more owner-employees, are considered to control within the meaning of the preceding sentence.

(10) The plan does not provide contributions or benefits for any owneremployee who controls (within the meaning of paragraph (9) (B), or for two or more owner-employees who together control, as an owner-employee or as owner-employees, any other trade or business, unless the employees of each trade or business which such owner-employee or such owner-employees control are included under a plan which meets the requirements of subsection (a) (including paragraph (10) thereof) and of this subsection, and provides contributions and benefits for employees which are not less favorable than contributions and benefits provided for owner-employees under the plan.

(11) Under the plan, the plan, 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) EXCESS CONTRIBUTIONS ON BEHALF OF OWNER-EMPLOYEES.

(1) EXCESS CONTRIBUTION DEFINED.— For purposes of this section, the term excess contribution means, except as provided in paragraph (3)—

(A) if, in the taxable year, contributions are made under the plan only on behalf of owner-employees, the amount of any contribution made on behalf of any owner-employee which (without regard to this subsection) is not deductible under section 404 (determined without regard to section 404 (a) (10)) for the taxable year; or

(B) if, in the taxable year, contributions are made under the plan on behalf of employees other than owner-employees

(i) the amount of any contribution made by the employer on behalf of any owner-employee which (without regard to this subsection) is not deductible under section 404 (determined without regard to section 404 (a) (10)) for the taxable year;

(ii) the amount of any contribution made by any owner-employee (as an employee) at a rate which exceeds the rate of contributions permitted to be made by employees other than owneremployees;

(iii) the amount of any contribution made by any owneremployee (as an employee) which exceeds the lesser of $2,500 or 10 percent of the earned income for such taxable year derived by such owner-employee from the trade or business with respect to which the plan is established; and

(iv) in the case of any individual on whose behalf contributions are made under more than one plan as an owner-employee, the amount of any con

tribution made by such owneremployee (as an employee) under all such plans which exceeds $2,500; and

(C) the amount of any contribution made on behalf of an owner-employee in any taxable year for which, under paragraph (2) (A) or (E), the plan does not (for purposes of section 404) meet the requirements of subsection (d) with respect to such owner-employee. For purposes of this subsection, the amount of any contribution which is allocable (determined in accordance with regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account.

(2) EFFECT OF EXCESS CONTRIBUTION.— (A) IN GENERAL.-If an excess contribution (other than an excess contribution to which subparagraph (E) applies) is made on behalf of an owner-employee in any taxable year, the plan with respect to which such excess contribution is made shall, except as provided in subparagraphs (C) and (D), be considered, for purposes of section 404, as not meeting the requirements of subsection (d) with respect to such owner-employee for the taxable year and for all succeeding taxable years.

(B) INCLUSION OF AMOUNTS IN GROSS INCOME OF OWNER-EMPLOYEES. For any taxable year for which any plan does not meet the requirements of subsection (d) with respect to an owner-employee by reason of subparagraph (A), the gross income of such owner-employee shall, for purposes of this chapter, include the amount of net income for such taxable year attributable to the interest of such owner-employee under such plan.

(C) REPAYMENT WITHIN PRESCRIBED PERIOD.-Subparagraph (A) shall not apply to an excess contribution with respect to any taxable year, if, on or before the close of the 6-month period beginning on the day on which the Secretary or his delegate sends notice (by certified or registered mail) to the person to whom such excess contribution was paid of the amount of such excess contribution, the amount of such excess contribution, and the net income attributable thereto, is repaid to the owner-employee on whose behalf such excess contribution was made. If the excess contribution is an excess contribution as defined in paragraph (1)(A) or (B) (i), or is an excess contribution as defined in paragraph (1)(C) with respect to which a deduction has been claimed under section 404, the notice required by the preceding sentence shall not be mailed prior to the time that the amount of the tax under this chapter of such owner-employee for the taxable year in which such excess contribution was made has been finally determined.

(D) REPAYMENT AFTER PRESCRIBED PERIOD.-If an excess contribution, together with the net income attributable thereto, is not repaid within the 6-month period referred to in subparagraph (C), subparagraph (A) shall not apply to an excess contribution with respect to any taxable year beginning with the taxable year in which the person to whom such excess contribution was paid repays the amount of such excess contribution to the owneremployee on whose behalf such excess contribution was made, and pays to such owner-employee the amount of net income attributable to the interest of such owner-employee which, under subparagraph (B), has been included in the gross income of such owner-employee for any prior taxable year.

(E) SPECIAL RULE IF EXCESS CONTRIBUTION WAS WILLFULLY MADE.If an excess contribution made on behalf of an owner-employee is determined to have been willfully made, then

(i) subparagraphs (A), (B), (C), and (D) shall not apply with respect to such excess contribution;

(ii) there shall be distributed to the owner-employee on whose behalf such excess contribution was willfully made his entire interest in all plans with respect to which he is an owner-employee; and

(iii) no plan shall, for purposes of section 404, be considered as meeting the requirements of subsection (d) with respect to such owner-employee for the taxable year in which it is determined that such excess contribution was willfully made and for the 5 taxable years following such taxable year. (F) STATUTE OF LIMITATIONS.-In any case in which subparagraph (A) applies, the period for assessing any deficiency arising by reason of—

(i) the disallowance of any deduction under section 404 on account of a plan not meeting the requirements of subsection (d) with respect to the owner-employee on whose behalf an excess contribution was made, or

(ii) the inclusion, under subparagraph (B), in gross income of such owner-employee of income attributable to the interest of such owner-employee under a plan,

for the taxable year in which such excess contribution was made or for any succeeding taxable year shall not expire prior to one year after the close of the 6-month period referred to in subparagraph (C).

(3) CONTRIBUTIONS FOR PREMIUMS ON ANNUITY, ETC., CONTRACTS.-A contribution by the employer on behalf of an owner-employee shall not be considered to be an excess contribution within the meaning of paragraph (1), if—

(A) under the plan such contribution is required to be applied (directly or through a trustee) to pay premiums or other consideration for one or more annuity, endowment, or life insurance contracts on the life of such owner-employee issued under the plan,

(B) the amount of such contribution exceeds the amount deductible under section 404 (determined without regard to section 404 (a) (10) with respect to contributions made by the employer on behalf of such owner-employee under the plan, and

(C) the amount of such contribution does not exceed the average of the amounts which were deductible under section 404 (determined without regard to section 404 (a) (10) with respect to contribution made by the employer on behalf of such owner-employee under the plan (or which would have been deductible under such section if such section had been in effect) for the first 3 taxable years (1) preceding the year in which the last such annuity, endowment, or life insurance contract was issued under the plan and (ii) in which such owner-employee derived earned income from the trade or business with respect to which the plan is established, or for as many of such taxable years as such owner-employee was engaged in such trade or business and derived earned income therefrom. In the case of any individual on whose behalf contributions described in subparagraph (A) are made under more than one plan as an owner-employee during any taxable year, the preceding sentence shall not apply if the amount of such contributions under all such plans for such taxable year exceeds $2,500. Any contribution which is not considered to be an excess contribution by reason of the application of this paragraph shall, for purposes of subparagraphs (B) (11). (III), and (iv) of paragraph (1), be taken into account as a contribution made by such owner-employee as an employee to the extent that the amount of such contribution is not deductible under section 404 (determined without regard to section 404 (a) (10) for the taxable year, but only for the purpose of applying such subparagraphs to other contributions made by such owner-employee as an employee.

(f) CERTAIN CUSTODIAL ACCOUNTS.

(1) TREATMENT AS QUALIFIED TRUST.For purposes of this title, a custodial account shall be treated as a qualified trust under this section, if

(A) such custodial account would, except for the fact that it is not a trust, constitute a qualified trust under this section:

(B) the custodian is a bank (as defined in subsection (d) (1));

(C) the investment of the funds in such account (including all earnings) is to be made

(1) solely in regulated investment company stock with respect to which an employee is the beneficial owner, or

(ii) solely in annuity, endowment, or life insurance contracts issued by an insurance company: (D) the shareholder of record of any such stock described in subparagraph (C) (i) is the custodian or its nominee; and

(E) the contracts described in subparagraph (C) (ii) are held by the custodian until distributed unthe plan.

For purposes of this title, in the case of a custodial account treated as a qualified trust under this section by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

(2) DEFINITION.-For purposes of paragraph (1), the term regulated investment company means a domestic corporation which—

(A) is a regulated investment company within the meaning of section 851(a), and

(B) issues only redeemable stock. (g) ANNUITY DEFINED.For purposes of this section and sections 402, 403, and 404, the term annuity includes a faceamount 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. SEC.. DEDUCTIBILITY OF . DEDUCTIBILITY OF CONTRIBUTIONS TO PLANS.

(a) INCLUSION OF SELF-EMPLOYED INDIVIDUALS. Section 404 (a) of the Internal Revenue Code of 1954 (relating to the deductibility of contributions to pension, annuity, profit-sharing, or stock bonus plans or plans of deferred compensation) is amended

(1) by striking out in paragraph (2) and (6), and inserting in lieu thereof (6), (7), and (8), and if applicable, the requirements of section 401(a), (9), and (10) and of section 401(d) (other than paragraph (1)); and

(2) by adding after paragraph (7) the following new paragraphs:

(8) SELF-EMPLOYED INDIVIDUALS.— In the case of a plan included in paragraph (1), (2), or (3) which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1), for purposes of this section

(A) 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);

(B) the term earned income has the meaning assigned to it by section 401 (c) (2);

(C) the contributions to such plan on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall be considered to satisfy the conditions of section 162 or 212 to the extent that such contributions do not exceed the earned income of such individual derived from the trade or business with respect to which such plan is established, and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance; and

(D) any reference to compensation shall, in the case of an individual who is an employee within the meaning of section 401(c) (1), be considered to be a reference to the earned income of such individual derived from the trade or business with respect to which the plan is established.

(9) PLANS BENEFITING SELF-EMPLOYED INDIVIDUALS.—In the case of a plan included in paragraph (1), (2), or (3) which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401 (c) (1)—

(A) the limitations provided by paragraphs (1), (2), (3), and (7) on the amounts deductible for any taxable year shall be computed, with respect to contributions on behalf of employees (other than employees within the meaning of section 401(c)(1)), as if such employees were the only employees for whom contributions and benefits are provided under the plan;

(B) the limitations provided by paragraphs (1), (2), (3), and (7) on the amounts deductible for any taxable year shall be computed, with respect to contributions on behalf of employees within the meaning of section 401(c) (1)—

(i) as if such employees were the only employees for whom contributions and benefits are provided under the plan, and

(ii) without regard to paragraph (1)(D), the second and third sentences of paragraph (3) ̧ and the second sentence of paragraph (7); and

(C) the amounts deductible under paragraphs (1), (2), (3), and (7), with respect to contributions on behalf of any employee within the meaning of section 401(c) (1), shall not exceed the applicable limitation provided in subsection (e).

(10) SPECIAL LIMITATION ON AMOUNT ALLOWED AS DEDUCTION FOR SELF-EMPLOYED INDIVIDUALS.—Notwithstanding any other provision of this section, the

amount allowable as a deduction under paragraphs (1), (2), (3), and (7) in any taxable year with respect to contributions made on behalf of an individual who is an employee within the meaning of section 401 (c) (1) shall be an amount equal to one-half of the contributions made on behalf of such individual in such taxable year which are deductible under such paragraphs (determined with the application of paragraph (9) and of subsection (e) but without regard to this paragraph). For purposes of section 401, the amount which may be deducted, or the amount deductible, under this section with respect to contributions made on behalf of such individual shall be determined without regard to the preceding sentence.

(b) LIMITATIONS ON DEDUCTIBLE CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED INDIVIDUALS.-Section 404 of the Internal Revenue Code of 1954 (relating to the deductibility of contributions to pension, annuity, profit-sharing, or stock bonus plans or plans of deferred compensation) is amended by adding after subsection (d) the following new subsections:

(e) SPECIAL LIMITATIONS FOR SELFEMPLOYED INDIVIDUALS.

(1) IN GENERAL.-In the case of a plan included in subsection (a) (1), (2), or (3), which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401 (c) (1), the amounts deductible under subsection (a) (determined without regard to paragraph (10) thereof) in any taxable year with respect to contributions on behalf of any employee within the meaning of section 401 (c) (1), shall, subject to the provisions of paragraph (2), not exceed $2,500, or 10 percent of the earned income derived by such employee from the trade or business with respect to which the plan is established, whichever is the lesser.

(2) CONTRIBUTIONS MADE UNDER MORE THAN ONE PLAN.

(A) OVERALL LIMITATION.-In any taxable year in which amounts are deductible with respect to contributions under two or more plans on behalf of an individual who is an employee within the meaning of section 401 (c) (1) with respect to such plans, the aggregate amount deductible for such taxable year under all such plans with respect to contributions on behalf of such employee (determined without regard to subsection (a) (10) shall not exceed $2,500, or 10 percent of the earned income derived by such employee from the trades or businesses with respect to which the plans are established, whichever is the lesser.

(B) ALLOCATION OF AMOUNTS DEDUCTIBLE. In any case in which the amounts deductible under subsection (a) (with the application of the limitations of this subsection) with respect to contributions made on behalf of an employee within the

meaning of section 401 (c) (1) under two or more plans are by reason of subparagraph (A), less than the amounts deductible under such subsection determined without regard to such subparagraph, the amount deductible under subsection (a) (determined without regard to paragraph (10) thereof) with respect to such contributions under each such plan shall be determined in accordance with regulations prescribed by the Secretary or his delegate.

(3) CONTRIBUTIONS ALLOCABLE TO INSURANCE PROTECTION.—

For purposes of this subsection, contributions which are allocable (determined under regulations prescribed by the Secretary or his delegate) to the purchase of life, accident, health, or other insurance shall not be taken into account.

(f) CERTAIN LOAN REPAYMENTS CONSIDERED AS CONTRIBUTIONS.-For purposes of this section, any amount paid, directly or indirectly, by an owner-employee (within the meaning of section 401(c) (3)) in repayment of any loan which under section 72 (m) (4) (B) was treated as an amount received under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501 (a) or purchased as part of a plan described in section 403 (a) shall be treated as a contribution to which this section applies on behalf of such owner-employee to such trust or to or under such plan.

SEC. TAXABILITY OF DISTRIBUTIONS.

(a) EMPLOYEES' ANNUITIES.-Section 72(d) (2) of the Internal Revenue Code of 1954 (relating to employees' annuities) is amended to read as follows:

(2) SPECIAL RULES FOR APPLICATION OF PARAGRAPH (1).-For purposes of paragraph (1) —

(A) if the employee died before any amount was received as an annuity under the contract, the words receivable by the employee shall be read as receivable by a beneficiary of the employee, and

(B) any contribution made with respect to the contract while the employee is an employee within the meaning of section 401(c) (1) which is not allowed as a deduction under section 404 shall be treated as consideration for the contract contributed by the employee.

(b) SPECIAL RULES RELATING TO SELFEMPLOYED INDIVIDUALS AND OWNER-EMPLOYEES.-Section 72 of the Internal Revenue Code of 1954 (relating to annuities, etc.) is amended by redesignating subsection (m) as subsection (0) and by inserting after subsection (1) the following new subsections:

(m) SPECIAL RULES APPLICABLE TO EMPLOYEE ANNUITIES AND DISTRIBUTIONS UNDER EMPLOYEE PLANS.

(1) CERTAIN AMOUNTS RECEIVED BEFORE ANNUITY STARTING DATE.-Any amounts received under an annuity, endownment, or life insurance contract before the annuity starting date which are not received as an annuity (within the meaning of subsection (e) (2)) shall be included in the re

cipient's gross income for the taxable year in which received to the extent that

(A) such amounts, plus all amounts theretofore received under the contract and includible in gross income under this paragraph, do not exceed

(B) the aggregate premiums or other consideration paid for the contract while the employee was an owner-employee which were allowed as deduction under section 404 for the taxable year and all prior taxable years.

Any such amounts so received which are not includible in gross income under this paragraph shall be subject to the provisions of subsection (e).

(2) COMPUTATION OF CONSIDERATION PAID BY THE EMPLOYEE.-In computing

(A) the aggregate amount of premiums or other consideration paid for the contract for purposes of subsection (c) (1) (A) (relating to the investment in the contract),

(B) the consideration for the contract contributed by the employee for purposes of subsection (d) (1) (relating to employee's contributions recoverable in 3 years), and

(C) the aggregate premiums or other consideration paid for purposes of subsection (e) (1) (B) (relating to certain amounts not received as an annuity),

any amount allowed as a deduction with respect to the contract under section 404 which was paid while the employee was an employee within the meaning of section 401 (c) (1) shall be treated as consideration contributed by the employer, and there shall not be taken into account any portion of the premiums or other consideration for the contract paid while the employee was an owner-employee which is properly allocable (as determined under regulations prescribed by the Secretary or his delegate) to the cost of life, accident, health, or other insurance.

(3) LIFE INSURANCE CONTRACTS.—
(A) This paragraph shall apply
to any life insurance contract-

(i) purchased as a part of a plan described in section 403 (a),

or

(ii) purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant.

(B) Any contribution to a plan described in subparagraph (A) (i) or a trust described in subparagraph (A) (ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A) (ii), which is determined in accordance with regulations prescribed by the Secretary or

his delegate to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied.

(C) In the case of the death of an individual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract immediately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash surrender value shall not be includible in gross income under this section and shall be treated as provided in section 101.

(4) AMOUNTS CONSTRUCTIVELY CEIVED.———

RE

(A) ASSIGNMENTS OR PLEDGES.If during any taxable year an owner-employee assigns (or agrees to assign) or pledges (or agrees to pledge) any portion of his interest in a trust described in section 401 (a) which is exempt from tax under section 501(a) or any portion of the value of a contract purchased as part of a plan described in section 403(a), such portion shall be treated as having been received by such owner-employee as a distribution from such trust or as an amount received under the contract.

(B) LOANS ON CONTRACTS.-If during any taxable year, an owneremployee receives, directly or indirectly, any amount from any insurance company as a loan under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501 (a) or purchased as part of a plan described in section 503(a), and issued by such insurance company. such amount shall be treated as an amount received under the contract. (5) PENALTIES APPLICABLE TO CERTAIN AMOUNTS RECEIVED BY OWNEREMPLOYEES —

(A) This paragraph shall apply

(i) to amounts (other than any amount received by an individual in his capacity as a policyholder of an annuity, endowment. or life insurance contract which is in the nature of a dividend or similar distribution which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) and which are received by an individual, who is or has been, an owner-employee, before such individual attains the age of 591 years. for any reason other than the individual's becoming disabled (within the meaning of section 213(g) (3)), but only to the extent that such amounts are attributable to contributions paid on behalf of such individual (whether or not paid by him while he was an owner-employee.

(11) to amounts which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) at any time by an individual who is, or has been, an owner-employee, or by the successor of such individual, but only to the extent that such amounts are determined, under regulations prescribed by the Secretary or his delegate, to exceed the benefits provided for such individual under the plan formula, and

are

(ii) to amounts which received, by an individual who is. or has been, an owner-employee. by reason of the distribution under the provisions of section 401 (e) (2) (E) of his entire interest in all qualified trusts described in section 401(a) and in all plans described in section 403(a).

(B) (1) If the aggregate of the amounts to which this paragraph applies received by any person in his taxable year equals or exceeds $2.500, the increase in his tax for the taxable year in which such amounts are received and attributable to such amounts shall not be less than 110 percent of the aggregate increase in taxes, for the taxable year and the 4 immediately preceding taxable years, which would have resulted if such amounts had been included in such person's gross income ratably over such taxable years.

(ii) If deductions have been allowed under section 404 for contributions paid on behalf of the individual while he is an owner-employee for a number of prior taxable years less than 4, clause (i) shall be applied by taking into account a number of taxable years immediately preceding the taxable year in which the amount was so received equal to such lesser number.

(C) If subparagraph (B) does not apply to a person for the taxable year, the increase in tax of such person for the taxable year attributable to the amounts to which this paragraph applies shall be 110 percent of such increase (computed without regard to this subparagraph).

(D) Subparagraph (A)(ii) of this paragraph shall not apply to any amount to which section 402 (a)(2) or 403(a)(2) applies.

(E) For special rules for computation of taxable income for taxable years to which this paragraph applies, see subsection (n) (3). (6) OWNER-EMPLOYEE DEFINED.-For purposes of this subsection, the term owner-employee has the meaning assigned to it by section 401(c)(3). (n) TREATMENT OF CERTAIN DISTRIBUTIONS WITH RESPECT TO CONTRIBUTIONS BY SELF-EMPLOYED INDIVIDUALS.—

(1) APPLICATION OF SUBSECTION.—

(A) DISTRIBUTIONS BY EMPLOYEES' TRUST Subject to the provisions of subparagraph (C), this subsection shall apply to amounts

distributed to a distributee, in the case of an employees' trust described in section 401(a) which is exempt from tax under section 501(a), if the total distributions payable to the distributee with respect to an employee are paid to the distributee within one taxable year of the distributee

(1) on account of the em ployee's death.

(ii) after the employee has attained the age of 59 years, or

(iii) after the employee has become disabled (within the meanof section 213(g) (3)).

(B) ANNUITY PLANS.-Subject to the provisions of subparagraph (C), this subsection shall apply to amounts paid to a payee, in the case of an annuity plan described in section 403(a), if the total amounts payable to the payee with respect to an employee are paid to the payee within one taxable year of the payee

(1) on account of the employee's death,

(ii) after the employee has attained the age of 59 years, or (ii) after the employee has become disabled (within the meaning of section 213(g) (3)). (C) LIMITATIONS AND EXCEPTIONS. This subsection shall apply

(1) only with respect to so much of any distribution or payment to which (without regard to this subparagraph) subparagraph (A) or (B) applies as to attributable to contributions made on behalf of an employee while he was an employee within the meaning of section 410(c) (1), and

(ii) if the recipient is the employee on whose behalf such contributions were made, only if contributions which were allowed as a deduction under section. 404 have been made on behalf of such employee while he was an employee within the meaning of section 401(c) (1) for 5 or more taxable years prior to the taxable year in which the total distributions payable or total amounts payable, as the case may be, are paid. This subsection shall not apply to amounts described in clauses (11) and (iii) of subparagraph (A) of subsection (m) (5) (but, in the case of amounts described in clause (11) of such subparagraph, only to the extent that subsection (m) (5) applies to such amounts).

(2) LIMITATION OF TAX-In any case to which this subsection applies, the tax attributable to the amounts to which this subsection applies for the taxable year in which such amounts are received shall not exceed whichever of the following is the greater:

(A) 5 times the increase in tax which would result from the inclusion in gross income of the recipient of 20 percent of so much of

the amount so received as is includible in gross income, or

(B) 5 times the increase in tax which would result if the taxable income of the recipient for such taxable year equaled 20 percent of the amount of the taxable income of the recipient for such taxable year determined under paragraph (3) (A).

(3) DETERMINATION OF TAXABLE INCOME. Notwithstanding section 63 (relating to definition of taxable income), for purposes only of computing the tax under this chapter attributable to amounts to which this subsection or subsection (m) (5) applies and which are includible in gross income

(A) the taxable income of the recipient for the taxable year of receipt shall be treated as being not less than the amounts by which (i) the aggregate of such amounts so includible in gross income exceeds (ii) the amount of the deductions allowed for such taxable year under section 151 (relating to deductions for personal exemptions); and

(B) in making ratable inclusion computations under paragraph (5) (B) of subsection (m), the taxable income of the recipient for each taxable year involved in such ratable inclusion shall be treated as being not less than the amount required by such paragraph (5) (B) to be treated as includible in gross income for such taxable year. In any case in which the preceding sentence results in an increase in taxable income for any taxable year, the resulting increase in the taxes imposed by section 1 or 3 for such taxable year shall not be reduced by any credit under part IV of subchapter A (other than section 31 thereof) which, but for this sentence, would be allowable.

(c) CAPITAL GAINS TREATMENT OF CERTAIN EMPLOYEES' TRUST DISTRIBUTIONS. Section 402(a) (2) of the Internal Revenue Code of 1954 (relating to capital gains treatment for certain distributions) is amended by adding at the end thereof the following new sentence: This paragraph shall not apply to distributions paid to any distributee to the extent such distributions are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401 (c) (1).

(d) CAPITAL GAINS TREATMENT OF CERTAIN EMPLOYEES' ANNUITY PAYMENTS.-Section 403 (a) of the Internal Revenue Code of 1954 (relating to taxability of a beneficiary under a qualified annuity plan) is amended

(1) by striking out in paragraph (2) (A) (i) which meets the requirements of section 401(a) (3), (4), (5), and (6) and inserting in lieu thereof described in paragraph (1);

(2) by adding at the end of paragraph (2) (A) the following new sentence: This subparagraph shall not apply to amounts paid to any payee to the extent such amounts are attribut

able to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c) (1).; and

(3) by adding after paragraph (2) the following new paragraph:

(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).

SEC. 5. PLANS FOR PURCHASE OF UNITED STATES BONDS.

(a) QUALIFIED BOND PURCHASE PLANS.-Part I of subchapter D of chapter 1 of the Internal Revenue Code of 1954 (relating to deferred compensation, etc.) is amended by adding at the end thereof the following new section: SEC. 405. QUALIFIED

PLANS.

BOND PURCHASE

(a) REQUIREMENTS FOR QUALIFICATION. A plan of an employer for the purchase for and distribution to his employees or their beneficiaries of United States bonds described in subsection (b) shall constitute a qualified purchase plan under this section if

(1) the plan meets the requirements of section 401(a) (3), (4), (5), (6), (7), and (8) and, if applicable, the requirements of section 401(a) (9) and (10) and of section 401 (d) (other than paragraphs (1), (5) (B), and (8)); and

(2) contributions under the plan are used solely to purchase for employees or their beneficiaries United States bonds described in subsection (b).

(b) BONDS TO WHICH APPLICABLE.

(1) CHARACTERISTICS OF BONDS.This section shall apply only to a bond issued under the Second Liberty Bond Act, as amended, which by its terms, or by regulations prescribed by the Secretary under such Act

(A) provides for payment of interest, or investment yield, only upon redemption;

(B) may be purchased only in the name of an individual;

(C) ceases to bear interest, or provide investment yield, not later than 5 years after the death of the individual in whose name it is purchased;

(D) may be redeemed before the death of the individual in whose name it is purchased only if such individual

(i) has attained the age of 592 years, or

(ii) has become disabled (within the meaning of section 213(g) (3)); and

(E) is nontransferable.

(2) MUST BE PURCHASED IN NAME OF EMPLOYEE.-This section shall apply to a bond described in paragraph (1) only if it is purchased in the name of the employee.

(1) GROSS INCOME NOT TO INCLUDE BONDS AT TIMES OF DISTRIBUION.— For purposes of this chapter, in the case of a distributee of a bond described in subsection (b) under a qualified bond purchase plan, or from a trust described in section 401(a) which is exempt from tax under section 501 (a), gross income does not include any amount attributable to the receipt of such bond. Upon redemption of such bond, the proceeds shall be subject to taxation under this chapter, but the provisions of section 72 (relating to annuities, etc.) and section 1232 (relating to bonds and other evidences of indebtedness) shall not apply.

(2) BASIS.-The basis of any bond received by a distributee under a qualified bond purchase plan—

(A) if such bond is distributed to an employee, or with respect to an employee, who at the time of purchase of the bond, was an employee other than an employee within the meaning of section 401 (c) (1), shall be the amount of the contributions by the employee which were used to purchase the bond, and

(B) if such bond is distributed to an employee, or with respect to an employee, who, at the time of purchase of the bond, was an employee within the meaning of section 401 (c) (1), shall be the amount of the contributions used to purchase the bond which were made on behalf of such employee and were not allowed as a deduction under subsection (c). The basis of any bond described in subsection (b) received by a distributee from a trust described in section 401 (a) which is exempt from tax under section 501 (a) shall be determined under regulations prescribed by the Secretary or his delegate.

(e) CAPITAL GAINS TREATMENT NOT TO APPLY TO BONDS DISTRIBUTED BY TRUSTS. Section 402 (a) (2) shall not apply to any bond described in subsection (b) distributed to any distributee and, for purposes of applying such section, any such bond distributed to any distributee and any such bond to the credit of any employee shall not be taken into account.

(f) EMPLOYEE DEFINED.-For purposes of this section, the term "employee" includes an individual who is an employee within the meaning of section 401 (c) (1), and the employer of such individual shall be the person treated as his employer under section 401 (c) (4).

(g) PROOF OF PURCHASE.-At the time of purchase of any bond to which this section applies, proof of such pur