The text of the bill below is as of Nov 10, 1988 (Passed Congress).
You are reading a bill enacted 12,551 days ago. In the intervening time subsequent legislation may have amended or repealed the provisions below.
102 STAT. 3342 PUBLIC LAW 100-647—NOV. 10, 1988
Public Law 100-647
100th Congress
An Act
Nov. 10, 1988 To make technical corrections relating to the Tax Reform Act of 1986, and for other
[H.R. 4333] purposes.
Be it enacted by the Senate and House of Representatives of the
Technical and United States of America in Congress assembled,
Miscellaneous
Revenue Act of SECTION 1. SHORT TITLE; ETC.
1988. (a) SHORT TITLE.—This Act may be cited as the "Technical and
26 u s e 1 note.
Miscellaneous Revenue Act of 1988".
(b) DEFINITIONS.—For purposes of this Act—
(1) 1986 CODE.—The term "1986 Code" means the Internal
Revenue Code of 1986.
(2) REFORM ACT.—Except where incompatible with the intent,
the term "Reform Act" means the Tax Reform Act of 1986.
(c) CLERICAL AMENDMENT.—Paragraph (29) of section 7701(a) of
the 1986 Code is amended by striking out "of 1954" and inserting in
lieu thereof "of 1986".
(d) TABLE OF CONTENTS.—
TITLE I — T E C H N I C A L CORRECTIONS TO TAX REFORM ACT OF 1986
Sec. 1001. Amendments related to title I of the Reform Act.
Sec. 1002. Amendments related to title II of the Reform Act.
Sec. 1003. Amendments related to title III of the Reform A c t
Sec. 1004. Amendments related to title IV of the Reform Act
Sec. 1005. Amendments related to title V of the Reform Act.
Sec. 1006. Amendments related to title VI of the Reform Act.
Sec. 1007. Amendments related to title VII of the Reform Act.
Sec. 1008. Amendments related to title VIII of the Reform Act.
Sec. 1009. Amendments related to title IX of the Reform Act
Sec. 1010. Amendments related to title X of the Reform Act.
Sec. 1011. Amendments related to parts I and U of subtitle A of title XI of the
Reform Act.
Sec. 1011 A. Amendments related to parts m and IV of subtitle A of title XI of the
Reform Act.
Sec. 101 IB. Amendments related to subtitles B and C of title XI of the Reform Act.
Sec. 1012. Amendments related to title XII of the Reform Act.
Sec. 1013. Amendments related to title XIII of the Reform Act.
Sec. 1014. Amendments related to title XIV of the Reform Act.
Sec. 1015. Amendments related to title XV of the Reform Act.
Sec. 1016. Amendments related to title XVI of the Reform Act
Sec. 1017. Amendments related to title XVII of the Reform Act
Sec. 1018. Amendments related to title XVIII of the Reform Act
Sec. 1019. Effective date.
TITLE n—AMENDMENTS RELATED TO TAX PROVISIONS IN OTHER
LEGISLATION
Sec. 2001. Amendments related to Superfund Revenue Act of 1986.
Sec. 2002. Amendments related to Harbor Maintenance Revenue Act of 1986.
Sec. 2003. Amendments related to Omnibus Budget Reconciliation Act of 1986.
Sec. 2004. Amendments related to the Revenue Act of 1987.
Sec. 2005. Amendments related to Pension Protection Act and full funding limi-
tetions.
Sec. 2006. Amendments related to section 9201 of the Omnibus Budget Reconcilia-
tion Act of 1987.
PUBLIC LAW 100-647-NOV. 10, 1988 102 STAT. 3343
TITLE in—ADDITIONAL SIMPLIFICATION AND CLARIFICATION
PROVISIONS
Subtitle A—Diesel Fuel Excise Tax Collection and Exemption Procedures
Sec. 3001. Tax-free purchases of certain fuels.
Sec. 3002. Expedited refund for certain fuels used in nontaxable uses.
Sec. 3003. Marine retailers treated as producers.
Subtitle B—Health Care Continuation Rules
Sec. 3011. Failure to satisfy continuation requirements of group health plans.
Subtitle C—Employee Benefit Nondiscrimination Rules
Sec. 3021. Modifications to discrimination rules applicable to certain employee
benefit plans.
Subtitle D—Estate and Gift Taxes
Sec. 3031. Estate tax valuation freezes.
Subtitle E—Indian Fishing Rights
Sec. 3041. Federal tax treatment of income derived by Indians from exercise of Hsh-
ing rights secured by treaty, etc.
Sec. 3042. State tax treatment of income derived by Indians from exercise of fishing
rights secured by treaty, etc.
Sec. 3043. Conforming amendments relating to old-age, survivors, and disability
insurance program.
Sec. 3044. Effective date; no inference created.
TITLE IV—EXTENSIONS AND MODIFICATIONS OF EXPIRING TAX
PROVISIONS
Sec. 4001. Elxtension and modification of exclusion for employer-provided education
assistance.
Sec. 4002. Extension and modification of exclusion of amounts received under group
l ^ a l services plans.
Sec. 4003. Carryover of post-1987 low-income housing credit dollar amounts per-
mitted.
Sec. 4004. Simplification of rule where partnership holds qualified low-income
building.
Sec. 4005. Provisions relating to mortgage revenue bonds and mortgage credit
certificates.
Sec. 4006. Extension of certain business energy credits.
Sec. 4007. Extension of credit for increasing research activities.
Sec. 4008. Denial of deduction for 50 percent of amounts allowed as a research
credit.
Sec. 4009. Allocation of research and experimental expenditures.
Sec. 4010. Extension and modification of targeted jobs credit.
Sec. 4011. Treatment of publicly offered r^ulated investment companies under
2-percent floor.
Sec. 4012. Extension and modifications of provisions relating to financial institu-
tions.
TITLE V—REVENUE INCREASE PROVISIONS
Subtitle A—Corporate Estimated Tax Provisions
Sec. 5001. Corporate estimated tax payments.
Subtitle B—Insurance Provisions
Sec. 5011. Limitation on unreasonable mortality and other expense charges under
section 7702.
Sec. 5012. Treatment of modified endowment contracts.
Sec. 5013. Valuation of group-term life insurance.
Sec. 5014. Study.
Subtitle C—Loss Transfer Rules for Alaska Native Corporations
Sec. 5021. Repeal of rules permitting loss transfers by Alaska Native Corporations.
Subtitle D—Estate and Gift Tax Provisions
Sec. 5031. Valuation tables.
Sec 5032. Rate schedule for tax on estates of nonresidents not citizens.
102 STAT. 3344 PUBLIC LAW 100-647—NOV. 10, 1988
Sec. 5033. Disallowance of marital deduction where spouse is not citizen of United
States.
Subtitle E—Long-Term Contract Provisions
Sec. 5041. Long-term contract provisions.
Subtitle F—Tax-Exempt Bond Provisions
Sec. 5051. Treatment of certain pooled flnancing bonds.
Sec. 5052. Treasury regulations relating to student loan bonds.
Sec. 5053. Restrictions on bonds used to provide residential rental property for
family units.
Subtitle G—Excise Tax Provisions
Sec. 5061. Imposition of excise tax on manufacture or importation of pipe tobacco.
Sec. 5062. McMdiflcation of distilled spirits tax credit for flavors content.
Subtitle H—Other Revenue Increase Provisions
Sec. 5071. Increase in penalty for bad checks.
Sec. 5072. Time for payment of tax on reversion of pension plan assets.
Sec. 5073. Denial of deduction for certain residential telephone service.
Sec. 5074. Partnership reporting of unrelated business taxable income.
Sec. 5075. Options subject to wash sale rules.
Sec. 5076. Interest charge on installment sales of certain property.
Sec. 5077. Applications of net operating loss rules to stock acquired by an employee
stock ownership plan.
TITLE VI—OTHER SUBSTANTIVE REVENUE PROVISIONS
Subtitle A—Provisions Relating to Individuals
Sec. 6001. Treatment of certain amounts paid to or for the benefit of an institution
of higher education.
Sec. 6002. Nonrecognition of gain where one spouse dies before occupying new
residence.
Sec. 6003. Meals on certain vessels and offshore oil platforms exempt from 80 per-
cent limitation on deduction for meals.
Sec. 6004. Treatment of certain innocent spouses.
Sec. 6005. Interim treatment of certain amounts awarded to Christa McAuliffe
Fellows.
Sec. 6006. Election to claim certain unearned income of child on parent's return.
Sec. 6007. Jury duty pay remitted to an individual's employer allowed as a deduc-
tion in computing gross income.
Sec. 6008. Business use of automobiles by rural mail carriers.
Sec. 6009. Exclusion from gross income for income from United States savings
bonds used to pay tuition and fees.
Sec. 6010. Modification of additional exemption for student dependents.
Sec. 6011. Principal residence capital gains exclusion.
Subtitle B—Provisions Relating to Accounting and Agriculture
Sec. 6026.
Amendments to uniform capitalization rules.
Sec. 6027.
Treatment of single purpose agricultural or horticultural structures.
Sec. 6028.
Treatment of property used in the farming business.
Sec. 6029.
Treatment of certain trees.
Sec. 6030.
One-year deferral of proceeds from live-stock sold on account of drought.
Sec. 6031.
Certain repledges permitted.
Sec. 6032.
Treatment of indirect holdings through trusts under section 448 of the
1986 Code.
Sec. 6033. Disaster assistance act payments included in special rule for taxable year
of inclusion.
Subtitle C—Pensions and Employee Benefits
Sec. 6051. Provisions relating to benefits under discriminatory plans.
Sec. 6052. Modifications of discrimination rules applicable to certain annuity
contracts.
Sec. 6053. Required distribution beginning date for governmental and church plans.
Sec. 6054. Section 415 limitation for State and local plans.
Sec. 6055. Minimum participation standards.
Sec. 6056. Study of effect of minimum participation rule on employers required to
provide certain retirement benefits.
Sec. 6057. Prohibition on collectibles not to include State coins.
Sec. 6058. Application of fundings rules to multiple employer plans.
Sec. 6059. Application of section 415 limitations to police and firefighters.
PUBLIC LAW 100-647-NOV. 10, 1988 102 STAT. 3345
Sec. 6060. Excise tax on disposition of stock by an ESOP not to apply to certain
forced dispositicMis.
Sec. 6061. Loans to acquire employer securities.
Sec. 6062. Effective date of section 415 limitations of collectively bargained agree-
ments.
Sec. 6063. Treatment of pre-1989 elections for dependent care assistance under cafe-
teria plans.
Sec. 6064. Modifications to section 457.
Sec. 6065. Exception for governmental plans.
Sec. 6066. Air transportation of cargo and of passengers treated as same service for
purposes of fringe benefits inclusion.
Sec 6067. Special rule for applying spin-off rules to bridge banks.
Sec. 6068. Income averaging allowed to lumpsum distributions of alternate payees.
Sec. 6069. Increase in employer reversion tax.
Sec. 6070. Definition of part^ime employee for purposes of section 89.
S e c 6071. Rural t e i e i ^ n e cooperatives permitted to have qualified cash or
deferred arrangements.
Sec. 6072. Study of treatment of certain technical personnel.
Subtitle D—^Insurance Provisions
Sec. 6076. Treatment of certain workers' compensation funds.
Sec. 6077. S^iedal estimated tax payments.
Sec. 6078. Qiurch self-funded death benefit plans treated as life insurance.
Sec. 6079. Treatment of structured settlements.
Sec. 6080. Variable contracts invested in government securities permitted.
Subtitle E^Exdse Tax Provisions
Sec. 6101. Authority to prescribe tolerances for the volume of wine in bottles for
purposes of the exdse tax on wine.
Sec. 6102. Wholesale distributors to administer claims for refund of gasoline tax.
Sec. 6103. Authority to exempt articles from e x c ^ tax on heavy trucks and trailers
where benefit accrues to United States.
Sec. 6104. Application of reduced gasoline tax rate to blenders.
Sec. 6105. Certain educational institutions exempt from user fees on permits for
industrial use of specially denatured distilled spirits.
Sec. 6106. Small procedures exempt from occupational tax on distilled spirits
plants.
Sec. 6107. Quarterly payment of archery exdse tax.
Sec. 6108. Extension of time for enacting authorizing legislation relating to the oil
spill liability trust fund.
Sec. 6109. Donated cargo exempt from harbor maintenance tax.
Sec 6110. Relay cargo.
Sec 6111. Clarification of meaning of manufacture under truck excise tax.
Subtitle F—^Foreign Provisions
Sec 6126. Dual resident companies.
Sec. 6127. Election to be treated as qualified electing fund to be made by taxpayer.
Sec. 6128. Treatment of certain United States affiliate obligations.
Sec. 6129. Treatment of certain insurance branches of foreign corporations.
Sec. 6130. Treatment of certain instruments unckr foreign currency rules.
Sec. 6131. Treatment of insurance companies under chain deficit rule.
Sec. 6132. Virgin Islands treated as qualified Caribbean basin country.
Sec. 6133. Treatment of certain United States obligations held by possession banks
Sec 6134. Treatment of certain gambling winnings received by nonresident aliens.
Sec. 6135. Election to be treated as domestic corporation.
Sec. 6136. Tax exemption for ENJEBI community trust fund.
Sec. 6137. Applicationof section 912 to judicial employees.
Sec. 6138. Study of definition of United States resident
Sec. 6139. Sunset of treaty provisions.
Sec. 6140. Treatment of certain awards by the district court of Guam.
Subtitle G—^Estate Tax Provisions
Sec 6151. Treatment of certain rents under section 2032A.
Sec. 6152. Clarification of treatment of joint and survivor annuities under Qtip
rules.
Subtitle H—^Tax-Exempt Bond Provisions
Sec 6176. Oarification of small issue bond definition of manufacturing facility.
Sec. 6177. Rules applicable to tax and revenue anticipation bonds.
Sec. 6178. Amendment to mortgage bond purchase price regulations.
102 STAT. 3346 PUBLIC LAW 100-647—NOV. 10, 1988
Sec. 6179. Application of security interest test to bond financing of hazardous waste
clean-up activities.
Sec. 6180. Tax-exempt financing for certain rail facilities.
Sec. 6181. Rules relating to rebate on earnings on bona fide debt service fund.
Sec. 6182. Bonds issued by volunteer fire departments.
Sec. 6183. Disregard of pooled financings in determination of qualification for small
issuer exception.
Subtitle I—Provisions Relating to Exempt Organizations
Sec. 6201. Certain games of chance not treated as unrelated trade or business.
Sec. 6202. Purchase of insurance by cooperative hospital service organizations.
Sec. 6203. Cancellation of certain debts originated by or guaranteed by the United
States not taken into account in determining tax exempt status of cer-
tain organizations.
Sec. 6204. Determination of operating foundation status for certain purposes.
Subtitle J—Taxpayer Rights and Procedures
Sec. 6226. Short title.
PART I—TAXPAYER RIGHTS
Sec. 6227. Disclosure of rights of taxpayers.
Sec. 6228. Procedures involving taxpayer interviews.
Sec. 6229. Taxpayers may rely on written advice of Internal Revenue Service.
Sec. 6230. Teixpayer assistance orders.
Sec. 6231. Basis for evaluation of Internal Revenue Service employees.
Sec. 6232. Procedures relating to Internal Revenue Service regulations.
Sec. 6233. Content of tax due, deficiency, and other notices.
Sec. 6234. Installment payment of tax liability.
Sec. 6235. Assistant Commissioner for taxpayer services.
PART II—LEVY AND LIEN PROVISIONS
Sec. 6236. Levy and distraint.
Sec. 6237. Review of jeopardy levy and assessment procedures.
Sec. 6238. Administrative appeal of liens.
PART III—PROCEEDINGS BY TAXPAYERS
Sec. 6239. Awarding costs and certain fees in administrative and court proceedings.
Sec. 6240. Civil cause of action for damages sustained due to failure to release lien.
Sec. 6241. Civil cause of action for damages sustained due to certain unauthorized
actions by internal revenue service.
Sec. 6242. Assessable penalty for improper disclosure or use of information by pre-
parers of returns.
PART FV—TAX COURT JURISDICTION
Sec. 6243. Jurisdiction to restrain certain premature assessments.
Sec. 6244. Jurisdiction to enforce overpayment determinations.
Sec. 6245. Jurisdiction to review certain sales of seized property.
Sec. 6246. Jurisdiction to redetermine interest on deficiencies.
Sec. 6247. Jurisdiction to inodify decisions in certain estate tax cases.
Subtitle K—Other Administrative Provisions
Sec. 6251. Exchange of information.
Sec. 6252. Provisions relating to previously required studies.
Sec. 6253. Repeal of secretarial authority to prescribe class lives.
Sec. 6254. Amendments related to Crude Oil Windfall Profit Tax Act of 1980.
Subtitle L—Provisions Relating to Corporations and Personal Holding Companies
Sec. 6276. Authority to pay refunds to certain fiduciaries of insolvent members of
affiliated groups.
Sec. 6277. Application of net operating loss limitations to bankruptcy reorganiza-
tions.
Sec. 6278. Application of section 7503 of 1986 Code for purposes of section 10222(b)
of Revenue Act of 1987.
Sec. 6279. Interest earned by brokers or dealers not taken into account as personal
holding company income.
Sec. 6280. Treatment of certain bank holding companies.
Sec. 6281. Authority to waive appraisal requirement for certain charitable contribu-
tions of property.
Sec. 6282. Distributions by cooperative housing corporations.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3347
Subtitle M—Miscellaneous Provisions
Sec. 6301. Repeal of limit on long*term bonds.
Sec. 6302. One-year extension of credit for producing fuel from a nonconventional
source.
Sec. 6303. Certain discharge of debt income not included in adjusted book income.
Sec. 6304. Nonconventional fuels credit.
Sec. 6305. Treatment of certain family services providers.
TITLE Vn—RAILROAD UNEMPLOYMENT AND RETIREMENT PROGRAMS
Sec TOOL Short title.
Sec. 7002. References to Railroad Unemployment Insurance Act
Subtitle A—Financing Provisions
Sec 7101. Amendments relating to definition of "compensation".
Sec 7102. Contribution adjustments.
Sec. 7103. Administrative expenses.
Sec 7104. Notification to employer.
Sec 7105. Annual report.
Sec 7106. Amendments relating to railroad unemployment repayment tax.
S e c 7107. GAO study of fraud and payment errors.
Sec. 7108. One-year extension of time limit for filing report by Commission on Rail-
road Retirement Reform.
Subtitle B—^Benefit and Other Adjustments
Sec. 7201. Waiting period for benefits and benefit increases.
Sec. 7202. Qualifying condition.
S e c 7203. Increase in TnaTimum permitted subsidiary remuneration.
Subtitle C—^Retirement Act Amendments
Sec 7301. Additional lump sum payment in certain cases.
Sec 7302. Deletion of last person service as a disqualification.
Sec 7303. Beamings of disability annuitants.
Sec 7304. Allowance of credit for military service.
TITLE Vffl—AB4ENDMENTS RELATING TO SOCIAL SECURITY ACT
PROGRAMS
Subtitle A—Old-Age, Survivors, and Disability Insurance and Related Provisions
Sec 8001. Interim disability benefits in cases of delayed final decisions.
Sec 8002. Application of earnings test in year of individual's death.
Sec. 8003. niaseout of reduction in windfall benefits.
Sec 8004. Denial of benefits to individuals deported or ordered deported on the
basis of associations with the Nazi Government of Germany during
World War U.
Sec. 8005. Modifications in the term of office of public members of the board of
trustees of the social security trust funds.
S e c 8006. Continuation of disability benefits during appeal.
Sec 8007. Exemption from social security for employers and employees who are
both members of certain religious faiths.
Sec. 8008. Blood donor locator service.
S e c 8009. Requirement of social security account number as a condition for receipt
of social security benefits.
S e c 8010. Substitution of certificate of election for application to establish entitle-
ment for certain reduced widow's and widower's benefits.
Sec 8011. Calculation of the windfall benefit guarantee amount based on pension
amounts payable in the first month of concurrent entitlement rather
than concurrent eligibility.
Sec 8012. Consolidation of reports on continuing disability reviews.
S e c 8013. Exclusion of employees separated finom employment before January 1,
1989, from rule including as wages taxable under PICA certain pay-
ments for group-term life insurance.
Sec 8014. Clarification of applicability of Government pension o f ^ t to certain Fed-
eral employees.
Sec 8015. Amendments to rules governing social security coverage of Federal
employment
Sec 8016. Technical corrections in OASDI provisions.
Sec 8017. Certain cash wages paid to seasonal agricultural laborers excluded from
OASDI coverage.
Sec 8018. Certain employer pension contributions not included in FICA wage base.
102 STAT. 3348 PUBLIC LAW 100-647—NOV. 10, 1988
Sec. 8019. Reports regarding certain disability-related benefits.
Subtitle B—Public Assistance Provisions
Sec. 8101. Extension of prohibition against implementation of certain proposed reg-
ulations.
Sec. 8102. Review of policy governing use of AFDC funds to meet emergency needs
of families eligible for AFDC through emergency assistance or special
needs payments; report to Congress.
Sec. 8103. Disregard of certain housing assistance payments in determining income
and resources under SSI program.
Sec. 8104. Foster care independent living initiatives.
Sec. 8105. Technical corrections to Family Support Act of 1988.
Subtitle C—National Commission on Children
Sec. 8201. Delay in reporting date for National Commission on Children.
Subtitle D—Unemployment Compensation
Sec. 8301. Self^mployment demonstration project.
Subtitle E—Medicare and Medicaid
PART I—PROVISIONS RELATING TO PART A OF MEDICARE
Sec. 8401. Extension of disproportionate share provisions.
Sec. 8402. Maintenance of bad debt collection policy.
Sec. 8403. Application of wage indices in case of areas affected by section 4005(aXl)
ofOBRAof 1987.
Sec. 8404. Demonstration projects with respect to chronic ventilator-dependent
units in hospitals.
Sec. 8405. Election of personnel policy for PROPAC employees.
PART II—RELATING TO PARTS A AND B OF MEDICARE PROGRAM
Sec. 8411. Elimination of waivers of 50:50 rule for HMO enrollment.
Sec. 8412. Increase in authorization for the patient outcome assessment research
program.
Sec. 8413. Delay in reporting deadline for the United States Bipartisan Commission
on Comprehensive Health Care.
PART III—PROVISIONS RELATING TO PART B OF MEDICARE
Sec. 8421. Budget neutrality adjustment for certified registered nurse anesthetists.
Sec. 8422. Coverage of psychologists' services when provided off-site as part of a
treatment plan.
Sec. 8423. Nonapplication of certain requirements to physical therapists in inde-
pendent practice.
Sec. 8424. Functions of physician payment review commission.
Sec. 8425. Moratorium on laboratory payment demonstration extended.
Sec. 8426. Study of trip fees for clinical laboratories.
PART IV—PROVISIONS RELATING TO MEDICAID
Sec. 8431. Delay in issuance of final regulations concerning the use of voluntary
contributions and provider-paid taxes by States to receive Federal
matching funds.
Sec. 8432. Medicaid long-term care waiver program.
Sec. 8433. Extension of time period for submission of correction and reduction plans
for certain intermediate care facilities for the mentally retarded.
Sec. 8434. Correction relating to medicare buy-in.
Sec. 8435. Clarification of Federal financial participation for case-management serv-
ices.
Sec. 8436. Determination of premium amounts for extended medical assistance.
TITLE IX—TRADE PROVISIONS
Sec. 9001. Trade technical amendments.
Sec. 9002. Foreign trade zones.
Sec. 9003. Report on the small business innovation research program.
Sec. 9004. Extension of certain existing suspensions of duty and duty reductions.
TITLE X—MANASSAS NATIONAL BATTLEFIELD PARK
Sec. 10001. Short title.
Sec. 10002. Addition to Manassas National Battlefield Park.
Sec. 10003. Visual protection.
Sec. 10004. Highway relocation.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3349
TITLE I—TECHNICAL CORRECTIONS TO g^r^^r"
TAX REFORM ACT OF 1986
SEC. 1001. AMENDMENTS RELATED TO TITLE I OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 101 OF THE REFORM ACT.—
(1) Paragraph (2) of section 6867(b) of the 1986 Code is amend-
ed by striking out "at a 50-percent rate" and inserting in lieu
thereof "at the highest rate of tax specified in section 1".
(2XA) Section 531 of the 1986 Code is amended to read as
follows:
•^EC. 531. IMPOSITION OF ACCUMULATED EARNINGS TAX.
"In addition to other taxes imposed by this chapter, there is
hereby imposed for each taxable year on the accumulated taxable
income (as defined in section 535) of each corporation described in
section 532, an accumulated earnings tax equal to 28 percent of the
accumulated taxable income."
OB) The amendment made by subparagraph (A) shall apply to 26 USC 531 note.
taxable years b^inning after December 31, 1987. Such amend-
ment shall not be treated as a change in a rate of tax for
purposes of section 15 of the 1986 Code.
(3) The last sentence of section l(gX2) of the 1986 C!ode is
amended by inserting before the period at the end thereof the
following: "and subparagraph (B) shall be applied as if a deduc-
tion for a personal exemption were allowable under section 151
to such individual for such individual's spouse."
(b) AMENDMENTS RELATED TO SECTION 102 OF THE REFORM ACT.—
(1) Paragraph (5) of section 63(c) of the 1986 C ^ e is
amended—
(A) by striking out "the standard deduction applicable"
and inserting in lieu thereof "the basic standard deduction
applicable", and
(B) by striking out "STANDARD DEDUCTION" in the para-
graph heading and inserting in lieu thereof "BASIC STAND-
ARD DEDUCTION".
(2) Subclause a) of section 6012(aXlXCXi) of the 1986 Code is
amended to read as follows:
"(I) income (other than earned income) in excess
of the sum of the amount in effect under section
63(cX5XA) plus the additional standard deduction
(if any) to which the individual is entitled, or".
(3XA) Subparagraph (A) of section 62(aX2) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "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) Paragraph (2) of section 527(e) of the 1986 Code (defining
exempt function) is amended by adding at the end thereof the
following new sentence: "Such term includes the making of
expenditures relating to an office described in the preceding
sentence which, if incurred by the individual, would be allow-
able as a deduction under section 162(a)."
102 STAT. 3350 PUBLIC LAW 100-647—NOV. 10, 1988
(c) AMENDMENT RELATED TO SECTION 111 OF THE REFORM ACT.—
Paragraph (3) of section 32(i) of the 1986 Code is amended to read as
follows:
"(3) ROUNDING.—If any dollar amount after being increased
under paragraph (1) is not a multiple of $10, such dollar amount
shall be rounded to the nearest multiple of $10 (or, if such dollar
amount is a multiple of $5, such dollar amount shall be in-
creased to the next higher multiple of $10)."
Fellowships and (d) AMENDMENTS RELATED TO SECTION 123 OF THE REFORM ACT.—
scholarships. dXA) Clause (ii) of section 4941(dX2XG) of the 1986 Code is
Schools and amended to read as follows:
colleges.
"(ii) scholarships and fellowship grants which would
be subject to the provisions of section 117(a) (as in effect
on the day before the date of the enactment of the Tax
Reform Act of 1986) and are to be used for study at an
educational organization described in section
170(bXlXAXii),".
(B) Paragraph (1) of section 4945(g) of the 1986 Code is
amended to read £is follows:
"(1) the grant constitutes a scholarship or fellowship grant
which would be subject to the provisions of section 117(a) (as in
effect on the day before the date of the enactment of the Tax
Reform Act of 1986) and is to be used for study at an educational
organization described in section 170(bXl)(AXii),".
Aliens. (2XA) The second sentence of section 1441(b) of the 1986 Code
is amended to read as follows: "The items of income referred to
in subsection (a) from which tax shall be deducted and withheld
at the rate of 14 percent are amounts which are received by a
nonresident alien individual who is temporarily present in the
United States as a nonimmigrgmt under subparagraph (F), (J),
or (M) of section 101(a)(15) of the Immigration and Nationsility
Act and which are—
"(1) incident to a qualified scholarship to which section 117(a)
applies, but only to the extent includible in gross income; or
"(2) in the case of an individual who is not a candidate for a
degree at an educational organization described in
170(bXlXAXii), granted by—
"(A) an organization described in section 501(cX3) which
is exempt from tax under section 501(a),
"(B) a foreign government,
"(C) an international organization, or a binational or
multinational educational and cultural foundation or
commission created or continued pursuant to the Mutual
Educational and Cultural Exchange Act of 1961, or
"(D) the United States, or an instrumentality or agency
thereof, or a State, or a possession of the United States,
or any political subdivision thereof, or the District of
Columbia,
as a scholarship or fellowship for study, training, or research in
the United States."
(B) Subsection (c) of section 871 of the 1986 Code is amended—
(i) by striking out "section 1441(bXl) or (2)" and inserting
in lieu thereof "the second sentence of section 1441(b)"; and
(ii) by striking out "(F) or (J)" each place it appears and
inserting in lieu thereof "(F), (J), or (M)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3351
(C) The following provisions of the 1986 Code are each
amended by striking out "(F) or (J)" each place it appears and
inserting in lieu thereof "(F), (J), or (M)":
(i) Section 3121(bX19).
(ii) Section 3231(eXl).
(iii) Section 3306(cX19).
(D) Clause (iXD of section 7701(bX5XD) of the 1986 Code is
amended by striking out "subparagraph (F)" and inserting in
lieu thereof "subparagraph (F) or (M)".
(E) Section 210(aX19) of the Social Security Act is amended by 42 USC 410.
striking out "(F) or (J)" each place it appears and inserting in
lieu thereof "(F), (J), or (M)".
(e) AMENDMENT RELATED TO SECTION 131 OF THE REFORM ACT.—
Subsection (f) of section 86 of the 1986 Code is amended by inserting
"and" at the end of paragraph (3), by striking out paragraph (4), and
by redesignating paragraph (5) as paragraph (4).
(f) AMENDMENTS RELATED TO SECTION 132 OF THE REFORM ACT.—
(1) Section 67 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(f) COORDINATION WITH OTHER LIMITATION.—This section shall be
applied before the application of the dollar limitation of the last
sentence of section 162(a) (relating to trade or business expenses)."
(2) Paragraph (4) of section 67(b) of the 1986 Code is
amended—
(A) by striking out "deduction" and inserting in lieu
thereof "deductions", and
(B) by inserting before the comma at the end thereof "and
section 642(c) (relating to deduction for amounts paid or
permanently set aside for a charitable purpose)".
(3) Subsection (e) of section 67 of the 1986 (Dode is amended to
read as follows:
"(e) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ES-
TATES AND TRUSTS.—For purposes of this section, the adjusted gross
income of an estate or trust shall be computed in the same manner
as in the case of an individual, except that—
"(1) the deductions for costs which are paid or incurred in
connection with the administration of the estate or trust and
which would not have been incurred if the property were not
held in such trust or estate, and
"(2) the deductions allowable under sections 642(b), 651, and
661,
shall be treated as allowable in arriving at adjusted gross income.
Under regulations, appropriate adjustments shall be made in the
application of part I of subchapter J of this chapter to take into
account the provisions of this section."
(4) Subsection (c) of section 67 of the 1986 Code is amended by
striking out the last sentence and inserting in lieu thereof the
following: "The preceding sentence shall not apply—
"(1) with respect to cooperatives and real estate investment
trusts, and
"(2) except as provided in regulations, with respect to estates
and trusts.
(g) AMENDMENTS RELATED TO SECTION 142 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 274(nX2) of the 1986 Code is
amended to read as follows:
"(A) such expense is described in paragraph (2), (3), (4), (7),
(8), or (9) of subsection (e),".
102 STAT. 3352 PUBLIC LAW 100-647—NOV. 10, 1988
(2) Paragraph (2) of section 274(k) of the 1986 Code is amended
to read as follows:
"(2) EXCEPTIONS.—Paragraph (1) shall not apply to—
"(A) any expense described in paragraph (2), (3), (4), (7),
(8), or (9) of subsection (e), and
"(B) any other expense to the extent provided in regula-
tions."
(3) Clause (ii) of section 274(m)(l)(B) of the 1986 Code is
amended to read as follows:
"(ii) any expense described in paragraph (2), (3), (4),
(7), (8), or (9) of subsection (e).".
(4XA) Paragraph (2) of section 274(n) of the 1986 Code is
amended—
(i) by striking "or" at the end of subparagraph (C),
(ii) by striking the period at the end of subparagraph (D)
and inserting ", or", and
(iii) by adding at the end thereof the following:
"(E) in the case of an employer who pays or reimburses
moving expenses of an employee, such expenses are includ-
ible in the income of the employee under section 82.
In the case of the employee, the exception of subparagraph (A)
shall not apply to expenses described in subparagraph (E)."
(B) The following provisions of the 1986 C!ode are each
amended by striking out "section 217" and inserting in lieu
thereof "section 217 (determined without regard to section
274(n))":
(i) Section 3121(a)(ll).
(ii) Section 3306(b)(9).
(iii) Section 3401(a)(15).
42 use 409. (C) Section 209(k) of the Social Security Act is amended bv
striking out "section 217 of the Internal Revenue Code of 1954 '
and inserting in lieu thereof "section 217 of the Internal Reve-
nue Code of 1986 (determined without regard to section 274(n) of
such Code)".
(5) Paragraphs (1) and (2) of section 274(h) of the 1986 Code are
each amended by striking out "trade or business that" and
inserting in lieu thereof "trade or business and that".
Housing. (h) AMENDMENTS RELATED TO SECTION 143 OF THE REFORM ACT.—
(1) Paragraph (5) of section 280A(c) of the 1986 Code
amended by adding at the end thereof the following new sen-
tence: "Any amount taken into account for any taxable year
under the preceding sentence shall be subject to the limitation
of the 1st sentence of this paragraph whether or not the dwell-
ing unit is used as a residence during such taxable year."
(2) Clause (ii) of section 280A(c)(5XB) of the 1986 Code is
amended by striking out "trade or business" and inserting
lieu thereof "trade or business (or rental activity)".
(3) Section 183(e)(2) of the 1986 Code is amended by striking
out "2" and inserting in lieu thereof "3 (or 2 if applicable)'.
SEC. 1002. AMENDMENTS RELATED TO TITLE II OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 201 OF THE REFORM A C T . -
(1) Subsection (d) of section 1250 of the 1986 Code is amended
by striking out paragraph (11).
26 use 7701. (2) Subparagraph (B) of section 201(dX14) of the Reform Act is
amended by striking out "section 168(cX2XF)" and inserting in
lieu thereof "within the meaning of section 168(cX2XF)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3353
(3) Paragraph (4) of section 312(k) of the 1986 Code is amended
by striking out "paragraphs (1) and (3)" and inserting in lieu
thereof "paragraph (1) \
(4) Paragraph (4) of section 46(e) of the 1986 Code is
amended—
(A) by striking out "168(jX6)" in subparagraph (B) and
inserting in lieu thereof "168(iX3)",
(B) by striking out "paragraphs (8) and (9) of section
168(j)" in subparagraph (D) and inserting in lieu thereof
"paragraphs (5) and (6) of section 168(h)",
(C) by striking out "1680*)" in subparagraph (E) and
inserting in lieu thereof "168(h)", and
(D) by striking out "168(j)(4)" in subparagraph (E) and
inserting in lieu thereof "168(hX2)".
(5) Clause (i) of section 168(dX3XA) of the 1986 Code is
amended by striking out "and which are".
(6XA) Subparagraph (B) of section 168(0(5) of the 1986 Code is
amended—
(i) by striking out "1st full taxable year" in clause (ii) and
inserting in lieu thereof "1st taxable year", and
(ii) by striking out "or" at the end of clause (i), by striking
out the period at the end of clause (ii) and inserting in lieu
thereof ", or", and by adding at the end thereof the follow-
ing new clause:
"(iii) any property to which this section (as amended
by the Tax Reform Act of 1986) applied in the hands of
the transferor."
(B) Paragraph (5) of section 168(f) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(C) SPECIAL RULE.—In the case of any property to which
this section would apply but for this paragraph, the depre-
ciation deduction under section 167 shall be determined
under the provisions of this section as in effect before the
amendments made by section 201 of the Tax Reform Act of
1986."
(7XA) Subparagraph (A) of section 168(iX7) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "In any case where this section as in effect before the
amendments made by section 201 of the Tax Reform Act of 1986
applied to the property in the hands of the transferor, the
reference in the preceding sentence to this section shall be
treated as a reference to this section as so in effect."
(B) Subparagraph (B) of section 168(iX7) of the 1986 Code is
amended to read as follows:
"(B) TRANSACTIONS COVERED.—The transactions described
in this subparagraph are—
"(i) any transaction described in section 332, 351, 361,
371(a), 374(a), 721, or 731, and
"(ii) any transaction between members of the same
afBliated group during any taxable year for which a
consolidated return is made by such group.
Subparagraph (A) shall not apply in the C£ise of a termi-
nation of a partnership under section 708(bXlXB)."
(C) Subparagraph (D) of section 168(iX7) of the 1986 Code is
(8) Subparagraph (B) of section 168(hX2) of the 1986 Code is
amended to read as follows:
102 STAT. 3354 PUBLIC LAW 100-647—NOV. 10, 1988
"(B) EXCEPTION FOR CERTAIN PROPERTY SUBJECT TO UNITED
STATES TAX AND USED BY FOREIGN PERSON OR ENTITY.—
Clause (iii) of subparagraph (A) shall not apply with respect
to any property if more than 50 percent of the gross income
for the taxable year derived by the foreign person or entity
from the use of such property is—
"(i) subject to tax under this chapter, or
"(ii) included under section 951 in the gross income of
a United States shareholder for the taxable year with
or within which ends the taxable year of the controlled
foreign corporation in which such income was derived.
For purposes of the preceding sentence, any exclusion or
exemption shall not apply for purposes of determining the
amount of the gross income so derived, but shall apply for
purposes of determining the portion of such gross income
subject to tax under this chapter."
(9) Subsection (a) of section 178 of the 1986 Code is amended
by striking out "the deduction allowable to a lessee of a lease for
any taxable year for amortization under section 167, 169, 179,
185, 190, 193, or 194" and inserting in lieu thereof "the deduc-
tion allowable to a lessee for exhaustion, wear and tear, obsoles-
cence, or amortization".
(10) Subparagraph (A) of section 280F(dX3) of the 1986 Code is
amended by striking out "any recovery deduction" and insert-
ing in lieu thereof "any depreciation deduction".
(IIXA) Paragraph (2) of section 1680^) of the 1986 Code is
amended to read as follows:
"(2) 1 5 0 PERCENT DECUNING BALANCE METHOD IN CERTAIN
CASES.—Paragraph (1) shall be applied by substituting '150 per-
cent' for '200 percent' in the case of—
"(A) any 15-year or 20-year property, or
"(B) any property (other than property described in para-
graph (3)) with respect to which the taxpayer elects under
paragraph (5) to have the provisions of this paragraph
apply."
(B) Paragraph (5) of section 168(b) of the 1986 Code is amended
by striking out "under paragraph (3XC)" and inserting in lieu
thereof "under paragraph (2XB) or (3XC)".
(C) Subsection (c) of section 168 of the 1986 Code is amended to
read as follows:
"(c) APPLICABLE RECOVERY PERIOD.—For purposes of this section—
"(1) I N GENERAL.—Except as provided in paragraph (2), the
applicable recovery period shall be determined in accordance
with the following table:
The applicable
"In the case of: recovery period is:
3-year property 3 years
5-year property 5 years
7-year property 7 years
10-year property 10 years
15-year property 15 years
20-year property 20 years
Residential rental property 27.5 years
Nonresidential real property 31.5 years.
"(2) PROPERTY FOR W H I C H 1 5 0 PERCENT METHOD ELECTED.—In
the case of property to which an election under subsection
(bX2XB) applies, the applicable recovery period shall be deter-
mined under the table contained in subsection (gX2XC)."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3355
(12) Clause (i) of section 56(aXlXC) of the 1986 Code is
amended by striking out "do not apply" and inserting in lieu
thereof "do not apply by reason of section 203, 204, or 251(d) of
such Act"
(13) The heading of paragraph (24) of section 381(c) of the 1986
Code is amended by striking out "RECOVERY ALLOWANCE FOR
RECOVERY PROPERTY" and inserting in lieu thereof "DEPRECIA-
TION DEDUCTION".
(14) Paragraph (5) of section 48(a) of the 1986 Code is
amended—
(A) by striking out "168(jX4)(C)" and inserting in lieu
thereof "168(hX2XC)",
(B) by striking out "168(jX4XAXiii)" and inserting in lieu
thereof "168(hX2XAXiii)",
(C) by striking out "168(jX4XB)" and inserting in lieu
thereof "168(hX2XB)",
(D) by striking out "168(jX6)" and inserting in lieu thereof
"168(i)(3)",
(E) by striking out "168(jX3XCXii)" and inserting in lieu
thereof "168(hXl)(CXii)",
(F) by striking out "paragraphs (8) and (9) of section
168(j)" and inserting in lieu thereof "paragraphs (5) and (6)
of section 168(h)", and
(G) by striking out subparagraph (E) and inserting in lieu
thereof the following:
"(E) CROSS REFERENCE.—
"For provision providing special rules for the application of this
paragraph and paragraph (4), see section 168(h)."
(15) The last sentence of section 46(eX3) of the 1986 Code is
amended—
(A) by striking out "recovery property (within the mean-
ing of section 168)" and inserting in lieu thereof "property
to which section 168 applies",
(B) by striking out "present class life" and inserting in
lieu thereof "class life", and
(C) by striking out "168(gX2)" and inserting in lieu thereof
"168(iXl)".
(16XA) Subsection (s) of section 48 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(9) TERMINATION.—This subsection shall not apply to any
property placed in service after December 31, 1985, unless such
property is transition property (as defined in section 49(eXl))."
(B) Paragraph (4) of section 168(f) of the 1986 Code is amended
to read as follows:
"(4) SOUND RECORDINGS.—Any works which result from the
fixation of a series of musical, spoken, or other sounds, regard-
less of the nature of the material (such as discs, tapes, or other
phonorecordings) in which such sounds are embodied."
(17) Paragraph (7) of section 46(c) of the 1986 Code is
amended—
(A) by striking out "recovery property" and inserting in
lieu thereof "property to which section 168 applies",
(B) by striking out "168(c)" each place it appears and
inserting in lieu thereof "168(e)",
19-194 O—91—Part 4 13 i QL 8
102 STAT. 3356 PUBLIC LAW 100-647—NOV. 10, 1988
(C) by striking out "168(£X3XB)" and inserting in lieu
thereof "168(fX3XB) (as in effect on the day before the date
of the enactment of the Tax Reform Act of 1986)", and
(D) by striking out "RECOVERY PROPERTY" in the para-
graph heading and inserting in lieu thereof "PROPERTY TO
WHICH SECTION 168 APPLIES".
(18) Paragraph (1) of section 47(d) of the 1986 Code is amended
by striking out "section 48(cX8XC)" and inserting in lieu thereof
"section 46(cX8XC)".
(19) Paragraph (1) of section 179(d) of the 1986 Code is amend-
ed by striking out "recovery property" and inserting in lieu
thereof "tangible property (to which section 168 applies)".
(20) Section 48 of the 1986 Code is amended by redesignating
the subsection (s) relating to cross references as subsection (t).
(21) Clause (v) of section 168(eX3XB) of the 1986 Code is
amended by striking out "any property" and inserting in lieu
thereof "any section 1245 property".
(22) The last sentence of section 167(1X3)(G) of the 1986 Code is
amended by striking out "section 168(e)(3XC)" and inserting in
lieu thereof "section 168(iX9)(B)".
(23)(A) Subparagraph (B) of section 168(dX3) of the 1986 Code
is amended to read as follows:
"(B) CERTAIN PROPERTY NOT TAKEN INTO ACCOUNT.—For
purposes of subparagraph (A), there shall not be taken into
account—
"(i) any nonresidential real property and residential
rental property, and
"(ii) any other property placed in service and dis-
posed of during the same taxable year."
26 use 168 note. (B) Clause (ii) of section 168(dX3XB) of the 1986 Code (as added
by subparagraph (A)) shall apply to taxable years beginning
after March 31, 1988, unless the taxpayer elects, at such time
and in such manner as the Secretary of the Treasury or his
delegate may prescribe, to have such clause apply to taxable
years beginning on or before such date.
(24) Subsection (a) of section 167 of the 1986 Code is amended
by striking out the last sentence.
(25) Subparagraph (B) of section 46(dXl) of the 1986 Code is
amended—
(A) by striking out "recovery property (within the mean-
ing of section 168)" in clause (i) and inserting in lieu thereof
"property to which section 168 applies", and
(B) by striking out "which is not recovery property
(within the meaning of section 168)" in clause (ii) and
inserting in lieu thereof "to which section 168 does not
apply".
(26XA) Subparagraph (E) of section 47(aX5) of the 1986 Code is
amended by adding at the end thereof the following new clause:
"(v) TREATMENT AS RECOVERY PROPERTY.—Any ref-
erence in this paragraph to recovery property shall be
treated as including a reference to any property to
which section 168 (as amended by the Tax Reform Act
of 1986) applies."
(B) Subparagraph (D) of section 47(aX5) of the 1986 Code is
amended by striking out the last sentence.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3357
(C) Clause (iii) of section 47(aX5XE) of the 1986 Code is amend-
ed by striking out "section 168(c)" and inserting in lieu thereof
"section 168(e)".
(27) Subparagraph (A) of section 47(aX9) of the 1986 Code is
amended by striking out "section 168(j)(4)(C)" and inserting in
lieu thereof "section 168(hX2)".
(28) Clause (i) of section 47(dX3XC) of the 1986 Code is
amended—
(A) by striking out "present class life (as defined in
section 168(gX2)) and inserting in lieu thereof "class life (as
defined in section 168(iXl))", and
(B) by striking out "no present class life" and inserting in
lieu thereof "no class life'.
(29) Paragraph (1) of section 48(a) of the 1986 CJode is amended
by striking out "recovery property (within the meaning of
section 168)" in the material following subparagraph (G) and
inserting in lieu thereof "property to which section 168 applies".
(30) Subparagraph (C) of section 48(1X2) of the 1986 Code is
amended by striking out "which is recovery property (within
the meaning of section 168)" and inserting in lieu thereof "to
which section 168 applies".
(31) Subsection (d) of section 167 of the 1986 Code is amended
by striking out "recoverv property defined in section 168" and
inserting in lieu thereof property to which section 168 applies".
(b) AMENDMENTS RELATED TO SECTION 202 OF THE REFORM ACT.—
(1) Paragraph (3) of section 179(b) of the 1986 Code is amended
to read as follows:
"(3) LIMITATION BASED ON INCOME FROM TRADE OR BUSINESS.—
"(A) I N GENERAL.—The amount allowed as a deduction
under subsection (a) for any taxable year (determined after
the application of paragraphs (1) and (2)) shall not exceed
the aggregate amount of taxable income of the taxpayer for
such taxable year which is derived from the active conduct
by the taxpayer of any trade or business during such tax-
able year.
"(B) CARRYOVER OF DISALLOWED DEDUCTION.—The amount
allowable as a deduction under subsection (a) for any tax-
able year shall be increased by the lesser of—
"(i) the aggregate amount disallowed under subpara-
graph (A) for all prior taxable years (to the extent not
previously allowed as a deduction by reason of this
subparagraph), or
"(ii) the excess (if any) of—-
"(I) the limitation of paragraphs (1) and (2) (or if
lesser, the aggregate amount of taxable income
referred to in subparagraph (A)), over
"(II) the amount allowable as a deduction under
subsection (a) for such taxable year without regard
to this subparagraph.
"(C) COMPUTATION OF TAXABLE INCOME.—For purposes of
this paragraph, taxable income derived from the conduct of
a trade or business shall be computed without regard to the
deduction allowable under this section."
(2) Paragraph (1) of section 280F(d) of the 1986 Code is
amended by striking out "subsections (a) and (b)" and inserting
in lieu thereof "subsections (a) and (b), and the limitation of
paragraph (3) of this subsection,".
102 STAT. 3358 PUBLIC LAW 100-647—NOV. 10, 1988
Real property. (c) AMENDMENTS RELATED TO SECTION 2 0 3 OF THE REFORM ACT.—
26 use 168 note. (1) Subparagraph (B) of section 203(aXl) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "No election may be made under this subparagraph with
respect to property to which section 168 of the Internal Revenue
Code of 1986 would not apply by reason of section 168(f)(5) of
such Code if such property were placed in service after Decem-
ber 31,1986."
(2) Subsection (d) of section 203 of the Reform Act is
amended—
(A) by striking out "the case of any taxable year" and
inserting in lieu thereof "the case of any taxable year
beginning before October 1,1987", and
(B) by adding at the end thereof the following new sen-
tence: "The preceding sentence shall only apply to property
which would be taken into account if such amendments did
apply."
26USCl68note. (3) Notwithstanding section 203 of the Reform Act, the
amendments made by section 201 of the Reform Act shall apply
to any real property which was acquired before January 1,1987,
and was converted on or after such date from personal use to a
use for which depreciation is allowable.
(4) Paragraph (1) of section 203(b) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence:
"For purposes of this paragraph, all members of the same
affiliated group of corporations (within the meaning of section
1504 of the Internal Revenue Code of 1986) filing a consolidated
return shall be treated as one taxpayer."
(5) Paragraph (1) of section 203(c) of the Reform Act is
amended by striking out "Subparagraph" and inserting in lieu
thereof "Except as otherwise provided in this subsection or
section 204, subparagraph".
(6) Clause (i) of section 203(bX2XC) of the Reform Act is
amended by striking out "shall be the class life" and inserting
in lieu thereof "applies shall be the class life".
(7) Paragraph (3) of section 203(b) of the Reform Act is
amended—
(A) by inserting before the comma at the end of subpara-
graph (A) "(or would have met such requirements if placed
in service by such person)", and
(B) by inserting ", or is leased to such person," before
"not later than".
(8) Paragraph (2) of section 203(a) of the Reform Act is
amended to read as follows:
"(2) SECTION 202.—
"(A) IN GENERAL.—The amendments made by section 202
shall apply to property placed in service after December 31,
1986, in taxable years ending after such date.
"(B) SPECIAL RULE FOR FISCAL YEARS INCLUDING JANUARY
1, 1987.—In the case of any taxable year (other than a
calendar year) which includes January 1, 1987, for purposes
of applying the amendments made by section 202 to prop-
erty placed in service during such taxable year and after
December 31,1986—
"(i) the limitation of section 179(bXl) of the Internal
Revenue Code of 1986 (as amended by section 202) shall
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3359
be reduced by the aggregate deduction under section
179 (as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986) for section
179 property placed in service during such taxable year
and before January 1,1987,
"(ii) the limitation of section 179(b)(2) of such Code (as
so amended) shall be applied by taking into account the
cost of all section 179 property placed in service during
such taxable year, and
"(iii) the limitation of section 179(b)(3) of such Code
shall be applied by taking into account the taxable
income for the entire taxable year reduced by the
amount of any deduction under section 179 of such
Code for property placed in service during such taxable
year and before January 1,1987."
(d) AMENDMENTS RELATED TO SECTION 204 OF THE REFORM ACT.—
(1) Subparagraph (B) of section 204(a)(1) of the Reform Act is 26 use 168 note.
amended by striking out "and" at the end of clause (ii), by
striking out the period at the end of clause (iii) and inserting in
lieu thereof ", and", and by inserting after clause (iii) the
following new clause:
"(iv) described in subparagraph (F) or (H)."
(2) Subparagraph (C) of section 204(a)(1) of the Reform Act is
amended by striking out the last sentence and inserting in lieu
thereof the following:
"For purposes of this subparagraph, section 203(bX2) shall
be applied by substituting 'January 1, 1994' for 'January 1,
1991 each place it appears."
(3) Subparagraph (E) of section 204(aXl) of the Reform Act is
amended by striking out the last sentence and inserting in lieu
thereof the following: "For purposes of this subparagraph, sec-
tion 203(b)(2) shall be applied by substituting 'January 1, 1998'
for 'January 1,1991' each place it appears."
(4) Subparagraph (F) of section 204(a)(1) of the Reform Act is
amended—
(A) by striking out "paragraph" and inserting in lieu
thereof "subparagraph",
(B) by striking out ", or" at the end of clause (iii) and
inserting in lieu thereof a period, and
(C) by striking out so much of clause (iv) as precedes
subclause (I) thereof and inserting in lieu thereof the
following:
"A project is also described in this subparagraph if it is a
mixed-use development which is—".
(5) The last sentence of section 204(a)(1)(F) of the Reform Act
is amended—
(A) by striking out "subsection (b)(2)" and inserting in
lieu thereof "section 203(b)(2)", and
(B) by striking out "1993" and inserting in lieu thereof
"1998".
(6) Subparagraph (H) of section 204(aXl) of the Reform Act is
amended by striking out "July 1, 1986" and inserting in lieu
thereof "June 30,1986".
(7XA) Paragraph (4) of section 204(a) of the Reform Act is
amended to read as follows:
"(4) PROPERTY TREATED UNDER PRIOR TAX ACTS.—The amend-
ments made by section 201 shall not apply—
102 STAT. 3360 PUBLIC LAW 100-647—NOV. 10, 1988
"(A) to property described in section 12(c)(2) (as amended
by the Technical and Miscellaneous Revenue Act of 1988),
31(g)(5), or 31(g)(17)(J) of the Tax Reform Act of 1984,
"(B) to property described in section 209(d)(lXB) of the
Tax Equity and Fiscal Responsibility Act of 1982, as amend-
ed by the Tax Reform Act of 1984, and
"(C) to property described in section 216(b)(3) of the Tax
Equity and Fiscal Responsibility Act of 1982."
(B) Paragraph (2) of section 12(c) of the Tax Reform Act of
26 use 168 note. 1984 is amended by striking out "which is placed in service
before January 1,1988".
26 use 168 note. (8) Subparagraph (K) of section 204(a)(5) of the Reform Act is
amended—
(A) by striking out "either" in the matter preceding
clause (i),
(B) by striking out "super calendar" in clause (i) and
inserting in lieu thereof "supercalendered",
(C) by striking out "were incurred" in clause (i) and
inserting in lieu thereof "was incurred", and
(D) by inserting "the project" before "involves" in clause
(v).
(9) Paragraph (5) of section 204(a) of the Reform Act is
amended by adding at the end thereof the following new
subparagraph:
"(Z) A project is described in this subparagraph if—
eommunications "(i) such project involves a fiber optic network of at
and tele- least 475 miles, passing through Minnesota and
communications. Wisconsin; and
Minnesota.
Wisconsin. "(ii) before January 1, 1986, at least $15,000,000 was
expended or committed for electronic equipment or
fiber optic cable to be used in constructing the
network."
(10)(A) Paragraph (8) of section 204(a) of the Reform Act is
amended by striking out the period at the end of subparagraph
(C) and inserting in lieu thereof a comma, and by adding at the
end thereof the following new subparagraphs:
Tennessee. "(D) a bond volume carryforward election was made for
the facility and the facility is for Chattanooga, Knoxville, or
Kingsport, Tennessee, or
Massachusetts. "(E) such facility is to serve Haverhill, Massachusetts."
(B) Paragraph (8) of section 204(a) of the Reform Act is
amended by striking out ", and section 203(c),".
(11) Paragraph (10) of section 204(a) of the Reform Act is
amended—
(A) by striking out "either" in the material preceding
subparagraph (A),
South earolina. (B) by striking out "wastewater treatment facility" in
subparagraph (C) and inserting in lieu thereof "wastewater
treatment facility serving Greenville, South Carolina", and
(C) by striking out "the letter of intent and service agree-
ment described in subparagraph (AX2) of this paragraph" in
subparagraph (D) and inserting in lieu thereof "such letter
of intent and service agreement".
(12) Paragraph (11) of section 204(a) of the Reform Act is
amended—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3361
(A) by striking out "Kansas, Florida, Georgia, or Texas"
in subparagraph (A) and inserting in lieu thereof "the
United States",
(B) by striking out "the purchase" in subparagraph (C)
and inserting in lieu thereof "the purchaser", and
(C) by striking out the last sentence.
(13) Paragraph (14) of section 204(a) of the Reform Act is 26 u s e 168 note.
amended by striking out the period at the end of subparagraph
(E) and inserting in lieu thereof a comma, and by inserting after
subparagraph (E) the following:
"(F) the project has a planned scheduled capacity of Energy.
approximately 38,000 kilowatts, the project property is Massachusetts.
placed in service before January 1, 1991, and the project is Utilities.
operated, established, or constructed pursuant to certain
agreements, the negotiation of which began before 1986,
with public or municipal utilities conducting business in
Massachusetts, or
"(G) the Board of Regents of Oklahoma State University Oklahoma.
took official action on July 25, 1986, with respect to the
project.
In the case of the project described in subparagraph (F), section
203(b)(2)(A) shall be applied by substituting 'January 1, 1991' for
'January 1,1989'."
(14) Paragraph (15) of section 204(a) of the Reform Act is
amended—
(A) by adding "located in New Mexico" after "to a New Mexico,
project",
(B) by striking out "$72,000" and inserting in lieu thereof
"$72,000,000", and
(C) by striking out the last sentence and inserting in lieu
thereof the following:
"For purposes of this paragraph, section 2030t>X2) shall be ap-
plied by substituting 'January 1,1996' for 'January 1,1991' each
place it appears."
(15) Paragraph (24) of section 204(a) of the Reform Act is
amended by adding at the end thereof the following new sub-
paragraphs:
"(E) The amendments made by section 201 shall not apply
to the Muskegon, Michigan, Cross-Lake Ferry project
having a projected cost of approximately $7,200,000.
"(F) The amendments made by section 201 shall not apply
to a new automobile carrier vessel, the contract price for
which is no greater than $28,000,000, and which will be
constructed for and placed in service by OSG Car Carriers,
Inc., to transport, under the United States flag and with an
American crew, foreign automobiles to North America in a
case where negotiations for such transportation arrange-
ments commenced in 1985, and definitive transportation
contracts were awarded before June 1986."
(16) Paragraph (25) of section 204(a) of the Reform Act is
amended by striking out "wood energy products" and inserting
in lieu thereof "wood energy projects'.
(17) Paragraph (27) of section 204(a) of the Reform Act is
amended—
(A) in subparagraph (B), by striking out "525,000" and
inserting in lieu thereof "540,000",
(B) in subparagraph (C)—
102 STAT. 3362 PUBLIC LAW 100-647—NOV. 10, 1988
(i) by striking out "$32,000,000" and inserting in lieu
thereof "$22,000,000", and
(ii) by striking out "before" and inserting in lieu
thereof "on",
(C) in subparagraph (D), by striking out "and 7th
Avenue", and
(D) in subparagraph (H), by striking out "$62,000" and
inserting in lieu thereof "$62,600,000".
26 u s e 168 note. (18) Paragraph (27) of section 204(a) of the Reform Act is
amended by adding at the end thereof the following:
"(I) A 600,000 square foot mixed use building known as
Flushing Center with respect to which a letter of intent was
executed on March 26, 1986.
In the case of the building described in subparagraph (I), section
203(bX2XA) shall be applied by substituting 'January 1,1993' for
the applicable date which would otherwise apply."
(19) Paragraph (31) of section 204(a) of the Reform Act is
amended by striking out "$10,200,000" and inserting in lieu
thereof "$10,500,000"
(20) Paragraph (32) of section 204(a) of the Reform Act is
amended—
(A) in subparagraph (A)—
(i) by striking out "July 30, 1984" and inserting in
lieu thereof "December 26,1985",
(ii) by striking out "February 28, 1985" and inserting
in lieu thereof '^July 2,1986", and
(iii) by striking out "on June 17, 1985" and inserting
in lieu thereof "in May 1985",
(B) in subparagraph (B)—
(i) by striking out "August 30, 1984" and inserting in
lieu thereof "December 26,1985",
(ii) by striking out "May 4, 1985" and inserting in
lieu thereof "July 2,1986", and
(iii) by striking out "on July 3,1985" and inserting in
lieu thereof "in July 1985",
(C) in subparagraph (E)—
(i) by striking out "$2,200,000" and inserting in lieu
thereof "$5,000,000",
(ii) by striking out "on January 27, 1986" and insert-
ing "in 1986", and
Pennsylvania. (iii) by inserting "in Masontown, Pennsylvania,"
after "plant",
(D) by amending subparagraph (K) to read as follows:
Energy. "(K) A 250 megawatt coal-fired electric plant in north-
Nevada.
eastern Nevada estimated to cost $600,000,000 and known
as the Thousand Springs project, on which the Sierra Pa-
cific Power Company, a subsidiary of Sierra Pacific Re-
sources, began in 1980 work to design, finance, construct,
and operate (and section 203(bX2) shall be applied with
respect to such plant by substituting 'January 1, 1995' for
'January 1,1991^",
(E) in subparagraph (L), by inserting "in connection with"
after "housing",
(F) by amending subparagraph (M) to read £is follows:
"(M) property which is part of the Kenosha Downtown
Redevelopment Project and which is financed with the
proceeds of bonds issued pursuant to section 1317(6XW),",
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3363
(G) in subparagraph (O), by striking out "New Orleans, Florida.
Louisiana" and inserting in lieu thereof "Pensacola, Flor-
ida", and
(H) in subparagraph (S)—
(i) by inserting "to be" before "placed",
(ii) by inserting "Coal" before "Company",
(iii) by inserting "(or any subsidiary thereof)" after
"Company", and
(iv) by striking out "on December 31, 1985" and
inserting in lieu thereof "by December 31,1985".
(21) Subparagraph (T) of section 204(aX32) of the Reform Act 26 use 168 note,
is amended to read as follows:
"(T) a portion of a fiber optics network placed in service
by LDX NET after December 31, 1988, but only to the
extent the cost of such portion does not exceed
$25,000,000,".
(22) Subparagraph (U) of section 204(aX32) of the Reform Act
is amended by striking out "placed in service" and inserting in
(23) Subparagraph (X) of section 204(aX32) of the Reform Act
is amended by striking out "the home rule city and the State
housing finance agency adopted inducement resolutions on
December 20,1985" and inserting in lieu thereof "the home rule
city on December 4,1985, and the State housing finance agency
on December 20,1985, adopted inducement resolutions".
(24) Subparagraph (C) of paragraph (33) of section 204(a) of the Energy.
Reform Act is amended to read as follows: New Hampshire.
"(CXi) a waste-to-energy project in Derry, New Hamp-
shire, costing approximately $60,000,000, and
"(ii) a waste-to-energy project in Manchester, New Hamp-
shire, costing approximately $60,000,000,".
(25) Paragraph (33) of section 204(a) of the Reform Act is
amended by striking out "and" at the end of subparagraph (J),
by striking out the period at the end of subparsigraph (K) and
inserting in lieu thereof ", and", and by inserting after subpara-
graph (K) the following:
"(L) a cc^eneration facility to be built at a paper company Massachusetts.
in Turners Falls, Massachusetts, with respect to which a
letter of intent was executed on behalf of the paper com-
pany on September 26,1985."
(26) Subsection (a) of section 204 of the Reform Act is amended
by adding at the end thereof the following new paragraphs:
"(34) The amendments made by section 201 shall not apply to
an approximately 240,000 square foot beverage container manu-
facturing plant located in Batesville, Mississippi, or plant equip-
ment used exclusively on the plant premises if—
"(A) a 2-year supply contract was signed by the taxpayer
and a customer on November 1,1985,
"(B) such contract further obligated the customer to pur- /
chase beverage containers for an additional 5-year period if
• physical signs of construction of the plant are present
before September 1986,
"(C) ground clearing for such plant began before August
1986, and
"(D) construction is completed, the equipment is in-
stalled, and operations are commenced before July 1, 1987.
102 STAT. 3364 PUBLIC LAW 100-647—NOV. 10, 1988
"(35) The amendments made by section 201 shall not apply to
any property which is part of the multifamily housing at the
Columbia Point Project in Boston, Massachusetts. A project
shall be treated as not described in the preceding sentence and
as not described in section 252(f)(1)(D) unless such project in-
cludes at substantially all times throughout the compliance
period (within the meaning of section 42(i)(l) of the Internal
Revenue Code of 1986), a facility which provides health services
to the residents of such project for fees commensurate with the
abiUty of such individuals to pay for such services.
"(36) The amendments made by section 201 shall not apply to
any ethanol facility located in Blair, Nebraska, if—
"(A) in July of 1984 an initial binding construction con-
tract was entered into for such facility,
"(B) in June of 1986, certain Department of Energy rec-
ommended contract changes required a change of contrac-
tor, and
"(C) in September of 1986, a new contract to construct
such facility, consistent with such recommended changes,
was entered into.
"(37) The amendments made by section 201 shall not apply to
any property which is part of a sewage treatment facility if,
prior to January 1, 1986, the City of Conyers, Georgia, selected a
privatizer to construct such facility, received a guaranteed
maximum price bid for the construction of such facility, signed
a letter of intent and began substantial negotiations of a service
agreement with respect to such facility.
"(38) The amendments made by section 201 shall not apply
to—
"(A) a $28,000,000 wood resource complex for which
construction was authorized by the Board of Directors on
August 9,1985,
"(B) an electrical cogeneration plant in Bethel, Maine
which is to generate 2 megawatts of electricity from the
burning of wood residues, with respect to which a contract
was entered into on July 10,1984, and with respect to which
$200,000 of the expected $2,000,000 cost had been commit-
ted before June 15,1986,
"(C) a mixed income housing project in Portland, Maine
which is known as the Back Bay Tower and which is
expected to cost $17,300,000,
"(D) the Eastman Place project and office building in
Rochester, New York, which is projected to cost $20,000,000,
with respect to which an inducement resolution was
adopted in December 1986, and for which a binding contract
of $500,000 was entered into on April 30,1986,
"(E) the Marquis Two project in Atlanta, Georgia which
has a total budget of $72,000,000 and the construction phase
of which began under a contract entered into on March 26,
1986,
"(F) a 166-unit continuing care retirement center in New
Orleans, Louisiana, the construction contract for which was
signed on February 12, 1986, and is for a maximum
amount not to exceed $8,500,000,
"(G) the expansion of the capacity of an oil refining
facility in Rosemont, Minnesota from 137,000 to 207,000
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3365
barrels per day which is expected to be completed by
December 31,1990, and
"(H) a project in Ransom, Pennsylvania which will burn
coal waste (known as 'culm') with an approximate cost of
$64,000,000 and for which a certification from the Federal
Energy Regulatory Commission was received on March 11,
1986.
"(39) The amendments made by section 201 shall not apply to
any facility for the manufacture of an improved particle board
if a binding contract to purchase such equipment was executed
March 3, 1986, such equipment will be placed in service by
January 1, 1988, and such facility is located in or near Moncure,
North Carolina."
(27) Subsection (b) of section 204 of the Reform Act is amended 26 USC168 note,
by inserting "(as amended by the Tax Reform Act of 1984)"
immediately before the period at the end thereof.
(28) Subparagraph (A) of section 204(cXl) of the Reform Act is Pennsylvania,
amended by inserting "located in Pennsylvania and" before
"constructed pursuant".
(29) Paragraph (3) of section 204(c) of the Reform Act is
amended—
(A) by striking out "for the applicable date" and inserting
in lieu thereof "(or, in the case of a project described in
subparagraph (B), by substituting 'April 1, 1992') for the
applicable date",
(B) by striking out "before April 1,1986" in subparagraph
(A) and inserting in lieu thereof "on or before April 1,
1986", and
(C) by adding at the end thereof the following:
"In the case of an aircraft described in subparagraph (A),
section 2030t))(lXA) shall be applied by substituting 'April 1,
1986' for 'March 1, 1986' and section 49(eXlXB) of the Internal
Revenue C!ode of 1986 shall not apply."
(30XA) Paragraph (4) of section 204(c) of the Reform Act is
amended by striking out all that precedes subparagraph (L) and
inserting in lieu thereof the following:
"(4) The amendments made by section 201 shall not apply to a
limited amount of the following property or a limited amount of
property set forth in a submission before September 16, 1986, by
the following taxpayers:
"(A) Arena project, Michigan, but only with respect to
$78,000,000 of investments.
"(B) Campbell Soup Company, Pennsylvania, California,
North Carolina, Ohio, Maryland, Florida, Nebraska, Michi-
gan, South Carolina, Texas, New Jersey, and Delaware, but
only with respect to $9,329,000 of regular investment tax
credits.
"(C) The Southeast Overtown/Park West development,
Florida, but only with respect to $200,000,000 of invest-
ments.
"(D) Equipment placed in service and operated by Leggett
and Piatt before July 1, 1987, but only with respect to
$2,000,000 of regular investment tax credits, and subsec-
tions (c) and (d) of section 49 of the Internal Revenue Code
of 1986 shall not apply to such equipment.
"(E) East Bank Housing Project.
102 STAT. 3366 PUBLIC LAW 100-647—NOV. 10, 1988
"(F) $1,561,215 of investments by Standard Telephone
Company.
"(G) Five aircraft placed in service before January 1,
1987, by Presidential Air.
"(H) A rehabilitation project by Ann Arbor Railroad, but
only with respect to $2,900,000 of investments.
"(I) Property that is part of a cogeneration project located
in Ada, Michigan, but only with respect to $30,000,000 of
investments.
"(J) Anchor Store Project, Michigan, but only with re-
spect to $21,000,000 of investments.
"(K) A waste-fired electrical generating facility of Biogen
Power, but only with respect to $34,000,000 of investments."
26 use 168 note. (B) Paragraph (4) of section 204(c) of the Reform Act is
amended by striking out all that follows subparagraph (L) and
inserting in lieu thereof the following:
"(M) Interests of Samuel A. Hardage (whether owned
individually or in partnership form).
"(N) Two aircraft of Mesa Airlines with an aggregate cost
of $5,723,484.
"(O) Yam-spinning equipment used at Spray (Dotton
Mills, but only with respect to $3,000,000 of investments.
"(P) 328 units of low-income housing at Angelus Plaza,
but only with respect to $20,500,000 of investments.
"(Q) One aircraft of 0)ntinental Aviation Services with a
cost of approximately $15,000,000 that was purchased
pursuant to a contract entered into during March of 1983
and that is placed in service by December 31,1988."
(31) Paragraph (29) of section 204(a) of the Reform Act is
amended—
(A) by striking out "January 18" in subparagraph (A) and
inserting in lieu thereof "January 25", and
(B) by striking out "law suits filed on June 22, 1984, and
November 21, 1985" in subparagraph (B) and inserting in
lieu thereof "a law suit filed on October 25,1985".
(32) Subparagraph (J) of section 204(aX33) of the Reform Act,
as amended by paragraph (25), is amended to read as follows:
"(J) A 25.85 megawatt alternative energy facility located
in Deblois, Medne, with respect to which certification by
the Federal Energy Regulatory (Dommission was made on
April 3,1986,".
(33) Paragraph (3) of section 204(c) of the Reform Act is
amended—
(A) by inserting "and" at the end of subparsigraph (B),
(B) by striking out subparagraph (C), and
(C) by redesignating subparagraph (D) as subparagraph
(C).
(34) Subclause (II) of section 204(aX5XJXii) of the Reform Act is
amended to read as follows:
"(II) the Board of Directors of an automobile
manufacturer approved a written plan for the
conversion of existing facilities to produce new
models of a vehicle not currently produced in the
United States, such facilities will be placed in serv-
ice by July 1, 1987, and such Board action occurred
in July 1985 with respect to a $602,000,000 expendi-
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3367
ture, a $438,000,000 expenditure, and a
$321,000,000 expenditure."
(35) Subparagraph (T) of section 204(a)(5) of the Reform Act is
amended to read as follows:
"(T) A project is described in this subparagraph if it is a Alaska,
plant facility on Alaska's North Slope which is placed in
service before January 1,1988, and—
"(i) the approximate cost of which is $675,000,000, of
which approximately $400,000,000 was spent on off-site
construction,
"(ii) the approximate cost of which is $445,000,000, of
which approximately $400,000,000 was spent on off-site
construction and more than 50 percent of the project
cost was spent prior to December 31,1985, or
"(iii) the approximate cost of which is $375,000,000, of
which approximately $260,000,000 was spent on off-site
construction."
(e) AMENDMENTS RELATING TO SECTION 211 OF THE REFORM ACT.—
(1) Paragraph (1) of section 49(d) of the 1986 Code is amended
to read as follows:
"(1) IN GENERAL.—In the case of periods after December 31,
1985, with respect to so much of the credit determined under
section 46(a) with respect to transition property as is attrib-
utable to the regular investment credit (as defined in subsection
(c)(5)(B))-
"(A) paragraphs (1), (2), and (7) of section 48(q) and section
48(d)(5) shall be applied by substituting '100 percent' for '50
percent' each place it appears, and
"(B) sections 48(q)(4) and 196(d) shall not apply."
(2) Subparagraph (B) of section 49(c)(4) of the 1986 Code is
amended to read as follows:
"(B) No CARRYBACK FOR YEARS STRADDLING JULY 1, 1987;
GROSS UP OF CARRYFORWARDS.—In any case to which para-
graph (3) applies—
"(i) the amount of the reduction under paragraph (3)
may not be carried back to any taxable year, but
"(ii) there shall be added to the carryforwards from
the taxable year (before applying paragraph (2)) an
amount equal to the amount which bears the same
ratio to the carryforwards from such taxable year
(determined without regard to this clause) as—
"(I) the applicable percentage, bears to
"(II) 1 minus the applicable percentage."
(3) Clause (i) of section 49(c)(5)(B) of the 1986 Code is amended
to read as follows:
"(i) IN GENERAL.—The term 'regular investment
credit' means the credit determined under section 46(a)
to the extent attributable to the regular percentage."
(4) Paragraph (1) of section 211(e) of the Reform Act is 26USC49note.
amended by adding at the end thereof the following new sen-
tence: "Section 49(c) of the Internal Revenue Code of 1986 (as
added by subsection (a)) shall apply to taxable years ending
after June 30, 1987, and to amounts carried to such taxaole
years."
(5) Paragraph (4)(A) of section 211(e) of the Reform Act is
amended—
102 STAT. 3368 PUBLIC LAW 100-647—NOV. 10, 1988
(A) by striking out "Paragraphs (c) and (d) of section 49 of
the Internal Revenue Code of 1954" and inserting in lieu
thereof "Subsections (c) and (d) of section 49 of the Internal
Revenue Code of 1986", and
(B) by striking out "1935" and inserting in lieu thereof
"1985".
26 use 49 note. (6) Paragraph (4XB) of section 211(e) of the Reform Act is
amended by striking out "shall be treated as transition prop-
erty" and inserting in lieu thereof "shall be treated as transi-
tion property and subsections (c) and (d) of section 49 of such
Code shall not apply to such property".
(7) Paragraph (4) of section 211(e) of the Reform Act is
amended by adding at the end thereof the following new sub-
paragraphs:
Waste disposal. "(C) Any solid waste disposal facility which will process
Minnesota. and incinerate solid waste of one or more public or private
entities including Dakota County, Minnesota, and with re-
spect to which a bond carryforward from 1985 was elected
in an amount equal to $12,500,000 shall be treated as
transition property within the meaning of section 49(e) of
the Internal Revenue Code of 1986.
Maritime affairs. "(D) For purposes of section 49 of such Code, the following
property shall be treated as transition property:
Washington. "(i) 2 catamarans built by a shipbuilder incorporated
in the State of Washington in 1964, the contracts for
which were signed on April 22, 1986 and November 12,
1985, and 1 barge built by such shipbuilder the contract
for which was signed on August 7,1985.
"(ii) 2 large passenger ocean-going United States flag
cruise ships with a passenger rated capacity of up to
250 which are built by the shipbuilder described in
clause (i), which are the first such ships built in the
United States since 1952, and which were designed at
the request of a Pacific Coast cruise line pursuant to a
contract entered into in October 1985. This clause shall
apply only to that portion of the cost of each ship which
does not exceed $40,000,000.
Minnesota. "(iii) Property placed in service during 1986 by Sat-
ellite Industries, Inc., with headquarters in Minneapo-
lis, Minnesota, to the extent that the cost of such
property does not exceed $1,950,000.
"(E) Subsections (c) and (d) of section 49 of such Code shall
not apply to property described in section 204(aX4) of this
Act."
(8XA) Subsection (d) of section 38 is amended to read as
follows:
"(d) ORDERING RULES.—For purposes of sections 46(f), 47(a), 196(a),
and any other provision of this title where it is necessary to as-
certain the extent to which the credits determined under any
section referred to in subsection (b) are used in a taxable year or as a
carryback or carrsrforward—
"(1) I N GENERAL.—The order in which such credits are used
shall be determined on the basis of the order in which they are
listed in subsection (b) as of the close of the taxable year in
which the credit is used.
"(2) COMPONENTS OF INVESTMENT CREDIT.—The order in which
credits attributable to a percentage referred to in section 46(a)
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3369
are used shall be determined on the basis of the order in which
such percentages are listed in section 46(a) as of the close of the
taxable year in which the credit is used.
"(3) CREDITS NO LONGER LISTED.—For purposes of this sub-
section—
"(A) the credit allowable by section 40, as in effect on the
day before the date of the enactment of the Tax Reform Act
of 1984, (relating to expenses of work incentive programs)
and the credit allowable by section 41(a), as in effect on the
day before the date of the enactment of the Tax Reform Act
of 1986, (relating to employee stock ownership credit) shall
be treated as referred to in that order after the last para-
graph of subsection (b), and
"(B) the employee plan percentage (as defined in section
46(a)(2)(E), as in effect on the day before the date of the
enactment of the Tax Reform Act of 1984) shall be treated
as referred to after section 46(a)(2)."
(B) Subparagraph (C) of section 49(c)(5) of the 1986 Code is
hereby repealed.
(C) The amendments made by this paragraph shall apply to 26 USC 38 note,
taxable years beginning after December 31, 1983, and to
carrybacks from such years.
(f) AMENDMENTS RELATED TO SECTION 212 OF THE REFORM ACT.—
(1) Paragraph (2) of section 212(f) of the Reform Act is 26 USC 38 note.
amended by striking out so much of such paragraph as precedes
subparagraph (A) and insert in lieu thereof the following:
"(2) SPECIAL RULE.—In the case of the LTV Corporation, in
lieu of the requirements of paragraph (1)—".
(2) Subclause (I) of section 212(f)(2)(B)(i) of the Reform Act is
amended by striking out "such involvement begins" and insert-
ing in lieu thereof "when the corporation receives the refund".
(3) Subsection (g) of section 212 of the Reform Act is amended
by adding at the end thereof the following new paragraph:
"(3) SPECIAL RULE FOR RESTRUCTURING.—In the case of any
corporation, any restructuring shall not limit, increase, or
otherwise affect the benefits which would have been available
under this section but for such restructuring."
(4) Section 212 of the Reform Act is amended by adding at the
end thereof the following new subsection:
"(h) TENTATIVE REFUNDS.—Rules similar to the rules of section
6425 of the Internal Revenue Code of 1986 shall apply to any
overpayment resulting from the application of this section."
(5) Subparagraph (B) of section 212(g)(2) of the Reform Act is
amended by striking out "determined under" and inserting in
lieu thereof "determined for periods before January 1, 1986,
under".
(6) Section 212(f) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(3) In the case of a qualified corporation, no offset to any
refund under this section may be made by reason of any tax
imposed by section 4971 of the Internal Revenue Code of 1986
(or any interest or penalty attributable to any such tax), and the
date on which any such refund is to be paid shall be determined
without regard to such corporation's status under title 11,
United States Code."
(g) AMENDMENT RELATED TO SECTION 213 OF THE REFORM ACT.—
Subparagraph (B) of section 213(e)(2) of the Reform Act is amended 26 USC 38 note.
102 STAT. 3370 PUBLIC LAW 100-647—NOV. 10, 1988
by striking out "determined under" and inserting in lieu thereof
"determined for periods before January 1,1986, under".
Oi) AMENDMENTS RELATED TO SECTION 231 OF THE REFORM ACT.—
(1) Subsection (g) of section 41 of the 1986 Code is amended by
adding at the end thereof the following new sentence: "If the
amount determined under subsection (a) for any taxable year
exceeds the limitation of the preceding sentence, such amount
may be carried to other taxable years under the rules of section
39; except that the limitation of the preceding sentence shall be
taken into account in lieu of the limitation of section 38(c) in
applying section 39."
(2) Subsection (c) of section 6411 of the 1986 Code is amended
by striking out "unused research credit,".
(3) Section 936(hX5XCXiXIVXc) of the 1986 Code is amended—
(A) by striking out "section 30" and inserting in lieu
thereof "section 41", and
(B) by striking out "section 30(f)" and inserting in lieu
thereof "section 41(0".
(i) AMENDMENTS RELATED TO SECTIONS 241 AND 242 OF THE REFORM
ACT.—
(1) Section 167 of the 1986 Code is amended by redesignating
subsection (r) as subsection (s) and by inserting after subsection
(q) the following new subsection:
"(rj TRADEMARK OR TRADE NAME EXPENDITURES NOT DEPRE-
CIABLE.—
"(1) I N GENERAL.—No depreciation deduction shall be allow-
able under this section (and no depreciation or amortization
deduction shall be allowable under any other provision of this
subtitle) with respect to any trademark or trade name
expenditure.
"(2) TRADEMARK OR TRADE NAME EXPENDITURE.—For purposes
of this subsection, the term 'trademark or trade name expendi-
ture' means any expenditure which is directly connected with
the acquisition, protection, expansion, r^istration (Federal,
State, or foreign), or defense of a trademark or trade name."
(2XA) Paragraph (1) of section 168(c) of the 1986 Code (as
amended by section 102(a) is amended by adding at the end
thereof the following new item:
"Any railroad grading or tunnel bore 50 years."
(BXi) Paragraph (3) of section 168(b) of the 1986 Code is
amended by redesignating subparagraph (C) as subparagraph
(D) and by inserting after subparagraph (B) the following new
subparagraph:
"(C) Any railroad grading or tunnel bore."
(ii) Paragraph (5) of section 168(b) of the 1986 (Dode (as
amended by section 102(a)) is amended by striking out "(3XC)"
and inserting in lieu thereof "(3XD)".
(C) Subsection (e) of section 168 of the 1986 (Dode is amended
by adding at the end thereof the following new paragraph:
"(4) RAILROAD GRADING OR TUNNEL BORE.—The term 'railroad
grading or tunnel bore' means all improvements resulting from
excavations (including tunneling), construction of embank-
ments, clearings, diversions of roads and streams, sodding of
slopes, and from similar work necessary to provide, construct,
reconstruct, alter, protect, improve, replace, or restore a road-
bed or right-of-way for railroad track."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3371
(D) Paragraph (2) of section 168(d) of the 1986 Code is
amended by striking out "and" at the end of subparagraph (A),
by inserting "and" at the end of subparagraph (B), and by
inserting after subparagraph (B) the following new subpara-
graph:
"(C) any railroad grading or tunnel bore,".
(E) Clause (i) of section 168(d)(3)(B) of the 1986 Code (as
amended by section 102(a)) is amended by striking out "and
residential rental property" and inserting in lieu thereof "resi-
dential rental property, and railroad grading or tunnel bore".
(F) The table contained in paragraph (2XC) of section 168(g) of
the 1986 Code is amended by adding at the end thereof the
following new item:
"(iv) Any railroad grading or tunnel bore 50 years."
(G) Subparagraph (E) of section 168(iXl) of the 1986 Code is
amended by adding at the end thereof the following new clause:
"(iii) SPECIAL RULE FOR RAILROAD GRADING OR TUNNEL
BORES.—In the case of any property which is a railroad
grading or tunnel bore—
"(I) such property shall be treated as an assigned
property,
"(II) the recovery period applicable to such property
shall be treated as an assigned item, and
"(III) clause (ii) of subparagraph (D) shall not apply."
(H) The table contained in subparagraph (A) of section
467(eX3) of the 1986 Code is amended by adding at the end
thereof the following new item:
"Any railroad grading or tunnel bore 50 years."
(I) Paragraph (3) of section 1245(a) of the 1986 Code is
amended by striking out "or" at the end of subparagraph (D), by
striking out the period at the end of subparagraph (E), and
inserting in lieu thereof ", or", and by adding at the end thereof
the following new subparagraph:
"(F) any railroad grading or tunnel bore (as defined in section
168(eX4))."
(j) AMENDMENTS RELATED TO SECTION 243 OF THE REFORM ACT.—
(1) Section 243 of the Reform Act (related to deduction of bus 26 USC165 note.
and freight forwarder operating authority) is amended by
redesignating subsection (d) as subsection (e) and by inserting
after subsection (c) the following new subsection:
"(d) APPUCATION OF SECTION 334(bX2).—For purposes of subsec-
tions (a) and (b), the reference to section 334(bX2) in section
266(cX2XAXii) of the Economic Recovery Tax Act of 1981 shall be a
reference to such section £is in effect before its repeal."
(2) The heading of subparagraph (A) of section 243(bX2) of the
Reform Act is amended by striking out "TO BEGIN IN 1987".
(k) AMENDMENTS RELATED TO SECTION 251 OF THE REFORM ACT.—
(1) Paragraph (2XB) of section 251(d) of the Reform Act is 26 USC 46 note.
amended by striking out clause (i) and redesignating clauses (ii)
and (iii) as clauses (i) and (ii), respectively.
(2) Subparagraph (P) of section 251(dX3) of the Reform Act is California.
amended by striking out "San Francisco" and inserting ' lieu
thereof "San Jose, California".
(3) Paragraph (4) of section 251(d) of the Reform Act is
amended—
102 STAT. 3372 PUBLIC LAW 100-647—NOV. 10, 1988
(A) by striking out "Lakeland marbel Arcade" in
subparagraph (K) and inserting in lieu thereof "Marble
Arcade office building",
(B) by striking out "and" at the end of subparagraph (Y),
and
(C) by striking out subparagraph (Z) and inserting in lieu
thereof the following:
State listing. "(Z) the Bigelow-Hartford Carpet Mill in Enfield,
Connecticut,
"(AA) properties abutting 125th street in New York
County from 7th Avenue west to Morningside and the pier
area on the Hudson River at the end of such 125th Street,
"(BB) the City of Los Angeles Central Library project
pursuant to an agreement dated December 28,1983,
"(CO the Warehouse Row project in Chattanooga, Ten-
nessee,
"(DD) any project described in section 204(a)(lXF) of this
Act,
"(EE) the Wood Street Commons project in Pittsburgh,
Pennsylvania,
"(FF) any project described in section 803(d)(6) of this Act,
"(GG) Union Station, Indianapolis, Indiana,
"(HH) the Mattress Factory project in Pittsburgh, Penn-
sylvania,
"(II) Union Station in Providence, Rhode Island,
"(JJ) South Pack Flaza, Asheville, North Carolina,
"(KK) Old Louisville Trust Project, Louisville, Kentucky,
"(LL) Stewarts Rehabilitation Project, Louisville, Ken-
tucky,
"(MM) Bernheim Officenter, Louisville, Kentucky,
"(NN) Springville Mill Project, Rockville, Connecticut,
and
"(00) the D.J. Stewart Company Building, State and
Main Streets, Rockford, Illinois."
26 u s e 46 note. (4) Subsection (d) of section 251 of the Reform Act is amended
by striking out paragraph (6) and inserting in lieu thereof the
following:
"(6) EXPENSING OF REHABILITATION EXPENSES FOR THE
FRANKFORD ARSENAL.—In the case of any expenditures paid or
incurred in connection with improvements (including repairs
and maintenance) of the Frankford Arsenal pursuant to a
contract and partnership agreement during the 8-year period
specified in the contract or agreement, all such expenditures to
be made during the period 1986 through and including 1993
shall—
"(A) be treated as made (and allowable as a deduction)
during 1986,
"(B) be treated as qualified rehabilitation expenditures
made during 1986, and
"(C) be allocated in accordance with the partnership
agreement regardless of when the interest in the partner-
ship was acquired, except that—
"(i) if the taxpayer is not the original holder of such
interest, no person (other than the taxpayer) had
claimed any benefits by reason of this paragraph,
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3373
"(ii) no interest under section 6611 of the 1986 Code
on any refund of income taxes which is solely attrib-
utable to this paragraph shall be paid for the period—
"(I) beginning on the date which is 45 days after
the later of Apnl 15,1987, or the date on which the
' return for such taxes was filed, and
"(H) ending on the date the taxpayer acquired
the interest in the partnership, and
"(iii) if the expenditures to be made under this provi-
sion are not paid or incurred before January 1, 1994,
then the tax imposed by chapter 1 of such Code for the
taxpayer's last taxable year beginning in 1993 shall be
increased by the amount of the tax benefits by reason
of this paragraph which are attributable to the
expenditures not so paid or incurred.
"(7) SPECIAL RULE.—In the case of the rehabilitation of the District of
Willard Hotel in Washington, D.C., section 205(cXlXBXii) of the Columbia.
Tax Equity and Fiscal Responsibility Act of 1982 shall be ap-
plied by substitutmg '1987' for '1986'.'^'
(5) Subparagraph (B) of section 251(dX3) of the Reform Act is 26 u s e 46 note.
amended by striking out "Pontabla" and inserting in lieu
thereof "Pontalba".
(6) Subparagraph (T) of section 251(dX4) of the Reform Act is
amended by striking out "Louisville" and inserting in lieu
thereof "Covington".
(1) AMENDMENTS RELATED TO SECTION 252 OF THE REFORM ACT.— Housing.
dXA) Subparagraph (A) of section 42(bX2) of the 1986 Code Contracts.
is amended by striking out "for the month" and all that follows
and inserting in lieu thereof "for the earlier of—
"(i) the month in which such building is placed in
service, or
"(ii) at the election of the taxpayer—
"(I) the month in which the taxpayer and the
housing credit agency enter into an agreement
with respect to such building (which is binding on
such agency, the taxpayer, and all successors in
interest) as to the housing credit dollar amount to
be allocated to such building, or
"(II) in the case of any building to which subsec-
tion (hX4XB) applies, the month in which the tax-
exempt obligations are issued.
A month may be elected under clause (ii) only if the election
is made not later than the 5th day aJPter the close of such
month. Such an election, once made, shall be irrevocable."
(B) Clause (ii) of section 42(bX2XC) of the 1986 Code is
amended by striking out "the month in which the building was
placed in service" and inserting in lieu thereof "the month
applicable under clause (i) or (ii) of subparagraph (A)".
(2XA) Subparagraph (A) of section 42(cX2) of the 1986 Code Disadvantaged
(defining qualified low-income building) is amended to read as persons.
follows:
"(A) which is part of a qualified low-income housing
project at all times during the period—
"(i) beginning on the 1st day in the compliance period
on which such building is part of such a project, and
"(ii) ending on the last day of the compliance period
with respect to such building, and".
102 STAT. 3374 PUBLIC LAW 100-647—NOV. 10, 1988
(B) Paragraph (1) of section 42(f) of the 1986 Code (defining
credit period) is amended by striking out "beginning with" and
all that follows and inserting in lieu thereof "beginning with—
"(A) the taxable year in which the building is placed in
service, or
"(B) at the election of the taxpayer, the succeeding tax-
able year,
but only if the building is a qualified low-income building as of
the close of the 1st year of such period. The election under
subparagraph (B), once made, shall be irrevocable."
(3) Clause (ii) of section 42(dX2)(D) of the 1986 Code is amended
to read as follows:
"(ii) SPECIAL RULES FOR CERTAIN TRANSFERS.—For pur-
poses of determining under subparagraph (B)(ii) when a
building was last placed in service, there shall not be
taken into account any placement in service—
"(I) in connection with the acquisition of the
building in a transaction in which the basis of the
building in the hands of the person acquiring it is
determined in whole or in part by reference to the
adjusted basis of such building in the hands of the
person from whom acquired,
"(II) by a person whose basis in such building is
determined under section 1014(a) (relating to prop-
erty acquired from a decedent),
' (III) by any governmental unit or qualified non-
profit organization (as defined in subsection (h)(5))
if the requirements of subparagraph (BXii) are met
with respect to the placement in service by such
unit or organization and all the income from such
property is exempt from Federal income taxation,
or
"(IV) by any person who acquired such building
by foreclosure (or by instrument in lieu of fore-
closure) of any purchase-money security interest
held by such person if the requirements of subpara-
graph (B)(ii) are met with respect to the placement
in service by such person and such building is
resold within 12 months after the date such build-
ing is placed in service by such person after such
foreclosure."
(4) Paragraph (3) of section 42(d) of the 1986 Code is amended
to read as follows:
"(3) EUGIBLE BASIS REDUCED WHERE DISPROPORTIONATE STAND-
ARDS FOR UNITS.—
"(A) IN GENERAL.—Except as provided in subparagraph
(B), the eligible beisis of any building shall be reduced by an
amount equal to the portion of the adjusted basis of the
building which is attributable to residential rental units in
the building which are not low-income units and which are
above the average quality standard of the low-income units
in the building.
"(B) EXCEPTION WHERE TAXPAYER ELECTS TO EXCLUDE
EXCESS COSTS.—
"(i) I N GENERAL.—Subparagraph (A) shall not apply
with respect to a residential rental unit in a building
which is not a low-income unit if—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3375
"(I) the excess described in clause (ii) with re-
spect to such unit is not greater than 15 percent of
the cost described in clause (iiXII), and
"(II) the taxpayer elects to exclude from the '
eligible basis of such building the excess described
in clause (ii) with respect to such unit,
"(ii) EXCESS.—The excess described in this clause
with respect to any unit is the excess of—
"(I) the cost of such unit, over
"(II) the amount which would be the cost of such
unit if the average cost per square foot of low-
income units in the building were substituted for
the cost per square foot of such unit.
The Secretary may by regulation provide for the deter-
mination of the excess under this clause on a basis
other than square foot costs."
(5) Subparagraph (A) of section 42(d)(5) of the 1986 Code is
amended by inserting before the period "(increased, in the case
of an existing building which meets the requirements of para-
graph (2)(B), by the amounts described in paragraph
(2)(A)(i)(II))".
(6)(A) Paragraph (5) of section 42(d) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(C) EUGIBLE BASIS NOT TO INCLUDE EXPENDITURES WHERE
167 (k) ELECTED.—The eligible basis of any building shall
not include any portion of its adjusted basis which is attrib-
utable to amounts with respect to which an election is made
under section 167(k)."
(B) Subparagraph (A) of section 42(dX5) of the 1986 Code is
amended by striking out "subparagraph (B)" and inserting in
lieu thereof "subparagraphs (B) and (C) .
(7) Subparagraph (A) of section 42(d)(6) of the 1986 Code is
amended by inserting "or" at the end of clause (i), by striking
out ", or" at the end of clause (ii) and inserting in lieu thereof a
period, and by striking out clause (iii).
(8) Clause (ii) of section 42(d)(6XB) of the 1986 Code (defining
federally assisted building) is amended by striking out "of
1934".
(9XA) Paragraph (3) of section 42(f) of the 1986 Code is
amended to read as follows:
"(3) DETERMINATION OF APPUCABLE PERCENTAGE WITH RESPECT
TO INCREASES IN QUALIFIED BASIS AFTER 1ST YEAR OF CREDIT
PERIOD.—
"(A) IN GENERAL.—In the case of any building which was Disadvantaged
a qualified low-income building as of the close of the 1st persons.
year of the credit period, if^
"(i) as of the close of any taxable year in the compli-
ance period (after the 1st year of the credit period) the
qualified basis of such building exceeds
"(ii) the qualified basis of such building as of the close
of the 1st year of the credit period,
the applicable percentage which shall apply under subsec-
tion (a) for the taxable year to such excess shall be the
percentage equal to % of the applicable percentage which
(after the application of subsection (h)) would but for this
paragraph apply to such basis.
102 STAT. 3376 PUBLIC LAW 100-647—NOV. 10, 1988
"(B) 1ST YEAR COMPUTATION APPLIES.—A rule similar to
the rule of paragraph (2)(A) shall apply to any increase in
qualified basis to which subparagraph (A) applies for the 1st
year of such increase."
(B) Paragraph (3) of section 42(b) of the 1986 Code is amended
to read as follows:
"(3) CROSS REFERENCES.—
"(A) For treatment of certain rehabilitation expenditures as separate new
buildings, see subsection (e).
"(B) For determination of applicable percentage for increases in qualifled
basis after the 1st year of the credit period, see subsection (f)(3).
"(C) For authority of housing credit agency to limit applicable percentage
and qualified basis which may be taken into account under this section with
respect to any building, see subsection (h)(6)."
(10) Subparagraph (B) of section 42(gX2) of the 1986 Code
(defining gross rent) is amended by striking out "Federal rental
assistance" and inserting in lieu thereof "rental assistance".
(11) Paragraph (2) of section 42(g) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(C) UNITS WHERE FEDERAL RENTAL ASSISTANCE IS REDUCED
AS TENANT'S INCOME INCREASES.—If the gross rent with
respect to a residential unit exceeds the limitation under
subparagraph (A) by reason of the fact that the income of
the occupants thereof exceeds the income limitation ap-
plicable under paragraph (1), such unit shall, nevertheless,
be treated as a rent-restricted unit for purposes of para-
graph (1) if—
"(i) a Federal rental assistance payment described in
subparagraph (B)(i) is made with respect to such unit or
its occupants, and
"(ii) the sum of such payment and the gross rent with
respect to such unit does not exceed the sum of the
amount of such payment which would be made and the
gross rent which would be payable with respect to such
unit if—
"(I) the income of the occupants thereof did not
exceed the income limitation applicable under
paragraph (1), and
"(II) such units were rent-restricted within the
meaning of subparagraph (A).
The preceding sentence shall apply to any unit only if the
result described in clause (ii) is required by Federal statute
as of the date of the enactment of this subparagraph and as
of the date the Federal rental assistance payment is made."
(12) Paragraph (3) of section 42(g) of the 1986 Code is amended
to read as follows:
Disadvantaged "(3) D A T E FOR MEETING REQUIREMENTS.—
pei*sons. "(A) IN GENERAL.—Except as otherwise provided in this
paragraph, a building shall be treated as a qualified low-
income building only if the project (of which such building
is a part) meets the requirements of paragraph (1) not later
than the close of the 12-month period beginning on the date
the building is placed in service.
"(B) BUILDINGS WHICH RELY ON LATER BUILDINGS FOR
QUALIFICATION.—
"(i) IN GENERAL.—In determining whether a building
(hereinafter in this subparagraph referred to as the
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3377
'prior building') is a qualified low-income building, the
taxpayer may take into account 1 or more additional
buildings placed in service during the 12-month period
described in subparagraph (A) with respect to the prior
building only if the taxpayer elects to apply clause (ii)
with respect to each additional building taken into
account.
"(ii) TREATMENT OF ELECTED BUILDINGS.—In the case
of a building which the taxpayer elects to take into
account under clause (i), the period under subpara-
graph (A) for such building shall end at the close of the
12-month period applicable to the prior building.
"(iii) DATE PRIOR BUILDING IS TREATED AS PLACED IN
SERVICE.—For purposes of determining the credit
period and the compliance period for the prior building,
the prior building shall be treated for purposes of this
section as placed in service on the most recent date any
additional building elected by the taxpayer (with re-
spect to such prior building) was placed in service.
"(C) SPECIAL RULE.—A building—
"(i) other than the 1st building placed in service as
part of a project, and
"(ii) other than a building which is placed in service
during the 12-month period described in subparagraph
(A) with respect to a prior building which becomes a
qualified low-income building,
shall in no event be treated as a qualified low-income
building unless the project is a qualified low-income hous-
ing project (without regard to such building) on the date
such building is placed in service."
(13) Paragraph (4) of section 42(g) of the 1986 Code is amended
by inserting before the period "; except that, in applying such
provisions (other than section 142(dX4)(B)(iii)) for such purposes,
the term 'gross rent' shall have the meaning given such term by
paragraph (2)(B) of this subsection".
(14XA) Paragraph (1) of section 42(h) of the 1986 Code is
amended to read as follows:
"(1) CREDIT MAY NOT EXCEED CREDIT AMOUNT ALLOCATED TO
BUILDING.—
"(A) IN GENERAL.—The amount of the credit determined
under this section for any taxable year with respect to any
building shall not exceed the housing credit dollar amount
allocated to such building under this subsection.
"(B) TIME FOR MAKING ALLOCATION.—Except in the case of
an allocation which meets the requirements of subpara-
graph (C) or (D), an allocation shall be taken into account
under subparagraph (A) only if it is made not later than the
close of the calendar year in which the building is placed in
service.
"(C) EXCEPTION WHERE BINDING COMMITMENT.—An alloca-
tion meets the requirements of this subparagraph if there is
a binding commitment (not later than the close of the
calendar year in which the building is placed in service) by
the housing credit agency to allocate a specified housing
credit dollar amount to such building beginning in a speci-
fied later taxable year.
"(D) EXCEPTION WHERE INCREASE IN QUAUFIED BASIS.—
102 STAT. 3378 PUBLIC LAW 100-647—NOV. 10, 1988
"(i) I N GENERAL.—An allocation meets the require-
ments of this subparagraph if such allocation is made
not later than the close of the calendar year in which
ends the taxable year to which it will 1st apply but only
to the extent the amount of such allocation does not
exceed the limitation under clause (ii).
"(ii) LIMITATION.—The limitation under this clause is
the amount of credit allowable under this section (with-
out regard to this subsection) for a taxable year with
respect to an increase in the qualified basis of the
building equal to the excess of—
"(I) the qualified basis of such building as of the
close of the 1st taxable year to which such alloca-
tion will apply, over
"(II) the qualified basis of such building as of the
close of the 1st taxable year to which the most
recent prior housing credit allocation with respect
to such building applied,
"(iii) HOUSING CREDIT DOLLAR AMOUNT REDUCED BY
FULL ALLOCATION.—Notwithstanding clause (i), the full
amount of the allocation shall be taken into account
under paragraph (2)."
(B) Clause (ii) of section 42(hX6XB) of the 1986 Code is hereby
repealed.
(15) Subparagraph (A) of section 42(hX4) of the 1986 Code is
amended by striking out "financed" and all that follows and
inserting in lieu thereof "financed by any obligation the interest
on which is exempt from tax under section 103 if—
"(i) such obligation is taken into account under sec-
tion 146, and
"(ii) principal pa5mients on such financing are ap-
plied within a reasonable period to redeem obligations
the proceeds of which were used to provide such financ-
ing.
(16) Paragraph (5) of section 42(h) of the 1986 Code is amended
by redesignating subparagraph (D) as subparagraph (E) emd by
inserting after subparagraph (C) the following new subpara-
graph:
"(D) TREATMENT OF CERTAIN SUBSIDIARIES.—
"(i) I N GENERAL.—For purposes of this paragraph, a
qualified nonprofit organization shall be treated as
satisfying the material participation test of subpara-
graph (B) if any qualified corporation in which such
organization holds stock satisfies such test.
(ii) QuAUFiED CORPORATION.—For purposes of clause
(ii), the term 'qualified corporation' means any corpora-
tion if 100 percent of the stock of such corporation is
held by 1 or more qualified nonprofit organizations at
all times during the period such corporation is in
existence "
(17) Subparagraph (D) of section 42(hX6) of the 1986 Code is
amended to read as follows:
"(D) CREDIT REDUCED IF ALLOCATED CREDIT DOLLAR
AMOUNT IS LESS THAN CREDIT WHICH WOULD BE ALLOWABLE
WITHOUT REGARD TO PLACED IN SERVICE CONVENTION, ETC.—
"(i) I N GENERAL.—The amount of the credit deter-
mined under this section with respect to any building
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3379
shall not exceed the clause (ii) percentage of the
amount of the credit which would Ot)ut for this subpara-
graph) be determined under this section with respect to
such building.
"(ii) DETERMINATION OF PERCENTAGE.—For purposes
of clause (i), the clause (ii) percentage with respect to
any building is the percentage which—
"(I) the housing credit dollar amount allocated to
such building bears to
"(II) the credit amount determined in accordance
with clause (iii).
"(iii) DETERMINATION OF CREDIT AMOUNT.—The credit
amount determined in accordance with this clause is
the amount of the credit which would (but for this
subparagraph) be determined under this section with
respect to the building if—
"(I) this section were applied without regard to
paragraphs (2XA) and (3XB) of subsection (f), and
"(II) subsection (fK3XA) were applied without
regard to 'the percentage equal to % of."
(18) Paragraph (6) of section 42(h) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(E) HOUSING CREDIT AGENCY TO SPECIFY APPUCABLE
PERCENTAGE AND MAXIMUM QUAUFIED BASIS.—In a l l o c a t i n g
a housing credit dollar amount to any building, the housing
credit agency shall specify the applicable percentage and
the maximum qualiHed basis which may be taken into
account under this section with respect to such building.
The applicable percentage and maximum qualiiied basis so
specified shall not exceed the applicable percentage and
qualified basis determined under this section without
rftffsrd to t n i s suDS^ction
(19XA) Subparagraph (A) of section 42(iX2) of the 1986 Code is
amended—
(i) by inserting "or any prior taxable year" after "such
taxable year",
(ii) by striking out "there is outstanding" and inserting in
lieu thereof "there is or was outstanding , and
(iii) by striking out "are used" and inserting in lieu
thereof are or were used".
(B) Subparagraph (B) of section 42(iX2) of the 1986 Code is
amended to read as follows:
"(B) ELECTION TO REDUCE EUGIBLE BASIS BY BALANCE OF
LOAN OR PROCEEDS OF OBUGATiONS.—A loan or tax-exempt
obligation shall not be taken into account under subpara-
graph (A) if the taxpayer elects to exclude from the eligible
basis of the building for purposes of subsection (d)—
"(i) in the case of a loan, the principal amount of such
loan, and
"(ii) in the case of a tax-exempt obligation, the pro-
ceeds of such obligation."
(C) Paragraph (2) of section 42(i) of the 1986 Code is amended
by redesignating subparagraph (C) as subparagraph (D) and by
inserting after subparagraph (B) the following new subpara-
graph:
"(C) SPECIAL RULE FOR SUBSIDIZED CONSTRUCTION FINANC-
ING.—Subparagraph (A) shall not apply to any tax-exempt
102 STAT. 3380 PUBLIC LAW 100-647—NOV. 10, 1988
obligation or below market Federal loan used to provide
construction financing for any building if—
"(i) such obligation or loan (when issued or made)
identified the building for which the proceeds of such
obligation or loan would be used, and
"(ii) such obligation is redeemed, and such loan is
repaid, before such building is placed in service."
(D) Subparagraph (D) of section 42(iX2) of the 1986 Code is
amended by striking out "subparagraph (A)" and inserting in
lieu thereof "this paragraph".
(20) Paragraph (4) of section 42(j) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(F) N o RECAPTURE WHERE DE MINIMIS CHANGES IN FLOOR
SPACE.—The Secretary may provide that the increase in tax
under this subsection shaJl not apply with respect to any
building if—
'^i) such increase results from a de minimis change
in the floor space fraction under subsection (cXD, and
"(ii) the building is a qualified low-income building
(21) Clause (i) of section 42(jX5XB) of the 1986 Code is amended
to read as follows:
"(i) more than Va the capital interests, and more than
Vi the profit interests, in which are owned by a group
of 35 or more partners each of whom is a natural
person or an estate, and".
(22) Paragraph (6) of section 420') of the 1986 Code is
amended—
(A) by inserting " ( O R INTEREST THEREIN)" after "BUILD-
ING" in the heading, and
(B) by inserting or an interest therein" after "disposition
of a building" in the text.
(23) Subparagraph (B) of section 42(kX2) of the 1986 Code is
amended by inserting before the period at the end thereof the
following: , except that this subparagraph shall not apply in
the case of a federally assisted building described in subsection
(dX6XB)if-
"(i) a security interest in such building is not per-
mitted by a Federal agency holding or insuring the
mortgage secured by such building, and
"(ii) the proceeds from the financing (if any) are
applied to acquire or improve such building."
(24XA) Subsection (1) of section 42 of the 1986 Code is amended
by redesignating paragraph (2) as paragraph (3) and by insert-
ing after paragraph (1) the following new paragraph:
'(2) ANNUAL REPORTS TO THE SECRETARY.—The Secretary may
require t a x p ^ e r s to submit an information return (at such time
and in such form and manner as the Secretary prescribes) for
each taxable year setting forth—
"(A) the qualified basis for the taxable year of each
qualified low-income building of the taxpayer,
"(B) the information described in paragraph (IXC) for the
taxable year, and
"(C) such other information as the Secretary may require.
The penalty under section 6652(j) shall apply to any failure to
submit the return required by the Secretary under the preced-
ing sentence on the date prescribed therefor."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3381
(B) The subsection heading of subsection (1) of section 42 is
amended to read as follows:
"(1) CERTIFICATIONS AND OTHER REPORTS TO SECRETARY.—".
(25) Paragraph (1) of section 42(n) of the 1986 Code is amended
by inserting before the period at the end thereof the following:
", and, except for any building described in paragraph (2)(B),
subsection (h)(4) shall not apply to any building placed in service
after 1989".
(26) Subsection (d) of section 39 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(4) No CARRYBACK OF LOW-INCOME HOUSING CREDIT BEFORE
1987.—No portion of the unused business credit for any taxable
year which is attributable to the credit determined under sec-
tion 42 (relating to low-income housing credit) may be carried
back to a taxable year ending before January 1,1987."
(27) Paragraph (1) of section 55(c) of the 1986 Code (defining
regular tax) is amended by striking out "section 42(j)" and
inserting in lieu thereof "subsection (j) or (k) of section 42".
(28) Subparagraph (A) of section 252(0(1) of the Reform Act is 26 u s e 42 note.
amended by striking out "and" at the end of clause (i), by
striking out the period at the end of clause (ii) and inserting in
lieu thereof a comma, and by inserting after clause (ii) the
following new clauses:
"(iii) the eligible basis of such building shall be treat-
ed, for purposes of section 42(hX4XA) of such Code, as if
it were financed by an obligation the interest on which
is exempt from tax under section 103 of such Code and
which is taken into account under section 146 of such
Code, and
"(iv) the amendments made by section 803 shall not
apply."
(29) Subparagraph (E) of section 252(f)(1) of the Reform Act is
amended by striking out "maximum annual additional credit"
and inserting in lieu thereof "maximum present value of addi-
tional credits".
(30) Subparagraph (E) of section 252(fX2) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "The preceding sentence shall apply to any building only Housing.
to the extent of the portion of the additional housing credit
dollar amount (allocated to such agency under subparagraph
(A)) allocated to such building."
(31) Subsection (f) of section 252 of the Reform Act is amended
by adding at the end thereof the following new paragraph:
"(5) TRANSITIONAL RULE.—In the case of any rehabilitation Indiana.
expenditures incurred with respect to units located in the Community
neighborhood strategy area within the community development development.
block grant program in Ft. Wayne, Indiana—
"(A) the amendments made by this section shall not
apply, and
"(B) paragraph (1) of section 167(k) of the Internal Reve-
nue Code of 1986, shall be applied as if it did not contain the
phrase 'and before January 1,1987'.
The number of units to which the preceding sentence applies
shall not exceed 150."
(32) Subsection (g) of section 42 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
102 STAT. 3382 PUBLIC LAW 1 0 0 - 6 4 7 - N O V . 10, 1988
"(6) SPECIAL RULE WHERE DE MINIMIS EQUITY CONTRIBUTION.—
Property shall not be treated as failing to be residential rental
property for purposes of this section merely because the occu-
pant of a residential unit in the project pays (on a voluntary
basis) to the lessor a de minimis amount to be held toward the
purchase by such occupant of a residential unit in such project
if—
"(A) all amounts so paid are refunded to the occupant on
the cessation of his occupancy of a unit in the project, and
"(B) the purchase of the unit is not permitted until after
the close of the compliance period with respect to the
building in which the unit is located.
Any amount paid to the lessor as described in the preceding
sentence shall be included in gross rent under paragraph (2) for
purposes of determining whether the unit is rent-restricted."
(m) AMENDMENTS RELATED TO SECTION 261 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 7518(g)(6) of the 1986 Code, is
amended by striking out "section l(i)' and inserting in lieu
thereof "section l(j)".
(2) Subparagraph (A) of section 607(h)(6) of the Merchant
46 use app. Marine Act, 1936 is amended by striking out "section l(i)" and
ii'^'^- inserting in lieu thereof "section 10')"-
SEC. 1003. AMENDMENTS RELATED TO TITLE III OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 301 OF THE REFORM ACT.—
(1) Subparagraph (B) of section 172(d)(4) of the 1986 Code is
amended by striking out ", (2)(B),".
(2) Paragraph (1) of section 3402(m) of the 1986 Code is
amended by striking out "section 62^ (other than paragraph (13)
thereof)" and inserting in lieu thereof "section 62(a) (other than
paragraph (10) thereof)".
(3) Paragraph (2) of section 12120?) of the 1986 Code is
amended to read as follows:
"(2) TREATMENT O F AMOUNTS ALLOWED UNDER SECTION 1211 (b)
(1) OR (2).—
"(A) I N GENERAL.—For purposes of determining the
excess referred to in subparagraph (A) or (B) of paragraph
(1), there shall be treated as a short-term capital gain in the
taxable year an amount equal to the lesser of—
"(i) the amount allowed for the taxable year under
paragraph (1) or (2) of section 1211(b), or
"(ii) the adjusted taxable income for such taxable
year.
"(B) ADJUSTED TAXABLE INCOME.—For purposes of
subparagraph (A), the term 'adjusted taxable income'
means taxable income increased by the sum of^
"(i) the amount allowed for the taxable year under
paragraph (1) or (2) of section 1211(b), and
"(ii) the deduction allowed for such year under
section 151 or any deduction in lieu thereof.
For purposes of the preceding sentence, any excess of the
deductions allowed for the taxable year over the gross
income for such year shall be taken into account as nega-
tive taxable income."
(b) AMENDMENTS RELATED TO SECTION 302 OF THE REFORM ACT.—
26 use 1 note. (1) Section 302 of the Reform Act is amended by striking out
sulDsection (c).
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3383
(2XA) Paragraph (2) of section 904(b) of the 1986 Code is
amended to read as follows:
"(2) CAPITAL GAINS.—For purposes of this section—
"(A) I N GENERAL.—Taxable income from sources outside
the United States shall include gain from the sale or ex-
change of capital assets only to the extent of foreign source
capital gain net income.
"(B) SPECIAL RULES WHERE CAPITAL GAIN RATE DIFFEREN-
TIAL.—In the case of any taxable year for which there is a
capital gain rate differential—
"(i) in lieu of applying subparagraph (A), the taxable
income from sources outside the United States shall
include gain from the sale or exchange of capital assets
only in an amount equal to foreign source capital gain
net income reduced by the rate differential portion of
foreign source net capital gain,
"(ii) the entire taxable income shall include gain
from the sale or exchange of capital assets only in an
amount equal to capital gain net income reduced by the
rate differential portion of net capital gain, and
"(iii) for purposes of determining taxable income
from sources outside the United States, any net capital
loss (and any amount which is a short-term capital loss
under section 1212(a)) from sources outside the United
States to the extent taken into account in determining
capital gain net income for the taxable year shall be
reduced by an amount equal to the rate differential
portion of the excess of net capital gain from sources
within the United States over net capital gain."
(B) Paragraph (3) of section 904(b) of the 1986 Code is amended
by striking out subparagraph (D) and inserting in lieu thereof
the following new subparagraphs:
"(D) CAPITAL GAIN RATE DIFFERENTIAL.—There is a capital
gain rate differential for any taxable year if—
"(i) in the case of a taxpayer other than a corpora-
tion, subsection (j) of section 1 applies to such taxable
year, or
"(ii) in the case of a corporation, any rate of tax
imposed by section 11, 511, or 831 (a) or (b) (whichever
applies) exceeds the alternative rate of tax under sec-
tion 1201(a) (determined without regard to the last
sentence of section 11(b)).
"(E) RATE DIFFERENTIAL PORTION.—
"(i) I N GENERAL.—The rate differential portion of
foreign source net capital gain, net capital gain, or the
excess of net capited gain from sources within the
United States over net capital gain, as the case may be,
is the same proportion of such amount as—
"(I) the excess of the highest applicable tax rate
over the alternative tax rate, bears to
"(II) the highest applicable tax rate.
"(ii) HIGHEST APPUCABLE TAX RATE.—For purposes of
clause (i), the term 'highest applicable tax rate'
means—
"(I) in the case of a taxpayer other than a cor-
poration, the highest rate of tax set forth in subsec-
102 STAT. 3384 PUBLIC LAW 100-647—NOV. 10, 1988
tion (a), (b), (c), (d), or (e) of section 1 (whichever
applies), or
"(II) in the case of a corporation, the highest rate
of tax specified in section 11(b).
"(iii) ALTERNATIVE TAX RATE.—For purposes of clause
(i), the term 'alternative tax rate' means—
"(I) in the case of a taxpayer other than a cor-
poration, the alternative rate of tax determined
under section l(j), or
"(II) in the case of a corporation, the alternative
rate of tax under section 1201(a)."
(3) Effective for taxable years beginning after December 31,
1987, paragraph (1) of section 1445(e) of the 1986 Code is
amended by striking out "34 percent" and inserting in lieu
thereof "34 percent (or, to the extent provided in regulations, 28
percent)".
(c) AMENDMENTS RELATED TO SECTION 311 OF THE REFORM ACT.—
(1) Subsection (a) of section 1201 of the 1986 Code is amended
by striking out "831(a)" and inserting in lieu thereof "831 (a)
or (b)".
26 use 1201 (2) Subsection (c) of section 311 of the Reform Act is amended
note. by inserting before the period at the end thereof the following:
"; except that the amendment made by subsection (b)(4) shall
apply to payments made after December 31,1986".
(3) Subparagraph (D) of section 593(b)(2) of the 1986 Code is
amended by striking out "and" at the end of clause (iii), by
striking out the period at the end of clause (iv) and inserting in
lieu thereof ", and", and by adding at the end thereof the
following new clause:
"(v) if there is a capital gain rate differential (as
defined in section 904(b)(3)(D)) for the taxable year, by
excluding from gross income the rate differential por-
tion (within the meaning of section 904(b)(3)(E)) of the
lesser of—
"(I) the net long-term capital gain for the taxable
year, or
"(II) the net long-term capital gain for the tax-
able year from the sale or exchange of property
other than property described in clause (iii)."
(d) AMENDMENT RELATED TO SECTION 321 OF THE REFORM ACT.—
(1)(A) Subsection O?) of section 422A of the 1986 Code is
amended by adding at the end thereof the following new
sentence:
"Such term shall not include any option if (as of the time the option
is granted) the terms of such option provide that it will not be
treated as an incentive stock option."
26 use 422A (B) In the case of an option granted after December 31, 1986,
note. and on or before the date of the enactment of this Act, such
option shall not be treated as an incentive stock option if the
terms of such option are amended before the date 90 days after
such date of enactment to provide that such option will not be
treated as an incentive stock option.
(2)(A) Section 422A of the 1986 Code is amended by adding at
the end thereof the following new subsection:
"(d) $100,000 PER YEAR LIMITATION.—
"(1) IN GENERAL.—To the extent that the aggregate fair
market value of stock with respect to which incentive stock
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3385
options (determined without regard to this subsection) are exer-
cisable for the 1st time by any individual during any calendar
year (under all plans of the individual's employer corporation
and its parent and subsidiary corporations) exceeds $100,000,
such options shall be treated as options which are not incentive
stock options.
"(2) ORDERING RULE.—Paragraph (1) shall be applied by
taking options into account in the order in which they were
granted.
"(3) DETERMINATION OF FAIR MARKET VALUE.—For purposes of
paragraph (1), the fair market value of any stock shall be
determined as of the time the option with respect to such stock
is granted."
(B) Subsection (b) of section 422A of the 1986 Code is amended
by adding "and" at the end of paragraph (5), by striking out
"; and" at the end of paragraph (6) and inserting in lieu thereof a
period, and by striking out paragraph (7).
(C) Paragraph (1) of section 422A(c) of the 1986 Code is
amended by striking out "paragraph (7) of subsection (b)" and
inserting in lieu thereof "subsection (d)".
SEC 1004. AMENDMENTS RELATED TO TITLE IV OF THE REFORM ACT. Agriculture and
(a) AMENDMENTS RELATED TO SECTION 405 OF THE REFORM ACT.— commodMes.
(1) Paragraph (1) of section 108(a) of the 1986 Code is amended
by striking out "or" at the end of subparagraph (A), by striking
out the period at the end of subparagraph (B) and inserting in
lieu thereof ", or" and by adding at the end thereof the follow-
ing new subparagraph:
"(C) the indebtedness discharged is qualified farm indebt-
edness."
(2) Paragraph (2) of section 108(a) of the 1986 Code is amended
to read as follows:
"(2) COORDINATION OF EXCLUSIONS.—
"(A) TITLE i i EXCLUSION TAKES PRECEDENCE.—Subpara-
graphs (B) and (C) of paragraph (1) shall not apply to a
discharge which occurs in a title 11 case.
"(B) INSOLVENCY EXCLUSION TAKES PRECEDENCE OVER
QUAUFiED FARM EXCLUSION.—Subparagraph (C) of para-
graph (1) shall not apply to a discharge to the extent the
taxpayer is insolvent."
(3) Subsection Ot>) of section 108 of the 1986 Code is amended—
(A) by striking out "subparagraph (A) or (B)" in para-
graph (1) £ind inserting in lieu thereof "subparagraph (A),
(B), or (C)", and
(B) by striking out " I N TITLE 11 CASE OR INSOLVENCY" in
the subsection heading.
(4) Subsection (g) of section 108 of the 1986 Code is amended to
read as follows:
"(g) SPECIAL RULES FOR DISCHARGE OF QUAUFIED FARM INDEBTED-
NESS.—
"(1) DISCHARGE MUST BE BY QUALIFIED PERSON.—
"(A) I N GENERAL.—Subparagraph (C) of subsection (aXD
shall apply only if the discharge is by a qualified person.
"(B) QUAUFIED PERSON.—For purposes of subparagraph
(A), the term 'qualified person' has the meaning given to
such term by section 46(cX8XDXiv); except that such term
102 STAT. 3386 PUBLIC LAW 100-647—NOV. 10, 1988
shall include any Federal, State, or local government or
agency or instrumentality thereof.
"(2) QUALIFIED FARM INDEBTEDNESS.—For purposes of this sec-
tion, indebtedness of a taxpayer shall be treated as qualified
farm indebtedness if—
"(A) such indebtedness was incurred directly in connec-
tion with the operation by the taxpayer of the trade or
business of farming, and
"(B) 50 percent or more of the aggregate gross receipts of
the taxpayer for the 3 taxable years preceding the taxable
year in which the discharge of such indebtedness occurs is
attributable to the trade or business of farming.
"(3) AMOUNT EXCLUDED CANNOT EXCEED SUM OF TAX
ATTRIBUTES AND BUSINESS AND INVESTMENT ASSETS.—
"(A) IN GENERAL.—The amount excluded under subpara-
graph (C) of subsection (aXD shall not exceed the sum of—
"(i) the adjusted tax attributes of the taxpayer, and
"(ii) the aggregate adjusted bases of qualified prop-
erty held by the taxpayer as of the beginning of the
taxable year following the taxable year in which the
discharge occurs.
"(B) ADJUSTED TAX ATTRIBUTES.—For purposes of subpara-
graph (A), the term 'adjusted tax attributes' means the sum
of the tax attributes described in subparagraphs (A), (B), (C),
and (E) of subsection (b)(2) determined by taking into ac-
count $3 for each $1 of the attributes described in subpara-
graphs (B) and (E) of subsection (bX2).
"(C) QUAUFIED PROPERTY.—For purposes of this para-
graph, the term 'qualified property' means any property
which is used or is held for use in a trade or business or for
the production of income.
"(D) COORDINATION WITH INSOLVENCY EXCLUSION.—For
purposes of this paragraph, the adjusted basis of any quali-
fied property and the amount of the adjusted tax attributes
shall be determined after any reduction under subsection
(b) by reason of amounts excluded from gross income under
subsection (aXlXB)."
(5) Paragraph (4) of section 1017(b) of the 1986 Code is
amended to read as follows:
"(4) SPECIAL RULES FOR QUAUFIED FARM INDEBTEDNESS.—
"(A) IN GENERAL.—Any amount which under subsection
(bX2XD) of section 108 is to be applied to reduce basis and
which is attributable to an amount excluded under subsec-
tion (aXlXC) of section 108—
"(i) shall be applied only to reduce the basis of quali-
fied property held by the taxpayer, and
"(ii) shall be applied to reduce the basis of qualified
property in the following order:
"(I) First the basis of qualified property which is
depreciable property.
(II) Second the basis of qualified property which
is land used or held for use in the trade or business
of farming.
"(Ill) Then the basis of other qualified property.
"(B) QUAUFIED PROPERTY.—For purposes of this para-
graph, the term 'qualified property' has the meaning given
to such term by section 108(gX3XC).
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3387
"(C) CERTAIN RULES MADE APPUCABLE.—Rules similar to
the rules of subparagraph (C), (D), and (E) of paragraph (8)
shall apply for purposes of this paragraph and section
108(g)."
(6XA) Paragraphs (6) and (7) of section 108(d) of the 1986 Code
are each amended by striking out "subsections (a) and (b)" and
inserting in lieu thereof "subsections (a), (b), and (g)".
(B) The subsection heading for section 108(d) of the 1986 Code
is amended by striking out "SUBSECTIONS (a), AND (b)" and
inserting in lieu thereof "SUBSECTIONS (a), (b), AND (g)".
(C) The headings for paragraphs (6) and (7XA) of section 108(d)
of the 1986 Code are each amended by striking out "SUBSEC-
TIONS (a) AND (b)" and inserting in lieu thereof "SUBSECTIONS
(a), (b), AND (g)".
Ot)) AMENDMENT RELATED TO SECTION 406 OF THE REFORM ACT.—
Section 406 of the Reform Act is amended— 26 use 1202
(1) by inserting "before October 1, 1987," after "from the note,
sale", and
(2) by striking out "to the extent such gain" and all that
follows down through the period at the end thereof and insert-
ing in lieu thereof "to the extent such gain is properly taken
into account under the taxpayer's method of accounting during
1987.".
(c) AMENDMENT RELATED TO SECTION 413 OF THE REFORM ACT.—
Subsection (a) of section 1254 of the 1986 Code is amended by adding
at the end thereof the following new paragraph:
"(4) ADJUSTMENT FOR AMOUNTS INCLUDED IN GROSS INCOME
UNDER SECTION 617 (b) (1) (A) .—The amount of the expenditures
referred to in paragraph (IXAXi) shall be properly adjusted for
amounts included in gross income under section 617(bXlXA)."
SEC. 1005. AMENDMENTS RELATED TO TITLE V OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 501 OF THE REFORM ACT.—
(1) Clause (ii) of section 469(eXlXA) of the 1986 Code (relating
to certain income not treated as income from passive activity) is
amended by inserting "not derived in the ordinary course of a
trade or business which is" after "gain or loss".
(2XA) Subparagraph (A) of section 469(gXl) of the 1986 Code
(relating to disposition of interests in passive activities in fully
taxable transactions) is amended to read as follows:
"(A) I N GENERAL.—If all gain or loss realized on such
disposition is recognized, the excess of—
"(i) the sum of—
"(I) any loss from such activity for such taxable
year (determined after application of subsection
03)), plus
"(II) any loss realized on such disposition, over
"(ii) net income or gain for such taxable year from all
-• passive activities (determined without regard to losses
described in clause (i)),
shall be treated as a loss which is not from a passive
activity."
(B) Subparagraph (C) of section 469(gXl) of the 1986 Code is
amended to read as follows:
"(C) INCOME FROM PRIOR YEARS.—To the extent provided
in regulations, income or gain from the activity for preced-
ing taxable years shall be taken into account under
19-194 O—91—Part 4 14 : QL 3
102 STAT. 3388 PUBLIC LAW 100-647—NOV. 10, 1988
subparagraph (A)(ii) for the taxable year to the extent
necessary to prevent the avoidance of this section."
(3) Subparagraph (A) of section 469(g)(2) of the 1986 Code is
amended—
(A) by striking out "paragraph (1)" and inserting in lieu
thereof "paragraph (1)(A)"; and
(B) by striking out "such losses" the first place it appears
and inserting in lieu thereof "losses described in paragraph
(1)(A)".
(4) Section 469(g)(3) of the 1986 Code is amended—
(A) by striking out "realized (or to be realized)" and
inserting in lieu thereof "(realized or to be realized", and
(B) by inserting a closing parenthesis after "completed".
(5) Paragraph (4) of section 469(h) of the 1986 Code (relating to
certain closely held C corporations and personal service corpora-
tions) is amended by inserting "only" before " i f .
(6) Paragraph (1) of section 469(i) of the 1986 Code (relating to
$25,000 offset for rental real estate activities) is amended by
striking out "in the taxable year in which such portion of such
loss or credit arose" and inserting in lieu thereof "in such
taxable year (and if any portion of such loss or credit arose in
another taxable year, in such other taxable year)".
(7) Subparagraph (C) of section 469(i)(6) of the 1986 Code
(relating to interest as a limited partner) is amended by striking
out "No" and inserting in lieu thereof "Except as provided in
regulations, no".
(8) Subparagraph (A) of section 469(j)(6) of the 1986 Code
(relating to special rule for gifts) is amended by inserting "with
respect to which a deduction has not been allowed by reason of
subsection (a)" before ", and".
(9) Section 469(j) of the 1986 Code (relating to definitions and
special rules) is amended by adding a t the end thereof the
following new paragraphs:
"(10) COORDINATION WITH SECTION 280A.—If a passive activity
involves the use of a dwelling unit to which section 280A(cX5)
applies for any taxable year, any income, deduction, gain, or
loss allocable to such use shall not be taken into account for
purposes of this section for such taxable year.
"(11) AGGREGATION OF MEMBERS OF AFFIUATED GROUPS.—
Except as provided in regulations, all members of an affiliated
group which files a consolidated return shall be treated as 1
corporation."
26 use 469 note. (10) Section 501(c) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(4) INCOME FROM SALES OF PASSIVE ACTIVITIES IN TAXABLE
YEARS BEGINNING BEFORE JANUARY 1, 1987.—If^
"(A) gain is recognized in a taxable year beginning after
December 31,1986, from a sale or exchange of an interest in
an activity in a taxable year beginning before January 1,
1987, and
"(B) such gain would have been treated as gain from a
passive activity had section 469 of the Internal Revenue
Code of 1986 (as added by this section) been in effect for the
taxable year in which the sale or exchange occurred and for
all succeeding taxable years,
then such gain shall be treated as gain from a passive activity
for purposes of such section."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3389
(11) Subsection (j) of section 469 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(12) SPECIAL RULE FOR DISTRIBUTIONS BY ESTATES OR TRUSTS.—
If any interest in a passive activity is distributed by an estate or
trust—
"(A) the basis of such interest immediately before such
distribution shall be increased by the amount of any passive
activity losses allocable to such interest, and
"(B) such losses shall not be allowable as a deduction for
any taxable year."
(12) Subsection (m) of section 469 of the 1986 Code, as redesig-
nated by section 10211 of the Revenue Act of 1987, is amended
by striking all that precedes subparagraph (B) of paragraph (3)
thereof and inserting in lieu thereof the following:
"(m) PHASE-IN OF DISALLOWANCE OF LOSSES AND CREDITS FOR
INTEREST HELD BEFORE DATE OF ENACTMENT.—
"(1) IN GENERAL.—In the case of any passive activity loss or
passive activity credit for any taxable year beginning in cal-
endar years 1987 through 1990, subsection (a) shall not apply to
the applicable percentage of that portion of such loss (or such
credit) which is attributable to pre-enactment interests.
"(2) APPUCABLE PERCENTAGE.—For purposes of this subsec-
tion, the applicable percentage shall be determined in accord-
ance with the following table:
"In the case of taxable The applicable
years beginning in: percentage is:
1987 65
1988 40
1989 20
1990 10.
"(3) PORTION OF LOSS OR CREDIT ATTRIBUTABLE TO PRE-ENACT-
MENT INTERESTS.—For purposes of this subsection—
"(A) IN GENERAL.—The portion of the passive activity loss
(or passive activity credit) for any taxable year which is
attributable to preenactment interests is the lesser of—
,; ,^ "(i) the amount of the passive activity loss (or passive
activity credit) which is disallowed for the tgixable year
under subsection (a) (without regard to this subsection),
or
"(ii) the amount of the passive activity loss (or p£is-
sive activity credit) which would be disallowed for the
taxable year (without regard to this subsection and
without regard to any amount allocable to an activity
for the taxable year under subsection (b)) taking into
account only pre-enactment interests."
(b) AMENDMENTS RELATED TO SECTION 502 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 502(dXl) of the Reform Act 26 use 469 note,
(defining qualified investor) is amended to read as follows:
"(A) if—
"(i) in the case of a project placed in service on or
before August 16, 1986, such person held an interest in
such project on August 16, 1986, and such person made
his initial investment after December 31,1983, or
"(ii) in the case of a project placed in service after
August 16, 1986, such person made his initial invest-
ment after December 31, 1983, and such person held an
interest in such project on December 31, 1986, and".
102 STAT. 3390 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 469 note. (2) Subsection (d) of section 502 of the Reform Act (defining
qualified investor) is amended by adding after paragraph (2) the
following new paragraph:
"(3) SPECIAL RULE FOR CERTAIN PARTNERSHIPS.—In the case of
any property which is held by a partnership—
"(A) which placed such property in service on or after
December 31, 1985, and before August 17, 1986, and
continuously held such property through the close of the
taxable year for which the determination is being made,
and
"(B) which was not treated as a new partnership or as
terminated at any lime on or after the date on which such
property was placed in service and through the close of the
taxable year for which the determination is being made,
aragraph (IXAXi) shall be applied by substituting 'Decem-
Per 31, 1988' for 'August 16, 1986' the 2nd place it appears."
(3) 'The subsection (d) of section 502 of the Reform Act which
relates to special rules is redesignated as subsection (e).
(c) AMENDMENTS RELATED TO SECTION 511 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 163(dX3) of the 1986 Code
(defining investment interest) is amended by striking out "in-
curred or continued to purchase or carry" and inserting in lieu
thereof "properly allocable to".
(2) Subparagraph (B) of section 163(dX4) of the 1986 Code is
amended to read as follows:
"(B) INVESTMENT INCOME.—The term 'investment income'
means the sum of—
"(i) gross income (other than gain taken into account
under clause (ii)) from property held for investment,
and
"(ii) any net gain attributable to the disposition of
property held for investment."
(3) Subparagraph (A) of section 163(dX6) of the 1986 Code is
amended to read as follows:
"(A) IN GENERAL.—The amount of interest paid or ac-
crued during any such taxable year which is disallowed
under this subsection shall not exceed the sum of—
"(i) the amount which would be disallowed under this
subsection if—
"(I) paragraph (1) were applied by substituting
'the sum of the ceiling amount and the net invest-
ment income' for 'the net investment income', and
"(II) paragraphs (4XE) and (5XAXii) did not apply,
and
"(ii) the applicable percentage of the excess of^
"(I) the amount which (without regard to this
paragraph) is not allowable as a deduction under
this subsection for the taxable year, over
"(II) the amount described in clause (i).
The preceding sentence shall not apply to any interest
treated as paid or accrued during the taxable year under
paragraph (2)."
(4) Subparagraph (A) of section 163(hX2) of the 1986 Code is
amended by striking out "incurred or continued in connection
with the conduct of' and inserting in lieu thereof "properly
allocable to".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3391
(5) Subparagraph (C) of section 163(hX3) of the 1986 Code
(defining qualified residence interest) is amended to read as
follows:
"(C) COST NOT LESS THAN BALANCE OF INDEBTEDNESS IN-
CURRED ON OR BEFORE AUGUST 16, 1986.—
"(i) I N GENERAL.—The amount under subparagraph
(B)(ii)(I) at any time after August 16, 1986, shall not be
less than the outstanding principal amount (as of such
time) of indebtedness—
"(I) which was incurred on or before August 16,
1986, and which was secured by the qualified resi-
dence on August 16,1986, or
"(II) which is secured by the qualified residence
and was incurred after August 16, 1986, to re-
finance indebtedness described in subclause (I) (or
refinanced indebtedness meeting the requirements
of this subclause) to the extent (immediately after
the refinancing) the principal amount of the
indebtedness resulting from the refinancing does
not exceed the principal amount of the refinanced
indebtedness (immediately before the refinancing).
"(ii) LIMITATION ON PERIOD OF REFINANCING.—
Subclause (II) of clause (i) shall not apply to any indebt-
edness after—
"(I) the expiration of the term of the indebted-
ness described in clause (iXD, or
"(II) if the principal of the indebtedness de-
scribed in clause (iXD is not amortized over its
term, the expiration of the term of the 1st refinanc-
ing of such indebtedness (or if earlier, the date
which is 30 years after the date of such refinanc-
ing)."
(6XA) The heading for section 163(hX5) of the 1986 Code is
amended to read as follows:
"(5) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of
(B) Paragraph (5) of section 163(h) of the 1986 Code is
amended—
(i) by striking out "For purposes of this subsection—" in
subparagraph (A), and
(ii) by striking out "For purposes of this paragraph, any"
in subparagraph (B) and inserting in lieu thereof "Any".
(7) Clause (iii) of section 163(hX5XA) of the 1986 Code is
amended by striking out "USED OR" in the heading thereof and
by striking out "or use".
(8) Section 163(hX5) of the 1986 Code is amended by adding at
the end thereof the following new subparagraphs:
"(C) UNENFORCEABLE SECURITY INTERESTS.—Indebtedness
shall not fail to be treated as secured by any property solely
because, under any applicable State or local homestead or
other debtor protection law in effect on August 16,1986, the
security interest is ineffective or the enforceability of the
security interest is restricted.
"(D) SPECIAL RULES FOR ESTATES AND TRUSTS.—For pur-
poses of determining whether any interest paid or accrued
by an estate or trust is qualified residence interest, any
residence held by such estate or trust shall be treated £is a
102 STAT. 3392 PUBLIC LAW 100-647—NOV. 10, 1988
qualified residence of such estate or trust if such estate or
trust establishes that such residence is a qualified residence
of a beneficiary who has a present interest in such estate or
trust or an interest in the residuary of such estate or trust."
(9) Paragraph (6) of section 163(h) of the 1986 Code is amended
by striking out "subsection" the 3rd place it appears and insert-
ing in lieu thereof "paragraph".
(10) Paragraph (2)(A) of section 511(d) of the Reform Act is
amended to read as follows:
"(2XA) Sections 467(cX5) and 1255(b)(2) are each amended by
striking out •163(d),'."
26 u s e 469 note. (11) If—
(A) any amount was disallowed as a deduction under
section 163(d) of the Internal Revenue Code of 1954 (as in
effect on the day before the date of the enactment of the
Reform Act),
(B) such amount would (but for this paragraph) be treated
as investment interest paid or accrued by the taxpayer in
the taxpayer's first taxable year beginning after Decem-
ber 31, 1986, and
(C) the taxpayer makes an election under this paragraph
at such time and in such manner £is the Secretary of the
Treasury or his delegate shall prescribe,
to the extent such amount is attributable to an activity subject
to the limitations of section 469 of the 1986 Code, such amount
shall not be treated as investment interest but shall be treated
as a deduction allocable to such activity for such first taxable
year. Subsection (m) of section 469 of the 1986 Code and section
501(c)(2) of the Reform Act shall not apply to any amount so
(12) Subparagraph (E) of section 163(h)(2) of the 1986 Code is
amended by inserting before the period "or under section 6166A
(as in effect before its repeal by the Economic Recovery Tax Act
of 1981)".
26 use 163 note. (13) For purposes of applying the amendments made by this
subsection and the amendments made by section 10102 of the
Revenue Act of 1987, the provisions of this subsection shall be
treated as having been enacted immediately before the enact-
ment of the Revenue Act of 1987.
26 use 163 note. (14)(A) For purposes of applying section 163(h) of the 1986
Code to any taxable year beginning during 1987, if, incident to a
divorce or legal separation—
(i) an individual acquires the interest of a spouse or
former spouse in a qualified residence in a transfer to
which section 1041 of the 1986 Code applies, and
(ii) such individual incurs indebtedness which is secured
by such qualified residence,
the amount determined under paragraph (3)(BXiiXI) of section
163(h) of the 1986 Code (as in effect before the amendments
made by the Revenue Act of 1987) with respect to such qualified
residence shall be increeised by the amount determined under
subparagraph (B).
(B) The amount determined under this subparagraph shall be
equal to the excess (if any) of—
(i) the lesser of the amount of the indebtedness described
in subparagraph (A)(ii), or the fair market value of the
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3393
spouse's or former spouse's interest in the qualified resi-
dence as of the time of the transfer, over
(ii) the basis of the spouse or former spouse in such
interest in such residence (adjusted only by the cost of any
improvements to such residence).
(15) Clause (i) of section 7872(dXlXE) of the 1986 Code is
amended by striking out "section 163(d)(3)" and inserting in lieu
thereof "section 163(dX4)".
SEC. 1006. AMENDMENTS RELATED TO TITLE VI OF THE REFORM ACT.
(a) AMENDMENT RELATED TO SECTION 601 OF THE REFORM ACT.—
Section 15 of the 1986 Code is amended by adding at the end thereof
the following new subsection:
"(e) REFERENCES TO HIGHEST RATE.—If the change referred to in
subsection (a) involves a change in the highest rate of tax imposed
by section 1 or llOt)), any reference in this chapter to such highest
rate (other than in a provision imposing a tax by reference to such
rate) shall be treated as a reference to the weighted average of the
highest rates before and after the change determined on the basis of
the respective portions of the taxable year before the date of the
change and on or after the date of the change."
(b) AMENDMENTS RELATED TO SECTIONS 611 AND 612 OF THE 26 use 245 note.
REFORM ACT.—
(1) In the case of dividends received or accrued during 1987—
(A) subparagraph (B) of section 245(cXl) of the 1986 Code
shall be applied by substituting "80 percent" for the
percentage specified therein, and
(B) subparagraph (B) of section 861(aX2) of the 1986 Code
shall be applied by substituting "^""/soths" for the fraction
(2) Paragraph (3) of section 8540)) of the 1986 Code is amended
to read as follows:
"(3) AGGREGATE DIVIDENDS.—For purposes of this subsection—
"(A) IN GENERAL.—In computing the amount of aggregate
dividends received, there shall only be taken into account
dividends received from domestic corporations.
"(B) DIVIDENDS.—For purposes of subparagraph (A), the
term 'dividend' shall not include any distribution from—
"(i) a corporation which, for the taxable year of the
corporation in which the distribution is made, or for
the next preceding taxable year of the corporation, is a
corporation exempt from tax under section 501 (relat-
ing to certain charitable, etc., organizations) or section
521 (relating to farmers' cooperative associations), or
"(ii) a real estate investment trust which, for the
taxable year of the trust in which the dividend is paid,
qualifies under part II of subchapter M (section 856 and
following).
"(C) LIMITATIONS ON DIVIDENDS FROM REGULATED INVEST-
MENT COMPANIES.—In determining the amount of any divi-
dend for purposes of this paragraph, a dividend received
from a regulated investment company shall be subject to
the limitations prescribed in this section."
(c) AMENDMENTS RELATED TO SECTION 614 OF THE REFORM ACT.—
(1) Section 1059(d) of the 1986 Code (relating to extension to
certain property distributions) is amended by striking out para-
102 STAT. 3394 PUBLIC LAW 100-647—NOV. 10, 1988
graph (5) and redesignating paragraphs (6) and (7) as para-
graphs (5) and (6), respectively.
(2) Section 1059(dX5) of the 1986 Code (defining dividend
announcement date), as redesi^ated by paragraph (1), is
amended by inserting "amount or before payment".
(3) Section 1059(dX6) of the 1986 Code (relating to exception
where stock held during entire existence of corporation), as
redesignated by paragraph (1), is amended to read as follows:
"(6) EXCEPTION WHERE STOCK HELD DURING ENTIRE EXISTENCE
OF CORPORATION.—
"(A) I N GENERAL.—Subsection (a) shall not apply to any
extraordinary dividend with respect to any share of stock of
a corporation if—
"(i) such stock was held by the taxpayer during the
entire period such corporation was in existence, and
"(ii) except as provided in r^ulations, no earnings
and profits of such corporation were attributable to
transfers of property from (or earnings and profits of) a
corporation which is not a qualified corporation.
"(B) QUALIFIED CORPORATION.—For purposes of subpara-
graph (A), the term 'qualified corporation' means any cor-
poration (including a predecessor corporation)—
"(i) with respect to which the taxpayer holds directly
or indirectly during the entire period of such corpora-
tion's existence at least the same ownership interest as
the taxpayer holds in the corporation distributing the
extraordinary dividend, and
"(ii) which has no earnings and profits—
"(I) which were earned by, or
"(II) which are attributable to gain on property
which accrued during a period the corporation
holding the property was,
a corporation not described in clause (i).
"(C) APPLICATION OF PARAGRAPH.—This paragraph shall
not apply to any extraordinary dividend to the extent such
application is inconsistent with the purposes of this
SGct^ion
(4) Paragraph (1) of section 1059(e) of the 1986 Code (relating
to treatment of partial liquidation) is amended by striking out
"for purposes of this section (without regard to the holding
period of the stock)" and inserting in lieu thereof: "to which
peu*agraphs (1) and (2) of subsection (a) apply without regard to
the period the taxpayer held such stock".
(5) Paragraph (2) of section 1059(e) of the 1986 Code (relating
to qualif}ring dividends) is amended to read as follows:
'X2) QUALIFYING DIVIDENDS.—
(A) I N GENERAL.—Except as provided in regulations, the
term 'extraordinary dividend' does not include any qualify-
ing dividend (within the meaning of section 243).
(B) EXCEPTION.—Subparagraph (A) shall not apply to
any portion of a dividend which is attributable to earnings
and profits which—
"(i) were earned by a corporation during a period it
was not a member of the affiliated group, or
"(ii) are attributable to gain on property which ac-
crued during a period the corporation holding the prop-
erty was not a member of the affiliated group."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3395
(6) Subparagraph (A) of section 1059(eX3) of the 1986 Code
(relating to qualified preferred dividends) is amended to read as
follows:
"(A) IN GENERAL.—In the case of 1 or more qualified
preferred dividends with respect to any share of stock—
"(i) this section shall not apply to such dividends if
the taxpayer holds such stock for more than 5 years,
and
"(ii) if the taxpayer disposes of such stock before it
has been held for more than 5 years, the aggregate
reduction under subsection (aXD with respect to such
dividends shall not be greater than the excess (if any)
of—
"(I) the qualified preferred dividends paid with
respect to such stock during the period the tax-
paver held such stock, over
(II) the qualified preferred dividends which
would have been paid during such period on the
basis of the stated rate of return."
(7) Clause (i) of section 1059(eX3XC) of the 1986 Code is
amended—
(A) by striking out "any dividend payable" and inserting
in lieu thereof "any fixed dividend payable", and
(B) by adding at the end thereof the following new sen-
tence:
"Such term shall not include any dividend payable
with respect to any share of stock if the actual rate of
return on such stock exceeds 15 percent."
(8) Subparagraph (B) of section 1059(eX3) of the 1986 Code is
amended—
(A) by striking out "subparagraph (A)" and the material
preceding clause (i) and inserting in lieu thereof "this
paragraph", and
(B) by striking out "subparagraph (BXiXII)" in clause (ii)
and inserting in lieu thereof "clause (iXII)".
(9) Subsection (f) of section 1059 of the 1986 Code is amended
by inserting before the period at the end thereof the following:
"and in the case of stock held by pass-thru entities".
(d) AMENDMENTS RELATED TO SECTION 621 OF THE REFORM ACT.—
(IXA) Section 382(eX2) of the 1986 Code is amended—
(i) by inserting "or other corporate contraction" after
"redemption" each place it appears, and
(ii) by inserting "OR OTHER CORPORATE CONTRACTION" after
"REDEMPTION" in the heading thereof.
(B) Clause (ii) of section 382(hX3XA) of the 1986 Code is
amended—
(i) by inserting "or other corporate contraction" after
"redemption" each place it appears, and
(ii) by inserting "OR OTHER CORPORATE CONTRACTIONS"
after "REDEMPTIONS" in the heading thereof.
(C) Section 382(m) of the 1986 Code is amended by inserting
"and" at the end of paragraph (3), by striking out paragraph (4),
and by redesignating paragraph (5) £is paragraph (4).
(D) The amendments made by this paragraph shall apply with 26 USC 382 note.
respect to ownership changes after June 10,1987.
(2) Section 382(gX4XC) of the 1986 Code is amended by insert-
ing "rules similar to" before "the rules".
102 STAT. 3396 PUBLIC LAW 100-647—NOV. 10, 1988
(3)(A) Section 382(hXlXC) of the 1986 Code is amended to read
as follows:
"(C) SPECIAL RULES FOR CERTAIN SECTION 338 GAINS.—If an
election under section 338 is made in connection with an
ownership change and the net unrealized built-in gain is
zero by reason of paragraph (3XB), then, with respect to
such change, the section 382 limitation for the post-change
year in which gain is recognized by reason of such election
' shall be increased by the lesser of—
"(i) the recognized built-in gains by reason of such
election, or
"(ii) the net unrealized built-in gain (determined
without regard to paragraph (3XB))."
(B) Paragraph (5) of section 382(h) of the 1986 Code is
amended by striking out "recognized built-in gains and losses"
and inserting in lieu thereof recognized built-in gains to the
extent such gains increased the section 382 limitation for the
year (or recognized built-in losses to the extent such losses are
treated as pre-change losses)".
(4) Section 382(iX3) of the 1986 Code is amended—
(A) by inserting "the earlier o f before "the 1st day", and
(B) by inserting "or the taxable year in which the trans-
action being tested occurs" after "1st post-change year".
(5XA) Section 382(kXl) of the 1986 Code is amended by insert-
ing "or having a net operating loss for the taxable year in which
the ownership change occurs after "carryover".
(B) Section 382(kX2) of the 1986 Code is amended to read as
follows:
"(2) OLD LOSS CORPORATION.—The term 'old loss corporation'
means any corporation—
"(A) with respect to which there is an ownership change,
and
"(B) which (before the ownership change) was a loss
corporation."
(6) Section 382(1X3XA) of the 1986 Code is amended by striking
out "and" at the end of clause (iii), and by striking out clause
(iv) and inserting in lieu thereof the following new clauses:
"(iv) except to the extent provided in regulations, an
option to acquire stock shall be treated as exercised if
such exercise results in an ownership change, and
"(v) in attributing stock from an entity under para-
graph (2) of section 318(a), there shall not be taken into
account—
"(I) in the case of attribution from a corporation,
stock which is not treated as stock for purposes of
this section, or
"(II) in the case of attribution from another
entity, an interest in such entity similar to stock
described in subclause (I)."
(7) Clause (ii) of section 382(1X5XA) of the 1986 Code is
amended by striking out "immediately after such ownership
change" and inserting in lieu thereof "after such ownership
change and as a result of being shareholders or creditors imme-
diately before such change".
(8) Section 382(1X5XF) of the 1986 Code is amended—
(A) by inserting " '1504(aX2XB)' for '1504(aX2)' and" after
"substituting" in clause (iXD, and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3397
(B) by striking out "deposits described in subclause (II)"
in clause (iiXIII) and inserting in lieu thereof "the amount
of deposits in the new loss corporation immediately after
the change".
(9) Paragraph (6) of section 382(1) of the 1986 Code is amended
by striking out "shall be the value of the new loss corporation
immediately after the ownership change" and inserting in lieu
thereof "shall reflect the increase (if any) in value of the old loss
corporation resulting from any surrender or cancellation of
creditors' claims in the transaction".
(10) Section 382(1) of the 1986 Code is amended by adding at
the end thereof the following new paragraph:
"(8) PREDECESSOR AND SUCCESSOR ENTITIES.—Except as pro-
vided in regulations, any entity and any predecessor or succes-
sor entities of such entity shall be treated as 1 entity."
(11) Paragraph (1) of section 621(f) of the Reform Act is 26 use 382 note.
amended to read as follows:
"(1) AMENDMENTS MADE BY SUBSECTIONS (a), (b), and (c).—
"(A) I N GENERAL.—
"(i) CHANGES AFTER 1986.—The amendments made by
subsections (a), (b), and (c) shall apply to any ownership
change after December 31,1986.
"(ii) PLANS OF REORGANIZATION ADOPTED BEFORE
1987.—For purposes of clause (i), any equity structure
shift pursuant to a plan of reorganization adopted
before January 1, 1987, shall be treated as occurring
when such plan was adopted.
"(B) TERMINATION OF OLD SECTION 382.—Except in a case
described in any of the following paragraphs—
"(i) section 382(a) of the Internal Revenue Code of
1954 (as in effect before the amendment made by
subsection (a) and the amendments made by section 806
of the Tax Reform Act of 1976) shall not apply to any
increase in percentage points occurring after Decem-
ber 31,1988, and
"(ii) section 382(b) of such Code (as so in effect) shall
' not apply to any reorganization occurring pursuant to
a plan of reorganization adopted after December 31,
1986.
In no event shall sections 382 (a) and (b) of such Code (as so
in effect) apply to any ownership change described in
subparagraph (A).
"(C) COORDINATION WITH SECTION 382 (i).—For purposes of
section 382(i) of the Internal Revenue CJode of 1986 (as
added by this section), any equity structure shift pursuant
to a plan of reorganization adopted before January 1, 1987,
shall be treated as occurring when such plan was adopted."
(12XA) Section 621(fK2XC) of the Reform Act is amended by
inserting "and reincorporated in Delaware in 1987," after
"1924,".
(B) Clause (ii) of section 621(fK2XC) of the Reform Act is
amended to read as follows:
"(ii) the amendments made by subsections (e) and (f)
of section 806 of the Tax Reform Act of 1976 shall not
apply to such debt restructuring, except that the
amendment treated as part of such subsections under
section 59(b) of the Tax Reform Act of 1984 (relating
102 STAT. 3398 PUBLIC LAW 100-647—NOV. 10, 1988
to qualified workouts) shall apply to such debt restruc-
turing."
26 use 382 note. (13) Subparagraph (D) of section 621(fX2) of the Reform Act is
amended—
(A) by striking out "or reorganization", and
(B) by adding at the end thereof the following new sen-
tence: "For purposes of the preceding sentence, in applying
section 382 (as so in effect), if a person has a warrant to
acquire stock, such stock shall be considered as owned by
such person."
(14) Section 621(fK3) of the Reform Act is amended by striking
out "after December 31,1986".
(15) Paragraph (4) of section 621(f) of the Reform Act is
amended by striking out the last sentence and inserting in lieu
thereof the following:
"Any regulations prescribed under section 382 of the Internal
Revenue Code of 1986 (as added by subsection (a)) which have
the effect of treating a group of shareholders as a separate
5-percent shareholder by reason of a public offering shall not
apply to any public offering before Jsuiuary 1, 1989, for the
benefit of institutions described in section 591 of such Code.
Unless the corporation otherwise elects, an underwriter of any
offering of stock in a corporation before September 19, 1986
(January 1, 1989, in the case of an offering for the benefit of an
institution described in the preceding sentence), shall not be
treated as acquiring any stock of such corporation by reason of a
firm commitment underwriting to the extent the stock is dis-
posed of pursuant to the offering (but in no event later than 60
days after the initial offering)."
(16) Subparagraph (A) of section 621(fK7) of the Reform Act is
amended by striking out "the parent corporation referred to in
section 203(dX13XB)" and inserting in lieu thereof "a parent
corporation incorporated in Msu-ch 1980 under the laws of
Delaware".
(17XA) Subsection (e) of section 382 of the 1986 Code is
amended by adding at the end thereof the following new
paragraph:
"(3) TREATMENT OF FOREIGN CORPORATIONS.—Except as other-
wise provided in regulations, in determining the value of any
old loss corporation which is a foreign corporation, there shall
be taken into account only items treated as connected with the
conduct of a trade or business in the United States."
26 use 382 note. (B) The amendment made by subparagraph (A) shall apply to
any ownership change after June 10, 1987. For purposes of the
preceding sentence, any equity structure shift pursuant to a
plan of reorganization adopted on or before June 10, 1987, shall
be treated as occurring when such plan was adopted.
(18) Subparagraph (C) of section 382(1X5) of the 1986 Code is
amended to read as follows:
"(C) REDUCTION OF TAX ATTRIBUTES WHERE DISCHARGE OF
INDEBTEDNESS.—
"(i) IN GENERAL.—In any case to which subparagraph
(A) applies, 50 percent of the amount which, but for the
application of section 108(eX10XB), would have been
applied to reduce tax attributes under section 1080t))
shall be so applied.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3399
"(ii) CLARIFICATION WITH SUBPARAGRAPH (B).—In
applying clause (i), there shall not be taken into ac-
count any indebtedness for interest described in
subparagraph (B)."
(19) Subparagraph (E) of section 382(1X5) of the 1986 Code is
amended by striking out so much of such subparagraph as
precedes clause (i) thereof and inserting in lieu thereof the
following:
"(E) ONLY CERTAIN STOCK TAKEN INTO ACCOUNT.—For pur-
poses of subparagraph (AXii), stock transferred to a creditor
shall be taken into account only to the extent such stock is
transferred in satisfaction of indebtedness and only if such
indebtedness—".
(20) Paragraph (4) of section 382(h) of the 1986 Code is
amended—
(A) by inserting before the comma at the end of subpara-
graph (A) the following: "(or to the extent the amount so
disallowed is attributable to capital losses, under rules
similar to the rules for the carrying forward of net capital
losses)", and
(B) by striking out "TREATED AS A NET OPERATING LOSS" in
the paragraph heading and inserting in lieu thereof "AL-
LOWED AS A CARRYFORWARD".
(21) Paragraph (1) of section 382(g) of the 1986 Code is
amended—
(A) by striking out "new loss corporation" and inserting
in lieu thereof "loss corporation", and
(B) by striking out "old loss corporation" and inserting in
lieu thereof "loss corporation".
(22) Paragraph (6) of section 382(h) of the 1986 Code is
amended to read as follows:
"(6) TREATMENT OF CERTAIN BUILT-IN ITEMS.—
"(A) INCOME ITEMS.—Any item of income which is prop-
erly taken into account during the recognition period but
which is attributable to periods before the change date shall
be treated as a recognized built-in gain for the taxable year
in which it is properly taken into account.
"(B) DEDUCTION ITEMS.—Any amount which is allowable
as a deduction during the recognition period but which is
attributable to pericSs before the change date shall be
treated as a recognized built-in loss for the taxable year for
which it is allowable as a deduction.
"(C) ADJUSTMENTS.—The amount of the net unrealized
built-in gain or loss shall be properly adjusted for amounts
treated as recognized built-in gains or losses under this
paragraph."
(23) Paragraph (9) of section 382(h) of the 1986 Code is
amended by striking out "is transferred" and inserting in lieu
thereof "was acquired (or is subsequently transferred)".
(24) Subsection (m) of section 382 of the 1986 Code (as
amended by paragraph (1)) is amended by striking out "and" at
the end of paragraph (3), by striking out the period at the end of
paragraph (4) and inserting in lieu thereof ", and", and by
adding at the end thereof the following:
"(5) providing, in the case of any group of corporations de-
scribed in section 1563(a) (determined by substituting '50 per-
cent' for '80 percent' each place it appears and determined
102 STAT. 3400 PUBLIC LAW 100-647—NOV. 10, 1988
without regard to paragraph (4) thereof), appropriate adjust-
ments to value, built-in gain or loss, and other items so that
items are not omitted or taken into account more than once."
(25) Clause (ii) of section 382(1X5XA) of the 1986 Code is
amended by striking out "stock of controlling corporation" and
inserting in lieu thereof "stock of a controlling corporation".
(26) Clause (ii) of section 382(hX3XB) of the 1986 Code is
amended by striking out "there shall not" and inserting in lieu
thereof "except as provided in regulations, there shall not".
(27) Subparagraph (B) of section 382(1X5) of the 1986 Code is
amended by striking out "the net operating loss deduction
under section 172(a) for any post-change year shall be deter-
mined" and inserting in lieu thereof "the pre-chcmge losses and
excess credits (within the meaning of section 383(aX2)) which
may be carried to a post-change year shall be computed".
(28XA) Clause (ii) of section 382(hX3XA) of the 1986 Code is
amended by striking out "determinations under clause (i)" and
inserting in lieu thereof "to the extent provided in regulations,
determinations under clause (i)".
26 use 382 note. (B) The amendment made by subparagraph (A) shall apply in
the case of ownership changes on or sifter June 21,1988.
(29) Subclause (I) of section 382(lX5XFXiii) of the 1986 Code is
amended by striking out "section 368(a)(DXii)" and inserting in
lieu thereof "section 368(aX3XDXii)".
(e) AMENDMENTS RELATED TO SECTION 631 OF THE REFORM ACT.—
(1) Clause (ii) of section 336(dX2XB) of the 1986 Code is
amended to read as follows:
"(ii) CERTAIN ACQUISITIONS TREATED AS PART OF
PLAN.—For purposes of clause (i), any property de-
scribed in clause (iXD acquired by the liquidated cor-
poration after the date 2 years before the date of the
adoption of the plan of complete liquidation shall,
except as provided in regulations, be treated as ac-
quired as part of a plan described in clause (iXII)."
(2) Paragraph (3) of section 336(d) of the 1986 Code is amended
by adding at the end thereof the following new sentence: "The
preceding sentence shall apply to any distribution to the 80-
percent distributee only if subsection (a) or (bXD of section 337
applies to such distribution."
(3) Subsection (e) of section 336 of the 1986 Code is amended
by striking out "such corporation mav elect" and inserting in
lieu thereof "an election may be made .
(4) Subparagraph (B) of section 337(bX2) of the 1986 Code is
amended—
(A) by striking out "or 511(bX2)" in clause (i),
(B) by striking out "in an unrelated trade or business (as
defined in section 513)" in clause (i) and inserting in lieu
thereof "in an activity the income from which is subject to
tax under section 511(a)", and
(C) by striking out "an unrelated trade or business of such
organization" in clause (ii) and inserting in lieu thereof "an
activity referred to in clause (i)".
(5XA) Subsection (d) of section 337 of the 1986 Code is
amended—
(i) by striking out "made to this subpart by the Tax
Reform Act of 1986" and inserting in lieu thereof "made by
subtitle D of title VI of the Tax Reform Act of 1986", and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3401
(ii) by inserting "or through the use of a regulated invest-
ment company, real estate investment trust, or tax-exempt
entity" after "subchapter)" in paragraph (1).
(B) The amendment made by subparagraph (A)(ii) shall not 26 USC 337 note.
apply to any reorganization if before June 10,1987—
(i) the board of directors of a party to the reorganization
adopted a resolution to solicit shareholder approval for the
transaction, or
(ii) the shareholders or the board of directors of a party to
the reorganization approved the transaction.
(6) Subsection (b) of section 334 of the 1986 Code is amended to
read as follows:
'(b) LIQUIDATION OF SUBSIDIARY.—
"(1) I N GENERAL.—If property is received by a corporate
distributee in a distribution in a complete liquidation to which
section 332(a) applies (or in a transfer described in section
337(bXl)), the basis of such property in the hands of such
distributee shall be the same as it would be in the hands of the
transferor; except that, in any case in which gain or loss is
recognized by the liquidating corporation with respect to such
property, the basis of such property in the hands of such
distributee shall be the fair market value of the property at the
time of the distribution.
"(2) CORPORATE DISTRIBUTEE.—For purposes of this subsection,
the term 'corporate distributee' means only the corporation
which meets the stock ownership requirements specified in
section 332(b)."
(7XA) Subparagraph (B) of section 453(hXl) of the 1986 Code is
amended by striking out "to one person" and inserting in lieu
thereof "to 1 person in 1 transaction".
(B) Subparagraph (E) of section 453(hXl) of the 1986 Code is
amended by striking out "section 368(cXl)" and inserting in lieu
thereof "section 368(c)".
(8XA) Part VII of subchapter C of chapter 1 of the 1986 Code is
hereby repealed.
(B) Subsection (b) of section 311 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) SPECIAL RULE FOR CERTAIN DISTRIBUTIONS OF PARTNERSHIP
OR TRUST INTERESTS.—If the property distributed consists of an
interest in a partnership or trust, the Secretary may by regula-
tions provide that the amount of the gain recognized under
paragraph (1) shall be computed without regard to any loss
attributable to property contributed to the partnership or trust
for the principal purpose of recognizing such loss on the dis-
tribution."
(C) The table of parts for subchapter C of chapter 1 of the 1986
Code is amended by striking out the item relating to part VII.
(9) Paragraph (1) of section 267(a) of the 1986 Code is
amended—
(A) by striking out "(other than a loss in case of a
distribution in corporate liquidation)", and
(B) by adding at the end thereof the following new sen-
tence: The preceding sentence shall not apply to any loss
of the distributing corporation (or the distributee) in the
case of a distribution in complete liquidation."
(10) Paragraph (1) of section 301(b) of the 1986 Code is
amended to read as follows:
102 STAT. 3402 PUBLIC LAW 100-647—NOV. 10, 1988
"(1) GENERAL RULE.—For purposes of this section, the amount
of any distribution shall be the amount of money received, plus
the fair market value of the other property received."
(11) Subsection (d) of section 301 of the 1986 Code is amended
to read as follows:
"(d) BASIS.—The basis of property received in a distribution to
which subsection (a) applies s h ^ l be the fair market value of such
property."
(12) Section 301 of the 1986 Code is amended by striking out
subsection (e) and by redesignating subsections (f) and (g) as
subsections (e) and (0, respectively.
(13XA) Subsection (a) of section 367 of the 1986 Code is
amended by redesignating paragraph (5) as paragraph (6) and
by inserting after paragraph (4) the following new paragraph:
"(5) PARAGRAPHS (2) AND (3) NOT TO APPLY TO CERTAIN SEC-
TION 361 TRANSACTIONS.—Paragraphs (2) and (3) shall not apply
in the case of an exchange described in section 361. Subject to
such basis adjustments and such other conditions as shall be
provided in regulations, the preceding sentence shall not apply
if the transferor corporation is controlled (within the meaning
of section 368(c)) by 5 or fewer domestic corporations. For
purposes of the preceding sentence, all members of the same
affiliated group (within the meaning of section 1504) shall be
treated as 1 corporation."
26 use 367 note. (B) The amendment made by subparagraph (A) shall apply to
exchanges on or after June 21, 1988, except that such amend-
ment shall not apply to any exchange pursuant to any reorga-
nization for which a plan of reorganization was adopted before
June 21,1988.
(C) Section 367(eX2) of the 1986 Code (as amended by the
Reform Act) shall not apply in the case of any corporation
completely liquidated before June 10, 1987, into a corporation
organized in a country which has an income tax treaty with the
United States
(14XA) Subsection (d) of section 1248 of the 1986 Code is
amended by striking out paragraph (2).
(B) Subparagraph (B) of section 1248(fXl) of the 1986 Code is
amended to read as follows:
"(B) such domestic corporation distributes stock of such
foreign corporation in a distribution to which section 311(a),
337, or 361(cXl) applies,".
(C) Paragraph (1) of section 1248(f) of the 1986 Code is
amended by striking out "distribution, sale, or exchange" in the
last sentence and inserting in lieu thereof "distribution".
(D) Subsection (f) of section 1248 of the 1986 Code is amended
by striking out paragraph (3) and by redesignating paragraph
(4) as paragraph (3).
(E) The subsection heading for section 1248(f) of the 1986 Code
is amended by striking out "SECTION 311, 336, OR 337 TRANS-
ACTIONS" and inserting in lieu thereof "NONRECOGNITION
TRANSACTIONS".
(15) Paragraph (1) of section 995(c) of the 1986 Code is
amended by inserting "or" a t the end of subparagraph (A), by
striking out ", or" at the end of subparagraph (B) and inserting
in lieu thereof a period, and by striking out subparagraph (C)
and the sentence following subparagraph (C).
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3403
(16) Subsection (d) of section 245 of the 1986 Code is hereby
(17) Paragraph (14) of section 1223 of the 1986 Code is
amended to read as follows:
"(14) CROSS REFERENCE.—
"For special holding period provision relating to certain partnership
distributions, see section 735(b)."
(18) Clause (ii) of section 341(eXl)(C) of the 1986 Code is
amended—
(A) by striking out "sale or exchange" the first place it
appears and inserting in lieu thereof "liquidating sale or
exchange", and
(B) by striking out ", gain or loss on which was not
recognized to such other corporation under section 337(a),".
(19) Subsection (1) of section 897 of the 1986 Code is hereby
I*613Gd.l6Q
(20) Paragraph (7) of section 338(h) of the 1986 Code is hereby
(21)(A) The heading of subsection (b) of section 336 of the 1986
Code is amended by striking out " I N EXCESS OF BASIS".
(B) The heading of paragraph (2) of section 311(b) of the 1986
Code is amended by striking out " I N EXCESS OF BASIS".
(22) Section 453B of the 1986 Code is amended by adding at
the end thereof the following new subsection:
"(h) CERTAIN LIQUIDATING DISTRIBUTIONS BY S CORPORATIONS.—
If—
"(1) an installment obligation is distributed by an S corpora-
tion in a complete liquidation, and
"(2) receipt of the obligation is not treated as payment for the
stock by reason of section 453(hXl),
then, except for purposes of any tax imposed by subchapter S, no
gain or loss with respect to the distribution of the obligation shall be
recognized by the distributing corporation. Under regulations pre-
scribed by the Secretary, the character of the gain or loss to the
shareholder shall be determined in accordance with the principles of
section 1366(b)."
(f) AMENDMENTS RELATED TO SECTION 632 OF THE REFORM ACT.—
(1) Subsection (a) of section 1374 of the 1986 Code is amended
by striking out "a recognized built-in gain" and inserting in lieu
thereof "a net recognized built-in gain .
(2) Subsection (b) of section 1374 of the 1986 Code is amended
by striking out paragraphs (1) and (2) and inserting in lieu
thereof the following:
"(1) I N GENERAL.—The amount of the tax imposed by subsec-
tion (a) shall be computed by applying the highest rate of tax
specified in section 11(b) to the net recognized built-in gain of
the S corporation for the taxable year.
"(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS AL-
LOWED.—Notwithstanding section 1371(bXl), any net operating
loss carryforward arising in a taxable year for which the cor-
poration was a C corporation shall be allowed for purposes of
this section as a deduction against the net recognized built-in
gain of the S corporation for the taxable year. For purposes of
determining the amount of any such loss which may be carried
to subsequent taxable years, the amount of the net recognized
built-in gain shall be treated as taxable income. Rules similar to
102 STAT. 3404 PUBLIC LAW 100-647—NOV. 10, 1988
the rules of the preceding sentences of this paragraph shall
apply in the case of a capital loss carryforward arising in a
taxable year for which the corporation was a C corporation."
(3) Subparagraph (B) of section 1374(bX4) of the 1986 Code is
amended to read as follows:
"(B) the amount of the net recognized built-in gain shall
be treated as the taxable income."
(4) Paragraph (2) of section 1374(c) of the 1986 Code is amend-
ed by striking out "recognized built-in gains" each place it
appears and inserting in lieu thereof "net recognized built-in
gain".
(5XA) Section 1374 of the 1986 Code is amended by striking
out all that follows paragraph (1) of subsection (d) and inserting
in lieu thereof the following:
"(2) N E T RECOGNIZED BUILT-IN GAIN.—
"(A) IN GENERAL.—The term 'net recognized built-in gain'
means, with respect to any taxable year in the recognition
period, the lesser of—
"(i) the amount which would be the taxable income of
the S corporation for such taxable year if (except as
provided in subsection (bX2)) only recognized built-in
gains and recognized built-in losses were taken into
account, or
"(ii) such corporation's taxable income for such tax-
able year (determined as provided in section
1375(bXlXB)).
"(B) CARRYOVER.—If, for any taxable year, the amount
referred to in clause (i) of subparagraph (A) exceeds the
amount referred to in clause (ii) of subparagraph (A), such
excess shall be treated as a recognized built-in gain in the
succeeding taxable year. The preceding sentence shall
apply only in the case of a corporation treated as an S
corporation by reason of an election made on or after
March 31,1988.
"(3) RECOGNIZED BUILT-IN GAIN.—The term 'recognized built-
in gain' means any gain recognized during the recognition
period on the disposition of any asset except to the extent that
the S corporation establishes that—
"(A) such asset was not held by the S corporation as of
the beginning of the 1st taxable year for which it w£is an S
corporation, or
*(B) such gain exceeds the excess (if any) of—
"(i) the fair market value of such asset as of the
beginning of such 1st taxable year, over
(ii) the adjusted basis of the asset as of such time.
"(4) RECOGNIZED BUILT-IN LOSSES.—The term 'recognized built-
in loss' means any loss recognized during the recognition period
on the disposition of any asset to the extent that the S corpora-
tion establishes that—
"(A) such asset was held by the S corporation as of the
beginning of the 1st taxable year referred to in paragraph
(3), and
"(B) such loss does not exceed the excess of—
"(i) the adjusted basis of such asset as of the begin-
ning of such 1st taxable year, over
"(ii) the fair market value of such Eisset as of such
time.
PUBLIC L A W 100-647—NOV. 10, 1988 102 STAT. 3405
"(5) TREATMEENT OP CERTAIN BUILT-IN ITEMS.—
"(A) INCOME ITEMS.—Any item of income which is prop-
erly taken into account during the recognition period but
which is attributable to periods before the 1st taxable year
for which the corporation was an S corporation shall be
treated as a recognized built-in gain for the taxable year in
which it is properly taken into account.
"(B) DEDUCTION ITEMS.—Any amount which is allowable
as a deduction during the recc^nition period but which is
attributable to periods before the 1st taxable year referred
to in subparagraph (A) shall be treated as a recognized
built-in loss for the taxable year for which it is allowable as
a deduction.
"(C) ADJUST»«ENT TO NET UNREAUZED BUILT-IN GAIN.—The
amount of the net unrealized built-in gain shall be properly
adjusted for amounts treated as recognized built-in gains or
losses under this paragraph.
"(6) TREATMENT OF CERTAIN PROPERTY.—If the adjusted basis
of any asset is determined (in whole or in part) by reference to
the adjusted basis of any other asset held by the S corporation
as of the b ^ i n n i n g of the 1st taxable year referral to in
paragraph (3)—
"(A) such asset shall be treated as held by the S corpora-
tion as of the beginning of such 1st taxable year, and
"(B) any determination under paragraph (3XB) or (4XB)
with respect to such asset shall be made by reference to the
fair market value and adjusted basis of such other asset as
of the beginning of such 1st taxable year.
"(7) RECOGNITION PERIOD.—The term 'recognition period'
means the 10-year period beginning with the 1st day of the 1st
taxable year for which the corporation was an S corporation.
"(8) TREATMENT OF TRANSFER OF ASSETS FROM C CORPORATION
TO s CORPORATION.—
"(A) I N GENERAL.—Except to the extent provided in regu-
lations, if—
"(i) an S corporation acquires any asset, and
"(ii) the S corporation's basis in such asset is deter-
mined (in whole or in part) by reference to the basis of
such asset (or any other property) in the hands of a C
corporation,
then a tax is hereby imposed on any net recognized built-in
gain attributable to any such assets for any taxable year
b a n n i n g in the rec(^nition period. The amount of such tax
shall be determined under the rules of this section as
modified by subparagraph (B).
"(B) MODIFICATIONS.—For purposes of this paragraph, the
modifications of this subparagraph are as follows:
"(i) I N GENERAL.—The preceding paragraphs of this
subsection shall be applied by taking into account the
day on which the assets were acquired by the S corpora-
tion in lieu of the b a n n i n g of the 1st taxable year for
which the corporation was an S corporation.
"(ii) SUBSECTION ( C ) ( 1 ) NOT TO APPLY.—Subsection
(cXD shall not apply.
"(9) REFERENCE TO 1ST TAXABLE YEAR.—Any reference in this
section to the 1st taxable year for which the corporation was an
S corporation shall be treated as a reference to the 1st taxable
102 STAT. 3406 PUBLIC LAW 100-647—NOV. 10, 1988
year for which the corporation was an S corporation pursuant to
its most recent election under section 1362.
"(e) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary to carry out the purposes of this section
including regulations providing for the appropriate treatment of
siicc6ssoir con30i*&tioiis
(B) Subparagraph (B) of section 1375(bXl) of the 1986 Code is
amended to read as follows:
"(B) LIMITATION.—The amount of the excess net passive
income for any taxable year shall not exceed the amount of
the corporation's taxable income for such taxable year as
determined under section 63(a)—
"(i) without regard to the deductions allowed by part
VIII of subchapter B (other than the deduction allowed
by section 248, relating to organization expenditures),
and
"(ii) without regard to the deduction under section
172."
(C) Subsection (b) of section 1375 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(4) COORDINATION WITH SECTION 1374.—Notwithstanding
paragraph (3), the amount of passive investment income shall
be determined by not taking into account any recognized built-
in gain or loss of the S corporation for any taxable year in the
recognition period. Terms used in the preceding sentence shall
have the same respective meanings as when used in section
1374."
(D) Subsection (c) of section 1375 of the 1986 Code is amended
to read as follows:
"(c) CREDITS NOT ALLOWABLE.—No credit shall be allowed under
part IV of subchapter A of this chapter (other than section 34)
against the tax imposed by subsection (a)."
(E) Paragraph (2) of section 1366(f) of the 1986 Code is
amended by striking out "as defined in section 1374(dX2)" and
inserting in lieu thereof "within the meaning of section 1374".
(6) Paragraph (3) of section 1362(d) of the 1986 Code is
amended—
(A) by striking out clause (v) of subparagraph (D), and
(B) by adding a t the end thereof the following new
subparagraph:
"(E) SPECIAL RULE FOR OPTIONS AND COMMODITY DEAL-
INGS.—
"(i) IN GENERAL.—In the case of any options dealer or
commodities de£der, passive investment income shall be
determined by not taking into account any gain or loss
(in the normal course of the taxpayers activity of
dealing in or trading section 1256 contracts) from any
section 1256 contract or property related to such a
contract.
"(ii) DEFINITIONS.—For purposes of this subpara-
graph—
"(I) OPTIONS DEALER.—The term 'options dealer'
has the meaning given such term by section
1256(gX8).
"(II) CoMMODmES DEALER.—The term 'commod-
ities dealer' means a person who is actively en-
gaged in trading section 1256 contracts and is
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3407
registered with a domestic board of trade which is
designated as a contract market by the Commod-
ities Futures Trading Commission.
"(Ill) SECTION 1256 CONTRACT.—The term 'section
1256 contract' has the meaning given to such term
by section 1256(b)."
(7) The subsection (d) of section 1363 of the 1986 Code which
relates to distributions of appreciated property, and subsection
(e) of section 1363 of the 1986 C!ode, are hereby repealed.
(g) AMENDMENTS RELATED TO SECTION 633 OF THE REFORM ACT.—
(1) Subsection (b) of section 633 of the Reform Act is amended 26 USC 336 note,
to read as follows:
"(b) BUILT-IN GAINS OF S CORPORATIONS.—
"(1) I N GENERAL.—The amendments made by section 632
(other than subsection (b) thereof) shall apply to taxable years
beginning after December 31, 1986, but only in cases where the
return for the taxable year is filed pursuant to an S election
made after December 31,1986.
"(2) APPLICATION OF PRIOR LAW.—In the case of any taxable
year of an S corporation which begins after December 31, 1986,
and to which the amendments made by section 632 (other than
subsection (b) thereof) do not apply, paragraph (1) of section
1374(b) of the Internal Revenue Code of 1954 (as in effect on the
date before the date of the enactment of this Act) shall be
applied as if it read as follows:
" '(1) an amount equal to 34 percent of the amount by which
the net capital gain of the corporation for the taxable year
exceeds $25,000, or' ".
(2) Subparagraph (B) of section 633(cXl) of the Reform Act is
amended by striking out "50 percent or more" and inserting in
lieu thereof "more than 50 percent".
(3) Paragraph (1) of section 633(d) of the Reform Act is
amended—
(A) by striking out "this section" and inserting in lieu
thereof "this subtitle",
(B) by striking out "would be recognized and inserting in
lieu thereof "would be recognized by the liquidating cor-
poration", and
(C) by adding at the end thereof the following new sen-
tence: "Section 333 of the Internal Revenue Code of 1954 (as
in effect on the day before the date of the enactment of this
Act) shall continue to apply to any complete liquidation
described in the preceding sentence.'.
(4) Subparagraph (C) of section 633(d)(2) of the Reform Act is
amended to read as follows:
"(C) any gain on an asset acquired by the qualified cor-
poration if—
"(i) the basis of such asset in the hands of the quali-
fied corporation is determined (in whole or in part) by
reference to the basis of such asset in the hands of the
person from whom acquired, and
"(ii) a principal purpose for the transfer of such asset
to the qualified corporation was to secure the benefits
of this subsection."
(5)(A) Subparagraph (A) of section 633(d)(5) of the Reform Act
is amended by striking out "10 or fewer qualified persons" and
inserting in lieu thereof "a qualified group".
102 STAT. 3408 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 336 note. (B) Paragraph (6) of section 633(d) of the Reform Act is
amended to read as follows:
"(6) DEFINITIONS AND SPECIAL RULES.—For purposes of this
subsection—
"(A) Q U A U F I E D GROUP.—
"(i) IN GENERAL.—Except as provided in clause (ii),
the term 'qualified group' means any group of 10 or
fewer qualified persons who at all times during the 5-
year period ending on the date of the adoption of the
plan of complete liquidation (or, if shorter, the period
during which the corporation or any predecessor was in
existence) owned (or was treated as owning under the
rules of subparagraph (O) more than 50 percent (by
value) of the stock in such corporation.
"(ii) 5-YEAR OWNERSHIP REQUIREMENT NOT TO APPLY IN
CERTAIN CASES.—In the case of—
"(I) any complete liquidation pursuant to a plan
of liquidation adopted before March 31,1988,
"(II) any distribution not in liquidation made
before March 31,1988,
"(III) an election to be an S corporation filed
before March 31,1988, or
"(IV) a transaction described in section 338 of the
Internal Revenue Code of 1986 where the acquisi-
tion date (within the meaning of such section 338)
is before March 31,1988,
the term 'qualified group' means any group of 10 or
fewer qualified persons.
"(B) QuAUFiED PERSON.—The term 'qualified person'
means—
"(i) an individual,
"(ii) an estate, or
"(iii) any trust described in clause (ii) or clause (iii) of
section 1361(cX2XA) of the Internal Revenue (Dode of
1986.
"(C) ATTRIBUTION RULES.—
"(i) IN GENERAL.—Any stock owned by a corporation,
trust (other than a trust referred to in subparagraph
(BXiii), or partnership shall be treated as owned propor-
tionately by its shareholders, beneficiaries, or partners,
and shall not be treated as owned by such corporation,
trust, or partnership. Stock considered to be owned by a
person by reason of the application of the preceding
sentence shall, for purposes of applying such sentence,
be treated as actually owned by such person.
"(ii) FAMILY MEMBERS.—Stock owned (or treated as
owned) by members of the same family (within the
meaning of section 318(aXl) of the Internal Revenue
(Dode of 1986) shall be treated as owned by 1 person, and
shall be treated as owned by such 1 person for any
period during which it was owned (or treated as owned)
by any such member.
"(iii) TREATMENT OF CERTAIN TRUSTS.—Stock owned
(or treated as owned) by the estate of any decedent or
by any trust referred to in subparagraph (BXiii) with
respect to such decedent shall be treated as owned by 1
person and shall be treated as owned by such 1 person
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3409
for the period during which it was owned (or treated as
owned) by such estate or any such trust or by the
decedent.
"(D) SPECIAL HOLDING PERIOD RULES.—Any property ac- Real property,
quired by reason of the death of an individual shall be
treated as owned at all times during which such property
was owned (or treated as owned) by the decedent.
"(E) CONTROLLED GROUP OF CORPORATIONS.—All members
of the same controlled group (as defined in section 267(f)(1)
of such Code) shall be treated as 1 corporation for purposes
of determining whether any of such corporations met the
requirement of paragraph (5)(B) and for purposes of deter-
mining the applicable percentage with respect to any of
such corporations. For purposes of the preceding sentence,
an S corporation shall not be treated as a member of a
controlled group unless such corporation was a C corpora-
tion for its taxable year which includes August 1,1986, or it
was not described for such taxable year in paragraph (1) or
(2) of section 1374(c) of such Code (as in effect on the day
before the date of the enactment of this Act)."
(6) Subsection (d) of section 633 of the Reform Act is amended 26 USC 336 note.
by adding at the end thereof the following new paragraph:
"(9) APPLICATION TO NONUQUIDATING DISTRIBUTIONS.—The
provisions of this subsection shall also apply in the case of any
distribution (not in complete liquidation) made by a qualified
corporation before January 1, 1989, without regard to whether
such corporation is completely liquidated."
(7) Paragraph (8) of the section 633(d) of the Reform Act is
amended by striking out "becomes an S corporation for a tax-
able year beginning before January 1, 1989' and inserting in
lieu thereof "makes an election to be an S corporation under
section 1362 of such Code before January 1, 1989, without
regard to whether such corporation is completely liquidated".
(8) Section 633 of the Reform Act is amended by redesignating
the subsections following the first subsection (d) as subsections
(e), (f), and (g), respectively.
(9) Subsection (fK2) of section 633 of the Reform Act (as so
redesignated) is amended by striking out "May 9, 1929" and
inserting in lieu thereof "May 9, 1929 (or any direct or indirect
subsidiary of such corporation)".
(10) Paragraph (3) of section 633(f) of the Reform Act (as so
redesignated) is amended by striking out "of such Code)" in the
last sentence thereof and inserting in lieu thereof "of such
Code".
(11) Subclause (I) of section 633(fK4XA)(i) of the Reform Act (as Massachusetts.
so redesignated) is amended by striking out "binding on the
selling corporation to sell substantially all its assets" and insert-
ing in lieu thereof "to sell substantially all of the assets of a
selling corporation organized under the laws of Massachusetts
on October 20,1976,".
(12) Subparagraph (A) of section 633(f)(5) of the Reform Act (as
so redesignated) is amended to read as follows:
"(A) a voting trust established not later than December
31, 1987, shall qualify as a trust permitted as a shareholder
of an S corporation and shall be treated as only 1 share-
holder if the holders of beneficial interests in such voting
trust are—
102 STAT. 3410 PUBLIC LAW 100-647—NOV. 10, 1988
"(i) employees or retirees of such corporation, or
"(ii) in the case of stock or voting trust certificates
acquired from an employee or retiree of such corpora-
tion, the spouse, child, or estate of such employee or
retiree or a trust created by such employee or retiree
which is described in section 1361(cX2) of the Internal
Revenue Code of 1986 (or treated as described in such
section by reason of section 1361(d) of such Code), and",
(h) AMENDMENTS RELATED TO SECTION 641 OF THE REFORM ACT.—
(1) Paragraph (3) of section 1060(b) of the 1986 Code is
amended by striking out "the Secretary may find necessary"
and inserting in lieu thereof "the Secretary deems necessary".
(2) Section 1060 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(d) TREATMENT OF CERTAIN PARTNERSHIP TRANSACTIONS.—In the
case of a distribution of partnership property or a transfer of an
interest in a partnership—
"(1) the rules of subsection (a) shall apply but only for pur-
poses of determining the value of goodwill or going concern
value (or similar items) for purposes of applying section 755, and
"(2) if section 755 applies, such distribution or transfer (as the
case may be) shall be treated as an applicable asset acquisition
for purposes of subsection (b)."
(3XA) Subparagraph (B) of section 6724(dXl) of the 1986 Code
(defining information return) is amended by striking out "or" at
the end of clause (ix), by striking out the period at the end of
clause (x) and inserting in lieu thereof ", or", and by adding at
the end thereof the following new clause:
"(xi) section 1060(b) (relating to reporting require-
ments of transferors and transferees in certain asset
acquisitions)."
(B) Section 1060 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(e) CROSS REFERENCE.—
"For provisions relating to penalties for failure to file a return required
by this section, see section 6721."
(i) AMENDMENTS RELATED TO SECTION 642 OF THE REFORM ACT,—
(1) Paragraph (1) of section 453(g) of the 1986 Code is amended
by striking out subparagraphs (A) and (B) and inserting in lieu
thereof the following:
"(A) subsection (a) shall not apply,
"(B) for purposes of this title—
"(i) except as provided in clause (ii), all payments to
be received shall be treated as received in the year of
the disposition, and
"(ii) in the case of any payments which are contin-
gent as to the amount but with respect to which the
fair market value may not be reasonably ascertained,
the basis shall be recovered ratably, and
"(C) the purchaser may not increase the basis of any
property acquired in such sale by any amount before the
time such amount is includible in the gross income of the
seller."
(2XA) Section 453(g) of the 1986 Code is amended by adding at
the end thereof the following new paragraph:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3411
"(3) RELATED PERSONS.—For purposes of this subsection, the
term 'related persons' has the meaning given to such term by
section 1239(b), except that such term shall include 2 or more
partnerships having a relationship to each other described in
section 707(b)(1)(B)."
(B) Section 453(gXl) of the 1986 CJode is amended by striking
out "(within the meaning of section 1239(b))".
(3) The heading of paragraph (2) of section 642(c) of the
Reform Act is amended by striking out "TRADITIONAL" and
inserting in lieu thereof "TRANSITIONAL".
(j) AMENDMENTS RELATED TO SECTION 643 OF THE REFORM ACT.—
(1)(A) Subsection (e) of section 171 of the 1986 Code is
amended to read as follows:
"(e) TREATMENT AS OFFSET TO INTEREST PAYMENTS.—Except as
provided in regulations, in the case of any taxable bond—
"(1) the amount of any bond premium shall be allocated
among the interest payments on the bond under rules similar to
the rules of subsection (bX3), and
"(2) in lieu of any deduction under subsection (a), the amount
of any premium so allocated to any interest payment shall be
applied against (and operate to reduce) the amount of such
interest payment.
For purposes of the preceding sentence, the term 'taxable bond'
means any bond the interest of which is not excludable from gross
income."
(B) Paragraph (5) of section 1016(a) of the 1986 Code is
amended by striking out "allowable pursuant to section
171(a)(1)" and inserting in lieu thereof "allowable pursuant to
section 171(aXl) (or the amount applied to reduce interest pay-
ments under section 171(e)(2))".
(C) The amendments made by this paragraph shall apply in 26 u s e 171 note.
the case of obligations acquired after December 31, 1987; except
that the taxpayer may elect to have such amendment apply to
obligations acquired after October 22,1986.
(2) Paragraph (2) of section 643(b) of the Reform Act is 26 u s e 171 note.
amended by striking out "issued after" and inserting in lieu
thereof "acquired after",
(k) AMENDMENTS RELATED TO SECTION 646 OF THE REFORM ACT.—
(1) Paragraph (2) of section 646(b) of the Reform Act is 26 u s e 671 note.
amended to read as follows:
"(2) such entity is exclusively engaged in the leasing of min- Minerals and
eral property and activities incidental thereto, and". mining.
(2) Paragraph (3) of section 646(b) of the Reform Act is amend-
ed by inserting "as of October 22,1986," after "publicly traded".
(3) Subparagraph (A) of section 646(cXl) of the Reform Act is
amended by inserting "before January 1, 1991" after "entity".
(4) Paragraph (2) of section 646(c) of the Reform Act is
amended to read as follows:
"(2) AGREEMENT.— Real property.
"(A) IN GENERAL.—The agreement described in this para- Minerals
graph is a written agreement signed by the board of trust- and mining.
ees of the entity which provides that the entity will not
acquire any additional property other than property de-
scribed in subparagraph (B).
"(B) PERMISSIBLE ACQUISITIONS.—Property is described in
this paragraph if it is—
102 STAT. 3412 PUBLIC LAW 100-647—NOV. 10, 1988
"(i) surface rights to property the acquisition of
which—
"(I) is necessary to mine mineral rights held on
October 22,1986, and
"(II) is required by a written binding agreement
between the entity and an unrelated person en-
tered into on or before October 22,1986,
"(ii) surface rights to property which are not de-
scribed in clause (i) and which—
"(I) are acquired in an exchange to which section
1031 applies, and
"(II) a r e necessary to mine mineral rights held
on October 22,1986,
Gifts and "(iii) tangible personal property incidental to the
property. leasing of mineral property and activities incidental
thereto, or
"(iv) part of any required reserves of the entity."
26 u s e 671 note. (5) Paragraph (1) of section 646(d) of the Reform Act is amend-
ed by striking out subparagraph (B) and inserting in lieu
thereof:
"(B) for purposes of section 333 of such Code (as so in
effect)—
"(i) any person holding a n income interest in such
entity as of such time shall be treated as a qualified
electing shareholder, and
"(ii) the e a r n i n g and profits, and the value of money
or stock or securities, of such entity shall be appor-
tioned ratably among persons described in clause (i).
The amendments made by subtitle D of this title and section
1804 of this Act s h ^ l not apply to any liquidation under this
paragraph."
(6XA) Paragraph (2) of section 646(d) of the Reform Act is
amended to read as follows:
"(2) TERMINATION OF ELECTION.—If an entity ceases to be
described in subsection (b) or violates any term of the agreement
described in subsection (cX2), the entity shall, for purposes of
the Internal Revenue C!ode of 1986, be treated as a corporation
for the taxable year in which such cessation or violation occurs
and for all subsequent taxable years."
(B) Paragraph (3) of section 646(c) of t h e Reform Act is
amended to read as follows:
"(3) BEGINNING OP PERIOD FOR WHICH ELECTION IS IN EFFECT.—
The period during which an election is in effect under this
subsection shall begin on the 1st day of the 1st taxable year
beginning after the date of t h e enactment of this Act and
following the taxable year in which the election is made."
(7XA) Subsection (e) of section 646 of the Reform Act is
amended to read as follows:
"(e) SPECIAL RULE FOR PERSONS HOLDING INCOME INTERESTS.—In
appl3dng subpart E of part I of subchapter J of chapter 1 of the
Internal Revenue Code of 1986 to any entity to which this section
applies—
"(1) a reversionary interest shall not be taken into account
until it comes into possession, and
"(2) all items of income, gain, loss, deduction, and credit shall
be allocated to persons holding income interests for the period
of the allocation."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3413
(B) Section 646(dX3) of the Reform Act is amended by striking 26 USC 671 note,
out "or by reason of subsection (e)".
(1) AMENDMENTS RELATED TO SECTION 651 OF THE REFORM ACT.—
(IXA) Paragraph (6) of section 852(b) of the 1986 Code (as
added by section 651(bXlXA) of the Reform Act) is redesignated
as paragraph (7).
(B) Subsection (b) of section 855 of the 1986 Code is amended
by striking out "section 852(bX6)" and inserting in lieu thereof
"section 852(bX7)".
(2) Paragraph (2) of section 4982(e) of the 1986 Code is
amended to read as follows:
"(2) CAPITAL GAIN NET INOOBIE.—
"(A) I N GENERAL.—Except as provided in subparagraph
(B), the term 'capital gain net income' has the meaning
given such term by section 1222(9) (determined by treating
the 1-year period ending on October 31 of any calendar year
as the company's taxable year).
"(B) REDUCTION BY NET ORDINARY LOSS FOR CALENDAR
YEAR.—The amount determined under subparagraph (A)
shall be reduced (but not below the net capital gain) by the
amount of the company's net ordinary loss for the calendar
year.
"(C) DEFINITIONS.—For purposes of this paragraph—
"(i) NET CAPITAL GAIN.—The term 'net capital gain*
has the meaning given such term by section 1222(11)
(determined by treating the 1-year period ending on
October 31 of the calendar year as the company's tax-
able year).
"(ii) NET ORDINARY LOSS.—The net ordinary loss for
the calendar year is the amount which woidd be the
net operating loss of the company for the calendar year
if the amount of such loss were determined in the same
manner as ordinary income is determined under para-
graph (1)."
(3) Paragraph (2) of section 852(c) of the 1986 Code is amended
to read as follows:
"(2) CIOORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—For
purposes of applying this chapter to distributions made by a
regulated investment company with respect to any calendar
year, the earnings and profits of such company shall be deter-
mined without r^ard to any net capital loss (or net foreign
currency loss) attributable to transactions after October 31 of
such year and with such other adjustments as the Secretary
may by regulations prescribe. The preceding sentence shall
apply—
"(A) only to the extent that the amount distributed by the
company with respect to the calendar year does not exceed
the required distribution for such calendar year (as deter-
mined under section 4982 by substituting '100 percent' for
each percentage set forth in section 4982(bXl)), and
"(B) except as provided in r^ulations, only if an election
under section 4982(eX4) is not in effect with respect to such
company."
(4) Subparagraph (C) of section 852(bX3) of the 1986 Code is
amended—
102 STAT. 3414 PUBLIC LAW 100-647—NOV. 10, 1988
(A) by striking out "net capital loss" each place it appears
in the 3rd sentence and inserting in lieu thereof "net
capital loss or net long-term capital loss", and
(B) by striking out "regulated investment company tax-
able income" in the last sentence and inserting in lieu
thereof "the taxable income of the regulated investment
company".
(5) Subsection (e) of section 4982 of the 1936 Code is amended
by adding at the end thereof the following new paragraph:
"(5) TREATMENT OF FOREIGN CURRENCY GAINS AND LOSSES
AFTER OCTOBER 31 OF CALENDAR YEAR.—Any foreign Currency
gain or loss which is attributable to a section 988 transaction
and which is properly taken into account for the portion of the
calendar year after October 31 shall not be taken into account
in determining the amount of the ordinary income of the regu-
lated investment compsmy for such calendar year but shall be
taken into account in determining the ordinary income of the
investment company for the following calendar year. In the case
of any company making an election under paragraph (4), the
preceding sentence shall be applied by substituting the last day
of the company's taxable year for October 31."
(6) Section 4982 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(f) EXCEPTION FOR CERTAIN REGULATED INVESTMENT COMPA-
NIES.—This section shall not apply to any regulated investment
company for any calendar year if at all times during such calendar
year each shareholder in such company was either—
"(1) a trust described in section 401(a) and exempt from tax
under section 501(a), or
"(2) a s^regated asset account of a life insurance company
held in connection with variable contracts (as defined in section
817(d)).
For purposes of the preceding sentence, any shares attributable to
an investment in the regulated investment company (not exceeding
$250,000) made in connection with the organization of such company
shall not be taken into account."
(7) Subsection (b) of section 852 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(8) SPECIAL RULE FOR TREATMENT OF CERTAIN FOREIGN CUR-
RENCY LOSSES.—To the extent provided in regulations, the tax-
able income of a regulated investment company (other than a
company to which an election under section 4982(eX4) applies)
shall be computed without regard to any net foreign currency
loss attributable to transactions after Ctetober 31 of such year,
and any such net foreign currency loss shall be treated as
arising on the 1st day of the following taxable year."
(8) Subsection (a) of section 852 of the 1986 Code is amended
by adding at the end thereof the following new sentence:
"The Secretary may waive the requirements of paragraph (1) for
any taxable year if the regulated investment company establishes to
the satisfaction of the Secretary that it was unable to meet such
requirements by reason of distributions previously made to meet the
requirements of section 4982."
(9) Effective with respect to dividends declared in 1988 and
subsequent calendar years, paragraph (7) of section 852(b) of the
1986 Code (as redesignated by paragraph (1)) is amended—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3415
(A) by striking out "in December" and inserting in lieu
thereof "in October, November, or December",
(B) by striking out "in such month" and inserting in lieu
thereof "in such a month",
(C) by striking out "on such date" in subparagraphs (A)
and (B) and inserting in lieu thereof "on December 31 of
such calendar year", and
(D) by striking out "before February 1" and inserting in
lieu thereof "during January".
(10) Paragraph (1) of section 852(e) of the 1986 Code is
amended by striking out "subsection (a)(3)" and inserting in lieu
thereof "subsection (aX2)".
(m) AMENDMENTS RELATED TO SECTION 652 OF THE REFORM ACT.—
(1) Paragraph (1) of section 851(a) of the 1986 Code is amended
to read as follows:
"(1) which, at all times during the taxable year—
"(A) is registered under the Investment Company Act of
1940, as amended (15 U.S.C. 80a-l to 80b-2) as a manage-
ment company or unit investment trust, or
"(B) has in effect an election under such Act to be treated
as a business development company, or".
(2) Paragraph (1) of section 851(e) of the 1986 Code is amended
by striking out "a registered management company or reg-
istered business development company" and inserting in lieu
thereof "a management company or a business development
company described in subsection (aXD".
(n) AMENDMENTS RELATED TO SECTION 653 OF THE REFORM ACT.—
(1) Subsection (b) of section 851 of the 1986 Code is amended
by adding at the end thereof the following new sentence:
"Income derived from a partnership or trust shall be treated as
described in paragraph (2) only to the extent such income is
attributable to items of income of the partnership or trust (as
the case may be) which would be described in paragraph (2) if
realized by the regulated investment company in the same
manner as realized by the partnership or trust."
(2)(A) Paragraph (3) of section 851(b) of the 1986 Code is
amended to read as follows:
"(3) less than 30 percent of its gross income is derived from
the sale or disposition of any of the following which was held for
less than 3 months:
"(A) stock or securities (as defined in section 2(aX36) of
the Investment Company Act of 1940, as amended),
"(B) options, futures, or forward contracts (other than
options, futures, or forward contracts on foreign cur-
rencies), or
"(C) foreign currencies (or options, futures, or forward
contracts on foreign currencies) but only if such currencies
(or options, futures, or forward contracts) are not directly
related to the company's principal business of investing in
stock or securities (or options and futures with respect to
stocks or securities), and '.
(B) Subsection (b) of section 851 of the 1986 Code is amended
by striking out "which are not ancillary" in the material follow-
ing paragraph (4), and inserting in lieu thereof "which are not
directly related".
(C) Subparagraph (C) of section 851(bX3) of the 1986 Code (as 26 USC 851 note.
amended by subparagraph (A)), and the amendment made by
102 STAT. 3416 PUBLIC LAW 100-647—NOV. 10, 1988
subparagraph (B), shall apply to taxable years beginning after
the date of the enactment of this Act.
(4) Clause (i) of section 851(g)(2XA) of the 1986 Code (defining
designated hedge) is amended by striking out "contractual
option" and inserting in lieu thereof "contractual obligation"
(5) Subsection (b) of section 851 of the 1986 Code is amended
by adding at the end thereof the following new sentence: "In the
case of the tsixable year in which a regulated investment com-
pany is completely liquidated, there shall not be taken into
account under paragraph (3) any gain from the sale, exchange,
or distribution of any property after the adoption of the plan of
complete liquidation."
(o) AMENDMENTS RELATED TO SECTION 654 OF THE REFORM ACT.—
Subsection (q) of section 851 of the 1986 Code (as added by section
654 of the Reform Act)—
(1) is redesignated as subsection (h), and
(2) is amended by adding at the end thereof the following new
paragraph:
"(3) SPECIAL RULE FOR ABNORMAL REDEMPTIONS.—
"(A) I N GENERAL.—Any fund treated as a separate cor-
poration under paragraph (1) shall not be disqualified
under subsection (bX3) for any taxable year by reason of
sales resulting from abnormal redemptions on any day and
occurring before the close of the 5th business day after such
day if—
"(i) the sum of the percentages determined under
subparagraph (B) for the abnormal redemptions on
such day and for abnormal redemptions on prior days
during such taxable year exceeds 30 percent; and
"(ii) the regulated investment company of which such
fund is a part would meet the requirements of subsec-
tion (bX3) for such taxable year if all the funds which
are part of such company were treated as a single
company.
"(B) ABNORMAL REDEMPTIONS.—For purposes of subpara-
graph (A), the term 'abnormal redemptions' means redemp-
tions occurring on any day if the net redemptions on such
day exceed 1 percent of the fund's net asset value.
(C) DETERMINATION OF NET ASSET VALUE.—For purposes
of this par£igraph, net asset value for any day shall be
determined as of the close of the preceding day.
"(D) LIMITATION.—For purposes of subparagraph (A), any
sale or other disposition of stock or securities held less than
3 months occurring during any day shall be deemed to
result from abnormal redemptions until the cumulative
proceeds from such sales or dispositions occurring during
such day, plus the cumulative net positive cash flow of the
fund for preceding business days (if any) following the day
with abnormal redemptions, exceed the amount of net
redemptions on the day with abnormal redemptions."
(p) AMENDMENTS RELATED TO SECTION 662 OF THE REFORM ACT.—
(1) Subclause (I) of section 856(cX6XDXi) of the 1986 Code (as
added by section 662 of the Reform Act) is amended by striking
out "debt instrument" and inserting in lieu thereof "debt in-
strument (within the meaning of section 1275(aXl))".
26 use 856 note. (2) Notwithstanding section 669 of the Reform Act, the
amendment made by section 662(c) of the Reform Act shall
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3417
apply to taxable years beginning after December 31, 1986, but
only in the case of obligations acquired after October 22, 1986.
(3) Subsection (c) of section 856 of the 1986 Code is amended by
adding at the end thereof the following new paragraph:
"(8) TREATMENT OF UQUIDATING GAINS.—In the case of the
t£ixable year in which a real estate investment trust is com-
pletely liquidated, there shall not be taken into account under
paragraph (4) any gain from the sale, exchange, or distribution
of any property after the adoption of the plan of complete
liquidation.
(4XA) Paragraph (6) of section 856(c) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(G) TREATMENT OF CERTAIN INTEREST RATE AGREE-
MENTS.—Except to the extent provided by regulations. Real property.
any—
"(i) payment to a real estate investment trust under
a bona fide interest rate swap or cap agreement en-
tered into by the real estate investment trust to hedge
any variable rate indebtedness of such trust incurred or
to be incurred to acquire or carry real estate assets,
and
"(ii) any gain from the sale or other disposition of
such agreement,
shall be treated as income qualifying under paragraph (2)
and such agreement shall be treated as a security for
purposes of paragraph (4XA)."
(B) The gunendment made by subparagraph (A) shall apply to 26 USC 856 note.
taxable years ending after the date of the enactment of this Act.
(5) Subclause (I) of section 856(cX6XDXii) of the 1986 Code (as
added by section 662 of the Reform Act) is amended by striking
out "stock in" and inserting in lieu thereof "stock (or certifi-
cates of beneficial interests) in",
(q) AMENDMENTS RELATED TO SECTION 663 OF THE REFORM ACT.— Real property.
(1) Subparagraph (A) of section 856(dX6) of the 1986 C!ode is
amended to read as follows:
"(A) IN GENERAL.—If—
"(i) a real estate investment trust receives or accrues,
with respect to real or personal property, amounts from
a tenant which derives substantially all of its income
with respect to such property from the subleasing of
substantially all of such property, and
"(ii) a portion of the amount such tenant receives or
accrues, directly or indirectly, from subtenants consists
of qualified rents,
then the amounts which the trust receives or accrues from
the tenant shall not be excluded from the term 'rents from
real property' by reason of being based on the income or
profits of such tenant to the extent the amounts so received
or accrued are attributable to qualified rents received or
accrued by such tenant."
(2) Subsection (f) of section 856 of the 1986 Code is amended to
read as follows:
"(f) INTEREST.—
"(1) IN GENERAL.—For purposes of paragraphs (2XB) and (3XB)
of subsection (c), the term 'interest' does not include any
amount received or accrued, directly or indirectly, if the deter-
102 STAT. 3418 PUBLIC LAW 100-647—NOV. 10, 1988
mination of such amount depends in whole or in part on the
income or profits of any person except that—
"(A) any amount so received or accrued shall not be
excluded from the term 'interest' solely by reason of being
based on a fixed percentage or percentages of receipts or
sales, and
"(B) where a real estate investment trust receives any
amount which would be excluded from the term 'interest'
solely because the debtor of the real estate investment trust
receives or accrues any amount the determination of which
depends in whole or in psut on the income or profits of any
person, only a proportionate part (determined pursuant to
regulations prescribed by the Secretary) of the amount
received or accrued by the real estate investment trust from
the debtor will be excluded from the term 'interest'.
"(2) SPECIAL RULE.—If—
"(A) a real estate investment trust receives or accrues
with respect to an obligation secured by a mortgage on real
property or an interest in real property amounts from a
debtor which derives substantially all of its gross income
with respect to such property (not t£iking into account any
gain on any disposition) from the leasing of substantially all
of its interests in such property to tenants, and
"(B) a portion of the amount which such debtor receives
or accrues, directly or indirectly, from tenants consists of
qualified rents (as defined in subsection (dX6XB)),
then the amounts which the trust receives or accrues from such
debtor shall not be excluded from the term 'interest' by reason
of being based on the income or profits of such debtor to the
extent the amounts so received are attributable to qualified
rents received or accrued by such debtor "
(r) AMENDMENT RELATED TO SECTION 664 OP THE REFORM ACT.—
Clause (i) of section 857(eX2XB) of the 1986 Code is amended by
striking out "as original issue discount on instrimaents" and insert-
ing "with respect to instruments"
(s) AMENDMENTS RELATED TO SECTION 668 OF THE REFORM ACT.—
(1) Paragraph (2) of section 4981(e) of the 1986 Code is
amended to read as follows:
"(2) CAPITAL GAIN NET INCOME.—
"(A) I N GENERAL.—The term 'capital gain net income' has
the meaning given such term by section 1222(9) (determined
by treating the calendar year as the trust's taxable year).
"(B) REDUCTION FOR NET ORDINARY LOSS.—The amount
determined under subparagraph (A) shall be reduced by the
amount of the trust's net ordinary loss for the taxable year.
"(C) N E T ORDINARY LOSS.—For purposes of this paragraph,
the net ordinary loss for the calendar year is the amount
which would be net operafmg loss of the trust for the
calendar year if the amount of such loss were determined in
the same manner as ordinary income is determined under
paragraph (1)."
(2) Subparagraph (C) of section 857(bX3) of the 1986 Code is
amended by striking out "real estate investment trust taxable
income" in the last sentence and inserting in lieu thereof "the
taxable income of the real estate investment trust".
(3) Subparagraph (A) of section 4981(cXl) of the 1986 Ckxie is
amended by striking out "such calendar year" and inserting in
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3419
lieu thereof "such calendar year (but computed without regard
to that portion of such deduction which is attributable to the
amount excluded under section 857(bX2XD))".
(4) Subsection (a) of section 857 of the 1986 Code is amended
by adding at the end thereof the following new sentence:
"The Secretary may waive the requirements of paragraph (1) for
any taxable year if the real estate investment trust establishes to
the satisfaction of the Secretary that it was unable to meet such
requirements by reason of distributions previously made to meet the
requirements of section 4981."
(5) Effective with respect to dividends declared in 1988 and
subsequent calendar years, paragraph (8) of section 857(b) of the
1986 Code is amended—
(A) by striking out "in December" and inserting in lieu
thereof "in October, November, or December",
(B) by striking out "in such month" and inserting in lieu
thereof "in such a month",
(C) by striking out "on such date" in subparsigraphs (A)
and (B) and inserting in lieu thereof "on December 31 of
such calendar year", and
(D) by striking out "before February 1" and inserting in
lieu thereof "during January".
(t) AMENDMENTS RELATED TO SECTION 671 OF THE REFORM ACT.—
(1) Paragraph (1) of section 860ae) of the 1986 Code is
amended to read as follows:
"(1) AMOUNTS TREATED AS ORDINARY.—Any amount taken into
account under subsection (a) by any holder of a residual interest
in a REMIC shall be treated as ordinary income or ordinary
loss, as the case may be."
(2XA) Paragraph (4) of section 860D(a) of the 1986 Code is
amended—
(i) by striking out "4th month ending after" and inserting
in lieu thereof "3rd month beginning after", and
(ii) by striking out "and each quarter ending thereafter"
and inserting in lieu thereof "and at all times thereafter".
(B) The amendment made by subparagraph (AXii) shall take Effective date.
effect on January 1,1988. 26USC860D
(3XA) Clause (i) of section 860F(aX2XA) of the 1986 Code is ''°^^-
amended to read as follows:
"(i) the substitution of a qualified replacement mort-
gage for a qualified mortgage (or the repurchase in lieu
of substitution of a defective obligation),".
(BXi) Paragraph (2) of section 860F(a) of the 1986 Code is
amended by striking out the last sentence of subparagraph (A),
(ii) Subsection (a) of section 860F of the 1986 Code is amended
by adding at the end thereof the following new parsigraph:
"(5) EXCEPTIONS.—Notwithstanding subparagraphs (A) and
4 (D) of paragraph (1), the term 'prohibited trsmsaction' shall not
include any disposition—
"(A) required to prevent default on a regular interest
where the threatened default resulted from a default on 1
or more qualified mortggiges, or
"(B) to facilitate a clean-up call (as defined in regula-
tions)."
(C) Subparagraph (D) of section 860F(aX2) of the 1986 Code is
amended by striking out "described in subsection (b)".
19-194 O—91—Part 4 15 : QL 3
102 STAT. 3420 PUBLIC LAW 100-647—NOV. 10, 1988
(4) Subparagraph (A) of section 860F(bXl) of the 1986 Code is
amended by striking out "the transfer of any property to a
REMIC" and inserting in lieu thereof "the transfer of any
property to a REMIC in exchange for regular or residual in-
terests in such REMIC".
(5XA) Paragraph (1) of section 860G(a) of the 1986 Code is
amended to read as follows:
"(1) REGULAR INTEREST.—The term 'regular interest' means
any interest in a REMIC which is issued on the startup day with
fixed terms and which is designated as a regular interest if—
"(A) such interest unconditionally entitles the holder to
receive a specified principal amount (or other similar
amount), and
"(B) interest payments (or other similar amount), if any,
with respect to such interest at or before maturity—
"(i) are payable based on a fixed rate (or to the extent
provided in regulations, at a variable rate), or
"(ii) consist of a specified portion of the interest
payments on qualified mortgages and such portion does
not vary during the period such interest is outstanding.
The interest shall not fail to meet the requirements of subpara-
graph (A) merely because the timing (but not the amount) of the
principal payments (or other similar amounts) may be contin-
gent on the extent of prepayments on qualified mortgages and
the amount of income from permitted investments."
(B) Paragraph (2) of section 860G(a) of the 1986 Code is
amended to read £is follows:
"(2) RESIDUAL INTEREST.—The term 'residual interest' means
an interest in a REMIC which is issued on the startup day,
which is not a regular interest, and which is designated as a
residual interest"
(C) Paragraph (3) of section 860G(a) of the 1986 Code is
amended—
(i) by striking out "on or before the startup day" in
subparagraph (AXi) and inserting in lieu thereof "on the
startup day in exchange for regular or residual interests in
the REMIC",
(ii) by inserting "if, except as provided in regulations,
such purchase is pursuant to a fixed-price contract in effect
on the startup day" before the comma at the end of
subparagraph (AXii), and
(iii) by striking out "on or before the startup day" in
subparagraph (C) and inserting in lieu thereof "on the
startup day in exchange for regular or residual interests in
the REMIC".
(D) Subparagraph (A) of section 860G(aX4) of the 1986 Code is
amended to read as follows:
"(A) which would be a qualified mortgage if transferred
on the startup day in exchange for regular or residual
interests in the REMIC, and".
(E) Paragraph (9) of section 860G(a) of the 1986 Code is
amended to read as follows:
"(9) STARTUP DAY.—The term 'startup day' means the day on
which the REMIC issues all of its regular and residual interests.
To the extent provided in regulations, all interests issued (and
all transfers to the REMIC) during any period (not exceeding 10
days) permitted in such regulations shall be treated as occur-
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3421
ring on the day during such period selected by the HEMIC for
purposes of this paragraph."
(F) The amendments made by this paragraph shall not apply 26 USC 860G
to any REMIC where the startup day (as defined in section note.
860G(aX9) of the 1986 Code as in effect on the day before the
date of the enactment of this Act) is before July 1, 1987.
(6) Paragraph (3) of section 860G(a) of the 1986 Code is
amended—
(A) by striking out "directly or indirectly," in subpara-
graph (A), and
(B) by adding at the end thereof the following new sen-
tence:
"For purposes of this subparagraph, any obligation secured by
stock held by a person as a tenant-stockholder (as defined in
section 216) in a cooperative housing corporation (as so defined)
shall be treated as secured by an interest in real property."
(7) Subparagraph (B) of section 860G(aX7) of the 1986 Code is
amended by inserting before the period at the end of the 1st
sentence the following: "or lower than expected returns on cash
flow investments".
(8XA) Paragraph (8) of section 860G(a) of the 1986 Code is
amended—
(i) by striking out "section 856(e)" in subparagraph (A)
and inserting in lieu thereof "section 856(e) (without regard
to paragraph (5) thereof)", and
(ii) by striking out the last sentence and inserting in lieu
thereof the following:
"Solely for purposes of section 860D(a), the determination of
whether any property is foreclosure property shall be made
without r^ard to section 856(eX4)."
(B) Section 860G of the 1986 Code is amended by redes^at-
ing subsection (c) as subsection (d) and by inserting after subsec-
tion (b) the following new subsection:
"(c) TAX ON INCOME FROM FORECLOSURE PROPERTY,—
"(1) IN GENERAL.—A tax is hereby imposed for each taxable
year on the net income from foreclosure property of each
REMIC. Such tax shall be computed by multiplying the net
income from foreclosure property by the highest rate of tax
specified in section 11(b).
"(2) NET INCOME FROM FORECLOSURE PROPERTY.—For purposes
of this part, the term 'net income from foreclosure property'
means the amount which would be the REMIC's net income
from foreclosure property under section 857(bX4XB) if the
REMIC were a real estate investment trust."
(C) Paragraph (1) of section 860C(b) of the 1986 Code is
amended by striking out "and" at the end of subparagraph (C),
by striking out the period at the end of subparagraph (D) and
inserting in lieu thereof ", and", and by adding at the end
thereof the following new subparagraph:
"(E) the amount of the net income from foreclosure prop-
erty (if any) shall be reduced by the amount of the tax
imposed by section 860G(c)."
(9XA) Section 860G of the 1986 Code (as amended by para-
graph (8)) is amended by redesignating subsection (d) as subsec-
tion (e) and by inserting after subsection (c) the following new
subsection:
"(d) TAX ON (;k)NTRiBunoNS AFTER STARTUP DATE.—
102 STAT. 3422 PUBLIC LAW 100-647—NOV. 10, 1988
"(1) IN GENERAL.—Except as provided in paragraph (2), if any
amount is contributed to a REMIC after the startup day, there
is hereby imposed a tax for the taxable year of the REMIC in
^ which the contribution is received equal to 100 percent of the
amount of such contribution.
"(2) EXCEPTIONS.—Parg^aph (1) shall not apply to any con-
tribution which is made in cash and is describcKl in any of the
following subparagraphs:
"(A) Any contribution to facilitate a clean-up call (as
defined in r^ulations) or a qualified liquidation.
"(B) Any pa3anent in the nature of a guarantee.
"(C) Any contribution during the 3-month period begin-
ning on the startup day.
"(D) Any contribution to a qualified reserve fund by any
holder of a residual interest in the REMIC.
"(E) Any other contribution permitted in regulations."
26USC860G (B) The amendment made by subparagraph (A) shall not
>^ot®. apply to any REMIC where the startup day (as defined in
section 860G<aX9) of the 1986 Code as in effect on the day before
the date of the enactment of this Act) is before July 1, 1987.
(10) Subsection (e) of section 860G of the 1986 Code (as redesig-
nated by paragraph (9)) is amended by striking out "and" at the
end of parsigraph (2), by striking out the period at the end of
paragraph (3) and inserting in lieu thereof a comma, and by
adding at the end thereof the following new paragraphs:
"(4) providing appropriate rules for treatment of transfers of
qualified replacement mortgages to the REMIC where the
transferor holds any interest in the REMIC, and
"(5) providing that a mortgage will be treated as a qualified
replacement mortgage only if it is part of a bona fide replace-
ment (and not part of a swap of mortgages)."
(11) Paragraph (6) of section 856(c) of the 1986 CJode is amend-
ed by redesignating the last subparagraph as subparagraph (F)
and by striking out the subparagraph (D) added by section
671(bXl) of the Reform Act and inserting in lieu thereof the
following:
"(E) A regular or residual interest in a REMIC shall be
treated as a real estate £isset, and any amount includible in
gross income with respect to such an interest shall be
treated as interest on an obligation secured by a mortgage
on real property; except that, if less than 95 percent of the
assets of such REMIC are real estate assets (determined as
if the real estate investment trust held such assets), such
real estate investment trust shall be treated as holding
directly (and as receiving directly) its proportionate share of
the assets and income of the REMIC. For purposes of
determining whether any interest in a REMIC qualifies
under the preceding sentence, any interest held by such
REMIC in another REMIC shall be treated as a real estate
asset under principles similar to the principles of the
preceding sentence, except that, if such REMIC's are part of
a tiered structure, they shall be treated as one REMIC for
purposes of this subparagraph."
(12) Clause (xi) of section 7701(a)(19)(C) of the 1986 Code is
amended by striking out "are loans described" and inserting in
lieu thereof "are assets described".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3423
(13) Subparagraph (B) of section 860E(cX2) of the 1986 Code is
amended by striking out "issue price of residual interest" and
inserting in lieu thereof "issue price of the residual interest".
(14) Clause (ii) of section 860F(bXlXD) of the 1986 Code is
amended by striking out "the real estate mortgage pool" and
inserting in lieu thereof "the REMIC".
(15) Subsection (a) of section 860E of the 1986 Code is amended
by adding at the end thereof the following new paragraphs:
"(3) SPECIAL RULE FOR AFFIUATED GROUPS.—All members of an
affiliated group filing a consolidated return shall be treated as 1
taxpayer for purposes of this subsection, except that paragraph
(2) shall be applied separately with respect to each corporation
which is a member of such group and to which section 593
applies.
"(4) TREATMENT OF CERTAIN SUBSIDIARIES.—
"(A) I N GENERAL.—For purposes of this subsection, a
corporation to which section 593 applies and each qualified
subsidiary of such corporation shall be treated as a single
corporation to which section 593 applies.
"(B) QUAUFIED SUBSIDIARY.—For purposes of this subsec-
tion, the term 'qualified subsidiary' means any corpora-
tion—
"(i) all the stock of which, and substantially all the
indebtedness of which, is held directly by the corpora-
tion to which section 593 applies, and
"(ii) which is organized and operated exclusively in
connection with the organization and operation of 1 or
more REMIC's."
(16XA) Subsection (a) of section 860D of the 1986 Code is
amended by striking out "and" a t the end of paragraph (4), by
striking out the period at the end of paragraph (5) and inserting
in lieu thereof ", and", and by adding at the end thereof the
following new paragraph:
"(6) with respect to which there are reasonable arrangements
designed to ensure that—
"(A) residual interests in such entity are not held by
disqualified organizations (as defined in section 860EXeX5)),
and
"(B) information necessary for the application of section
860E(e) will be made available by the entity."
(B) Section 860E of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(e) TAX ON TRANSFERS OF RESIDUAL INTERESTS TO CERTAIN ,
ORGANIZATIONS, ETC.—
"(1) IN GENERAL.—A tax is hereby imposed on any transfer of
"'^ a residual interest in a REMIC to a disqualified organization.
"(2) AMOUNT OF TAX.—The amount of the tax imposed by
paragraph (1) on any transfer of a residual interest shall be
equal to the product of—
"(A) the amount (determined under regulations) equal to
the present value of the total anticipated excess inclusions
with respect to such interest for periods after such transfer,
multiplied by
"(B) the highest rate of tax specified in section ll(bXl).
"(3) LIABIUTY.—The tax imposed by paragraph (1) on any
transfer shall be paid by the transferor; except that, where such
102 STAT. 3424 PUBLIC LAW 100-647—NOV. 10, 1988
transfer is through an agent for a disqualified organization,
such tax shall be paid by such agent.
"(4) TRANSFEREE FURNISHES AFFIDAVIT.—The person (other-
wise liable for any tax imposed by paragraph (1)) shall be
relieved of liability for the tax imposed by paragraph (1) with
respect to any transfer if—
"(A) the transferee furnishes to such person an affidavit
that the transferee is not a disqualified organization, and
"(B) as of the time of the transfer, such person does not
have actual knowledge that such affidavit is false.
"(5) DiSQUAUFiED ORGANIZATION.—For purposes of this sec-
tion, the term 'disqualified organization' means—
"(A) the United States, any State or political subdivision
thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the
foregoing,
"(B) any organization (other than a cooperative described
in section 521) which is exempt from tax imposed by this
chapter unless such organization is subject to the tax im-
posed by section 511, and
"(C) any organization described in section 1381(aX2XC).
For purposes of subparagraph (A), the rules of section
168(h)(2XD) (relating to treatment of certain taxable instrumen-
talities) shall apply; except that, in the case of the Federal
Home Loan Mortgage Corporation, clause (ii) of such section
shall not apply.
"(6) TREATMENT OF PASS-THRU ENTITIES.—
"(A) IMPOSITION OF TAX.—If, at any time during any
taxable year of a pass-thru entity, a disqualified organiza-
tion is the record holder of an interest in such entity, there
is hereby imposed on such entity for such taxable year a tax
equal to the product of—
"(i) the amount of excess inclusions for such taxable
year allocable to the interest held by such disqualified
organization, multiplied by
(ii) the highest rate of tax specified in section
ll(bXl).
"(B) PASS-THRU ENTITY.—For purposes of this paragraph,
the term 'pass-thru entity' means—
"(i) any regulated investment company, real estate
investment trust, or common trust fund,
"(ii) any partnership, trust, or estate, and
"(iii) any organization to which part I of subchapter
T applies.
Except as provided in regulations, a person holding an
interest in a pass-thru entity as a nominee for another
person shall, with respect to such interest, be treated as a
pass-thru entity.
"(C) TAX TO BE DEDUCTIBLE.—Any tax imposed by this
paragraph with respect to any excess inclusion of any pass-
thru entity for any taxable year shall, for purposes of this
title (other than this subsection), be applied against (and
operate to reduce) the amount included in gross income
with respect to the residual interest involved.
"(D) EXCEPTION WHERE HOLDER FURNISHES AFFIDAVIT.—No
tax shall be imposed by subparsigraph (A) with respect to
any interest in a pass-thru entity for any period if—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3425
"(i) the record holder of such interest furnishes to
such pass-thru entity an affidavit that such record
holder is not a disqualified organization, and
"(ii) during such period, the pass-thru entity does not
have actual knowledge that such affidavit is false.
"(7) WAIVER.—The Secretary may waive the tax imposed by
paragraph (1) on any transfer tf—
"(A) within a reasonable time after discovery that the
transfer was subject to tax under paragraph (1), steps are
taken so that the interest is no longer held by the disquali-
fied organization, and
"(B) there is paid to the Secretary such amounts as the
Secretary may require.
"(8) ADMINISTRATIVE PROVISIONS.—For purposes of subtitle F,
the taxes imposed by this subsection shall be treated as excise
taxes with respect to which the deficiency procedures of such
subtitle apply.
(C) Paragraph (2) of section 26(b) of the 1986 (Dode is amended
by striking out "and" a t the end of subparagraph (J), by striking
out the period at the end of subparagraph (K) and inserting in
lieu thereof ", and", and by adding a t the end thereof the
following new subparagraph:
"(L) section 860E(e) (relating to taxes with respect to
certain residual interests)."
(DXi) The amendments made by subparagraph (A) shall apply 26 use 860D
in the case of any REMIC where the start-up day (as defined in ^°^-
section 860G(aX9) of the 1986 Code, as in effect on the day before
the date of the enactment of this Act) is after March 31, 1988;
except that such amendments shall not apply in the case of a
REMIC formed pursuant to a binding written contract in effect
on such date.
(ii) The amendments made by subparagraphs (B) and (C) 26USC860E
(except to the extent they relate to paragraph (6) of section note.
860E(e) of the 1986 (Dode as added by such amendments) shall
apply to transfers after March 31,1988; except that such amend-
ments shall not apply to any transfer pursuant to a binding
written contract in effect on such date.
(iii) Except as provided in clause (iv), the amendments made
by subparagraphs (B) and (C) (to the extent they relate to
paragraph (6) of section 860E(e) of the 1986 (Dode as so added)
shall apply to excess inclusions for periods after March 31, 1988
but only to the extent such inclusions are—
(I) allocable to an interest in a pass-thru entity acquired
after March 31,1988, or
(II) allocable to an interest in a pass-thru entity acquired
on or before March 31, 1988, but attributeble to a residual
interest acquired by the pass-thru entity after March 31,
1988.
For purposes of the preceding sentence, any interest in a pass-
thru entity (or residual interest) acquired after March 31, 1988,
pursuant to a binding written contract in effect on such date
shall be treated as acquired before such date.
(iv) In the case of any real estate investment trust, regulated
investment company, common trust fund, or publicly traded
partnership, no tax shall be imposed under section 860E(eX6) of
the 1986 Code (as added by the amendment made by subpara-
102 STAT. 3426 PUBLIC LAW 100-647—NOV. 10, 1988
graph (B)) for any taxable year beginning before January 1,
1989
(17) Subparagraph (B) of section 860E(cX2) of the 1986 Code is
amended—
(A) by inserting "(adjusted for contributions)" after
"residual interest" the second place it appears, and
(B) by striking "decreased by" in clause (ii) and inserting
in lieu thereof "decreased (but not below zero) by".
(18XA) Subsection (e) of section 860F of the 1986 Code is
amended by adding at the end thereof the following new sen-
tences: "Such return shall be filed by the REMIC. The deter-
mination of who may sign such return shall be made without
regard to the first sentence of this subsection."
26 u s e 860F (B) Unless the REMIC otherwise elects, the amendment made
note. by subparagraph (A) shall not apply to any REMIC where the
start-up day (as defined in section 860(jr(aX9) of the 1986 C!ode as
in effect on the day before the date of the enactment of this Act)
is before the date of the enactment of this Act.
(19) Subsection (a) of section 860D of the 1986 (Dode is amended
by adding at the end thereof the following new sentence:
"In the case of a qualified liquidation (as defined in section
860F(aX4XA)), paragraph (4) shall not apply during the liquidation
period (as defined in section 860F(aX4XB).'^
(20) Subsection (a) of section 860A of the 1986 Code is
amended by striking out "this chapter" each place it appears
and inserting in lieu thereof "this subtitle".
(21) Paragraph (1) of section 860C(b) of the 1986 Code is
amended by striking out "and in the same manner" and insert-
ing in lieu thereof "and, except as provided in regulations, in
the same manner".
(22) The following sections of the 1986 Code are each amended
by striking out "real estate mortgage pool" and inserting in lieu
thereof "REMIC":
(A) Section 382(lX4XBXii).
(B) Section 860F(aX2XAXiii).
(C) Section 860F(aX2XC).
(D) Section 860F(bXlXCXii).
(E) Section 860F(bXlXDXii).
(23) Subsection (d) of section 860E of the 1986 Code is amended
by adding at the end thereof the following new sentence:
"Rules similar to the rules of the preceding sentence shall apply also
in the case of regulated investment companies, common trust funds,
and organizations to which part I of subchapter T applies."
(24) Subparagraph (C) of section 6049(dX7) of the 1986 Code is
amended by striking out "the issue price" and inserting in lieu
thereof "the adjusted issue price".
(25XA) Paragraph (19) of section 7701(a) of the 1986 Code is
amended by adding at the end thereof the following new sen-
Loans, tence: "For purposes of determining whether any interest in a
REMIC qualifies under clause (xi), any regular interest in an-
other REMIC held by such REMIC shall be treated as a loan
described in a preceding clause under principles similar to the
principles of clause (xi); except that, if such REMIC's are part of
a tiered structure, they shall be treated as 1 REMIC for pur-
poses of clause (xi)."
(B) Paragraph (4) of section 593(d) of the 1986 Ckxie is amended
by adding at the end thereof the following new sentence: "For
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3427
purposes of determining whether any interest in a REMIC
qualifies under the preceiding sentence, any interest in another
REMIC held by such REMIC shall be treated as a qualifying
real property loan under principles similar to the principles of
the preceding sentence, except that if such REMIC's are part of
a tiered structure, they shall be treated as 1 REMIC for pur-
poses of this paragraph."
(26) Section 860E of the 1986 Code is amended by adding at
the end thereof the following new subsection:
"(f) TREATMENT OF VARIABLE INSURANCE CONTRACTS.—^Except as
provided in r^ulations, with respect to any variable contract (as
defined in section 817), there shall be no adjustment in the reserve
to the extent of any excess inclusion."
(27) Subsection (a) of section 860E of the 1986 Ckxle is amended
by adding at the end thereof the following new paragraph:
"(5) (COORDINATION WITH SECTION 172.—^Any excess inclusion
for any taxable year shall not be taken into account—
"(A) in determining under section 172 the amount of any
net operating loss for such taxable year, and
"(B) in determining taxable income for such taxable year
for purposes of the 2nd sentence of section 172(bX2)."
(u) AMENDlifENTS RELATED TO SECTION 672 OP THE REFORM ACT.—
(1) Subparagraph (B) of section 163(eX2) of the 1986 Code is
amended by striking out "paragraph (6)" and inserting in lieu
thereof "paragraph (7)".
(2) Subparagraph (B) of section 1278(aX4) of the 1986 Code is
amended by striking out "section 1272(aX6)" and inserting in
lieu thereof "section 1272(aX7)".
(3) Section 1288(a) of the 1986 Code is amended by striking out
"paragraph (6)" each place it appears and inserting in lieu
thereof "paragraph (7)".
(4) Sections 1271(aX2XAXii) and 1275(aX4XBXiiXD of the 1986
Code are each amended by striking out "subsection (aX6)" and
inserting in lieu thereof "subsection (aX7)".
(v) AMENDMENT RELATED TO SECTION 674 OF THE REFORM ACT.—
Subparagraph (A) of section 6049(dX7) of the 1986 Ck)de is amended
by inserting "(and such amounts shall be treated as paid when
includible in gross income under section 860B(b))" before the period
at the end thereof.
(w) AMENDMENTS RELATED TO SECTION 675 OF THE REFORM ACT.—
(1) Subsection (a) of section 675 of the Reform Act is amended 26 u s e 860A
to read as follows: note.
"(a) GENERAL RULE.—Except as otherwise provided in this section, Effective date.
the amendments made by this subtitle shall take effect on Janu-
ary 1,1987."
(2) Section 675 of the Reform Act is amended by adding at the
end thereof the following new subsection:
"(d) STUDY.—The Secretary of the Treasury or his delegate shall Banks and
conduct a study of the operation of the amendments made by this banking.
part and their competitive impact on savings and loan institutions 26 u s e 860A
note.
and similar financial institutions. Not later than January 1, 1990, Reports.
the Secretary shall submit a report of such study to the (jommittee
on Ways and Means of the House of Representatives and the
Ck>mmittee on Finance of the Senate (t<^ether with such rec-
ommendations as he may deem advisable)."
102 STAT. 3428 PUBLIC LAW 100-647—NOV. 10, 1988
Real property. SEC. 1007. AMENDMENTS RELATED TO TITLE VII OF THE REFORM ACT.
(a) AMENDMENTS TO SECTION 55 OF THE 1986 CODE.—
(1) Paragraph (1) of section 55(c) of the 1986 Code is amended
by inserting before the period at the end of the first sentence
the following: "and the section 936 credit allowable under sec-
tion 27(b)".
(2) Paragraph (2) of section 55(b) of the 1986 Code is amended
by adding at the end thereof the following new sentence:
"If a taxpayer is subject to the regular tax, such taxpayer shall
be subject to the tax imposed by this section (and, if the regular
tax is determined by reference to an amount other than taxable
income, such amount shall be treated as the taxable income of
such taxpayer for purposes of the preceding sentence)."
(3) Effective with respect to taxable years ending after the
date of the enactment of this Act, paragraph (3) of section 55(d)
of the 1986 Code is amended by adding at the end thereof the
following new sentence: "In the case of a taxpayer described in
paragraph (l)(CXi), alternative minimum taxable income shall
be increased by the lesser of (i) 25 percent of the excess of
alternative minimum taxable income (determined without
regard to this sentence) over $155,000, or (ii) $20,000.".
(b) AMENDMENTS TO SECTION 56 OF THE 1986 CODE.—
(1) Paragraph (3) of section 56(a) of the 1986 Code is amended
by adding at the end thereof the following new sentence: "For
purposes of the preceding sentence, in the case of a contract
described in section 460(eXl), the percentage of the contract
completed shall be determined under section 4600t))(2) by using
the simplified procedures for allocation of costs prescribed
under section 460(b)(4)."
(2) Subparagraph (E) of section 56(bXl) of the 1986 Code is
amended to read as follows:
"(E) STANDARD DEDUCTION AND DEDUCTION FOR PERSONAL
EXEMPTIONS NOT ALLOWED.—The standard deduction under
section 63(c), the deduction for personal exemptions under
section 151, and the deduction under section 6420t)) shall not
be allowed."
(3) Subparagraph (C) of section 560^X1) of the 1986 Code is
amended by striking out "and" at the end of clause (ii), by
striking out the period at the end of clause (iii) and inserting in
lieu thereof a comma, and by adding at the end thereof the
following new clauses:
"(iv) in lieu of the exception under section
163(d)(3XBXi), the term 'investment interest' shall not
include any qualified housing interest (as defined in
subsection (e)), and
"(v) the adjustments of this section and sections 57
and 58 shall apply in determining net investment
income under section 163(d)."
(4) Clause (iii) of section 56(bXlXC) of the 1986 Code is
amended—
(A) by striking out "specified activity bond" and inserting
in lieu thereof "specified private activity bond", and
(B) by striking out "section 56(aX5XB)" and inserting m
lieu thereof "section 57(aX5XB)".
(5) Subparagraph (A) of section 56(dX2) of the 1986 Code is
amended—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3429
(A) by striking out "(other than subsection (a)(6) thereof)",
and
(B) by adding at the end thereof the following new sen-
tence:
"An item of tax preference shall be taken into account
under clause (ii) only to the extent such item increased the
amount of the net operating loss for the taxable year under
section 172(c)."
(6XA) Paragraph (1) of section 56(e) of the 1986 Code is
amended—
(i) by striking out "interest which is" and inserting in lieu
thereof "interest which is qualified residence interest (as
defined in section 163(h)(3)) and is", and
(ii) by striking out "section 163(hX3)" in subparagraph (B)
and inserting in lieu thereof "section 163(h)(4)'.
(B) Paragraph (3) of section 56(e) of the 1986 Code is amended
by striking out "interest paid or accrued" and inserting in lieu
thereof "interest which is qualified residence interest (as de-
fined in section 163(hX3)) and is paid or accrued".
(7) The last sentence of section 56(fK2XB) of the 1986 Code is
amended by striking out "any such taxes" and inserting in lieu
thereof "any such taxes (otherwise eligible for the credit pro-
vided by section 901 without regard to section 9010'))".
(8) Clause (iii) of section 56(fK3XA) of the 1986 Code is
amended by striking out "an income statement" and inserting
in lieu thereof "an income statement for a substantial nontax
purpose".
(9) Subparagraph (B) of section 56(fK3) of the 1986 Code is
amended by striking out "paragraph (3)(A)" and inserting in
lieu thereof "this subsection '.
(10) Subparagraph (C) of section 56(fK3) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "If the taxpayer has 2 or more statements described in
the clause (or subclause) with the lowest number designation,
the applicable financial statement shall be the one of such
statements specified in regulations."
(IIXA) Subparagraph (F) of section 56(fK2) of the 1986 Code is
amended to read as follows:
"(F) TREATMENT OF TAXES ON DIVIDENDS FROM 936 COR-
PORATIONS.—
"(i) I N GENERAL.—For purposes of determining the
alternative minimum tax foreign tax credit, 50 percent
of any withholding tax or income tax paid to a posses-
sion of the United States with respect to dividends
received from a corporation eligible for the credit pro-
vided by section 936 shall be treated as a tax paid to a
foreign country by the corporation receiving the divi-
dend.
"(ii) LIMITATION.—If the aggregate amount of the
dividends referred to in clause (i) for any taxable year
exceeds the excess referred to in paragraph (1), the
amount treated as a tax paid to a foreign country under
clause (i) shall not exceed the amount which would be
so treated without regard to this clause multiplied by a
fraction—
"(I) the numerator of which is the excess referred
to in paragraph (1), and
102 STAT. 3430 PUBLIC LAW 100-647—NOV. 10, 1988
"(II) the denominator of which is the aggregate
amount of such dividends,
"(iii) TREATMENT OF TAXES IMPOSED ON 936 CORPORA-
TION.—For purposes of this subparagraph, taxes paid
by any corporation eUgible for the credit provided by
section 936 to a possession of the United States shall be
treated as a withholding tax paid with respect to any
dividend paid by such corporation to the extent such
taxes would be treated as paid by the corporation
receiving the dividend under rules similar to the rules
of section 902 (and the amount of any such dividend
shall be increased by the amount so treated)."
(B) Qause (iii) of section 56(gX4XC) of the 1986 Ck)de is
amended by striking out "clause (iiXD" and inserting in lieu
(12) Clause (iii) of section 56(gX4XB) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "The preceding sentence shall not apply to anv annuity
contract held under a plan described in section 403(a).
(13) Paragraph (1) of section 56(c) of the 1986 Code is
amended—
(A) by striking out "ADJUSTED EARNINGS AND PROFITS" in
the paragraph heading and inserting in lieu thereof
"ADJUSTED CURRENT EARNINGS", and
(B) by striking out "ADJUSTED EARNINGS AND PROFITS" in
the heading of subparagraph (B) and inserting in lieu
thereof "ADJUSTED CURRENT EARNINGS".
(14XA) Subsection (b) of section 56 of the 1986 (Dode is
amended by adding a t the end thereof the following new para-
graph:
"(3) TREATMENT OF INCENTIVE STOCK OPTIONS.—Section 421
shall not apply to the transfer of stock acquired pursuant to the
exercise of an incentive stock option (as defined in section
422A). The adjusted basis of any stock so acquired shall be
determined on the basis of the treatment prescribed by the
preceding sentence."
(B) Paragraph (3) of section 57(a) of the 1986 Code is hereby
repealed.
26 use 56 note. (C) The amendments made by this paragraph shall apply with
respect to options exercised after December 31,1987.
(15) Clause (i) of section 56(aXlXA) of the 1986 Code is
amended by striking out "REAL" in the heading and inserting in
lieu thereof "PERSONAL".
(16) The heading of paragraph (1) of section 56(b) of the 1986
Code is amended by striking out "ITEMIZED".
(17) Subparagraph (A) of section 56(gX4) of the 1986 Code is
amended by adding at the end thereof the following new
clauses:
"(vi) ELECTION TO HAVE CUMULATIVE LIMITATION.—
"(I) I N GENERAL.—In the case of any property
placed in service during a taxable year to which an
election under this clause applies, in lieu of apply-
ing clause (i), the depreciation deduction for such
property for any taxable year shall be the lesser of
the accumulated 168(g) depreciation or the
accumulated book depreciation; reduced by the
aggregate amount of the depreciation deductions
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3431
determined under this subclause with respect to
such property for prior taxable years,
"(II) ACCUMULATED 166(g) DEPRECIATION.—For
purposes of this clause, the term'accumulated sec-
tion 168(g) depreciation' means the aggregate
amount of the depreciation deductions determined
under the alternative system of section 168(g) with
respect to the property for all periods before the
close of the teixable year.
"(Ill) ACCUMULATED BOOK DEPRECIATION.—For
purposes of this clause, the term 'accumulated
book depreciation' means the aggregate amount of
the depreciation deductions determined under the
method used for book purposes with respect to the
property for all periods before the close of the
taxable year.
"(IV) ELECTION.—The taxpayer may make an
election under this clause for any taxable year
beginning after 1989. Such an election, once made
with respect to any such taxable year, shall apply
to all property placed in service during such tax-
able year, and shall be irrevocable.
"(V) SIMILAR RULES FOR PROPERTY DESCRIBED I N
CLAUSE (i), (iii), OR (iv).—Rules similar to the
rules of the preceding provisions of this clause
shall also apply in the case of property to which
clause (ii), (iii), or (iv) applies.
"(vii) SPECIAL RULE FOR CERTAIN PROPERTY.—In the
case of any property described in paragraph (1), (2), (3),
or (4) of section 168(f), the amount of depreciation
allowable for purposes of the regular tax shall be
treated as the amount allowable under the alternative
system of section 168(g)."
(18) Paragraph (4) of section 56(g) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(1) ADJUSTED BASIS.—The adjusted basis of any property
with respect to which an adjustment under this paragraph
applies shall be determined by applying the treatment
prescribed in this paragraph."
102 STAT. 3432 PUBLIC LAW 100-647—NOV. 10, 1988
(19) Subsection (a) of section 56 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(8) SECTION 87 NOT APPLICABLE.—Section 87 (relating to alco-
hol fuel credit) shall not apply."
(c) AMENDMENTS TO SECTION 57 OF THE 1986 CODE.—
(1) Clause (iii) of section 57(a)(5)(C) of the 1986 Code is
amended by inserting "(whether a current or advance refund-
ing)" after "any refunding bond".
(2) Clause (i) of section 57(a)(5)(C) of the 1986 Code is amended
to read as follows:
"(i) IN GENERAL.—For purposes of this part, the term
'specified private activity bond' means any private
activity bond (as defined in section 141) which is issued
after August 7, 1986, and the interest on which is not
includible in gross income under section 103."
(3) Subparagraph (A) of section 57(a)(6) of the 1986 Code is
amended by inserting "or 642(c)" after "section 170".
(d) AMENDMENTS TO SECTION 58 OF THE 1986 CODE.—
(1) Paragraph (2) of section 58(a) of the 1986 Code is
amended—
(A) by striking out "(as modified by section 461(iX4XA))",
and
(B) by striking out "section 469(d), without regard to
paragraph (1)(B) thereof and inserting in lieu thereof "sec-
tion 469(c)".
(2) Paragraph (3) of section 58(a) of the 1986 Code is amended
by striking out "section 469(gXl)(C)" and inserting in lieu
thereof "section 469(jX2)".
(3) Subsection (a) of section 58 of the 1986 Code is amended by
adding at the end thereof the following new paragraph:
Agriculture and "(4) DETERMINATION OF LOSS.—In determining the amount of
agricultural the loss from any tax shelter farm activity, the adjustments of
T^S°^'^'^^' sections 56 and 57 shall apply."
(4) Subsection (b) of section 58 of the 1986 Code is amended by
striking out paragraphs (1), (2), and (3), and inserting in lieu
thereof the following:
"(1) the adjustments of sections 56 and 57 shall apply,
"(2) the provisions of section 469(m) (relating to phase-in of
disallowance) shall not apply, and
Taxes. "(3) in lieu of applying section 469(jX7), the passive activity
loss of a taxpayer shall be computed without regard to qualified
housing interest (as defined in section 56(e))."
(e) AMENDMENTS TO SECTION 59 OF THE 1986 CODE.—
(1) Paragraph (2) of section 59(e) of the 1986 Code is amended
by striking out "would have been allowable as a deduction" and
inserting in lieu thereof "would have been allowable as a
deduction (determined without regard to section 291)".
(2) Subsection (h) of section 59 of the 1986 (IJode is amended by
striking out "taxable year—" and all that follows and inserting
in lieu thereof "taxable year with the adjustments of sections
56, 57, and 58."
(3) Paragraph (1) of section 59(a) of the 1986 Code is amended
by striking out "and" at the end of subparagraph (B), by strik-
ing out the period at the end of subparagraph (C) and inserting
in lieu thereof ", and", and by adding at the end thereof the
following new subparagraph:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3433
"(D) the determination of whether any income is high-
taxed income for purposes of section 904(dX2) were made on
the basis of the applicable rate specified in section
55(bXlXA) in lieu of the highest rate of tax specified in
section 1 or 11 (whichever applies)."
(4) Subsection (i) of section 59 of the 1986 (Dode is amended—
(A) by striking out "of this subtitle" and inserting in lieu
thereof "of this subtitle (other than this part)", and
(B) by striking out "by this title" and inserting in lieu
thereof "by this subtitle".
(f) TRANSITIONAL PROVISIONS.—
(1) In the case of the taxable year of an estate or trust which 26 USC 55 note.
begins before January 1, 1987, and ends on or after such date,
the items of tax preference apportioned to any beneficiary of
such estate or trust under section 58(c) of the Internal Revenue
Code of 1954 (as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986) shall be taken into
account for purposes of determining the amount of the tax
imposed by section 55 of the Internal Revenue CJode of 1986 (as
amended by the Tax Reform Act of 1986) on such beneficiary for
such beneficiary's taxable year in which such taxable year of
the estate or trust ends.
(2) The last sentence of subparagraph (B) of section 701(fX6) of
the Reform Act is amended to read as follows: "The aggregate 26 USC 55 note.
amount of investment tax credits with respect to the unit in
Mississippi allowed solely by reason of being described in this
subparagraph shall not exceed $141,000,000."
(3) Subsection (f) of section 701 of the Reform Act is amended
by adding at the end thereof the following new paragraph:
"(7) AGREEMENT VESSEL DEPRECIATION ADJUSTMENT.—
"(A) For purposes of part VI of subchapter A of chapter 1
of the Internal Revenue (Dode of 1986, in the case of a
qualified taxpayer, alternative minimum taxable income
for the taxable year shall be reduced by an amount equal to
the agreement vessel depreciation adjustment.
"(B) For purposes of this paragraph, the agreement vessel
depreciation adjustment shall be an amount equal to the
depreciation deduction that would have been allowable for
such year under section 167 of such Code with respect to
agreement vessels placed in service before January 1, 1987,
if the basis of such vessels had not been reduced under
section 607 of the Merchant Marine Act of 1936, as
amended, and if depreciation with respect to such vessel
had been computed using the 25-year straight-line method.
The aggregate amount by which basis of a qualified tax-
payer is treated as not reduced by reason of this subpara-
graph shall not exceed $100,000,000.
"(C) For purposes of this paragraph, the term 'qualified
taxpayer' means a parent corporation incorporated in the
State of Delaware on December 1, 1972, and engaged in
water transportation, and includes any other corporation
which is a member of the affiliated group of which the
parent corporation is the common parent. No taxpayer
shall be treated as a qu£dified corporation for any taxable
year beginning after December 31, 1991."
(4XA) If any property to which this paragraph applies is 26 USC 57 note.
placed in service in a taxable year which begins before Janu-
102 STAT. 3434 PUBLIC LAW 100-647—NOV. 10, 1988
ary 1,1987, and ends on or after August 1, 1986, the item of tax
preference determined under section 57(a) of the Internal Reve-
nue Code of 1954 (as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986) with respect to such
property shall be the excess of—
(i) the amount allowable as a deduction for depreciation
or amortization for such taxable year, over
(ii) the amount which would be determined for such
taxable year under the rules of paragraph (1) or (5) (which-
ever is appropriate) of section 56(a) of the Internal Revenue
Code of 1954 (as amended by the Tax Reform Act of 1986).
(B) This paragraph shall apply to any property—
(i) which is described in paragraph (4) or (12) of section
57(a) of the Internal Revenue Code of 1954 (as so in effect),
and
(ii) to which paragraph (1) or (5) of section 56(a) of the
Internal Revenue Code of 1986 would apply if the taxable
year referred to in subparagraph (A) began after Decem-
ber 31, 1986.
26 use 59 note. (5) In determining the amount of the alternative minimum
tax foreign tax credit under section 59 of the 1986 (Dode, there
shall not be taken into account any taxes paid or accrued in a
taxable year beginning after December 31, 1986, which are
treated under section 904(c) of the 1986 Code as paid or accrued
in a taxable year beginning on or before December 31, 1986.
(g) MISCELLANEOUS AMENDMENTS.—
(1) Subparagraph (K) of section 26(bX2) of the 1986 Code is
amended by striking out the comma at the end thereof and
inserting in lieu thereof ").".
(2XA) So much of section 38(c) as precedes paragraph (4)
thereof is amended to read as follows:
"(c) LIMITATION BASED ON AMOUNT OF TAX.—
"(1) IN GENERAL.—The credit allowed under subsection (a) for
any taxable year shall not exceed the excess (if any) of the
taxpayer's net income tax over the greater of—
"(A) the tentative minimum tax for the taxable year, or
"(B) 25 percent of so much of the taxpayer's net regular
tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term 'net income
tax' means the sum of the regular tax liability and the tax
imposed by section 55, reduced by the credits allowable under
subparts A and B of this part, and the term 'net regular tax
liability' means the regular tax liability reduced by the sum of
the credits allowable under subparts A and B of this part.
"(2) REGULAR INVESTMENT TAX CREDIT MAY OFFSET 25 PERCENT
OF MINIMUM TAX.—
"(A) I N GENERAL.—In the case of a C corporation, the
amount determined under paragraph (IXA) shall be re-
duced by the lesser of—
"(i) the portion of the regular investment tax credit
not used against the normal limitation, or
"(ii) 25 percent of the taxpayer's tentative minimum
tax for the taxable year.
"(B) PORTION OF REGULAR INVESTMENT TAX CREDIT NOT
USED AGAINST NORMAL UMiT.—For purposes of Subpara-
graph (A), the portion of the regular investment tax credit
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3435
for any taxable year not used against the normal limitation
is the excess (if any) of—
"(i) the portion of the credit under subsection (a)
which is attributable to the application of the regular
percenteige under section 46, over
"(ii) the limitation of paragraph (1) (without regard to
this paragraph) reduced by the portion of the credit
under subsection (a) which is not so attributable.
"(C) LIMITATION.—In no event shall this paragraph
permit the allowance of a credit which would result in a net
chapter 1 tax less than an amount equal to 10 percent of
the amount determined under section 55(bXlXA) without
regard to the alternative tax net operating loss deduction.
For purposes of the preceding sentence, the term 'net chap-
ter 1 tax' means the sum of the regular tax liability for the
taxable year and the tax imposed by section 55 for the
taxable year, reduced by the sum of the credits allowable
under this part for the taxable year (other than under
section 34)."
(B) Subsection (c) of section 38 of the 1986 Code is amended—
(i) by redesignating paragraph (4) as paragraph (3), and
(ii) by striking out "subparagraphs (A) and (B) of para-
graph (1)" each place it appears in such paragraph and
inserting in lieu thereof "subparagraph (B) of paragraph (1).
(3)(A) Subsection (c) of section 47 of the 1986 Code is amended
by striking out "or D" and inserting in lieu thereof "D, or G".
(B) Subparagraph (D) of section 42qX4) of the 1986 Code is
amended by striking out "or D" and inserting in lieu thereof
"D, or G".
(4) The last sentence of clause (ii) of section 53(dXlXB) of the
1986 Code is amended by striking out "earnings and profits"
and inserting in lieu thereof "current earnings".
(5) Sections 173(b), 174(eX2), and 263(c) of the 1986 Code are
each amended by striking out "section 59(d)" and inserting in
lieu thereof "section 59(e)".
(6) Section 511 of the 1986 C!ode is amended by striking out
subsection (d).
(7) Sections 616(e) and 617g) of the 1986 Code are each
amended by striking out "section 58(i)" and inserting in lieu
thereof "section 59(e)".
(8) Paragraph (4) of section 701(c) of the Reform Act is 26USC38.
amended by striking out "section 631(a)" and inserting in lieu
thereof "section 221(a)".
(9) Subparagraph (B) of section 1362(eX5) of the 1986 Code is
amended by striking out "Subsection (dX2)" and inserting in
lieu thereof "Subsection (d)".
(10) Subsection (a) of section 6154 of the 1986 Ck)de (as in effect
before its repeal by the Revenue Act of 1987) is amended by
striking out "11, 59A" and inserting in lieu thereof "11, 55,
59 A".
(11) Paragraph (1) of section 962(a) of the 1986 Code is
amended—
(A) by striking out "section 1" and inserting in lieu
thereof "sections 1 and 55", and
(B) by striking out "section 11" and inserting in lieu
thereof "sections 11 and 55".
102 STAT. 3436 PUBLIC LAW 100-647—NOV. 10, 1988
(12) Subsection (h) of section 32 of the 1986 Code is amended
by striking out "for taxpayers other than corporations".
(13XA) Subsection (d) of section 2 of the 1986 Ckxle is amended
by striking out "the tax imposed by section 1" and inserting in
lieu thereof "the taxes imported by sections 1 and 55".
(B) Subsection (d) of section 11 of the 1986 Code is amended by
striking out "the tax imposed by subsection (a)" and inserting in
lieu thereof "the taxes imposed by subsection (a) and section
55".
SEC. 1008. AMENDMENTS RELATED TO TITLE VIII OP THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 801 OF THE REFORM ACT.—
dXA) Subparagraph (B) of section 448(dX2) of the 1986 Code
(defining qualified person£d service corporation) is amended by
striking out "or indirectly" and inserting in lieu thereof "(or
indirectly through 1 or more partnerships, S corporations, or
qusdified personal service corporations not described in para-
graph (2) or (3) of subsection (a))".
(B) Section 448(d) of the 1986 Oxie is amended by adding a t
the end thereof the following new paragraph:
Regulations. "(8) UsE OF RELATED PARTIES, ETC.—The Secretary shall pre-
scribe such regulations as may be necessary to prevent the use
of related parties, pass-thru entities, or intermediaries to avoid
the application of this section."
(2) Subparagraph (C) of section 448(dX4) of the 1986 Code
(relating to special rules for application of paragraph (2)) is
amended by striking out "all such members" and inserting in
lieu thereof "such group".
(3) Paragraph (2) of section 461(i) of the 1986 Code is amended
to read as follows:
"(2) SPECIAL RULE FOR SPUDDING OF OIL OR GAS WELLS.—
"(A) I N GENERAL.—In the case of a tax shelter, economic
performance with respect to amounts paid during the tax-
able year for drilling an oil or gas well shall be treated as
having occurred within a taxable year if drilling of the well
commences before the close of the 90th day after the close
of the taxable year.
"(B) DEDUCTION LIMITED TO CASH BASIS.—
"(i) TAX SHELTER PARTNERSHIPS.—In the case of a tax
shelter which is a partnership, in applying section
704(d) to a deduction or loss for any taxable year
attributable to an item which is deductible by reason of
subparagraph (A), the term 'cash basis' shall be sub-
stituted for the term 'adjusted basis*.
"(ii) OTHER TAX SHELTERS.—Under regulations pre-
scribed by the Secretary, in the case of a tax shelter
other than a partnership, the aggregate amount of the
deductions allowable by reason of subparagraph (A) for
any taxable year shall be limited in a manner similar
to the limitation under clause (i).
"(C) CASH BASIS DEFINED.—For purposes of subparagraph
(B), a partner's cash basis in a partnership shall be equal to
the adjusted basis of such partner's interest in the partner-
ship, determined without regard to—
"(i) any liability of the partnership, and
"(ii) any amount borrowed by the partner with re-
spect to such partnership which—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3437
"(I) was arranged by the partnership or by any
person who participated in the organization, sale,
or management of the partnership (or any person
related to such person within the meaning of sec-
tion 465(bX3)(C)), or
"(II) was secured by any asset of the partner-
ship."
(4) Section 464 of the 1986 Code (relating to limitations on
deductions for certain farming expenses) is amended by adding
at the end thereof the following new subsection:
"(g) TERMINATION.—Except as provided in subsection (f), subsec-
tions (a) and (b) shall not apply to any t£ixable year beginning after
December 31,1986."
(5) Paragraph (4) of section 801(d) of the Reform Act is amend- 26 USC 448 note.
ed by striking out "the completed contract method" and insert-
ing in lieu thereof "a method of accounting for long-term
contracts".
(6) Section 801(d) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(5) SPECIAL RULE FOR PARAGRAPHS (2) AND (3).—If any loan,
lease, contract, or evidence of any transaction to which para-
graph (2) or (3) applies is transferred after June 10, 1987, to a
person other than a related party (within the meaning of para-
graph (2)), paragraph (2) or (3) shall cease to apply on and after
the date of such transfer.''
(7) Paragraph (3) of section 448(d) of the 1986 Code is amended
by adding at the end thereof the following new sentence: "An S
corporation shall not be treated as a tax shelter for purposes of
this section merely by reason of being required to file a notice of
exemption from registration with a State agency described in
section 461(iX3)(A), but only if there is a requirement applicable
to all corporations offering securities for sale in the State that
to be exempt from such registration the corporation must file
sucii 3. noticp
(8) Subparagraph (C) of section 448(d)(4) of the 1986 Code is
amended by striking out "substantially all o f and inserting in
lieu thereof "90 percent or more of.
(9) Paragraph (3) of section 448(c) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(D) TREATMENT OF PREDECESSORS.—Any reference in this
subsection to an entity shall include a reference to any
predecessor of such entity."
(b) AMENDMENTS RELATED TO SECTION 803 OF THE REFORM ACT.—
(1) Paragraph (2) of section 263A(a) of the 1986 Code is amend-
ed by adding at the end thereof the following new sentence:
"Any cost which (but for this subsection) could not be taken into
account in computing taxable income for any taxable year shall
not be treated as a cost described in this paragraph."
(2) Section 263A(c) of the 1986 Code (relating to general
exceptions) is amended—
(A) by striking out "263(c), 616(a), or 617(a)" and inserting
in lieu thereof "263(c), 263(i), 291(b)(2), 616, or 617", and
(B) by adding at the end thereof the following new para-
graph:
"(6) COORDINATION WITH SECTION 59(e).—Paragraphs (2) and
(3) shall apply to any amount allowable as a deduction under
102 STAT. 3438 PUBLIC LAW 100-647—NOV. 10, 1988
section 59(e) for qualified expenditures described in subpara-
graphs (B), (C), (D), and (E) of paragraph (2) thereof."
(3) Subparagraph (B) of section 263A(dX2) of the 1986 Code
(relating to special rule for person with minority interest who
materially participates) is amended—
(A) by striking out "such grove, orchard, or vineyard" in
clause (i) and inserting in lieu thereof "the plants described
in subparagraph (A) at all times during the taxable year in
which such amounts were paid or incurred", and
(B) by striking out "such grove, orchard, or vineyard
during the 4-taxable year period beginning with the taxable
year in which the grove, orchard, or vineyard was lost or
damaged" and inserting in lieu thereof "the plants de-
scribed in subparagraph (A) during the taxable year in
which such amounts were paid or incurred".
(4) Paragraph (3) of section 263A(f) of the 1986 Code (relating
to interest relating to property used to produce property) is
amended—
(A) by striking out "incurred or continued in connection
with" and inserting in lieu thereof "allocable (as deter-
mined under paragraph (2)) to", and
(B) by inserting "(as so determined)" after "allocable".
(5) Section 447(b) of the 1986 Code is amended—
(A) by striking out " o f before "expenses", and
(B) by striking out "OF" before "EXPENSES" in the heading
thereof.
(6) Section 447(gXl) of the 1986 Code is amended by striking
out "trade or business of farming" each place it appears and
inserting in lieu thereof "qualified farming trade or business".
26 use 263A (7) Paragraph (4XAXi) of section 803(d) of the Reform Act is
note. amended by striking out "203" each place it appears and insert-
ing in lieu thereof "204".
26USC263A (8) The allocation used in the regulations prescribed under
note. section 263A(hX2) of the Internal Revenue Code of 1986 for
apportioning storage costs and related handling costs shall be
determined by dividing the amount of such costs by the begin-
ning inventory balances and the purchases during the year and
by multiplying the resulting allocation ratio by inventory
amounts determined in accordance with the provisions of the
joint explanatory statement of the committee of conference of
the conference report accompanying H.R. 3838 (H.R. Rept. No.
99-841, Vol. II., 99th Cong., 2d Sess. 11-306-307 (1986)).
Contracts. (c) AMENDMENTS RELATED TO SECTION 8 0 4 OF THE REFORM ACT.—
(1) Paragraph (3) of section 460(b) of the 1986 Code is
amended—
|; ^ v^ ~. (A) by striking out "subparagraph" and inserting in lieu
thereof "paragraph",
(B) by striking out "paragraph (1)" each place it appears
in subparagraph (B) and inserting in lieu thereof "subpara-
graph (A)", and
(C) by striking out "paragraph (1)" in subparagraph (C)
and inserting in lieu thereof "subparagraph (B)".
(2)(A) Section 4600)) of the 1986 Code (relating to percentage
of completion method) is amended by adding at the end thereof
the following new parsigraph:
"(4) SPECIAL RULES.—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3439
"(A) SiMPUFiED METHOD OF cx)ST ALLOCATION.—In the case
of any long-term contract, the Secretary may prescribe a
simplified procedure for allocation of costs to such contract
in lieu of the method of allocation under subsection (c).
"(B) LOOK-BACK METHOD NOT TO APPLY TO CERTAIN CON-
TRACTS.—Paragraph (2XB) and subsection (aX2) shall not
apply to any contract—
"(i) the gross price of which (as of the completion of
the contract) does not exceed the lesser of—
"O) $1,000,000, or
"(ED 1 percent of the average annual gross re-
ceipts of the taxpayer for the 3 taxable years
preceding the taxable year in which the contract
was completed, and
"(ii) which is completed within 2 years of the contract
commencement date.
For purposes of this subparagraph, rules similar to the
rules of subsections (eX2) and (fX3) shall apply."
(B) Section 460(bX2) of the 1986 Code is amended by striking
out "In" and inserting in lieu thereof "Except as provided in
paragraph (4), in".
(3) Subparagraph (B) of section 804(dX2) of the Reform Act is 26 use 460 note.
amended by striking out "section 263A(cX5)" and inserting in
lieu thereof "section 460(cX5)".
(4XA) Paragraph (3) of section 4600t)) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tences:
"For purposes of the preceding sentence, any amount received
or accrued after completion of the contract shall be taken into
account by discounting (using the Federal mid-term rate deter-
mined under section 1^4(d) as of the time such amount was
received or accrued) such amount to its value as of the comple-
tion of the contract. The taxpayer may elect with respect to any
contract to have the preceding sentence not apply to such
coiity]rd.c^
(B) Subparagraph (B) of section 4600i)X2) of the 1986 Code is
amended by striking out "completion of the contract" and
inserting in lieu thereof "completion of the contract (or, with
respect to any amount received or accrued after completion of
the contract, when such amount is so received or accrued)".
(d) AMENDIKIENT RELATED TO SECTION 805 OF THE REFORM ACT.—
(1) Section 166(dXlXA) of the 1986 Code is amended by striking
out "subsections (a) and (c)" and inserting in Ueu thereof
"subsection (a)".
(2) Subsection (b) of section 805 of the Reform Act is amended 26 use 166.
by inserting ", as amended by section 901(dX4)," after "Section
166".
(3) Subsection (a) of section 582 of the 1986 (Dode is amended
by striking out "subsections (a), (b), and (c) of section 166" and
inserting in lieu thereof "subsections (a) and (b) of section 166".
(e) AMENDMENTS RELATED TO SECTION 806 OF THE REFORM ACT.—
(IXA) Clause (i) of section 706a)XlXB) of the 1986 Code is
amended to read as follows:
"(i) the majority interest taxable year (as defined in
paragraph (4)),".
(B) Paragraph (4) of section 7060t)) of the 1986 Code is amended
to read as follows:
102 STAT. 3440 PUBLIC LAW 100-647—NOV. 10, 1988
"(4) MAJORITY INTEREST TAXABLE YEAR; UMITATION ON RE-
QUIRED CHANGES.—
"(A) MAJORITY INTEREST TAXABLE YEAR DEFINED.—For
purposes of paragraph (l)(BXi)—
"(i) I N GENERAL.—The term 'majority interest tax-
able year' means the taxable year (if any) which, on
each testing day, constituted the taxable year of 1 or
more partners having (on such day) an aggregate in-
terest in partnership profits and capital of more than
50 percent,
"(ii) TESTING DAYS.—The testing days shall be—
"(I) the 1st day of the partnership taxable year
(determined without regard to clause (i)), or
"(11) the days during such representative period
as the Secretary may prescribe.
"(B) FURTHER CHANGE NOT REQUIRED FOR 3 YEARS.—
Except as provided in regulations necessary to prevent the
avoidance of this section, if, by reason of paragraph (IXBXi),
the taxable year of a partnership is changed, such partner-
ship shall not be required to change to another taxable year
for either of the 2 taxable years following the year of
change."
(2) Clause (iii) of section 706(bXlXB) of the 1986 Code is
amended by striking out "or such other period as the Secretary
may prescribe in regulations" and inserting in lieu thereof
"unless the Secretary by regulations prescribes another period".
(3) Section 706(b) of the 1986 Code is amended by adding at the
end thereof the following new paragraph:
"(5) APPLICATION WITH OTHER SECTIONS.—Except as provided
in regulations, for purposes of determining the taxable year to
which a partnership is required to change by reason of this
subsection, changes in taxable years of other persons required
by this subsection, section 441(i), section 584(h), section 645, or
section 1378(a) shall be taken into account."
(4) Paragraph (2) of section 441(i) of the 1986 Code (defining
personal service corporation) is amended by adding at the end
thereof the following:
"A corporation shall not be treated as a personal service cor-
poration unless more than 10 percent of the stock (by value) in
such corporation is held by employee-owners (within the mean-
ing of section 269A(bX2), as modified by the preceding sentence).
If a corporation is a member of an affiliated group filing a
consolidated return, all members of such group shall be taken
into account in determining whether such corporation is a
personal service corporation."
(5XA) Section 584 of the 1986 Code (relating to common trust
funds) is amended by adding at the end thereof the following
new subsection:
"(h) TAXABLE YEAR OF COMMON TRUST FUND.—For purposes of
this subtitle, the taxable year of any common trust fund shall be the
calendar year."
26 use 584 note. (B) The amendment made by subparagraph (A) shall take
effect as if included in the amendments made by section 806 of
the Reform Act, except that section 806(eXl) shall be applied by
substituting "December 31, 1987" for "December 31, 1986". For
purposes of section 806(eX2) of the Reform Act—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3441
(i) a participant in a common trust fund shall be treated
in the same manner as a partner, and
(ii) subparagraph (C) thereof shall be applied by substitut-
mg "December 31, 1987" for "December 31, 1986" and as if
it did not contain the election to include all income in the
short taxable year.
(6) Section 806(cX2) of the Reform Act is amended by striking 26 use 267.
out "Section 267(a)" and inserting in lieu thereof "Section
267(aX2)".
(7) Subparagraph (C) of section 806(eX2) of the Reform Act is 26 use 1378
amended— ^°^-
(A) by striking out "(including such short taxable year)",
and
(B) by striking out "short taxable year" the second place
it appears and inserting in lieu thereof "the partner's or
shareholder's taxable year with or within which the part-
nership's or S corporation's short taxable year ends".
(8) Section 806(e)(2) of the Reform Act is amended—
(A) by striking out "any taxable year" and inserting in
lieu thereof "the taxpayer's first taxable year beginning
after December 31,1986'\ and
(B) by striking out "taxpayer" each place it appears and
inserting in lieu thereof "partnership, S corporation, or
personal service corporation'.
(9) Nothing in section 806 of the Reform Act or in any 26 use 1378
legislative history relating thereto shall be construed as requir- note.
ing the Secretary of the Treasury or his delegate to permit an
automatic change of a taxable year.
(10) Subsection (e) of section 806 of the Reform Act is amended 26 use 1378
by adding at the end thereof the following new paragraph: ^°^-
"(3) BASIS, ETC. RULES.—
"(A) BASIS RULE.—The adjusted basis of any partner's
interest in a partnership or shareholder's stock in an S
corporation shall be determined as if all of the income to be
taken into account ratably in the 4 taxable years referred to
in paragraph (2XC) were included in gross income for the
1st of such taxable years.
"(B) TREATMENT OF DISPOSITIONS.—If any interest in a
partnership or stock in an S corporation is disposed of
before the last taxable year in the spread period, all
amounts which would be included in the gross income of
the partner or shareholder for subsequent taxable years in
the spread period under paragraph (2XC) and attributable
to the interest or stock disposed of shall be included in gross
income for the taxable year in which the disposition occurs.
For purposes of the preceding sentence, the term 'spread
period' means the period consisting of the 4 taxable years
referred to in paragraph (2XC)."
(f) AMENDMENTS RELATED TO SECTION 811 OF THE REFORM ACT.—
(1) Paragraph (4) of section 45300)) of the 1986 Code is
amended—
(A) by striking out "at any time during" and inserting in
lieu thereof "as of the close of, and
(B) by striking out "as of the close of such taxable year in
lieu" and inserting in lieu thereof "as of the close of such
taxable year (determined by not taking into account any
indebtedness described in paragraph (3XB)) in lieu"
102 STAT. 3442 PUBLIC LAW 100-647—NOV. 10, 1988
(2) So much of paragraph (2) of section 453C(d) of the 1986
Code as precedes subparagraph (A) is amended to read as
follows:
"(2) EXCESS ALLOCABLE INSTALLMENT INDEBTEDNESS.—If the
allocable installment indebtedness for any taxable year exceeds
the amount which may be allocated under paragraph (1) to
applicable installment obligations arising in (and outstanding as
of the close of) such taxable year, such excess shall—".
(3) Subparagraph (A) of section 453aeXl) of the 1986 Code is
amended by adding at the end thereof the following new
sentence:
"Such term also includes any obligation held by any person
if the basis of such obligation in the hands of such person is
determined (in whole or in part) by reference to the basis of
such obligation in the hands of another person and such
obligation was an applicable installment obligation in the
hands of such other person."
(4) Paragraph (2) of section 453C(e) of the 1986 Code (relating
to aggregation rules) is amended by striking out "For" and
inserting in lieu thereof "Except as provided in regulations,
for".
(5) Subparagraph (B) of section 453C(eX4) of the 1986 Code is
amended by striking out "or (3)".
26USC453C (6) Paragraph (4) of section 811(c) of the Reform Act is
note. amended by striking out the second subparagraphs (D) and (E).
(7) Paragraph (5) of section 811(c) of the Reform Act is
amended by striking out "October 23, 1985" each place it ap-
pears and inserting in lieu thereof "October 23,1984".
(8) Section 811(c) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(9) SPECIAL RULES.—For purposes of section 453C of the 1986
Code (as added by subsection (a))—
"(A) REVOLVING CREDIT PLANS, ETC.—The term 'applicable
installment obligation' shall not include any obligation aris-
ing out of any disposition or sale described in paragraph (1)
or (2) of section 453(k) of such Code (as added by section
812(a)).
"(B) CERTAIN DISPOSITIONS DEEMED MADE ON FIRST DAY OP
TAXABLE YEAR.—In the case of a taxpayer's 1st taxable year
ending after December 31,1986, dispositions after February
28, 1986, and before the 1st day of such taxable year shall
be treated as made on such 1st day."
26 use 453C (9) For purposes of appljdng the amendments made by this
*^ote. subsection and the amendments made by section 10202 of the
Revenue Act of 1987, the provisions of this subsection shall be
treated as having been enacted immediately before the enact-
ment of the Revenue Act of 1987.
(g) AMENDMENTS RELATED TO SECTION 812 OF THE REFORM ACT.—
(1) Section 453 of the 1986 Code is amended by redesignating
the subsection (j) added by section 812 of the Reform Act as
subsection (k).
(2) Subsection (c) of section 453A of the 1986 Code (as in effect
on the date before the date of the enactment of the Revenue Act
of 1987) is amended by striking out "453(j)" and inserting in lieu
thereof "453(k)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3443
(3) Paragraph (1) of section 812(c) of the Reform Act is 26 use 453 note.
amended by striking out "paragraph (2)" and inserting in lieu
thereof "paragraphs (2) and (3)".
(4) Sul^ection (c) of section 812 of the Reform Act is amended
by redesignating paragraph (2) as paragraph (3) and inserting
after paragraph (1) the following new paragraph:
"(2) SALES OF STOCK, ETC.—Section 453(kX2) of the Internal
Revenue Code of 1986, as added by subsection (a), shall apply to
sales after December 31, 1986, in taxable years ending after
such date."
(5) Paragraph (3) of section 812(c) of the Reform Act (as so
redesignated) is amended by striking out subparagraphs (B) and
(C) and inserting in lieu thereof the following:
"(B) such change shall be treated as having been made
with the consent of the Secretary,
"(C) the period for taking into account adjustments under
section 481 of such Code by reason of such chemge shall be
equal to 4 years, and
"(D) except as provided in paragraph (4), the amount
taken into account in each of such 4 years shall be the
applicable percentage (determined in accordance with the
following table) of the net adjustment:
The applicable
"In the case of the: percentage is:
1st tcuuble year 15
2nd taxable year 25
3rd taxable year 30
4th taxable year 30.
If the taxpayer's last taxable year beginning before January 1,
1987, was the taxpayer's 1st taxable year in which sales were
made under a revolving credit plan, all adjustments under
section 481 of such Code shall be taken into account in the
taxpayer's 1st taxable year beginning after December 31,1986."
(6) Subsection (c) of section 812 of the Reform Act is amended
by adding at the end thereof the following new paragraphs:
"(4) ACCELERATION OP ADJUSTMENTS WHERE CONTRACTION IN
AMOUNT OF INSTALLMENT OBLIGATIONS.—
"(A) I N GENERAL.—If the percentage determined under
subparagraph (B) for any taxable year in the adjustment
period exceeds the percentage which would otherwise apply
under paragraph (3)(D) for such taxable year (determined
after the application of this paragraph for prior taxable
years in the adjustment period)—
"(i) the percentage determined under subparagraph
(B) shall be substituted for the applicable percentage
which would otherwise apply under p£u-agraph (3)(D),
and
"(ii) any increase in the applicable percentage by
reason of clause (i) shall be appUed to reduce the
applicable percentage determined under paragraph
(3)Q)) for subsequent taxable years in the adjustment
period (beginning with the 1st of such subsequent tax-
able years).
"(B) DETERBONATION OF PERCENTAGE.—For purposes of
subparagraph (A), the percentage determined under this
subparagraph for any taxable year in the adjustment period
is the excess (if any) of—
102 STAT. 3444 PUBLIC LAW 100-647—NOV. 10, 1988
"(i) the percentage determined by dividing the aggre-
gate contraction in revolving installment obligations by
the aggregate face amount of such obligations outstand-
ing as of the close of the taxpayer's last taxable year
beginning before January 1,1987, over
(ii) the sum of the applicable percentages under
paragraph (3XD) (as modified by this paragraph) for
prior taxable years in the adjustment period.
"(C) AGGREGATE coNTRAcmoN IN REVOLVING INSTALLMENT
OBUGATiONS.—For purposes of subparagraph (B), the aggre-
gate contraction in revolving instadlment obligations is the
amount by which—
"(i) the aggregate face amount of the revolving
installment obligations outstanding as of the close of
the taxpayer's last taxable year beginning before Janu-
ary 1,1987, exceeds
"(ii) the aggregate face amount of the revolving
installment obligations outstanding as of the close of
the taxable year involved.
"(D) REVOLVING INSTALLMENT OBUGATIONS.—For pur-
poses of this paragraph, the term 'revolving installment
obligations' means installment obligations arising under a
revolving credit plan.
"(E) "TREATMENT OF CERTAIN OBLIGATIONS DISPOSED OF ON
OR BEFORE OCTOBER 26, 1987.—For purposes of subpara-
graphs (BXi) and (CXi), in determining the aggregate face
amount of revolving installment obligations outstanding as
of the close of the taxpayer's last teaable year beginning
before January 1, 1987, there shall not be taken into ac-
count any obligation—
"(i) which was disposed of to an unrelated person on
or before October 26,1987, or
"(ii) was disposed of to an unrelated person on or
after such date pursuant to a binding written contract
in effect on October 26,1987, and at all times thereafter
before such disposition.
For purposes of the preceding sentence, the term 'unrelated
person' means any person who is not a related person (as
defined in section 453(g) of the Internal Revenue Code of
1986).
"(5) LIMITATION ON LOSSES FROM SALES OF OBLIGATIONS UNDER
REVOLVING CREDIT PLANS.—If 1 or more obligations arising
under a revolving credit plan and taken into account under
paragraph (3) are disposed of during the adjustment period,
then, notwithstanding any other provision of law—
"(A) no losses from such dispositions shall be recognized,
and
"(B) the aggregate amount of the adjustment for taxable
years in the adjustment period (in reverse order of time)
A shall be reduced by the amount of such losses.
"(6) ADJUSTMENT PERIOD.—For purposes of paragraphs (4) and
(5), the adjustment period is the 4-year period under paragraph
(3)."
(h) AMENDBIENT RELATED TO SECTION 821 OF THE REFORM ACT.—
26 use 451 note. Section 821(bX3) of the Reform Act is amended by adding at the end
thereof the following new sentence: "The preceding sentence shall
also apply to any taxable year beginning after August 16,1986, and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3445
before January 1, 1987, if the taxpayer treated such income in the
same manner for the taxable year preceding such taxable year."
(i) AMENDMENT RELATED TO SECTION 822 OF THE REFORM ACT.—
Paragraph (1) of section 703(b) of the 1986 Code is amended by
striking out "or (dX4)".
(j) AMENDMENTS RELATED TO SECTION 824 OF THE REFORM ACT.—
(1) Section 6501(o) of the 1986 Code which relates to cross
references is amended by striking out paragraph (3).
(2) Paragraph (4) of section 824(c) of the Reform Act is amend- 26 USC118 note.
ed by striking out "an indemnity agreement" and inserting in
lieu thereof "an underwriting agreement".
SEC. 1009. AMENDMENTS RELATED TO TITLE IX OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 901 OF THE REFORM ACT.—
(1) Subparagraph (C) of section 46(eX4) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tences: "Notwithstamding the preceding provisions of this
subparagraph, any such election shall terminate effective with
respect to the 1st taxable year of the organization making such
election which begins aiter 1986 and during which such
organization (or any successor organization) was not at any time
the lessee under any lease of regular investment tax credit
property. For purposes of the preceding sentence, the term
' r ^ u l a r investment tax credit property' means any section 38
property if the regular percentage applied to such property and
the amount of qualified investment with respect to such prop-
erty would have been reduced under paragraph (1) but for an
election under this subparagraph."
(2XA) Paragraph (5) of section 585(c) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(C) ELECTION MADE BY EACH MEMBER.—In the case of a
parent-subsidiary controlled group, any election under this
section shall be made separately by each member of such
group."
(B) Subclause (1) of section 585(cX3XAXiii) of the 1986 Code is
amended by striking out "or such greater amount as the tax-
payer may designate" and inserting in lieu thereof "or such
higher percentage of such net amount as the taxpayer may
elect".
(C) a a u s e (ii) of section 585(cX3XB) of the 1986 Code is
amended by striking out "designate an amount" and inserting
in lieu thereof "elects a higher percentage".
(3) Paragraph (4) of section 585(c) of the 1986 CJode is amended
by adding at the end thereof the following new sentence:
"If the amount of the reserve referred to in subparagraph (B) as of
the close of any taxable year exceeds the outstanding badance (as of
such time) of the loans referred to in subpsu'agraph (B), such excess
shall be included in gross income for such taxable year."
(b) AMENDMENTS RELATED TO SECTION 902 OF THE REFORM ACT.—
(1) Paragraph (3) of section 902(f) of the Reform Act is State listing.
amended— 26 USC 265 note.
(A) in subparagraph (F), by striking out "distribution
company" and inserting in lieu thereof "distribution
facility',
(B) in subparagraph (L), by striking out "waterfront
project" and inserting in lieu thereof "2 Festival Market
102 STAT. 3446 PUBLIC LAW 100-647—NOV. 10, 1988
Place projects at Union Pier Terminal and 1 project at the
Remount Road Container Yard, State Pier No. 15 at North
Charleston Terminal",
(C) in subparagraph (M), by striking out "Pontabla" and
inserting in lieu thereof "Pontalba",
(D) in subparagraph (P), by striking out "Birmingham,
Alabama," and inserting in lieu thereof "Homewood, Ala-
bama, the", and
(E) by adding at the end thereof the following new
subparagraphs:
"(T) Bellows Falls, Vermont—building project.
"(U) East Broadway Project, Louisville, Kentucky.
"(V) O.K. Industries, Oklahoma."
26 use 265 note. (2) Paragraph (4) of section 902(f) of the Reform Act is
amended by striking out "subparagraph" and inserting in lieu
thereof "paragraph".
(3XA) Paragraph (3) of section 265(b) of the 1986 Code is
amended to read as follows:
"(3) EXCEPTION FOR CERTAIN TAX-EXEMPT OBUGATIONS.—
"(A) I N GENERAL.—Any qualified tax-exempt obligation
acquired after August 7, 1986, shall be treated for purposes
of paragraph (2) and section 291(eXlXB) as if it were ac-
quired on August 7,1986.
"(B) QUAUFIED TAX-EXEMPT OBLIGATION.—
"(i) I N GENERAL.—For purposes of subparagraph (A),
the term 'qualified tax-exempt obligation' means a tax-
exempt obligation—
"(I) which is issued after August 7, 1986, by a
qualified small issuer,
"(II) which is not a private activity bond (as
defined in section 141), and
"(III) which is designated by the issuer for pur-
poses of this paragraph,
"(ii) CERTAIN BONDS NOT TREATED AS PRIVATE ACTIVITY
BONDS.—For purposes of clause (iXII), there shall not be
treated as a private activity bond—
"(I) any qualified 501(cX3) bond (as defined in
section 145), or
"(II) any obligation issued to refund (or which is
part of a series of obligations issued to refund) an
obligation issued before August 8, 1986, which was
not an industrial development bond (as defined in
section 103(bX2) as in effect on the day before the
date of the enactment of the Tax Reform Act of
1986) or a private loan bond (as defined in section
103(oX2XA), as so in effect, but without regard to
any exemption from such definition other than
section 103(oX2XA)).
"(C) QUALIFIED SMALL ISSUER.—
"(i) I N GENERAL.—For purposes of subparagraph (B),
the term 'qualified small issuer' means, with respect to
obligations issued during any calendar year, any issuer
if the reasonably anticipated amount of tax-exempt
obligations (other than obligations described in clause
(ii)) which will be issued by such issuer during such
calendar year does not exceed $10,000,000.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3447
"(ii) OBUGATIONS NOT TAKEN INTO ACCOUNT IN DETER
MINING STATUS AS QUAUFIED SMALL ISSUER.—For pur-
poses of clause (i), an obligation is described in this
clause if such obligation is—
"(I) a private activity bond (other than a quali-
fied 501(cX3) bond, as defined in section 145),
"(II) an obligation to which section 141(a) does
not apply by reason of section 1312, 1313, 1316(g),
or 1317 of the Tax Reform Act of 1986 and which
would (if issued on August 15, 1986) have been an
industrial development bond (as defined in section
103(bX2) as in effect on the day before the date of
the enactment of such Act) or a private loan bond
(as defined in section 103(oX2XA), as so in effect,
but without regard to any exception from such
definition other than section 103(oX2XA)), or
"(III) an obligation issued to refund (other than
to advance refund within the meaning of section
149(dX5)) any obligation to the extent the amount
of the refunding obligation does not exceed the
outstanding amount of the refunded obligation.
"(iii) ALLOCATION OF AMOUNT OF ISSUE IN CERTAIN
CASES.—In the case of an issue under which more than
1 governmental entity receives benefits, if—
"(I) all governmental entities receiving benefits
from such issue irrevocably agree (before the date
of issuance of the issue) on an allocation of the
amount of such issue for purposes of this subpara-
graph, and
"(II) such allocation bears a reasonable relation-
ship to the respective benefits received by such
entities,
then the amount of such issue so allocated to an entity
(and only such amount with respect to such issue) shall
be taken into account under clause (i) with respect to
such entity.
"(D) LIMITATION ON AMOUNT OF OBLIGATIONS WHICH MAY
BE DESIGNATED.—
"(i) I N GENERAL.—Not more than $10,000,000 of
obligations issued by an issuer during any calendar
year may be designated by such issuer for purposes of
this paragraph.
"(ii) CERTAIN REFUNDINGS OF DESIGNATED OBUGATIONS
DEEMED DESIGNATED.—Except as provided in clause (iii),
in the case of a refunding (or series of refundings) of a
qualified tax-exempt obligation, the refunding obliga-
tion shall be treated as a qualified tax-exempt obliga-
tion (and shall not be taken into account under clause
(i))if-
"(I) the refunding obligation was not taken into
account imder subparagraph (C) by reason of
clause (ii)(III) thereof,
"(II) the average maturity date of the refunding
obligations issued as part of the issue of which such
refunding obl^ation is a part is not later than the
average maturity date of the obligations to be re-
funded by such issue, and
102 STAT. 3448 PUBLIC LAW 100-647—NOV. 10, 1988
"(HI) the refunding obligation has a maturity
date which is not later than the date which is 30
years after the date the original qualified tax-
exempt obligation was issued.
Subclause (11) shall not apply if the average maturity of
the issue of which the original qualifi^ tax-exempt
obligation was a part (and of the issue of which the
obligations to be refunded are a part) is 3 years or less.
For purposes of this clause, average maturity shall be
determined in accordance with section 147(bX2XA).
"(iii) CERTAIN OBUGATIONS MAY NOT BE DESIGNATED
OR DEEMED DESIGNATED.—No obligation issued as part
of an issue may be designated under this paragraph (or
may be treated as designated under clause (ii)) if—
"(I) any obligation issued as part of such issue is
issued to refund another obligation, and
"(II) the aggregate face amount of such issue
exceeds $10,000,000.
"(E) AGGREGATION OP ISSUERS.—For purposes of subpara-
graphs (C) and (D)—
"(i) an issuer and all entities which issue obligations
on behalf of such issuer shall be treated as 1 issuer,
"(ii) all obligations issued by a subordinate entity
shall, for purposes of applying subparagraphs (C) and
(D) to each other entity to which such entity is subordi-
nate, be treated as issued by such other entity, and
"(iii) an entity formed (or, to the extent provided by
the Secretary, availed of) to avoid the purposes of
subparagraph (C) or (D) and all entities benefiting
thereby shall be treated as 1 issuer.
"(F) TREATMENT OF COMPOSITE ISSUES.—In the case of an
obligation which is issued as part of a direct or indirect
composite issue, such obligation shaU not be treated as a
qualified tax-exempt obligation unless—
"(i) the requirements of this paragraph are met with
respect to such composite issue (determined by treating
such composite issue as a single issue), and
"(ii) the requirements of this paragraph are met with
respect to each separate lot of obligations which are
part of the issue (determined by treating each such
separate lot as a separate issue)."
26 use 265 note. (B) In the case of any obligation issued after August 7,
1986, and before January 1, 1987, the time for msdking a
designation with respect to such obligation under section
265(bX3XBXiii) of the 1986 Code shall not expire before
January 1,1989.
(C)If-
(i) an obligation is issued on or after January 1, 1986,
and on or before August 7,1986,
(ii) when such obl^ation was issued, the issuer made
a designation that it intended to qualify under section
802(eX3) of H.R. 3838 of the 99th Congress as passed by
the House of Representatives, and
(iii) the issuer makes an election under this subpara-
graph with respect to such obligation,
for purposes of section 265(bX3) of the 1986 Code, such
obligation shall be treated as issued on August 8, 1986.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3449
(DXi) Except as provided in clause (ii), the following provi-
sions of section 265(bX3) of the 1986 Code (as amended by
this subparagraph (A)) shall apply to obligations issued
after June 30,1987:
a) subparagraph (CXiiXIH),
(II) clauses (ii) and (iii) of subparagraph (D), and
(III) subparagraphs (E) and (F).
(ii) At the election of an issuer (made at such time and in
such manner as the Secretary of the Treasury or his dele-
gate may prescribe), the provisions referred to in clause (i)
shall apply to such issuer as if included in the amendments
made by section 902(a) of the Tax Reform Act of 1986.
(4) Subparagraph (B) of section 291(eXl) of the 1986 Code is
amended by redesignating the clause (iv) added by section
902(cX2) of the Reform Act as clause (v).
(5) Clause (i) of section 291(eXlXB) of the 1986 Code is
amended by striking out "section 582(a)(2)" and inserting in lieu
thereof "section 585(aX2)".
(6) Paragraph (1) of section 902(e) of the Reform Act is 26 USC 163.
amended by striking out "Section 163(hX12)" and inserting in
lieu thereof "Section 163(iX2) (as redesignated by section 511(b)
of this Act)".
(7) Paragraph (4) of section 902(f) of the Reform Act is 26 use 265 note.
amended—
(A) by inserting "and qualified 501(cX3) bonds designated
by such Grovemor for purposes of this paragraph," after
"1987),", and
(B) by striking out "subparagraph" in the last sentence
and inserting in lieu thereof "paragraph".
(c) AMENDMENTS RELATED TO SECTION 903 OF THE REFORM ACT.—
(1) Paragraph (1) of section 172(b) of the 1986 CJode is amended
by redesignating subpareigraphs (L) and (M) as subparagraphs
(K) and (L), respectively.
(2) Subparagraph (A) of section 172(bXl) of the 1986 Code is
amended by striking out "Except" and all that follows down
through "a net operating loss" and inserting in lieu thereof
"Except as otherwise provided in this paragraph, a net operat-
ing loss".
(3) Subparagraph (B) of section 172(bXl) of the 1986 Code is
amended to read as follows:
"(B) Except as otherwise provided in this paragraph, a
net operating loss for any taxable year ending after Decem-
ber 31, 1975, shall be a net operating loss carryover to each
of the 15 taxable years following the taxable year of the
loss."
(d) AMENDMENTS RELATED TO SECTION 905 OF THE REFORM ACT.—
(1) Subsection G) of section 165 of the 1986 Code is amended by
redesignating paragraph (6) as paragraph (7) and by striking out
paragraph (5) and inserting in lieu thereof the following:
"(5) ELECTION TO TREAT AS ORDINARY LOSS.—
"(A) I N GENERAL.—In lieu of any election under para-
graph (1), the taxpayer may elect to treat the amount
referred to in paragraph (1) for the taxable year as an
ordinary loss described in subsection (cX2) incurred during
the taxable year.
"(B) LIMITATIONS.—
102 STAT. 3450 PUBLIC LAW 100-647—NOV. 10, 1988
"(i) DEPOSIT MAY NOT BE FEDERALLY INSURED.—No
election may be made under subparagraph (A) with
respect to any loss on a deposit in a qualified financial
institution if part or all of such deposit is insured under
Federal law.
Banks and "(ii) DOLLAR UMiTATiON.—With respect to each finan-
banking. cial institution, the aggregate amount of losses attrib-
utable to deposits in such financial institution to which
an election under subparagraph (A) may be made by
the taxpayer for any taxable year shsdl not exceed
$20,000 ($10,000 in the case of a separate return by a
married in<Uvidual). The limitation of the preceding
sentence shall be reduced by the amount of any insur-
ance proceeds under any State law which can reason-
ably be expected to be received with respect to losses on
deposits in such institution.
"(6) ELECTION.—Any election by the taxpayer under this
subsection for any taxable year—
"(A) shall apply to all losses for such taxable year of the
taxpayer on deposits in the institution with respect to
which such election was made, and
"(B) may be revoked only with the consent of the
Secretary.'-
26 use 451 note. (2) Paragraph (1) of section 905(c) of the Reform Act is
amended to read as follows:
"(1) IN GENERAL.—The amendment made by subsection (a)
shall apply to taxable years beginning after December 31,1981,
and, except as provided in paragraph (2), the amendment made
by subsection (b) shall apply to taxable years beginning sifter
December 31,1982."
(3) The subsection (f) of section 451 of the 1986 Code which
was added by section 905(b) of the 1986 Reform Act is redesig-
nated as subsection (g).
26 use 165 note. (4) If on the date of the enactment of this Act (or at any time
before the date 1 year after such date of enactment) credit or
refund of any overpayment of tax attributable to amendments
made by section 905 of the Reform Act or by this subsection (or
the assessment of any underpayment of tax so attributable) is
barred by any law or rule of law—
(A) credit or refund of any such overpayment may never-
theless be made if claim therefore is filed before the date 1
year after such date of enactment, and
(B) assessment of any such underpayment may neverthe-
less be made if made before the date 1 year after such date
of enactment.
SEC. 1010. AMENDMENTS RELATED TO TITLE X OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1011 OF THE REFORM ACT.—
(1) Paragraph (1) of section 813(a) of the 1986 Code (relating to
foreign life insurance companies) is amended by striking out
"the special life insurance company deduction and".
26 use 801 note. (2) Paragraph (1) of section 1011(d) of the Reform Act is
amended—
(A) by striking out "any bond" and inserting in lieu
thereof "einy market discount bond (as defined in section
1278 of the Internal Revenue Code of 1986)",
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3451
(B) by striking out "28 percent" and inserting in lieu
thereof "31.6 percent", and
(C) by adding at the end thereof the following new sen-
tence: The preceding sentence shall apply only if the tax
determined under the preceding sentence is less than the
tax which would otherwise be imposed."
(3) Paragraph (2) of section 1011(d) of the Reform Act is 26 USC 801
amended to read as follows: ^°^-
"(2) QUALIFIED LIFE INSURANCE COMPANY.—For purposes of
paragraph (1), the term 'qualified life insurance company'
means any life insurance company subject to tax under part I of
subchapter L of chapter 1 of the Internal Revenue Code of
1986."
0)) AMENDMENTS RELATED TO SECTION 1012 OF THE REFORM ACT.—
(1) Qause (iv) of section 1012(cX4XC) of the Reform Act is 26 USC 833 note.
amended to read as follows:
"(iv) dental benefit coverage provided by a Delta Health care
Dental Plans Association organization through con- professionals.
tracts with independent professional service providers
so long as the provision of such coverage is the prin-
cipal £^tivity of such organization."
(2) a a u s e (ii) of section 1012(cX4XC) of the Reform Act is
amended by striking out "Association" and inserting in lieu
thereof "Plan".
(3) The Secretary of the Treasury or his del^ate may pre- 26 USC 833 note.
scribe rules providing proper adjustments for taxpayers which
become subject to subchapter L of chapter 1 of the 1986 (Dode by
reason of the amendments made by section 1012 of the Reform
Act with respect to short taxable years which b^;in during 1987
by reason of section 843 of such C^ode.
(4XA) Paragraph (3) of section 501(m) of the 1986 Code is
amended by striking out "and" at the end of subparagraph (C),
by striking out the period at the end of subparagraph (D) and
inserting in lieu thereof ", and", and by adding at tiie end
thereof the following new subparagraph:
"(E) charitable gift annuities."
(B) Subsection (m) of section 501 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(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(cX5) (deter-
mined as if any amount paid in cash in connection with
such issuance were property)."
(c) AMENDMENTS RELATED TO SECTION 1021 OF THE REFORM ACT.— insurance.
(IXA) Subparagraph (C) of section 832ft)X7) of the 1986 Code
(relating to special rules for determining premiums earned) is
amended by striking out "this part" and inserting in lieu
thereof "section 831(a)".
OB) The subparagraph heading for such subparagraph is
amended by striking out "NONUFE INSURANCE COMPANY and
inserting in lieu thereof "INSURANCE COMPANY TAXABLE UNDER
SECTION 831 (a)".
(2) Paragraph (7) of section 8320)) of the 1986 Code is amended
by adding at the end thereof the following new subparagraphs:
19-194 O—91—Part 4 16 : QL 3
102 STAT. 3452 PUBLIC LAW 100-647—NOV. 10, 1988
"(D) TREATMENT OF COMPANIES WHICH BECOME TAXABLE
UNDER SECTION 831 (a).—
"(i) EXCEPTION TO PHASE-IN FOR COMPANIES WHICH
WERE NOT TAXABLE, ETC., BEFORE 1987.—Subparagraph
(,C) of paragraph (4) shall not apply to any insurance
company which, for each taxable year beginning before
January 1, 1987, was not subject to the tax imposed by
section 821(a) or 831(a) (as in effect on the day before
the date of the enactment of the Tax Reform Act of
1986) by reason of being—
"(I) subject to tax under section 821(c) (as so in
effect), or
"(II) described in section 501(c) (as so in effect)
and exempt from tax under section 501(a).
"(ii) PHASE-IN BEGINNING AT LATER DATE FOR COMPA-
NIES NOT 1ST TAXABLE UNDER SECTION 831 (a) IN 1987.—
In the case of an insurance company—
"(I) which was not subject to the tax imposed by
section 831(a) for its 1st taxable year beginning
after December 31, 1986, by reason of being sulv
ject to tax under section 831(b), or described in
section 501(c) and exempt from tax under section
501(a), and
"(II) which, for any taxable year beginning
before January 1, 1987, was subject to the tax
imposed by section 821(a) or 831(a) (as in effect on
the day before the date of the enactment of the Tax
Reform Act of 1986),
subparagraph (C) of paragraph (4) shall apply begin-
ning with the 1st taxable year beginning after Decem-
ber 31, 1986, for which such company is subject to the
tax imposed by section 831(a) and shall be applied by
substituting the last day of the preceding taxable year
for 'December 31, 1986' and the 1st day of the 7th
succeeding taxable year for 'January 1,1993'.
"(E) TREATMENT OF CERTAIN RECIPROCAL INSURERS.—In
the case of a reciprocal (within the meaning of section
835(a)) which reports (as required by State law) on its
annual statement reserves on unearned premiums net of
premium acquisition expenses—
"(i) subparagraph (B) of paragraph (4) shall be ap-
plied by treating unearned premiums as including an
amount equal to such expenses, and
"(ii) appropriate adjustments shall be made under
subparagraph (c) of paragraph (4) to reflect the amount
by which—
"(I) such reserves at the close of the most recent
taxable year beginning before January 1,1987, are
greater or less than,
"(II) 80 percent of the sum of the amount under
subclause (I) plus such premium acquisition
expenses,"
(3) Paragraph (5) of section 832(e) of the 1986 Code is amended
by striking out "and" at the end of subparagraph (A) and by
striking out the period a t the end of subparagraph (B) and
inserting in lieu thereof a comma.
(d) AMENDMENTS RELATED TO SECTION 1022 OF THE REFORM ACT.—
T*'"-
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3453
(1) Section 832 of the 1986 Code (defining insurance company
taxable income) is amended by adding at the end thereof the
following new subsection:
"(g) DIVIDENDS WITHIN GROUP.—In the case of an insurance com-
pany subject to tax under section 831(a) filing or required to file a
consolidated return under section 1501 with respect to any afHliated
group for any taxable year, any determination under this part with
respect to any dividend paid by one member of such group to
another member of such group shall be made as if such group were
not filing a consolidated return."
(2) Subclause (H) of section 832(bX5XBXii) of the 1986 Ck)de
(relating to losses incurred) is amended by inserting "(directly
or indirectly)" after "attributable".
(3) For purposes of section 832(bX5XCXi) of the 1986 Code, any 26 USC 832 note.
stock or obligation acquired on or after August 8, 1986, by an
insurance company subject to the tax imposed by section 831 of
the 1986 Clode (hereinafter in this paragraph referred to as the
"acquiring company") from another insurance company so sub-
ject (hereinafter in this paragraph referred to as the "transferor
company") shall be treated as acquired on the date on which
such stock or obligation was acquired by the transferor com-
pany if ^
(A) the transferor company acquired such stock or obliga-
tion before August 8,1986, and
(B) at all times after the date on which such stock or
obligation was acquired by the transferor company and
before the date of the acquisition by the acquiring company,
the transferor company and the acquiring company were
members of the same affiliated group filing a consolidated
return.
For purposes of the preceding sentence, the date on which the
stock or obligation was acquired by the transferor company
shall be determined with r^ard to any prior application of the
preceding sentence. For purposes of this paragraph, if the
acquiring corporation or transferor corporation was a party to a
reorganization described in section 368(aXl)(F) of the 1986 Code,
any reference to such corporation shall include a reference to
any predecessor thereof involved in such reorganization,
(e) AMENDBOINTS RELATED TO SECTION 1023 OP THE REFORM ACT.—
(1) Subparagraph (B) of section 846(fX6) of the 1986 Code
(relating to special rule for certain accident and health insur-
ance lines of business) is amended by striking out "paid during
the year" and inserting in lieu thereof "paid in the middle of
the year".
(2) Subsection (g) of section 846 of the 1986 (Dode is amended
by striking out "and" at the end of paragraph (1), by striking
out the period at the end of paragraph (2) and inserting in lieu
thereof ", and", and by adding at the end thereof the following
new paragraph:
"(3) r^ulations providing appropriate adjustments in the
application of this section to a taxpayer having a taxable year
wMch is not the calendar year."
(3) Subsection (e) of section 1023 of the Reform Act (relating to 26 use 846 note.
discounting of unpaid losses and certain unpaid expenses) is
amended by adding at the end thereof the following new
paragraph:
102 STAT. 3454 PUBLIC LAW 100-647—NOV. 10, 1988
"(4) APPUCATION OF FRESH START TO COMPANIES WHICH BECOME
SUBJECT TO SECTION 831(a) TAX IN LATER TAXABLE YEAR.—If—
"(A) an insurance company was not subject to tax under
section 831(a) of the Internal Revenue Code of 1986 for its
1st taxable year beginning after December 31, 1986, by
reason of being—
"(i) subject to tax under section 831(b) of such Code,
or
"(ii) described in section 501(c) of such Code and
exempt from tax under section 501(a) of such Cktde, and
"(B) such comparty becomes subject to tax under such
section 831(a) for any later taxable year,
paragraph (2) and subparagraphs (A) and (C) of paragraph (3)
shall be applied by treating such later taxable year as its 1st
taxable year beginning after December 31, 1986, and by treat-
ing the calendar year in which such later taxable year begins as
1987; and paragraph (3XB) shall not apply."
(f) AMENDMENTS RELATED TO SECTION 1024 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 831(bX2) of the 1986 Code
(relating to companies to which alternative tax applies) is
amended by adding at the end thereof the following new
sentence:
"The election under clause (ii) shall apply to the taxable
year for which made and for all subsequent taxable years
for which the requirements of clause (i) are met. Such an
election, once made, may be revoked only with the consent
of the Secretary."
(2) Subsection (a) of section 835 of the 1986 Code (relating to
election by reciprocal) is amended by striking out "section
821(a)" and inserting in lieu thereof "section 831(a)".
(3) Subsection (f) of section 835 of the 1986 Code is amended by
striking out "subsection (e)" and inserting in lieu thereof
"subsection (d)".
(4) Paragraph (6) of section 2430?) of the 1986 Code (relating to
special rules for insurance companies) is amended by striking
out "or 821".
(5) Subsection (c) of section 543 of the 1986 Code (relating to
gross income of insurance companies other than life or mutual)
is amended—
(A) by striking out "OR MUTUAL" in the heading and
inserting in lieu thereof "INSURANCE CJOMPANIES", and
(B) by striking out "life or mutual" in the text and
inserting in lieu thereof "a life insurance company".
(6) Subsection (g) of section 816 of the 1986 Code (relating to
burial and funeral benefit insurance companies) is amended by
striking out "section 821 or".
(7) The table of sections for part II of subchapter L of chapter
1 of the 1986 Code (relating to other insurance companies) is
amended by striking out the item relating to section 831 and
inserting in lieu thereof the following new item:
"Sec. 831. Tax on insurance companies other than life insurance
companies."
26 use 831 note. (8) Paragraph (1) of section 1024(d) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "In the case of a company taxable under section 831(b) of
the Internal Revenue Code of 1986 (as amended by subsection
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3455
(a)), any amount included in gross income under this paragraph
shall be treated as gross investment income."
(9) Section 831(b) of the 1986 Code is amended by adding at the
end thereof the following new paragraph:
"(3) LIMITATION ON USE OF NET OPERATING LOSSES.—For pur-
poses of this part, except as provided in section 844, a net
operating loss (as defined in section 172) shall not be carried—
"(A) to or from any taxable year for which the insurance
company is not subject to the tax imposed by subsection (a),
or
"(B) to any taxable year if, between the taxable year from
which such loss is being carried and such taxable year,
there is an intervening taxable year for which the insur-
ance company was not subject to the tax imposed by subsec-
tion (a)."
(g) AMENDMENTS RELATED TO SECTION 1031 OF THE REFORM ACT.—
(1) Paragraph (1) of section 1031(a) of the Reform Act is 26 use 832 note.
amended by inserting "(whether made in a lump sum or a series
of substantially equal payments over a period of not more than
6 years)" after "any initial payment".
(2) Paragraph (2) of section 1031(a) of the Reform Act is
amended by striking out "initial payment" each place it ap-
pears and inserting in lieu thereof "initial pajonent referred to
in paragraph (1)".
(3) Paragraph (2) of section 1031(a) of the Reform Act is
amended by striking out "this title" each place it appears and
inserting in lieu thereof "the Internal Revenue Code of 1986".
(h) SPECIAL RULE FOR MUTUAL LIFE INSURANCE COMPANY.—
(1) I N GENERAL.—Paragraph (2) of section 217(i) of the Tax
Reform Act of 1984 is amended to read as follows: 26 use 816 note.
"(2) EFFECT OF ELECTION ON SUBSIDIARIES OF ELECTING
PARENT.—For purposes of determining the amount of the small
life insurance company deduction of any controlled group which
includes a mutusd company which made an election under
paragraph (1), the taxable income of such electing company
shall be taken into account under section 806(bX2) of the
Internal Revenue Code of 1954 (relating to phaseout of small life
insurance company deduction)."
(2) EFFECTIVE DATE.—The amendment made by this subsection 26 use 816 note.
shall apply to taxable years beginning after December 31,1986,
and before January 1,1992.
(3) REVENUE LOSS LIMITED.—The decrease in the amount of 26 use 816 note.
Federal revenue by reason of the amendment made by this
subsection shall not exceed $300,000 per taxable year,
(i) DELAY IN EM^CTIVE DATE FOR DIVERSIFICATION REQUIREMENTS 26 use 817 note.
WITH RESPECT TO ACCOUNTS FOR CERTAIN IMMEDIATE ANNUITIES.—
Section 817(h) of the 1986 Code shall not apply until January 1,1989
with respect to a variable contract (as defined in section 817(d) of the
1986 Code) if—
(1) such contract provides for the payment of an immediate
annuity (as defined in section 72(uX4) of the 1986 Code),
(2) such contract was outstanding on September 12, 1986, and
(3) the segregated asset account on which such contract is
based was, on September 12, 1986, wholly invested in deposits
insured by the Federal Deposit Insurance Corporation or the
Federal Savings and Loan Insurance Corporation.
102 STAT. 3456 PUBLIC LAW 100-647—NOV. 10, 1988
0') TREATMENT OF ALTERNATIVE MINIMUM TAX WITH RESPECT TO
SHAREHOLDERS SURPLUS ACXX)UNT.—
(1) Paragraph (2) of section 815(c) of the 1986 Code (relating to
shareholders surplus account) is amended by adding at the end
thereof the following new sentence:
"If for any taxable year a tax is imposed by section 55, under
r^^ations proper adjustments shall be made for such year and
all subsequent taxable years in the amounts taken into account
under subparagraphs (A) and (B) of this paragraph and subpara-
graph (B) of subsection (dX3)."
26 use 815 note. (2) EFFECTIVE DATE.—^TTie amendment made by paragraph (1)
shall apply to taxable years b ^ i n n i i ^ after December 31, 1986.
(k) TREATMENT OF CERTAIN ITEMS AS NOT INTEREST FOR SOURCE
RULES, ETC.—Subsection (f) of section 818 of the 1986 0)de is
amended by adding at the end thereof the following new paragraph:
"(3) ITEMS DESCRIBED IN SECTION 807(C) TREATED AS NOT
INTEREST FOR SOURCE RULES, ETC.—For purposes of part I of
subchapter N, items described in any paragraph of section 807(c)
shall be treated as amounts which are not interest."
SEC. 1011. AMENDMENTS RELATED TO PARTS I AND II OF SUBTITLE A OF
TITLE XI OF THE REFORM ACT.
(a) AMENDMENT RELATED TO SECTION 1101 OF THE REFORM ACT.—
(1) Paragraph (4) of section 2 1 ^ ) of the 1986 Code (relatmg to
special rule for married individuals filing separately) is
amended to read as foUows:
"(4) SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPA-
RATELY AND LIVING APART.—A husband and wife who—
"(A) file separate returns for any taxable year, and
"(B) live apart at all times during such taxable year,
shall not be treated as married individuals for purposes of this
subsection."
26 use 219 note. (2XA) Except as provided in subparagraph (B), the amend-
ment made by paragraph (1) shall apply to taxable years b a n -
ning after December 31,1987.
(B) A taxpayer may elect to have the amendment made by
paragraph (1) apply to any taxable year b^inning in 1987.
(b) AMran>MENTS RELATED TO SECTION 1102 OF THE REFORM ACT.—
(1) Sections 408(dX2XC) and 408(oX4XBXiv) of the 1986 Code
are each amended by striking out "with or within which the
taxable year ends" and inserting in lieu thereof "in which the
taxable year begins".
(2XA) Section 408(dX4) of the 1986 Code (relating to excess
contributions returned before due date of return) is amended by
striking out "to the extent that such contribution exceeds the
amount allowable as a deduction under section 219".
(B) Section 408(dX4) of the 1986 Code is amended—
(i) by striking out "excess" each place it appears, and
(ii) by striking out "EXCESS CONTRIBUTIONS" in the head-
ing and inserting in lieu thereof "0)NTRIBUTIONS".
(3) Sections 408(dX5) and 4973(b) of the 1986 Code are each
amended by striking out all that follows "section 219" in the
last sentence thereof and inserting in lieu thereof "shall be
computed without r^ard to section 219(g).".
(4XA) Section 6693(b) of the 1986 Code (relating to overstate-
ment of designated nondeductible contributions) is amended to
read as follows:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3457
"Ot)) PENALTIES RELATING TO NONDEDUCTIBLE CONTRIBUTIONS.—
"(1) OVERSTATEMENT OF DESIGNATED NONDEDUCTIBLE CON-
TRIBUTIONS.—Any individual who—
"(A) is required to furnish information under section
408(oX4) as to the amount of designated nondeductible con-
tributions made for any taxable year, and
"(B) overstates the amount of such contributions made
for such taxable year,
shall pay a penalty of $100 for each such overstatement unless
it is shown that such overstatement is due to reasonable cause.
"(2) FAILURE TO FILE FORM.—Any individual who fails to file a Law
form required to be filed by the Secretary under section 408(oX4) f^^^*^®'"®"*^ ^^
shall pay a penalty of $50 for each such failure unless it is crime.
shown that such failure is due to reasonable cause."
(BXi) The heading for section 6693 of the 1986 Code is
amended by striking out "overstatement o f and inserting in
lieu thereof "penalties relating to".
(ii) The item relating to section 6693 in the table of sections
for subchapter B of chapter 68 is amended by striking out
"overstatement o f and inserting in lieu thereof "penalties
relating to".
(c) AMENDMENTS RELATED TO SECTION 1105 OF THE REFORM ACT.—
(1) Section 402(gX2XC) of the 1986 Code (relating to taxation of
distribution) is amended—
(A) by striking out "(and no tax shall be imposed under
section 72(t))" in clause (i),
(B) by striking out "such excess deferral is made" in
clause (ii) and inserting in lieu thereof "such income is
distributed", and
(C) by inserting at the end thereof the following new flush
sentence:
"No tax shall be imposed under section 72(t) on any dis-
tribution described in the preceding sentence."
(2) Section 402(gX2) is amended by striking out "REQUIRED
DISTRIBUTION" in the heading thereof and inserting in lieu
thereof "DISTRIBUTION".
(3) Section 402(gX2) of the 1986 Code is amended by adding at
the end thereof the following new subparagraph:
"(D) PARTIAL DISTRIBUTIONS.—If a plan distributes only a
portion of any excess deferral and income allocable thereto,
such portion shall be treated as having been distributed
ratably from the excess deferral and the income."
(4) Section 402(gX3) of the 1986 Code (defining elective defer-
ral) is amended by striking out "paragraph" and inserting in
lieu thereof "subsection"
(5XA) Qause (iii) of section 402(gX8XA) of the 1986 Code
(relating to special rule for certain organizations) is amended by
inserting "(determined in the manner prescribed by the Sec-
retary)" after "taxable years".
(B) Section 402(gX8) of the 1986 Code is amended by adding at
the end thereof the following new subparagraph:
"(D) YEARS OF SERVICE.—For purposes of this paragraph,
the term 'years of service' has the meaning given such term
by section 4O301>)."
(6XA) Section 402(g) of the 1986 Code, as added by section
1852(b)(3XA) of the Reform Act, is redesignated as subsection (i).
102 STAT. 3458 PUBLIC LAW 100-647—NOV. 10, 1988
(B) Section 402(g) of the 1986 Code, as added by section
1854(fX2) of the Reform Act, is redesignated as subsection 0')-
26 use 402 note. (Q Section 1854(0(4XC) of the Reform Act is amended by
striking out "section 402(g)" and inserting in lieu thereof "sec-
tion 402(j)".
(7XA) Section 401(a) of the 1986 (Ik)de is amended by adding at
the end thereof the following new paragraph:
"(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(gX3)) may be made with
respect to any individual during a calendar year, such trust
shsdl 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(gXl) for
taxable years b^inning in such calendar year."
(B) Section 403a>Xl) of the 1986 Code is amended by striking
out "and" at the end of subparagraph (CJ), by inserting "and" at
the end of subparagraph (D), and by inserting after subpara-
graph (D) the following new subparagraph:
"(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(aX30),".
(Q Subparagraph (A) of section 408(kX6) of the 1986 Code, as
amended by subsection (fXl), is amended by adding at the end
thereof the following new clause:
"(iv) LIMITATIONS ON ELECTIVE DEFERRALS.—(Dlause (i)
shall not apply to a simplified employee pension unless
the requirements of section 401(aX30) are met."
(D) Subparagraph (D) of section 501(cX18) of the 1986 Code is
amended by striking out "and" at the end of clause (ii), by
striking out the period at the end of clause (iii) and inserting in
lieu thereof ", and", and by inserting after clause (iii) the
following new clause:
"(iv) the requirements of section 401(aX30) are met."
26 use 401 note. (EXD Elxcept as provided in clause (ii), the amendments made
by this paragraph shall apply to plan years b^^inning after
December 31,1987.
(ii) In the case of a plan described in section 1105(cX2) of the
Reform Act, the amendments made by this paragraph shall not
apply to contributions made pursuant to an agreement de-
scribed in such section for plan years b^inning before the
earlier of—
(D the later of January 1,1988, or the date on which the
last of such agreements terminates (determined without
r^ard to any extension thereof after February 28,1986), or
(ID January 1,1989.
26 use 402 note. (8) Section 1105(cX2XA) of the Reform Act is amended by
striking out "the last of such collective bargaining agreements'
and inserting in lieu thereof "such agreement".
(9) Section 1105(c) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(6) REPORTING REQUIREMENTS.—The amendments made by
subsection (b) shall apply to calendar years b a n n i n g after
December 31,1986."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3459
(10) Notwithstanding any other provision of law, a plgm may 26 use 402 note.
incorporate by reference the dollar limitations under section
402(g) of the Internal Revenue Code of 1986.
(11) Section 402(gX3) of the 1986 CJode is amended by inserting Wages.
' at the end thereof the following new sentence: "An employer
contribution shall not be treated as an elective deferral de-
scribed in subparagraph (C) if under the salary reduction
agreement such contribution is made pursuant to a one-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 specified in regulations."
(12) Subpara^aph (A) of section 403(bX12) of the 1986 Code is Wages.
amended by mserting after clause (ii) the following new
sentence:
"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 irrev-
ocable election made by the employee at the time of initial
eligibility to participate in the agreement or is made pursu-
ant to a similar arrangement specified in regulations."
(d) AMENDMENTS RELATED TO SECTION 1106 OF THE REFORM ACT.—
(1) Section 404(1) of the 1986 (Dode (relating to limitation on
amount of compensation which may be taken into account) is
amended by adding at the end thereof the following new sen-
tence: "For purposes of clause (i), (ii), or (iii) of subsection
(aXlXA), and in computing the full funding limitation, any
adjustment under the preceding sentence shall not be taken
into account for any year before the year for which such
adjustment first takes effect.".
(2) Section 415(bX5XD) of the 1986 Code (relating to applica-
tion to changes in benefit structures) is amended by striking out
"this paragraph" and inserting in lieu thereof "subparagraph
(A)".
(3) Paragraph (2) of section 415(k) of the 1986 Code (relating to
contributions to provide cost-of-living protection under defined
benefit plans), as added by section 1106(c) of the Reform Act, is
amended—
(A) by striking out "to the arrangement" in subparagraph
(CXii) and inserting in lieu thereof "to such increase , and
(B) by striking out subparagraph (D) and inserting in lieu
thereof:
"(D) ARRANGEMENT ELECTIVE; TIME FOR ELECTION.—An
arrangement meets the requirements of this subparagraph
only if it is elective, it is available under the same terms to
€01 participants, and it provides that such election may at
least be made in the year in which the participant—
"(i) attains the earliest retirement age under the
defined benefit plan (determined without regard to any
requirement of separation from service), or
(ii) separates from service."
(4) Sections 401(aX17) and 404a) of the 1986 Code are each
amended by adding at the end thereof the following new sen-
tence: "In determining the compensation of an employee, the
rules of section 414(qX6) shall apply, except that in applying
such rules, the term 'family' shall include only the spouse of the
employee and any lineal descendants of the employee who have
not attained age 19 before the close of the year.
102 STAT. 3460 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 415 note. (5) Paragraph (4) of section 1106(i) of the Reform Act is
amended by striking the period at the end thereof and inserting
in Ueu thereof "(determined as if the amendments made by this
section were in effect for such year).".
(6) Section 415(bX5XB) of the 1986 Code is amended by insert-
ing "and subsection (e)" after "paragraphs (IXB) and (4) .
(7) Subparagraph (A) of section 415(cX6) of the 1986 Code is
amended—
(A) by striking out "paragraph (cXlXA) (as adjusted for
such year pursuant to subsection (dXD)", and inserting in
lieu thereof "paragraph (IXA)"; and
(B) by striking out "paragraph (cXlXA) (as so adjusted)"
and inserting in Heu thereof "paragraph (1)(A)".
(8) Sections 414(qXlXD) and 416(iXlXAXi) of the 1986 Code are
each amended by striking out "150 percent of the amount in
effect under section 415(cXlXA)" and inserting in Heu thereof
"50 percent of the amount in effect under section 415(bXlXA)".
(e) AMENDMENTS RELATED TO SECTION 1107 OF THE REFORM ACT.—
(1) Section 457(cX2) of the 1986 Code is amended by striking
out "and paragraphs (2) and (3) of subsection (b)".
(2) Section 457(dXlXA) of the 1986 Code (relating to distribu-
tion requirements) is amended to read as follows:
(A) under the plan amounts will not be made available
to participants or beneficiaries earlier than—
"(i) the calendar year in which the participant at-
tains age 70 y2,
"(ii) when the participant is separated from service
with the employer, or
"(iii) when the participant is faced with an unforesee-
able emergency (determined in the manner prescribed
by the Secretary in regulations)."
(3) Paragraph (7) of section 401(k) of the 1986 Code (defining
rural electric cooperative plan) is amended to read as follows:
"(7) RURAL ELECTRIC COOPERATIVE PLAN.—For purposes of this
subsection—
"(A) I N GENERAL.—The term 'rural electric 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
electric cooperative.
"(B) RURAL ELECTRIC COOPERATIVE DEFINED.—For pur-
p>oses of subpareigraph (A), the term 'rural electric coopera-
tive' means—
"(i) any organization which—
"(I) is exempt from tax under this subtitle or
which is a State or local government or political
subdivision thereof (or agency or instrumentality
thereof), and
"(II) is engaged primarily in providing electric
service on a mutual or cooperative basis,
"(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), and
"(iii) an organization which is a national association
of organizations described in clause (i) or (ii)."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3461
(4) Section 414(o) of the 1986 Code is amended by inserting "or
any requirement under section 457" after "(nX3)".
(5XA) Paragraph (6) of section 818(a) of the 1986 Code (defin-
ing pension plan contracts) is amended—
(i) by striking out "State" in subparagraph (A),
(ii) by inserting "or any organization (other than a
governmental imit) exempt from tax under this subtitle,"
> after "forgoing," in subparagraph (B),
(iii) by striking out "or" before "agency" in subparagraph
(B), and
(iv) by inserting ", or organization" after "instrumental-
ity" the second place it appears in subparagraph (B).
(B) The amendments made by this paragraph shall apply to 26 USC 818 note.
contracts issued after December 31,1986.
(6) Section 1107(cX3) of the Reform Act is amended— 26 USC 457 note.
(A) by striking out "eligible" each place it appears, and
(B) by inserting at the end of subparagraph (B) the follow-
ing new sentence: "This subparagraph shall only apply to
individuals who were covered under the plan and agree-
ment on August 16,1986."
(7) Paragraph (5) of section 1107(c) of the Reform Act is
amended—
(A) by striking out "to employees on August 1,1986, o f ,
(B) by striking out "a deferred compensation plan" in
subparagraph (A) and inserting in lieu thereof "to employ-
ees on August 16,1986,",
(C) by inserting "maintaining a deferred compensation
plan" aiter "Alabama" in subparagraph (A), and
. (D) by striking out "a deferred compensation plan" in
subparagraph (B) and inserting in lieu thereof "to individ-
uals eligible to participate on August 16,1986, in a deferred
compensation plan".
(8) Section 3121(vX3XA) of the 1986 Code is amended by
striking out "457(eXl)" and inserting in lieu thereof "457(£X1)".
(9) Effective for years beginning after December 31, 1988,
paragraph (9) of section 457(e) of the 1986 (Dode is amended by
inserting "after separation from service and" before "within 60
days".
(10) Subclause (1) of section 457(dX2XBXi) of the 1986 Code is
amended to read as follows:
"(I) the amounts payable with respect to the
participant will be paid at times specified by the
Secretary which are not later than the time deter-
mined under section 401(aX9XG) (relating to in-
cidental death benefits),",
(f) AMENDMENTS RELATED TO SECTION 1108 OF THE REFORM ACT.— Retirement.
(1) Subparagraph (A) of section 408(kX6) of the 1986 Code
(relating to salary reduction arrangements under simplified
employee pensions) is amended to read as follows:
. "(A) A R R A N G E B I E N T S WHICH QUALIFY.—
"(i) IN GENERAL.—A simplified employee pension
shall not fail to meet the requirements of this subsec-
tion for a year merely because, under the terms of the
pension, an employee may elect to have the employer
make payments—
102 STAT. 3462 PUBLIC LAW 100-647—NOV. 10, 1988
"(I) as elective employer contributions to the
simplified employee pension on behalf of the em-
ployee, or
(II) to the employee directly in cash.
"(ii) 5 0 PERCENT OP EUGIBLE EMPLOYEES MUST ELECT.—
Clause (i) shall not apply to a simplified employee
pension unless an election described in clause (iXD 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 PERCENT-
AGE.—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 com-
pensated employees) eligible to participate, multi-
plied by
"(II) 1.25."
(2) Section 408(kX6XB) of the 1986 Code (relating to exception
where more than 25 employees) is amended by inserting who
were eligible to participate (or would have been required to be
eligible to participate if a pension was maintained)" after "25
employees'.
(3XA) Section 408(kX6XDXii) of the 1986 Code (defining defer-
ral percentage) is amended by striking out "(within the mean-
ing of section 414(s))" and inserting in lieu thereof "(not in
excess of the first $200,000)".
(B) Subparagraph (B) of section 408(kX7) of the 1986 Code
(defining compensation) is amended to read as follows:
"(B) COMPENSATION.—Except as provided in paragraph
(2X0), the term 'compensation' has the meaning given such
term by section 414(s)."
(C) Subparagraph (C) of section 408(kX3) of the 1986 Code is
amended by striking out "total" before "compensation".
(D) Section 408(kX8) of the 1986 Code is amended by striking
out "paragraph (3XC)" and inserting in lieu thereof "paragraphs
(3XC)and(6XDXii)".
(4) Section 408(kX6) of the 1986 Code (relating to employee
may elect salary reduction arrangement) is amended by
redesignating subparagraph (F) as subparagraph (G) and
by inserting after subparagraph (E) the following new
subparagraph:
"(F) EXCEPTION WHERE PENSION DOES NOT MEET REQUIRE-
MENTS NECESSARY TO INSURE DISTRIBUTION OF EXCESS CON-
TRIBUTIONS.—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 alloca-
ble thereto) may not be withdrawn from a simplified
employee pension until a determination has been made
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3463
that the requirements of subparagraph (AXiii) have
been met with respect to such contributions."
(5) Section 408(d) of the 1986 Code (relating to tax treatment
of distributions) is amended by adding at the end thereof the
following new paragraph:
"(7) SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS.—
"(A) TRANSFER OR ROLLOVER OF CONTRIBUTIONS PROHIBITED
UNTIL DEFERRAL TEST MET.—Notwithstanding any other
provision of this subsection or section 72(t), paragraph (1)
and section 72(tXl) shall apply to the transfer or distribu-
tion from a simplified employee pension of any contribution
under a salary reduction arrangement described in subsec-
tion (kX6) (or any income allocable thereto) before a deter-
mination as to whether the requirements of subsection
(kX6XAXiii) are met with respect to such contribution.
"(B) (JERTAIN EXCLUSIONS TREATED AS DEDUCTIONS.—For
purposes of paragraphs (4) and (5) and section 4973, any
amount excludable or excluded from gross income under
section 402(h) shall be treated as an amount allowable or
allowed as a deduction under section 219."
(6) Subparagraph (C) of section 404(hXl) of the 1986 Code is
amended by inserting "(or during the taxable year in the case of
a taxable year described in subparagraph (AXii))" after "taxable
year" the second place it appears.
(7) Section 1108(h) of the Reform Act is amended to read as 26 USC 219 note.
follows:
"(h) EFFECTIVE DATES.—
"(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to years b ^ i n
ning after December 31,1986.
"(2) INTEGRATION RULES.—Subparagraphs (D) and (E) of sec-
tion 408(kX3) of the Internal Revenue Code of 1954 (as in effect
before the amendments made by this section) shall continue to
apply for years b^inning after December 31, 1986, and before
January 1, 1989, except that employer contributions under an
arrangement under section 408(kX6) of the Internal Revenue
Code of 1986 (as added by this section) may not be int^rated
under such subparagraphs."
(8) Section 209(eX8) of the Social Security Act is amended to 42 USC 409.
read as follows:
"(8) under a simplified employee pension (as defined in section
408(kXl) of such Code), other than any contributions described
in section 408(kX6) of such Code,".
(9) Section 3401(aX12XC) of the 1986 Code is amended—
(A) by striking out "section 219" and inserting in lieu
thereof "section 402(h) (1) and (2)", and
(B) by striking out "a deduction" and inserting in lieu
thereof "an exclusion".
(10) Section 408(kX8) of the 1986 Ck)de is amended by inserting
", except that in the case of years b^^inning after 1988, the
$200,000 amount (as so adjusted) shall not exceed the amount in
effect under section 401(aX17)" after "section 415(d)".
(g) AMENDMENTS RELATED TO SECTION 1111 OF THE REFORM ACT.—
dXA) Section 40iaX2XB) of the 1986 Code (defining contribu-
tion percentages) is amended by inserting "by the employer"
after "contributed" each place it appears.
102 STAT. 3464 PUBLIC LAW 100-647—NOV. 10, 1988
(B) Clause (ii) of section 40iaX3XA) of the 1986 Code is
amended by inserting ''attributable to employer contributions"
after "benefits".
(2) Section 4010X5X0 of the 1986 Code (defining average
annual compensation) is amended to read as follows:
"(O AVERAGE ANNUAL COMPENSATION.—^The term 'aver-
age 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.
(3) Section 4biaX5XE) of the 1986 Code (defining covered
compensation) is amended—
(A) by striking out "age 65" each place it appears and
inserting in lieu thereof "the social security retirement
age", and
(B) by adding at the end thereof the following new clause:
"(iii) SOCIAL SECURITT RETIREMENT AGE.—For pur-
poses of this subparagraph, the term 'social security
retirement age' has the meaning given such term by
section 415(bX8)."
26 use 401 note. (4) Section 1111(c)(3) of the Reform Act is amended by striking
out "benefits pursuant to, and individuals covered by, any such
agreement in",
(h) AMENDMENTS RELATED TO SECTION 1112 OF THE REFORM ACT.—
(1) Section 410(bX4XB) of the 1986 Code (relating to exclusion
of employees not meeting age and service requirements) is
amended—
(A) by striking out "do not meet" and inserting in lieu
thereof "not meeting", and
(B) by striking out "and".
(2) Section 410(bX6) of the 1986 Code (relating to definitions
and special rules) is amended by redesignating subparagraph (F)
as subparagraph (G) and by adding after subparagraph (E) the
following new subparagraph:
"CF) EMPLOYERS WTTH ONLY HIGHLY COMPENSATED EMPLOY-
EES.—^A plan maintained by an employer which has no
employees other than highly compensated employees for
any year shall be treated as meetuig the requirements of
t h ^ subsection for such year."
(3) Section 401(aX26) of the 1986 Code (relating to additional
participation requirements) is amended by redesignating
subparagraph (F) as subparagraph (H) and by adding after
subparagraph (E) the following new subparagraphs:
"CF) SPECIAL RULE FOR CERTAIN DISPOSITIONS OR ACQUISI-
TIONS.—^Rules similar to the rules of section 410(bX6XC)
shall am)ly for purposes of this paragraph.
"(G) SEPARATE LINES OF BUSINESS.—At the election of the
employer and with the consent of the Secretary, this para-
graph may be applied separately with respect to each sepa-
rate line of business of ^ e employer. For purposes of this
paragraph, the term 'separate line of business' has the
meaning given such term by section 414(r) (without r^ard
to paragraph (7) thereof)."
(4) Section 402(bX2) of the 1986 Code (relating to failure to
meet requirements of section 410(b)) is amended by striking out
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3465
subparagraphs (A) and (B) and inserting in lieu thereof the
following:
"(A) HIGHLY COMPENSATED EMPLOYEES.—If 1 of the rea-
sons a trust is not exempt from tax under section 501(a) is
the failure of the plan of which it is a part to meet the
requirements of section 401(aX26) or 410(b), then a highly
compensated employee shall, in lieu of the amount deter-
mined under paragraph (1), include in gross income for the
taxable year with or within which the taxable year of the
trust ends an amount equal to the vested accrued benefit of
such employee (other than the employee's investment in
the contract) as of the close of such taxable year of the
trust.
"(B) FAILURE TO MEET COVERAGE TESTS.—If a trust is not
exempt from tax under section 501(a) for any taxable year
solely because such trust is part of a plan which fails to
meet the requirements of section 401(aX26) or 410(b), para-
graph (1) shall not apply by reason of such failure to any
employee who was not a highly compensated employee
during—
"(i) such taxable year, or
"(ii) any preceding period for which service was cred-
itable to such employee under the plan."
(5» Subsections (mX4XA) and (nX3XA) of section 414 of the 1986
Code are each amended by striking out "and (16)" and inserting
in lieu thereof "(16), (17), and (26)".
(6) Clause (iii) of section 1112(eX3XA) of the Reform Act is 26 use 401 note.
amended by striking out "a plan or merger" and inserting in
lieu thereof "the plan".
(7) Section 1112(eX2) of the Reform Act is amended by striking
out "employees covered by such agreement in".
(8) Subsection (e) of section 1112 of the Reform Act is amended
by striking out paragraph (3XC) and by adding at the end of
such subsection the following new paragraph:
"(4) SPECIAL RULE FOR PLANS WHICH MAY NOT TERMINATE.—^To
the extent provided in r^ulations prescribed by the Secretary
of the Treasury or his delegate, if a plan is prohibited from
terminating under title IV of the Employee Retirement Income
Security Act of 1974 before the 1st year to which the amend-
ment made by subsection (b) would apply, the amendment made
by subsection (b) shall only apply to years after the 1st year in
which the plan is able to terminate."
(9) Subparagraph (B) of section 1112(eX3) of the Reform Act is
amended to read as follows:
"(B) INTEREST RATE FOR DETERMINING ACCRUED BENEFIT OF
HIGHLY C O M P E N S A T E D EMPLOYEES FOR CERTAIN PURPOSES.—In
the case of a termination, transfer, or distribution of assets
of a plan described in subparagraph (AXii) before the 1st
year to which the amendment made by subsection (b)
applies—
"(i) AMOUNT ELIGIBLE FOR ROLLOVER, INCOME AVERAG-
ING, OR TAX-FREE TRANSFER.—For purposes of determin-
ing anv eligible amount, the present value of the
accrued benefit of any highly compensated employee
shall be determined by using an interest rate not less
than the highest of—
102 STAT. 3466 PUBLIC LAW 100-647—NOV. 10, 1988
"(I) the applicable rate under the plan's method
in effect under the plan on August 16,1986,
"(II) the highest rate (as of the date of the termi-
nation, transfer, or distribution) determined under
any of the methods applicable under the plan at
any time after August 15, 1986, and before the
termination, transfer, or distribution in calculating
the present value of the accrued benefit of an
employee who is not a highly compensated em-
ployee under the plan (or any other plan used in
determining whether the plan meets the require-
ments of section 401 of the Internal Revenue Code
of 1986), or
"(III) 5 percent,
"(ii) EuGiBLE AMOUNT.—For purposes of clause (i),
the term 'eligible amount' means any amount with
respect to a highly compensated employee which—
"(I) may be rolled over under section 402(aX5) of
such Code,
"(II) is eligible for income avers^ng under sec-
tion 402(eXl) of such Code, or capital gains treat-
ment under section 402(aX2) or 403(aX2) of such
Code (as in effect before this Act), or
"(III) may be transferred to another plan without
inclusion in gross income.
"(iii) AMOUNTS SUBJECT TO EARLY WITHDRAWAL OR
EXCESS DISTRIBUTION TAX.—For purposes of sections
72(t) and 4980A of such Code, there shall not be taken
into account the excess (if any) of—
"(I) the amount distributed to a highly com-
pensated employee by reason of such termination
or distribution, over
"(II) the amount determined by using the in-
terest rate applicable under clause (i).
"(iv) DISTRIBUTIONS OF ANNUITY CONTRACTS.—If an
<, annuity contract purchased after August 16, 1986, is
distributed to a highly compensated em{)loyee in
connection with such termination or distribution, there
shall be included in gross income for the taxable year of
such distribution an amount equal to the excess of—
"(I) the purchase price of such contract, over
"(II) the present value of the benefits payable
under such contract determined by using the in-
terest rate applicable under clause (i).
Such excess shall not be taken into account for pur-
poses of sections 72(t) and 4980A of such Code.
"(v) HIGHLY COMPENSATED EMPLOYEE.—For purposes
of this subparagraph, the term 'highly compensated
employee' has the meaning given such term by section
414(q) of such Code."
(10) Section 413(b) of the 1986 CJode is amended by adding at
the end thereof the following new paragraph:
"(9) PLANS COVERING A PROFESSIONAL EMPLOYEE.—Notwith-
standing subsection (a), in the case of a plan (and trust forming
part thereof) which covers any professional employee, para-
graph (1) shall be applied by substituting 'section 410(a)' for
Section 410', and paragraph (2) shall not apply."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3467
(11) Section 410(bX4) of the 1986 Code is amended by adding at
the end thereof the following new subparagraph:
"(C) REQUIREMENTS NOT TREATED AS BEING MET BEFORE
ENTRY DATE.—An employee shall not be treated as meeting
the age and service requirements described in this para-
graph until the first date on which, under the plan, any
employee with the same age and service would be eligible to
commence participation in the plan."
(i) AMENDMENTS RELATED TO SECTION 1114 OF THE REFORM ACT.—
(1) Paragraph (1) of section 414(q) of the 1986 Code (defining
highly compensated employee) is amended by adding at the end
thereof the following new flush sentence:
"The Secretary shall adjust the $75,000 and $50,000 amounts
under this paragraph at the same time and in the same manner
as under section 415(d)."
(2) Section 414(qX6) of the 1986 Code is amended by adding at
the end thereof the following new subparagraph:
"(C) RULES TO APPLY TO OTHER PROVISIONS.—
"(i) I N GENERAL.—Except as provided in regulations
and in clause (ii), the rules of subparagraph (A) shall be
applied in determining the compensation of (or any
contributions or benefits on behalf of) any employee for
purposes of any section with respect to which a highly
compensated employee is defined by reference to this
subsection.
"(ii) EXCEPTION FOR DETERMINING INTEGRATION
LEVELS.—Clause (i) shall not apply in determining the
portion of the compensation of a participant which is
under the integration level for purposes of section
401(1)."
(3XA) Section 414(qX8) of the 1986 Code (relating to excluded
employees) is amended—
(i) by inserting "and" at the end of subparagraph (D), by
striking ", and" at the end of subparagraph (E) and insert-
ing in lieu thereof a period, and by striking out subpara-
graph (F), and
(ii) by striking out "The" in the last sentence thereof and
inserting in lieu thereof "Except as provided by the Sec-
retary, the".
(B) Section 414(q) of the 1986 Code is amended by adding at
the end thereof the following new paragraph:
"(11) SPECIAL RULE FOR NONRESIDENT AUENS.—For purposes of
this subsection and subsection (r), employees who are non-
resident aliens and who receive no earned income (within the
meaning of section 911(dX2)) from the employer which
constitutes income from sources within the United States
(within the meaning of section 861(aX3)) shall not be treated as
emolovees "
(4XA) Paragraph (8) of section 414(q) of the 1986 Code is
amended by inserting "or the number of officers taken into
account under paragraph (5)" after "paragraph (4)".
(B) Section 416(iXlXA) of the 1986 Code is amended by adding
at the end thereof the following new sentence: "For purposes of
determining the number of officers taken into account under
clause (i), employees described in section 414(qX8) shall be
excluded."
102 STAT. 3468 PUBLIC LAW 100-647—NOV. 10, 1988
(5) Subparagraph (B) of section 408(kX3) of the 1986 Code is
amended to read as follows:
"(B) SPECIAL RULES.—For purposes of subparagraph (A),
there shall be excluded from consideration employees de-
scribed in subparagraph (A) or (C) of section 410(bX3)."
0') AMENDMENTS RELATED TO SECTION 1115 OF THE REFORM ACT.—
(1) So much of section 414(s) of the 1986 Code as precedes
paragraph (2) is amended to read as follows:
"(s) COMPENSATION.—For purposes of any applicable provision—
"(1) I N GENERAL.—Except as provided in this subsection, the
term 'compensation' has the meaning given such term by sec-
tion 415(c)(3)."
(2) Section 414(s) of the 1986 Code is amended by striking out
paragraph (2), by redesignating paragraphs (3) and (4) as para-
graphs (2) and (3), respectively, and by adding at the end thereof
the following new paragraph:
"(4) APPLICABLE PROVISION.—For purposes of this subsection,
the term 'applicable provision' means any provision which
specifically refers to this subsection."
(3XA) Section 416(iXl) of the 1986 Code (defining key
employee) is amended by adding at the end thereof the follow-
ing new subparagraph:
"(D) COMPENSATION.—For purposes of this paragraph, the
term 'compensation' has the meaning given such term by
section 414(qX7)."
26 use 416 note. (B) The amendment made by tWs paragraph shall apply to
years beginning after December 31,1988.
(k) AMENDMENTS RELATED TO SECTION 1116 OF THE REFORM ACT.—
dXA) Subparagraph (B) of section 401(kX2) of the 1986 Code
(relating to distributions from a cash or deferred arrangement)
IS amended—
(i) by striking out subclauses (11), (III), and (IV) of clause
(i) and inserting in lieu thereof:
"(II) an event described in paragraph (10),", and
(ii) by redesignating subclauses (V) and (VI) as subclauses
(III) and (IV), respectively.
(B) Section 401(k) of the 1986 (IJode is amended by adding at
the end thereof the following new paragraph:
"(10) DISTRIBUTIONS UPON TERMINATION OF PLAN OR DISPOSI-
TION OF ASSETS OR SUBSIDIARY —
"(A) I N GENERAL.—The following events are described in
this paragraph:
"(i) TERMINATION.—The termination of the plan with-
out establishment or maintenance of another defined
contribution plan (other than an employee stock owner-
ship plan as defined in section 4975(eX7)).
' (ii) DISPOSITION OF ASSETS.—The disposition by a
corporation of substantially all of the assets (within the
meaning of section 409(dX2)) used by such corporation
in a trade or business of such corporation, but only
with respect to an employee who continues employ-
ment with the corporation acquiring such assets.
"(iii) DISPOSITION OF SUBSIDIARY.—The disposition by
a corporation of such corporation's interest in a subsidi-
ary (within the meaning of section 409(d)(3)), but only
with respect to an employee who continues employ-
ment with such subsidiary.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3469
"(B) DISTRIBUTIONS MUST BE LUMP SUM DISTRIBUTIONS.—
"(i) I N GENERAL.—An event shall not be treated as
described in subparagraph (A) with respect to any em-
ployee unless the employee receives a lump sum dis-
tribution by reason of the event.
"(ii) LUMP SUM DISTRIBUTION.—For purposes of this
subparagraph, the term 'lump sum distribution' has
the meaning given such term by section 402(eX4), with-
out regard to clauses (i), (ii), (iii), and (iv) of subpara-
graph (A), subparagraph (B), or subparagraph (H)
thereof.
"(C) TRANSFEROR CORPORATION MUST MAINTAIN PLAN.—An
event shall not be treated as described in clause (ii) or (iii) of
subparagraph (A) unless the transferor corporation contin-
ues to maintain the plan after the disposition."
(CXi) Subparagraph (AXi) of section 401(kX10) of the 1986 Code 26 USC 401 note.
(as added by subparagraph (B)) shall apply to distributions after
October 16,1987.
(ii) Subparagraph (B) of section 401(kX10) of the 1986 Code (as
added by subparagraph (B)) shall apply to distributions after
March 31,1988.
(2) Subparagraph (B) of section 401(kX2) of the 1986 Code is
amended—
(A) by inserting "amounts held by the trust which are
attributable to employer contributions made pursuant to
the employee's election" after "under which",
(B) by striking out "amounts held by the trust which are
attributable to employer contributions made pursuant to
the employee's election" in clause (i), and
(C) by striking out "amounts" in clause (ii).
(3XA) Clause (ii) of section 401(kX3XA) of the 1986 Code is
amended by inserting "eligible" before "highly compensated
employees" each place it appears.
(B) Section 1116(bX4) of the Reform Act is amended by strik- 26 use 401.
ing out "any" the first place it appears and inserting in lieu
thereof "an'\
(4) Subparagraph (C) of section 401(kX3) of the 1986 Code, as
added by section 1116(e) of the Reform Act, is redesignated as
subparagraph (D).
(5) Subclause (I) of section 401(kX3XDXii) of the 1986 Code, as
redesignated by paragraph (4), is amended by striking out
"meets" and inserting in lieu thereof "meet".
(6) Section 401(kX4XA) of the 1986 Code is amended by strik-
ing out "provided by such employer".
(7) Section 401(kX8) of the 1986 Code (relating to arrangement
not disqualified if excess contributions distributed) is amended
by redesignating subparagraph (E) as subparagraph (F)
and by inserting after subparagraph (D) the following new
subparagraph:
"CE) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED
BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION.—For pur-
poses of paragraph (2XC), a matching contribution (within
the meaning of subsection (m)) shsdl 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
102 STAT. 3470 PUBLIC LAW 100-647—NOV. 10, 1988
(B), an excess deferral under section 402(gX2XA), or an
excess aggregate contribution under section 401(mX6)(B)."
26 use 401 note. (8) Subparagraph (B) of section 1116(fK2) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "If clause (i) or (ii) applies to any arrangement adopted by
a governmental unit, then any cash or deferred arrangement
adopted by such unit on or after the date referred to in the
applicable clause shall be treated as adopted before such date."
(9) Section 401(kX4XB) of the 1986 Code is amended by adding
at the end thereof the following new sentence:
"This subparagraph shall not apply to a rural electric
cooperative plan."
26 use 401 note. (10) Clause (i) of section 1116(fK2XB) of the Reform Act is
amended by striking out "(or political subdivision thereof)" and
inserting in lieu thereof "or political subdivision thereof, or any
agency or instrumentality thereof,".
' (1) AMENDMENTS RELATED TO SECTION 1117 OF THE REFORM ACT.—
(1) Paragraph (1) of section 401(m) of the 1986 Code (relating
to nondiscrimination test for matching contributions and em-
ployee contributions) is amended by striking out "A plan" £ind
inserting in lieu therepf "A defined contribution plan".
(2) Paragraph (3) of section 401(m) of the 1986 Code (relating
to requirements) is amended by adding at the end thereof the
following new sentence: "If matching contributions are taken
into account for purposes of subsection (kX3XAXii) for any plan
year, such contributions shall not be taken into account under
subparagraph (A) for such year."
(3) The last sentence of section 401(mX2XB) of the 1986 Code is
amended by strikinjg out "such contributions" the first place it
appears and inserting in lieu thereof "contributions to which
this subsection applies".
(4) Section 401(mX4XA) of the 1986 Code (defining matching
contribution) is amended by striking out "the plan" each place
it appears and inserting in lieu thereof "a defined contribution
plan'.
(5XA) Section 401(mX4XB) of the 1986 Code (defining elective
deferral) is amended by striking out "section 402(gX3XA)" and
inserting in lieu thereof "section 402(gX3)".
Effective date. (B) The amendment made by this paragraph shall take effect
26 use 401 note. as if included in the amendments made by section 1120 of the
Reform Act.
(6) Subparagraph (C) of section 401(mX6) of the 1986 Code is
amended by striHng out "EXCESS" in the subparagraph heading
and inserting in lieu thereof "EXCESS AGGREGATE".
(7) Section 401(mX7XA) of the 1986 Code (relating to additional
tax of section 72(t) not applicable) is amended by striking out
"paragraph (8)" and inserting in lieu thereof "paragraph (6)".
(8) Section 4979(aXl) of the 1986 Code (relating to tax on
certain excess contributions) is amended by striking out "a cash
or deferred arrangement which is part of.
(9) Section 4979(c) of the 1986 Code (defining excess contribu-
tions) is amended—
(A) by striking out "403(b),", and
(B) by striking out "408(kX8XB)" and inserting in lieu
thereof "408(kX6XC)".
(10) Section 4979(d) of the 1986 Code (defining excess aggre-
gate contribution) is amended by adding at the end thereof the
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3471
following new sentence: "For purposes of determining excess Contracts.
aggr^ate contributions under an annuity contract described in
section 403Q)), such contract shall be treated as a plan described
in subsection (eXD."
(11) Paragraph (2) of section 4979(f) of the 1986 Code (relating
to inclusion in prior year) is amended to read as follows:
"(2) YEAR OF INCLUSION.—
"(A) I N GENERAL.—Except as provided in subparagraph
(B), any amount distributed as provided in paragraph (1)
shall be treated as received and earned by the recipient in
his taxable year for which such contribution was made.
"(B) D E MINIMIS DISTRIBUTIONS.—If the total excess con-
tributions and excess aggregate contributions distributed to
a recipient under a plan for any plan year are less than
$100, such distributions (and any income allocable thereto)
shall be treated as earned and received by the recipient in
his taxable year in which such distributions were made."
(12) Subsection (d) of section 1117 of the Reform Act 26 USC 401 note.
is amended by adding at the end thereof the following new
paragraph:
"(4) DISTRIBUTIONS BEFORE PLAN AMENDMENT.—
"(A) IN GENERAL.—If a plan amendment is required to
allow a plan to make any distribution described in section
401(mX6) of the Internal Revenue CJode of 1986, any such
distribution which is made before the close of the 1st plan
year for which such amendment is required to be in effect
under section 1140 shall be treated as made in accordance
with the provisions of the plan.
"(B) DISTRIBUTIONS PURSUANT TO MODEL AMENDMENT.—
"(i) SECRETARY TO PRESCRIBE AMENDMENT.—The Sec-
retary of the Treasury or his del^ate shall prescribe
an amendment which allows a plan to make any dis-
tribution described in section 401(mX6) of the Internal
Revenue CJode of 1986.
"(ii) ADOPTION BY PLAN.—If a plan adopts the amend-
ment prescribed under clause (i) and makes a dis-
tribution in accordance with such amendment, such
distribution shall be treated as made in accordance
with the provisions of the plan."
(m) AMENDMENTS RELATED TO SECTION 1120 OF THE REFORM ACT.—
(IXA) Section 403a)X10) of the 1986 Code (relating to non-
discrimination requirements), as added by section 1120(b) of the
Reform Act, is redesignated as paragraph (12).
(B) Subparagraph (D) of section 403(bXl) of the 1986 Code is
amended by striking out "paragraph (10)" and inserting in lieu
thereof "paragraph (12)".
(2) (Dlause (i) of section 403(bX12XA), as redesignated by para-
graph (1), is amended—
(A) by inserting "(17)," after "(5),", and
(B) by inserting ", section 401(m)," after "section 401(a)"
the first place it appears.
(3) Section 112(Xc) of the Reform Act is amended to read as 26 USC 403 note.
follows:
"(c) EFFECTIVE DATES.—
"(1) IN GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to years begin-
ning after December 31,1988.
102 STAT. 3472 PUBLIC LAW 100-647—NOV. 10, 1988
"(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a
plan maintained pursuant to 1 or more collective bargaining
agreements between employee representatives and 1 or more
employers ratified before March 1,1986, the amendments made
by this section shall not apply to plan years beginning before
the earlier of—
"(A) January 1,1991, or
"(B) the later of—
"(i) January 1,1989, or
"(ii) the date on which the last of such collective
bargaining agreements terminates (determined without
regard to any extension thereof after February 28,
1986)."
SEC. lOllA. AMENDMENTS RELATED TO PARTS III AND IV OF SUBTITLE A
OF TITLE XI OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1121 OP THE REFORM ACT.—
(1) Subparagraph (F) of section 402(aX5) of the 1986 Code
(relating to transfer treated as rollover contribution under sec-
tion 408) is amended by striking out "described in subparagraph
(A)" and inserting in lieu thereof "resulting in any portion of a
distribution being excluded from gross income under subpara-
graph (A)".
(2XA) Section 408(dX3XA) is amended by striking out the last
sentence thereof.
26 use 408 note. (B) The amendment made by subparagraph (A) shall apply to
rollover contributions made in taxable years beginning aiter
December 31 1986.
26 use 401 note. (3) Section 'll21(d) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(5) PLANS MAY INCORPORATE SECTION 4 0 1 (a) (9) REQUIRE-
MENTS BY REFERENCE.—Notwithstanding any other provision of
law, except as provided in regulations prescribed by the Sec-
retary of the Treasury or his delegate, a plan may incorporate
by reference the requirements of section 401(aX9) of the Internal
Revenue Code of 1986."
(4) Section 1121(dX3) of the Reform Act is amended by striking
out "plan years" and inserting in lieu thereof "years".
26 use 402 note. (5) Section 402(aX5XFXii) of the Internal Revenue Code of 1954
shall not apply to distributions after October 22, 1986, and
before the 1st taxable year beginning after 1986 which are
attributable to benefits which accrued before January 1, 1985.
(b) AMENDMENTS RELATED TO SECTION 1122 OF THE REFORM ACT,—
(IXA) Section 72(f) of the 1^86 Code (relating to special rules
for computing employees' contributions) is amended by striking
out "for purposes of subsections (dXD and (eX7), the consider-
ation for the contract contributed by the employee,".
(B) Section 72(n) of the 1986 Ckxle (relating to annuities under
retired serviceman's family protection plan or survivor benefit
plan) is amended by striking out "Subsections (b) and (d)" and
inserting in lieu thereof "Subsection (b)".
(C) Sections 406(e) and 407(e) of the 1986 Code are each
amended by striking out paragraph (1) and by redesignating
paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respec-
tively.
(2XA) Section 72 of the 1986 Code (relating to annuities and
certain proceeds of endowment and life insurance contracts) is
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3473
amended by adding after subsection (c) the following new
subsection:
"(d) TREATMENT OF EMPLOYEE Ck)NTRiBUTiONS U N D E R DEFINED
CONTRIBUTION PLANS AS SEPARATE CONTRACTS.—For purposes of this
section, employee contributions (and any income allocable thereto)
under a defined contribution plan may be treated as a separate
contract."
(B) Section 72(e) of the 1986 Oxle is amended by striking out
paragraph (9).
(3) Section 414(kX2) of the 1986 Code (relating to certain plans
treated as defined contribution plans) is amended by inserting
"72(d) (relating to treatment of employee contributions as sepa-
rate contract)," before "411(aX7XA)".
(4XA) Hie amendment made by section 1122(eXl) of the
Reform Act is repealed and the Internal Revenue (Dode of 1986 26 USC 402 and
shall be applied and administered as if such amendment had note.
(B) Subclause (D of section 402(aX5XDXi) of the 1986 Code is
amended by inserting "is payable as provided in clause (i), (iii),
or (iv) of subsection (eX4XA) (without r^ard to the second
sentence thereof) and" after "such distribution" the first place
it appears.
(C) Section 402(aX5XDXi) of the 1986 0)de is amended by
addu^ at the end thereof the following new sentence: "Any
distribution described in section 401(aX28)(BXii) shall be treated
as meeting the requirements of subclauses (I) and (11)."
(D) Section 402(aX5)(DXiii) is amended by striking out "lO-
YEAR" in the heading.
(E) Section 402(aX5XDXiXID of the 1986 Code (as in effect after 26 USC 402 note.
the amendment made by subparagraph (A)) shall not apply to
distributions after December 31, 1986, and before March 31,
1988
(5) Qause (ii) of section 402(aX6XH) of the 1986 Code (relating
to special rule for frozen deposits) is amended by adding at the
end thereof the following new flush sentence:
"A deposit shall not be treated as a frozen deposit
unless on at least 1 day during the 60-day period
described in paragraph (5XC) (without r^ard to this
subparagraph) such deposit is described in the preced-
ing sentence."
(6) Qause (i) of section 402(eX4XB) of the 1986 Code is
amended by striking out "taxpayer" and inserting in lieu
thereof "employee".
(7) The last sentence of section 402(eX4XJ) of the 1986 Code
(relating to unrealized appreciation on employer securities) is
amended to read as follows: "In accordance with rules pre-
scribed by the Secretary, a taxpayer may elect, on the return of
tax on which a distribution is required to be included, not to
have this subparagraph apply with respect to such dis-
tribution."
(8) Section 402 of the 1986 Code (relating to taxabiUty of
beneficiary of employees' trust) is amended as follows:
(A) Subsection (aXl) is amended by striking out "para-
graphs (2) and (4)" and inserting in Ueu thereof "para-
graph (4)".
(B) Subsection (aX4) is amended by striking out "or (2)".
102 STAT. 3474 PUBLIC LAW 100-647—NOV. 10, 1988
(C) Subsection (aX6XC) is amended by striking out "para-
graph (2) of subsection (a), and".
(D) Subsection (aXBXEXii) is amended by striking out
"paragraph (2) of subsection (a), and" and by striking out
the comma after "subsection (e)".
(E) Subsection (eXlXA) is amended by striking out "ordi-
nary income portion of a".
(F) Subsection (eX4XA) is amended—
(i) by striking out "Except for purposes of subsection
(aX2) and section 403(aX2), a" and inserting in Heu
thereof "A", and
(ii) by striking out "subsection (aX2) of this section,
and subsection (aX2) of section 403,".
(G) Subparagraph (L) of subsection (eX4) is hereby re-
pealed.
(H) Subsection (eX4XM) is amended by striking out ",
subsection (aX2) of this section, and section 403(aX2) .
(I) Subsection (eX5) is amended by striking out "and
paragraph (2) of subsection (a)".
(J) Subsection (eX6XC) is amended to read as follows:
"(C) SPECIAL LUMP-SUM TREATMENT,—For purposes of this
paragraph, special lump sum treatment applies to any
distribution if any portion of such distribution is taxed
under this subsection by reason of an election under para-
graph (4XB)."
(9XA) Section 72(eX7) of the 1986 Code is hereby repealed.
(B) Section 72(eX5XD) is amended by striking out "paragraphs
(7) and (8)" and inserting in lieu thereof "paragraph (8)".
(C) Section 72(eX8XA) is amended by striking out "(other than
paragraph (7))".
(D) Section 72(qX2XE) of the 1986 Code is amended by striking
out "(determined without regard to subsection (eX7))".
(10) Section 402(eXlXB) of the 1986 Code (relating to amount of
tax on lump-sum distributions) is amended by adding at the end
thereof the following new flush sentence:
"For purposes of the preceding sentence, in determining the
amount of tax under section 1(c), section 1(g) shall be
applied without regard to paragraph (2XB) thereof."
26 use 402 note. (11) Section 1122(h) of the Reform Act is amended by adding
at the end thereof the following new paragraph:
"(9) SPECIAL RULE FOR STATE PLANS.—In the case of a plan
maintained by a State which on May 5, 1986, permitted with-
drawal by the employee of employee contributions (other than
as an annuity), section 72(e) of the Internal Revenue Code of
1986 shall be applied—
"(A) without regard to the phrase 'before separation from
service' in paragraph (8XD), and
"(B) by treating any amount received (other than as an
annuity) before or with the 1st annuity payment as having
been received before the annuity starting date."
(12) Subparagraph (B) of section 1122(hX2) of the Reform Act
is amended by inserting ", except that section 72(bX3) of the
Internal Revenue Code of 1986 (as added by such subsection)
shall apply to individuals whose annuity starting date is after
July 1,1986" after "1986".
(13) Sections 1122 (hX3XC) and (hX4XC) of the Reform Act are
each amended by striking out "with respect to any other lump
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3475
sum distribution" and inserting in lieu thereof "for purposes of
such Code".
(14) Clause (i) of section 1122(hX3XC) of the Reform Act is' 26 use 402 note.
amended—
(A) by striking out "individual" and inserting in lieu
thereof "employee", and
(B) by inserting "or by an individual, estate, or trust with
respect to such an employee" after "1986".
(15) Section 1122(hX5) of the Reform Act is amended—
(A) by striking out "individual" and inserting in lieu
thereof "employee",
(B) by inserting "and by including in gross income the
zero bracket amount in effect under section 63(d) of such
Code for such years" after "1986" in the last sentence, and
(C) by adding at the end thereof the following new sen-
tence: "This paragraph shall also apply to an individual,
estate, or trust which receives a distribution with respect to
an employee described in this paragraph."
(16) Sections 406(c) and 407(c) of the 1986 Code are each
amended—
(A) by striking out "subsections (aX2) and (e) of section
402, and section 403(aX2)" and inserting in lieu thereof
"section 402(e)", and
(B) by striking out "OP CAPITAL GAIN PROVISIONS AND" in
the heading thereof.
(c) AMENDMENTS RELATED TO SECTION 1123 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 72(tX2) of the 1986 Code
(relating to subsection not to apply to certain distributions) is
amended by striking out "on account of early retirement under
the plan" in clause (v).
(2) Subparagraph (C) of section 72(tX2) of the 1986 Code (relat-
ing to certain plans) is amended to read as follows:
"(C) EXCEPTIONS FOR DISTRIBUTIONS PROM EMPLOYEE STOCK
OWNERSHIP PLANS.—Any distribution made before January
1, 1990, to an employee from an employee stock ownership
plan (as defined in section 4975(eX7)) or a tax credit em-
ployee stock ownership plan (as defined in section 409) if—
"(i) such distribution is attributable to assets which
have been invested in employer securities (within the
meaning of section 409(1)) at all times during the 5-
plan-year period preceding the plan year in which the
distribution is made, and
"(ii) at all times during such period the requirements
of sections 401(aX28) and 409 (as in effect at such times)
are met with respect to such employer securities."
(3) Subparagraph (A) of section 72(tX3) of the 1986 Code
(relating to certain exceptions not to apply to individual retire-
ment plans) is amended by striking out "and (C)" and inserting
m lieu thereof "(C), and (D)".
(4) Subparagraphs (D) and (G) of section 72(qX2) of the 1986
Code are each amended by striking out the period at the end
thereof and inserting in lieu thereof a comma.
(5) Subparagraph (B) of section 72(qX3) of the 1986 Ckxle
(relating to change in substantially equal pajonents) is amended
by striking out "employee" each place it appears and inserting
in lieu thereof "taxpayer".
102 STAT. 3476 PUBLIC LAW 100-647—NOV. 10, 1988
(6) Section 72(qX2) of the 1986 Code (relating to subsection not
to apply to certain dispositions) is amended by inserting after
subparagraph (G) the following new subparagraph:
"CH) to which subsection (t) applies (without r^ard to
paragraph (2) thereof)/'.
(7) Subparagraph (D) of section 72(qX2) and clause (iv) of
section 72(tX2XA) of the 1986 (Jode are each amended by insert-
ing "designated" before **beneficiary".
(8) Paragraph (2) of section 72(o) of the 1986 Code (relating to
additional tax if amount received before age 59V^) is hereby
repealed.
(9) Subparagraph (I) of section 402(eX4) of the 1986 Code is
amended by striking out "clause (ii) o f .
(10) Section 26(bX2) of the 1986 Code is amended—
(A) by striking out ", (oX2)," in subparagraph (Q, and
(B) by striking out "408(f) (relating to additional tax on
income from certain retirement accounts)" in subparagraph
(D) and inserting in lieu thereof "72(t) (relating to 10-
percent addition£d tax on early distributions from qualified
retirement plans)".
26 use 72 note. ? (11) Section 1123(eX2) of the Reform Act is amended—
(A) by striking out "taxable", and
(B) by inserting ", but only with respect to distributions
from contracts described in section 403(b) of the Internal
Revenue Code of 1986 which are attributable to assets other
than assets held as of the close of the last year b^inning
before January 1,1989" after "1988".
(12) Section 1123(e) of the Reform Act is amended by adding at
the end thereof the following new paragraph:
"(5) SPECIAL RULE FOR DISTRIBUTIONS UNDER AN ANNUITY CON-
TRACT.—The amendments made by paragraphs (1), (2), and (3) of
subsection (b) shall not apply to any distribution under an
annuity contract if—
"(A) as of March 1, 1986, payments were being made
under such contract pursuant to a written election provid-
ing a specific schedule for the distribution of the taxpayer's
interest in such contract, and
"(B) such distribution is made pursuant to such written
election."
26 use 72 note. (13) Section 72(t) of the 1986 Code shall apply to any distribu-
tion without r^ard to whether such distribution is made with-
out the consent of the participant pursuant to section 411(aXll)
or section 417(e) of the 1986 Code,
(d) AMENDMENTS RELATED TO SECTION 1124 OF THE REFORM ACT.—
26 use 402 note. (1) Section 1124(a) of the Reform Act is amended to read as
follows:
Handicapped "(a) IN GENERAL.—^If an employee dies, separates from service, or
P®^<)"s- becomes disabled before 1987 and an individual, trust, or estate
receives a lump-sum distribution with respect to such employee
after December 31, 1986, and before March 16, 1987, on account of
such death, separation fh>m service, or disability, then, for purposes
of the Internal Revenue Code of 1986, such individual, ^(tate, or
trust may treat such distribution as if it were received in 1986."
(2) Section 1124(b) of the Reform Act is amended—
(A) by striking out "employee" each place it appears and
inserting in Ueu thereof individual, estate, or trust", and
PUBLIC LAW 100-647—NOV. 10,1988 102 STAT. 3477
(B) by inserting "with respect to an employee" after
"receives".
(3) Section 1124 of the Reform Act is amended by adding at
the end thereof the following new subsection:
"(c) LUMP SUM DISTRIBUTION.—For purposes of this section, the
term 'lump sum distribution' has the meaning given such term by
section 402(eX4XA) of the Internal Revenue Code of 1986, without
regard to subparagraph (B) or (H) of section 402(eX4) of such Code."
(e) AMENDMENTS RELATED TO SECTION 1131 OF THE REFORM ACT.—
(1) Subsection (c) of section 4972 of the 1986 Code (defining
nondeductible contributions) is amended to read as follows:
"(c) NONDEDUCTIBLE CONTRIBUTIONS.—For purposes of this
section—
"(1) I N GENERAL.—^The term 'nondeductible contributions'
means, with respect to any qualified employer pl£ui, the sum
of—
"(A) the excess (if any) of—
"(i) the amount contributed for the taxable year by
the employer to or under such plan, over
"(ii) the amount allowable as a deduction under sec-
tion 404 for such contributions (determined without
regard to subsection (e) thereof), and
"(B) the amount determined under this subsection for the
preceding taxable year reduced by the sum of—
"(i) the portion of the amount so determined re-
turned to the employer during the taxable year, and
"(ii) the portion of the amount so determined deduct-
ible under section 404 for the taxable year (determined
without r^ard to subsection (e) thereof).
"(2) ORDERING RULE FOR SECTION 404.—For purposes of para-
graph (1), the amount allowable as a deduction under section
404 for any taxable year shall be treated as—
"(A) first from carryforwards to such taxable year from
preceding taxable years (in order of time), and
"(B) then from contributions made during such taxable
year.
"(3) CONTRIBUTIONS wracH MAY BE RETURNED TO EMPLOYER.—
In determining the amoimt of nondeductible contributions for
any taxable year, there shall not be taken into account any
contribution for such taxable year which is distributed to the
employer in a distribution described in section 4980(cX2)(BXii) if
such distribution is made on or before the last day on which a
contribution may be made for such taxable year under section
404(aX6).
"(4) PRE-1987 CONTRIBUTIONS.—The term 'nondeductible con-
tribution' shall not include any contribution made for a taxable
year b^inning before January 1,1987."
(2) Paragraph (1) of section 4972(d) of the 1986 Code (definmg
qualified employer plan) is amended to read as follows:
"(1) QUALIFIED EMPLOYER PLAN.—
"(A) IN GENERAL.—The term 'qualified employer plan*
means—
"(i) any plan meeting the requirements of section
401(a) which includes a trust exempt from tax under
section 501(a),
"(ii) an annuity plan described in section 403(a), and
102 STAT. 3478 PUBLIC LAW 100-647—NOV. 10, 1988
"(iii) any simplified employee pension (within the
meaning of section 408(k)).
"(B) EXEMPTION FOR GOVERNMENTAL AND TAX EXEMPT
PLANS.—The term 'qualified employer plan' does not in-
clude a plan described in subparagraph (A) or (B) of section
4980(cXl)."
26 use 404 note. (3) Section 1131(d) of the Reform Act is amended to read as
follows:
"(d) EFFECTIVE DATES.—
"(1) I N GENERAL.—Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31,1986.
"(2) SPECIAL RULES FOR COLLECTIVE BARGAINING AGREE-
MENTS.—In the case of a plan maintained pursuant to 1 or more
collective bargaining agreements between employee representa-
tives and 1 or more employers ratified before March 1,1986, the
amendments made by this section shall not apply to contribu-
tions pursuant to any such agreement for taxable years begin-
ning before the earlier of—
"(A) January 1,1989, or
"(B) the date on which the last of such collective bargain-
ing agreements terminates (determined without regard to
any extension thereof after February 28,1986)."
(4XA) Subparagraph (A) of section 404(aX7) of the 1986 Ck)de is
amended—
(i) by striking out "provisions" and inserting in lieu
thereof "paragraphs", and
(ii) by inserting "or in connection with trusts or plans
described in 2 or more of such pareigraphs" after "1 or more
defined benefit plans".
(B) Paragraph (3) of section 404(h) of the 1986 Code is amend-
ed to read as follows:
"(3) COORDINATION WITH SUBSECTION (a) (7).—For purposes of
subsection (aX7), a simplified employee pension shall be treated
as if it were a separate stock bonus or profit-sharing trust."
26 use 4972 (5) In the case of any taxable year beginning in 1987, the
note. amount under section 4972(cXlXAXii) of the 1986 Code for a plan
to which title IV of the Employee Retirement Income Security
Act of 1974 applies shall be increased by the amount (if any) by
which, as of the close of the plan year with or within which such
taxable year begins—
(A) the liabilities of such plan (determined as if the plan
had terminated as of such time), exceed
(B) the assets of such plan.
Securities. (f) AMENDMENTS RELATED TO SECTION 1 1 3 2 OF THE REFORM ACT.—
(1) Section 4980(cXlXA) of the 1986 Code (defining qualified
plan) is amended by striking out "this subtitle" and inserting in
lieu thereof "subtitle A".
(2) Section 4980(cX3XA) of the 1986 Code (relating to exception
for employee stock ownership plans) is amended—
(A) by inserting "or a tax credit emplovee stock owner-
ship plan (as described in section 409) after "section
4975(eX7)", and
(B) by inserting ", except to the extent necessary to meet
the requirements of section 401(aX28)," after "must".
(3) Subparagraph (C) of section 4980(cX3) of the 1986 Code is
amended—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3479
(A) by striking out "(by reason of the limitations of
section 415)", and
(B) by adding at the end thereof the following new
sentence:
"The amount allocated in the year of transfer shall not be
less than the lesser of the maximum amount allowable
under section 415 or Vs of the amount attributable to the
securities acquired."
(4) Subparagraph (B) of section 1132(cX2) of the Reform Act is 26 use 4980
amended by striking out "November 19, 1978" and inserting in note.
lieu thereof "September 19,1978".
(5) Section 1132(c) of the Reform Act is amended by adding at
the end thereof the followii^ new paragraph:
"(5) SPECIAL RULE FOR EMPLOYEE STOCK OWNERSHIP PLANS.—
Section 4980(cX3) of the Internal Revenue Code of 1986 (as added
by subsection (a)) shall apply to reversions occurring after
March 31,1985."
(6) Section 4980(cX3) of the 1986 Code is amended by adding at
the end thereof the following new subparagraphs:
"(F) No CREDIT OR DEDUCTION ALLOWED.—No Credit or
deduction shall be allowed under chapter 1 for any amount
transferred to an employee stock ownership plan in a trans-
fer to which this paragraph applies.
"(G) AMOUNT TRANSFERRED TO INCLUDE INCOME THEREON,
ETC.—The amount transferred shall not be treated as meet-
ing the requirements of subparagraphs (B) and (O unless
amounts attributable to such amount also meet such
requirements."
(7) Section 4980(cX3XC) of the 1986 Code is amended by adding
at the end thereof the following new sentence:
"In the case of dividends on securities held in the suspense
account, the requirements of this subparagraph are met
only if the dividends are allocated to accounts of partici-
pants or paid to participants in proportion to their ac-
coimts, or used to repay loans used to purchase employer
securities."
(g) AMENDMENTS RELATED TO SECTION 1133 OF THE REFORM ACT.— Retirement.
(IXA) Section 4981A of the 1986 Code (as added by section
1133 of the Reform Act) is redesignated as section 4980A.
(B) The table of sections for chapter 43 of the 1986 Code is
amended by redesignating section 4981A as section 4980A.
(2) Paragraph (1) of section 4980A(c) of the 1986 Code (as
redesignated by paragraph (1)) is amended by striking out
"$112,500 (adjusted at the same time and in the same manner as
under section 415(d))" and inserting in lieu thereof "the greater
of—
"(A) $150,000, or
"(B) $112,500 (adjusted at the same time and in the same
manner as under section 415(d))."
(3) Section 4980A(cX2) of the 1986 Code (relating to exclusion
of certain distributions), as redesignated by paragraph (1), is
amended—
(A) by striking out "employee's" in subparagraph (C) and
inserting in lieu thereof "individual's", and
(B) by adding after subp€u*agraph (D) the following new
subparagraphs:
102 STAT. 3480 PUBLIC LAW 100-647—NOV. 10, 1988
"(E) Any retirement distribution with respect to an
individual of an annuity contract the value of which is not
includible in gross income at the time of the distribution
(other than distributions under, or proceeds from the sale
or exchange of, such contract).
"(F) Any retirement distribution with respect to an
individual of—
"(i) excess deferrals (and income allocable thereto)
under section 402(gX2XAXii), or
"(ii) excess contributions (and income allocable there-
to) under section 401(kX8) or 408(dX4) or excess aggre-
gate contributions (and income allocable thereto) under
section 401(mX6)."
(4)(A) Section 4980A of the 1986 Code, as redesignated by
paragraph (1), is amended by adding at the end thereof the
following new subsection:
"(f) EXEMPTION OF ACCRUED BENEFITS IN EXCESS OF $562,500 ON
AUGUST 1,1986.—For purposes of this section—
"(1) I N GENERAL.—If an election is made with respect to an
eligible individual to have this subsection apply, the individual's
excess distributions and excess retirement accumulation shall
be computed without regard to any distributions or interests
attributable to the accrued benefit of the individual as of
August 1,1986.
"(2) REDUCTION IN AMOUNTS WHICH MAY BE RECEIVED WITHOUT
TAX.—If this subsection applies to any individual—
"(A) EXCESS DISTRIBUTIONS.—Subsection (cXD shall be
applied—
"(i) without regard to subparagraph (A), and
"(ii) by reducing (but not below zero) the amount
determined under subparagraph (B) thereof by retire-
ment distributions attributable (as determined under
rules prescribed by the Secretary) to the individual's
accrued benefit as of August 1,1986.
"(B) EXCESS RETIREMENT ACCUMULATION.—The amount
determined under subsection (dX3XB) (without regard to
subsection (cXlXA)) with respect to such individual shall be
reduced (but not below zero) by the present value of the
individual's accrued benefit as of August 1,1986, which has
not been distributed as of the date of death.
"(3) EUGIBLE INDIVIDUAL.—For purposes of this subsection,
the term 'eligible individual' means any individual if, on August
1, 1986, the present value of such individual's interests in
qualified employer plans and individual retirement plans ex-
ceeded $562,500.
"(4) CERTAIN AMOUNTS EXCLUDED.—In determining an individ-
ual's accrued benefit for purposes of this subsection, there shall
not be taken into account any portion of the accrued benefit—
"(A) payable to an alternate payee pursuant to a qualified
domestic relations order (within the meaning of section
414(p)) if includible in income of the alternate payee, or
"(B) attributable to the individual's investment in the
contract (as defined in section 72(f)).
"(5) ELECTION.—An election under paragraph (1) shall be
made on an individual's return of tax imposed by chapter 1 or
11 for a taxable year beginning before January 1,1989.'
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3481
(B) Section 4980A(c) of the 1986 Code, as redesignated by
paragraph (1), is amended by striking out paragraph (5).
(5) Section 4980A(d) of the 1986 Code (relating to increase in
estate tax if individual dies with excess accumulation), as re-
designated by paragraph (1), is amended—
(A) by striking out "section 2010" in paragraph (2) and
inserting in lieu thereof "chapter 11", and
(B) by adding at the end thereof the following new para-
graphs:
"(4) RULES FOR COMPUTING EXCESS RETIREMENT ACCUMULA-
TION.—The excess retirement accumulation of an individual
shall be computed without regard to—
"(A) any community property law,
"(B) the value of—
"(i) amounts payable to an alternate payee pursuant
to a qualified domestic relations order (within the
meaning of section 414(p)) if includible in income of the
alternate payee, and
"(ii) the individual's investment in the contract (as
defined in section 72(f)), and
"(C) the excess (if any) of—
"(i) any interests which are payable immediately
after death, over
"(ii) the value of such interests immediately before
death.
"(5) ELECTION BY SPOUSE TO HAVE EXCESS DISTRIBUTION RULE
APPLY.—
"(A) I N GENERAL.—If the spouse of an individual is the
beneficiary of all of the interests described in paragraph
(3XA), the spouse may elect—
"(i) not to have this subsection apply, and
"(ii) to have this section apply to such interests and
any retirement distribution attributable to such in-
terests as if such interests were the spouse's.
"(B) D E MINIMIS EXCEPTION.—If 1 or more persons other
than the spouse are beneficiaries of a de minimis portion of
the interests described in paragraph (3XA)—
"(i) the spouse shall not be treated as failing to meet
the requirements of subparagraph (A), and
"(ii) if the spouse makes the election under subpara-
graph (A), this section shall not apply to such portion or
any retirement distribution attributable to such
portion."
(6) Subparagraph (B) of section 4980A(dX3) of the 1986 Code,
as redesignated by paretgraph (1), is amended to read as follows:
"(B) the present value (as determined under rules pre-
scribed by the Secretary as of the valuation date prescribed
in subparagraph (A)) of a single life annuity with annual
payments equal to the limitation of subsection (c) (as in
effect for the year in which death occurs and as if the
individual had not died)."
(7) Section 2013 of the 1986 Code (relating to credit for tax on
prior transfer) is amended by adding at the end thereof the
following new subsection:
"(g) TREATMENT OF ADnmoNAL TAX UNDER SECTION 4980A.—For
purposes of this section, the estate tax paid shall not include any
portion of such tax attributable to section 4980A(d)."
102 STAT. 3482 PUBLIC LAW 100-647—NOV. 10, 1988
26USC4980A (8) Paragraph (1) of section 1133(c) of the Reform Act is
note. amended by inserting ", other than a distribution with respect
to a decedent dying before January 1, 1987" after "1986".
(9) Section 4980A(dX3XA) of the 1986 Code is amended by
inserting "(other than as a beneficiary, determined after ap-
plication of paragraph (5))" after "the individual's interests .
(10) Section 691(cXl) of the 1986 Code is amended by adding at
the end thereof the following new subparagraph:
"(C) EXCESS RETIREMENT ACCUMULATION TAX.—For pur-
poses of this subsection, no deduction shall be allowed for
the portion of the estate tax attributable to the increase in
such tax under section 4980A(d)."
(11) Section 2053(cXlXB) of the 1986 Code is amended by
adding at the end thereof the following new sentence: "This
subparagraph shall not apply to any increase in the tax imposed
by this chapter by reason of section 4980A(d)."
(12) Section 6018(a) of the 1986 Code is amended by adding at
the end thereof the following new paragraph:
"(5) RETURN REQUIRED IF EXCESS RETIREMENT ACCUMULATION
TAX.—The executor shall make a return with respect to the
estate tax imposed by subtitle B in any case where such tax is
increased by reason of section 4980A(d)."
(h) AMENDMENTS RELATED TO SECTION 1134 OF THE REFORM ACT.—
(1) Section 72(pX3XA) of the 1986 Code (relating to denial of
interest deductions in certain cases) is amended by inserting "to
which paragraph (1) does not apply by reason of paragraph (2)
during the period" after "loan".
(2) Subparagraph (B) of section 72(pX3) of the 1986 Code is
amended to read as follows:
"(B) PERIOD TO WHICH SUBPARAGRAPH (A) APPLIES.—For
purposes of subparagraph (A), the period described in this
subparagraph is the period—
"(i) on or after the 1st day on which the individual to
whom the loan is made is a key employee (as defined in
section 416(i)), or
"(ii) such loan is secured by amounts attributable to
elective deferrals described in subparagraph (A) or (C)
of section 402(gX3)."
(i) AMENDMENTS RELATED TO SECTION 1135 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 72(uXl) of the 1986 Code
(relating to annuity contracts not held by natural persons) is
amended by inserting "(other than subchapter D " after
"subtitle".
(2) Subparagraph (D) of section 72(uX3) of the 1986 Code
(relating to exceptions) is amended by striking out "until such
time as the employee separates from service" and inserting in
lieu thereof "until all amounts under such contract are distrib-
uted to the employee for whom such contract was purchased or
the employee's beneficiary".
(3) Subparagraphs (D) and (E) of section 72(uX3) of the 1986
dkxle (relating to exceptions) are each amended by striking out
"which".
(4) Paragraph (4) of section 72(u) of the 1986 Code is amended
by striking out "and" at the end of subparagraph (A), by
striking out the period at the end of subparagraph (B) and
inserting in heu thereof ", and", and by adding at the end
thereof the following new subparagraph:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3483
"(C) which provides for a series of substantially equal
periodic payments (to be made not less frequently than
annually) during the annuity period."
(j) AMENDMENTS RELATED TO SECTION 1136 OP THE REFORM ACT.—
(1) Section 401(aX27) of the 1986 Code is amended by adding at
the end thereof the following new subparagraph:
"(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."
(2) Section 401(aX27) of the 1986 Code is amended by striking
out "(27)" and inserting in lieu thereof:
"(27) DETERMINATIONS AS TO PROFIT-SHARING PLANS.—
"(A) CONTRIBUTIONS NEED NOT BE BASED ON PROFITS.—".
(k) AMENDMENT RELATED TO SECTION 1139 OF THE REFORM ACT.—
Clause (i) of section 1139(dX2XA) of the Reform Act is amended by 26 use 4ii note,
striking out "before January" and inserting in lieu thereof "after
January".
(1) AMENDMENT RELATED TO SECTION 1145 OP THE REFORM ACT.—
Subparagraph (E) of section 401(aXll) of the 1986 Code (relating to
cross reference) is redesignated as subparagraph (F).
(m) AMENDMENTS RELATED TO SECTION 1147 OP THE REFORM ACT.—
(1) Subparagraph (C) of section 770igXl) of the 1986 Code
(relating to tax treatment of Federal Tiirift Savings Fund) is
amended by inserting ", section 401(kX4XB)," after "paragraph
(2)".
(2) Section 8440(aX3) of title 5, United States Code, is amended
by inserting ", 401(kX4XB) of such Code," after "subsection (b)".
SEC. lOllB. AMENDMENTS RELATED TO SUBTITLES B AND C OF TITLE XI
OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1151 OP THE REFORM ACT.—
(1) Paragraph (2) of section 89(a) of the 1986 Code (relating to
year of inclusion) is amended to read as follows:
"(2) YEAR OF INCLUSION.—
"(A) IN GENERAL.—Except as provided in subparagraph
(B)-
"(i) any amount included in gross income under para-
graph (1) shall be taken into account for the taxable
year of the employee with or within which the plan
year ends, and
"(ii) any deduction of the employer attributable to
such amount shall be allowable for the taxable year of
the employer with or within which the plan year ends.
"(B) ELECTION TO DELAY INCLUSION FOR i YEAR.—If an
employer maintaining a plan with a plan year ending after
September 30 and on or before December 31 of a calendar
year elects the application of this subparagraph—
"(i) amounts included in gross income under para-
graph (1) with respect to employees of such employer
shall be taken into account for the taxable year of the
y ; employee following the taxable year determined under
subparagraph (A), but
"(ii) any deduction of the employer which is attrib-
utable to such amounts shall be allowable for the tax-
102 STAT. 3484 PUBLIC LAW 100-647—NOV. 10, 1988
able year with or within which the plan year following
the plan year in which the excess benefits occurred
ends."
(2) Paragraph (4) of section 89(b) of the 1986 Code (defining
nontaxable beneHts) is amended by adding at the end thereof
the following new sentence: "Such term includes any group-
term life insurance the cost of which is includible in gross
income under section 79."
(3) Paragraph (1) of section 89(g) of the 1986 Code (relating to
the a ^ r ^ a t i o n of comparable health plans) is amended by
adding at the end thereof the following new subparagraph:
"(C) EMPLOYEES COVERED BY MORE THAN i PLAN.—The
Secretary may provide that 2 or more plans providing
benefits to the same participant shall be treated as 1 plan
for purposes of applying suteections (dXDCB), (dX2), and (f)."
(4) Subparagraph (B) of section 89(gX2) of the 1986 Code
(relating to sworn statements) is amended by adding at the end
thereof the following new sentence: "No statement shall be
required under clause (ii) with respect to any individual eligible
for coverage at no cost under a health plan which provides core
health benefits and with respect to whom the employee does not
elect any core health coverage from the employer."
(5) Subparagraph (D) of section 89(gX2) of the 1986 Code is
amended by striking out "under such plan" and inserting in
lieu thereof "under such plans".
(6) Section 89(g) of the 1986 Code is amended by striking out
paragraph (6).
(7) Subparagraph (A) of section 89(hXl) of the 1986 Code
(relating to excluded employees) is amended by inserting "(or
1st day of a period of less than 31 days specified by the plan)"
after' Wnttf'.
(8) Section 89(j) of the 1986 (Dode (relating to other definitions
and special rules) is amended by adding at the end thereof the
following new paragraph:
"(12) EMPLOYERS WITH ONLY HIGHLY COBIPENSATED EMPLOY-
EES.—The requirements of subsections (d) and (e) shall not apply
to any statutory employee benefit plan for any year for which
the only employees of the employer maintaining the plan are
highly compensated employees."
(9) Section 89(k) of the 1986 Code (relating to requirement that
plan be in writing) is amended by adding at the end thereof the
following new paragraph:
"(5) Loss OF EXEMPTION FOR CERTAIN PLANS.—If a plan de-
scribed in paragraph (2)(E) fails to meet the requirements of
paragraph (1), the organization which is part of such plan shall
not be exempt from tax under section 501(a)."
(10) Section 6652(kX2XB) of the 1986 Code (relating to amount
of additional tax) is amended by striking out "subsection (gX3)"
and inserting in lieu thereof "subsection (gX3XCXi)".
(IIXA) Subsection (a) of section 125 of the 1986 Code is
amended to read as follows:
"(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) Paragraph <1) of section 12d(b) of the 1986 Code is amended
-by striking out "A plan shall be treated as fiedling to meet t l ^
PUBLIC LAW 106-647—NOV. 10, l§8g 102 STAT. 3485
requirements of this subsection" and inserting in lieu thereof
"In the case of a highly compensated employee, subsection (a)
shall not apply to any benefit attributsJble to a plan year".
(O Paragraph (2) of section 125(b) of the 1986 Ckxle is amended
by striking out "a plan shall be treated as failing to meet the
requirements of this subsection" and inserting in lieu thereof
"subsection (a) shall not apply to any plan year".
(12) Subparagraph (B) of section 125(cXl) of the 1986 Code
(defining cafeteria plans) is amended to read as follows:
"(B) the participant may choose among 2 or more benefits
consisting of cash and qusdified benefits."
(13XA) Paragraph (1) of section 125(e) of the 1986 Code (defin-
ing qualified benefits) is amended by inserting "and without
regard to section 89(a)" after "subsection (a)".
(B) The last sentence of section 125(bX2) of the 1986 Code is
amended to read as follows: "For purposes of the preceding
sentence, qualified benefits shall not include benefits which
(without r^ard to this paragraph) are includible in gross
income."
(14) Subsection (d) of section 129 of the 1986 (Dode is amended
by redesignating paragraph (8) as paragraph (7).
(15) Paragraph (7) of section 129(d) of the 1986 Code (as so
redesignated) is amended—
(A) by inserting "under all plans of the employer" after
"employees" the 2nd and 3rd time it appears in subpara-
graph (A),
(B) by striking out "there shall be disr^arded" in
subparagraph (B) and inserting in lieu thereof "a plan may
disregard", and
(C) by striking out "415(qX7)" in subparagraph (B) and
inserting in lieu thereof "414(q)(7)".
(16) Section 414(mX4) of the 1986 Code is amended by insert-
ing "and" at the end of subparagraph (A), by striking out the
comma at the end of subparagraph (B) and inserting in lieu
thereof a period, and by striking out subparagraphs (C) and (D).
(17) Paragraph (2) of section 414(t) of the 1986 Code is amend-
ed by striking out "132," and inserting in lieu thereof "132,
162(iX2), 162(k),".
(18) Paragraph (6) of section 129(e) of the 1986 Code is amend-
ed by striUng out "of subsection (d)" and inserting in lieu
thereof "of subsection (d) (other than paragraphs (4) and (7)
thereof)".
(19) Subparagraph (C) of section 414(nX3) of the 1986 Code is
amended by striking out "132," and inserting in lieu thereof
"132,162(iX2), 162(k),".
(20) Section 414(tXl) of the 1986 Code (relating to appUcation
of controlled group rules to certain employees) is amended by
striking out "of section 414" each place it appears.
(21) Section 89(jX6) of the 1986 Code is amended by striking
out "described in subparagraph (A), (B), or (Q of subsection
(iX2)".
(22XA) Section 3121 of the 1986 Code (relating to definitions)
is amended by adding at the end thereof the following new sub-
section:
"(x) BENEFITS PROVTOED UNDER CERTAIN E}MPLOYEE BENEFIT
PLANS.—Notwithstanding any paragraph of subsection (a) (other
102 STAT. 3486 PUBLIC LAW 100-647—NOV. 10, 1988
than paragraph (1)), the term 'wages' shall include anv amount
which is includible in gross income by reason of section 89.'
(B) Section 3231(e) of the 1986 Code (defining compensation)
is amended by adding at the end thereof the following new
paragraph:
"(8) BENEFITS PROVIDED UNDER CERTAIN EMPLOYEE BENEFIT
PLANS.—Notwithstanding any other paragraph of this subsec-
tion (other than paragraph (2)), the term 'compensation' shall
include any amount which is includible in gross income by
reason of section 89."
(C) Section 3306 of the 1986 Code (relating to definitions) is
amended by adding at the end thereof the following new subsec-
tion:
"(t) BENEFITS PROVIDED UNDER CERTAIN EMPLOYEE BENEFIT
PLANS.—Notwithstanding any paragraph of subsection (b) (other
than paragraph (1)), the term 'wages' shall include anv amount
which is includible in gross income by reason of section 89.'
(D) Section 3401 of the 1986 Code (relating to definitions)
is amended by adding at the end thereof the following new sub-
section:
"(g) BENEFITS PROVIDED UNDER CERTAIN EMPLOYEE BENEFIT
PLANS.—Notwithstanding any paragraph of subsection (a), the term
'wages' shall include anv amount which is includible in gross income
by reason of section 89.'
(E) The third to last sentence of section 209 of the Social
42 use 409. Security Act is amended—
(i) by striking out the period at the end of clause (2) £md
inserting in lieu thereof ", or", and
(ii) by inserting after clause (2) the following new clause:
"(3) Any amount required to be included in gross income
under section 89 of the Internal Revenue Code of 1986."
26 use 3121 (F) The amendments made by this paragraph shall not apply
note. to any individual who separated from service with the employer
before January 1,1989.
Wages. (23XA) Sections 3121(aX5XG) and 3306(bX5XG) of the 1986 Code
are each amended by inserting "if such payment would not be
treated as wages without regard to such plan and it is reason-
able to believe that (if section 125 applied for purposes of this
section) section 125 would not treat any wages as constructively
received" after "section 125)".
(B) Section 209(eX9) of the Social Security Act is amended by
inserting "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" after
"1986)".
26USe6039B, (24) Section 1151(hX3) of the Reform Act is amended by
6039D. striking out "Section 6039B(c)" and inserting in lieu thereof
"Section 6039D(c)".
26 use 89 note. (25) Paragraph (i) of section 1151(k) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "Notwithstanding the preceding sentence, the amend-
ments made by subsections (eXl) and (iX3XC) shall, to the extent
they relate to sections 106, 162(iX2), and 162(k) of the Internal
Revenue Code of 1986, apply to years beginning after 1986."
(26) Section 1151(k) of the Reform Act is amended by adding
at the end thereof the following new paragraph:
PUBLIC LAW 100-647—NdV. 10,1988 102 STAT. 3487
"(6) CERTAIN PLANS MAINTAINED BY EDUCATIONAL INSTITU-
TIONS.—If an educational organization described in section
170(bXlXAXii) of the Internal Revenue Code of 1986 makes an
election under this paragraph with respect to a plan described
in section 125(cX2XC) of such Code, the amendments made by
this section shall apply with respect to such plan for plan years
b a n n i n g after the date of the enactment of this Act.
(27XA) Section 4976 of the 1986 Code is amended by re-
designating subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:
"(c) TAX ON FUNDED WELFARE BENEFIT FUNDS WHICH INCLUDE
DISCRIMINATORY EMPLOYEE BENEFIT PLAN.—
"(1) I N GENERAL.—If—
"(A) an employer maintains a welfare benefit fund, and
"(6) a discnminatory employee benefit plan (within the
meaning of section 89) is part of such fund for any plan
year,
there is hereby imposed on such employer for the taxable year
with or within which the plan year ends a tax in the amount
determined under paragraph (2).
"(2) AMOUNT OF TAX.—The amount of the tax under para-
graph (1) shall be equal to the excess (if any) of—
"(A) the product of the highest rate of tax imposed by
section 11, multiplied by the lesser of—
"(i) the aggregate excess benefits (as defined in sec-
tion 89) for such plan year, or
"(ii) the taxable income of the fund for such plan
year, over
"(B) the amount of tax imposed by chapter 1 on such fund
for such plan year."
(B) Section 4976(b) of the 1986 (Dode is amended by adding at
the end thereof the following new paragraph:
"(5) LIMITATION IN CASE OF BENEFITS TO WHICH SECTION 89
APPLIES.—If section 89 applies to any post-retirement medical
benefit or life insurance benefit provided by a fund, the amount
of the disqualified benefit under paragraph (1)(B) with respect to
such benefit shall not exceed the aggregate excess benefits
provided by the plan (as determined under section 89)."
(C) Section 505(aXl) of the 1986 Code is amended by adding at
the end thereof the following new subsection: "This paragraph
shall not apply to any organization by reason of a failure to
meet the requirements of subsection (b) with respect to a benefit
to which section 89 applies."
(28) Section 89(hX4) of the 1986 Code is amended by striking
out "subsection (h)(5)" and inserting in lieu thereof "subsection
(gX5)".
(29) Section 89(kXl) of the 1986 Code is amended by striking
out the last sentence and inserting in lieu thereof the following
new sentences:
"Such inclusion shall be coordinated (under regulations pre-
scribed by the Secretary) with any inclusion under subsection
(a) with respect to such plan. In the case of a statutory employee
benefit plan described in subsection (iXlXB), any amount re-
quired to be included in gross income under this subsection
shall be included in the gross income of the beneficiary."
(30) Section 129(dXlXB) of the 1986 Code is amended by strik-
ing out "(6)" and inserting in lieu thereof "(7)".
102 STAT. 3488 PUBLIC LAW 100-647—NOV. 10, 1988
(31)(A) Section 129(d) of the 1986 Code is amended—
(i) by striking out the last sentence of paragraph (3), and
(ii) by inserting at the end thereof the following new
paragraph:
"(8) EXCLUDED EMPLOYEES.—For purposes of paragraphs (2),
(3), and (7), there shall be excluded from consideration employ-
ees who are excluded from consideration under section 89(h)."
(B) Sections 117(dX4), 120(c)(2), 127(b)(2), 132(h)(1), and 505(bX2)
of the 1986 Code are each amended—
(i) by striking out "may" the first place it appears and
inserting in lieu thereof "shall", and
(ii) by striking out "may be" the second place it appears
and inserting in lieu thereof "are".
(32) Section 505(b) of the 1986 Code is amended by adding at
the end thereof the following new paragraph:
"(7) $200,000 COMPENSATION UMIT.—A plan shall not be treat-
ed as meeting the requirements of this subsection unless under
the plan the annual compensation of each employee taken into
account for any year does not exceed $200,000. The Secretary
shall adjust the $200,000 amount at the same time and in the
same manner as under section 415(d)."
(33) Section 3401(a) of the 1986 Code is amended by inserting
"or" at the end of paragraph (18), by striking out paragraph
(19), and by redesignating paragraph (20) as paragraph (19).
(34) Section 89(1X2) of the 1986 Code is amended by striking
out "6652(1)" and inserting in lieu thereof "6652(k)".
(b) AMENDMENTS RELATED TO SECTION 1161 OF THE REFORM ACT.—
(1) Section 162(m) of the 1986 Code (relating to special rules
for health insurance costs of self-employed individuals) is
amended by redesignating paragraph (4) as paragraph (5) and
by inserting after paragraph (3) the following new paragraph:
"(4) DEDUCTION NOT ALLOWED FOR SELF-EMPLOYMENT TAX PUR-
POSES.—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 sec-
tion 1402(a)) for purposes of chapter 2."
(2) Section 162(m) of the 1986 Code (relating to cross reference)
as redesignated by section 1161(a) of the Reform Act, is redesig-
nated as subsection (n).
(3) Section 162(mX2XA) of the 1986 Code is amended by insert-
ing: "derived by the taxpayer from the trade or business with
respect to which the plan providing the medical care coverage is
established" after "401(c))".
42 use 411. (4) Section 211(a) of the Social Security Act is amended by
inserting after paragraph (13) the following new paragraph:
"(14) The deduction under section 162(m) (relating to health
insurance costs of self-employed individuals) shall not be al-
lowed."
(c) AMENDMENTS RELATED TO SECTION 1163 OF THE REFORM ACT.—
(1) Paragraph (8) of section 129(e) of the 1986 Code (relating to
treatment of onsite facilities) is amended—
(A) by inserting "maintained by an employer" after
"onsite facility",
(B) by inserting "of dependent care assistance provided to
an employee" after "the amount",
(C) by inserting "of the facility by a dependent of the
employee" after "utilization" in subparagraph (A), and
PUBLIC LAW 100-647—NOV. 10,1988 102 STAT. 3489
(D) by inserting "with respect to such dependent" after
"provided" in subparagraph (B).
(2XA) Paragraph (2) of section 129(a) of the 1986 CJode is
£imended to read as follows:
"(2) LIMITATION OF EXCLUSION.—
"(A) I N GENERAL.—The amount which may be excluded
under paragraph (1) for dependent care assistance with
respect to dependent care services provided during a tax-
able 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 pajrment of dependent care assist-
ance 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 para-
graphs (3) and (4) of section 21(e)."
(B) Section 6051(a) of the 1986 Code is amended by striking
out the period at the end of paragraph (8) £uid inserting in lieu
thereof ", and", and by adding a t the end thereof the following
new paragraph:
"(9) the total amount incurred for dependent care assistance
with respect to such employee under a dependent care assist-
ance program described in section 129(d)."
(CXi) Except as provided in this subparagraph, the amend- 26 use 129 note.
ments made by this paragraph shall apply to taxable years
beginning after December 31,1987.
(ii) A taxpayer may elect to have the amendment made by
subparagraph (A) apply to taxable years beginning in 1987,
(iii) In the case of a taxpayer not making an election under
clause (ii), any dependent care assistance provided in a tsixable
year beginning in 1987 with respect to which reimbursement
was not received in such taxable year shall be treated as
provided in the taxpayer's first taxable year beginning after
December 31,1987.
(d) AMENDMENT RELATED TO SECTION 1164 OF THE REFORM ACT.—
Section 119(dX2) of the 1986 Code is amended—
(1) by striking out "(as of the close of the calcmdar year in
which the taxable year begins)" in subparagraph (AXi), and
(2) by adding at the end thereof the following:
"The appraised value under subparagraph (AXi) shall be deter-
mined 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."
(e) AMENDMENTS RELATED TO SECTION 1166 OF THE REFORM
ACT.—Section 7701(aX20) of the 1986 Code (defining employee) is
amended—
(1) by striking out "106, and 125" and inserting in lieu thereof
"and 106", and
(2) by inserting "and for purposes of applying section 125 with
respect to cafeteria plans," before "the term".
(f) AMENDMENTS RELATED TO SECTION 1168 OF THE REFORM ACT.—
(1) Paragraph (1) of section 134(b) of the 1986 Code is amended
by striking out "or regulation thereunder" and inserting in lieu
thereof ", regulation, or administrative practice".
102 STAT. 3490 PUBLIC LAW 100-647—NOV. 10, 1988
(2XA) Section 134(bXl) of the 1986 Code is amended by insert-
ing "(other than personal use of a vehicle)" after "in-kind
benefit".
26 use 134 note. (B) The amendment made by subparagraph (A) shall apply to
taxable years b^inning after December 31, 1986.
(3) Section 134(bX3XA) of the 1986 Code is amended by striking
out "under any provision of law or r^^ation described in
paragraph (1)".
26 use 134 note. (4) Section 1168(c) of the Reform Act is amended by striking
out "1986" and insertmg in Ueu thereof "1984".
(g) AMENDMENTS RELATED TO SECTION 1172 OF THE REFORM ACT.—
26 use 409. (1) Section 1172(bXlXA) of the Reform Act is amended by
inserting "each place it appears" before the comma.
(2) Paragraphs (2) and (3) of section 409(n) of the 1986 Code
(relating to securities received in certain transactions) is
amended by inserting "or section 2057" after "section 1042"
each place it appears.
(3) Paragraph (1) of section 2057(b) of the 1986 Code (relating
to qualified sale) is amended by striking out "is".
Loans. (h) AMENDMENTS RELATED TO SECTION 1 1 7 3 OF THE REFORM ACT.—
(1) Section 133 of the 1986 Code (relating to exclusion of
interest on securities acquisition loans) is amended by adding at
the end thereof the following new subsection:
"(e) PERIOD TO WHICH INTEREST EXCLUSION APPLIES.—
"(1) IN GENERAL.—In the case of—
"(A) an original securities acquisition loan, and
"(B) any securities acquisition loan (or series of such
loans) used, to refinance tiie original securities acquisition
loan,
subsection (a) shall apply only to interest accruing during the
excludable period with respect to the original securities acquisi-
tion loan.
"(2) ElxcLUDABLE PERIOD.—For purposes of this subsection, the
term 'excludable period' means, with respect to any original
securities acquisition loan—
"(A) I N GENERAL.—The 7-year period b^inning on the
date of such loan.
"(B) LOANS DESCRIBED IN SUBSECTION 0)X1XA).—If the
term of an original securities acquisition loan described in
subsection (bXlXA) is greater than 7 years, the term of such
loan. This subparagraph shall not apply to a loan described
in subsection (bX3)(B).
"(3) ORIGINAL SECURITIES ACQUISITION LOAN.—For the pur-
poses of this subsection, the term 'original securities acquisition
loan' means a securities acquisition loan described in subpara-
graph (A) or (B) of subsection a>Xl)."
(2XA) Section 133(b) of the 1986 Code (defining securities
acquisition loan) is amended—
(i) by strikii^ out "or are used to refinance such a loan,"
in paragraph (IXA),
(ii) by striking out ", except that this subparagraph shall
not apply to any loan the commitment period of which
exceeds 7 years" in paragraph (1)(B), and
(iii) by adding at the end thereof the following new
paragraph:
"(5) TMAT»«ENT OF REFINANCINGS.—The term 'securities ac-
quisition loan' shall include any loan which—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3491
"(A) is (or is part of a series of loans) used to refinance a
loan described-in subparagraph (A) or (B) of paragraph (1),
and
"(B) meets the requirements of paragraphs (2) and (3)."
(B) Subparagraph (B) of section 133(bX3) of the 1986 Code is
amended to read as follows:
"(B) repayment terms providing for more rapid repay-
ment of principal or interest on such loan, but only if
allocations under the plan attributable to such repajnnent
do not discriminate in favor of highly compensated em-
ployees (within the meaning of section 414(q)).'
(3) Section 404(k) of the 1986 Code is amended—
(A) by inserting "(whether or not allocated to partici-
pants)" after "employer securities" in paragraph (2XC), and
(B) by adding at the end thereof the following new sen-
tence: Paragraph (2XC) shall not apply to dividends from
employer securities which are allocated to any participant
unless the plan provides that employer securities with a
fair market value not less than the amount of such divi-
dends are allocated to such participant for the year which
(but for paragraph (2XC)) such dividends would have been
allocated to such participant."
(4) Subparagraph (C) of section 852(bX5) of the 1986 Code
(relating to interest on certain loans used to acquire employer
securities) is amended by striking out "paragraph" and insert-
ing in lieu thereof "section".
(5)(A) The amendments made by parcigraphs (1) and (2) shall 26 use 133 note,
apply to—
(i) any loan used to acquire employer securities after
July 18,1984, and
(ii) loans made after July 18, 1984, which were used (or
were part of a series of loans used) to refinance any loan
which—
(I) was used to acquire employer securities after
May 23, 1984 (July 18, 1984, in the case of a loan
described in section 133(bX3XB) of the Internal Revenue
Code of 1986), and
(II) met the requirements of section 133 (other than
subsection (bX2) thereof) of such (Dode as in effect as of
the later of the date on which the loan was made, or
July 19,1984.
In no event shall such amendments apply to any loan described
in section 133(bXl)(B) of such Code which is made before Octo-
ber 22, 1986 (or loan used, or part of a series of loans used, to
refinance such a loan).
(B) Subparagraph (B) of section 1173(cX2) of the Reform Act is 26 use 133 note.
amended to read as follows:
"(B) Section 133(bXlXA) of the Internal Revenue Code of
1986, as amended by subsection (bX2), shall apply to any
loan used (or part of a series of loans used) to refinance a
loan which—
"(i) was used to acquire employer securities after
May 23,1984, and
"(ii) met the requirements of section 133 of the In-
ternal Revenue CJode of 1986 as in effect as of the later
of—
"(I) the date on which the loan was made, or
102 STAT. 3492 PUBLIC LAW 100-647—NOV. 10, 1988
"(II) July 19,1984."
(6) Section 404(k) of the 1986 Code is amended by striking out
"merely by reason of any distribution" in the third sentence
and inserting in lieu thereof "or as engaging in a prohibited
transaction for purposes of section 4975(dX3) merely by reason
of any distribution or payment",
(i) AMENDMENTS RELATED TO SECTION 1174 OF THE REFORM ACT.—
(1) Clause (ii) of section 409(oXlXA) of the 1986 Code (relating
to distribution requirement) is amended by striking out "such
year" and inserting in lieu thereof "distribution is required to
begin under this clause".
26 use 409 note. (2) Section 1174(a)(2) of the Reform Act is amended by striking
out "plan terminations" and inserting in lieu thereof "distribu-
tions".
(3) Section 409(oXlXA) of the 1986 Code is amended by striking
out "unless the participant otherwise elects" and inserting in
lieu thereof "if the participant and, if applicable pursuant to
sections 401 (aXU) and 417, with the consent of the participant's
spouse elects",
(j) AMENDMENTS RELATED TO SECTION 1175 OF THE REFORM ACT.—
(1) Subclause (H) of section 401(aX28XB) of the 1986 Code
(relating to method of meeting requirements) is amended by
inserting "and within 90 da3rs 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" after "clause (i)".
(2) Clause (iv) of section 401(aX28XB) of the 1986 Code is
amended to read as follows:
"(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
"(n) the Ist plan year b^inning after Decem-
ber 31,1986.
For purposes of the preceding sentence, an employer
may elect to treat an individual first becoming a quali-
fied p£u*ticip€mt in the 1st plan year beginning in 1987
as having become a participant in the 1st plan year
beginning in 1988."
(3) The last sentence of section 409(d) of the 1986 Code (relat-
ing to employer securities must stay in the plan) is amended by
inserting "or to any distribution or reinvestment required
under section 401(aX28)" after "section 401(aX9)".
(4) Section 4978(d) of the 1986 Ck>de (relating to section not to
apply to certain dispositions) is amended by adding at the end
thereof the following new paragraph:
"(4) DISPOSITIONS TO MEET DIVERSIFICATION REQUIREMENTS.—
This section shall not apply to any disposition of qualified
securities which is required under section 401(aX28),"
(5) Section 409(h) of the 1986 Code (relating to right to demand
employer securities; put option) is amended by adding at the
end thereof the following new paragraph:
"(7) EXCEPTK»( WHERE EMPLOYEE ELECTED DIVERSIFICATION.—
-Faragrs^h (IXA) Jihall not apply iwith respect to the portion of
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3493
the participant's account which the employee elected to have
reinvested under section 401(aX28XB)."
(6) Section 401(aX28XB) of the 1986 Code is amended by adding
at the end thereof the following new clause:
"(v) COORDINATION WITH DISTRIBUTION RUI£S.—Any
distribution required by this subparagraph shall not be
taken into account in determining whether—
"(I) a subsequent distribution is a lump-sum dis-
tribution under section 402(eX4XA), or /
"(U) section 402(aX5XDXiii) applies to a subse-
quent distribution."
(k) AMENDMENTS RELATED TO SECTION 1176 OF THE REFORM ACT.—
(1) Section 401(aX22) of the 1986 Code is amended by striking
out "is not publicly traded" each place it appears and inserting
in lieu thereof "is not readily tradable on an established
(2) Section 401(aX22) of the 1986 Code is amended by adding at
the end thereof the following new sentence: "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 msirket."
(3) Section 4090X4) of the 1986 Code (relating to nonvoting
common stock may be acquired in certain cases), as added by
section 1176(b) of the Reform Act, is redesignated as para-
graph (5).
G) AMENDMENTS RELATED TO SECTION 1177 OF THE REFORM ACT.—
(1) Paragraph (2) of section 1177(b) of the Reform Act is 26 USC 38 note.
amended by striking out "section 143(dX3XC)" and inserting in
lieu thereof "section 146(dX3XC)".
(2) Subsection (b) of section 1177 of the Reform Act is amended
by striking out "made by this subtitle" and inserting in lieu
thereof "made by section 1175".
(3) If any newspaper corporation described in section 1177(b) Newspapers.
of the Reform Act, as amended by this subsection, pays in cash a 26 USC 38 note.
dividend within 60 days after the date of the enactment of this
Act to the corporation's employee stock ownership plans and if
a corporate resolution declaring such dividend was adopted
before November 30, 1987, and such resolution specifies that
such dividend shall be contingent upon passage by the Congress
of technical corrections, then such dividend (to the extent the
aggr^ate amount so paid does not exceed $3,500,000) shall be
treated as if it had been declared and paid in 1987 for all
purposes of the Internal Revenue Code of 1986.
SEC. 1012. AMENDMENTS RELATED TO TITLE XII OF THE REFORM ACT. Corporations.
(a) AMENDMENTS RELATED TO SECTION 1201 OF THE REFORM ACT.—
(IXA) Subparagraph (C) of section 904(dX2) of the 1986 Cbde is
amended to read as follows:
"(dO FiNANCLAL SERVICES INCOME.—
"(i) IN GENERAL.—Except as otherwise provided in ^
this subparagraph, the term'financial services income'
means any income which is received or accrued by any
person predominantly engaged in the active conduct of
a banking, insurance, financing, or similar business,
and which is—
"(D described in clause (ii).
102 STAT. 3494 PUBLIC LAW 100-647—NOV. 10, 1988
"(II) passive income (determined without regard
to subclause (I) of subparagraph (AXiii)), or
"(III) export financing interest which (but for
subparagraph (BXii)) would be high withholding
tax interest.
"(ii) GENERAL DESCRIPTION OF FINANCIAL SERVICES
INCOME.—Income is described in this clause if such
income is—
"(I) derived in the active conduct of a banking,
financing, or similar business,
"(II) derived from the investment by an insur-
ance company of its unearned premiums or
reserves ordinary and necessary for the proper
conduct of its insurance business, or
"(III) of a kind which would be insurance income
as defined in section 953(a) determined without
regard to those provisions of paragraph (IXA) of
such section which limit insurance income to
income from countries other than the country in
which the corporation was created or organized,
"(iii) EXCEPTIONS.—^The term 'financial services
income' does not include—
"(I) any high withholding tax interest,
"(II) any dividend from a noncontrolled section
902 corporation, and
"(III) any export financing interest not described
in clause (iXIII)."
(B) Clause (i) of section 864(dX5XA) of the 1986 Code is
amended by striking out "(CXiii)" and inserting in lieu thereof
"(CXiiiXIII)*^.
(2) Subparagraph (D) of section 904(dX2) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "Such term does not include any dividend from a
noncontrolled section 902 corporation and does not include any
financial services income."
(3) Paragraph (3) of section 904(d) of the 1986 Code is amended
by adding at the end thereof the following new subparagraph:
"(H) EXCEPTION FOR CERTAIN HIGH WITHHOLDING TAX IN-
TEREST.—This paragraph shall not apply to any amount
which—
"(i) without regard to this paragraph, is high
withholding tax interest (including any amount treated
as high withholding tax interest under paragraph
(2XBXiii)), and
"(ii) would (but for this subparagraph) be treated as
financial services income under this paragraph.
The amount to which this paragraph does not apply by
reason of the preceding sentence shall not exceed the
interest or equivalent income of the controlled foreign cor-
poration taken into account in determining financial serv-
ices income without regard to this subparagraph."
(4) Subparagraph (E) of section 904(dX3) of the 1986 Code is
amended—
(A) by striking out the first sentence and inserting in lieu
thereof the following: "If a controlled foreign corporation
meets the requirements of section 954(bX3XA) (relating to
de minimis rule) for any taxable year, for purposes of this
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3495
paragraph, none of its foreign base company income (as
defined in section 954(a) without r ^ a r d to section 954(bX5))
and none of its gross insurance income (as defined in sec-
tion 954(bX3XC)) for such taxable year shall be treated as
income in a separate cat^ory, except that this sentence
shall not apply to any income which (without regard to this
sentence) would be treated as financial services income.",
and
(B) by striking out "income (other than high withholding
tax interest and dividends from a noncontroUed section 902
corporation)" and inserting in lieu thereof "passive
income".
(5) Paragraph (2) of section 1201(e) of the Reform Act is 26 USC 904 note.
amended by adding at the end thereof the following new
subparagraph:
"(J) TREATMENT OF AFFILIATED GROUP FILING CONSOLI-
DATED RETURN.—For purposes of this paragraph, all mem-
bers of an affiliated group of corporations filing a consoli-
dated return shall be treated as 1 corporation."
(6) Subparagraph (A) of section 904(dX2) of the 1986 Code is
amended—
(A) by striking out "The term" in clause (ii) and inserting
in lieu thereof "Except as provided in clause (iii), the t e r m ' ,
and
(B) by adding at the end thereof the following new clause:
(iv) CLARIFICATION OF APPLICATION OF SECTION
864 (d) (6).—In determining whether any income is of a
kind which would be foreign personal holding company
income, the rules of section 864(dX6) shall apply only in
the case of income of a controlled foreign corporation."
(7) Subparagraph (F) of section 904(dX3) of the 1986 Code is
amended to read as follows:
"(F) SEPARATE CATEGORY.—For purposes of this para-
graph—
"(i) IN GENERAL.—Except as provided in clause (ii),
the term 'separate c a t ^ o r y ' means any category of
income described in subparagraph (A), (B), (C), (D), or
(E) of paragraph (1).
"(ii) COORDINATION WITH HIGH-TAXED INCOME PROVI-
- SIONS.—
"(I) In determining whether any income of a
controlled foreign corporation is in a separate cat-
egory, subclause (HI) of paragraph (2XAXiii) shall
not apply.
"(II) Ajiy income of the taxpayer which is treated
as income in a separate category under this para-
graph shall be so treated notwithstanding any
provision of paragraph (2); except that the deter-
mination of whether any amount is high-taxed
income shall be made after the application of this
paragraph."
(8) a a u s e (iii) of section 904(dX2XB) of the 1986 Code is
amended to read as follows:
"(iii) REGULATIONS.—The Secretary may by regula-
tions provide that—
"(I) amounts (not otherwise high withholding tax
interest) shall be treated as high withholding tax
102 STAT. 3496 PUBLIC LAW 100-647—NOV. 10, 1988
interest where necessary to prevent avoidance of
the purposes of this subparagraph, and
"(11) a tax shall not be treated as a withholding
tax or other tax imposed on a gross basis if such
tax is in the nature of a prepajnnent of a tax
imposed on a net basis."
(9) Clause (ii) of section 904(dX2XI) of the 1986 Code is
amended by striking out "except to the extent that" and all that
follows down through "and" at the end thereof and inserting in
lieu thereof the following:
"except that—
"(I) such taxes shall be treated as paid or accrued
with respect to shipping income to the extent the
taxpayer establishes to the satisfaction of the Sec-
retary that such taxes were paid or accrued with
respect to such income,
* (II) in the case of a person described in subpara-
graph (CXi), such taxes shall be treated as paid or
accrued with respect to financial services income to
the extent the taxpayer establishes to the satisfac-
tion of the Secretary that such taxes were paid or
accrued with respect to such income, and
"(III) such taxes shall be treated as paid or ac-
crued with respect to high withholding tax interest
to the extent the taxpayer establishes to the satis-
faction of the Secretary that such taxes were paid
or accrued with respect to such income, and".
(10) Clause (i) of section 904(dX2XE) of the 1986 Code is
amended by striking out "during which it was a controlled
foreign corporation" and inserting in lieu thereof "during which
it was a controlled foreign corporation and except as provided in
regulations, the taxpayer was a United States shareholder in
such corporation".
(11) Subparagraph (E) of section 904(dXl) of the 1986 Code is
amended by striking out "dividends" and inserting in lieu
thereof "in the case of a corporation, dividends".
(b) AMENDMENT RELATED TO SECTION 1202 OF THE REFORM ACT.—
(1) Paragraph (7) of section 902(c) of the 1986 Code is
amended—
(A) by striking out "secton 960" and inserting in lieu
thereof "section 960", and
(B) by striking out "this section" the second place it
appears and inserting in lieu thereof "this section and
section 960".
(2) Paragraph (1) of section 902(c) of the 1986 (Dode is amended
by striking out "sections 964 and 986" and inserting in lieu
thereof "sections 964(a) and 986".
26 use 902 note. (3) For purposes of sections 902 and 960 of the 1986 Code, the
increase in earnings and profits of any foreign corporation
under section 1023(eX3XC) of the Reform Act shall be taken into
account ratably over the 10-year period beginning with the
corporation's first taxable year beginning after December 31,
1986.
(4) Paragraph (3) of section 404A(d) of the 1986 Code is
amended by striking out "the amount determined" and insert-
ing in lieu thereof "except £is provided in regulations, the
amount determined".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3497
(c) AMENDMENT RELATED TO SECTION 1203 OF THE REFORM ACT.—
Paragraph (5) of section 904(f) of the 1986 Code is amended by
adding at the end thereof the following new subparsigraph:
"(F) DISPOSITIONS.—If any separate limitation loss for any
taxable year is allocated against any separate limitation
income for such taxable year, except to the extent provided
in regulations, rules similar to the rules of paragraph (3)
shall apply to any disposition of property if gain from such
disposition would be in the income category with respect to
which there was such separate limitation loss."
(d) AMENDMENTS RELATED TO SECTION 1211 OF THE REFORM ACT.—
(1) Subsection (d) of section 865 of the 1986 Code is amended
by adding at the end thereof the following new pargigraph:
"(4) COORDINATION WITH SUBSECTION (C) .—
"(A) GAIN NOT IN EXCESS OF DEPRECIATION ADJUSTMENTS
souRCED UNDER SUBSECTION (c).—Notwithstanding para-
graph (1), any gain from the sale of an intangible shall be
sourced under subsection (c) to the extent such gain does
not exceed the depreciation adjustments with respect to
such intangible.
"(B) SUBSECTION (C) (2) NOT TO APPLY TO INTANGIBLES.—
Paragraph (2) of subsection (c) shall not apply to any gain
from the sale of an intangible."
(2) Subparagraph (A) of section 865(eXl) of the 1986 Code is
amended by striking out "(d), or (f)" and inserting in lieu
thereof "(dXlXB) or (3), or (f)".
(3XA) Clause (ii) of section 865(gXlXA) of the 1986 Code is
amended by striking out "partnership,".
(B) Subsection (h) of section 865 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(5) TREATMENT OF PARTNERSHIPS.—In the case of a partner-
ship, except as provided in regulations, this section shall be
applied at the partner level."
(4) Subsection (f) of section 865 of the 1986 Code is amended to
read as follows:
"(f) STOCK OF AFFILIATES.—If—
"(1) a United States resident sells stock in an affiliate which is
a foreign corporation,
"(2) such sale occurs in a foreign country in which such
afHliate is engaged in the active conduct of a trade or business,
and
"(3) more than 50 percent of the gross income of such affiliate
for the 3-year period ending with the close of such af^iate's
taxable year immediately preceding the year in which the sale
occurred was derived from the active conduct of a trade or
business in such foreign country,
any gain from such sale shall be sourced outside the United States.
For purposes of paragraphs (2) and (3), the United States resident
may elect to treat an affiliate and all other corporations which are
wholly owned (directly or indirectly) by the affiliate as one
corporation."
(5) Effective with respect to taxable years beginning after
December 31, 1987, subparagraph (B) of section 865(eX2) of the
1986 Code is amended to read as follows:
"(B) EXCEPTION.—Subparagraph (A) shall not apply to
^ ^^. any sale of inventory property which is sold for use, disposi-
tion, or consumption outside the United States if an office
102 STAT. 3498 PUBLIC LAW 100-647—NOV. 10, 1988
or other fixed place of business of the taxpayer in a foreign
country materially participated in the sale."
(6XA) Subsection (g) of section 865 of the 1986 Code is
amended by adding at the end thereof the following new para-
graph:
"(3) SPECIAL RULE FOR CERTAIN STOCK SALES BY RESIDENTS OF
PUERTO RICO.—Paragraph (2) shall not apply to the sale by an
individual who was a bona fide resident of Puerto Rico during
the entire taxable year of stock in a corporation if—
"(A) such corporation is engaged in the active conduct of
a trade or business in Puerto Rico, and
"(B) more than 50 percent of its gross income for the
3-year period ending with the close of such corporation's
taxable year immediately preceding the year in which such
sale occurred was derived from the active conduct of a trade
or business in Puerto Rico.
For purposes of the preceding sentence, the taxpayer may elect
to treat a corporation and all other corporations which are
wholly owned (directly or indirectly) by such corporation as one
corporation."
(B) Subsection (i) of section 865 of the 1986 Code is amended
by striking out "and" at the end of paragraph (1), by striking
out the period at the end of paragraph (2) and inserting in lieu
thereof ", and", and by adding at the end thereof the following
new paragraph:
"(3) providing that, subject to such conditions (which may
include provisions comparable to section 877) as may be pro-
vided in such r^^ations, subsections (eXl)(B) and (gX2) shall
not apply for purposes of sections 931,933, and 936."
(7) Subparagraph (B) of section 864(cX4) of the 1986 Code is
amended by striking out "or" at the end of clause (i), by striking
out the period at the end of clause (ii) and inserting in lieu
thereof ; or", and by adding at the end thereof the following
new clause:
"(iii) is derived from the sale or exchange (outside the
United States) through such office or other fixed place
of business of personal property described in section
1221(1), except that this clause shall not apply if the
property is sold or exchanged for use, consumption, or
disposition outside the United States and an office or
other fixed place of business of the taxpayer in a
foreign country participated materially in such sale."
(8) Section 865 of the 1986 Code is amended by redesignating
subsections (h), (i), and (j) as subsections (i), (j), and (k), respec-
tively, and by inserting after subsection (g) the following new
subsection:
"(h) TREATMENT OF GAINS FROM SALE OF CERTAIN STOCK OR INTAN-
GIBLES AND FROM CERTAIN LIQUIDATIONS.—
"(1) IN GENERAL.—In the case of gain to which this subsection
applies—
"(A) such gain shall be sourced outside the United States,
but
"(B) subsections (a), (b), and (c) of section 904 and sections
902, 907, and 960 shall be applied separately with respect to
such gain.
"(2) GAIN TO WHICH SUBSECTION APPLIES.—This subsection
shall apply to—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3499
"(A) G A I N FROM SALE OF CERTAIN STOCK OR INTANGIBLES.—
Any gain—
"(i) which is from the sale of stock in a foreign
corporation or an intangible (as defined in subsection
(dX2)) and which would otherwise be sourced in the
United States under this section,
"(ii) which, under a treaty obligation of the United
States (applied without regard to this section), would be
sourced outside the United States, and
"(iii) with respect to which the taxpayer chooses the
benefits of this subsection.
"(B) GAIN FROM UQUIDATION IN POSSESSION.—Any gain
which is derived from the receipt of any distribution in
liquidation of a corporation—
"(i) which is organized in a possession of the United
States, and
"(ii) more than 50 percent of the gross income of
which during the 3-taxable year period ending with the
close of the taxable year immediately preceding the
taxable year in whicn the distribution is received is
from the active conduct of a trade or business in such
possession."
(9) Subparagraph (A) of section 865(eXl) of the 1986 Code is
amended by striking out "outside the United States" the first
place it appears and inserting in lieu thereof "in a foreign
country".
(10) Subparagraph (B) of section 864(cX4) of the 1986 Code is
amended—
(A) by striking out "(including any gain or loss realized on
the sale or exchange of such property)" in clause (i), and
(B) by striking out ", or gain or loss from the sale or
exchange of stock or notes, bonds, or other evidences of
indebtedness" in clause (ii).
(11) Clause (i) of section 865(gXlXA) of the 1986 Cbde is Aliens.
amended to read as follows—
"(i) any individual who—
"(I) is a United States citizen or a resident alien
and does not have a tax home (as defined in
section 911(dX3)) in a foreign country, or
"(II) is a nonresident Edien and has a tax home
(as so defined) in the United States, and".
(12) Paragraph (2) of section 865(d) of the 1986 Code is
amended by inserting "franchise," after "trade brand,".
(e) AMENDMENTS RELATED TO SECTION 1212 OF THE REFORM ACT.—
(IXA) Paragraph (3) of section 883(c) of the 1986 Code is
amended to read as follows:
"(3) SPECIAL RULES FOR PUBLICLY TRADED CORPORATIONS.—
"(A) EXCEPTION.—Paragraph (1) shall not apply to any
corporation which is organized in a foreign country meeting
the requirements of paragraph (1) or (2) of subsection (a) (as
the case may be) and the stock of which is primarily and
regularly traded on an established securities market in
such foreign country, another foreign country meeting the
requirements of such paragraph, or the United States.
(B) TREATMENT OF STOCK OWNED BY PUBUCLY TRADED
CORPORATION.—Any stock in another corporation which is
owned (directly or indirectly) by a corporation meeting the
102 STAT. 3500 PUBLIC LAW 100-647—NOV. 10, 1988
requirements of subparagraph (A) shall be treated as owned
by individuals who are residents of the foreign country in
which the corporation meeting the requirements of
subparagraph (A) is organized."
(B) Paragraph (1) of section 883(c) of the 1986 Code is
amended—
(i) by striking out "Paragraphs (1) and (2) of subsection
(a)" and inserting in lieu thereof "Paragraph (1) or (2) of
subsection (a) (as the case may be)", and
(ii) by stri^ng out "such paragraphs (1) and (2)" and
inserting in lieu thereof "such paragraph".
(2XA) Paragraphs (1) and (2) of section 883(a) of the 1986 Code
are each amended by striking out "to citizens of the United
States and"
(B) Paragraphs (1) and (2) of section 872(b) of the 1986 Code
are each amended by striking out "to citizens of the United
States and to corporations organized in the United States" and
inserting in lieu thereof "to individual residents of the United
States".
(3XA) The section heading for section 863 of the 1986 Code is
amended to read as follows:
"SEC 863. SPECIAL RULES FOR DETERMINING SOURCE.'*
(B) The table of sections for part I of subchapter N of chapter
1 of the 1986 Code is amended by striking out the item relating
to section 863 and inserting in lieu thereof the following:
"Sec. 863. Special rules for determining source."
(4) Subsection (c) of section 862 is hereby repealed.
(5) Paragraphs (1) and (2) of section 872(b) of the 1986 Code
and paragraphs (1) and (2) of section 883(a) of the 1986 Oxle are
each amended by striking out "operation" and inserting in lieu
thereof "international operation".
(6) Paragraph (1) of section 887(b) of the 1986 Code is
amended—
(A) by striking out "under section 863(c)" and inserting in
lieu thereof "under section 863(cX2)", and
(B) by adding at the end thereof the following new sen-
tence: "To the extent provided in regulations, such term
does not include any income of a kind to which an exemp-
tion under paragraph (1) or (2) of section 883(a) would not
apply."
(f) AMENDBIIENT RELATED TO SECTION 1213 OF THE REFORM ACT.—
Paragraph (2) of section 863(e) of the 1986 Code is amended by
striUng out "foreign country" each place it appears and inserting in
lieu thereof "foreign country (or possession of the United States)".
(g) AMENDMENTS RELATED TO SECTION 1214 OF THE REFORM ACT.—
26 use 861 note. dXA) Paragraph (1) of section 1214(d) of the Reform Act is
amended to read as follows:
"(1) I N GENERAL.—^The amendments made by this section
shall apply to payments made in a taxable year of the payor
b^inning after December 31,1986."
(B) A taxpayer may elect not to have the amendment made by
subparagraph (A) apply and to have section 1214(dXl) of the
Reform Act apply as in effect before such amendment. Such
election shall be made at such time and in such manner as the
Secretary of the Treasury or his delegate may prescribe.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3501
(2) Subparagraph (B) of section 1214(dX2) of the Reform Act is
amended by striking out "section 904(dX2XG)" and inserting in
lieu thereof "section 904(dX2XH)".
(3) Subparagraph (B) of section 861(cXl) of the 1986 Code is
amended—
(A) by striking out "subchapter)" in clause (i) and insert-
ing in lieu thereof "subchapter) or, in the case of a corpora-
tion, is attributable to income so derived by a subsidiary of
such corporation",
(B) by striking out "or chain of subsidiaries of such
corporation" in clause (ii), and
(C) by adding at the end thereof the following new
sentence:
"For purposes of this subparagraph, the term 'subsidiary'
means any corporation in which the corporation referred to in
this subparagraph owns (directly or indirectly) stock meeting
the requirements of section 1504(aX2) (determined by substitut-
ing '50 percent' for '80 percent' each place it appears)."
(4) Paragraph (1) of section 210501)) of the 1986 Code is
amended by striking out "section 861(c), if any interest thereon
would be treated by reason of section 861(aXlXA) as income
from sources without the United States" and inserting in lieu
thereof "section 871(iX3), if any interest thereon would not be
subject to tax by reason of section 871(iXl)".
(5) Paragraph (2) of section 864(c) of the 1986 CJode is amended
by striking out the last sentence.
(6) Paragraph (3) of section 907(c) of the 1986 Ckxie is amended:
(A) by striking out subparagraph (B) and redesignating
subparagraphs (C) and (D) as subparagraphs (B) and (C),
respectively, and
(B) by striking out "and dividends described in subpara-
graph (B)".
(7) Subsection (a) of section 1442 of the 1986 Code is
amended—
(A) by striking out "and the references in" and inserting
in lieu thereof "the references in", and
(B) by inserting before the period at the end thereof the
following: ", and the reference in section 1441(cX10) to
section 871(iX2) shall be treated as referring to section
881(d)".
(h) AMENDMENTS RELATED TO SECTION 1215 OF THE REFORM ACT.—
(1) Paragraph (4) of section 864(e) of the 1986 Code is amended
to read as follows:
"(4) BASIS OF STOCK IN NONAFFILIATED IO-PERCENT OWNED COR-
PORATIONS ADJUSTED FOR EARNINGS AND PROFITS CHANGES.—
"(A) I N GENERAL.—For purposes of allocating and appor-
tioning expenses on the basis of assets, the adjusted basis of
any stock in a nonaffiliated 10-percent owned corporation
shall be—
"(i) increased by the amount of the earnings and
profits of such corporation attributable to such stock
and accumulated during the period the taxpayer held
such stock, or
"(ii) reduced (but not below zero) by any deficit in
earnings and profits of such corporation attributable to
such stock for such period.
102 STAT. 3502 PUBLIC LAW 100-647—NOV. 10, 1988
"(B) NONAFFILIATED IO-PERCENT OWNED CORPORATION.—
For purposes of this paragraph, the term 'nonaffiliated
10-percent owned corporation' means any corporation if—
"(i) such corporation is not included in the taxpayer's
affiliated group, and
"(ii) members of such affiliated group own 10 percent
or more of the total combined voting power of all
classes of stock of such corporation entitled to vote.
"(C) EARNINGS AND PROFITS OF LOWER TIER CORPORATIONS
TAKEN I N T O ACCOUNT.—
"(i) IN GENERAL.—If, by reason of holding stock in a
nonaffiliated 10-percent owned corporation, the tax-
payer is treated under clause (iii) as owning stock in
another corporation with respect to which the stock
ownership requirements of clause (ii) are met, the
adjustment under subparagraph (A) shall include an
adjustment for the amount of the earnings and profits
(or deficit therein) of such other corporation which are
attributable to the stock the taxpayer is so treated as
owning and to the period during which the taxpayer is
treated as owning such stock.
"(ii) STOCK OWNERSHIP REQUIREMENTS.—The stock
ownership requirements of this clause are met with
respect to any corporation if members of the taxpayer's
affiliated group own (directly or through the applica-
tion of clause (iii)) 10 percent or more of the total
combined voting power of all classes of stock of such
corporation entitled to vote.
"(iii) STOCK OWNED THROUGH ENTITIES.—For purposes
of this subparagraph, stock owned (directly or in-
directly) by a corporation, partnership, or trust shall be
treated as being owned proportionately by its share-
holders, partners, or beneficiaries. Stock considered to
be owned by a person by reason of the application of
the preceding sentence, shall, for purposes of applying
such sentence, be treated as actually owned by such
person.
"(D) COORDINATION WITH SUBPART F, ETC.—For purposes of
this paragraph, proper adjustment shall be made to the
earnings and profits of any corporation to take into account
any earnings and profits included in gross income under
section 951 or under any other provision of this title and
reflected in the adjusted basis of the stock."
(2XA) Paragraph (1) of section 864(e) of the 1986 Code is
amended by striking out "from sources outside the United
States".
(B) Subsection (h) of section 936 of the 1986 Code is amended
by redesignating paragraph (7) as paragraph (8) and by insert-
ing after paragraph (6) the following new paragraph:
"(7) SECTION 864(eKi) NOT TO APPLY.—This subsection shall
be applied as if section 864(eXl) (relating to treatment of affili-
ated groups) had not been enacted."
(C) The heading for part I of subchapter N of chapter 1 of the
1986 Code is amended to read as follows:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3503
TART I—SOURCE RULES AND OTHER GENERAL
RULES RELATING TO FOREIGN INCOME".
(D) The table of parts for subchapter N of chapter 1 of the
1986 Code is amended by striking out the item relating to part I
and inserting in lieu thereof the following:
"Part I. Source rules and other general rules relating to foreign income."
(3) Paragraph (3) of section 864(e) of the 1986 Code is amended
by striking out the last sentence and inserting in lieu thereof
the following: "A similar rule shall apply in the case of the
portion of any dividend (other than a qualifying dividend as
defined in section 243(b)) equal to the deduction allowable under
section 243 or 245(a) with respect to such dividend and in the
case of a like portion of any stock the dividends on which would
be so deductible and would not be qualif}dng dividends (as so
defined)."
(4XA) Paragraph (5) of section 864(e) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(D) TREATMENT OF BANK HOLDING COMPANIES.—TO the
extent provided in regulations—
"(i) a bank holding company (within the meaning of
section 2(a) of the Bank Holding Company Act of 1956),
and
"(ii) any subsidiary of a financial institution de-
scribed in section 581 or 591 or of any bank holding
company if such subsidiary is predominantly engaged
(directly or indirectly) in the active conduct of a bank-
ing, financing, or similar business,
shall be treated as a corporation described in subparagraph
(C)."
(B) Subparagraph (B) of section 864(eX5) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "This subparagraph shall not apply for purposes of para-
graph (6)."
(5) Paragraph (6) of section 864(e) of the 1986 (Dode is amended
by striking out "directly allocable and apportioned" and insert-
ing in lieu thereof "directly allocable or apportioned".
(6XA) Paragraph (7) of section 864(e) of the 1986 Code is
amended by striking out "and" at the end of subparagraph (B),
by striking out the period at the end of subparagraph (C) and
inserting in lieu thereof a comma, and by adding at the end
thereof the following new subparagraphs:
"(D) for direct allocation of interest expense in the case of
indebtedness resulting in a disallowance under section
246A,
"(E) for appropriate adjustments in the application of
paragraph (3) in the case of an insurance company, and
"(F) that this subsection shall not apply for purposes of
any provision of this subchapter to the extent the Secretary
determines that the application of this subsection for such
purposes would not be appropriate."
(B) Subsection (e) of section 864 of the 1986 Code is amended
by striking out "(except as provided in regulations)" in the
material preceding paragraph (1).
102 STAT. 3504 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 864 note. (7) Paragraph (2) of section 1215(c) of the Reform Act is
amended to read as follows:
"(2) TRANSITIONAL RULES.—
"(A) G E N E R A L PHASE-IN.—
"(i) I N GENERAL.—In the case of the 1st 3 taxable
years of the taxpayer beginning after December 31,
1986, the amendments made by this section shall not
apply to interest expenses paid or accrued by the tax-
payer during the taxable year with respect to an aggre-
gate amount of indebtedness which does not exceed the
general phase-in amount.
"(ii) GENERAL PHASE-IN AMOUNT.—Except as provided
in clause (iii), the general phase-in amount for purposes
of clause (i) is the applicable percentage (determined
under the following table) of the aggregate amount of
indebtedness of the taxpayer outstanding on Novem-
ber 16,1985:
The applicable
"In the case of the: percentage is:
1st taxable year 75
2nd taxable year 50
3rd taxable year 25.
"(iii) LOWER LIMIT WHERE TAXPAYER REDUCES INDEBT-
EDNESS.—For purposes of applying this subparagraph
' to interest expenses attributable to any month, the
general phase-in amount shall in no event exceed the
lowest amount of indebtedness of the taxpayer
outstanding as of the close of any preceding month
beginning after November 16, 1985. To the extent pro-
vided in regulations, the average amount of indebted-
ness outstanding during any month shall be used (in
lieu of the amount outstanding as of the close of such
month) for purposes of the preceding sentence.
"(B) ClONSOLIDATION RULE NOT TO APPLY TO CERTAIN
INTEREST.—
"(i) I N GENERAL.—In the case of the 1st 5 taxable
years of the taxpayer beginning after December 31,
1986—
"(I) subparagraph (A) shall not apply for pur-
poses of paragraph (1) of section 864(e) of the In-
ternal Revenue Code of 1986 (as added by this
section), but
"(II) such paragraph (1) shall not apply to in-
terest expenses paid or accrued by the taxpayer
during the taxable year with respect to an aggre-
gate amount of indebtedness which does not exceed
the special phase-in amount,
"(ii) SPECIAL PHASE-IN AMOUNT.—The special phase-in
amount for purposes of clause (i) is the sum of—
"(I) the general phase-in amount as determined
for purposes of subparagraph (A),
"(II) the 5-year phase-in amount, and
"(HI) the 4-year phase-in amount.
For purposes of applying this subparagraph to interest
expense attributable to any month, the special phase-in
amount shall in no event exceed the limitation deter-
mined imder subparagraph (AXiii)-
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3505
"(iii) 5-YEAR PHASE-IN AMOUNT.—The 5-year phase-in
amount is the lesser of—
"(I) the applicable percentage (determined under
the following table for purposes of this subclause)
of the 5-year debt amount, or
"(II) t h e applicable percentage (determined
under t h e following table for purposes of this
subclause) of the 5-year debt amount reduced by
paydowns:
The applicable The applicable
"In the case of the: '^l':""*?!*/?'" ^nnr^!!^?''
purposes of purposes of
subclause (I) is: subclause (II) is:
1st taxable year 8% 10
2nd taxable year 16% 25
3rd taxable year 25 50
4th taxable year 33% 100
5th taxable year 16% 100.
"(iv) 4-YEAR PHASE-IN AMOUNT.—The 4-year phase-in
amount is the lesser of—
"(I) the applicable percentage (determined under
the following table for purposes of this subclause)
of the 4-year debt amount, or
"dD t h e applicable percentage (determined
under t h e following table for purposes of this
subclause) of the 4-year debt amount reduced by
paydowns to the extent such paydowns exceed the
5-year debt amount:
The applicable The applicable
.., .. ,.. percentage for percentage for
"In the case of the: %urposls of purposes of
subclause (I) is: subclause (II) is:
1st taxable year 5 6V*
2nd taxable year 10 16%
3rd taxable year 15 31V2
4th taxable year 20 100
5th taxable year 0 0.
"(v) 5-YEAR DEBT AMOUNT.—The term '5-year debt
amount' means the excess (if any) of—
"(X) the amount of the outstanding indebtedness
of the taxpayer on May 29,1985, over
"(11) the amount of the outstaiiding indebtedness
of the taxpayer as of the close of December 31,
1983.
The 5-year debt amount shall not exceed the aggregate
amount of indebtedness of the taxpayer outstanding on
November 16,1985.
"(vi) 4-YEAR DEBT AMOUNT.—The term *4-year debt
amount' means the excess (if any) of—
"(I) the amount referred to in clause (v)(n), over
"(II) the amount of the outstanding indebtedness
of the taxpayer as of the close of December 31,
1982.
The 4-year debt amount shall not exceed the aggregate
amount t}f inddbtedness of the taxpayer outstanding on
November 16,1985, reduced l)y the^year debt amount.
102 STAT. 3506 PUBLIC LAW 100-647—NOV. 10, 1988
"(vii) PAYDOWNS.—For purposes of applying this
subparagraph to interest expenses attributable to any
month, the term 'paydowns' means the excess (if any)
of—
"(I) the aggregate amount of indebtedness of the
taxpayer outstanding on November 16, 1985, over
"(II) the lowest amount of indebtedness of the
taxpayer outstanding as of the close of any preced-
ing month beginning after November 16, 1985 (or,
to the extent provided in regulations under
subparagraph (A)(iii), the average amount of
indebtedness outstanding during any such month).
"(C) COORDINATION OF SUBPARAGRAPHS (A) A N D ( B ) . — I n
applying subparagraph (B), there shall first be taken into
account indebtedness to which subparagraph (A) applies.
"(D) SPECIAL RULES.—
"(i) In the case of the 1st 9 taxable years of the
taxpayer beginning after December 31, 1986, the
amendments made by this section shall not apply to
interest expenses paid or accrued by the taxpayer
during the taxable year with respect to an aggregate
amount of indebtedness which does not exceed the
applicable percentage (determined under the following
table) of the indebtedness described in clause (iii) or (iv):
The applicable
"In the case of the: percentage is:
1st taxable year 90
2nd taxable year 80
3rd taxable year 70
4th taxable year 60
5th taxable year 50
6th taxable year 40
7th taxable year 30
8th taxable year 20
9th taxable year 10.
"(ii) The provisions of this subparagraph shall apply
in lieu of the provisions of subparagraphs (A) and (B).
Oklahoma. "(iii) INDEBTEDNESS OUTSTANDING ON MAY 29, 1985.—
Indebtedness is described in this clause if it is indebted-
ness (which was outstanding on May 29, 1985) of a
corporation incorporated on June 13, 1917, which has
its principal place of business in Bartlesville, Okla-
homa.
New York. "(iv) INDEBTEDNESS OUTSTANDING ON MAY 29, 1985.—
Indebtedness is described in this clause if it is indebted-
ness (which was outstanding on May 29, 1985) of a
member of an affiliated group (as defined in section
1504(a)), the common parent of which was incorporated
on August 26, 1926, and has its principal place of
business in Harrison, New York.
"(E) TREATMENT OF AFFIUATED GROUP.—For purposes of
this paragraph, all members of the same affiliated group of
corporations (as defined in section 864(e)(5)(A) of the In-
ternal Revenue Code of 1986, as added by this section) shall
be treated as 1 taxpayer whether or not such members filed
a consolidated return.
"(F) ELECTION TO HAVE PARAGRAPH NOT APPLY.—A tax-
payer may elect (at such time and in such manner as the
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3507
Secretary of the Treasury or his delegate may prescribe) to
have this paragraph not apply. In the case of members of
the same af^liated group (as so defined), such an election
may be made only if each member consents to such
election."
(i) AMENDMENTS RELATED TO SECTION 1221 OF THE REFORM ACT.—
dXA) Subparagraph (C) of section 953(cX3) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence:
"An election under this subparagraph made for any taxable
year shall not be effective if the corporation (or any prede-
cessor thereof) was a disqualified corporation for the tax-
able year for which the election was made or for any prior
taxable year beginning after 1986."
(B) Clause (i) of section 953(cX3XD) of the 1986 Code is
amended to read as follows:
"(i) PERIOD DURING WHICH ELECTION IN EFFECT.—
"(I) I N GENERAL.—Except as provided in
subclause (II), any election under subparagraph (C)
shall apply to the taxable year for which made and
all subsequent taxable years unless revoked with
the consent of the Secretary.
"(II) TERMINATION.—If a foreign corporation
which made an election under subparagraph (C) for
any taxable year is a disqualified corporation for
any subsequent taxable year, such election shall
not apply to any taxable year beginning after such
subsequent taxable year.
(C) Paragraph (3) of section 953(c) of the 1986 Clode is amended
by adding at the end thereof the following new subparagraph:
"(E) DISQUALIFIED CORPORATION.—For purposes of this
paragraph the term 'disqualified corporation' means, with
respect to any taxable year, any foreign corporation which
is a controlled foreign corporation for an uninterrupted
period of 30 days or more during such taxable year (deter-
mined without regard to this subsection) but only if a
United States shareholder (determined without regard to
this subsection) owns (within the meaning of section 958(a))
stock in such corporation at some time during such taxable
year."
(2XA) Paragraph (1) of section 953(c) of the 1986 Code is
amended by striking out "and" at the end of subparagraph (A),
by striking out the period at the end of subparagraph (B) and
inserting in lieu thereof ", and", and by adding at the end
thereof the following new subparagraph:
"(C) the pro rata share referred to in section 951(aXl)(AXi)
shall be determined under paragraph (5) of this subsection."
(B) Subsection (c) of section 953 of the 1986 Code is amended
by redesignating paragraph (5) as paragraph (6) and by insert-
ing after paragraph (4) the following new paragraph:
"(5) DETERMINATION OF PRO RATA SHARE.—
"(A) I N GENERAL.—The pro rata share determined under
this paragraph for any United States shareholder is the
lesser of—
"(i) the amount which would be determined under
paragraph (2) of section 951(a) if—
102 STAT. 3508 PUBLIC LAW 100-647—NOV. 10, 1988
"(I) only related person insurance income were
taken into account,
"(II) stock owned (within the meaning of section
958(a)) by United States shareholders on the last
day of the taxable year were the only stock in the
foreign corporation, and
"(III) only distributions received by United
States shareholders were taken into account under
subparagraph (B) of such paragraph (2), or
"(ii) the amount which would be determined under
paragraph (2) of section 951(a) if the entire earnings
and profits of the foreign corporation for the taxable
year were subpart F income.
Regulations. "(B) COORDINATION WITH OTHER PROVISIONS.—The Sec-
retary shall prescribe regulations providing for such modi-
fications to the provisions of this subpart as may be nec-
essary or appropriate by reason of subparagraph (A)."
(3)(A) Paragraph (2) of section 953(c) of the 1986 Code is
amended by striking out "with respect to which the primary
insured is" and inserting in lieu thereof "with respect to which
the person (directly or indirectly) insured is".
(B) Subparagraph (A) of section 953(cX3) of the 1986 Code is
amended—
(i) by striking out "persons who are the primary insured"
and inserting in lieu thereof "persons who are (directly or
indirectly) insured", and
(ii) by striking out "to any such primary insured" and
inserting in lieu thereof "to any such person .
26 u s e 953 note. (C) The amendments made by this paragraph to the extent
such amendments add the phrase "(directly or indirectly)" shall
apply only to taxable years beginning after December 31, 1987.
(4)(A) Subsection (c) of section 953 of the 1986 Code (as amend-
ed by paragraph (2)) is amended by redesignating paragraph (6)
as paragraph (7) and by inserting after paragraph (5) the follow-
ing new paragraph:
"(6) RELATED PERSON.—For purposes of this subsection—
"(A) I N GENERAL.—Except as provided in subparagraph
(B), the term 'related person' has the meaning given such
term by section 954(dX3).
"(B) TREATMENT OF CERTAIN LIABILITY INSURANCE POU-
ciES.—In the case of any policy of insurance covering liabil-
ity arising from services performed as a director, officer, or
employee of a corporation or as a partner or employee of a
partnership, the person performing such services and the
entity for which such services are performed shall be treat-
ed as related persons."
(B) Paragraphs (2) and (3XA) of section 953(c) of the 1986 Code
are each amended by striking out "(within the meeming of
section 954(dX3))".
(5) Paragraph (2) of section 953(c) of the 1986 Code is amended
by striking out "insurance income attributable" and inserting
in lieu thereof "insurance income (within the meaning of
subsection (a)) attributable".
26 u s e 952 note. (6) For purposes of applying section 952(c)(lXA) of the 1986
Code, the earnings and profits of any corporation shall be
determined without regard to any increase in earnings and
profits under section 1023(eX3XC) of the Reform Act.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3509
(7) Subsection (b) of section 953 of the 1986 Code is amended—
(A) by striking out paragraph (1) and redesignating para-
graphs (2), (3), and (4) as paragraphs (1), (2), and (3), respec-
tively,
(B) by striking out subparagraph (A) of paragraph (1) (as
so redesignated) and inserting in lieu thereof the following:
"(A) The small life insurance company deduction.", and
(C) by striking out "(other than those taken into account
under paragraph (3))" in paragraph (3) (as so redesignated).
(8) Subparagraph (B) of section 953(cX3) of the 1986 Code is
amended—
(A) by striking out "related person insursmce income"
and inserting in lieu thereof "related person insurance
income (determined on a gross basis)", and
(B) by striking out "its insurance income" and inserting
in lieu thereof "its insurance income (as so determined)".
(9) Subclause (H) of section 953(cX3XCXi) of the 1986 Code is
amended—
(A) by striking out "all benefits" and inserting in lieu
thereof "all benefits (other than with respect to section
884)", and
(B) by striking out "under any income tax treaty" and
inserting in lieu thereof "granted by the United States
under any treaty".
(10) Paragraph (7) of section 861(a) of the 1986 Code is
amended to read as follows:
"(7) Amounts received as underwriting income (as defined in
section 832(bX3)) derived from the issuing (or reinsuring) of any
insurance or annuity contract—
"(A) in connection with property in, liability arising out
of an activity in, or in connection with the lives or health of
residents of, the United States, or
"(B) in connection with risks not described in subpara-
graph (A) as a result of any arrangement whereby another
corporation receives a substantially equal amoimt of pre-
miums or other consideration in respect to issuing (or
reinsuring) any insurance or annuity contract in connection
with property in, liability arising out of activity in, or in
connection with the lives or health of residents of, the
United States."
(11) Subparagraph (A) of section 955(aX2) of the 1986 Code is
amended by striking out "b^;inning before 1987" and inserting
in lieu thereof " b ^ i n n i n g before 1987 (to the extent such
amount exceeds the sum of the decreases in qualified invest-
ments determined under this paragraph for prior taxable years
beginning after 1986)".
(12) Paragraphs (6) and (7) of section 954(b) of the 1986 Code
are each amended Jby striking out "(determined without regard
to the exclusion under paragraph (2) of this subsection)".
(13XA) Subparagraph (C) of section 1221(gX3) of the Reform
Act is amended— 26 USC 954 note,
(i) by striking out "July 9" and inserting in lieu thereof
"June 9", and
(ii) by striking out "March 31, 1982" and inserting in lieu
thereof "November 3,1981".
(B) Subparagraph (D) of section 1221(gX3) of the Reform Act is
amended—
102 STAT. 3510 PUBLIC LAW 100-647—NOV. 10, 1988
(i) by striking out "as of August 16,1986, under a reinsur-
ance contract in effect on such date" and inserting in lieu
thereof "under a reinsurance contract",
(ii) by striking out "the preceding sentence" and inserting
in lieu thereof "this subparagraph", and
(iii) by adding at the end thereof the following: "For
purposes of this paragraph, the amount of qualified reinsur-
ance income shall not exceed the amount of insurance
income from reinsurance contracts for calendar year 1985.
In the case of controlled foreign corporations described in
subparagraph (C)(ii), the preceding sentence shall not apply
and the qualified reinsurance income of any such corpora-
tion shall not exceed such corporation's proportionate share
of $27,000,000 (determined on the basis of respective
amounts of qualified reinsurance income determined with-
out regard to this subparagraph)."
(14)(A) Paragraph (3) of section 954(d) of the 1986 Code is
amended by striking out "50 percent or more" each place it
appears and inserting in lieu thereof "more than 50 percent".
(B) Clause (ii) of section 861(c)(2XB) of the 1986 Code is amend-
ed to read as follows:
"(ii) such section shall be applied by substituting *10
percent or more' for 'more than 50 percent' each place
it appears."
(15) Subsection (b) of section 951 of the 1986 Code is amended
by striking out "section 957(d)" and inserting in lieu thereof
"section 957(c)".
(16) Subsection (c) of section 952 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) SPECIAL RULE FOR DETERMINING EARNINGS AND PROFITS.—
For purposes of this subsection, earnings and profits of any
controlled foreign corporation shall be determined without
regard to paragraphs (4), (5), and (6) of section 312(n). Under
regulations, the preceding sentence shall not apply to the extent
it would increase earnings and profits by an amount which was
previously distributed by the controlled foreign corporation."
(17) Subparagraph (A) of section 881(cX4) of the 1986 Code is
amended by strilang out clauses (ii), (iii), (iv), and (v) and
inserting in lieu thereof the following:
"(ii) Paragraph (4) of section 954(b) (relating to excep-
tion for certain income subject to high foreign taxes).
"(iii) Clause (i) of section 954(c)(3)(A) (relating to cer-
tain income received from related persons)."
(18) Subparagraph (B) of section 954(c)(1) of the 1986 Code is
amended by striking out "or" at the end of clause (i), by
redesignating clause (ii) as clause (iii), and by inserting after
clause (i) the following new clause:
"(ii) which is an interest in a trust, partnership, or
REMICor".
(19)(A) Subsection (a) of section 6046 of the 1986 Code is
amended by striking out "and" at the end of paragraph (2), by
redesignating paragraph (3) as paragraph (4), and by inserting
after paragraph (2) the following new paragraph:
"(3) each person (not described in paragraph (2)) who, at any
time after January 1, 1987, is treated as a United States share-
holder under section 953(c) with respect to a foreign corporation,
and".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3511
(B) Subsection (b) of section 6046 of the 1986 Code is amended
by striking out "subsection (aX2)" and inserting in lieu thereof
"paragraph (2) or (3) of subsection (a)".
(C) Subsection (a) of section 6046 of the 1986 Code is amended
by adding at the end thereof the following new sentence:
"In the case of a foreign corporation with respect to which any
person is treated as a United States shareholder under section
953(c), paragraph (1) shall be treated as including a reference to each
United States person who is an officer or director of such corpora-
tion."
(20) Subparagraph (B) of section 954(cXl) of the 1986 Code is
amended by striking out the last sentence and inserting in lieu
thereof the following:
"In the case of any regular dealer in property, gains and losses
from the sale or exchange of any such property or arising out of
bona fide hedging transactions reasonably necessary to the
conduct of the business of being a dealer in such property shall
not be taken into account under this subparagraph. Gains and
losses from the sale or exchange of any property which, in the
hands of the controlled foreign corporation, is property de-
scribed in section 1221(1) also shall not be taken into account
under this subparagraph."
(21) Subsection (c) of section 953 (as amended by this subsec-
tion) is amended by striking out paragraph (7) and inserting in
lieu thereof the following:
"(7) (COORDINATION WITH SECTION 1248.—For purposes of sec-
tion 1248, if any person is (or would be but for paragraph (3))
treated under parsigraph (1) as a United States shareholder with
respect to any foreign corporation which would be taxed under
subchapter L if it were a domestic corporation and which is (or
would be but for paragraph (3)) treated under paragraph (1) as a
controlled foreign corporation—
"(A) such person shall be treated as meeting the stock
ownership requirements of section 1248(aX2) with respect to
such foreign corporation, and
"(B) such foreign corporation shall be treated as a con-
trolled foreign corporation.
"(8) REGULATIONS.—The Secretary shall prescribe such regu-
lations as may be necessary to carry out the purposes of this
subsection, including—
"(A) regulations preventing the avoidance of this subsec-
tion through cross insurance arrangements or otherwise,
and
"(B) regulations which may provide that a person will not
be treated as a United States shareholder under paragraph
(1) with respect to any foreign corporation if neither such
person (nor any related person to such person) is (directly or
indirectly) insured under any policy of insurance or reinsur-
ance issued by such foreign corporation."
(22) Subclause (III) of section 952(cXlXBXiii) of the 1986 Code is
amended by striking out "insurance income" and inserting in
lieu thereof "insurance income or foreign personal holding
company income,".
(23) Clause (iii) of section 952(cXlXB) of the 1986 Code is
amended by redesignating subclauses (III) and (IV) as
subclauses (V) and (VI), respectively, and by inserting after
subclause (II) the following new subclauses:
102 STAT. 3512 PUBLIC LAW 100-647—NOV. 10, 1988
"(III) foreign base company sales income,
"(IV) foreign base company services income,".
(24) Clause (ii) of section 952(c)(lXB) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "In determining the deficit attributable to qualified
activities described in clause (iiiXIH) or (IV), deficits in earnings
and profits (to the extent not previously taken into account
under this section) for taxable years beginning after 1962 and
' before 1987 also shall be taken into account. In the case of the
qualified activity described in clause (iiiXH), the rule of the
preceding sentence shall apply, except that '1982' shall be sub-
stituted for '1962'."
(25XA) Paragraph (1) of section 952(c) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(C) CERTAIN DEFICITS OF MEMBER OF THE SAME CHAIN OF
CORPORATIONS MAY BE TAKEN INTO ACCOUNT.—
"(i) IN GENERAL.—A Controlled foreign corporation
may elect to reduce the amount of its subpart F income
for any taxable year which is attributable to any quali-
fied activity by the amount of any deficit in earnings
and profits of a qualified chain member for a taxable
year ending with (or within) the taxable year of such
controlled foreign corporation to the extent such deficit
is attributable to such activity. To the extent any defi-
cit reduces subpart F income under the preceding sen-
tence, such deficit shall not be taken into account
under subparagraph (B).
"(ii) QuAUFiED CHAIN MEMBER.—For purposes of this
subparagraph, the term 'qualified chain member'
means, with respect to any controlled foreign corpora-
tion, any other corporation which is created or orga-
nized under the laws of the same foreign country as the
controlled foreign corporation but only if—
"(I) all the stock of such other corporation (other
than directors' qualifying shares) is owned at all
times during the taxable year in which the deficit
arose (directly or through 1 or more corporations
other than the common parent) by such controlled
foreign corporation, or
"(II) all the stock of such controlled foreign cor-
poration (other than directors' qualifjdng shares) is
owned at all times during the taxable year in
which the deficit arose (directly or through 1 or
more corporations other th£m the common parent)
by such other corporation,
"(iii) CJooRDiNATiON.—This subparagraph shall be ap-
plieid after subparagraphs (A) and (B).
(B) Subparagraph (B) of section 954(cX3) of the 1986 Code is
amended by inserting before the period at the end thereof the
following: "or creates (or increases) a deficit which under sec-
tion 952(c) may reduce the subpart F income of the payor or
another controlled foreign corporation",
(j) AMENDMENT RELATED TO SECTION 1224 OF THE REFORM ACT.—
Paragraph (2) of section 901(g) of the 1986 Code and section
936(dX3)(B) of the 1986 Code are each amended by striking out
"section 957(c)" and inserting in lieu thereof "section 957(c) (as in
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3513
effect on the day before the date of the enactment of the Tax Reform
Act of 1986)".
QO AMENDMENT RELATED TO SECTION 1225 OP THE REFORM Acrr.—
Subsection (c) of section 1225 of the Reform Act is amended by 26 USC 535 note.
striking out "March 1,1986" and inserting in lieu thereof "January
1,1986".
G) AMENDMENTS RELATED TO SECTION 1226 OF THE REFORM ACT.—
(1) Subsection (a) of section 246A of the 1986 Code is amended
by striking out the last sentence.
(2XA) Paragraph (8) of section 245 of the 1986 Code is
amended to read as follows:
"(8) DISALLOWANCE OF FOREIGN TAX CREDIT.—No credit shall
be allowed under section 901 for any taxes paid or accrued (or
treated as paid or accrued) with respect to the United States-
source portion of any dividend received by a corporation from a
qualified 10-percent-owned foreign corporation."
(6) Subsection (a) of section 245 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(10) (COORDINATION WITH TREATIES.—If^
"(A) any portion of a dividend received by a corporation
from a qualified 10-percent-owned foreign corporation
would be treated as from sources in the United States
under paragraph (9),
"(B) under a treaty obligation of the United States (ap-
plied without r ^ a r d to this subsection), such portion would
be treated as arising from sources outside the United
States, and
"((D) the taxpayer chooses the benefits of this paragraph,
this subsection shall not apply to such dividend (but subsections
(a), 0>), and (c) of section 904 and sections 902, 907, and 960 shall
be apphed separately with respect to such portion of such
dividend)."
(3) Subsection (a) of section 245 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(11) COORDINATION WITH SECTION 1248.—For purposes of this
subsection, the term 'dividend' does not include any amount
treated as a dividend under section 1248."
(m) AMENDMENTS RELATED TO SECTION 1228 OF THE REFORM ACT.—
(1) Subsection (a) of section 1228 of the Reform Act is amended 26 use 897 note.
by striking out "and" at the end of paragraph (3), and by
striking out paragraph (4) and inserting in lieu thereof the
following:
"(4) the transfer, sale, exchange, or other disposition is part of
a single i n t ^ r a t e d plan, whereby the stock of the corporation
described in paragraph (1) becomes owned directly by the 2
corporations specifically referred to in subsection (b) or by such
2 corporations and by 1 or both of their jointly owned direct
subsidiaries,
"(5) within 20 days after each transfer, sale, exchange, or
other disposition, the person making such transfer, sale, ex-
change, or other disposition notifies the Internal Revenue Serv-
ice of the transaction, the date of the transad^ion, the b a a s of
the stock involved, the holding period for such^stock, and^suc^
other mf<n*mation as the Internal Revenue Sendce^may reqpiire,
and
102 STAT. 3514 PUBLIC LAW 100-647—NOV. 10, 1988
"(6) the integrated plan is completed before the date 4 years
after the date of the enactment of the Technical and Miscellane-
ous Revenue Act of 1988.
In the case of any underpayment attributable to a failure to meet
any requirement of this subsection, the period during which such
underpayment may be assessed shall in no event expire before the
date 5 years after the date of the enactment of the Technical and
Miscellaneous Revenue Act of 1988."
(2) Subsection (c) of section 1228 of the Reform Act is hereby
repealed,
(n) AMENDMENTS RELATED TO SECTION 1231 OF THE REFORM ACT.—
26 use 936 note. (1) Subparagraph (A) of section 1231(g)(2) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "In the case of any transfer (or license) which is not to a
foreign person, the preceding sentence shall be applied by
substituting 'August 16,1986' for 'November 16,1985'."
(2) Subparagraph (B) of section 1231(g)(2) of the Reform Act is
amended by striking out "was made" and inserting in lieu
thereof ", if any, weis made".
26 use 936 note. (3) Subsection (g) of section 1231 of the Reform Act is amended
by adding at the end thereof the following new paragraph:
"(5) TRANSITIONAL RULE FOR INCREASE IN GROSS INCOME TEST.—
"(A) IN GENERAL.—If—
"(i) a corporation fails to meet the requirements of
subparagraph (B) of section 936(aX2) of the Internal
Revenue Code of 1986 (as amended by subsection (dXD)
for any taxable year beginning in 1987 or 1988,
"(ii) such corporation would have met the require-
ments of such subparagraph (B) if such subparagraph
had been applied without regard to the amendment
made by subsection (dXD, and
"(iii) 75 percent or more of the gross income of such
corporation for such taxable year (or, in the case of a
taxable year beginning in 1988, for the period consist-
ing of such taxable year and the preceding taxable
year) was derived from the active conduct of a trade or
business within a possession of the United States, such
corporation shall nevertheless be treated as meeting
the requirements of such subparagraph (B) for such
taxable year if it elects to reduce the amount of the
qualified possession source investment income for the
taxable year by the amount of the shortfall determined
under subparagraph (B) of this paragraph.
"(B) DETERMINATION OF SHORTFALL.—The shortfall deter-
mined under this subparagraph for any taxable year is an
amount equal to the excess of—
"(i) 75 percent of the gross income of the corporation
for the 3-year period (or part thereof) referred to in
section 936(aX2)(A) of such Code, over
"(ii) the amount of the gross income of such corpora-
tion for such period (or part thereof) which was derived
from the active conduct of a trade or business within a
possession of the United States.
"(C) SPECIAL RULE.—Any income attributable to the
investment of the amount not treated as qualified posses-
sion source investment income under subparagraph (A)
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3515
shall not be treated as qualified possession source invest-
ment income for any taxable year.'
(4) Subparagraph (B) of section 1231(aXl) of the Reform Act is
amended by striking out "at the end thereof and inserting in
lieu thereof "at the end of the material relating to payment of
cost sharing".
(5XA) Qause (ii) of section 936(dX4XA) of the 1986 Ckxie is Puerto Rico.
amended to read as follows:
"(ii) in accordance with a specific authorization
granted by the Conmiissioner of Financial Institutions
of Puerto Rico pursuant to r^ulations issued by such
Commissioner."
(B) Qauses (i) and (ii) of section 936(dX4XC) of the 1986 Code
are each amended by striking out "the Secretary of the Treas-
ury of Puerto Rico" and inserting in Ueu thereof "the (Dommis-
sioner of Financial Institutions of Puerto Rico",
(o) AMENDMENT RELATED TO SECTION 1234 OF THE REFORM ACT.—
Subsection (d) of section 6039E of the 1986 Code is amended by
adding at the end thereof the following new sentence:
"Nothing in the preceding sentence shall be construed to require the
disclosure of information which is subject to section 245A of the
Immigration and Nationality Act (as in effect on the date of the
enactment of this sentence)."
(p) AMENDMENTS RELATED TO SECTION 1235 OF THE REFORM ACT.—
(1) Paragraph (1) of section 1291(d) of the 1986 Code is
amended to read as follows:
"(1) IN GENERAL.—This section shall not apply with respect to
any distribution paid by a passive foreig^i investment company,
or any disposition of stock in a passive foreign investment
company, if such company is a qualified electing fund for each
of its taxable years—
"(A) which begins after December 31,1986, and for which
such company is a passive f o r e ^ investment company, and
"(B) which includes any portion of the taxpayer s holding
period."
(2) Subsection (c) of section 1296 of the 1986 Ck)de is amended
by striking out "owns at least" and inserting in lieu thereof
"owns (directly or indirectly) at least".
(3) Paragraph (3) of section 1291(b) of the 1986 Code is
amended by striking out "and" at the end of subparagraph (D),
by striking out the period at the end of subparagraph (E) and
inserting in lieu thereof ", and", and by adding at the end
thereof tiie following new subparagraph:
"(F) proper adjustment shall be made for amounts not
includible in gross income by reason of section 551(d),
959(a), or 1293(c)."
(4) Paragraph (2) of section 1294(c) of the 1986 Code is
amended—
(A) by striking out "is disposed o f in subparagraph (A)
and inserting in lieu thereof is transferred",
CB) by striking out "such disposition or cessation" each
place it appears and inserting in lieu thereof "such transfer
or cessation", and
(O by striking out "DLSPOSITIONS" in the p£u*agraph head-
ing and insertii^ in lieu thereof "TRANSFERS".
(5) Paragraph (1) of section 1296(b) of the 1986 Code is
amended to read as follows:
19-194 O—91—Part 4 18 : OL 3
102 STAT. 3516 PUBLIC LAW 100-647—NOV. 10, 1988
"(1) I N GENERAL.—Except as provided in paragraph (2), the
term 'passive income' means any income which is of a kind
which would be foreign personal holding company income as
defined in section 954(c)."
(6XA) Subsection (f) of section 1291 of the 1986 Code is
amended to read as follows:
"(f) RECOGNITION OF GAIN.—To the extent provided in regulations,
in the case of £iny transfer of stock in a passive foreign investment
company where (but for this subsection) there is not full recognition
of gain, the excess (if any) of—
"(1) the fair market value of such stock, over
"(2) its adjusted basis,
shall be treated as gain from the sale or exchange of such stock and
shall be recognized notwithstanding any provision of law. Proper
adjustment shall be made to the basis of any such stock for gain
recognized under the preceding sentence."
(B) Subsection (e) of section 1291 of the 1986 (Dode is amended
by striking out "Rules similar" and inserting in lieu thereof
"Except to the extent inconsistent with the regulations pre-
scribed under subsection (f), rules similar".
(7)(A) Paragraphs (4) and (5) of section 1291(a) of the 1986 (^de
are hereby repealed.
(B) Section 1291 of the 1986 CJode is amended by adding at the
end thereof the following new subsection:
"(g) COORDINATION WITH FOREIGN TAX CREDIT RULES.—
"(1) I N GENERAL.—If there are creditable foreign taxes with
respect to any distribution in respect of stock in a peissive
foreign investment company—
"(A) the amount of such distribution shall be determined
for purposes of this section with regard to section 78,
"(B) the excess distribution taxes shall be allocated rat-
ably to each day in the taxpayer's holding period for the
stock, and
"(C) to the extent—
"(i) that such excess distribution taxes are allocated
to a taxable year referred to in subsection (aXlXB), such
taxes shall be taken into account under section 901 for
the current year, and
"(ii) that such excess distribution taxes are allocated
to any other taxable year, such taxes shall reduce
(subject to the principles of section 904(d) and not below
zero) the increase in tax determined under subsection
(cX2) for such taxable year by reason of such distribu-
tion (but such taxes shall not be taken into account
under section 901).
"(2) DEFINITIONS.—For purposes of this subsection—
"(A) CREDITABLE FOREIGN TAXES.—The term 'creditable
foreign taxes' means, with respect to any distribution—
"(i) any foreign taxes deemed paid under section 902
with respect to such distribution, and
"(ii) any withholding tax imposed with respect to
such distribution,
but only if the taxpayer chooses the benefits of section 901
and such taxes are creditable under section 901 (determined
without regard to paragraph (IXCXii))-
"(B) EXCESS DISTRIBUTION TAXES.—The term 'excess dis-
tribution taxes' means, with respect to any distribution, the
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3517
portion of the creditable foreign taxes with respect to such
distribution which is attributable (on a pro rata basis) to the
portion of such distribution which is an excess distribution.
"(C) SECTION 1248 GAIN.—The rules of this subsection also
shall apply in the case of any gain which but for this section
would be includible in gross income as a dividend under
section 1248."
(8) Section 1294 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
'(g) CROSS REFERENCE.—
"For provisions providing for interest for the period of the extension
under tliis section, see section 6601."
(9) Paragraph (2) of section 1291(e) of the 1986 Code is
amended by striking out "not" the second place it appears.
(lOXA) Subsection (a) of section 1297 of the 1986 Code is
amended by redesignating paragraph (4) as paragraph (5) and
by inserting after paragraph (3) the following new paragraph:
"(4) OPTIONS.—To the extent provided in regulations, if any
person has an option to acquire stock, such stock shall be
considered as owned by such person. For purposes of this para-
graph, an option to acquire such an option, and each one of a
series of such options, shall be considered as an option to
acquire such stock."
(B) Paragraph (5) of section 1297(a) of the 1986 Code (as
redesignated by subparagraph (A)) is amended by striking out
"paragraph (2) or (3)" and inserting in lieu thereof "paragraph
(2), (3), or (4)".
(11) Paragraph (3) of section 904(d) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(I) LOOK-THRU APPUES TO PASSIVE FOREIGN INVESTMENT
COMPANY INCLUSION.—If^
"(i) a passive foreign investment company is a con-
trolled foreign corporation, and
"(ii) the taxpayer is a United States shareholder in
such controlled foreign corporation,
any amount included in gross income under section 1293
shall be treated as income in a separate category to the
extent such amount is attributable to income in such cat-
egory."
(12) Clause (ii) of section 1291(aXlXB) of the 1986 Code is
amended to read as follows:
"(ii) any period in the taxpayer's holding period
before the 1st day of the 1st taxable year of the com-
pany which begins after December 31, 1986, and for
which it was a passive foreign investment company,
and".
(13) Subparagraph (A) of section 1291(bX2) of the 1986 Code is
amended by adding at the end thereof the following new
sentence:
"For purposes of clause (ii), any excess distribution received
during such 3-year period shall be taken into account only
to the extent it was included in gross income under subsec-
tion (aXlXB)."
(14) Subparagraph (A) of section 1291(aX3) of the 1986 Code is
amended by striking out "in the case of an excess distribution"
102 STAT. 3518 PUBLIC LAW 100-647—NOV. 10, 1988
and inserting in lieu thereof "for purposes of appl3dng this
section to an excess distribution".
(15) Subsection (b) of section 1293 of the 1986 Code is amended
by adding at the end thereof the following new sentence: "To
the extent provided in regulations, if the fund establishes to the
satisfaction of the Secretary that it uses a shorter period than
the taxable year to determine shareholders' interests in the
earnings of such fund, pro rata shares may be determined by
using such shorter period."
(16) Subparagraph (B) of section 1296(b)(2) of the 1986 Code is
amended by striking out "by a corporation which" and inserting
in lieu thereof "by a corporation which is predominantly en-
gaged in an insurance business and which".
(17) Paragraph (5) of section 1297(b) of the 1986 Code is
amended to read as follows:
"(5) APPUCATION OF PART WHERE HELD BY OTHER ENTITY.—
"(A) I N GENERAL.—Under regulations, in any case in
which a United States person is treated as owning stock in a
passive foreign investment company by reason of subsection
(a)-
"(i) any disposition by the United States person or the
person owning such stock which results in the United
States person being treated as no longer owning such
stock, or
"(ii) any disposition of property in respect of such
stock to the person holding such stock,
shall be treated as a disposition to, the United States person
with respect to the stock in the passive foreign investment
company.
"(B) AMOUNT TREATED IN SAME MANNER AS PREVIOUSLY
TAXED INCOME.—Rules similar to the rules of section 959(b)
shall apply to any amount described in subparagraph (A)
and to any amount included in gross income under section
1293(a) (or which would have been so included but for
section 951(f)) in respect of stock which the taxpayer is
treated as owning under subsection (a)."
(18) Subsection (e) of section 1293 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) DETERMINATION OF EARNINGS AND PROFITS.—The earnings
and profits of any qualified electing fund shall be determineid
without regard to paragraphs (4), (5), and (6) of section 312(n).
Under regulations, the preceding sentence shall not apply to the
extent it would increase earnings and profits by an amount
which was previously distributed by the qualified electing
fund."
(19) Subsection (d) of section 1248 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(7) AMOUNTS INCLUDED IN GROSS INCOME UNDER SECTION
1293.—Earnings and profits of the foreign corporation attrib-
utable to any amount previously included in the gross income of
such person under section 1293 with respect to the stock sold or
exchanged, but only to the extent the inclusion of such amount
did not result in an exclusion of an amount under section
1293(c)."
(20) Paragraph (6) of section 1297(b) of the 1986 Code is
amended by striking out "If a" and inserting in lieu thereof
"Except as provided in regulations, if a".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3519
, (21) Section 1246 of the 1986 Code is amended by redesignat-
ing the sulwection relating to information with respect to cer-
tain foreign investment companies as subsection (f), by re-
designating the subsection relating to coordination with section
1248 as subsection (g), and by redesignating the subsection
relating to cross reference as subsection (h).
(22) Subparagraph (A) of section 1297(bX3) of the 1986 Code is
amended to read as follows:
"(A) neither such corporation (nor any predecessor) was a
passive foreign investment company for any prior taxable
year,".
(23) Subsection (c) of section 1293 of the 1986 Code is amended
by striking out "shall be treated as a distribution which is not a
dividend" and inserting in heu thereof "shall be treated, for
purposes of this chapter, as a distribution which is not a divi-
dend; except that such distribution shall immediately reduce
earnings and profits".
(24) Subsection (b) of section 1297 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(8) TREATMENT OP CERTAIN FOREIGN CORPORATIONS OWNING
STOCK IN 25-PERCENT OWNED DOMESTIC CORPORATION.—
"(A) IN GENERAL.—If—
"(i) a foreign corporation is subject to the tax imposed
by section 531 (or waives any benefit under any treaty
which would otherwise prevent the imposition of such
tax), and
"(ii) such foreign corporation owns at least 25 percent
(by value) of the stock of a domestic corporation,
for purposes of determining whether such foreign corporation is
a passive foreign investment company, any qualified stock held
by such domestic corporation shall be treated as an asset which
does not produce passive income (and is not held for the produc-
tion of passive income) and any amount included in gross
income with respect to such stock shall not be treated as passive
income.
"(B) QUALIFIED STOCK.—For purposes of subparagraph (A),
the term 'qualified stock' means any stock in a C corpora-
tion which is a domestic corporation and which is not a
regulated investment company or real estate investment
trust."
(25) Section 1294 of the 1986 (Ik)de is amended by adding at the
end thereof the following new subsection:
"(f) TREATMENT OF LOANS TO SHAREHOLDER.—^For purposes of this
section and section 1293, any loan by a qualified electing fund
(directly or indirectly) to a shareholder of such fund shall be treated
as a distribution to such shareholder.
(26XA) Paragraph (2) of section 1296(b) of the 1986 Code is
amended by striking out "or" at the end of subparagraph (A), by
striking out the period at the end of subparagraph (B) and
inserting in lieu thereof ", or", and by adding at tiie end thereof
the following:
"(C) which is interest, a dividend, or a rent or royalty,
which is received or accrued from a related person (withm
the meaning of section 954(dX3)) to the extent such amount
is properly allocable (under regulations prescribed by the
Secretary) to income of such related person which is not
passive income.
102 STAT. 3520 PUBLIC LAW 100-647—NOV. 10, 1988
For purposes of subparagraph (C), the term 'related person' has
the meaning given such term by section 954(dX3) determined by
substituting 'foreign corporation' for 'controlled foreign corpora-
tion' each place it appears in section 954(dX3)."
(B) The paragraph heading for paragraph (2) of section 1296(b)
of the 1986 Code is amended by striking out"ExcEPnoN FOR
CERTAIN BANKS AND INSURANCE COMPANIES" and inserting in
lieu thereof "EXCEPTIONS".
(27) Subsection (a) of section 1296 of the 1986 Code is amended
by adding at the end thereof the following new sentences:
"A foreign corporation may elect to have the determination under
paragraph (2) based on the adjusted bases of its assets in lieu of their
value. Such an election, once made, may be revoked only with the
consent of the Secretary."
(28) Paragraph (2) of section 1291(d) of the 1986 Code is
amended by striking out subparagraph (B) and inserting in lieu
thereof the following:
"(B) ADDITIONAL ELECTION FOR SHAREHOLDER OF CON-
TROLLED FOREIGN CORPORATIONS.—
"(i) IN GENERAL.—If—
"(I) a passive foreign investment company be-
comes a qualified electing fund for a taxable year
which begins after December 31,1986,
"(II) the taxpayer holds stock in such company
on the first day of such taxable year, and
"(III) such company is a controlled foreign cor-
poration (as defined in section 957(a)),
the taxpayer may elect to include in gross income as a
dividend received on such first day an amount equal to
the portion of the post-1986 earnings and profits of such
company attributable (under regulations prescribed by
the Secretary) to the stock in such company held by the
taxpayer on such first day. The amount treated as a
dividend under the preceding sentence shall be treated
as an excess distribution and shall be allocated under
subsection (aXlXA) only to days during periods taken
into account in determining the post-1986 earnings and
profits so attributable.
"(ii) POST-1986 EARNINGS AND PROFITS.—For purposes
of clause (i), the term 'post-1986 earnings and profits'
means earnings and profits which were accumulated in
taxable years of such company beginning after Decem-
ber 31, 1986, and during the period or periods the stock
was held by the taxpayer while the company was a
passive foreign investment company.
"(iii) COORDINATION WITH SECTION 959(e).—For pur-
poses of section 959(e), any amount included in gross
income under this subparagraph shall be treated as
included in gross income under section 1248(a).
"(C) ADJUSTMENTS.—In the case of any stock to which
subparagraph (A) or (B) applies—
"(i) the adjusted basis of such stock shall be increased
by the gain recognized under subparagraph (A) or the
amount treated as a dividend under subparsigraph (B),
as the case may be, and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3521
"(ii) the taxpayer's holding period in such stock shall
be treated as beginning on the first day referred to in
such subparagraph."
(29XA) Clause (ii) of section 904(dX2XA) of the 1986 Code is
amended by striking out "or section 1293" and inserting in lieu
thereof "or, except as provided in subparagraph (EXiii) or para-
graph (3X1), section 1293".
(B) Subparagraph (E) of section 904(dX2) of the 1986 Code is
amended by adding at the end thereof the following new clause:
"(iii) TREATMENT OF INCLUSIONS UNDER SECTION 1293.—If
any foreign corporation is a non-controlled section 902 cor-
poration with respect to the taxpayer, any inclusion under
section 1293 with respect to such corporation shall be
treated as a dividend from such corporation."
(30) Clause (ii) of section 864(bX2XA) of the 1986 Code is
amended by striking out "section 542(cX7)" and inserting in lieu
thereof "section 542(cX7), 542(cX10),".
(31) Paragraph (1) of section 1291(c) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "Any increase in the tax imposed by this chapter for the
current year under subsection (a) to the extent attributable to
the amount referred to in subparagraph (B) shall be treated as
interest paid under section 6601 on the due date for the current
year."
(32) Section 1293 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(g) OTHER SPECIAL RULES.—
"(1) EXCEPTION FOR CERTAIN INCOME.—For purposes of deter-
mining the amount included in the gross income of any person
under this section, the ordinary earnings and net capital gain of
a qualified electing fund shall not include any item of income
received by such fund if—
"(A) such fund is a controlled foreign corporation (as
defined in section 957(a)) and such person is a United States
shareholder (as defined in section 951(b)) in such fund, and
"(B) such person establishes to the satisfaction of the
Secretary that—
"(i) such income was subject to an effective rate of
income tax imposed by a foreign country greater than
90 percent of the maximum rate of tax specified in
section 11, or
"(ii) such income is—
"(I) from sources within the United States,
"(II) effectively connected with the conduct by
the qualified electing fund of a trade or business in
the United States, and
"(III) not exempt from taxation (or subject to a
reduced rate of tax) pursuant to a treaty obligation
of the United States.
"(2) PREVENTION OF DOUBLE INCLUSION.—The Secretary shall
prescribe such adjustment to the provisions of this section as
may be necessary to prevent the same item of income of a
qualified electing fund from being included in the gross income
of a United States person more than once."
(33) Paragraph (3) of section 12910t)) of the 1986 Code (as
amended by paragraph (3)) is amended by striking out "and" at
the end of subparagraph (E), by striking out the period at the
102 STAT. 3522 PUBLIC LAW 100-647—NOV. 10, 1988
end of subparagraph (F) and inserting in lieu thereof ", and",
and by adding at the end thereof the following new
subparagraph:
"(G) if a charitable deduction was allowable under section
642(c) to a trust for any distribution of its income, proper
adjustments shall be made for the deduction so allowable to
the extent allocable to distributions or gain in respect of
stock in a passive foreign investment company."
(34) Paragraph (2) of section 1294(c) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "To the extent provided in regulations, the preceding
sentence shall not apply in the case of a transfer in a trans-
action with respect to which gain or loss is not recognized (in
whole or in part), and the transferee in such transaction shall
succeed to the treatment under this section of the transferor."
(35) Section 1297 of the 1986 Oxie is amended by redesignat-
ing subsection (c) as subsection (d) and by inserting after subsec-
tion (b) the following new subsection:
"(c) TREATMENT OF STOCK HELD BY POOLED INCOME P^JND.—If stock
in a passive foreign investment company is owned (or treated as
owned under subsection (a)) by a pooled income fund (as defined in
section 642(cX5)) and no portion of any gain from a disposition of
such stock may be allocated to income under the terms of the
governing instrument of such fund—
"(1) section 1291 shall not apply to any gain on a disposition of
such stock by such fund if (without regard to section 1291) a
deduction would be allowable with respect to such gain under
section 642(cX3),
"(2) section 1293 shall not apply with respect to such stock,
and
"(3) in determining whether section 1291 applies to any dis-
tribution in respect of such stock, subsection (d) of section 1291
shall not apply.
(36) Paragraph (1) of section 1297(b) of the 1986 Code is
amended by striking out "passive foreign investment corpora-
tion" and inserting in heu thereof "passive foreign investment
company".
(37XA) Paragraph (2) of section 1295(b) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "To the extent provided in r^ulations, such an election
may be made later than as required by the preceding sentence
in cases where the company failed to make a timely election
because it reasonably believed it was not a passive foreign
investment company.
26 use 1295 (B) The period during which an election under section 1295(b)
note. of the 1986 Code may be made shall in no event expire before
the date 60 dajrs after the date of enactment of this Act.
(q) AMENDMENTS RELATED TO SECTION 1241 OF THE ACT.—
dXA) Subparagraph (B) of section SS4(bX2) of the 1986 Code is
amended to read as follows:
"(B) LIMITATION.—
"(i) IN GENERAL.—The increase imder subparagraph
(A) for any taxable year shall not exceed the accumu-
lated effectively connected earnings and profits as of
the close of the preceding taxable year.
"(ii) ACCUMULATED EFFECTIVELY CONNECTED EARNINGS
AND PROFITS.—For puiposes of clause (i), the term
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3523
'accumulated effectively connected earnings and prof-
its' means the excess of—
"(I) the aggregate effectively connected earnings
and profits for preceding taxable years beginning
after December 31,1986, over
"(11) the aggregate dividend equivalent amounts
determined for such preceding taxable years."
(B) For purposes of appl3dng section 884 of the 1986 Code, the 26 USC 884 note,
earnings and profits of any corporation shall be determined
without regard to any increase in earnings and profits under
sections 1023(eX3XC) and 1021(eX2XC) of the Reform Act or
arising from section 823(bX4XC) of the 1986 Code.
(2XA) Paragraph (1) of section 884(e) of the 1986 Code is
amended to read as follows:
"(1) LIMITATION ON TREATY EXEMPTION.—No treaty between '
the United States and a foreign country shall exempt any
foreign corporation from the tax imposed by subsection (a) (or
reduce the amount thereof) unless—
"(A) such treaty is an income tax treaty, and
"(B) such foreign corporation is a qualified resident of
such foreign country."
(B) Paragraph (3) of section 884(e) of the 1986 Code is amended
to read as follows:
"(3) C!OORDINATION WITH WITHHOLDING TAX.—
"(A) I N GENERAL.—If a foreign corporation is subject to
the tax imposed by subsection (a) for any taxable year
(determined after the application of any treaty), no tax
shall be imposed by section 871(a), 881(a), 1441, or 1442 on
any dividends paid by such corporation out of its earnings
and profits for such taxable year.
"(B) LIMITATION ON CERTAIN TREATY BENEFITS.—If—
"(i) any dividend described in section 861(aX2XB) is
received by a foreign corporation, and
"(ii) subparagraph (A) does not apply to such
dividend,
rules similar to the rules of subparagraphs (A) and (B) of
subsection (fX3) shall apply to such dividend."
(C) Subsection (f) of section 884 of the 1986 Code is amended—
(i) by striking out the 2nd sentence of paragraph (1), Eind
(ii) by adding at the end thereof the following new
paragraph:
"(3) COORDINATION WITH TREATIES.—
"(A) PAYOR MUST BE QUALIFIED RESIDENT.—In the case of
any interest described in paragraph (1) which is paid or
accrued by a foreign corporation, no benefit under any
treaty between the United States and the foreign country of
which such corporation is a resident shall apply unless—
"(i) such treaty is an income tax treaty, and
"(ii) such foreign corporation is a qualified resident of
such foreign country.
"(B) RECIPIENT MUST BE QUALIFIED RESIDENT.—In the case
of any interest described in paragraph (1) which is received
or accrued by any corporation, no benefit under any treaty
between the United States and the foreign country of which
such corporation is a resident shall apply unless—
"(i) such treaty is an income tax treaty, and
102 STAT. 3524 PUBLIC LAW 100-647—NOV. 10, 1988
"(ii) such foreign corporation is a qualified resident of
such foreign country."
(3) Paragraph (1) of section 884(0 of the 1986 Code is
amended—
(A) by striking out "sections 871, 881, 1441, and 1442" and
inserting in lieu thereof "this subtitle", and
(B) by adding at the end thereof the following new
sentence:
"To the extent provided in regulations, subparagraph (A) shall
not apply to interest in excess of the amounts reasonably ex-
• pected to be deductible under section 882 in computing the
effectively connected teixable income of such foreign corpora-
tion."
(4) Paragraph (4) of section 884(e) of the 1986 Code is
amended by redesignating subparagraph (C) as subparagraph
(D) and by inserting after subparagraph (B) the following new
' subparagraph:
"(C) CORPORATIONS OWNED BY PUBLICLY TRADED DOMESTIC
CORPORATIONS.—A foreign corporation which is a resident of
a foreign country shall be treated as a qualified resident of
such foreign country if—
"(i) such corporation is wholly owned (directly or
indirectly) by a domestic corporation, and
"(ii) the stock of such domestic corporation is pri-
marily and regularly traded on an established securi-
ties market in the United States."
(5) Subparagraph (A) of section 884(eX4) of the 1986 Code is
amended—
(A) by striking out "more than 50 percent" in clause (i)
and inserting in lieu thereof "50 percent or more", and
(B) by striking out "or the United States" in clause (ii)
and inserting in lieu thereof "or citizens or residents of the
United States".
(6) Subsection (e) of section 884 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(5) EXCEPTION FOR INTERNATIONAL ORGANIZATIONS.—This sec-
tion shall not apply to an international organization (as defined
in section 7701(aX18))."
(7) Subparagraph (B) of section 861(aX2) of the 1986 Code is
amended by striking out "other than under section 884(dX2)"
each place it appears and inserting in lieu thereof "other than
income described in section 884(dX2)".
(8) Paragraph (2) of section 26(b) of the 1986 Code is amended
by striking out "and" at the end of subparagraph (J), by striking
out the period at the end of subparagraph (K) and inserting in
lieu thereof ", and", and by adding at the end thereof the
following new subparagraph:
"(L) section 884 (relating to branch profits tax)."
(9) Section 861 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(0 CROSS REFERENCE.—
"For treatment of interest paid by the branch of a foreign corporation,
see section 884(f)."
(10) The paragraph (6) of section 906(b) of the 1986 Code which
was added by section 1241(c) of the Reform Act is redesignated
as paragraph (7).
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3525
(11) Subsection (c) of section 2104 of the 1986 Code is amended
by striking out "section 861(aXlXB), section 861(aXlXG), or sec-
tion 861(aXlXH)" and inserting in lieu thereof "subparagraph
(A), (C), or (D) of section 861(aXl)".
(12) Subparagraph (A) of section 904(gX9) of the 1986 Code is
amended by striking out "861(aXlXB)' and inserting in lieu
thereof "861(aXlXA)".
(13XA) Paragraph (1) of section 4373 of the 1986 Code is
amended to read as follows:
"(1) EFFECTIVELY CONNECTED ITEMS.—Any amount which is
effectively connected with the conduct of a trade or business
within the United States unless such amount is exempt from
the application of section 882(a) pursuant to a treaty obligation
of the United States."
(B) The amendment made by subparagraph (A) shall apply 26USC4373
with respect to premiums paid after the date 30 days after the note.
date of the enactment of this Act.
(14) Paragraph (1) of section 884(f) of the 1986 Code is
amended by inserting "(or having gross income treated as effec-
tively connected with the conduct of a trade or business in the
United States)" after "United States" in the material preceding
subparagraph (A) thereof.
(15) Section 861(aX2XC) of the 1986 Code is amended by strik-
ing out "section 243(d)" and inserting in lieu thereof "section
243(e)".
(r) AMENDMENTS RELATED TO SECTION 1242 OF THE REFORM ACT.—
(1) Paragraph (7) of section 864(c) of the 1986 Code is amended
to read as follows:
"(7) TREATMENT OF CERTAIN PROPERTY TRANSACTIONS.—For
purposes of this title, if^
"(A) any property ceases to be used or held for use in
connection with the conduct of a trade or business within
the United States, and
"(B) such property is disposed of within 10 years after
such cessation,
the determination of whether any income or gain attributable
to such disposition is taxable under section 871(b) or 882 (as the
case may be) shall be made as if such sale or exchange occurred
immediately before such cessation and without regard to the
requirement that the taxpayer be engaged in a trade or business
within the United States during the taxable year for which such
income or gain is taken into account."
(2) Paragraph (6) of section 864(c) of the 1986 (Dode is amended
to read as follows:
"(6) TREATMENT OF CERTAIN DEFERRED PAYMENTS, ETC.—For
purposes of this title, in the case of any income or gain of a
nonresident alien individual or a foreign corporation which—
"(A) is taken into account for any taxable year, but
"(B) is attributable to a sale or exchange of property or
the performance of services (or any other transaction) in
any other taxable year,
the determination of whether such income or gain is taxable
under section 871(b) or 882 (as the case may be) shall be made as
if such income or gain were taken into account in such other
taxable year and without regard to the requirement that the
taxpayer be engaged in a trade or business within the United
States during the taxable year referred to in subparagraph (A),"
102 STAT. 3526 PUBLIC LAW 100-647—NOV. 10, 1988
(s) AMENDMENTS RELATED TO SECTION 1246 OF THE REFORM ACT.—
(IXA) Section 1446 of the 1986 Code is amended to read as
follows:
"SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS' SHARE OF
EFFECTIVELY CONNECTED INCOME.
Regulations. "(a) GENERAL RULE.—If—
"(1) a partnership has effectively connected taxable income
for any taxable year, and
"(2) any portion of such income is allocable under section 704
to a foreign partner,
such partnership shall pay a withholding tax under this section at
such time and in such manner as the Secretary shall by regulations
prescribe.
"(b) AMOUNT OF WITHHOLDING TAX.—
"(1) IN GENERAL.—The amount of the withholding tax payable
by any partnership under subsection (a) shall be equal to the
applicable percentage of the effectively connected taxable
income of the partnership which is allocable under section 704
to foreign partners.
"(2) APPUCABLE PERCENTAGE.—For purposes of paragraph (1),
the term 'applicable percentage' means—
"(A) the highest rate of tax specified in section 1 in the
case of the portion of the effectively connected taxable
income which is allocable under section 704 to foreign
partners who are not corporations, and
"(B) the highest rate of tax specified in section 11(b) in
the case of the portion of the effectively connected taxable
income which is allocable under section 704 to foreign
partners which are corporations.
"(c) EFFECTIVELY CONNECTED TAXABLE INCOME.—For purposes of
this section, the term 'effectively connected taxable income' means
the taxable income of the partnership which is effectively connected
(or treated as effectively connected) with the conduct of a trade or
business in the United States computed with the following
adjustments:
"(1) Paragraph (1) of section 703(a) shall not apply.
Petroleum and "(2) The partnership shall be allowed a deduction for deple-
petroleum tion with respect to oil and gas wells but the amount of such
products.
Natural gas. deduction shall be determined without regard to sections 613
and 613A.
"(3) There shall not be taken into account any item of income,
gain, loss, or deduction to the extent allocable under section 704
to any partner who is not a foreign partner.
"(d) TREATMENT OF FOREIGN PARTNERS.—
"(1) ALLOWANCE OF CREDIT.—Each foreign partner of a part-
nership shall be allowed a credit under section 33 for such
partner's share of the withholding tax paid by the partnership
under this section. Such credit shall be allowed for the partner's
taxable year in which (or with which) the partnership taxable
year (for which such tax was paid) ends.
"(2) CREDIT TREATED AS DISTRIBUTED TO PARTNER.—A foreign
partner's share of any withholding tax paid by the partnership
under this section shall be treated as distributed to such partner
by such partnership on the last day of the partnership's taxable
year (for which such tax was paid).
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3527
"(e) FOREIGN PARTNER.—For purposes of this section, the term
'foreign partner' means any partner who is not a United States
person.
"(f) REGULATIONS.—The Secretary shall prescribe such regulations
as may be necessary to carry out the purposes of this section,
including regulations providing for the application of this section in
the case of publicly traded partnerships."
(B) Paragraph (2) of section 6401(b) of the 1986 C!ode is amend-
ed by striking out the last sentence and inserting in lieu thereof
the following: "The preceding sentence shall not apply to any
credit so allowed by reason of section 1446."
(C) The table of sections for subchapter A of chapter 3 of the
1986 Code is amended by striking out the item relating to
section 1446 and inserting in lieu thereof the following:
"Sec. 1446. Withholding of tax on foreign partners' share of effectively con-
nected income."
(D) The amendments made by this paragraph shall apply to 26 USC 1446
taxable years beginning after December 31, 1987. No amount note.
shall be required to be deducted and withheld under section
1446 of the 1986 Code (as in effect before the amendment made
by subparagraph (A)).
(2XA) Subsection (a) of section 872 of the 1986 Code is
amended by striking out "the case of a nonresident alien
individual" and inserting in lieu thereof "the case of a non-
resident alien individual, except where the context clearly in-
dicates otherwise".
(B) Subsection (b) of section 882 of the 1986 Code is amended
by striking out "the case of a foreign corporation" and
inserting in lieu thereof "the case of a foreign corporation,
except where the context clearly indicates otherwise".
(t) AMENDMENTS RELATED TO SECTION 1247 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 892(aX2) of the 1986 Code is
amended by striking out "or" at the end of clause (i), by striking
out the period at the end of clause (ii) and inserting in lieu
thereof ", or", and by adding at the end thereof the following
new clause:
"(iii) derived from the disposition of any interest in a
controlled commercial entity."
(2) Clause (ii) of section 892(aX2XA) of the 1986 Code is
amended to read as follows:
"(ii) received by a controlled commercial entity or
received (directly or indirectly) from a controlled
commercial entity."
(3) Subsection (a) of section 892 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) TREATMENT AS RESIDENT.—For purposes of this title, a
foreign government shall be treated as a corporate resident of
its country. A foreign government shall be so treated for pur-
poses of any income tax treaty obligation of the United States if
such government grants equivalent treatment to the Grovern-
ment of the United States."
(4) Section 893 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(c) LIMITATION ON EXCLUSION.—Subsection (a) shall not apply
to—
102 STAT. 3528 PUBLIC LAW 100-647—NOV. 10, 1988
"(1) any employee of a controlled commercial entity (as de-
fined in section 892(aX2XB)), or
"(2) any employee of a foreign government whose services are
primarily in connection with a commercial activity (whether
within or outside the United States) of the foreign government."
(u) AMENDMENT RELATED TO SECTION 1249 OF THE REFORM ACT.—
Subsection (d) of section 1503 of the 1986 CJode is amended by adding
at the end thereof the following new paragraphs:
"(3) TREATMENT OF LOSSES OF SEPARATE BUSINESS UNITS.—To
the extent provided in regulations, any loss of a separate unit of
a domestic corporation shall be subject to the limitations of this
subsection in the same manner as if such unit were a wholly
owned subsidiary of such corporation.
Regulations. "(4) INCOME ON ASSETS ACQUIRED AFTER THE LOSS.—The Sec-
retary shall prescribe such regulations as may be necessary or
appropriate to prevent the avoidance of the purposes of this
subsection by contributing assets to the corporation with the
dual consolidated loss after such loss was sustained."
(v) AMENDMENTS RELATED TO SECTION 1261 OF THE REFORM ACT.—
(IXA) SO much of section 986 of the 1986 Code as precedes
subsection (c) thereof is amended to read as follows:
"SEC. 986. DETERMINATION OF FOREIGN TAXES AND FOREIGN CORPORA-
TION'S EARNINGS AND PROFITS.
"(a) FOREIGN TAXES.—
"(1) IN GENERAL.—For purposes of determining the amount of
the foreign tax credit—
"(A) any foreign income taxes shall be translated into
dollars using the exchange rates as of the time such taxes
were paid to the foreign country or possession of the United
States, and
"(B) any adjustment to the amount of foreign income
taxes shall be translated into dollars using—
"(i) except as provided in clause (ii), the exchange
rate as of the time when such adjustment is paid to the
foreign country or possession, or
"(ii) in the case of any refund or credit of foreign
income taxes, using the exchange rate as of the time of
original pajnment of such foreign income taxes.
"(2) FOREIGN INCOME TAXES.—For purposes of paragraph (1),
'foreign income taxes' means any income, war profits, or excess
profits taxes paid to any foreign country or to any possession of
the United States.
"(b) EARNINGS AND PROFITS AND DISTRIBUTIONS.—For purposes of
determining the tax under this subtitle—
"(1) of any shareholder of any foreign corporation, the earn-
ings and profits of such corporation shall be determined in the
corporation's functional currency, and
* (2) in the case of any United States person, the earnings and
profits determined under paragraph (1) (when distributed,
deemed distributed, or otherwise taken into account under this
subtitle) shall (if necessary) be translated into dollars using the
appropriate exchange rate."
(B) Section 987 of the 1986 (Dode is amended by inserting
"and" at the end of paragraph (2), by striking out ", and" at the
, end of paragraph (3) and inserting in lieu thereof a period, and
by striking out paragraph (4).
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3529
(C) The table of sections for subpart J of part III of subchapter
N of chapter 1 is amended by striking out the item relating to
section 986 and inserting in lieu thereof the following:
"Sec. 986. Determination of foreign taxes and foreign corporation's earnings
and profits."
(2XA) Subsection (c) of section 988 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(5) SPECIAL RULES WHERE TAXPAYER TAKES OR MAKES DEUV-
ERY.—If the taxpayer takes or makes delivery in connection
with any section 988 transaction described in paragraph
(IXBXiii), any gain or loss (determined as if the taxpayer sold
the contract, option, or instrument on the date on which he took
or made delivery for its fair market value on such date) shall be
recognized in the same manner as if such contract, option, or
instrument were so sold."
(B) The amendment made by subparagraph (A) shall not 26 USC 988 note.
apply in any case in which the taxpayer takes or makes delivery
before June 11,1987.
(3XA) Subsection (b) of section 988 of the 1986 Code is
amended by adding at the end thereof the following new
paragraph:
"(3) SPECIAL RULE FOR CERTAIN CONTRACTS, ETC.—In the case of
any section 988 transaction described in subsection (cXlXBXiii),
any gain or loss from such transaction shall be treated as
foreign currency gain or loss (as the case may be)."
(B) Subclause (II) of section 988(cXlXCXi) of the 1986 Code is
amended to read as follows:
"(II) any gain or loss from such transaction shall
be treated as foreign currency gain or loss (as the
case may be)."
(C) Paragraph (2) of section 988(c) of the 1986 Code is amended
by inserting "or" at the end of subparagraph (A), by striking out
", or" at the end of subparsigraph (B) and inserting in lieu
thereof a period, and by striking out subpargigraph (C).
(D) Paragraph (3) of section 988(c) of the 1986 (Dode is amended
to read as follows:
"(3) PAYMENT DATE.—The term 'payment date' means the
date on which the payment is made or received."
(4) The first sentence of paragraph (1) of section 988(d) is
amended by striking out "this section" and inserting in lieu
thereof "this subtitle".
(5) Subsection (b) of section 989 of the 1986 Code is amended—
(A) by striking out "951(a)" in paragraph (3) and inserting
in lieu thereof "951(aXlXA)", and
(B) by adding at the end thereof the following new
sentence:
"For purposes of the preceding sentence, any amount included in
income under section 951(a)(1)(B) shall be treated as an actual
distribution made on the last day of the taxable year for which such
amount was so included."
(6) Clause (iii) of section 988(cXlXB) of the 1986 Code is
amended to read as follows:
"(iii) Entering into or acquiring any forward con- Contracts.
tract, futures contract, option, or similar financial in-
strument unless such instrument would be marked to
102 STAT. 3530 PUBLIC LAW 100-647—NOV. 10, 1988
market under section 1256 if held on the last day of the
taxable year."
(7) Subparagraph (B) of section 988(aX3) of the 1986 Code is
amended by adding at the end thereof the following new clause:
"(iii) SPECIAL RULE FOR PARTNERSHIPS.—To the extent
provided in regulations, in the case of a partnership, the
determination of residence shall be made at the partner
level."
(8) Clause (i) of section 988(aX3XB) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "If an individual does not have a tax home (as so defined),
the residence of such individual shall be the United States if
such individual is a United States citizen or a resident alien and
shall be a country other than the United States if such individ-
ual is not a United States citizen or a resident alien."
(9) Section 903 of the 1986 Code is amended by striking out
"this subpart" and inserting in lieu thereof "this part".
(w) AMENDMENTS RELATED TO SECTION 1274 OF THE REFORM ACT.—
(1) Subsection (e) of section 932 of the 1986 Code is amended to
read as follows:
"(e) SPECIAL RULE FOR APPLYING SECTION TO TAX IMPOSED IN
VIRGIN ISLANDS.—In applying this section for purposes of determin-
ing income tax liability incurred to the Virgin Islands, the provi-
sions of this section shaJl not be affected by the provisions of Federal
law referred to in section 934(a)."
(2) Paragraph (4) of section 932(c) of the 1986 Code is amended
to read as follows:
"(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an
individual—
"(A) who is a bona fide resident of the Virgin Islands at
the close of the taxable year,
"(B) who, on his return of income tax to the Virgin
Islands, reports income from all sources and identifies the
source of each item shown on such return, and
"(C) who fully pays his tax liability referred to in section
934(a) to the Virgin Islands with respect to such income,
for purposes of calculating income tax liability to the United
States, gross income shall not include any amount included in
gross income on such return, and allocable deductions and
credits shall not be taken into account."
(3) Paragraph (2) of section 932(c) of the 1986 Code is amended
by striking out "his income tax return" and inserting in lieu
thereof "an income tax return".
26 use 932 note. (4) Subsection (c) of section 1274 of the Reform Act is amended
by striking out "this title" and inserting in lieu thereof "the
Internal Revenue Code of 1986".
(x) AMENDMENT RELATED TO SECTION 1275 OF THE REFORM ACT.—
Section 1444 of the 1986 Code is amended by striking out "(as
modified by section 934A)".
(y) AMENDMENT RELATED TO SECTION 1276 OF THE REFORM ACT.—
Subsection (a) of section 7654 of the 1986 Code is amended by
striking out "an individual to which" and inserting in lieu thereof
"an individual to whom".
(z) AMENDMENT RELATED TO SECTION 1277 OF THE REFORM ACT.—
26 use 931 note. (1) Section 1277 of the Reform Act is amended by adding at
the end thereof the following new subsection:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3531
"(f) EXEMPTION FROM WITHHOLDING.—Notwithstanding subsection
(b), the modification of section 884 of the Internal Revenue Code of
1986 by reason of the amendment to section 881 of such Code by
section 1278(b)(1) of this Act shall apply to taxable years beginning
after December 31,1986."
(2) Subsection (e) of section 1277 of the Reform Act is amended
by striking out "The preceding sentence" and inserting in lieu
thereof "Notwithstanding subsection (b), the preceding
sentence",
(aa) COORDINATION WITH TREATIES.—
(1) TREATY OBLIGATIONS.—
(A) Subsection (d) of section 7852 of the 1986 Code is
amended to read as follows:
"(d) TREATY OBUGATIONS.—
"(1) I N GENERAL.—For purposes of determining the relation-
ship between a provision of a treaty and any law of the United
States affecting revenue, neither the treaty nor the law shall
have preferential status by reason of its being a treaty or law.
"(2) SAVINGS CLAUSE FOR 1954 TREATIES.—No provision of this
title (as in effect without regard to any amendment thereto
enacted after August 16, 1954) shall apply in any case where its
application would be contrary to any treaty obligation of the
United States in effect on August 16,1954."
(B) Section 7852(d)(1) of the 1986 Code, as added by 26 use 7852
subparagraph (A), shall apply to any taxable period with note.
respect to which the time for assessment of any deficiency
has not expired by reason of any law or rule of law before
the date of the enactment of this Act.
(2) CERTAIN AMENDMENTS TO APPLY NOTWITHSTANDING TREA- 26 use 861 note.
TIES.—The following amendments made by the Reform Act shall
apply notwithstanding any treaty obligation of the United
States in effect on the date of the enactment of the Reform Act:
(A) The amendments made by section 1201 of the Reform
Act.
(B) The amendments made by title VII of the Reform Act
to the extent such amendments relate to the alternative
minimum tax foreign tax credit.
(3) CERTAIN AMENDMENTS NOT TO APPLY TO THE EXTENT 26 use 861 note.
INCONSISTENT WITH TREATIES.—The following amendments made
by the Reform Act shall not apply to the extent the application
of such amendments would be contrary to any treaty obligation
of the United States in effect on the date of the enactment of
the Reform Act:
(A) The amendments made by section 1211 of the Reform
Act to the extent—
(i) such amendments apply in the case of an individ-
ual treated as a resident of a foreign country under a
treaty obligation of the United States as so in effect, or
(ii) such amendments relate to income of a non-
resident from the sale or exchange of inventory prop-
erty which would otherwise be sourced under section
865(eX2) of the 1986 Code.
(B) The amendments made by section 1212(a) of the
Reform Act; except for purposes of determining the amount
of the foreign tax credit.
(C) The amendments made by subsections (b) and (c) of
section 1212 of the Reform Act.
102 STAT. 3532 PUBLIC LAW 100-647—NOV. 10, 1988
(D) The amendments made by section 1214 of the Reform
Act; except for purposes of determining the amount of the
foreign tax credit.
(E) The amendment made by section 1241(a) of the
Reform Act to the extent that, under a treaty obligation of
the United States, interest described in section 884(fKlXA)
of the 1986 Code (as added by such amendment) which is in
excess of amounts deducted would be treated as other than
United States source.
(F) The amendment made by section 1241(bX2XA) of the
Reform Act.
(G) The amendment made by section 1241(a) of the
Reform Act to the extent such amendment relates to sec-
tion 884(f)(lXB) of the 1986 Code.
(H) The amendments made by section 1242 of the Reform
Act to the extent they relate to paragraph (7) of section
864(c) of the 1986 Code.
(I) The amendment made by section 1247(a) of the Reform
Act.
(J) The amendments made by section 123 of the Reform
Act.
26 u s e 861 note. (4) TREATMENT OF TECHNICAL CORRECTIONS.—For purpOSeS o f
paragraphs (2) and (3), any amendment made by this title shall
be treated as if it had been included in the provision of the
Reform Act to which such amendment relates.
(5) REPORTING OF CERTAIN TREATY-BASED RETURN POSITIONS.—
(A) Subchapter B of chapter 61 of the 1986 Code is
amended by redesignating section 6114 as section 6115 and
by inserting after section 6113 the following new section:
"SEC. 6114. TREATY-BASED RETURN POSITIONS.
"(a) IN GENERAL.—Each taxpayer who, with respect to any tax
imposed by this title, takes the position that a treaty of the United
States overrules (or otherwise modifies) an internal revenue law of
the United States shall disclose (in such manner as the Secretary
may prescribe) such position—
"(1) on the return of tax for such tax (or any statement
attached to such return), or
"(2) if no return of tax is reqiiired to be filed, in such form as
the Secretary may prescribe.
"(b) WAIVER AUTHORITY.—^The Secretary may by r^ulations
waive the requirements of subsection (a) with respect to classes of
cases for which the Secretary determines that the waiver will not
impede the assessment and collection of tax."
(B) Part I of subchapter B of chapter 68 of the 1986 Code is
amended by adding at the end thereof the following new section:
"SEC. 6712. FAILURE TO DISCLOSE TREATY-BASED RETURN POSITIONS.
Law "(a) GENERAL RULE.—If a taxpayer fails to meet t h e requirements
enforcement and of section 6114, there is hereby imposed a penalty equal to $1,000
crime. ($10,000 i n t h e case of a C corporation) on each such failure.
"(b) AUTHORITY TO WAIVE.—^The Secret«uy m a y waive all or a n y
part of the penalty provided by this section on a showing by t h e
taxpayer that there w a s reasonable cause for the failure and that
the taxpayer acted in good faith.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3533
"(c) PENALTY IN ADDITION TO OTHER PENALTIES.—The penalty
imposed by this section shall be in addition to any other penalty
imposed by law."
(CXi) The table of sections for subchapter B of chapter 61 of
the 1986 Code is amended by striking out the item relating to
section 6114 and inserting in lieu thereof the following:
"Sec. 6114. Treaty-based return positions.
"Sec. 6115. Cross reference."
(ii) The table of sections for part I of subchapter B of chapter
68 of the 1986 Code is amended by adding at the end thereof the
following new item:
"Sec. 6712. Failure to disclose treaty-based return positions."
(D) The amendments made by this paragraph shall apply to 26 USC 6114
taxable periods the due date for filing returns for which (with- note,
out extension) occurs after December 31,1988.
(6) Subsection (a) of section 894 of the 1986 Code is amended to
read as follows:
"(a) TREATY PROVISIONS.—
"(1) IN GENERAL.—The provisions of this title shall be applied
to any taxpayer with due regard to any treaty obligation of the
United States which applies to such taxpayer.
"(2) CROSS REFERENCE.—
"For relationship between treaties and this title, see section 7852(d)."
(bb) MISCELLANEOUS FOREIGN TECHNICAL CORRECTIONS.—
(1) PROVISIONS RELATING TO FOREIGN PERSONAL HOLDING
COMPANIES.—
(A) Subsection (f) of section 551 of the 1986 Code is
amended—
(i) by amending paragraph (1) to read as follows:
"(1) a foreign partnership or an estate or trust which is a
foreign estate or trust, or", and
(ii) by striking out the last sentence and inserting in
lieu thereof the following: "In any case to which the
preceding sentence applies, the Secretary may by regu-
lations provide that rules similar to the rules of section
1297(bX5) shall apply, and provide for such other
adjustments in the application of this subchapter as
may be necessary to carry out the purposes of this
subsection."
(B) Subsection (a) of section 551 of the 1986 Code is
amended by striking out "(other than estates or trusts the
gross income of which under this subtitle includes only
income from sources within the United States)" and insert-
ing in lieu thereof "(other than foreign estates or trusts)".
(C) Subsection (c) of section 552 of the 1986 Code is
amended to read as follows:
"(c) LOOK-THRU FOR CERTAIN DIVIDENDS AND INTEREST.—
"(1) I N GENERAL.—For purposes of this part, any related
person dividend or interest shall be treated as foreign personal
holding company income only to the extent such dividend or
interest is attributable (determined under rules similar to the
rules of subparagraphs (C) and (D) of section 904(dX3)) to income
of the related person which would be foreign personal holding
company income.
102 STAT. 3534 PUBLIC LAW 100-647—NOV. 10, 1988
"(2) RELATED PERSON DIVIDEND OR INTEREST.—For purposes of
paragraph (1), the term 'related person dividend or interest'
means any dividend or interest which—
"(A) is described in subparagraph (A) of section 954(c)(3),
and
"(B) is received from a related person which is not a
foreign personal holding company (determined without
regard to this subsection).
For purposes of the preceding sentence, the term 'related
person' has the meaning given such term by section 954(d)(3)
(determined by substituting 'foreign personal holding company'
for 'controlled foreign corporation each place it appears)."
26 use 551 note. . (D) The amendments made by this paragraph shall apply
to taxable years of foreign corporations beginning after
December 31,1986.
(2) TREATMENT OF CERTAIN PAYMENTS OUTSIDE THE UNITED
STATES.
(A) Subparagraph (A) of section 3405(d)(13) of the 1986
Code is amended by striking out "the United States" and
inserting in lieu thereof "the United States and any posses-
sion of the United States".
(B) Clause (i) of section 3405(dX13XB) of the 1986 Code is
amended to read as follows:
"(i) a United States citizen or a resident alien of the
United States, or".
(C) The heading of paragraph (13) of section 3405(d) of the
1986 Code is amended by striking out "UNITED STATES" and
inserting in lieu thereof "UNITED STATES OR ITS POSSES-
SIONS".
26 use 3405 (D) The amendments made by this paragraph shall apply
note. to distributions made after the date of the enactment of this
Act.
(3) CLARIFICATION OF DISCLOSURE UNDER CERTAIN AGREE-
MENTS.—
(A) Paragraph (4) of section 6103(k) of the 1986 Code is
amended—
(i) by striking out "or other convention" and insert-
ing in lieu thereof "or other convention or bilateral
agreement", and
(ii) by striking out "such convention" and inserting
in lieu thereof "such convention or bilateral agree-
ment".
(B) Subparagraph (A) of section 6103(bX5) of the 1986
Code is amended by striking out "the Commonwealth of the
Northern Mariana Islands, the Republic of the Marshall
Islands, the Federated States of Micronesia, and the Repub-
lic of Palau" and inserting in lieu thereof "and the
Commonwealth of the Northern Mariana Islands".
Effective date. (C) The amendments made by this paragraph shall take
26 use 6103 effect on the date of the enactment of the Tax Reform Act
note. of 1986.
(4) COORDINATION OF TREATIES WITH SECTION 904 (g).—
(A) Subsection (g) of section 904 of the 1986 Code is
amended by redesignating paragraph (10) as paragraph (11)
and by inserting after paragraph (9) the following new
paragraph:
"(10) COORDINATION WITH TREATIES.—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3535
f "(A) I N GENERAL.—If—
"(i) any amount derived from a United States-owned
foreign corporation would be treated as derived from
sources within the United States under this subsection
by reason of an item of income of such United States-
OMmed foreign corporation,
"(ii) under a treaty obligation of the United States
(applied without r^ard to this subsection and by treat-
ing any amount included in gross income under section
951(aXl) as a dividend), such amount would be treated
as arising from sources outside the United States, and
"(iii) the taxpayer chooses the benefits of this
paragraph,
this subsection shall not apply to such amount to the extent
attributable to such item of income (but subsections (a), (b),
and (c) of this section and sections 902, 907, and 960 shall be
applied separately with respect to such amount to the
extent so attributable).
"(B) SPECIAL RULE.—Amounts included in gross income
under section 951(aXl) shall be treated as a dividend under
subparagraph (AXii) only if dividends paid by each corpora-
tion (the stock in which is taken into account in determin-
ing whether the shareholder is a United States shareholder
in the United States-owned foreign corporation), if paid to
the United States shareholder, would be treated under a
treaty obligation of the United States as arising from
sources outside the United States (applied without r^ard to
this subsection)."
(B) The amendment made by subparagraph (A) shall take Effective date.
effect as if included in the amendment made by section 121 26 USC 904 note.
of the Tax Reform Act of 1984.
(5) TREATMENT OP ELECTION UNDER SECTION 338.—
(A) I N GENERAL.—Subsection (h) of section 338 of the 1986
Oxie is amended by adding at the end thereof the following
new paragraph:
"(16) CioORDINATION WITH FOREIGN TAX CREDIT PROVISIONS.—
Except as provided in regulations, this section shall not apply
for purposes of determining the source or character of any item
for purposes of subpart A of part III of subchapter N of this
chapter (relating to foreign tax credit). The preceding sentence
shall not apply to any gain to the extent such gain is includible
in gross income as a dividend under section 1248 (determined
without r^ard to any deemed sale under this section by a
foreign corporation)."
(B) EFFECTIVE DATE.—The amendment made by subpara- 26 USC 338 note.
graph (A) shall apply to qualified stock purchases (as
defined in section 338(dX3) of the 1986 Code) after March 31,
1988, except that, in the case of an election under section
338(hX10) of the 1986 CJode, such amendment shall apply to
quedified stock purchases (as so defined) after June 10,1987.
(6) TREATMENT OP TAX-EXEMPT SHAREHOLDERS OP A DISC.—
? (A) Section 995 of the 1986 (Dode is amended by adding at
the end thereof the following new subsection:
"(g) TREATMENT OP TAX-EXEMPT SHAREHOLDERS.—If any organiza-
tion described in subsection (aX2) or (bX2) of section 511 is a share-
holder in a DISC—
102 STAT. 3536 PUBLIC LAW 100-647—NOV. 10, 1988
"(1) any amount deemed distributed to such shareholder
under subsection (b),
"(2) any actual distribution to such shareholder which under
section 996 is treated as out of accumulated DISC income, and
"(3) any gain which is treated as a dividend under subsection
(0,
shall be treated as derived from the conduct of an unrelated trade or
business (and the modifications of section 512(b) shall not apply).
The rules of the preceding sentence shall apply also for purposes of
determining any such shareholder's DISC-related deferred tax liabil-
ity under subsection (f)."
26 use 995 note. (B) The amendment made by subparagraph (A) shall
apply to taxable years beginning after December 31, 1987.
(7) TREATMENT OP CERTAIN AMOUNTS PREVIOUSLY TAXED UNDER
SECTION 1248.—
(A) IN GENERAL.—Subsection (e) of section 959 of the 1986
Code is amended by striking out "such person under" and
inserting in lieu thereof "such person (or, in any case to
which section 1248(e) applies, of the domestic corporation
referred to in section 1248(eX2)) under".
26 use 959 note. (B) EFFECTIVE DATE.—The amendment made by subpara-
graph (A) shall apply in the case of transactions to which
section 1248(e) of the 1986 Code applies and which occur
after December 31,1986.
(8) TREATMENT OF SHARED FSC'S.—
(A) I N GENERAL.—Section 927 of the 1986 Code is amend-
ed by adding at the end thereof the following new subsec-
tion:
"(g) TREATMENT OF SHARED FSC's.—
"(1) I N GENERAL.—Except as provided in paragraph (2), each
separate account referred to in pareigraph (3) maintained by a
shared FSC shall be treated as a separate corporation for
purposes of this subpart.
"(2) CERTAIN REQUIREMENTS APPUED AT SHARED FSC LEVEL.—
Paragraph (1) shall not apply—
"(A) for purposes of—
"(i) subparagraphs (A), (B), (D), and (E) of section
922(aXl),
"(ii) paragraph (2) of section 922(a),
"(iii) subsections (b), (c), and (e) of section 924, and
"(iv) subsection (f) of this section, and
"(B) for such other purposes as the Secretary may by
regulations prescribed.
"(3) SHARED FSC.—For purposes of this subsection, the term
'shared FSC' means any corporation if—
"(A) such corporation maintains a separate account for
transactions with each shareholder (and persons related to
such shareholder),
"(3) distributions to each shareholder are based on the
amounts in the separate account maintained with respect
to such shareholder, and
"(C) such corporation meets such other requirements as
the Secretary may by regulations prescribe."
26 use 927 note. (B) The amendment made by subparagraph (A) shall apply as
if included in the provision of the Tax Reform Act of 1984 to
which it relates.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3537
(9) CLARIFICATION OF DIVIDENDS RECEIVED DEDUCTION FOR DIVI-
DENDS FROM A FSC.—
(A) Subsection (c) of section 245 of the 1986 Code is
amended to read as follows:
"(c) CERTAIN DIVIDENDS RECEIVED FROM FSC—
"(1) IN GENERAL.—In the case of a domestic corporation, there
shall be allowed as a deduction an amount equal to—
"(A) 100 percent of any dividend received from another
corporation which is distributed out of earnings and profits
attributable to foreign trade income for a period during
which such other corporation was a FSC, and
"(B) 70 percent (80 percent in the case of dividends from a
20-percent owned corporation as defined in section 243(cX2))
of any dividend received from another corporation which is
distributed out of earnings and profits attributable to effec-
tively connected income received or accrued by such other
corporation while such other corporation was a FSC.
"(2) EXCEPTION FOR CERTAIN DIVIDENDS.—Paragraph (1) shall
not apply to any dividend which is distributed out of earnings
and profits attributable to foreign trade income which—
"(A) is section 923(aX2) nonexempt income (within the
meaning of section 927(dX6)), or
"(B) would not, but for section 923(aX4), be treated as
exempt foreign trade income.
"(3) No DEDUCTION UNDER SUBSECTION (a) OR (b).—No deduc-
tion shall be allowable under subsection (a) or (b) with respect to
any dividend which is distributed out of earnings and profits of
a corporation accumulated while such corporation was a FSC.
"(4) DEFINITIONS.—For purposes of this subsection—
"(A) FOREIGN TRADE INCOME; EXEMPT FOREIGN TRADE
INCOME.—The terms 'foreign trade income' and 'exempt
foreign trade income' have the respective meanings given
such terms by section 923.
"(B) EFFECTIVELY CONNECTED INCOME.—The term 'effec-
tively connected income' means any income which is effec-
tively connected (or treated as effectively connected) with
the conduct of a trade or business in the United States and
is subject to tax under this chapter. Such term shall not
include any foreign trade income."
(B) The amendment made by subparagraph (A) shall 26 use 245 note.
apply as if included in the provision of the Tax Reform Act
of 1984 to which it relates.
SEC. 1013. AMENDMENTS RELATED TO TITLE XIII OP THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1301 OF THE REFORM ACT.—
(1) Clause (iii) of section 142(dX4XB) of the 1986 Code is
amended by striking out "average rent" and inserting in lieu
thereof "average gross rent".
(2) Clause (iii) of section 143(aX2XA) of the 1986 Code is
amended by striking out "no bond which is part of such issue
meets" and inserting in lieu thereof "such issue does not meet".
(3) Paragraph (4) of section 143(b) of the 1986 Ckxie is amended
by inserting "is part of an issue which" after "which".
(4XA) Clause (ii) of section 144(aX12XA) of the 1986 Code is
amended by inserting "(or series of bonds)" before "issued to
refund".
102 STAT. 3538 PUBLIC LAW 100-647—NOV. 10,1988
(BXi) Subclause 0) of section 144(aX12XAXii) of the 1986 Code
is amended to read as follows:
"CD the average maturity date of the issue of
which the refunding bond is a part is not later than
the average maturity date of the bonds to be
refunded by such issue,",
(u) Subparagraph (A) of section 144(aX12) of the 1986 Code is
amended by addmg at the end thereof the following new sen-
tence:
"For purposes of clause (iiXD, average maturity shall be
determined in accordance with section 147G>X2XA)."
26 use 144 note. (iii) A refunding bond issued before July 1, 1987, shall be
treated as meeting the requirement of subclause (I) of section
144(aX12XAXii) of the 1986 Code if such bond met the require-
ment of such subclause as in effect before the amendments
made by this subparagraph.
(Q Clause (ii) of section 144(aX12XA) of the 1986 Code is
amended by adding "and" at the end of subclause (II), by
striking out subclause (m), and by redesignating subclause (TV)
as subclause OH).
Loans. (5) Subparagraph (B) of section 144(bXl) of the 1986 Code is
amended—
(A) by striking out "to which part B of title IV of the
Higher Education Act of 1965 (relating to guaranteed stu-
dent loans) does not apply", and
(B) by striking out "of such Act" and inserting in lieu
thereof "of the Higher Education Act of 1965", and
(O by striking out "eligible" and all that follows in such
subparagraph and inserting in lieu thereof the following:
"eligible. A p n ^ a m shall not be treated as described in
this subparagraph if such program is described in subpara-
graph (A).
A bond shall not be treated as a qualified student loan bond if
the issue of which such bond is a part meets the private
I business tests of paragraphs (1) and (2) of section 141(b) (deter-
' mined by treating 501(c)(3) organizations as governmental units
with respect to their activities which do not constitute unre-
lated trades or businesses, determined by appl3mig section
513(a))."
(6) Subclause (D of section 145a)X2XBXii) of the 1986 Code is
amended by striking out "103(b)" and inserting in lieu thereof
"103(bX2)".
(7) Qause (i) of section 145a)X2XC) of the 1986 Code is
amended by striking out "subparagraph (BXii)" and inserting in
lieu thereof "subparagraph (B)".
(8) Paragraph (4) of section 145(b) of the 1986 Code is amended
by striking out "subparagraphs (C) and (D)" and inserting in
lieu thereof "subparagraphs (C), (D), and (E)".
(9) Subparagraph (A) of section 146(fX5) of the 1986 Code (as in
efTect before the amendments made by section 10631 of the
Revenue Act of 1987) is amended to read as follows:
"(A) the purpose of issuing exempt facility bonds
described in 1 of the paragraphs of section 142(a),".
(lOXA) Paragraph (1) of section 1460c) of the 1986 Code is
amended by striking out "paragraph (2)" and inserting in lieu
thereof "paragraphs (2) and (3)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3539
(B) Subsection (k) of section 146 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) TREATMENT OP GOVERNMENTAL BONDS TO WHICH VOLUME
CAP ALLOCATED.—Paragraph (1) shall not apply to any bond to
which volume cap is allocated under section 141(bX5)—
"(A) for an output facility, or
"(B) for a facility of a tjrpe described in paragraph (4), (5),
(6), or (10) of section 142(a),
if the issuer establishes that the State's share of the private
business use (as defined by section 141(bX6)) of the facility will
equal or exceed the State's share of the volume cap allocated
with respect to bonds issued to finance the facility."
(11) Subsection (e) of section 147 of the 1986 Code is amended
by striking out "treated as".
(12) Subsection (f) of section 147 of the 1986 Code (relating to
public approval requirement for private activity bonds) is
amended by adding at the end thereof the following new para-
graph:
"(4) SPECIAL RULES FOR SCHOLARSHIP FUNDING BOND ISSUES AND
VOLUNTEER FIRE DEPARTMENT BOND ISSUES.—
"(A) SCHOLARSHIP FUNDING BONDS.—In the case of a quali-
fied scholarship funding bond, any governmental unit
which made a request described in section 150(dX2XB) with
respect to the issuer of such bond shall be treated for
purposes of paragraph (2) of this subsection as the govern-
mental unit on behalf of which such bond was issued.
Where more than one governmental unit within a State has
made a request described in section 150(dX2)(B), the State
may also be treated for purposes of paragraph (2) of this
subsection as the governmental unit on behalf of which
such bond was issued.
"(B) VOLUNTEER FIRE DEPARTMENT BONDS.—In the case of
a bond of a volunteer fire department which meets the
requirements of section 150(e), the political subdivision
described in section 150(eX2XB) with respect to such depart-
ment shall be treated for purposes of paragraph (2) of this
subsection as the governmental unit on behalf of which
such bond was issued."
(13XA) Paragraph (1) of section 147(g) of the 1986 Code (relat-
ing to restriction on issuance costs financed by issue) is
amended by striking out "aggregate face amount of the issue"
and inserting in lieu thereof "proceeds of the issue".
(B) Paragraph (2) of section 147(g) of the 1986 Code is amended
by striking out "aggregate authorized face amount of the issue
does not" and inserting in lieu thereof "proceeds of the issue do
not".
(C) The amendments made by this paragraph shall apply to 26 USC147 note,
bonds issued after June 30,1987.
(14) Paragraph (2) of section 148(d) of the 1986 Code (relating
to special rules for reasonably required reserve or replacement
fund) is amended by striking out "any fund described in para-
graph (1)" and inserting in lieu thereof "any reserve or replace-
ment fund".
(15) Paragraph (3) of section 148(f) of the 1986 Code is amend-
ed by adding at the end thereof the following new sentence: "A
series of issues which are redeemed during a 6-month period (or
such longer period as the Secretary may prescribe) shall be
102 STAT. 3540 PUBLIC LAW 100-647—NOV. 10, 1988
treated (at the election of the issuer) as 1 issue for purposes of
the preceding sentence if no bond which is part of any issue in
such series has a maturity of more than 270 days or is a private
activity bond."
(16XA) Subclause (I) of section 148(fX4)(BXiii) of the 1986 Code
(relating to safe harbor for determining when proceeds of tax or
revenue anticipation bonds are expended) is amended by strik-
ing out "aggregate face amount of such issue" and inserting in
lieu thereof "proceeds of such issue".
26 use 148 note. (B) The amendment made by subparagraph (A) shall apply to
bonds issued after June 30,1987.
(17XA) Subparagraph (C) of section 148(fX4) of the 1986 Code is
amended—
(i) by striking out the heading and inserting in lieu
thereof:
"(C) EXCEPTION FOR GOVERNMENTAL UNITS ISSUING
$5,000,000 OR LESS OF BONDS.—
"(i) IN GENERAL.—",
(ii) by redesignating clauses (i) through (iv) as subclauses
(I) through (IV), respectively, and moving the margins of
such subclauses 2 ems to the right, and
(iii) by striking out the last sentence and inserting in lieu
thereof the following new clauses:
"(ii) AGGREGATION OF ISSUERS.—For purposes of
subclause (IV) of clause (i)—
"(I) an issuer and all entities which issue bonds
on behalf of such issuer shall be treated as 1 issuer,
"(n) all bonds issued by a subordinate entity
shall, for purposes of applying such subclause to
each other entity to which such entity is subordi-
nate, be treated as issued by such other entity, and
"(IQ) an entity formed (or, to the extent provided
by the Secretary, availed of) to avoid the purposes
of such subclause (TV) and aU other entities bene-
fiting thereby shall be treated as 1 issuer,
"(iii) (SKTAIN REFUNDING BONDS NOT TAKEN INTO AC-
COUNT IN DETERMINING SMALL ISSUER STATUS.—There
shall not be taken into account under subclause (IV) of
clause (i) any bond issued to refund (other than to
advance refund) any bond to the extent the amount of
the refunding bond does not exceed the outstanding
amount of the refunded bond.
"(iv) CERTAIN ISSUES ISSUED BY SUBORDINATE GOVERN-
MENTAL UNITS, ETC., EXEBfFT FROM REBATE REQUIRE-
MENT.—^An issue issued by a subordinate entity of a
governmental unit with general taxing powers shall be
treated as described in clause (i)CD if the aggr^ate face
amount of such issue does not exceed the lesser of—
"a) $5,000,000, or
"(II) the amount which, when added to the aggre-
gate face amount of other issues issued by such
entity, does not exceed the portion of the $5,000,000
limitation under clause dXTV) which such govern-
mental unit allocates to such entity.
For purposes of the preceding sentence, an entity
which issues bonds on behalf of a governmental unit
with general taxing powers shsdl be treated as a
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3541
subordinate entity of such unit. An allocation shall be
taken into account under subclause (II) only if it is
irrevocable and made before the issuance date of such
issue and only to the extent that the limitation so
allocated bears a reasonable relationship to the bene-
fits received by such governmental unit from issues
issued by such entity,
"(v) DETERMINATION OF WHETHER REFUNDING BONDS
EUGIBLE FOR EXCEPTION FROM REBATE REQUIREMENT.—If
any portion of an issue is issued to refund other bonds,
such portion shall be treated as a separate issue which
does not meet the requirements of paragraphs (2) and
(3) by reason of this subparagraph unless—
"(I) the aggregate face amount of such issue does
not exceed $5,000,000,
"(II) each refunded bond was issued as part of an
issue which was treated as meeting the require-
ments of paragraphs (2) and (3) by reason of this
subparagraph,
"(III) the average maturity date of the refunding
bonds issued as part of such issue is not later than
the average maturity date of the bonds to be
refunded by such issue, and
"(IV) no refunding bond has a maturity date
which is later than the date which is 30 years after
the date the original bond was issued.
Subclause (III) shall not apply if the average maturity
of the issue of which the original bond was a part (and
of the issue of which the bonds to be refunded are a
part) is 3 years or less. For purposes of this clause,
average maturity shall be determined in accordance
with section 147(bX2XA).
"(vi) REFUNDINGS OF BONDS ISSUED UNDER LAW PRIOR
TO TAX REFORM ACT OF 1986.—If section 141(a) did not
apply to any refunded bond, the issue of which such
refunded bond was a part shall be treated as meeting
the requirements of subclause (II) of clause (v) if—
' (I) such issue was issued by a governmental unit
with general taxing powers,
"(II) no bond issued as part of such issue was an
industrial development bond (as defined in section
103(bX2), but without regard to subparagraph (B) of
section 103(bX3)) or a private loan bond (as defined
in section 103(oX2XA), but without regard to any
exception from such definition other than section
103(oX2XC)), and
"(III) the aggregate face amount of all tax-
exempt bonds (other than bonds described in
subclause (ID) issued by such unit during the cal-
endar year in which such issue was issued did not
exceed $5,000,000.
References in subclause (II) to section 103 shall be to
such section as in effect on the day before the date of
the enactment of the Tax Reform Act of 1986. Rules
similar to the rules of clauses (ii) and (iii) shall apply
for purposes of subclause (III). For purposes of
subclause (II) of clause (i), bonds described in subclause
102 STAT. 3542 PUBLIC LAW 100-647—NOV. 10, 1988
(II) of this clause to which section 141(a) does not apply
shall not be treated as private activity bonds."
(B) Subclause (IV) of section 148(fX4)(C)(i) of the 1986 Code (as
redesignated by subparagraph (A)) is amended by striking out
"(and all subordinate entities thereof)".
26 use 148 note. (CXD Except as provided in clause (ii), the Eimendments made
by this paragraph shall apply to bonds issued after June 30,
1987.
(ii) At the election of an issuer (made at such time and in such
manner as the Secretary of the Treasury or his delegate may
prescribe), the amendments made by this paragraph shall apply
to such issuer as if included in the amendments made by section
1301(a) of the Tax Reform Act of 1986.
(18) Clause (i) of section 148(fK4XD) of the 1986 Code is
amended—
(A) by inserting "for a program" before "described in
section 144(bXlXA)",
(B) by striking out "such a program" and inserting in lieu
thereof "such program", and
Loans. (C) by adding at the end thereof the following: "Amounts
designated as interest on student loans shall not be taken
into account in determining whether the issuer is
reimbursed for such costs. Except as otherwise hereafter
provided in regulations prescribed by the Secretary, costs
described in subclause (I) paid from amounts earned as
described in the first sentence of this clause may also be
taken into account in determining the yield on the student
loans under a program described in section 144(bXlXA)."
(19) Subparagraph (B) of section 148(fK7) of the 1986 Code is
amended by striking out "due to reasonable cause and not" and
inserting in lieu thereof "not due".
(20) Clause (iii) of section 149(bX3XA) of the 1986 Code is
amended by striking out "with respect to any bond issued before
July 1,1989".
(21) Subparagraph (A) of section 149(bX4) of the 1986 Code is
amended by striking out "a qualified student loan bond, and a
qu^ified redevelopment bond" and inserting in lieu thereof
and a qualified student loan bond".
(22) Paragraph (3) of section 149(e) of the 1986 Code (relating
to information reporting) is amended by striking out "there is
reasonable cause for the failure to file such statement in a
timely fashion" and inserting in lieu thereof "the failure to file
in a timely fashion is not due to willful neglect".
(23XA) Subparagraph (B) of section 150a)X4) of the 1986 Code
(relating to change in use of facilities financed with tax-exempt
private activity bonds) is amended by inserting before the
period "or a qualified small issue bond".
(B) The heading for paragraph (4) of section 150(b) of the 1986
Code is amended by inserting "AND SMALL ISSUE BONDS" after
"EXEIMPT FACILITY BONDS"
(C) Subparagraph (A) of section 150(bXl) of the 1986 Code is
amended by inserting "tax-exempt" before "qualified mortgage
bond".
(24XA) Subsection (e) of section 150 of the 1986 Code is amend-
ed by adding at the end thereof the following new paragraph:
"(3) TREATMENT AS PRIVATE ACTIVITY BONDS ONLY FOR CERTAIN
PURPOSES.—Bonds which are part of an issue which meets the
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3543
requirements of paragraph (1) shall not be treated as private
activity bonds except for purposes of sections 147(f) and 149(d)."
(B) The amendment made by subparagraph (A) shall apply to 26 USC150 note,
bonds issued after October 21,1988.
(25) Clause (ii) of section 1301(fX2XC) of the Reform Act is 26 USC 25.
amended to read as follows:
"(ii) Clause (ii) of section 25(cX2XA) is amended by strik-
ing out all that follows 'an amount of and inserting in lieu
thereof 'private activity bonds which it may otherwise issue
during such calendar year under section 146,'."
(26) Subsection (h) of section 25 of the 1986 Code (relating to
credit for interest on certain home mortgages) is amended by
striking out "1987" and inserting in lieu thereof "1988".
(27) The date contained in section 143(aXlXB) of the 1986 Code 26 USC 143 note,
shall be treated as contained in section 103A(cXlXB) of the
Internal Revenue Code of 1954, as in effect on the day before the
date of the enactment of the Reform Act, for purposes of any
bond issued to refund a bond to which such 103A(cXl) applies.
(28XA) Subparagraph (A) of section 146(iX2) of the 1986 Code is
amended to read as follows:
"(A) the average maturity date of the qualified student
loan bonds to be refunded by the issue of which the refund-
ing bond is a part, or".
(B) Subparagraph (A) of section 146(iX3) of the 1986 Code is
amended to read as follows:
"(A) the average maturity date of the qualified mortgage
bonds to be refunded by the issue of which the refunding
bond is a part, or".
(C) Subsection (i) of section 146 of the 1986 Code is amended
by redesignating paragraph (4) as paragraph (5) and by insert-
ing after paragraph (3) the following new paragraph:
(4) AVERAGE MATURITY.—For purposes of paragraphs (2) and
(3), avereige maturity shall be determined in accordance with
section 147(bX2XA)."
(29) Subparagraph (D) of section 147(0(2) of the 1986 Code is
amended by striking out "the maturity date" and all that
follows and inserting in lieu thereof "the average maturity date
of the issue of which the refunding bond is a part is later than
the average maturity date of the bonds to be refunded by such
issue. For purposes of the preceding sentence, average maturity
shall be determined in accordance with subsection (bX2XA).
(30) Subparagraph (A) of section 150(bXl) of the 1986 Code is
amended by inserting before the period "and before the date
such residence is again the principal residence of at least 1 of
the mortggigors who received such financing".
(31) Subparagraph (A) of section 150(bX2) of the 1986 Code is
amended by striking out "described paragraph" and inserting
in lieu thereof "described in paragraph".
(32) Paragraph (2) of section 150(b) of the 1986 Code is amend-
ed by adding at the end thereof the following: "If the provisions
of prior law corresponding to section 142(d) apply to a refunded
bond, such provisions shall apply (in lieu of section 142(d)) to the
refunding bond."
(33) Subsection (b) of section 150 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(6) SMALL ISSUE BONDS WHICH EXCEED CAPITAL EXPENDFTURE
LIMITATION.—In the case of any financing provided from the
102 STAT. 3544 PUBLIC LAW 100-647—NOV. 10, 1988
proceeds of any bond which, when issued, purported to be a
qualified small issue bond, no deduction shall be allowed under
this chapter for interest on such financing which accrues during
the period such bond is not a qualified small issue bond.
(34XA) Paragraph (7) of section 103(c) of the Internal Revenue
Code of 1954 (as in effect on the day before the date of the
enactment of the Tax Reform Act of 1986) is amended by
striking out "necessary" and inserting in lieu thereof "nec-
essary .
26 use 103 note. (B) Subparagraph (A) shall apply to obligations sold after May
2, 1978, and to which Treasury regulation section 1.103-13
(1979) was provided to apply.
26 u s e 103 note. (35) VAUDATION OF SINKING FUND REGULATIONS.—
(A) Treasunr Regulation section 1.103-13(g) (1979) is
hereby enacted into positive law.
(BXi) Except as provided in clause (ii), subparagraph (A)
shall apply to obligations sold after May 2, 1978, and to
which such regulation was provided to apply.
(ii) Treasury Regulation section 1.103-13(g) (1979) as
enacted into positive law by subparagraph (A) shall cease to
apply to the extent hereafter modified by the Secretary of
the Treasury or his delegate by regulations.
(36) Clause (i) of section 147(fK2XE) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence:
"If the office of any elected official described in
subclause (II) is vacated and an individual is appointed
by the chief elected executive officer of the govern-
mental unit and confirmed by the elected legislative
body of such unit (if any) to serve the remaining term
of the elected official, the individual so appointed shall
be treated as the elected official for such remaining
term."
(37) The table of sections for part III of subchapter B of
chapter 1 of the 1986 Code is amended by striking out the items
relating to sections 103 and 103A and inserting in lieu thereof
the following new item:
"Sec. 103. Interest on State and local bonds."
(38) Subparagraph (B) of section 141(bX5) of the 1986 Code is
amended by striking out "which would cause bond" and insert-
ing in lieu thereof "which would cause a bond".
(39) Clause (ii) of section 142(bXlXB) of the 1986 Code is
amended by striking out "(as defined in 168(iX3))" and inserting
in lieu thereof "(as defined in section 168(iX3))".
(40) Subparagraph (B) of section 146(dX4) of the 1986 Code is
£unended by striking out "with respect a possession" and insert-
ing in lieu thereof "with respect to a possession".
(41) Clause (ii) of section 48(1X1 IXA) of the 1986 Code is
amended by striking out "an industrial development bond
(within the meaning of section 103(bX2))" and inserting in lieu
thereof "a private activity bond (within the meaning of section
141)".
(42) Subsection (a) of section 7478 of the 1986 Code is
amended—
(A) by striking out "whether prospective obligations are
described in section 103(a)" in paragraph (1) and inserting
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3545
' in lieu thereof "whether interest on prospective obligations
will be excludable from gross income under section 103(a)",
and
(B) by striking out "whether such prospective obligations
are described in section 103(a)" and inserting in lieu thereof
"whether interest on such prospective obligations will be
excludable from gross income under section 103(a)".
(43XA) Subsection (b) of section 148 of the 1986 Code (defining
higher jdelding investments) is amended by adding at the end
thereof the following new paragraph:
"(3) ALTERNATIVE MINIMUM TAX BONDS TREATED AS INVEST-
MENT PROPERTY IN CERTAIN CASES.—
"(A) I N GENERAL.—Except as provided in subparagraph
(B), the term 'investment property' does not include any
tax-exempt bond.
"(B) EXCEPTION.—With respect to an issue other than an
issue a part of which is a specified private activity bond (as
defined in section 57(aX5XC)), the term 'investment prop-
erty' includes a specified private activity bond (as so
defined)."
(B) Paragraph (2) of section 148(b) of the 1986 Code (defining
investment property) is amended Ijy striking the last sentence.
(C) The amendments made by this paragraph shall apply to 26 USC148 note.
obligations issued eifter March 31,1988.
(44) Subparagraph (B) of section 46(cX5) of the 1986 (Dode is
amended—
(A) by striking out "INDUSTRIAL DEVELOPMENT BONDS" in
the heading and inserting in lieu thereof "PRIVATE ACTIVITY
BONDS", and
(B) by striking "an industrial development bond (within
the meaning of section 103(bX2))" and inserting in lieu
thereof "a private activity bond (within the meaning of
section 141)".
(b) AMENDMENTS RELATED TO SECTION 1311 OF THE REFORM ACT.—
(1) Section 1311 of the Reform Act is amended by redesignat- 26 USC 141 note,
ing subsection (d) as subsection (f), and by inserting after subsec-
tion (c) the following new subsections:
"(d) P U B U C APPROVAL AND INFORMATION REPORTING.—Sections
147(f) and 149(e) of the 1986 Code shall apply to bonds issued after
December 31,1986.
"(e) REBATE REQUIREMENT FOR QUALIFIED SCHOLARSHIP FUNDING
BONDS.—Section 150(d) of the 1986 (Dode shall apply to payments
made after August 15,1986."
(2) Paragraph (2) of section 1311(b) of the Reform Act (relating
to effective date for section 1301(f)) is amended by inserting
"with respect to non-issued bond amounts elected" after
"issued".
(c) AMENDMENTS RELATED TO SECTION 1313 OF THE REFORM ACT.—
(1) Clause (i) of section 1313(aXlXB) of the Reform Act is
amended by striking out "the proceeds" and inserting in lieu
thereof "the net proceeds".
(2XA) Subparagraph (C) of section 1313(aX3) of the Reform Act
is amended by striking out "section 148" and inserting in lieu
thereof "sections 143(g) and 148".
(B) The amendment made by subparagraph (A) shall apply to 26 USC 141 note.
bonds issued after June 30,1987.
102 STAT. 3546 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 141 note. (3) Subparagraph (E) of section 1313(aX3) of the Reform Act is
amended by striking out "of such Code".
(4) Paragraph (3) of section 1313(a) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "In the case of a refunding bond described in paragraph
(1) with respect to a qualified bond described in paragraph (2XB),
the requirements of section 13120))(1) which applied to such
qualified bond shall be treated as specified in this paragraph
with respect to such refunding bond.'
(5) Subparsigraph (A) of section 1313(aX4) of the Reform Act is
amended by inserting "and by substituting 'September 1, 1986'
for 'August 16, 1986 before the comma at the end thereof.
(6) Paragraph (2) of section 1313(b) of the Reform Act is
amended by adding at the end thereof "For purposes of the
preceding sentence, the determination of whether a bond is
described in such subsection (oX2XA) shall be made without
regard to any exception other than section 103(oX2XC) of such
Code."
(7) Subparagraph (F) of section 131303X3) of the Reform Act is
amended by strilang out "of such Code".
(8) Paragraph (3) of section 1313(b) of the Reform Act is
amended by adding eifter subparagraph (F) the following new
subparagraph:
"(G) Except as provided in the last sentence of subsection
(cX2) of this section, the requirements of section 145(b)
(relating to $150,000,000 limitation on bonds other than
hospital bonds)."
(9) Paragraph (5) of section 1313(b) of the Reform Act is
amended by striking out "are to be" and inserting in lieu
thereof "are or will be".
(lOXA) The heading for subsection (c) of section 1313 of the
Reform Act is amended by striking out "CURRENT" and insert-
ing in lieu thereof "CERTAIN".
(B) Paragraph (1) of section 1313(c) of the Reform Act is
amended—
(i) by striking out "apply to any bond" and inserting in
lieu thereof "apply to any bond (or series of bonds)", and
(ii) by striking out "law do not" and inserting in lieu
thereof "law did not".
(IIXA) Subparagraph (A) of section 1313(cXl) of the Reform
Act is amended to read as follows:
"(A) the average maturity date of the issue of which the
refunding bond is a part is not later than the average
maturity date of the bonds to be refunded by such issue,".
(B) Paragraph (1) of section 1313(c) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence:
"For purposes of subparagraph (A), average maturity shall be
determined in accordance with section 147(bX2XA) of the 1986
Code."
(C) Paragraph (1) of section 1313(c) of the Reform Act is
amended by adding "and" at the end of subparagraph (B), by
striking out subparagraph (C), and by redesignating subpara-
graph (D) as subparagraph (C).
(D) Subparagraph (B) of section 1313(cX2) of the Reform Act is
amended by striking out "and (D)" and inserting in lieu thereof
"and(C)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3547
(E) A refunding bond issued before July 1, 1987, shall be 26 USC141 note.
treated as meeting the requirement of subparagraph (A) of
section 1313(cXl) of the Reform Act if such bond met the
requirement of such subparagraph as in effect before the
amendments made by this paragraph.
(12XA) Subparagraph (N) of section 103(bX6) of the Internal
Revenue Code of 1954, as in effect on the day before the date of
the enactment of the Reform Act (relating to termination
dates), is amended by redesignating clauses (ii) and (iii) as
clauses (iii) and (iv), respectively, and by striking out clause (i)
and inserting in lieu thereof the following new clauses:
"(i) IN GENERAL.—Except as provided in clause (ii),
this paragraph shall not apply to any obligation issued
after December 31,1986.
"(ii) CERTAIN REFTJNDINGS.—This paragraph shall
apply to any obligation (or series of obligations) issued
to refund an obligation issued on or before December
31,1986, if—
"(I) the average maturity date of the issue of
which the refmuting obligation is a part is not later
than the average maturity date of the obligations
to be refunded by such issue,
"(ID the amount of the refunding obligation does
not exceed the outstanding amount of the refunded
obligation, and
"OJD the proceeds of the refunding obligation are
used to redeem the refunded obligation not later
than 90 days after the date of the issuance of the
refunding obligation.
For purposes of subclause (I), average maturity shall be
determined in accordance ¥dth subsection (bX14)(BXi)."
(B) The date applicable imder section 144(aX12)(B) of the 1986 26 USC 144 note.
Code shall be treated as contained in section 103(bX6)(NXiii) of
the Internal Revenue C!ode of 1954, as in effect on the day before
the date of the enactment of the Reform Act, for purposes of any
bond issued to refund a bond to which such section
103(bX6XNXiii) applies.
(13) Paragraph (2) of section 1313(c) of the Reform Act is 26 USC 141 note.
amended—
(A) by striking out "apply to any bond" and inserting in
lieu thereof "apply to any bond (or series of bonds)",
(B) by striking out "subsection does not" and inserting in
lieu thereof "subsection did not", and
(CJ) by striking out "the proceeds" in subparagraph (AXD
and inserting in lieu thereof "the net proceeds".
(14XA) Section 1313 of the Reform Act is amended by adding
at the end thereof the following new subsection:
"(d) MORTGAGE AND STUDENT LOAN TARGETING RULES TO APPLY TO
LOANS MADE MORE THAN 3 YEARS AFTER THE DATE OF THE ORIGINAL
ISSUE.—Subsections (aX3) and (bX3) shall be treated as including the
requirements of subsections (e) and (f) of section 143 and paragraphs
(3) and (4) of section 144(b) of the 1986 Code with respect to bonds the
proceeds of which are used to finance loans made more than 3 years
after the date of the issuance of the original bond."
(B) The amendment made by subparagraph (A) shall apply 26 USC 141 note.
with respect to refunding bonds issued after October 16, 1987.
19-194 O _ 0 1 _ p o r t i-
102 STAT. 3548 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 103 note. (15) A bond issued to refund an obligation described in section
103(o)(3) of the Internal Revenue Code of 1954 (as in effect on
the day before the date of the enactment of the Tax Reform Act
of 1986) shall not be treated as described in section 144(b) of the
1986 Code unless it is described in section 144(b)(1)(A) of the
1986 Code.
(d) AMENDMENTS RELATED TO SECTION 1314 OF THE REFORM ACT.—
26 use 141 note. (1) Subsection (a) of section 1314 of the Reform Act is
amended by adding at the end thereof the following: "The
preceding sentence shall not apply to the first advance refund-
ing after September 25, 1985, of a bond issued before Septem-
ber 26, 1985."
(2) Subsection (f) of section 1314 of the Reform Act is amended
by striking out "December" and inserting in lieu thereof
"August".
(3) Section 1314 of the Reform Act is amended by redesignat-
ing subsection (g) as subsection (i) and by inserting after subsec-
tion (f) the following new subsections:
"(g) TERMINATION OF MORTGAGE BOND POUCY STATEMENT
REQUIREMENT.—Paragraph (5) of section 103A(j) of the 1954 Code
(relating to policy statement) shall not apply to any bond issued
after August 15, 1986, and shall not apply to nonissued bond
amounts elected under section 25 of the 1986 Code after such date.
"(h) ARBITRAGE RESTRICTION ON INVESTMENTS IN INVESTMENT-TYPE
PROPERTY.—In the case of a bond issued before August 16, 1986
(September 1, 1986 in the case of a bond described in section
1312(c)(2)), section 103(c) of the 1954 Code shall be applied by treat-
ing the reference to securities in paragraph (2) thereof as including a
reference to investment-type property but only for purposes of
determining whether any bond issued after October 16, 1987, to
advance refund such bond (or a bond which is part of a series of
refundings of such bond) is an arbitrage bond (within the meaning of
section 148(a) of the 1986 Code)."
(e) AMENDMENTS RELATED TO SECTION 1315 OF THE REFORM ACT.—
(1) Subsection (c) of section 1315 of the Reform Act is
amended—
(A) by inserting "for calendar year 1986" after "1954
Code" each place it appears,
(B) by striking out "before August 16" each place it
appears and inserting in lieu thereof "on August 15", and
(C) by adding at the end thereof the following new
sentence:
"The preceding sentence shall not apply to the extent section
1313(bX5) treats any bond as a private activity bond for purposes of
section 146 of the 1986 Code."
(2XA) Subsection (e) of section 1315 of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "The preceding sentence shall not apply to any bond
which (if issued on August 15, 1986) would have been an indus-
trial development bond (as defined in section 103(b)(2) of the
1954 Code)."
26 use 141 note. (B) The amendment made by subparagraph (A) shall apply to
bonds issued after June 10,1987.
(f) AMENDMENTS RELATED TO SECTION 1316 OF THE REFORM ACT.—
(1)(A) Subsections (aXD, (bXD, (cXD, and (fXD of section 1316 of
26 use 141 note. the Reform Act are each amended by inserting "and as having a
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3549
carryforward purpose described in section 14G(fX5) of such
Code" after "the 1986 Code".
(B) The amendment made by subparagraph (A) shall apply 26 USC141 note.
only with respect to carr3rforwards of volume cap for years after
1986.
(2) Subsection (c) of section 1316 of the Reform Act is amended 26 USC 141 note,
by adding at the end thereof the following new paragraph:
"(4) APPUCATION OF SECTION 147(b).—A bond to which this
subsection applies (other than a refunding bond) shall be treat-
ed as meeting the requirements of section 147(b) of the 1986
Code if the average maturity (determined in accordance with
section 147(bX2XA) of such Code) of the issue of which such bond
is a part does not exceed 20 years. A bond issued to refund (or
which is part of a series of bonds issued to refund) a bond
described in the preceding sentence shall be treated as meeting
the requirements of such section if the refunding bond has a
maturity date not later than the date which is 20 years after the
date on which the original bond was issued."
(3) Paragraph (1) of section 1316(e) of the Reform Act is
(A) by inserting "(and section 103(hX2XBXii) of the 1954
Code)" after "1986 (Dode" the first place it appears, and
(B) by inserting "(and section 103(bX16) of the 1954 Code)"
after "1986 Ck)de in the last sentence.
(4) Paragraph (2) of section 1316(g) of the Reform Act is
amended—
(A) by striking out "described in the paragraph (3)" in
subparagraph (A) and inserting in lieu thereof issued to
provide a facility described in paragraph (3)", and
(B) by striking out "which paragraph (3)" in subpara-
graph (C) and inserting in lieu thereof "which such para-
graph (3)".
(5) Paragraph (6) of section 1316(g) of the Reform Act is
amended by inserting "(and the provisions of section 1314)"
after "section 1301".
(6) Paragraph (7) of section 1316(g) of the Reform Act is
amended to read as follows:
"(7) In the case of a bond described in section 632(d) of the Tax
Reform Act of 1984—
"(A) section 141 of the 1986 Code shall be applied without
regard to subsection (aX2) and paragraphs (4) and (5) of
subsection (b),
"(B) paragraphs (1) and (2) of section 141(b) of the 1986
Code shall be applied by substituting '25 percent' for '10
percent' each place it appears, and
"(C) section 1490?) of the 1986 Code shall not apply.
This paragraph shall not apply to any bond issued after Decem-
ber 31,1990.'^
(7XA) Subparagraph (A) of section 1316(gX8) of the Reform Act
is amended by inserting "and as having a carryforward purpose
described in section 146(fX5) of such Code" after "the 1986
Code"
(B) The amendment made by subparagraph (A) shall apply 26 USC 141 note.
only with respect to carryforwards of volume cap for years after
1986.
(8) Paragraph (2) of section 1316(j) of the Reform Act is
amended to read as follows:
102 STAT. 3550 PUBLIC LAW 100-647—NOV. 10, 1988
"(2) by adding at the end thereof the following new sentence:
Florida. 'In the case of refunding obligations not to exceed $100,000,000
issued after October 21, 1986, by Dade County, Florida, for the
purpose of advance refunding its Aviation Revenue Bonds
(Series J), the first sentence of this paragraph shall be applied
by substituting "the date which is 1 year after the date of the
enactment of the Technical and Miscellaneous Revenue Act of
1988" for "December 31, 1984" and the amendments made by
section 1301 of the Tax Reform Act of 1986 shall not apply.'''
26 use 141 note. (9) Paragraph (2) of section 1316(k) of the Reform Act is
amended by striking out "$55,000,000 must be redeemed no
later than November 1, 1987" and inserting in lieu thereof "no
more than $55,000,000 shall be outstanding later than Novem-
ber 1,1987".
(10) Section 1104 of the Mortgage Subsidy Bond Tax Act of
1980 is amended by adding at the end of subsection (r) the
following new sentence:
"Section 148(f) of the Internal Revenue Code of 1986 and the amend-
ments made by section 1301 of the Tax Reform Act of 1986 shall not
apply to any bonds described in paragraph (1) which may be issued
as a result of the amendments made by the Tax Reform Act of
1986."
(11) Subsection (1) of section 1316 of the Reform Act is hereby
repealed.
Community (g) AMENDMENTS RELATED TO SECTION 1317 OF THE REFORM ACT.—
development. (1) Subparagraph (J) of section 1317(2) of the Reform Act is
26USC^rilnote amended by striking out "began construction in 1980" and
inserting in lieu thereof ", a subsidiary of Sierra Pacific
Resources, began in 1980 work to design, finance, construct, and
operate".
(2) Subparagraph (C) of section 1317(3) of the Reform Act is
amended to read as follows:
Baseball. "(C) A facility is described in this subparagraph if—
Football. "(i) it is one or more stadiums to be used either by an
Stadiums. American League baseball team or a National Football
League team currently using a stadium in a city having
a population in excess of 2,500,000 and described in
section 146(dX3) of the 1986 Code,
"(ii) the bonds to be used to provide financing for one
or more such stadiums are issued by a political subdivi-
sion or a State agency pursuant to a resolution approv-
ing an inducement resolution adopted by a State
agency on November 20, 1985, as it may be amended
(whether or not the beneficiaries of such issue or issues
are the beneficiaries (if any) specified in such induce-
ment resolution and whether or not the number of such
stadiums and the locations thereof are as specified in
such inducement resolution) or pursuant to P.A.
84-1470 of the State in which such city is located (and
by an agency created thereby), and
"(iii) such stadium or stadiums are located in the city
described in (i).
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $250,000,000. In the case of
any carryforward of volume cap for one or more stadiums
described in the first sentence of this subparagraph, such
carryforward shall be valid with respect to bonds issued for
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3551
such stadiums notwithstanding any other provision of the
1986 Code or the 1954 Code, and whether or not (i) there is a
change in the number of stadiums or the beneficiaries or
sites of the stadium or stadiums and (ii) the bonds are
issued by either of the state agencies described in the first
sentence of this subparagraph."
(3XA) Subparagraph (P) of section 1317(3) of the Reform Act is
amended—
(i) by striking out "approved" and inserting in heu
thereof "authorized", and
(ii) by striking out "December 9, 1985" and inserting in
Heu thereof "December 2,1985".
(B) Section 1317(3XA) of the Reform Act is amended by strik-
ing out "domed".
(C) Section 1317(3XU) of the Reform Act is amended by delet- California,
ing "coliseum complex." and inserting in lieu thereof "coliseum Baseball,
complex, or is a renovation of an existing stadium located in
Oakland, California, and used by an American League baseball
team."
(D) Section 1317(3XW) of the Reform Act is amended by
striking out "$225,000,000" and inserting "$25,000,000".
(4) Paragraph (3) of section 1317 of the Reform Act is amended
by adding at the end thereof the following new subparagraph:
"(Z) A facility is described in this subparagraph if—
"(i) such facility was a redevelopment project that
was approved in concept by the city council sitting as
the redevelopment agency in October 1984, and
"(ii) $20,000,000 in funds for such facility was identi-
fied in a 5-year budget approved by the city redevelop-
ment agency on October 25,1984.
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $80,000,000."
(5) Paragraph (4) of section 1317 of the Reform Act is
amended—
(A) by striking out "1986. The bonds" and inserting in
lieu thereof "1986, and the bonds",
(B) by striking out "and" at the end the subparagraph
(A), and
(C) by adding "and" at the end of subparagraph (B).
(6) Subparagraph (W) of section 1317(6) of the Reform Act is
amended to read as follows:
"(W) A project is described in this subparagraph if such
project is—
"(i) a part of the Kenosha Downtown Redevelopment
project, and
"(ii) located in an area bounded—
"(I) on the east by the east wall of the Army
(Dorps of Engineers Confined Disposal Facility
(extended),
"(II) on the north by 48th Street (extended),
"(III) on the west by the present Chicago &
Northwestern Railroad tracks, and
"(IV) on the south by the north line of
Eichelman Park (60th Street) (extended).
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $105,000,000."
102 STAT. 3552 PUBLIC LAW 100-647—NOV. 10, 1988
(7) Paragraph (6) of section 1317 of the Reform Act is amended
by redesignating subparagraph (X) as subparagraph (Z) and by
inserting after subparagraph (W) the following new subpara-
graphs:
California. "(X) A project is described in this subparagraph if a
redevelopment plan for such project was approved by the
city council of Bell Gardens, California, on June 12, 1979.
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $10,000,000.
"(Y) Nothing in this paragraph shall be construed as
having the effect of exempting from tax interest on any
bond issued after June 10, 1987, if such interest would not
have been exempt from tax were such bond issued on
August 15,1986."
(8) The last sentence of subparagraph (A) of section 1317(7) of
the Reform Act is amended by inserting before the period "and
section 149(dX2) of the 1986 Code shall not apply to bonds so
treated".
(9) Subparagraph (D) of section 1317(7) of the Reform Act is
amended to read as follows:
"(D) A facility is described in this subparagraph if—
"(i) it is a convention, trade, or spectator facility,
"(ii) a regional convention, trade, and spectator facili-
ties study committee was created before March 19,
1985, with respect to such facility, and
"(iii) feasibility and preliminary design consultants
were hired on May 1, 1985, and October 31, 1985, with
respect to such facility.
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed the excess of $175,000,000
over the amount of bonds to which paragraph (48XB)
applies."
(10) Clause (ii) of section 1317(7)(G) of the Reform Act is
amended to read as follows:
"(ii) such facility's location was approved in Decem-
ber 1985 by a task force created jointly by the Governor
of the State within which such facility will be located
and the mayor of the capital city of such State, and".
(11) Subparagraph (J) of section 1317(7) of the Reform Act is
amended—
(A) by striking out "civic festival" in clause (i) and insert-
ing in lieu thereof "aquafestival",
(B) by striking out clause (ii) and inserting in lieu thereof
the following:
"(ii) a referendum was held on April 6,1985, in which
voters permitted the city council to lease 130 acres of
dedicated parkland for the purpose of constructing
such facility, and", and
(C) by striking out "$5,000,000" and inserting in lieu
thereof "$10,000,000".
(12) Subparagraph (E) of section 1317(9) of the Reform Act is
amended by striking out "March 5, 1985" and inserting in lieu
thereof "March 6,1985".
(13) Clause (iii) of section 1317(9XJ) of the Reform Act is
amended by striking out all that precedes "by the governor"
and inserting in lieu thereof the following:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3553
"(iii) such facility's location was approved in Decem-
ber 1985 by a task force created jointly".
(14) Subparagraph (A) of section 1317(11) of the Reform Act is
amended by striking out "and section 142(a)" and inserting in
lieu thereof "in section 142(a)".
(15) Subparagraph (C) of section 1317(11) of the Reform Act is
amended to read as follows:
"(C) A facility is described in this subparagraph if it is
described in section 1865(cX2XC) of this Act."
(16) Subparagraph (X) of section 1317(13) of the Reform Act is
amended by striking out the last sentence.
(17) Paragraph (13) of section 1317 of the Reform Act is
amended by adding at the end thereof the following new sub-
paragraphs:
"(AA) A residential rental property project is described in Tennessee.
this subparagraph if it is the Carriage Trace residential Real property.
rental project in Clinton, Tennessee. The aggregate face
amount of bonds to which this subparagraph applies shall
: not exceed $10,000,000.
"(BB) A residential rental property project is described in
this subparagraph if—
"(i) a contract to purchase such property was dated Contracts.
as of August 9,1985,
"(ii) there was an inducement resolution adopted on
September 27, 1985, for the issuance of obligations to
finance such property,
"(iii) there was a State court final validation of such
financing on November 15,1985, and
"(iv) the certificate of nonappeal from such valida-
tion was available on December 15,1985.
The aggregate face amount of bonds to which this subpara-
graph applies shall not exceed $27,750,000."
(18) Paragraph (14) of section 1317 of the Reform Act is
amended by striking out "$90,000,000" and inserting in lieu
thereof "$130,000,000" and by inserting "incorporated on Feb-
ruary 20, 1985" before the period at the end of the 1st sentence.
(19) Subparagraph (B) of section 1317(15) of the Reform Act is
amended—
(A) by striking out all that follows "agreement with" in
clause (i) and inserting in lieu thereof "an underwriter to
provide planning and financial guidance for a possible bond
issue, and", and
(B) by striking out "certificates" in clause (ii) and insert-
ing in lieu thereof "bond issue"
(20) Paragraph (16) of section 1317 of the Reform Act is
amended by striking out the last sentence.
(21) Clause (i) of section 1317(19XD) of the Reform Act is
amended by striking out "light rail transitway" and inserting in
lieu thereof "fixed guideway".
(22) Paragraph (20) of section 1317 of the Reform Act is
amended by striking out "Section 148(f)" and inserting in lieu
thereof "Subsections (cX2) and (f) of section 148".
(23) Subparagraph (B) of section 1317(21) of the Reform Act is
amended—
(A) by striking out "Subsection (c)" and inserting in lieu
thereof "Subsections (cX2)", and
102 STAT. 3554 PUBLIC L A W 100-647—NOV. 10, 1988
(B) by striking out "103A(gX5XC)l" and inserting in lieu
thereof "103A(gX5XC)".
(24) Paragraph (22) of section 1317 of the Reform Act is
amended to read as follows:
"(22) DOWNTOWN REDEVELOPMENT PROJECT.—Subsection (b) of
section 626 of the Tax Reform Act of 1984 is amended by adding
at the end thereof the following new paragraph:
" '(7) EXCEPTION FOR CERTAIN DOWNTOWN REDEVELOPMENT
PROJECT.—The amendments made by this section shall not
apply to any obligation which is issued as part of an issue 95
percent or more of the proceeds of which are to be used to
provide a project to acquire and redevelop a downtown area if—
" '(A) on August 15, 1985, a downtown redevelopment
authority adopted a resolution to issue obligations for such
project,
" '(B) before September 26, 1985, the city expended, or
entered into binding contracts to expend, more than
$10,000,000 in connection with such project, and
" '(C) the State supreme court issued a ruling regarding
the proposed financing structure for such project on Decem-
ber 11,1985.
The aggregate face amount of obligations to which this para-
graph applies shall not exceed $85,000,000 and such obligations
must be issued before January 1,1992.' "
(25) Subparagraph (A) of section 1317(24) of the Reform Act is
amended by adding at the end thereof the following: "The last
paragraph of this section shall not apply to the treatment under
the Drecedinsf sentence
(26XA) Clause (i) of section 1317(25XA) of the Reform Act is
amended by striking out "3 counties" and inserting in lieu
thereof "1 or more of 3 counties".
(B) Clause (i) of section 1317(25XB) of the Reform Act is
amended by adding at the end thereof the following new sen-
tence: "For purposes of applying section 146(k) of the 1986 Code,
the public utility facility described in subparagraph (A) shall be
treated as described in paragraph (2) of such section and such
paragraph shall be applied without regard to the requirement
that the issuer establish that a State s share of the use of a
facility (or its output) will equal or exceed the State's share of
the private activity bonds issued to finance the facility."
(27) Subparagraph (I) of section 1317(27) of the Reform Act is
amended by adding at the end thereof the following: "For
purposes of determining whether any bond to which this
subparagraph applies is a qualified small issue bond, there shall
not be taken into account under section 144(a) of the 1986 Code
capital expenditures with respect to any facility of the United
Stetes Government and there shall not be t£iken into account
any bond allocable to the United States Government."
(28) Clause (i) of section 1317(29XB) of the Reform Act is
amended by striking out all that follows "1993" and inserting in
lieu thereof ", by the Stete of (Connecticut, and".
(29) Subparagraph (D) of section 1317(29) of the Reform Act is
amended by striking out "the net proceeds" and inserting in
lieu thereof "the proceeds".
(30) Section 1317(33XAXii) of the Reform Act is amended—
(A) bv striking out "on" and inserting in lieu thereof
"dated' each place it appears, and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3555
(B) by inserting "dated on December 1, 1985" after
"(Series 1985A and 1985B)" in subclause (III).
(31) Subparagraph (B) of section 1317(33) of the Reform Act is
amended—
(A) by striking out "and before August 7, 1988,", and
(B) bv adding at the end thereof the following new sen-
tence: The aggregate face amount of bonds to which this
subparagraph applies shall not exceed $90,000,000."
(32) Subparagraph (G) of section 1317(33) of the Reform Act is
amended by striking out "subparagraph (H)" and inserting in
lieu thereof "subparagraph (F)'.
(33) Subparagraph (H) of section 1317(33) of the Reform Act is
amended—
(A) by striking out clause (ii) and inserting in lieu thereof
the following:
"(ii) the proceeds of the issue are to be used to
finance projects (to be determined by such university
and the issuer) which are similar to those projects
intended to be financed by bonds that were the subject
of a request transmitted to Congress on November 7,
1985", and
(B) by adding at the end thereof the following: "Bonds to
which this subparagraph applies shall be treated as quali-
fied 501(cX3) bonds if such bonds would not (if issued on
August 15, 1986) be industrial development bonds (as de-
fined in section 103(bX2) of the 1954 Code), and section 147(f)
of the 1986 Code shall not apply to the issue of which such
bonds are a part. Bonds issued to finance facilities described
in this subparagraph shall be treated as issued to finance
such facilities notwithstanding the fact that a period in
excess of 1 year has expired since the facilities were placed
in service.
(34) Subparagraph (K) of section 1317(33) of the Reform Act is
amended—
(A) by striking out "the issue is" in clause (i) and insert-
ing in lieu thereof "the issue or issues are",
(B) by inserting "at least" before "900 units",
(C) by striking out "2,000 square feet" and inserting in
lieu thereof "245,000 square feet", and
(D) by striking out ^'$150,000,000" and inserting in lieu
thereof "$112,000,000".
(35) Paragraph (33) of section 1317 of the Reform Act is
amended by striking out subparagraphs (M), (N), and (O) and
inserting in lieu thereof the following new subparagraphs:
"(M) Proceeds of an issue are described in this subpara- Health care
graph if such issue is issued on behalf of the Society of the facilities.
New York Hospital to finance completion of a project com-
menced by such hospital in 1981 for construction of a
diagnostic and treatment center or to refund bonds issued
on behalf of such hospital in connection with the construc-
tion of such diagnostic and treatment center or to finance
construction and renovation projects associated with an
inpatient psychiatric care facility. The aggregate face
amount of bonds to which this subparagraph applies shall
not exceed $150,000,000.
"(N) Any bond to which section 145(b) of the 1986 Ckxie
does not apply by reason of this paragraph (other than
102 STAT. 3556 PUBLIC LAW 100-647—NOV. 10,1988
subparagraph (A) thereof) shall be taken into account in
determining whether such section applies to any later issue.
"(O) In the case of any refunding bond—
"(i) to which any subparagraph of this paragraph
applies, and
"(ii) to which the last sentence of section 1313(cX2)
applies,
such bond shall be treated as having such subparagraph
apply (and the refunding bond shall be treated for purposes
of such section as issued before January 1, 1986, and as not
being an advance refunding) unless the issuer elects the
opposite result."
(36) Paragraph (36) of section 1317 of the Reform Act is
amended by striking out "$80,000,000" and inserting in lieu
thereof "$400,000,000".
(37) Paragraph (38) of section 1317 of the Reform Act is
amended by striking out "and sections 148 and 149".
(38) Paragraphs (39) and (40) of section 1317 of the Reform Act
are amended to read as follows:
"(39) CERTAIN BONDS TREATED AS QUAUFIED 501(CX3) BONDS.—
A bond issued as part of an issue shall be treated for purposes of
part IV of subchapter B of chapter 1 of the 1986 Code as a
qualified 501(cX3) bond if—
"(A) such bond would not (if issued on August 15,1986) be
an industrial development bond (as defined in section
103(bX2) of the 1954 Code), and
"(B) such issue was approved by city voters on January
19, 1985, for construction or renovation of facilities for the
cultural and performing arts.
The aggregate face amount of bonds to which this par£igraph
applies shall not exceed $5,000,000.
California. "(40) CERTAIN UBRARY BONDS.—In the case of a bond issued
before January 1, 1986, by the City of Los Angeles Community
Redevelopment Agency to provide the library and related struc-
tures associated with the City of Los Angeles Central Library
Project, the ownership and use of the land and facilities associ-
ated with such project by persons which are not governmental
units (or payments from such persons) shall not adversely affect
the exclusion from gross income under section 103 of the 1954
Code of interest on such bonds."
(39) Paragraph (41) of section 1317 of the Reform Act is
amended to read as follows:
Washington. "(41) CERTAIN REFUNDING OBLIGATIONS FOR CERTAIN POWER
FACILITIES.—With respect to 2 net billed nuclear power facilities
located in the State of Washington on which construction has
been suspended, the requirements of section 147(b) of the 1986
Code shall be treated as satisfied with respect to refunding
bonds issued before 1992 if—
"(A) each refunding bond has a maturity date not later
than the maturity date of the refunded bond, and
"(B) the facilities have not been placed in service as of the
date of issuance of the refunding bond.
The aggregate face amount of bonds to which this paragraph
applies shall not exceed $2,000,000,000. Section 146 of the 1986
Code and the last paragraph of this section shall not apply to
bonds to which this paragraph applies."
->?*• 5^>P
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3557
(40) Paragraph (43) of section 1317 of the Reform Act is
amended by inserting before the period "and the Internal Reve-
nue (Dode of 1986 shall be applied without regard to section
149(dX2)."
(41) Paragraph (44) of section 1317 of the Reform Act is
amended—
(A) by inserting after "1986 CJode" the following: "and the
temporary period limitation of section 148(cX2) of the 1986
Code",
(B) by striking out "$100,000,000" and inserting in lieu
thereof "$200,000,000", and
(C) by striking out "Hospitals Bond Pool" in the second
item in the table and inserting in lieu thereof "Hospital
Equipment Loan Council".
(42) Paragraph (48) of section 1317 of the Reform Act is
amended by striking out "either" in the material preceding
subparagraph (A) and inserting in lieu thereof "any".
(43) Subparagraph (B) of section 1317(48) of the Reform Act is
amended by striking out "subparagraph (O)" and inserting in
lieu thereof "paragraph (6XU)".
(44) Paragraph (48) of section 1317 of the Reform Act is
amended by adding at the end thereof the following new
subparagraph:
"(C) A facility which is part of a project described in
paragraph (6XO). The aggregate face amount of bonds to
which this subparagraph applies shall not exceed
$20,000,000."
(45) Paragraph (49) of section 1317 of the Reform Act is
amended—
(A) by striking out "149(d)" and inserting in lieu thereof
"149(dX2)", and
(B) by inserting "United States" before "Housing Act of
1937".
(46) Paragraph (50) of section 1317 of the Reform Act is
amended to read as follows:
"(50) TRANSITIONED BONDS SUBJECT TO CERTAIN RULES.—In the
case of any bond to which any provision of this section applies,
except as otherwise expressly provided, sections 103 and 103A of
the 1954 Code shall be applied as if the requirements of sections
147(g), 148, and 149(d) of the 1986 Code were included in each
such section."
(47) Paragraph (51) of section 1317 of the Reform Act is
amended—
(A) by striking out "Section 141(a)" and inserting in lieu
thereof "Section 1410))", and
(B) by striking out "141(aX3)" and inserting in lieu
thereof "14ia)X3)^.
(48) Paragraph (52) of section 1317 of the Reform Act is
amended by striking out "This section" and inserting in lieu
thereof "Except as otherwise provided in this section, this sec-
tion".
(49) The material preceding subparagraph (A) of section
1317(2) of the Reform Act is amended by striking out "section
10303X4XC)" and inserting in lieu thereof "section 103(bX4XF)".
(50) Clause (ii) of section 1317(27XH) of the Reform Act is
amended by striking out "November 14, 1985" and inserting in
lieu thereof "November 13,1985".
102 STAT. 3558 PUBLIC LAW 100-647—NOV. 10, 1988
(51) Subparagraph (I) of section 1317(33) of the Reform Act is
amended by striking out "November 11, 1985" gind inserting in
lieu thereof "November 1,1985".
(52) Subparagraph (J) of section 1317(3) of the Reform Act is
amended by striking out "October 29" in clause (iv) and insert-
ing in lieu thereof "November 5".
(h) AMENDMENTS RELATED TO SECTION 1318 OF THE REFORM ACT.—
26 use 141 note. Section 1318 of the Reform Act (relating to definitions, etc., relating
to effective dates and transitional rules) is amended—
(1) by inserting "(a) DEFINITIONS.—" before "For purposes of
this subtitle—", and
(2) by adding at the end thereof the following new subsections:
"(b) MINIMUM TAX TREATMENT.—
"(1) I N GENERAL.—Any bond described in paragraph (2) shall
not be treated as a private activity bond for purposes of section
57 of the 1986 Clode unless such bond would (if issued on August
7,1986) be—
"(A) an industrial development bond (as defined in sec-
tion 103(bX2) of the 1954 Code), or
"(B) a private loan bond (as defined in section 103(oX2XA)
of the 1954 Code, without regard to any exception from such
definition other them section 103(oX2XC) of such (Dode).
"(2) BONDS DESCRIBED.—For purposes of paragraph (1), a bond
is described in this paragraph if—
"(A) the amendments made by section 1301 do not apply
to such bond by reason of section 1312 or 1316(g),
"(B) any provision of section 1317 applies to such bond, or
"(C) the proceeds of such bond are used to refund any
bond referred to in subparagraph (A) or (B) (or any bond
which is part of a series of refundings of such a bond) if the
requirements of paragraphs (1), (2), and (3) of subsection (c)
are met with respect to the refunding bond.
"(c) CURRENT REFUNDINGS NOT TAKEN INTO ACCOUNT IN APPLYING
AGGREGATE LIMIT ON BONDS TO WHICH TRANSITIONAL RULES
APPLY.—The limitation on the aggregate face amount of bonds to
which any provision of section 1316(g) or 1317 applies shall not be
reduced by the face amount of any bond the proceeds of which are to
be used exclusively to refund any bond to which such provision
applies (or any bond which is part of a series of refundings of such
bond) if—
"(1) the average maturity date of the issue of which the
refunding bond is a part is not later than the average maturity
date of the bonds to be refunded by such issue,
"(2) the amount of the refunding bond does not exceed the
outstanding amount of the refunded bond, and
"(3) the net proceeds of the refunding bond are used to redeem
the refunded bond not later than 90 days after the date of the
issuance of the refunding bond.
For purposes of paragraph (1), average maturity shall be determined
in accordemce with section 147(bX2XA) of the 1986 CJode. No limita-
tion in section 1316(g) or 1317 on the period during which bonds may
be issued under such section shall apply to any refunding bond
which meets the requirements of this subsection.
"(d) SPECIAL RULE PERMITTING CARRYFORWARD OF VOLUME CAP
FOR CERTAIN TRANSITIONED PROJECTS.—A bond to which section 1312
or 1317 applies shall be treated as having a carryforward purpose
described in section 146(fK5) of the 1986 (Jode, and the requirement
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PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3559
of section 146(fX2XA) of the 1986 Code shall be treated as met if such
project is identified with reasonable specificity. The preceding sen-
tence shall not apply so as to permit a carryforward with respect to
any qualified small issue bond."
(i) APPUCATION TO 501 (c) (3) BONDS.—In accordance with section 26 use 501 note.
1302 of the Reform Act, each amendment and other provision of this
Act which applies to private activity bonds shall, unless otherwise
expressly provided, apply to qualified 501(cX3) bonds.
SEC. 1014. AMENDMENTS RELATED TO TITLE XIV OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1401 OF THE REFORM ACT.—
(1) Subsection (e) of section 672 of the 1986 Code is amended to
read as follows:
"(e) GRANTOR TREATED AS HOLDING ANY POWER OR INTEREST OF
GRANTOR'S SPOUSE.—
"(1) IN GENERAL.—For purposes of this subpart, a grantor
shall be treated as holding any power or interest held by—
"(A) any individual who was the spouse of the grantor at
the time of the creation of such power or interest, or
"(B) any individual who became the spouse of the grantor
after the creation of such power or interest, but only with
respect to periods after such individual became the spouse
of the grantor.
"(2) MARITAL STATUS.—For purposes of paragraph (IXA), an
individual legally separated from his spouse under a decree of
divorce or of separate maintenance shall not be considered as
married."
(2) Paragraph (3) of section 675 of the 1986 (Dode is amended
by adding at the end thereof the following new sentence:
"For periods during which an individual is the spouse of the
grantor (within the meaning of section 672(eX2)), any reference
in this paragraph to the grantor shall be treated as including a
reference to such individual."
(3) Subsection (c) of section 674 of the 1986 (Dode is amended by
adding at the end thereof the following new sentence: "For
periods during which an individual is the spouse of the grantor
(within the meaning of section 672(eX2)), any reference in this
subsection to the grantor shall be treated as including a ref-
erence to such individual."
(b) AMENDMENT RELATED TO SECTION 1402 OF THE REFORM ACT.—
Section 673 of the 1986 Code is amended by adding at the end
thereof the following new subsections:
"(c) SPECIAL RULE FOR DETERMINING VALUE OF REVERSIONARY
INTEREST.—For purposes of subsection (a), the value of the grantor's
reversionary interest shall be determined by assuming the maxi-
mum exercise of discretion in favor of the grantor.
"(d) POSTPONEMENT OF DATE SPECIFIED FOR REACQUISITION.—Any
postponement of the date specified for the reacquisition of posses-
sion or enjoyment of the reversionary interest shall be treated as a
new transfer in trust commencing with the date on which the
postponement is effective and terminating with the date prescribed
by the postponement. However, income for any period shall not be
included in the income of the grantor by reason of the preceding
sentence if such income would not be so includible in the absence of
such postponement."
(c) AMENDMENTS RELATED TO SECTION 1403 OF THE REFORM ACT.— 26 use 645 note.
102 STAT. 3560 PUBLIC LAW 100-647—NOV. 10, 1988
(1) If a beneficiary of a trust to which section 664 of the 1986
Code applies elects (at such time and in such manner as the
Secretary of the Treasury or his delegate may prescribe) to have
this paragraph apply, such beneficiary shall be entitled to the
benefits of section 1403(cX2) of the Reform Act with respect to
amounts included in gross income under section 664(b) of the
1986 Code in the same manner as if such amounts were included
in gross income under section 652(a) of the 1986 Code.
(2) Any trust beneficiary may elect (at such time and in such
manner as the Secretary of the Treasury or his delegate may
prescribe) to waive the benefits of section 1403(cX2) of the
Reform Act.
(3XA) For purposes of determining the gross income of any
pass-thru entity, such pass-thru entity shall not be allowed the
benefits of section 806(eX2XC) (other than with respect to income
from a common trust fund) or 1403(cX2) of the Reform Act if
such pass-thru entity is required to change its taxable year by
reason of the amendments made by section 806 or 1403 of the
Reform Act.
(B) For purposes of subparagraph (A), the term "pass-thru
entity" means any trust, partnership, S corporation, or common
trust fund.
(4) If any trust was required to change its taxable year by the
amendments made by section 1403 of the Reform Act, such
change shall be treated as initiated by such trust and approved
by the Secretary of the Treasury or his delegate,
(d) AMENDMENTS RELATED TO SECTION 1404 OF THE REFORM ACT.—
26 use 6654. (D Subsection (a) of section 1404 of the Reform Act is
amended—
(A) by striking out "Subsection (k) of section 6654" and
inserting in lieu thereof "Subsection (1) of section 6654, as
amended by section 1841 of this Act", and
(B) by striking out " '(k) TRUSTS" and inserting in lieu
thereof "'(1) TRUSTS".
(2) Subsection (1) of section 6654 of the 1986 Code is amended
to read as follows:
"(1) ESTATES AND TRUSTS.—
"(1) I N GENERAL.—Except as otherwise provided in this
subsection, this subsection shall apply to any estate or trust.
"(2) EXCEPTION FOR ESTATES AND CERTAIN TRUSTS.—With
respect to any taxable year ending before the date 2 years after
the date of the decedent's death, this section shall not apply
to—
"(A) the estate of such decedent, or
"(B) any trust—
"(i) all of which was treated (under subpart E of part
I of subchapter J of chapter 1) as owned by the
decedent, and
"(ii) to which the residue of the decedent's estate will
pass under his will.
"(3) EXCEPTION FOR CHARITABLE TRUSTS AND PRIVATE FOUNDA-
TIONS.—This section shall not apply to any trust which is sub-
ject to the tax imposed by section 511 or which is a private
foundation.
"(4) SPECIAL RULE FOR ANNUAUZATIONS.—In the case of any
estate or trust to which this section applies, subsection
(d)(2XBXi) shall be applied by substituting 'ending before the
-^ii^ -
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3561
date 1 month before the due date for the installment' for
'ending before the due date for the installment'."
(3) Subsection (g) of section 643 of the 1986 Code is amended—
(A) by striking out the last sentence of paragraph (1), and
(B) by amending paragraph (2) to read as follows:
"(2) TIME FOR MAKING ELECTION.—An election under para-
graph (1) shall be made on or before the 65th day after the close
of the taxable year of the trust and in such manner as the
Secretary may prescribe."
(4) Subsection (g) of section 643 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) EXTENSION TO LAST YEAR OF ESTATE.—In the case of a
taxable year reasonably expected to be the last taxable year of
an estate—
"(A) any reference in this subsection to a trust shall be
treated as including a reference to an estate, and
"(B) the fiduciary of the estate shall be treated as the
trustee."
(e) AMENDMENTS RELATED TO SECTION 1411 OF THE REFORM ACT.—
(1) Paragraph (3) of section l(i) of the 1986 Code is amended by
adding at the end thereof the following new subparagraph:
"(C) COORDINATION WITH SECTION 644.—If tax is imposed
under section 644(aXl) with respect to the sale or exchange
of any property of which the parent was the transferor, for
purposes of appljdng subparagraph (A) to the taxable year
of the parent in which such sale or exchange occurs—
"(i) taxable income of the parent shall be increased
by the amount treated as included in gross income
under section 644(aX2XAXi), and
"(ii) the amount described in subparagraph (AXii)
shall be increased by the amount of the excess referred
to in section 644(aX2XA)."
(2) The last sentence of subparagraph (A) of section l(iX3) of
the 1986 Code is amended by striking out "any deduction or
credit" and inserting in lieu thereof "any exclusion, deduction,
or credit".
(3) Subparagraph (A) of section l(iX4) of the 1986 Code is
amended—
(A) by striking out "gross income for the taxable year
which is not earned income" in clause (i) and inserting in
lieu thereof "adjusted gross income for the taxable year
which is not attributable to earned income",
(B) by striking out "his deduction" in clause (iiXH) and
inserting in lieu thereof "his deductions",
(C) by striking out "the deductions allowed" in clause
(ii)(II) and inserting in lieu thereof "the itemized deductions
allowed", and
(D) by striking out "gross income" in clause (iiXII) and
inserting in lieu thereof "adjusted gross income".
(4) Clause (iv) of section 6103(eXlXA) of the 1986 Code is
amended by striking out "section l(j)" and inserting in lieu
thereof "section l(i) or 590')".
(5XA) Section 59 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(j) TREATMENT OF UNEARNED INCOME OF MINOR CHILDREN.—
102 STAT. 3562 PUBLIC LAW 100-647—NOV. 10, 1988
"(1) LIMITATION ON EXEMPTION AMOUNT.—In the case of a
child to whom section l(i) appUes, the exemption amount for
purposes of section 55 shall not exceed the sum of—
"(A) such child's earned income (as defined in section
911(dX2)) for the taxable year, plus
"(B) $1,000.
"(2) LIMITATION BASED ON PARENTAL MINIMUM TAX.—
"(A) IN GENERAL.—In the case of a child to whom section
l(i) applies, the amount of the tax imposed by section 55
shall not exceed such child's share of the allocable parental
minimum tax.
"(B) ALLOCABLE PARENTAL MINIMUM TAX.—For purposes
of this paragraph, the term 'allocable parental minimum
tax' means the excess of^
"(i) the tax which would be imposed by section 55 on
the parent if—
"(I) the amount of the parent's tentative mini-
mum tax were increased by the aggregate of the
tentative minimum taxes of all children of the
parent to whom section l(i) applies, and
"(II) the amount of the parent's regular tax were
increased by the aggregate of the regular taxes of
all children of the parent to whom section l(i)
applies, over
"(ii) the tax imposed by section 55 on the parent
without regard to this subparagraph.
"(C) CHILD SHARE.—A child's share of any allocable paren-
tal minimum tax shall be determined under rules similar to
the rules of section l(iX3XB).
"(D) OTHERS RULES MADE APPUCABLE.—For purposes of
this paragraph, rules similar to the rules of paragraphs (5)
and (6) of section l(i) shall apply."
26 use 59 note. (B) The amendment made by subparagraph (A) shall
apply to taxable years beginning after December 31, 1988.
(6) Subparagraph (A) of section l(iX5) of the 1986 Code is
amended by striking out "custodial parent" and inserting in
lieu thereof "custodial parent (within the meaning of section
152(e))".
(7) Paragraph (3) of section l(i) of the 1986 Code is amended by
adding at the end thereof the following new subparagraph:
"(C) SPECIAL RULE WHERE PARENT HAS DIFFERENT TAXABLE
YEAR.—Except as provided in regulations, if the parent does
not have the same taxable year as the child, the allocable
parental tax shall be determined on the basis of the taxable
year of the parent ending in the child's taxable year."
(£) AMENDMENT RELATED TO SECTION 1421 OF THE REFORM ACT.—
26 use 2032A Subsection (a) of section 1421 of the Reform Act is amended by
note. striking out "within the time prescribed for filing such return
(including extensions thereof)".
(g) AMENDMENTS RELATED TO SECTION 1431 OF THE REFORM ACT.—
(1) Subsection (a) of section 2611 of the 1986 Code is amended
by striking out "generation-skipping transfers" and inserting in
lieu thereof "generation-skipping transfer".
(2) Subsection (b) of section 2611 of the 1986 Code is amended
by striking out paragraph (1) and by redesignating paragraphs
(2) and (3) as paragraphs (1) and (2), respectively.
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3563
(3XA) Section 2642 of the 1986 Ckxie is amended by adding a t
the end thereof the following new subsection:
(e) SPECIAL RULES FOR CHARITABLE LEAD ANNUITY TRUSTS.—
"(1) I N GENERAL.—For purposes of determining the inclusion
ratio for any charitable lead annuity trust, the applicable frac-
tion shall be a fraction—
"(A) the numerator of which is the adjusted GST exemp-
tion, and
"OB) the denominator of which is the value of all of the
property in such trust immediately after the termination of
the charitable lead annuity.
"(2) ADJUSTED GST EXEMPTION.—For purposes of paragraph (1),
the adjusted GST exemption is a n amount equal to the GST
exemption allocated to t h e trust increased by interest deter-
mined—
"(A) a t the interest rate used in determining the amount
of the deduction under section 2055 or 2522 (as the case may
be) for the charitable lead annuity, and
"(B) for the actual period of the charitable lead annuity.
"(3) DEFINITIONS.—For purposes of this subsection—
"(A) CHARITABLE LEAD ANNUITY TRUST.—The term 'chari-
table lead annuity trust' means any trust in which there is
a charitable lead annuity.
"(B) CHARITABLE LEAD ANNUITY.—The term 'charitable
lead annuity' means any interest in the form of a guaran-
teed annuity with respect to which a deduction w£is allowed
under section 2055 or 2522 (as the case may be).
"(4) COORDINATION WITH SUBSECTION (d).—Under regulations,
appropriate adjustments shall be made in the application of
subsection (d) to take into account the provisions of this subsec-
tion."
(B) The amendment made by subparagraph (A) shall apply for 26 use 2642
purposes of determining the inclusion ratio with respect to note.
property transferred after October 13,1987.
(4XA) Section 2642 of the 1986 Code is amended by adding a t
the end thereof the following new subsection:
"(f) SPECIAL RULES FOR CERTAIN INTER VIVOS TRANSFERS.—Except Real property.
as provided in regulations—
"(1) I N GENERAL.—For purposes of determining the inclusion
ratio, if—
"(A) an individual makes an inter vivos transfer of prop-
erty, and
"(B) the value of such property would be includible in the
gross estate of such individual under chapter 11 if such
individual died immediately after making such transfer
(other than by reason of section 2035),
any allocation of GST exemption to such property shall not be
made before the close of the estate tax inclusion period (and the
value of such property shall be determined under paragraph
(2)). If such transfer is a direct skip, such skip shall be treated as
occurring as of the close of the estate tsoc inclusion period.
"(2) VALUATION.—In the case of any property to which para-
graph (1) applies, the value of such property s h ^ l be—
"(A) tf such property is includible in the gross estate of
the transferor (other than by reason of section 2035), its
value for purposes of chapter 11, or
102 STAT. 3564 PUBLIC LAW 100-647—NOV. 10, 1988
"(B) if subparagraph (A) does not apply, its value as of the
close of the estate tax inclusion period (or, if any allocation
of GST exemption to such property is not made on a timely
filed gift t£ix return for the calendar year in which such
period ends, its value as of the time such allocation is filed
with the Secretary).
"(3) ESTATE TAX INCLUSION PERIOD.—For purposes of this
subsection, the term 'estate tax inclusion period' means any
period after the transfer described in paragraph (1) during
which the value of the property involved in such transfer would
be includible in the gross estate of the transferor under chapter
11 if he died. Such period shall in no event extend beyond the
earlier of—
"(A) the date on which there is a generation-skipping
transfer with respect to such property, or
"(B) the date of the death of the transferor.
"(4) TREATMENT OF SPOUSE.—Except as provided in regula-
tions, any reference in this subsection to an individual or
transferor shall be treated as including a reference to the
spouse of such individual or transferor.
"(5) COORDINATION WITH SUBSECTION (d).—Under regulations,
appropriate adjustments shall be made in the application of
subsection (d) to take into account the provisions of this subsec-
tion."
(B) Paragraph (2) of section 2642(a) of the 1986 Code is
amended by striking out the last sentence.
(C) Subparagraph (A) of section 2642(bX2) of the 1986 Code is
amended by inserting before the period a t the end thereof the
following: "; except that, if the requirements prescribed by the
Secretary respecting allocation of post-death changes in value
are not met, the value of such property shall be determined as
of the time of the distribution concerned."
(D) Subsection (b) of section 2642 of the 1986 Code is amended
by inserting "Except as provided in subsection (f)—" imme-
diately after the subsection heading.
(E) Subparagraph (B) of section 2642(bX2) of the 1986 Code is
amended—
(i) by striking out "at or after the death of the transferor"
and inserting in lieu thereof "to property transferred as a
result of the death of the transferor"; and
(ii) by striking out "AT OR AFTER DEATH" in the subpara-
graph heading and inserting in lieu thereof "TO PROPERTY
TRANSFERRED AT D E A T H " .
(F) Paragraph (3) of section 2642(b) of the 1986 Code is
amended—
(i) by striking out "to any property is made during the life
of the transferor but is" and inserting in lieu thereof "to
any property not transferred as a result of the death of the
transferor is"; and
(ii) by striking out "INTER VIVOS ALLOCATIONS" in the
subparagraph heading and inserting in lieu thereof
"ALLOCATIONS TO INTER VIVOS TRANSFERS".
(5XA) Paragraph (1) of section 2613(a) of the 1986 Code is
amended by striking out "a person assigned" and inserting in
lieu thereof "a natural person assigned".
(B) Subsection (c) of section 2612 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3565
"(3) LOOK-THRU RULES NOT TO APPLY.—Solely for purposes of
determining whether any transfer to a trust is a direct skip, the
rules of section 2651(eX2) shall not apply."
(6) Subsection (c) of section 2652 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) CERTAIN SUPPORT OBUGATIONS DISREGARDED.—The fact Gifts and
that income or corpus of the trust may be used to satisfy an property,
obligation of support arising under State law shall be dis-
regarded in determining whether a person has an interest in
the trust, if—
"(A) such use is discretionary, or
"(B) such use is pursuant to the provisions of any State
law substantially equivalent to the Uniform Gifts to Minors
Act."
(7) Paragraph (2) of section 2612(c) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "If any transfer of property to a trust would be a direct
skip but for this paragraph, any generation assignment under
this paragraph shall apply also for purposes of applying this
chapter to transfers from the portion of the trust attributable to
such property."
(8) Paragraph (2) of section 2652(c) of the 1986 Code is
amended—
(A) by striking out "NOMINAL INTERESTS" in the para-
graph heading and inserting in lieu thereof "INTERESTS",
and
(B) by striking out "the tax" and inserting in lieu thereof
"any tax".
(9) Paragraph (1) of section 2652(a) of the 1986 Code is
amended—
(A) by striking out "a transfer of a kind" each place it
appears and inserting in lieu thereof "any property", and
(B) by adding at the end thereof the following new sen-
tence:
"An individual shall be treated as transferring any property with
respect to which such individual is the transferor."
(10) Section 2663-of the 1986 Code is amended by striking out
"and" at the end of paragraph (1), by striking out the period at
the end of paragraph (2) and inserting in lieu thereof ", and",
and by adding at the end thereof the following new paragraph:
"(3) regulations providing for such adjustments as may be
necessary to the application of this chapter in the case of any
arrangement which, although not a trust, is treated as a trust
under section 2652(b)."
(11) Paragraph (3) of section 2651(e) of the 1986 Code is
amended to read as follows:
"(3) TREATMENT OF CERTAIN CHARITABLE ORGANIZATIONS AND
GOVERNMENTAL ENTmES.—Any—
"(A) organization described in section 511(aX2),
"(B) charitable trust described in section 511(bX2), and
"(C) governmental entity,
shall be assigned to the transferor's generation."
(12) Paragraph (2) of section 2654(a) of the 1986 Code is
amended—
(A) by striking out "any increase" and inserting in lieu
thereof "any increase or decrease", and
102 STAT. 3566 PUBLIC LAW 100-647—NOV. 10, 1988
(B) by striking out "such increase" and inserting in lieu
thereof "such increase or decrease (as the case may be)".
(13) Subsection (b) of section 2654 of the 1986 Code is amended
to read as follows:
"(b) CERTAIN TRUSTS TREATED AS SEPARATE TRUSTS.—For purposes
of this chapter—
"(1) the portions of a trust attributable to transfers from
different transferors shall be treated as separate trusts, and
"(2) substantially separate and independent shares of dif-
ferent beneficiaries in a trust shall be treated as separate trusts.
Except as provided in the preceding sentence, nothing in this chap-
ter shall be construed as authorizing a single trust to be treated as 2
or more trusts."
(14) Paragraph (3) of section 2652(a) of the 1986 Code is
amended—
(A) by striking out "any property" in subparagraphs (A)
and (B) and inserting in lieu thereof "any trust", and
(B) by striking out "may elect to treat such property" and
inserting in lieu thereof "may elect to treat all of the
DroDertv in such trust"
(15) Paragraph (2) of section 2612(a) of the 1986 Code is
amended to read as follows:
"(2) CERTAIN PARTIAL TERMINATIONS TREATED AS TAXABLE.—If,
upon the termination of an interest in property held in trust by
reason of the death of a lineal descendant of the transferor, a
specified portion of the trust's assets are distributed to 1 or
more skip persons (or 1 or more trusts for the exclusive benefit
of such persons), such termination shall constitute a taxable
termination with respect to such portion of the trust property."
(16) Paragraph (2) of section 2632(b) of the 1986 Code is
amended bv striking out "paragraph (D) with respect to a prior
direct s l d p ' and inserting in lieu thereof "paragraph (1) with
respect to a prior direct skip)".
(17XA) Subsection (c) of section 2642 of the 1986 Code is
amended to read as follows:
"(c) TREATMENT OF CERTAIN DIRECT SKIPS WHICH ARE NON-
TAXABLE GIFTS.—
"(1) I N GENERAL.—In the case of a direct skip which is a
nontaxable gift, the inclusion ratio shall be zero.
"(2) EXCEPTION FOR CERTAIN TRANSFERS IN TRUST.—Paragraph
(1) shall not apply to any transfer to a trust for the benefit of an
individual unless—
"(A) during the life of such individual, no portion of the
corpus or income of the trust may be distributed to (or for
the benefit of) any person other than such individual, and
"(B) if such individual dies before the trust is terminated,
the assets of such trust will be includible in the gross estate
of such individual.
"(3) NONTAXABLE GIFT.—For purposes of this subsection, the
term 'nontaxable gift' means any transfer of property to the
extent such transfer is not treated as a taxable gift by reason
of—
"(A) section 2503(b) (taking into account the application
of section 2513), or
"(B) section 2503(e)."
(B) Paragraph (1) of section 2642(d) of the 1986 Code is amend-
ed by striking out "(other than a nontaxable gift)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3567
(C) The amendments made by this paragraph shall apply to 26 USC 2642
transfers after March 31,1988. note.
(18) Clause (i) of section 2642(dX2XB) of the 1986 Code is
amended to read as follows:
"(i) the value of the property involved in such trans-
fer reduced by the sum of—
"(I) any Federal estate tax or state death tax
actually recovered from the trust attributable to
such property, and
"(II) any charitable deduction allowed under sec-
tion 2055 or 2522 with respect to such property,
and".
(19) Paragraph (2) of section 2651(b) of the 1986 Code is
amended by striking out "a spouse of the transferor" and
inserting in lieu thereof "a spouse (or former spouse) of the
transferor".
(20) Section 2652 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(d) Executor.—For purposes of this chapter, the term 'executor'
has the meaning given such term by section 2203."
(h) AMENDMENTS RELATED TO SECTION 1433 OF THE REFORM ACT.—
(1) Subsection (a) of section 1433 of the Reform Act is amended 26 USC 2601
by striking out "this part" and inserting in lieu thereof "this note,
subtitle".
(2) Paragraph (2) of section 1433(b) of the Reform Act is
amended—
(A) by striking out "this part" in the material preceding
subparagraph (A) and inserting in lieu thereof "this sub-
title",
(B) by inserting before the comma at the end of subpara-
graph (A) the following: "(or out of income attributable to
corpus so added)", and
(C) by inserting "or revocable trust" after "a will" in
subparagraph (B).
(3XA) Subsection (b) of section 1433 of the Reform Act is
amended by striking out paragraph (3) and inserting in lieu
thereof the following new paragraphs:
"(3) TREATMENT OF CERTAIN TRANSFERS TO GRANDCHILDREN.—
"(A) IN GENERAL.—For purposes of chapter 13 of the
Internal Revenue Code of 1986, the term 'direct skip' shall
not include any transfer before January 1, 1990, from a
transferor to a grandchild of the transferor to the extent
the aggregate transfers from such transferor to such grand-
child do not exceed $2,000,000.
"(B) TREATMENT OF TRANSFERS IN TRUST.—For purposes of
subparagraph (A), a transfer in trust for the benefit of a
grandchild shall be treated as a transfer to such grandchild
if (and only if)—
"(i) during the life of the grandchild, no portion of
the corpus or income of the trust may be distributed to
(or for the benefit of) any person other than such
grandchild,
"(ii) the eissets of the trust will be includible in the
gross estate of the grandchild if the grandchild dies
before the trust is terminated, and
"(iii) all of the income of the trust for periods gifter
the grandchild has attained age 21 will be distributed
102 STAT. 3568 PUBLIC LAW 100-647—NOV. 10, 1988
to (or for the benefit of) such grandchild not less fre-
quently than annually.
"(C) COORDINATION WITH SECTION 2653(a) OF THE I 9 8 6
CODE.—In the case of any transfer which would be a genera-
tion-skipping transfer but for subparagraph (A), the rules of
section 2653(a) of the Internal Revenue Code of 1986 shall
apply as if such transfer were a generation-skipping trans-
fer.
"(D) COORDINATION WITH TAXABLE TERMINATIONS AND TAX-
ABLE DISTRIBUTIONS.—For purposes of chapter 13 of the
Internal Revenue Code of 1986, the terms 'taxable termi-
nation' and 'taxable distribution' shall not include any
transfer which would be a direct skip but for subparagraph
(A).
"(4) DEFINITIONS.—Terms used in this section shall have the
same respective meanings as when used in chapter 13 of the
Internal Revenue CJode of 1986; except that section 2612(cX2) of
such (Dode shall not apply in determining whether an individual
is a grandchild of the transferor."
26 use 2601 (B) Clause (iii) of section 1443(bX3XB) of the Reform Act (as
"°*®- amended by subparagraph (A)) shall apply only to transfers
after June 10,1987.
26 use 2601 (4) Subsection (d) of section 1433 of the Reform Act is
note. amended—
(A) by striking out "shall be treated as a direct skip" and
inserting in lieu thereof "shall be treated as a direct skip to
such grandchild",
(B) by striking out "would be a direct skip" in subpara-
graph (B) and inserting in lieu thereof "would be a direct
skip to a grandchild", and
(C) by adding at the end thereof the following new sen-
tence: "Unless the grandchild otherwise directs by will, the
estate of such grandchild shall be entitled to recover from
the person receiving the property on the death of the
grandchild any increase in Federal estate tax on the estate
of the grandchild by reason of the preceding sentence."
26 u s e 2601 (5) Subparagraph (C) of section 1433(bX2) of the Reform Act
^°^- shall not exempt any direct skip from the amendments made by
subtitle D of title XIV of the Reform Act if—
(A) such direct skip results from the application of section
2044 of the 1986 Code, and
(B) such direct skip is attributable to property transferred
to the trust after October 21,1988.
SEC. 1015. AMENDMENTS RELATED TO TITLE XV OF THE REFORM ACT.
(a) AMENDMENT RELATED TO SECTION 1501 OF THE REFORM ACT.—
Subparagraph (B) of section 6724(dX2) of the 1986 Code is amended
by striking out "6031(b)" and inserting in lieu thereof "6031(b) or
(0".
(b) AMENDMENTS RELATED TO SECTION 1503 OF THE REFORM ACT.—
(1) Subparagraph (A) of section 6013(bX5) of the 1986 Code is
amended to read as follows:
"(A) COORDINATION WITH SECTION 6653.—For purposes of
section 6653, where the sum of the amounts shown as tax
on the separate returns of each spouse is less than the
amount shown as tax on the joint return made under this
subsection—
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3569
"(i) such sum shall be treated as the amount shown
on the joint return,
"(ii) any negligence (or disregard of rules or regula-
tions) on either separate return shall be treated as
negligence (or such disregard) on the joint return, and
"(iii) any fraud on either separate return shall be Fraud.
treated as fraud on the joint return."
(2XA) Paragraph (1) of section 6653(a) of the 1986 Code is
amended to read as follows:
"(1) I N GENERAL.—If any part of any underpajmient (as de- Fraud.
fined in subsection (c)) of tax required to be shown on a return is
due to negligence (or disregard of rules or regulations), there
shall be added to the tax an amount equal to 5 percent of the
underpajmient."
(B) Paragraph (1) of section 6653(b) of the 1986 Ck)de is amend-
ed to read as follows:
"(1) I N GENERAL.—If any part of any underpayment (as de-
fined in subsection (c)) of t8ix required to be shown on a return is
due to fraud, there shall be added to the tax an amount equal to
75 percent of the portion of the underpa3ntnent which is attrib-
utable to fraud."
(C) Paragraph (2) of section 6601(e) of the 1986 Code is amend;
ed by striking out "6659" each place it appears and inserting in
lieu thereof "6653, 6659".
(3) Subsection (g) of section 6653 of the 1986 (Dode is amended
by adding at the end thereof the following new sentence: "If any
penalty is imposed under subsection (a) by reason of the preced-
ing sentence, only the portion of the underpayment which is
attributable to the failure described in the preceding sentence
shall be taken into account in determining the amount of the
penalty under subsection (a)."
(4) The amendments made by this subsection (other than 26 u s e 6001
paragraph (3)) shall apply to returns the due date for which note.
(determined without regard to extensions) is after December 31,
1988.
(c) AMENDMENT RELATED TO SECTION 1504 OF THE REFORM ACT.— Effective date.
The repeal made by section 8002(c) of the Omnibus Budget Reconcili- 26 u s e 6661
ation Act of 1986 shall take effect as if the Tax Reform Act of 1986 note.
had been enacted on the day before the date of the enactment of the
Omnibus Budget Reconciliation Act of 1986.
(d) AMENDMENTS RELATED TO SECTION 1511 OF THE REFORM ACT.—
Section 6621 of the 1986 C!ode is amended—
(1) by striking out "short-term Federal rate" each place it
appears in subsections (a) and (bXD and inserting in lieu thereof
"Federal short-term rate", and
(2) by striking out "SHORT-TERM FEDERAL RATE" in the head-
ing of subsection (b) and inserting in lieu thereof "FEDERAL
SHORT-TERM RATE".
(e) AMENDMENTS RELATED TO SECTION 1521 OF THE REFORM ACT.—
(IXA) Paragraph (1) of section 6045(c) of the 1986 Code is
amended by adding at the end thereof the following new
sentence:
"A person shall not be treated as a broker with respect to Agriculture and
activities consisting of managing a farm on behalf of another agricultural
commodities.
person."
102 STAT. 3570 PUBLIC LAW 100-647—NOV. 10, 1988
Effective date. (B) The amendment made by subparagraph (A) shall take
26 u s e 6045 effect as if included in the amendments made by section
note. 311(aXl) of the Tax Equity and Fiscal Responsibility Act of 1982.
(2XA) Subsection (e) of section 6045 of the 1986 Code is amend-
ed by adding at the end thereof the following new paragraph:
Resil property. "(3) PROHIBITION OF SEPARATE CHARGE FOR FILING RETURN.—It
shall be unlawful for any real estate reporting person to sepa-
rately charge any customer for complying with any require-
ment of paragraph (1)."
Effective date. (B) The amendment made by subparagraph (A) shall take
26 u s e 6045 effect on the date of the enactment of this Act.
note. (3) Subsection (e) of section 6045 of the 1986 Code is
amended—
(A) by striking out "real estate broker" each place it
appears in the text and inserting in lieu thereof "real estate
reporting person", and
(B) by striking out "REAL ESTATE BROKER" in the heading
of paragraph (2) and inserting in lieu thereof "REAL ESTATE
REPORTING PERSON".
(f) AMENDMENT RELATED TO SECTION 1522 OF THE REFORM ACT.—
Section 6050M of the 1986 Code is amended by adding at the end
thereof the following new subsection:
"(e) EXCEPTION FOR CERTAIN CLASSIFIED OR CONFIDENTIAL CON-
TRACTS.—
"(1) I N GENERAL.—Except as provided in paragraph (2), this
section shall not apply in the case of a contract described in
paragraph (3).
"(2) REPORTING REQUIREMENT.—Each Federal executive
agency which has entered into a contract described in para-
graph (3) shall, upon a request of the Secretary which identifies
a particular person, acknowledge whether such person has
entered into such a contract with such agency and, if so, provide
to the Secretary—
"(A) the information required under this section with
respect to such person, and
(B) such other information with respect to such person
which the Secretary and the head of such Federal executive
agency agree is appropriate.
"(3) DESCRIPTION OF CONTRACT.—For purposes of this subsec-
tion, a contract between a Federal executive agency and an-
other person is described in this paragraph if—
Classified "(A) the fact of the existence of such contract or the
information. subject matter of such contract has been designated and
Defense and clearly marked or clearly represented, pursuant to the
national
security. provisions of Federal law or an Executive order, as requir-
ing a specific degree of protection against unauthorized
disclosure for reasons of national security, or
"(B) the head of such Federal executive agency (or his
designee) pursuant to regulations issued by such agency
determines, in writing, that filing the required return
under this section would interfere with the effective con-
duct of a confidential law enforcement or foreign counter-
intelligence activity."
(g) AMENDMENTS RELATED TO SECTION 1523 OF THE REFORM ACT.—
Section 6676 of the 1986 Code is amended—
(1) by striking out "6049, or 6050N" in subsection (aX3) and
inserting in lieu thereof "or 6049",
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3571
(2) by striking out "6049, or 6050N" in subsection (bXlXA) and
inserting in lieu thereof "or 6049", and
(3) by striking out " , DIVIDENDS, AND ROYALTIES" in the
heading for subsection (b) and inserting in lieu thereof "AND
DIVIDEND",
(h) AMENDMENTS RELATED TO SECTION 1542 OF THE REFORM ACT.—
Subsection (h) of section 6154 of the 1986 Code (as in effect before its
repeal by the Revenue Act of 1987) is amended—
(1) by striking out "subject to the tax imposed by section
4940" in paragraph (1),
(2) by amending paragraph (2) to read as follows:
"(2) any tax imposed by section 511, and any tax imposed by
section 1 or 4940 on a private foundation, shall be treated as a
tax imposed by section 11, and", and
(3) by adding at the end thereof the following new sentence:
"In the case of an organization described in paragraph (1), subsec-
tion (c) of section 6655 shall be applied by substituting '5th month'
for 'third month' and subsection (dX3XA) of section 6655 shall be
applied by substituting *2 months' for '3 months' in clause (i), by
substituting '4 months' for *5 months, in clause (ii), by substituting '7
months' for '8 months' in clause (iii), and by substituting '10 months'
for '11 months' in clause (iv)."
(i) AMENDMENT RELATED TO SECTION 1551 OF THE REFORM ACT.—
Clause (iii) of section 7430(cX2XA) of the 1986 Code is amended to
read as follows:
"(iii) meets the requirements of the 1st sentence of
section 2412(dXlXB) of title 28, United States Code (as
in effect on October 22, 1986) and meets the require-
ments of section 2412(dX2XB) of such title 28 (as so in
effect)."
(j) PROVISION RELATED TO SECTION 1556 OF THE REFORM ACT.—To 26 use 7443A
the extent the salary recommendations submitted by the President ^°^-
on January 5, 1987, are inconsistent with the provisions of section
7443A(dXl) of the 1986 Code, such recommendations shall not be
effective for any period,
(k) AMENDMENT RELATED TO SECTION 1557 OF THE REFORM ACT.—
(1) Subsection (d) of section 7447 of the 1986 Code is amended
by adding at the end thereof the following new sentence: "In
computing the rate of the retired pay under paragraph (1) of
this subsection for any individual who is entitled thereto, any
period during which such individual performs services under
subsection (c) on a substantially full-time basis shall be treated
as a period during which he has served as a judge."
(2) The amendment made by paragraph (1) shall apply for 26 use 7447
purposes of determining the amount of retired pay for months note.
beginning after the date of the enactment of this Act regardless
of when the services under section 7447(c) of the 1986 Code were
performed.
(1) AMENDMENTS RELATED TO SECTION 1561 OF THE REFORM ACT.—
(1) Subsection (eX2) of section 7609 of the 1986 Code is
amended—
(A) by inserting "or the summoned party's response to a
summons described in subsection (f)," after "the summons
described in subsection (c),", and
(B) by striking out "the summons is issued other" and
inserting in lieu thereof "the summons is issued".
102 STAT. 3572 PUBLIC L A W 100-647—NOV. 10, 1988
(2) Subsection (i) of section 7609 of the 1986 Code is
amended—
(A) by striking out "the third-party recordkeeper" in
paragraph (4) and inserting in lieu thereof "the summoned
party", and
(B) by inserting "AND SUMMONED PARTY" after "RECORD-
KEEPER in the subsection heading.
Effective date. (3) The amendments made by this subsection shall take effect
26 u s e 7609 on the date of the enactment of this Act.
note. (m) AMENDMENT RELATED TO SECTION 1562 OF THE REFORM ACT.—
Subsection (d) of section 6212 of the 1986 Code is amended by adding
at the end thereof the following new sentence: "Nothing in this
subsection shall affect any suspension of the running of any period
of limitations during any period during which the rescinded notice
was outstanding."
(n) AMENDMENT RELATED TO SECTION 1563 OF THE REFORM ACT.—
Subparagraph (B) of section 6404(eXl) of the 1986 Code is amended—
(1) by inserting "error or" before "delay", and
(2) by inserting "erroneous or" before "dilatory".
(o) AMENDMENT RELATED TO SECTION 1565 OF THE REFORM ACT.—
Effective with respect to levies made after December 31, 1988,
paragraph (10) of section 6334(a) of the 1986 Code is amended—
(1) in subparagraph (A)—
(A) by striking out "IV" and inserting in lieu thereof "III,
IV, V,", and
(B) by adding "or" at the end thereof,
(2) in subparagraph (C) by striking out "21," and inserting in
lieu thereof "13, 21, 23," and
(3) by striking out subparagraph (B) and redesignating
subparagraph (C) as subparagraph (B).
(p) AMENDMENT RELATED TO SECTION 1581 OF THE REFORM ACT.—
26 u s e 3402 Subsection (c) of section 1581 of the Reform Act is amended by
note. adding at the end thereof the following new sentence:
"The preceding sentence shall not apply if its application would
result in an increase in the number of withholding allowances for
the employee."
(q) GENERAL REQUIREMENT OF RETURN, STATEMENT, OR LIST.—
(1) Subsection (a) of section 6011 of the 1986 Code is amended
by striking out "for the collection thereof and inserting in lieu
thereof "with respect to the collection thereof.
Effective date. (2) The amendment made by paragraph (1) shall take effect on
the date of the enactment of this Act.
(r) CERTAIN REFUNDABLE CREDITS To B E ASSESSED UNDER DEFI-
CIENCY PROCEDURES.—
(1) Subsection (a) of section 6201 of the 1986 Code is amended
by striking out paragraph (4).
26 u s e 6011 (2) Paragraph (4) of section 6211(b) is amended to read as
note. follows:
"(4) For purposes of subsection (a)—
"(A) any excess of the sum of the credits allowable under
sections 32 and 34 over the tax imposed by subtitle A
(determined without regard to such credits), and
"(B) any excess of the sum of such credits £is shown by the
taxpayer on his return over the amount shown as the tax
by the taxpayer on such return (determined without regard
to such credits),
shall be taken into account as negative amounts of tax."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3573
(3) Subsection (h) of section 6211 of the 1986 Code is amended
by striking out paragraph (3) and by redesignating paragraph
(4) as paragraph (3).
(4) The amendments made by this subsection shaU apply to 26 u s e 6201
notices of deficiencies mailed after the date of the enactment of note.
this Act.
(s) NoncB OP LIEN ON PEHSONAL PROPERTY.—
(1) Subsection (f) of section 6323 of the 1986 Code is
amended—
(A) by inserting ", except that State law merely conform-
ing to or reenacting Federal law establishing a national
filing system does not constitute a second office for filing as
designated by the laws of such State" after "situated" in
paragraph (IXAXiiX and
(B) by adding at the end thereof the following new para-
graph:
"(5) NATIONAL FILING SYSTEMS.—^The filing of a notice of lien
shall be governed solely by this titie and shall not be subject to
any other Federal law establishing a place or places for the
filing of liens or encumbrances under a national filing system."
(2) The amendments made by this subsection shall take effect Effective date.
on the date oftibeenactment of this Act. 26 u s e 6323
(t) EFFECT OF HONORING LEVY.—
note.
(1) Subsection (d) of section 6332 of the 1986 Code is
amended—
(A) by inserting "and any other person" after "delinquent
taxpayer", and
(B) by striking out the last sentence thereof.
(2) The amendment made by this subsection shall apply to 26 u s e 6332
levies issued after the date of the enactment of this Act. note.
(u) COLLECTION AFTER COMMENCEMENT OF JUDICIAL PROCEED-
INGS.—
(1) The last sentence of section 6502(a) of the 1986 Code is
amended to read as follows: "If a timely proceeding in court for
the collection of a tax is commenced, the period during which
such tax may be collected by levy shall be extended and shall
not expire until the liability for tiie tax (or a judgment against
the taxpayer arising from such liability) is satisfied or becomes
enforceable."
(2) The amendment made by this subsection shall apply to 26 u s e 6502
levies issued after the date of the enactment of this Act. note.
SEC 1016. AMENDMENTS RELATED TO TITLE XVI OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1603 OF THE REFORM ACT.—
(IXA) Subparagraph (A) of section 501(cX25) of the 1986 Code
ia amended by adding at the end thereof the following new
sentence:
"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) The amendment made by subparagraph (A) shall apply Real property,
¥rith respect to property acquired by tiie organization after June eontracts.
10, 1987, except that such amendment shall not apply to any eorporations.
26 u s e 501 note.
property acquired after June 10, 1987, pursuant to a binding
written contract in effect on June 10, 1987, and at all times
thereafl:er before such acquisition.
102 STAT. 3574 PUBLIC LAW 100-647—NOV. 10, 1988
(2) Subparagraph (D) of section 501(cX25) of the 1986 Code is
amended by striking out so much of such subparagraph as
precedes clause (i) and inserting in lieu thereof the following:
"(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—".
(3XA) Paragraph (25) of section 501(c) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(EXi) 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, deduc-
tion, 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 sub-
paragraph (A),
"(ii) For purposes of this subparagraph, the term 'quali-
fied subsidiary' means any corporation if, a t 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 require-
ments 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 ex-
clid.ii£r6ft)rits s^ock
(B) Subparagraph (C) of section 501(cX25) of the 1986 Code is
amended by inserting "or" at the end of clause (iii), by striking
out ", or" at the end of clause (iv) and inserting in lieu thereof a
period, and by striking out clause (v).
(4) Paragraph (25) of section 501(c) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(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(dXl)) 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."
(5XA) Paragraph (9) of section 514(c) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(E) SPECIAL RULES FOR ORGANIZATIONS DESCRIBED IN SEC-
TION 501(CX25).—
"(i) IN GENERAL.—In computing under section 512 the
unrelated business taxable income of a disqualified
holder of an interest in an organization described in
section 501(cX25), there shall be taken into account—
"(I) as gross income derived from an unrelated
trade or business, such holder's pro rata share of
the items of income described in clause (ii)(I) of
such organization, and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3575
"(ID as deductions allowable in computing unre-
lated business taxable income, such holder's pro
rata share of the items of deduction described in
clause (iiXn) of such organization.
Such amounts shall be token into account for the
taxable year of the holder in which (or with which) the
taxable year of such organization ends.
"(ii) DESCRIPTION OF AMOUNTS.—For purposes of
clause (i)—
"(0 gross income is described in this clause to the
extent such income would (but for this paragraph)
be treated under subsection (a) as derived from an
unrelated trade or business, and
"(ID any deduction is described in this clause to
the extent it would (but for this paragraph) be
allowable under subsection (aX2) in computing un-
related business taxable income,
"(iii) DISQUALIFIED HOLDER.—For purposes of this
subparagraph, the term 'disqualified holder' means any
shareholder (or beneficiary) which is not described in
clause (i) or (ii) of subparagraph (C)."
(B) The amendment made by subparagraph (A) shall apply 26 use 514 note.
with respect to interests in the organization acquired after June
10, 1987, except that such amendment shall not apply to any
such interest acquired after June 10, 1987, pursuant to a bind-
ing written contract in effect on Jiuie 10, 1987, and at all times
thereafter before such acquisition.
(6) The last sentence of section 514(cX9XB) of the 1986 Code is
amended by striking out "clause (vi)" and inserting in lieu
thereof "th^ paragraph",
(b) REPEAL OF SECTIION 1608 OF THE REFORM ACT.—Section 1608 of
the Reform Act is hereby repealed. 26 USC170 note.
SEC. 1017. AMENDMENTS RELATED TO TITLE XYII OF THE REFORM ACT.
(a) AMENDMENTS RELATED TO SECTION 1701 OF THE REFORM ACT.—
Oause (i) of section 51(dX12XB) of the 1986 Code is amended by
striking out "subsection (a)(1)" and inserting in lieu thereof "subsec-
tion (a)".
(b) AMENDMENT RELATED TO SECTION 1702 OF THE REFORM ACT.—
Subsection (j) of section 6652 of the 1986 (^ode, as added by section
1702(b) of the Reform Act and as in effect before its repeal by the
Revenue Act of 1987, is amended by inserting "(and the correspond-
ing provision of section 4041(dXl))" after "section 4041(aXl)".
(c) AMENDBCENTS RELATED TO SECTION 1703 OF THE REFORM ACT.—
dXA) Subsection (a) of section 4081 of the 1986 Code, as
amended by section 1703 of the Reform Act, is amended by
redesignating paragraph (2) as paragraph (3) and by striking out
paragraph (1) and inserting in lieu thereof the following new
paragraphs:
"(1) I N GENERAL.—^There is hereby imposed a tax at the rate
specified in paragraph (2) on the earlier of—
"(A) the removal, or
"(B) the sale,
of gasoline by the refiner or importer thereof or the terminal
operator.
"(2) RATES OF TAX.—
102 STAT. 3576 PUBLIC LAW 100-647—NOV. 10, 1988
"(A) IN GENERAL.—The rate of the tax imposed by this
section is the sum of—
"(i) the Highway Trust Fund financing rate, and
"(ii) the Leaking Underground Storage Tank Trust
Fund financing rate.
"(B) RATES.—For purposes of subparsigraph (A)—
"(i) the Highway Trust Fund financing rate is 9 cents
a gallon, and
"(ii) the Leaking Underground Storage Tank Trust
Fund financing rate is 0.1 cent a gallon."
(B) Subsections (b) and (c) of section 4081 of the 1986 Code, as
amended by section 1703 of the Reform Act, are each amended
by striking out "subsection (d)" and inserting in lieu thereof
"subsection (a)".
(C) Subsection (e) of section 4081 of the 1986 C!ode, as amended
by section 1703 of the Reform Act, is amended—
(i) by striking out "subsection (dX2XA)" in par£igraph (1)
and inserting in lieu thereof "subsection (aX2)", and
(ii) by striking out "subsection (dX2)(B)" each place it
appears in paragraph (2) and inserting in lieu thereof
"subsection (aX2)".
(D) Section 4081 of the 1986 Code, as amended by section 1703
of the Reform Act, is amended by striking out subsection (d) and
by redesignating subsection (e) as subsection (d).
(2) Subsection (b) of section 34 of the 1986 Code is amended by
striking out "section 6421(i) or 6427(j)" and inserting in lieu
thereof "section 6421(j) or 6427(k)".
(3) Sections 4041(bXlXC) and 6427(mX3) of the 1986 Code are
each amended by striking out "section 6421(dX2)" and inserting
in lieu thereof "section 6421(eX2)".
(4) Paragraph (3) of section 4041(0 of the 1986 Code is
amended to read as follows:
"(3) TERMINATION.—Except with respect to the taxes imposed
by subsection (d), paragraph (1) shall not apply on and after
October 1,1993."
26 use 4221 (5) The amendment made by section 10502(dX4) of the Reve-
note. nue Act of 1987 shall be treated as if included in the amend-
ments made by section 1703 of the Reform Act except that the
reference to section 4091 of the Internal Revenue Code of 1986
shall not apply to sales before April 1,1988.
(6) Section 6421 of the 1986 C!ode is amended by redesignating
subsection (i) (relating to income tax credit in lieu of pa3maent)
and subsection (j) (relating to cross references) as subsections 0')
and (k), respectively.
(7) Subsections (a) and (hXD of section 6421 of the 1986 Code
are each amended by striking out "subsection (i)" and inserting
in lieu thereof "subsection (j)".
(8) Paragraph (2) of section 6421(j) of the 1986 Code (as redesig-
nated by paragraph (6)) is amended by striking out "subsection
'cX2)" and inserting in lieu thereof "subsection (dX2)".
(9) Sections 7210, 7603, 7604(b), 7604(cX2), 7605(a), 7609(cXl),
and 7610(c) of the 1986 Code are each amended by striking out
"6421(fX2)" and inserting in lieu thereof "6421(gX2)".
(10) Paragraph (2) of section 6427(k) of the 1986 Code is
amended by striking out "subsection" and all that follows and
inserting in lieu thereof "paragraph (2) or (3) of subsection (i)."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3577
(11) Paragraph (6) of section 6511(i) of the 1986 Code is
amended by strikii^ out "section 6421(c)" and inserting in lieu
thereof "section 6421(d)".
(12) Subparagraph (G) of section 1703(eX2) of the Reform Act 100 Stat. 2774.
is amended by striking out all that follows "are amended" and
inserting in lieu thereof "by striking out '6427(iX2)' and insert-
ing in lieu thereof '6427(jX2)'."
(13) Paragraph (2) of section 1703(f) of the Reform Act is 26 USC 4081
amended by adding at the end thereof the following new sen- ^o*®-
tence: "All other provisions of law, including penalties, ap-
plicable with respect to the taxes imposed by section 4081 of the
Internal Revenue Code of 1986 shall apply to the floor stocks
taxes imposed by this section."
(14) Paragraph (1) of section 4081(c) of the 1986 Code, as
amended by section 1703 of the Reform Act, is amended by
strikii^ out "3 cents" and inserting in lieu thereof "SVa cents".
(15) Subsection (d) of section 6421 of the 1986 dkxle is amended
by adding at the end thereof the following new paragraph:
"(3) APPUCATION TO SALES UNDER SUBSECTION (C) .—For pur- Petroleum and
poses of this subsection, gasoline shall be treated as used for a petroleum
purpose referred to in subsection (c) when it is sold for such a Products.
purpose."
(16) Section 4222(d) of the 1986 Code is amended by striking
out "4083" and inserting in lieu thereof "4101".
SEC. 1018. AMENDMENTS RELATED TO TITLE XVIII OF THE REFORM ACT.
(a) AMENDMENT RELATED TO SECTION 1801 OF THE REFORM ACT.—
Clause (iii) of section 1801(aX2XA) of the Reform Act is amended to 26 USC 168 note.
read as follows:
"(iii) a person became a partner in such partnership
(or a beneficiary in such trust) after its formation but
before September 26,1985,".
(b) AMEND&HENTS RELATED TO SECTION 1802 OF THE REFORM ACT.—
(1) The last sentence of section 31(gX17XL) of the Tax Reform
Act of 1984, as added by section 1802(aX10XG) of the Reform Act, 26 use 168 note.
is amended—
(A) by striking out "Registry of Deeds" each place it
appears and inserting in lieu thereof "Roister of Deed",
and
(B) by strikii^ out "May 7, 1985" and inserting in lieu
thereof "May 7,1984".
(2) Subparagraph (E) of section 168(jX9) of the 1986 Code (as
amended by section 1802(aX2) of the Reform Act and as in effect
before the amendments made by section 201 of the Reform Act)
is amended—
(A) by striking out "this paragraph" in clauses (i) and
(iiXD and inserting in lieu thereof "this paragraph and
paragraph (8)", and
(B) by striking out clause (iii) and inserting in lieu thereof
the following:
"(iii) TAX-EXEMPT CONTROLLED ENTmr.—
"(I) I N GENERAL.—^The term 'tax-exempt con-
trolled entity' means any corporation (which is not
a tax-exempt entity determined without regard to
this subparagraph and paragraph (4)CE)) if 50 per-
cent or more (in value) of the stock in such corpora-
102 STAT. 3578 PUBLIC LAW 100-647—NOV. 10, 1988
tion is held by 1 or more tax-exempt entities (other
than a foreign person or entity).
"(II) ONLY 5-PERCENT SHAREHOLDERS TAKEN INTO
ACCOUNT IN C A S E OF PUBLICLY TRADED STOCK.—For
purposes of subclause (I), in the case of a corpora-
tion the stock of which is publicly traded on an
established securities market, stock held by a tax-
exempt entity shall not be taken into account
unless such entity holds at least 5 percent (in
value) of the stock in such corporation. For pur-
poses of this subclause, related entities (within the
meaning of paragraph (7)) shall be treated as 1
entity.
"(Ill) SECTION 3 1 8 TO APPLY.—For purposes of this
clause, a tax-exempt entity shall be treated as
holding stock which it holds through application of
section 318 (determined without regard to the
50-percent limitation contained in subsection
(a)(2XC) thereof)."
(c) AMENDMENT RELATED TO SECTION 1803 OF THE REFORM ACT.—
26 use 1281 (1) Subparagraph (A) of section 1803(aX8) of the Reform Act is
note. amended by striking out "September 27, 1985" and inserting in
lieu thereof "December 31,1985".
(2) Subsection (c) of section 1278 of the 1986 Code is amended
by inserting before the period ", including regulations providing
proper adjustments in the case of a bond the principal of which
may be paid in 2 or more paynients".
(3) Section 1278(b) of the 1986 Code is amended by adding at
the end thereof the following new paragraph:
"(4) BASIS ADJUSTMENT.—The basis of any bond in the hands
of the taxpayer shall be increased by the amount included in
gross income pursuant to this subsection."
(d) AMENDMENTS RELATED TO SECTION 1804 OF THE REFORM ACT.—
26 use 311 note. (1) Paragraph (3) of section 1804(b) of the Reform Act is
amended by striking out "Paragraph (3) of section 54" and
inserting "Paragraph (3) of section 54(d)".
(2) Clause (i) of section 54(dX3XD) of the Tax Reform Act of
26 use 311 note. 1984 is amended by striking out "subtitle D of title VI" and
inserting "subtitle D of title VI of the Tax Reform Act of 1986".
(3) Clause (ii) of section 54(dX3XD) of the Tax Reform Act of
1984 (as added by section 180406X3) of the Tax Reform Act of
1986) is amended—
(A) by striking out "December 9, 1968," each place it
appears and inserting in lieu thereof "December 10,1968,",
and
(B) by striking out "October 5,1981" and inserting in lieu
thereof "March 2,1978,".
(4) Subsection (b) of section 312 of the 1986 Code is amended
by striking out "of any property" and inserting in lieu thereof
"of any property (other than an obligation of such corporation)".
(5XA) Section 361 of the 1986 Code is amended to read as
follows:
"SEC. 361. NONRECOGNITION OF GAIN OR LOSS TO CORPORATIONS;
TREATMENT OF DISTRIBUTIONS.
"(a) GENERAL RULE.—No gain or loss shall be recognized to a
corporation if such corporation is a party to a reorganization and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3579
exchanges property, in pursuance of the plan of reorganization,
solely for stock or securities in another corporation a party to the
reoi^anization.
"(b) EXCHANGES NOT SOLELY IN KIND.—
"(1) GAIN.—If subsection (a) would apply to an exchange but
for the fact that the property received in exchai^e consists not
only of stock or securities permitted by subsection (a) to be
received without the recognition of gain, but also of other
property or money, then—
"(A) PROPERTY DISTRIBUTED.—^If the corporation receiving
such other property or money distributes it in pursuance of
the plan of reorganization, no gain to the corporation shall
be recognized from the exchange, but
"(B) PROPERTY NOT DISTRIBUTED.—If the corporation
receiving such other property or money does not distribute
it in pursuance of the plan of reorganization, the gain, if
any, to the corporation shall be reco^iized.
The amount of gain recogiazed under subparagraph (B) shall
not exceed the sum of the money and the fair market value of
the other property so received which is not so distributed.
"(2) Loss.—U subsection (a) would apply to an exchange but
for the fact that the property received in exchai^e consists not
only of property permitted by subsection (a) to be received
without the recognition of gain or loss, but also of other prop-
erty or money, then no loss from the exchange shall be
recognized.
"(3) TREATMENT OF TRANSFERS TO CREDITORS.—For purposes of
pars^aph (1), any transfer of the other property or money
received in the exchange by the corporation to its creditors in
connection with the reorganization shall be treated as a dis-
tribution in pursuance of the plan of reorganization. Tlie Sec-
retary may prescribe such r^ulations as may be necessary to
prevent avoidance of tax through abuse of the preceding sen-
tence or subsection (cX3).
"(c) TREATMENT OF DISTRIBUTIONS.—
"(1) I N GENERAL.—Except as provided in paragraph (2), no
gain or loss shall be recognized to a corporation a party to a
reorganization on the distribution to its shareholders of prop-
erty in pursuance of the plan of reorganization.
' (2) DISTRIBUTIONS OF APPRECIATED PROPERTY.—
"(A) IN GENERAL.—If—
"(i) in a distribution referred to in paragraph (1), the
corporation distributes property other than qualified
property, and
"(ii) tiie fair market value of such property exceeds
its adjusted basis (in the hands of the distributing
corporation),
then gain shall be recognized to the distributing corpora-
tion as if such property were sold to the distributee at its
fair market value.
"(B) QUALIFIED PROPERTY.—^For purposes of this subsec-
tion, the term 'qualified property* means—
"(i) any stock in (or right to acquire stock in) the
distributuig corporation or obligation of the distribut-
i i ^ corporation, or
'(ii) any stock in (or right to acquire stock in) another
corporation which is a party to the reorganization or
19-194 O—91—Part 4 20 : QL 3
102 STAT. 3580 PUBLIC LAW 100-647—NOV. 10, 1988
obligation of another corporation which is such a party
if such stock (or right) or obligation is received by the
distributing corporation in the exchange.
"(C) TREATMENT OF UABILTTIES.—If any property distrib-
uted in the distribution referred to in paragraph (1) is
subject to a liability or the shareholder assumes a liability
of the distributing corporation in connection with the dis-
tribution, then, for purposes of subparagraph (A), the fair
market value of such property shall be treated as not less
than the amount of such liability.
"(3) TREATMENT OF CERTAIN TRANSFERS TO CREDITORS.—For
purposes of this subsection, any transfer of qualified property by
the corporation to its creditors in connection with the reorga-
nization shall be treated as a distribution to its shareholders
pursuant to the plan of reorganization.
"(4) COORDINATION WITH OTHER PROVISIONS.—Section 311 and
subpart B of part II of this subchapter shall not apply to any
distribution referred to in paragraph (1).'
(B) Section 358 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(f) DEFINITION OF NONRECOGNITION PROPERTY IN CASE OF SECTION
361 EXCHANGE.—For purposes of this section, the property per-
mitted to be received under section 361 without the recognition of
gain or loss shall be treated as consisting only of stock or securities
in another corporation a party to the reorganization."
(C) Section 355 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(c) TAXABILITY OF CORPORATION ON DISTRIBUTION.—Section 311
shall apply to any distribution—
"(1) to which this section (or so much of section 356 as relates
to this section) applies, and
"(2) which is not in pursuance of a plan of reorganization,
in the same manner as if such distribution were a distribution to
which subpart A of part I applies; except that subsection (b) of
section 311 shall not apply to any distribution of stock or securities
in the controlled corporation."
(D) Subsection (c) of section 336 of the 1986 Code (as amended
by section 631 of the Reform Act) is amended to read as follows:
"(c) EXCEPTION FOR LIQUIDATIONS WHICH ARE PART OF A REORGA-
NIZATION.—
"For provision providing that tliis subpart does not apply to distributions
in pursuance of a plan of reorganization, see section 361(c)(4)."
(E) Subsection (a) of section 311 of the 1986 Code is amended
by striking out "distribution, with respect to its stock," and
inserting in lieu thereof "distribution (not in complete liquida-
tion) with respect to its stock".
(F) The table of sections for subpart C of part III of subchapter
C of chapter 1 of the 1986 Code is amended by striking out the
item relating to section 361 and inserting in lieu thereof the
following new item:
"Sec. 361. Nonrecognition of gain or loss to corporations; treatment of dis-
tributions."
(G) Effective with respect to transfers on or after June 21,
1988, section 351 of the 1986 Code is amended by redesignating
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3581
subsection (f) as subsection (g) and by inserting after subsection
(e) the following new subsection:
" ( 0 TREATBdENT OF CONTROLLED CORPORATION.—^If—
"(1) property is transferred to a corporation (hereinafter in
this subsection referred to as the 'controlled corporation') in an
exchange with respect to which gain or loss is not reo^nized (in
whole or in part) to the transferor under this section, and
"(2) such exchange is not in pursuance of a plan of reorganiza-
tion,
section 311 shall apply to any transfer in such exchange by the
controlled corporation in the same manner as if such transfer were
a distribution to which subpart A of part I applies."
(6) Subparagraph (A) of section 280G(bX5) of the 1986 Code is
amended—
(A) in clause (i) by striking out "section 1361(b))" and
inserting in lieu thereof "section 1361(b) but without r^ard
to paragraph (IXC) thereof)", and
(B) by adding at the end thereof the following: "Stock
described in section 1504(aX4) shall not be taken into ac-
count under clause (ii)(D if tiie payment does not adversely
affect the shareholder's redemption and liquidation rights.'
(7) Subparagraph (B) of section 280G(bX5) of the 1986 Code
(relatii^ to shareholder approval requirements) is amended by
adding at the end thereof tiie followii^ new sentence:
"The r^ulations prescribed under subsection (e) shall in-
clude r^ulations providing for the appUcation of this
subparagraph in the case of shareholders which are not
individimls (including the treatment of nonvoting interests
in an entity which is a shareholder) and where an entitv
holds a de minimis amount of stock in the corporation.'
(8) Paragraph (5) of section 280G(d) of the 1986 Code is
amended by striking out "officer or any member" and inserting
in lieu thereof "officer of any member".
(9) Paragraph (3) of section 338(e) of the 1986 Code is amended
by striking out "which meet the 80 percent requirements of
subparagraphs (A) and (B) of subsection (dX3)" and inserting in
lieu thereof "which meet the requirements of section
1504(aX2)".
(lOXA) Paragraph (7) of section 1504(b) of the 1986 Code is
amended to read as follows:
"(7) A DISC (as defined in section 992(aXl))."
(B) Section 1504 of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(f) SPECIAL RULE FOR C ^ T A I N AMOUNTS DERIVED FROM A COR-
PORATION PREVIOUSLY TREATED AS A DISC.—In determining the
consolidated taxable income of an affiliated group for any taxable
year b^innii^ after December 31, 1984, a corporation which had
been a DISC and which would otherwise be a member of such group
shall not be treated as such a member with respect to—
"(1) any distribution (or deemed distribution) of accumulated
DISC income which was not treated as previously taxed income
under section 805(bX2XA) of the Tax Reform Act of 1984, and
"(2) any amount treated as received under section 805(bX3) of
such Act."
(e) PROVISION RELATED TO SECTION 1806 OF THE REFORM ACT.—^If— 26 use 643 note.
(1) on a return for the 1st taxable year of the trusts involved
b^inning after March 1, 1984, 2 or more trusts were treated as
102 STAT. 3582 PUBLIC LAW 100-647—NOV. 10, 1988
a single trust for purposes of the tax imposed by chapter 1 of the
Internal Revenue Code of 1954,
(2) such trusts would have been required to be so treated but
for the amendment made by section 1806(b) of the Reform Act,
and
(3) such trusts did not accumulate any income during such
taxable year and did not make any accumulation distributions
during such taxable year,
then, notwithstanding the amendment ma^e by section 18060)) of
the Reform Act, such trusts shall be treated as one trust for
purposes of such taxable year.
(f) AMENDMENTS RELATED TO SECTION 1807 OF THE REFORM ACT.—
(1) Paragraphs (IXA) and (2XE) of section 468B(d) of the 1986
Code are each amended by striking out "the taxpayer" and
inserting in lieu thereof "the taxpayer (or any related person)".
(2) Subparagraph (A) of section 468B(dX2) of the 1986 Code is
amended to read as follows:
"(A) which is established pursuant to a court order and
which extinguishes completely the taxpayer's tort liability
with respect to claims described in subparagraph (D),".
26USC468B (3) Clause (i) of section 1807(aX7XC) of the Reform Act is
note. amended to read as follows:
"(i) any portion of such fund which is established
pursuant to a court order and with qualified pa3mients,
which meets the requirements of subparagraphs (C)
and (D) of section 468B(dX2) of the Internal Revenue
Code of 1954 (as added by this paragraph), and with
respect to which an election is made under subpara-
graph (F) thereof, shall be treated as a designated
settlement fund for purposes of section 468B of such
Code,".
(4) Paragraph (2) of section 468B(b) of the 1986 Code is
amended—
(A) by striking out "the corporation," and inserting in
lieu thereof "a corporation.", and
(B) by striking out "no other" and inserting in lieu
thereof "No other".
(5XA) Section 468B of the 1986 Code is amended by adding at
the end thereof the following new subsection:
"(g) CLARIFICATION OF TAXATION OF CERTAIN FUNDS.—Nothing in
any provision of law shall be construed as providing that an escrow
account, settlement fund, or similar fund is not subject to current
Regulations. income tax. The Secretary shall prescribe regulations providing for
the taxation of any such account or fund whether as a grantor trust
or otherwise."
(B) Subparagraph (D) of section 1807(aX7) of the Reform Act is
hereby repealed.
(g) AMENDMENTS RELATED TO SECTION 1810 OF THE REFORM ACT.—
26 use 904 note. (1) Paragraph (5) of section 181(Ka) of the Reform Act is
amended by striking out "section 125(bX5)" each place it ap-
pears and inserting in lieu thereof "section 121(bX5)".
(2) Section 133(dX3XBXiii) of the Tax Reform Act of 1984, as
26 use 959 note. amended by section 1810(iX2) of the Reform Act, is amended by
striking out "Tax Reform Act of 1985" and inserting in lieu
thereof "Tax Reform Act of 1986".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3583
(3) a a u s e (iv) of section 7701(bX5XA) of the 1986 Code is
amended by striking out "section 274(kX2)" and inserting in lieu
thereof "section 274(1X1XB)".
Qi) AMENDMENT RELATED TO SECTION 1821 OF THE REFORM ACT.—
(1) Subsection (e) of section 812 of the 1986 Code (relating to
dividends from certain subsidiaries not included in gross invest-
ment income) is amended to read as follows:
"(e) DIVIDENDS FROM (CERTAIN SUBSIDIARIES NOT INCLUDED IN
GROSS INVESTMENT INCOIKIE.—
"(1) IN GENERAL.—For purposes of this section, the term 'gross
investment income' shall not include any dividend received by
the life insurance company which is a 100 percent dividend.
"(2) 100 PERCENT DIVIDEND DEFINED.—
"(A) IN GENERAL.—Elxcept as provided in subparagraphs
(B) and (CO, the term '1()0 percent dividend' means any
dividend if the percentage used for purposes of determining
the deduction sdlowable under section 243, 244, or 245(b) is
100 percent.
"(B) (DERTAIN DIVIDENDS OUT OF TAX-EXEMPT INTEREST,
ETC.—The term '100 percent dividend' does not include any
distribution by a corporation to the extent such distribution
is out of tax-exempt interest or out of dividends which are
not 100 percent dividends (determined with the application
of this subparagraph).
"(C) CJERTAIN DIVIDENDS RECEIVED BY FOREIGN CORPORA-
TIONS.—The term '100 percent dividends' does not include
any dividend described in section 805(aX4)(E) (relating to
certain dividends in the case of foreign corporations)."
(2) The amendment made by paragraph (1) shall take effect as Effective date.
if included in the amendments made by section 211 of the Tax 26 u s e 812 note.
Reform Act of 1984.
(i) AMENDMENT RELATED TO SECTION 1822 OF THE REFORM ACT.—
Clause (i) of section 216(bX4XC) of the Tax Reform Act of 1984
(relating to section 818(c) elections made by certain acquired compa-
nies) is amended by striking out "clause (i)" and inserting in lieu 26 u s e 801 note.
thereof "subclause (I)".
(j) AMENDMENT RELATED TO SECTION 1825 OF THE REFORM ACT.— Contracts.
Paragraph (4) of section 1825(a) of the Reform Act (relating to
amendments related to section 221 of the Tax Reform Act of 1984) is 26 u s e 7702
amended by strikii^ out "Section 7702(eX2)" and inserting in Ueu note.
thereof "Effective with respect to contracts entered into aftier Octo-
ber 22,1986, section 7702(eX2)".
(k) AMENDMENTS RELATED TO SECTION 1826 OF THE REFORM ACT.—
(1) Paragraph (5) of section 72(s) of the 1986 Code is amended
by striking out "or" at the end of subparagraph (B), by striking
out the period at the end of subparagraph (C) and inserting in
lieu thereof ", or", and by adding at the end thereof the
following new subparagraph:
"CD) which is a qualified funding asset (as defined in
section 13(Kd), but without r^ard to whether there is a
qualified assignment)."
(2) The paragraph heading of paragraph (5) of section 72(s) of
the 1986 Code is amended by striking out "ANNUITY CONTRACTS
WHICH ARE PART OF QUALIFIED PLANS" and inserting in lieu
thereof "CERTAIN ANNUITY CONTRACTS".
G) AMENDMENTS RELATED TO SECTION 1842 OF THE REFORM ACT.
102 STAT. 3584 PUBLIC LAW 100-647—NOV. 10, 1988
(1) Subsection (c) of section 425 of the 1986 Code is amended by
adding at the end thereof the following new paragraph:
"(4) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE.—In
the case of any transfer described in subsection (a) of section
1041—
"(A) such transfer shall not be treated as a disposition for
purposes of this part, and
"(B) the same tax treatment under this part with respect
to the transferred property shall apply to the transferee as
would have applied to the transferor."
(2) Paragraph (1) of section 425(c) of the 1986 Code is amended
by striking out "paragraph (2) and (3)" and inserting in lieu
thereof "paragraphs (2), (3), and (4)".
(3) Effective with respect to transfers after June 21, 1988,
subsection (d) of section 1041 of the 1986 Code is amended—
(A) by striking out "Paragraph (1) of subsection (a)" and
inserting in lieu thereof "Subsection (a)", and
(B) by striking out "the spouse" and inserting in lieu
thereof "the spouse (or former spouse)".
(m) AMENDMENTS RELATED TO SECTION 1866 OF THE REFORM ACT.—
26 use 103 note. (1) Section 1866 of the Reform Act is amended by striking out
"obligation issued to refund" and inserting in lieu thereof
"obligation (or series of obligations) issued to refund".
(2)(A) Paragraph (1) of section 1866 of the Reform Act is
amended to read as follows:
"(1) the average maturity of the issue of which the refunding
obligation is a part does not exceed the average maturity of the
obligations to be refunded by such issue,".
(B) Section 1866 of the Reform Act is amended by adding at
the end thereof the following new sentence: "For purposes of
paragraph (1), average maturity shall be determined in accord-
ance with subsection (b)(14)(B)(i) of such Code."
(3) Paragraph (4) of section 1866 of the Reform Act is amended
by striking out "30 days" and inserting in lieu thereof "90
days".
(4) Section 1866 of the Reform Act is amended by adding
"and" at the end of paragraph (2), by striking out paragraph (3),
and by redesignating paragraph (4) as paragraph (3).
26 use 103 note. (5) A refunding obligation issued before July 1, 1987, shall be
treated as meeting the requirement of paragraph (1) of section
1866 of the Reform Act if such obligation met the requirement
of such paragraph as enacted by the Reform Act.
(n) AMENDMENTS RELATED TO SECTION 1869 OF THE REFORM ACT.—
26 use 103 (1) Clause (ii) of section 1869(c)(3)(A) of the Reform Act is
"°t^ amended by striking out "pursuant to the exercise of eminent
domain" and inserting in lieu thereof "(by a governmental unit
having the power to exercise eminent domain)".
(2) Subparagraph (C) of section 1869(c)(3) of the Reform Act is
amended by inserting "(or similar issues)" after "resulting from
the issue",
(o) AMENDMENTS RELATED TO SECTION 1875 OF THE REFORM ACT.—
(1) Clause (ii) of section 6230(aX2)(A) of the 1986 Code is
amended by striking out "nonpartnership items" and inserting
in lieu thereof "nonpartnership items (other than by reason of
section 6231(bXl)(C))".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3585
(2) Subsection (g) of section 1246 of the 1986 Code (as redesig-
nated by this Act) is amended by striking out "1248(gX3)" and
inserting in lieu thereof "1248(gX2)".
(3) Subsection (f) of section 6229 of the 1986 Code is amended Contracts,
by adding at the end thereof the following new sentence: "The
period described in the preceding sentence (including any exten-
sion period under this sentence) may be extended with respect
to any partner by agreement entered into by the Secretary and
such partner."
(p) AMENDMEISTT RELATED TO SECTION 1878 OF THE REFORM ACT.—
Paragraph (1) of section 852(e) of the 1986 Code is amended by
striking out "subsection (aX3)" and inserting in lieu thereof "subsec-
tion (aX2)".
(q) AMENDMENTS RELATED TO SECTION 1879 OF THE REFORM ACT.—
(1) Subclause (II) of section 28(bX2XAXii) of the 1986 Code is
amended to read as follows:
"(II) before the date on which an application
with respect to such drug is approved under section
505(b) or 507 of such Act or, if the drug is a
biological product, before the date on which a li-
cense for such drug is issued under section 351 of
the Public Health Service Act; cmd".
(2) The last sentence of section 1361(dX3) of the 1986 Code is
amended by striking out "treated as a separate trust under
section 663(c)" and inserting in lieu thereof "within the mean-
ing of section 663(c)".
(3) Subsection (p) of section 1879 of the Reform Act is 26 USC 83 note.
amended—
(A) by striking out "Subsection (a)" in paragraph (2) and
inserting "Paragraph (1)", and
(B) by striking out "subsection (a)" each place it appears
in paragraphs (2) and (3) and inserting in lieu thereof
"paragraph (1)".
(4XA) Subsection (d) of section 1286 of the 1986 Code is
amended to read as follows:
"(d) SPECIAL RULES FOR TAX-EXEMPT OBUGATIONS.—
"(1) IN GENERAL.—In the case of any tax-exempt obligation (as
defined in section 1275(aX3)) from which 1 or more coupons have
been stripped—
"(A) the amount of the original issue discount determined
under subsection (a) with respect to any stripped bond or
stripped coupon—
"(i) shall be treated as original issue discount on a
tax-exempt obligation to the extent such discount does
not exceed the tax-exempt portion of such discount, and
"(ii) shall be treated as original issue discount on an
obligation which is not a tax-exempt obligation to the
extent such discount exceeds the tax-exempt portion of
such discount,
"(B) subsection (bXlXA) shall not apply, and
"(C) subsection (bX2) shall be applied by increasing the
basis of the bond or coupon by the sum of—
"(i) the interest accrued but not paid before such
bond or coupon was disposed of (and not previously
reflected in basis), plus
"(ii) the amount included in gross income under
subsection (bXlXB).
102 STAT. 3586 PUBLIC LAW 100-647—NOV. 10, 1988
"(2) TAX-EXEMPT PORTION.—For purposes of paragraph (1), the
tax-exempt portion of the original issue discount determined
under subsection (a) is the excess of—
"(A) the amount referred to in subsection (aXD, over
"(B) an issue price which would produce a jdeld to matu-
rity as of the purchase date equal to the lower of—
"(i) the coupon rate of interest on the obligation from
which the coupons were separated, or
"(ii) the yield to maturity (on the basis of the pur-
chase price) of the stripped obligation or coupon.
The purchaser of any stripped obligation or coupon may
elect to apply clause (i) by substituting 'original yield to
maturity of for 'coupon rate of interest on'."
26 use 1286 (BXi) Except as provided in clause (ii), the amendment
J^ote. made by subparagraph (A) shall apply to any purchase or
sale after June 10, 1987, of any stripped tax-exempt obliga-
tion or stripped coupon from such an obligation.
(ii)If-
(I) any person held any obligation or coupon in
stripped form on June 10,1987, and
(II) such obligation or coupon was held by such
person on such date for sale in the ordinary course of
such person's trade or business,
the amendment made by subparagraph (A) shall not apply
to any sale of such obligation or coupon by such person and
shall not apply to any such obligation or coupon while held
by another person who purchased such obligation or coupon
from the person referred to in subclause (I).
(5) Clause (ii) of section 368(aX2XF) of the 1986 Code is
amended—
(A) by striking out the two parenthetical phrases in the
first sentence, and
(B) by adding at the end thereof the following new sen-
tence: For purposes of this clause, a person holding stock
in a regulated investment company, a real estate invest-
ment trust, or an investment company which meets the
requirements of this clause shall, except as provided in
regulations, be treated as holding its proportionate share of
the assets held by such company or trust.
(r) AMENDMENTS RELATED TO SECTION 1895 OF THE REFORM ACT.—
42 use 1395WW (1) Subsection (b) of section 1895 of the Reform Act is amended
and note. by Striking out paragraphs (1) and (2).
(2XA) Clause (ii) of section 3121(uX2XB) of the 1986 Code is
amended by striking out "or" at the end of subclause (IV), by
striking out the period at the end of subclause (V) and inserting
in lieu thereof ' , or", and by inserting after subclause (V) the
following new subclause:
"(VI) by an individual in a position described in
section 1402(cX2XE)."
(B) The amendment made by subparagraph (A) shall apply to
services performed after March 31,1986.
(s) MISCELLANEOUS PROVISIONS.—
(1) Subsection (a) of section 8021 of the 1986 Code is amended
by striking out "6103(d)" and inserting in lieu thereof "6103(f)".
(2XA) Section 2503 of the 1986 Code is amended by adding at
the end thereof the following new subsection:
"(f) TREATMENT OF CERTAIN LOANS OF ARTWORKS.—
M^r--..'—.v-v
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3587
"(1) IN GENERAL.—For purposes of this subtitle, any loan of a Loans,
qualified work of art shall not be treated as a transfer (and the
value of such qualified work of art shall be determined as if
such loan had not been made) if—
"(A) such loan is to an organization described in section
501(cX3) and exempt from tax under section 501(c) (other
than a private foundation), and
"(B) the use of such work by such organization is related
to the purpose or function constituting the basis for its
exemption under section 501.
"(2) DEFINITIONS.—For purposes of this section—
"(A) QUALIFIED WORK OF ART.—The term 'qualified work
of art' means any archaeological, historic, or creative tan-
gible personal property.
"(B) PRIVATE FOUNDATION.—The term 'private founda-
tion' has the meaning given such term by section 509,
except that such term shall not include any private operat-
ing foundation (as defined in section 4942(jX3))."
(B) The amendment made by subparagraph (A) shall apply to 26 use 2503
loans after July 31 1969. "°**-
(3XA) Subparagraph (B) of section 1563(dXl) of the 1986 Code
is amended by strilang out "subsection (eXD" and inserting in
lieu thereof "paragraphs (1), (2), and (3) of subsection (e)"
(B) The amendment made by subparagraph (A) shall apply to 26 use 1563
taxable years beginning after the date of the enactment of this note-
Act,
(t) ADDITIONAL AMENDMENTS RELATED TO PENSION PLANS.—
(1) AMENDMENTS RELATED TO SECTION I 8 2 6 OF THE REFORM
^cr^
(A) Section 72(sX7) of the 1986 Code is amended by strik-
ing out "primary annuity" and inserting in lieu thereof
"primary annuitant".
(B) Section 72(qX2XB) of the 1986 Code is amended by
striking out the last parenthesis.
(C) Section 419A(f)(5) of the 1986 Code is amended by
striking out "accounts" and inserting in lieu thereof
"account".
(D) Section 1826(c) of the Reform Act is amended by 26 use 72 note.
striking out "made" and inserting in lieu thereof
"commencing".
(2) AMENDMENTS RELATED TO SECTION 1 8 5 1 OF THE REFORM
ACT.—
(A) Section 1851(a) of the Reform Act is amended by 26USC419A.
striking out paragraph (4) thereof.
(B) Subclause (U) of section 512(aX3XEXii) of the 1986
Code is amended, (i) by striking out "subclause (II)" and
inserting in lieu thereof "subclause (I)", and (ii) by striking
out the comma at the end thereof and inserting in lieu
tflicrGOi 8, i36iriod
(C) Section 419(aXl) of the 1986 Code is amended by
striking out "subchapter" and inserting in lieu thereof
"chapter".
(D) Subparagraph (B) of section 1851(aX3) of the Reform
Act is amended by inserting ", section 505, and section 26USe4l9A
4976(bXlXB)" after "section 419A". note.
(3) A M E N D M E N T S RELATED TO SECTION 1852 O F THE REFORM
ACT.—
102 STAT. 3588 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 401 note. (A) Paragraph (4) of section 1852(a) of the Reform Act is
amended by adding at the end thereof the following new
subparagraph:
"(C) An individual whose required beginning date would,
but for the amendment made by subparagraph (A), occur
after December 31,1986, but whose required beginning date
after such amendment occurs before January 1, 1987, shall
be treated as if such individual had become a 5-percent
owner during the plan year ending in 1986,"
26 use 415. (B) Section 1852(hX2) of the Reform Act is amended by
striking out "section 416(1)" and inserting in lieu thereof
"section 415(1)".
26 use 401 note. (C) Section 1852(hXl) of the Reform Act is amended by
striking out "Subsection" and inserting in lieu thereof
"Effective for years beginning after December 31, 1985,
subsection".
(D) Subparagraph (E) of section 408(dX3) of the 1986 Code
is amended by striking out "subparagraph" and inserting
in lieu thereof "paragraph".
(4) AMENDMENTS RELATED TO SECTION 1854 OF THE REFORM
ACT.—
(A) Section 404(k) of the 1986 Code is amended by striking
out "avoidance" in the 4th sentence and inserting in lieu
thereof "evasion".
(B) Section 409(hX2) of the 1986 Code (relating to plan
may distribute cash) is amended by striking out "section
409(o)" and inserting in lieu thereof "paragraph (IXB)".
(C) Subparagraph (C) of section 409(nX3) of the 1986 Code
(defining nonallocation period) is amended to read as fol-
lows:
"(C) NONALLOCATION PERIOD.—The term 'nonallocation
period' means the period beginning on the date of the sale
of the qualified securities and ending on the later of—
"(i) the date which is 10 years after the date of sale,
or
"(ii) the date of the plan allocation attributable to the
final payment of acquisition indebtedness incurred in
connection with such sale."
(D) Subparagraph (A) of section 1042(cX4) of the 1986 Code
(defining qualified replacement property) is amended by
inserting ' (as in effect immediately before the Tax Reform
Act of 1986)" after "section 954(cX3)".
(E) Clause (i) of section 1042(cX4XB) of the 1986 Code
(relating to operating corporation) is amended by striking
out "placement period" and inserting in lieu thereof
(F) Section 1854(aX3XB) of the Reform Act is amended by
striking out "1042(b)(3)" and inserting in lieu thereof
"1042(b)".
(G) Subparagraph (C) of section 1854(aX3) of the Reform
26 use 409 note. Act is amended to read as follows:
"(CXi) Except as provided in clause (ii), the amendments made
by this paragraph shall apply to sales of securities after the date
of the enactment of this Act.
"(ii) A taxpayer or executor may elect to have section
1042(bX3) of the Internal Revenue Code of 1954 (as in effect
before the amendment made by subparagraph (B)) apply to sales
i^l" '• '-'^^fS-. •
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3589
before the date of the enactment of this Act as if such section
included the last sentence of section 409(nXl) of the Internal
Revenue Code of 1986 (as added by subparagraph (A))."
(H) Section 409(eX5) of the 1986 Code is amended by
striking out "(2) or".
(5) AMENDMENT RELATED TO SECTION 1875 OF THE REFORM
ACT.—Section 1875(cX7XB) of the Reform Act is amended by 26 USC 404.
striking out "and section 405(c)".
(6) AMENDMENT RELATED TO SECTION I 8 7 9 OF THE REFORM
ACT.—Subparagraph (B) of section 125(cX2) of the 1986 Code
(relating to exception for cash and deferred arrangements) is
amended by inserting "or rural electric cooperative plan (within
the meaning of section 401(kX7))" after "stock bonus plan".
(7) AMENDMENTS RELATED TO SECTION 1895 OF THE REFORM
ACT.—
(A) Section 106(bXl) of the 1986 Code (relating to excep-
tion for highly compensated individuals where plan fails to
provide certsiin continuation coverage) is amended—
(i) by striking out "any amount contributed by an
employer" and inserting in lieu thereof "any employer-
provided coverage", and
(ii) by striking out "to a group" and inserting in lieu
thereof "under a group".
(B) Section 1895(dX5XA) of the Reform Act is amended by 26 USC 162.
striking out "section 162(kX2)" and inserting in lieu thereof
"section 162(kX5)".
(8) AMENDMENTS RELATED TO SECTION 1898 OF THE REFORM
(A) Subparagraph (G) of section 402(aX6) of the 1986 Code
(relating to treatment of potential future vesting), as added
by section 1898(aX3) of the Reform Act, is redesignated as
subparagraph (I).
(B) Subparagraph (A) of section 411(aXll) of the 1986
Code is amended by striking out "vested" and inserting in
lieu thereof "nonforfeitable".
(C) Section 402(fKl) of the 1986 Code is amended by
striking out "a eligible" and inserting in lieu thereof "an
eligible".
(D) Section 1899A of the Reform Act is amended by 26 USC 415.
striking out paragraph (13).
(E) Subparagraph (B) of section 414(pX4) of the 1986 Code
is amended—
(i) by striking out "means earlier o f and inserting in
lieu thereof "means the earlier of, and
(ii) by striking out "in" each place it appears.
(F) Section 414(pX10) of the 1986 Code (relating to waiver
of certain distribution requirements) is amended by insert-
ing ", 403(b)," after "section 401".
(G) Section 414(pX9) of the 1986 C!ode is amended by Contracts.
adding at the end thereof the following new sentence: "For
purposes of this title, except as provided in regulations, any
distribution from an annuity contract under section 403(b)
pursuant to a qualified domestic relations order shall be
treated in the same manner as a distribution from a plan to
which section 401(aX13) applies."
(u) ADDITIONAL CLERICAL AMENDMENTS.—
102 STAT. 3590 PUBLIC LAW 100-647—NOV. 10, 1988
26 use 402. (1) Paragraph (5) of section 104(b) of the Reform Act is
amended by striking out "12220b)" and inserting in lieu thereof
"1122(b)". \
26 use 274 note. (2) The amendment made by section 122(cX2) of the Reform
Act shall be applied as if it also struck out the comma at the end
of section 274(bXlXB) of the 1986 Code.
(3) Clause (i) of section 280F(bX3XB) of the 1986 Code is
amended by striking out "recovery deductions" and inserting in
lieu thereof "depreciation deductions".
26 use 312. (4) Subparagraph (A) of section 803(bX3) of the Reform Act is
amended by inserting closing quotation marks after "section
189)" and by striking out the closing quotation marks following
"subparagraph (B)".
26 use 461. (5) Paragraph (1) of section 823(b) of the Reform Act is
amended to read as follows:
"(1) Paragraph (5) of section 461(h), as amended by section
805(c)(5), is amended by striking out subparagraph (B) and by
redesignating subparagraph (C) as subparagraph (B)."
26 use 402 note. (6) The amendment made by section 1122(bX2XBXiii) of the
Reform Act shall be applied as if it struck out "Initial separate
tax".
26 use 402 note. (7) The amendment made by section 1122(bX2XC) of the
Reform Act shall be applied as if it did not strike out "the"
(8) Paragraph (2) of section 72(qX2) of the 1986 Code is
amended by striking out the period at the end of subparagraph
(D) and inserting in lieu thereof a comma.
(9) Subparagraph (A) of section 417(eX3) of the 1986 Code is
amended by striking out "subclause (II)" and inserting in lieu
thereof "clause (ii)".
(10) Subparagraph (A) of section 246(cXl) of the 1986 Code is
amended by striking out "Which" and inserting in lieu thereof
"which".
(11) Subsection (a) of section 164 of the 1986 Code is amended
by striking out "the GST tax" and inserting in lieu thereof "The
GST tax".
26 use 419A. (12) Subparagraph (B) of section 1851(aX6) of the Reform Act
is amended by striking out "Subsection (b)" and inserting in lieu
thereof "Subsection (a)".
26 use 514. (13XA) Paragraph (1) of section 1878(e) of the Reform Act is
amended by striking out "last sentence of section 514(cX9XB)
(relating to exceptions)" and inserting in lieu thereof "second to
the last sentence of section 514(cX9)(B) (as amended by para-
graph (3))".
(B) Paragraph (3) of section 1878(e) of the Reform Act is
amended by striking out "is amended" and inserting in lieu
thereof ", and the last sentence of such section, are amended".
(14) Paragraph (23) of section 501(c) of the 1986 Code is
amended by striking out "any association" and inserting in lieu
thereof "Any association".
(15) Paragraph (1) of section 501(c) of the 1986 Code is
amended by striking out "any corporation organized" and
inserting in lieu thereof "Any corporation organized"
(16) The table of chapters for subtitle E of the 1986 Code is
amended by inserting 'smokeless tobacco," after "cigarettes,"
in the item relating to chapter 52.
(17) Paragraph (4) of section 3321(c) of the 1986 Code is
amended by adding a period at the end thereof.
PUBLIC LAW 1 0 0 - 6 4 7 - N O V . 10, 1988 102 STAT. 3591
(18) Paragraph (3) of section 521(b) of the Superfund Revenue
Act of 1986 is amended by striking out "Paragraph (1) of section 26 use 9506.
9506(b)" and inserting in lieu thereof "Subsection (b) of section
9506".
(19) Paragraph (2) of section 5054(a) of the 1986 Code is
amended by adding a period at the end thereof.
(20) Paragraph (3) of section 9507(b) of the 1986 Code is
amended by striking out "Deep Water" each place it appears
and inserting in lieu thereof "Deepwater".
(21) Subparagraph (I) of section 231(d)(3) of the Reform Act is 26 USC 6511.
amended by striking out "section 6511(d)(6)" and inserting in
lieu thereof "section 6511(d)(4)".
(22) Subsection (a) of section 1016 of the 1986 Code is amended
by striking out all that follows paragraph (20) and inserting in
lieu thereof the following:
"(21) to the extent provided in section 48(q), in the case of
expenditures with respect to which a credit has been allowed
under section 38;
"(22) for amounts allowed as deductions under section 59(e)
(relating to optional 10-year writeoff of certain tax preferences);
"(23) to the extent provided in section 1059 (relating to reduc-
tion in basis for extraordinary dividends); and
"(24) in the case of qualified replacement property the acquisi-
tion of which resulted under section 1042 in the nonrecognition
of any part of the gain realized on the sale or exchange of any
property, to the extent provided in section 1042(d)."
(23) Paragraph (1) of section 7518(g) of the 1986 Code is
amended by striking out "not qualified withdrawal" and insert-
ing in lieu thereof "not a qualified withdrawal".
(24) The table of sections for part IV of subchapter P of
chapter 1 of the 1986 Code is amended by striking out the item
relating to section 1254 and inserting in lieu thereof the follow-
ing:
"Sec. 1254. Gain from disposition of interest in oil, gas, geothermal, or other
mineral properties."
(25) Paragraph (1) of section 453(f) of the 1986 Code is
amended by striking out "subsection (g)" and inserting in lieu
thereof "subsections (sY'
(26) Paragraph (8) of section 453(f) of the 1986 Code is
amended by striking out "pajnnent to be" and inserting in lieu
thereof "payments to be".
(27) Subparagraph (B) of section 668(bXl) of the Reform Act is 26 USC 858.
amended by striking out "section 856" and inserting in lieu
thereof "section 858".
(28) The second to the last sentence of section 857(b)(3)(C) of
the 1986 (Ilode is amended by striking out "such capital loss
such" and inserting in lieu thereof "such capital loss shall".
(29) Subsection (a) of section 669 of the Reform Act is amended 26 use 856 note.
by striking out "this part" and inserting in lieu thereof "this
subtitle".
(30) The table of parts for subchapter M of chapter 1 of the
1986 Code is amended by adding at the end thereof the following
new item:
"Part IV. Real estate mortgage investment conduits."
102 STAT. 3592 PUBLIC LAW 100-647—NOV. 10, 1988
(31) Subsection (c) of section 1277 of the 1986 Code is amended
by inserting a closing parenthesis after "section 585(aX2)".
(32) The table of parts for subchapter L of chapter 1 of the
1986 Code is amend^ by striking out the items relating to parts
n, m, and IV and inserting in lieu thereof the following:
'Tart n. Other insurance companies.
"Part m. Provisions of general application."
(33) Paragraph (7) of section 6051(a) of the 1986 Code is
amended by adding a comma at the end thereof
26 use 501. (34) Paragraph (14) of section 1114(b) of the Reform Act is
amended—
(A) by striking out "section 501(cX17)" and inserting in
lieu thereof "section 501(cX17XA)", and
(B) by striking out "duties consists" and inserting in lieu
thereof "duties consist".
(35) Subparagraph (C) of section 3121(vX3) of the 1986 Code is
amended by striking out "Saving" and inserting in lieu thereof
"Savings".
(36) Paragraph (4) of section 6652(k) of the 1986 Code is
amended by striking out "or section 6678" and inserting in lieu
thereof "or part 11 of subchapter B of this chapter".
(37) The table of sections for part I of subchapter N of chapter
1 of the 1986 Code is amended by adding at the end thereof the
following new item:
"Sec. 865. Source rules for personal property sales."
26 use 954 note. (38) The amendment made by section 12210>X3XB) of the
Reform Act shall be construed as striking out paragraph (3) of
section 954(e) of the 1986 Code.
(39) The heading of section 861(aX6) of the 1986 Code is
amended by striking out "personal property" and inserting in
lieu thereof "inventory property".
(40) Subsection (a) of section 1296 of the 1986 Code is amended
by inserting a comma after "this subpart".
(41) Subsection (b) of section 7703 of the 1986 Code is amended
by striking out "section 151(eX3)" and inserting in lieu thereof
"section 151(cX3)".
26 use 6601. (42) Paragraph (3) of section 1404(c) of the Reform Act is
amended by striking out "section 6601" and inserting in lieu
thereof "section 6601(b)".
(43) Subsection (a) of section 2611 of the 1986 Code is amended
by striking out "mean" and inserting in lieu thereof "means".
(44) Subparagraph (D) of section 3406(hX5) of the 1986 Ck>de is
amended by adding a period at the end thereof
(45) The table of sections for part III of subchapter C of
chapter 76 of the 1986 Code is amended by adding at the end
thereof the following new item:
"Sec. 7475. Practice fee."
(46) The paragraph added to section 1276(b) of the 1986 Code
by section 1803(aX13XAXiii) of the Reform Act is amended—
(A) by inserting "(3)" before "SPECIAL" in the paragraph
heading,
(B) by inserting a 1 em dash after "PAYMENTS." in the
heading, and
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3593
(C) by adding a period at the end thereof.
(47) Subparagraph (C) of section 809(d)(4) of the 1986 Code is
amended by striking out "the Secretary—" and inserting in lieu
thereof "The Secretary—".
(48) Subsection (f) of section 7872 of the 1986 Code is amended
by redesignating the paragraph (11) added by section 1854 of the
Reform Act £is paragraph (12).
(49) Paragraph (5) of section 761 l(i) of the 1986 Code is
amended by striking out "the title" and inserting in lieu thereof
"this title".
(50) Section 13303(a) of Public Law 99-272 is amended (in the
matter proposed to be inserted in section 3306(c) of the Internal
Revenue Code of 1954), effective as of the date of its enactment, 26 u s e 3306
by inserting a comma immediately after "1988". note.
(51) Subsection (f) of section 6511 of the 1986 Code is
amended—
(A) by striking out "chapter 42" in the text and inserting
in lieu thereof "section 4912, chapter 42,", and
(B) by striking out "CERTAIN CHAPTER 43 TAXES" in the
subsection heading and inserting in lieu thereof "SIMILAR
TAXES".
(52) Section 2503(e)(2XB) of the 1986 Code is amended by
striking out "section 213(e)" and inserting in lieu thereof "sec-
tion 213(d)".
SEC. 1019. EFFECTIVE DATE. 26 u s e 1 note.
(a) GENERAL RULE.—Except as otherwise provided in this title, any
amendment made by this title shall take effect as if included in the
provision of the Reform Act to which such amendment relates.
Ot)) WAIVER OF ESTIMATED TAX PENALTIES.—No addition to tax
shall be made under section 6654 or 6655 of the 1986 Code for any
period before April 16, 1989 (March 16, 1989 in the case of a
taxpayer subject to section 6655 of the 1986 Code) with respect to
any underpayment to the extent such underpa3niient was created or
increased by any provision of this title or title II.
TITLE II—AMENDMENTS RELATED TO
TAX PROVISIONS IN OTHER LEGISLA-
TION
SEC. 2001. AMENDMENTS RELATED TO SUPERFUND REVENUE ACT OF 1986.
(a) AMENDMENTS RELATED TO SECTION 513 OF THE ACT.—
(1) Subsection (e) of section 4662 of the 1986 Code is amended
by redesignating paragraph (3) as paragraph (4) and by insert-
ing after paragraph (2) the following new paragraph:
(3) REFUNDS DIRECTLY TO EXPORTER.—The Secretary shall Regulations.
provide, in regulations, the circumstances under which a credit
or refund (without interest) of the tax under section 4661 shall
be allowed or made to the person who exported the taxable
chemical or taxable substance, where—
"(A) the person who paid the tax waives his claim to the
amount of such credit or refund, and
"(B) the person exporting the taixable chemical or taxable
substance provides such information as the Secretary may
require in such regulations."
102 STAT. 3594 PUBLIC LAW 100-647—NOV. 10, 1988
(2) Subparagraph (A) of section 4662(bX10) of the 1986 Code is
amended by striking out "a mixture of' and inserting in lieu
thereof "one or more".
(b) AMENDMENTS RELATED TO SECTION 515 OF THE ACT.—
(1) Subparagraph (B) of section 4672(aX2) of the 1986 Code is
amended by inserting "(or more than 50 percent of the value)"
after "more than 50 percent of the weight .
(2) Paragraph (2) of section 4672(a) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence:
Imports. "If an importer or exporter of any substance requests that the
Exports. Secretary determine whether such substance be listed as a
taxable substance under paragraph (1) or be removed from such
listing, the Secretary shall make such determination within 180
days after the date the request was filed."
(3) Paragraph (4) of section 4672(a) of such (Dode is amended to
read as follows:
"(4) MODIFICATIONS TO LIST.—The Secretary shall add to the
list under paragraph (3) substances which meet either the
weight or value tests of paragraph (2)(B) and may remove from
such list only sutetances which meet neither of such tests."
(c) AMENDBCENTS RELATED TO SECTION 516 OF THE ACT.—
(1) Section 59A of the 1986 Code (relating to environmental
tax) is amended by redesignating subsections (c) and (d) as
subsections (d) and (e), respectively, and by inserting after
subsection (b) the following new subsection:
"(c) EXCEPTION FOR RIC'S AND REIT'S.—The tax imposed by
subsection (a) shall not apply to—
"(1) a r^ulated investment company to which part I of
subchapter M applies, and
"(2) a real estate investment trust to which part II of sub-
chapter M applies."
(2) Paragraph (1) of section 882(a) of the 1986 Code is amended
by inserting '^9A," after "55,".
(3XA) Subparagraph (B) of section 56(fX2) of the 1986 Code is
amended by ad<£ng at the end thereof the following new sen-
tence: "No adjustment shall be made under this subparagraph
for the tax imposed by section 59A."
(B) Paragraph (2) of section 59A0t>) of the 1986 Code is
amended by inserting "(and the last sentence of section
56(fX2XB))" before the period at the end thereof.
(d) AMENDBfENTS RELATED TO SECTION 5 2 1 OF THE ACT.—
26 use 4041 (IXA) The amendments made by subsections Ot>X3) and (dX17)
note. of section 10502 of the Revenue Act of 1987 shall be treated as if
included in the amendments made by section 521 of the
Superfimd Revenue Act of 1986 except that the last sentence of
paragraphs (2) and (3) of section 4041(d) of the Internal Revenue
Code of 1986 (as amended by such subsection (bX3)) and the
reference to section 4091 of such C]k)de in section 9508(cX2XA) of
such Code (as amended by such subsection (dXD) shall not apply
to sales before April 1,1988.
(B) Paragraph (2) of section 6416(b) of the 1986 Code is
amended by striking out "(or under paragraph (IXA) or (2XA) of
section 4041(a) or under paragraph (IXA) or (2XA) of section
4041(d) or under section 4051)" and inserting in lieu thereof "(or
under subsection (a) or (d) of section 4041 in respect of sales or
under section 4051)".
'--t«yS%c,:
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3595
(2) Paragraph (3) of section 4041(c) of the 1986 Ck)de is
amended by striking out "the rate at which" and inserting in
lieu thereof "the Highway Trust Fund financing rate at which".
(3XA) Subparagraph (A) of section 4041(bXl) of the 1986 Code
is amended by striking out "subsection (a)" and inserting in lieu
thereof "subsection (a) or (dXD".
(B) Subparagraph (B) of section 4041(bXl) of the 1986 Code is
amended by inserting before the period "and by the correspond-
ing provision of subsection (dXD".
(Q Subsection 0>) of section 4041 of the 1986 Code is amended
by striking out paragraph (3).
(D) Subparagraph (A) of section 4041(bX2) of the 1986 Code is
amended to r c ^ as follows:
"(A) IN GENERAL.—^In the case of any qualified methanol
or ethanol fuel—
"(i) subsection (aX2) shall be applied by substituting
*3 cents' for *9 cents', and
"(ii) subsection (dXD shall be applied by substituting
'0.05 cent' for '0.1 cent' with respect to the sales and
uses to which clause (i) applies."
(E) Subsection (f) of section 6421 of the 1986 Code is amended
by striking out all that follows paragraph (1) and inserting in
lieu thereof the follovdng new paragraphs:
"(2) GASOLINE USED IN AVIATION.—This section shall not apply
in respect of gasoline which is used as a fuel in an aircraft—
"(A) in noncommercial aviation (as defined in section
4041(cX4)), or
"(B) in aviation which is not noncommercial aviation (as
so defined) with respect to the tax imposed by section 4081
at the Leaking Underground Storage Tank Trust Fund
financing rate.
"(3) LEAKING UNDERGROUND STORAGE TANK TRUST FUND TAX
ON GASOLINE USED IN TRAINS.—^This section shall not apply with
respect to the tax imposed by section 4081 at the Leaking
Underground Storage Tank Trust Fund financing rate on gaso-
line used as a fiiel in a train."
(F) The second sentence of section 6421(a) of the 1986 Code is
amended by striking out "paragraph (3) of subsection (e)" and
inserting in lieu thereof "paragraph (2) of subsection (0".
(4XA) Paragraph (1) of section 1703(f) of the Reform Act
(relating to floor stock taxes) is amended by striking out "9 26 use 4081
cents" and insertii^ in lieu thereof "9.1 cents". note.
(B) Paragraph (4) of section 1703(f) of the Reform Act is
amended to read as ifbllows:
"(4) TRANSFER OF FLOOR STOCK TAX REVENUES TO TRUST
FUNDS,—For purposes of determining the amount transferred to
any trust fund, the tax imposed by this section shall be treated
as imposed by section 4081 of the Internal Revenue Ciode of
1986—
"(A) at the Highway Trust Fund financing rate under
such section to the extent of 9 cents per gallon, and
"(B) at the Leaking Underground Storage Tank Trust
Fund financing rate under such section to the extent of 0.1
cent per gallon."
(5XA) Paragraph (1) of section 4081(c) of the 1986 Code, as
amended by section 1703 of the Reform Act, is amended by
102 STAT. 3596 PUBLIC LAW 100-647—NOV. 10, 1988
inserting "and by substituting '% cent' for '0,1 cent' " before "in
the case of the removal".
(B) The last sentence of section 4081(cX2) of the 1986 Code, as
amended by such section 1703, is amended by striking out "5%
cents a gallon" and inserting in lieu thereof "reduced by the
amount of tax imposed (and not credited or refunded) on any
prior removal or sale of such fuel".
(6XA) Paragraph (1) of section 4091(c) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence:
"In the case of a sale described in subparagraph (B), the Leaking
Underground Storage Tank Trust Fund financing rate shall be
% cent per gallon."
(B) Paragraph (4) of section 4091(b) of the 1986 Code is
amended by inserting "except as provided in subsection (c),"
after "paragraph (1),".
(C) The last sentence of section 4091(cX2) of the 1986 Code is
amended by striking out "5 cents a gallon" and inserting in lieu
thereof "reduced by the amount of tax imposed (and not cred-
ited or refunded) on any prior sale of such fuel".
Effective date. (D) The amendments made by this paragraph shall take effect
26 use 4091 as if included in the amendments made by section 10502 of the
note. Revenue Act of 1987.
26 use 6427 (7XA) The amendment made by section 10502(cX4) of the
note. Revenue Act of 1987 shall be treated as if included in the
amendments made by section 1703 of the Reform Act except
that references to section 4091 of the Internal Revenue Code of
1986 shall not apply to sales before April 1,1988.
(B) Subparagraph (A) of section 6427(fXl) of the 1986 Code is
amended—
(i) by striking out "r^ular Highway Trust Fund financ-
ing rate" each place it appears and inserting in lieu thereof
"regular tax rate", and
(Li) by striking out "incentive Highway Trust Fund
financing rate" and inserting in lieu thereof "incentive tax
rate".
(C) Subparagraph (B) of section 6427(gXl) of the 1986 Code is
amended to read as follows:
"(B) DEFINITIONS.—For purposes of subparagraph (A)—
"(i) REGULAR TAX RATE.—The term 'r^ular tax rate'
means—
"OD in the case of gasoline, the aggr^ate rate of
tax imposed by section 4081 determined without
r^ard to subsection (c) thereof, and
"(II) in the case of diesel fuel, the aggr^ate rate
of tax imposed by section 4091 on such fuel deter-
mined without regard to subsection (c) thereof,
"(ii) INCENTIVE TAX RATE.—The term 'incentive tax
rate' means—
"(I) in the case of gasoline, the aggr^ate rate of
tax imposed by section 4081 with respect to fuel
described in subsection (cXD thereof, and
"(II) in the case of diesel fuel, the aggr^ate rate
of tax imposed by section 4091 with respect to fuel
described in subsection (cXlXB) thereof.'
(D) Paragraph (2) of section 6427(1) of the 1986 Code is
amended by inserting "under section 4041" after "exempt".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3597
(E) The amendments made by this paragraph shall take effect Effective date.
as if included in the amendments made by section 10502 of the 26 USC 6427
Revenue Act of 1987. "°*^
(e) EFFECTIVE DATE.—Except as otherwise provided in this section, 26 USC 56 note.
the amendments made by this section shall take effect as if included
in the provision of the Superfund Revenue Act of 1986 to which it
relates.
SEC. 2002. AMENDMENTS RELATED TO HARBOR MAINTENANCE REVENUE
ACT OF 1986.
(a) ORDER OF ENACTMENTS.—
(1) For purposes of section 4042 of the 1986 Code, the 26 USC 4042
amendment made by section 521(a)(3) of the Superfund Revenue ^°^^-
Act of 1986 shall be treated as enacted after the amendment
made by section 1404(a) of the Harbor Maintenance Revenue
Act of 1986.
(2) Paragraph (2) of section 4042(b) of the 1986 Code is
amended to read as follows:
"(2) RATES.—For purposes of paragraph (1)—
"(A) The Inland Waterways Trust Fund financing rate is
the rate determined in accordance with the following table:
The tax per
If the use occurs: gallon is:
Before 1990 10 cents
During 1990 11 cents
During 1991 13 cents
During 1992 15 cents
During 1993 17 cents
During 1994 19 cents
After 1994 20 cents.
"(B) The Leaking Underground Storage Tank Trust Fund
financing rate is 0.1 cent per gallon."
(b) CARGO TRANSPORTED BETWEEN POSSESSIONS, ETC.—Subpara-
graph (B) of section 44620t)Xl) of the 1986 Code is amended to read as
follows:
"(B) cargo loaded on a vessel in Alaska, Hawaii, or any
possession of the United States for transportation to the
United States mainland, Alaska, Hawaii, or such a posses-
sion for ultimate use or consumption in the United States
mainland, Alaska, Hawaii, or such a possession,".
(c) DELAY IN DUE DATE FOR STUDY OF CARGO DIVERSION.—Section
1407 of the Harbor Maintenance Revenue Act of 1986 is amended by 26 USC 4461
striking out "1 year from the date of the enactment of this Act" and "ote.
inserting in lieu thereof "December 1,1988".
(d) EFFECTIVE DATE.—The amendments made by this section shall 26 USC 4042
take effect as if included in the provision of the Harbor Maintenance note.
Revenue Act of 1986 to which it relates.
SEC. 2003. AMENDMENTS RELATED TO OMNIBUS BUDGET RECONCILI-
ATION ACT OF 1986.
(a) AMENDMENT RELATED TO SECTION 1011 OF THE ACT.—
(1) Subparagraph (B) of section 501(cX12) of the 1986 Code is
amended by striking out "or" at the end of clause (ii), by
striking out the period at the end of clause (iii), and inserting in
lieu thereof ", or", and by adding at the end thereof the
following new clause:
102 STAT. 3598 PUBLIC LAW 100-647—NOV. 10, 1988
"(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)."
(2) Subparagraph (C) of section 501(cX12) of the 1986 Code is
amended to read as follows:
"(C) In the case of a mutual or cooperative electric com-
pany, subparagraph (A) shall be applied without taking into
account any income received or accrued—
"(i) from qualified pole rentals, or
"(ii) fix>m 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)."
26 use 501 note. (3) The amendments made by this subsection shall apply to
taxable years ending after the date of the enactment of the
Omnibus Bu(]^et Reconciliation Act of 1986.
(b) AMENDMENTS RELATED TO SECTION 8011 OF THE ACT.—
(1) The following provisions of the 1986 Code are each
amended by striking out "the 14th day after the date on which"
and inserting in lieu thereof "the 14th day after the last day of
the semimonthly period during which":
(A) Subparagraphs (A) and (B) of section 5061(dX2).
(B) Paragraph (3) of section 5061(d).
(C) a a u s e s (i) and (ii) of section 5703(bX2XB).
(D) Subparagraph (C) of section 5703(bX2).
Effective date. (2) The amendments made by paragraph (1) shall take effect
26 use 5061 as if included in the amendments made by section 8011 of the
note. Omnibus Budget Reconciliation Act of 1986.
(c) AMENDMENT RELATED TO SECTION 8041 OF THE ACT.—
(1) IN GENERAL.—Paragraph (3) of section 901(j) of the 1986
Code is amended—
(A) by striking out "Section 275" and inserting in lieu
thereof "Sections 275 and 78", and
(B) by inserting ", ETC." after "DEDUCTION" in the para-
graph heading.
26 use 901 note. (2) EFFECTIVE DATE.—^Thc amendments made by paragraph (1)
shaU take effect on January 1,1987.
(d) AMENDMENT RELATED TO SECTION 9002 OF THE ACT.—Para-
graph (3) of section 3509(d) of the 1986 Code is amended by striking
out "subsection (dX3)" and inserting in Ueu thereof "subsection
(dX4)".
SEC. 2004. AMENDMENTS RELATED TO THE REVENUE ACT OF 1987.
(a) AMENDMENT RELATED TO SECTION 10101 OF THE ACT.—Section
26 use 21 note. 10101(b) of the Revenue Act of 1987 is amended to read as follows:
"(b) EFFECTIVE DATE.—
"(1) IN GENERAL.—^The amendment made by subsection (a)
shall apply to expenses paid in taxable years b^inning after
December 31,1987.
"(2) SPECIAL RULE FOR CAFETERIA PLANS.—For purposes of
section 125 of the Internal Revenue Code of 1986, a plan shall
not be treated as failing to be a cafeteria plan solely because
under the plan a participant elected before January 1, 1988, to
receive reimbursement imder the plan for dependent care
assistance for periods after December 31, 1987, and such assist-
ance included reimbursement for expenses at a camp where the
dependent stays overnight."
(b) AMENDMENTS RELATED TO SECTION 10102 OF THE ACT.—
PUBLIC LAW 100-647—NOV. 10,1988 102 STAT. 3599
(1) Subsection (h) of section 163 of the 1986 Code is amended
by redesignating paragraph (6) as paragraph (5).
(2) Clause (ii) of section 56(bXlXC) of the 1986 Code is amended
by striking out "163(hX6)" and inserting in lieu thereof
"163(hX5)".
(3) Paragraph (1) of section 56(e) of the 1986 Code is
amended—
(A) by striking out "substantially rehabilitating" and
inserting in lieu thereof "substantially improving", and
(B) by striking out "or is paid" in subparagraph (A).
(c) AMENDMENT RELATED TO SECTION 10103.—Paragraph (1) of
section 10103(a) of the Revenue Act of 1987 is amended by inserting 26 USC 219 note.
"in a plan established for its employees by the United States" after
"participant".
(d) AMENDMENTS RELATED TO SECTION 10202 OF THE ACT.—
(1) Subparagraph (A) of section 453(1X1) of the 1986 Code, is
amended by striking out "disposes of personal property" and
inserting in lieu thereof "disposes of personal property of the
same type".
(2) Section 453A of the 1986 Code is amended by adding at the
end thereof the following new subsection:
"(e) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary to carry out the purposes of this section,
including regulations—
"(1) disallowing the use of the installment method in whole or
in part for transactions in which the rules of this section
otherwise would be avoided through the use of related persons,
pass-thru entities, or intermediaries, and
"(2) providing that the sale of an interest in a partnership or
other pass-thru entity will be treated as a sale of the propor-
tionate share of the assets of the partnership or other entity."
(3) Paragraph (3) of section 10202(e) of the Revenue Act of
1987 is amended by adding at the end thereof the following new 26 USC 453 note.
subparagraph:
"(C) CERTAIN DISPOSITIONS DEEMED MADE ON 1ST DAY OF
TAXABLE YEAR.—If the taxpayer makes an election under
subparagraph (A), in the case of the taxpayer's 1st taxable
year ending after December 31,1986—
"(i) dispositions after August 16, 1986, and before the
1st day of such taxable year shall be treated as made on
such 1st day, and
"(ii) subsections (bX2XB) and (cX4) of section 453A of
such Code shall be applied separately with respect to
such dispositions by substituting for '$5,000,000' the
amount which bears the same ratio to $5,000,000 as the
number of days after August 16, 1986, and before such
1st day bears to 365."
(4) Paragraph (2) of section 10202(e) of the Revenue Act of
1987 is amended by adding at the end thereof the following new
subparagraph:
"(C) CERTAIN RULES MADE APPUCABLE.—For purposes of
this paragraph, rules similar to the rules of paragraphs (4)
and (5) of section 812(c) of the Tax Reform Act of 1986 (as
added by the Technical and Miscellaneous Revenue Act of
1988) shall apply."
(5) Subsection (k) of section 453 of the 1986 Code is amended
by striking out "and section 453A".
102 STAT. 3600 PUBLIC LAW 100-647—NOV. 10, 1988
(6) Subparagraph (A) of section 10202(eX2) of the Revenue Act
26 use 453 of 1987 is amended by striking out "section 453A of the Internal
"ot®- Revenue Code of 1986" and inserting in heu thereof "section
453(1X1) of the Internal Revenue Code of 1986 as added by this
SGcti o n
(7) Paragraph (2) of section 453A(b) of the 1986 Code is
amended by striking out "for purposes of this paragraph" and
inserting in lieu thereof "for purposes of this paragraph and
subsftction fc)(4i
(8) Paragraph' (3) of section 453A(b) of the 1986 Code is
amended to read as follows:
"(3) EXCEPTION FOR FARM PROPERTY.—An installment obliga-
tion shall not be treated as described in paragraph (1) if it arises
from the disposition of any property used or produced in the
trade or business of farming (within the meaning of section
2032A(e) (4) or (5)."
(e) AMENDMENTS RELATED TO SECTION 10206 OF THE ACT.—
(IXA) Subsection (a) of section 444 of the 1986 (Dode is
amended by striking out "as provided in subsections (b) and (c)"
and inserting in lieu thereof "as otherwise provided in this
section".
(B) Paragraph (3) of section 444(d) of the 1986 Code is amended
to read as follows:
"(3) TIERED STRUCTURES, ETC.—
"(A) I N GENERAL.—Except as otherwise provided in this
paragraph—
"(i) no election may be under subsection (a) with
respect to any entity which is part of a tiered structure,
and
"(ii) an election under subsection (a) with respect to
any entity shall be terminated if such entity becomes
part of a tiered structure.
"(B) EXCEPTIONS FOR STRUCTURES CONSISTING OF CERTAIN
ENTITIES WITH SAME TAXABLE YEAR.—Subparagraph (A)
shall not apply to any tiered structure which consists only
of partnerships or S corporations (or both) all of which have
the same taxable year."
(C) Subparagraph (B) of section 444(dX2) of the 1986 C ^ e is
amended by striking out "under subparagraph (A)" and insert-
ing in lieu thereof "under subparagraph (A) or paragraph
(3XA)".
(2XA) Section 444 of the 1986 Code is amended by redesignat-
ing subsection (f) as subsection (g) and inserting after subsection
(e) the following new subsection:
"(f) PERSONAL SERVICE CORPORATION.—For purposes of this sec-
tion, the term 'personal service corporation' has the meaning given
to such term by section 441(iX2)."
(B) Subsection (f) of section 280H of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(5) PERSONAL SERVICE CORPORATION.—The term 'personal
service corporation' has the meaning given to such term by
section 441(iX2)."
(3) Paragraph (2) of section 280H(f) of the 1986 Code is
amended by striking out "section 296A(bX2)" and inserting in
lieu thereof "section 269A(bX2) (as modified by section
441(iX2))".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3601
(4XA) Paragraph (2) of section 75190)) of the 1986 Code is
amended to read as follows:
"(2) the net required payment balance."
(B) Subsection (e) of section 7519 of the 1986 Code is amended
by adding at the end tiiereof the following new paragraph:
"(4) NET REQUIRED PAYMENT BALANCE.—^The term 'net required
payment balance' means the excess (if any) of—
"(A) the aggr^ate of the required payments under this
section for aU preceding applicable election years, over
"(B) the aggr^ate amount allowable as a refund to the
entity under subsection (c) for all preceding applicable elec-
tion years."
(5) Subsection (c) of section 7519 of the 1986 Code is amended
to read as follows:
"(c) REFUND OF PAYBCENTS.—
"(1) IN GENERAL.—If, for any applicable election year, the
amount determined under subsection (bX2) exceeds the amount
determined under subsection (bXl), the entity shall be entitled
to a refund of such excess for such year.
"(2) TERMINATION OF ELECTIONS, ETC.—If^
"(A) an election under section 444 is terminated effective
with respect to any year, or
"(B) the entity is liquidated during any year, the entity
shall be entitled to a refund of the net required pajrment
balance.
"(3) DATE ON WHICH REFUND PAYABLE.—Any refund under this
subsection shall be payable on later of—
"(A) April 15 of the calendar year following—
"(i) in the case of the year referred to in paragraph
(1), the calendar year in which it b ^ n s ,
"(ii) in the case of the year referred to in paragraph
(2), the calendar year in which it ends, or
"(B) the day 90 days after the day on which claim there-
for is filed with the Secretary."
(6) Subsection (g) of section 7519 of the 1986 Code is amended
by striking out "including r^ulations" and all that follows
down through the period at the end thereof and inserting in lieu
thereof
"including regulations providing for appropriate adjustments in the
application of this section and sections 280H and 444 in cases
where—
"(1) 2 or more applicable election years b ^ ^ in the same
calendar year, or
"(2) the base year is a taxable year of less than 12 months."
(7) Subparagraph (B) of section 7519(dX2) of the 1986 Code is
amended by inserting before the period at the end thereof the
following: "(and such corporation shall be treated as an S
corporation for such taxable year for purposes of paragraph
(3))r
(8) Subsection (d) of section 7519 of the 1986 CJode is amended
by adding at the end thereof the following new paragraph:
"(5) TREATMENT OF GUARANTEED PAYMENTS.—
"(A) IN GENERAL.—Any guaranteed pa3rment by a part-
nership shall not be treated as an applicable payment, and
the amount of the net income of the partnership shall be
determined by not taking such guaranteed pajnnent into
account.
102 STAT. 3602 PUBLIC LAW 100-647—NOV. 10, 1988
"(B) GUARANTEED PAYMENT.—For purposes of subpara-
graph (A), the term 'guaranteed payment' means any pay-
ment referred to in section 707(c)."
(9) Paragraph (4) of section 7519(d) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "Notwithstanding the preceding provisions of this para-
graph, for taxable years beginning after 1987, the applicable
percentage for any partnership or S corporation shall be 100
percent if more than 50 percent of such entity's net income for
the short taxable year which would have resulted if the entity
had not made an election under section 444 would have been
allocated to partners or shareholders who would not have been
entitled to the benefits of section 806(eX2XC) of the Tax Reform
Act of 1986 with respect to such income."
(10) Subparagraphs (A) and (B) of section 7519(dX2) of the 1986
Code are each amended by striking out "(other than credits)"
and inserting in lieu thereof "(other than credits and tax-
exempt income)".
(11) Paragraph (4) of section 10206(d) of the Revenue Act of
26 use 444 note. 1987 is amended by adding at the end thereof the following new
sentence: "The preceding sentence shall apply only in the case
of an election under section 444 of such (Dode made for a taxable
year beginning before 1989."
(12) Subparagraph (A) of section 444(dX2) of the 1986 Code is
amended by inserting "or otherwise terminates such election"
before the period a t the end of the first sentence thereof.
(13) Paragraph (4) of section 444(b) of the 1986 Code is
amended by striking out "the term" and inserting in lieu
thereof "except as provided in regulations, the term".
(14XA) Paragraph (4) of section 280H(f) of the 1986 Code is
amended to read as follows:
"(4) ADJUSTED TAXABLE INCOME.—The term 'adjusted taxable
income' means taxable income determined without regard to—
"(A) any amount paid to an employee-owner which is
includible in the gross income of such employee-owner, and
"(B) any net operating loss carryover to the extent such
carryover is attributable to amounts described in subpara-
graph (A)."
(B) Subparagraph (A) of section 7519(dX3) of the 1986 Code is
amended by striking out "or incurred".
(C) Subsections (cXlXAXi) and (dXD of section 280H of the 1986
Code are each amended by striking out "or incurred".
(f) AMENDMENTS RELATED TO SECTION 10211 OF THE ACT.—
(1) Paragraph (4) of section 7704(e) of the 1986 Code is
amended by striking out "as may be required" and inserting in
lieu thereof "or to pay such amounts as may be required".
(2) Paragraph (2) of section 10211(c) of the Revenue Act of
26 use 7704 1987 is amended by adding at the end thereof the following new
note. subparagraph:
"(C) COORDINATION WITH PASSIVE-TYPE INCOME REQUIRE-
MENTS.—In the case of an existing partnership, paragraph
(1) of section 7704(c) of the Internal Revenue Code of 1986
(as added by this section) shall be applied by substituting
for 'December 31,1987' the earlier of—
"(i) December 31,1997, or
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3603
"(ii) the day (if any) £is of which such partnership
ceases to be treated as an existing partnership by
reason of subparagraph (B)."
(3) Paragraph (1) of section 7704(c) of the 1986 Ck)de is
amended by adding a t the end thereof the following new sen-
tence: "For purposes of the preceding sentence, a partnership
shall not be treated as being in existence during any period
before the 1st taxable year in which such partnership (or a
predecessor) was a publicly traded partnership."
(4) Paragraph (1) of section 7704(d) of the 1986 Code is
amended by adding at the end thereof the following new sen-
tence: "For purposes of subparagraph (E), the term 'mineral or
natural resource' means any product of a character with respect
to which a deduction for depletion is allowable under section
611; except that such term shall not include any product
described in subparagraph (A) or (B) of section 613(b)(7).
(5) Paragraph (3) of section 7704(d) of the 1986 Code is
amended to read as follows:
"(3) REAL PROPERTY RENT.—The term 'real property rent'
means amounts which would qualify as rent from real property
under section 856(d) if—
"(A) such section were applied without regard to para-
graph (2XC) thereof (relating to independent contractor
requirements), and
(B) stock owned, directly or indirectly, by or for a part-
ner would not be considered as owned under section
318(aX3XA) by the partnership unless 5 percent or more (by
value) of the interests in such partnership are owned,
directly or indirectly, by or for such partner.'
(g) AMENDMENT RELATED TO SECTION 10212 OF THE ACT.—Subsec-
tion (k) of section 469 of the 1986 Code is amended by adding at the
end thereof the following new paragraph:
"(3) COORDINATION WITH SUBSECTION (g).—For purposes of
subsection (g), a taxpayer shall not be treated as having dis-
posed of his entire interest in an activity of a publicly traded
partnership until he disposes of his entire interest in such
partnership."
(h) AMENDMENTS RELATED TO SECTION 10214 OF THE ACT.—
(1) Subparagraph (E) of section 514(cX9) of the 1986 Code is
amended by adding at the end thereof the following new clause:
(iii) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the
purposes of this subparagraph, including regulations
which may provide for exclusion or segregation of
items."
(2) Clause (i) of section 514(cX9XE) of the 1986 Code is
amended by striking out subclause (I) and by redesignating
subclauses (ID and (III) as subclauses (I) and (II), respectively.
(i) AMENDMENTS RELATED TO SECTION 10221 OF THE ACT.—
(1) Paragraph (2) of section 10221(e) of the Revenue Act of
1987 is amended by striking out "amendments made by subsec- 26 USC 243 note.
tion (b)" and inserting in lieu thereof "amendments made by
subsection (c)".
(2) Subsection (b) of section 244 of the 1986 Code is amended
by striking out "section 243(cX4)" and inserting in lieu thereof
"section 243(dX4)".
(j) AMENDMENTS RELATED TO SECTION 10222 OF THE ACT.—
102 STAT. 3604 PUBLIC LAW 100-647—NOV. 10, 1988
(IXA) Paragraph (1) of section 1503(e) of the 1986 Code is
amended by striking out so much of such paragraph as precedes
subparagraph (A) thereof and inserting in lieu thereof the
following:
"(1) IN GENERAL.—Solely for purposes of determining gain or
loss on the disposition of intragroup stock and the amount of
any inclusion by reason of an excess loss account, in determin-
ing the adjustments to the basis of such intragroup stock on
account of the earnings and profits of any member of an affili-
ated group for any consolidated year (and in determining the
amount in such account)—"
(B) Paragraph (2) of section 10222(a) of sthe Revenue Act of
26 u s e 1503 1987 is amended by adding at the end thereof the following new
note. subparagraph:
"(C) TREATMENT OF CERTAIN EXCESS LOSS ACCOUNTS.—
"(i) I N GENERAL.—If—
"(I) any disposition on or before December 15,
1987, of stock resulted in an inclusion of an excess
loss account (or would have so resulted if the
amendments made by paragraph (1) had applied to
such disposition), and
"(II) there is an unrecaptured amount with
respect to such disposition,
the portion of such unrecaptured amount allocable to
stock disposed of in a disposition to which the amend-
ment made by paragraph (1) applies shall be taken into
account as negative basis. To the extent permitted by
the Secretary of the Treasury or his delegate, the
preceding sentence shall not apply to the extent the
taxpayer elects to reduce its basis in indebtedness of
the corporation with respect to which there would have
been an excess loss account.
"(ii) SPECIAL RULES.—For purposes of this subpara-
graph—
"(I) UNRECAPTURED AMOUNT.—The term
'unrecaptured amount' means the amount by
which the inclusion referred to in clause (iXI)
would have been increased if the amendment made
by paragraph (1) and applied to the disposition.
"(II) COORDINATION WITH BINDING CONTRACT
EXCEPTION.—A disposition shall be treated as
occurring on or before December 15, 1987, if the
amendment made by paragraph (1) does not apply
to such disposition by reason of subparagraph (B)."
(2) Subsection (e) of section 1503 of the 1986 Code is amended
by adding at the end thereof the following new paragraph:
"(3) ADJUSTMENTS.—Under regulations prescribed by the Sec-
retary, proper adjustments shall be made in the application of
paragraph (1)—
"(A) in the case of any property acquired by the corpora-
tion before consolidation, for the difference between the
adjusted basis of such property for purposes of computing
taxable income and its adjusted bsisis for purposes of
computing earnings and profits, and
"(B) in the case of any property, for any basis adjustment
under section 48(q)."
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3605
(3XA) Paragraph (2) of section 1503(e) of the 1986 Code is
amended by adding at the end thereof the following new
subparagraph:
"(C) APPUCATION OF SECTION 312 (n) (7) NOT AFFECTED.—
The reference in paragraph (1) to subsection (n) of section
312 shall be treated sis not including a reference to para-
graph (7) of such subsection."
(B) Subsection (e) of section 301 of the 1986 Code (as redesig-
nated by section 106(eX12) of this Act) is amended by redesignat-
ing paragraph (3) as paragraph (4) and by inserting after para-
graph (2) the following new paragraph:
"(3) APPUCATION OF SECTION 312 (n) (7) NOT AFFECTED.—The
reference in paragraph (1) to subsection (n) of section 312 shall
be treated as not including a reference to paragraph (7) of such
siibsficiiioii
(4) Subparagraph (B) of section 10222(bX2) of the Revenue Act
of 1987 is amended to read as follows: 26 use 301 note.
"(B) EXCEPTION.—The amendment made by paragraph (1)
shall not apply for purposes of determining gain or loss on
any disposition of stock after December 15,1987, and before
January 1,1989, if such disposition is pursuEint to a written
binding contract, governmental order, letter of intent or
preliminary agreement, or stock acquisition agreement, in
effect on or before December 15,1987."
(k) AMENDMENTS RELATED TO SECTION 10223 OF THE ACT.—
(1) Subparagraph (D) of section 3550)X2) of the 1986 Code is
amended by striking out clauses (i) and (ii) and inserting in lieu
thereof the following:
"(i) was not acquired by any distributee corporation
directly (or through 1 or more corporations, whether
through the distributing corporation or otherwise)
within the period described in subparagraph (B) and
was not acquired by the distributing corporation di-
rectly (or through 1 or more corporations) within such
period, or
"(ii) was so acquired by any such corporation within
such period, but, in each case in which such control was
so acquired, it was so acquired, only by reason of
transactions in which gain or loss was not recognized in
whole or in part, or only by reason of such transactions
combined with acquisitions before the beginning of
sucli 1361*iod '*
(2) Subparagraph (A) of section 304(bX4) of the 1986 Code is
amended by striking out "stock of 1 member" and inserting in
lieu thereof "stock from 1 member".
(3) Paragraph (2) of section 10223(d) of the Revenue Act of
1987 is amended by adding at the end thereof the following new 26 USC 304 note.
subparagraph:
"(D) TREATMENT OF CERTAIN MEMBERS OF AFFIUATED
GROUP.—
"(i) I N GENERAL.—For purposes of subparagraph (A),
all corporations which were in existence on the des-
ignated date and were members of the same affiliated
group which included the distributees on such date
shall be treated as 1 distributee.
"(ii) LIMITATION TO STOCK HELD ON DESIGNATED
DATE.—Clause (i) shall not exempt any distribution
102 STAT. 3606 PUBLIC LAW 100-647—NOV. 10, 1988
from the amendments made by this section if such
distribution is with respect to stock not held by the
distributee (determined without regard to clause (i)) on
the designated date directly or indirectly through a
corporation which goes out of existence in the trans-
action.
"(iii) DESIGNATED DATE.—For purposes of this
subparagraph, the term 'designated date' means the
later of—
"(I) December 15,1987, or
"(11) the date on which the acquisition meeting
the requirements of subparagraph (A) occurred.
(4) Subparagraph (B) of section 10223(dX2) of the Revenue Act
26 use 304 note. of 1987 is amended—
(A) by striking out "before January 1,1993" and inserting
in lieu thereof "on or before March 31,1988", and
(B) by striking out "before January 1,1989,".
(1) AMENDMENT RELATED TO SECTION 10224 OF THE ACT.—Sections
1201(a) and 1561(a) of the 1986 Code, and section 904(b)(3)(DXii) of the
1986 Code (as amended by section 106(bX2) of this Act), are each
amended by striking out "section 11(b)" and inserting in lieu thereof
"section IKbXD".
(m) AMENDMENTS RELATED TO SECTION 10226 OF THE ACT.—
(IXA) Subsection (a) of section 384 of the 1986 Code is
amended to read as follows:
"(a) GENERAL RULE.—If—
"(IXA) a corporation acquires directly (or through 1 or more
other corporations) control of another corporation, or
"(B) the assets of a corporation are acquired by another
corporation in a reorganization described in subparagraph (A),
(C), or (D) of section 368(aXl), and
"(2) either of such corporations is a gain corporation,
income for any recognition period taxable year (to the extent attrib-
utable to recognized built-in gains) shall not be offset by any
preacquisition loss (other than a preacquisition loss of the gain
corporation)."
(B) Subsection (c) of section 384 of the 1986 Code is amended
by redesignating paragraph (4) as paragraph (8) and by insert-
ing after paragraph (3) the following new paragraphs:
"(4) GAIN CORPORATION.—The term 'gain corporation' means
any corporation with a net unrealized built-in gain.
(5) CONTROL.—The term 'control' means ownership of stock
in a corporation which meets the requirements of section
1504(aX2).
"(6) "TREATMENT OF MEMBERS OF SAME GROUP.—Except as pro-
vided in regulations and except for purposes of subsection (b), all
corporations which are members of the same afQliated group
immediately before the acquisition date shall be treated as 1
corporation. To the extent provided in regulations, section 1504
shall be applied without regard to subsection (b) thereof for
purposes of the preceding sentence.
"(7) TREATMENT OF PREDECESSORS AND SUCCESSORS.—Any ref-
erence in this section to a corporation shall include a reference
to any predecessor or successor thereof."
(C) Paragraph (2) of section 384(c) of the 1986 Code is amended
to read as follows:
"(2) ACQUISITION DATE.—The term 'acquisition date' means
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3607
"(A) in any case described in subsection (aXlXA), the date
on which the acquisition of control occurs, or
"(B) in any case described in subsection (aXlXB), the date
of the transfer in the reorganization."
(D) Paragraph (1) of section 384(c) of the 1986 Code is amended
by striking out "subsection (aX2)" and inserting in lieu thereof
"subsection (aXlXB)".
(2) Paragraph (2) of section 384(e) of the 1986 Code is amended
by striking out "the gain corporation" and inserting in lieu
thereof "a corporation'.
(3) Subsection (b) of section 384 of the 1986 Code is amended to
read as follows:
"(b) EXCEPTION WHERE CORPORATIONS UNDER COMMON CONTROL.—
"(1) I N GENERAL.—Subsection (a) shall not apply to the
preacquisition loss of any corporation if such corporation and
the gain corporation were members of the same controlled
group at all times during the 5-year period ending on the
acquisition date.
"(2) CONTROLLED GROUP.—For purposes of this subsection, the
term 'controlled group' means a controlled group of corpora-
tions (£is defined in section 1563(a)); except that—
"(A) 'more than 50 percent' shall be substituted for 'at
least 80 percent' each place it appears,
"(B) the ownership requirements of section 1563(a) must
be met both with respect to voting power and value, and
"(C) the determination shall be made without regard to
subsection (aX4) of section 1563.
"(3) SHORTER PERIOD WHERE CORPORATIONS NOT IN EXISTENCE
FOR 5 YEARS.—If either of the corporations referred to in para-
graph (1) was not in existence throughout the 5-year period
referred to in paragraph (1), the period during which such
corporation WEIS in existence (or if both, the shorter of such
periods) shall be substituted for such 5-year period."
(4) Section 384 of the 1986 Code is amended by redesignating
subsection (e) as subsection (f) and by inserting after subsection
(d) the following new subsection:
"(e) ORDERING RULES FOR N E T OPERATING LOSSES, ETC.—
"(1) CARRYOVER RULES.—If any preacquisition loss may not
offset a recognized build-in gain by reason of this section, such
gain shall not be taken into account in determining under
section 172(bX2) the amount of such loss which may be carried
to other taxable years. A similar rule shall apply in the case of
any excess credit or net capital loss limited by reason of subsec-
tion (d).
"(2) ORDERING RULE FOR LOSSES CARRIED FROM SAME TAXABLE
YEAR.—In any case in w h i c h ^
"(A) a preacquisition loss for any taxable year is subject
to limitation under subsection (a), and
"(B) a net operating loss from such taxable year is not
subject to such limitation,
taxable income shall be treated as having been offset 1st by the
loss subject to such limitation."
(5) In any case where the acquisition date (as defined in 26 USC 384 note.
section 384(cX2) of the 1986 Code as amended by this subsection)
is before March 31, 1988, the acquiring corporation may elect to
have the amendments made by this subsection not apply. Such
an election shall be made in such manner as the Secretary of
102 STAT. 3608 PUBLIC LAW 100-647—NOV. 10, 1988
the Treasury or his delegate shall prescribe and shall be made
not later than the later of the due date (including extensions)
for filing the return for the taxable year of the acquiring
corporation in which the acquisition date occurs or the date 120
days after the date of the enactment of this Act. Such an
election, once made, shall be irrevocable,
(n) AMENDMENTS RELATED TO SECTION 10227 OF THE ACT.—Para-
graph (4) of section 1363(d) of the 1986 Code (relating to recapture of
LIFO benefits) is amended by adding at the end thereof the follow-
ing new subparagraph:
"(D) NOT TREATED AS MEMBER OF AFFIUATED GROUP.—
Except as provided in regulations, the corporation referred
to in paragraph (1) shall not be treated as a member of an
affiliated group with respect to the amount included in
gross income under paragraph (1)."
(o) AMENDMENTS RELATED TO SECTION 10228 OF THE ACT.—
dXA) Subsection (a) of section 5881 of the 1986 Code is
amended by striking out "gain realized by such person on such
receipt" and inserting in lieu thereof "gain or other income of
such person by reason of such receipt".
(BXi) Subsection (b) of section 5881 of the 1986 Code is
amended by striking out "a corporation to directly or indirectly
acquire its stock" and inserting in lieu thereof "a corporation (or
any person acting in concert with such corporation) to directly
or indirectly acquire stock of such corporation".
26 use 5881 (ii) The amendment made by clause (i) shall apply to trans-
note, actions occurring on or after March 31,1988.
(C) Subsection (d) of section 5881 of the 1986 Code is
amended—
(i) by striking out "the gain" and inserting in lieu thereof
"the gain or other income", and
(ii) by striking out "GAIN RECOGNIZED" in the subsection
heading and inserting in lieu thereof "AMOUNT RECOG-
NIZED".
(2) Section 5881 of the 1986 (Dode is amended by adding at the
end thereof the following new subsection:
"(e) ADMINISTRATIVE PROVISIONS.—For purposes of the deficiency
procedures of subtitle F, any tax imposed by this section shall be
tre