H.R. 4333 (100th): Technical and Miscellaneous Revenue Act of 1988

100th Congress, 1987–1988. Text as of Nov 10, 1988 (Passed Congress/Enrolled Bill).

Status & Summary | PDF | Source: GPOStatutes at Large

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
-Hi^^v 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 treated as a tax imposed by subtitle A." (p) AMENDMENTS RELATED TO SECTION 10241 OF THE ACT.— (1) Paragraph (1) of section 811(d) of the 1986 Code is amended by striking out "the prevailing State assumed interest rate for the contract" and inserting in lieu thereof "the greater of the prevailing State assumed interest rate or applicable Federal interest rate in effect under section 807 for the contract". (2) Paragraph (2) of section 812(b) of the 1986 (Dode is amended by striking out the last sentence and inserting in lieu thereof the following: "In any case where neither the prevailing State assumed interest rate nor the applicable Federal interest rate is used, another appro- priate rate shall be used for purposes of subparagraph (A)." (q) AMENDMENTS RELATED TO SECTION 10242 OF THE ACT.— (1) Subsection (h) of section 816 of the 1986 Code is amended by striking out "section 842(cXlXA)" and inserting in lieu thereof "section 842(bX2XBXi)".
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3609 (2XA) Subparagraph (B) of section 842(bX3) of the 1986 Code is amended by striking out "held for the production of such income". (B) Subparagraph (B) of section 842(bX4) of the 1986 Code is amended by striking out "held for the production of investment income". (3) Subparagraph (d) of section 842 of the 1986 Code is amended by striking out "and" at the end of paragraph (2), by striking out the period at the end of paragraph (3) and inserting in lieu thereof ", and", and by adding at the end thereof the foUowing new paragraph: "(4) which may provide that, in the case of companies taxable under part II of this subchapter, determinations under subsec- tion (b) will be made separately for cat^ories of such companies established in such r^ulations." (r) AMENDMENT RELATED TO SECTION 10301 OP THE ACT.—Para- graph (3) of section 6655(g) of the 1986 Code is amended by striking the sentence following subparagraph (Q and inserting in lieu thereof the following: "In the case of any organization described in subparagraph (A), subsection 0>X2XA) shall be applied by substituting '5th month' for '3rd month', and subsection (eX2XA) shall be applied by substituting '2 months' for '3 months' and in clause (iXD, by substituting '4 months' for '5 months' in clause (iXII)> by substituting '7 months' for '8 months' in clause (iXHI), and by substituting '10 months' for *11 months' in clause (iXIV)". (s) AMENDMENTS RELATED TO SECTION 10502 OF THE ACT.— (1) Section 4093 of the 1986 Code is amended by redesignating subsections (d) and (e) as subsections (e) and (f), respectively, and by inserting after subsection (c) the following new subsection: "(d) CERTAIN AVIATION FUEL SALES.—Under r^ulations pre- scribed by the Secretary, the Leaking Underground Storage Tank Trust Fund financing rate under section 4091 shall not apply to aviation fuel sold for use or used as supplies for vessels or aircraft (within the meaning of section 4221(dX3))." (2) Subparagraph (B) of section 64270X3) of the 1986 Code (relating to no refund of Leaking Underground Storage Tank Trust Fund financing tax) is amended by inserting "(except as supplies for vessels or aircraft within the meaning of section 4221(dX3))" after "aircraft". (3) Section 6427 of the 1986 Code is amended by redesignating the subsection (p) relating to gasoline used in noncommercial aviation during period rate reduction in effect and subsection (q) (relating to cross references) as subsections (q) and (r), respec- tively. (t) AMQIIDMENTS RELATED TO SECTION 10512 OF THE ACT.— (1) Section 5276 of the 1986 Code is amended by adding at the end thereof the following new subsection: "(c) EIXCEPTION FOR UNFTED STATES.—Subsection (a) shall not apply to any permit issued to an agency or instrumentality of the United States." (2) Subsection (a) of section 5113 of the 1986 Code is amended— (A) by inserting "taxpaid wine bottling house," after "bonded wine cellar," each place it appears, and
102 STAT. 3610 PUBLIC LAW 100-647—NOV. 10, 1988 (B) by striking out "DISTILLED SPIRITS PLANTS, BONDED W I N E CELLARS, OR BREWERIES" in the heading and inserting in lieu thereof "CONTROLLED PREMISES". (3) Section 5123 of the 1986 Code is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection Qy) the following new subsection: "(c) COORDINATION OF TAXES UNDER SECTION 5121,—NO tax shall be imposed by section 5121(a) with respect to a person's activities at any place during a year if such person has paid the tax imposed by section 5121(b) with respect to such place for such year." (4) Section 5113 of the 1986 Code is amended by adding at the end thereof the following new subsection: "(g) COORDINATION OF TAXES UNDER SECTION 5111.—No tax shall be imposed by section 5111(a) with respect to a person's activities at any place during a year if such person has paid the tax imposed by section 5111(b) with respect to such place for such year." 26 use 56 note. (u) EFFECTIVE DATE.—Except as otherwise provided in this section, any amendment made by this section shall take effect as if included in the provisions of the Revenue Act of 1987 to which such amend- ment relates. SEC. 2005. AMENDMENTS RELATED TO PENSION PROTECTION ACT AND FULL FUNDING LIMITATIONS. (a) AMENDMENT RELATED TO SECTION 9303.— (1) Section 4972(c) of the 1986 Code is amended by redesignat- ing paragraph (4) as paragraph (5) and by inserting after para- graph (3) the following new paragraph: "(4) SPECIAL RULE FOR SELF-EMPLOYED INDIVIDUALS.—For pur- poses of paragraph (1), if— "(A) the amount which is required to be contributed to a plan under section 412 on behalf of an individual who is an employee (within the meaning of section 401(cXl)), exceeds "(B) the earned income (within the meaning of section 404(aX8)) of such individual derived from the trade or busi- ness with respect to which such plan is established, such excess shall be treated as an amount allowable as a deduction under section 404." (2XA) Subparagraph (C) of section 412(1X3) of the 1986 Code is amended— (i) by striking out "October 17, 1987" in clause (i) and inserting in lieu thereof "October 29,1987", and (ii) by striking out "October 16, 1987" in clause (iii) and inserting in lieu thereof "October 28,1987". (B) Subparagraph (C) of section 302(dX3) of the Employee 29 use 1082. Retirement Income Security Act of 1974 is amended— (i) by striking out 'MOctober 17, 1987" in clause (i) and inserting in lieu thereof "October 29,1987", and (ii) by striking out "October 16, 1987" in clause (iii) and inserting in lieu thereof "October 28,1987". (b) AMENDMENTS RELATED TO SECTION 9307.— (1) The last sentence of section 404(aXlXD) of the 1986 Code is amended by striking out "For purposes of this subparagraph" and inserting in lieu thereof "For purposes of determining whether a plan has more than 100 participants". (2) Section 404(aX7XA) of the 1986 Code is amended by adding at the end thereof the following new sentence: "For purposes of clause (ii), if paragraph (IXD) applies to a defined benefit plan
PUBLIC LAW 100-647—NOV. 10, 1988 102 STAT. 3611 for any plan year, the amount necessary to satisfy the minimum funding standard provided by section 412 with respect to such plan for such plan year shall not be less than the unfunded current liability of such plan under section 412(1).". (3) Section 404(aXlXD) of the 1986 Ck)de is amended by striking out "(without r^ard to any reduction by the credit balance in the funding standard account)", (c) AMENDMENTS RELATED TO SECTION 9301.— (1) Section 414(1) of the 1986 <3ode is amended by adding at the end thereof the following new paragraph: "(2) ALLOCATION OF ASSETS IN PLAN SPIN-OFFS, ETC.— "(A) IN GENERAL.—In the case of a plan spin-off of a defined benefit plan, a trust which forms part of— "(i) the original plan, or "(ii) any plan spun off from such plan, shall not constitute a qualified trust under this section imless the applicable percentage of excess assets are allo- cated to each of such plans. "(B) APPLICABLE PERCENTAGE.—^For purposes of subp£u-a- graph (A), the term 'applicable percentage' means, with respect to each of the plans describied in clauses (i) and (ii) of subparagraph (A), the percentage determined by dividing— "(i) the excess (if any) of— "(D the amount determined under section 412(c)(7XAXi) with respect to the plan, over "(II) the amount of the assets required to be allocated to the plan after the spin-off (without r^ard to this paragraph), by "(ii) the sum of the excess amounts determined sepa- rately under clause (i) for all such plans. "(CD) BIxcESS ASSETS.—For purposes of subparagraph (A), the term 'excess assets' means an amount equal to the excess (if any) of— "(i) the fair market value of the assets of the original plan immediately before the spin-off, over "(ii) the amount of assets required to be allocated after the spin-off to all plans (determined without r^ard to this paragraph). "(D) CERTAIN SPUN-OFF PLANS NOT TAKEN INTO ACCOXJNT.— "(i) IN GENERAL.—^A plan involved in a spin-off which is described in clause (ii), (ill), or (iv) shall not be taken into account for purposes of this paragraph, except that the amount determined under subparagraph (CXii) shall be increased by the amount of assets allocated to such plan. "(ii) PLANS TRANSFERRED OUT OF CONTROLLED GROUPS.—^A plan is described in this clause if, after such spin-off, such plan is maintained by an employer who is not a member of the same controlled group as the employer maintaining the original plan. "(iii) PLANS TRANSFERRED OUT OF BCULTEPLE EMPLOYER PLANS.—^A plan as described in this clause if, after the spin-off, aiw employer maintaining such plan (and any member of the same controlled group as such em- ployer) does not maintain any other pkm remaining after the spin-off which is also maintained by another employer (or member of the same controlled group as
102 STAT. 3612 PUBLIC LAW 100-647—NOV. 10, 1988 such other employer) which maintained the plan in existence before the spin-off. "(iv) TERMINATED PLANS.—A plan is described in this clause if, pursuant to the transaction involving the spin-off, the plan is terminated. "(v) CONTROLLED GROUP.—For purposes of this subparagraph, the term 'controlled group' means any