended by adding at the end the following new section:

6050X.

Returns relating to Internet gambling

(a)

Requirement

Every person who is a licensee (within the meaning of section 5382(3) of title 31, United States Code) or who otherwise is engaged in the business of accepting any bet or wager within the meaning of section 5362(1) of title 31, United States Code, during a taxable year shall furnish, at such time and in such manner as the Secretary shall by regulations prescribe, the information described in subsection (b), and such person shall maintain (in the location, in the manner, and to the extent prescribed in regulations) such records as may be appropriate to the information described in subsection (b).

(b)

Required information

For purposes of subsection (a), the information described is set forth below, which information may be modified as appropriate by the Secretary through regulation—

(1)

the name, address, and TIN of the licensee or other person engaged in the business of accepting any bet or wager,

(2)

the name, address, and TIN of each person placing a bet or wager with the licensee or other person engaged in the business of accepting any bet or wager during the calendar year,

(3)

the gross winnings, gross wagers, and gross losses for the calendar year of each person placing a bet or wager with the licensee or other person engaged in the business of accepting any bet or wager during the year,

(4)

the net Internet gambling winnings for each such person for the calendar year,

(5)

the amount of tax withheld with respect to each such person for the calendar year,

(6)

beginning and end-of-year account balances for each such person for the calendar year, and

(7)

amounts deposited and withdrawn by each such person during the calendar year.

(c)

Statement To be furnished to persons with respect to whom information is required

Every person required to make a return under subsection (a) shall furnish to each person whose name is required to be set forth in such return by reason of placing a bet or wager a written statement showing—

(1)

the name, address, and phone number of the information contact of the person required to make such return, and

(2)

the information required to be shown on such return with respect to each person whose name is required to be set forth in such return.

The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.
(d)

Definitions

(1)

Net internet gambling winnings

The term net Internet gambling winnings means gross winnings from wagers placed over the Internet with a person required to be licensed under section 5382 of chapter 53 of title 31, United States Code, less the amounts wagered.

(2)

Internet; wager

The terms Internet and wager shall have the respective meanings given such terms by section 5362 of chapter 53 of title 31, United States Code.

.

(c)

Clerical amendments

(1)

The table of subchapters for chapter 36 is amended by adding at the end the following new item:

Subchapter E. Internet Gambling.

.

(2)

The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6050W the following new item:

Sec. 6050X. Returns relating to Internet gambling.

.

(d)

Effective date

The amendments made by this section shall apply to bets or wagers placed after the date of the enactment of this Act.

422.

Withholding from certain gambling winnings

(a)

Net Internet gambling winnings

Paragraph (3) of section 3406(b) (relating to other reportable payments for purposes of backup withholding) is amended—

(1)

by striking or in subparagraph (E);

(2)

by striking . and inserting , or at the end of subparagraph (F); and

(3)

by adding at the end thereof the following new subparagraph:

(G)

section 6050X(b)(4) (relating to net Internet gambling winnings).

.

(b)

Effective date

The amendment made by this section shall apply to bets or wagers placed after the date of the enactment of this Act.

423.

Withholding of tax on nonresident aliens

(a)

Tax on nonresident alien individuals

Paragraph (1) of section 871(a) (relating to income not connected with United States business) is amended—

(1)

by striking and at the end of subparagraph (C),

(2)

by inserting and at the end of subparagraph (D), and

(3)

by inserting after subparagraph (D) the following new subparagraph:

(E)

the gross amount of winnings from each wager placed over the Internet with a person required to be licensed under section 5382 of chapter 53 of title 31, United States Code (as such terms are defined in section 6050X(d)(2)),

.

(b)

Exemption for certain gambling winnings

Section 871(j) (relating to exemption for certain gambling winnings) is amended by inserting before the period at the end the following: or to any bets or wagers placed over the Internet (as such terms are defined in section 6050X(d)(2)).

(c)

Withholding of tax on nonresident alien individuals

The first sentence of subsection (b) of section 1441 (relating to withholding of tax on nonresident aliens) is amended by inserting after gains subject to tax under section 871(a)(1)(D), the following: the gross amount of winnings from wagers placed over the Internet described in section 871(a)(1)(E),.

(d)

Source of Internet gambling winnings

Subsection (a) of section 861 is amending by inserting at the end thereof the following new paragraph:

(9)

Internet gambling winnings

Any Internet gambling winnings received from a licensee within the meaning of section 5382(3) of title 31, United States Code.

.

(e)

Effective date

The amendments made by this section shall apply to bets or wagers placed after the date of the enactment of this Act.

424.

Territorial extent

Paragraph (2) of section 4404 is amended to read as follows:

(2)

placed within the United States or any Commonwealth, territory, or possession thereof by a United States citizen or resident.

.

425.

Federal licensing requirement for Internet gambling operators

(a)

In general

Chapter 53 of title 31, United States Code, is amended by adding at the end the following new subchapter:

V

Regulation of lawful Internet gambling

5381.

Congressional findings

The Congress finds the following:

(1)

Since the development of the Internet, millions of people have chosen to gamble online, and today Internet gambling is offered by operators located in many different countries under a variety of licensing and regulatory regimes.

(2)

Despite the increasing use of the Internet for gambling by persons in the United States, there is no Federal or State regulatory regime in place to protect United States citizens who choose to engage in this interstate activity, or to oversee operators to establish and enforce standards of integrity and fairness.

(3)

In the United States, gambling activities, equipment, and operations have been subject to various forms of Federal and State control, regulation, and enforcement, with some form of gambling being permitted in nearly every State and by many Indian tribes.

(4)

Internet gambling in the United States should be controlled by a strict Federal licensing and regulatory framework to protect underage and otherwise vulnerable individuals, to ensure the games are fair, to address the concerns of law enforcement, and to enforce any limitations on the activity established by the States and Indian tribes.

(5)

An effective Federal licensing system would ensure that licenses are issued only to Internet gambling operators which meet strict criteria to protect consumers, and which—

(A)

are in good financial and legal standing, and of good character, honesty, and integrity;

(B)

utilize appropriate technology to determine the age and location of users;

(C)

adopt and implement systems to protect minors and problem gamblers;

(D)

adopt and implement systems to enforce any applicable Federal, State, and Indian tribe limitations on Internet gambling; and

(E)

have in place risk-based methods to identify and combat money laundering and fraud relating to Internet gambling, and to protect the privacy and security of users.

(6)

There is a need to extend the regulatory provisions of this Act to all persons, locations, equipment, practices, and associations related to Internet gambling, with each State and Indian tribe having the ability to limit Internet gambling operators from offering Internet gambling to persons located within its territory by opting out of the provisions of this Act.

5382.

Definitions

For purposes of this subchapter, the following definitions shall apply:

(1)

Applicant

The term applicant means any person who has applied for a license pursuant to this subchapter.

(2)

Bet or wager

The term bet or wager has the same meaning as in section 5362(1).

(3)

Enforcement Agent

The term enforcement agent means any individual authorized by the Secretary to enforce the provisions of this subchapter and regulations prescribed under this subchapter.

(4)

Indian lands and indian tribe

The terms Indian lands and Indian tribe have the same meanings as in section 4 of the Indian Gaming Regulatory Act.

(5)

Internet

The term Internet has the same meaning as in section 5362(5).

(6)

Licensee

The term licensee means an entity authorized to operate an Internet gambling facility in accordance with this subchapter.

(7)

Operate an internet gambling facility

The term operate an Internet gambling facility or operation of an Internet gambling facility means the direction, management, supervision, or control of an Internet site through which bets or wagers are initiated, received, or otherwise made, whether by telephone, Internet, satellite, or other wire or wireless communication.

(8)

Secretary

The term Secretary means the Secretary of the Treasury, or any person designated by the Secretary.

(9)

State

The term State means any State of the United States, the District of Columbia, or any commonwealth, territory, or other possession of the United States.

(10)

Sporting event

The term sporting event means any athletic competition, whether professional, scholastic, or amateur.

5383.

Establishment and administration of licensing program

(a)

Treasury responsibilities

The Secretary shall have responsibility for the following activities:

(1)

Exercising full regulatory jurisdiction over—

(A)

the operation of Internet gambling facilities by licensees; and

(B)

the licensure of all applicants.

(2)

Prescribing such regulations as may be necessary to administer and enforce the requirements of this subchapter.

(3)

Employing enforcement agents with sufficient training and experience to administer the requirements of this subchapter and the regulations prescribed under this subchapter.

(4)

Enforcing the requirements of this subchapter through all appropriate means provided under this subchapter and other provisions of law.

(b)

Internet gambling licensing program

(1)

Licensing required for certain Internet gambling

No person may operate an Internet gambling facility that knowingly accepts bets or wagers from persons located in the United States without a license issued by the Secretary in accordance with this subchapter.

(2)

Authority under valid license

A licensee may accept bets or wagers from persons located in the United States, subject to the limitations set forth in this subchapter, so long as its license remains in good standing.

(c)

Application for license

(1)

In general

Any person seeking authority to operate an Internet gambling facility offering services to persons in the United States may apply for a license issued by the Secretary.

(2)

Information required

Any application for a license under this subchapter shall contain such information as may be required by the Secretary, including the following:

(A)

The criminal and credit history of the applicant, any senior executive and director of the applicant, and any person deemed to be in control of the applicant.

(B)

The financial statements of the applicant.

(C)

Documentation showing the corporate structure of the applicant and all related businesses and affiliates.

(D)

Documentation containing detailed evidence of the applicant’s plan for complying with all applicable regulations should a license be issued, with particular emphasis on the applicant’s ability to—

(i)

protect underage and problem gamblers;

(ii)

ensure games are being operated fairly; and

(iii)

comply with and address the concerns of law enforcement.

(E)

Certification that the applicant agrees to submit to United States jurisdiction and all applicable United States laws relating to acceptance by the applicant of bets or wagers over the Internet from persons located in the United States and all associated activities.

(d)

Standards for license issuance; suitability qualifications and disqualification standards

(1)

Suitability for licensing standards

(A)

In general

No person shall be eligible to obtain a license unless the Secretary has determined, upon completion of a background check and investigation, that the applicant, and any person deemed to be in control of the applicant, is suitable for licensing.

(B)

Associates of applicants

If the applicant is a corporation, partnership, or other business entity, a background check and investigation shall occur with respect to the president or other chief executive of the corporation, partnership, or other business entity and other partners or senior executives and directors of the corporation, partnership, or entity, as determined appropriate by the Secretary, in the Secretary’s sole discretion.

(C)

Background check and investigation

The Secretary shall establish standards and procedures for conducting background checks and investigations for purposes of this subsection.

(2)

Suitability for licensing standards described

For purposes of this subchapter, an applicant and any other person associated with the applicant, as applicable, is suitable for licensing if the applicant demonstrates to the Secretary by clear and convincing evidence that the applicant (or individual associated with the applicant, as applicable)—

(A)

is a person of good character, honesty, and integrity;

(B)

is a person whose prior activities, reputation, habits, and associations do not—

(i)

pose a threat to the public interest or to the effective regulation and control of the licensed activities; or

(ii)

create or enhance the dangers of unsuitable, unfair, or illegal practices, methods, and activities in the conduct of the licensed activities or the carrying on of the business and financial arrangements incidental to such activities;

(C)

is capable of and likely to conduct the activities for which the applicant is licensed in accordance with the provisions of this subchapter and any regulations prescribed under this subchapter;

(D)

has or guarantees acquisition of adequate business competence and experience in the operation of Internet gambling facilities; and

(E)

has or will obtain sufficient financing for the nature of the proposed operation and from a suitable source.

(3)

Unsuitable for licensing

An applicant or any other person may not be determined to be suitable for licensing within the meaning of this subchapter if the applicant or such person—

(A)

has failed to provide information and documentation material to a determination of suitability for licensing under paragraph (1);

(B)

has supplied information which is untrue or misleading as to a material fact pertaining to any such determination;

(C)

has been convicted of an offense punishable by imprisonment of more than 1 year; or

(D)

is delinquent in filing any applicable Federal or State tax returns or in the payment of any taxes, penalties, additions to tax, or interest owed to a State or the United States.

(4)

Ongoing requirement

A licensee (and any other person who is required to be determined to be suitable for licensing in connection with such licensee) shall meet the standards necessary to be suitable for licensing throughout the term of the license.

(5)

Protection of the public trust

The Secretary may take such action as is necessary to protect the public trust, including the implementation of such safeguards as may be necessary to ensure the operation of an Internet gambling facility licensed under this subchapter is controlled only by persons who are suitable for licensing.

(6)

Enforcement actions

(A)

Determination of unsuitability for continued licensure

If the Secretary finds that an individual owner or holder of a security of a licensee, or of a holding or intermediary company of a licensee or any person with an economic interest in a licensee or a director, partner, or officer of a licensee is not suitable for licensing, the Secretary may determine that the licensee is not qualified to continue as a licensee.

(B)

Action to protect the public interest, including suspension

If the Secretary may determine that the licensee is not qualified to continue as a licensee, the Secretary shall propose action necessary to protect the public interest, including, if deemed necessary, the suspension of the licensee.

(C)

Imposition of conditions including removal of parties

Notwithstanding a determination under subparagraph (A), the Secretary may allow a licensee to continue engaging in licensed activities by imposing conditions on the licensee under penalty of revocation or suspension of a license, including—

(i)

the identification of any person determined to be unsuitable for licensing; and

(ii)

the establishment of appropriate safeguards to ensure such person is excluded from any interest in the licensed activities.

(e)

Assessments for administrative expenses

(1)

User fees

(A)

In general

The cost of administering this subchapter with respect to each licensee, including the cost of any review or examination of a licensee to ensure compliance with the terms of the license and this subchapter, shall be assessed by the Secretary against the licensee institution by written notice in an amount appropriate to meet the Secretary’s expenses in carrying out such administration, review, or examination.

(B)

Disposition

Amounts assessed by the Secretary as user fees under subparagraph (A) shall—

(i)

be maintained by the Secretary solely for use in accordance with clause (ii);

(ii)

be available to the Secretary to cover all expenses incurred by the Secretary in carrying out this subchapter; and

(iii)

not be construed to be Government funds or appropriated monies, or subject to apportionment for the purposes of chapter 15 or any other authority.

(C)

Hearing

Any licensee against whom an assessment is assessed under this paragraph shall be afforded an agency hearing if such person submits a request for such hearing within 20 days after the issuance of the notice of assessment.

(D)

Collection

(i)

Referral

If any licensee fails to pay an assessment under this paragraph after the assessment has become final, the Secretary shall recover the amount assessed by action in the appropriate United States district court.

(ii)

Appropriateness of assessment not reviewable

In any civil action under clause (i), the validity and appropriateness of the assessment shall not be subject to review.

(2)

Direct and exclusive obligation of licensee

The user fee shall be the direct and exclusive obligation of the licensee and may not be deducted from amounts available as deposits to any person placing a bet.

(f)

Approval of license

The Secretary shall grant licenses under this subchapter if the applicant meets the criteria set by the Secretary set forth in this subchapter and in any regulations promulgated thereunder.

(g)

Safeguards required of licensee

No person shall receive or retain a license under this section unless the person maintains or requires mechanisms so that the following requirements, and the standards established under section 5384, are met with respect to any Internet bet or wager:

(1)

Legal age

Appropriate safeguards to ensure that the individual placing a bet or wager is of legal age as defined by the law of the State or tribal area in which the individual is located at the time the bet or wager is placed.

(2)

Permissible location

Appropriate safeguards to ensure that the individual placing a bet or wager is physically located in a jurisdiction that permits Internet gambling at the time the bet or wager is placed.

(3)

Collection of customer taxes

Appropriate mechanisms to ensure that all taxes relating to Internet gambling from persons engaged in Internet gambling are collected at the time of any payment of any proceeds of Internet gambling.

(4)

Collection of taxes of licensee

Appropriate mechanisms to ensure that all taxes relating to Internet gambling from any licensee are collected and disbursed as required by law, and that adequate records to enable later audit or verification are maintained.

(5)

Safeguards against financial crime

Appropriate safeguards to combat fraud, money laundering, and terrorist finance.

(6)

Safeguards against compulsive gambling

Appropriate safeguards to combat compulsive Internet gambling.

(7)

Privacy safeguards

Appropriate safeguards to protect the privacy and security of any person engaged in Internet gambling.

(8)

Payment of assessments

Appropriate mechanisms to ensure that any assessment under subsection (e) is paid to the Secretary.

(9)

Other requirements

Such other requirements as the Secretary may establish by regulation or order.

(h)

Term and renewal of license

(1)

Term

Any license issued under this section shall be issued for a 5-year term beginning on the date of issuance.

(2)

Renewal

Licenses may be renewed in accordance with the requirements prescribed by the Secretary pursuant to this subchapter.

(i)

Revocation of license

(1)

In general

Any license granted under this subchapter may be revoked by the Secretary if—

(A)

the licensee fails to comply with any provision of this subchapter; or

(B)

the licensee is determined to be unsuitable for licensing, within the meaning of this subchapter.

(2)

Final action

Any revocation of a license under paragraph (1) shall be treated as a final action by the Secretary.

(j)

Regulations

The regulations prescribed by the Secretary under this subchapter shall include regulations to fully implement—

(1)

safeguards required for licensees under subsection (g); and

(2)

the requirements for programs relating to the Problem Gambling, Responsible Gambling, and Self-Exclusion Program under section 5384.

(k)

Administrative provisions

(1)

General powers of Secretary

The Secretary shall have the authority to engage in the following:

(A)

Investigate the suitability of each applicant to ensure compliance with this subchapter and regulations prescribed under this subchapter.

(B)

Require licensees to maintain appropriate procedures to ensure compliance with this subchapter and regulations prescribed under this subchapter.

(C)

Examine any licensee and any books, papers, records, or other data of licensees relevant to any recordkeeping or reporting requirements imposed by the Secretary under this subchapter.

(D)

When determined by the Secretary to be necessary, summon a licensee or an applicant for a license, an officer or employee of a licensee or any such applicant (including a former officer or employee), or any person having possession, custody, or care of the reports and records required by the Secretary under this subchapter, to appear before the Secretary or a designee of the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give testimony, under oath, as may be relevant or material to any investigation in connection with the enforcement of this subchapter or any application for a license under this subchapter.

(E)

Investigate any violation of this subchapter and any regulation under this subchapter and any other violation of law relating to the operation of an Internet gambling facility.

(F)

Conduct continuing reviews of applicants and licensees and the operation of Internet gambling facilities by use of technological means, onsite observation of facilities, including servers, or other reasonable means to assure compliance with this subchapter and any regulations promulgated hereunder.

(2)

Administrative aspects of summons

(A)

Production at designated site

A summons issued pursuant to this subsection may require that books, papers, records, or other data stored or maintained at any place be produced at any business location of a licensee or applicant for a license or any designated location in any State or in any territory or other place subject to the jurisdiction of the United States not more than 500 miles distant from any place where the licensee or applicant for a license operates or conducts business in the United States.

(B)

No liability for expenses

The United States shall not be liable for any expense incurred in connection with the production of books, papers, records, or other data under this subsection.

(C)

Service of summons

Service of a summons issued under this subsection may be by registered mail or in such other manner calculated to give actual notice as the Secretary may prescribe by regulation.

(3)

Contumacy or refusal

(A)

Referral to attorney general

In case of contumacy by a person issued a summons under this subsection or a refusal by such person to obey such summons or to allow the Secretary to conduct an examination, the Secretary shall refer the matter to the Secretary of the Treasury for referral to the Attorney General.

(B)

Jurisdiction of court

The Attorney General may invoke the aid of any court of the United States to compel compliance with the summons within the jurisdiction of which—

(i)

the investigation which gave rise to the summons or the examination is being or has been carried on;

(ii)

the person summoned is an inhabitant; or

(iii)

the person summoned carries on business or may be found.

(C)

Court order

The court may issue an order requiring the person summoned to appear before the Secretary or a delegate of the Secretary to produce books, papers, records, and other data, to give testimony as may be necessary to explain how such material was compiled and maintained, to allow the Secretary to examine the business of a licensee, and to pay the costs of the proceeding.

(D)

Failure to comply with order

Any failure to obey the order of the court may be punished by the court as a contempt thereof.

(E)

Service of process

All process in any case under this subsection may be served in any judicial district in which such person may be found.

(l)

Civil money penalties

(1)

In general

The Secretary may assess upon any licensee or other person subject to the requirements of this subchapter for any willful violation of this subchapter or any regulation prescribed or order issued under this subchapter, a civil penalty of not more than the greater of—

(A)

the amount (not to exceed $100,000) involved in the violation, if any; or

(B)

$25,000.

(2)

Assessment

(A)

Written notice

Any penalty imposed under paragraph (1) may be assessed and collected by the Secretary by written notice.

(B)

Finality of assessment

If, with respect to any assessment under paragraph (1), a hearing is not requested pursuant to subparagraph (E) within the period of time allowed under such subparagraph, the assessment shall constitute a final and unappealable order.

(C)

Authority to modify or remit penalty

The Secretary may compromise, modify, or remit any penalty which the Secretary may assess or has already assessed under paragraph (1).

(D)

Mitigating factors

In determining the amount of any penalty imposed under paragraph (1), the Secretary shall take into account the appropriateness of the penalty with respect to—

(i)

the size of the financial resources and the good faith of the person against whom the penalty is assessed;

(ii)

the gravity of the violation;

(iii)

the history of previous violations; and

(iv)

such other matters as justice may require.

(E)

Hearing

The person against whom any penalty is assessed under paragraph (1) shall be afforded an agency hearing if such person submits a request for such hearing within 20 days after the issuance of the notice of assessment.

(F)

Collection

(i)

Referral

If any person fails to pay an assessment after any penalty assessed under this paragraph has become final, the Secretary shall recover the amount assessed by action in the appropriate United States district court.

(ii)

Appropriateness of penalty not reviewable

In any civil action under clause (i), the validity and appropriateness of the penalty shall not be subject to review.

(G)

Disbursement

All penalties collected under authority of this subsection shall be deposited into the Treasury.

(3)

Condition for licensure

Payment by a licensee of any civil penalty assessed under this subsection that has become final shall be a requirement for the retention of its license.

(m)

Treatment of records

In light of business competition, confidentiality, and privacy concerns, the Secretary shall protect from disclosure information submitted in support of a license application under this subchapter and information collected in the course of regulating licensees to the full extent permitted by sections 552 and 552a of title 5, United States Code.

(n)

Suitability for licensing requirements for certain service providers

(1)

In general

Any person that knowingly manages, administers, or controls bets or wagers that are initiated, received, or otherwise made within the United States or that otherwise manages or administers the games with which such bets or wagers are associated must meet all of the suitability for licensing criteria established under this section in the same manner and to the same extent as if that person were itself a licensee.

(2)

Subject to same enforcement jurisdiction

Any failure on the part of such person to remain suitable for licensing shall be grounds for revocation of the license of the licensee for whom such service is provided, in the same manner and in accordance with subsection (i).

(o)

Reliance on State and tribal regulatory body certifications of suitability for applicants

(1)

Qualification of state and tribal regulatory bodies

(A)

Application for determination

Any State or tribal regulatory body with expertise in regulating gambling may—

(i)

notify the Secretary of its willingness to review prospective applicants to certify whether any such applicant meets the qualifications established under this subchapter; and

(ii)

provide the Secretary with such documentation as the Secretary determines necessary for the Secretary to determine whether such State or tribal regulatory body is qualified to conduct such review and may be relied upon by the Secretary to make any such certification.

(B)

Determination and notice

Within 60 days after receiving any notice under subparagraph(A)(i), the Secretary shall—

(i)

make the determination as to whether a State or tribal regulatory body is qualified to conduct a review of prospective applicants and may be relied upon to certify whether any such applicant meets the qualifications established under this subchapter; and

(ii)

notify the State or tribal regulatory body of such determination.

(2)

Actions by qualified authorities

During the period that any determination of qualification under paragraph (1)(B) is in effect with respect to any such State or tribal regulatory body, the State or tribal regulatory body—

(A)

may undertake reviews of any applicant to determine whether the applicant or any person associated with the applicant meets the criteria for suitability for licensing established under this subchapter;

(B)

may impose on each such applicant an administrative fee or assessment for conducting such review in an amount the regulatory body determines to be necessary to meet its expenses in the conduct of such review; and

(C)

shall process and assess each applicant fairly and equally based on objective criteria, regardless of any prior licensing of an applicant by the State or tribal regulatory body.

(3)

Reliance on state or tribal certification

Any applicant may provide a certification of suitability for licensing made by any State or tribal regulatory body under paragraph (2), together with all documentation the applicant has submitted to any such State or tribal regulatory body, to the Secretary, and any such certification and documentation shall be relied on by the Secretary as evidence that an applicant has met the suitability for licensing requirements under this section.

(4)

Authority of secretary to review

Notwithstanding any certification of suitability for licensing made by any State or tribal regulatory body, the Secretary retains the authority to review, withhold, or revoke any license if the Secretary has reason to believe that any applicant or licensee does not meet the suitability requirements for licensing established under this section, or any other requirement of a licensee.

(5)

Reliance on qualified regulatory body for other purposes

At the discretion of the Secretary, the Secretary may rely on any State and tribal regulatory body found qualified under this subsection for such other regulatory and enforcement activities as the Secretary finds to be useful and appropriate to carry out the purposes of this subchapter.

(6)

Revocation of qualification

The Secretary may revoke, at any time and for any reason, the qualification of any State or tribal regulatory body to certify or to conduct any other regulatory or enforcement activity to carry out the purposes of this subchapter.

5384.

Problem Gambling, Responsible Gambling, and Self-Exclusion Program

(a)

Regulations required

The Secretary and any State or tribal regulatory body that has been qualified under subsection 5383(o) shall prescribe regulations for the development of a Problem Gambling, Responsible Gambling, and Self-Exclusion Program on the basis of standards that each licensee shall implement as a condition of licensure.

(b)

Minimum requirements

Any application for a license shall include a submission to the Secretary or qualified State or tribal regulatory body setting forth a comprehensive program that is intended—

(1)

to verify the identity and age of each customer;

(2)

to ensure that no customers under the legal age as defined by State or tribal law, as applicable, may initiate or otherwise make any bets or wagers;

(3)

to verify the State or tribal land in which the customer is located at the time the customer attempts to initiate a bet or wager;

(4)

to ensure that no customer who is located in a State or tribal land that opts out pursuant to section 5386 can initiate or otherwise make a bet or wager prohibited by such opt-out;

(5)

to ensure that responsible gambling materials are made available to customers upon request;

(6)

to make available individualized responsible gambling options that any customer may choose, including any stake limit, loss limit, deposit limit, and session time limit option, and any other similar option, that the Secretary or qualified State or tribal regulatory body may deem appropriate and require to be made available;

(7)

to protect the privacy and security of any customer in connection with any lawful Internet gambling activity; and

(8)

to protect against fraud and money laundering relating to Internet gambling activity.

(c)

List of persons self-Excluded from gambling activities

(1)

Establishment

(A)

In general

The Secretary shall provide by regulation for the establishment of a list of persons self-excluded from gambling activities at all licensee sites.

(B)

Placement request

Any person may request placement on the list of self-excluded persons by—

(i)

acknowledging in a manner to be established by the Secretary that the person wishes to be denied gambling privileges; and

(ii)

agreeing that, during any period of voluntary exclusion, the person may not collect any winnings or recover any losses resulting from any gambling activity at any licensee sites.

(2)

Placement and removal procedures

The regulations prescribed by the Secretary under paragraph (1)(A) shall establish procedures for placements on, and removals from, the list of self-excluded persons.

(3)

Limitation on liability

(A)

In general

The United States, the Secretary, an enforcement agent, or a licensee, or any employee or agent of the United States, the Secretary, an enforcement agent, or a licensee, shall not be liable to any self-excluded person or to any other party in any judicial or administrative proceeding for any harm, monetary or otherwise, which may arise as a result of—

(i)

any failure to withhold gambling privileges from, or to restore gambling privileges to, a self-excluded person; or

(ii)

otherwise permitting a self-excluded person to engage in gambling activity while on the list of self-excluded persons.

(B)

Rule of construction

No provision of subparagraph (A) shall be construed as preventing the Director from assessing any regulatory sanction against a licensee for failing to comply with the minimum standards prescribed pursuant to this subsection.

(4)

Disclosure provisions

(A)

In general

Notwithstanding any other provision of Federal or State law, the list of self-excluded persons shall not be open to public inspection.

(B)

Affiliate disclosure

Any licensees may disclose the identities of persons on the self-excluded list to any affiliated company or, where required to comply with this subsection, any service provider, to the extent that the licensee ensures that any affiliated company or service provider maintains such information under confidentiality provisions comparable to those in this subsection.

(5)

Limitation on liability for disclosure

A licensee or an employee, agent, or affiliate of a licensee shall not be liable to any self-excluded person or to any other party in any judicial proceeding for any harm, monetary or otherwise, which may arise as a result of disclosure or publication in any manner.

(d)

Gambling by prohibited persons

(1)

Prohibition benefitting from prohibited gambling activity

A person who is prohibited from gambling with a licensee by law, or by order of the Secretary or any court of competent jurisdiction, including any person on the self-exclusion list as established in accordance with subsection (c), shall not collect, in any manner or proceeding, any winnings or recover any losses arising as a result of any prohibited gambling activity.

(2)

Forfeiture

In addition to any other penalty provided by law, any money or thing of value that has been obtained by, or is owed to, any prohibited person by a licensee as a result of bets or wagers made by a prohibited person shall be subject to forfeiture by order of the Secretary, following notice to the prohibited person and opportunity to be heard.

(3)

Deposit of forfeited funds

Any funds forfeited pursuant to this subsection shall be deposited into the general fund of the Treasury.

(e)

Problem or compulsive gamblers not on the list of self-Excluded persons

(1)

Public awareness program

(A)

In general

The Secretary and any State or tribal regulatory body that has been qualified under subsection 5383(o) shall provide by regulation for the establishment of a program to alert the public to the existence, consequences, and availability of the self-exclusion list, and shall prepare and promulgate written materials to be used in such a program.

(B)

Licensee-provided publicity

Regulations prescribed under subparagraph (A) may require a licensee to make available literature or screen displays relating to the existence of the program.

(2)

Rule of construction

No provision of this subsection shall be construed as creating a legal duty in the Secretary, a qualified State or tribal regulatory body, a licensee, or any representative of a licensee to identify or to exclude problem or compulsive gamblers not on the list of self-excluded persons.

(3)

Immunity

The United States, the Secretary, a qualified State or tribal regulatory body, a licensee, and any employee or agent of a licensee, shall not be liable to any person in any proceeding for losses or other damages of any kind arising out of that person’s gambling activities based on a claim that the person was a compulsive, problem, or pathological gambler.

5385.

Financial transaction providers

(a)

In general

No financial transaction provider shall be held liable for engaging in financial activities and transactions for or on behalf of a licensee or involving a licensee, including payments processing activities, if such activities are performed in compliance with this subchapter and with applicable Federal and State laws.

(b)

Definitions

For purposes of this section, the following definitions shall apply:

(1)

Financial transaction provider

The term financial transaction provider means a creditor, credit card issuer, financial institution, operator of a terminal at which an electronic fund transfer may be initiated, money transmitting business, or international, national, regional, or local payment network utilized to effect a credit transaction, electronic fund transfer, stored value product transaction, or money transmitting service, or a participant in such network, or other participant in a payment system.

(2)

Other terms

(A)

Credit, creditor, credit card, and card issuer

The terms credit, creditor, credit card, and card issuer have the meanings given the terms in section 103 of the Truth in Lending Act.

(B)

Electronic fund transfer

The term electronic fund transfer

(i)

has the meaning given the term in section 903 of the Electronic Fund Transfer Act, except that the term includes transfers that would otherwise be excluded under section 903(6)(E) of such Act; and

(ii)

includes any fund transfer covered by Article 4A of the Uniform Commercial Code, as in effect in any State.

(C)

Financial institution

The term financial institution has the meaning given the term in section 903 of the Electronic Fund Transfer Act, except that such term does not include a casino, sports book, or other business at or through which bets or wagers may be placed or received.

(D)

Insured depository institution

The term insured depository institution

(i)

has the meaning given the term in section 3(c) of the Federal Deposit Insurance Act; and

(ii)

includes an insured credit union (as defined in section 101 of the Federal Credit Union Act).

(E)

Money transmitting business and money transmitting service

The terms money transmitting business and money transmitting service have the meanings given the terms in section 5330(d) (determined without regard to any regulations prescribed by the Secretary under such section).

5386.

Limitation of licenses in States and Indian lands

(a)

State opt-Out exercise

(1)

Limitations imposed by States

(A)

In general

No licensee may engage, under any license issued under this subchapter, in the operation of an Internet gambling facility that knowingly accepts bets or wagers initiated by persons who reside in any State which provides notice that it will limit such bets or wagers, if the Governor or other chief executive officer of such State informs the Director of such limitation, in a manner which clearly identifies the nature and extent of such limitation, before the end of the 90-day period beginning on the date of the enactment of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, or in accordance with paragraph (2), until such time as any notice of any amendment or repeal of such specific limitation becomes effective under paragraph (2).

(B)

Coordination between state and tribal opt-out exercises

Any State limitation under subparagraph (A) shall not apply to the acceptance by a licensee of bets or wagers from persons located within the tribal lands of an Indian tribe that—

(i)

has itself opted out pursuant to subsection (b) (in which case the tribal opt-out exercise under such subsection shall apply); or

(ii)

would be entitled pursuant to other applicable law to permit such bets or wagers to be initiated and received within its territory without use of the Internet.

(C)

Coordination with indian gaming regulatory act

No decision by a State under this subsection shall be considered in making any determination with regard to the ability of an Indian tribe to offer any class of gambling activity pursuant to section 11 of the Indian Gaming Regulatory Act.

(2)

Changes to State limitations

The establishment, repeal, or amendment by any State of any limitation referred to in paragraph (1) after the end of the 90-day period beginning on the date of the enactment of this subchapter shall apply, for purposes of this subchapter, beginning on the first January 1 that occurs after the end of the 60-day period beginning on the later of—

(A)

the date a notice of such establishment, repeal, or amendment is provided by the Governor or other chief executive officer of such State in writing to the Secretary; or

(B)

the effective date of such establishment, repeal, or amendment.

(b)

Indian tribe opt-Out exercise

(1)

Limitations imposed by indian tribes

No Internet gambling licensee knowingly may accept a bet or wager from a person located in the tribal lands of any Indian tribe which limits such gambling activities or other contests if the principal chief or other chief executive officer of such Indian tribe informs the Secretary of such limitation, in a manner which clearly identifies the nature and extent of such limitation, before the end of the 90-day period beginning on the date of the enactment of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, or in accordance with paragraph (2), until such time as any notice of any amendment or repeal of such specific limitation becomes effective under paragraph (2).

(2)

Changes to indian tribe limitations

The establishment, repeal, or amendment by any Indian tribe of any limitation referred to in paragraph (1) after the end of the 90-day period beginning on the date of the enactment of this subchapter shall apply, for purposes of this subchapter, beginning on the first January 1 that occurs after the end of the 60-day period beginning on the later of—

(A)

the date a notice of such establishment, repeal, or amendment is provided by the principal chief or other chief executive officer of such Indian tribe in writing to the Secretary; or

(B)

the effective date of such establishment, repeal, or amendment.

(c)

Notification and Enforcement of State and Indian Tribe Limitations

(1)

In general

The Secretary shall notify all licensees and applicants of all States and Indian tribes that have provided notice pursuant to paragraph (1) or (2) of subsection (a) or (b), as the case may be, promptly upon receipt of such notice and in no event fewer than 30 days before the effective date of such notice.

(2)

Compliance

The Secretary shall take effective measures to ensure that any licensee under this subchapter, as a condition of the license, complies with any limitation or prohibition imposed by any State or Indian tribe to which the licensee is subject under subsection (a) or (b), as the case may be.

(3)

Violations

It shall be a violation of this subchapter for any licensee knowingly to accept bets or wagers initiated or otherwise made by persons located within any State or in the tribal lands of any Indian tribe for which a notice is in effect under subsection (a) or (b), as the case may be.

(4)

State Attorney General Enforcement

In any case in which the attorney general of a State, or any State or local law enforcement agency authorized by the State attorney general or by State statute to prosecute violations of consumer protection law, has reason to believe that an interest of the residents of that State has been or is threatened or adversely affected by a violation by a licensee pursuant to paragraph (2), the State, or the State or local law enforcement agency on behalf of the residents of the agency’s jurisdiction, may bring a civil action on behalf of the residents of that State or jurisdiction in a district court of the United States located therein, to—

(A)

enjoin that practice; or

(B)

enforce compliance with this subchapter.

5387.

Professional and Amateur Sports Protection Act prohibitions

No provision of this subchapter shall be construed as authorizing any licensee to operate an Internet gambling facility that knowingly accepts bets or wagers on sporting events from persons located in the United States in violation of section 3702 of title 28, United States Code, except for fantasy or simulation sports games (as defined in section 5362 of this title).

5388.

Safe harbors

It shall be a complete defense against any prosecution or enforcement action under any Federal or State law against any person possessing a valid license under this subchapter that the activity is authorized under and has been carried out lawfully under the terms of this subchapter.

5389.

Relation to section 1084 of title 18 and the Unlawful Internet Gambling Enforcement Act

Section 1084 of title 18 and subchapter IV of this chapter shall not apply to any Internet bet or wager occurring pursuant to a license issued by the Secretary under this subchapter.

5390.

Cheating and other fraud

(a)

Electronic cheating devices prohibited

No person initiating, receiving, or otherwise making a bet or wager with a licensee, or sending, receiving, or inviting information assisting with a bet or wager with a licensee, knowingly shall use, or assist another in the use of, an electronic, electrical, or mechanical device which is designed, constructed, or programmed specifically for use in obtaining an advantage in any game authorized under this subchapter, where such advantage is prohibited or otherwise violates the rules of play established by the licensee.

(b)

Additional offense

No person initiating, receiving, or otherwise making a bet or wager with a licensee, or sending, receiving, or inviting information assisting with a bet or wager with a licensee, knowingly shall use or possess any cheating device with intent to cheat or defraud any licensee or other persons placing bets or wagers with such licensee.

(c)

Permanent injunction

Upon conviction of a person for violation of this section, the court may enter a permanent injunction enjoining such person from initiating, receiving, or otherwise making bets or wagers or sending, receiving, or inviting information assisting in the placing of bets or wagers.

(d)

Criminal penalty

Whoever violates subsection (a) or (b) of this section shall be fined under title 18 of the United States Code or imprisoned for not more than 5 years, or both.

.

(b)

Rules of construction

(1)

Technical and conforming amendment

Section 310(b)(2) of title 31, United States Code is amended—

(A)

by redesignating subparagraphs (J) and (K) as subparagraphs (K) and (L), respectively; and

(B)

by inserting after subparagraph (I) the following new subparagraph:

(J)

Administer the requirements of subchapter V of chapter 53.

.

(c)

Clerical amendment

The table of subchapters and sections for chapter 53 of title 31, United States Code, is amended by adding at the end the following:

Subchapter V—Regulation of lawful Internet gambling

5381. Congressional findings and purpose.

5382. Definitions.

5383. Establishment and administration of licensing program.

5384. Minimum requirements: Problem Gambling, Responsible Gambling, and Self-Exclusion Program.

5385. Financial transaction providers.

5386. Limitation of licenses in States and Indian lands.

5387. Professional and Amateur Sports Protection Act prohibitions.

5388. Safe harbors.

5389. Relation to section 1084 of title 18 and the Unlawful Internet Gambling Enforcement Act.

5390. Cheating and other fraud.

.

426.

Report required

(a)

In general

Before the end of the 1-year period beginning on the effective date of the regulations prescribed under section 327(a), and annually thereafter, the Secretary shall submit a report to Congress on the licensing and regulation of Internet gambling operators.

(b)

Information required

Each report submitted under subsection (a) shall include the following information:

(1)

A comprehensive statement regarding the prohibitions notified by the States and Indian tribes pursuant to section 5386 of title 31, United States Code.

(2)

Relevant statistical information on applicants and licenses.

(3)

The amount of licensing and user fees collected during the period covered by the report.

(4)

Information on regulatory or enforcement actions undertaken during the period.

(5)

Any other information that may be useful to Congress in evaluating the effectiveness of the Act in meeting its purpose, including the provision of protections against underage gambling, compulsive gambling, money laundering, and fraud, and in combating tax avoidance relating to Internet gambling.

427.

Effective date

(a)

Regulations

The Secretary of the Treasury shall prescribe such regulations as the Secretary may determine to be appropriate to implement subchapter V of chapter 53 of title 31, United States Code (as added by this Act) and shall publish such regulations in final form in the Federal Register before the end of the 180-day period beginning on the date of the enactment of this Act.

(b)

Scope of application

The amendment made by section 325(a) shall apply after the end of the 90-day period beginning on the date of the publication of the regulations in final form in accordance with subsection (a).

D

Miscellaneous

431.

Denial of deduction for punitive damages

(a)

Disallowance of Deduction

(1)

In general

Section 162(g) (relating to treble damage payments under the antitrust laws) is amended—

(A)

by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively,

(B)

by striking If and inserting:

(1)

Treble damages

If

, and

(C)

by adding at the end the following new paragraph:

(2)

Punitive damages

No deduction shall be allowed under this chapter for any amount paid or incurred for punitive damages in connection with any judgment in, or settlement of, any action. This paragraph shall not apply to punitive damages described in section 104(c).

.

(2)

Conforming amendment

The heading for section 162(g) is amended by inserting Or Punitive Damages after Laws.

(b)

Inclusion in Income of Punitive Damages Paid by Insurer or Otherwise

(1)

In general

Part II of subchapter B of chapter 1 (relating to items specifically included in gross income) is amended by adding at the end the following new section:

91.

Punitive damages compensated by insurance or otherwise

Gross income shall include any amount paid to or on behalf of a taxpayer as insurance or otherwise by reason of the taxpayer’s liability (or agreement) to pay punitive damages.

.

(2)

Reporting requirements

Section 6041 (relating to information at source) is amended by adding at the end the following new subsection:

(h)

Section To Apply to Punitive Damages Compensation

This section shall apply to payments by a person to or on behalf of another person as insurance or otherwise by reason of the other person’s liability (or agreement) to pay punitive damages.

.

(3)

Conforming amendment

The table of sections for part II of subchapter B of chapter 1 is amended by adding at the end the following new item:

Sec. 91. Punitive damages compensated by insurance or otherwise.

.

(c)

Effective Date

The amendments made by this section shall apply to damages paid or incurred on or after the date of the enactment of this Act.

432.

Application of medicare payroll tax to all State and local government employees

(a)

In general

Paragraph (2) of section 3121(u) is amended—

(1)

by striking subparagraphs (B) and (C) in subparagraph (A) and inserting subparagraph (B), and

(2)

by striking subparagraphs (C) and (D).

(b)

Entitlement to hospital insurance benefits

Subsection (p) of section 210 of the Social Security Act is amended—

(1)

by striking paragraphs (2) and (3) in paragraph (1)(B) and inserting paragraph (2), and

(2)

by striking paragraphs (3) and (4).

(c)

Conforming amendment

Paragraph (2) of section 218(v) of the Social Security Act is amended to read as follows:

(2)

This subsection shall apply only with respect to employees who are not otherwise covered under the State's agreement under this section.

.

(d)

Effective date

The amendments made by this section shall apply to services performed after the date of the enactment of this Act.

433.

Corrections for CPI overstatement in cost-of-living indexation

(a)

In general

Paragraph (3) of section 1(f) (defining Consumer Price Index), as amended by ths Act, is amended to read as follows:

(3)

Cost-of-living adjustment

(A)

In general

For purposes of paragraph (2), the cost-of-living adjustment for any calendar year is the product of—

(i)

the CPI fraction for calendar years before 2013, multiplied by

(ii)

the Chained CPI fraction for calendar years after 2012,

reduced by 1.
(B)

CPI fraction for calendar years before 2013

The CPI fraction for calendar years before 2013 is the fraction—

(i)

the numerator of which is the CPI for the calendar year 2011, and

(ii)

the denominator of which is the CPI for the calendar year 2010.

(C)

Chained CPI fraction for calendar years after 2012

The Chained CPI fraction for calendar years after 2012 is the fraction—

(i)

the numerator of which is the Chained CPI for the preceding calendar year, and

(ii)

the denominator of which is the Chained CPI for the calendar year 2011.

.

(b)

Conforming amendments

(1)

Paragraph (4) of section 1(f) is amended to read as follows:

(4)

CPI and chained CPI for any calendar year

For purposes of paragraph (3)—

(A)

CPI

The CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year.

(B)

Chained CPI

The Chained CPI for any calendar year is the average of the Chained Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year.

.

(2)

Paragraph (5) of section 1(f) is amended to read as follows:

(5)

Consumer Price Index and Chained Consumer Price Index

For purposes of paragraph (4)—

(A)

Consumer Price Index

The term Consumer Price Index means the last Consumer Price Index for all-urban consumers published by the Department of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the Consumer Price Index for calendar year 1986 shall be used.

(B)

Chained Consumer Price Index

The term Chained Consumer Price Index means the initial Chained Consumer Price Index for all-urban consumers published by the Department of Labor.

.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2012.

V

Technical and conforming amendments

501.

Technical and conforming amendments

The Secretary of the Treasury or the Secretary’s delegate shall not later than 90 days after the date of the enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a draft of any technical and conforming changes in the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the purposes of the provisions of, and amendments made by, this Act.