P.L. 83–591, Approved August 16, 1954 (68A Stat. 3)

Internal Revenue Code of 1986 [76]

SEC. 21. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY FOR GAINFUL EMPLOYMENT.

(a)  Allowance of Credit.—

(1)  In general.—In the case of an individual for which there are 1 or more qualifying individuals (as defined in subsection (b)(1)) with respect to such individual, 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 the employment-related expenses (as defined in subsection (b)(2)) paid by such individual during the taxable year.

(2)  Applicable percentage defined.—For purposes of paragraph (1), the term “applicable percentage” means 35 percent reduced (but not below 20 percent) by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000.

(b)  Definitions of Qualifying Individual and Employment-Related Expenses.—For purposes of this section—

(1)  Qualifying individual.—The term “qualifying individual” means—

(A)  a dependent of the taxpayer (as defined in section 152(a)(1)) who has not attained age 13,

(B)  a dependent of the taxpayer (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, or

(C)  the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year.

(2)  Employment-related expenses.—

(A)  In general.—The term “employment-related expenses” means amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the taxpayer:

(i)  expenses for household services, and

(ii)  expenses for the care of a qualifying individual.

Such term shall not include any amount paid for services outside the taxpayer’s household at a camp where the qualifying individual stays overnight.

(B)  Exception.—Employment-related expenses described in subparagraph (A) which are incurred for services outside the taxpayer’s household shall be taken into account only if incurred for the care of—

(i)  a qualifying individual described in paragraph (1)(A), or

(ii)  a qualifying individual (not described in paragraph (1)(A)) who regularly spends at least 8 hours each day in the taxpayer’s household.

(C)  Dependent care centers.—Employment-related expenses described in subparagraph (A) which are incurred for services provided outside the taxpayer’s household by a dependent care center (as defined in subparagraph (D)) shall be taken into account only if—

(i)  such center complies with all applicable laws and regulations of a State or unit of local government, and

(ii)  the requirements of subparagraph (B) are met.

(D)  Dependent care center defined.—For purposes of this paragraph, the term “dependent care center” means any facility which—

(i)  provides care for more than six individuals (other than individuals who reside at the facility), and

(ii)  receives a fee, payment, or grant for providing services for any of the individuals (regardless of whether such facility is operated for profit).

(c)  Dollar Limit on Amount Creditable.—The amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed—

(1)  $3,000 if there is 1 qualifying individual with respect to the taxpayer for such taxable year, or

(2)  $6,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year.

The amount determined under paragraph (1) or (2) (whichever is applicable) shall be reduced by the aggregate amount excludable from gross income under section 129 for the taxable year.

(d)  Earned Income Limitation.—

(1)  In general.—Except as otherwise provided in this subsection, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed—

(A)  in the case of an individual who is not married at the close of such year, such individual’s earned income for such year, or

(B)  in the case of an individual who is married at the close of such year, the lesser of such individual’s earned income or the earned income of his spouse for such year.

(2)  Special rule for spouse who is a student or incapable of caring for himself.—In the case of a spouse who is a student or a qualifying individual described in subsection (b)(1)(C), for purposes of paragraph (1), such spouse shall be deemed for each month during which such spouse is a full-time student at an educational institution, or is such a qualifying individual, to be gainfully employed and to have earned income of not less than—

(A)  $250 if subsection (c)(1) applies for the taxable year, or

(B)  $500 if subsection (c)(2) applies for the taxable year.

In the case of any husband and wife, this paragraph shall apply with respect to only one spouse for any one month.

(e)  Special Rules.—For purposes of this section—

(1)  Place of abode.—An individual shall not be treated as having the same principal place of abode of the taxpayer if at any time during the taxable year of the taxpayer the relationship between the individual and the taxpayer is in violation of local law.

(2)  Married couples must file joint return.—If the taxpayer is married at the close of the taxable year, the credit shall be allowed under subsection (a) only if the taxpayer and his spouse file a joint return for the taxable year.

(3)  Marital status.—An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.

(4)  Certain married individuals living apart.—If—

(A)  an individual who is married and who files a separate return—

(i)  maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a qualifying individual, and

(ii)  furnishes over half of the cost of maintaining such household during the taxable year, and

(B)  during the last 6 months of such taxable year such individual’s spouse is not a member of such household,

such individual shall not be considered as married.

(5)  Special dependency test in case of divorced parents, etc.—If—

(A)  section 152(e) applies to any child with respect to any calendar year, and

(B)  such child is under the age of 13 or is physically or mentally incapable of caring for himself,

in the case of any taxable year beginning in such calendar year, such child shall be treated as a qualifying individual described in subparagraph (A) or (B) of subsection (b)(1) (whichever is appropriate) with respect to the custodial parent (as defined in section 152(e)(4)(A)), and shall not be treated as a qualifying individual with respect to the noncustodial parent.

(6)  Payments to related individuals.—No credit shall be allowed under subsection (a) for any amount paid by the taxpayer to an individual—

(A)  with respect to whom, for the taxable year, a deduction under section 151(c) (relating to deduction for personal exemptions for dependents) is allowable either to the taxpayer or his spouse, or

(B)  who is a child of the taxpayer (within the meaning of section 152(f)(1)) who has not attained the age of 19 at the close of the taxable year.

For purposes of this paragraph, the term “taxable year” means the taxable year of the taxpayer in which the service is performed.

(7)  Student.—The term “student” means an individual who during each of 5 calendar months during the taxable year is a full-time student at an educational organization.

(8)  Educational organization.—The term “educational organization” means an educational organization described in section 170(b)(1)(A)(ii).

(9)  Identifying information required with respect to service provider.—No credit shall be allowed under subsection (a) for any amount paid to any person unless—

(A)  the name, address, and taxpayer identification number of such person are included on the return claiming the credit, or

(B)  if such person is an organization described in section 501(c)(3) and exempt from tax under section 501(a), the name and address of such person are included on the return claiming the credit.

(10)  Identifying information required with respect to qualifying individuals

No credit shall be allowed under this section with respect to any qualifying individual unless the TIN of such individual is included on the return claiming the credit.

In the case of a failure to provide the information required under the preceding sentence, the preceding sentence shall not apply if it is shown that the taxpayer exercised due diligence in attempting to provide the information so required.

(f)  Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

*    *    *    *    *    *    *

SEC. 32. EARNED INCOME

(a)  Allowance of Credit.—

(1)  In general.—In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the credit percentage of so much of the taxpayer’s earned income for the taxable year as does not exceed the earned income amount.

(2)  Limitation.—The amount of the credit allowable to a taxpayer under paragraph (1) for any taxable year shall not exceed the excess (if any) of—

(A)  the credit percentage of the earned income amount, over

(B)  the phaseout percentage of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds the phaseout amount.

(b)  Percentage and Amounts.—For purposes of subsection (a)—

(1)  Percentages.—The credit percentage and the phaseout percentage shall be determined as follows:

(A)  In general.—In the case of taxable years beginning after 1995:

In the case of an eligible individual with: The credit percentage is: The phaseout percentage is:
1 qualifying child 34 15.98
2 or more qualifying children 40 21.06
No qualifying children 7.65 7.65

(B)  Transitional percentages for 1995.—In the case of taxable years beginning in 1995:

In the case of an eligible individual with: The credit percentage is: The phaseout percentage is:
1 qualifying child 34 15.98
2 or more qualifying children 36 20.22
No qualifying children 7.65 7.65

(C)  Transitional percentages for 1994.—In the case of a taxable year beginning in 1994:

In the case of an eligible individual with: The credit percentage is: The phaseout percentage is:
1 qualifying child 26.3 15.98
2 or more qualifying children 30 17.68
No qualifying children 7.65 7.65

(2)  Amounts.—

(A)  In general.—Subject to subparagraph (B), the earned.

In the case of an eligible individual with: The earned income amount is: The phaseout amount is:
1 qualifying child $6,330 $11,610
2 or more qualifying children $8,890 $11,610
No qualifying children $4,220 $5,280

(B)  Joint Returns.—In the case of a joint return filed by an eligible individual and such individual’s spouse, the phaseout amount determined under subparagraph (A) shall be increased by—

(i)  $1,000 in the case of taxable years beginning in 2002, 2003, and 2004,

(ii)  $2,000 in the case of taxable years beginning in 2005, 2006, and 2007, and

(iii)  $3,000 in the case of taxable years beginning after 2007.

In the case of an eligible individual with: The earned income amount is: The phaseout amount is:
1 qualifying child $7,750 $11,000
2 or more qualifying children $8,425 $11,000
No qualifying children $4,000 $5,000

(c)  Definitions and Special Rules.—For purposes of this section—

(1)  Eligible individual.—

(A)  In general.—The term “eligible individual” means—

(i)  any individual who has a qualifying child for the taxable year, or

(ii)  any other individual who does not have a qualifying child for the taxable year, if—

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

(II)  such individual (or, if the individual is married, either the individual or the individual’s spouse) has attained age 25 but not attained age 65 before the close of the taxable year, and

(III)  such individual is not a dependent for whom a deduction is allowable under section 151 to another taxpayer for any taxable year beginning in the same calendar year as such taxable year.

For purposes of the preceding sentence, marital status shall be determined under section 7703.

(B)  Qualifying child ineligible.—If an individual is the qualifying child of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall not be treated as an eligible individual for any taxable year of such individual beginning in such calendar year.

(C)  Exception for individual claiming benefits under section 911.—The term “eligible individual” does not include any individual who claims the benefits of section (relating to citizens or residents living abroad) for the taxable year.

(D)  Limitation on eligibility of nonresident aliens.—The term “eligible individual” shall not include any individual who is a nonresident alien individual for any portion of the taxable year unless such individual is treated for such taxable year as a resident of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.

(E)  Identification number requirements.—No credit shall be allowed under this section to an eligible individual who does not include on the return of tax for the taxable year—

(i)  such individual’s taxpayer identification number, and

(ii)  if the individual is married (within the meaning of section 7703), the taxpayer identification number of such individual’s spouse.

(F)  Individuals who do not include tin, etc. of any qualifying child.—No credit shall be allowed under this section to any eligible individual who has one or more qualifying children if no qualifying child of such individual is taken into account under subsection (b) by reason of paragraph (3)(D).

(2)  Earned income.—

(A)  The term “earned income” means—

(i)  wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income for the taxable year, plus

(ii)  the amount of the taxpayer’s net earnings from self-employment for the taxable year (within the meaning of section 1402(a)), but such net earnings shall be determined with regard to the deduction allowed to the taxpayer by section 164(f).

(B)  For purposes of subparagraph (A)—

(i)  the earned income of an individual shall be computed without regard to any community property laws,

(ii)  no amount received as a pension or annuity shall be taken into account,

(iii)  no amount to which section 871(a) applies (relating to income of nonresident alien individuals not connected with United States business) shall be taken into account,

(iv)  no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account,

(v)  no amount described in subparagraph (A) received for service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act shall be taken into account, but only to the extent such amount is subsidized under such State program, and

(vi)  in the case of any taxable year ending—

(I)  after the date of the enactment of this clause, and

(II)  before January 1, 2008, a taxpayer may elect to treat amounts excluded from gross income by reason of section 112 as earned income.

(3) Qualifying child.—

(A)  In general.—The term “qualifying child” means a qualifying child of the taxpayer (as defined in section 152(c), determined without regard to paragraph (1)(D) thereof and section 152(e)).

(B)  Married individual.—The term “qualifying child” shall not include an individual who is married as of the close of the taxpayer’s taxable year unless the taxpayer is entitled to a deduction under section 151 for such taxable year with respect to such individual (or would be so entitled but for section 152(e)).

(C)  Place of abode.—For purposes of subparagraph (A), the requirements of section 152(c)(1)(B) shall be met only if the principal place of abode is in the United States.

(D) Identification requirements.—

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

(ii)  Other methods.—The Secretary may prescribe other methods for providing the information described in clause (i).

(4)  Treatment of military personnel stationed outside the united states.—For purposes of paragraphs (1)(A)(ii)(I) and (3)(C), the principal place of abode of a member of the Armed Forces of the United States shall be treated as in the United States during any period during which such member is stationed outside the United States while serving on extended active duty with the Armed Forces of the United States. For purposes of the preceding sentence, the term “extended active duty” means any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

(d)  Married Individuals.—In the case of an individual who is married (within the meaning of section 7703), this section shall apply only if a joint return is filed for the taxable year under section 6013.

(e)  Taxable Year Must be Full Taxable Year.—Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.

(f)  Amount of Credit To Be Determined Under Tables.—

(1)  In general.—The amount of the credit allowed by this section shall be determined under tables prescribed by the Secretary.

(2)  Requirements for tables.—The tables prescribed under paragraph (1) shall reflect the provisions of subsections (a) and (b) and shall have income brackets of not greater than $50 each—

(A)  for earned income between $0 and the amount of earned income at which the credit is phased out under subsection (b), and

(B)  for adjusted gross income between the dollar amount at which the phaseout begins under subsection (b) and the amount of adjusted gross income at which the credit is phased out under subsection (b).

(g)  Coordination With Advance Payments of Earned Income Credit.—

(1)  Recapture of excess advance payments.—If any payment is made to the individual by an employer under section 3507 during any calendar year, then the tax imposed by this chapter for the individual’s last taxable year beginning in such calendar year shall be increased by the aggregate amount of such payments.

(2)  Reconciliation of payments advanced and credit allowed.—Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit (other than the credit allowed by subsection (a)) allowable under this part.

(h)  [Repealed.[77]]

(i)  Denial of credit for individuals having excessive investment income.—

(1)  In general.—No credit shall be allowed under subsection (a) for the taxable year if the aggregate amount of disqualified income of the taxpayer for the taxable year exceeds $2,200.

(2)  Disqualified income.—For purposes of paragraph (1), the term “disqualified income” means—

(A)  interest or dividends to the extent includible in gross income for the taxable year,

(B)  interest received or accrued during the taxable year which is exempt from tax imposed by this chapter,

(C)  the excess (if any) of—

(i)  gross income from rents or royalties not derived in the ordinary course of a trade or business, over

(ii)  the sum of—

(I)  the deductions (other than interest) which are clearly and directly allocable to such gross income, plus

(II)  interest deductions properly allocable to such gross income,

(D)  the capital gain net income (as defined in section 1222) of the taxpayer for such taxable year, and

(E)  the excess (if any) of—

(i)  the aggregate income from all passive activities for the taxable year (determined without regard to any amount included in earned income under subsection (c)(2) or described in a preceding subparagraph), over

(ii)  the aggregate losses from all passive activities for the taxable year (as so determined).

For purposes of subparagraph (E), the term “passive activity” has the meaning given such term by section 469.

(j)  Inflation Adjustments.—

(1)  In general.—In the case of any taxable year beginning after 1996, each of the dollar amounts in subsections (b)(2) and (i)(1) shall be increased by an amount equal to—

(A)  such dollar amount, multiplied by

(B)  the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined—

(i)  in the case of amounts in subsections (b)(2)(A) and (i)(1), by substituting “calendar year 1995” for “calendar year 1992” in subparagraph (B) thereof, and

(ii)  in the case of the $3,000 amount in subsection (b)(2)(B)(iii), by substituting “calendar year 2007” for “calendar year 1992” in subparagraph (B) of such section 1.

(2)  Rounding.—

(A)  In general.—If any dollar amount in subsection (b)(2)(A) (after being increased under subparagraph (B) thereof), after being increased under paragraph (1), is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.

(B)  Disqualified income threshold amount.—If the dollar amount in subsection (i)(1), after being increased under paragraph (1), is not a multiple of $50, such amount shall be rounded to the next lowest multiple of $50.

(k)  Restrictions On Taxpayers Who Improperly Claimed Credit In Prior Year.—

(1)  Taxpayers making prior fraudulent or reckless claims.—

(A)  In general.—No credit shall be allowed under this section for any taxable year in the disallowance period.

(B)  Disallowance period.—For purposes of paragraph (1), the disallowance period is—

(i)  the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to fraud, and

(ii)  the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud).

(2)  Taxpayers making improper prior claims.—In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

(l)  Coordination With Certain Means-tested Programs.—

For purposes of—

(1)  the United States Housing Act of 1937,

(2)  title V of the Housing Act of 1949,

(3)  section 101 of the Housing and Urban Development Act of 1965,

(4)  sections 221(d)(3), 235, and 236 of the National Housing Act, and

(5)  the Food and Nutrition Act of 2008,

any refund made to an individual (or the spouse of an individual) by reason of this section, and any payment made to such individual (or such spouse) by an employer under section 3507, shall not be treated as income (and shall not be taken into account in determining resources for the month of its receipt and the following month).

(m)  Identification Numbers.—Solely for purposes of subsections (c)(1)(E) and (c)(3)(D), a taxpayer identification number means a social security number issued to an individual by the Social Security Administration (other than a social security number issued pursuant to clause (II) (or that portion of clause (III) that relates to clause (II)) of section 205(c)(2)(B)(i) of the Social Security Act).

*    *    *    *    *    *    *

SEC. 62. ADJUSTED GROSS INCOME DEFINED

(a)  General rule.—For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:

(1)  Trade and business deductions.—The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.

(2)  Certain trade and business deductions of employees.—

(A)  Reimbursed expenses of employees.—The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies.

(B)  Certain expenses of performing artists.—The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee.

(C)  Certain expenses of officials.—The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.

(D)  Certain expenses of elementary and secondary school teachers.—In the case of taxable years beginning during 2002, 2003, 2004, 2005, 2006, 2007, 2008, or 2009 the deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.

(E)  Certain expenses of members of reserve components of the Armed Forces of the United States.—The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for travel expenses (including per diem in lieu of subsistence) authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services.

(3)  Losses from sale or exchange of property.—The deductions allowed by part VI (sec. 161 and following) as losses from the sale or exchange of property.

(4)  Deductions attributable to rents and royalties.—The deductions allowed by part VI (sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties.

(5)  Certain deductions of life tenants and income beneficiaries of property.—In the case of a life tenant of property, or an income beneficiary of property held in trust, or an heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by section 611.

(6)  Pension, profit-sharing, and annuity plans of self-employed individuals.—In the case of an individual who is an employee within the meaning of section 401(c)(1), the deduction allowed by section 404.

(7)  Retirement savings.—The deduction allowed by section 219 (relating to deduction of certain retirement savings).

(8)  [Repealed.[78]]

(9)  Penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits.—The deductions allowed by section 165 for losses incurred in any transaction entered into for profit, though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.

(10)  Alimony.—The deduction allowed by section 215.

(11)  Reforestation expenses.—The deduction allowed by section 194.

(12)  Certain required repayments of supplemental unemployment compensation benefits.—The deduction allowed by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).

(13)  Jury duty pay remitted to employer.—Any deduction allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer in exchange for payment by the employer of compensation for the period such individual was performing jury duty. For purposes of the preceding sentence, the term “jury pay” means any payment received by the individual for the discharge of jury duty.

(14)  Deduction for clean-fuel vehicles and certain refueling property.—The deduction allowed by section 179A.

(15)  Moving expenses.—The deduction allowed by section 217.

(16)  Archer MSAs.—The deduction allowed by section 220.

(17)  Interest on education loans.—The deduction allowed by section 221.

(18)  Higher education expenses.—The deduction allowed by section 222.

(19)  Health savings accounts.—The deduction allowed by section 223. Nothing in this section shall permit the same item to be deducted more than once.

(20)  Costs involving discrimination suits, etc.—Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.

(21)  Attorneys fees relating to awards to whistleblowers.—Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under section 7623(b) (relating to awards to whistleblowers). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of such award.

Nothing in this section shall permit the same item to be deducted more than once.

(b)  Qualified Performing Artist.—

(1)  In general.—For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if—

(A)  such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,

(B)  the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual’s gross income attributable to the performance of such services, and

(C)  the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000.

(2)  Nominal employer not taken into account.—An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.

(3)  Special rules for married couples.—

(A)  In general.—Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year.

(B)  Application of paragraph (1).—In the case of a joint return—

(i)  paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but

(ii)  paragraph (1)(C) shall be applied with respect to their combined adjusted gross income.

(C)  Determination of marital status.—For purposes of this subsection, marital status shall be determined under section 7703(a).

(D)  Joint return.—For purposes of this subsection, the term “joint return” means the joint return of a husband and wife made under section 6013.

(c)  Certain Arrangements Not Treated as Reimbursement Arrangements.—For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if—

(1)  such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or

(2)  such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.

The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.

(d)  Definition; Special Rules.—

(1)  Eligible educator.—

(A)  In general.—For purposes of subsection (a)(2)(D), the term “eligible educator” means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.

(B)  School.—The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.

(2)  Coordination with exclusions.—A deduction shall be allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable year.

(e)  Unlawful Discrimination Defined.—For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:

(1)  Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 1202).[79]

(2)  Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).

(3)  The National Labor Relations Act (29 U.S.C. 151 et seq.).

(4)  The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et seq.).

(5)  Section 4 or 15 of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).

(6)  Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).

(7)  Section 510 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1140).

(8)  Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.).

(9)  The Employee Polygraph Protection Act of 1988 (29 U.S.C. 2001 et seq.).

(10)  The Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102 et seq.).

(11)  Section 105 of the Family and Medical Leave Act of 1993 (29 U.S.C. 2615).

(12)  Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services).

(13)  Section 1977, 1979, or 1980 of the Revised Statutes (42 U.S.C. 1981, 1983, or 1985).

(14)  Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).

(15)  Section 804, 805, 806, 808, or 818 of the Fair Housing Act 42 U.S.C. 3604, 3605, 3606, 3608, or 3617).

(16)  Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203).

(17)  Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.

(18)  Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—

(i)  providing for the enforcement of civil rights, or

(ii)  regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.

*    *    *    *    *    *    *

SEC. 74. PRIZES AND AWARDS

*    *    *    *    *    *    *

(c)  Exception for Certain Employee Achievement Awards.—

(1)  In general.—Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.

(2)  Excess deduction award.—If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of—

(A)  an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or

(B)  the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.

The remaining portion of the value of such award shall not be included in the gross income of the recipient.

(3)  Treatment of tax-exempt employers.—In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle.

For provisions excluding certain de minimis fringes from gross income, see section 132(e).

*    *    *    *    *    *    *

SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.

(a)(1)  In General.—Except as provided in paragraph (2), gross income for the taxable year of any taxpayer described in subsection (b) (notwithstanding section 207 of the Social Security Act) includes social security benefits in an amount equal to the lesser of—

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

(B)  one-half of the excess described in subsection (b)(1).

(2)  Additional amount.—In the case of a taxpayer with respect to whom the amount determined under subsection (b)(1)(A) exceeds the adjusted base amount, the amount included in gross income under this section shall be equal to the lesser of—

(A)  the sum of—

(i)  85 percent of such excess, plus

(ii)  the lesser of the amount determined under paragraph (1) or an amount equal to one-half of the difference between the adjusted base amount and the base amount of the taxpayer, or

(B)  85 percent of the social security benefits received during the taxable year.

(b)  Taxpayers to Whom Subsection (a) applies.—

(1)  In general.—A taxpayer is described in this subsection if—

(A)  the sum of—

(i)  the modified adjusted gross income of the taxpayer for the taxable year, plus

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

(B)  the base amount.

(2)  Modified adjusted gross income.—For purposes of this subsection, the term “modified adjusted gross income” means adjusted gross income—

(A)  determined without regard to this section and sections 135, 137, 199, 221, 222, 911, 931, and 933, and

(B)  increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.

(c)  Base Amount and Adjusted Base Amount.—For purposes of this section—

(1)  Base amount.—The term “base amount” means—

(A)  except as otherwise provided in the paragraph, $25,000,

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

(C)  zero in the case of a taxpayer who—

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

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

(2)  Adjusted base amount.—The term “adjusted base amount” means—

(A)  except as otherwise provided in this paragraph, $34,000,

(B)  $44,000 in the case of a joint return, and

(C)  zero in the case of a taxpayer described in paragraph (1)(C).

(d)  Social Security Benefit.—

(1)  In general.—For purposes of this section, the term “social security benefit” means any amount received by the taxpayer by reason of entitlement to—

(A)  a monthly benefit under title II of the Social Security Act, or

(B)  a tier 1 railroad retirement benefit.

(2)  Adjustment for repayments during year.—

(A)  In general.—For purposes of this section, the amount of social security benefits received during any taxable year shall be reduced by any repayment made by the taxpayer during the taxable year of a social security benefit previously received by the taxpayer (whether or not such benefit was received during the taxable year).

(B)  Denial of deduction.—If (but for this subparagraph) any portion of the repayments referred to in subparagraph (A) would have been allowable as a deduction for the taxable year under section 165, such portion shall be allowable as a deduction only to the extent it exceeds the social security benefits received by the taxpayer during the taxable year (and not repaid during such taxable year).

(3)  Workmen’s compensation benefits substituted for social security benefits.—For purposes of this section, if, by reason of section 224 of the Social Security Act (or by reason of section 3(a)(1) of the Railroad Retirement Act of 1974), any social security benefit is reduced by reason of the receipt of a benefit under a workmen’s compensation act, the term “social security benefit” includes that portion of such benefit received under the workmen’s compensation act which equals such reduction.

(4)  Tier 1 railroad retirement benefit.—For purposes of paragraph (1), the term “tier 1 railroad retirement benefit” means—

(A)  the amount of the annuity under the Railroad Retirement Act of 1974 equal to the amount of the benefit to which the taxpayer would have been entitled under the Social Security Act if all of the service after December 31, 1936, of the employee (on whose employment record the annuity is being paid) had been included in the term “employment” as defined in the Social Security Act, and

(B)  a monthly annuity amount under section 3(f)(3) of the Railroad Retirement Act of 1974.

(5)  Effect of early delivery of benefit checks.—For purposes of subsection (a), in any case where section 708 of the Social Security Act causes social security benefit checks to be delivered before the end of the calendar month for which they are issued, the benefits involved shall be deemed to have been received in the succeeding calendar month.

(e)  Limitation on Amount Included Where Taxpayer Receives Lump-Sum Payment.—

(1)  Limitation.—If—

(A)  any portion of a lump-sum payment of social security benefits received during the taxable year is attributable to prior taxable years, and

(B)  the taxpayer makes an election under this subsection for the taxable year,

then the amount included in gross income under this section for the taxable year by reason of the receipt of such portion shall not exceed the sum of the increases in gross income under this chapter for prior taxable years which would result solely from taking into account such portion in the taxable years to which it is attributable.

(2)  Special rules.—

(A)  Year to which benefit attributable.—For purposes of this subsection, a social security benefit is attributable to a taxable year if the generally applicable payment date for such benefit occurred during such taxable year.

(B)  Election.—An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such election, once made, may be revoked only with the consent of the Secretary.

(f)  Treatment as Pension or Annuity For Certain Purposes.—For purposes of—

(1)  section 22(c)(3)(A) (relating to reduction for amounts received as pension or annuity),

(2)  section 32(c)(2) (defining earned income),

(3)  section 219(f)(1) (defining compensation), and

(4)  section 911(b)(1) (defining foreign earned income),

any social security benefit shall be treated as an amount received as a pension or annuity.

*    *    *    *    *    *    *

SEC. 107.  RENTAL VALUE OF PARSONAGES

In the case of a minister of the gospel, gross income does not include—

(1)  the rental value of a home furnished to him as part of his compensation; or

(2)  the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

*    *    *    *    *    *    *

SEC. 117. QUALIFIED SCHOLARSHIPS.

(a)  General Rule.—Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii).

(b)  Qualified Scholarship.—For purposes of this section—

(1)  In general.—The term “qualified scholarship” means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.

(2)  Qualified tuition and related expenses.—For purposes of paragraph (1), the term “qualified tuition and related expenses” means—

(A)  tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and

(B)  fees, books, supplies, and equipment required for courses of instruction at such an educational organization.

(c)  Limitation.—

(1)  In general.—Except as provided in paragraph (2), subsection (a) and (d) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction.

(2)  Exceptions.—Paragraph (1) shall not apply to any amount received by an individual under—

(A)  the National Health Service Corps Scholarship Program under section 338A(g)(1)(A) of the Public Health Service Act, or

(B)  the Armed Forces Health Professions Scholarship and Financial Assistance program under subchapter I of chapter 105 of title 10, United States Code.

(d)  Qualified Tuition Reduction.—

(1)  In general.—Gross income shall not include any qualified tuition reduction.

(2)  Qualified tuition reduction.—For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii)) of—

(A)  such employee, or

(B)  any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h).

(3)  Reduction must not discriminate in favor of highly compensated, etc.—Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).

(4)  [Stricken.[80]]

(5)  Special rules for teaching and research assistants.—In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, paragraph (2) shall be applied as if it did not contain the phrase “(below the graduate level)”.

*    *    *    *    *    *    *

SEC. 119.  MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE EMPLOYER.

(a)  Meals and Lodging Furnished to Employee, His Spouse, and His Dependents, Pursuant to Employment.—There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if—

(1)  in the case of meals, the meals are furnished on the business premises of the employer, or

(2)  in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

(b)  Special Rules.—For purposes of subsection (a)—

(1)  Provisions of employment contract or state statute not to be determinative.—In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.

(2)  Certain factors not taken into account with respect to meals.—In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.

(3)  Certain fixed charges for meals.—

(A)  In general.—If—

(i)  an employee is required to pay on a periodic basis a fixed charge for his meals, and

(ii)  such meals are furnished by the employer for the convenience of the employer,

there shall be excluded from the employee’s gross income an amount equal to such fixed charge.

(B)  Application of subparagraph (A).—Subparagraph (A) shall apply—

(i)  whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and

(ii)  only if the employee is required to make the payment whether he accepts or declines the meals.

(4)  Meals furnished to employees on business premises where meals of most employees are otherwise excludable.—All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer.

(c)  Employees Living in Certain Camps.—

(1)  In general.—In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer.

(2)  Camp.—For purposes of this section, a camp constitutes lodging which is—

(A)  provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market,

(B)  located, as near as practicable, in the vicinity of the place at which such individual renders services, and

(C)  furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.

(d)  Lodging Furnished by Certain Educational Institutions to Employees.—

(1)  In general.—In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year.

(2)  Exception in cases of inadequate rent.—Paragraph (1) shall not apply to the extent of the excess of—

(A)  the lesser of—

(i)  5 percent of the appraised value of the qualified campus lodging, or

(ii)  the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over

(B)  the rent paid by the employee for the qualified campus lodging during such calendar year.

The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins.

(3)  Qualified campus lodging.—For purposes of this subsection, the term “qualified campus lodging” means lodging to which subsection (a) does not apply and which is—

(A)  located on, or in the proximity of, a campus of the educational institution, and

(B)  furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence.

(4)  Educational institution.—For purposes of this paragraph, the term “educational institution” means an institution described in section 170(b)(1)(A)(ii).

(A)  In general.—The term “educational institution” means—

(i)  an institution described in section 170(b)(1)(A)(ii) (or an entity organized under State law and composed of public institutions so described), or

(ii)  an academic health center.

(B)  Academic health center.—For purposes of subparagraph (A), the term “academic health center” means an entity—

(i)  which is described in section 170(b)(1)(A)(iii),

(ii)  which receives (during the calendar year in which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 of the Social Security Act (relating to graduate medical education), and

(iii)  which has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty.

SEC. 120.  AMOUNTS RECEIVED UNDER QUALIFIED GROUP LEGAL SERVICES PLANS.

(a)  Exclusion by Employee for Contributions and Legal Services Provided by Employer.—Gross income of an employee, his spouse, or his dependents, does not include—

(1)  amounts contributed by an employer on behalf of an employee, his spouse, or his dependents under a qualified group legal services plan (as defined in subsection (b)); or

(2)  the value of legal services provided, or amounts paid for legal services, under a qualified group legal services plan (as defined in subsection (b)) to, or with respect to, an employee, his spouse, or his dependents.

No exclusion shall be allowed under this section with respect to an individual for any taxable year to the extent that the value of insurance (whether through an insurer or self-insurance) against legal costs incurred by the individual (or his spouse or dependents) provided under a qualified group legal services plan exceeds $70.

(b)  Qualified Group Legal Services Plan.—For purposes of this section, a qualified group legal services plan is a separate written plan of an employer for the exclusive benefit of his employees or their spouses or dependents to provide such employees, spouses, or dependents with specified benefits consisting of personal legal services through prepayment of, or provision in advance for, legal fees in whole or in part by the employer, if the plan meets the requirements of subsection (c).

(c)  Requirements.—

(1)  Discrimination.—The contributions or benefits provided under the plan shall not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)).

(2)  Eligibility.—The plan shall benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees who are described in paragraph (1). For purposes of this paragraph, there shall be excluded from consideration employees not included in the plan who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that group legal services plan benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.

(3)  Contribution limitation.—Not more than 25 percent of the amounts contributed under the plan during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.

(4)  Notification.—The plan shall give notice to the Secretary, in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of the status of a qualified group legal services plan.

(5)  Contributions.—Amounts contributed under the plan shall be paid only (A) to insurance companies, or to organizations or persons that provide personal legal services, or indemnification against the cost of personal legal services, in exchange for a prepayment or payment of a premium, (B) to organizations or trusts described in section 501(c)(20), (C) to organizations described in section 501(c) which are permitted by that section to receive payments from an employer for support of one or more qualified group legal services plan or plans, except that such organizations shall pay or credit the contribution to an organization or trust described in section 501(c)(20), (D) as prepayments to providers of legal services under the plan, or (E) a combination of the above.

(d)  Other Definitions and Special Rules.—For purposes of this section—

(1)  Employee.—The term “employee” includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).

(2)  Employer.—An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1).

(3)  Allocations.—Allocations of amounts contributed under the plan shall be made in accordance with regulations prescribed by the Secretary and shall take into account the expected relative utilization of benefits to be provided from such contributions or plan assets and the manner in which any premium or other charge was developed.

(4)  Dependent.—The term “dependent” has the meaning given to it by section 152 (determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof).

(5)  Exclusive benefit.—In the case of a plan to which contributions are made by more than one employer, in determining whether the plan is for the exclusive benefit of an employer’s employees or their spouses or dependents, the employees of any employer who maintains the plan shall be considered to be the employees of each employer who maintains the plan.

(6)  Attribution rules.—For purposes of this section—

(A)  ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)), and

(B)  the interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regulations prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of subparagraph (A).

(7)  Time of notice to secretary.—A plan shall not be a qualified group legal services plan for any period prior to the time notification was provided to the Secretary in accordance with subsection (c)(4), if such notice is given after the time prescribed by the Secretary by regulations for giving such notice.

(e)  Termination.—This section and section 501(c)(20) shall not apply to taxable years beginning after December 31, 1991.

*    *    *    *    *    *    *

SEC. 125. CAFETERIA PLANS.

(a)  General Rule.—Except as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan.

(b)  Exception for Highly Compensated Participants and Key Employees.—

(1)  Highly compensated participants.—In the case of a highly compensated participant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of—

(A)  highly compensated individuals as to eligibility to participate, or

(B)  highly compensated participants as to contributions and benefits.

(2)  Key employees.—In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, statutory nontaxable benefits shall be determined without regard to the second sentence of subsection (f).

(3)  Year of inclusion.—For purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) or (2) shall be treated as received or accrued in the taxable year of the participant or key employee in which the plan year ends.

(c)  Discrimination as to Benefits or Contributions.—For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where qualified benefits and total benefits (or employer contributions allocable to qualified benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants.

(d)  Cafeteria Plan Defined.—For purposes of this section—

(1)  In general.—The term “cafeteria plan” means a written plan under which—

(A)  all participants are employees, and

(B)  the participants may choose among 2 or more benefits consisting of cash and qualified benefits.

(2)  Deferred compensation plans excluded.—

(A)  In general.—The term “cafeteria plan” does not include any plan which provides for deferred compensation.

(B)  Exception for cash and deferred arrangements.—Subparagraph (A) shall not apply to a profit-sharing or stock bonus plan or rural cooperative plan (within the meaning of section 401(k)(7)) which includes a qualified cash or deferred arrangement (as defined in section 401(k)(2)) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee.

(C)  Exception for certain plans maintained by educational institutions.—Subparagraph (A) shall not apply to a plan maintained by an educational organization described in section 170(b)(1)(A)(ii) to the extent of amounts which a covered employee may elect to have the employer pay as contributions for post-retirement group life insurance if—

(i)  all contributions for such insurance must be made before retirement, and

(ii)  such life insurance does not have a cash surrender value at any time.

For purposes of section 79, any life insurance described in the preceding sentence shall be treated as group-term life insurance.

(D)  Exception for health savings accounts.—Subparagraph (A) shall not apply to a plan to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a health savings account established on behalf of the employee.

(e)  Highly Compensated Participant and Individual Defined.—For purposes of this section—

(1)  Highly compensated participant.—The term “highly compensated participant” means a participant who is—

(A)  an officer,

(B)  a shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer,

(C)  highly compensated, or

(D)  a spouse or dependent (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of an individual described in subparagraph (A), (B), or (C).

(2)  Highly compensated individual.—The term “highly compensated individual” means an individual who is described in subparagraphs (A), (B), (C), or (D) of paragraph (1).

(f)  Qualified Benefits Defined.—For purposes of this section, the term “qualified benefit” means any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section 106(b), 117, 127, or 132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section 79 and such term includes any other benefit permitted under regulations. Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.

(g)  Special Rules.—

(1)  Collectively bargained plan not considered discriminatory.—For purposes of this section, a plan shall not be treated as discriminatory if the plan is maintained under an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and one or more employers.

(2)  Health benefits.—For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan which provides health benefits shall not be treated as discriminatory if—

(A)  contributions under the plan on behalf of each participant include an amount which—

(i)  equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated, or

(ii)  equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan, and

(B)  contributions or benefits under the plan in excess of those described in subparagraph (A) bear a uniform relationship to compensation.

(3)  Certain participation eligibility rules not treated as discriminatory.—For purposes of subparagraph (A) of subsection (b)(1), a classification shall not be treated as discriminatory if the plan—

(A)  benefits a group of employees described in section 410(b)(2)(A)(i), and

(B)  meets the requirements of clauses (i) and (ii):

(i)  No employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the employment requirement for each employee is the same.

(ii)  Any employee who has satisfied the employment requirement of clause (i) and who is otherwise entitled to participate in the plan commences participation no later than the first day of the first plan year beginning after the date the employment requirement was satisfied unless the employee was separated from service before the first day of that plan year.

(4)  Certain controlled groups, etc.—All employees who are treated as employed by a single employer under subsection (b), (c), or (m) of section 414 shall be treated as employed by a single employer for purposes of this section.

(h)  Special Rule for Unused Benefits in Health Flexible Spending Arrangements of Individuals Called to Active Duty.—

(1)  In general.—For purposes of this title, a plan orother arrangement shall not fail to be treated as a cafeteria plan or health flexible spending arrangement merely because such arrangement provides for qualified reservist distributions.

(2)  Qualified reservist distribution.—For purposes of this subsection, the term “qualified reservist distribution” means, any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if—

(A)  such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37, United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and

(B)  such distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under such arrangement for the plan year which includes the date of such order or call.

(i)  Cross References.—

For reporting and recordkeeping requirements, see section 6039D.

(j)  Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.

*    *    *    *    *    *    *

SEC. 127.  EDUCATIONAL ASSISTANCE PROGRAM.

(a)  Exclusion From Gross Income.—

(1)  In general.—Gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance is furnished pursuant to a program which is described in subsection (b).

(2)  $5,250 maximum exclusion.—If, but for this paragraph, this section would exclude from gross income more than $5,250 of educational assistance furnished to an individual during a calendar year, this section shall apply only to the first $5,250 of such assistance so furnished.

(b) Educational Assistance Program.—

(1)  In general.—For purposes of this section an educational assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance. The program must meet the requirements of paragraphs (2) through (6) of this subsection.

(2)  Eligibility.—The program shall benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)) or their dependents. For purposes of this paragraph, there shall be excluded from consideration employees not included in the program who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that educational assistance benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.

(3)  Principal shareholders or owners.—Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.

(4)  Other benefits as an alternative.—A program must not provide eligible employees with a choice between educational assistance and other remuneration includible in gross income. For purposes of this section, the business practices of the employer (as well as the written program) will be taken into account.

(5)  No funding required.—A program referred to in paragraph (1) is not required to be funded.

(6)  Notification of employees.—Reasonable notification of the availability and terms of the program must be provided to eligible employees.

(c)  Definitions; Special Rules.—For purposes of this section—

(1)  Educational assistance.—The term “educational assistance” means—

(A)  the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment), and

(B)  the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment),

but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term “educational assistance” also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies and such term also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.

(2)  Employee.—The term “employee” includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).

(3)  Employer.—An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (2).

(4)  Attribution rules.—

(A)  Ownership of stock.—Ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)).

(B)  Interest in unincorporated trade or business.—The interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regulations prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of subparagraph (A).

(5)  Certain tests not applicable.—An educational assistance program shall not be held or considered to fail to meet any requirements of subsection (b) merely because—

(A)  of utilization rates for the different types of educational assistance made available under the program; or

(B)  successful completion, or attaining a particular course grade, is required for or considered in determining reimbursement under the program.

(6)  Relationship to current law.—This section shall not be construed to affect the deduction or inclusion in income of amounts (not within the exclusion under this section) which are paid or incurred, or received as reimbursement, for educational expenses under section 117, 162 or 212.

(7)  Disallowance of excluded amounts as credit or deduction.—No deduction or credit shall be allowed to the employee under any other section of this chapter for any amount excluded from income by reason of this section.

(d)  Cross reference.—For reporting and recordkeeping requirements, see section 6039D.

*    *    *    *    *    *    *

SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.

(a)  Exclusion.—

(1)  In General.—Gross income of an employee does not include amounts paid or incurred by the employer for dependent care assistance provided to such employee if the assistance is furnished pursuant to a program which is described in subsection (d).

(2)  Limitation of exclusion.—

(A)  In general.—The amount which may be excluded under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $5,000 ($2,500 in the case of a separate return by a married individual).

(B)  Year of inclusion.—The amount of any excess under subparagraph (A) shall be included in gross income in the taxable year in which the dependent care services were provided (even if payment of dependent care assistance for such services occurs in a subsequent taxable year).

(C)  Marital status.—For purposes of this paragraph, marital status shall be determined under the rules of paragraphs (3) and (4) of section 21(e).

(b)  Earned Income Limitation.—

(1)  In general.—The amount excluded from the income of an employee under subsection (a) for any taxable year shall not exceed—

(A)  in the case of an employee who is not married at the close of such taxable year, the earned income of such employee for such taxable year, or

(B)  in the case of an employee who is married at the close of such taxable year, the lesser of—

(i)  the earned income of such employee for such taxable year, or

(ii)  the earned income of the spouse of such employee for such taxable year.

(2)  Special rule for certain spouses.—For purposes of paragraph (1), the provisions of section 21(d)(2) shall apply in determining the earned income of a spouse who is a student or incapable of caring for himself.

(c)  Payments to Related Individuals.—No amount paid or incurred during the taxable year of an employee by an employer in providing dependent care assistance to such employee shall be excluded under subsection (a) if such amount was paid or incurred to an individual—

(1)  with respect to whom, for such taxable year, a deduction is allowable under section 151(c) (relating to personal exemptions for dependents) to such employee or the spouse of such employee, or

(2)  who is a child of such employee (within the meaning of section 152(f)(1)) under the age of 19 at the close of such taxable year.

(d)  Dependent Care Assistance Program.—

(1)  In general.—For purposes of this section a dependent care assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with dependent care assistance which meets the requirements of paragraphs (2) through (8) of this subsection. If any plan would qualify as a dependent care assistance program but for a failure to meet the requirements of this subsection, then, notwithstanding such failure, such plan shall be treated as a dependent care assistance program in the case of employees who are not highly compensated employees.

(2)  Discrimination.—The contributions or benefits provided under the plan shall not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)) or their dependents.

(3)  Eligibility.—The program shall benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees described in paragraph (2), or their dependents.

(4)  Principal shareholders or owners.—Not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.

(5)  No funding required.—A program referred to in paragraph (1) is not required to be funded.

(6)  Notification of eligible employees.—Reasonable notification of the availability and terms of the program shall be provided to eligible employees.

(7)  Statement of expenses.—The plan shall furnish to an employee, on or before January 31, a written statement showing the amounts paid or expenses incurred by the employer in providing dependent care assistance to such employee during the previous calendar year.

(8)  Benefits.—

(A)  In general.—A plan meets the requirements of this paragraph if the average benefits provided to employees who are not highly compensated employees under all plans of the employer is at least 55 percent of the average benefits provided to highly compensated employees under all plans of the employer.

(B)  Salary reduction agreements.—For purposes of subparagraph (A), in the case of any benefits provided through a salary reduction agreement, a plan may disregard any employees whose compensation is less than $25,000. For purposes of this subparagraph, the term “compensation” has the meaning given such term by section 414(q)(4), except that, under rules prescribed by the Secretary, an employer may elect to determine compensation on any other basis which does not discriminate in favor of highly compensated employees.

(9)  Excluded employees.—For purposes of paragraphs (3) and (8), there shall be excluded from consideration—

(A)  subject to rules similar to the rules of section 410(b)(4), employees who have not attained the age of 21 and completed 1 year of service (as defined in section 410(a)(3)), and

(B)  employees not included in a dependent care assistance program who are included in a unit of employees covered by an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and 1 or more employees, if there is evidence that dependent care benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.

(e)  Definitions and Special Rules.—For purposes of this section—

(1)  Dependent care assistance.—The term “dependent care assistance” means the payment of, or provision of, those services which if paid for by the employee would be considered employment-related expenses under section 21(b)(2) (relating to expenses for household and dependent care services necessary for gainful employment).

(2)  Earned income.—The term “earned income” shall have the meaning given such term in section 32(c)(2), but such term shall not include any amounts paid or incurred by an employer for dependent care assistance to an employee.

(3)  Employee.—The term “employee” includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).

(4)  Employer.—An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (3).

(5)  Attribution rules.—

(A)  Ownership of stock.—Ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)).

(B)  Interest in unincorporated trade or business.—The interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regulations prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of subparagraph (A).

(6)  Utilization test not applicable.—A dependent care assistance program shall not be held or considered to fail to meet any requirements of subsection (d) (other than paragraphs (4) and (8) thereof) merely because of utilization rates for the different types of assistance made available under the program.

(7)  Disallowance of excluded amounts as credit or deduction.—No deduction or credit shall be allowed to the employee under any other section of this chapter for any amount excluded from the gross income of the employee by reason of this section.

(8)  Treatment of onsite facilities.—In the case of an onsite facility maintained by an employer, except to the extent provided in regulations, the amount of dependent care assistance provided to an employee excluded with respect to any dependent shall be based on—

(A)  utilization of the facility by a dependent of the employee, and

(B)  the value of the services provided with respect to such dependent.

(9)  Identifying information required with respect to service provider.—No amount paid or incurred by an employer for dependent care assistance provided to an employee shall be excluded from the gross income of such employee unless—

(A)  the name, address, and taxpayer identification number of the person performing the services are included on the return to which the exclusion relates, or

(B)  if such person is an organization described in section 501(c)(3) and exempt from tax under section 501(a), the name and address of such person are included on the return to which the exclusion relates.

In the case of a failure to provide the information required under the preceding sentence, the preceding sentence shall not apply if it is shown that the taxpayer exercised due diligence in attempting to provide the information so required.

*    *    *    *    *    *    *

SEC. 132. CERTAIN FRINGE BENEFITS.

(a)  Exclusion From Gross Income.—Gross income shall not include any fringe benefit which qualifies as a—

(1)  no-additional-cost service,

(2)  qualified employee discount,

(3)  working condition fringe,

(4)  de minimis fringe,

(5)  qualified transportation fringe,

(6)  qualified moving expense reimbursement,

(7)  qualified retirement planning services, or

(8)  qualified military base realignment and closure fringe.

(b)  No-Additional-Cost-Service Defined.—For purposes of this section, the term “no-additional-cost service” means any service provided by an employer to an employee for use by such employee if—

(1)  such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, and

(2)  the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service).

(c)  Qualified Employee Discount Defined.—For purposes of this section—

(1)  Qualified employee discount.—The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed—

(A)  in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or

(B)  in the case of services, 20 percent of the price at which the services are being offered by the employer to customers.

(2)  Gross profit percentage.—

(A)  In general.—The term “gross profit percentage” means the percent which—

(i)  the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of

(ii)  the aggregate sale price of such property.

(B)  Determination of gross profit percentage.—Gross profit percentage shall be determined on the basis of—

(i)  all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and

(ii)  the employer’s experience during a representative period.

(3)  Employee discount defined.—The term “employee discount” means the amount by which—

(A)  the price at which the property or services are provided by the employer to an employee for use by such employee, is less than

(B)  the price at which such property or services are being offered by the employer to customers.

(4)  Qualified property or services.—The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is peforming[81] services.

(d)  Working Condition Fringe Defined.—For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.

(e)  De Minimis Fringe Defined.—For purposes of this section—

(1)  In General.—The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.

(2)  Treatment of certain eating facilities.—The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if—

(A)  such facility is located on or near the business premises of the employer, and

(B)  revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.

The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.

(f)  Qualified Transportation Fringe.—

(1)  In general.—For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:

(A)  Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.

(B)  Any transit pass.

(C)  Qualified parking.

(D)  Any qualified bicycle commuting reimbursement.

(2)  Limitation on exclusion.—The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed—

(A)  $65 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1),

(B)  $155 per month in the case of qualified parking; and

(C)  the applicable annual limitation in the case of any qualified bicycle commuting reimbursement.

(3)  Cash reimbursements.—For purposes of this subsection the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.

(4)  No constructive receipt.—No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.

(5)  Definitions.—For purposes of this subsection—

(A)  Transit pass.—The term “transit pass” means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is—

(i)  on mass transit facilities (whether or not publicly owned), or

(ii)  provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i).

(B)  Commuter highway vehicle.—The term “commuter highway vehicle” means any highway vehicle—

(i)  the seating capacity of which is at least 6 adults (not including the driver), and

(ii)  at least 80 percent of the mileage use of which can reasonably be expected to be—

(I)  for purposes of transporting employees in connection with travel between their residences and their place of employment, and

(II)  on trips during which the number of employees transported for such purposes is at least 1/2 of the adult seating capacity of such vehicle (not including the driver).

(C)  Qualified parking.—The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.

(D)  Transportation provided by employer.—Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer.

(E)  Employee.—For purposes of this subsection, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1).

(F)  Definitions related to bicycle commuting reimbursement.—

(i)  Qualified bicycle commuting reimbursement.—The term “qualified bicycle commuting reimbursement” means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.

(ii)  Applicable annual limitation.—The term “applicable annual limitation” means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.

(iii)  Qualified bicycle commuting month.—The term “qualified bicycle commuting month” means, with respect to any employee, any month during which such employee—

(I)  regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and

(II)  does not receive any benefit described in subparagraph (A), (B), or (C) of paragraph (1).

(6)  Inflation adjustment.—

(A)  In general.—In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) 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, by substituting “calendar year 1998” for “calendar year 1992”.

(B)  Rounding.—If any increase determined under the preceding sentence is not a multiple of $5, such increase shall be rounded to the next lowest multiple of $5.

(7)  Coordination with other provisions.—For purposes of this section, the terms “working condition fringe” and “de minimus fringe” shall not include any qualified transportation fringe (determined without regard to paragraph (2)).

(g)  Qualified Moving Expense Reimbursement.—For purposes of this section, the term “qualified moving expense reimbursement” means any amount received (directly or indirectly) by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year.

(h)  Certain Individuals Treated as Employees for Purposes of Subsections (a)(1) and (2).—For purposes of paragraphs (1) and (2) of subsection (a)—

(1)  Retired and disabled employees and surviving spouse of employee treated as employee.—With respect to a line of business of an employer, the term “employee” includes—

(A)  any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and

(B)  any widow or widower of any individual who died while employed by such employer in such line of business or while an employee within the meaning of subparagraph (A).

(2)  Spouse and dependent children.—

(A)  In general.—Any use by the spouse or a dependent child of the employee shall be treated as use by the employee.

(B)  Dependent child.—For purposes of subparagraph (A), the term “dependent child” means any child (as defined in section 152(f)(1)) of the employee—

(i)  who is a dependent of the employee, or

(ii)  both of whose parents are deceased and who has not attained age 25.

For purposes of the preceding sentence, any child to whom section 152(e) applies shall be treated as the dependent of both parents.

(3)  Special rule for parents in the case of air transportation.—Any use of air transportation by a parent of an employee (determined without regard to paragraph (1)(B)) shall be treated as use by the employee.

(i)  Reciprocal Agreements.—For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if—

(1)  such service is provided pursuant to a written agreement between such employers, and

(2)  neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.

(j)  Special Rules.—

(1)  Exclusions under subsection (a)(1) and (2) apply to highly compensated employees Only if no discrimination.—Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.

(2)  Special rule for leased sections of department stores.—

(A)  In general.—For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store—

(i)  such section shall be treated as part of the line of business of the person operating the department store, and

(ii)  employees in the leased section shall be treated as employees of the person operating the department store.

(B)  Leased section of department store.—For purposes of subparagraph (A), a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.

(3)  Auto salesmen.—

(A)  In general.—For purposes of subsection (a)(3), qualified automobile demonstration use shall be treated as a working condition fringe.

(B)  Qualified automobile demonstration use.—For purposes of subparagraph (A), the term “qualified automobile demonstration use” means any use of an automobile by a full-time automobile salesman in the sales area in which the automobile dealer’s sales office is located if—

(i)  such use is provided primarily to facilitate the salesman’s performance of services for the employer, and

(ii)  there are substantial restrictions on the personal use of such automobile by such salesman.

(4)  On-premises gyms and other athletic facilities.—

(A)  In general.—Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees.

(B)  On-premises athletic facility.—For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility—

(i)  which is located on the premises of the employer,

(ii)  which is operated by the employer, and

(iii)  substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)).

(5)  Special rule for affiliates of airlines.—

(A)  In general.—If—

(i)  a qualified affiliate is a member of an affiliated group another member of which operates an airline, and

(ii)  employees of the qualified affiliate who are directly engaged in providing airline-related services are entitled to no-additional-cost service with respect to air transportation provided by such other member,

then, for purposes of applying paragraph (1) of subsection (a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged in the same line of business as such other member.

(B)  Qualified affiliate.—For purposes of this paragraph, the term “qualified affiliate” means any corporation which is predominantly engaged in airline-related services.

(C)  Airline-related services.—For purposes of this paragraph, the term “airline-related services” means any of the following services provided in connection with air transportation:

(i)  Catering.

(ii)  Baggage handling.

(iii)  Ticketing and reservations.

(iv)  Flight planning and weather analysis.

(v)  Restaurants and gift shops located at an airport.

(vi)  Such other similar services provided to the airline as the Secretary may prescribe.

(D)  Affiliated group.—For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a).

(6)  Highly compensated employee.—For purposes of this section, the term “highly compensated employee” has the meaning given such term by section 414(q).

(7)  Air cargo.—For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by air shall be treated as the same service.

(8)  Application of section to otherwise taxable educational or training benefits.—Amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe.

(k)  Customers Not To Include Employees.—For purposes of this section (other than subsection (c)(2)), the term “customers” shall only include customers who are not employees.

(l)  Section Not To Apply to Fringe Benefits Expressly Provided for Elsewhere.—This section (other than subsection (e) and (g)) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter.

(m)  Qualified Retirement Planning Services.—

(1)  In general.—For purposes of this section, the term qualified retirement planning services’ means any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.

(2)  Nondiscrimination rule.—Subsection (a)(7) shall apply in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.

(3)  Qualified employer plan.—For purposes of this subsection, the term “qualified employer plan” means a plan, contract, pension, or account described in section 219(g)(5).

(n)  Qualified Military Base Realignment and Closure Fringe.—For purposes of this section—

(1)  In general.—The term “qualified military base realignment and closure fringe” means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of this subsection) to offset the adverse effects on housing values as a result of a military base realignment or closure.

(2)  Limitation.—With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all of such payments related to such property exceeds the maximum amount described in clause (1) of subsection (c) of such section (as in effect on such date).

(o)  Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

*    *    *    *    *    *    *

SEC. 139A. FEDERAL SUBSIDIES FOR PRESCRIPTION DRUG PLANS.

Gross income shall not include any special subsidy payment received under section 1860D-22 of the Social Security Act. This section shall not be taken into account for purposes of determining whether any deduction is allowable with respect to any cost taken into account in determining such payment.

*    *    *    *    *    *    *

SEC. 139B. BENEFITS PROVIDED TO VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS.

(a)  In General.—In the case of any member of a qualified volunteer emergency response organization, gross income shall not include—

(1)  any qualified State and local tax benefit, and

(2)  any qualified payment.

(b)  Denial of Double Benefits.—In the case of any member of a qualified volunteer emergency response organization—

(1)  the deduction under 164 shall be determined with regard to any qualified State and local tax benefit, and

(2)  expenses paid or incurred by the taxpayer in connection with the performance of services as such a member shall be taken into account under section 170 only to the extent such expenses exceed the amount of any qualified payment excluded from gross income under subsection (a).

(c)  Definition.—For purposes of this section—

(1)  Qualified state and local tax benefit.—The term “qualified state and local tax benefit” means any reduction or rebate of a tax described in paragraph (1), (2), or (3) of section 164(a) provided by a State or political division thereof on account of services performed as a member of a qualified volunteer emergency response organization.

(2)  Qualified payment.—

(A)  In general.—The term “qualified payment” means any payment (whether reimbursement or otherwise) provided by a State or political division thereof on account of the performance of services as a member of a qualified volunteer emergency response organization.

(B)  Applicable dollar limitation.—The amount determined under subparagraph (A) for any taxable year shall not exceed $30 multiplied by the number of months during such year that the taxpayer performs such services.

(3)  Qualified volunteer emergency response organization.—The term “qualified volunteer emergency response organization” means any volunteer organization—

(A)  which is organized and operated to provide firefighting or emergency medical services for persons in the State or political subdivision, as the case may be, and

(B)  which is required (by written agreement) by the State or political subdivision to furnish firefighting or emergency medical services in such State or political subdivision.)

(d)  Termination.—This section shall not apply with respect to taxable years beginning after December 31, 2010.

*    *    *    *    *    *    *

SEC. 143.  MORTGAGE REVENUE BONDS: QUALIFIED MORTGAGE BOND AND QUALIFIED VETERANS’ MORTGAGE BOND.

*    *    *    *    *    *    *

(e)  Purchase Price Requirement.—

*    *    *    *    *    *    *

(3)  Separate application to new residences and old residences.—For purposes of this subsection, the determination of average area purchase price shall be made separately with respect to—

(A)  residences which have not been previously occupied, and

(B)  residences which have been previously occupied.

(4)  Special rule for 2 to 4 family residences.—For purposes of this subsection, to the extent provided in regulations, the determination of average area purchase price shall be made separately with respect to 1 family, 2 family, 3 family, and 4 family residences.

*    *    *    *    *    *    *

SEC. 162. TRADE OR BUSINESS EXPENSES.

(a)  In General.—There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

(1)  a reasonable allowance for salaries or other compensation for personal services actually rendered;

(2)  traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and

(3)  rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes in excess of $3,000. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.

(b)  Charitable Contributions and Gifts Excepted.—No deduction shall be allowed under subsection (a) for any contribution or gift which would be allowable as a deduction under section 170 were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section.

(c)  Illegal Bribes, Kickbacks, and Other Payments.—

(1)  Illegal payments to government officials or employees.—No deduction shall be allowed under subsection (a) for any payment made, directly or indirectly, to an official or employee of any government, or of any agency or instrumentality of any government, if the payment constitutes an illegal bribe or kickback or, if the payment is to an official or employee of a foreign government, the payment is unlawful under the Foreign Corrupt Practices Act of 1977. The burden of proof in respect of the issue, for the purposes of this paragraph, as to whether a payment constitutes an illegal bribe or kickback (or is unlawful under the Foreign Corrupt Practices Act of 1977) shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud).

(2)  Other illegal payments.—No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1)) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer. The burden of proof in respect of the issue, for purposes of this paragraph, as to whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud).

(3)  Kickbacks, rebates, and bribes under medicare and medicaid.—No deduction shall be allowed under subsection (a) for any kickback, rebate, or bribe made by any provider of services, supplier, physician, or other person who furnishes items or services for which payment is or may be made under the Social Security Act, or in whole or in part out of Federal funds under a State plan approved under such Act, if such kickback, rebate, or bribe is made in connection with the furnishing of such items or services or the making or receipt of such payments. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer.

(d)  Capital Contributions to Federal National Mortgage Association.—For purposes of this subtitle, whenever the amount of capital contributions evidenced by a share of stock issued pursuant to section 303(c) of the Federal National Mortgage Association Charter Act (12 U.S.C., sec. 1718) exceeds the fair market value of the stock as of the issue date of such stock, the initial holder of the stock shall treat the excess as ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.

(e)  Denial of Deduction for Certain Lobbying and Political Expenditures.—

(1)  In general.—No deduction shall be allowed under subsection (a) for any amount paid or incurred in connection with—

(A)  influencing legislation,

(B)  participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office,

(C)  any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or

(D)  any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.

(2)  Exception for local legislation.—In the case of any legislation of any local council or similar governing body—

(A)  paragraph (1)(A) shall not apply, and

(B)  the deduction allowed by subsection (a) shall include all ordinary and necessary expenses (including, but not limited to, traveling expenses described in subsection (a)(2) and the cost of preparing testimony) paid or incurred during the taxable year in carrying on any trade or business—

(i)  in direct connection with appearances before, submission of statements to, or sending communications to the committees, or individual members, of such council or body with respect to legislation or proposed legislation of direct interest to the taxpayer, or

(ii)  in direct connection with communication of information between the taxpayer and an organization of which the taxpayer is a member with respect to any such legislation or proposed legislation which is of direct interest to the taxpayer and to such organization,

and that portion of the dues so paid or incurred with respect to any organization of which the taxpayer is a member which is attributable to the expenses of the activities described in clauses (i) and (ii) carried on by such organization.

(3)  Application to dues of tax-exempt organizations.—No deduction shall be allowed under subsection (a) for the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is allocable to expenditures to which paragraph (1) applies.

(4)  Influencing legislation.—For purposes of this subsection—

(A)  In general.—The term “influencing legislation” means any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation.

(B)  Legislation.—The term “legislation” has the meaning given such term by section 4911(e)(2).

(5)  Other special rules.—

(A)  Exception for certain taxpayers.—In the case of any taxpayer engaged in the trade or business of conducting activities described in paragraph (1), paragraph (1) shall not apply to expenditures of the taxpayer in conducting such activities directly on behalf of another person (but shall apply to payments by such other person to the taxpayer for conducting such activities).

(B)  De minimis exception.—

(i)  In general.—Paragraph (1) shall not apply to any in-house expenditures for any taxable year if such expenditures do not exceed $2,000. In determining whether a taxpayer exceeds the $2,000 limit under this clause, there shall not be taken into account overhead costs otherwise allocable to activities described in paragraphs (1)(A) and (D).

(ii)  In-house expenditures.—For purposes of clause (i), the term “in-house expenditures” means expenditures described in paragraphs (1)(A) and (D) other than—

(I)  payments by the taxpayer to a person engaged in the trade or business of conducting activities described in paragraph (1) for the conduct of such activities on behalf of the taxpayer, or

(II)  dues or other similar amounts paid or incurred by the taxpayer which are allocable to activities described in paragraph (1).

(C)  Expenses incurred in connection with lobbying and political activities.—Any amount paid or incurred for research for, or preparation, planning, or coordination of, any activity described in paragraph (1) shall be treated as paid or incurred in connection with such activity.

(6)  Covered executive branch official.—For purposes of this subsection, the term “covered executive branch official” means—

(A)  the President,

(B)  the Vice President,

(C)  any officer or employee of the White House Office of the Executive Office of the President, and the 2 most senior level officers of each of the other agencies in such Executive Office, and

(D)  any individual serving in a position in level I of the Executive Schedule under section 5312 of title 5, United States Code, (ii) any other individual designated by the President as having Cabinet level status, and (iii) any immediate deputy of an individual described in clause (i) or (ii).

(7)  Special rule for indian tribal governments.—For purposes of this subsection, an Indian tribal government shall be treated in the same manner as a local council or similar governing body.

(8)  Cross reference.—For reporting requirements and alternative taxes related to this subsection, see section 6033(e).

*    *    *    *    *    *    *

(f)  Fines and Penalties.—No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.

(g)  Treble Damage Payments under the Antitrust Laws.—If in a criminal proceeding a taxpayer is convicted of a violation of the antitrust laws, or his plea of guilty or nola contendere to an indictment or information charging such a violation is entered or accepted in such a proceeding, no deduction shall be allowed under subsection (a) for two-thirds of any amount paid or incurred—

(1)  on any judgment for damages entered against the taxpayer under section 4 of the Act entitled “An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes”, approved October 15, 1914 (commonly known as the Clayton Act), on account of such violation or any related violation of the antitrust laws which occurred prior to the date of the final judgment of such conviction, or

(2)  in settlement of any action brought under such section 4 on account of such violation or related violation.

The preceding sentence shall not apply with respect to any conviction or plea before January 1, 1970, or to any conviction or plea on or after such date in a new trial following an appeal of a conviction before such date.

(i)[82]  State Legislators’ Travel Expenses Away From Home.—

(1)  In general.—For purposes of subsection (a), in the case of any individual who is a State legislator at any time during the taxable year and who makes an election under this subsection for the taxable year—

(A)  the place of residence of such individual within the legislative district which he represented shall be considered his home,

(B)  he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the greater of—

(i)  the amount generally allowable with respect to such day to employees of the State of which he is a legislator for per diem while away from home, to the extent such amount does not exceed 110 percent of the amount described in clause (ii) with respect to such day, or

(ii)  the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States, and

(C)  he shall be deemed to be away from home in the pursuit of a trade or business on each legislative day.

(2)  Legislative days.—For purposes of paragraph (1), a legislative day during any taxable year for any individual shall be any day during such year on which—

(A)  the legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or

(B)  the legislature was not in session but the physical presence of the individual was formally recorded at a meeting of a committee of such legislature.

(3)  Election.—An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary shall by regulations prescribe.

(4)  Section not to apply to legislators who reside near capitol.—For taxable years beginning after December 31, 1980, this subsection shall not apply to any legislator whose place of residence within the legislative district which he represents is 50 or fewer miles from the capitol building of the State.

(i)  [ Repealed.[83]]

(j)  Certain Foreign Advertising Expenses.—

(1)  In general.—No deduction shall be allowed under subsection (a) for any expenses of an advertisement carried by a foreign broadcast undertaking and directed primarily to a market in the United States. This paragraph shall apply only to foreign broadcast undertakings located in a country which denies a similar deduction for the cost of advertising directed primarily to a market in the foreign country when placed with a United States broadcast undertaking.

(2)  Broadcast undertaking.—For purposes of paragraph (1), the term “broadcast undertaking” includes (but is not limited to) radio and television stations.

(k)  Stock Requisition Expenses.—

(1)  In general.—Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the requisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C)).

(2)  Exceptions.—Paragraph (1) shall not apply to—

(A)  Certain specific deductions.—Any—

(i)  deduction allowable under section 163 (relating to interest), or

(ii)  deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or

(iii)  deduction for dividends paid (within the meaning of section 561).

(B)  Stock of certain regulated investment companies.—Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder.

(l)  Special Rules for Health Insurance Costs of Self-Employed Individuals.—

(1)  Allowance of deduction.—

(A)  In general.—In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.

(B)  Applicable percentage.—For purposes of subparagraph (A), the applicable percentage shall be determined under the following table:

For taxable years beginning in calendar year— The applicable percentage is—
1999 through 2001 60
2003 and thereafter 100.

(2)  Limitations.—

(A)  Dollar amount.—No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer’s earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.

(B)  Other coverage.—Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of the taxpayer. The preceding sentence shall be applied separately with respect to—

(i)  plans which include coverage for qualified long-term are services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and

(ii)  plans which do not include such coverage and are not such contracts.

(C)  Long-term care premiums.—In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1).

(3)  Coordination with medical deduction.—Any amount paid by a taxpayer for insurance to which paragraph (1) applies shall not be taken into account in computing the amount allowable to the taxpayer as a deduction under section 213(a).

(4)  Deduction not allowed for self-employment tax purposes.—The deduction allowable by reason of this subsection shall not be taken into account in determining an individual’s net earnings from self-employment (within the meaning of section 1402(a)) for purposes of chapter 2.

(5)  Treatment of certain s corporation shareholders.—This subsection shall apply in the case of any individual treated as a partner under section 1372(a), except that—

(A)  for purposes of this subsection, such individual’s wages (as defined in section 3121) from the S corporation shall be treated as such individual’s earned income (within the meaning of section 401(c)(1)), and

(B)  there shall be such adjustments in the application of this subsection as the Secretary may by regulations prescribe.

(m)  Certain Excessive Employee Remuneration.—

(1)  In general.—In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any covered employee to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds $1,000,000.

(2)  Publicly held corporation.—For purposes of this subsection, the term “publicly held corporation” means any corporation issuing any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934.

(3)  Covered employee.—For purposes of this subsection, the term “covered employee” means any employee of the taxpayer if—

(A)  as of the close of the taxable year, such employee is the chief executive officer of the taxpayer or is an individual acting in such a capacity, or

(B)  the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the 4 highest compensated officers for the taxable year (other than the chief executive officer).

(4)  Applicable employee remuneration.—For purposes of this subsection—

(A)  In general.—Except as otherwise provided in this paragraph, the term “applicable employee remuneration” means, with respect to any covered employee for any taxable year, the aggregate amount allowable as deduction under this chapter for such taxable year (determined without regard to this subsection) for remuneration for services performed by such employee (whether or not during the taxable year).

(B)  Exception for remuneration payable on commission basis.—The term “applicable employee remuneration” shall not include any remuneration payable on a commission basis solely on account of income generated directly by the individual performance of the individual to whom such remuneration is payable.

(C)  Other performance-based compensation.—The term “applicable employee remuneration” shall not include any remuneration payable solely on account of the attainment of one or more performance goals, but only if—

(i)  the performance goals are determined by a compensation committee of the board of directors of the taxpayer which is comprised solely of 2 or more outside directors,

(ii)  the material terms under which the remuneration is to be paid, including the performance goals, are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before the payment of such remuneration, and

(iii)  before any payment of such remuneration, the compensation committee referred to in clause (i) certifies that the performance goals and other material terms were in fact satisfied.

(D)  Exception for existing binding contracts.—The term “applicable employee remuneration” shall not include any remuneration payable under a written binding contract which was in effect on February 17, 1993, and which was not modified thereafter in any material respect before such remuneration is paid.

(E)  Remuneration.—For purposes of this paragraph, the term “remuneration” includes any remuneration (including benefits) in any medium other than cash, but shall not include—

(i)  any payment referred to in so much of section 3121(a)(5) as precedes subparagraph (E) thereof, and

(ii)  any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from gross income under this chapter.

For purposes of clause (i), section 3121(a)(5) shall be applied without regard to section 3121(v)(1).

(F)  Coordination with disallowed golden parachute payments.—The dollar limitation contained in paragraph (1) shall be reduced (but not below zero) by the amount (if any) which would have been included in the applicable employee remuneration of the covered employee for the taxable year but for being disallowed under section 280G.

(G)  Coordination with excise tax on specified stock compensation.—The dollar limitation contained in paragraph (1) with respect to any covered employee shall be reduced (but not below zero) by the amount of any payment (with respect to such employee) of the tax imposed by section 4985 directly or indirectly by the expatriated corporation (as defined in such section) or by any member of the expanded affiliated group (as defined in such section) which includes such corporation.

(5)  Special rule for application to employers participating in the troubled assets relief program.—

(A)  In general.—In the case of an applicable employer, no deduction shall be allowed under this chapter—

(i)  in the case of executive remuneration for any applicable taxable year which is attributable to services performed by a covered executive during such applicable taxable year, to the extent that the amount of such remuneration exceeds $500,000, or

(ii)  in the case of deferred deduction executive remuneration for any taxable year for services performed during any applicable taxable year by a covered executive, to the extent that the amount of such remuneration exceeds $500,000 reduced (but not below zero) by the sum of—

(I)  the executive remuneration for such applicable taxable year, plus

(II)  the portion of the deferred deduction executive remuneration for such services which was taken into account under this clause in a preceding taxable year.

(B)  Applicable employer.—For purposes of this paragraph—

(i)  In general.—Except as provided in clause (ii), the term “applicable employer” means any employer from whom 1 or more troubled assets are acquired under a program established by the Secretary under section 101(a) of the Emergency Economic Stabilization Act of 2008 if the aggregate amount of the assets so acquired for all taxable years exceeds $300,000,000.

(ii)  Disregard of certain assets sold through direct purchase.—If the only sales of troubled assets by an employer under the program described in clause (i) are through 1 or more direct purchases (within the meaning of section 113(c) of the Emergency Economic Stabilization Act of 2008), such assets shall not be taken into account under clause (i) in determining whether the employer is an applicable employer for purposes of this paragraph.

(iii)  Aggregation rules.—Two or more persons who are treated as a single employer under subsection (b) or (c) of section 414 shall be treated as a single employer, except that in applying section 1563(a) for purposes of either such subsection, paragraphs (2) and (3) thereof shall be disregarded.

(C)  Applicable taxable year.—For purposes of this paragraph, the term “applicable taxable year” means, with respect to any employer—

(i)  the first taxable year of the employer—

(I)  which includes any portion of the period during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 thereof), and

(II)  in which the aggregate amount of troubled assets acquired from the employer during the taxable year pursuant to such authorities (other than assets to which subparagraph (B)(ii) applies), when added to the aggregate amount so acquired for all preceding taxable years, exceeds $300,000,000, and

(ii)  any subsequent taxable year which includes any portion of such period.

(D)  Covered executive.—For purposes of this paragraph—

(i)  In general.—The term “covered executive” means, with respect to any applicable taxable year, any employee—

(I)  who, at any time during the portion of the taxable year during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 thereof), is the chief executive officer of the applicable employer or the chief financial officer of the applicable employer, or an individual acting in either such capacity, or

(II)  who is described in clause (ii).

(ii)  Highest compensated employees.—An employee is described in this clause if the employee is 1 of the 3 highest compensated officers of the applicable employer for the taxable year (other than an individual described in clause (i)(I)), determined—

(I)  on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (without regard to whether those rules apply to the employer), and

(II)  by only taking into account employees employed during the portion of the taxable year described in clause (i)(I).

(iii)  Employee remains covered executive.—If an employee is a covered executive with respect to an applicable employer for any applicable taxable year, such employee shall be treated as a covered executive with respect to such employer for all subsequent applicable taxable years and for all subsequent taxable years in which deferred deduction executive remuneration with respect to services performed in all such applicable taxable years would (but for this paragraph) be deductible.

(E)  Executive remuneration.—For purposes of this paragraph, the term “executive remuneration” means the applicable employee remuneration of the covered executive, as determined under paragraph (4) without regard to subparagraphs (B), (C), and (D) thereof. Such term shall not include any deferred deduction executive remuneration with respect to services performed in a prior applicable taxable year.

(F)  Deferred deduction executive remuneration.—For purposes of this paragraph, the term “deferred deduction executive remuneration” means remuneration which would be executive remuneration for services performed in an applicable taxable year but for the fact that the deduction under this chapter (determined without regard to this paragraph) for such remuneration is allowable in a subsequent taxable year.

(G)  Coordination.—Rules similar to the rules of subparagraphs (F) and (G) of paragraph (4) shall apply for purposes of this paragraph.

(H)  Regulatory authority.—The Secretary may prescribe such guidance, rules, or regulations as are necessary to carry out the purposes of this paragraph and the Emergency Economic Stabilization Act of 2008, including the extent to which this paragraph applies in the case of any acquisition, merger, or reorganization of an applicable employer.

(n)  Special rule for certain group health plans.—

(1)  In general.—No deduction shall be allowed under this chapter to an employer for any amount paid or incurred in connection with a group health plan if the plan does not reimburse for inpatient hospital care services provided in the State of New York—

(A)  except as provided in subparagraphs (B) and (C), at the same rate as licensed commercial insurers are required to reimburse hospitals for such services when such reimbursement is not through such a plan,

(B)  in the case of any reimbursement through a health maintenance organization, at the same rate as health maintenance organizations are required to reimburse hospitals for such services for individuals not covered by such a plan (determined without regard to any government-supported individuals exempt from such rate), or

(C)  in the case of any reimbursement through any corporation organized under Article 43 of the New York State Insurance Law, at the same rate as any such corporation is required to reimburse hospitals for such services for individuals not covered by such a plan.

(2)  State law exception.—Paragraph (1) shall not apply to any group health plan which is not required under the laws of the State of New York (determined without regard to this subsection or other provisions of Federal law) to reimburse at the rates provided in paragraph (1).

(3)  Group health plan.—For purposes of this subsection, the term “group health plan” means a plan of, or contributed to by, an employer or employee organization (including a self-insured plan) to provide health care (directly or otherwise) to any employee, any former employee, the employer, or any other individual associated or formerly associated with the employer in a business relationship, or any member of their family.

(o)  Treatment of certain expenses of rural mail carriers.—

(1)  General rule.—

In the case of any employee of the United States Postal Service who performs services involving the collection and delivery of mail on a rural route and who receives qualified reimbursements for the expenses incurred by such employee for the use of a vehicle in performing such services—

(A)  the amount allowable as a deduction under this chapter for the use of a vehicle in performing such services shall be equal to the amount of such qualified reimbursements; and

(B)  such qualified reimbursements shall be treated as paid under a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) (and section 62(c) shall not apply to such qualified reimbursements).

(2)  Special rule where expenses exceed reimbursements.—Notwithstanding paragraph (1)(A), if the expenses incurred by an employee for the use of a vehicle in performing services described in paragraph (1) exceed the qualified reimbursements for such expenses, such excess shall be taken into account in computing the miscellaneous itemized deductions of the employee under section 67.

(3)  Definition of qualified reimbursements.—

For purposes of this subsection, the term “qualified reimbursements” means the amounts paid by the United States Postal Service to employees as an equipment maintenance allowance under the 1991 collective bargaining agreement between the United States Postal Service and the National Rural Letter Carriers’ Association. Amounts paid as an equipment maintenance allowance by such Postal Service under later collective bargaining agreements that supersede the 1991 agreement shall be considered qualified reimbursements if such amounts do not exceed the amounts that would have been paid under the 1991 agreement, adjusted for changes in the Consumer Price Index (as defined in section 1(f)(5)) since 1991.

(p)  Treatment of Expenses of Members of Reserve Component of Armed Forces of the United States.—For purposes of subsection (a)(2), in the case of an individual who performs services as a member of a reserve component of the Armed Forces of the United States at any time during the taxable year, such individual shall be deemed to be away from home in the pursuit of a trade or business for any period during which such individual is away from home in connection with such service.

(q)  Cross Reference.—

(1)  For special rule relating to expenses in connection with subdividing real property for sale, see section 1237.

(2)  For special rule relating to the treatment of payments by a transferee of a franchise, trademark, or trade name, see section 1253.

(3)  For special rules relating to—

(A)  funded welfare benefit plans, see section 419, and

(B)  deferred compensation and other deferred benefits, see section 404.

*    *    *    *    *    *    *

SEC. 164. TAXES.

*    *    *    *    *    *    *

(f)  Deduction for One-Half of Self-Employment taxes.—

(1)  In general.—In the case of an individual, in addition to the taxes described in subsection (a), there shall be allowed as a deduction for the taxable year an amount equal to one-half of the taxes imposed by section 1401 for such taxable year.

(2)  Deduction treated as attributable to trade or business.—For purposes of this chapter, the deduction allowed by paragraph (1) shall be treated as attributable to a trade or business carried on by the taxpayer which does not consist of the performance of services by the taxpayer as an employee.

*    *    *    *    *    *    *

SEC. 172. NET OPERATING LOSS DEDUCTION.

(a)  Deduction allowed.—There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of (1) the net operating loss carvers to such year, plus (2) the net operating loss carryback to such year. For purposes of this subtitle, the term “net operating loss deduction” means the deduction allowed by this subsection.

(b)  Net Operating Loss Carryback and Carryovers.—

(1)  Years to which loss may be carried.—

(A)  General rule.—Except as otherwise provided in this paragraph, a net operating loss for any taxable year—

(i)  shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and

(ii)  shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss.

(B)  Special rules for reit’s.—

(i)  In general.—A net operating loss for a REIT year shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss.

(ii)  Special rule.—In the case of any net operating loss for a taxable year which is not a REIT year, such loss shall not be carried back to any taxable year which is a REIT year.

(iii)  REIT year.—For purposes of this subparagraph, the term “REIT year” means any taxable year for which the provisions of part II of subchapter M (relating to real estate investment trusts) apply to the taxpayer.

(C)  Specified liability losses.—In the case of a taxpayer which has a specified liability loss (as defined in subsection (f)) for a taxable year, such specified liability loss shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss.

(D)  Bad debt losses of commercial banks.—In the case of any bank (as defined in section 585(a)(2)), the portion of the net operating loss for any taxable year beginning after December 31, 1986, and before January 1, 1994, which is attributable to the deduction allowed under section 166(a) shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of the loss and a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss.

(E)  Excess interest loss.—

(i)  In general.—If—

(I)  there is a corporate equity reduction transaction, and

(II)  an applicable corporation has a corporate equity reduction interest loss for any loss limitation year ending after August 2, 1989,

then the corporate equity reduction interest loss shall be a net operating loss carryback and carryover to the taxable years described in subparagraph (A), except that such loss shall not be carried back to a taxable year preceding the taxable year in which the corporate equity reduction transaction occurs.

(ii)  Loss limitation year.—For purposes of clause (i) and subsection (m), the term “loss limitation year” means, with respect to any corporate equity reduction transaction, the taxable year in which such transaction occurs and each of the 2 succeeding taxable years.

(iii)  Applicable corporation.—For purposes of clause (i), the term “applicable corporation” means—

(I)  a C corporation which acquires stock, or the stock of which is acquired in a major stock acquisition,

(II)  a C corporation making distributions with respect to, or redeeming, its stock in connection with an excess distribution, or

(III)  a C corporation which is a successor of a corporation described in subclause (I) or (II).

For definitions of terms used in this subparagraph, see subsection (h).

(F)  Retention of 3-year carryback in certain cases.—

(i)  In general.—Subparagraph (A)(i) shall be applied by substituting “3 taxable years” for “2 taxable years” with respect to the portion of the net operating loss for the taxable year which is an eligible loss with respect to the taxpayer.

(ii)  Eligible loss—For purposes of clause (i), the term “eligible loss” means.—

(I)  in the case of an individual, losses of property arising from fire, storm, shipwreck, or other casualty, or from theft,

(II)  in the case of a taxpayer which is a small business, net operating losses attributable to federally declared disasters (as defined by subsection (h)(3)(C)(i)), and

(III)  in the case of a taxpayer engaged in the trade or business of farming (as defined in section 263A(e)(4)), net operating losses attributable to such federally declared disasters.

Such term shall not include any farming loss (as defined in subsection (i)) or qualified disaster loss (as defined in subsection (j)).

(iii)  Small business.—For purposes of this subparagraph, the term “small business” means a corporation or partnership which meets the gross receipts test of section 448(c) for the taxable year in which the loss arose (or, in the case of a sole proprietorship, which would meet such test if such proprietorship were a corporation).

(iv)  Coordination with paragraph (2).—For purposes of applying paragraph (2), an eligible loss for any taxable year shall be treated in a manner similar to the manner in which a specified liability loss is treated.

(G)  Farming losses.—In the case of a taxpayer which has a farming loss (as defined in subsection (i)) for a taxable year, such farming loss shall be a net operating loss carryback to each of the 5 taxable years preceding the taxable year of such loss.

(H)  In the case of a net operating loss for any taxable year ending during 2001 or 2002, subparagraph (A)(i) shall be applied by substituting “5” for “2” and subparagraph (F) shall not apply.

(I)  Transmission property and pollution control investment.—

(i)  In general.—At the election of the taxpayer for any taxable year ending after December 31, 2005, and before January 1, 2009, in the case of a net operating loss for a taxable year ending after December 31, 2002, and before January 1, 2006, there shall be a net operating loss carryback to each of the 5 taxable years preceding the taxable year of such loss to the extent that such loss does not exceed 20 percent of the sum of the electric transmission property capital expenditures and the pollution control facility capital expenditures of the taxpayer for the taxable year preceding the taxable year for which such election is made.

(ii)  Limitations.—For purposes of this subsection—

(I)  not more than one election may be made under clause (i) with respect to any net operating loss for a taxable year, and

(II)  an election may not be made under clause (i) for more than 1 taxable year beginning in any calendar year.

(iii)  Coordination with ordering rule.—For purposes of applying subsection (b)(2), the portion of any loss which is carried back 5 years by reason of clause (i) shall be treated in a manner similar to the manner in which a specified liability loss is treated.

(iv)  Special rules relating to credit or refund.—In the case of the portion of the loss which is carried back 5 years by reason of clause (i)—

(I)  an application under section 6411(a) with respect to such portion shall not fail to be treated as timely filed if filed within 24 months after the due date specified under such section, and

(II)  references in sections 6501(h), 6511(d)(2)(A), and 6611(f)(1) to the taxable year in which such net operating loss arises or results in a net operating loss carryback shall be treated as references to the taxable year for which such election is made.

(v)  Definitions.—For purposes of this subparagraph—

(I)  Electric transmission property capital expenditures.—The term “electric transmission property capital expenditures” means any expenditure, chargeable to capital account, made by the taxpayer which is attributable to electric transmission property used by the taxpayer in the transmission at 69 or more kilovolts of electricity for sale. Such term shall not include any expenditure which may be refunded or the purpose of which may be modified at the option of the taxpayer so as to cease to be treated as an expenditure within the meaning of such term.

(II)  Pollution control facility capital expenditures.—The term “pollution control facility capital expenditures” means any expenditure, chargeable to capital account, made by an electric utility company (as defined in section 2(3) of the Public Utility Holding Company Act (15 U.S.C. 79b(3)), as in effect on the day before the date of the enactment of the Energy Tax Incentives Act of 2005) which is attributable to a facility which will qualify as a certified pollution control facility as determined under section 169(d)(1) by striking “before January 1, 1976,” and by substituting “an identifiable” for “a new identifiable”. Such term shall not include any expenditure which may be refunded or the purpose of which may be modified at the option of the taxpayer so as to cease to be treated as an expenditure within the meaning of such term.

(J)  Certain losses attributable federally declared disasters.—In the case of a taxpayer who has a qualified disaster loss (as defined in subsection (j)), such loss shall be a net operating loss carryback to each of the 5 taxable years preceding the taxable year of such loss.

(2)  Amount of carrybacks and carryovers.—The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall be computed—

(A)  with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and

(B)  by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter,

and the taxable income so computed shall not be considered to be less than zero.

(3)  Election to waive carryback.—Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

(c)  Net Operating Loss Defined.—For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).

(d)  Modifications.—The modifications referred to in this section are as follows:

(1)  Net operating loss deduction.—No net operating loss deduction shall be allowed.

(2)  Capital gains and losses of taxpayers other than corporations.—In the case of a taxpayer other than a corporation—

(A)  the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and

(B)  the exclusion provided by section 1202 shall not be allowed.

(3)  Deduction for personal exemptions.—No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed.

(4)  Nonbusiness deductions of taxpayers other than corporations.—In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—

(A)  any gain or loss from the sale or other disposition of—

(i)  property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or

(ii)  real property used in the trade or business,

shall be treated as attributable to the trade or business;

(B)  the modifications specified in paragraphs (1) and (3) shall be taken into account;

(C)  any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; and

(D)  any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual.

(5)  Computation of deduction for dividends received, etc.—The deductions allowed by sections 243 (relating to dividends received by corporations), 244 (relating to dividends received on certain preferred stock of public utilities), and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) (relating to limitation on aggregate amount of deductions); and the deduction allowed by section 247 (relating to dividends paid on certain preferred stock of public utilities) shall be computed without regard to subsection (a)(1)(B) of such section.

(6)  Modifications related to real estate investment trusts.—In the case of any taxable year for which part II of subchapter M (relating to real estate investment trusts) applies to the taxpayer—

(A)  the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid described in section 857(b)(2)(B)); and

(B)  where such taxable year is a “prior taxable year” referred to in paragraph (2) of subsection (b), the term “taxable income” in such paragraph shall mean “real estate investment trust taxable income” (as defined in section 857(b)(2)).

(7)  Manufacturing deduction.—The deduction under section 199 shall not be allowed.

(e)  Law Applicable to Computations.—In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.

(f)  Rules Relating to Specified Liability Loss.—For purposes of this section—

(1)  In general.—The term “specified liability loss” means the sum of the following amounts to the extent taken into account in computing the net operating loss for the taxable year:

(A)  Any amount allowable as a deduction under section 162 or 165 which is attributable to—

(i)  product liability, or

(ii)  expenses incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of product liability.

(B)(i)  Any amount allowable as a deduction under this chapter (other than section 468(a)(1) or 468A(a)) which is in satisfaction of a liability under a Federal or State law requiring—

(I)  the reclamation of land,

(II)  the decommissioning of a nuclear power plant (or any unit thereof),

(III)  the dismantlement of a drilling platform,

(IV)  the remediation of environmental contamination, or

(V)  a payment under any workers compensation act (within the meaning of section 461(h)(2)(C)(i)).

(ii)  A liability shall be taken into account under this subparagraph only if—

(I)  the act (or failure to act) giving rise to such liability occurs at least 3 years before the beginning of the taxable year, and

(II)  the taxpayer used an accrual method of accounting throughout the period or periods during which such act (or failure to act) occurred.

(2)  Limitation.—The amount of the specified liability loss for any taxable year shall not exceed the amount of the net operating loss for such taxable year.

(3)  Special rule for nuclear powerplants.—Except as provided in regulations prescribed by the Secretary, that portion of a specified liability loss which is attributable to amounts incurred in the decommissioning of a nuclear powerplant (or any unit thereof) may, for purposes of subsection (b)(1)(C), be carried back to each of the taxable years during the period—

(A)  beginning with the taxable year in which such plant (or unit thereof) was placed in service, and

(B)  ending with the taxable year preceding the loss year.

(4)  Product liability.—The term “product liability” means—

(A)  liability of the taxpayer for damages on account of physical injury or emotional harm to individuals, or damage to or loss of the use of property, on account of any defect in any product which is manufactured, leased, or sold by the taxpayer, but only if

(B)  such injury, harm, or damage arises after the taxpayer has completed or terminated operations with respect to, and has relinquished possession of, such product.

(5)  Coordination with subsection (b)(2).—For purposes of applying subsection (b)(2), a specified liability loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year.

(6)  Election.—Any taxpayer entitled to a 10-year carryback under subsection (b)(1)(C) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to subsection (b)(1)(C). Such election shall be made in such manner as may be prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for that taxable year.

(g)  Rules Relating to Bad Debt Losses of Commercial Banks.—For purposes of this section—

(1)  Portion attributable to deduction for bad debts.—The portion of the net operating loss for any taxable year which is attributable to the deduction allowed under section 166(a) shall be the excess of—

(i)  the net operating loss for such taxable year, over

(ii)  the net operating loss for such taxable year determined without regard to the amount allowed as a deduction under section 166(a) for such taxable year.

(2)  Coordination with subsection (b)(2).—For purposes of subsection (b)(2), the portion of a net operating loss for any taxable year which is attributable to the deduction allowed under section 166(a) shall be treated in a manner similar to the manner in which a specified liability loss is treated.

(h)  Corporate Equity Reduction Interest Losses.—For purposes of this section—

(1)  In general.—The term “corporate equity reduction interest loss” means, with respect to any loss limitation year, the excess (if any) of—

(A)  the net operating loss for such taxable year, over

(B)  the net operating loss for such taxable year determined without regard to any allocable interest deductions otherwise taken into account in computing such loss.

(2)  Allocable interest deductions.—

(A)  In general.—The term “allocable interest deductions” means deductions allowed under this chapter for interest on the portion of any indebtedness allocable to a corporate equity reduction transaction.

(B)  Method of allocation.—Except as provided in regulations and subparagraph (E), indebtedness shall be allocated to a corporate equity reduction transaction in the manner prescribed under clause (ii) of section 263A(f)(2)(A) (without regard to clause (i) thereof).

(C)  Allocable deductions not to exceed interest increases.—Allocable interest deductions for any loss limitation year shall not exceed the excess (if any) of—

(i)  the amount allowable as a deduction for interest paid or accrued by the taxpayer during the loss limitation year, over

(ii)  the average of such amounts for the 3 taxable years preceding the taxable year in which the corporate equity reduction transaction occurred.

(D)  De minimis rule.—A taxpayer shall be treated as having no allocable interest deductions for any taxable year if the amount of such deductions (without regard to this subparagraph) is less than $1,000,000.

(E)  Special rule for certain unforeseeable events.—If an unforeseeable extraordinary adverse event occurs during a loss limitation year but after the corporate equity reduction transaction—

(i)  indebtedness shall be allocated in the manner described in subparagraph (B) to unreimbursed costs paid or incurred in connection with such event before being allocated to the corporate equity reduction transaction, and

(ii)  the amount determined under subparagraph (C)(i) shall be reduced by the amount of interest on indebtedness described in clause (i).

(F)  Transition rule.—If any of the 3 taxable years described in subparagraph (C)(ii) end on or before August 2, 1989, the taxpayer may substitute for the amount determined under such subparagraph an amount equal to the interest paid or accrued (determined on an annualized basis) during the taxpayer’s taxable year which includes August 3, 1989, on indebtedness of the taxpayer outstanding on August 2, 1989.

(3)  Corporate equity reduction transaction.—

(A)  In general.—The term “corporate equity reduction transaction” means—

(i)  a major stock acquisition, or

(ii)  an excess distribution.

(B)  Major stock acquisition.—

(i)  In general.—The term “major stock acquisition” means the acquisition by a corporation pursuant to a plan of such corporation (or any group of persons acting in concert with such corporation) of stock in another corporation representing 50 percent or more (by vote or value) of the stock in such other corporation.

(ii)  Exception.—The term “major stock acquisition” does not include a qualified stock purchase (within the meaning of section 338) to which an election under section 338 applies.

(C)  Excess distribution.—The term “excess distribution” means the excess (if any) of—

(i)  the aggregate distributions (including redemptions) made during a taxable year by a corporation with respect to its stock, over

(ii)  the greater of—

(I)  150 percent of the average of such distributions during the 3 taxable years immediately preceding such taxable year, or

(II)  10 percent of the fair market value of the stock of such corporation as of the beginning of such taxable year.

(D)  Rules for applying subparagraph (B).—For purposes of subparagraph (B)—

(i)  Plans to acquire stock.—All plans referred to in subparagraph (B) by any corporation (or group of persons acting in concert with such corporation) with respect to another corporation shall be treated as 1 plan.

(ii)  Acquisitions during 24-month period.—All acquisitions during any 24-month period shall be treated as pursuant to 1 plan.

(E)  Rules for applying subparagraph (C).—For purposes of subparagraph (C)—

(i)  Certain preferred stock disregarded.—Stock described in section 1504(a)(4), and distributions (including redemptions) with respect to such stock, shall be disregarded.

(ii)  Issuance of stock.—The amounts determined under clauses (i) and (ii)(I) of subparagraph (C) shall be reduced by the aggregate amount of stock issued by the corporation during the applicable period in exchange for money or property other than stock in the corporation.

(4)  Other rules.—

(A)  Ordering rule.—For purposes of paragraph (1), in determining the allocable interest deductions taken into account in computing the net operating loss for any taxable year, taxable income for such taxable year shall be treated as having been computed by taking allocable interest deductions into account after all other deductions.

(B)  Coordination with subsection (b)(2).—For purposes of subsection (b)(2)

(i)  a corporate equity reduction interest loss shall be treated in a manner similar to the manner in which a specified liability loss is treated, and

(ii)  in determining the net operating loss deduction for any prior taxable year referred to in the 3rd sentence of subsection (b)(2), the portion of any net operating loss which may not be carried to such taxable year under subsection (b)(1)(E) shall not be taken into account.

(C)  Members of affiliated groups.—Except as provided by regulations, all members of an affiliated group filing a consolidated return under section 1501 shall be treated as 1 taxpayer for purposes of this subsection and subsection (b)(1)(E).

(5)  Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations—

(A)  for applying this subsection to successor corporations and in cases where a taxpayer becomes, or ceases to be, a member of an affiliated group filing a consolidated return under section 1501,

(B)  to prevent the avoidance of this subsection through related parties, pass-through entities, and intermediaries, and

(C)  for applying this subsection where more than 1 corporation is involved in a corporate equity reduction transaction.

(i)  Rules relating to farming losses.—For purposes of this section.—

(1)  In general.—The term “farming loss” means the lesser of—

(A)  the amount which would be the net operating loss for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4)) are taken into account, or

(B)  the amount of the net operating loss for such taxable year.

Such term shall not include any qualified disaster loss (as defined in subsection (j)).

(2)  Coordination with subsection (b)(2).—For purposes of applying subsection (b)(2), a farming loss for any taxable year shall be treated in a manner similar to the manner in which a specified liability loss is treated.

(3)  Election.—Any taxpayer entitled to a 5-year carryback under subsection (b)(1)(G) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to subsection (b)(1)(G). Such election shall be made in such manner as may be prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

(j)  Rules Relating To Qualified Disaster Losses.—For purposes of this section—

(1)  In general.—The term “qualified disaster loss” means the lesser of—

(A)  the sum of—

(i)  the losses allowable under section 165 for the taxable year—

(I)  attributable to a federally declared disaster (as defined in section 165(h)(3)(C)(i)) occurring before January 1, 2010, and

(II)  occurring in a disaster area (as defined in section 165(h)(3)(C)(ii)), and

(ii)  the deduction for the taxable year for qualified disaster expenses which is allowable under section 198A(a) or which would be so allowable if not otherwise treated as an expense, or

(B)  the net operating loss for such taxable year.

(2)  Coordination with subsection (b)(2).—For purposes of applying subsection (b)(2), a qualified disaster loss for any taxable year shall be treated in a manner similar to the manner in which a specified liability loss is treated.

(3)  Election.—Any taxpayer entitled to a 5-year carryback under subsection (b)(1)(J) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to subsection (b)(1)(J). Such election shall be made in such manner as may be prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

(4)  Exclusion.—The term “qualified disaster loss” shall not include any loss with respect to any property described in section 1400N(p)(3).

(k)  Election To Disregard 5-Year Carryback for Certain Net Operating Losses.—Any taxpayer entitled to a 5-year carryback under subsection (b)(1)(H) from any loss year may elect to have the carryback period with respect to such loss year determined without regard to subsection (b)(1)(H). Such election shall be made in such manner as may be prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

(l)  Cross References.—

(1)  For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381.

(2)  For special limitation on net operating loss carryovers in case of a corporate change of ownership, see section 382.

*    *    *    *    *    *    *

SEC. 217.  MOVING EXPENSES.

(a)  Deduction Allowed.—There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.

(b)  Definition of Moving Expenses.—

(1)  In general.—For purposes of this section, the term “moving expenses” means only the reasonable expenses—

(A)  of moving household goods and personal effects from the former residence to the new residence, and

(B)  of traveling (including lodging) from the former residence to the new place of residence.

Such term shall not include any expenses for meals.

(2)  Individuals other than taxpayer.—In the case of any individual other than the taxpayer, expenses referred to in paragraph (1) shall be taken into account only if such individual has both the former residence and the new residence as his principal place of abode and is a member of the taxpayer’s household.

(c)  Conditions for Allowance.—No deduction shall be allowed under this section unless—

(1)  the taxpayer’s new principal place of work—

(A)  is at least 50 miles farther from his former residence than was his former principal place of work, or

(B)  if he had no former principal place of work, is at least 50 miles from his former residence, and

(2)  either—

(A)  during the 12-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or

(B)  during the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A).

For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points.

(d)  Rules for Application of Subsection (c)(2).—

(1)  The condition of subsection (c)(2) shall not apply if the taxpayer is unable to satisfy such condition by reason of—

(A)  death or disability, or

(B)  involuntary separation (other than for willful misconduct) from the service of, or transfer for the benefit of, an employer after obtaining full-time employment in which the taxpayer could reasonably have been expected to satisfy such condition.

(2)  If a taxpayer has not satisfied the condition of subsection (c)(2) before the time prescribed by law (including extensions thereof) for filing the return for the taxable year during which he paid or incurred moving expenses which would otherwise be deductible under this section, but may still satisfy such condition, then such expenses may (at the election of the taxpayer) be deducted for such taxable year notwithstanding subsection (c)(2).

(3)  If—

(A)  for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph (2), and

(B)  the condition of subsection (c)(2) cannot be satisfied at the close of a subsequent taxable year,

then an amount equal to the expenses which were so deducted shall be included in gross income for the first such subsequent taxable year.

(e)  [Stricken.[84]]

(f)  Self-Employed Individual.—For purposes of this section, the term “self-employed individual” means an individual who performs personal services—

(1)  as the owner of the entire interest in an unincorporated trade or business, or

(2)  as a partner in a partnership carrying on a trade or business.

(g)  Rules for Members of the Armed Forces of the United States.—In the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station—

(1)  the limitations under subsection (c) shall not apply;

(2)  any moving and storage expenses which are furnished in kind (or for which reimbursement or an allowance is provided, but only to the extent of the expenses paid or incurred) to such member, his spouse, or his dependents, shall not be includible in gross income, and no reporting with respect to such expenses shall be required by the Secretary of Defense or the Secretary of Transportation, as the case may be; and

(3)  if moving and storage expenses are furnished in kind (or if reimbursement or an allowance for such expenses is provided) to such member’s spouse and his dependents with regard to moving to a location other than the one to which such member moves (or from a location other than the one from which such member moves), this section shall apply with respect to the moving expenses of his spouse and dependents—

(A)  as if his spouse commenced work as an employee at a new principal place of work at such location; and

(B)  without regard to the limitations under subsection (c).

(h)  Special Rules for Foreign Moves.—

(1)  Allowance of certain storage fees.—In the case of a foreign move, for purposes of this section, the moving expenses described in subsection (b)(1)(A) include the reasonable expenses—

(A)  of moving household goods and personal effects to and from storage, and

(B)  of storing such goods and effects for part or all of the period during which the new place of work continues to be the taxpayer’s principal place of work.

(2)  Foreign move.—For purposes of this subsection, the term “foreign move” means the commencement of work by the taxpayer at a new principal place of work located outside the United States.

(3)  United states defined.—For purposes of this subsection and subsection (i), the term “United States” includes the possessions of the United States.

(i)  Allowance of Deductions in Case of Retirees or Decedents Who Were Working Abroad.—

(1)  In general.—In the case of any qualified retiree moving expenses or qualified survivor moving expenses—

(A)  this section (other than subsection (h)) shall be applied with respect to such expenses as if they were incurred in connection with the commencement of work by the taxpayer as an employee at a new principal place of work located within the United States, and

(B)  the limitations of subsection (c)(2) shall not apply.

(2)  Qualified retiree moving expenses.—For purposes of paragraph (1), the term “qualified retiree moving expenses” means any moving expenses—

(A)  which are incurred by an individual whose former principal place of work and former residence were outside the United States, and

(B)  which are incurred for a move to a new residence in the United States in connection with the bona fide retirement of the individual.

(3)  Qualified survivor moving expenses.—For purposes of paragraph (1), the term “qualified survivor moving expenses” means moving expenses—

(A)  which are paid or incurred by the spouse or any dependent of any decedent who (as of the time of his death) had a principal place of work outside the United States, and

(B)  which are incurred for a move which begins within 6 months after the death of such decedent and which is to a residence in the United States from a former residence outside the United States which (as of the time of the decedent’s death) was the residence of such decedent and the individual paying or incurring the expense.

(j)  Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.

*    *    *    *    *    *    *

SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT. ETC., EXPENSES

*    *    *    *    *    *    *

(n)  Only 50 Percent of Meal and Entertainment Expenses Allowed as Deduction.—

(1)  In general.—The amount allowable as a deduction under this chapter for—

(A)  any expense for food or beverages, and

(B)  any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity,

shall not exceed 50 percent of the amount of such expense or item which would (but for this paragraph) be allowable as a deduction under this chapter.

(2)  Exceptions.—Paragraph (1) shall not apply to any expense if—

(A)  such expense is described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e),

(B)  in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason of subsection (e) thereof (relating to de minimis fringes),

(C)  such expense is covered by a package involving a ticket described in subsection (l)(1)(B),

(D)  in the case of an employer who pays or reimburses moving expenses of an employee, such expenses are includible in the income of the employee under section 82, or

(E)  such expense is for food or beverages—

(i)  required by any Federal law to be provided to crew members of a commercial vessel,

(ii)  provided to crew members of a commercial vessel—

(I)  which is operating on the Great Lakes, the Saint Lawrence Seaway, or any inland waterway of the United States, and

(II)  which is of a kind which would be required by Federal law to provide food and beverages to crew members if it were operated at sea,

(iii)  provided on an oil or gas platform or drilling rig if the platform or rig is located offshore, or

(iv)  provided on an oil or gas platform or drilling rig, or at a support camp which is in proximity and integral to such platform or rig, if the platform or rig is located in the United States north of 54 degrees north latitude.

In the case of the employee, the exception of subparagraph (A) shall not apply to expenses described in subparagraph (D). Clauses (i) and (ii) of subparagraph (E) shall not apply to vessels primarily engaged in providing luxury water transportation (determined under the principles of subsection (m)).

*    *    *    *    *    *    *

SEC. 401.  QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.

(a)  Requirements For Qualification.—A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section—

(1)  if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) (relating to deduction for contributions to profit-sharing and stock bonus plans), or by a charitable remainder trust pursuant to a qualified gratuitous transfer (as defined in section 664(g)(1)), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;

(2)  if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries (but this paragraph shall not be construed, in the case of a multiemployer plan, to prohibit the return of a contribution within 6 months after the plan administrator determines that the contribution was made by a mistake of fact or law (other than a mistake relating to whether the plan is described in section 401(a) or the trust which is part of such plan is exempt from taxation under section 501(a), or the return of any withdrawal liability payment determined to be an overpayment within 6 months of such determination). [85];

(3)  if the plan of which such trust is a part satisfies the requirements of section 410 (relating to minimum participation standards); and

(4)  if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C).

(5)  Special rules relating to nondiscrimination requirements.—

(A)  Salaried or clerical employees.—A classification shall not be considered discriminatory within the meaning of paragraph (4) or section 410(b)(2)(A)(i) merely because it is limited to salaried or clerical employees.

(B)  Contributions and benefits may bear uniform relationship to compensation.—A plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, or on behalf of, the employees under the plan bear a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees.

(C)  Certain disparity permitted.—A plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the contributions or benefits of, or on behalf of, the employees under the plan favor highly compensated employees (as defined in section 414(q)) in the manner permitted under subsection (l).

(D)  Integrated defined benefit plan.—

(i)  In general.—A defined benefit plan shall not be considered discriminatory within the meaning of paragraph (4) merely because the plan provides that the employer-derived accrued retirement benefit for any participant under the plan may not exceed the excess (if any) of—

(I)  the participant’s final pay with the employer, over

(II)  the employer-derived retirement benefit created under Federal law attributable to service by the participant with the employer.

For purposes of this clause, the employer-derived retirement benefit created under Federal law shall be treated as accruing ratably over 35 years.

(ii)  Final pay.—For purposes of this subparagraph, the participant’s final pay is the compensation (as defined in section 414(q)(4)) paid to the participant by the employer for any year—

(I)  which ends during the 5-year period ending with the year in which the participant separated from service for the employer, and

(II)  for which the participant’s total compensation from the employer was highest.

(E)  2 or more plans treated as single plan.—For purposes of determining whether 2 or more plans of an employer satisfy the requirements of paragraph (4) when considered as a single plan—

(i)  Contributions.—If the amount of contributions on behalf of the employees allowed as a deduction under section 404 for the taxable year with respect to such plans, taken together, bears a uniform relationship to the compensation (within the meaning of section 414(s)) of such employees, the plans shall not be considered discriminatory merely because the rights of employees to, or derived from, the employer contributions under the separate plans do not become nonforfeitable at the same rate.

(ii)  Benefits.—If the employees’ rights to benefits under the separate plans do not become nonforfeitable at the same rate, but the levels of benefits provided by the separate plans satisfy the requirements of regulations prescribed by the Secretary to take account of the differences in such rates, the plans shall not be considered discriminatory merely because of the difference in such rates.

(F)  Social security retirement age.—For purposes of testing for discrimination under paragraph (4)—

(i)  the social security retirement age (as defined in section 415(b)(8)) shall be treated as a uniform retirement age, and

(ii)  subsidized early retirement benefits and joint and survivor annuities shall not be treated as being unavailable to employees on the same terms merely because such benefits or annuities are based in whole or in part on an employee’s social security retirement age (as so defined).

(G)  Governmental plans.—Paragraphs (3) and (4) shall not apply to a governmental plan (within the meaning of section 414(d)).

(6)  A plan shall be considered as meeting the requirements of paragraph (3) during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements.

(7)  A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part satisfies the requirements of section 411 (relating to minimum vesting standards).

(8)  A trust forming part of a defined benefit plan shall not constitute a qualified trust under this section unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan.

(9)  Required distributions.—

(A)  In general.—A trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee—

(i)  will be distributed to such employee not later than the required beginning date, or

(ii)  will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).

(B)  Required distribution where employee dies before entire interest is distributed.—

(i)  Where distributions have begun under subparagraph (A)(ii).—A trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee—

(I)  the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), and

(II)  the employee dies before his entire interest has been distributed to him,

the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph (A)(ii) as of the date of his death.

(ii)  5-year rule for other cases.—A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee.

(iii)  Exception to 5-year rule for certain amounts payable over life of beneficiary.—If—

(I)  any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary,

(II)  A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee.

(III)  such distributions begin not later than 1 year after the date of the employee’s death or such later date as the Secretary may by regulations prescribe, for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.

for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.

(iv)  Special rule for surviving spouse of employee.—If the designated beneficiary referred to in clause (iii)(I) is the surviving spouse of the employee—

(I)  the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the date on which the employee would have attained age 70 1/2, and

(II)  if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be applied as if the surviving spouse were the employee.

(C)  Required beginning date.—For purposes of this paragraph,—

(i)  In general.—The term “required beginning date” means April 1 of the calendar year following the later of

(I)  the calendar year in which the employee attains age 701/2, or

(II)  the calendar year in which the employee retires.

(ii)  Exception.—Subclause (II) of clause (i) shall not apply

(I)  except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 701/2, or

(II)  for purposes of section 408(a)(6) or (b)(3).

(iii)  Actuarial adjustment.—In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year in which the employee attains age 701/2, the employee’s accrued benefit shall be actuarially increased to take into account the period after age 701/2 in which the employee was not receiving any benefits under the plan.

(iv)  Exception for governmental and church plans.—Clauses (ii) and (iii) shall not apply in the case of a governmental plan or church plan. For purposes of this clause, the term “church plan” means a plan maintained by a church for church employees, and the term “church” means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).

(D)  Life expectancy.—For purposes of this paragraph, the life expectancy of an employee and the employee’s spouse (other than in the case of a life annuity) may be redetermined but not more frequently than annually.

(E)  Designated beneficiary.—For purposes of this paragraph, the term “designated beneficiary” means any individual designated as a beneficiary by the employee.

(F)  Treatment of payments to children.—Under regulations prescribed by the Secretary, for purposes of this paragraph, any amount paid to a child shall be treated as if it had been paid to the surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations).

(G)  Treatment of incidental death benefit distributions.—For purposes of this title, any distribution required under the incidental death benefit requirements of this subsection shall be treated as a distribution required under this paragraph.

(H)  Temporary waiver of minimum required distribution.—

(i)  In general.—The requirements of this paragraph shall not apply for calendar year 2009 to—

(I)  a defined contribution plan which is described in this subsection or in section 403(a) or 403(b),

(II)  a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A), or

(III)  an individual retirement plan.

(ii)  Special rules regarding waiver period.—For purposes of this paragraph—

(I)  the required beginning date with respect to any individual shall be determined without regard to this subparagraph for purposes of applying this paragraph for calendar years after 2009, and

(II)  if clause (ii) of subparagraph (B) applies, the 5-year period described in such clause shall be determined without regard to calendar year 2009.

(10)  Other requirements.—

(A)  Plans benefiting owner-employees.—In the case of any plan which provides contributions or benefits for employees some or all of whom are owner-employees (as defined in subsection (c)(3)), a trust forming part of such plan shall constitute a qualified trust under this section only if the requirements of subsection (d) are also met.

(B)  Top-heavy plans.—

(i)  In general.—In the case of any top-heavy plan, a trust forming part of such plan shall constitute a qualified trust under this section only if the requirements of section 416 are met.

(ii)  Plans which may become top-heavy.—Except to the extent provided in regulations, a trust forming part of a plan (whether or not a top-heavy plan) shall constitute a qualified trust under this section only if such plan contains provisions—

(I)  which will take effect if such plan becomes a top-heavy plan, and

(II)  which meet the requirements of section 416.

(iii)  Exemption for governmental plans.—This subparagraph shall not apply to any governmental plan.

(11)  Requirement of joint and survivor annuity and preretirement survivor annuity.—

(A)  In general.—In the case of any plan to which this paragraph applies, except as provided in section 417, a trust forming part of such plan shall not constitute a qualified trust under this section unless—

(i)  in the case of a vested participant who does not die before the annuity starting date, the accrued benefit payable to such participant is provided in the form of a qualified joint and survivor annuity, and

(ii)  in the case of a vested participant who dies before the annuity starting date and who has a surviving spouse, a qualified preretirement survivor annuity is provided to the surviving spouse of such participant.

(B)  Plans to which paragraph applies.—This paragraph shall apply to—

(i)  any defined benefit plan,

(ii)  any defined contribution plan which is subject to the funding standards of section 412, and

(iii)  any participant under any other defined contribution plan unless—

(I)  such plan provides that the participant’s nonforfeitable accrued benefit (reduced by any security interest held by the plan by reason of a loan outstanding to such participant) is payable in full, on the death of the participant, to the participant’s surviving spouse (or, if there is no surviving spouse or the surviving spouse consents in the manner required under section 417(a)(2), to a designated beneficiary),

(II)  such participant does not elect a payment of benefits in the form of a life annuity, and

(III)  with respect to such participant, such plan is not a direct or indirect transferee (in a transfer after December 31, 1984) of a plan which is described in clause (i) or (ii) or to which this clause applied with respect to the participant.

Clause (iii)(III) shall apply only with respect to the transferred assets (and income therefrom) if the plan separately accounts for such assets and any income therefrom.

(C)  Exception for certain esop benefits.—

(i)  In general.—In the case of—

(I)  a tax credit employee stock ownership plan (as defined in section 409(a)), or

(II)  an employee stock ownership plan (as defined in section 4975(e)(7)),

subparagraph (A) shall not apply to that portion of the employee’s accrued benefit to which the requirements of section 409(h) apply.

(ii)  Nonforfeitable benefit must be paid in full, etc.—In the case of any participant, clause (i) shall apply only if the requirements of subclauses (I), (II), and (III) of subparagraph (B)(iii) are met with respect to such participant.

(D)  Special rule where participant and spouse married less than 1 year.—A plan shall not be treated as failing to meet the requirements of subparagraphs (B)(iii) or (C) merely because the plan provides that benefits will not be payable to the surviving spouse of the participant unless the participant and such spouse had been married throughout the 1-year period ending on the earlier of the participant’s annuity starting date or the date of the participant’s death.

(E)  Exception for plans described in section 404(c).—This paragraph shall not apply to a plan which the Secretary has determined is a plan described in section 404(c) (or a continuation thereof) in which participation is substantially limited to individuals who, before January 1, 1976, ceased employment covered by the plan.

(F)  Cross reference.—For—

(i)  provisions under which participants may elect to waive the requirements of this paragraph, and

(ii)  other definitions and special rules for purposes of this paragraph,

see section 417.

(12)  A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan after September 2, 1974, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated). The preceding sentence does not apply to any multiemployer plan with respect to any transaction to the extent that participants either before or after the transaction are covered under a multiemployer plan to which title IV of the Employee Retirement Income Security Act of 1974 applies.

(13)  Assignment and alienation.—

(A)  In general.—A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. For purposes of the preceding sentence, there shall not be taken into account any voluntary and revocable assignment of not to exceed 10 percent of any benefit payment made by any participant who is receiving benefits under the plan unless the assignment or alienation is made for purposes of defraying plan administration costs. For purposes of this paragraph a loan made to a participant or beneficiary shall not be treated as an assignment or alienation if such loan is secured by the participant’s accrued nonforfeitable benefit and is exempt from the tax imposed by section 4975 (relating to tax on prohibited transactions) by reason of section 4975(d)(1). This paragraph shall take effect on January 1, 1976 and shall not apply to assignments which were irrevocable on September 2, 1974.

(B)  Special rules for domestic relations orders.—Subparagraph (A) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that subparagraph (A) shall not apply if the order is determined to be a qualified domestic relations order.

(C)  Special rule for certain judgments and settlements.—Subparagraph (A) shall not apply to any offset of a participant’s benefits provided under a plan against an amount that the participant is ordered or required to pay to the plan if—

(i)  the order or requirement to pay arises—

(I)  under a judgment of conviction for a crime involving such plan,

(II)  under a civil judgment (including a consent order or decree) entered by a court in an action brought in connection with a violation (or alleged violation) of pat 4 of subtitle B of title I of the Employee Retirement Income Security Act of 1974, or

(III)  pursuant to a settlement agreement between the Secretary of Labor and the participant, or a settlement agreement between the Pension Benefit Guaranty Corporation and the participant, in connection with a violation (or alleged violation) of part 4 of such subtitle by a fiduciary or any other person,

(ii)  the judgment, order, decree, or settlement agreement expressly provides for the offset of all or part of the amount ordered or required to be paid to the plan against the participant’s benefits provided under the plan, and

(iii)  in a case in which the survivor annuity requirements of section 401(a)(11) apply with respect to distributions from the plan to the participant, if the participant has a spouse at the time at which the offset is to be made—

(I)  either such spouse has consented in writing to such offset and such consent is witnessed by a notary public or representative of the plan (or it is established to the satisfaction of a plan representative that such consent may not be obtained by reason of circumstances described in section 417(a)(2)(B)), or an election to waive the right of the spouse to either a qualified joint and survivor annuity or a qualified preretirement survivor annuity is in effect in accordance with the requirements of section 417(a),

(II)  such spouse is ordered or required in such judgment, order, decree, or settlement to pay an amount to the plan in connection with a violation of part 4 of such subtitle, or

(III)  in such judgment, order, decree, or settlement, such spouse retains the right to receive the survivor annuity under a qualified joint and survivor annuity provided pursuant to section 401(a)(11)(A)(i) and under a qualified preretirement survivor annuity provided pursuant to section 401(a)(11)(A)(ii), determined in accordance with subparagraph (D).

A plan shall not be treated as failing to meet the requirements of this subsection, subsection (k), section 403(b), or section 409(d) solely by reason of an offset described in this subparagraph.

(D)  Survivor annuity.—

(i)  In general.—The survivor annuity described in subparagraph (C)(iii)(III) shall be determined as if—

(I)  the participant terminated employment on the date of the offset,

(II)  there was no offset,

(III)  the plan permitted commencement of benefits only on or after normal retirement age,

(IV)  the plan provided only the minimum-required qualified joint and survivor annuity, and

(V)  the amount of the qualified preretirement survivor annuity under the plan is equal to the amount of the survivor annuity payable under the minimum-required qualified joint and survivor annuity.

(ii)  Definition.—For purposes of this subparagraph, the term “minimum-required qualified joint and survivor annuity” means the qualified joint and survivor annuity which is the actuarial equivalent of the participant’s accrued benefit (within the meaning of section 411(a)(7)) and under which the survivor annuity is 50 percent of the amount of the annuity which is payable during the joint lives of the participant and the spouse.

(14)  A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, unless the participant otherwise elects, the payment of benefits under the plan to the participant will begin not later than the 60th day after the latest of the close of the plan year in which —

(A)  the date on which the participant attains the earlier of age 65 or the normal retirement age specified under the plan,

(B)  occurs the 10th anniversary of the year in which the participant commenced participation in the plan, or

(C)  the participant terminates his service with the employer.

In the case of a plan which provides for the payment of an early retirement benefit, a trust forming a part of such plan shall not constitute a qualified trust under this section unless a participant who satisfied the service requirements for such early retirement benefit, but separated from the service (with any nonforfeitable right to an accrued benefit) before satisfying the age requirement for such early retirement benefit, is entitled upon satisfaction of such age requirement to receive a benefit not less than the benefit to which he would be entitled at the normal retirement age, actuarially, reduced under regulations prescribed by the Secretary.

(15)  a trust shall not constitute a qualified trust under this section unless under the plan of which such trust is a part—

(A)  in the case of a participant or beneficiary who is receiving benefits under such plan, or

(B)  in the case of a participant who is separated from the service and who has nonforfeitable rights to benefits,

such benefits are not decreased by reason of any increase in the benefit levels payable under title II of the Social Security Act or any increase in the wage base under such title II, if such increase takes place after September 2, 1974, or (if later) the earlier of the date of first receipt of such benefits or the date of such separation, as the case may be.

(16)  A trust shall not constitute a qualified trust under this section if the plan of which such trust is a part provides for benefits or contributions which exceed the limitations of section 415.

(17)  Compensation limit.—

(A)  In general.—In general—A trust shall not constitute a qualified trust under this section unless, under the plan of which such trust is a part, the annual compensation of each employee taken into account under the plan for any year does not exceed $200,000.

(B)  Cost-of-living adjustment.—The Secretary shall adjust annually the $200,000 amount in subparagraph (A) for increases in the cost-of-living at the same time and in the same manner as adjustments under section 415(d); except that the base period shall be the calendar quarter beginning July 1, 2001, and any increase which is not a multiple of $5,000 shall be rounded to the next lowest multiple of $5,000.

(18)  [Repealed.[86]]

(19)  A trust shall not constitute a qualified trust under this section if under the plan of which such trust is a part any part of a participant’s accrued benefit derived from employer contributions (whether or not otherwise nonforfeitable), is forfeitable solely because of withdrawal by such participant of any amount attributable to the benefit derived from contributions made by such participant. The preceding sentence shall not apply to the accrued benefit of any participant unless, at the time of such withdrawal, such participant has a nonforfeitable right to at least 50 percent of such accrued benefit (as determined under section 411). The first sentence of this paragraph shall not apply to the extent that an accrued benefit is permitted to be forfeited in accordance with section 411(a)(3)(D)(iii) (relating to proportional forfeitures of benefit accrued before September 2, 1974, in the event of withdrawal of certain mandatory contributions).

(20)  A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section merely because the pension plan of which such trust is a part makes 1 or more distributions within 1 taxable year to a distributee on account of a termination of the plan of which the trust is a part, or in the case of a profit-sharing or stock bonus plan, a complete discontinuance of contributions under such plan. This paragraph shall not apply to a defined benefit plan unless the employer maintaining such plan files a notice with the Pension Benefit Guaranty Corporation (at the time and in the manner prescribed by the Pension Benefit Guaranty Corporation) notifying the Corporation of such payment or distribution and the Corporation has approved such payment or distribution or, within 90 days after the date on which such notice was filed, has failed to disapprove such payment or distribution. For purposes of this paragraph, rules similar to the rules of section 402(a)(6)(B) (as in effect before its repeal by section 521 of the Unemployment Compensation Amendments of 1992) shall apply.

(21)  [Repealed.[87]]

(22)  If a defined contribution plan (other than a profit-sharing plan)—

(A)  If a defined contribution plan (other than a profit-sharing plan)

(B)  after acquiring securities of the employer, more than 10 percent of the total assets of the plan are securities of the employer,

any trust forming part of such plan shall not constitute a qualified trust under this section unless the plan meets the requirements of subsection (e) of section 409. The requirements of subsection (e) of section 409 shall not apply to any employees of an employer who are participants in any defined contribution plan established and maintained by such employer if the stock of such employer is not readily tradable on an established market and the trade or business of such employer consists of publishing on a regular basis a newspaper for general circulation. For purposes of the preceding sentence, subsections (b), (c), (m), and (o) of section 414 shall not apply except for determining whether stock of the employer is not readily tradable on an established market.

(23)  A stock bonus plan shall not be treated as meeting the requirements of this section unless such plan meets the requirements of subsections (h) and (o) of section 409, except that in applying section 409(h) for purposes of this paragraph, the term “employer securities” shall include any securities of the employer held by the plan.

(24)  Any group trust which otherwise meets the requirements of this section shall not be treated as not meeting such requirements on account of the participation or inclusion in such trust of the moneys of any plan or governmental unit described in section 818(a)(6).

(25)  requirement that actuarial assumptions be specified.—A defined benefit plan shall not be treated as providing definitely determinable benefits unless, whenever the amount of any benefit is to be determined on the basis of actuarial assumptions, such assumptions are specified in the plan in a way which precludes employer discretion.

(26)  Additional participation requirements.—

(A)  In general.—In the case of a trust which is a part of a defined benefit plan, such trust shall not constitute a qualified trust under this subsection unless on each day of the plan year such trust benefits at least the lesser of—

(i)  50 employees of the employer, or

(ii)  the greater of—

(I)  40 percent or more of all employees of the employer.

(II)  2 employees (or if there is only 1 employee, such employee.

(B)  Treatment of excludable employees.—

(i)  In general.—A plan may exclude from consideration under this paragraph employees described in paragraphs (3) and (4)(A) of section 410(b).

(ii)  Separate application for certain excludable employees.—If employees described in section 410(b)(4)(B) are covered under a plan which meets the requirements of subparagraph (A) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets such requirements if—

(I)  the benefits for such employees are provided under the same plan as benefits for other employees,

(II)  the benefits provided to such employees are not greater than comparable benefits provided to other employees under the plan, and

(III)  no highly compensated employee (within the meaning of section 414(q)) is included in the group of such employees for more than 1 year.

(C)  Special rule for collective bargaining units.—Except to the extent provided in regulations, a plan covering only employees described in section 410(b)(3)(A) may exclude from consideration any employees who are not included in the unit or units in which the covered employees are included.

(D)  Paragraph not to apply to multiemployer plans.—Except to the extent provided in regulations, this paragraph shall not apply to employees in a multiemployer plan (within the meaning of section 414(f)) who are covered by collective bargaining agreements.

(E)  Special rule for certain dispositions or acquisitions.—Rules similar to the rules of section 410(b)(6)(C) shall apply for purposes of this paragraph.

(F)  Separate lines of business.—Separate lines of business—At the election of the employer and with the consent of the Secretary, this paragraph may be applied separately with respect to each separate line of business of the employer. For purposes of this paragraph, the term “separate line of business” has the meaning given such term by section 414(r) (without regard to paragraph (2)(A) or (7) thereof).

(G)  Exception for plans.—This paragraph shall not apply to a governmental plan (within the meaning of section 414(d)).

(H)  Regulations.—The Secretary may by regulation provide that any separate benefit structure, any separate trust, or any other separate arrangement is to be treated as a separate plan for purposes of applying this paragraph.

(27)  Determinations as to profit-sharing plans.—

(A)  Contributions need not be based on profits.—The determination of whether the plan under which any contributions are made is a profit-sharing plan shall be made without regard to current or accumulated profits of the employer and without regard to whether the employer is a tax-exempt organization.

(B)  Plan must designate type.—In the case of a plan which is intended to be a money purchase pension plan or a profit- sharing plan, a trust forming part of such plan shall not constitute a qualified trust under this subsection unless the plan designates such intent at such time and in such manner as the Secretary may prescribe.

(28)  Additional requirements relating to employee stock ownership plans.—

(A)  In general.—In the case of a trust which is part of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a plan which meets the requirements of section 409(a), such trust shall not constitute a qualified trust under this section unless such plan meets the requirements of subparagraphs (B) and (C).

(B)  Diversification of investments.—

(i)  In general.—A plan meets the requirements of this subparagraph if each qualified participant in the plan may elect within 90 days after the close of each plan year in the qualified election period to direct the plan as to the investment of at least 25 percent of the participant’s account in the plan (to the extent such portion exceeds the amount to which a prior election under this subparagraph applies). In the case of the election year in which the participant can make his last election, the preceding sentence shall be applied by substituting “50 percent” for “25 percent”.

(ii)  Method of meeting requirements.—A plan shall be treated as meeting the requirements of clause (i) if—

(I)  the portion of the participant’s account covered by the election under clause (i) is distributed within 90 days after the period during which the election may be made, or

(II)  the plan offers at least 3 investment options (not inconsistent with regulations prescribed by the Secretary) to each participant making an election under clause (i) and within 90 days after the period during which the election may be made, the plan invests the portion of the participant’s account covered by the election in accordance with such election.

(iii)  Qualified participant.—For purposes of this subparagraph, the term “qualified participant” means any employee who has completed at least 10 years of participation under the plan and has attained age 55.

(iv)  Qualified election period.—For purposes of this subparagraph, the term “qualified election period” means the 6-plan-year period beginning with the later of—

(I)  the 1st plan year in which the individual first became a qualified participant, or

(II)  the 1st plan year beginning after December 31, 1986.

For purposes of the preceding sentence, an employer may elect to treat an individual first becoming a qualified participant in the 1st plan year beginning in 1987 as having become a participant in the 1st plan year beginning in 1988.

(v)  Exception.—This subparagraph shall not apply to an applicable defined contribution plan (as defined in paragraph (35)(E).

(C)  Use of independent appraiser.—A plan meets the requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For purposes of the preceding sentence, the term “independent appraiser” means any appraiser meeting requirements similar to the requirements of the regulations prescribed under section 170(a)(1).

(29)  Benefit limitations.—In the case of a defined benefit plan (other than a multiemployer plan) to which the requirements of section 412 apply, the trust of which the plan is a part shall not constitute a qualified trust under this subsection unless the plan meets the requirements of section 436.

(30)  Limitations on elective deferrals.—In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year.

(31)  Direct transfer of eligible rollover distributions.—

(A)  In general.—A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution—

(i)  elects to have such distribution paid directly to an eligible retirement plan, and

(ii)  specifies the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe),

such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified.

(B)  Certain mandatory distributions.—

(i)  In general.—In case of a trust which is part of an eligible plan, such trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if—

(I)  a distribution described in clause (ii) in excess of $1,000 is made, and

(II)  the distributee does not make an election under subparagraph (A) and does not elect to receive the distribution directly,

the plan administrator shall make such transfer to an individual retirement plan of a designated trustee or issuer and shall notify the distributee in writing (either separately or as part of the notice under section 402(f)) that the distribution may be transferred to another individual retirement plan.

(ii)  Eligible plan.—For purposes of clause (i), the term “eligible plan” means a plan which provides that any nonforfeitable accrued benefit for which the present value (as determined under section 411(a)(11)) does not exceed $5,000 shall be immediately distributed to the participant.

(C)  Limitation.—Subparagraphs (A) and (B) shall apply only to the extent that the eligible rollover distribution would be includible in gross income if not transferred as provided in subparagraph (A) (determined without regard to sections 402(c), 403(a)(4), 403(b)(8), and 457(e)(16)). The preceding sentence shall not apply to such distribution if the plan to which such distribution is transferred—

(i)  is a qualified trust which is part of a plan which is a defined contribution plan and agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or

(ii)  is an eligible retirement plan described in clause (i) or (ii) of section 402(c)(8)(B).

(D)  Eligible rollover distribution.—For purposes of this paragraph, the term “eligible rollover distribution” has the meaning given such term by section 402(f)(2)(A).

(E)  Eligible retirement plan.—For purposes of this paragraph, the term “eligible retirement plan” has the meaning given such term by section 402(c)(8)(B), except that a qualified trust shall be considered an eligible retirement plan only if it is a defined contribution plan, the terms of which permit the acceptance of rollover distributions.

(32)  Treatment of failure to make certain payments if plan has liquidity shortfall.—

(A)  In general.—A trust forming part of a pension plan to which section 430(j)(4) applies shall not be treated as failing to constitute a qualified trust under this section merely because such plan ceases to make any payment described in subparagraph (B) during any period that such plan has a liquidity shortfall (as defined in section 430(j)(4)).

(B)  Payments described.—A payment is described in this subparagraph if such payment is—

(i)  any payment, in excess of the monthly amount paid under a single life annuity (plus any social security supplements described in the last sentence of section 411(a)(9)), to a participant or beneficiary whose annuity starting date (as defined in section 417(f)(2)) occurs during the period referred to in subparagraph (A),

(ii)  any payment for the purchase of an irrevocable commitment from an insurer to pay benefits, and

(iii)  any other payment specified by the Secretary by regulations.

(C)  Period of shortfall.—For purposes of this paragraph, a plan has a liquidity shortfall during the period that there is an underpayment of an installment under section 430(j)(3) by reason of section 430(j)(4)(A) thereof.

(33)  Prohibition on benefit increases while sponsor is in bankruptcy.—

(A)  In general.—A trust which is part of a plan to which this paragraph applies shall not constitute a qualified trust under this section if an amendment to such plan is adopted while the employer is a debtor in a case under title 11, United States Code, or similar Federal or State law, if such amendment increases liabilities of the plan by reason of—

(i)  any increase in benefits,

(ii)  any change in the accrual of benefits, or

(iii)  any change in the rate at which benefits become nonforfeitable under the plan,

with respect to employees of the debtor, and such amendment is effective prior to the effective date of such employer’s plan of reorganization.

(B)  Exceptions.—This paragraph shall not apply to any plan amendment if—

(i)  the plan, were such amendment to take effect, would have a funding target attainment percentage liability percentage (as defined in section 430(d)(2)) of 100 percent or more,

(ii)  the Secretary determines that such amendment is reasonable and provides for only de minimis increases in the liabilities of the plan with respect to employees of the debtor,

(iii)  such amendment only repeals an amendment described in section 412(d)(2), or

(iv)  such amendment is required as a condition of qualification under this part.

(C)  Plans to which this paragraph applies.—This paragraph shall apply only to plans (other than multiemployer plans) covered under section 4021 of the Employee Retirement Income Security Act of 1974.

(D)  Employer.—For purposes of this paragraph, the term “employer” means the employer referred to in section 412(b)(1), without regard to section 412(b)(2).

(34)  Benefits of missing participants on plan termination.—In the case of a plan covered by title IV of the Employee Retirement Income Security Act of 1974, a trust forming part of such plan shall not be treated as failing to constitute a qualified trust under this section merely because the pension plan of which such trust is a part, upon its termination, transfers benefits of missing participants to the Pension Benefit Guaranty Corporation in accordance with section 4050 of such Act.

(35)  Diversification requirements for certain defined contribution plans.—

(A)  In general.—A trust which is part of an applicable defined contribution plan shall not be treated as a qualified trust unless the plan meets the diversification requirements of subparagraphs (B), (C), and (D).

(B)  Employee contributions and elective deferrals invested in employer securities.—In the case of the portion of an applicable individual’s account attributable to employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if the applicable individual may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D).

(C)  Employer contributions invested in employer securities.—In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if each applicable individual who—

(i)  is a participant who has completed at least 3 years of service, or

(ii)  is a beneficiary of a participant described in clause (i) or of a deceased participant,

may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D).

(D)  Investment options.—

(i)  In general.—The requirements of this subparagraph are met if the plan offers not less than 3 investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities pursuant to this paragraph, each of which is diversified and has materially different risk and return characteristics.

(ii)  Treatment of certain restrictions and conditions.—

(I)  Time for making investment choices.—A plan shall not be treated as failing to meet the requirements of this subparagraph merely because the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly.

(II)  Certain restrictions and conditions not allowed.—Except as provided in regulations, a plan shall not meet the requirements of this subparagraph if the plan imposes restrictions or conditions with respect to the investment of employer securities which are not imposed on the investment of other assets of the plan. This subclause shall not apply to any restrictions or conditions imposed by reason of the application of securities laws.

(E)  Applicable defined contribution plan.—For purposes of this paragraph—

(i)  In general.—The term “applicable defined contribution plan” means any defined contribution plan which holds any publicly traded employer securities.

(ii)  Exception for certain esop.—Such term does not include an employee stock ownership plan if—

(I)  there are no contributions to such plan (or earnings thereunder) which are held within such plan and are subject to subsection (k) or (m), and

(II)  such plan is a separate plan for purposes of section 414(l) with respect to any other defined benefit plan or defined contribution plan maintained by the same employer or employers.

(iii)  Exception for one participant plans.—Such term does not include a one-participant retirement plan.

(iv)  One-participant retirement plan.—For purposes of clause (iii), the term “one-participant retirement plan” means a retirement plan that on the first day of the plan year—

(I)  covered only one individual (or the individual and the individual’s spouse) and the individual (or the individual and the individual’s spouse) owned 100 percent of the plan sponsor (whether or not incorporated), or

(II)  covered only one or more partners (or partners and their spouses) in the plan sponsor.

(F)  Certain plans treated as holding publicly traded employer securities.—

(i)  In general.—Except as provided in regulations or in clause (ii), a plan holding employer securities which are not publicly traded employer securities shall be treated as holding publicly traded employer securities if any employer corporation, or any member of a controlled group of corporations which includes such employer corporation, has issued a class of stock which is a publicly traded employer security.

(ii)  Exception for certain controlled groups with publicly traded securities.—Clause (i) shall not apply to a plan if—

(I)  no employer corporation, or parent corporation of an employer corporation, has issued any publicly traded employer security, and

(II)  no employer corporation, or parent corporation of an employer corporation, has issued any special class of stock which grants particular rights to, or bears particular risks for, the holder or issuer with respect to any corporation described in clause (i) which has issued any publicly traded employer security.

(iii)  Definitions.—For purposes of this subparagraph, the term—

(I)  “controlled group of corporations” has the meaning given such term by section 1563(a), except that “50 percent” shall be substituted for “80 percent” each place it appears,

(II)  “employer corporation” means a corporation which is an employer maintaining the plan, and

(III)  “parent corporation” has the meaning given such term by section 424(e).

(G)  Other definitions.—For purposes of this paragraph—

(i)  Applicable individual.—The term “applicable individual” means—

(I)  any participant in the plan,

and

(II)  any beneficiary who has an account under the plan with respect to which the beneficiary is entitled to exercise the rights of a participant.

(ii)  Elective deferral.—The term “elective deferral” means an employer contribution described in section 402(g)(3)(A).

(iii)  Employer security.—The term “employer security” has the meaning given such term by section 407(d)(1) of the Employee Retirement Income Security Act of 1974.

(iv)  Employee stock ownership plan.—The term “employee stock ownership plan” has the meaning given such term by section 4975(e)(7).

(v)  Publicly traded employer securities.—The term “publicly traded employer securities” means employer securities which are readily tradable on an established securities market.

(vi)  year of service.—The term “year of service” has the meaning given such term by section 411(a)(5).

(H)  Transition rule for securities attributable to employer contributions.—

(i)  Rules phased in over 3 years.—

(I)  In general.—In the case of the portion of an account to which subparagraph (C) applies and which consists of employer securities acquired in a plan year beginning before January 1, 2007, subparagraph (C) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to each class of securities.

(II)  Exception for certain participants aged 55 or over.—Subclause (I) shall not apply to an applicable individual who is a participant who has attained age 55 and completed at least 3 years of service before the first plan year beginning after December 31, 2005.

(ii)  Applicable percentage.—For purposes of clause (i), the applicable percentage shall be determined as follows:

Plan years beginning to which subparagraph (C) applies— The applicable percentage is—
1st 33
2nd 66
3rd 100.

(36)  Distributions during working retirement.—A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.

(37)  Death benefits under userra-qualified active military service.—A trust shall not constitute a qualified trust unless the plan provides that, in the case of a participant who dies while performing qualified military service (as defined in section 414(u)), the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan had the participant resumed and then terminated employment on account of death.

Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply only in the case of a plan to which section 411 (relating to minimum vesting standards) applies without regard to subsection (e)(2) of such section.

Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply only in the case of a plan to which section 411 (relating to minimum vesting standards) applies without regard to subsection (e)(2) of such section.

(b)  Certain Retroactive Changes In Plan.—A stock bonus, pension, profit-sharing, or annuity plan shall be considered as satisfying the requirements of subsection (a) for the period beginning with the date on which it was put into effect, or for the period beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements, and ending with the time prescribed by law for filing the return of the employer for his taxable year in which such plan or amendment was adopted (including extensions thereof) or such later time as the Secretary may designate, if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made effective for all purposes for the whole of such period.

(c)  Definitions And Rules Relating To Self-Employed Individuals And Owner-Employees.—For purposes of this section—

(1)  Self-employed individual treated as employee.—

(A)  In general.—The term “employee” includes, for any taxable year, an individual who is a self-employed individual for such taxable year.

(B)  Self-employed individual.—The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year—

(i)  an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and

(ii)  an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year.

(2)  Earned income.—

(A)  In general.—The term “earned income” means the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined—

(i)  only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor,

(ii)  without regard to paragraphs (4) and (5) of section 1402(c),

(iii)  in the case of any individual who is treated as an employee under sections 3121(d)(3)(A), (C), or (D), without regard to paragraph (2) of section 1402(c),

(iv)  without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items,

(v)  with regard to the deductions allowed by section 404 to the taxpayer, and

(vi)  with regard to the deduction allowed to the taxpayer by section 164(f).

For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as having been in effect for all taxable years ending before such date. For purposes of this part only (other than sections 419 and 419A), this subparagraph shall be applied as if the term “trade or business” for purposes of section 1402 included service described in section 1402(c)(6).

(B)  [Repealed.[88]]

(C)  Income from disposition of certain property.—For purposes of this section, the term “earned income” includes gains (other than any gain which is treated under any provision of this chapter as gain from the sale or exchange of a capital asset) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than good will) by an individual whose personal efforts created such property.

(3)  Owner-employee.—The term “owner-employee” means an employee who—

(A)  owns the entire interest in an unincorporated trade or business, or

(B)  in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

To the extent provided in regulations prescribed by the Secretary, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence.

(4)  Employer.—An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1).

(5)  Contributions on behalf of owner-employees.—The term “contribution on behalf of an owner-employee” includes, except as the context otherwise requires, a contribution under a plan—

(A)  by the employer for an owner-employee, and

(B)  by an owner-employee as an employee.

(6)  Special rule for certain fishermen.—For purposes of this subsection, the term “self-employed individual” includes an individual described in section 3121(b)(20) (relating to certain fishermen).

(d)  Contribution Limit On Owner-Employees.—A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the plan provides that contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established.

(e)  [Repealed.[89]]

(f)  Certain Custodial Accounts And Contracts.—For purposes of this title, a custodial account, an annuity contract, or a contract (other than a life, health or accident, property, casualty, or liability insurance contract) issued by an insurance company qualified to do business in a State shall be treated as a qualified trust under this section if—

(1)  the custodial account or contract would, except for the fact that it is not a trust, constitute a qualified trust under this section, and

(2)  in the case of a custodial account the assets thereof 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 hold the assets will be consistent with the requirements of this section.

For purposes of this title, in the case of a custodial account or contract treated as a qualified trust under this section by reason of this subsection, the person holding the assets of such account or holding such contract shall be treated as the trustee thereof.

(g)  Annuity Defined.—For purposes of this section and sections 402, 403, and 404, the term “annuity” includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but does not include any contract or certificate issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described in section 401(a) which is exempt from tax under section 501(a) is the owner of such contract or certificate.

(h)  Medical, Etc., Benefits For Retired Employees And Their Spouses And Dependents.—Under regulations prescribed by the Secretary, and subject to the provisions of section 420, a pension or annuity plan may provide for the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents, but only if—

(1)  such benefits are subordinate to the retirement benefits provided by the plan,

(2)  a separate account is established and maintained for such benefits,

(3)  the employer’s contributions to such separate account are reasonable and ascertainable,

(4)  it is impossible, at any time prior to the satisfaction of all liabilities under the plan to provide such benefits, for any part of the corpus or income of such separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits,

(5)  notwithstanding the provisions of subsection (a)(2), upon the satisfaction of all liabilities under the plan to provide such benefits, any amount remaining in such separate account must, under the terms of the plan, be returned to the employer, and

(6)  in the case of an employee who is a key employee, a separate account is established and maintained for such benefits payable to such employee (and his spouse and dependents) and such benefits (to the extent attributable to plan years beginning after March 31, 1984, for which the employee is a key employee) are only payable to such employee (and his spouse and dependents) from such separate account.

For purposes of paragraph (6), the term “key employee” means any employee, who at any time during the plan year or any preceding plan year during which contributions were made on behalf of such employee, is or was a key employee as defined in section 416(i). In no event shall the requirements of paragraph (1) be treated as met if the aggregate actual contributions for medical benefits, when added to actual contributions for life insurance protection under the plan, exceed 25 percent of the total actual contributions to the plan (other than contributions to fund past service credits) after the date on which the account is established. For purposes of this subsection, the term “dependent” shall include any individual who is a child (as defined in section 152(f)(1)) of a retired employee who as of the end of the calendar year has not attained age 27.

(i)  Certain Union-Negotiated Pension Plans.—In the case of a trust forming part of a pension plan which has been determined by the Secretary to constitute a qualified trust under subsection (a) and to be exempt from taxation under section 501(a) for a period beginning after contributions were first made to or for such trust, if it is shown to the satisfaction of the Secretary that—

(1)  such trust was created pursuant to a collective bargaining agreement between employee representatives and one or more employers,

(2)  any disbursements of contributions, made to or for such trust before the time as of which the Secretary determined that the trust constituted a qualified trust, substantially complied with the terms of the trust, and the plan of which the trust is a part, as subsequently qualified, and

(3)  before the time as of which the Secretary determined that the trust constitutes a qualified trust, the contributions to or for such trust were not used in a manner which would jeopardize the interests of its beneficiaries,

then such trust shall be considered as having constituted a qualified trust under subsection (a) and as having been exempt from taxation under section 501(a) for the period beginning on the date on which contributions were first made to or for such trust and ending on the date such trust first constituted (without regard to this subsection) a qualified trust under subsection (a).

(j)  [Repealed.[90]]

(k)  Cash Or Deferred Arrangements.—

(1)  General rule.—A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred arrangement.

(2)  Qualified cash or deferred arrangement.—A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of subsection (a)—

(A)  under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;

(B)  under which amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election—

(i)  may not be distributable to participants or other beneficiaries earlier than—

(I)  severance from employment, death, or disability,

(II)  an event described in paragraph (10),

(III)  in the case of a profit-sharing or stock bonus plan, the attainment of age 59 1/2,

(IV)  in the case of contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies, upon hardship of the employee, or

(V)  in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii), the date on which the period referred to in subclause (III) of such section begins, and

(ii)  will not be distributable merely by reason of the completion of a stated period of participation or the lapse of a fixed number of years;

(C)  which provides that an employee’s right to his accrued benefit derived from employer contributions made to the trust pursuant to his election is nonforfeitable, and

(D)  which does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof).

(3)  Application of participation and discrimination standards.—

(A)  A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement unless—

(i)  those employees eligible to benefit under the arrangement satisfy the provisions of section 410(b)(1), and

(ii)  the actual deferral percentage for eligible highly compensated employees (as defined in paragraph (5)) for such year bears a relationship to the actual deferral percentage for all other eligible employees for such plan year which meets either of the following tests:

(I)  The actual deferral percentage for the group of eligible highly compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by 1.25.

(II)  The excess of the actual deferral percentage for the group of eligible highly compensated employees over that of all other eligible employees is not more than 2 percentage points, and the actual deferral percentage for the group of eligible highly compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by 2.

If 2 or more plans which include cash or deferred arrangements are considered as 1 plan for purposes of section 401(a)(4) or 410(b), the cash or deferred arrangements included in such plans shall be treated as 1 arrangement for purposes of this subparagraph.

If any highly compensated employee is a participant under 2 or more cash or deferred arrangements of the employer, for purposes of determining the deferral percentage with respect to such employee, all such cash or deferred arrangements shall be treated as 1 cash or deferred arrangement. An arrangement may apply clause (ii) by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary.

(B)  For purposes of subparagraph (A), the actual deferral percentage for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of—

(i)  the amount of employer contributions actually paid over to the trust on behalf of each such employee for such plan year, to

(ii)  the employee’s compensation for such plan year.

(C)  A cash or deferred arrangement shall be treated as meeting the requirements of subsection (a)(4) with respect to contributions if the requirements of subparagraph (A)(ii) are met.

(D)  For purposes of subparagraph (B), the employer contributions on behalf of any employee—

(i)  shall include any employer contributions made pursuant to the employee’s election under paragraph (2), and

(ii)  under such rules as the Secretary may prescribe, may, at the election of the employer, include—

(I)  matching contributions (as defined in 401(m)(4)(A)) which meet the requirements of paragraph (2)(B) and (C), and

(II)  qualified nonelective contributions (within the meaning of section 401(m)(4)(C)).

(E)  For purposes of this paragraph, in the case of the first plan year of any plan (other than a successor plan), the amount taken into account as the actual deferral percentage of nonhighly compensated employees for the preceding plan year shall be—

(i)  3 percent, or

(ii)  if the employer makes an election under this subclause, the actual deferral percentage of nonhighly compensated employees determined for such first plan year.

(F)  Special rule for early participation.—If an employer elects to apply section 410(b)(4)(B) in determining whether a cash or deferred arrangement meets the requirements of subparagraph (A)(i), the employer may, in determining whether the arrangement meets the requirements of subparagraph (A)(ii), exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age and service requirements of section 410(a)(1)(A).

(G)  Governmental plan.—A governmental plan (within the meaning of section 414(d)) shall be treated as meeting the requirements of this paragraph.

(4)  Other requirements.—

(A)  Benefits (other than matching contributions) must not be contingent on election to defer.—A cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election.

(B)  Eligibility of State and local governments and tax-exempt organizations.—

(i)  Tax-exempts eligible.—Except as provided in clause (ii), any organization exempt from tax under this subtitle may include a qualified cash or deferred arrangement as part of a plan maintained by it.

(ii)  Governments ineligible.—A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement if it is part of a plan maintained by a State or local government or political subdivision thereof, or any agency or instrumentality thereof. This clause shall not apply to a rural cooperative plan or to a plan of an employer described in clause (iii).

(iii)  Treatment of Indian tribal governments.—An employer which is an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), an agency or instrumentality of an Indian tribal government or subdivision thereof, or a corporation chartered under Federal, State, or tribal law which is owned in whole or in part by any of the foregoing may include a qualified cash or deferred arrangement as part of a plan maintained by the employer.

(C)  Coordination with other plans.—Except as provided in section 401(m), any employer contribution made pursuant to an employee’s election under a qualified cash or deferred arrangement shall not be taken into account for purposes of determining whether any other plan meets the requirements of section 401(a) or 410(b). This subparagraph shall not apply for purposes of determining whether a plan meets the average benefit requirement of section 410(b)(2)(A)(ii).

(5)  Highly compensated employee.—For purposes of this subsection, the term “highly compensated employee” has the meaning given such term by section 414(q).

(6)  Pre-erisa money purchase plan.—For purposes of this subsection, the term “pre-ERISA money purchase plan” means a pension plan—

(A)  which is a defined contribution plan (as defined in section 414(i)),

(B)  which was in existence on June 27, 1974, and which, on such date, included a salary reduction arrangement, and

(C)  under which neither the employee contributions nor the employer contributions may exceed the levels provided for by the contribution formula in effect under the plan on such date.

(7)  Rural cooperative plan.—For purposes of this subsection—

(A)  In general.—The term “rural cooperative plan” means any pension plan—

(i)  which is a defined contribution plan (as defined in section 414(i)), and

(ii)  which is established and maintained by a rural cooperative.

(B)  Rural cooperative defined.—For purposes of subparagraph (A), the term “rural cooperative” means—

(i)  any organization which—

(I)  is engaged primarily in providing electric service on a mutual or cooperative basis,

(II)  is engaged primarily in providing electric service to the public in its area of service and which is exempt from tax under this subtitle or which is a State or local government (or an agency or instrumentality thereof), other than a municipality (or an agency or instrumentality thereof),

(ii)  any organization described in paragraph (4) or (6) of section 501(c) and at least 80 percent of the members of which are organizations described in clause (i),

(iii)  a cooperative telephone company described in section 501(c)(12), and

(iv)  an organization which

(I)  is a mutual irrigation or ditch company described in section 501(c)(12) (without regard to the 85 percent requirement thereof), or

(II)  is a district organized under the laws of a State as a municipal corporation for the purpose of irrigation, water conservation, or drainage, and

(v)  an organization which is a national association of organizations described in clause (i), (ii),,[91] (iii), or (iv).

(C)  Special rule for certain distributions.—A rural cooperative plan which includes a qualified cash or deferred arrangement shall not be treated as violating the requirements of section 401(a) or of paragraph (2) merely by reason of a hardship distribution or a distribution to a participant after attainment of age 59 1/2. For purposes of this section, the term “hardship distribution” means a distribution described in paragraph (2)(B)(i)(IV) (without regard to the limitation of its application to profit-sharing or stock bonus plans).

(8)  Arrangement not disqualified if excess contributions distributed.—

(A)  In general.—A cash or deferred arrangement shall not be treated as failing to meet the requirements of clause (ii) of paragraph (3)(A) for any plan year if, before the close of the following plan year—

(i)  the amount of the excess contributions for such plan year (and any income allocable to such contributions through the end of such year) is distributed, or

(ii)  to the extent provided in regulations, the employee elects to treat the amount of the excess contributions as an amount distributed to the employee and then contributed by the employee to the plan.

Any distribution of excess contributions (and income) may be made without regard to any other provision of law.

(B)  Excess contributions.—For purposes of subparagraph (A), the term “excess contributions” means, with respect to any plan year, the excess of—

(i)  the aggregate amount of employer contributions actually paid over to the trust on behalf of highly compensated employees for such plan year, over

(ii)  the maximum amount of such contributions permitted under the limitations of clause (ii) of paragraph (3)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of the actual deferral percentages beginning with the highest of such percentages).

(C)  Method of distributing excess contributions.—Any distribution of the excess contributions for any plan year shall be made to highly compensated employees on the basis of the respective portions of the excess contributions attributable to each of such employees.

(D)  Additional tax under section 72(t) not to apply.—No tax shall be imposed under section 72(t) on any amount required to be distributed under this paragraph.

(E)  Treatment of matching contributions forfeited by reason of excess deferral or contribution or erroneous automatic contribution.—For purposes of paragraph (2)(C), a matching contribution (within the meaning of subsection (m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under subparagraph (B), an excess deferral under section 402(g)(2)(A), a permissible withdrawal under section 414(w), or an excess aggregate contribution under section 401(m)(6)(B).

(F)  Cross Reference.—For excise tax on certain excess contributions, see section 4979.

(9)  Compensation.—For purposes of this subsection, the term “compensation” has the meaning given such term by section 414(s).

(10)  Distributions upon termination of plan.—

(A)  In general.—An event described in this subparagraph is the termination of the plan without establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7)).

(B)  Distributions must be lump sum distributions.—

(i)  In general.—A termination shall not be treated as described in subparagraph (A) with respect to any employee unless the employee receives a lump sum distribution by reason of the termination.

(ii)  Lump sum distribution.—For purposes of this subparagraph, the term “lump-sum distribution” has the meaning given such term by section 402(e)(4)(D) (without regard to subclauses (I), (II), (III), and (IV) of clause (i) thereof). Such term includes a distribution of an annuity contract from—

(I)  a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501(a), or

(II)  an annuity plan described in section 403(a).

(11)  Adoption of simple plan to meet nondiscrimination tests.—

(A)  In general.—A cash or deferred arrangement maintained by an eligible employer shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement meets—

(i)  the contribution requirements of subparagraph (B),

(ii)  the exclusive plan requirements of subparagraph (C), and

(iii)  the vesting requirements of section 408(p)(3).

(B)  Contribution requirements.—

(i)  In general.—The requirements of this subparagraph are met if, under the arrangement—

(I)  an employee may elect to have the employer make elective contributions for the year on behalf of the employee to a trust under the plan in an amount which is expressed as a percentage of compensation of the employee but which in no event exceeds the amount in effect under section 408(p)(2)(A)(ii),

(II)  the employer is required to make a matching contribution to the trust for the year in an amount equal to so much of the amount the employee elects under subclause (I) as does not exceed 3 percent of compensation for the year, and

(III)  no other contributions may be made other than contributions described in subclause (I) or (II).

(ii)  Employer may elect 2-percent nonelective contribution.—An employer shall be treated as meeting the requirements of clause (i)(II) for any year if, in lieu of the contributions described in such clause, the employer elects (pursuant to the terms of the arrangement) to make nonelective contributions of 2 percent of compensation for each employee who is eligible to participate in the arrangement and who has at least $5,000 of compensation from the employer for the year. If an employer makes an election under this subparagraph for any year, the employer shall notify employees of such election within a reasonable period of time before the 60th day before the beginning of such year.

(iii)  Administrative requirements.—

(I)  In general.—Rules similar to the rules of subparagraphs (B) and (C) of section 408(p)(5) shall apply for purposes of this subparagraph.

(II)  Notice of election period.—The requirements of this subparagraph shall not be treated as met with respect to any year unless the employer notifies each employee eligible to participate, within a reasonable period of time before the 60th day before the beginning of such year (and, for the first year the employee is so eligible, the 60th day before the first day such employee is so eligible), of the rules similar to the rules of section 408(p)(5)(C) which apply by reason of subclause (I).

(C) Exclusive plan requirement.—The requirements of this subparagraph are met for any year to which this paragraph applies if no contributions were made, or benefits were accrued, for services during such year under any qualified plan of the employer on behalf of any employee eligible to participate in the cash or deferred arrangement, other than contributions described in subparagraph (B).

(k) (11) (C) Exclusive plan requirementThe requirements of this subparagraph are met for any year to which this paragraph applies if no contributions were made, or benefits were accrued, for services during such year under any qualified plan of the employer on behalf of any employee eligible to participate in the cash or deferred arrangement, other than contributions described in subparagraph (B).

(D)  Definitions and special rule.—

(i)  Definitions.—For purposes of this paragraph, any term used in this paragraph which is also used in section 408(p) shall have the meaning given such term by such section.

(ii)  Coordination with top-heavy rules.—A plan meeting the requirements of this paragraph for any year shall not be treated as a top-heavy plan under section 416 for such year if such plan allows only contributions required under this paragraph.

(12)  Alternative methods of meeting requirements.—

(A)  In general.—A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement—

(i)  meets the contribution requirements of subparagraph (B) or (C), and

(ii)  meets the notice requirements of subparagraph (D).

(B)  Matching contributions.—

(i)  In general.—The requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to—

(I)  100 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 3 percent of the employee’s compensation, and

(II)  50 percent of the elective contributions of the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 percent of the employee’s compensation.

(ii)  Rate for highly compensated employees.—The requirements of this subparagraph are not met if, under the arrangement, the rate of matching contribution with respect to any elective contribution of a highly compensated employee at any rate of elective contribution is greater than that with respect to an employee who is not a highly compensated employee.

(iii)  Alternative plan designs.—If the rate of any matching contribution with respect to any rate of elective contribution is not equal to the percentage required under clause (i), an arrangement shall not be treated as failing to meet the requirements of clause (i) if—

(I)  the rate of an employer’s matching contribution does not increase as an employee’s rate of elective contributions increase, and

(II)  the aggregate amount of matching contributions at such rate of elective contribution is at least equal to the aggregate amount of matching contributions which would be made if matching contributions were made on the basis of the percentages described in clause (i).

(C)  Nonelective contributions.—The requirements of this subparagraph are met if, under the arrangement, the employer is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation.

(D)  Notice requirement.—An arrangement meets the requirements of this paragraph if, under the arrangement, each employee eligible to participate is, within a reasonable period before any year, given written notice of the employee’s rights and obligations under the arrangement which—

(i)  is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and

(ii)  is written in a manner calculated to be understood by the average employee eligible to participate.

(E)  Other requirements.—

(i)  Withdrawal and vesting restrictions.—An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) of this paragraph unless the requirements of subparagraphs (B) and (C) of paragraph (2) are met with respect to all employer contributions (including matching contributions) taken into account in determining whether the requirements of subparagraphs (B) and (C) of this paragraph are met.

(ii)  Social security and similar contributions not taken into account.—An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) unless such requirements are met without regard to subsection (l), and, for purposes of subsection (l), employer contributions under subparagraph (B) or (C) shall not be taken into account.

(F)  Other plans.—An arrangement shall be treated as meeting the requirements under subparagraph (A)(i) if any other plan maintained by the employer meets such requirements with respect to employees eligible under the arrangement.

(13)  Alternative method for automatic distribution arrangements to meet nondiscrimination requirements.—

(A)  In general.—A qualified automatic contribution arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii).

(B)  Qualified automatic contribution arrangement.—For purposes of this paragraph, the term “qualified automatic contribution arrangement” means any cash or deferred arrangement which meets the requirements of subparagraphs (C) through (E).

(C)  Automatic deferral.—

(i)  In general.—The requirements of this subparagraph are met if, under the arrangement, each employee eligible to participate in the arrangement is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation.

(ii)  Election out.—The election treated as having been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election—

(I)  to not have such contributions made, or

(II)  to make elective contributions at a level specified in such affirmative election.

(iii)  Qualified percentage.—For purposes of this subparagraph, the term “qualified percentage: means, with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly, does not exceed 10 percent, and is at least—

(I)  3 percent during the period ending on the last day of the first plan year which begins after the date on which the first elective contribution described in clause (i) is made with respect to such employee,

(II)  4 percent during the first plan year following the plan year described in subclause (I),

(III)  5 percent during the second plan year following the plan year described in subclause (I), and

(IV)  6 percent during any subsequent plan year.

(iv)  Automatic deferral for current employees not required.—Clause (i) may be applied without taking into account any employee who—

(I)  was eligible to participate in the arrangement (or a predecessor arrangement) immediately before the date on which such arrangement becomes a qualified automatic contribution arrangement (determined after application of this clause), and

(II)  had an election in effect on such date either to participate in the arrangement or to not participate in the arrangement.

(D)  Matching or nonelective Contributions.—

(i)  In general.—The requirements of this subparagraph are met, if under the arrangement, the employer—

(I)  makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to the sum of 100 percent of the elective contributions of the employee to the extent that such contributions do not exceed 1 percent of compensation plus 50 percent of so much of such compensation as exceeds 1 percent but does not exceed 6 percent of compensation, or

(II)  is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation.

(ii)  Application of rules for matching contributions.—The rules of clauses (ii) and (iii) of paragraph (12)(B) shall apply for purposes of clause (i)(I).

(iii)  Withdrawal and vesting restrictions.—An arrangement shall not be treated as meeting the requirements of clause (i) unless, with respect to employer contributions (including matching contributions) taken into account in determining whether the requirements of clause (i) are met—

(I)  any employee who has completed at least 2 years of service (within the meaning of section 411(a)) has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from such employer contributions, and

(II)  the requirements of subparagraph (B) of paragraph (2) are met with respect to all such employer contributions.

(iv)  Application of certain other rules.— The rules of subparagraphs (E)(ii) and (F) of paragraph (12) shall apply for purposes of subclauses (I) and (II) of clause (i).

(E)  Notice requirements.—

(i)  In general.—The requirements of this subparagraph are met if, within a reasonable period before each plan year, each employee eligible to participate in the arrangement for such year receives written notice of the employee’s rights and obligations under the arrangement which—

(I)  is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and

(II)  is written in a manner calculated to be understood by the average employee to whom the arrangement applies.

(ii)  Timing and content requirements.—A notice shall not be treated as meeting the requirements of clause (i) with respect to an employee unless—

(I)  the notice explains the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made at a different percentage),

(II)  in the case of an arrangement under which the employee may elect among 2 or more investment options, the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee, and

(III)  the employee has a reasonable period of time after receipt of the notice described in subclauses (I) and (II) and before the first elective contribution is made to make either such election.

(l)  Permitted Disparity in Plan Contributions or Benefits.—

(1)  In general.—The requirements of this subsection are met with respect to this plan if—

(A)  in the case of a defined contribution plan, the requirements of paragraph (2) are met, and

(B)  in the case of a defined benefit plan, the requirements of paragraph (3) are met.

(2)  Defined contribution plan.—

(A)  In general.—A defined contribution plan meets the requirements of this paragraph if the excess contribution percentage does not exceed the base contribution percentage by more than the lesser of—

(i)  the base contribution percentage, or

(ii)  the greater of—

(I)  5.7 percentage points, or

(II)  the percentage equal to the portion of the rate of tax under section 3111(a) (in effect as of the beginning of the year) which is attributable to old-age insurance.

(B)  Contribution percentages.—For purposes of this paragraph—

(i)  Excess contribution percentage.—The term “excess contribution percentage” means the percentage of compensation which is contributed by the employer under the plan with respect to that portion of each participant’s compensation in excess of the integration level.

(ii)  Base contribution percentage.—The term “base contribution percentage” means the percentage of compensation contributed by the employer under the plan with respect to that portion of each participant’s compensation not in excess of the integration level.

(3)  Defined benefit plan.—A defined benefit plan meets the requirements of this paragraph if—

(A)  Excess plans.—

(i)  In general.—In the case of a plan other than an offset plan—

(I)  the excess benefit percentage does not exceed the base benefit percentage by more than the maximum excess allowance,

(II)  any optional form of benefit, preretirement benefit, actuarial factor, or other benefit or feature provided with respect to compensation in excess of the integration level is provided with respect to compensation not in excess of such level, and

(III)  benefits are based on average annual compensation.

(ii)  Benefit percentages.—For purposes of this subparagraph, the excess and base benefit percentages shall be computed in the same manner as the excess and base contribution percentages under paragraph (2)(B), except that such determination shall be made on the basis of benefits attributable to employer contributions rather than contributions.

(B)  Offset plans.—In the case of an offset plan, the plan provides that—

(i)  a participant’s accrued benefit attributable to employer contributions (within the meaning of section 411(c)(1)) may not be reduced (by reason of the offset) by more than the maximum offset allowance, and

(ii)  benefits are based on average annual compensation.

(4)  Definitions relating to paragraph (3).—For purposes of paragraph (3)—

(A)  Maximum excess allowance.—The maximum excess allowance is equal to—

(i)  in the case of benefits attributable to any year of service with the employer taken into account under the plan, 3/4 of a percentage point, and

(ii)  in the case of total benefits, 3/4 of a percentage point, multiplied by the participant’s years of service (not in excess of 35) with the employer taken into account under the plan.

In no event shall the maximum excess allowance exceed the base benefit percentage.

(B)  Maximum offset allowance.—The maximum offset allowance is equal to—

(i)  in the case of benefits attributable to any year of service with the employer taken into account under the plan, 3/4 percent of the participant’s final average compensation, and

(ii)  in the case of total benefits, 3/4 percent of the participant’s final average compensation, multiplied by the participant’s years of service (not in excess of 35) with the employer taken into account under the plan.

In no event shall the maximum offset allowance exceed 50 percent of the benefit which would have accrued without regard to the offset reduction.

(C)  Reductions.—

(i)  In general.—The Secretary shall prescribe regulations requiring the reduction of the 3/4 percentage factor under subparagraph (A) or (B)—

(I)  in the case of a plan other than an offset plan which has an integration level in excess of covered compensation, or

(II)  with respect to any participant in an offset plan who has final average compensation in excess of covered compensation.

(ii)  Basis of reductions.—Any reductions under clause (i) shall be based on the percentages of compensation replaced by the employer-derived portions of primary insurance amounts under the Social Security Act for participants with compensation in excess of covered compensation.

(D)  Offset plan.—The term “offset plan” means any plan with respect to which the benefit attributable to employer contributions for each participant is reduced by an amount specified in the plan.

(5)  Other definitions and special rules.—For purposes of this subsection—

(A)  Integration level.—

(i)  In general.—The term “integration level” means the amount of compensation specified under the plan (by dollar amount or formula) at or below which the rate at which contributions or benefits are provided (expressed as a percentage) is less than such rate above such amount.

(ii)  Limitation.—The integration level for any year may not exceed the contribution and benefit base in effect under section 230 of the Social Security Act for such year.

(iii)  Level to apply to all participants.—A plan’s integration level shall apply with respect to all participants in the plan.

(iv)  Multiple integration levels.—Under rules prescribed by the Secretary, a defined benefit plan may specify multiple integration levels.

(B)  Compensation.—The term “compensation” has the meaning given such term by section 414(s).

(C)  Average annual compensation.—The term “average annual compensation” means the participant’s highest average annual compensation for—

(i)  any period of at least 3 consecutive years, or

(ii)  if shorter, the participant’s full period of service.

(D)  Final average compensation.—

(i)  In general.—The term “final average compensation” means the participant’s average annual compensation for—

(I)  the 3-consecutive year period ending with the current year, or

(II)  if shorter, the participant’s full period of service.

(ii)  Limitation.—A participant’s final average compensation shall be determined by not taking into account in any year compensation in excess of the contribution and benefit base in effect under section 230 of the Social Security Act for such year.

(E)  Covered compensation.—

(i)  In general.—The term “covered compensation” means, with respect to an employee, the average of the contribution and benefit bases in effect under section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains the social security retirement age.

(ii)  Computation for any year.—For purposes of clause (i), the determination for any year preceding the year in which the employee attains the social security retirement age shall be made by assuming that there is no increase in the bases described in clause (i) after the determination year and before the employee attains the social security retirement age.

(iii)  Social security retirement age.—For purposes of this subparagraph, the term “social security retirement age” has the meaning given such term by section 415(b)(8).

(F)  Regulations.—The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this subsection, including—

(i)  in the case of a defined benefit plan which provides for unreduced benefits commencing before the social security retirement age (as defined in section 415(b)(8)), rules providing for the reduction of the maximum excess allowance and the maximum offset allowance, and

(ii)  in the case of an employee covered by 2 or more plans of the employer which fail to meet the requirements of subsection (a)(4) (without regard to this subsection), rules preventing the multiple use of the disparity permitted under this subsection with respect to any employee.

For purposes of clause (i), unreduced benefits shall not include benefits for disability (within the meaning of section 223(d) of the Social Security Act).

(6)  Special rule for plan maintained by railroads.—In determining whether a plan which includes employees of a railroad employer who are entitled to benefits under the Railroad Retirement Act of 1974 meets the requirements of this subsection, rules similar to the rules set forth in this subsection shall apply. Such rules shall take into account the employer-derived portion of the employees’ tier 2 railroad retirement benefits and any supplemental annuity under the Railroad Retirement Act of 1974.

(m)  Nondiscrimination Test for Matching Contributions and Employee Contributions.—

(1)  In general.—A defined contribution plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee contribution for any plan year only if the contribution percentage requirement of paragraph (2) of this subsection is met for such plan year.

(2)  Requirements.—

(A)  Contribution percentage requirement.—A plan meets the contribution percentage requirement of this paragraph for any plan year only if the contribution percentage for eligible highly compensated employees does not exceed the greater of—

(i)  125 percent of such percentage for all other eligible employees, or

(ii)  the lesser of 200 percent of such percentage for all other eligible employees, or such percentage for all other eligible employees plus 2 percentage points.

This subparagraph may be applied by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary.

(B)  Multiple plans treated as a single plan.—If two or more plans of an employer to which matching contributions, employee contributions, or elective deferrals are made are treated as one plan for purposes of section 410(b), such plans shall be treated as one plan for purposes of this subsection. If a highly compensated employee participates in two or more plans of an employer to which contributions to which this subsection applies are made, all such contributions shall be aggregated for purposes of this subsection.

(3)  Contribution percentage.—For purposes of paragraph (2), the contribution percentage for a specified group of employees for a plan year shall be the average of the ratios (calculated separately for each employee in such group) of—

(A)  the sum of the matching contributions and employee contributions paid under the plan on behalf of each such employee for such plan year, to

(B)  the employee’s compensation (within the meaning of section 414(s)) for such plan year.

Under regulations, an employer may elect to take into account (in computing the contribution percentage) elective deferrals and qualified nonelective contributions under the plan or any other plan of the employer. If matching contributions are taken into account for purposes of subsection (k)(3)(A)(ii) for any plan year, such contributions shall not be taken into account under subparagraph (A) for such year. Rules similar to the rules of subsection (k)(3)(E) shall apply for purposes of this subsection.

(4)  Definitions.—For purposes of this subsection—

(A)  Matching contribution.—The term “matching contribution” means—

(i)  any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee contribution made by such employee, and

(ii)  any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee’s elective deferral.

(B)  Elective deferral.—The term “elective deferral” means any employer contribution described in section 402(g)(3).

(C)  Qualified nonelective contributions.—The term “qualified nonelective contribution” means any employer contribution (other than a matching contribution) with respect to which—

(i)  the employee may not elect to have the contribution paid to the employee in cash instead of being contributed to the plan, and

(ii)  the requirements of subparagraphs (B) and (C) of subsection (k)(2) are met.

(5)  Employees taken into consideration.—

(A)  In general.—Any employee who is eligible to make an employee contribution (or, if the employer takes elective contributions into account, elective contributions) or to receive a matching contribution under the plan being tested under paragraph (1) shall be considered an eligible employee for purposes of this subsection.

(B)  Certain nonparticipants.—If an employee contribution is required as a condition of participation in the plan, any employee who would be a participant in the plan if such employee made such a contribution shall be treated as an eligible employee on behalf of whom no employer contributions are made.

(C)  Special rule for early participation.—If an employer elects to apply section 410(b)(4)(B) in determining whether a plan meets the requirements of section 410(b), the employer may, in determining whether the plan meets the requirements of paragraph (2), exclude from consideration all eligible employees (other than highly compensated employees) who have not met the minimum age and service requirements of section 410(a)(1)(A).

(6)  Plan not disqualified if excess aggregate contributions distributed before end of following plan year.—

(A)  In general.—A plan shall not be treated as failing to meet the requirements of paragraph (1) for any plan year if, before the close of the following plan year, the amount of the excess aggregate contributions for such plan year (and any income allocable to such contributions through the end of such year) is distributed (or, if forfeitable, is forfeited). Such contributions (and such income) may be distributed without regard to any other provision of law.

(B)  Excess aggregate contributions.—For purposes of subparagraph (A), the term “excess aggregate contributions” means, with respect to any plan year, the excess of—

(i)  the aggregate amount of the matching contributions and employee contributions (and any qualified nonelective contribution or elective contribution taken into account in computing the contribution percentage) actually made on behalf of highly compensated employees for such plan year, over

(ii)  the maximum amount of such contributions permitted under the limitations of paragraph (2)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of their contribution percentages beginning with the highest of such percentages).

(C)  Method of distributing excess aggregate contributions.—Any distribution of the excess aggregate contributions for any plan year shall be made to highly compensated employees on the basis of the respective portions of such amounts attributable to each of such employees. Forfeitures of excess aggregate contributions may not be allocated to participants whose contributions are reduced under this paragraph.

(D)  Coordination with subsection (k) and 402(g).—The determination of the amount of excess aggregate contributions with respect to a plan shall be made after—

(i)  first determining the excess deferrals (within the meaning of section 402(g)), and

(ii)  then determining the excess contributions under subsection (k).

(7)  Treatment of distributions.—

(A)  Additional tax of section 72 (t) not applicable.—No tax shall be imposed under section 72(t) on any amount required to be distributed under paragraph (6).

(B)  Exclusion of employee contributions.—Any distribution attributable to employee contributions shall not be included in gross income except to the extent attributable to income on such contributions.

(8)  Highly compensated employee.—For purposes of this subsection, the term “highly compensated employee” has the meaning given to such term by section 414(q).

(9)  Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (k), including regulations permitting appropriate aggregation of plans and contributions.

(10)  Alternative method of satisfying tests.—A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan—

(A)  meets the contribution requirements of subparagraph (B) of subsection (k)(11),

(B)  meets the exclusive plan requirements of subsection (k)(11)(C), and

(C)  meets the vesting requirements of section 408(p)(3).

(11)  Additional alternative method of satisfying tests.—

(A)  In general.—A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan—

(i)  meets the contribution requirements of subparagraph (B) or (C) of subsection (k)(12),

(ii)  meets the notice requirements of subsection (k)(12)(D), and

(iii)  meets the requirements of subparagraph (B).

(B)  Limitation on matching contributions.—The requirements of this subparagraph are met if—

(ii)  the rate of an employer’s matching contribution does not increase as the rate of an employee’s contributions or elective deferrals increase, and

(iii)  the matching contribution with respect to any highly compensated employee at any rate of an employee contribution or rate of elective deferral is not greater than that with respect to an employee who is not a highly compensated employee.

(12)  Alternative method for automatic contribution arrangements.—A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan—

(A)  is a qualified automatic contribution arrangement (as defined in subsection (k)(13)), and

(B)  meets the requirements of paragraph (11)(B).

(13)  Cross reference.—For excise tax on certain excess contributions, see section 4979.

(n)  Coordination With Qualified Domestic Relations Orders.—The Secretary shall prescribe such rules or regulations as may be necessary to coordinate the requirements of subsection (a)(13)(B) and section 414(p) (and the regulations issued by the Secretary of Labor there under) with the other provisions of this chapter.

(o)  Cross Reference.—For exemption from tax of a trust qualified under this section, see section 501(a).

*    *    *    *    *    *    *

SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES’ TRUST.

(a)  Taxability of Beneficiary of Employees’ Trust.—Except as otherwise provided in this section, any amount actually distributed to any distributee by any employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under section 72 (relating to annuities).

(b)  Taxability of Beneficiary of Nonexempt Trust.—

(1)  Contributions.—Contributions to an employees’ trust made by an employer during a taxable year of the employer which ends with or within a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employee’s interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section.

(2)  Distributions.—The amount actually distributed or made available to any distributee by any trust described in paragraph (1) shall be taxable to the distributee, in the taxable year in which so distributed or made available, under section 72 (relating to annuities), except that distributions of income of such trust before the annuity starting date (as defined in section 72(c)(4)) shall be included in the gross income of the employee without regard to section 72(e)(5) (relating to amounts not received as annuities).

(3)  Grantors.—A beneficiary of any trust described in paragraph (1) shall not be considered the owner of any portion of such trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners).

*    *    *    *    *    *    *

(c)  Other Rules Applicable to Exempt Trusts.—

*    *    *    *    *    *    *

(2)  Cash or deferred arrangements.—For purposes of this title, contributions made by an employer on behalf of an employee to a trust which is a part of a qualified cash or deferred arrangement (as defined in section 401(k)(2)) or which is part of a salary agreement under section 403(b) shall not be treated as distributed or made available to the employee nor as contributions made to the trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash.

*    *    *    *    *    *    *

(e)  Other Rules Applicable to Exempt Trusts.—

*    *    *    *    *    *    *

(3)  Cash or deferred arrangements.—For purposes of this title, contributions made by an employer on behalf of an employee to a trust which is a part of a qualified cash or deferred arrangement (as defined in section 401(k)(2)) or which is part of a salary agreement under section 403(b) shall not be treated as distributed or made available to the employee nor as contributions made to the trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash.

*    *    *    *    *    *    *

(h)  Special Rules for Simplified Employee Pensions.—For purposes of this chapter—

(1)  In general.—Except as provided in paragraph (2), contributions made by an employer on behalf of an employee to an individual retirement plan pursuant to a simplified employee pension (as defined in section 408(k))—

*    *    *    *    *    *    *

(B)  if such contributions are made pursuant to an arrangement under section 408(k)(6) under which an employee may elect to have the employer make contributions to the simplified employee pension on behalf of the employee, shall not be treated as distributed or made available or as contributions made by the employee merely because the simplified employee pension includes provisions for such election.

*    *    *    *    *    *    *

SEC. 403.  TAXATION OF EMPLOYEE ANNUITIES.

(a)  Taxability of Beneficiary under a Qualified Annuity Plan.—

(1)  Distributee taxable under section 72.—If an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of section 404(a)(2) (whether or not the employer deducts the amounts paid for the contract under such section), the amount actually distributed to any distributee under the contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities).

(2)  Special rule for health and long-term care insurance.—To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.

(3)  Self-employed individuals.—For purposes of this subsection, the term “employee” includes an individual who is an employee within the meaning of section 401(c)(1), and the employer of such individual is the person treated as his employer under section 401(c)(4).

(4)  Rollover amounts.—

(A)  General rule.—If—

(i)  any portion of the balance to the credit of an employee in an employee annuity described in paragraph (1) is paid to him in an eligible rollover distribution (within the meaning of section 402(c)(4)),

(ii)  the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan, and

(iii)  in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,

then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.

(B)  Certain rules made applicable.—The rules of paragraphs (2) through (7) and (11) and (9) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A).

(5)  Direct trustee-to-trustee transfer.—Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of such transfer.

(b)  Taxability of Beneficiary Under Annuity Purchased by Section 501(c)(3) Organization or Public School.—

(1)  General Rule.—If—

(A)  an annuity contract is purchased—

(i)  for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a), or

(ii)  for an employee (other than an employee described in clause (i)), who performs services for an educational organization described in section 170(b)(1)(A)(ii), by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing,

(iii)  for the minister described in section 414(e)(5)(A) by the minister or by an employer,

(B)  such annuity contract is not subject to subsection (a),

(C)  the employee’s rights under the contract are nonforfeitable, except for failure to pay future premiums,

(D)  except in the case of a contract purchased by a church, such contract is purchased under a plan which meets the nondiscrimination requirements of paragraph (12), and

(E)  in the case of a contract purchased under a plan which provides a salary reduction agreement, the plan meets the requirements of section 401(a)(30),

then contributions and other additions by such employer for such annuity contract shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such contributions and additions (when expressed as an annual addition (within the meaning of section 415(c)(2))) does not exceed the applicable limit under section 415. The amount actually distributed to any distributee under such contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities). For purposes of applying the rules of this subsection to contributions and other additions by an employer for a taxable year, amounts transferred to a contract described in this paragraph by reason of a rollover contribution described in paragraph (8) of this subsection or section 408(d)(3)(A)(ii) shall not be considered contributed by such employer.

(2)  Special rule for health and long-term care insurance.—To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.

(3)  Includible compensation.—For purposes of this subsection, the term “includible compensation” means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies or any amount received by a former employee after the fifth taxable year following the taxable year in which such employee was terminated. Such term includes—

(A)  any elective deferral (as defined in section 402(g)(3)), and

(B)  any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457.

(4)  Years of service.—In determining the number of years of service for purposes of this subsection, there shall be included—

(A)  one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and

(B)  a fraction of a year (determined in accordance with regulations prescribed by the Secretary) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization.

In no case shall the number of years of service be less than one.

(5)  Application to more than one annuity contract.—If for any taxable year of the employee this subsection applies to 2 or more annuity contracts purchased by the employer, such contracts shall be treated as one contract.

(6)  [Stricken.[92]]

(7)  Custodial accounts for regulated investment company stock.—

(A)  Amounts paid treated as contributions.—For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract for his employee if—

(i)  the amounts are to be invested in regulated investment company stock to be held in that custodial account, and

(ii)  under the custodial account no such amounts may be paid or made available to any distributee (unless such amount is a distribution to which section 72(t)(2)(G) applies) before the employee dies, attains age 59 1/2, has a severance from employment, becomes disabled (within the meaning of section 72(m)(7)), or in the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)), encounters financial hardship.

(B)  Account treated as plan.—For purposes of this title, a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as an organization described in section 401(a) solely for purposes of subchapter F and subtitle F with respect to amounts received by it (and income from investment thereof).

(C)  Regulated investment company.—For purposes of this paragraph, the term “regulated investment company” means a domestic corporation which is a regulated investment company within the meaning of section 851(a).

(8)  Rollover amounts.—

(A)  General rule.—If—

(i)  any portion of the balance to the credit of an employee in an annuity contract described in paragraph (1) is paid to him in an eligible rollover distribution (within the meaning of section 402(c)(4),

(ii)  the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and

(iii)  in the case of a distribution of property other than money, the property so transferred consists of the property distributed,

then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.

(B)  Certain rules made applicable.—The rules of paragraphs (2) through (7), (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A), except that section 402(f) shall be applied to the payor in lieu of the plan administrator.

(9)  Retirement income accounts provided by churches, etc.—

(A)  Amounts paid treated as contributions.—For purposes of this title—

(i)  a retirement income account shall be treated as an annuity contract described in this subsection, and

(ii)  amounts paid by an employer described in paragraph (1)(A) to a retirement income account shall be treated as amounts contributed by the employer for an annuity contract for the employee on whose behalf such account is maintained.

(B)  Retirement income account.—For purposes of this paragraph, the term “retirement income account” means a defined contribution program established or maintained by a church, or a convention or association of churches, including an organization described in section 414(e)(3)(A), to provide benefits under section 403(b) for an employee described in paragraph (1) or his beneficiaries.

(10)  Distribution requirements.—Under regulations prescribed by the Secretary, this subsection shall not apply to any annuity contract (or to any custodial account described in paragraph (7) or retirement income account described in paragraph (9)) unless requirements similar to the requirements of sections 401(a)(9) and 401(a)(31) are met (and requirements similar to the incidental death benefit requirements of section 401(a) are met) with respect to such annuity contract (or custodial account or retirement income account). Any amount transferred in an direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of the transfer.

(11)  Requirement that distributions not begin before age 59 1/2, has a severance from employment, death, or disability.—This subsection shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement (within the meaning of section 402(g)(3)(C)) may be paid only—

(A)  when the employee attains age 59 1/2, has a severance from employment, dies, or becomes disabled (within the meaning of section 72(m)(7)),

(B)  in the case of hardship, or

(C)  for distributions to which section 72(t)(2)(G) applies.

Such contract may not provide for the distribution of any income attributable to such contributions in the case of hardship.

(12)  Nondiscrimination requirements.—

(A)  In general.—For purposes of paragraph (1)(D), a plan meets the nondiscrimination requirements of this paragraph if—

(i)  with respect to contributions not made pursuant to a salary reduction agreement, such plan meets the requirements of paragraphs (4), (5), (17), and (26) of section 401(a), section 401(m), and section 410(b) in the same manner as if such plan were described in section 401(a), and

(ii)  all employees of the organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement.

For purposes of clause (i), a contribution shall be treated as not made pursuant to a salary reduction agreement if under the agreement it is made pursuant to a 1-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement involving a one-time irrevocable election specified in regulations. For purposes of clause (ii), there may be excluded any employee who is a participant in an eligible deferred compensation plan (within the meaning of section 457) or a qualified cash or deferred arrangement of the organization or another annuity contract described in this subsection. Any nonresident alien described in section 410(b)(3)(C) may also be excluded. Subject to the conditions applicable under section 410(b)(4), there may be excluded for purposes of this subparagraph employees who are students performing services described in section 3121(b)(10) and employees who normally work less than 20 hours per week.

(B)  Church.—For purposes of paragraph (1)(D), the term “church” has the meaning given to such term by section 3121(w)(3)(A). Such term shall include any qualified church-controlled organization (as defined in section 3121(w)(3)(B)).

(C)  State and local governmental plans.—For purposes of paragraph (1)(D), the requirements of subparagraph (A)(i) (other than those relating to section 401(a)(17)) shall not apply to a governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof).

(13)  Trustee-to-trustee transfers to purchase permissive service credit.—No amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is—

(A)  for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or

(B)  a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.

(14)  Death benefits under userra-qualified active military service.—This subsection shall not apply to an annuity contract unless such contract meets the requirements of section 401(a)(37).

(c)  Taxability of Beneficiary under Nonqualified Annuities or Under Annuities Purchased by Exempt Organizations.—Premiums paid by an employer for an annuity contract which is not subject to subsection (a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of such contract shall be substituted for the fair market value of the property for purposes of applying such section. The preceding sentence shall not apply to that portion of the premiums paid which is excluded from gross income under subsection (b). In the case of any portion of any contract which is attributable to premiums to which this subsection applies, the amount actually paid or made available under such contract to any beneficiary which is attributable to such premiums shall be taxable to the beneficiary (in the year in which so paid or made available) under section 72 (relating to annuities).

*    *    *    *    *    *    *

SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.

*    *    *    *    *    *    *

(k)  Simplified Employee Pension Defined.—

(1)  In general.—For purposes of this title, the term “simplified employee pension” means an individual retirement account or individual retirement annuity—

(A)  with respect to which the requirements of paragraphs (2), (3), (4), and (5) of this subsection are met, and

(B)  if such account or annuity is part of a top-heavy plan (as defined in section 416), with respect to which the requirements of section 416(c)(2) are met.

*    *    *    *    *    *    *

(6)  Employee may elect salary reduction arrangement.—

(A)  Arrangements which qualify.—

(i)  In general.—A simplified employee pension shall not fail to meet the requirements of this subsection for a year merely because, under the terms of the pension, an employee may elect to have the employer make payments—

(I)  as elective employer contributions to the simplified employee pension on behalf of the employee, or

(II)  to the employee directly in cash.

(ii)  50 percent of eligible employees must elect.—Clause (i) shall not apply to a simplified employee pension unless an election described in clause (i)(I) is made or is in effect with respect to not less than 50 percent of the employees of the employer eligible to participate.

(iii)  Requirements relating to deferral percentage.—Clause (i) shall not apply to a simplified employee pension for any year unless the deferral percentage for such year of each highly compensated employee eligible to participate is not more than the product of—

(I)  the average of the deferral percentages for such year of all employees (other than highly compensated employees) eligible to participate, multiplied by

(II)  1.25.

(iv)  Limitations on elective deferrals.—Clause (i) shall not apply to a simplified employee pension unless the requirements of section 401(a)(30) are met.

(B)  Exception where more than 25 employees.—This paragraph shall not apply with respect to any year in the case of a simplified employee pension maintained by an employer with more than 25 employees who were eligible to participate (or would have been required to be eligible to participate if a pension was maintained) at any time during the preceding year.

(C)  Distributions of excess contributions.—

(i)  In general.—Rules similar to the rules of section 401(k)(8) shall apply to any excess contribution under this paragraph. Any excess contribution under a simplified employee pension shall be treated as an excess contribution for purposes of section 4979.

(ii)  Excess contribution.—For purposes of clause (i), the term “excess contribution” means, with respect to a highly compensated employee, the excess of elective employer contributions under this paragraph over the maximum amount of such contributions allowable under subparagraph (A)(iii).

(D)  Deferral percentage.—For purposes of this paragraph, the deferral percentage for an employee for a year shall be the ratio of—

(i)  the amount of elective employer contributions actually paid over to the simplified employee pension on behalf of the employee for the year, to

(ii)  the employee’s compensation (not in excess of the first $200,000) for the year.

(E)  Exception for state and local and tax-exempt pensions.—This paragraph shall not apply to a simplified employee pension maintained by—

(i)  a State or local government or political subdivision thereof, or any agency or instrumentality thereof, or

(ii)  an organization exempt from tax under this title.

(F)  Exception where pension does not meet requirements necessary to insure distribution of excess contributions.—This paragraph shall not apply with respect to any year for which the simplified employee pension does not meet such requirements as the Secretary may prescribe as are necessary to insure that excess contributions are distributed in accordance with subparagraph (C), including—

(i)  reporting requirements, and

(ii)  requirements which, notwithstanding paragraph (4), provide that contributions (and any income allocable thereto) may not be withdrawn from a simplified employee pension until a determination has been made that the requirements of subparagraph (A)(iii) have been met with respect to such contributions.

(G)  Highly compensated employee.—For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).

(H)  Termination.—This paragraph shall not apply to years beginning after December 31, 1996. The preceding sentence shall not apply to a simplified employee pension of an employee pension of an employer if the terms of simplified employee pensions of such employer, as in effect on December 31, 1996, provide that an employee may make the election described in subparagraph (A).

*    *    *    *    *    *    *

SEC. 414. DEFINITIONS AND SPECIAL RULES.

*    *    *    *    *    *    *

(h)  *  *  *

(2)  Designation by units of government.—For purposes of paragraph (1), in the case of any plan established by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, where the contributions of employing units are designated as employee contributions but where any employing unit picks up the contributions, the contributions so picked up shall be treated as employer contributions.

*    *    *    *    *    *    *

SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

(a)  Year of Inclusion in Gross Income.—In the case of a participant in an eligible deferred compensation plan, any amount of compensation deferred under the plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary.

*    *    *    *    *    *    *

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.

(a)  Exemption from Taxation.—An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.

(b)  Tax on Unrelated Business Income and Certain other Activities.—An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II, III, and VI of this subchapter, but (notwithstanding parts II, III, and VI of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.

(c)  List of Exempt Organizations.—The following organizations are referred to in subsection (a):

(1)  Any corporation organized under Act of Congress which is an instrumentality of the United States but only if such corporation—

(A)  is exempt from Federal income taxes—

(i)  under such Act as amended and supplemented before July 18, 1984, or

(ii)  under this title without regard to any provision of law which is not contained in this title and which is not contained in a revenue Act, or

(B)  is described in subsection (l).

(2)  Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under this section. Rules similar to the rules of subparagraph (G) of paragraph (25) shall apply for purposes of this paragraph.

(3)  Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

(4)  Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

(5)  Labor, agricultural, or horticultural organizations.

(6)  Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(7)  Clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.

(8)  Fraternal beneficiary societies, orders, or associations—

(A)  operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and

(B)  providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents.

(9)  Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual.

(10)  Domestic fraternal societies, orders, or associations, operating under the lodge system—

(A)  the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and

(B)  which do not provide for the payment of life, sick, accident, or other benefits.

(11)  Teachers’ retirement fund associations of a purely local character, if—

(A)  no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any private shareholder or individual, and

(B)  the income consists solely of amounts received from public taxation, amounts received from assessments on the teaching salaries of members, and income in respect of investments.

(12)(A)  Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.

(B)  In the case of a mutual or cooperative telephone company, subparagraph (A) shall be applied without taking into account any income received or accrued—

(i)  from a nonmember telephone company for the performance of communication services which involve members of the mutual or cooperative telephone company,

(ii)  from qualified pole rentals,

(iii)  from the sale of display listings in a directory furnished to the members of the mutual or cooperative telephone company, or

(iv)  from the prepayment of a loan under section 306A, 306B, or 311 of the Rural Electrification Act of 1936 (as in effect on January 1, 1987).

(C)  In the case of a mutual or cooperative electric company, subparagraph (A) shall be applied without taking into account any income received or accrued—

(i)  from qualified pole rentals, or

(ii)  from any provision or sale of electric energy transmission services or ancillary services if such services are provided on a nondiscriminatory open access basis under an open access transmission tariff approved or accepted by FERC or under an independent transmission provider agreement approved or accepted by FERC (other than income received or accrued directly or indirectly from a member),

(iii)  from the provision or sale of electric energy distribution services or ancillary services if such services are provided on a nondiscriminatory open access basis to distribute electric energy not owned by the mutual or electric cooperative company—

(I)  to end-users who are served by distribution facilities not owned by such company or any of its members (other than income received or accrued directly or indirectly from a member), or

(II)  generated by a generation facility not owned or leased by such company or any of its members and which is directly connected to distribution facilities owned by such company or any of its members (other than income received or accrued directly or indirectly from a member),

(iv)  from any nuclear decommissioning transaction, or

(v)  from any asset exchange or conversion transaction.

(D)  For purposes of this paragraph, the term “qualified pole rental” means any rental of a pole (or other structure used to support wires) if such pole (or other structure)—

(i)  is used by the telephone or electric company to support one or more wires which are used by such company in providing telephone or electric services to its members, and

(ii)  is used pursuant to the rental to support one or more wires (in addition to the wires described in clause (i)) for use in connection with the transmission by wire of electricity or of telephone or other communications.

For purposes of the preceding sentence, the term “rental” includes any sale of the right to use the pole (or other structure).

(E)  For purposes of subparagraph (C)(ii), the term “FERC” means the Federal Energy Regulatory Commission and references to such term shall be treated as including the Public Utility Commission of Texas with respect to any ERCOT utility (as defined in section 212(k)(2)(B) of the Federal Power Act (16 U.S.C. 824k(k)(2)(B))).

(F)  For purposes of subparagraph (C)(iv), the term “nuclear decommissioning transaction” means—

(i)  any transfer into a trust, fund, or instrument established to pay any nuclear decommissioning costs if the transfer is in connection with the transfer of the mutual or cooperative electric company’s interest in a nuclear power plant or nuclear power plant unit,

(ii)  any distribution from any trust, fund, or instrument established to pay any nuclear decommissioning costs, or

(iii)  any earnings from any trust, fund, or instrument established to pay any nuclear decommissioning costs.

(G)  For purposes of subparagraph (C)(v), the term “asset exchange or conversion transaction” means any voluntary exchange or involuntary conversion of any property related to generating, transmitting, distributing, or selling electric energy by a mutual or cooperative electric company, the gain from which qualifies for deferred recognition under section 1031 or 1033, but only if the replacement property acquired by such company pursuant to such section constitutes property which is used, or to be used, for—

(i)  generating, transmitting, distributing, or selling electric energy, or

(ii)  producing, transmitting, distributing, or selling natural gas.

(H)(i)  In the case of a mutual or cooperative electric company described in this paragraph or an organization described in section 1381(a)(2)(C), income received or accrued from a load loss transaction shall be treated as an amount collected from members for the sole purpose of meeting losses and expenses.

(ii)  For purposes of clause (i), the term “load loss transaction” means any wholesale or retail sale of electric energy (other than to members) to the extent that the aggregate sales during the recovery period do not exceed the load loss mitigation sales limit for such period.

(iii)  For purposes of clause (ii), the load loss mitigation sales limit for the recovery period is the sum of the annual load losses for each year of such period.

(iv)  For purposes of clause (iii), a mutual or cooperative electric company’s annual load loss for each year of the recovery period is the amount (if any) by which—

(I)  the megawatt hours of electric energy sold during such year to members of such electric company are less than

(II)  the megawatt hours of electric energy sold during the base year to such members.

(v)  For purposes of clause (iv)(II), the term “base year” means—

(I)  the calendar year preceding the start-up year, or

(II)  at the election of the mutual or cooperative electric company, the second or third calendar years preceding the start-up year.

(vi)  For purposes of this subparagraph, the recovery period is the 7-year period beginning with the start-up year.

(vii)  For purposes of this subparagraph, the start-up year is the first year that the mutual or cooperative electric company offers nondiscriminatory open access or the calendar year which includes the date of the enactment of this subparagraph, if later, at the election of such company.

(viii)  A company shall not fail to be treated as a mutual or cooperative electric company for purposes of this paragraph or as a corporation operating on a cooperative basis for purposes of section 1381(a)(2)(C) by reason of the treatment under clause (i).

(ix)  For purposes of subparagraph (A), in the case of a mutual or cooperative electric company, income received, or accrued, indirectly from a member shall be treated as an amount collected from members for the sole purpose of meeting losses and expenses.

(x)  This subparagraph shall not apply to taxable years beginning after December 31, 2006.

(13)  Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(14)(A)  Credit unions without capital stock organized and operated for mutual purposes and without profit.

(B)  Corporations or associations without capital stock organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for, and insurance of shares or deposits in—

(i)  domestic building and loan associations,

(ii)  cooperative banks without capital stock organized and operated for mutual purposes and without profit,

(iii)  mutual savings banks not having capital stock represented by shares, or

(iv)  mutual savings banks described in section 591(b)[93]

(C)  Corporations or associations organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for associations or banks described in clause (i), (ii), or (iii) of subparagraph (B); but only if 85 percent or more of the income is attributable to providing such reserve funds and to investments. This subparagraph shall not apply to any corporation or association entitled to exemption under subparagraph (B).

(15)(A)  Insurance companies (as defined in section 816(a)) other than life (including interinsurers and reciprocal underwriters) if—

(i)(I)  the gross receipts for the taxable year do not exceed $600,000, and

(II)  more than 50 percent of such gross receipts consist of premiums, or

(ii)  in the case of a mutual insurance company—

(I)  the gross receipts of which for the taxable year do not exceed $150,000, and

(II)  more than 35 percent of such gross receipts consist of premiums.

Clause (ii) shall not apply to a company if any employee of the company, or a member of the employee’s family (as defined in section 2032A(e)(2)), is an employee of another company exempt from taxation by reason of this paragraph (or would be so exempt but for this sentence).

(B)  For purposes of subparagraph (A), in determining whether any company or association is described in subparagraph (A), such company or association shall be treated as receiving during the taxable year amounts described in subparagraph (A) which are received during such year by all other companies or associations which are members of the same controlled group as the insurance company or association for which the determination is being made.

(C)  For purposes of subparagraph (B), the term “controlled group” has the meaning given such term by section 831(b)(2)(B)(ii), except that in applying section 831(b)(2)(B)(ii) for purposes of this subparagraph, subparagraphs (B) and (C) of section 1563(b)(2) shall be disregarded.

(16)  Corporations organized by an association subject to part IV of this subchapter or members thereof, for the purpose of financing the ordinary crop operations of such members or other producers, and operated in conjunction with such association. Exemption shall not be denied any such corporation because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the corporation, on dissolution or otherwise, beyond the fixed dividends) is owned by such association, or members thereof; nor shall exemption be denied any such corporation because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose.

(17)(A)  A trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits, if—

(i)  under the plan, it is impossible, at any time prior to the satisfaction of all liabilities, with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of supplemental unemployment compensation benefits,

(ii)  such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)), and

(iii)  such benefits do not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)). A plan shall not be considered discriminatory within the meaning of this clause merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan.

(B)  In determining whether a plan meets the requirements of subparagraph (A), any benefits provided under any other plan shall not be taken into consideration, except that a plan shall not be considered discriminatory—

(i)  merely because the benefits under the plan which are first determined in a nondiscriminatory manner within the meaning of subparagraph (A) are then reduced by any sick, accident, or unemployment compensation benefits received under State or Federal law (or reduced by a portion of such benefits if determined in a nondiscriminatory manner), or

(ii)  merely because the plan provides only for employees who are not eligible to receive sick, accident, or unemployment compensation benefits under State or Federal law the same benefits (or a portion of such benefits if determined in a nondiscriminatory manner) which such employees would receive under such laws if such employees were eligible for such benefits, or

(iii)  merely because the plan provides only for employees who are not eligible under another plan (which meets the requirements of subparagraph (A)) of supplemental unemployment compensation benefits provided wholly by the employer the same benefits (or a portion of such benefits if determined in a nondiscriminatory manner) which such employees would receive under such other plan if such employees were eligible under such other plan, but only if the employees eligible under both plans would make a classification which would be nondiscriminatory within the meaning of subparagraph (A).

(C)  A plan shall be considered to meet the requirements of subparagraph (A) during the whole of any year of the plan if on one day in each quarter it satisfies such requirements.

(D)  The term “supplemental unemployment compensation benefits” means only—

(i)  benefits which are paid to an employee because of his involuntary separation from the employment of the employer (whether or not such separation is temporary) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, and

(ii)  sick and accident benefits subordinate to the benefits described in clause (i).

(E)  Exemption shall not be denied under subsection (a) to any organization entitled to such exemption as an association described in paragraph (9) of this subsection merely because such organization provides for the payment of supplemental unemployment benefits (as defined in subparagraph (D)(i)).

(18)  A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if—

(A)  under the plan, it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of benefits under the plan,

(B)  such benefits are payable to employees under a classification which is set forth in the plan and which is found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)),

(C)  such benefits do not discriminate in favor of employees who are highly compensated employees (within the meaning of section 414(q)). A plan shall not be considered discriminatory within the meaning of this subparagraph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan, and

(D)  in the case of a plan under which an employee may designate certain contributions as deductible—

(i)  such contributions do not exceed the amount with respect to which a deduction is allowable under section 219(b)(3),

(ii)  requirements similar to the requirements of section 401(k)(3)(A)(ii) are met with respect to such elective contributions,

(iii)  such contributions are treated as elective deferrals for purposes of section 402(g), and

(iv)  the requirements of section 401(a)(30) are met.

For purposes of subparagraph (D)(ii), rules similar to the rules of section 401(k)(8) shall apply. For purposes of section 4979, any excess contribution under clause (ii) shall be treated as an excess contribution under a cash or deferred arrangement.

(19)  A post or organization of past or present members of the Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or organization—

(A)  organized in the United States or any of its possessions,

(B)  at least 75 percent of the members of which are past or present members of the Armed Forces of the United States and substantially all of the other members of which are individuals who are cadets or are spouses, widows, widowers, ancestors, or lineal descendants of past or present members of the Armed Forces of the United States or of cadets, and

(C)  no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(20)  an[94] organization or trust created or organized in the United States, the exclusive function of which is to form part of a qualified group legal services plan or plans, within the meaning of section 120. An organization or trust which receives contributions because of section 120(c)(5)(C) shall not be prevented from qualifying as an organization described in this paragraph merely because it provides legal services or indemnification against the cost of legal services unassociated with a qualified group legal services plan.

(21)(A)  A trust or trusts established in writing, created or organized in the United States, and contributed to by any person (except an insurance company) if—

(i)  the purpose of such trust or trusts is exclusively—

(I)  to satisfy, in whole or in part, the liability of such person for, or with respect to, claims for compensation for disability or death due to pneumoconiosis under Black Lung Acts,

(II)  to pay premiums for insurance exclusively covering such liability,

(III)  to pay administrative and other incidental expenses of such trust in connection with the operation of the trust and the processing of claims against such person under Black Lung Acts, and

(IV)  to pay accident or health benefits for retired miners and their spouses and dependents (including administrative and other incidental expenses of such trust in connection therewith) or premiums for insurance exclusively covering such benefits; and

(ii)  no part of the assets of the trust may be used for, or diverted to, any purpose other than—

(I)  the purposes described in clause (i),

(II)  investment (but only to the extent that the trustee determines that a portion of the assets is not currently needed for the purposes described in clause (i)) in qualified investments, or

(III)  payment into the Black Lung Disability Trust Fund established under section 9501, or into the general fund of the United States Treasury (other than in satisfaction of any tax or other civil or criminal liability of the person who established or contributed to the trust).

(B)  No deduction shall be allowed under this chapter for any payment described in subparagraph (A)(i)(IV) from such trust.

(C)  Payments described in subparagraph (A)(i)(IV) may be made from such trust during a taxable year only to the extent that the aggregate amount of such payments during such taxable year does not exceed the lesser of—

(i)  the excess (if any) (as of the close of the preceding taxable year) of—

(I)  the fair market value of the assets of the trust, over

(II)  110 percent of the present value of the liability described in subparagraph (A)(i)(I) of such person, or

(ii)  the excess (if any) of—

(I)  the sum of a similar excess determined as of the close of the last taxable year ending before the date of the enactment of this subparagraph plus earnings thereon as of the close of the taxable year preceding the taxable year involved, over

(II)  the aggregate payments described in subparagraph (A)(i)(IV) made from the trust during all taxable years beginning after the date of the enactment of this subparagraph.

The determinations under the preceding sentence shall be made by an independent actuary using actuarial methods and assumptions (not inconsistent with the regulations prescribed under section 192(c)(1)(A) each of which is reasonable and which are reasonable in the aggregate.

(D)  For purposes of this paragraph:

(i)  The term “Black Lung Acts” means part C of title IV of the Federal Mine Safety and Health Act of 1977, and any State law providing compensation for disability or death due to that pneumoconiosis.

(ii)  The term “qualified investments” means—

(I)  public debt securities of the United States,

(II)  obligations of a State or local government which are not in default as to principal or interest, and

(III)  time or demand deposits in a bank (as defined in section 581) or an insured credit union (within the meaning of section 101(6) of the Federal Credit Union Act, 12 U.S.C. 1752(6) located in the United States.

(iii)  The term “miner” has the same meaning as such term has when used in section 402(d) of the Black Lung Benefits Act (30 U.S.C. 902(d)).

(iv)  The term “incidental expenses” includes legal, accounting, actuarial, and trustee expenses.

(22)  A trust created or organized in the United States and established in writing by the plan sponsors of multiemployer plans if—

(A)  the purpose of such trust is exclusively—

(i)  to pay any amount described in section 4223(c) or (h) of the Employee Retirement Income Security Act of 1974, and

(ii)  to pay reasonable and necessary administrative expenses in connection with the establishment and operation of the trust and the processing of claims against the trust,

(B)  no part of the assets of the trust may be used for, or diverted to, any purpose other than—

(i)  the purposes described in subparagraph (A), or

(ii)  the investment in securities, obligations, or time or demand deposits described in clause (ii) of paragraph (21)(B),

(C)  such trust meets the requirements of paragraphs (2), (3), and (4) of section 4223(b), 4223(h), or, if applicable, section 4223(c) of the Employee Retirement Income Security Act of 1974, and

(D)  the trust instrument provides that, on dissolution of the trust, assets of the trust may not be paid other than to plans which have participated in the plan or, in the case of a trust established under section 4223(h) of such Act, to plans with respect to which employers have participated in the fund.

(23)  Any association organized before 1880 more than 75 percent of the members of which are present or past members of the Armed Forces and a principal purpose of which is to provide insurance and other benefits to veterans or their dependents.

(24)  A trust described in section 4049 of the Employee Retirement Income Security Act of 1974 (as in effect on the date of the enactment of the Single-Employer Pension Plan Amendments Act of 1986).

(25)(A)  Any corporation or trust which—

(i)  has no more than 35 shareholders or beneficiaries,

(ii)  has only 1 class of stock or beneficial interest, and

(iii)  is organized for the exclusive purposes of—

(I)  acquiring real property and holding title to, and collecting income from, such property, and

(II)  remitting the entire amount of income from such property (less expenses) to 1 or more organizations described in subparagraph (C) which are shareholders of such corporation or beneficiaries of such trust.

For purposes of clause (iii), the term “real property” shall not include any interest as a tenant in common (or similar interest) and shall not include any indirect interest.

(B)  A corporation or trust shall be described in subparagraph (A) without regard to whether the corporation or trust is organized by 1 or more organizations described in subparagraph (C).

(C)  An organization is described in this subparagraph if such organization is—

(i)  a qualified pension, profit sharing, or stock bonus plan that meets the requirements of section 401(a),

(ii)  a governmental plan (within the meaning of section 414(d)),

(iii)  the United States, any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing, or

(iv)  any organization described in paragraph (3).

(D)  A corporation or trust shall in no event be treated as described in subparagraph (A) unless such corporation or trust permits its shareholders or beneficiaries—

(i)  to dismiss the corporation’s or trust’s investment adviser, following reasonable notice, upon a vote of the shareholders or beneficiaries holding a majority of interest in the corporation or trust, and

(ii)  to terminate their interest in the corporation or trust by either, or both, of the following alternatives, as determined by the corporation or trust:

(I)  by selling or exchanging their stock in the corporation or interest in the trust (subject to any Federal or State securities law) to any organization described in subparagraph (C) so long as the sale or exchange does not increase the number of shareholders or beneficiaries in such corporation or trust above 35, or

(II)  by having their stock or interest redeemed by the corporation or trust after the shareholder or beneficiary has provided 90 days notice to such corporation or trust.

(E)(i)  For purposes of this title—

(I)  a corporation which is a qualified subsidiary shall not be treated as a separate corporation, and

(II)  all assets, liabilities, and items of income, deduction, and credit of a qualified subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the corporation or trust described in subparagraph (A).

(ii)  For purposes of this subparagraph, the term “qualified subsidiary” means any corporation if, at all times during the period such corporation was in existence, 100 percent of the stock of such corporation is held by the corporation or trust described in subparagraph (A).

(iii)  For purposes of this subtitle, if any corporation which was a qualified subsidiary ceases to meet the requirements of clause (ii), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the corporation or trust described in subparagraph (A) in exchange for its stock.

(F)  For purposes of subparagraph (A), the term “real property” includes any personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal property (determined under the rules of section 856(d)(1)) for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and personal property leased under, or in connection with, such lease.

(G)(i)  An organization shall not be treated as failing to be described in this paragraph merely by reason of the receipt of any otherwise disqualifying income which is incidentally derived from the holding of real property.

(ii)  Clause (i) shall not apply if the amount of gross income described in such clause exceeds 10 percent of the organization’s gross income for the taxable year unless the organization establishes to the satisfaction of the Secretary that the receipt of gross income described in clause (i) in excess of such limitation was inadvertent and reasonable steps are being taken to correct the circumstances giving rise to such income.

(d)  Religious and Apostolic Organizations.—The following organizations are referred to in subsection (a): Religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.

(e)  Cooperative Hospital Service Organizations.—For purposes of this title, an organization shall be treated as an organization organized and operated exclusively for charitable purposes, if—

(1)  such organization is organized and operated solely—

(A)  to perform, on a centralized basis, one or more of the following services which, if performed on its own behalf by a hospital which is an organization described in subsection (c)(3) and exempt from taxation under subsection (a), would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption: data processing, purchasing (including the purchasing of insurance on a group basis), warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel (including selection, testing, training, and education of personnel) services; and

(B)  to perform such services solely for two or more hospitals each of which is—

(i)  an organization described in subsection (c)(3) which is exempt from taxation under subsection (a),

(ii)  a constituent part of an organization described in subsection (c)(3) which is exempt from taxation under subsection (a) and which, if organized and operated as a separate entity, would constitute an organization described in subsection (c)(3), or

(iii)  owned and operated by the United States, a State, the District of Columbia, or a possession of the United States, or a political subdivision or an agency or instrumentality of any of the foregoing;

(2)  such organization is organized and operated on a cooperative basis and allocates or pays, within 8 1/2 months after the close of its taxable year, all net earnings to patrons on the basis of services performed for them; and

(3)  if such organization has capital stock, all of such stock outstanding is owned by its patrons.

For purposes of this title, any organization which, by reason of the preceding sentence, is an organization described in subsection (c)(3) and exempt from taxation under subsection (a), shall be treated as a hospital and as an organization referred to in section 170(b)(1)(A)(iii).

(f)  Cooperative Service Organizations of Operating Educational Organizations.—For purposes of this title, if an organization is—

(1)  organized and operated solely to hold, commingle, and collectively invest and reinvest (including arranging for and supervising the performance by independent contractors of investment services related thereto) in stocks and securities, the moneys contributed thereto by each of the members of such organization, and to collect income therefrom and turn over the entire amount thereof, less expenses, to such members,

(2)  organized and controlled by one or more such members, and

(3)  comprised solely of members that are organizations described in clause (ii) or (iv) of section 170(b)(1)(A)—

(A)  which are exempt from taxation under subsection (a), or

(B)  the income of which is excluded from taxation under section 115(a),

then such organization shall be treated as an organization organized and operated exclusively for charitable purposes.

(g)  Definition of Agricultural.—For purposes of subsection (c)(5), the term “agricultural” includes the art or science of cultivating land, harvesting crops or aquatic resources, or raising livestock.

(h)  Expenditures by Public Charities to Influence Legislation.—

(1)  General rule.—In the case of an organization to which this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial part of the activities of such organization consists of carrying on propaganda, or otherwise attempting, to influence legislation, but only if such organization normally—

(A)  makes lobbying expenditures in excess of the lobbying ceiling amount for such organization for each taxable year, or

(B)  makes grass roots expenditures in excess of the grass roots ceiling amount for such organization for each taxable year.

(2)  Definitions.—For purposes of this subsection—

(A)  Lobbying expenditures.—The term “lobbying expenditures” means expenditures for the purpose of influencing legislation (as defined in section 4911(d)).

(B)  Lobbying ceiling amount.—The lobbying ceiling amount for any organization for any taxable year is 150 percent of the lobbying nontaxable amount for such organization for such taxable year, determined under section 4911.

(C)  Grass roots expenditures.—The term “grass roots expenditures” means expenditures for the purpose of influencing legislation (as defined in section 4911(d) without regard to paragraph (1)(B) thereof).

(D)  Grass roots ceiling amount.—The grass roots ceiling amount for any organization for any taxable year is 150 percent of the grass roots nontaxable amount for such organization for such taxable year, determined under section 4911.

(3)  Organizations to which this subsection applies.—This subsection shall apply to any organization which has elected (in such manner and at such time as the Secretary may prescribe) to have the provisions of this subsection apply to such organization and which, for the taxable year which includes the date the election is made, is described in subsection (c)(3) and—

(A)  is described in paragraph (4), and

(B)  is not a disqualified organization under paragraph (5).

(4)  Organizations permitted to elect to have this subsection apply.—An organization is described in this paragraph if it is described in—

(A)  section 170(b)(1)(A)(ii) (relating to educational institutions),

(B)  section 170(b)(1)(A)(iii) (relating to hospitals and medical research organizations),

(C)  section 170(b)(1)(A)(iv) (relating to organizations supporting government schools),

(D)  section 170(b)(1)(A)(vi) (relating to organizations publicly supported by charitable contributions),

(E)  section 509(a)(2) (relating to organizations publicly supported by admissions, sales, etc.), or

(F)  section 509(a)(3) (relating to organizations supporting certain types of public charities) except that for purposes of this subparagraph, section 509(a)(3) shall be applied without regard to the last sentence of section 509(a).

(5)  Disqualified organizations.—For purposes of paragraph (3) an organization is a disqualified organization if it is—

(A)  described in section 170(b)(1)(A)(i) (relating to churches),

(B)  an integrated auxiliary of a church or of a convention or association of churches, or

(C)  a member of an affiliated group of organizations (within the meaning of section 4911(f)(2)) if one or more members of such group is described in subparagraph (A) or (B).

(6)  Years for which election is effective.—An election by an organization under this subsection shall be effective for all taxable years of such organization which—

(A)  end after the date the election is made, and

(B)  begin before the date the election is revoked by such organization (under regulations prescribed by the Secretary).

(7)  No effect on certain organizations.—With respect to any organization for a taxable year for which—

(A)  such organization is a disqualified organization (within the meaning of paragraph (5)), or

(B)  an election under this subsection is not in effect for such organization,

nothing in this subsection or in section 4911 shall be construed to affect the interpretation of the phrase, “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation,” under subsection (c)(3).

(8)  Affiliated organizations.—For rules regarding affiliated organizations, see section 4911(f).

(i)  Prohibition of Discrimination by Certain Social Clubs.—Notwithstanding subsection (a), an organization which is described in subsection (c)(7) shall not be exempt from taxation under subsection (a) for any taxable year if, at any time during such taxable year, the charter, bylaws, or other governing instrument, of such organization or any written policy statement of such organization contains a provision which provides for discrimination against any person on the basis of race, color, or religion. The preceding sentence to the extent it relates to discrimination on the basis of religion shall not apply to—

(1)  an auxiliary of a fraternal beneficiary society if such society—

(A)  is described in subsection (c)(8) and exempt from tax under subsection (a), and

(B)  limits its membership to the members of a particular religion, or

(2)  a club which in good faith limits its membership to the members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color.

(j)  Special Rules for Certain Amateur Sports Organizations.—

(1)  In general.—In the case of a qualified amateur sports organization—

(A)  the requirement of subsection (c)(3) that no part of its activities involve the provision of athletic facilities or equipment shall not apply, and

(B)  such organization shall not fail to meet the requirements of subsection (c)(3) merely because its membership is local or regional in nature.

(2)  Qualified amateur sports organization defined.—For purposes of this subsection, the term “qualified amateur sports organization” means any organization organized and operated exclusively to foster national or international amateur sports competition if such organization is also organized and operated primarily to conduct national or international competition in sports or to support and develop amateur athletes for national or international competition in sports.

(k)  Treatment of Certain Organizations Providing Child Care.—For purposes of subsection (c)(3) of this section and sections 170(c)(2), 2055(a)(2), and 2522(a)(2), the term “educational purposes” includes the providing of care of children away from their homes if—

(1)  substantially all of the care provided by the organization is for purposes of enabling individuals to be gainfully employed, and

(2)  the services provided by the organization are available to the general public.

(l)  Government Corporations Exempt Under Subsection (c)(1).—For purposes of subsection (c)(1), the following organizations are described in this subsection:

(1)  The Central Liquidity Facility established under title III of the Federal Credit Union Act (12 U.S.C. 1795 et seq.).

(2)  The Resolution Trust Corporation established under section 21A of the Federal Home Loan Bank Act.

(3)  The Resolution Funding Corporation established under section 21B of the Federal Home Loan Bank Act.

(4)  The Patient-Centered Outcomes Research Institute established under section 1181(b) of the Social Security Act.

(m)  Certain Organizations Providing Commercial-Type Insurance Not Exempt From Tax.—

(1)  Denial of tax exemption where providing commercial-type insurance is substantial part of activities.—An organization described in paragraph (3) or (4) of subsection (c) shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercial-type insurance.

(2)  Other organizations taxed as insurance companies on insurance business.—In the case of an organization described in paragraph (3) or (4) of subsection (c) which is exempt from tax under subsection (a) after the application of paragraph (1) of this subsection—

(A)  the activity of providing commercial-type insurance shall be treated as an unrelated trade or business (as defined in section 513), and

(B)  in lieu of the tax imposed by section 511 with respect to such activity, such organization shall be treated as an insurance company for purposes of applying subchapter L with respect to such activity.

(3)  Commercial-type insurance.—For purposes of this subsection, the term “commercial-type insurance” shall not include—

(A)  insurance provided at substantially below cost to a class of charitable recipients,

(B)  incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organizations,

(C)  property or casualty insurance provided (directly or through an organization described in section 414(e)(3)(B)(ii)) by a church or convention or association of churches for such church or convention or association of churches,

(D)  providing retirement or welfare benefits (or both) by a church or a convention or association of churches (directly or through an organization described in section 414(e)(3)(A) or 414(e)(3)(B)(ii)) for the employees (including employees described in section 414(e)(3)(B)) of such church or convention or association of churches or the beneficiaries of such employees, and

(E)  charitable gift annuities.

(4)  Insurance includes annuities.—For purposes of this subsection, the issuance of annuity contracts shall be treated as providing insurance.

(5)  Charitable gift annuity.—For purposes of paragraph (3)(E), the term “charitable gift annuity” means an annuity if—

(A)  a portion of the amount paid in connection with the issuance of the annuity is allowable as a deduction under section 170 or 2055, and

(B)  the annuity is described in section 514(c)(5) (determined as if any amount paid in cash in connection with such issuance were property).

(n)  Cross reference.—For nonexemption of Communist-controlled organizations, see section 11(b) of the Internal Security Act of 1950 (64 Stat. 997; 50 U.S.C. 790(b)).

*    *    *    *    *    *    *

SEC. 509. PRIVATE FOUNDATION DEFINES

(a)  General Rule.—For purposes of this title, the term “private foundation” means a domestic or foreign organization described in section 501(c)(3) other than—

*    *    *    *    *    *    *

(3)  an organization which—

(A)  is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2),

(B)  is operated, supervised, or controlled by or in connection with one or more organizations described in paragraph (1) or (2), and

(C)  is not controlled directly or indirectly by one or more disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in paragraph (1) or (2); and

*    *    *    *    *    *    *

SEC. 513. UNRELATED TRADE OR BUSINESS

(a)  General Rule.—The term “unrelated trade or business” means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business—

(1)  in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or

(2)  which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B), by the organization primarily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or

(3)  which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.

*    *    *    *    *    *    *

SEC. 631. GAIN OR LOSS IN THE CASE OF TIMBER, COAL, OR DOMESTIC IRON ORE

(a)  Election to Consider Cutting as Sale or Exchange.—If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer’s trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right on the first day of such year and for a period of more than 6 months before such cutting) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsection and subsection (b), the term “timber” includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.

(b)  Disposal of Timber.—In the case of the disposal of timber held for more than 6 months before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner either retains an economic interest in such timber or makes an outright sale of such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. In the case of disposal of timber with a retained economic interest, the date of disposal of such timber shall be deemed to be the date such timber is cut, but if payment is made to the owner under the contract before such timber is cut the owner may elect to treat the date of such payment as the date of disposal of such timber. For purposes of this subsection, the term “owner” means any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber.

(c)  Disposal of Coal or Domestic Iron Ore with a Retained Economic Interest.—In the case of the disposal of coal (including lignite), or iron ore mined in the United States, held for more than 6 months before such disposal, by the owner thereof under any form of contract by virtue of which such owner retains an economic interest in such coal or iron ore, the difference between the amount realized from the disposal of such coal or iron ore and the adjusted depletion basis thereof plus the deductions disallowed for the taxable year under section 272 shall be considered as though it were a gain or loss, as the case may be, on the sale of such coal or iron ore. If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner shall not be entitled to the allowance for percentage depletion provided in section 613 with respect to such coal or iron ore. This subsection shall not apply to income realized by any owner as a co- adventurer, partner, or principal in the mining of such coal or iron ore, and the word “owner” means any person who owns an economic interest in coal or iron ore in place, including a sublessor. The date of disposal of such coal or iron ore shall be deemed to be the date such coal or iron ore is mined. In determining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. This subsection shall have no application, for purposes of applying subchapter G, relating to corporations used to avoid income tax on shareholders (including the determinations of the amount of the deductions under section 535(b)(6) or section 545(b)(5)). This subsection shall not apply to any disposal of iron ore or coal—

(1)  to a person whose relationship to the person disposing of such iron ore or coal would result in the disallowance of losses under section 267 or 707(b), or

(2)  to a person owned or controlled directly or indirectly by the same interests which own or control the person disposing of such iron ore or coal.

*    *    *    *    *    *    *

SEC. 707. TRANSACTIONS BETWEEN PARTNER AND PARTNERSHIP

*    *    *    *    *    *    *

(c)  Guaranteed Payments.—To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263, for purposes of section 162(a) (relating to trade or business expenses).

*    *    *    *    *    *    *

SEC. 861. INCOME FROM SOURCES WITHIN THE UNITED STATES.

(a)  Gross Income From Sources Within United States.—The following items of gross income shall be treated as income from sources within the United States:

*    *    *    *    *    *    *

(8)  Social security benefits.—Any social security benefit (as defined in section 86(d)).

*    *    *    *    *    *    *

SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS.

(a)  Income Not Connected With United States Business—30 Percent Tax.

*    *    *    *    *    *    *

(3)  Taxation of social security benefits.—For purposes of this section and section 1441—

(A)  85 percent of any social security benefit (as defined in section 86(d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and

(B)  section 86 shall not apply.

For treatment of certain citizens of possessions of the United States, see section 932(c).

*    *    *    *    *    *    *

SEC. 911. CITIZENS OR RESIDENTS OF THE UNITED STATES LIVING ABROAD.

(a)  Exclusion From Gross Income.—At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—

(1)  the foreign earned income of such individual, and

(2)  the housing cost amount of such individual.

(b)  Foreign Earned Income.—

(1)  Definition.—For purposes of this section—

(A)  In general.—The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.

(B)  Certain amounts not included in foreign earned income.—The foreign earned income for an individual shall not include amounts—

(i)  received as a pension or annuity,

(ii)  paid by the United States or an agency thereof to an employee of the United States or an agency thereof,

(iii)  included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or

(iv)  received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.

(2)  Limitation on foreign earned income.—

(A)  In general.—The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate equal to the exclusion amount for the calendar year in which such taxable year begins.

(B)  Attribution to year in which services are performed.—For purposes of applying subparagraph (A), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed.

(C)  Treatment of community income.—In applying subparagraph (A) with respect to amounts received from services performed by a husband or wife which are community income under community property laws applicable to such income, the aggregate amount which may be excludable from the gross income of such husband and wife under subsection (a)(1) for any taxable year shall equal the amount which would be so excludable if such amounts did not constitute community income.

(D)  Exclusion Amount.—

(i)  The exclusion amount for any calendar year is the exclusion amount determined in accordance with the following table (as adjusted by clause (ii)):

For calendar year— The exclusion amount is—
1998 $72,000
1999 74,000
2000 76,000
2001 78,000
2002 and thereafter 80,000.

(ii)  Inflation adjustment.—In the case of any taxable year beginning in a calendar year after 2005, the $80,000 amount in clause (i) shall be increased by an amount equal to the product of —

(I)  such dollar amount, and

(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 “2004” for “1992” in subparagraph (B) thereof.

If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100.

(c)  Housing Cost Amount.—For purposes of this section—

(1)  In general.—The term “housing cost amount” means an amount equal to the excess of—

(A)  the housing expenses of an individual for the taxable year, over

(B)  an amount equal to the product of—

(i)  16 percent of the salary (computed on a daily basis) of an employee of the United States who is compensated at a rate equal to the annual rate paid for step 1 of grade GS-14, multiplied by

(ii)  the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).

(2)  Limitation.—

(A)  In general.—The amount determined under this paragraph is an amount equal to the product of—

(i)  30 percent (adjusted as may be provided under subparagraph (B)) of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual begins, multiplied by

(ii)  the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).

(3)  Housing expenses.—

(A)  In general.—The term “housing expenses” means the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for the individual (and, if they reside with him, for his spouse and dependents) in a foreign country. The term—

(i)  includes expenses attributable to the housing (such as utilities and insurance), but

(ii)  does not include interest and taxes of the kind deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a).

Housing expenses shall not be treated as reasonable to the extent such expenses are lavish or extravagant under the circumstances.

(B)  Second foreign household.—

(i)  In general.—Except as provided in clause (ii), only housing expenses incurred with respect to that abode which bears the closest relationship to the tax home of the individual shall be taken into account under paragraph (1).

(ii)  Separate household for spouse and dependents.—If an individual maintains a separate abode outside the United States for his spouse and dependents and they do not reside with him because of living conditions which are dangerous, unhealthful, or otherwise adverse, then—

(I)  the words “if they reside with him” in subparagraph (A) shall be disregarded, and

(II)  the housing expenses incurred with respect to such abode shall be taken into account under paragraph (1).

(4)  Special rules where housing expenses not provided by employer.—

(A)  In general.—To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, such amount shall be treated as a deduction allowable in computing adjusted gross income to the extent of the limitation of subparagraph (B).

(B)  Limitation.—For purposes of subparagraph (A), the limitation of this subparagraph is the excess of—

(i)  the foreign earned income of the individual for the taxable year, over

(ii)  the amount of such income excluded from gross income under subsection (a) for the taxable year.

(C)  1-year carryover of housing amounts not allowed by reason of subparagraph (b).—

(i)  In general.—The amount not allowable as a deduction for any taxable year under subparagraph (A) by reason of the limitation of subparagraph (B) shall be treated as a deduction allowable in computing adjusted gross income for the succeeding taxable year (and only for the succeeding taxable year) to the extent of the limitation of clause (ii) for such succeeding taxable year.

(ii)  Limitation.—For purposes of clause (i), the limitation of this clause for any taxable year is the excess of—

(I)  the limitation of subparagraph (B) for such taxable year, over

(II)  amounts treated as a deduction under subparagraph (A) for such taxable year.

(D)  Employer provided amounts.—For purposes of this paragraph, the term “employer provided amounts” means any amount paid or incurred on behalf of the individual by the individual’s employer which is foreign earned income included in the individual’s gross income for the taxable year (without regard to this section).

(E)  Foreign earned income.—For purposes of this paragraph, an individual’s foreign earned income for any taxable year shall be determined without regard to the limitation of subparagraph (A) of subsection (b)(2).

(d)  Definitions and Special Rules.—For purposes of this section—

(1)  Qualified individual.—The term “qualified individual” means an individual whose tax home is in a foreign country and who is—

(A)  a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(B)  a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

(2)  Earned income.—

(A)  In general.—The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

(B)  Taxpayer engaged in trade or business.—In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.

(3)  Tax home.—The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States.

(4)  Waiver of period of stay in foreign country.—Notwithstanding paragraph (1), an individual who—

(A)  is a bona fide resident of, or is present in, a foreign country for any period,

(B)  leaves such foreign country after August 31, 1978—

(i)  during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and

(ii)  before meeting the requirements of such paragraph (1), and

(C)  establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B),

shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A) and (c)(1)(B)(ii) with respect to such individual, only the days within such period shall be taken into account.

(5)  Test of bona fide residence.—If—

(A)  an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and

(B)  such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings,

then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A).

(6)  Denial of double benefits.—No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).

(7)  Aggregate benefit cannot exceed foreign earned income.—The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(3)(A) for the taxable year shall not exceed the individual’s foreign earned income for such year.

(8)  Limitation on income earned in restricted country.—

(A)  In general.—If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period—

(i)  the term “foreign earned income” shall not include any income from sources within such country attributable to services performed during such period,

(ii)  the term “housing expenses” shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and

(iii)  an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period.

(B)  Regulations.—For purposes of this paragraph, regulations are described in this subparagraph if such regulations—

(i)  have been adopted pursuant to the Trading With the Enemy Act (50 U.S.C. App. 1 et seq.), or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), and

(ii)  include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.

(C)  Exception.—Subparagraph (A) shall not apply to any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B).

(9)  Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules—

(A)  for cases where a husband and wife each have earned income from sources outside the United States, and

(B)  for married individuals filing separate returns.

(e)  Election.—

(1)  In general.—An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).

(2)  Revocation.—A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.

(f)  Determination of Tax Liability on Nonexcluded amounts.—For purposes of this chapter, if any amount is excluded from the gross income of a taxpayer under subsection (a) for any taxable year, then, notwithstanding section 1 or 55—

(1)  the tax imposed by section 1 on the taxpayer for such taxable year shall be equal to the excess (if any) of—

(A)  the tax which would be imposed by section 1 for the taxable year if the taxpayer’s taxable income were increased by the amount excluded under subsection (a) for the taxable year, over

(B)  the tax which would be imposed by section 1 for the taxable year if the taxpayer’s taxable income were equal to the amount excluded under subsection (a) for the taxable year, and

(2)  the tentative minimum tax under section 55 for such taxable year shall be equal to the excess (if any) of—

(A)  the amount which would be such tentative minimum tax for the taxable year if the taxpayer’s taxable excess were increased by the amount excluded under subsection (a) for the taxable year, over

(B)  the amount which would be such tentative minimum tax for the taxable year if the taxpayer’s taxable excess were equal to the amount excluded under subsection (a) for the taxable year.

For purposes of this subsection, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect to such excluded amount.

(g)  Cross References.—

For administrative and penal provisions relating to the exclusions provided for in this section, see sections 6001, 6011, 6012(c), and the other provisions of subtitle F.

*    *    *    *    *    *    *

SEC. 931.  INCOME FROM SOURCES WITHIN GUAM, AMERICAN SAMOA, OR THE NORTHERN MARIANA ISLANDS.

(a)  General Rule.—In the case of an individual who is a bona fide resident of a specified possession during the entire taxable year, gross income shall not include—

(1)  income derived from sources within any specified possession, and

(2)  income effectively connected with the conduct of a trade or business by such individual within any specified possession.

(b)  Deductions, Etc. Allocable to Excluded Amounts Not Allowable.—An individual shall not be allowed—

(1)  as a deduction from gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or

(2)  any credit,

properly allocable or chargeable against amounts excluded from gross income under this section.

(c)  Specified Possession.—For purposes of this section, the term “specified possession” means Guam, American Samoa, and the Northern Mariana Islands.

(d)  Employees of the United States.—Amounts paid for services performed as an employee of the United States (or any agency thereof) shall be treated as not described in paragraph (1) or (2) of subsection (a).

*    *    *    *    *    *    *

SEC. 933. INCOME FROM SOURCES WITHIN PUERTO RICO.

The following items shall not be included in gross income and shall be exempt from taxation under this subtitle:

(1)  Resident of Puerto Rico for entire taxable year. In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.

(2)  Taxable year of change of residence from Puerto Rico. In the case of an individual citizen of the United States who has been a bona fide resident of Puerto Rico for a period of at least 2 years before the date on which he changes his residence from Puerto Rico, income derived from sources therein (except amounts received for services performed as an employee of the United States or any agency thereof) which is attributable to that part of such period of Puerto Rican residence before such date; but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction for personal exemptions under section 151), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.

*    *    *    *    *    *    *

SEC. 954. FOREIGN BASE COMPANY INCOME.

*    *    *    *    *    *    *

(d)  Foreign base company sales income.—

*    *    *    *    *    *    *

(3)  For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if—

(A)  such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or

(B)  such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.

For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply.

*    *    *    *    *    *    *

SEC. 1256. SECTION 1256 CONTRACTS MARKED TO MARKET.

(a)  General Rule.—For purposes of this subtitle—

(1)  each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),

(2)  proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1),

(3)  any gain or loss with respect to a section 1256 contract shall be treated as—

(A)  short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and

(B)  long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and

(4)  if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.

(b)  Section 1256 Contract Defined.—For purposes of this section, the term “section 1256 contract” means—

(1)  any regulated futures contract,

(2)  any foreign currency contract,

(3)  any nonequity option,

(4)  any dealer equity option, and

(5)  any dealer securities futures contract.

The term “section 1256 contract” shall not include any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract.

(c)  Terminations, Etc.—

(1)  In general.—The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.

(2)  Special rule where taxpayer takes delivery on or exercises part of straddle.—If—

(A)  2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and

(B)  the taxpayer takes delivery under or exercises any of such contracts,

then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.

(3)  Fair market value taken into account.—For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.

(d)  Elections With Respect to Mixed Straddles.—

(1)  Election.—The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.

(2)  Time and manner.—An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.

(3)  Election revocable only with consent.—An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.

(4)  Mixed straddle.—For purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))—

(A)  at least 1 (but not all) of the positions of which are section 1256 contracts, and

(B)  with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.

(e)  Mark to Market Not to Apply to Hedging Transactions.—

(1)  Section not to apply.—Subsection (a) shall not apply in the case of a hedging transaction.

(2)  Definition of hedging transaction.—For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.

(3)  Special rule for syndicates.—

(A)  In general.—Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate.

(B)  Syndicate defined.—For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 464(e)(2)).

(C)  Holdings attributable to active management.—For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 464(e)(2))—

(i)  for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity,

(ii)  for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,

(iii)  if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years,

(iv)  if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or

(v)  if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax-avoidance purposes.

For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.

(4)  Limitation on losses from hedging transactions.—

(A)  In general.—

(i)  Limitation.—Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.

(ii)  Carryover of disallowed loss.—Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.

(B)  Exception where economic loss.—Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.

(C)  Exception for certain hedging transactions.—In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).

(D)  Hedging loss.—The term “hedging loss” means the excess of—

(i)  the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over

(ii)  income received or accrued by the taxpayer during such taxable year from such transactions.

(E)  Unrecognized gain.—The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).

(f)  Special Rules.—

(1)  Denial of capital gains treatment for property identified as part of a hedging transaction.—For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.

(2)  Subsection (a)(3) not to apply to ordinary income property.—Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss.

(3)  Capital gain treatment for traders in section 1256 Contracts.—

(A)  In general.—For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.

(B)  Exception for certain hedging transactions.—Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.

(C)  Treatment of underlying property.—For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.

(4)  Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneurs.—In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))—

(A)  paragraph (3) of subsection (a) shall not apply to any such gain or loss, and

(B)  all such gains or losses shall be treated as short-term capital gains or losses, as the case may be.

(g)  Definitions.—For purposes of this section—

(1)  Regulated futures contracts defined.—The term “regulated futures contract” means a contract—

(A)  with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and

(B)  which is traded on or subject to the rules of a qualified board or exchange.

(2)  Foreign currency contract defined.—

(A)  Foreign currency contract.—The term “foreign currency contract” means a contract—

(i)  which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts,

(ii)  which is traded in the interbank market, and

(iii)  which is entered into at arm’s length at a price determined by reference to the price in the interbank market.

(B)  Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes.

(3)  Nonequity option.—The term “nonequity option” means any listed option which is not an equity option.

(4)  Dealer equity option.—The term “dealer equity option” means, with respect to an options dealer, any listed option which—

(A)  is an equity option,

(B)  is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and

(C)  is listed on the qualified board or exchange on which such options dealer is registered.

(5)  Listed option.—The term “listed option” means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange.

(6)  Equity option.—The term “equity option” means any option—

(A)  to buy or sell stock, or

(B)  the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph).

The term “equity option” includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).

(7)  Qualified board or exchange.—The term “qualified board or exchange” means—

(A)  a national securities exchange which is registered with the Securities and Exchange Commission,

(B)  a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or

(C)  any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section.

(8)  Options dealer.—

(A)  In general.—The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.

(B)  Persons trading in other markets.—In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.

(9)  Dealer securities futures contract.—

(A)  In general.—The term “dealer securities futures contract” means, with respect to any dealer, any securities futures contract, and any option on such a contract, which—

(i)  is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and

(ii)  is traded on a qualified board or exchange.

(B)  Dealer.—For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section.

(C)  Securities futures contract.—The term “securities futures contract” has the meaning given to such term by section 1234B.

*    *    *    *    *    *    *

SEC. 1393. DEFINITIONS AND SPECIAL RULES.

(a) 

*    *    *    *    *    *    *

(2)  Rural area.—The term “rural area” means any area which is—

(A)  outside of a metropolitan statistical area (within the meaning of section 143(k)(2)(B)), or

(B)  determined by the Secretary of Agriculture, after consultation with the Secretary of Commerce, to be a rural area.

(3)  Urban area.—The term “urban area” means an area which is not a rural area.

*    *    *    *    *    *    *

Subtitle A—Income Taxes

CHAPTER 2—TAX ON SELF–EMPLOYMENT INCOME

SEC. 1401. RATE OF TAX.

(a)  Old-Age, Survivors, and Disability Insurance.—In addition to other taxes, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax equal to the following percent of the amount of the self-employment income for such taxable year:

In the case of a taxable year
Beginning after: And before: Percent:
December 31, 1983 January 1, 1988 11.40
December 31, 1987 January 1, 1990 12.12
December 31, 1989 January 1, 1993 12.40*

*As in original. No punctuation.

(b)  Hospital Insurance.—In addition to the tax imposed by the preceding subsection, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax equal to the following percent of the amount of the self-employment income for such taxable year:

In the case of a taxable year
Beginning after: And before: Percent:
December 31, 1983 January 1, 1985 2.60
December 31, 1984 January 1, 1986 2.70
December 31, 1985 January 1, 1987 2.90.

(c)  Relief From Taxes in Cases Covered by Certain International Agreements.—During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, the self-employment income of an individual shall be exempt from the taxes imposed by this section to the extent that such self-employment income is subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.

SEC. 1402. DEFINITIONS.

(a)  Net Earnings From Self-Employment.—The term “net earnings from self-employment” means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member; except that in computing such gross income and deductions and such distributive share of partnership ordinary income or loss—

(1)  there shall be excluded rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares, and including payments under section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2)) to individuals receiving benefits under section 202 or 223 of the Social Security Act) together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer; except that the preceding provisions of this paragraph shall not apply to any income derived by the owner or tenant of land if (A) such income is derived under an arrangement, between the owner or tenant and another individual, which provides that such other individual shall produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land, and that there shall be material participation by the owner or tenant (as determined without regard to any activities of an agent of such owner or tenant) in the production or the management of the production of such agricultural or horticultural commodities, and (B) there is material participation by the owner or tenant (as determined without regard to any activities of an agent of such owner or tenant) with respect to any such agricultural or horticultural commodity;

(2)  there shall be excluded dividends on any share of stock, and interest on any bond, debenture, note, or certificate, or other evidence of indebtedness, issued with interest coupons or in registered form by any corporation (including one issued by a government or political subdivision thereof), unless such dividends and interest are received in the course of a trade or business as a dealer in stocks or securities;

(3)  there shall be excluded any gain or loss—

(A)  which is considered as gain or loss from the sale or exchange of a capital asset,

(B)  from the cutting of timber, or the disposal of timber, coal, or iron ore, if section 631 applies to such gain or loss, or

(C)  from the sale, exchange, involuntary conversion, or other disposition of property if such property is neither—

(i)  stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor

(ii)  property held primarily for sale to customers in the ordinary course of the trade or business;

(4)  the deduction for net operating losses provided in section 172 shall not be allowed;

(5)  if—

(A)  any of the income derived from a trade or business (other than a trade or business carried on by a partnership) is community income under community property laws applicable to such income, the gross income and deductions attributable to such trade or business shall be treated as the gross income and deductions of the spouse carrying on such trade or business or, if such trade or business is jointly operated, treated as the gross income and deductions of each spouse on the basis of their respective distributive share of the gross income and deductions; and

(B)  any portion of a partner’s distributive share of the ordinary income or loss from a trade or business carried on by a partnership is community income or loss under the community property laws applicable to such share, all of such distributive share shall be included in computing the net earnings from self-employment of such partner, and no part of such share shall be taken into account in computing the net earnings from self-employment of the spouse of such partner;

(6)  a resident of Puerto Rico shall compute his net earnings from self-employment in the same manner as a citizen of the United States but without regard to section 933;

(7)  the deduction for personal exemptions provided in section 151 shall not be allowed;

(8)  an individual who is a duly ordained, commissioned, or licensed minister of a church or a member of a religious order shall compute his net earnings from self-employment derived from the performance of service described in subsection (c)(4) without regard to section 107 (relating to rental value of parsonages), section 119 (relating to meals and lodging furnished for the convenience of the employer), and section 911 (relating to citizens or residents of the United States living abroad), but shall not include in such net earnings from self-employment the rental value of any parsonage or any parsonage allowance (whether or not excludable under section 107) provided after the individual retires, or any other retirement benefit received by such individual from a church plan (as defined in section 414(e)) after the individual retires;

(9)  the exclusion from gross income provided by section 931 shall not apply;

(10)  there shall be excluded amounts received by a partner pursuant to a written plan of the partnership, which meets such requirements as are prescribed by the Secretary, and which provides for payments on account of retirement, on a periodic basis, to partners generally or to a class or classes of partners, such payments to continue at least until such partner’s death, if—

(A)  such partner rendered no services with respect to any trade or business carried on by such partnership (or its successors) during the taxable year of such partnership (or its successors), ending within or with his taxable year, in which such amounts were received, and

(B)  no obligation exists (as of the close of the partnership’s taxable year referred to in subparagraph (A)) from the other partners to such partner except with respect to retirement payments under such plan, and

(C)  such partner’s share, if any, of the capital of the partnership has been paid to him in full before the close of the partnership’s taxable year referred to in subparagraph (A);

(11)  the exclusion from gross income provided by section 911(a)(1) shall not apply;

(12)  in lieu of the deduction provided by section 164(f) (relating to deduction for one-half of self-employment taxes), there shall be allowed a deduction equal to the product of—

(A)  the taxpayer’s net earnings from self-employment for the taxable year (determined without regard to this paragraph), and

(B)  one-half of the sum of the rates imposed by subsections (a) and (b) of section 1401 for such year;

(13)  there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services;

(14)  in the case of church employee income, the special rules of subsection (j)(1) shall apply;

(15)  in the case of a member of an Indian tribe, the special rules of section 7873 (relating to income derived by Indians from exercise of fishing rights) shall apply;

(16)  the deduction provided by section 199 shall not be allowed; and

(17)  notwithstanding the preceding provisions of this subsection, each spouse’s share of income or loss from a qualified joint venture shall be taken into account as provided in section 761(f) in determining net earnings from self-employment of such spouse.

If the taxable year of a partner is different from that of the partnership, the distributive share which he is required to include in computing his net earnings from self-employment shall be based on the ordinary income or loss of the partnership for any taxable year of the partnership ending within or with his taxable year. In the case of any trade or business which is carried on by an individual or by a partnership and in which, if such trade or business were carried on exclusively by employees, the major portion of the services would constitute agricultural labor as defined in section 3121(g)—

(i)  in the case of an individual, if the gross income derived by him from such trade or business is not more than $2,400, the net earnings from self-employment derived by him from such trade or business may, at his option, be deemed to be 66 2/3 percent of such gross income; or

(ii)  in the case of an individual, if the gross income derived by him from such trade or business is more than $2,400 and the net earnings from self-employment derived by him from such trade or business (computed under this subsection without regard to this sentence) are less than $1,600, the net earnings from self-employment derived by him from such trade or business may, at his option, be deemed to be $1,600; and

(iii)  in the case of a member of a partnership, if his distributive share of the gross income of the partnership derived from such trade or business (after such gross income has been reduced by the sum of all payments to which section 707(c) applies) is not more than $2,400, his distributive share of income described in section 702(a)(8) derived from such trade or business may, at his option, be deemed to be an amount equal to 66 2/3 percent of his distributive share of such gross income (after such gross income has been so reduced); or

(iv)  in the case of a member of a partnership, if his distributive share of the gross income of the partnership derived from such trade or business (after such gross income has been reduced by the sum of all payments to which section 707(c) applies) is more than $2,400 and his distributive share (whether or not distributed) of income described in section 702(a)(8) derived from such trade or business (computed under this subsection without regard to this sentence) is less than $1,600, his distributive share of income described in section 702(a)(8) derived from such trade or business may, at his option, be deemed to be $1,600.

For purposes of the preceding sentence, gross income means—

(v)  in the case of any such trade or business in which the income is computed under a cash receipts and disbursements method, the gross receipts from such trade or business reduced by the cost or other basis of property which was purchased and sold in carrying on such trade or business, adjusted (after such reduction) in accordance with the provisions of paragraphs (1) through (7) and paragraph (9) of this subsection; and

(vi)  in the case of any such trade or business in which the income is computed under an accrual method, the gross income from such trade or business, adjusted in accordance with the provisions of paragraphs (1) through (7) and paragraph (9) of this subsection;

and, for purposes of such sentence, if an individual (including a member of a partnership) derives gross income from more than one such trade or business, such gross income (including his distributive share of the gross income of any partnership derived from any such trade or business) shall be deemed to have been derived from one trade or business.

The preceding sentence and clauses (i) through (iv) of the second preceding sentence shall also apply in the case of any trade or business (other than a trade or business specified in such second preceding sentence) which is carried on by an individual who is self-employed on a regular basis as defined in subsection (h), or by a partnership of which an individual is a member on a regular basis as defined in subsection (h), but only if such individual’s net earnings from self-employment as determined without regard to this sentence in the taxable year are less than $1,600 and less than 66 2/3 percent of the sum (in such taxable year) of such individual’s gross income derived from all trades or businesses carried on by him and his distributive share of the income or loss from all trades or businesses carried on by all the partnerships of which he is a member; except that this sentence shall not apply to more than 5 taxable years in the case of any individual, and in no case in which an individual elects to determine the amount of his net earnings from self-employment for a taxable year under the provisions of the two preceding sentences with respect to a trade or business to which the second preceding sentence applies and with respect to a trade or business to which this sentence applies shall such net earnings for such year exceed $1,600.

(b)  Self-Employment Income.—The term “self-employment income” means the net earnings from self-employment derived by an individual (other than a nonresident alien individual, except as provided by an agreement under section 233 of the Social Security Act) during any taxable year; except that such term shall not include—

(1)  in the case of the tax imposed by section 1401(a), that part of the net earnings from self-employment which is in excess of (i) an amount equal to the contribution and benefit base (as determined under section 230 of the Social Security Act) which is effective for the calendar year in which such taxable year begins, minus (ii) the amount of the wages paid to such individual during such taxable years; or

(2)  the net earnings from self-employment, if such net earnings for the taxable year are less than $400.

For purposes of paragraph (1), the term “wages” (A) includes such remuneration paid to an employee for services included under an agreement entered into pursuant to the provisions of section 3121(l) (relating to coverage of citizens of the United States who are employees of foreign affiliates of American employers), as would be wages under section 3121(a) if such services constituted employment under section 3121(b), and (B) includes compensation which is subject to the tax imposed by section 3201 or 3211,[95]. An individual who is not a citizen of the United States but who is a resident of the Commonwealth of Puerto Rico, the Virgin Islands, Guam, or American Samoa shall not, for purposes of this chapter be considered to be a nonresident alien individual. In the case of church employee income, the special rules of subsection (j)(2) shall apply for purposes of paragraph (2).

(c)  Trade or Business.—The term “trade or business”, when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 (relating to trade or business expenses), except that such term shall not include—

(1)  the performance of the functions of a public office, other than the functions of a public office of a State or a political subdivision thereof with respect to fees received in any period in which the functions are performed in a position compensated solely on a fee basis and in which such functions are not covered under an agreement entered into by such State and the Commissioner of Social Security pursuant to section 218 of the Social Security Act;

(2)  the performance of service by an individual as an employee, other than—

(A)  service described in section 3121(b)(14)(B) performed by an individual who has attained the age of 18,

(B)  service described in section 3121(b)(16),

(C)  service described in section 3121(b)(11), (12), or (15) performed in the United States (as defined in section 3121(e)(2)) by a citizen of the United States except service which constitutes “employment” under section 3121(y),

(D)  service described in paragraph (4) of this subsection,

(E)  service performed by an individual as an employee of a State or a political subdivision thereof in a position compensated solely on a fee basis with respect to fees received in any period in which such service is not covered under an agreement entered into by such State and the Secretary of Health and Human Services pursuant to section 218 of the Social Security Act,

(F)  service described in section 3121(b)(20), and

(G)  service described in section 3121(b)(8)(B);

(3)  the performance of service by an individual as an employee or employee representative as defined in section 3231;

(4)  the performance of service by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order;

(5)  the performance of service by an individual in the exercise of his profession as a Christian Science practitioner; or

(6)  the performance of service by an individual during the period for which an exemption under subsection (g) is effective with respect to him.

The provisions of paragraph (4) or (5) shall not apply to service (other than service performed by a member of a religious order who has taken a vow of poverty as a member of such order) performed by an individual unless an exemption under subsection (e) is effective with respect to him.

(d)  Employee and Wages.—The term “employee” and the term “wages” shall have the same meaning as when used in chapter 21 (sec. 3101 and following, relating to Federal Insurance Contributions Act).

(e)  Ministers, Members of Religious Orders, and Christian Science Practitioners.—[96]

(1)  Exemption.—Subject to paragraph (2), any individual who is (A) a duly ordained, commissioned, or licensed minister of a church or a member of a religious order (other than a member of a religious order who has taken a vow of poverty as a member of such order) or (B) a Christian Science practitioner, upon filing an application (in such form and manner, and with such official, as may be prescribed by regulations made under this chapter) together with a statement that either he is conscientiously opposed to, or because of religious principles he is opposed to, the acceptance (with respect to services performed by him as such minister, member, or practitioner) of any public insurance which makes payments in the event of death, disability, old age, or retirement or makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act) and, in the case of an individual described in subparagraph (A), that he has informed the ordaining, commissioning, or licensing body of the church or order that he is opposed to such insurance, shall receive an exemption from the tax imposed by this chapter with respect to services performed by him as such minister, member, or practitioner. Notwithstanding the preceding sentence, an exemption may not be granted to an individual under this subsection if he had filed an effective waiver certificate under this section as it was in effect before its amendment in 1967.

(2)  Verification of Application.—The Secretary may approve an application for an exemption filed pursuant to paragraph (1) only if the Secretary has verified that the individual applying for the exemption is aware of the grounds on which the individual may receive an exemption pursuant to this subsection and that the individual seeks exemption on such grounds. The Secretary (or the Commissioner of Social Security under an agreement with the Secretary) shall make such verification by such means as prescribed in regulations.

(3)  Time for filing application.—Any individual who desires to file an application pursuant to paragraph (1) must file such application on or before whichever of the following dates is later: (A) the due date of the return (including any extension thereof) for the second taxable year for which he has net earnings from self-employment (computed without regard to subsections (c)(4) and (c)(5)) of $400 or more, any part of which was derived from the performance of service described in subsection (c)(4) or (c)(5); or (B) the due date of the return (including any extension thereof) for his second taxable year ending after 1967.

(4)  Effective date of exemption.—An exemption received by an individual pursuant to this subsection shall be effective for the first taxable year for which he has net earnings from self-employment (computed without regard to subsections (c)(4) and (c)(5)) of $400 or more, any part of which was derived from the performance of service described in subsection (c)(4) or (c)(5), and for all succeeding taxable years. An exemption received pursuant to this subsection shall be irrevocable.

(f)  Partner’s Taxable Year Ending as the Result of Death.—In computing a partner’s net earnings from self-employment for his taxable year which ends as a result of his death (but only if such taxable year ends within, and not with, the taxable year of the partnership), there shall be included so much of the deceased partner’s distributive share of the partnership’s ordinary income or loss for the partnership taxable year as is not attributable to an interest in the partnership during any period beginning on or after the first day of the first calendar month following the month in which such partner died. For purposes of this subsection—

(1)  in determining the portion of the distributive share which is attributable to any period specified in the preceding sentence, the ordinary income or loss of the partnership shall be treated as having been realized or sustained ratably over the partnership taxable year; and

(2)  the term “deceased partner’s distributive share” includes the share of his estate or of any other person succeeding, by reason of his death, to rights with respect to his partnership interest.

(g)  Members of Certain Religious Faiths.—

(1)  Exemption.—Any individual may file an application (in such form and manner, and with such official, as may be prescribed by regulations under this chapter) for an exemption from the tax imposed by this chapter if he is a member of a recognized religious sect or division thereof and is an adherent of established tenets or teachings of such sect or division by reason of which he is conscientiously opposed to acceptance of the benefits of any private or public insurance which makes payments in the event of death, disability, old-age, or retirement or makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act). Such exemption may be granted only if the application contains or is accompanied by—

(A)  such evidence of such individual’s membership in, and adherence to the tenets or teachings of, the sect or division thereof as the Secretary may require for purposes of determining such individual’s compliance with the preceding sentence, and

(B)  his waiver of all benefits and other payments under titles II and XVIII of the Social Security Act on the basis of his wages and self-employment income as well as all such benefits and other payments to him on the basis of the wages and self-employment income of any other person,

and only if the Commissioner of Social Security finds that—

(C)  such sect or division thereof has the established tenets or teachings referred to in the preceding sentence,

(D)  it is the practice, and has been for a period of time which he deems to be substantial, for members of such sect or division thereof to make provision for their dependent members which in his judgment is reasonable in view of their general level of living, and

(E)  such sect or division thereof has been in existence at all times since December 31, 1950.

An exemption may not be granted to any individual if any benefit or other payment referred to in subparagraph (B) became payable (or, but for section 203 or 222(b) of the Social Security Act, would have become payable) at or before the time of the filing of such waiver.

(2)  Period for which exemption effective.—An exemption granted to any individual pursuant to this subsection shall apply with respect to all taxable years beginning after December 31, 1950, except that such exemption shall not apply for any taxable year—

(A)  beginning (i) before the taxable year in which such individual first met the requirements of the first sentence of paragraph (1), or (ii) before the time as of which the Commissioner of Social Security finds that the sect or division thereof of which such individual is a member met the requirements of subparagraphs (C) and (D), or

(B)  ending (i) after the time such individual ceases to meet the requirements of the first sentence of paragraph (1), or (ii) after the time as of which the Commissioner of Social Security finds that the sect or division thereof of which he is a member ceases to meet the requirements of subparagraph (C) or (D).

(3)  Subsection to apply to certain church employees.—This subsection shall apply with respect to services which are described in subparagraph (B) of section 3121(b)(8) (and are not described in subparagraph (A) of such section).

(h)  Regular Basis.—An individual shall be deemed to be self-employed on a regular basis in a taxable year, or to be a member of a partnership on a regular basis in such year, if he had net earnings from self-employment, as defined in the first sentence of subsection (a), of not less than $400 in at least two of the three consecutive taxable years immediately preceding such taxable year from trades or businesses carried on by such individual or such partnership.

(i)  Special Rules for Options and Commodities Dealers.—

(1)  In general.—Notwithstanding subsection (a)(3)(A), in determining the net earnings from self-employment of any options dealer or commodities dealer, there shall not be excluded any gain or loss (in the normal course of the taxpayer’s activity of dealing in or trading section 1256 contracts) from section 1256 contracts or property related to such contracts.

(2)  Definitions.—For purposes of this subsection—

(A)  Options dealer.—The term “options dealer” has the meaning given such term by section 1256(g)(8).

(B)  Commodities dealer.—The term “commodities dealer” means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission.

(C)  Section 1256 contracts.—The term “section 1256 contract” has the meaning given to such term by section 1256(b).

(j)  Special Rules for Certain Church Employee Income.—

(1)  Computation of net earnings.—In applying subsection (a)—

(A)  church employee income shall not be reduced by any deduction;

(B)  church employee income and deductions attributable to such income shall not be taken into account in determining the amount of other net earnings from self-employment.

(2)  Computation of self-employment income.—

(A)  Separate application of subsection (b)(2).—Paragraph (2) of subsection (b) shall be applied separately—

(i)  to church employee income, and

(ii)  to other net earnings from self-employment.

(B)  $100 Floor.—In applying paragraph (2) of subsection (b) to church employee income, “$100” shall be substituted for “$400”.

(3)  Coordination with subsection (a)(12).—Paragraph (1) shall not apply to any amount allowable as a deduction under subsection (a)(12), and paragraph (1) shall be applied before determining the amount so allowable.

(4)  Church employee income defined.—For purposes of this section, the term “church employee income” means gross income for services which are described in section 3121(b)(8)(B) (and are not described in section 3121(b)(8)(A)).

*    *    *    *    *    *    *

Subtitle C—Employment Taxes

CHAPTER 21—FEDERAL INSURANCE CONTRIBUTIONS ACT

*    *    *    *    *    *    *

Subchapter A—Tax on Employees

SEC. 3101. RATE OF TAX.

(a)  Old-Age, Survivors, and Disability Insurance.—In addition to other taxes, there is hereby imposed on the income of every individual a tax equal to the following percentages of the wages (as defined in section 3121(a)) received by him with respect to employment (as defined in section 3121(b))—

In cases of wages during: The rate received shall be:
1984, 1985, 1986, or 1987 5.7 percent
1988 or 1989 6.06 percent
1990 or thereafter 6.2 percent.

(b)  Hospital Insurance.—In addition to the tax imposed by the preceding subsection, there is hereby imposed on the income of every individual a tax equal to the following percentages of the wages (as defined in section 3121(a)) received by him with respect to employment (as defined in section 3121(b))—

(1)  with respect to wages received during the calendar years 1974 through 1977, the rate shall be 0.90 percent;

(2)  with respect to wages received during the calendar year 1978, the rate shall be 1.00 percent;

(3)  with respect to wages received during the calendar years 1979 and 1980, the rate shall be 1.05 percent;

(4)  with respect to wages received during the calendar years 1981 through 1984, the rate shall be 1.30 percent;

(5)  with respect to wages received during the calendar year 1985, the rate shall be 1.35 percent; and

(6)  with respect to wages received after December 31, 1985, the rate shall be 1.45 percent.

(c)  Relief From Taxes in Cases Covered by Certain International Agreements.—During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, wages received by or paid to an individual shall be exempt from the taxes imposed by this section to the extent that such wages are subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.

SEC. 3102.  DEDUCTION OF TAX FROM WAGES.

(a)  Requirement.—The tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid. An employer who in any calendar year pays to an employee cash remuneration to which paragraph (7)(B) of section 3121(a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration, even though at the time of payment the total amount of such remuneration paid to the employee by the employer in the calendar year is less than the applicable dollar threshold (as defined in section 3121(x)) for such year; and an employer who in any calendar year pays to an employee cash remuneration to which paragraph (7)(C) or (10) of section 3121(a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration, even though at the time of payment the total amount of such remuneration paid to the employee by the employer in the calendar year is less than $100; and an employer who in any calendar year pays to an employee cash remuneration to which paragraph (8)(B) of section 3121(a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration, even though at the time of payment the total amount of such remuneration paid to the employee by the employer in the calendar year is less than $150 and an employer who is furnished by an employee a written statement of tips (received in a calendar month) pursuant to section 6053(a) to which paragraph (12)(B) of section 3121(a) is applicable may deduct an amount equivalent to such tax with respect to such tips from any wages of the employee (exclusive of tips) under his control, even though at the time such statement is furnished the total amount of the tips included in statements furnished to the employer as having been received by the employee in such calendar month in the course of his employment by such employer is less than $20.

(b)  Indemnification of Employer.—Every employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer.

(c)  Special Rule for Tips.—

(1)  In the case of tips which constitute wages, subsection (a) shall be applicable only to such tips as are included in a written statement furnished to the employer pursuant to section 6053(a), and only to the extent that collection can be made by the employer, at or after the time such statement is so furnished and before the close of the 10th day following the calendar month (or, if paragraph (3) applies, the 30th day following the year) in which the tips were deemed paid, by deducting the amount of the tax from such wages of the employee (excluding tips, but including funds turned over by the employee to the employer pursuant to paragraph (2)) as are under control of the employer.

(2)  If the tax imposed by section 3101, with respect to tips which are included in written statements furnished in any month to the employer pursuant to section 6053(a), exceeds the wages of the employee (excluding tips) from which the employer is required to collect the tax under paragraph (1), the employee may furnish to the employer on or before the 10th day of the following month (or, if paragraph (3) applies, on or before the 30th day of the following year) an amount of money equal to the amount of the excess.

(3)  The Secretary may, under regulations prescribed by him, authorize employers—

(A)  to estimate the amount of tips that will be reported by the employee pursuant to section 6053(a) in any calendar year,

(B)  to determine the amount to be deducted upon each payment of wages (exclusive of tips) during such year as if the tips so estimated constituted the actual tips so reported, and

(C)  to deduct upon any payment of wages (other than tips, but including funds turned over by the employee to the employer pursuant to paragraph (2)) to such employee during such year (and within 30 days thereafter) such amount as may be necessary to adjust the amount actually deducted upon such wages of the employee during the year to the amount required to be deducted in respect of tips included in written statements furnished to the employer during the year.

(4)  If the tax imposed by section 3101 with respect to tips which constitute wages exceeds the portion of such tax which can be collected by the employer from the wages of the employee pursuant to paragraph (1) or paragraph (3), such excess shall be paid by the employee.

(d)  Special Rule for Certain Taxable Group-Term Life Insurance Benefits.—

(1)  In general.—In the case of any payment for group-term life insurance to which this subsection applies—

(A)  subsection (a) shall not apply,

(B)  the employer shall separately include on the statement required under section 6051—

(i)  the portion of the wages which consists of payments for group-term life insurance to which this subsection applies, and

(ii)  the amount of the tax imposed by section 3101 on such payments, and

(C)  the tax imposed by section 3101 on such payments shall be paid by the employee.

(2)  Benefits to which subsection applies.—This subsection shall apply to any payment for group-term life insurance to the extent—

(A)  such payment constitutes wages, and

(B)  such payment is for coverage for periods during which an employment relationship no longer exists between the employee and the employer.

(e)  Special Rule for Certain Transferred Federal Employees.—In the case of any payments of wages for service performed in the employ of an international organization pursuant to a transfer to which the provisions of section 3121(y) are applicable—

(1)  subsection (a) shall not apply,

(2)  the head of the Federal agency from which the transfer was made shall separately include on the statement required under section 6051—

(A)  the amount determined to be the amount of the wages for such service, and

(B)  the amount of the tax imposed by section 3101 on such payments, and

(3)  the tax imposed by section 3101 on such payments shall be paid by the employee.

Subchapter B—Tax on Employers

SEC. 3111. RATE OF TAX.

(a)  Old-Age, Survivors, and Disability Insurance.—In addition to other taxes, there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b))—

In cases of wages paid during: The rate shall be:
1984, 1985, 1986, or 1987 5.7 percent
1988 or 1989 6.06 percent
1990 or thereafter 6.2 percent.

(b)  Hospital Insurance.—In addition to the tax imposed by the preceding subsection, there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b))—

(1)  with respect to wages paid during the calendar years 1974 through 1977, the rate shall be 0.90 percent;

(2)  with respect to wages paid during the calendar year 1978, the rate shall be 1.00 percent;

(3)  with respect to wages paid during the calendar years 1979 and 1980, the rate shall be 1.05 percent;

(4)  with respect to wages paid during the calendar years 1981 through 1984, the rate shall be 1.30 percent;

(5)  with respect to wages paid during the calendar year 1985, the rate shall be 1.35 percent; and

(6)  with respect to wages paid after December 31, 1985, the rate shall be 1.45 percent.

(c)  Relief From Taxes in Cases Covered by Certain International Agreements.—During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, wages received by or paid to an individual shall be exempt from the taxes imposed by this section to the extent that such wages are subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.

SEC. 3112. INSTRUMENTALITIES OF THE UNITED STATES.

Notwithstanding any other provision of law (whether enacted before or after the enactment of this section) which grants to any instrumentality of the United States an exemption from taxation, such instrumentality shall not be exempt from the tax imposed by section 3111 unless such other provision of law grants a specific exemption, by reference to section 3111 (or the corresponding section of prior law), from the tax imposed by such section.

Subchapter C—General Provisions

SEC. 3121. DEFINITIONS.

(a)  Wages.—For purposes of this chapter, the term “wages” means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include—

(1)  in the case of the taxes imposed by sections 3101(a) and 3111(a) that part of the remuneration which, after remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) equal to the contribution and benefit base (as determined under section 230 of the Social Security Act) with respect to employment has been paid to an individual by an employer during the calendar year with respect to which such applicable contribution and benefit base is effective, is paid to such individual by such employer during such calendar year. If an employer (hereinafter referred to as successor employer) during any calendar year acquires substantially all the property used in a trade or business of another employer (hereinafter referred to as a predecessor), or used in a separate unit of a trade or business of a predecessor, and immediately after the acquisition employs in his trade or business an individual who immediately prior to the acquisition was employed in the trade or business of such predecessor, then, for the purpose of determining whether the successor employer has paid remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) with respect to employment equal to the contribution and benefit base (as determined under subsection (x)) to such individual during such calendar year, any remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) with respect to employment paid (or considered under this paragraph as having been paid) to such individual by such predecessor during such calendar year and prior to such acquisition shall be considered as having been paid by such successor employer;

(2)  the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of—

(A)  sickness or accident disability (but, in the case of payments made to an employee or any of his dependents, this subparagraph shall exclude from the term “wages” only payments which are received under a workmen’s compensation law), or

(B)  medical or hospitalization expenses in connection with sickness or accident disability, or

(C)  death, except that this paragraph does not apply to a payment for group-term life insurance to the extent that such payment is includible in the gross income of the employee;

(3)  [Stricken.[97]]

(4)  any payment on account of sickness or accident disability, or medical or hospitalization expenses in connection with sickness or accident disability, made by an employer to, or on behalf of, an employee after the expiration of 6 calendar months following the last calendar month in which the employee worked for such employer;

(5)  any payment made to, or on behalf of, an employee or his beneficiary—

(A)  from or to a trust described in section 401(a) which is exempt from tax under section 501(a) at the time of such payment unless such payment is made to an employee of the trust as remuneration for services rendered as such employee and not as a beneficiary of the trust,

(B)  under or to an annuity plan which, at the time of such payment, is a plan described in section 403(a),

(C)  under a simplified employee pension (as defined in section 408(k)(1)), other than any contributions described in section 408(k)(6),

(D)  under or to an annuity contract described in section 403(b), other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement (whether evidenced by a written instrument or otherwise),

(E)  under or to an exempt governmental deferred compensation plan (as defined in subsection (v)(3)),

(F)  to supplement pension benefits under a plan or trust described in any of the foregoing provisions of this paragraph to take into account some portion or all of the increase in the cost of living (as determined by the Secretary of Labor) since retirement but only if such supplemental payments are under a plan which is treated as a welfare plan under section 3(2)(B)(ii) of the Employee Retirement Income Security Act of 1974,

(G)  under a cafeteria plan (within the meaning of section 125) if such payment would not be treated as wages without regard to such plan and it is reasonable to believe that (if section 125 applied for purposes of this section) section 125 would not treat any wages as constructively received,

(H)  under an arrangement to which section 408(p) applies, other than any elective contributions under paragraph (2)(A)(i) thereof, or

(I)  under a plan described in section 457(e)(11)(A)(ii) and maintained by an eligible employer (as defined in section 457(e)(1));

(6)  the payment by an employer (without deduction from the remuneration of the employee)—

(A)  of the tax imposed upon an employee under section 3101, or

(B)  of any payment required from an employee under a State unemployment compensation law,

with respect to remuneration paid to an employee for domestic service in a private home of the employer or for agricultural labor;

(7)(A)  remuneration paid in any medium other than cash to an employee for service not in the course of the employer’s trade or business or for domestic service in a private home of the employer;

(B)  cash remuneration paid by an employer in any calendar year to an employee for domestic service in a private home of the employer (including domestic) on a farm operated for profit, if the cash remuneration paid in such year by the employer to the employee for such service is less than the applicable dollar threshold (as defined in subsection (x)) for such year;

(C)  cash remuneration paid by an employer in any calendar year to an employee for service not in the course of the employer’s trade or business, if the cash remuneration paid in such year by the employer to the employee for such service is less than $100. As used in this subparagraph, the term “service not in the course of the employer’s trade or business” does not include domestic service in a private home of the employer and does not include service described in subsection (g)(5);

(8)(A)  remuneration paid in any medium other than cash for agricultural labor;

(B)  cash remuneration paid by an employer in any calendar year to an employee for agricultural labor unless—

(i)  the cash remuneration paid in such year by the employer to the employee for such labor is $150 or more, or

(ii)  the employer’s expenditures for agricultural labor in such year equal or exceed $2,500,

except that clause (ii) shall not apply in determining whether remuneration paid to an employee constitutes “wages” under this section if such employee (I) is employed as a hand harvest laborer and is paid on a piece rate basis in an operation which has been, and is customarily and generally recognized as having been, paid on a piece rate basis in the region of employment, (II) commutes daily from his permanent residence to the farm on which he is so employed, and (III) has been employed in agriculture less than 13 weeks during the preceding calendar year;

(9)  [Stricken.[98]]

(10)  remuneration paid by an employer in any calendar year to an employee for service described in subsection (d)(3)(C) (relating to home workers), if the cash remuneration paid in such year by the employer to the employee for such service is less than $100;

(11)  remuneration paid to or on behalf of an employee if (and to the extent that) at the time of the payment of such remuneration it is reasonable to believe that a corresponding deduction is allowable under section 217 (determined without regard to section 274(n));

(12)(A)  tips paid in any medium other than cash;

(B)  cash tips received by an employee in any calendar month in the course of his employment by an employer unless the amount of such cash tips is $20 or more;

(13)  any payment or series of payments by an employer to an employee or any of his dependents which is paid—

(A)  upon or after the termination of an employee’s employment relationship because of (i) death, or (ii) retirement for disability, and

(B)  under a plan established by the employer which makes provision for his employees generally or a class or classes of his employees (or for such employees or class or classes of employees and their dependents),

other than any such payment or series of payments which would have been paid if the employee’s employment relationship had not been so terminated;

(14)  any payment made by an employer to a survivor or the estate of a former employee after the calendar year in which such employee died;

(15)  any payment made by an employer to an employee, if at the time such payment is made such employee is entitled to disability insurance benefits under section 223(a) of the Social Security Act and such entitlement commenced prior to the calendar year in which such payment is made, and if such employee did not perform any services for such employer during the period for which such payment is made;

(16)  remuneration paid by an organization exempt from income tax under section 501(a) (other than an organization described in section 401(a)) or under section 521 in any calendar year to an employee for service rendered in the employ of such organization, if the remuneration paid in such year by the organization to the employee for such service is less than $100;

(17)  any contribution, payment, or service provided by an employer which may be excluded from the gross income of an employee, his spouse, or his dependents, under the provisions of section 120 (relating to amounts received under qualified group legal services plans);

(18)  any payment made, or benefit furnished, to or for the benefit of an employee if at the time of such payment or such furnishing it is reasonable to believe that the employee will be able to exclude such payment or benefit from income under section 127, 129, 134(b)(4), or 134(b)(5);

(19)  the value of any meals or lodging furnished by or on behalf of the employer if at the time of such furnishing it is reasonable to believe that the employee will be able to exclude such items from income under section 119;

(20)  any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from income under section 74(c), 108(f)(4) 117, or 132; or

(21)  in the case of a member of an Indian tribe, any remuneration on which no tax is imposed by this chapter by reason of section 7873 (relating to income derived by Indians from exercise of fishing rights);

(22)  remuneration on account of.—(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or (B) any disposition by the individual of such stock; or

(23)  any benefit or payment which is excludable from the gross income of the employee under section 139B(b).

Nothing in the regulations prescribed for purposes of chapter 24 (relating to income tax withholding) which provides an exclusion from “wages” as used in such chapter shall be construed to require a similar exclusion from “wages” in the regulations prescribed for purposes of this chapter. Except as otherwise provided in regulations prescribed by the Secretary, any third party which makes a payment included in wages solely by reason of the parenthetical matter contained in subparagraph (A) of paragraph (2) shall be treated for purposes of this chapter and chapter 22 as the employer with respect to such wages.

(b)  Employment.—For purposes of this chapter, the term “employment” means any service, of whatever nature, performed (A) by an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States, or (ii) on or in connection with an American vessel or American aircraft under a contract of service which is entered into within the United States or during the performance of which and while the employee is employed on the vessel or aircraft it touches at a port in the United States, if the employee is employed on and in connection with such vessel or aircraft when outside the United States, or (B) outside the United States by a citizen or resident of the United States as an employee for an American employer (as defined in subsection (h)), or (C) if it is service, regardless of where or by whom performed, which is designated as employment or recognized as equivalent to employment under an agreement entered into under section 233 of the Social Security Act; except that such term shall not include—

(1)  service performed by foreign agricultural workers lawfully admitted to the United States from the Bahamas, Jamaica, and the other British West Indies, or from any other foreign country or possession thereof, on a temporary basis to perform agricultural labor;

(2)  domestic service performed in a local college club, or local chapter of a college fraternity or sorority, by a student who is enrolled and is regularly attending classes at a school, college, or university;

(3)(A)  service performed by a child under the age of 18 in the employ of his father or mother;

(B)  service not in the course of the employer’s trade or business, or domestic service in a private home of the employer, performed by an individual under the age of 21 in the employ of his father or mother, or performed by an individual in the employ of his spouse or son or daughter; except that the provisions of this subparagraph shall not be applicable to such domestic service performed by an individual in the employ of his son or daughter if—

(i)  the employer is a surviving spouse or a divorced individual and has not remarried, or has a spouse living in the home who has a mental or physical condition which results in such spouse’s being incapable of caring for a son, daughter, stepson, or stepdaughter (referred to in clause (ii)) for at least 4 continuous weeks in the calendar quarter in which the service is rendered, and

(ii)  a son, daughter, stepson, or stepdaughter of such employer is living in the home, and

(iii)  the son, daughter, stepson, or stepdaughter (referred to in clause (ii)) has not attained age 18 or has a mental or physical condition which requires the personal care and supervision of an adult for at least 4 continuous weeks in the calendar quarter in which the service is rendered;

(4)  service performed by an individual on or in connection with a vessel not an American vessel, or on or in connection with an aircraft not an American aircraft, if (A) the individual is employed on and in connection with such vessel or aircraft, when outside the United States and (B)(i) such individual is not a citizen of the United States or (ii) the employer is not an American employer;

(5)  service performed in the employ of the United States or any instrumentality of the United States, if such service—

(A)  would be excluded from the term “employment” for purposes of this title if the provisions of paragraphs (5) and (6) of this subsection as in effect in January 1983 had remained in effect, and

(B)  is performed by an individual who—

(i)  has been continuously performing service described in subparagraph (A) since December 31, 1983, and for purposes of this clause—

(I)  if an individual performing service described in subparagraph (A) returns to the performance of such service after being separated therefrom for a period of less than 366 consecutive days, regardless of whether the period began before, on, or after December 31, 1983, then such service shall be considered continuous,

(II)  if an individual performing service described in subparagraph (A) returns to the performance of such service after being detailed or transferred to an international organization as described under section 3343 of subchapter III of chapter 33 of title 5, United States Code, or under section 3581 of chapter 35 of such title, then the service performed for that organization shall be considered service described in subparagraph (A),

(III)  if an individual performing service described in subparagraph (A) is reemployed or reinstated after being separated from such service for the purpose of accepting employment with the American Institute in Taiwan as provided under section 3310 of chapter 48 of title 22, United States Code, then the service performed for that Institute shall be considered service described in subparagraph (A),

(IV)  if an individual performing service described in subparagraph (A) returns to the performance of such service after performing service as a member of a uniformed service (including, for purposes of this clause, service in the National Guard and temporary service in the Coast Guard Reserve) and after exercising restoration or reemployment rights as provided under chapter 43 of title 38, United States Code, then the service so performed as a member of a uniformed service shall be considered service described in subparagraph (A), and

(V)  if an individual performing service described in subparagraph (A) returns to the performance of such service after employment (by a tribal organization) to which section 105(e)(2) of the Indian Self-Determination Act applies, then the service performed for that tribal organization shall be considered service described in subparagraph (A); or

(ii)  is receiving an annuity from the Civil Service Retirement and Disability Fund, or benefits (for service as an employee) under another retirement system established by a law of the United States for employees of the Federal Government (other than for members of the uniformed service);

except that this paragraph shall not apply with respect to any such service performed on or after any date on which such individual performs—

(C)  service performed as the President or Vice President of the United States,

(D)  service performed—

(i)  in a position placed in the Executive Schedule under sections 5312 through 5317 of title 5, United States Code,

(ii)  as a noncareer appointee in the Senior Executive Service or a noncareer member of the Senior Foreign Service, or

(iii)  in a position to which the individual is appointed by the President (or his designee) or the Vice President under section 105(a)(1), 106(a)(1), or 107(a)(1) or (b)(1) of title 3, United States Code, if the maximum rate of basic pay for such position is at or above the rate for level V of the Executive Schedule,

(E)  service performed as the Chief Justice of the United States, an Associate Justice of the Supreme Court, a judge of a United States court of appeals, a judge of a United States district court (including the district court of a territory), a judge of the United States Claims Court[99], a judge of the United States Court of International Trade, a judge of the United States Tax Court, a United States magistrate, or a referee in bankruptcy or United States bankruptcy judge,

(F)  service performed as a Member, Delegate, or Resident Commissioner of or to the Congress,

(G)  any other service in the legislative branch of the Federal Government if such service—

(i)  is performed by an individual who was not subject to subchapter III of chapter 83 of title 5, United States Code, or to another retirement system established by a law of the United States for employees of the Federal Government (other than for members of the uniformed services), on December 31, 1983, or

(ii)  is performed by an individual who has, at any time after December 31, 1983, received a lump-sum payment under section 8342(a) of title 5, United States Code, or under the corresponding provision of the law establishing the other retirement system described in clause (i), or

(iii)  is performed by an individual after such individual has otherwise ceased to be subject to subchapter III of chapter 83 of title 5, United States Code (without having an application pending for coverage under such subchapter), while performing service in the legislative branch (determined without regard to the provisions of subparagraph (B) relating to continuity of employment), for any period of time after December 31, 1983,

and for purposes of this subparagraph (G) an individual is subject to such subchapter III or to any such other retirement system at any time only if (a) such individual’s pay is subject to deductions, contributions, or similar payments (concurrent with the service being performed at that time) under section 8334(a) of such title 5 or the corresponding provision of the law establishing such other system, or (in a case to which section 8332(k)(1) of such title applies) such individual is making payments of amounts equivalent to such deductions, contributions, or similar payments while on leave without pay, or (b) such individual is receiving an annuity from the Civil Service Retirement and Disability Fund, or is receiving benefits (for service as an employee) under another retirement system established by a law of the United States for employees of the Federal Government (other than for members of the uniformed services), or

(H)  service performed by an individual—

(i)  on or after the effective date of an election by such individual, under section 301 of the Federal Employees’ Retirement System Act of 1986[100], section 307 of the Central Intelligence Agency Retirement Act (50 U.S.C. 2157), or the Federal Employees’ Retirement System Open Enrollment Act of 1997 to become subject to the Federal Employees’ Retirement System provided in chapter 84 of title 5, United States Code, or

(ii)  on or after the effective date of an election by such individual, under regulations issued under section 860 of the Foreign Service Act of 1980, to become subject to the Foreign Service Pension System provided in subchapter II of chapter 8 of title I of such Act;

(6)  service performed in the employ of the United States or any instrumentality of the United States if such service is performed—

(A)  in a penal institution of the United States by an inmate thereof;

(B)  by any individual as an employee included under section 5351(2) of title 5, United States Code (relating to certain interns, student nurses, and other student employees of hospitals of the Federal Government), other than as a medical or dental intern or a medical or dental resident in training; or

(C)  by any individual as an employee serving on a temporary basis in case of fire, storm, earthquake, flood, or other similar emergency;

(7)  service performed in the employ of a State, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned thereby, except that this paragraph shall not apply in the case of—

(A)  service which, under subsection (j), constitutes covered transportation service,

(B)  service in the employ of the Government of Guam or the Government of American Samoa or any political subdivision thereof, or of any instrumentality of any one or more of the foregoing which is wholly owned thereby, performed by an officer or employee thereof (including a member of the legislature of any such Government or political subdivision), and, for purposes of this title with respect to the taxes imposed by this chapter—

(i)  any person whose service as such an officer or employee is not covered by a retirement system established by a law of the United States shall not, with respect to such service, be regarded as an employee of the United States or any agency or instrumentality thereof, and

(ii)  the remuneration for service described in clause (i) (including fees paid to a public official) shall be deemed to have been paid by the Government of Guam or the Government of American Samoa or by a political subdivision thereof or an instrumentality of any one or more of the foregoing which is wholly owned thereby, whichever is appropriate,

(C)  service performed in the employ of the District of Columbia or any instrumentality which is wholly owned thereby, if such service is not covered by a retirement system established by a law of the United States (other than the Federal Employees Retirement System provided in chapter 84 of title 5, United States Code); except that the provisions of this subparagraph shall not be applicable to service performed—

(i)  in a hospital or penal institution by a patient or inmate thereof;

(ii)  by any individual as an employee included under section 5351(2) of title 5, United States Code (relating to certain interns, student nurses, and other student employees of hospitals of the District of Columbia Government), other than as a medical or dental intern or as a medical or dental resident in training;

(iii)  by any individual as an employee serving on a temporary basis in case of fire, storm, snow, earthquake, flood or other similar emergency; or

(iv)  by a member of a board, committee, or council of the District of Columbia, paid on a per diem, meeting, or other fee basis,

(D)  service performed in the employ of the Government of Guam (or any instrumentality which is wholly owned by such Government) by an employee properly classified as a temporary or intermittent employee, if such service is not covered by a retirement system established by a law of Guam; except that (i) the provisions of this subparagraph shall not be applicable to services performed by an elected official or a member of the legislature or in a hospital or penal institution by a patient or inmate thereof, and (ii) for purposes of this subparagraph, clauses (i) and (ii) of subparagraph (B) shall apply,

(E)  service included under an agreement entered into pursuant to section 218 of the Social Security Act, or

(F)  service in the employ of a State (other than the District of Columbia, Guam, or American Samoa), of any political subdivision thereof, or of any instrumentality of any one or more of the foregoing which is wholly owned thereby, by an individual who is not a member of a retirement system of such State, political subdivision, or instrumentality, except that the provisions of this subparagraph shall not be applicable to service performed—

(i)  by an individual who is employed to relieve such individual from unemployment;

(ii)  in a hospital, home, or other institution by a patient or inmate thereof,

(iii)  by any individual as an employee serving on a temporary basis in case of fire, storm, snow, earthquake, flood, or other similar emergency;

(iv)  by an election official or election worker if the remuneration paid in a calendar year for such service is less than $1,000 with respect to service performed during any calendar year commending on or after January 1, 1995, ending on or before December 31, 1999, and the adjusted amount determined under section 218(c)(8)(B) of the Social Security Act for any calendar year commencing on or after January 1, 2000, with respect to service performed during such calendar year; or

(v)  by an employee in a position compensated solely on a fee basis which is treated pursuant to section 1402(c)(2)(E) as a trade or business for purposes of inclusion of such fees in net earnings from self-employment;

for purposes of this subparagraph, except as provided in regulations prescribed by the Secretary, the term “retirement system” has the meaning given such term by section 218(b)(4) of the Social Security Act.

(8)(A)  service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order, except that this subparagraph shall not apply to service performed by a member of such an order in the exercise of such duties, if an election of coverage under subsection (r) is in effect with respect to such order, or with respect to the autonomous subdivision thereof to which such member belongs;

(B)  service performed in the employ of a church or qualified church-controlled organization if such church or organization has in effect an election under subsection (w), other than service in an unrelated trade or business (within the meaning of section 513(a));

(9)  service performed by an individual as an employee or employee representative as defined in section 3231;

(10)  service performed in the employ of—

(A)  a school, college, or university, or

(B)  an organization described in section 509(a)(3) if the organization is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of a school, college, or university and is operated, supervised, or controlled by or in connection with such school, college, or university, unless it is a school, college, or university of a State or a political subdivision thereof and the services performed in its employ by a student referred to in section 218(c)(5) of the Social Security Act are covered under the agreement between the Commissioner of Social Security and such State entered into pursuant to section 218 of such Act;

if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university;

(11)  service performed in the employ of a foreign government (including service as a consular or other officer or employee or a nonautomatic representative);

(12)  service performed in the employ of an instrumentality wholly owned by a foreign government—

(A)  if the service is of a character similar to that performed in foreign countries by employees of the United States Government or of an instrumentality thereof; and

(B)  if the Secretary of State shall certify to the Secretary of the Treasury that the foreign government, with respect to whose instrumentality and employees thereof exemption is claimed, grants an equivalent exemption with respect to similar service performed in the foreign country by employees of the United States Government and of instrumentalities thereof;

(13)  service performed as a student nurse in the employ of a hospital or a nurses’ training school by an individual who is enrolled and is regularly attending classes in a nurses’ training school chartered or approved pursuant to State law;

(14)(A)  service performed by an individual under the age of 18 in the delivery or distribution of newspapers or shopping news, not including delivery or distribution to any point for subsequent delivery or distribution;

(B)  service performed by an individual in, and at the time of, the sale of newspapers or magazines to ultimate consumers, under an arrangement under which the newspapers or magazines are to be sold by him at a fixed price, his compensation being based on the retention of the excess of such price over the amount at which the newspapers or magazines are charged to him, whether or not he is guaranteed a minimum amount of compensation for such service, or is entitled to be credited with the unsold newspapers or magazines turned back;

(15)  service performed in the employ of an international organization, except service which constitutes “employment” under subsection (y);

(16)  service performed by an individual under an arrangement with the owner or tenant of land pursuant to which—

(A)  such individual undertakes to produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land,

(B)  the agricultural or horticultural commodities produced by such individual, or the proceeds therefrom, are to be divided between such individual and such owner or tenant, and

(C)  the amount of such individual’s share depends on the amount of the agricultural or horticultural commodities produced;

(17)  service in the employ of any organization which is performed (A) in any year during any part of which such organization is registered, or there is in effect a final order of the Subversive Activities Control Board requiring such organization to register, under the Internal Security Act of 1950, as amended, as a Communist-action organization, a Communist-front organization, or a Communist-infiltrated organization, and (B) after June 30, 1956;

(18)  service performed in Guam by a resident of the Republic of the Philippines while in Guam on a temporary basis as a nonimmigrant alien admitted to Guam pursuant to section 101(a)(15)(H)(ii) of the Immigration and Nationality Act (8 U.S.C. 1101(a)(15)(H)(ii));

(19)  Service[101] which is performed by a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended, and which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q) as the case may be; or

(20)  service (other than service described in paragraph (3)(A)) performed by an individual on a boat engaged in catching fish or other forms of aquatic animal life under an arrangement with the owner or operator of such boat pursuant to which—

(A)  such individual does not receive any cash remuneration other than as provided in subparagraph (B) and other than cash remuneration—

(i)  which does not exceed $100 per trip;

(ii)  which is contingent on a minimum catch; and

(iii)  which is paid solely for additional duties (such as mate, engineer, or cook) for which additional cash remuneration is traditional in the industry,

(B)  such individual receives a share of the boat’s (or the boats’ in the case of a fishing operation involving more than one boat) catch of fish or other forms of aquatic animal life or a share of the proceeds from the sale of such catch, and

(C)  the amount of such individual’s share depends on the amount of the boat’s (or the boats’ in the case of a fishing operation involving more than one boat) catch of fish or other forms of aquatic animal life,

but only if the operating crew of such boat (or each boat from which the individual receives a share in the case of a fishing operation involving more than one boat) is normally made up of fewer than 10 individuals; or

(21)  domestic service in a private home of an employer which—

(A)  is performed in any year by an individual under the age of 18 during any portion of such year; and

(B)  is not the principal occupation of such employee.

For purposes of paragraph (20), the operating crew of a boat shall be treated as normally made up of fewer than 10 individuals if the average size of the operating crew on trips made during the preceding 4 calendar quarters consisted of fewer than 10 individuals.

(c)  Included and Excluded Service.—For purposes of this chapter, if the services performed during one-half or more of any pay period by an employee for the person employing him constitute employment, all the services of such employee for such period shall be deemed to be employment; but if the services performed during more than one-half of any such pay period by an employee for the person employing him do not constitute employment, then none of the services of such employee for such period shall be deemed to be employment. As used in this subsection, the term “pay period” means a period (of not more than 31 consecutive days) for which a payment of remuneration is ordinarily made to the employee by the person employing him. This subsection shall not be applicable with respect to services performed in a pay period by an employee for the person employing him, where any of such service is excepted by subsection (b)(9).

(d)  Employee.—For purposes of this chapter, the term “employee” means—

(1)  any officer of a corporation; or

(2)  any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee; or

(3)  any individual (other than an individual who is an employee under paragraph (1) or (2)) who performs services for remuneration for any person—

(A)  as an agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services, for his principal;

(B)  as a full-time life insurance salesman;

(C)  as a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or

(D)  as a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-time basis in the solicitation on behalf of, and the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations;

if the contract of service contemplates that substantially all of such services are to be performed personally by such individual; except that an individual shall not be included in the term “employee” under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed; or

(4)  any individual who performs services that are included under an agreement entered into pursuant to section 218 of the Social Security Act.

(e)  State, United States, and Citizen.—For purposes of this chapter—

(1)  State.—The term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa.

(2)  United States.—The term “United States” when used in a geographical sense includes the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa.

An individual who is a citizen of the Commonwealth of Puerto Rico (but not otherwise a citizen of the United States) shall be considered, for purposes of this section, as a citizen of the United States.

(f)  American Vessel and Aircraft.—For purposes of this chapter, the term “American vessel” means any vessel documented or numbered under the laws of the United States; and includes any vessel which is neither documented or numbered under the laws of the United States nor documented under the laws of any foreign country, if its crew is employed solely by one or more citizens or residents of the United States or corporations organized under the laws of the United States or of any State; and the term “American aircraft” means an aircraft registered under the laws of the United States.

(g)  Agricultural Labor.—For purposes of this chapter, the term “agricultural labor” includes all service performed—

(1)  on a farm, in the employ of any person, in connection with cultivating the soil, or in connection with raising or harvesting any agricultural or horticultural commodity, including the raising, shearing, feeding, caring for, training, and management of livestock, bees, poultry, and fur-bearing animals and wildlife;

(2)  in the employ of the owner or tenant or other operator of a farm, in connection with the operation, management, conservation, improvement, or maintenance of such farm and its tools and equipment, or in salvaging timber or clearing land of brush and other debris left by a hurricane, if the major part of such service is performed on a farm;

(3)  in connection with the production or harvesting of any commodity defined as an agricultural commodity in section 15(g) of the Agricultural Marketing Act, as amended (12 U.S.C. 1141j), or in connection with the ginning of cotton, or in connection with the operation or maintenance of ditches, canals, reservoirs, or waterways, not owned or operated for profit, used exclusively for supplying and storing water for farming purposes;

(4)(A)  in the employ of the operator of a farm in handling, planting, drying, packing, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to a carrier for transportation to market, in its unmanufactured state, any agricultural or horticultural commodity; but only if such operator produced more than one-half of the commodity with respect to which such service is performed;

(B)  in the employ of a group of operators of farms (other than a cooperative organization) in the performance of service described in subparagraph (A), but only if such operators produced all of the commodity with respect to which such service is performed. For purposes of this subparagraph, any unincorporated group of operators shall be deemed a cooperative organization if the number of operators comprising such group is more than 20 at any time during the calendar year in which such service is performed;

(C)  the provisions of subparagraphs (A) and (B) shall not be deemed to be applicable with respect to service performed in connection with commercial canning or commercial freezing or in connection with any agricultural or horticultural commodity after its delivery to a terminal market for distribution for consumption; or

(5)  on a farm operated for profit if such service is not in the course of the employer’s trade or business.

(h)  American Employer.—For purposes of this chapter, the term “American employer” means an employer which is—

(1)  the United States or any instrumentality thereof,

(2)  an individual who is a resident of the United States,

(3)  a partnership, if two-thirds or more of the partners are residents of the United States,

(4)  a trust, if all of the trustees are residents of the United States, or

(5)  a corporation organized under the laws of the United States or of any State.

(i)  Computation of Wages in Certain Cases.—

(1)  Domestic service.—For purposes of this chapter, in the case of domestic service described in subsection (a)(7)(B), any payment of cash remuneration for such service which is more or less than a whole-dollar amount shall, under such conditions and to such extent as may be prescribed by regulations made under this chapter, be computed to the nearest dollar. For the purpose of the computation to the nearest dollar, the payment of a fractional part of a dollar shall be disregarded unless it amounts to one-half dollar or more, in which case it shall be increased to $1. The amount of any payment of cash remuneration so computed to the nearest dollar shall, in lieu of the amount actually paid, be deemed to constitute the amount of cash remuneration for purposes of subsection (a)(7)(B).

(2)  Service in the uniformed services.—For purposes of this chapter, in the case of an individual performing service, as a member of a uniformed service, to which the provisions of subsection (m)(1) are applicable, the term “wages” shall, subject to the provisions of subsection (a)(1) of this section, include as such individual’s remuneration for such service only (A) his basic pay as described in chapter 3 and section 1009 of title 37, United States Code, in the case of an individual performing service to which subparagraph (A) of such subsection (m)(1) applies, or (B) his compensation for such service as determined under section 206(a) of title 37, United States Code, in the case of an individual performing service to which subparagraph (B) of such subsection (m)(1) applies.

(3)  Peace corps volunteer service.—For purposes of this chapter, in the case of an individual performing service, as a volunteer or volunteer leader within the meaning of the Peace Corps Act, to which the provisions of section 3121(p) are applicable, the term “wages” shall, subject to the provisions of subsection (a)(1) of this section, include as such individual’s remuneration for such service only amounts paid pursuant to section 5(c) or 6(1) of the Peace Corps Act.

(4)  Service performed by certain members of religious orders.—For purposes of this chapter, in any case where an individual is a member of a religious order (as defined in subsection (r)(2)) performing service in the exercise of duties required by such order, and an election of coverage under subsection (r) is in effect with respect to such order or with respect to the autonomous subdivision thereof to which such member belongs, the term “wages” shall, subject to the provisions of subsection (a)(1), include as such individual’s remuneration for such service the fair market value of any board, lodging, clothing, and other perquisites furnished to such member by such order or subdivision thereof or by any other person or organization pursuant to an agreement with such order or subdivision, except that the amount included as such individual’s remuneration under this paragraph shall not be less than $100 a month.

(5)  Service performed by certain retired justices and judges.—For purposes of this chapter, in the case of an individual performing service under the provisions of section 294 of title 28, United States Code (relating to assignment of retired justices and judges to active duty), the term “wages” shall not include any payment under section 371(b) of such title 28 which is received during the period of such service.

(j)  Covered Transportation Service.—For purposes of this chapter—

(1)  Existing transportation systems—General rule.—Except as provided in paragraph (2), all service performed in the employ of a State or political subdivision in connection with its operation of a public transportation system shall constitute covered transportation service if any part of the transportation system was acquired from private ownership after 1936 and prior to 1951.

(2)  Existing transportation systems—Cases in which no transportation employees, or only certain employees, are covered.—Service performed in the employ of a State or political subdivision in connection with the operation of its public transportation system shall not constitute covered transportation service if—

(A)  any part of the transportation system was acquired from private ownership after 1936 and prior to 1951, and substantially all service in connection with the operation of the transportation system was, on December 31, 1950, covered under a general retirement system providing benefits which, by reason of a provision of the State constitution dealing specifically with retirement systems of the State or political subdivisions thereof, cannot be diminished or impaired; or

(B)  no part of the transportation system operated by the State or political subdivision on December 31, 1950, was acquired from private ownership after 1936 and prior to 1951;

except that if such State or political subdivision makes an acquisition after 1950 from private ownership of any part of its transportation system, then, in the case of any employee who—

(C)  became an employee of such State or political subdivision in connection with and at the time of its acquisition after 1950 of such part, and

(D)  prior to such acquisition rendered service in employment (including as employment service covered by an agreement under section 218 of the Social Security Act) in connection with the operation of such part of the transportation system acquired by the State or political subdivision,

the service of such employee in connection with the operation of the transportation system shall constitute covered transportation service, commencing with the first day of the third calendar quarter following the calendar quarter in which the acquisition of such part took place, unless on such first day such service of such employee is covered by a general retirement system which does not, with respect to such employee, contain special provisions applicable only to employees described in subparagraph (C).

(3)  Transportation systems acquired after 1950.—All service performed in the employ of a State or political subdivision thereof in connection with its operation of a public transportation system shall constitute covered transportation service if the transportation system was not operated by the State or political subdivision prior to 1951 and, at the time of its first acquisition (after 1950) from private ownership of any part of its transportation system, the State or political subdivision did not have a general retirement system covering substantially all service performed in connection with the operation of the transportation system.

(4)  Definitions.—For purposes of this subsection—

(A)  The term “general retirement system” means any pension, annuity, retirement, or similar fund or system established by a State or by a political subdivision thereof for employees of the State, political subdivision, or both; but such term shall not include such a fund or system which covers only service performed in positions connected with the operation of its public transportation system.

(B)  A transportation system or a part thereof shall be considered to have been acquired by a State or political subdivision from private ownership if prior to the acquisition service performed by employees in connection with the operation of the system or part thereof acquired constituted employment under this chapter or subchapter A of chapter 9 of the Internal Revenue Code of 1939 or was covered by an agreement made pursuant to section 218 of the Social Security Act and some of such employees became employees of the State or political subdivision in connection with and at the time of such acquisition.

(C)  The term “political subdivision” includes an instrumentality of—

(i)  a State,

(ii)  one or more political subdivisions of a State, or

(iii)  a State and one or more of its political subdivisions.

(k)  [Repealed.[102]]

(l)  Agreements Entered Into by American Employers With Respect to Foreign Affiliates.—

(1)  Agreement with respect to certain employees of foreign affiliate.—The Secretary shall, at the American employer’s request, enter into an agreement (in such manner and form as may be prescribed by the Secretary) with any American employer (as defined in subsection (h)) who desires to have the insurance system established by title II of the Social Security Act extended to service performed outside the United States in the employ of any 1 or more of such employer’s foreign affiliates (as defined in paragraph (6)) by all employees who are citizens or residents of the United States, except that the agreement shall not apply to any service performed by, or remuneration paid to, an employee if such service or remuneration would be excluded from the term “employment” or “wages”, as defined in this section, had the service been performed in the United States. Such agreement may be amended at any time so as to be made applicable, in the same manner and under the same conditions, with respect to any other foreign affiliate of such American employer. Such agreement shall be applicable with respect to citizens or residents of the United States who, on or after the effective date of the agreement, are employees of and perform services outside the United States for any foreign affiliate specified in the agreement. Such agreement shall provide—

(A)  that the American employer shall pay to the Secretary, at such time or times as the Secretary may by regulations prescribe, amounts equivalent to the sum of the taxes which would be imposed by sections 3101 and 3111 (including amounts equivalent to the interest, additions to the taxes, additional amounts, and penalties which would be applicable) with respect to the remuneration which would be wages if the services covered by the agreement constituted employment as defined in this section; and

(B)  that the American employer will comply with such regulations relating to payments and reports as the Secretary may prescribe to carry out the purposes of this subsection.

(2)  Effective period of agreement.—An agreement entered into pursuant to paragraph (1) shall be in effect for the period beginning with the first day of the calendar quarter in which such agreement is entered into or the first day of the succeeding calendar quarter, as may be specified in the agreement; except that in case such agreement is amended to include the services performed for any other affiliate and such amendment is executed after the first month following the first calendar quarter for which the agreement is in effect, the agreement shall be in effect with respect to service performed for such other affiliate only after the calendar quarter in which such amendment is executed. Notwithstanding any other provision of this subsection, the period for which any such agreement is effective with respect to any foreign entity shall terminate at the end of any calendar quarter in which the foreign entity, at any time in such quarter, ceases to be a foreign affiliate as defined in paragraph (6).

(3)  No termination of agreement.—No agreement under this subsection may be terminated, either in its entirety or with respect to any foreign affiliate, on or after June 15, 1989.

(4)  Deposits in trust funds.—For purposes of section 201 of the Social Security Act, relating to appropriations to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, such remuneration—

(A)  paid for services covered by an agreement entered into pursuant to paragraph (1) as would be wages if the services constituted employment, and

(B)  as is reported to the Secretary pursuant to the provisions of such agreement or of the regulations issued under this subsection,

shall be considered wages subject to the taxes imposed by this chapter.

(5)  Overpayments and underpayments.—

(A)  If more or less than the correct amount due under an agreement entered into pursuant to this subsection is paid with respect to any payment of remuneration, proper adjustments with respect to the amounts due under such agreement shall be made, without interest, in such manner and at such times as may be required by regulations prescribed by the Secretary.

(B)  If an overpayment cannot be adjusted under subparagraph (A), the amount thereof shall be paid by the Secretary, through the Fiscal Service of the Treasury Department, but only if a claim for such overpayment is filed with the Secretary within two years from the time such overpayment was made.

(6)  Foreign affiliate defined.—For purposes of this subsection and section 210(a) of the Social Security Act—

(A)  In general.—A foreign affiliate of an American employer is any foreign entity in which such American employer has not less than a 10-percent interest.

(B)  Determination of 10-percent interest.—For purposes of subparagraph (A), an American employer has a 10-percent interest in any entity if such employer has such an interest directly (or through one or more entities)—

(i)  in the case of a corporation, in the voting stock thereof, and

(ii)  in the case of any other entity, in the profits thereof.

(7)  American employer as separate entity.—Each American employer which enters into an agreement pursuant to paragraph (1) of this subsection shall, for purposes of this subsection and section 6413(c)(2)(C), relating to special refunds in the case of employees of certain foreign entities, be considered an employer in its capacity as a party to such agreement separate and distinct from its identity as a person employing individuals on its own account.

(8)  Regulations.—Regulations of the Secretary to carry out the purposes of this subsection shall be designed to make the requirements imposed on American employers with respect to services covered by an agreement entered into pursuant to this subsection the same, so far as practicable, as those imposed upon employers pursuant to this title with respect to the taxes imposed by this chapter.

(m)  Service in the Uniformed Services.—For purposes of this chapter—

(1)  Inclusion of service.—The term “employment” shall, notwithstanding the provisions of subsection (b) of this section, include—

(A)  service performed by an individual as a member of a uniformed service on active duty, but such term shall not include any such service which is performed while on leave without pay, and

(B)  service performed by an individual as a member of a uniformed service on inactive duty training.

(2)  Active duty.—The term “active duty” means “active duty” as described in section 102 of the Servicemen’s and Veterans’ Survivor Benefits Act, except that it shall also include “active duty for training” as described in such section.

(3)  Inactive duty training.—The term “inactive duty training” means “inactive duty training” as described in such section 102.

(n)  Member of a Uniformed Service.—For purposes of this chapter, the term “member of a uniformed service” means any person appointed, enlisted, or inducted in a component of the Army, Navy, Air Force, Marine Corps, or Coast Guard (including a reserve component as defined in section 101(27) of title 38, United States Code), or in one of those services without specification of component, or as a commissioned officer of the Coast and Geodetic Survey, the National Oceanic and Atmospheric Administration Corps, or the Regular or Reserve Corps of the Public Health Service, and any person serving in the Army or Air Force under call or conscription. The term includes—

(1)  a retired member of any of those services;

(2)  a member of the Fleet Reserve or Fleet Marine Corps Reserve;

(3)  a cadet at the United States Military Academy, a midshipman at the United States Naval Academy, and a cadet at the United States Coast Guard Academy or United States Air Force Academy;

(4)  a member of the Reserve Officers’ Training Corps, the Naval Reserve Officers’ Training Corps, or the Air Force Reserve Officers’ Training Corps, when ordered to annual training duty for fourteen days or more, and while performing authorized travel to and from that duty; and

(5)  any person while en route to or from, or at, a place for final acceptance or for entry upon active duty in the military, naval, or air service—

(A)  who has been provisionally accepted for such duty; or

(B)  who, under the Military Selective Service Act, has been selected for active military, naval, or air service;

and has been ordered or directed to proceed to such place.

The term does not include a temporary member of the Coast Guard Reserve.

(o)  Crew Leader.—For purposes of this chapter, the term “crew leader” means an individual who furnishes individuals to perform agricultural labor for another person, if such individual pays (either on his own behalf or on behalf of such person) the individuals so furnished by him for the agricultural labor performed by them and if such individual has not entered into a written agreement with such person whereby such individual has been designated as an employee of such person; and such individuals furnished by the crew leader to perform agricultural labor for another person shall be deemed to be the employees of such crew leader. For purposes of this chapter and chapter 2, a crew leader shall, with respect to service performed in furnishing individuals to perform agricultural labor for another person and service performed as a member of the crew, be deemed not to be an employee of such other person.

(p)  Peace Corps Volunteer Service.—For purposes of this chapter, the term “employment” shall, notwithstanding the provisions of subsection (b) of this section, include service performed by an individual as a volunteer or volunteer leader within the meaning of the Peace Corps Act.

(q)  Tips Included for Both Employee and Employer Taxes.—For purposes of this chapter, tips received by an employee in the course of his employment shall be considered remuneration for such employment (and deemed to have been paid by the employer for purposes of subsections (a) and (b) of section 3111). Such remuneration shall be deemed to be paid at the time a written statement including such tips is furnished to the employer pursuant to section 6053(a) or (if no statement including such tips is so furnished) at the time received; except that, in determining the employer’s liability in connection with the taxes imposed by section 3111 with respect to such tips in any case where no statement including such tips was so furnished (or to the extent that the statement so furnished was inaccurate or incomplete), such remuneration shall be deemed for purposes of subtitle F to be paid on the date on which notice and demand for such taxes is made to the employer by the Secretary.

(r)  Election of Coverage by Religious Orders.—

(1)  Certificate of election by order.—A religious order whose members are required to take a vow of poverty, or any autonomous subdivision of such order, may file a certificate (in such form and manner, and with such official, as may be prescribed by regulations under this chapter) electing to have the insurance system established by title II of the Social Security Act extended to services performed by its members in the exercise of duties required by such order or such subdivision thereof. Such certificate of election shall provide that—

(A)  such election of coverage by such order or subdivision shall be irrevocable;

(B)  such election shall apply to all current and future members of such order, or in the case of a subdivision thereof to all current and future members of such order who belong to such subdivision;

(C)  all services performed by a member of such an order or subdivision in the exercise of duties required by such order or subdivision shall be deemed to have been performed by such member as an employee of such order or subdivision; and

(D)  the wages of each member, upon which such order or subdivision shall pay the taxes imposed by sections 3101 and 3111, will be determined as provided in subsection (i)(4).

(2)  Definition of member.—For purposes of this subsection, a member of a religious order means any individual who is subject to a vow of poverty as a member of such order and who performs tasks usually required (and to the extent usually required) of an active member of such order and who is not considered retired because of old age or total disability.

(3)  Effective date for election.—(A) A certificate of election of coverage shall be in effect, for purposes of subsection (b)(8) and for purposes of section 210(a)(8) of the Social Security Act, for the period beginning with whichever of the following may be designated by the order or subdivision thereof:

(i)  the first day of the calendar quarter in which the certificate is filed,

(ii)  the first day of the calendar quarter succeeding such quarter, or

(iii)  the first day of any calendar quarter preceding the calendar quarter in which the certificate is filed, except that such date may not be earlier than the first day of the twentieth calendar quarter preceding the quarter in which such certificate is filed.

Whenever a date is designated under clause (iii), the election shall apply to services performed before the quarter in which the certificate is filed only if the member performing such services was a member at the time such services were performed and is living on the first day of the quarter in which such certificate is filed.

(B)  If a certificate of election filed pursuant to this subsection is effective for one or more calendar quarters prior to the quarter in which such certificate is filed, then—

(i)  for purposes of computing interest and for purposes of section 6651 (relating to addition to tax for failure to file tax return), the due date for the return and payment of the tax for such prior calendar quarters resulting from the filing of such certificate shall be the last day of the calendar month following the calendar quarter in which the certificate is filed; and

(ii)  the statutory period for the assessment of such tax shall not expire before the expiration of 3 years from such due date.

(s)  Concurrent Employment by Two or More Employers.—For purposes of sections 3102, 3111, and 3121(a)(1), if two or more related corporations concurrently employ the same individual and compensate such individual through a common paymaster which is one of such corporations, each such corporation shall be considered to have paid as remuneration to such individual only the amounts actually disbursed by it to such individual and shall not be considered to have paid as remuneration to such individual amounts actually disbursed to such individual by another of such corporations.

(t)  [Repealed.[103]]

(u)  Application of Hospital Insurance Tax to Federal, State, and Local Employment.—

(1)  Federal employment.—For purposes of the taxes imposed by sections 3101(b) and 3111(b), subsection (b) shall be applied without regard to paragraph (5) thereof.

(2)  State and local employment.—For purposes of the taxes imposed by sections 3101(b) and 3111(b)—

(A)  In general.—Except as provided in subparagraphs (B) and (C), subsection (b) shall be applied without regard to paragraph (7) thereof.

(B)  Exception for certain services.—Service shall not be treated as employment by reason of subparagraph (A) if—

(i)  the service is included under an agreement under section 218 of the Social Security Act, or

(ii)  the service is performed—

(I)  by an individual who is employed by a State or political subdivision thereof to relieve him from unemployment,

(II)  in a hospital, home, or other institution by a patient or inmate thereof as an employee of a State or political subdivision thereof or of the District of Columbia,

(III)  by an individual, as an employee of a State or political subdivision thereof or of the District of Columbia, serving on a temporary basis in case of fire, storm, snow, earthquake, flood or other similar emergency,

(IV)  by any individual as an employee included under section 5351(2) of title 5, United States Code (relating to certain interns, student nurses, and other student employees of hospitals of the District of Columbia Government), other than as a medical or dental intern or a medical or dental resident in training,

(V)  by an election official or election worker if the remuneration paid in a calendar year for such service is less than $1,000 with respect to service performed during any calendar year commencing on or after January 1, 1995, ending on or before December 31, 1999, and the adjusted amount determined under section 218(c)(8)(B) of the Social Security Act for any calendar year commencing on or after January 1, 2000, with respect to service performed during such calendar year, or

(VI)  by an individual in a position described in section 1402(c)(2)(E).

As used in this subparagraph, the terms “State” and “political subdivision” have the meanings given those terms in section 218(b) of the Social Security Act.

(C)  Exception for current employment which continues.—Service performed for an employer shall not be treated as employment by reason of subparagraph (A) if—

(i)  such service would be excluded from the term “employment” for purposes of this chapter if subparagraph (A) did not apply;

(ii)  such service is performed by an individual—

(I)  who was performing substantial and regular service for remuneration for that employer before April 1, 1986,

(II)  who is a bona fide employee of that employer on March 31, 1986, and

(III)  whose employment relationship with that employer was not entered into for purposes of meeting the requirements of this subparagraph; and

(iii)  the employment relationship with that employer has not been terminated after March 31, 1986.

(D)  Treatment of agencies and instrumentalities.—For purposes of subparagraph (C), under regulations—

(i)  All agencies and instrumentalities of a State (as defined in section 218(b) of the Social Security Act) or of the District of Columbia shall be treated as a single employer.

(ii)  All agencies and instrumentalities of a political subdivision of a State (as so defined) shall be treated as a single employer and shall not be treated as described in clause (i).

(3)  Medicare qualified government employment.—For purposes of this chapter, the term “medicare qualified government employment” means service which—

(A)  is employment (as defined in subsection (b)) with the application of paragraphs (1) and (2), but

(B)  would not be employment (as so defined) without the application of such paragraphs.

(v)  Treatment of Certain Deferred Compensation and Salary Reduction Arrangements.—

(1)  Certain employer contributions treated as wages.—Nothing in any paragraph of subsection (a) (other than paragraph (1)) shall exclude from the term “wages”—

(A)  any employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k)) to the extent not included in gross income by reason of section 402(e)(3), or

(B)  any amount treated as an employer contribution under section 414(h)(2) where the pickup referred to in such section is pursuant to a salary reduction agreement (whether evidenced by a written instrument or otherwise).

(2)  Treatment of certain nonqualified deferred compensation plans.—

(A)  In general.—Any amount deferred under a nonqualified deferred compensation plan shall be taken into account for purposes of this chapter as of the later of—

(i)  when the services are performed, or

(ii)  when there is no substantial risk of forfeiture of the rights to such amount.

The preceding sentence shall not apply to any excess parachute payment (as defined in section 280G(b)) or to any specified stock compensation (as defined in section 4985) on which tax is imposed by section 4985.

(B)  Taxed only once.—Any amount taken into account as wages by reason of subparagraph (A) (and the income attributable thereto) shall not thereafter be treated as wages for purposes of this chapter.

(C)  Nonqualified deferred compensation plan.—For purposes of this paragraph, the term “nonqualified deferred compensation plan” means any plan or other arrangement for deferral of compensation other than a plan described in subsection (a)(5).

(3)  Exempt governmental deferred compensation plan.—For purposes of subsection (a)(5), the term “exempt governmental deferred compensation plan” means any plan providing for deferral of compensation established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing. Such term shall not include—

(A)  any plan to which section 83, 402(b), 403(c), 457(a), or 457(f)(1) applies,

(B)  any annuity contract described in section 403(b), and

(C)  the Thrift Savings Fund (within the meaning of subchapter III of chapter 84 of title 5, United States Code).

(w)  Exemption of Churches and Qualified Church-Controlled Organizations.—

(1)  General rule.—Any church or qualified church-controlled organization (as defined in paragraph (3)) may make an election within the time period described in paragraph (2), in accordance with such procedures as the Secretary determines to be appropriate, that services performed in the employ of such church or organization shall be excluded from employment for purposes of title II of the Social Security Act and this chapter. An election may be made under this subsection only if the church or qualified church-controlled organization states that such church or organization is opposed for religious reasons to the payment of the tax imposed under section 3111.

(2)  Timing and duration of election.—An election under this subsection must be made prior to the first date, more than 90 days after July 18, 1984, on which a quarterly employment tax return for the tax imposed under section 3111 is due, or would be due but for the election, from such church or organization. An election under this subsection shall apply to current and future employees, and shall apply to service performed after December 31, 1983. The election may be revoked by the church or organization under regulations prescribed by the Secretary. The election shall be revoked by the Secretary if such church or organization fails to furnish the information required under section 6051 to the Secretary for a period of 2 years or more with respect to remuneration paid for such services by such church or organization, and, upon request by the Secretary, fails to furnish all such previously unfurnished information for the period covered by the election. Any revocation under the preceding sentence shall apply retroactively to the beginning of the 2-year period for which the information was not furnished.

(3)  Definitions.—

(A)  For purposes of this subsection, the term “church” means a church, a convention or association of churches, or an elementary or secondary school which is controlled, operated, or principally supported by a church or by a convention or association of churches.

(B)  For purposes of this subsection, the term “qualified church-controlled organization” means any church-controlled tax-exempt organization described in section 501(c)(3), other than an organization which—

(i)  offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services, or facilities which are sold at a nominal charge which is substantially less than the cost of providing such goods, services, or facilities; and

(ii)  normally receives more than 25 percent of its support from either (I) governmental sources, or (II) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities which are not unrelated trades or businesses, or both.

(x)  Applicable Dollar Threshold.—For purposes of this subsection (a)(7)(B), the term “applicable dollar threshold” means $1,000. In the case of calendar years after 1995, the Commissioner of Social Security shall adjust such $1,000 amount at the same time and in the same manner as under section 215(a)(1)(B)(ii) of the Social Security Act with respect to the amounts referred to in section 215(a)(1)(B)(i) of such Act, except that, for purposes of this paragraph, 1993 shall be substituted for the calendar year referred to in section 215(a)(1)(B)(ii)(II) of such Act. If any amount as adjusted under the preceding sentence is not a multiple of $100, such amount shall be rounded to the next lowest multiply of $100.

(y)  Service in the Employ of International Organizations by Certain Transferred Federal Employees.—

(1)  In general.—For purposes of this chapter, service performed in the employ of an international organization by an individual pursuant to a transfer of such individual to such international organization pursuant to section 3582 of title 5, United States Code, shall constitute “employment” if—

(A)  immediately before such transfer, such individual performed service with a Federal agency which constituted “employment” under subsection (b) for purposes of the taxes imposed by sections 3101(a) and 3111(a), and

(B)  such individual would be entitled, upon separation from such international organization and proper application, to reemployment with such Federal agency under such section 3582.

(2)  Definitions.—For purposes of this subsection—

(A)  Federal agency.—The term “Federal agency” means an agency, as defined in section 3581(1) of title 5, United States Code.

(B)  International organization.—The term “international organization” has the meaning provided such term by section 3581(3) of title 5, United States Code.

(z)  Treatment of Certain Foreign Persons as American Employers.—

(1)  In general.—If any employee of a foreign person is performing services in connection with a contract between the United States Government (or any instrumentality thereof) and any member of any domestically controlled group of entities which includes such foreign person, such foreign person shall be treated for purposes of this chapter as an American employer with respect to such services performed by such employee.

(2)  Domestically controlled group of entities.—For purposes of this subsection—

(A)  In general.—The term “domestically controlled group of entities” means a controlled group of entities the common parent of which is a domestic corporation.

(B)  Controlled group of entities.—The term “controlled group of entities” means a controlled group of corporations as defined in section 1563(a)(1), except that—

(i)  “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears therein, and

(ii)  the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563.

A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).

(3)  Liability of common parent.—In the case of a foreign person who is a member of any domestically controlled group of entities, the common parent of such group shall be jointly and severally liable for any tax under this chapter for which such foreign person is liable by reason of this subsection, and for any penalty imposed on such person by this title with respect to any failure to pay such tax or to file any return or statement with respect to such tax or wages subject to such tax. No deduction shall be allowed under this title for any liability imposed by the preceding sentence.

(4)  Provisions preventing double taxation.—

(A)  Agreements.—Paragraph (1) shall not apply to any services which are covered by an agreement under subsection (l).

(B)  Equivalent foreign taxation.—Paragraph (1) shall not apply to any services if the employer establishes to the satisfaction of the Secretary that the remuneration paid by such employer for such services is subject to a tax imposed by a foreign country which is substantially equivalent to the taxes imposed by this chapter.

(5)  Cross reference.—For relief from taxes in cases covered by certain international agreements, see sections 3101(c) and 3111(c).

SEC. 3122.  FEDERAL SERVICE.

In the case of the taxes imposed by this chapter with respect to service performed in the employ of the United States or in the employ of any instrumentality which is wholly owned by the United States, including such service which is medicare qualified government employment (as defined in section 3121(u)(3)), including service, performed as a member of a uniformed service, to which the provisions of section 3121(m)(1)are applicable, and including service, performed as a volunteer or volunteer leader within the meaning of the Peace Corps Act, to which the provisions of section 3121(p) are applicable, the determination of the amount of remuneration for such service, and the return and payment of the taxes imposed by this chapter, shall be made by the head of the Federal agency or instrumentality having the control of such service, or by such agents as such head may designate. In the case of the taxes imposed by this chapter with respect to service performed in the employ of an international organization pursuant to a transfer to which the provisions of section 3121(y) are applicable, the determination of the amount of remuneration for such service, and the return and payment of the taxes imposed by this chapter, shall be made by the head of the Federal agency from which the transfer was made. Nothing in this paragraph shall be construed to affect the Secretary’s authority to determine under subsections (a) and (b) of section 3121 whether any such service constitutes employment, the periods of such employment, and whether remuneration paid for any such service constitutes wages. The person making such return may, for convenience of administration, make payments of the tax imposed under section 3111 with respect to such service without regard to the contribution and benefit base limitation in section 3121(a)(1), and he shall not be required to obtain a refund of the tax paid under section 3111 on that part of the remuneration not included in wages by reason of section 3121(a)(1). Payments of the tax imposed under section 3111 with respect to service, performed by an individual as a member of a uniformed service, to which the provisions of section 3121(m)(1) are applicable, shall be made from appropriations available for the pay of members of such uniformed service. The provisions of this section shall be applicable in the case of service performed by a civilian employee, not compensated from funds appropriated by the Congress, in the Army and Air Force Exchange Service, Army and Air Force Motion Picture Service, Navy Exchanges, Marine Corps Exchanges, or other activities, conducted by an instrumentality of the United States subject to the jurisdiction of the Secretary of Defense, at installations of the Department of Defense for the comfort, pleasure, contentment, and mental and physical improvement of personnel of such Department; and for purposes of this section the Secretary of Defense shall be deemed to be the head of such instrumentality. The provisions of this section shall be applicable also in the case of service performed by a civilian employee, not compensated from funds appropriated by the Congress, in the Coast Guard Exchanges or other activities, conducted by an instrumentality of the United States subject to the jurisdiction of the Secretary of the Department in which the Coast Guard is operating, at installations of the Coast Guard for the comfort, pleasure, contentment, and mental and physical improvement of personnel of the Coast Guard; and for purposes of this section the Secretary of the Department in which the Coast Guard is operating shall be deemed to be the head of such instrumentality.

SEC. 3123.  DEDUCTIONS AS CONSTRUCTIVE PAYMENTS.

Whenever under this chapter or any act of Congress, or under the law of any State, an employer is required or permitted to deduct any amount from the remuneration of an employee and to pay the amount deducted to the United States, a State, or any political subdivision thereof, then for purposes of this chapter the amount so deducted shall be considered to have been paid to the employee at the time of such deduction.

SEC. 3124.  ESTIMATE OF REVENUE REDUCTION.

The Secretary at intervals of not longer than 3 years shall estimate the reduction in the amount of taxes collected under this chapter by reason of the operation of section 3121(b)(9) and shall include such estimate in his annual report.

SEC. 3125.  RETURNS IN THE CASE OF GOVERNMENTAL EMPLOYEES IN STATES, GUAM, AMERICAN SAMOA, AND THE DISTRICT OF COLUMBIA.

(a)  States.—Except as otherwise provided in this section, in the case of the taxes imposed by sections 3101(b) and 3111(b) with respect to service performed in the employ of a State or any political subdivision thereof (or any instrumentality of any one or more of the foregoing which is wholly owned thereby), the return and payment of such taxes may be made by the head of the agency or instrumentality having the control of such service, or by such agents as such head may designate. The person making such return may, for convenience of administration, make payments of the tax imposed under section 3111 with respect to the service of such individuals without regard to the contribution and benefit base limitation in section 3121(a)(1).

(b)  Guam.—The return and payment of the taxes imposed by this chapter on the income of individuals who are officers or employees of the Government of Guam or any political subdivision thereof or of any instrumentality of any one or more of the foregoing which is wholly owned thereby, and those imposed on such Government or political subdivision or instrumentality with respect to having such individuals in its employ, may be made by the Governor of Guam or by such agents as he may designate. The person making such return may, for convenience of administration, make payments of the tax imposed under section 3111 with respect to the service of such individuals without regard to the contribution and benefit base limitation in section 3121(a)(1).

(c)  American Samoa.—The return and payment of the taxes imposed by this chapter on the income of individuals who are officers or employees of the Government of American Samoa or any political subdivision thereof or of any instrumentality of any one or more of the foregoing which is wholly owned thereby, and those imposed on such Government or political subdivision or instrumentality with respect to having such individuals in its employ, may be made by the Governor of American Samoa or by such agents as he may designate. The person making such return may, for convenience of administration, make payments of the tax imposed under section 3111 with respect to the service of such individuals without regard to the contribution and benefit base limitation in section 3121(a)(1).

(d)  District of Columbia.—In the case of the taxes imposed by this chapter with respect to service performed in the employ of the District of Columbia or in the employ of any instrumentality which is wholly owned thereby, the return and payment of the taxes may be made by the Mayor of the District of Columbia or such agents as he may designate. The person making such return may, for convenience of administration, make payments of the tax imposed by section 3111 with respect to such service without regard to the contribution and benefit base limitation in section 3121(a)(1).

SEC. 3126. RETURN AND PAYMENT BY GOVERNMENTAL EMPLOYER.

If the employer is a State or political subdivision thereof, or an agency or instrumentality of any one or more of the foregoing, the return of the amount deducted and withheld upon any wages under section 3101 and the amount of the tax imposed by section 3111 may be made by any officer or employee of such State or political subdivision or such agency or instrumentality, as the case may be, having control of the payment of such wages, or appropriately designated for that purpose.

SEC. 3127.  EXEMPTION FOR EMPLOYERS AND THEIR EMPLOYEES WHERE BOTH ARE MEMBERS OF RELIGIOUS FAITHS OPPOSED TO PARTICIPATION IN SOCIAL SECURITY ACT PROGRAMS.

(a)  In General.—Notwithstanding any other provision of this chapter (and under regulations prescribed to carry out this section), in any case where—

(1)  an employer (or, if the employer is a partnership, each partner therein) is a member of a recognized religious sect or division thereof described in section 1402(g)(1) and an adherent of established tenets or teachings of such sect or division as described in such section, and has filed and had approved under subsection (b) an application (in such form and manner, and with such official, as may be prescribed by such regulations) for an exemption from the taxes imposed by section 3111, and

(2)  an employee of such employer who is also a member of such a religious sect or division and an adherent of its established tenets or teachings has filed and had approved under subsection (b) an identical application for exemption from the taxes imposed by section 3101,

such employer shall be exempt from the taxes imposed by section 3111 with respect to wages paid to each of the employees thereof who meets the requirements of paragraph (2) and each such employee shall be exempt from the taxes imposed by section 3101 with respect to such wages paid to him by such employer.

(b)  Approval of Application.—An application for exemption filed by an employer (or a partner) under subsection (a)(1) or by an employee under subsection (a)(2) shall be approved only if—

(1)  such application contains or is accompanied by the evidence described in section 1402(g)(1)(A) and a waiver described in section 1402(g)(1)(B),

(2)  the Commissioner of Social Security makes the findings (with respect to such sect or division) described in section 1402(g)(1)(C), (D), and (E), and

(3)  no benefit or other payment referred to in section 1402(g)(1)(B) became payable (or, but for section 203 or 222(b) of the Social Security Act, would have become payable) to the individual filing the application at or before the time of such filing.

(c)  Effective Period of Exemption.—An exemption granted under this section to any employer with respect to wages paid to any of the employees thereof, or granted to any such employee, shall apply with respect to wages paid by such employer during the period—

(1)  commencing with the first day of the first calendar quarter, after the quarter in which such application is filed, throughout which such employer (or, if the employer is a partnership, each partner therein) or employee meets the applicable requirements specified in subsections (a) and (b), and

(2)  ending with the last day of the calendar quarter preceding the first calendar quarter thereafter in which (A) such employer (or, if the employer is a partnership, any partner therein) or the employee involved does not meet the applicable requirements of subsection (a), or (B) the sect or division thereof of which such employer (or, if the employer is a partnership, any partner therein) or employee is a member is found by the Commissioner of Social Security to have ceased to meet the requirements of subsection (b)(2).

SEC. 3128.  SHORT TITLE.

This chapter may be cited as the “Federal Insurance Contributions Act.”

Subchapter A—Tax on Employees

SEC. 3201. RATE OF TAX.

(a)  Tier 1 Tax.—In addition to other taxes, there is hereby imposed on the income of each employee a tax equal to the applicable percentage of the compensation received during any calendar year by such employee for services rendered by such employee. For purposes of the preceding sentence, the term “applicable percentage” means the percentage equal to the sum of the rates of tax in effect under subsections (a) and (b) of section 3101 for the calendar year.

(b)  Tier 2 Tax.—

(1)  In general.—In addition to other taxes, there is hereby imposed on the income of each employee a tax equal to the applicable percentage of the compensation received during any calendar year by such employee for services rendered by such employee.

(2)  Applicable percentage.—For purposes of paragraph (1), the term “applicable percentage” means—

(A)  4.90 percent in the case of compensation received during 2002 or 2003, and

(B)  in the case of compensation received during any calendar year after 2003, the percentage determined under section 3241 for such calendar year.

(c)  Cross Reference.—For application of different contribution bases with respect to the taxes imposed by subsections (a) and (b), see section 3231(e)(2).

*    *    *    *    *    *    *

SEC. 3231.  DEFINITIONS.

(a)  Employer.—For purposes of this chapter, the term “employer” means any carrier (as defined in subsection (g)), and any company which is directly or indirectly owned or controlled by one or more such carriers or under common control therewith, and which operates any equipment or facility or performs any service (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad, and any receiver, trustee, or other individual or body, judicial or otherwise, when in the possession of the property or operating all or any part of the business of any such employer; except that the term “employer” shall not include any street, interurban, or suburban electric railway, unless such railway is operating as a part of a general steam-railroad system of transportation, but shall not exclude any part of the general steam-railroad system of transportation now or hereafter operated by any other motive power. The Surface Transportation Board is hereby authorized and directed upon request of the Secretary, or upon complaint of any party interested, to determine after hearing whether any line operated by electric power falls within the terms of this exception. The term “employer” shall also include railroad associations, traffic associations, tariff bureaus, demurrage bureaus, weighing and inspection bureaus, collection agencies and other associations, bureaus, agencies, or organizations controlled and maintained wholly or principally by two or more employers as hereinbefore defined and engaged in the performance of services in connection with or incidental to railroad transportation; and railway labor organizations, national in scope, which have been or may be organized in accordance with the provisions of the Railway Labor Act, as amended (45 U.S.C., chapter 8), and their State and National legislative committees and their general committees and their insurance departments and their local lodges and divisions, established pursuant to the constitutions and bylaws of such organizations. The term “employer” shall not include any company by reason of its being engaged in the mining of coal, the supplying of coal to an employer where delivery is not beyond the mine tipple, and the operation of equipment or facilities therefor, or in any of such activities.

(b)  Employee.—For purposes of this chapter, the term “employee” means any individual in the service of one or more employers for compensation; except that the term “employee” shall include an employee of a local lodge or division defined as an employer in subsection (a) only if he was in the service of or in the employment relation to a carrier on or after August 29, 1935. An individual shall be deemed to have been in the employment relation to a carrier on August 29, 1935, if—

(1)  he was on that date on leave of absence from his employment, expressly granted to him by the carrier by whom he was employed, or by a duly authorized representative of such carrier, and the grant of such leave of absence was established to the satisfaction of the Railroad Retirement Board before July 1947; or

(2)  he was in the service of a carrier after August 29, 1935, and before January 1946 in each of 6 calendar months, whether or not consecutive; or

(3)  before August 29, 1935, he did not retire and was not retired or discharged from the service of the last carrier by whom he was employed or its corporate or operating successor, but—

(A)  solely by reason of his physical or mental disability he ceased before August 29, 1935, to be in the service of such carrier and thereafter remained continuously disabled until he attained age 65 or until August 1945, or

(B)  solely for such last stated reason a carrier by whom he was employed before August 29, 1935, or a carrier who is its successor did not on or after August 29, 1935, and before August 1945 call him to return to service, or

(C)  if he was so called he was solely for such reason unable to render service in 6 calendar months as provided in paragraph (2); or

(4)  he was on August 29, 1935, absent from the service of a carrier by reason of a discharge which, within 1 year after the effective date thereof, was protested, to an appropriate labor representative or to the carrier, as wrongful, and which was followed within 10 years of the effective date thereof by his reinstatement in good faith to his former service with all his seniority rights;

except that an individual shall not be deemed to have been on August 29, 1935, in the employment relation to a carrier if before that date he was granted a pension or gratuity on the basis of which a pension was awarded to him pursuant to section 6 of the Railroad Retirement Act of 1937 (45 U.S.C. 228f), or if during the last payroll period before August 29, 1935, in which he rendered service to a carrier he was not in the service of an employer, in accordance with subsection (d), with respect to any service in such payroll period, or if he could have been in the employment relation to an employer only by reason of his having been, either before or after August 29, 1935, in the service of a local lodge or division defined as an employer in subsection (a). The term “employee” includes an officer of an employer. The term “employee” shall not include any individual while such individual is engaged in the physical operations consisting of the mining of coal, the preparation of coal, the handling (other than movement by rail with standard railroad locomotives) of coal not beyond the mine tipple, or the loading of coal at the tipple.

(c)  Employee Representative.—For purposes of this chapter, the term “employee representative” means any officer or official representative of a railway labor organization other than a labor organization included in the term “employer” as defined in subsection (a), who before or after June 29, 1937, was in the service of an employer as defined in subsection (a) and who is duly authorized and designated to represent employees in accordance with the Railway Labor Act (45 U.S.C., chapter 8), as amended, and any individual who is regularly assigned to or regularly employed by such officer or official representative in connection with the duties of his office.

(d)  Service.—For purposes of this chapter, an individual is in the service of an employer whether his service is rendered within or without the United States, if—

(1)  he is subject to the continuing authority of the employer to supervise and direct the manner of rendition of his service, or he is rendering professional or technical services and is integrated into the staff of the employer, or he is rendering, on the property used in the employer’s operations, other personal services the rendition of which is integrated into the employer’s operations, and

(2)  he renders such service for compensation;

except that an individual shall be deemed to be in the service of an employer, other than a local lodge or division or a general committee of a railway-labor-organization employer, not conducting the principal part of its business in the United States, only when he is rendering service to it in the United States; and an individual shall be deemed to be in the service of such a local lodge or division only if—

(3)  all, or substantially all, the individuals constituting its membership are employees of an employer conducting the principal part of its business in the United States; or

(4)  the headquarters of such local lodge or division is located in the United States;

and an individual shall be deemed to be in the service of such a general committee only if—

(5)  he is representing a local lodge or division described in paragraph (3) or (4) immediately above; or

(6)  all, or substantially all, the individuals represented by it are employees of an employer conducting the principal part of its business in the United States; or

(7)  he acts in the capacity of a general chairman or an assistant general chairman of a general committee which represents individuals rendering service in the United States to an employer, but in such case if his office or headquarters is not located in the United States and the individuals represented by such general committee are employees of an employer not conducting the principal part of its business in the United States, only such proportion of the remuneration for such service shall be regarded as compensation as the proportion which the mileage in the United States under the jurisdiction of such general committee bears to the total mileage under its jurisdiction, unless such mileage formula is inapplicable, in which case such other formula as the Railroad Retirement Board may have prescribed pursuant to section 1(c) of the Railroad Retirement Act of 1937 (45 U.S.C. 228a) shall be applicable, and if the application of such mileage formula, or such other formula as the Board may prescribe, would result in the compensation of the individual being less than 10 percent of his remuneration for such service, no part of such remuneration shall be regarded as compensation;

Provided however, That an individual not a citizen or resident of the United States shall not be deemed to be in the service of an employer when rendering service outside the United States to an employer who is required under the laws applicable in the place where the service is rendered to employ therein, in whole or in part, citizens or residents thereof; and the laws applicable on August 29, 1935, in the place where the service is rendered shall be deemed to have been applicable there at all times prior to that date.

(e)  Compensation.—For purposes of this chapter—

(1)  The term “compensation” means any form of money remuneration paid to an individual for services rendered as an employee to one or more employers. Such term does not include (i) the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of sickness or accident disability or medical or hospitalization expenses in connection with sickness or accident disability or death, except that this clause does not apply to a payment for group-term life insurance to the extent that such payment is includible in the gross income of the employee, (ii) tips (except as is provided under paragraph (3)), (iii) an amount paid specifically—either as an advance, as reimbursement or allowance—for traveling or other bona fide and necessary expenses incurred or reasonably expected to be incurred in the business of the employer provided any such payment is identified by the employer either by a separate payment or by specifically indicating the separate amounts where both wages and expense reimbursement or allowance are combined in a single payment, or (iv) any remuneration which would not (if chapter 21 applied to such remuneration) be treated as wages (as defined in section 3121(a)) by reason of section 3121(a)(5). Such term does not include remuneration for service which is performed by a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended, and which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q) as the case may be. For the purpose of determining the amount of taxes under sections 3201 and 3221, compensation earned in the service of a local lodge or division of a railway-labor-organization employer shall be disregarded with respect to any calendar month if the amount thereof is less than $25. Compensation for service as a delegate to a national or international convention of a railway labor organization defined as an “employer” in subsection (a) of this section shall be disregarded for purposes of determining the amount of taxes due pursuant to this chapter if the individual rendering such service has not previously rendered service, other than as such a delegate, which may be included in his “years of service” for purposes of the Railroad Retirement Act. Nothing in the regulations prescribed for purposes of chapter 24 (relating to wage withholding) which provides an exclusion from “wages” as used in such chapter shall be construed to require a similar exclusion from “compensation” in regulations prescribed for purposes of this chapter.

(2)  Application of contribution bases.—

(A)  Compensation in excess of applicable base excluded.—

(i)  In general.—The term “compensation” does not include that part of remuneration paid during any calendar year to an individual by an employer after remuneration equal to the applicable base has been paid during such calendar year to such individual by such employer for services rendered as an employee to such employer.

(ii)  Remuneration not treated as compensation excluded.—There shall not be taken into account under clause (i) remuneration which (without regard to clause (i)) is not treated as compensation under this subsection.

(iii)  Hospital insurance taxes.—Clause (i) shall not apply to—

(I)  so much of the rate applicable under section 3201(a) or 3221(a) as does not exceed the rate of tax in effect under section 3101(b), and

(II)  so much of the rate applicable under section 3211(a) as does not exceed the rate of tax in effect under section 1401(b).

(B)  Applicable base.—

(i)  Tier 1 taxes.—Except as provided in clause (ii), the term “applicable base” means for any calendar year the contribution and benefit base determined under section 230 of the Social Security Act for such calendar year.

(II)  Hospital insurance taxes.—For purposes of applying so much of the rate applicable under section 3201(a) or 3221(a) (as the case may be) as does not exceed the rate of tax in effect under section 3101(b), and for purposes of applying so much of the rate of tax applicable under section 3211(a)(1) as does not exceed the rate of tax in effect under section 1401(b), the term “applicable base” means for any calendar year the applicable contribution base determined under section 3121(x)(2) for such calendar year.

(ii)  Tier 2 taxes, etc.—For purposes of—

(I)  the taxes imposed by sections 3201(b), 3211(b), and 3221(b), and

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

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

(C)  Successor employers.—For purposes of this paragraph, the second sentence of section 3121(a)(1) (relating to successor employers) shall apply, except that—

(i)  the term “services” shall be substituted for “employment” each place it appears,

(ii)  the term “compensation” shall be substituted for “remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection)” each place it appears, and

(iii)  the terms “employer”, “services”, and “compensation” shall have the meanings given such terms by this section.

(3)  Solely for purposes of the taxes imposed by section 3201 and other provisions of this chapter insofar as they relate to such taxes, the term “compensation” also includes cash tips received by an employee in any calendar month in the course of his employment by an employer unless the amount of such cash tips is less than $20.

(4)(A)  For purposes of applying sections 3201(a), 3211(a), and 3221(a), in the case of payments made to an employee or any of his dependents on account of sickness or accident disability, clause (i) of the second sentence of paragraph (1) shall exclude from the term “compensation” only—

(i)  payments which are received under a workmen’s compensation law, and

(ii)  benefits received under the Railroad Retirement Act of 1974.

(B)  Notwithstanding any other provision of law, for purposes of the sections specified in subparagraph (A), the term “compensation” shall include benefits paid under section 2(a) of the Railroad Unemployment Insurance Act for days of sickness, except to the extent that such sickness (as determined in accordance with standards prescribed by the Railroad Retirement Board) is the result of on-the-job injury.

(C)  Under regulations prescribed by the Secretary, subparagraphs (A) and (B) shall not apply to payments made after the expiration of a 6-month period comparable to the 6-month period described in section 3121(a)(4).

(D)  Except as otherwise provided in regulations prescribed by the Secretary, any third party which makes a payment included in compensation solely by reason of subparagraph (A) or (B) shall be treated for purposes of this chapter as the employer with respect to such compensation.

(5)  The term “compensation” shall not include any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from income under section 74(c), 108(f)(4), 117, or 132.

(6)  The term “compensation” shall not include any payment made, or benefit furnished, to or for the benefit of an employee if at the time of such payment or such furnishing it is reasonable to believe that the employee will be able to exclude such payment or benefit from income under section 127.

(7)  The term “compensation” shall not include any contribution, payment, or service provided by an employer which may be excluded from the gross income of an employee, his spouse, or his dependents, under the provisions of section 120 (relating to amounts received under qualified group legal services plans).

(8)  Treatment of certain deferred compensation and salary reduction arrangements.—

(A)  Certain employer contributions treated as compensation.—Nothing in any paragraph of this subsection (other than paragraph (2)) shall exclude from the term “compensation” any amount described in subparagraph (A) or (B) of section 3121(v)(1).

(B)  Treatment of certain nonqualified deferred compensation.—The rules of section 3121(v)(2) which apply for purposes of chapter 21 shall also apply for purposes of this chapter.

(9)  Meals and lodging.—The term “compensation” shall not include the value of meals or lodging furnished by or on behalf of the employer if at the time of such furnishing it is reasonable to believe that the employee will be able to exclude such items from income under section 119.

(10)  Archer MSA contributions.—The term “compensation” shall not include any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(b).

(11)  Health savings account contributions.—The term “compensation” shall not include any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(b).

(12)  Qualified stock options.—The term “compensation” shall not include any remuneration on account of—

(A)  a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or

(B)  any disposition by the individual of such stock.

(f)  Company.—For purposes of this chapter, the term “company” includes corporations, associations, and joint-stock companies.

(g)  Carrier.—For purposes of this chapter, the term “carrier” means a rail carrier subject to part A of subtitle IV.

(h)  Tips Constituting Compensation, Time Deemed Paid.—For purposes of this chapter, tips which constitute compensation for purposes of the taxes imposed by section 3201 shall be deemed to be paid at the time a written statement including such tips is furnished to the employer pursuant to section 6053(a) or (if no statement including such tips is so furnished) at the time received.

(i)  Concurrent Employment by 2 or More Employers.—For purposes of this chapter, if 2 or more related corporations which are employers concurrently employ the same individual and compensate such individual through a common paymaster which is 1 of such corporations, each such corporation shall be considered to have paid as remuneration to such individual only the amounts actually disbursed by it to such individual and shall not be considered to have paid as remuneration to such individual amounts actually disbursed to such individual by another of such corporations.

SEC. 3301.  RATE OF TAX.

There is hereby imposed on every employer (as defined in section 3306(a)) for each calendar year an excise tax, with respect to having individuals in his employ, equal to—

(1)  6.2 percent in the case of calendar years 1988 through 2010 and the first 6 months of calendar year 2011.; or

(2)  6.0 percent in the case of the remainder of calendar year 2011 and each calendar year thereafter;

of the total wages (as defined in section 3306(b)) paid by him during the calendar year (or portion of the calendar year) with respect to employment (as defined in section 3306(c)).

SEC. 3302.  CREDITS AGAINST TAX.

(a)  Contributions to State Unemployment Funds.—

(1)  The taxpayer may, to the extent provided in this subsection and subsection (c), credit against the tax imposed by section 3301 the amount of contributions paid by him into an unemployment fund maintained during the taxable year under the unemployment compensation law of a State which is certified as provided in section 3304 for the 12-month period ending on October 31 of such year.

(2)  The credit shall be permitted against the tax for the taxable year only for the amount of contributions paid with respect to such taxable year.

(3)  The credit against the tax for any taxable year shall be permitted only for contributions paid on or before the last day upon which the taxpayer is required under section 6071 to file a return for such year; except that credit shall be permitted for contributions paid after such last day, but such credit shall not exceed 90 percent of the amount which would have been allowable as credit on account of such contributions had they been paid on or before such last day.

(4)  Upon the payment of contributions into the unemployment fund of a State which are required under the unemployment compensation law of that State with respect to remuneration on the basis of which, prior to such payment into the proper fund, the taxpayer erroneously paid an amount as contributions under another unemployment compensation law, the payment into the proper fund shall, for purposes of credit against the tax, be deemed to have been made at the time of the erroneous payment. If, by reason of such other law, the taxpayer was entitled to cease paying contributions with respect to services subject to such other law, the payment into the proper fund shall, for purposes of credit against the tax, be deemed to have been made on the date the return for the taxable year was filed under section 6071.

(5)  In the case of wages paid by the trustee of an estate under title 11 of the United States Code, if the failure to pay contributions on time was without fault by the trustee, paragraph (3) shall be applied by substituting “100 percent” for “90 percent”.

(b)  Additional Credit.—In addition to the credit allowed under subsection (a), a taxpayer may credit against the tax imposed by section 3301 for any taxable year an amount, with respect to the unemployment compensation law of each State certified as provided in section 3303 for the 12-month period ending on October 31 of such year, or with respect to any provisions thereof so certified, equal to the amount, if any, by which the contributions required to be paid by him with respect to the taxable year were less than the contributions such taxpayer would have been required to pay if throughout the taxable year he had been subject under such State law to the highest rate applied thereunder in such 12-month period to any person having individuals in his employ, or to a rate of 5.4%, whichever rate is lower.

(c)  Limit on Total Credits.—

(1)  The total credits allowed to a taxpayer under this section shall not exceed 90 percent of the tax against which such credits are allowable.

(2)  If an advance or advances have been made to the unemployment account of a State under title XII of the Social Security Act, then the total credits (after applying subsections (a) and (b) and paragraph (1) of this subsection) otherwise allowable under this section for the taxable year in the case of a taxpayer subject to the unemployment compensation law of such State shall be reduced—

(A)(i)  in the case of a taxable year beginning with the second consecutive January 1 as of the beginning of which there is a balance of such advances, by 5 percent of the tax imposed by section 3301 with respect to the wages paid by such taxpayer during such taxable year which are attributable to such State; and

(ii)  in the case of any succeeding taxable year beginning with a consecutive January 1 as of the beginning of which there is a balance of such advances, by an additional 5 percent, for each such succeeding taxable year, of the tax imposed by section 3301 with respect to the wages paid by such taxpayer during such taxable year which are attributable to such State;

(B)  in the case of a taxable year beginning with the third or fourth consecutive January 1 as of the beginning of which there is a balance of such advances, by the amount determined by multiplying the wages paid by such taxpayer during such taxable year which are attributable to such State by the percentage (if any), multiplied by a fraction, the numerator of which is the State’s average annual wage in covered employment for the calendar year in which the determination is made and the denominator of which is the wage base under this chapter, by which—

(i)  2.7 percent multiplied by a fraction, the numerator of which is the wage base under this chapter and the denominator of which is the estimated United States average annual wage in covered employment for the calendar year in which the determination is to be made, exceeds

(ii)  the average employer contribution rate for such State for the calendar year preceding such taxable year; and

(C)  in the case of a taxable year beginning with the fifth or any succeeding consecutive January 1 as of the beginning of which there is a balance of such advances, by the amount determined by multiplying the wages paid by such taxpayer during such taxable year which are attributable to such State by the percentage (if any) by which—

(i)  the 5-year benefit cost rate applicable to such State for such taxable year or (if higher) 2.7 percent, exceeds

(ii)  the average employer contribution rate for such State for the calendar year preceding such taxable year.

The provisions of the preceding sentence shall not be applicable with respect to the taxable year beginning January 1, 1975, or any succeeding taxable year which begins before January 1, 1980; and, for purposes of such sentence, January 1, 1980, shall be deemed to be the first January 1 occurring after January 1, 1974, and consecutive taxable years in the period commencing January 1, 1980, shall be determined as if the taxable year which begins on January 1, 1980, were the taxable year immediately succeeding the taxable year which began on January 1, 1974. Subparagraph (C) shall not apply with respect to any taxable year to which it would otherwise apply (but subparagraph (B) shall apply to such taxable year) if the Secretary of Labor determines (on or before November 10 of such taxable year) that the State meets the requirements of subsection (f)(2)(B) for such taxable year.

(3)  If the Secretary of Labor determines that a State, or State agency, has not—

(A)  entered into the agreement described in section 239 of the Trade Act of 1974, with the Secretary of Labor before July 15, 1975, or

(B)  fulfilled its commitments under an agreement with the Secretary of Labor as described in section 239 of the Trade Act of 1974,

then, in the case of a taxpayer subject to the unemployment compensation law of such State, the total credits (after applying subsections (a) and (b) and paragraphs (1) and (2) of this section) otherwise allowable under this section for a year during which such State or agency does not enter into or fulfill such an agreement shall be reduced by 7 1/2 percent of the tax imposed with respect to wages paid by such taxpayer during such year which are attributable to such State.

(d)  Definitions and Special Rules Relating to Subsection (c).—

(1)  Rate of tax deemed to be 6 percent.—In applying subsection (c), the tax imposed by section 3301 shall be computed at the rate of 6 percent in lieu of the rate provided by such section.

(2)  Wages attributable to a particular state.—For purposes of subsection (c), wages shall be attributable to a particular State if they are subject to the unemployment compensation law of the State, or (if not subject to the unemployment compensation law of any State) if they are determined (under rules or regulations prescribed by the Secretary) to be attributable to such State.

(3)  Additional taxes inapplicable where advances are repaid before november 10 of taxable year.—Paragraph (2) of subsection (c) shall not apply with respect to any State for the taxable year if (as of the beginning of November 10 of such year) there is no balance of advances referred to in such paragraph.

(4)  Average employer contribution rate.—For purposes of subparagraphs (B) and (C) of subsection (c)(2), the average employer contribution rate for any State for any calendar year is that percentage obtained by dividing—

(A)  the total of the contributions paid into the State unemployment fund with respect to such calendar year, by

(B)(i)  for purposes of subparagraph (B) of subsection (c)(2), the total of the wages (as determined without any limitation on amount) attributable to such State subject to contributions under this chapter with respect to such calendar year, and

(ii)  for purposes of subparagraph (C) of subsection (c)(2), the total of the remuneration subject to contributions under the State unemployment compensation law with respect to such calendar year.

For purposes of subparagraph (C) of subsection (c)(2), if the average employer contribution rate for any State for any calendar year (determined without regard to this sentence) equals or exceeds 2.7 percent, such rate shall be determined by increasing the amount taken into account under subparagraph (A) of the preceding sentence by the aggregate amount of employee payments (if any) into the unemployment fund of such State with respect to such calendar year which are to be used solely in the payment of unemployment compensation.

(5)  5-year benefit cost rate.—For purposes of subparagraph (C) of subsection (c)(2), the 5-year benefit cost rate applicable to any State for any taxable year is that percentage obtained by dividing—

(A)  one-fifth of the total of the compensation paid under the State unemployment compensation law during the 5-year period ending at the close of the second calendar year preceding such taxable year, by

(B)  the total of the remuneration subject to contributions under the State unemployment compensation law with respect to the first calendar year preceding such taxable year.

(6)  Rounding.—If any percentage referred to in either subparagraph (B) or (C) of subsection (c)(2) is not a multiple of.1 percent, it shall be rounded to the nearest multiple of.1 percent.

(7)  Determination and certification of percentages.—The percentage referred to in subsection (c)(2)(B) or (C) for any taxable year for any State having a balance referred to therein shall be determined by the Secretary of Labor, and shall be certified by him to the Secretary of the Treasury before June 1 of such year, on the basis of a report furnished by such State to the Secretary of Labor before May 1 of such year. Any such State report shall be made as of the close of March 31 of the taxable year, and shall be made on such forms, and shall contain such information, as the Secretary of Labor deems necessary to the performance of his duties under this section.

(e)  Successor Employer.—Subject to the limits provided by subsection (c), if—

(1)  an employer acquires during any calendar year substantially all the property used in the trade or business of another person, or used in a separate unit of a trade or business of such other person, and immediately after the acquisition employs in his trade or business one or more individuals who immediately prior to the acquisition were employed in the trade or business of such other person, and

(2)  such other person is not an employer for the calendar year in which the acquisition takes place,

then, for the calendar year in which the acquisition takes place, in addition to the credits allowed under subsections (a) and (b), such employer may credit against the tax imposed by section 3301 for such year an amount equal to the credits which (without regard to subsection (c)) would have been allowable to such other person under subsections (a) and (b) and this subsection for such year, if such other person had been an employer, with respect to remuneration subject to contributions under the unemployment compensation law of a State paid by such other person to the individual or individuals described in paragraph (1).

(f)  Limitation on Credit Reduction.—

(1)  Limitation.—In the case of any State which meets the requirements of paragraph (2) with respect to any taxable year the reduction under subsection (c)(2) in credits otherwise applicable to taxpayers subject to the unemployment compensation law of such State shall not exceed the greater of—

(A)  the reduction which was in effect with respect to such State under subsection (c)(2) for the preceding taxable year, or

(B)  0.6 percent of the wages paid by the taxpayer during such taxable year which are attributable to such State.

(2)  Requirements.—The requirements of this paragraph are met by any State with respect to any taxable year if the Secretary of Labor determines (on or before November 10 of such taxable year) that—

(A)  no State action was taken during the 12-month period ending on September 30 of such taxable year (excluding any action required under State law as in effect prior to the date of the enactment of this subsection) which has resulted or will result in a reduction in such State’s unemployment tax effort (as defined by the Secretary of Labor in regulations),

(B)  no State action was taken during the 12-month period ending on September 30 of such taxable year (excluding any action required under State law as in effect prior to the date of the enactment of this subsection) which has resulted or will result in a net decrease in the solvency of the State unemployment compensation system (as defined by the Secretary of Labor in regulations),

(C)  the State unemployment tax rate for the taxable year equals or exceeds the average benefit cost ratio for calendar years in the 5-calendar year period ending with the last calendar year before the taxable year, and

(D)  the outstanding balance for such State of advances under title XII of the Social Security Act on September 30 of such taxable year was not greater than the outstanding balance for such State of such advances on September 30 of the third preceding taxable year (or, for purposes of applying this subparagraph to taxable year 1983, September 30, 1981).

The requirements of subparagraphs (C) and (D) shall not apply to taxable years 1981 and 1982.

(3)  Credit reductions for subsequent years.—If the credit reduction under subsection (c)(2) is limited by reason of paragraph (1) of this subsection for any taxable year, for purposes of applying subsection (c)(2) to subsequent taxable years (including years after 1987), the taxable year for which the credit reduction was so limited (and January 1 thereof) shall not be taken into account.

(4)  State unemployment tax rate.—For purposes of this subsection—

(A)  In general.—The State unemployment tax rate for any taxable year is the percentage obtained by dividing—

(i)  the total amount of contributions paid into the State unemployment fund with respect to such taxable year, by

(ii)  the total amount of the remuneration subject to contributions under the State unemployment compensation law with respect to such taxable year (determined without regard to any limitation on the amount of wages subject to contribution under the State law).

(B)  Treatment of additional tax under this chapter.—

(i)  Taxable year 1983.—In the case of taxable year 1983, any additional tax imposed under this chapter with respect to any State by reason of subsection (c)(2) shall be treated as contributions paid into the State unemployment fund with respect to such taxable year.

(ii)  Taxable year 1984.—In the case of taxable year 1984, any additional tax imposed under this chapter with respect to any State by reason of subsection (c)(2) shall (to the extent such additional tax is attributable to a credit reduction in excess of 0.6 of wages attributable to such State) be treated as contributions paid into the State unemployment fund with respect to such taxable year.

(5)  Benefit cost ratio.—For purposes of this subsection—

(A)  In general.—The benefit cost ratio for any calendar year is the percentage determined by dividing—

(i)  the sum of the total of the compensation paid under the State unemployment compensation law during such calendar year and any interest paid during such calendar year on advances made to the State under title XII of the Social Security Act, by

(ii)  the total amount of the remuneration subject to contributions under the State unemployment compensation law with respect to such calendar year (determined without regard to any limitation on the amount of remuneration subject to contribution under the State law).

(B)  Reimbursable benefits not taken into account.—For purposes of subparagraph (A), compensation shall not be taken into account to the extent—

(i)  the State is entitled to reimbursement for such compensation under the provisions of any Federal law, or

(ii)  such compensation is attributable to services performed for a reimbursing employer.

(C)  Reimbursing employer.—The term “reimbursing employer” means any governmental entity or other organization (or group of governmental entities or any other organizations) which makes reimbursements in lieu of contributions to the State unemployment fund.

(D)  Special rules for years before 1985.—

(i)  Taxable year 1983.—For purposes of determining whether a State meets the requirements of paragraph (2)(C) for taxable year 1983, only regular compensation (as defined in section 205 of the Federal-State Extended Unemployment Compensation Act of 1970) shall be taken into account for purposes of determining the benefit ratio for any preceding calendar year before 1982.

(ii)  Taxable year 1984.—For purposes of determining whether a State meets the requirements of paragraph (2)(C) for taxable year 1984, only regular compensation (as so defined) shall be taken into account for purposes of determining the benefit ratio for any preceding calendar year before 1981.

(E)  Rounding.—If any percentage determined under subparagraph (A) is not a multiple of.1 percent, such percentage shall be reduced to the nearest multiple of.1 percent.

(6)  Reports.—The Secretary of Labor may, by regulations, require a State to furnish such information at such time and in such manner as may be necessary for purposes of this subsection.

(7)  Definitions and special rules.—The definitions and special rules set forth in subsection (d) shall apply to this subsection in the same manner as they apply to subsection (c).

(8)  Partial limitation.—

(A)  In the case of a State which would meet the requirements of this subsection for a taxable year prior to 1986 but for its failure to meet one of the requirements contained in subparagraph (C) or (D) of paragraph (2), the reduction under subsection (c)(2) in credits otherwise applicable to taxpayers in such State for such taxable year and each subsequent year (in a period of consecutive years for each of which a credit reduction is in effect for taxpayers in such State) shall be reduced by 0.1 percentage point.

(B)  In the case of a State which does not meet the requirements of paragraph (2) but meets the requirements of subparagraphs (A) and (B) of paragraph (2) and which also meets the requirements of section 1202(b)(8)(B) of the Social Security Act with respect to such taxable year, the reduction under subsection (c)(2) in credits otherwise applicable to taxpayers in such State for such taxable year and each subsequent year (in a period of consecutive years for each of which a credit reduction is in effect for taxpayers in such State) shall be further reduced by an additional 0.1 percentage point.

(C)  In no case shall the application of subparagraphs (A) and (B) reduce the credit reduction otherwise applicable under subsection (c)(2) below the limitation under paragraph (1).

(g)  Credit Reduction Not to Apply When State Makes Certain Repayments.—

(1)  In general.—In the case of any State which meets requirements of paragraph (2) with respect to any taxable year, subsection (c)(2) shall not apply to such taxable year; except that such taxable year (and January 1 of such taxable year) shall (except as provided in subsection (f)(3)) be taken into account for purposes of applying subsection (c)(2) to succeeding taxable years.

(2)  Requirements.—The requirements of this paragraph are met by any State with respect to any taxable year if the Secretary of Labor determines that—

(A)  the repayments during the 1-year period ending on November 9 of such taxable year made by such State of advances under title XII of the Social Security Act are not less than the sum of—

(i)  the potential additional taxes for such taxable year, and

(ii)  any advances made to such State during such 1-year period under such title XII,

(B)  there will be sufficient amounts in the State unemployment fund to pay all compensation during the 3-month period beginning on November 1 of such taxable year without receiving any advance under title XII of the Social Security Act, and

(C)  there is a net increase in the solvency of the State unemployment compensation system for the taxable year attributable to changes made in the State law after the date on which the first advance taken into account in determining the amount of the potential additional taxes was made (or, if later, after the date of the enactment of this subsection) and such net increase equals or exceeds the potential additional taxes for such taxable year.

(3)  Definitions.—For purposes of paragraph (2)—

(A)  Potential additional taxes.—The term “potential additional taxes” means, with respect to any State for any taxable year, the aggregate amount of the additional tax which would be payable under this chapter for such taxable year by all taxpayers subject to the unemployment compensation law of such State for such taxable year if paragraph (2) of subsection (c) had applied to such taxable year and any preceding taxable year without regard to this subsection but with regard to subsection (f).

(B)  Treatment of certain reductions.—Any reduction in the State’s balance under section 901(d)(1) of the Social Security Act shall not be treated as a repayment made by such State.

(4)  Reports.—The Secretary of Labor may require a State to furnish such information at such time and in such manner as may be necessary for purposes of paragraph (2).

SEC. 3303.  CONDITIONS OF ADDITIONAL CREDIT ALLOWANCE.

(a)  State Standards.—A taxpayer shall be allowed an additional credit under section 3302(b) with respect to any reduced rate of contributions permitted by a State law, only if the Secretary of Labor finds that under such law—

(1)  no reduced rate of contributions to a pooled fund or to a partially pooled account is permitted to a person (or group of persons) having individuals in his (or their) employ except on the basis of his (or their) experience with respect to unemployment or other factors bearing a direct relation to unemployment risk during not less than the 3 consecutive years immediately preceding the computation date;

(2)  no reduced rate of contributions to a guaranteed employment account is permitted to a person (or a group of persons) having individuals in his (or their) employ unless—

(A)  the guaranty of remuneration was fulfilled in the year preceding the computation date; and

(B)  the balance of such account amounts to not less than 2 1/2percent of that part of the payroll or payrolls for the 3 years preceding the computation date by which contributions to such account were measured; and

(C)  such contributions were payable to such account with respect to 3 years preceding the computation date;

(3)  no reduced rate of contributions to a reserve account is permitted to a person (or group of persons) having individuals in his (or their) employ unless—

(A)  compensation has been payable from such account throughout the year preceding the computation date, and

(B)  the balance of such account amounts to not less than five times the largest amount of compensation paid from such account within any 1 of the 3 years preceding such date, and

(C)  the balance of such account amounts to not less than 2 1/2 2 percent of that part of the payroll or payrolls for the 3 years preceding such date by which contributions to such account were measured, and

(D)  such contributions were payable to such account with respect to the 3 years preceding the computation date.

For any person (or group of persons) who has (or have) not been subject to the State law for a period of time sufficient to compute the reduced rates permitted by paragraphs (1), (2), and (3) of this subsection on a 3-year basis (i) the period of time required may be reduced to the amount of time the person (or group of persons) has (or have) had experience under or has (or have) been subject to the State law, whichever is appropriate, but in no case less than 1 year immediately preceding the computation date, or (ii) a reduced rate (not less than 1 percent) may be permitted by the State law on a reasonable basis other than as permitted by paragraph (1), (2), or (3).

(b)  Certification by the Secretary of Labor With Respect to Additional Credit Allowance.—

(1)  On October 31 of each calendar year, the Secretary of Labor shall certify to the Secretary of the Treasury the law of each State (certified by the Secretary of Labor as provided in section 3304 for the 12-month period ending on such October 31), with respect to which he finds that reduced rates of contributions were allowable with respect to such 12-month period only in accordance with the provisions of subsection (a).

(2)  If the Secretary of Labor finds that under the law of a single State (certified by the Secretary of Labor as provided in section 3304) more than one type of fund or account is maintained, and reduced rates of contributions to more than one type of fund or account were allowable with respect to any 12-month period ending on October 31, and one or more of such reduced rates were allowable under conditions not fulfilling the requirements of subsection (a), the Secretary of Labor shall, on such October 31, certify to the Secretary of the Treasury only those provisions of the State law pursuant to which reduced rates of contributions were allowable with respect to such 12-month period under conditions fulfilling the requirements of subsection (a), and shall, in connection therewith, designate the kind of fund or account, as defined in subsection (c), established by the provisions so certified. If the Secretary of Labor finds that a part of any reduced rate of contributions payable under such law or under such provisions is required to be paid into one fund or account and a part into another fund or account, the Secretary of Labor shall make such certification pursuant to this paragraph as he finds will assure the allowance of additional credits only with respect to that part of the reduced rate of contributions which is allowed under provisions which do fulfill the requirements of subsection (a).

(3)  The Secretary of Labor shall, within 30 days after any State law is submitted to him for such purpose, certify to the State agency his findings with respect to reduced rates of contributions to a type of fund or account, as defined in subsection (c), which are allowable under such State law only in accordance with the provisions of subsection (a). After making such findings, the Secretary of Labor shall not withhold his certification to the Secretary of the Treasury of such State law, or of the provisions thereof with respect to which such findings were made, for any 12-month period ending on October 31 pursuant to paragraph (1) or (2) unless, after reasonable notice and opportunity for hearing to the State agency, the Secretary of Labor finds the State law no longer contains the provisions specified in subsection (a) or the State has, with respect to such 12-month period, failed to comply substantially with any such provision.

(c)  Definitions.—As used in this section—

(1)  Reserve account.—The term “reserve account” means a separate account in an unemployment fund, maintained with respect to a person (or group of persons) having individuals in his (or their) employ, from which account, unless such account is exhausted, is paid all and only compensation payable on the basis of services performed for such person (or for one or more of the persons comprising the group).

(2)  Pooled fund.—The term “pooled fund” means an unemployment fund or any part thereof (other than a reserve account or a guaranteed employment account) into which the total contributions of persons contributing thereto are payable, in which all contributions are mingled and undivided, and from which compensation is payable to all individuals eligible for compensation from such fund.

(3)  Partially pooled account.—The term “partially pooled account” means a part of an unemployment fund in which part of the fund all contributions thereto are mingled and undivided, and from which part of the fund compensation is payable only to individuals to whom compensation would be payable from a reserve account or from a guaranteed employment account but for the exhaustion or termination of such reserve account or of such guaranteed employment account. Payments from a reserve account or guaranteed employment account into a partially pooled account shall not be construed to be inconsistent with the provisions of paragraph (1) or (4).

(4)  Guaranteed employment account.—The term “guaranteed employment account” means a separate account, in an unemployment fund, maintained with respect to a person (or group of persons) having individuals in his (or their) employ who, in accordance with the provisions of the State law or of a plan thereunder approved by the State agency,

(A)  guarantees in advance at least 30 hours of work, for which remuneration will be paid at not less than stated rates, for each of 40 weeks (or if more, 1 weekly hour may be deducted for each added week guaranteed) in a year, to all the individuals who are in his (or their) employ in, and who continue to be available for suitable work in, one or more distinct establishments, except that any such individual’s guaranty may commence after a probationary period (included within the 11 or less consecutive weeks immediately following the first week in which the individual renders services), and

(B)  gives security or assurance, satisfactory to the State agency, for the fulfillment of such guaranties, from which account, unless such account is exhausted or terminated, is paid all and only compensation, payable on the basis of services performed for such person (or for one or more of the persons comprising the group), to any such individual whose guaranteed remuneration has not been paid (either pursuant to the guaranty or from the security or assurance provided for the fulfillment of the guaranty), or whose guaranty is not renewed and who is otherwise eligible for compensation under the State law.

(5)  Year.—The term “year” means any 12 consecutive calendar months.

(6)  Balance.—The term “balance”, with respect to a reserve account or a guaranteed employment account, means the amount standing to the credit of the account as of the computation date; except that, if subsequent to January 1, 1940, any moneys have been paid into or credited to such account other than payments thereto by persons having individuals in their employ, such term shall mean the amount in such account as of the computation date less the total of such other moneys paid into or credited to such account subsequent to January 1, 1940.

(7)  Computation date.—The term “computation date” means the date, occurring at least once in each calendar year and within 27 weeks prior to the effective date of new rates of contributions, as of which such rates are computed.

(8)  Reduced rate.—The term “reduced rate” means a rate of contributions lower than the standard rate applicable under the State law, and the term “standard rate” means the rate on the basis of which variations therefrom are computed.

(d)  Voluntary Contributions.—A State law may, without being deemed to violate the standards set forth in subsection (a), permit voluntary contributions to be used in the computation of reduced rates if such contributions are paid prior to the expiration of 120 days after the beginning of the year for which such rates are effective.

(e)  Payments by Certain Nonprofit Organizations.—A State may, without being deemed to violate the standards set forth in subsection (a), permit an organization (or a group of organizations) described in section 501(c)(3) which is exempt from income tax under section 501(a) to elect (in lieu of paying contributions) to pay into the State unemployment fund amounts equal to the amounts of compensation attributable under the State law to service performed in the employ of such organization (or group).

(f)[104]  Prohibition on Noncharging Due to Employee Fault.—

(1)  In general.—A State law shall be treated as meeting the requirements of subsection (a)(1) only if such law provides that an employer’s account shall not be relieved of charges relating to a payment from the State unemployment fund if the State agency determines that—

(A)  the payment was made because the employer, or an agent of the employer, was at fault for failing to respond timely or adequately to the request of the agency for information relating to the claim for compensation; and

(B)  the employer or agent has established a pattern of failing to respond timely or adequately to such requests.

(2)  State authority to impose stricter standards.— Nothing in paragraph (1) shall limit the authority of a State to provide that an employer’s account not be relieved of charges relating to a payment from the State unemployment fund for reasons other than the reasons described in subparagraphs (A) and (B) of such paragraph, such as after the first instance of a failure to respond timely or adequately to requests described in paragraph (1)(A).

(g)  Transitional Rule for Unemployment Compensation Amendments of 1976.—To facilitate the orderly transition to coverage of service to which section 3309(a)(1)(A) applies by reason of the enactment of the Unemployment Compensation Amendments of 1976, a State law may provide that an organization (or group of organizations) which elects, when such election first becomes available under the State law with respect to such service, to make payments (in lieu of contributions) into the State unemployment fund as provided in section 3309(a)(2), and which had paid contributions into such fund under the State law with respect to such service performed in its employ before the date of the enactment of this subsection, is not required to make any such payment (in lieu of contributions) on account of compensation paid after its election as heretofore described which is attributable under the State law to such service performed in its employ, until the total of such compensation equals the amount—

(1)  by which the contributions paid by such organization (or group) on the basis of wages for such service with respect to a period before the election provided by section 3309(a)(2), exceed

(2)  unemployment compensation for the same period which was charged to the experience-rating account of such organization (or group) or paid under the State law on the basis of such service performed in its employ or wages paid for such service, whichever is appropriate.

SEC. 3304. APPROVAL OF STATE LAWS.

(a)  Requirements.—The Secretary of Labor shall approve any State law submitted to him, within 30 days of such submission, which he finds provides that—

(1)  all compensation is to be paid through public employment offices or such other agencies as the Secretary of Labor may approve;

(2)  no compensation shall be payable with respect to any day of unemployment occurring within 2 years after the first day of the first period with respect to which contributions are required;

(3)  all money received in the unemployment fund shall (except for refunds of sums erroneously paid into such fund and except for refunds paid in accordance with the provisions of section 3305(b)) immediately upon such receipt be paid over to the Secretary of the Treasury to the credit of the Unemployment Trust Fund established by section 904 of the Social Security Act (42 U.S.C. 1104);

(4)  all money withdrawn from the unemployment fund of the State shall be used solely in the payment of unemployment compensation, exclusive of expenses of administration, and for refunds of sums erroneously paid into such fund and refunds paid in accordance with the provisions of section 3305(b); except that—

(A)  an amount equal to the amount of employee payments into the unemployment fund of a State may be used in the payment of cash benefits to individuals with respect to their disability, exclusive of expenses of administration;

(B)  the amounts specified by section 903(c)(2) or 903(d)(4) of the Social Security Act may, subject to the conditions prescribed in such section, be used for expenses incurred by the State for administration of its unemployment compensation law and public employment offices;

(C)  nothing in this paragraph shall be construed to prohibit deducting an amount from unemployment compensation otherwise payable to an individual and using the amount so deducted to pay for health insurance, or the withholding of Federal, State, or local individual income tax, if the individual elected to have such deduction made and such deduction was made under a program approved by the Secretary of Labor;

(D)  amounts shall be deducted from unemployment benefits and used to repay overpayments as provided in section 303(g) of the Social Security Act; and

(E)  amounts may be withdrawn for the payment of short-time compensation program (as defined under section 3306(v));

(F)  amounts may be withdrawn for the payment of allowances under a self-employment assistance program (as defined in section 3306(t)); and

(G)  with respect to amounts of covered unemployment compensation debt (as defined in section 6402(f)(4)) collected under section 6402(f)—

(i)  amounts may be deducted to pay any fees authorized under such section; and

(ii)  the penalties and interest described in section 6402(f)(4)(B) may be transferred to the appropriate State fund into which the State would have deposited such amounts had the person owing the debt paid such amounts directly to the State;

(5)  compensation shall not be denied in such State to any otherwise eligible individual for refusing to accept new work under any of the following conditions:

(A)  if the position offered is vacant due directly to a strike, lockout, or other labor dispute;

(B)  if the wages, hours, or other conditions of the work offered are substantially less favorable to the individual than those prevailing for similar work in the locality;

(C)  if as a condition of being employed the individual would be required to join a company union or to resign from or refrain from joining any bona fide labor organization;

(6)(A)  compensation is payable on the basis of service to which section 3309(a)(1) applies, in the same amount, on the same terms, and subject to the same conditions as compensation payable on the basis of other service subject to such law; except that—

(i)  with respect to services in an instructional, research, or principal administrative capacity for an educational institution to which section 3309(a)(1) applies, compensation shall not be payable based on such services for any week commencing during the period between two successive academic years or terms (or, when an agreement provides instead for a similar period between two regular but not successive terms, during such period) to any individual if such individual performs such services in the first of such academic years (or terms) and if there is a contract or reasonable assurance that such individual will perform services in any such capacity for any educational institution in the second of such academic years or terms,

(ii)  with respect to services in any other capacity for an educational institution to which section 3309(a)(1) applies—

(I)  compensation payable on the basis of such services may be denied to any individual for any week which commences during a period between 2 successive academic years or terms if such individual performs such services in the first of such academic years or terms and there is a reasonable assurance that such individual will perform such services in the second of such academic years or terms, except that

(II)  if compensation is denied to any individual for any week under subclause (I) and such individual was not offered an opportunity to perform such services for the educational institution for the second of such academic years or terms, such individual shall be entitled to a retroactive payment of the compensation for each week for which the individual filed a timely claim for compensation and for which compensation was denied solely by reason of subclause (I),

(iii)  with respect to any services described in clause (i) or (ii), compensation payable on the basis of such services shall be denied to any individual for any week which commences during an established and customary vacation period or holiday recess if such individual performs such services in the period immediately before such vacation period or holiday recess, and there is a reasonable assurance that such individual will perform such services in the period immediately following such vacation period or holiday recess,

(iv)  with respect to any services described in clause (i) or (ii), compensation payable on the basis of services in any such capacity shall be denied as specified in clauses (i), (ii), and (iii) to any individual who performed such services in an educational institution while in the employ of an educational service agency, and for this purpose the term “educational service agency” means a governmental agency or governmental entity which is established and operated exclusively for the purpose of providing such services to one or more educational institutions,

(v)  with respect to services to which section 3309(a)(1) applies, if such services are provided to or on behalf of an educational institution, compensation may be denied under the same circumstances as described in clauses (i) through (iv), and

(vi)  with respect to services described in clause (ii), clauses (iii) and (iv) shall be applied by substituting “may be denied” for “shall be denied”, and

(B)  payments (in lieu of contributions) with respect to service to which section 3309(a)(1) applies may be made into the State unemployment fund on the basis set forth in section 3309(a)(2);

(7)  an individual who has received compensation during his benefit year is required to have had work since the beginning of such year in order to qualify for compensation in his next benefit year;

(8)  compensation shall not be denied to an individual for any week because he is in training with the approval of the State agency (or because of the application, to any such week in training, of State law provisions relating to availability for work, active search for work, or refusal to accept work);

(9)(A)  compensation shall not be denied or reduced to an individual solely because he files a claim in another State (or a contiguous country with which the United States has an agreement with respect to unemployment compensation) or because he resides in another State (or such a contiguous country) at the time he files a claim for unemployment compensation;

(B)  the State shall participate in any arrangements for the payment of compensation on the basis of combining an individual’s wages and employment covered under the State law with his wages and employment covered under the unemployment compensation law of other States which are approved by the Secretary of Labor in consultation with the State unemployment compensation agencies as reasonably calculated to assure the prompt and full payment of compensation in such situations. Any such arrangement shall include provisions for (i) applying the base period of a single State law to a claim involving the combining of an individual’s wages and employment covered under two or more State laws, and (ii) avoiding duplicate use of wages and employment by reason of such combining;

(10)  compensation shall not be denied to any individual by reason of cancellation of wage credits or total reduction of his benefit rights for any cause other than discharge for misconduct connected with his work, fraud in connection with a claim for compensation, or receipt of disqualifying income;

(11)  extended compensation shall be payable as provided by the Federal-State Extended Unemployment Compensation Act of 1970;

(12)  no person shall be denied compensation under such State law solely on the basis of pregnancy or termination of pregnancy;

(13)  compensation shall not be payable to any individual on the basis of any services, substantially all of which consist of participating in sports or athletic events or training or preparing to so participate, for any week which commences during the period between two successive sport seasons (or similar periods) if such individual performed such services in the first of such seasons (or similar periods) and there is a reasonable assurance that such individual will perform such services in the later of such seasons (or similar periods);

(14)(A)  compensation shall not be payable on the basis of services performed by an alien unless such alien is an individual who was lawfully admitted for permanent residence at the time such services were performed, was lawfully present for purposes of performing such services, or was permanently residing in the United States under color of law at the time such services were performed (including an alien who was lawfully present in the United States as a result of the application of the provisions of section 212(d)(5) of the Immigration and Nationality Act),

(B)  any data or information required of individuals applying for compensation to determine whether compensation is not payable to them because of their alien status shall be uniformly required from all applicants for compensation, and

(C)  in the case of an individual whose application for compensation would otherwise be approved, no determination by the State agency that compensation to such individual is not payable because of his alien status shall be made except upon a preponderance of the evidence;

(15)(A)  subject to subparagraph (B), the amount of compensation payable to an individual for any week which begins after March 31, 1980, and which begins in a period with respect to which such individual is receiving a governmental or other pension, retirement or retired pay, annuity, or any other similar periodic payment which is based on the previous work of such individual shall be reduced (but not below zero) by an amount equal to the amount of such pension, retirement or retired pay, annuity, or other payment, which is reasonably attributable to such week except that—

(i)  the requirements of this paragraph shall apply to any pension, retirement or retired pay, annuity, or other similar periodic payment only if—

(I)  such pension, retirement or retired pay, annuity, or similar payment is under a plan maintained (or contributed to) by a base period employer or chargeable employer (as determined under applicable law), and

(II)  in the case of such a payment not made under the Social Security Act or the Railroad Retirement Act of 1974 (or the corresponding provisions of prior law), services performed for such employer by the individual after the beginning of the base period (or remuneration for such services) affect eligibility for, or increase the amount of, such pension, retirement or retired pay, annuity, or similar payment, and

(ii)  the State law may provide for limitations on the amount of any such a reduction to take into account contributions made by the individual for the pension, retirement or retired pay, annuity, or other similar periodic payment, and

(B)  the amount of compensation shall not be reduced on account of any payments of governmental or other pensions, retirement or retired pay, annuity, or other similar payments which are not includible in the gross income of the individual for the taxable year in which it was paid because it was part of a rollover distribution;

(16)(A)  wage information contained in the records of the agency administering the State law which is necessary (as determined by the Secretary of Health and Human Services in regulations) for purposes of determining an individual’s eligibility for assistance, or the amount of such assistance, under a State program funded under part A of title IV of the Social Security Act, shall be made available to a State or political subdivision thereof when such information is specifically requested by such State or political subdivision for such purposes,

(B)  wage and unemployment compensation information contained in the records of such agency shall be furnished to the Secretary of Health and Human Services (in accordance with regulations promulgated by such Secretary) as necessary for the purposes of the National Directory of New Hires established under section 453(i) of the Social Security Act, and

(C)  such safeguards are established as are necessary (as determined by the Secretary of Health and Human Services in regulations) to insure that information furnished under subparagraph (A) or (B) is used only for the purposes authorized under such subparagraph;

(17)  any interest required to be paid on advances under title XII of the Social Security Act shall be paid in a timely manner and shall not be paid, directly or indirectly (by an equivalent reduction in State unemployment taxes or otherwise) by such State from amounts in such State’s unemployment fund; and

(18)  Federal individual income tax from unemployment compensation is to be deducted and withheld if an individual receiving such compensation voluntarily requests such deduction and withholding; and

(19)  all the rights, privileges, or immunities conferred by such law or by acts done pursuant thereto shall exist subject to the power of the legislature to amend or repeal such law at any time.

(b)  Notification.—The Secretary of Labor shall, upon approving such law, notify the governor of the State of his approval.

(c)  Certification.—On October 31 of each taxable year the Secretary of Labor shall certify to the Secretary of the Treasury each State whose law he has previously approved, except that he shall not certify any State which, after reasonable notice and opportunity for hearing to the State agency, the Secretary of Labor finds has amended its law so that it no longer contains the provisions specified in subsection (a) or has with respect to the 12-month period ending on such October 31 failed to comply substantially with any such provision in such subsection. No finding of a failure to comply substantially with any provision in paragraph (5) of subsection (a) shall be based on an application or interpretation of State law (1) until all administrative review provided for under the laws of the State has been exhausted, or (2) with respect to which the time for judicial review provided by the laws of the State has not expired, or (3) with respect to which any judicial review is pending. On October 31 of any taxable year, the Secretary of Labor shall not certify any State which, after reasonable notice and opportunity for hearing to the State agency, the Secretary of Labor finds has failed to amend its law so that it contains each of the provisions required by law to be included therein (including provisions relating to the Federal-State Extended Unemployment Compensation Act of 1970 (or any amendments thereto) as required under subsection (a)(11)), or has, with respect to the twelve-month period ending on such October 31, failed to comply substantially with any such provision.

(d)  Notice of Non certification.—If at any time the Secretary of Labor has reason to believe that a State whose law he has previously approved may not be certified under subsection (c), he shall promptly so notify the governor of such State.

(e)  Change of Law During 12-Month Period.—Whenever—

(1)  any provision of this section, section 3302, or section 3303 refers to a 12-month period ending on October 31 of a year, and

(2)  the law applicable to one portion of such period differs from the law applicable to another portion of such period,

then such provision shall be applied by taking into account for each such portion the law applicable to such portion.

(f)  Definition of Institution of Higher Education.—For purposes of subsection (a)(6), the term “institution of higher education” means an educational institution in any State which—

(1)  admits as regular students only individuals having a certificate of graduation from a high school, or the recognized equivalent of such a certificate;

(2)  is legally authorized within such State to provide a program of education beyond high school;

(3)  provides an educational program for it which awards a bachelor’s or higher degree, or provides a program which is acceptable for full credit toward such a degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and

(4)  is a public or other nonprofit institution.

SEC. 3305. APPLICABILITY OF STATE LAW.

(a)  Interstate and Foreign Commerce.—No person required under a State law to make payments to an unemployment fund shall be relieved from compliance therewith on the ground that he is engaged in interstate or foreign commerce, or that the State law does not distinguish between employees engaged in interstate or foreign commerce and those engaged in intrastate commerce.

(b)  Federal Instrumentalities in General.—The legislature of any State may require any instrumentality of the United States (other than an instrumentality to which section 3306(c)(6) applies), and the individuals in its employ, to make contributions to an unemployment fund under a State unemployment compensation law approved by the Secretary of Labor under section 3304 and (except as provided in section 5240 of the Revised Statutes, as amended (12 U.S.C., sec. 484), and as modified by subsection (c)), to comply otherwise with such law. The permission granted in this subsection shall apply (A) only to the extent that no discrimination is made against such instrumentality, so that if the rate of contribution is uniform upon all other persons subject to such law on account of having individuals in their employ, and upon all employees of such persons, respectively, the contributions required of such instrumentality or the individuals in its employ shall not be at a greater rate than is required of such other persons and such employees, and if the rates are determined separately for different persons or classes of persons having individuals in their employ or for different classes of employees, the determination shall be based solely upon unemployment experience and other factors bearing a direct relation to unemployment risk; (B) only if such State law makes provision for the refund of any contributions required under such law from an instrumentality of the United States or its employees for any year in the event such State is not certified by the Secretary of Labor under section 3304 with respect to such year; and (C) only if such State law makes provision for the payment of unemployment compensation to any employee of any such instrumentality of the United States in the same amount, on the same terms, and subject to the same conditions as unemployment compensation is payable to employees of other employers under the State unemployment compensation law.

(c)  National Banks.—Nothing contained in section 5240 of the Revised Statutes, as amended (12 U.S.C. 484), shall prevent any State from requiring any national banking association to render returns and reports relative to the association’s employees, their remuneration and services, to the same extent that other persons are required to render like returns and reports under a State law requiring contributions to an unemployment fund. The Comptroller of the Currency shall, upon receipt of a copy of any such return or report of a national banking association from, and upon request of, any duly authorized official, body, or commission of a State, cause an examination of the correctness of such return or report to be made at the time of the next succeeding examination of such association, and shall thereupon transmit to such official, body, or commission a complete statement of his findings respecting the accuracy of such returns or reports.

(d)  Federal Property.—No person shall be relieved from compliance with a State unemployment compensation law on the ground that services were performed on land or premises owned, held, or possessed by the United States, and any State shall have full jurisdiction and power to enforce the provisions of such law to the same extent and with the same effect as though such place were not owned, held, or possessed by the United States.

(e)  [Repealed.[105]]

(f)  American Vessels.—The legislature of any State in which a person maintains the operating office, from which the operations of an American vessel operating on navigable waters within or within and without the United States are ordinarily and regularly supervised, managed, directed and controlled, may require such person and the officers and members of the crew of such vessel to make contributions to its unemployment fund under its State unemployment compensation law approved by the Secretary of Labor under section 3304 and otherwise to comply with its unemployment compensation law with respect to the service performed by an officer or member of the crew on or in connection with such vessel to the same extent and with the same effect as though such service was performed entirely within such State. Such person and the officers and members of the crew of such vessel shall not be required to make contributions, with respect to such service, to the unemployment fund of any other State. The permission granted by this subsection is subject to the condition that such service shall be treated, for purposes of wage credits given employees, like other service subject to such State unemployment compensation law performed for such person in such State, and also subject to the same limitation, with respect to contributions required from such person and from the officers and members of the crew of such vessel, as is imposed by the second sentence (other than clause (B) thereof) of subsection (b) with respect to contributions required from instrumentalities of the United States and from individuals in their employ.

(g)  Vessels Operated by General Agents of United States.—The permission granted by subsection (f) shall apply in the same manner and under the same conditions (including the obligation to comply with all requirements of State unemployment compensation laws) to general agents of the Secretary of Commerce with respect to service performed by officers and members of the crew on or in connection with American vessels—

(1)  owned by or browbeat chartered to the United States, and

(2)  whose business is conducted by such general agents.

As to any such vessel, the State permitted to require contributions on account of such service shall be the State to which the general agent would make contributions if the vessel were operated for his own account. Such general agents are designated, for this purpose, instrumentalities of the United States neither wholly nor partially owned by it and shall not be exempt from the tax imposed by section 3301. The permission granted by this subsection is subject to the same conditions and limitations as are imposed in subsection (f), except that clause (B) of the second sentence of subsection (b) shall apply.

(h)  Requirement by State of Contributions.—Any State may, as to service performed on account of which contributions are made pursuant to subsection (g)—

(1)  require contributions from persons performing such service under its unemployment compensation law or temporary disability insurance law administered in connection therewith, and

(2)  require general agents of the Secretary of Commerce to make contributions under such temporary disability insurance law and to make such deductions from wages or remuneration as are required by such unemployment compensation or temporary disability insurance law.

(i)  General Agent as Legal Entity.—Each general agent of the Secretary of Commerce making contributions pursuant to subsection (g) or (h) shall, for purposes of such subsections, be considered a legal entity in his capacity as an instrumentality of the United States, separate and distinct from his identity as a person employing individuals on his own account.

(j)  Denial of Credits in Certain Cases.—Any person required, pursuant to the permission granted by this section, to make contributions to an unemployment fund under a State unemployment compensation law approved by the Secretary of Labor under section 3304 shall not be entitled to the credits permitted, with respect to the unemployment compensation law of a State, by subsections (a) and (b) of section 3302 against the tax imposed by section 3301 for any taxable year if, on October 31 of such taxable year, the Secretary of Labor certifies to the Secretary of the Treasury his finding, after reasonable notice and opportunity for hearing to the State agency, that the unemployment compensation law of such State is inconsistent with any one or more of the conditions on the basis of which such permission is granted or that, in the application of the State law with respect to the 12-month period ending on such October 31, there has been a substantial failure to comply with any one or more of such conditions. For purposes of section 3310, a finding of the Secretary of Labor under this subsection shall be treated as a finding under section 3304(c).

SEC. 3306.  DEFINITIONS.

(a)  Employer.—For purposes of this chapter—

(1)  In general.—The term “employer” means, with respect to any calendar year, any person who—

(A)  during any calendar quarter in the calendar year or the preceding calendar year paid wages of $1,500 or more, or

(B)  on each of some 20 days during the calendar year or during the preceding calendar year, each day being in a different calendar week, employed at least one individual in employment for some portion of the day.

For purposes of this paragraph, there shall not be taken into account any wages paid to, or employment of, an employee performing domestic services referred to in paragraph (3).

(2)  Agricultural labor.—In the case of agricultural labor, the term “employer” means, with respect to any calendar year, any person who—

(A)  during any calendar quarter in the calendar year or the preceding calendar year paid wages of $20,000 or more for agricultural labor, or

(B)  on each of some 20 days during the calendar year or during the preceding calendar year, each day being in a different calendar week, employed at least 10 individuals in employment in agricultural labor for some portion of the day.

(3)  Domestic service.—In the case of domestic service in a private home, local college club, or local chapter of a college fraternity or sorority, the term “employer” means, with respect to any calendar year, any person who during any calendar quarter in the calendar year or the preceding calendar year paid wages in cash of $1,000 or more for such service.

(4)  Special rule.—A person treated as an employer under paragraph (3) shall not be treated as an employer with respect to wages paid for any service other than domestic service referred to in paragraph (3) unless such person is treated as an employer under paragraph (1) or (2) with respect to such other service.

(b)  Wages.—For purposes of this chapter, the term “wages” means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include—

(1)  that part of the remuneration which, after remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) equal to $7,000 with respect to employment has been paid to an individual by an employer during any calendar year, is paid to such individual by such employer during such calendar year. If an employer (hereinafter referred to as successor employer) during any calendar year acquires substantially all the property used in a trade or business of another employer (hereinafter referred to as a predecessor), or used in a separate unit of a trade or business of a predecessor, and immediately after the acquisition employs in his trade or business an individual who immediately prior to the acquisition was employed in the trade or business of such predecessor, then, for the purpose of determining whether the successor employer has paid remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) with respect to employment equal to $7,000 to such individual during such calendar year, any remuneration (other than remuneration referred to in the succeeding paragraphs of this subsection) with respect to employment paid (or considered under this paragraph as having been paid) to such individual by such predecessor during such calendar year and prior to such acquisition shall be considered as having been paid by such successor employer;

(2)  the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of—

(A)  sickness or accident disability (but, in the case of payments made to an employee or any of his dependents, this subparagraph shall exclude from the term “wages” only payments which are received under a workmen’s compensation law), or

(B)  medical or hospitalization expenses in connection with sickness or accident disability, or

(C)  death;

(3)  [Stricken.[106]]

(4)  any payment on account of sickness or accident disability, or medical or hospitalization expenses in connection with sickness or accident disability, made by an employer to, or on behalf of, an employee after the expiration of 6 calendar months following the last calendar month in which the employee worked for such employer;

(5)  any payment made to, or on behalf of, an employee or his beneficiary—

(A)  from or to a trust described in section 401(a) which is exempt from tax under section 501(a) at the time of such payment unless such payment is made to an employee of the trust as remuneration for services rendered as such employee and not as a beneficiary of the trust, or

(B)  under or to an annuity plan which, at the time of such payment, is a plan described in section 403(a),

(C)  under a simplified employee pension (as defined in section 408(k)(1)), other than any contributions described in section 408(k)(6),

(D)  under or to an annuity contract described in section 403(b), other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement (whether evidenced by a written instrument or otherwise),

(E)  under or to an exempt governmental deferred compensation plan (as defined in section 3121(v)(3)),

(F)  to supplement pension benefits under a plan or trust described in any of the foregoing provisions of this paragraph to take into account some portion or all of the increase in the cost of living (as determined by the Secretary of Labor) since retirement but only if such supplemental payments are under a plan which is treated as a welfare plan under section 3(2)(B)(ii) of the Employee Retirement Income Security Act of 1974;

(G)  under a cafeteria plan (within the meaning of section 125) if such payment would not be treated as wages without regard to such plan and it is reasonable to believe that (if section 125 applied for purposes of this section) section 125 would not treat any wages as constructively received, or

(H)  under an arrangement to which section 408(p) applies, other than any elective contributions under paragraph (2)(A)(i) thereof,

(6)  the payment by an employer (without deduction from the remuneration of the employee)—

(A)  of the tax imposed upon an employee under section 3101, or

(B)  of any payment required from an employee under a State unemployment compensation law,

with respect to remuneration paid to an employee for domestic service in a private home of the employer or for agricultural labor;

(7)  remuneration paid in any medium other than cash to an employee for service not in the course of the employer’s trade or business;

(9)  remuneration paid to or on behalf of an employee if (and to the extent that) at the time of the payment of such remuneration it is reasonable to believe that a corresponding deduction is allowable under section 217 (determined without regard to section 274(n));

(10)  any payment or series of payments by an employer to an employee or any of his dependents which is paid—

(A)  upon or after the termination of an employee’s employment relationship because of (i) death, or (ii) retirement for disability, and

(B)  under a plan established by the employer which makes provision for his employees generally or a class or classes of his employees (or for such employees or class or classes of employees and their dependents),

other than any such payment or series of payments which would have been paid if the employee’s employment relationship had not been so terminated;

(11)  remuneration for agricultural labor paid in any medium other than cash;

(12)  any contribution, payment, or service, provided by an employer which may be excluded from the gross income of an employee, his spouse, or his dependents, under the provisions of section 120 (relating to amounts received under qualified group legal services plans);

(13)  any payment made, or benefit furnished, to or for the benefit of an employee if at the time of such payment or such furnishing it is reasonable to believe that the employee will be able to exclude such payment or benefit from income under section 127, 129, 134(b)(4), or 134(b)(5);

(14)  the value of any meals or lodging furnished by or on behalf of the employer if at the time of such furnishing it is reasonable to believe that the employee will be able to exclude such items from income under section 119;

(15)  any payment made by an employer to a survivor or the estate of a former employee after the calendar year in which such employee died;

(16)  any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from income under section 74(c), 108(f)(4), 117, or 132;

(17)  any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(d);

(18)  any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(d);

(19)  remuneration on account of—

(A)  a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or

(B)  any disposition by the individual of such stock; or

(20)  any benefit or payment which is excludable from the gross income of the employee under section 139B(b).

Except as otherwise provided in regulations prescribed by the Secretary, any third party which makes a payment included in wages solely by reason of the parenthetical matter contained in subparagraph (A) of paragraph (2) shall be treated for purposes of this chapter and chapter 22 as the employer with respect to such wages. Nothing in the regulations prescribed for purposes of chapter 24 (relating to income tax withholding) which provides an exclusion from “wages” as used in such chapter shall be construed to require a similar exclusion from “wages” in the regulations prescribed for purposes of this chapter.

(c)  Employment.—For purposes of this chapter, the term “employment” means any service performed prior to 1955, which was employment for purposes of subchapter C of chapter 9 of the Internal Revenue Code of 1939 under the law applicable to the period in which such service was performed, and (A) any service, of whatever nature, performed after 1954 by an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States, or (ii) on or in connection with an American vessel or American aircraft under a contract of service which is entered into within the United States or during the performance of which and while the employee is employed on the vessel or aircraft it touches at a port in the United States, if the employee is employed on and in connection with such vessel or aircraft when outside the United States, and (B) any service, of whatever nature, performed after 1971 outside the United States (except in a contiguous country with which the United States has an agreement relating to unemployment compensation) by a citizen of the United States as an employee of an American employer (as defined in subsection (j)(3)), except—

(1)  agricultural labor (as defined in subsection (k)) unless—

(A)  such labor is performed for a person who—

(i)  during any calendar quarter in the calendar year or the preceding calendar year paid remuneration in cash of $20,000 or more to individuals employed in agricultural labor (including labor performed by an alien referred to in subparagraph (B)), or

(ii)  on each of some 20 days during the calendar year or the preceding calendar year, each day being in a different calendar week, employed in agricultural labor (including labor performed by an alien referred to in subparagraph (B)) for some portion of the day (whether or not at the same moment of time) 10 or more individuals; and

(B)  such labor is not agricultural labor performed by an individual who is an alien admitted to the United States to perform agricultural labor pursuant to sections 214(c) and 101(a)(15)(H) of the Immigration and Nationality Act;

(2)  domestic service in a private home, local college club, or local chapter of a college fraternity or sorority unless performed for a person who paid cash remuneration of $1,000 or more to individuals employed in such domestic service in any calendar quarter in the calendar year or the preceding calendar year;

(3)  service not in the course of the employer’s trade or business performed in any calendar quarter by an employee, unless the cash remuneration paid for such service is $50 or more and such service is performed by an individual who is regularly employed by such employer to perform such service. For purposes of this paragraph, an individual shall be deemed to be regularly employed by an employer during a calendar quarter only if—

(A)  on each of some 24 days during such quarter such individual performs for such employer for some portion of the day service not in the course of the employer’s trade or business, or

(B)  such individual was regularly employed (as determined under subparagraph (A)) by such employer in the performance of such service during the preceding calendar quarter;

(4)  service performed on or in connection with a vessel or aircraft not an American vessel or American aircraft, if the employee is employed on and in connection with such vessel or aircraft when outside the United States;

(5)  service performed by an individual in the employ of his son, daughter, or spouse, and service performed by a child under the age of 21 in the employ of his father or mother;

(6)  service performed in the employ of the United States Government or of an instrumentality of the United States which is—

(A)  wholly or partially owned by the United States, or

(B)  exempt from the tax imposed by section 3301 by virtue of any provision of law which specifically refers to such section (or the corresponding section of prior law) in granting such exemption;

(7)  service performed in the employ of a State, or any political subdivision thereof, or in the employ of an Indian tribe, or any instrumentality of any one or more of the foregoing which is wholly owned by one or more States or political subdivisions or Indian tribes; and any service performed in the employ of any instrumentality of one or more States or political subdivisions to the extent that the instrumentality is, with respect to such service, immune under the Constitution of the United States from the tax imposed by section 3301;

(8)  service performed in the employ of a religious, charitable, educational, or other organization described in section 501(c)(3) which is exempt from income tax under section 501(a);

(9)  service performed by an individual as an employee or employee representative as defined in section 1 of the Railroad Unemployment Insurance Act (45 U.S.C. 351);

(10)(A)  service performed in any calendar quarter in the employ of any organization exempt from income tax under section 501(a) (other than an organization described in section 401(a)) or under section 521, if the remuneration for such service is less than $50, or

(B)  service performed in the employ of a school, college, or university, if such service is performed (i) by a student who is enrolled and is regularly attending classes at such school, college, or university, or (ii) by the spouse of such a student, if such spouse is advised, at the time such spouse commences to perform such service, that (I) the employment of such spouse to perform such service is provided under a program to provide financial assistance to such student by such school, college, or university, and (II) such employment will not be covered by any program of unemployment insurance, or

(C)  service performed by an individual who is enrolled at a nonprofit or public educational institution which normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are carried on as a student in a full-time program, taken for credit at such institution, which combines academic instruction with work experience, if such service is an integral part of such program, and such institution has so certified to the employer, except that this subparagraph shall not apply to service performed in a program established for or on behalf of an employer or group of employers, or

(D)  service performed in the employ of a hospital, if such service is performed by a patient of such hospital;

(11)  service performed in the employ of a foreign government (including service as a consular or other officer or employee or a nonautomatic representative);

(12)  service performed in the employ of an instrumentality wholly owned by a foreign government—

(A)  if the service is of a character similar to that performed in foreign countries by employees of the United States Government or of an instrumentality thereof; and

(B)  if the Secretary of State shall certify to the Secretary of the Treasury that the foreign government, with respect to whose instrumentality exemption is claimed, grants an equivalent exemption with respect to similar service performed in the foreign country by employees of the United States Government and of instrumentalities thereof;

(13)  service performed as a student nurse in the employ of a hospital or a nurses’ training school by an individual who is enrolled and is regularly attending classes in a nurses’ training school chartered or approved pursuant to State law; and service performed as an intern in the employ of a hospital by an individual who has completed a 4 years’ course in a medical school chartered or approved pursuant to State law;

(14)  service performed by an individual for a person as an insurance agent or as an insurance solicitor, if all such service performed by such individual for such person is performed for remuneration solely by way of commission;

(15)(A)  service performed by an individual under the age of 18 in the delivery or distribution of newspapers or shopping news, not including delivery or distribution to any point for subsequent delivery or distribution;

(B)  service performed by an individual in, and at the time of, the sale of newspapers or magazines to ultimate consumers, under an arrangement under which the newspapers or magazines are to be sold by him at a fixed price, his compensation being based on the retention of the excess of such price over the amount at which the newspapers or magazines are charged to him, whether or not he is guaranteed a minimum amount of compensation for such service, or is entitled to be credited with the unsold newspapers or magazines turned back;

(16)  service performed in the employ of an international organization;

(17)  service performed by an individual in (or as an officer or member of the crew of a vessel while it is engaged in) the catching, taking, harvesting, cultivating, or farming of any kind of fish, shellfish, crust ace a, sponges, seaweeds, or other aquatic forms of animal and vegetable life (including service performed by any such individual as an ordinary incident to any such activity), except—

(A)  service performed in connection with the catching or taking of salmon or halibut, for commercial purposes, and

(B)  service performed on or in connection with a vessel of more than 10 net tons (determined in the manner provided for determining the register tonnage of merchant vessels under the laws of the United States);

(18)  service described in section 3121(b)(20);

(19)  Service[108] which is performed by a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended, and which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q) as the case may be;

(20)  service performed by a full time student (as defined in subsection (q)) in the employ of an organized camp—

(A)  if such camp—

(i)  did not operate for more than 7 months in the calendar year and did not operate for more than 7 months in the preceding calendar year, or

(ii)  had average gross receipts for any 6 months in the preceding calendar year which were not more than 33 1/3 percent of its average gross receipts for the other 6 months in the preceding calendar year; and

(B)  if such full time student performed services in the employ of such camp for less than 13 calendar weeks in such calendar year; or

(21)  service performed by a person committed to a penal institution.

(d)  Included and Excluded Service.—For purposes of this chapter, if the services performed during one-half or more of any pay period by an employee for the person employing him constitute employment, all the services of such employee for such period shall be deemed to be employment; but if the services performed during more than one-half of any such pay period by an employee for the person employing him do not constitute employment, then none of the services of such employee for such period shall be deemed to be employment. As used in this subsection, the term “pay period” means a period (of not more than 31 consecutive days) for which a payment of remuneration is ordinarily made to the employee by the person employing him. This subsection shall not be applicable with respect to services performed in a pay period by an employee for the person employing him, where any of such service is excepted by subsection (c)(9).

(e)  State Agency.—For purposes of this chapter, the term “State agency” means any State officer, board, or other authority, designated under a State law to administer the unemployment fund in such State.

(f)  Unemployment Fund.—For purposes of this chapter, the term “unemployment fund” means a special fund, established under a State law and administered by a State agency, for the payment of compensation. Any sums standing to the account of the State agency in the Unemployment Trust Fund established by section 904 of the Social Security Act, as amended (42 U.S.C. 1104), shall be deemed to be a part of the unemployment fund of the State, and no sums paid out of the Unemployment Trust Fund to such State agency shall cease to be a part of the unemployment fund of the State until expended by such State agency. An unemployment fund shall be deemed to be maintained during a taxable year only if throughout such year, or such portion of the year as the unemployment fund was in existence, no part of the moneys of such fund was expended for any purpose other than the payment of compensation (exclusive of expenses of administration) and for refunds of sums erroneously paid into such fund and refunds paid in accordance with the provisions of section 3305(b); except that—

(1)  an amount equal to the amount of employee payments into the unemployment fund of a State may be used in the payment of cash benefits to individuals with respect to their disability, exclusive of expenses of administration;

(2)  the amounts specified by section 903(c)(2) or 903(d)(4) of the Social Security Act may, subject to the conditions prescribed in such section, be used for expenses incurred by the State for administration of its unemployment compensation law and public employment offices,

(3)  nothing in this subsection shall be construed to prohibit deducting any amount from unemployment compensation otherwise payable to an individual and using the amount so deducted to pay for health insurance, or the withholding of Federal, State, or local individual income tax, if the individual elected to have such deduction made and such deduction was made under a program approved by the Secretary of Labor;

(4)  amounts may be deducted from unemployment benefits and used to repay overpayments as provided in section 303(g) of the Social Security Act;

(5)  amounts may be withdrawn for the payment of short-time compensation under a short-time compensation program (as defined in subsection (v)); and

(6)  amounts may be withdrawn for the payment of allowances under a self-employment assistance program (as defined in subsection (t)).

(g)  Contributions.—For purposes of this chapter, the term “contributions” means payments required by a State law to be made into an unemployment fund by any person on account of having individuals in his employ, to the extent that such payments are made by him without being deducted or deductible from the remuneration of individuals in his employ.

(h)  Compensation.—For purposes of this chapter, the term “compensation” means cash benefits payable to individuals with respect to their unemployment.

(i)  Employee.—For purposes of this chapter, the term “employee” has the meaning assigned to such term by section 3121(d), except that paragraph (4) and subparagraphs (B) and (C) of paragraph (3) shall not apply.

(j)  State, United States, and American Employer.—For purposes of this chapter—

(1)  State.—The term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, and the Virgin Islands.

(2)  United States.—The term “United States” when used in a geographical sense includes the States, the District of Columbia, the Commonwealth of Puerto Rico, and the Virgin Islands.

(3)  American Employer.—The term “American employer” means a person who is—

(A)  an individual who is a resident of the United States,

(B)  a partnership, if two-thirds or more of the partners are residents of the United States,

(C)  a trust, if all of the trustees are residents of the United States, or

(D)  a corporation organized under the laws of the United States or of any State.

An individual who is a citizen of the Commonwealth of Puerto Rico or the Virgin Islands (but not otherwise a citizen of the United States) shall be considered, for purposes of this section, as a citizen of the United States.

(k)  Agricultural Labor.—For purposes of this chapter, the term “agricultural labor” has the meaning assigned to such term by subsection (g) of section 3121, except that for purposes of this chapter subparagraph (B) of paragraph (4) of such subsection (g) shall be treated as reading:

“(B) in the employ of a group of operators of farms (or a cooperative organization of which such operators are members) in the performance of service described in subparagraph (A), but only if such operators produced more than one-half of the commodity with respect to which such service is performed;”.

(l)  [Repealed.[109]]

(m)  American Vessel and Aircraft.—For purposes of this chapter, the term “American vessel” means any vessel documented or numbered under the laws of the United States; and includes any vessel which is neither documented or numbered under the laws of the United States nor documented under the laws of any foreign country, if its crew is employed solely by one or more citizens or residents of the United States or corporations organized under the laws of the United States or of any State; and the term “American aircraft” means an aircraft registered under the laws of the United States.

(n)  Vessels Operated by General Agents of United States.—Notwithstanding the provisions of subsection (c)(6), service performed by officers and members of the crew of a vessel which would otherwise be included as employment under subsection (c) shall not be excluded by reason of the fact that it is performed on or in connection with an American vessel—

(1)  owned by or bareboat chartered to the United States and

(2)  whose business is conducted by a general agent of the Secretary of Commerce.

For purposes of this chapter, each such general agent shall be considered a legal entity in his capacity as such general agent, separate and distinct from his identity as a person employing individuals on his own account, and the officers and members of the crew of such an American vessel whose business is conducted by a general agent of the Secretary of Commerce shall be deemed to be performing services for such general agent rather than the United States. Each such general agent who in his capacity as such is an employer within the meaning of subsection (a) shall be subject to all the requirements imposed upon an employer under this chapter with respect to service which constitutes employment by reason of this subsection.

(o)  Special Rule in Case of Certain Agricultural Workers.—

(1)  Crew leaders who are registered or provide specialized agricultural labor.—For purposes of this chapter, any individual who is a member of a crew furnished by a crew leader to perform agricultural labor for any other person shall be treated as an employee of such crew leader—

(A)  if—

(i)  such crew leader holds a valid certificate of registration under the Migrant and Seasonal Agricultural Worker Protection Act; or

(ii)  substantially all the members of such crew operate or maintain tractors, mechanized harvesting or crop-dusting equipment, or any other mechanized equipment, which is provided by such crew leader; and

(B)  if such individual is not an employee of such other person within the meaning of subsection (i).

(2)  Other crew leaders.—For purposes of this chapter, in the case of any individual who is furnished by a crew leader to perform agricultural labor for any other person and who is not treated as an employee of such crew leader under paragraph (1)—

(A)  such other person and not the crew leader shall be treated as the employer of such individual; and

(B)  such other person shall be treated as having paid cash remuneration to such individual in an amount equal to the amount of cash remuneration paid to such individual by the crew leader (either on his behalf or on behalf of such other person) for the agricultural labor performed for such other person.

(3)  Crew leader.—For purposes of this subsection, the term “crew leader” means an individual who—

(A)  furnishes individuals to perform agricultural labor for any other person,

(B)  pays (either on his behalf or on behalf of such other person) the individuals so furnished by him for the agricultural labor performed by them, and

(C)  has not entered into a written agreement with such other person under which such individual is designated as an employee of such other person.

(p)  Concurrent Employment by Two or More Employers.—For purposes of sections 3301, 3302, and 3306(b)(1), if two or more related corporations concurrently employ the same individual and compensate such individual through a common paymaster which is one of such corporations, each such corporation shall be considered to have paid as remuneration to such individual only the amounts actually disbursed by it to such individual and shall not be considered to have paid as remuneration to such individual amounts actually disbursed to such individual by another of such corporations.

(q)  Full Time Student.—For purposes of subsection (c)(20), an individual shall be treated as a full time student for any period—

(1)  during which the individual is enrolled as a full time student at an educational institution, or

(2)  which is between academic years or terms if—

(A)  the individual was enrolled as a full time student at an educational institution for the immediately preceding academic year or term, and

(B)  there is a reasonable assurance that the individual will be so enrolled for the immediately succeeding academic year or term after the period described in subparagraph (A).

(r)  Treatment of Certain Deferred Compensation and Salary Reduction Arrangements.—

(1)  Certain employer contributions treated as wages.—Nothing in any paragraph of subsection (b) (other than paragraph (1)) shall exclude from the term “wages”—

(A)  any employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k)) to the extent not included in gross income by reason of section 402(e)(3), or

(B)  any amount treated as an employer contribution under section 414(h)(2) where the pickup referred to in such section is pursuant to a salary reduction agreement (whether evidenced by a written instrument or otherwise).

(2)  Treatment of certain nonqualified deferred compensation plans.—

(A)  In general.—Any amount deferred under a nonqualified deferred compensation plan shall be taken into account for purposes of this chapter as of the later of—

(i)  when the services are performed, or

(ii)  when there is no substantial risk of forfeiture of the rights to such amount.

(B)  Taxed only once.—Any amount taken into account as wages by reason of subparagraph (A) (and the income attributable thereto) shall not thereafter be treated as wages for purposes of this chapter.

(C)  Nonqualified deferred compensation plan.—For purposes of this paragraph, the term “nonqualified deferred compensation plan” means any plan or other arrangement for deferral of compensation other than a plan described in subsection (b)(5).

(s)  Tips Treated as Wages.—For purposes of this chapter, the term “wages” includes tips which are—

(1)  received while performing services which constitute employment, and

(2)  included in a written statement furnished to the employer pursuant to section 6053(a).

(t)  Self-Employment Assistance Program.—For the purposes of this chapter, the term “self-employment assistance program” means a program under which—

(1)  individuals who meet the requirements described in paragraph (3) are eligible to receive an allowance in lieu of regular unemployment compensation under the State law for the purpose of assisting such individuals in establishing a business and becoming self-employed;

(2)  the allowance payable to individuals pursuant to paragraph (1) is payable in the same amount, at the same interval, on the same terms, and subject to the same conditions, as regular unemployment compensation under the State law, except that—

(A)  State requirements relating to availability for work, active search for work, and refusal to accept work are not applicable to such individuals;

(B)  State requirements relating to disqualifying income are not applicable to income earned from self-employment by such individuals; and

(C)  such individuals are considered to be unemployed for the purposes of Federal and State laws applicable to unemployment compensation,

as long as such individuals meet the requirements applicable under this subsection;

(3)  individuals may receive the allowance described in paragraph (1) if such individuals—

(A)  are eligible to receive regular unemployment compensation under the State law, or would be eligible to receive such compensation except for the requirements described in subparagraph (A) or (B) of paragraph (2);

(B)  are identified pursuant to a State worker profiling system as individuals likely to exhaust regular unemployment compensation; and

(C)  are participating in self-employment assistance activities which—

(i)  include entrepreneurial training, business counseling, and technical assistance; and

(ii)  are approved by the State agency; and

(D)  are actively engaged on a full-time basis in activities (which may include training) relating to the establishment of a business and becoming self-employed;

(4)  the aggregate number of individuals receiving the allowance under the program does not at any time exceed 5 percent of the number of individuals receiving regular unemployment compensation under the State law at such time;

(5)  the program does not result in any cost to the Unemployment Trust Fund (established by section 904(a) of the Social Security Act) in excess of the cost that would be incurred by such State and charged to such fund if the State had not participated in such program; and

(6)  the program meets such other requirements as the Secretary of Labor determines to be appropriate.

(u)  Indian Tribe.—For purposes of this chapter, the term “Indian tribe” has the meaning given to such term by section 4(e) of the Indian Self–Determination and Education Assistance Act (25 U.S.C. 450b(e)), and includes any subdivision, subsidiary, or business enterprise wholly owned by such an Indian tribe.

(v)[110]  Short-Time Compensation Program.—For purposes of this chapter, the term “short-time compensation program” means a program under which—

(1)  the participation of an employer is voluntary;

(2)  an employer reduces the number of hours worked by employees in lieu of layoffs;

(3)  such employees whose workweeks have been reduced by at least 10 percent , and by not more than the percentage, if any, that is determined by the State to be appropriate (but in no case more than 60 percent), are not disqualified from unemployment compensation;

(4)  the amount of unemployment compensation payable to any such employee is a pro rata portion of the unemployment compensation which would otherwise be payable to the employee if such employee were unemployed;

(5)  such employees meet the availability for work and work search test requirements while collecting short-time compensation benefits, by being available for their workweek as required by the State agency;

(6)  eligible employees may participate, as appropriate, in training (including employer-sponsored training or worker training funded under the Workforce Investment Act of 1998) to enhance job skills if such program has been approved by the State agency;

(7)  the State agency shall require employers to certify that if the employer provides health benefits and retirement benefits under a defined benefit plan (as defined in section 414(j) or contributions under a defined contribution plan (as defined in section 414(i) to any employee whose workweek is reduced under the program that such benefits will continue to be provided to employees participating in the short-time compensation program under the same terms and conditions as though the workweek of such employee had not been reduced or to the same extent as other employees not participating in the short-time compensation program;

(8)  the State agency shall require an employer to submit a written plan describing the manner in which the requirements of this subsection will be implemented (including a plan for giving advance notice, where feasible, to an employee whose workweek is to be reduced) together with an estimate of the number of layoffs that would have occurred absent the ability to participate in short-time compensation and such other information as the Secretary of Labor determines is appropriate;

(9)  the terms of the employer’s written plan and implementation shall be consistent with employer obligations under applicable Federal and State laws; and

(10)  upon request by the State and approval by the Secretary of Labor, only such other provisions are included in the State law that are determined to be appropriate for purposes of a short-time compensation program.

SEC. 3307. DEDUCTIONS AS CONSTRUCTIVE PAYMENTS.

Whenever under this chapter or any act of Congress, or under the law of any State, an employer is required or permitted to deduct any amount from the remuneration of an employee and to pay the amount deducted to the United States, a State, or any political subdivision thereof, then for purposes of this chapter the amount so deducted shall be considered to have been paid to the employee at the time of such deduction.

SEC. 3308. INSTRUMENTALITIES OF THE UNITED STATES.

Notwithstanding any other provision of law (whether enacted before or after the enactment of this section) which grants to any instrumentality of the United States an exemption from taxation, such instrumentality shall not be exempt from the tax imposed by section 3301 unless such other provision of law grants a specific exemption, by reference to section 3301 (or the corresponding section of prior law), from the tax imposed by such section.

SEC. 3309. STATE LAW COVERAGE OF SERVICES PERFORMED FOR NONPROFIT ORGANIZATIONS OR GOVERNMENTAL ENTITIES.

(a)  State Law Requirements.—For purposes of section 3304(a)(6)—

(1)  except as otherwise provided in subsections (b) and (c), the services to which this paragraph applies are—

(A)  service excluded from the term “employment” solely by reason of paragraph (8) of section 3306(c), and

(B)  service excluded from the term “employment” solely by reason of paragraph (7) of section 3306(c); and

(2)  the State law shall provide that a governmental entity, including an Indian tribe, or any other organization (or group of governmental entities or other organizations) which, but for the requirements of this paragraph, would be liable for contributions with respect to service to which paragraph (1) applies may elect, for such minimum period and at such time as may be provided by State law, to pay (in lieu of such contributions) into the State unemployment fund amounts equal to the amounts of compensation attributable under the State law to such service. The State law may provide safeguards to ensure that governmental entities or other organizations so electing will make the payments required under such elections.

(b)  Section Not To Apply to Certain Service.—This section shall not apply to service performed—

(1)  in the employ of (A) a church or convention or association of churches, (B) an organization which is operated primarily for religious purposes and which is operated, supervised, controlled, or principally supported by a church or convention or association of churches, or (C) an elementary or secondary school which is operated primarily for religious purposes, which is described in section 501(c)(3), and which is exempt from tax under section 501(a);

(2)  by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order;

(3)  in the employ of a governmental entity referred to in paragraph (7) of section 3306(c), if such service is performed by an individual in the exercise of his duties—

(A)  as an elected official;

(B)  as a member of a legislative body, or a member of the judiciary, of a State or political subdivision thereof, or of an Indian tribe;

(C)  as a member of the State National Guard or Air National Guard;

(D)  as an employee serving on a temporary basis in case of fire, storm, snow, earthquake, flood, or similar emergency;

(E)  in a position which, under or pursuant to the State or tribal law, is designated as (i) a major nontenured peacemaking or advisory position, or (ii) a peacemaking or advisory position the performance of the duties of which ordinarily does not require more than 8 hours per week; or

(F)  as an election official or election worker if the amount of remuneration received by the individual during the calendar year for services as an election official or election worker is less than $1,000;

(4)  in a facility conducted for the purpose of carrying out a program of—

(A)  rehabilitation for individuals whose earning capacity is impaired by age or physical or mental deficiency or injury, or

(B)  providing remunerative work for individuals who because of their impaired physical or mental capacity cannot be readily absorbed in the competitive labor market,

by an individual receiving such rehabilitation or remunerative work;

(5)  as part of an unemployment work-relief or work-training program assisted or financed in whole or in part by any Federal agency or an agency of a State or political subdivision thereof or of an Indian tribe, by an individual receiving such work relief or work training; and

(6)  by an inmate of a custodial or penal institution.

(c)  Nonprofit Organizations Must Employ 4 or More.—This section shall not apply to service performed during any calendar year in the employ of any organization unless on each of some 20 days during such calendar year or the preceding calendar year, each day being in a different calendar week, the total number of individuals who were employed by such organization in employment (determined without regard to section 3306(c)(8) and by excluding service to which this section does not apply by reason of subsection (b)) for some portion of the day (whether or not at the same moment of time) was 4 or more.

(d)  Election by Indian Tribe.—The State law shall provide that an Indian tribe may make contributions for employment as if the employment is within the meaning of section 3306 or make payments in lieu of contributions under this section, and shall provide that an Indian tribe may make separate elections for itself and each subdivision, subsidiary, or business enterprise wholly owned by such Indian tribe. State law may require a tribe to post a payment bond or take other reasonable measures to assure the making of payments in lieu of contributions under this section. Notwithstanding the requirements of section 3306(a)(6), if, within 90 days of having received a notice of delinquency, a tribe fails to make contributions, payments in lieu of contributions, or payment of penalties or interest (at amounts or rates comparable to those applied to all other employers covered under the State law) assessed with respect to such failure, or if the tribe fails to post a required payment bond, then service for the tribe shall not be excepted from employment under section 3306(c)(7) until any such failure is corrected. This subsection shall apply to an Indian tribe within the meaning of section 4(e) of the Indian Self–Determination and Education Assistance Act (25 U.S.C. 450b(e)).

SEC. 3310.  JUDICIAL REVIEW.

(a)  In General.—Whenever under section 3303(b) or section 3304(c) the Secretary of Labor makes a finding pursuant to which he is required to withhold a certification with respect to a State under such section, such State may, within 60 days after the Governor of the State has been notified of such action, file with the United States court of appeals for the circuit in which such State is located or with the United States Court of Appeals for the District of Columbia, a petition for review of such action. A copy of the petition shall be forthwith transmitted by the clerk of the court to the Secretary of Labor. The Secretary of Labor thereupon shall file in the court the record of the proceedings on which he based his action as provided in section 2112 of title 28 of the United States Code.[111]

(b)  Findings of Fact.—The findings of fact by the Secretary of Labor, if supported by substantial evidence, shall be conclusive; but the court, for good cause shown, may remand the case to the Secretary of Labor to take further evidence, and the Secretary of Labor may thereupon make new or modified findings of fact and may modify his previous action, and shall certify to the court the record of the further proceedings. Such new or modified findings of fact shall likewise be conclusive if supported by substantial evidence.

(c)  Jurisdiction of Court; Review.—The court shall have jurisdiction to affirm the action of the Secretary of Labor or to set it aside, in whole or in part. The judgment of the court shall be subject to review by the Supreme Court of the United States upon certiorari or certification as provided in section 1254 of title 28 of the United States Code.

(d)  Stay of Secretary of Labor’s Action.—

(1)  The Secretary of Labor shall not withhold any certification under section 3303(b) or section 3304(c) until the expiration of 60 days after the Governor of the State has been notified of the action referred to in subsection (a) or until the State has filed a petition for review of such action, whichever is earlier.

(2)  The commencement of judicial proceedings under this section shall stay the Secretary of Labor’s action for a period of 30 days, and the court may thereafter grant interim relief if warranted, including a further stay of the Secretary of Labor’s action and including such other relief as may be necessary to preserve status or rights.

SEC. 3311.  SHORT TITLE.

This chapter may be cited as the “Federal Unemployment Tax Act.”

*    *    *    *    *    *    *

SEC. 3402.  INCOME TAX COLLECTED AT SOURCE.

*    *    *    *    *    *    *

(i)  Changes in Withholding.—

(1)  In general.—The Secretary may by regulations provide for increases in the amount of withholding otherwise required under this section in cases where the employee requests such changes.

(2)  Treatment as tax.—Any increased withholding under paragraph (1) shall for all purposes be considered tax required to be deducted and withheld under this chapter.

*    *    *    *    *    *    *

(p)  Voluntary withholding agreements.—

(1)  Certain Federal payments.—

(A)  In general.—If, at the time a specified Federal payment is made to any person, a request by such person is in effect that such payment be subject to withholding under this chapter, then for purposes of this chapter and so much of subtitle F as relates to this chapter, such payment shall be treated as if it were a payment of wages by an employer to an employee.

(B)  Amount withheld.—The amount to be deducted and withheld under this chapter from any payment to which any request under subparagraph (A) applies shall be an amount equal to the percentage of such payment specified in such request. Such a request shall apply to any payment only if the percentage specified is 7 percent, any percentage applicable to any of the 3 lowest income brackets in the table under section 1(c), or such other percentage as is permitted under regulations prescribed by the Secretary.

(C)  Specified federal payments.—For purposes of this paragraph, the term “specified Federal payment” means—

(i)  any payment of a social security benefit (as defined in section 86(d)),

(ii)  any payment referred to in the second sentence of section 451(d) which is treated as insurance proceeds,

(iii)  any amount which is includible in gross income under section 77(a), and

(iv)  any other payment made pursuant to Federal law which is specified by the Secretary for purposes of this paragraph.

Requests for withholding.—Rules similar to the rules that apply to annuities under subsection (o)(4) shall apply to requests under this paragraph and paragraph (2).

*    *    *    *    *    *    *

SEC. 3507. ADVANCE PAYMENT OF EARNED INCOME CREDIT.

(a)  General Rule.—Except as otherwise provided in this section, every employer making payment of wages to an employee with respect to whom an earned income eligibility certificate is in effect shall, at the time of paying such wages, make an additional payment to such employee equal to such employee’s earned income advance amount.

(b)  Earned Income Eligibility Certificate.—For purposes of this title, an earned income eligibility certificate is a statement furnished by an employee to the employer which—

(1)  certifies that the employee will be eligible to receive the credit provided by section 32 for the taxable year,

(2)  certifies that the employee has 1 or more qualifying children (within the meaning of section 32(c)(3)) for such taxable year,

(3)  certifies that the employee does not have an earned income eligibility certificate in effect for the calendar year with respect to the payment of wages by another employer, and

(4)  states whether or not the employee’s spouse has an earned income eligibility certificate in effect.

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

(c)  Earned Income Advance Amount.—

(1)  In general.—For purposes of this title, the term “earned income advance amount” means, with respect to any payroll period, the amount determined—

(A)  on the basis of the employee’s wages from the employer for such period, and

(B)  in accordance with tables prescribed by the Secretary.

In the case of an employee who is a member of the Armed Forces of the United States, the earned income advance amount shall be determined by taking into account such employee’s earned income as determined for purposes of section 32.

(2)  Advance amount tables.—The tables referred to in paragraph (1)(B)—

(A)  shall be similar in form to the tables prescribed under section 3402 and, to the maximum extent feasible, shall be coordinated with such tables, and

(B)  if the employee is not married, or if no earned income eligibility certificate is in effect with respect to the spouse of the employee, shall treat the credit provided by section 32 as if it were a credit—

(i)  of not more than 60 percent of the credit percentage in effect under section 32(b)(1) for an eligible individual with 1 qualifying child and with earned income not in excess of the earned income amount in effect under section 32(b)(2) for such an eligible individual, which

(ii)  phases out at 60 percent of the phaseout percentage in effect under section 32(b)(1) for such an eligible individual between the phaseout amount in effect under section 32(b)(2) for such an eligible individual and the amount of earned income at which the credit under section 32(a) phases out for such an eligible, or

(C)  if an earned income eligibility certificate is in effect with respect to the spouse of the employee, shall treat the credit as if it were a credit determined under subparagraph (B) by substituting 1/2 of the amounts of earned income described in such subparagraph for such amounts.

(d)  Payments to be Treated as Payments of Withholding and FICA Taxes.—

(1)  In general.—For purposes of this title, payments made by an employer under subsection (a) to his employees for any payroll period—

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

(B)  shall be treated as made out of—

(i)  amounts required to be deducted and withheld for the payroll period under section 3401 (relating to wage withholding), and

(ii)  amounts required to be deducted for the payroll period under section 3102 (relating to FICA employee taxes), and

(iii)  amounts of the taxes imposed for the payroll period under section 3111 (relating to FICA employer taxes),

as if the employer had paid to the Secretary, on the day on which the wages are paid to the employees, an amount equal to such payments.

(2)  Advance payments exceed taxes due.—In the case of any employer, if for any payroll period the aggregate amount of earned income advance payments exceeds the sum of the amounts referred to in paragraph (1)(B), each such advance payment shall be reduced by an amount which bears the same ratio to such excess as such advance payment bears to the aggregate amount of all such advance payments.

(3)  Employer may make full advance payments.—The Secretary shall prescribe regulations under which an employer may elect (in lieu of any application of paragraph (2))—

(A)  to pay in full all earned income advance amounts, and

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

(4)  Failure to make advance payments.—For purposes of this title (including penalties), failure to make any advance payment under this section at the time provided therefor shall be treated as the failure at such time to deduct and withhold under chapter 24 an amount equal to the amount of such advance payment.

(e)  Furnishing and Taking Effect of Certificates.—For purposes of this section—

(1)  When certificate takes effect.—

(A)  First certificate furnished.—An earned income eligibility certificate furnished the employer in cases in which no previous such certificate had been in effect for the calendar year shall take effect as of the beginning of the first payroll period ending, or the first payment of wages made without regard to a payroll period, on or after the date on which such certificate is so furnished (or if later, the first day of the calendar year for which furnished).

(B)  Later certificate.—An earned income eligibility certificate furnished the employer in cases in which a previous such certificate had been in effect for the calendar year shall take effect with respect to the first payment of wages made on or after the first status determination date which occurs at least 30 days after the date on which such certificate is so furnished, except that at the election of the employer such certificate may be made effective with respect to any payment of wages made on or after the date on which such certificate is so furnished. For purposes of this section, the term “status determination date” means January 1, May 1, July 1, and October 1 of each year.

(2)  Period during which certificate remains in effect.—An earned income eligibility certificate which takes effect under this section for any calendar year shall continue in effect with respect to the employee during such calendar year until revoked by the employee or until another such certificate takes effect under this section.

(3)  Change of status.—

(A)  Requirement to revoke or furnish new certificate.—If, after an employee has furnished an earned income eligibility certificate under this section, there has been a change of circumstances which has the effect of—

(i)  making the employee ineligible for the credit provided by section 32 for the taxable year, or

(ii)  causing an earned income eligibility certificate to be in effect with respect to the spouse of the employee,

the employee shall, within 10 days after such change in circumstances, furnish the employer with a revocation of such certificate or with a new certificate (as the case may be). Such a revocation (or such a new certificate) shall take effect under the rules provided by paragraph (1)(B) for a later certificate and shall be made in such form as the Secretary shall by regulations prescribe.

(B)  Certificate no longer in effect.—If, after an employee has furnished an earned income eligibility certificate under this section which certifies that such a certificate is in effect with respect to the spouse of the employee, such a certificate is no longer in effect with respect to such spouse, then the employee may furnish the employer with a new earned income eligibility certificate.

(4)  Form and contents of certificate.—Earned income eligibility certificates shall be in such form and contain such other information as the Secretary may by regulations prescribe.

(5)  Taxable year defined.—The term “taxable year” means the last taxable year of the employee under subtitle A beginning in the calendar year in which the wages are paid.

(f)  Internal Revenue Service Notification.—The Internal Revenue Service shall take such steps as may be appropriate to ensure that taxpayers who have 1 or more qualifying children and who receive a refund of the credit under section 32 are aware of the availability of earned income advance amounts under this section.

SEC. 3508. TREATMENT OF REAL ESTATE AGENTS AND DIRECT SELLERS.

(a)  General Rule.—For purposes of this title, in the case of services performed as a qualified real estate agent or as a direct seller—

(1)  the individual performing such services shall not be treated as an employee, and

(2)  the person for whom such services are performed shall not be treated as an employer.

(b)  Definitions.—For purposes of this section—

(1)  Qualified real estate agent.—The term “qualified real estate agent” means any individual who is a sales person if—

(A)  such individual is a licensed real estate agent,

(B)  substantially all of the remuneration (whether or not paid in cash) for the services performed by such individual as a real estate agent is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

(C)  the services performed by the individual are performed pursuant to a written contract between such individual and the person for whom the services are performed and such contract provides that the individual will not be treated as an employee with respect to such services for Federal tax purposes.

(2)  Direct seller.—The term “direct seller” means any person if—

(A)  such person—

(i)  is engaged in the trade or business of selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis which the Secretary prescribes by regulations, for resale (by the buyer or any other person) in the home or otherwise than in a permanent retail establishment,

(ii)  is engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or otherwise than in a permanent retail establishment, or

(iii)  is engaged in the trade or business of the delivering or distribution of newspapers or shopping news (including any services directly related to such trade or business),

(B)  substantially all the remuneration (whether or not paid in cash) for the performance of the services described in subparagraph (A) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

(C)  the services performed by the person are performed pursuant to a written contract between such person and the person for whom the services are performed and such contract provides that the person will not be treated as an employee with respect to such services for Federal tax purposes.

(3)  Coordination with retirement plans for self-employed.—This section shall not apply for purposes of subtitle A to the extent that the individual is treated as an employee under section 401(c)(1) (relating to self-employed individuals).

*    *    *    *    *    *    *

SEC. 4131. IMPOSITION OF TAX.

(a)  General rule.—There is hereby imposed a tax on any taxable vaccine sold by the manufacturer, producer, or importer thereof.

(b)  Amount of tax.—

(1)  In general.—The amount of the tax imposed by subsection (a) shall be determined in accordance with the following table:

If the taxable vaccine is: The tax per dose is:
DPT vaccine $4.56
DT vaccine 0.06
MMR vaccine 4.44
Polio vaccine 0.29.

(2)  Combinations of vaccines.—If any taxable vaccine is included in more than 1 category of vaccines in the table contained in paragraph (1), the amount of the tax imposed by subsection (a) on such vaccine shall be the sum of the amounts determined under such table for each category in which such vaccine is so included.

*    *    *    *    *    *    *

SEC. 5000.  CERTAIN GROUP HEALTH PLANS.

(a)  Imposition of Tax.—There is hereby imposed on any employer (including a self-employed person) or employee organization that contributes to a nonconforming group health plan a tax equal to 25 percent of the employer’s or employee organization’s expenses incurred during the calendar year for each group health plan to which the employer or employee organization contributes.

(b)  Group Health Plan and Large Group Health Plan.—For purposes of this section—

(1)  Group health plan.—The term “group health plan” means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.

(2)  Large group health plan.—The term “large group health plan” means a plan of, or contributed to by, an employer or employee organization (including a self-insured plan) to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families, that covers employees of at least one employer that normally employed at least 100 employees on a typical business day during the previous calendar year. For purposes of the preceding sentence—

(A)  all employers treated as a single employer under subsection (a) or (b) of section 52 shall be treated as a single employer,

(B)  all employees of the members of an affiliated service group (as defined in section 414(m)) shall be treated as employed by a single employer, and

(C)  leased employees (as defined in section 414(n)(2)) shall be treated as employees of the person for whom they perform services to the extent they are so treated under section 414(n).

(c)  Nonconforming Group Health Plan.—For purposes of this section, the term “nonconforming group health plan” means a group health plan or large group health plan that at any time during a calendar year does not comply with the requirements of subparagraphs (A) and (C) or subparagraph (B), respectively, of paragraph (1), or with the requirements of paragraph (2), of section 1862(b) of the Social Security Act.

(d)  Government Entities.—For purposes of this section, the term “employer” does not include a Federal or other governmental entity.

*    *    *    *    *    *    *

SEC. 6011.  GENERAL REQUIRMENT OF RETURN, STATEMENT, OR LIST.

(a)  General Rule.—When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.

(b)  Identification of Taxpayer.—The Secretary is authorized to require such information with respect to persons subject to the taxes imposed by chapter 21 or chapter 24 as is necessary or helpful in securing proper identification of such persons.

(c)  Returns, Etc., of DISCs and Former DISCs and FAST’s and Former FAST’s.—

(1)  Records and information.—A DISC, former DISC, or former FSC (as defined in section 922 as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000) shall for the taxable year—

(A)  furnish such information to persons who were shareholders at any time during such taxable year, and to the Secretary, and

(B)  keep such records, as may be required by regulations prescribed by the Secretary.

(2)  Returns.—A DISC shall file for the taxable year such returns as may be prescribed by the Secretary by forms or regulations.

(d)  Authority to Require Information Concerning Section 912 Allowances.—The Secretary may by regulations require any individual who receives allowances which are excluded from gross income under section 912 for any taxable year to include on his return of the taxes imposed by subtitle A for such taxable year such information with respect to the amount and type of such allowances as the Secretary determines to be appropriate.

(e)  Regulations Requiring Returns on Magnetic Media, Etc.—

(1)  In general.—The Secretary shall prescribe regulations providing standards for determining which returns must be filed on magnetic media or in other machine-readable form. The Secretary may not require returns of any tax imposed by subtitle A on individuals, estates, and trusts to be other than on paper forms supplied by the Secretary.

(2)  Requirements of regulations.—In prescribing regulations under paragraph (1), the Secretary—

(A)  shall not require any person to file returns on magnetic media unless such person is required to file at least 250 returns during the calendar year, and

(B)  shall take into account (among other relevant factors) the ability of the taxpayer to comply at reasonable cost with the requirements of such regulations.

(f)  Income, Estate, and Gift Taxes.—For requirement that returns of income, estate, and gift taxes be made whether or not there is tax liability, see subparts B and C.

*    *    *    *    *    *    *

SEC. 6050B.  RETURNS RELATING TO UNEMPLOYMENT COMPENSATION.

(a)  Requirement of Reporting.—Every person who makes payments of unemployment compensation aggregating $10 or more to any individual during any calendar year shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the aggregate amounts of such payments and the name and address of the individual to whom paid.

(b)  Statements to be Furnished to Individuals with Respect to Whom Information is Required.—Every person required to make a return under subsection (a) shall furnish to each individual whose name is required to be set forth in such return a written statement showing—

(1)  the name and address of the person required to make such return, and

(2)  the aggregate amount of payments to the individual required to be shown on such return.

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

*    *    *    *    *    *    *

SEC. 6051.  RECEIPTS FOR EMPLOYEES.

(a)  Requirement.—Every person required to deduct and withhold from an employee a tax under section 3101 or 3402, or who would have been required to deduct and withhold a tax under section 3402 (determined without regard to subsection (n)) if the employee had claimed no more than one withholding exemption, or every employer engaged in a trade or business who pays remuneration for services performed by an employee, including the cash value of such remuneration paid in any medium other than cash, shall furnish to each such employee in respect of the remuneration paid by such person to such employee during the calendar year, on or before January 31 of the succeeding year, or, if his employment is terminated before the close of such calendar year, within 30 days after the date of receipt of a written request from the employee if such 30-day period ends before January 31, a written statement showing the following:

(1)  the name of such person,

(2)  the name of the employee (and his social security account number if wages as defined in section 3121(a) have been paid),

(3)  the total amount of wages as defined in section 3401(a),

(4)  the total amount deducted and withheld as tax under section 3402,

(5)  the total amount of wages as defined in section 3121(a),

(6)  the total amount deducted and withheld as tax under section 3101,

(7)  the total amount paid to the employee under section 3507 (relating to advance payment of earned income credit),

(8)  the total amount of elective deferrals (within the meaning of section 402(g)(3)) and compensation deferred under section 457, including the amount of designated Both contributions (as defined in section 402A),

(9)  the total amount incurred for dependent care assistance with respect to such employee under a dependent care assistance program described in section 129(d), and

(10)  in the case of an employee who is a member of the Armed Forces of the United States, such employee’s earned income as determined for purposes of section 32 (relating to earned income credit),

(11)  the amount contributed to any Archer MSA (as defined in section 220(d)) of such employee or such employee’s spouse,

(12)  the amount contributed to any health savings account (as defined in section 223(d)) of such employee or such employee’s spouse, and

(13)  the total amount of deferrals for the year under a nonqualified deferred compensation plan (within the meaning of section 409A(d)).

In the case of compensation paid for service as a member of a uniformed service, the statement shall show, in lieu of the amount required to be shown by paragraph (5), the total amount of wages as defined in section 3121(a), computed in accordance with such section and section 3121(i)(2). In the case of compensation paid for service as a volunteer or volunteer leader within the meaning of the Peace Corps Act, the statement shall show, in lieu of the amount required to be shown by paragraph (5), the total amount of wages as defined in section 3121(a), computed in accordance with such section and section 3121(i)(3). In the case of tips received by an employee in the course of his employment, the amounts required to be shown by paragraphs (3) and (5) shall include only such tips as are included in statements furnished to the employer pursuant to section 6053(a). The amounts required to be shown by paragraph (5) shall not include wages which are exempted pursuant to sections 3101(c) and 3111(c) from the taxes imposed by sections 3101 and 3111. In the case of the amounts required to be shown by paragraph (13), the Secretary may (by regulation) establish a minimum amount of deferrals below which paragraph (13) does not apply.

(b)  Special Rule As to Compensation of Members of Armed Forces.—In the case of compensation paid for service as a member of the Armed Forces, the statement required by subsection (a) shall be furnished if any tax was withheld during the calendar year under section 3402, or if any of the compensation paid during such year is includible in gross income under chapter 1, or if during the calendar year any amount was required to be withheld as tax under section 3101. In lieu of the amount required to be shown by paragraph (3) of subsection (a), such statement shall show as wages paid during the calendar year the amount of such compensation paid during the calendar year which is not excluded from gross income under chapter 1 (whether or not such compensation constituted wages as defined in section 3401(a)).

(c)  Additional Requirements.—The statements required to be furnished pursuant to this section in respect of any remuneration shall be furnished at such other times, shall contain such other information, and shall be in such form as the Secretary may by regulations prescribe. The statements required under this section shall also show the proportion of the total amount withheld as tax under section 3101 which is for financing the cost of hospital insurance benefits under part A of title XVIII of the Social Security Act.

(d)  Statements to Constitute Information Returns.—A duplicate of any statement made pursuant to this section and in accordance with regulations prescribed by the Secretary shall, when required by such regulations, be filed with the Secretary.

(e)  Railroad Employees.—

(1)  Additional requirement.—Every person required to deduct and withhold tax under section 3201 from an employee shall include on or with the statement required to be furnished such employee under subsection (a) a notice concerning the provisions of this title with respect to the allowance of a credit or refund of the tax on wages imposed by section 3101(b) and the tax on compensation imposed by section 3201 or 3211 which is treated as a tax on wages imposed by section 3101(b).

(2)  Information to be supplied to employees.—Each person required to deduct and withhold tax under section 3201 during any year from an employee who has also received wages during such year subject to the tax imposed by section 3101(b) shall, upon request of such employee, furnish to him a written statement showing—

(A)  the total amount of compensation with respect to which the tax imposed by section 3201 was deducted,

(B)  the total amount deducted as tax under section 3201, and

(C)  the portion of the total amount deducted as tax under section 3201 which is for financing the cost of hospital insurance under part A of title XVIII of the Social Security Act.

(f)  Statements Required In Case of Sick Pay Paid By Third Parties.—

(1)  Statements required from payor.—

(A)  In general.—If, during any calendar year, any person makes a payment of third-party sick pay to an employee, such person shall, on or before January 15 of the succeeding year, furnish a written statement to the employer in respect of whom such payment was made showing—

(i)  the name and, if there is withholding under section 3402(o), the social security number of such employee,

(ii)  the total amount of the third- party sick pay paid to such employee during the calendar year, and

(iii)  the total amount (if any) deducted and withheld from such sick pay under section 3402.

For purposes of the preceding sentence, the term “third-party sick pay” means any sick pay (as defined in section 3402(o)(2)(C)) which does not constitute wages for purposes of chapter 24 (determined without regard to section 3402(o)(1)).

(B)  Special Rules.—

(i)  Statements are in lieu of other reporting requirements.—The reporting requirements of subparagraph (A) with respect to any payments shall, with respect to such payments, be in lieu of the requirements of subsection (a) and of section 6041.

(ii)  Penalties made applicable.—For purposes of sections 6674 and 7204, the statements required to be furnished by subparagraph (A) shall be treated as statements required under this section to be furnished to employees.

(2)  Information required to be furnished by employer.—Every employer who receives a statement under paragraph (1)(A) with respect to sick pay paid to any employee during any calendar year shall, on or before January 31 of the succeeding year, furnish a written statement to such employee showing—

(A)  the information shown on the statement furnished under paragraph (1)(A), and

(B)  if any portion of the sick pay is excludable from gross income under section 104(a)(3), the portion which is not so excludable and the portion which is so excludable.

To the extent practicable, the information required under the preceding sentence shall be furnished on or with the statement (if any) required under subsection (a).

*    *    *    *    *    *    *

SEC. 6053.  REPORTING OF TIPS.

(a)  Reports By Employees.—Every employee who, in the course of his employment by an employer, receives in any calendar month tips which are wages (as defined in section 3121(a) or section 3401(a)) or which are compensation (as defined in section 3231(e)) shall report all such tips in one or more written statements furnished to his employer on or before the 10th day following such month. Such statements shall be furnished by the employee under such regulations, at such other times before such 10th day, and in such form and manner, as may be prescribed by the Secretary.

*    *    *    *    *    *    *

SEC. 6057.  ANNUAL REGISTRATION, ETC.

(a)  Annual Registration.—

(1)  General rule.—Within such period after the end of a plan year as the Secretary may by regulations prescribe, the plan administrator (within the meaning of section 414(g)) of each plan to which the vesting standards of section 203 of part 2 of subtitle B of title I of the Employee Retirement Income Security Act of 1974 applies for such plan year shall file a registration statement with the Secretary.

(2)  Contents.—The registration statement required by paragraph (1) shall set forth—

(A)  the name of the plan,

(B)  the name and address of the plan administrator,

(C)  the name and taxpayer identifying number of each participant in the plan—

(i)  who, during such plan year, separated from the service covered by the plan,

(ii)  who is entitled to a deferred vested benefit under the plan as of the end of such plan year, and

(iii)  with respect to whom retirement benefits were not paid under the plan during such plan year,

(D)  the nature, amount, and form of the deferred vested benefit to which such participant is entitled, and

(E)  such other information as the Secretary may require.

At the time he files the registration statement under this subsection, the plan administrator shall furnish evidence satisfactory to the Secretary that he has complied with the requirement contained in subsection (e).

(b)  Notification of Change In Status.—Any plan administrator required to register under subsection (a) shall also notify the Secretary, at such time as may be prescribed by regulations, of—

(1)  any change in the name of the plan,

(2)  any change in the name or address of the plan administrator,

(3)  the termination of the plan, or

(4)  the merger or consolidation of the plan with any other plan or its division into two or more plans.

(c)  Voluntary Reports.—To the extent provided in regulations prescribed by the Secretary, the Secretary may receive from—

(1)  any plan to which subsection (a) applies, and

(2)  any other plan (including any governmental plan or church plan (within the meaning of section 414)),

such information (including information relating to plan years beginning before January 1, 1974) as the plan administrator may wish to file with respect to the deferred vested benefit rights of any participant separated from the service covered by the plan during any plan year.

(d)  Transmission of Information to Commissioner of Social Security.—The Secretary shall transmit copies of any statements, notifications, reports, or other information obtained by him under this section to the Commissioner of Social Security.

(e)  Individual Statement to Participant.—Each plan administrator required to file a registration statement under subsection (a) shall, before the expiration of the time prescribed for the filing of such registration statement, also furnish to each participant described in subsection (a)(2)(C) an individual statement setting forth the information with respect to such participant required to be contained in such registration statement. Such statement shall also include a notice to the participant of any benefits which are forfeitable if the participant dies before a certain date.

(f)  Regulations.—

(1)  In general.—The Secretary, after consultation with the Commissioner of Social Security, may prescribe such regulations as may be necessary to carry out the provisions of this section.

(2)  Plans to which more than one employer contributes.—This section shall apply to any plan to which more than one employer is required to contribute only to the extent provided in regulations prescribed under this subsection.

*    *    *    *    *    *    *

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN INFORMATION.

(a)  General Rule.—Returns and return information shall be confidential, and except as authorized by this title—

(1)  no officer or employee of the United States,

(2)  no officer or employee of any State, any local law enforcement agency receiving information under subsection (i)(7)(A), any local child support enforcement agency, or any local agency administering a program listed in subsection (l)(7)(D) who has or had access to returns or return information under this section or section 6104(c), and

(3)  no other person (or officer or employee thereof) who has or had access to returns or return information under subsection (e)(1)(D)(iii), paragraph (6), (10), (12), (16), (19), (20), or (21) of subsection (l), paragraph (2) or (4)(B) of subsection (m), or subsection (n),

shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise or under the provisions of this section. For purposes of this subsection, the term “officer or employee” includes a former officer or employee.

*    *    *    *    *    *    *

(l)  Disclosure of Returns and Return Information for Purposes Other Than Tax Administration.—

(1)  Disclosure of certain returns and return information to social security administration and railroad retirement board.—The Secretary may, upon written request, disclose returns and return information with respect to—

(A)  taxes imposed by chapters 2, 21, and 24, to the Social Security Administration for purposes of its administration of the Social Security Act;

(B)  a plan to which part I of subchapter D of chapter 1 applies, to the Social Security Administration for purposes of carrying out its responsibility under section 1131 of the Social Security Act, limited, however to return information described in section 6057(d); and

(C)  taxes imposed by chapter 22, to the Railroad Retirement Board for purposes of its administration of the Railroad Retirement Act.

(2)  Disclosure of returns and return information to the department of labor and pension benefit guaranty corporation.—The Secretary may, upon written request, furnish returns and return information to the proper officers and employees of the Department of Labor and the Pension Benefit Guaranty Corporation for purposes of, but only to the extent necessary in, the administration of titles I and IV of the Employee Retirement Income Security Act of 1974.

(3)  Disclosure that applicant for federal loan has tax delinquent account.—

(A)  In general.—Upon written request, the Secretary may disclose to the head of the Federal agency administering any included Federal loan program whether or not an applicant for a loan under such program has a tax delinquent account.

(B)  Restriction on disclosure.—Any disclosure under subparagraph (A) shall be made only for the purpose of, and to the extent necessary in, determining the creditworthiness of the applicant for the loan in question.

(C)  Included federal loan program defined.—For purposes of this paragraph, the term “included Federal loan program” means any program—

(i)  under which the United States or a Federal agency makes, guarantees, or insures loans, and

(ii)  with respect to which there is in effect a determination by the Director of the Office of Management and Budget (which has been published in the Federal Register) that the application of this paragraph to such program will substantially prevent or reduce future delinquencies under such program.

(4)  Disclosure of returns and return information for use in personnel or claimant representative matters.—The Secretary may disclose returns and return information—

(A)  upon written request—

(i)  to an employee or former employee of the Department of the Treasury, or to the duly authorized legal representative of such employee or former employee, who is or may be a party to any administrative action or proceeding affecting the personnel rights of such employee or former employee; or

(ii)  to any person, or to the duly authorized legal representative of such person, whose rights are or may be affected by an administrative action or proceeding under section 330 of title 31, United States Code,

solely for use in the action or proceeding, or in preparation for the action or proceeding, but only to the extent that the Secretary determines that such returns or return information is or may be relevant and material to the action or proceeding; or

(B)  to officers and employees of the Department of the Treasury for use in any action or proceeding described in subparagraph (A), or in preparation for such action or proceeding, to the extent necessary to advance or protect the interests of the United States.

(5)  Social Security Administration.—Upon written request by the Commissioner of Social Security, the Secretary may disclose information returns filed pursuant to part III of subchapter A of chapter 61 of this subtitle for the purpose of—(A) carrying out, in accordance with an agreement and entered into pursuant to section 232 of the Social Security Act, an effective return processing program; or

(B)  providing information regarding the mortality status of individuals for epidemiological and similar research in accordance with section 1106(d) of the Social Security Act.

(6)  Disclosure of return information to federal, state, and local child support enforcement agencies.—

(A)  Return information from internal revenue service.—The Secretary may, upon written request, disclose to the appropriate Federal, State, or local child support enforcement agency—

(i)  available return information from the master files of the Internal Revenue Service relating to the social security account number (or numbers, if the individual involved has more than one such number), address, filing status, amounts and nature of income, and the number of dependents reported on any return filed by, or with respect to, any individual with respect to whom child support obligations are sought to be established or enforced pursuant to the provisions of part D of title IV of the Social Security Act and with respect to any individual to whom such support obligations are owing, and

(ii)  available return information reflected on any return filed by, or with respect to, any individual described in clause (i) relating to the amount of such individual’s gross income (as defined in section 61) or consisting of the names and addresses of payers of such income and the names of any dependents reported on such return, but only if such return information is not reasonably available from any other source.

(B)  Restriction on disclosure.&