MODIFICATION TO INDIVIDUAL ESTIMATED TAX REQUIREMENTS.

SEC. 403. MODIFICATION TO INDIVIDUAL ESTIMATED TAX REQUIREMENTS. (a) General Rule.— Paragraph (1) of section 6654(d) of the Internal Revenue Code of 1986 (relating to amount of required installments) is amended by adding at the end thereof the following new subparagraphs: “(C) Limitation on use of preceding year’s tax.— “(i) In general.— In any case to which this subparagraph applies, clause (ii) of subparagraph (B) shall be applied as if it read as follows: (ii) the greater of— “‘(I) 100 percent of the tax shown on the return of the individual for the preceding taxable year, or (II) 90 percent of the tax shown on the return for the current year, determined by taking into account the adjustments set forth in subparagraph (D).’ “(ii) Cases to which subparagraph applies.— This subparagraph shall apply if— “(I) the modified adjusted gross income for the current year exceeds the amount of the adjusted gross income shown on the return of the individual for the preceding taxable year by more than $40,000 ($20,000 in the case of a separate return for the current year by a married individual), “(II) the adjusted gross income shown on the return for the current year exceeds $75,000 ($37,500 in the case of a married individual filing a separate return), and “(III) the taxpayer has made a payment of estimated tax (determined without regard to subsection (g) and section 6402(b)) with respect to any of the preceding 3 taxable years (or a penalty has been previously assessed under this section for a failure to pay estimated tax with respect to any of such 3 preceding taxable years). This subparagraph shall not apply to any taxable year beginning after December 31, 1996. “(iii) May use preceding year’s tax for first installment.— This subparagraph shall not apply for purposes of determining the amount of the 1st required installment for any taxable year. Any reduction in an installment by reason of the preceding sentence shall be recaptured by increasing the amount of the 1st succeeding required installment (with respect to which the requirements of clause (iv) are not met) by the amount of such reduction. “(iv) Annualization exception.— This subparagraph shall not apply to any required installment if the individual establishes that the requirements of subclauses (I) and (II) of clause (ii) would not have been satisfied if such subclauses were applied on the basis of— 105 STAT. 1063 “(I) the annualized amount of the modified adjusted gross income for months in the current year ending before the due date for the installment determined by assuming that all items referred to in clause (i) of subparagraph (D) accrued ratably during the current year, and “(II) the annualized amount of the adjusted gross income for months in the current year ending before the due date for the installment. Any reduction in an installment under the preceding sentence shall be recaptured by increasing the amount of the 1st succeeding required installment (with respect to which the requirements of the preceding sentence are not met) by the amount of such reduction. “(D) Modified adjusted gross income for current year.— For purposes of this paragraph, the term ‘modified adjusted gross income’ means the amount of the adjusted gross income shown on the return for the current year determined with the following modifications: “(i) The qualified pass-thru items shown on the return for the preceding taxable year shall be treated as also shown on the return for the current year (and the actual qualified pass-thru items (if any) for the current year shall be disregarded). “(ii) The amount of any gain from any involuntary conversion (within the meaning of section 1033) which is shown on the return for the current year shall be disregarded. “(iii) The amount of any gain from the sale or exchange of a principal residence (within the meaning of section 1034) which is shown on the return for the current year shall be disregarded. “(E) Qualified pass-thru item.— For purposes of this paragraph— “(i) In general.— Except as otherwise provided in this subparagraph, the term ‘qualified pass-thru item’ means any item of income, gain, loss, deduction, or credit attributable to an interest in a partnership or S corporation. Such term shall not include any gain or loss from the disposition of an interest in an entity referred to in the preceding sentence. “(ii) 10-percent owners and general partners excluded.— The term ‘qualified pass-thru item’ shall not include, with respect to any year, any item attributable “(I) an interest in an S corporation, if at any time during such year the individual was a 10-percent owner in such corporation, or “(II) an interest in a partnership, if at any time during such year the individual was a 10-percent owner or general partner in such partnership. “(iii) 10-percent owner.— The term ‘10-percent owner’ means— “(I) in the case of an S corporation, an individual who owns 10 percent or more (by vote or value) of the stock in such corporation, and 105 STAT. 1064 “(II) in the case of a partnership, an individual who owns 10 percent or more of the capital interest (or the profits interest) in such partnership. “(F) Other definitions and special rules.— For purposes of this paragraph— “(i) Current year.— The term ‘current year’ means the taxable year for which the amount of the installment is being determined. “(ii) Special rule.— If no return is filed for the current year, any reference in subparagraph (C) or (D) to an item shown on the return for the current year shall be treated as a reference to the actual amount of such item for such year. “(iii) Marital status.— Marital status shall be determined under section 7703.”. (b) Technical Amendments.— (1) Subparagraph (C) of section 6654(i)(1) of such Code is amended to read as follows: “(C) the amount of such installment shall be equal to the required annual payment determined under subsection (d)(1)(B) by substituting ‘66⅔ percent’ for ‘90 percent’ and without regard to subparagraph (C) of subsection (d)(1) and”. (2) Subparagraph (A) of section 6654(j)(3) of such Code is amended by inserting before the period at the end thereof the following: “and subsection (d)(1)(C)(iii) shall not apply”. (3) Paragraph (4) of section 6654(1) of such Code is amended by striking “subsection (d)(2)(B)(i)” and inserting “paragraphs (1)(C)(iv) and (2)(B)(i) of subsection (d)”. (c) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1991.