INCOME AVERAGING.

SEC. 311. INCOME AVERAGING. (a) Limitation on Tax.—Section 1301 (relating to limitation on tax) is amended by striking out “20 percent of such income” and all that follows and inserting in lieu thereof “20 percent of such income to 120 percent of average base period income.” (b) Averagable Income.—Section 1302 (relating to the definition of averagable income and related definitions) is amended to read as follows: “SEC. 1302. DEFINITION OF AVERAGABLE INCOME; RELATED DEFINITIONS. “(a) Averagable Income.— “(1) In general.—For purposes of this part, the term ‘averagable income’ means the amount by which taxable income for the computation year (reduced as provided in paragraph (2)) exceeds 120 percent of average base period income. “(2) Reductions.—The taxable income for the computation a year shall be reduced by— “(A) the amount (if any) to which section 72(m)(3) applies, and “(B) the amounts included in the income of a beneficiary of a trust under section 668(a). “(b) Average Base Period Income.—For purposes of this part— “(1) In general.—The term ‘average base period income’ means one-fourth of the sum of the base period incomes for the base period. 83 Stat. 587 “(2) Base period income.—The base period income for any taxable year is the taxable income for such year— “(A) increased by an amount equal to the excess of— “(i) the amount excluded from gross income under section 911 (relating to earned income from sources without the United States) and subpart D of part III of subchapter N (sec. 931 and following, relating to income from sources within possessions of the United States), over “(ii) the deductions which would have been properly allocable to or chargeable against such amount but for the exclusion of such amount from gross income; and “(B) decreased by the amounts included in the income of a beneficiary of a trust under section 668(a). “(c) Other Related Definitions.—For purposes of this part— “(1) Computation year.—The term ‘computation year’ means the taxable year for which the taxpayer chooses the benefits of this part. “(2) Base period.—The term ‘base period’ means the 4 taxable years immediately preceding the computation year. “(3) Base period year.—The term ‘base period year’ means any of the 4 taxable years immediately preceding the computation year. “(4) Joint return.—The term ‘joint return’ means the return of a husband and wife made under section 6013.” (c) Special Rules.—Section 1304(b) (relating to special rules applicable to income averaging) is amended— (1) by striking out “and” at the end of paragraph (3); (2) by striking out the period at the end of paragraph (4) and inserting in lieu thereof a comma; and (3) by adding at the end thereof the following new paragraphs: “(5) section 1201(b) (relating to alternative capital gains tax), and “(6) section 1348 (relating to 50-percent maximum rate on earned income).” (d) Conforming Amendments.— (1) Section 1303(c)(2)(B) is amended by striking out “adjusted”. (2) Section 1304 is amended— (A) by striking out paragraph (3) of subsection (c) and by redesignating paragraphs (4) and (5) of such subsections as paragraphs (3) and (4), respectively; (B) by striking out “Paragraphs (2), (3), and (4)” in subsection (c)(1) and inserting in lieu thereof “Paragraphs (2) and (3)”; (C) by striking out “paragraph (4)” in subsection (c)(1) (B) and inserting in lieu thereof “paragraph (3)”; (D) by striking out “adjusted” in subparagraph (B) of subsection (c)(3) (as redesignated); (E) by striking out in subsection (d) “, and the $3,000 figure contained in section 1302(b)(2)(C) shall be applied to the aggregate net incomes”; (F) by striking out subsections (e) and (f) and inserting in lieu thereof the following: “(e) Treatment of Certain Other Items.— 83 Stat. 588 “(1) Section 72(m)(5).—Section 72(m)(5) (relating to penalties applicable to certain amounts received by owner-employees) shall be applied as if this part had not been enacted. “(2) Other items.—Except as otherwise provided in this part; the order and manner in which items of income or limitations on tax shall be taken into account in computing the tax imposed by this chapter on the income of any eligible individual to whom section 1301 applies for any computation year shall be determined under regulations prescribed by the Secretary or his delegate.”; and (G) by redesignating subsection (g) as (f). (3) Section 6511(d)(2)(B)(ii) is amended— (A) by striking out “1302(e)(1)” and inserting in lieu thereof “1302(c)(1)”; and (B) by striking out “1302(e)(3)” and inserting in lieu thereof “1302(c)(3)”. (e) Effective Date.—The amendments made by this section shall apply with respect to computation years (within the meaning of section 1302(c)(1) of the Internal Revenue Code of 1954) beginning after December 31, 1969, and to base period years (within the meaning of section 1302(c)(3) of such Code) applicable to such computation years.