[Pages S4029-S4031]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

  SA 2646. Mr. BENNET submitted an amendment intended to be proposed to 
amendment SA 2360 proposed by Mr. Thune (for Mr. Graham) to the bill 
H.R. 1, to provide for reconciliation pursuant to title II of H. Con. 
Res. 14; which was ordered to lie on the table; as follows:

       Strike section 70120 and insert the following:

     SEC. 70120. LIMITATION ON INDIVIDUAL DEDUCTIONS FOR CERTAIN 
                   STATE AND LOCAL TAXES, ETC AND ADDRESSING SALT 
                   WORKAROUNDS.

       (a) In General.--
       (1) Limitation.--Section 275 is amended by redesignating 
     subsection (b) as subsection (c) and by inserting after 
     subsection (a) the following new subsection:
       ``(b) Limitation on Individual Deductions for Certain State 
     and Local Taxes, etc.--
       ``(1) In general.--In the case of an individual, no 
     deduction shall be allowed for--
       ``(A) any disallowed foreign real property taxes,
       ``(B) any specified taxes to the extent that such taxes for 
     such taxable year in the aggregate exceed $10,000 ($5,000 in 
     the case of a married individual filing a separate return), 
     and
       ``(C) any pass-through entity taxes to the extent that such 
     taxes for the taxable year in the aggregate exceed the sum 
     of--
       ``(i) the excess (if any) of the amount applicable to such 
     individual under subparagraph (B) over the amount of the 
     individual's specified taxes, plus
       ``(ii) the greater of--

       ``(I) $40,000 ($20,000 in the case of a married individual 
     filing a separate return), or
       ``(II) 50 percent of the pass-through entity taxes of the 
     taxpayer.

       ``(2) Disallowed foreign real property tax.--For purposes 
     of this subsection, the term `disallowed foreign real 
     property tax' means any tax which--
       ``(A) is a foreign real property tax described in section 
     164(a)(1), and
       ``(B) is not an excepted tax.
       ``(3) Specified tax.--For purposes of this subsection, the 
     term `specified tax' means--
       ``(A) any tax which--
       ``(i) is described in paragraph (1), (2), or (3) of section 
     164(a) (determined without regard to any election under 
     section 164(b)(5)) or is taken into account under section 
     164(b)(5), and
       ``(ii) is not an excepted tax, a pass-through entity tax, 
     or a disallowed foreign real property tax,
       ``(B) any amount which is paid or accrued by a tenant-
     stockholder (as defined in section 216(b)(2)) to a 
     cooperative housing corporation and represents such tenant-
     stockholder's proportionate share of taxes described in 
     section 216(a)(1) (other than an excepted tax), and
       ``(C) any substitute payment.
       ``(4) Excepted tax.--For purposes of this subsection, the 
     term `excepted tax' means--
       ``(A) any tax described in section 164(a)(3) imposed by the 
     authority of a foreign country or by a possession of the 
     United States or a political subdivision thereof, and
       ``(B) any tax described in paragraph (1) or (2) of section 
     164(a), or section 216, which is paid or accrued in carrying 
     on a trade or business or an activity described in section 
     212.
       ``(5) Substitute payment.--For purposes of this 
     subsection--
       ``(A) In general.--The term `substitute payment' means any 
     amount (other than a tax described in paragraph (3)(A)) paid, 
     incurred, or accrued to any jurisdiction referred to in 
     section 164(b)(2) (other than a possession of the United 
     States or a political subdivision thereof)) if, under the 
     laws of one or more such jurisdictions, one or more persons 
     would (if the assumptions described in subparagraphs (B) and 
     (C) applied) be entitled to specified tax benefits the 
     aggregate dollar value of which equals or exceeds 25 percent 
     of such amount.
       ``(B) Assumption regarding dollar value of tax benefits.--
     The assumption described in this subparagraph is that the 
     dollar value of a specified tax benefit is--
       ``(i) in the case of a credit or refund, the amount of such 
     credit or refund,
       ``(ii) in the case of a deduction or exclusion, 15 percent 
     of the amount of such deduction or exclusion, and
       ``(iii) in any other case, an amount determined in such 
     manner as the Secretary may provide consistent with the 
     principles of clauses (i) and (ii).
       ``(C) Assumption regarding status of partners or 
     shareholders.--The assumption described in this subparagraph 
     is, in the case of any amount referred to in subparagraph (A) 
     which is paid, incurred, or accrued by a partnership or S 
     corporation, that all of the partners or shareholders of such 
     partnership or S corporation, respectively, are individuals 
     who are residents of the jurisdiction or jurisdictions 
     providing the specified tax benefits (and possess such other 
     characteristics as the laws of such jurisdictions may require 
     for entitlement to such benefits).
       ``(D) Specified tax benefit.--For purposes of subparagraph 
     (A), the term `specified tax benefit' means any benefit 
     which--
       ``(i) is determined with respect to the amount referred to 
     in subparagraph (A), and
       ``(ii) is allowed against, or determined by reference to, a 
     tax described in paragraph (3)(A) or section 164(b)(5).
       ``(E) Exception for non-deductible payments.--To the extent 
     that a deduction for an amount described in subparagraph (A) 
     is not allowed under this chapter (determined without regard 
     to this subsection, section 170(b)(1), section 703(a), 
     section 704(d), section 1363(b), and section 1366(d)), the 
     term `substitute payment' shall not include such amount.
       ``(F) Exception for certain withholding taxes.--To the 
     extent provided in regulations issued by the Secretary, the 
     term `substitute payment' shall not include an amount 
     withheld on behalf of another person if all of such amount is 
     included in the gross income of such person (determined under 
     this chapter).
       ``(6) Pass-through entity tax.--For purposes of this 
     subsection, the term `pass-through entity tax' means--
       ``(A) the taxpayer's distributive share of any tax 
     described in section 702(a)(6)(B), plus
       ``(B) the taxpayer's pro rata share of any such taxes taken 
     into account under section 1366(a)(1).
       ``(7) Regulations.--The Secretary shall issue such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the purposes of this subsection, 
     including regulations or other guidance--
       ``(A) to treat as a tax described in paragraph (3) of 
     section 164(a) any tax that is, in substance, based on 
     general tax principles, described in such paragraph,
       ``(B) to treat as a substitute payment any amount that, in 
     substance, substitutes for a specified tax, and
       ``(C) to otherwise prevent the avoidance of the purposes of 
     this subsection.''.
       (2) Conforming amendment.--Section 216(a)(1) is amended by 
     inserting ``(other than disallowed foreign real property 
     taxes (as defined in section 275(b)(2)))'' after ``under 
     section 164''.

[[Page S4030]]

       (b) State and Local Income Taxes Paid by Partnerships and S 
     Corporations Taken Into Account Separately by Partners and 
     Shareholders.--
       (1) In general.--Section 702(a)(6) is amended to read as 
     follows:
       ``(6)(A) taxes, described in section 901, paid or accrued 
     to foreign countries or to possessions of the United States,
       ``(B) pass-through entity taxes,
       ``(C) specified taxes (within the meaning of section 
     275(b)), and
       ``(D) taxes described in section 275(b)(2),''.
       (2) Rules relating to separately stated taxes.--Section 702 
     is amended by redesignating subsection (d) as subsection (e) 
     and by inserting after subsection (c) the following new 
     subsection:
       ``(d) Rules Relating to Taxes.--
       ``(1) Pass-through entity tax.--For purposes of subsection 
     (a)(6)(B)--
       ``(A) In general.--The term `pass-through entity tax' means 
     any tax which is described in section 164(a)(3) (other than 
     an excepted tax (as defined in section 275(b)(4)) to the 
     extent that such tax is paid or accrued in carrying on a 
     trade or business (other than the performance of services as 
     an employee) or an activity described in section 212.
       ``(B) Exception for jurisdictions with income taxes.--The 
     term `pass-through entity tax' shall not include any tax 
     described in subparagraph (A) if--
       ``(i) such tax is imposed for a taxable year beginning 
     after the date that is 18 months after the date of the 
     enactment of this subsection,
       ``(ii) the jurisdiction imposing the tax also imposes an 
     income tax on individuals, and
       ``(iii) the tax liability for such tax by any pass-through 
     entity would exceed 102 percent of the liability for the tax 
     described in clause (i) imposed on an unmarried individual 
     with net income (as determined under the rules of the 
     jurisdiction imposing the tax) equal to the net income of the 
     pass-through entity.
       ``(C) Exception for jurisdictions without income taxes.--
     The term `pass-through entity tax' shall not include any tax 
     described in subparagraph (A) if--
       ``(i) the jurisdiction imposing the tax does not also 
     impose an income tax on individuals, and
       ``(ii) such tax would be a substitute payment (as defined 
     in section 275(b)(5)) if, for purposes of applying section 
     275(b)(5)(A), section 275(b)(3)(A) were applied--

       ``(I) by substituting `paragraph (1) or (2) of section 
     164(a)' for `paragraph (1), (2), or (3) of section 164(a)' in 
     clause (i) thereof, and
       ``(II) without regard to the phrase `, a pass-through 
     entity tax,' in clause (ii) thereof.

       ``(2) Treatment of substitute payments.--Any substitute 
     payment (as defined in section 275(b)(5)) shall be taken into 
     account under subsection (a)(6)(C) and not under any other 
     paragraph of subsection (a).
       ``(3) Regulations.--The Secretary shall issue such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out, and prevent the avoidance of, the 
     purposes of this section, including regulations or other 
     guidance--
       ``(A) providing for whether and to what extent a tax is 
     described in paragraph (1)(A), and
       ``(B) for preventing the treatment of any tax which is 
     described in paragraph (1)(A) but not described in paragraph 
     (1)(B) as a pass-through entity tax if the principal purpose 
     of either such tax or the rates of such tax is to avoid the 
     purposes of section 275(b).''.
       (3) Disallowance of deduction to partnerships.--Section 
     703(a)(2)(B) is amended to read as follows:
       ``(B) any deduction under this chapter with respect to 
     taxes or payments described in section 702(a)(6),''.
       (4) Limitation on allowances of losses.--Section 704(d)(2) 
     is amended to read as follows:
       ``(2) Carryovers.--
       ``(A) In general.--Any excess of such loss over such basis 
     (determined after application of paragraph (3)) shall be 
     taken into account (including for purposes of section 705) at 
     the end of the partnership year in which such excess is 
     repaid to the partnership.
       ``(B) Treatment.--Any item of loss carried forward under 
     subparagraph (A) shall retain the character of such item.
       ``(C) Allocation.--The amount of the excess described in 
     subparagraph (A) shall be allocated to the partner's 
     distributive share of each item of separately stated and non-
     separately stated loss taken into account under paragraph 
     (1), apportioned in the ratio that the amount of each item of 
     loss bears to the total of all such losses. For the purposes 
     of the preceding sentence, the total losses for the taxable 
     year shall be the sum of the partner's distributive share of 
     such losses for the current year and the partner's losses 
     carried forward under this paragraph from prior years.
       ``(D) Special rule for nondeductible specified taxes.--
       ``(i) In general.--Except in the case of a partnership or 
     corporation, the lesser of the amount described in clause 
     (ii)(I), or the applicable percentage of nondeductible 
     specified taxes, of a partner shall be separately carried 
     forward under subparagraph (A) and shall not be allowed as a 
     deduction in any taxable year.
       ``(ii) Applicable percentage.--For purposes of this 
     subparagraph, the applicable percentage with respect to any 
     partner of a partnership is the ratio (expressed as a 
     percentage) of--

       ``(I) the amount described in section 702(a)(6)(C) with 
     respect to the partner of such partnership, to
       ``(II) the amount described in clause (iii)(I) which is 
     attributable to partnerships for which there is an excess 
     under subparagraph (A) and to S corporations for which there 
     is an excess under section 1366(d)(1).

       ``(iii) Nondeductible specified taxes.--For purposes of 
     this subparagraph, the nondeductible specified taxes for any 
     taxable year is the excess (if any) of--

       ``(I) the sum of the aggregate amounts described in section 
     702(a)(6)(C) with respect to the partner for all partnerships 
     plus the aggregate amounts so described which are a 
     separately stated item under section 1366(a)(1)(A) with 
     respect to the shareholder for all S corporations, over
       ``(II) the amount of specified taxes (as defined in section 
     275(b)(3)) allowable under this chapter for the taxable year, 
     reduced by the amount of any such taxes taken into account 
     under subclause (I).

     For purposes of subclause (II), the determination of the 
     amount of such taxes so allowable shall be made after the 
     application of section 275(b)(1)(B), after the application of 
     this subsection and 1366(d) to items of loss and deduction 
     other than such taxes but before their application to such 
     taxes, and before the application of section 68.''.
       (5) S corporations.--
       (A) In general.--For corresponding provisions related to S 
     corporations which apply by reason of the amendments made by 
     paragraphs (1) through (3), see sections 1366(a)(1) and 
     1363(b)(2) of the Internal Revenue Code of 1986.
       (B) Loss carryovers.--
       (i) In general.--Section 1366(d)(2) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Special rule for certain specified taxes.--
       ``(i) In general.--Except in the case of a partnership or 
     corporation, the lesser of the amount described in clause 
     (ii)(I), or the applicable percentage of nondeductible 
     specified taxes, of a shareholder shall be separately carried 
     forward under subparagraph (A) and shall not be allowed as a 
     deduction in any taxable year.
       ``(ii) Applicable percentage.--For purposes of this 
     subparagraph, the applicable percentage with respect to any 
     shareholder of an S corporation is the ratio (expressed as a 
     percentage) of--

       ``(I) the amount taken into account under section 
     704(d)(2)(D)(iii)(I) which are separately stated items under 
     subsection (a)(1)(A) with respect to such shareholder of such 
     S corporation, to
       ``(II) the amount described in section 704(d)(2)(D)(iii)(I) 
     which is attributable to S corporations for which there is an 
     excess under subparagraph (A) and to partnerships for which 
     there is an excess under section 704(d)(2)(A) .

       ``(iii) Nondeductible specified taxes.--For purposes of 
     this subparagraph, the term `nondeductible specified taxes' 
     has the meaning given such term under section 
     704(d)(2)(D)(iii),''.
       (ii) Conforming amendment.--Section 1366(d)(2)(A) is 
     amended by striking ``subparagraph (B)'' and inserting 
     ``subparagraph (B) or (C)''.
       (6) Conforming amendments.--
       (A) Alternative minimum tax.--Section 56(b)(1)(A)(ii) is 
     amended by inserting ``or for any substitute payment (as 
     defined in section 275(b)(5))'' before the period at the end.
       (B) Adjusted gross income.--Section 62(a)(1) is amended by 
     inserting ``or with respect to any specified tax (as defined 
     in section 275(b)(3))'' after ``this subchapter''.
       (c) Addition to Tax for State and Local Tax Allocation 
     Mismatch.--
       (1) In general.--Part I of subchapter A of chapter 68, as 
     amended by the preceding provisions of this Act, is amended 
     by adding at the end the following new section:

     ``SEC. 6660. STATE AND LOCAL TAX ALLOCATION MISMATCH.

       ``(a) In General.--In the case of any covered individual, 
     there shall be added to the tax imposed under section 1 for 
     the taxable year an amount equal to the product of--
       ``(1) the highest rate of tax in effect under such section 
     for such taxable year, multiplied by
       ``(2) the sum of the State and local tax allocation 
     mismatches for such taxable year with respect to each 
     partnership specified tax payment with respect to which such 
     individual is a covered individual.
       ``(b) Covered Individual.--For purposes of this section, 
     the term `covered individual' means, with respect to any 
     partnership specified tax payment, any individual (or estate 
     or trust) who--
       ``(1) is entitled (directly or indirectly) to one or more 
     specified tax benefits with respect to such payment, and
       ``(2) takes into account (directly or indirectly) any item 
     of income, gain, deduction, loss, or credit of the 
     partnership (including guaranteed payments) which made such 
     payment.
       ``(c) State and Local Tax Allocation Mismatch.--For 
     purposes of this section--
       ``(1) In general.--The term `State and local tax allocation 
     mismatch' means, with respect to any partnership specified 
     tax payment, the excess (if any) of--
       ``(A) the aggregate dollar value of the specified tax 
     benefits of the covered individual with respect to such 
     payment, over

[[Page S4031]]

       ``(B) the amount of such payment taken into account by such 
     individual under section 702(a) (without regard to sections 
     275(b) and 704(d)).
       ``(2) Taxable year of individual in which mismatch taken 
     into account.--In the case of any partnership specified tax 
     payment paid, incurred, or accrued in any taxable year of the 
     partnership, the State and local tax allocation mismatch 
     determined under paragraph (1) with respect to such payment 
     shall be taken into account under subsection (a) by the 
     covered individual for the taxable year of such individual in 
     which such individual takes into account the items referred 
     to in subsection (b)(2) which are determined with respect to 
     such partnership taxable year.
       ``(d) Determination of Dollar Value of Specified Tax 
     Benefits.--
       ``(1) In general.--Except in the case of a covered 
     individual who elects the application of paragraph (3) for 
     any taxable year, the dollar value of any specified tax 
     benefit shall be the sum of--
       ``(A) the aggregate increase in tax liability (and 
     reduction in credit or refund) for taxes described in section 
     275(b)(3)(A) for the taxable year and all prior taxable years 
     that would result if such specified tax benefit were not 
     taken into account with respect to such taxes, plus
       ``(B) the deemed value of any carryforward of such 
     specified tax benefit (including any tax attribute derived 
     from such benefit) to any subsequent taxable year.
       ``(2) Deemed value of carryforwards.--For purposes of 
     paragraph (1), the deemed value of any carryforward is--
       ``(A) in the case of a credit or refund, the amount of such 
     credit or refund,
       ``(B) in the case of a deduction or exclusion, the product 
     of--
       ``(i) the highest rate of tax which may be imposed on 
     individuals under the tax referred to in subsection (e)(4)(B) 
     with respect to the specified tax benefit, multiplied by
       ``(ii) the amount of such deduction or exclusion, and
       ``(C) in any other case, an amount determined in such 
     manner as the Secretary may provide consistent with the 
     principles of subparagraphs (A) and (B).
       ``(3) Election of simplified method.--In the case of a 
     covered individual who elects the application of this 
     paragraph for any taxable year, the dollar value of any 
     specified tax benefit shall be determined under the 
     assumptions described in section 275(b)(5)(B).
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Partnership specified tax payment.--The term 
     `partnership specified tax payment' means any specified tax 
     and any pass-through entity tax paid, incurred, or accrued by 
     a partnership.
       ``(2) Pass-through entity tax.--The term `pass-through 
     entity tax' has the meaning given such term by section 
     275(b)(6).
       ``(3) Specified tax.--The term `specified tax' has the 
     meaning given such term by section 275(b)(3).
       ``(4) Specified tax benefit.--The term `specified tax 
     benefit' means any benefit which--
       ``(A) is determined with respect to a partnership specified 
     tax payment, and
       ``(B) is allowed against, or determined by reference to, a 
     tax described in section 275(b)(3)(A).
       ``(f) Regulations.--The Secretary shall issue such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the purposes of this section, 
     including regulations or other guidance preventing avoidance 
     of the addition to tax prescribed by this section through 
     partnership allocations that achieve similar tax reductions 
     as a State and local tax allocation mismatch.''.
       (2) Clerical amendment.--The table of sections for part I 
     of subchapter A of chapter 68, as amended by the preceding 
     provisions of this Act, is amended by adding at the end the 
     following new item:

``Sec. 6660. State and local tax allocation mismatch.''.
       (d) Limitation on Capitalization of Specified Taxes.--
     Section 275, as amended by the preceding provisions of this 
     section, is amended by redesignating subsection (c) as 
     subsection (d) and by inserting after subsection (b) the 
     following new subsection:
       ``(c) Limitations on Capitalization of Specified Taxes.--
     Notwithstanding any other provision of this chapter, in the 
     case of an individual, specified taxes, pass-through entity 
     taxes, and disallowed foreign real property taxes (as such 
     terms are defined in subsection (b)) shall not be treated as 
     chargeable to capital account.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2025.
                                 ______