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H.R. 10612 (94th): Tax Reform Act

The text of the bill below is as of Oct 4, 1976 (Passed Congress).

90 STAT. 1520                         PUBLIC LAW 94-455—OCT. 4, 1976

                 Public Law 94-455
                 94th Congress
                                                      An Act
  Oct. 4, 1976
                                     To reform the tax laws of the United States.
 [H.R. 10612]
                  Be it enacted hy the Senate and House of Representatives of the
Tax Reform       United States of America in Congress assembled,
Act of 1976.
                 SECTION 1. TABLE OF CONTENTS
                 Sec.     1. Table of contents.                                     r
                          TITLE I—SHORT TITLE AND AMENDMENT OF 1954 CODE
                 Sec. 101. Short title.
                 Sec. 102. Amendment of 1954 Code.
                               TITLE II—AMENDMENTS RELATED TO TAX SHELTERS
                 Sec. 201. Capitalization and amortization of real property construction period
                             interest and taxes.
                 Sec. 202. Recapture of depreciation on real property.
                 Sec. 203. Amendment of section 167 ( k ) .
                 Sec. 204. Limitations on deductions for expenses.
                 Sec. 205. Gain from disposition of interest in oil and gas property.
                 Sec. 206. Amendments to farm loss recapture rules.
                 Sec. 207. Limitations on deductions in case of farming syndicates; capitalization
                             of certain orchard and vineyard expenses and method of accounting
                             for corporations engaged in farming.
                 Sec. 208. Treatment of prepared interest.
                 Sec. 209. Limitation on interest deduction.
                 Sec. 210. Amortization of production cost of motion pictures, books, records,
                             and other similar property.
                 Sec. 211. Clarification of definition of produced film rents.
                 Sec. 212. Basis limitation for and recapture of depreciation on player contracts.
                 Sec. 213. Certain partnership provisions.
                 Sec. 214. Scope of waiver of statute of limitations in case of activities not en-
                             gaged in for profit.
                                 TITLE III—MINIMUM TAX AND MAXIMUM TAX
                 Sec. 301. Minimum tax.
                 Sec. 302. Maximum tax.
                  TITLE IV—EXTENSIONS OF INDIVIDUAL INCOME TAX REDUCTIONS
                 Sec. 401. Extensions of individual income tax reductions.
                 Sec. 402. Refunds of earned income credit disregarded in the administration of
                             Federal programs and federally assisted programs.
                  TITLE V—TAX SIMPLIFICATION IN THE INDIVIDUAL INCOME TAX
                 Sec.   501.
                           Revision of tax tables for individuals.
                 Sec.   502.
                           Deduction for alimony allowed in determining adjusted gross income.
                 Sec.   503.
                           Revision of retirement income credit.
                 Sec.   504.
                           Credit for child care expenses. _
                 Sec.   505.
                           Changes in exclusions for sick pay and certain military, etc., dis-
                             ability pensions ; certain disability income.
                 Sec. 506. Moving expenses.
                 Sec. 507. Tax revision study.                             ,
                 Sec. 508. Effective date.
                         TITLE VI—BUSINESS RELATED INDIVIDUAL INCOME TAX
                                            PROVISIONS
                 Sec. 601. Deductions for expenses attributable to business use of homes, rental of
                             vacation homes, etc.
                 Sec. 602. Deductions for attending foreign conventions.
                 Sec. 603. Change in tax treatment of qualified stock options.
                 Sec. 604. State legislators' travel expenses away from home.
                 Sec. 605. Deduction for guarantees of business bad debts to guarantors not
                             involved in business.

PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1521 TABLE OF CONTENTS—Continued T I T L E VII—ACCUMULATION TRUSTS Sec. 701. Accumulation trusts. TITLE VIII—CAPITAL FORMATION Sec. 801. Extension of $100,000 limitation on used property for 4 years. Sec. 802. Extension of 10 percent credit for 4' years and first-in-flrst-out treat- ment of investment credit amounts. Sec. 803. Employee stock ownership plans; study of expanded stock ownership. Sec. 804. Investment credit in the case of movie and television films. Sec. 805. Investment credit in the case of certain ships. Sec. 806. Additional net operating loss carryover y e a r s ; limitations on net operating loss carryovers. Sec. 807. Small fishing vessel construction reserves. T I T L E IX—SMALL BUSINESS PROVISIONS Sec. 901. Extension of certain corporate income tax reductions. Sec. 902. Changes in subchapter S rules. TITLE X—CHANGES IN THE TREATMENT OF FOREIGN INCOME PART I—FOREIGN TAX PROVISIONS AFFECTING INDIVIDUALS ABROAD Sec. 1011. Income earned abroad by United States citizens living or residing abroad. Sec. 1012. Income tax treatment of nonresident alien individuals who are married to citizens or residents of the United States. Sec. 1013. Foreign trusts having one or more United States beneficiaries to be taxed currently to grantor. Sec. 1014. Interest charge on accumulation distributions from foreign trusts. Sec. 1015. Excise tax on transfers of property to foreign persons to avoid Fed- eral income tax. PART II—AMENDMENTS AFFECTING TAX TREATMENT OF CONTROLLED FOREIGN CORPORATIONS AND T H E I R SHAREHOLDERS Sec. 1021. Amendment of provision relating to investment in United States property by controlled foreign corporations. Sec. 1022. Repeal of exclusion for earnings of less developed country corpora- tions for purposes of section 1248. Sec. 1023. Exclusion from subpart F of certain earnings of insurance companies. Sec. 1024. Shipping profits of foreign corporations. PART III—AMENDMENTS AFFECTING TREATMENT OF FOREIGN TAXES Sec. 1031. Requirement that foreign tax credit be determined on overall basis. Sec. 1032. Recapture of foreign losses. Sec. 1033. Dividends from less developed country corporations to be grossed up for purposes of determining United States income and foreign tax credit against that income. Sec. 1034. Treatment of capital gains for purposes of foreign tax credit. Sec. 1035. Foreign oil and gas extraction income. Sec. 1036. Underwriting income. Sec. 1037. Third tier foreign tax credit when section 951 applies. PART IV—MONEY OR OTHER PROPERTY MOVING OUT OF OR INTO THE UNITED STATES Sec. 1041. Portfolio debt investments in United States of nonresident aliens and foreign corporations. Sec. 1042. Changes in ruling requirements under section 367; certain changes in section 1248. Sec. 1043. Contiguous country branches of domestic life insurance companies. Sec. 1044. Transitional rule for bond, etc., losses of foreign banks. PART V—SPECIAL CATEGORIES OF FOREIGN TAX TREATMENT Sec. 1051. Tax treatment of corporations conducting trade or business in Puerto Rico and possessions of the United States. Sec. 1052. Western Hemisphere trade corporations. Sec. 1053. Repeal of provisions relating to China Trade Act corporations. \
90 STAT. 1522 PUBLIC LAW 94-455—OCT. 4, 1976 TABLE OF CONTENTS—Continued TITLE X—CHANGES IN T H E TREATMENT OF FOREIGN INCOME— Continued PART VI—DENIAL OF CERTAIN TAX BENEFITS FOR COOPERATION W I T H OR PARTICI- PATION IN INTERNATIONAL BOYCOTTS AND I N CONNECTION W I T H THE PAYMENT OF CERTAIN BRIBES Sec. 1061. Denial of foreign tax credit. Sec. 1062. Denial of deferral of international boycott amounts. Sec. 1063. Denial of DISC benefits. Sec. 1064. Determinations as to participation in or cooperation with an inter- national boycott. Sec. 1065. Foreign bribes. Sec. 1066. Effective dates. Sec. 1067. Reports by Secretary. TITLE XI—AMENDMENTS AFFECTING DISC Sec. 1101. Amendments affecting DISC. T I T L E XII—ADMINISTRATIVE PROVISIONS Sec. 1201. Public inspection of written determinations by Internal Revenue Service. Sec. 1202. Confidentiality and disclosure of returns and return information. Sec. 1203. Income tax return preparers. Sec. 1204. Jeopardy and termination assessments. Sec. 1205. Administrative summons. Sec. 1206. Assessments in case of mathematical or clerical errors. Sec. 1207. Withholding. Sec. 1208. State-conducted lotteries. Sec. 1209. Minimum exemption from levy for wages, salary, and other income. Sec. 1210. Joint committee refund cases. Sec. 1211. Social security account numbers. Sec. 1212. Abatement of interest on errors when return is prepared for taxpayer by the Internal Revenue Service. TITLE XIII—TAX EXEMPT ORGANIZATIONS Sec. 1301. Disposition of private foundation property under transition rules of Tax Reform Act of 1969. Sec. 1302. New private foundation set-asides. Sec. 1303. Minimum distribution amount for private foundations. Sec. 1304. Extension of time to amend charitable remainder trust governing instrument. Sec. 1305. Unrelated trade or business income of trade shows. State fairs, etc. Sec. 1306. Declaratory judgments with respect to section 501(c)(3) status and classification. Sec. 1307. Lobbying by public charities. Sec. 1308. Tax liens, etc., not to constitute acquisition indebtedness. Sec. 1309. Extension of self-dealing transition rules for private foundations. Sec. 1310. Imputed interest. Sec. 1311. Certain hospital services. Sec. 1312. Clinical services of cooperative hospitals. Sec. 1313. Exemption of certain amateur athletic organizations from tax. TITLE XIV—CAPITAL GAINS Sec. 1401. Increase in amount of ordinary income against which capital loss may be offset. Sec. 1402. Increase in holding period required for capital gain or loss to be long term. Sec. 1403. Allowance of 8-year capital loss carryover in case of regulated invest- ment companies. Sec. 1404. Sale of residence by elderly.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1523 TABLE OF CONTENTS—Continued T I T L E XV—PENSION AND INSURANCE TAXATION Sec. 1501. Retirement savings for certain married individuals. Sec. 1502. Limitation on contributions to certain pension, etc., plans. Sec. 1503. Participation by members of reserves or National Guard in individual retirement accounts; participation by volunteer firefighters in individual retirement accounts, etc. See. 1504. Certain investments by annuity plans. Sec. 1505. Segregated asset accounts. Sec. 1506. Study of salary reduction pension plans. Sec. 1507. Consolidated returns for life and other insurance companies. Sec. 1508. Treatment of certain life insurance contracts guaranteed renevpable. Sec. 1509. Study of expanded participation in individual retirement accounts. Sec. 1510. Taxable status of pension benefits guaranty corporation. Sec. 1511. Level premium plans covering owner-employees. Sec. 1512. Lump-sum distributions from qualified pension, etc., plans. TITLE XVI—REAL ESTATE INVESTMENT TRUSTS Sec. 1601. Deficiency dividend procedure. Sec. 1602. Trust not disqualified in certain cases where income tests were not met. Sec. 1603. Treatment of property held for sale to customers. Sec. 1604. Other changes in limitations and requirements. Sec. 1605. Excise tax. Sec. 1606. Allowance of net operating loss carryover. Sec. 1607. Alternative tax in case of capital gains. Sec. 1608. Effective date for title. T I T L E XVII—RAILROAD AND AIRLINE PROVISIONS Sec. 1701. Certain provisions relating to railroads. Sec. 1702. Amortization over 50-year period of railroad grading and tunnel bores placed in service before 1969. See. 1703. Certain provisions relating to airlines. TITLE XVIII—INTERNATIONAL TRADE AMENDMENTS Sec. 1801. United States International Trade Commission. Sec. 1802. Trade Act of 1974 amendments. T I T L E XIX—REPEAL AND REVISION OF OBSOLETE, RARELY USED, ETC., PROVISIONS OF INTERNAL REVENUE CODE OF 1954 SUBTITLE A—^AMENDMENTS OF INTERNAL REVENUE CODE GENEBALLT See. 1901. Amendments of subtitle A ; income taxes. Sec. 1902. Amendments of subtitle B ; estate and gift taxes. Sec. 1903. Amendments of subtitle C ; employment taxes. Sec. 1904. Amendments of subtitle D ; miscellaneous excise taxes. Sec. 1905. Amendments of subtitle E ; alcohol, tobacco, and certain other excise taxes. Sec. 1906. Amendments of subtitle F ; procedure and administration. Sec. 1907. Amendments of subtitle G; the Joint Committee on Internal Revenue Taxation. Sec. 1908. Effective date of certain definitions and designations. SUBTITLE B—AMENDMENTS OF CODE PEOVISIONS W I T H LIMITED OUEBENT APPLICATION: REPEALS AND SAVINGS PEOVISIONS Sec. 1951. Provisions of subtitle A ; income taxes. See. 1952. Provisions of subchapter D of chapter 39; cotton futures.
90 STAT. 1524 PUBLIC LAW 94-455—OCT. 4, 1976 TABLE OF CONTENTS—Continued TITLE XX—ESTATE AND GIFT TAXES Sec. 2001. Unified rate schedule for estate and gift t a x e s ; unified credit in lieu of specific exemptions. Sec. 2002. Increase in limitations on marital deductions; fractional interests of spouse. Sec. 2003. Valuation for purposes of the Federal estate tax of certain real property devoted to farming or closely held businesses. Sec. 2004. Extension of time for payment of estate tax. Sec. 2005. Carryover basis. Sec. 2006. Certain generation-skipping transfers. Sec. 2007. Orphans' exclusion. Sec. 2008. Administrative changes. Sec. 2009. Miscellaneous provisions. Sec. 2010. Credit against certain estate taxes. TITLE XXI—MISCELLANEOUS PROVISIONS Sec. 2101. Tax treatment of certain housing associations. Sec. 2102. Treatment of certain disaster payments. Sec. 2103. Tax treatment of certain 1972 disaster losses. Sec. 2104. Tax treatment of certain debts ovped by political parties, etc., to accrual basis taxpayers. Sec. 2105. Tax-exempt bonds for student loans. Sec. 2106. Personal holding company income amendments. See. 2107. Work incentive program expenses. Sec. 2108. Repeal of excise tax on light-duty truck parts. Sec. 2109. Exclusion from excise tax on certain articles resold after modification. Sec. 2110. Franchise transfers. See. 2111. Employer's duties in connection vpith the recording and reporting of tips. Sec. 2112. Treatment of certain pollution control facilities. Sec. 2113. Clarification of status of certain fishermen's organizations. Sec. 2114. Application of section 6013(e) of the Internal Revenue Code of 1954. See. 2115. Amendments to rules relating to limitation on precentage depletion in case of oil and gas wells; transfers of oil and gas property within the same controlled group or family. Sec. 2116. Implementation of Federal-State Tax Collection Act of 1972. Sec. 2117. Cancellation of certain student loans. See. 2118. Treatment of gain or loss on sales or exchanges in connection with simultaneous liquidation of a parent and subsidiary corporation. Sec. 2119. Regulations relating to tax treatment of certain prepublication expenditures of publishers. Sec. 2120. Contributions in aid of construction for certain utilities. Sec. 2121. Prohibition of discriminatory State taxes on production and con- sumption of electricity. Sec. 2122. Allowance of deduction for eliminating architectural and transporta- tion barriers for the handicapped. Sec. 2123. High income taxpayer reports. Sec. 2124. Tax incentives to encourage the preservation of historic structures. Sec. 2125. Amendment to Supplemental Security Income program. Sec. 2126. Extension of carry-over period for Cuban expropriation losses. Sec. 2127. Outdoor advertising displays. Sec. 2128. Tax treatment of large cigars. See. 2129. Treatment of gain from sales or exchanges between related parties. See. 2130. Application of section 117 to certain education programs for members of the uniformed services. See. 2131. Exchange funds. Sec. 2132. Contributions of certain Government publications. See. 2133. Tax incentives study. Sec. 2184. Prepaid legal expenses. Sec. 2135. Special rule for certain charitable contributions of inventory and other property. Sec. 2136. Tax treatment of the grantor of options of stock, securities, and commodities. Sec. 2137. Exempt-interest dividends of regulated investment companies. See. 2138. Common trust fund treatment of certain custodial accounts. See. 2139. Support test for dependent children of divorced, etc., parents. See. 2140. Involuntary conversions of real property. Sec. 2141. Livestock sold on account of drought.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1525 TITLE I—SHORT TITLE AND AMENDMENT OF 1954 CODE SEC. 101. SHORT TITLE. 26 USC 1 note. T h i s Act may be cited as the " T a x Reform Act of 1976". SEC. 102. AMENDMENT OF 1954 CODE. Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the I n t e r n a l Revenue Code of 1954. 26 USC 1. TITLE II—AMENDMENTS RELATED TO TAX SHELTERS SEC. 201. CAPITALIZATION AND AMORTIZATION OF REAL PROPERTY CONSTRUCTION PERIOD INTEREST AND TAXES. (a) I N G E N E R A L . — P a r t V I of subchapter B of chapter 1 (relating to itemized deductions for individuals and corporations) is amended by a d d i n g at the end thereof the following new section: "SEC. 189. AMORTIZATION OF REAL PROPERTY CONSTRUCTION 26 USC 189. PERIOD INTEREST AND TAXES. "(a) CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST AND TAXES.—Except as otherwise provided in this section or in section 266 (relating to carrying charges), in the case of an individual, an electin<^ sipall business corporation (within the meaning of section 1371 ( b ) ) , or a personal holding company (within the meaning of sec- tion 542), no deduction shall be allowed for real property construction period interest and taxes. "(b) AMORTIZATION or AIVIOUNTS CHARGED TO CAPITAL A C C O U N T . — Any amount paid or accrued which would (but for subsection ( a ) ) be allowable as a deduction for the taxable year shall be allowable for such taxable year and each subsequent amortization year in accordance with the following t a b l e : If the amount Is paid or accrued In a taxable year beginning i n — The percentage of such amount allowable for each Nonresidential real Residential real property amortization year shall be property (other than low-Income Low-income housing the following percentage housing) of such amount 1976 see subsection ( f ) 1978 1982 25 1977 1979 1983 20 1S78 1980 1984 1979 1981 1985 14Jf 1980 1982 1986 U^ 1981 1983 1987 UH after 1981 after 1983 after 1987 10 " ( c ) AMORTIZATION Y E A R . — " (1) I N GENERAL.—For purposes of this section, the term 'amor- tization year' means the taxable year in which the amount is paid or accrued, and each taxable year thereafter (beginning with t h e taxable year after the taxable year in which paid or accrued or, if later, the taxable year in which the real property is ready to be placed in service or is ready to be held for sale) until the full amount has been allowable as a deduction (or until the property is sold or exchanged).
90 STAT. 1526 PUBLIC LAW 94-455—OCT. 4, 1976 " ( 2 ) R U L E S FOR SALES AND EXCHAKGES.—For purposes of p a r a - graph (l)— ( A ) PROPORTION OF PERCENTAGE ALLOWED.—For t h e amor- tization year in which t h e property is sold or exchanged, a proportionate p a r t of the percentage allowable for such year (determined without regard t o the sale or exchange) shall be allowable. I f the real property is subject t o a n allowance for depreciation, t h e proportion shall be determined in accord- ance with the convention used for depreciation purposes with respect to such property. I n the case of all other real property, under regulations prescribed by the Secretary, the proportion shall be based on t h a t proportion of t h e amortization year which elapsed before the sale or exchange. " ( B ) UNAMORTIZED BALANCE.—In t h e case of a sale or ex- change of the property, the portion of the amount not allow- able shall be treated as an adjustment to basis under section 26 u s e 1016. 1016 for purposes of determining gain or loss. " ( C ) CERTAIN EXCHANGES.—An exchange or t r a n s f e r after which the property received has a basis determined i n whole or i n p a r t by reference to t h e basis of the property to which the amortizable construction period interest and taxes relate, shall not be treated as an exchange. " ( d ) CERTAIN RESIDENTIAL PROPERTY EXCLUDED.—This section shall not apply to any real property acquired, constructed, or carried if such property is not, and cannot reasonably be expected to be, held in a t r a d e or Dusiness or in an activity conducted for profit. " ( e ) D E F I N I T I O N S . — F o r purposes of this section— " (1) CONSTRUCTION PERIOD INTEREST AND TAXES.—The t e r m 'con- struction period interest and taxes' means all.— " ( A ) interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry real property, a n d " ( B ) real property taxes, to t h e extent such interest a n d taxes are attributable to t h e con- struction period for such property a n d would be allowable as a deduction under this chapter for t h e taxable year in which paid or accrued (determined without regard to this section). "(2) CONSTRUCTION PERIOD.—The t e r m 'construction period', when used with respect t o any real property, means the period— " ( A ) beginning on the date on which construction of the building or other improvement begins, and " ( B ) ending on the date on which t h e item of property is ready t o be placed in service or is ready to be held for sale. "(3) NONRESIDENTIAL REAL PROPERTY.—The term 'nonresi- dential real property' means real property which is neither resi- dential real property nor low-income housing. " ( 4 ) RESIDENTIAL REAL PROPERTY.—The t e r m 'residential real property' means property which is or can reasonably be expected to be— " ( A ) residential rental property as defined in section 167 (j)(2)(B),or " ( B ) real property described in section 1221(1) held for sale as dwelling units (within the meaning of section 167(k) (3)(C)). "(5) LOW-INCOME HOUSING.—The t e r m 'low-income h o u s i n g ' means property described in clause ( i ) , ( i i ) , ( i i i ) , or (iv) of Post, p. 1527. section 1250(a) (1) ( B ) .
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1527 "(f) TRANSITIONAL RULE FOR 1976.—In the case of amounts paid or accrued by the taxpayer in a taxable year beginning in 1976, the per- centage of such amount allowable under this section for— "(1) the taxable year beginning in 1976 shall be 50 percent, and "(2) each amortization year thereafter shall be 16% percent." (b) CLERICAL AMENDMENT.—The table of sections for such part V I is amended by adding at the end thereof the following new item: "Sec. 189. Amortization of real property construction period interest and taxes." (c) EFFECTIVE DATE.—The amendments made by this section shall 26 u s e 189 apply— note. (1) in the case of nonresidential real property, if the construc- tion period begins after December 31,1975, (2) in the case of residential real property (other than low- income housing), to taxable years beginning after December 31, 1977, and (3) in the case of low-income housing, to taxable years begin- ning after December 31,1981. For purposes of this subsection, the terms "nonresidential real prop- Definitions. erty", "residential real property (other than low-income housing)", "low-income housing", and "construction period" have the same mean- ing as when used in section 189 of the Internal Revenue Code of 1954 (as added by subsection (a) of this section). SEC. 202. RECAPTURE OF DEPRECIATION ON REAL PROPERTY. (a) I N GENERAL.—Subsection (a) of section 1250 (relating to gain 26 u s e 1250. from dispositions of certain depreciable realty) is amended to read as follows: "(a) GENERAL RULE.—Except as otherwise provided in this section— " ( 1 ) ADDITIONAL DEPRECIATION AFTER DECEMBER 3 1 , 1975.— "(A) I N GENERAL.—If section 1250 property is disposed of after December 31,1975, then the applicable percentage of the lower of— "(i) that portion of the additional depreciation (as defined in subsection (b) (1) or (4)) attributable to periods after December 31, 1975, in respect of the prop- erty, or "(ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. " ( B ) APPLICABLE PERCENTAGE.—For purposes of subpara- graph (A), the term 'applicable percentage' means— "Applicable "(i) in the case of section 1250 property with respect percentage." to which a mortgage is insured under section 221(d) (3) or 236 of the National Housing Act, or housing financed 26 u s e 1715/, or assisted by direct loan or tax abatement under similar 1715Z-1. provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b) (1) (B), 100 percent minus 1 percent- age point for each full month the property was held after the date the property was held 100 full months';
90 STAT. 1528 PUBLIC LAW 94-455—OCT. 4, 1976 "(ii) in the case of dwelling units which, on the aver- age, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United 42 use 1408. States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; 26 use 1250. " (iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; " (iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and " (v) in the case of all other section 1250 property, 100 percent. In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling.units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses ( i ) , (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4). " ( 2 ) A D D I T I O N A L DEPRECIATION AFTER DECEMBER 3 1 , 1 9 6 9 , A N D BEFORE J A N U A R Y 1 , 1 9 7 6 . "(A) I N GENERAL.—If section 1250 property is disposed of after December 31,1969, and the amount determined under paragraph (1) (A) (ii) exceeds the amount determined under paragraph (1) (A) (i), then the applicable percentage of the lower of— "(i) that portion of the additional depreciation attrib- utable to periods after December 31, 1969, and before January 1,1976, in respect of the property, or "(ii) the excess of the amount determined under para- graph (1) (A) (ii) over the amount determined under paragraph (1) (A) (i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. " ( B ) APPLICABLE PERCENTAGE.—For purposes of subpara- graph (A), the term 'applicable percentage' means— "(i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, •* 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months; "(ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d) (3) 12 use 1715Z, or 236 of the National Housing Act, or housing financed 1715Z-1.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1529 or assisted by direct loan or t a x abatement under similar provisions of State or local laws, a n d with respect t o which the owner is subject to the restrictions described in section 1039(b) (1) ( B ) , 100 percent minus 1 percent- age point for each full month the property was held after the date t h e property was held 20 full m o n t h s ; " ( i i i ) in the case of residential rental property (as defined in section 167(j) (2) ( B ) ) other t h a n t h a t covered by clauses ( i ) a n d ( i i ) , 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full m o n t h s ; " ( i v ) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 1 6 7 ( k ) , 100 per- cent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; a n d " ( v ) in the case of all other section 1250 property, 100 percent. Clauses ( i ) , ( i i ) , a n d (iii) shall n o t apply with respect to t h e additional depreciation described in subsection ( b ) ( 4 ) . " ( 3 ) ADDITIONAL DEPRECIATION BEFORE JANUARY i , i070.— " ( A ) I N GENERAL.—If scction 1250 property is disposcd of after December 31, 1963, a n d the amount determined under p a r a g r a p h (1) ( A ) (ii) exceeds the sum of the amounts deter- mined under p a r a g r a p h s ( l ) ( A ) ( i ) a n d ( 2 ) ( A ) ( i ) , then the applicable percentage of the lower of— " ( i ) t h a t portion of the additional depreciation attrib- utable to periods before J a n u a r y 1, 1970, in respect of the property, or " ( i i ) the excess of the amount determined under para- g r a p h ( l ) ( A ) ( i i ) over the sum of the amounts deter- mined under p a r a g r a p h s ( l ) ( A ) ( i ) and ( 2 ) ( A ) ( i ) , shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. " ( B ) APPLICABLE PERCENTAGE.—For purposes of s u b p a r a - "Applicable g r a p h ( A ) , t h e term 'applicable percentage' means 100 per- percentage." cent minus 1 percentage point for each full month t h e property was held after t h e date on which the property was held for 20 full months.'* (b) PROPERTY DISPOSED OF PURSUANT TO FORECI-OSURE PROCEED- INGS.—Subsection ( d ) of section 1250 (relating to exceptions a n d 26 USC 1250. limitations) is amended by adding at the end thereof the following new p a r a g r a p h : " ( 1 0 ) FORECLOSURE DISPOSITIONS.—If any section 1250 p r o p e r t y is disposed of by the taxpayer pursuant t o a bid for such prop- erty a t foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such prop- erty secured, the applicable percentage referred to in p a r a g r a p h ( 1 ) ( B ) , ( 2 ) ( B ) , or ( 3 ) ( B ) of subsection ( a ) , as the case may be, shall be determined as if t h e taxpayer ceased to hold such property on t h e date of the beginning of the proceedings pur- suant t o which t h e disposition occurred, or, in the event there are n o proceedings, such percentage shall be determined as if t h e taxpayer ceased t o hold such property on the date, deter- mined under regulations prescribed by the Secretary, on which
90 STAT. 1530 PUBLIC LAW 94-455—OCT. 4, 1976 such operation of an agreement or process of law, p u r s u a n t to which the disposition occurred, began." (c) CONFORMING A M E N D M E N T S . — (1) A M E N D M E N T OF SECTION 1 2 5 0 ( f ) ( 2 ) . — P a r a g r a p h (2) of sec- 26 u s e 1250. tion 1250(f) (relating to special rule for property which is sub- stantially improved) is amended to read as follows: " ( 2 ) ORDINARY INCOME ATTRIBUTABLE TO A N E L E M E N T . — F o r purposes of p a r a g r a p h ( 1 ) , t h e amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection ( a ) , with t h e amount for any such period being determined by multiplying— " ( A ) the amount which bears the same ratio to t h e lower of the amounts specified in clause (i) or (ii) of subsection (a) (1) ( A ) , in clause ( i ) or ( i i ) of subsection ( a ) (2) ( A ) , or in clause (i) or (ii) of subsection ( a ) ( 3 ) ( A ) , as t h e case may be, for t h e section 1250 p r o p e r t y as t h e additional depreciation for such element attributable to such period uears to t h e sum of t h e additional depreciation for all ele- ments attributable t o such period, by " ( B ) the applicable percentage for such element for such period. F o r purposes of this p a r a g r a p h , determinations with respect t o any element shall be made as if it were a separate property." (2) A M E N D M E N T OF SECTION 1 2 5 0 ( g ) ( 2 ) . — P a r a g r a p h (2) of section 1250(g) (relating to special rules for qualified low-income housing) is amended to read as follows: "(2) ORDINARY INCOME ATTRIBUTABLE TO AN E L E M E N T . — F o r purposes of p a r a g r a p h ( 1 ) , t h e amount taken into account for any element shall be determined in a manner similar to t h a t pro- vided by subsection (f) ( 2 ) . " (3) A M E N D M E N T OF SECTION 167(e)(3). — P a r a g r a p h (3) of 26 u s e 167. section 167(e) (relating t o change in depreciation methoci with respect t o section 1250 p r o p e r t y ) is amended by striking out "beginning after J u l y 24, 1969," a n d inserting in lieu thereof "beginning after December 31,1975,". 26 u s e 1250 ( d ) EFFECTIVE D A T E . — T h e amendments made by this section (other "o*®- t h a n subsection ( b ) ) shall apply for taxable years ending after December 3 1 , 1975. T h e amendment made by subsection ( b ) shall apply with respect to proceedings (and to operations of law) referred to m section 1250(d) (10) of the I n t e r n a l Revenue Code of 1954 which begin after December 31,1975. SEC. 203. AMENDMENT OF SECTION 167(k). 26 u s e 167. ( a ) GENERAL RULE.—Section 167(k) (relating t o depreciation of expenditures to rehabilitate low-income rental housing) is amended— (1) by striking out " J a n u a r y 1, 1976," in p a r a g r a p h (1) a n d inserting in lieu thereof " J a n u a r y 1,1978"; (2) by striking out "$15,000" in p a r a g r a p h (2) ( A ) a n d insert- i n g in lieu thereof "$20,000"; (3) by striking out " t h e policies of t h e Housing a n d U r b a n Development A c t of 1968" in p a r a g r a p h (3) ( B ) a n d inserting in lieu thereof "the Leased Housing P r o g r a m under section 8 of the United States H o u s i n g Act of 1937"; a n d (4) by a d d i n g the following new s u b p a r a g r a p h a t the end of p a r a g r a p h (3) : " ( D ) REHABILITATION EXPENDITURES INCURRED.—Rehabili- tation expenditures incurred pursuant t o a binding con-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1531 tract entered into before January 1, 1978, and rehabilitation expenditures incurred with respect to low-income rental hous- ing the rehabilitation of which has begun before January 1, 1978, shall be deemed incurred before January 1,1978." (b) EFFECTIVE DATE.—The amendments made by paragraphs (1), 26 USC 167 (3), and (4) of subsection (a) shall apply to expenditures paid or note, incurred after December 31, 1975, and before January 1, 1978, and expenditures made pursuant to a binding contract entered into before January 1,1978. The amendment made by paragraph (2) of subsection (a) shall apply to expenditures incurred after December 31, 1975. SEC. 204. LIMITATIONS ON DEDUCTIONS FOR EXPENSES. (a) I N GENERAL.—Subpart C of part I I of subchapter E of chapter 1 (relating to taxable year for which deduction is taken) is amended by adding at the end thereof the following new section: "SEC. 465. DEDUCTIONS LIMITED TO AMOUNT AT RISK IN CASE OF 26 USC 465. CERTAIN ACTIVITIES. "(a) GENERAL RULE.—In the case of a taxpayer (other than a cor- L poration which is neither an electing small business corporation (as defined in section 1371(b)) nor a personal holding company (as defined in section 542)) engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year. Any loss from such activity not allowed under this section for the taxable year shall be treated as a deduction allocable to such activity in the first succeeding taxable year. "(b) AMOUNTS CONSIDERED AT RISK.— " (1) I N GENERAL.—For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including— "(A) the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and "(B) amounts borrowed with respect to such activity (as determined under paragraph (2)). "(2) BORROWED AMOUNTS.—For purposes of this section, a tax- payer shall be considered at risk with respect to amounts bor- rowed for use in an activity to the extent that he— "(A) is personally liable for the repayment of such amounts, or "(B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer's interest in such property). No property shall be taken into account as security if such prop- erty is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1). "(3) CERTAIN BORROWED AMOUNTS EXCLUDED.—For purposes of paragraph ( 1 ) ( B ) , amounts borrowed shall not be considered to be at risk with respect to an activity if such amounts are bor- rowed from any person who— "(A) has an interest (other than an interest as a creditor) in such activity, or "(B) has a relationship to the taxpayer specified within any one of the paragraphs of section 267(b).
90 STAT. 1532 PUBLIC LAW 94-455—OCT. 4, 1976 " (4) EXCEPTION.—Notwithstanding any other provision of this section, a taxpayer shall not be considered, a t risk with respect t o amounts protected against loss t h r o u g h nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. " (5) A M O U N T S AT RISK I N SUBSEQUENT YEARS.—If in any t a x a b l e year t h e taxpayer has a loss from an activity to which this sec- tion applies, the amount with respect t o which a taxpayer is con- sidered t o be a t risk (within t h e meaning of subsection ( b ) ) i n subsequent taxable years with respect t o t h a t activity shall be reduced by t h a t portion of t h e loss which (after t h e application of subsection ( a ) ) is allowable as a deduction. " ( c ) ACTIVITIES TO W H I C H SECTION A P P L I E S . — " ( 1 ) T Y P E S o r ACTIVITIES.—This section applies t o any t a x p a y e r engaged in the activity of— " ( A ) holding, producing, or distributing motion picture films or video tapes. Post, p. 1536. " ( B ) farming (as defined in section 4 6 4 ( e ) ) , 26 u s e 1245 " ( C ) leasing any section 1245 property (as defined in sec- tion 1245 (a) ( 3 ) ) , or " ( D ) exploring for, or exploiting, oil a n d gas resources as a trade or business or for the production of income. " ( 2 ) SEPARATE ACTIVITIES.—For purposes of this section, a tax- payer's activity with respect to each— " ( A ) film or video tape, " ( B ) section 1245 property which is leased or held for leasing, " ( C ) farm, or " ( D ) oil a n d gas property (as defined under section 614), shall be treated as a separate activity. A partner's interest in a partnership or a shareholder's interest in an electing small busi- ness corporation shall be treated as a single activity to t h e extent t h a t t h e p a r t n e r s h i p or an electing small business corporation is engaged in activities described in a n y s u b p a r a g r a p h of this paragraph. " ( d ) DEFINITION OF I.K)SS.—For purposes of this section, t h e term 'loss' means the excess of t h e deductions allowable under this chapter for the taxable year (determined without regard to this section) a n d allocable to an activity to which this section applies over t h e income received or accrued by the t a x p a y e r d u r i n g the taxable year from such activity." (b) CLERICAL A M E N D M E N T . — T h e table of sections for s u b p a r t C of p a r t I I of subchapter E of chapter 1 is amended by a d d i n g a t the end thereof t h e following new i t e m : "Sec. 465. Deductions limited to amount at risk in case of certain activities." 26 u s e 465 (c) EFFECTIVE D A T E S . — note. (1) I N GENERAL.—Except as provided in p a r a g r a p h s (2) a n d ( 3 ) , the amendments made by this section shall apply to losses attributable t o amounts paid or incurred in taxable years begin- n i n g after December 31,1975. F o r purposes of this subsection, any amount allowed or allowable for depreciation or amortization for any period shall be treated as an amount paid or incurred in such period. (2) SPECIAL TRANSITIONAL RULES FOR MOVIES AND VIDEO TAPES.— ( A ) I N GENERAL.—In t h e case of any activity described in section 4 6 5 ( c ) ( 1 ) ( A ) of t h e I n t e r n a l Revenue Code of
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1533 1954, t h e amendments made by this section shall not apply ^nte, p. 1531. to— (i) deductions for depreciation or amortization with respect to property the principal production of which began before September 11, 1975, and for the purchase of which there was on September 11, 1975, and at all times thereafter a binding contract, and (ii) deductions attributable to producing or distribut- ing property t h e principal production of which began before September 11, 1975. ( B ) EXCEPTION FOR CERTAIN AGREEMEXTS W^HERE PRINCIPAL PHOTOGRAPHY BEGIN BEFORE 1976.—In the case of any activity described in section 4 6 5 ( c ) ( 1 ) ( A ) of the I n t e r n a l Keve- nue Code of 1954, the amendments made by this section shall not apply t o deductions attributable to t h e producing of a film the principal photography of which began on or before December 31, 1975, if— (i) on September 10, 1975, there was an agreement with the director or a principal motion picture star, or on or before September 10, 1975, there had been expended (or committed to the production) an amount not less t h a n the lower of $100,000 or 10 percent of the estimated costs of producing t h e film, and (ii) t h e production takes place in the United States. S u b p a r a g r a p h ( A ) shall apply only to taxpayers who held their interests on September 10, 1975. S u b p a r a g r a p h ( B ) shall apply only to taxpayers who held their interests on December 31, 1975. (3) SPECIAL TRANSITIONAL RULES FOR LEASING ACTIVITIES.— ( A ) E U L E FOR LEASES OTHER THAN OPERATING LEASES. I N the case of any activity described in section 465(c) (1) ( B ) of the I n t e r n a l Revenue Code of 1954, t h e amendments made by this section shall not apply w^ith respect to— (i) leases entered into before J a n u a r y 1, 1976, and (ii) leases where t h e property was ordered by the lessor or lessee before J a n u a r y 1,1976. (B) HOLDING OF INTERESTS FOR PURPOSES OF SUBPARAGRAPH ( A ) . — S u b p a r a g r a p h ( A ) shall apply only to taxpayers who held their interests in t h e property on December 31, 1975. (C) SPECIAL RULE FOR OPERATING LEASES.—In the case of a lease described in section 46(e) (3) ( B ) of the I n t e r n a l Rev- enue Code of 1954— (i) s u b p a r a g r a p h ( A ) shall be applied by substituting "May 1,1976" for " J a n u a r y 1,1976" each place it appears therein, a n d ' (ii) s u b p a r a g r a p h ( B ) shall be applied by substituting " A p r i l 30,1976" for "December 31,1975". SEC. 205. GAIN FROM DISPOSITION OF INTEREST IN OIL OR GAS PROPERTY. (a) RECAPTURE R U L E S . — P a r t I V of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) is amended by adding at the end thereof the following new section: "SEC. 1254. GAIN FROM DISPOSITION OF INTEREST IN OIL OR GAS 26 USC 1254. PROPERTY. "(a) GENERAL R U L E . — "(1) ORDINARY INCOME.—If oil or gas p r o p e r t y is disposed of after December 31,1975, t h e lower of— 89-194 O—78—pt. 2 5
90 STAT. 1534 PUBLIC LAW 94-455—OCT. 4, 1976 " ( A ) the aggregate amount of expenditures after Decem- ber 31, 1975, which are allocable t o such property a n d which have been deducted as intangible drilling and development 26 use 263. costs under section 263(c) by the taxpayer or any other per- son a n d which (but for being so deducted) would be reflected in t h e adjusted basis of such property, adjusted as provided in p a r a g r a p h ( 4 ) , or " ( B ) the excess of— " ( i ) t h e amount realized (in t h e case of a sale, exchange, or involuntary conversion), or t h e fair market val«e of the interest (in the case of any other disposi- t i o n ) , over " ( i i ) t h e adjusted basis of such interest, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding a n y other provision of this subtitle. "(2) DISPOSITION OF PORTION OF PROPERTY.—For purposes of p a r a g r a p h (1) — " ( A ) I n the case of t h e disposition of a portion of an oil or gas property (other t h a n an undivided interest), the entire amount of the aggregate expenditures described in p a r a g r a p h (1) ( A ) with respect to such property shall be treated as allocable to such portion to the extent of the amount of t h e gain to which p a r a g r a p h (1) applies. " ( B ) I n the case of the disposition of an undivided interest in an oil or gas property (or a portion thereof), a propor- tionate p a r t of the expenditures described in p a r a g r a p h (1) ( A ) with respect to such property shall be treated as allocable to such undivided interest to the extent of t h e amount of the gain to which p a r a g r a p h (1) applies. T h i s p a r a g r a p h shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of t h e Secretary that such expenditures do not relate to the portion (or interest therein) disposed of. "Oil or gas " ( 3 ) O I L OR GAS PROPERTY.—The term 'oil or g a s p r o p e r t y ' property." means any property (within the meaning of section 614) with respect to which any expenditures described in p a r a g r a p h (1) ( A ) are properly chargeable. " ( 4 ) SPECIAL RULE FOR PARAGRAPH ( i ) ( A ) . — I n a p p l y i n g p a r a - g r a p h (1) ( A ) , t h e amount deducted for intangible drilling and development costs a n d allocable t o t h e interest disposed of shall be reduced by the amount (if a n y ) by which the deduction for depletion under section 611 with respect to such interest would have been increased if such costs incurred (after December 31, 1975) h a d been charged to capital account rather than, deducted. " ( b ) SPECIAL K U L E S U N D E R EEGULATIONS.—Under regulations p r e - scribed by the Secretary— " ( 1 ) rules similar to the rules of subsection (g) of section 617 and to t h e rules of subsections (b) a n d (c) of section 1245 shall be applied for purposes of this section; a n d " ( 2 ) in the case of the sale or exchange of stock in an electing small business corporation (as defined in section 1371 ( b ) ) , rules similar to the rules of section 751 shall be applied to t h a t portion of the excess of t h e amount realized over the adjusted basis of the stock which is attributable to expenditures referred t o in sub- section ( a ) ( 1 ) ( A ) of this section."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1535 (b) PARTNERSHIPS.—Section 751(c) (relating to definition of 26 USC 751. unrealized receivables) is amended by striking out " a n d farm land (as defined in section 1 2 5 2 ( a ) ) " a n d inserting in lieu thereof "farm land (as defined in section 1 2 5 2 ( a ) ) , and an oil or gas propertj^ (described in section 1254)", a n d by striking out "or 1 2 5 2 ( a ) " a n d inserting in lieu thereof "1252(a), or 1254 ( a ) " . (c) T E C H N I C A L A M E N D M E N T S . — (1) T h e following provisions are each amended by striking out " o r 1 2 5 2 ( a ) " a n d inserting in lieu thereof "1252(a), or 1254 ( A ) t h e second sentence of section 170(e) ( 1 ) ; 26 USC 170. ( B ) section 301(b) ( l ) ( B ) ( i i ) ; 26 USC 301. (C) section 3 0 1 ( d ) ( 2 ) ( B ) ; ( D ) section 312(c) ( 3 ) ; a n d 26 USC 312. ( E ) section 4 5 3 ( d ) ( 4 ) ( B ) . 26 USC 453. (2) Section 341(e) (12) is amended by striking out " a n d 1252 26 USC 341. ( a ) " a n d inserting in lieu thereof "1252(a), a n d 1254(a)". (3) Section 163(d) (3) ( A ) (iii) is amended by striking out 26 USC 163. "and 1250" and inserting in lieu thereof "1250, and 1254". ( d ) CLERICAL A M E N D M E N T . — T h e table of sections for p a r t I V of subchapter P of chapter 1 is amended by adding a t the end thereof the following new i t e m : "Sec. 1254. Gain from disposition of interest in oil or gas property." (e) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 1254 apply with respect t o taxable years ending after December 31, 1975. °°*^- SEC. 206. AMENDMENTS TO FARM LOSS RECAPTURE RULES. ( a ) T E R M I N A T I O N OF ADDITIONS TO EXCESS DEDUCTIONS A C C O U N T . — P a r a g r a p h (2) of section 1251(b) (relating to additions to excess 26 USC 1251. deductions account) is amended by adding at t h e end thereof the fol- lowing new s u b p a r a g r a p h : "(E) T E R M I N A T I O N OF ADDITIONS. — N o a m o u n t shall be added to the excess deductions account for any taxable year beginning after December 31,1975." ( b ) CERTAIN REORGANIZATIONS.— (1) S u b p a r a g r a p h ( A ) of section 1251(b)(5) is amended t o ; read as follows: " ( A ) C E R T A I N CORPORATE TRANSACTIONS.— " ( i ) I n the case of a transfer described in subsection (d) (3) t o which section 3 7 1 ( a ) , 3 7 4 ( a ) , or 381 applies, the acquiring corporation shall succeed to and take into account as of t h e close of the day of distribution or transfer, the excess deductions account of the transferor. " (ii) I n the case of a transfer which is described in sub- section ( d ) ( 3 ) , which is in connection with a reorgani- zation described in section 368(a) (1) ( D ) , a n d which is not described in clause ( i ) , the transferee corporati(Hi shall be deemed to have an excess deductions account in an amount equal to t h e amount in t h e excess deductions account of the transferor. T h e transferor's excess deduc- tions account shall not be reduced by reason of the pre- ceding sentence." (2) P a r a g r a p h (3) of section 1251 (b) is amended by a d d i n g a t the end thereof the following: " I n the case of a corporation which h a s made or received a trans- fer described in clause (ii) of p a r a g r a p h (5) ( A ) , subtractions from t h e excess deductions account shall be determined, in such
90 STAT. 1536 PUBLIC LAW 94-455—OCT. 4, 1976 manner as the Secretary shall prescribe, applying this p a r a g r a p h t o t h e farm n e t income, a n d t h e amounts described in subpara- g r a p h ( B ) , of the transferor corporation a n d the transferee cor- poration on an aggregate basis.". 26 u s e 1251 (3) T h e amendments made by this subsection shall apply t o note. transfers occurring after December 31, 1975. SEC. 207. LIMITATIONS ON DEDUCTIONS IN CASE OF FARMING SYNDI- CATES; CAPITALIZATION OF CERTAIN ORCHARD AND VINE- YARD EXPENSES; AND METHOD OF ACCOUNTING FOR COR- PORATIONS ENGAGED IN FARMING. ( a ) PfiEPAro E X P E N S E S . — (1) I N GENERAL.—Subpart C of p a r t I I of subchapter E of chapter 1 (relating t o taxable year for which deduction taken) is amended by inserting after section 463 the following new section : 26 u s e 464. "SEC. 464. LIMITATIONS ON DEDUCTIONS IN CASE OF FARMING SYNDICATES. "(a) GENERAL R U L E . — I n t h e case of a n y f a r m i n g syndicate (as defined in subsection ( c ) ) , a deduction (otherwise allowable under this chapter) for amounts paid for feed, seed, fertilizer, or other similar farm supplies shall only be allowed for the taxable year in which such feed, seed, fertilizer, or other supplies are actually used or consumed, or, if later, for t h e taxable year for which allowable as a deduction (determined without regard t o this section). "(b) CERTAIN POULTRY E X P E N S E S . — I n the case of a n y farming syndicate (as defined in subsection ( c ) ) — " ( 1 ) t h e cost of poultry (including egg-laying hens a n d baby chicks) purchased for use in a trade o r business (or both for use in a t r a d e or business a n d for sale) shall be capitalized a n d deducted ratably over t h e lesser of 12 months o r their useful life in the t r a d e or business, and " ( 2 ) t h e cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise dis- posed of. "(c) F A R M I N G SYNDICATE D E F I N E D . — " ( 1 ) I N GENERAL.—For purposes of this section, t h e term 'farming syndicate' means— " ( A ) a partnership or any other enterprise other t h a n a cor- poration which is not an electing small business corporation (as defined in section 1371(b)) engaged in the t r a d e or busi- ness of farming, if at any time interests in such partnership or enterprise have been offered for sale in a n y offering required t o be registered with a n y Federal o r State agency having authority t o regulate the offering of securities for sale, or " ( B ) a partnership or any other enterprise other t h a n a corporation which is not an electing small business corpora- tion (as defined in section 1371(b)) engaged in t h e t r a d e or business of farming, if more than 35 percent of the losses dur- ing a n y period are allocable to limited p a r t n e r s or limited entrepreneurs. "(2) HOLDINGS ATTRIBUIABLE TO ACTIVE MANAGEMENT.—For purposes of p a r a g r a p h (1) ( B ) , t h e following shall be treated as an interest which is not held by a limited p a r t n e r o r a limited entrepreneur : " ( A ) in t h e case of a n y individual who h a s actively par- ticipated ( f o r a period of not less t h a n 5 years) i n the man-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1537 agement of any trade or business of farming, any interest in a partnership or other enterprise which is attributable to such active participation, " ( B ) in t h e case of any individual whose principal resi- dence is on a farm, a n y partnership or other enterprise engaged in the t r a d e or business of farming such farm, " ( C ) in the case of any individual who is actively partici- p a t i n g in the management of any trade or business of farm- ing or who is an individual who is described in subparagraph ( A ) or ( B ) , any participation in the further processing of > livestock which was raised in such trade or business (or in the t r a d e or business referred to in subparagraph ( A ) or (B)), " ( D ) in the case of an individual whose principal business activity involves active participation in t h e management of a t r a d e or business of farming, any interest in any other trade or business of farming, and", " ( E ) a n y interest held by a member of the family (within the meaning of section 2 6 7 ( c ) ( 4 ) ) of a g r a n d p a r e n t of an 26 USC 267. individual described in s u b p a r a g r a p h ( A ) , ( B ) , ( C ) , or ( D ) if the interest in the partnership or the enterprise is attribut- able to t h e active participation of t h e individual described in subparagraph ( A ) , ( B ) , ( C ) , o r ( D ) . F o r purposes of s u b p a r a g r a p h ( A ) , where one farm is substituted for or added t o another farm, both farms shall be treated as one farm. " ( d ) EXCEPTIONS.—Subsection ( a ) shall not apply to— " ( 1 ) any amount paid for supplies which are on h a n d a t t h e close of the taxable year on account of fire, storm, flood, or other casualty or on account of disease or drought, or " ( 2 ) any amount required to be charged t o capital account under section 278. " ( e ) D E F I N I T I O N S . — F o r purposes of this section— " ( 1 ) F A R M I N G . — T h e term 'farming' means t h e cultivation of land or the raising or harvesting of a n y agricultural or horti- cultural commodity including t h e raising, shearing, feeding, car- ing for, training, and management of animals. F o r purposes of the preceding sentence, trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticultural commodity. " ( 2 ) LIMITED ENTREPRENEUR.—The t e r m ' l i m i t e d entrepreneur' means a person who— " ( A ) h a s an interest in an enterprise other than as a lim- ited partner, a n d " ( B ) does not actively participate in t h e management of such enterprise." (2) CLERICAL AMENDMENT.—The table of sections for such sub- p a r t C is amended by inserting after the item relating to section 463 the following new item : "Sec. 464. Limitations on deductions in case of farming syndicates." (3) EFFECTIVE DATES.— 26 USC 464 ( A ) I N GENERAL.—Except as provided in s u b p a r a g r a p h "°*^" ( B ) , the amendments made by this subsection shall apply to taxable years beginning after December 31, 1975. ( B ) TRANSITIONAL R U L E . — I n t h e case of a f a r m i n g syndi- cate in existence on December 31, 1975, a n d for which there
90 STAT. 1538 PUBLIC LAW 94-455—OCT. 4, 1976 was n o change of membership throughout its taxable year beginning i n 1976, t h e amendments made by this subsection shall apply to taxable years beginning after December 31, 1976. ( b ) ORCHARD AND VINEYARD E X P E N S E S . — 26 u s e 278. (1) I N GENERAL.—Section 278 (relating to capital expenditures incurred in p l a n t i n g a n d developing citrus a n d almond groves) is amended by striking out subsection (b) and by inserting in lieu thereof the following: " ( b ) F A R M I N G SYNDICATES.—Except as provided in subsection ( c ) , in t h e case of a n y farming syndicate (as defined in section 464(c)) engaged in planting, cultivating, maintaining, or developing a grove, orchard, or vineyard i n which fruit o r n u t s a r e grown, a n y amount— " ( 1 ) which would be allowable as a deduction b u t for t h e provisions of this subsection, " ( 2 ) which is attributable t o t h e planting, cultivation, main- tenance, or development of such grove, orchard, or vineyard, a n d " ( 3 ) which is incurred in a taxable year before t h e first tax- able year in which such grove, orchard, or vineyard bears a crop or yield in commercial quantities, shall be charged to capital account. " ( c ) EXCEPTIONS,—Subsections ( a ) a n d ( b ) shall not apply t o amounts allowable as deductions (without regard to this section) attributable t o a grove, orchard, o r vineyard which was replanted after h a v i n g been lost or damaged (while in t h e hands of t h e t a x p a y e r ) by reason of freezing temperatures, disease, drought, pests, or casualty." (2) CONFORMING AMENDMENTS.— ( A ) T h e heading of section 278 is amended t o read a s follows: "SEC. 278. CAPITAL EXPENDITURES INCURRED IN PLANTING AND DEVELOPING CITRUS AND ALMOND GROVES; CERTAIN CAPITAL EXPENDITURES OF FARMING SYNDICATES.". ( B ) Subsection ( a ) of section 278 (relating to general rule) is amended by striking out "subsection ( b ) " and insert- i n g i n lieu thereof "subsection ( c ) " . 26 u s e 278 (3) EFFECTIVE DATE.—The amendments made by this subsec- note. tion shall apply to taxable years beginning after December 31, 1975. T h e amendments made by this subsection shall not apply in t h e case of a grove, orchard, or vineyard referred t o i n t h e amendment made by subsection ( b ) (1) which was planted or replanted on or before December 31, 1975. F o r purposes of t h e preceding sentence, a tree or vine which, on or before Decem- ber 31,1975, was planted a t a place other t h a n the grove, orchard, or vineyard of t h e t a x p a y e r b u t which, on such date, was owned by the t a x p a y e r (or with respect to which the taxpayer had a bind- i n g contract t o purchase) shall be treated as planted on Decem- ber 31, 1975, in the grove, orchard, or vineyard of t h e taxpayer. (c) METHOD OF ACCOUNTING FOR CORPORATIONS ENGAGED I N FARMING.— (1) GENERAL RULE.— ( A ) S u b p a r t A of p a r t I I of subchapter E of chapter 1 (relating t o methods of accounting) is amended by a d d i n g a t the end thereof t h e following new section: 26 u s e 447. "SEC. 447. METHOD OF ACCOUNTING FOR CORPORATIONS ENGAGED IN FARMING. "(a) GENERAL R U L E . — E x c e p t as otherwise p r o v i d e d by law, t h e taxable income from f a r m i n g pf—
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1539 "(1) a corporation engaged in t h e trade or business of farm- ing, or " (2) a partnership engaged in the t r a d e or business of farming, if a corporation is a p a r t n e r in such partnership, shall be computed on an accrual method of accounting a n d with t h e capitalization of preproductive expenses described in subsection ( b ) . T h i s section shall not apply to the t r a d e or business of operating a nursery or to the raising or harvesting of trees (other t h a n fruit and nut trees). " ( b ) PREPRODUCTIVE PERIOD E X P E N S E S . — " ( 1 ) I N GENERAL.—For purposes of this section, the term 'pre- "Preproductive productive period expenses' means any amount which is attribut- period able t o crops, animals, or any other property having a crop or expenses." yield d u r i n g the preproductive period of such property. " ( 2 ) ExcEPiTONS.—Paragraph (1) shall not apply— " ( A ) to taxes and interest, and " ( B ) to any amount incurred on account of fire, storm, flood, or other casualty or on account of disease or drought. " (3) PREPRODUCTIVE PERIOD DEFINED.—For purposes of t h i s sub- section, the term 'preproductive period' means— " ( A ) in the case of property having a useful life of more t h a n 1 year which will have more than 1 crop or yield, t h e period before the disposition of the first such marketable crop or yield, or " ( B ) i n t h e case of any other property, t h e period before such property is disposed of. F o r purposes of this section, the use by the taxpayer i n the trade or business of farming of any supply produced in such trade or business shall be treated as a disposition. "(c) EXCEPTION FOR SMALL B U S I N E S S AND F A M I L Y CORPORATIONS.— F o r purposes of subsection ( a ) , a corporation shall be treated as not being a corporation if it is— " ( 1 ) an electing small business corporation (within t h e mean- ing of section 1 3 7 1 ( b ) ) , 26 u s e 1371. " (2) a corporation of which at least 50 percent of t h e total com- bined voting power of all classes of stock entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of the corporation, are owned by members of t h e same family, or " (3) a corporation the gross receipts of which meet the require- ments of subsection ( e ) . "(d) MEMBERS OF T H E S A M E F A M I L Y . — F o r purposes of subsection (c)(2)- " ( 1 ) the members of t h e same family are an individual, such individual's brothers a n d sisters, t h e brothers and sisters of such individual's parents a n d grandparents, the ancestors a n d lineal descendants or any of the foregoing, a spouse of any of the fore- going, and the estate of any of the foregoing, " ( 2 ) stock owned, directly or indirectly, by or for a partner- ship or t r u s t shall be treated as owned proportionately by its partners or beneficiaries, and " (3) if 50 percent or more in value of the stock i n a corporation (hereinafter in this p a r a g r a p h referred t o as 'first corporation') is owned, directly or through p a r a g r a p h ( 2 ) , by or for members of t h e same family, such members shall be considered as owning each class of stock in a second corporation (or a wholly owned
90 STAT. 1540 PUBLIC LAW 94-455—OCT. 4, 1976 subsidiary of such second corporation) owned, directly or indirectly, by or for the first corporation, in t h a t proportion which the value of t h e stock in t h e first corporation which such members so own bears to t h e value of all t h e stock i n t h e first corporation. F o r purposes of p a r a g r a p h ( 1 ) , individuals related by the half blood or by legal adoption shall be treated as if they were related by t h e whole blood. " (e) CORPORATIONS H A V I N G GROSS KECEIPTS OF $1,000,000 OR L E S S . — A corporation meets t h e requirements of this subsection if, for each p r i o r taxable year beginning after December 31,1975, such corporation (and any predecessor corporation) did not have gross receipts exceed- ing $1,000,000. F o r purposes of the preceding sentence, all corporations which are members of a controlled g r o u p of corporations (within t h e 26 u s e 1563. meaning of section 1563(a)) shall be treated as one corporation. "(f) COORDINATION W I T H SECTION 481.—In t h e case of a n y t a x p a y e r required by this section t o change its method of accounting for a n y taxable year— " (1) such change shall be treated as having been made with t h e consent of t h e Secretary, " ( 2 ) for purposes of section 481(a) ( 2 ) , such change shall be treated as a change not initiated by the taxpayer, and " ( 3 ) under regulations prescribed by t h e Secretary, t h e n e t amount of adjustments required by section 481(a) to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change. " ( g ) CERTAIN A N N U A L ACCRUAL ACCOUNTING METHODS.— " ( 1 ) I N GENEIiAL.—If— " ( A ) for its 10 taxable years ending with its first taxable year beginning after December 31, 1975, a corporation used an annual accrual method of accounting with respect to its t r a d e or business of farming, " ( B ) such corporation raises crops which are harvested not less than 12 months after planting, and " ( C ) such corporation has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975, and the taxable year, such corporation m a y continue to employ such method of accounting for the taxable year with respect to its trade or business of farming. " ( 2 ) A N N U A L ACCRUAL METHOD OF ACCOUNTING DEFINED.—For purposes of p a r a g r a p h ( 1 ) , t h e term 'annual accrual method of accounting' means a method under which revenues, costs, a n d expenses are computed on an accrual method of accounting a n d the preproductive expenses incurred during t h e taxable year are charged t o harvested crops or deducted in determining t h e taxable income for such years. " ( 3 ) CERTAIN REORGANIZATIONS.—For purposes of this subsec- tion, if a corporation acquired substantially all t h e assets of a farming trade or business from another corporation in a trans- action in which n o gain or loss was recognized to t h e transferor or transferee corporation, t h e transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of accounting d u r i n g the period for which the transferor corporation computed its taxable income from such trade or business on a n annual accrual method."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1541 ( B ) T h e table of sections for such subpart A is amended by adding at the end thereof the following: "Sec. 447. Method of accounting for corporations engaged in farming." (2) EFFECTIVE DATE.—The amendments made by p a r a g r a p h (1) 26 USC 447 shall apply t o taxable years beginning after December 31, 1976. "o*^- (3) ELECTIOX TO CHANGE FROM STATIC VALUE METHOD TO ACCRUAL 26 USC 447 METHOD O F A C C O U X T I X G . — note. ( A ) I x GEXERAL. If— (i) a corporation has computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops for the 10 taxable years ending with its first taxable year beginning after December 31,1975, (ii) such corporation raises crops which are harvested not less t h a n 12 months after planting, and (iii) such corporation elects, within one year after the date of the enactment of this Act and in such man- ner as the Secretary of t h e Treasury or his delegate pre- scribes, to change to the annual accrual method of accounting (within the meaning of section 4 4 7 ( g ) ( 2 ) of the Internal Revenue Code of 1954) for taxable years Ante, p. 1538. beginning after December 31,1976, such change shall be treated as having been made with the consent of the Secretary of the Treasury, and, under regula- tions prescribed by the Secretary of t h e Treasury or his delegate, the net amount of the adjustments required by sec- tion 481 (a) of t h e I n t e r n a l Revenue Code of 1954 to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with t h e year of change. ( B ) CooRDiXATiox WITH SECTiox' 44 7 OF THE CODE.—A Cor- poration which elects under s u b p a r a g r a p h ( A ) to change to the annual accrual method of accounting shall, for purposes of section 447(g) of the Internal Revenue Code of 1954, be deemed to be a corporation which has computed its taxable income on an annual accrual method of accounting for its 10 taxable years ending with its first taxable year beginning after December 31,1975. ( C ) CERTAIX CORPORATE REORGANIZATIONS.—For purposes of this p a r a g r a p h , if a corj^oration acquired substantially all the assets of a farming trade or business from another corpo- ration in a transaction in which no gain or loss was recog- nized to t h e transferor or transferee corporation, t h e transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops d u r i n g the period for which the transferor corporation computed its taxable income from such trade or business on such accrual and static value method. SEC. 208. TREATMENT OF PREPAID INTEREST. ( a ) GENERAL RULE.—Section 461 (relating to general rule for t a x - 26 USC 461. able year of deduction) is amended by a d d i n g at the end thereof t h e f ollowinc: new subsection r
90 STAT. 1542 PUBLIC LAW 94-455—OCT. 4, 1976 " ( g ) PREPAID INTEREST.— " '' ' * " ( 1 ) I N GENERAL.—If t h e taxable income of t h e t a x p a y e r is computed under the cash receipts a n d disbursements method of ,. accounting, interest paid by t h e t a x p a y e r which, under regula- tions prescribed by t h e Secretary, is properly allocable t o any period—• *" ' " ( A ) with respect to which the interest represents a charge for the use or forbearance of money, and " ( B ) which is after t h e close of t h e taxable year in which paid, shall be charged to capital account a n d shall be treated as paid in the period t o which so allocable. " ( 2 ) EXCEPTION.—This subsection shall n o t a p p l y t o points paid i n respect of any indebtedness incurred in connection with the purchase or improvement of, a n d secured by, t h e principal residence of t h e t a x p a y e r to t h e extent t h a t , u n d e r regulations prescribed by the Secretary, such payment of points is an estab- lished business practice in t h e area in which such indebtedness is incurred, a n d the amount of such payment does n o t exceed t h e amount generally charged i n such area." 26 u s e 461 ( b ) EFEECTIVE D A T E . — note. (1) jj^ GENERAL.—Except as provided in p a r a g r a p h ( 2 ) , the amendment made by subsection ( a ) shall apply to amounts paid after December 31, 1975, in taxable years ending after such date. (2) CERTAIN AMOUNTS PAID BEFORE 1977.—The amendment made by subsection ( a ) shall n o t apply to amounts paid before J a n u a r y 1, 1977, p u r s u a n t t o a binding contract or written loan commitment which existed on September 16,1975 (and a t all times t h e r e a f t e r ) , a n d which required prepayment of such amounts by the taxpayer. SEC. 209. LIMITATION ON INTEREST DEDUCTION. 26 u s e 163. (a) I N GENERAL.—Subsection ( d ) of section 163 (relating to limita- tion on interest on investment indebtedness) is amended— (1) b y striking out p a r a g r a p h s (1) a n d (2) a n d inserting i n lieu thereof t h e following: " ( 1 ) I N GENERAL.—In the case of a t a x p a y e r othcr t h a n a Cor- poration, the amount of investment interest (as defined in p a r - a g r a p h ( 3 ) ( D ) ) otherwise allowable as a deduction under this chapter shall be limited, in the following order, t o — " ( A ) $10,000 ($5,000, in the case of a separate r e t u r n by a married i n d i v i d u a l ) , plus " ( B ) t h e amount of t h e n e t investment income (as defined in p a r a g r a p h (3) ( A ) ) , plus t h e amount (if a n y ) by which the deductions allowable under this section (determined with- out regard to this subsection) a n d sections 162,164(a) (1) or (2), or 212 attributable to property of the t a x p a y e r subject to a net lease exceeds the rental income produced by such property for the taxable year. I n t h e case of a trust, t h e $10,000 amount specified in subpara- g r a p h ( A ) shall be zero. "(2) CARRYOVER or DISALLOWED INVESTMENT INTEREST.—The amount of disallowed investment interest for a n y taxable year , .- -, . shall be treated as investment interest p a i d or accrued in t h e succeeding taxable year."; (2) by adding at t h e end of p a r a g r a p h (3) ( A ) t h e following new sentence: " I f the t a x p a y e r h a s investment interest for t h e
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1543 taxable year to which this subsection (as in effect before the T a x Reform "Act of 1976) applies, the amount of t h e n e t investment Ante, p. 1520. income taken into account under this subsection shall be t h e amount of such income (determined without regard t o this sen- tence) multiplied by a fraction t h e numerator of which is t h e excess of the investment interest for t h e taxable year over t h e investment interest t o which such prior provision applies, a n d the denominator of which is t h e investment interest for t h e tax- able year."; (3") by striking out "limitations in p a r a g r a p h s (1) a n d (2) ( A ) ' ' in p a r a g r a p h (3) ( E ) and inserting in lieu thereof "limita- tion in p a r a g r a p h ( 1 ) " ; (4) by striking out p a r a g r a p h (5) and redesignating para- g r a p h s (6) a n d (7) as p a r a g r a p h s (5) a n d ( 6 ) , respectively; (5) by a d d i n g at the end of p a r a g r a p h (5) (as so redesignated) the following: " F o r taxable years beginning after December 31, 1975, this para- g r a p h shall be applied on an allocation basis rather than a specific item basis."; and (6) by a d d i n g at the end thereof the following new p a r a g r a p h : " ( 7 ) SPECIAL RULE WHERE TAXPAYER OWNS SO PERCENT OR MORE OF ENTERPRISE. " ( A ) GENERAL RULE.—In the case of any 50 percent owned corporation or partnership, t h e $10,000 figure specified in p a r a g r a p h (1) shall be increased by the lesser of— " ( i ) $15,000, or " ( i i ) the interest paid or accrued d u r i n g t h e taxable year on investment indebtedness incurred or continued in connection with the acquisition of the interest in such corporation or partnership. I n t h e case of a separate return by a married individual, $7,500 shall be substituted for the $15,000 figure in clause ( 1 ) . "(B) O W N E R S H I P REQUIREMENTS.—This p a r a g r a p h shall apply with respect to indebtedness only if t h e taxpayer, his spouse, a n d his children own 50 percent or more of the total value of all classes of stock of the corporation or 50 percent or more of all capital interests in the partnership, as the case may be." ( b ) EFEECTIVE D A T E . — 26 USC 163 (1) I N GENERAL.—Except as provided in p a r a g r a p h ( 2 ) , t h e °°*®- amendments made by subsection ( a ) shall a p p l y to taxable years beginning after December 31,1975. (2) INDEBTEDNESS INCURRED BEFORE SEPTEMBER 11,19 7 5.—In t h e case of indebtedness attributable t o a specific item of property which— ( A ) is for a specified term, and ( B ) was incurred before September 11,1975, or is incurred after September 10, 1975, pursuant to a written contract or commitment which on September 11, 1975, a n d a t all times thereafter before the incurring of such indebtedness, is bind- ing on the taxpayer, the amendments made by this section shall not apply, but section 163(d) of the I n t e r n a l Revenue Code of 1954 (as in effect before the enactment of this Act) shall apply. F o r purposes of t h e pre- ceding sentence, so much of the net investment income (as defined in section 163(d) (3) ( A ) of such Code) for any taxable year as
90 STAT. 1544 PUBLIC LAW 94-455—OCT. 4, 1976 is not taken into account under section 163(d) of such Code, as Ante, p. 1542. amended by this Act, by reason of the last sentence of section 1 6 3 ( d ) ( 3 ) ( A ) of such Code, shall be taken into account for purposes of applying such section as in effect before the date of enactment of this Act with respect to interest on indebtedness referred to in the precedino; sentence. SEC. 210. AMORTIZATION OF PRODUCTION COST OF MOTION PICTURES, BOOKS, RECORDS, AND OTHER SIMILAR PROPERTY. (a) I N G E N E R A L . — P a r t I X of subchapter B of chapter 1 (relating to items not deductible) is amended by adding at the end thereof the following new section: 26 u s e 280. "SEC. 280. CERTAIN EXPENDITURES INCURRED IN PRODUCTION OF FILMS, BOOKS, RECORDS, OR SIMILAR PROPERTY. " ( a ) GENERAL R U L E . — E x c e p t in the case of a corporation (other t h a n an electing small business corporation (as defined in section 1371 ( b ) ) or a personal holding company (as defined in section 542)) and except in the case of production costs which are charged to capital account, amounts attributable to the production of a film, sound recording, book, or similar property which are otherwise deductible under this chapter shall be allowed as deductions only in accordance with the provisions of subsection ( b ) . "(b) PRORATION OF PRODUCTION COST OVER INCOME PERIOD.— Amounts referred to in subsection (a) are deductible only for those taxable years ending d u r i n g the period d u r i n g which the taxpayer reasonably may be expected to receive substantially all of the income he will receive from any such film, sound recording, book, or similar property. T h e amount deductible for any such taxable year is an amount which bears the same ratio to the sum of all such amounts (attributable to such film, sound recording, book, or similar property) as the income received from the property for t h a t taxable year bears to the sum of the income the t a x p a y e r m a y reasonably be expected to receive d u r i n g such period. " ( c ) D E F I N I T I O N S . — F o r purposes of this section— " ( 1 ) F I L M . — T h e term 'film' means any motion picture film or video tape. " ( 2 ) SOUND RECORDING.—The term 'sound recording' means works t h a t result from the fixation of a series of musical, spoken, p :^ ' or other sounds, regardless of the nature of the material objects, such as discs, tapes, or other phonorecordings, in which such sounds are embodied." (b) CLERICAL A M E N D M E N T . — T h e table of sections for such p a r t is amended by a d d i n g at the end thereof the following new item: "Sec. 280. Certain expenditures incurred in production of films, books, records, or similar property." 26 u s e 280 (c) EFFECTIVE D A T E . — T h e amendment made by this section applies note. to amounts paid or incurred after December 31, 1975, with respect to property the principal production of which begins after December 31, 1975. SEC. 211. CLARIFICATION OF DEFINITION OF PRODUCED FILM RENTS. (a) I N GENERAL.—Subparagraph ( B ) of p a r a g r a p h (5) of section 26 u s e 543. 543(a) (defining produced film rents for purposes of personal holding company income) is amended by adding at the end thereof the follow- ing new sentence: " I n the case of a producer who actively participates in the production of t h e film, such term includes an interest in the
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1545 proceeds or profits from t h e film, but only to the extent such interest is attributable to such active participation." (b) ErrECTivE D A T E . — T h e amendment made by subsection (a) shall 26 USC 543 apply to taxable years ending on or after December 31, 1975. °ot«- SEC. 212. BASIS LIMITATION FOR AND RECAPTURE OF DEPRECIATION ON PLAYER CONTRACTS. (a) BASIS L I M I T A T I O N S . — (1) I N GENERAL.—Part I V of subchapter O of chapter 1 (relat- 26 USC 1051. ing to special rules applicable t o gain or loss on disposition of property) is amended by redesignating section 1056 as section 1057, a n d by inserting after section 1055 the following new section: "SEC. 1056. BASIS LIMITATION FOR PLAYER CONTRACTS TRANSFERRED 26 USC 1056. IN CONNECTION WITH THE SALE OF A FRANCHISE. " ( a ) GENERAL R U L E . — I f a franchise to conduct any sports enter- prise is sold or exchanged, and if, in connection with such sale or exchange, there is a transfer of a contract for the services of an athlete, the basis of such contract in the hands of the transferee shall not exceed the sum of— " ( 1 ) the adjusted basis of such contract in the hands of the transferor immediately before the transfer, plus " ( 2 ) the gain (if any) recognized by the transferor on the transfer of such contract. F o r purposes of this section, gain realized by the transferor on the transfer of such contract, but not recognized by reason of section 3 3 7 ( a ) , shall be treated as recognized to the extent recognized by the Post, p. 1772. transferor's shareholders. " ( b ) EXCEPTIONS.—Subsection (a) shall not apply— " ( 1 ) to an exchange described in section 1031 (relating to exchange of property held for productive use or investment), and " (2) to property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent (within the meaning of section 1 0 1 4 ( a ) ) . " "(c) TRANSFEROR REQUIRED To F U R N I S H CERTAIN I N F O R M A T I O N . — U n d e r regulations prescribed by the Secretary, the transfer shall, at the times and in the manner provided in such regulations, furnish to the Secretary and to the transferee the following information: " (1) the amount which the transferor believes to be the adjusted basis referred to in p a r a g r a p h (1) of subsection ( a ) , " ( 2 ) the amount which the transferor believes to be the gain referred to in p a r a g r a p h (2) of subsection ( a ) , and " (3) any subsequent modification of either such amount. T o the extent provided in such regulations, the amounts furnished pursuant to the preceding sentence shall be binding on the transferor and on the transferee. "(d) PRESUMPTION AS TO A M O U N T ALLOCABLE TO PLAYER C O N - TRACTS.—In the case of any sale or exchange described in subsection ( a ) , it shall be presumed t h a t not more than 50 percent of the con- sideration is allocable to contracts for the services of athletes unless it is established to the satisfaction of the Secretary that a specified amount in excess of 50 percent is properly allocable to such contracts. Nothing in the preceding sentence shall give rise to a presumption t h a t an allocation of less t h a n 50 percent of the consideration to contracts for the services of athletes is a proper allocation."
90 STAT. 1546 PUBLIC LAW 94-455—OCT. 4, 1976 (2) CLERICAL AMENDMENT.—The tables of sections for such p a r t V I is amended by striking out the last item a n d inserting in lieu thereof the following: "Sec. 1056. Basis limitation for player contracts transferred in con- nection with the sale of a franchise. "Sec. 1057. Cross references." 26 u s e 1056 (3) EFFECTIVE DATE.—The amendments made by this subsec- note. tion apply to sales or exchanges of franchises after December 31, 1975, in taxable years ending after such date. ( b ) RECAPTURE.— 26 u s e 1245. (1) I N GENERAL.—Section 1245(a) (relating to gain from dis- position of certain depreciable property) is amended by a d d i n g at the end thereof the following new p a r a g r a p h : " (4) SPECIAL RULE FOR PLAYER CONTRACTS,— " ( A ) I N GENERAL.—For purposes of this section, if a fran- chise t o conduct a n y sports enterprise is sold or exchanged, and if, in connection with such sale or exchange, there is a transfer of any player contracts, the recomputed basis of such player contracts in the hands of the transferor shall be the adjusted basis of such contracts increased by the greater of— r " ( i ) t h e previously unrecaptured depreciation with respect to player contracts acquired hj t h e transferor at the time of acquisition of such franchise, or " ( i i ) t h e previously unrecaptured depreciation with respect to the player contracts involved in such transfer. "(B) PREVIOUSLY UNRECAPTURED DEPRECIATION W I T H "Previously RESPECT TO INITIAL CONTRACTS.—For purposes of subpara- unrecaptured g r a p h ( A ) ( i ) , t h e term 'previously unrecaptured deprecia- depreciation." tion' means the excess (if any) of— " ( i ) the sum of the deduction allowed or allowable to the taxpayer transferor for the depreciation of any player contracts acquired by h im a t the time of acquisi- tion of such franchise, plus the deduction allowed or allowable for losses with respect to such player contracts acquired at the time of such acquisition, over " (ii) the aggregate of the amounts treated as ordinary income by reason of this section with respect to prior dispositions of such player contracts acquired upon acquisition of the franchise. "(C) PREVIOUSLY UNRECAPTURED DEPRECIATION WITH "Previously RESPECT TO CONTRACTS TRANSFERRED.—For purposcs of Sub- unrecaptured p a r a g r a p h ( A ) ( i i ) , the term 'previously unrecaptured depre- depreciation." ciation' means— " (i) the amount of any deduction allowed or allowable to t h e taxpayer transferor for the depreciation of any contracts involved in such transfer, over " (ii) the aggregate of the amounts treated as ordinary income by reason of this section with respect t o prior dispositions of such player contracts acquired upon acquisition of the franchise. "Player "(D) PLAYER CONTRACT.—For purposes of this p a r a g r a p h , contract." the term 'player contract' means any contract for the services of an athlete which, in the hands of the taxpayer, is of a character subject to the allowance for depreciation provided in section 167."
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1547 (2) EFFECTIVE DATE.—The amendment made by this subsection 26 USC 1245 applies to transfers of player contracts in connection with any note, sale or exchange of a franchise after December 31, 1975. SEC. 213. CERTAIN PARTNERSHIP PROVISIONS. ( a ) DOLLAR L I M I T A T I O N W I T H EESPECT TO ADDITIONAL F I R S T - Y E A R DEPRECIATION ALLOWANCE.—Subsection ( d ) of section 179 (relating to 26 USC 179. additional first-year depreciation allowance for small business) is amended by redesignating p a r a g r a p h (8) as p a r a g r a p h (9) a n d by inserting after p a r a g r a p h (7) t h e following new p a r a g r a p h : " (8) DOLLAR LIMITATION I N CASE OF PARTNERSHIPS.—In t h e case of a p a r t n e r s h i p , t h e dollar limitation contained i n t h e first sen- tence of subsection (b) shall apply with respect to the partnership a n d with respect to each partner." ( b ) CLARIFICATION OF TREATMENT OF P A R T N E R S H I P SYNDICATION FEES, ETC.— (1) I N GENERAL.—Part I of subchapter K of chapter 1 (relating to determination of t a x liability) is amended by a d d i n g a t the end thereof t h e following new section: "SEC. 709. TREATMENT OF ORGANIZATION AND SYNDICATION FEES. 26 USC 709. " ( a ) GENERAL R U L E . — E x c e p t as provided i n subsection ( b ) , n o deduction shall be allowed under this chapter to the p a r t n e r s h i p or to any p a r t n e r for a n y amounts paid or incurred to organize a part- nership or to promote t h e sale of (or t o sell) a n interest in such partnership. " ( b ) AMORTIZATION OF ORGANIZATION F E E S . — " ( 1 ) DEDUCTION.—Amounts paid or incurred t o organize a p a r t n e r s h i p m a y , a t t h e election of t h e p a r t n e r s h i p (made in accordance with regulations prescribed by t h e S e c r e t a r y ) , be treated as deferred expenses. Such deferred expenses shall be allowed as a deduction ratably over such period of not less t h a n 60 months as m a y be selected by the p a r t n e r s h i p (beginning with the month in which the partnership begins business), or if the partner- ship is liquidated before the end of such 60-month period, such deferred expenses (to t h e extent not deducted under this section) may be deducted to the extent provided in section 165. " ( 2 ) ORGANIZATIONAL EXPENSES DEFINED.—The organizational expenses to which p a r a g r a p h (1) applies, are expenditures which— " (A) are incident to t h e creation of the p a r t n e r s h i p ; " ( B ) are chargeable to capital account; a n d " ( C ) are of a character which, if expended incident to the creation of a p a r t n e r s h i p h a v i n g an ascertainable life, would be amortized over such life." (2) CLERICAL AMENDMENT.—The table of sections for such p a r t is amended by a d d i n g at t h e end thereof the following: "Sec. 709. Treatment of organization and syndication fees." (3) DETERMINATION OF AMOUNTS CHARGEABLE TO CAPITAL ACCOUNT.—Section 707(c) (relating t o guaranteed payments) is 26 USC 707. amended by striking out " a n d section 1 6 2 ( a ) " a n d inserting in lieu thereof "and, subject to section 263, for purposes of section 162(a)". (c) I T E M S M U S T B E ALLOCATED TO PORTION OF YEAR PARTNER H E L D INTEREST.— (1) I N GENERAL.—Subparagraph ( B ) of section 7 0 6 ( c ) ( 2 ) 26 USC 706. (relating t o disposition of less than entire interest) is amended
90 STAT. 1548 PUBLIC LAW 9 4 ^ 5 5 — O C T . 4, 1976 by striking o u t " o r with respect t o a p a r t n e r whose interest is reduced" a n d inserting in lieu thereof " o r with respect to a p a r t n e r whose interest is reduced (whether by entry of a new partner, p a r t i a l liquidation of a p a r t n e r ' s interest, gift, or otherwise)". ( 2 ) C E R T A I N PROVISIONS O F S U B C H A P T E R K M A Y N O T B E OVER- R I D D E N BY PARTNERSHIP AGREEMENT.—Subsectiou ( a ) o f SectioU 26 u s e 704. 704 (relating to effect of partnership agreement) is amended by striking out "except as otherwise provided in this section" a n d inserting in lieu thereof "except as otherwise provided in this chapter". (3) CROSS REFERENCES.— ( A ) Section 704 is amended by a d d i n g a t the end thereof the following: "(f) CROSS R E F E R E N C E . — "For rules in the case of the sale, exchange, liquidation, or reduction of a partner's interest, see section 706(c) (2)." 26 u s e 761. ( B ) Section 761 (relating t o terms defined) is amended by a d d i n g at t h e end thereof the following: "(e) CROSS R E F E R E N C E . — "For rules in the case of the sale, exchange, liquidation, or reduction of a partner's interest, see sections 704(b) and 706(c)(2)." ( d ) DETERMINATION OF PARTNER'S DISTRIBUTIVE SHARE.—Subsec- 26 u s e 704. tion (b) of section 704 (relating to distributive share determined by income or loss ratio) is amended to read as follows: "(b) DETERMINATION OF DISTRIBUTIVE S H A R E . — A p a r t n e r ' s dis- tributive share of income, gain, loss, deduction, o r credit (or item thereof) shall be determined in accordance with the partner's interest in the p a r t n e r s h i p (determined by t a k i n g into account all facts a n d circumstances), if—• " (1) t h e p a r t n e r s h i p agreement does not provide as t o the p a r t - ' ner's distributive share of income, gain, loss, deduction, o r credit (or item thereof), or " (2) t h e allocation to a p a r t n e r under the agreement of income, gain, loss, deduction, or credit (or item thereof) does n o t have substantial economic effect." (e) TREATMENT OF PARTNERSHIP LIABILITIES W I T H RESPECT TO W H I C H T H E PARTNER I S N O T PERSONALLY LIABLE.—Section 7 0 4 ( d ) (relating to limitation on allowance of losses) is amended by adding at the end thereof the following new sentences: " F o r purposes of this subsection, t h e adjusted basis of a n y p a r t n e r ' s interest in t h e partnership shall n o t include a n y portion of any part- nership liability with respect to which t h e p a r t n e r h a s no personal liability. T h e preceding sentence shall not apply with respect t o a n y Ante, p. 1531. activity to t h e extent t h a t section 465 (relating to limiting deductions to amounts at risk in case of certain activities) applies, n o r shall it apply t o a n y p a r t n e r s h i p the principal activity of which is investing in real property (other t h a n mineral p r o p e r t y ) . " 26 u s e 709 (f) EFFECTIVE DATES.— note. (1) ii^ GENERAL.—Exccpt as Otherwise provided i n this sub- section, t h e amendments made by this section shall apply in t h e case of p a r t n e r s h i p taxable years beginning after December 31, 1975. (2) SUBSECTION (e).—The amendment made by subsection (e) shall apply t o liabilities incurred after December 31, 1976.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1549 (3) SEC5TI0N 709(b) OF THE CODE.—Section 709(b) of t h e I n t e r n a l Revenue Code of 1954 (as added by the amendment made by subsection (b) (1) of this section) shall apply in t h e case of amounts paid or incurred in taxable years b e g i n n m g after December 31, 1976. SEC. 214. SCOPE OF WAIVER OF STATUTE OF LIMITATIONS IN CASE OF ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) I N GENERAL.—Subsection (e) of section 183 (relating to spe- 26 USC 183. cial rule for activities not engaged in for profit) is amended by add- ing at the end thereof the following new p a r a g r a p h : "(4) T I M E FOR ASSESSING DEFICIENCY ATTRIBUTABLE TO ACTIV- I T Y . — I f a t a x p a y e r makes an election under p a r a g r a p h (1) with respect to an activity, the statutory period for the assessment of any deficiency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (deter- * mined without extensions) for filing the return of t a x under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such deficiency m a y be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment.", (b) CROSS R E F E R E N C E . — P a r a g r a p h (2) of section 6212(c) (relat- Post, p. 1803. i n g to restriction of further deficiency letters) is amended by adding 26 USC 6212. at the end thereof the following new s u b p a r a g r a p h : "(E) Deficiency attributable to activities not engaged in for profit, see section 183(e)(4).". Supra. (c) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 183 a p p l y with respect to taxable years beginning after December 31, note. 1969; except t h a t such amendments shall not apply to any taxable year ending before the date of the enactment of this A c t with respect to which the period for assessing a deficiency has expired before such date of enactment. TITLE III—MINIMUM TAX AND MAXIMUM TAX SEC. 301. MINIMUM TAX. (a) I N GENERAL.—Subsection (a) of section 56 (relating to mini- 26 USC 56. m u m tax for tax preferences) is amended to read as follows: " ( a ) GENERAL R U L E . — I n addition to the other taxes imposed by this chapter, there is hereby imposed for each taxable year, with respect to the income of every person, a tax equal to 15 percent of the amount by which the sum of the items of tax preference exceeds the greater of— " ( 1 ) $10,000, o r " ( 2 ) the regular tax deduction for the taxable year (as deter- mined u n d e r subsection ( c ) ) . " Poif, p. 1550. (b) CONFORMING C H A N G E S . — (1) Section 56(b) (relating to deferral of tax liability in case of certain net operating losses) is amended— ( A ) by striking out "$30,000" in p a r a g r a p h ( 1 ) ( B ) and inserting in lieu thereof "$10,000", and ( B ) by striking out "10 percent" in p a r a g r a p h s (1) and (2) and inserting in lieu thereof "15 percent". 89-194 0—78—pt. 2 6
90 STAT. 1550 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 56. (2) Section 56(c) (relating to t a x carryovers) is amended to read as follows: " ( c ) REGULAR T A X DEDUCTION D E F I N E D . — F o r purposes of t h i s sec- tion, t h e t e r m 'regular t a x deduction' means an amount equal t o one- half of (or in the case of a corporation, an amount equal to) t h e taxes imposed by this chapter for the taxable year (computed without regard to this p a r t a n d without regard to t h e taxes imposed by sections 7 2 ( m ) (5) ( B ) , 402(e), 4 0 8 ( f ) , 531, a n d 541), reduced by t h e sum of the credits allowable under— Post, p. 1643. " ( 1 ) section 33 (relating to foreign t a x c r e d i t ) , Post, p. 1559. " (9S section 37 (relating to credit for the elderly), " (3) section 38 (relating to investment c r e d i t ) , " ( 4 ) section 40 (relating t o expenses of work incentive program), " ( 5 ) section 41 (relating t o contributions to candidates for public office), "^6) section 42 (relating t o general t a x credit), " ( 7 ) section 44 (relating t o purchase of new principal resi- dence) , a n d Post, p. 1563. " ( 8 ) section 44A (relating t o expenses for household a n d dependent care services necessary for gainful employment)." (c) ADDITIONAL T A X PREFERENCE I T E M S . — (1) ADDITIONAL PREFERENCE I T E M S . — 26 u s e 57. ( A ) Section 57(a) (relating to items of t a x preference) is amended by striking out p a r a g r a p h (1) a n d inserting in lieu thereof the following: "(1) EXCESS ITEMIZED DEDUCTIONS.—An a m o u n t equal to t h e excess itemized deductions for t h e taxable year (as determined under subsection ( b ) ) . " ( B ) Section 57(a) (relating to items of t a x preference) is amended by striking out t h e m a t t e r following p a r a g r a p h (10) and inserting in lieu thereof the following: " ( 1 1 ) INTANGIBLE DRILLING COSTS.—The excess of t h e intangible drilling and development costs described in section 263(c) paid or incurred in connection with oil a n d gas wells (other t h a n costs incurred in drilling a nonproductive well) allowable under this chapter for t h e taxable year over the amount which would have been allowable for t h e taxable year if such costs h a d been cap- italized a n d straight line recovery of intangibles (as defined in subsection ( d ) ) h a d been used with respect to such costs. P a r a g r a p h s ( 1 ) , ( 3 ) , a n d (11) shall not apply t o a corporation." (C) Section 5 7 ( a ) ( 3 ) (relating to accelerated deprecia- tion on personal property subject to a net lease) is amended to read as follows: "(3) ACCELERATED DEPRECIATION ON LEASED PERSONAL PROP- ERTY.—With respect t o each item of section 1245 property (as defined in section 1 2 4 5 ( a ) ( 3 ) ) which is subject t o a lease, t h e amount by which— •'•''' " ( - ^ ) the deduction allowable for the taxable year for depreciation or amortization, exceeds " ( B ) t h e deduction which would have been allowable for the taxable year h a d the taxpayer depreciated t h e property under t h e straight-line method for each taxable year of its useful life for which t h e taxpayer has held t h e property. F o r purposes of s u b p a r a g r a p h ( B ) , useful life shall be determined as if section 1 6 7 ( m ) ( l ) (relating t o asset depreciation range) did not include the last sentence thereof."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1551 (2) EXCESS ITEMIZED DEDUCTIONS DEFINED.—^Section 6 7 ( b ) is 26 USC 57. amended t o read as follows: " ( b ) EXCESS ITEMIZED DEDUCTIONS.— " ( 1 ) I N GENERAL.—For purposes of p a r a g r a p h (1) of subsection ( a ) , t h e amount of t h e excess itemized deductions for any taxable year is the amount by which the sum of the deductions for t h e taxable year other than— " ( A ) deductions allowable i n a r r i v i n g a t adjusted gross income, " ( B ) the standard deduction provided by section 141, " ( C ) t h e deduction for personal exemptions provided b y section 151, " ( D ) the deduction for medical, dental, etc., expenses pro- vided by section 213, and " ( E ) t h e deduction for casualty losses described i n section 165(c)(3), exceeds 60 percent ( b u t does not exceed 100 percent) of t h e tax- payer's adjusted gross income for the taxable year. " ( 2 ) SPECIAL RULE FOR TRUSTS AND ESTATES.—In t h e case of a t r u s t or estate, any deduction allowed or allowable for t h e taxable year— " ( A ) under section 642(c) (but only t o the extent t h a t t h e amount of t h e deduction allowable u n d e r such section is in- cluded in t h e income of t h e beneficiary under section 662(a) (1) for t h e taxable year of the beneficiary with which or within which the taxable year of the t r u s t e n d s ) ; " ( B ) under section 642'(d), 642(e), 6 4 2 ( f ) , 651 ( a ) , 661 ( a ) , or 691; or " ( C ) for costs paid or incurred i n connection with t h e administration of t h e t r u s t or estate; shall, for purposes of p a r a g r a p h ( 1 ) , be treated as a deduction allowable in a r r i v i n g a t an adjusted gross income." (3) STRAIGHT LINE RECOVERY OF INTANGIBLES DEFINED.—Section , 57 is amended by a d d i n g a t t h e end thereof t h e following new subsection: " ( d ) STRAIGHT L I N E RECOVERY OF INTANGIBLES D E F I N E D . — F o r p u r - poses of p a r a g r a p h (11) of subsection ( a ) — ^"^C' P- 1550. " (1) I N GENERAL.—The term 'straight line recovery of intangi- bles', when used with respect to intangible drilling a n d develop- ment costs for a n y well, means (except in t h e case of an election under p a r a g r a p h ( 2 ) ) ratable amortization of such costs over the 120-month period beginning with t h e month in which pro- duction from such well begins. " ( 2 ) ELECTION.—If t h e taxpayer elects, a t such time and in such manner as the Secretary m a y by regulations prescribe, with respect t o t h e intangible drilling a n d development costs for a n y well, t h e term 'straight line recovery of intangibles' means a n y method which would be permitted for purposes of determining cost depletion with respect to such well a n d which is selected by the t a x p a y e r for purposes of subsection ( a ) ( 1 1 ) . " ( 4 ) S P E C I A L RULES FOR TIMBER.— ( A ) PREFERENCE REDUCTION FOR TIMBER.—Section 57(a) (9) is amended by adding a t t h e end thereof the following new s u b p a r a g r a p h : " ( C ) PREFERENCE REDUCTION FOR T I M B E R . — I n t h e case of a corporation, the amount of t h e t a x preference under sub-
90 STAT. 1552 PUBLIC LAW 94-455—OCT. 4, 1976 paragraph (B) shall be reduced (but not below zero) by the sum of— "(i) one-third of the corporation's timber preference income (as defined in subsection (e)), plus "(ii) $20,000, but in no event shall this reduction exceed the amount of timber preference income." (B) REGULAR TAX DEDUCTION ADJUSTMENTS FOR TIMBER.— 26 use 56. Section 56 is amended by adding at the end thereof the fol- lowing new subsections: "(d) REGULAR TAX DEDUCTION ADJUSTMENT FOR TIMBER.—In the case of a corporation, the regular tax deduction (as determined under Ante, p. 1550. subsection (c)) shall be reduced by an amount equal to the lesser of— "(1) one-third of the amount determined under subsection (c) without regard to this subsection, or "(2) the preference reduction for timber determined under Ante, p. 1551. section 57(a) (9) (C). "(e) TAX CARRYOVER FOR TIMBER.— "(1) I N GENERAL.—In the case of a corporation, if for any tax- able year, including a taxable year beginning before January 1, 1976— "(A) the taxes imposed by this chapter (computed with- out regard to this part and without regard to the tax imposed by section 531) which, under regulations prescribed by the Secretary, are attributable to income from timber, reduced by the sum of the credits allowable under— Post, p. 1643. " (i) section 33 (relating to foreign tax credit), "(ii) section 38 (relating to investment credit), and "(iii) section 40 (relating to expenses of work incen- tive programs), exceed "(B) the items of tax preference (as determined under section 57), then the excess of the taxes described in subparagraph (A) over the items of tax preference shall be a tax carryover to each of the 7 taxable years following such year. The entire amount of the excess shall be carried to the first of such 7 taxable years, and then • to each of the other such taxable years to the extent that such excess is not used to reduce the amount subject to tax under sub- section (a) for a prior taxable year to which such excess may be carried. "(2) LIMITATION.—The amount of any carryover under para- graph (1) which may be deducted in a taxable year shall be limited to— " (A) the excess of— "(i) the amount of timber preference income for the taxable year (as defined in section 57(e)), over "(ii) the amount determined under section 57 (a) (9) (C) for the taxable year, "(B) reduced by the excess of— "(i) the regular tax deduction for the taxable year (as determined under subsection (c) without regard to ' this subsection), over "(ii) the amount determined under subsection (d) for the taxable year." 26 use 57. (C) TIMBER PREFERENCE INCOME DEFINED.—Section 57 is amended by adding at the end thereof the following new subsection:
PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 9 0 STAT. 1553 " ( e ) T I M B E R PREFERENCE I N C O M E DEnNED,—For purposes of t h i s p a r t , t h e term 'timber preference income' means t h e sum of— " (1) the gains referred t o in section 631 (a) and section 631 ( b ) , 26 USC 631. " (2) long-term capital gains on timber, and " ( 3 ) gains on t h e sale of timber included in p a r a g r a p h 1231 (b)(1), multiplied by t h e fraction determined in p a r a g r a p h 5 7 ( a ) ( 9 ) ( B ) . " (d) AMENDMENTS OF SECTION 58.—Section 58 (relating to rules for 26 USC 58. application of p a r t ) is amended— (1) by striking out subsection ( a ) a n d inserting in lieu thereof the following: " ( a ) MARRIED INDIVIDUALS F I L J N G SEPARATE EETTJRNS.—In t h e case of a married individual who files a separate return for the taxable year, section 56 shall be applied by substituting $5,000 for $10,000 each place it appears.", (2) by striking out "$30,000" each place it appears in subsections (b) a n d ( c ) ( 2 ) a n d inserting in lieu thereof "$10,000", a n d (3) by a d d i n g a t the end thereof the following new subsections: " ( h ) REGULATIONS T o INCLUDE T A X B E N E F I T R U L E . — T h e Secretary shall prescribe regulations under which items of t a x preference shall be properly adjusted where the t a x treatment giving rise to such items will not result in the reduction of the taxpayer's tax under this subtitle for a n y taxable years. " ( i ) CORPORATION DEFINED.—Except as provided in subsection ( d ) ( 2 ) , for purposes of this p a r t , t h e term 'corporation' does n o t include an electing small business corporation (as defined in section 1371(b)) or a personal holding company (as defined i n section 542)." (e) CONFORMING A M E N D M E N T . — S u b s e c t i o n ( d ) of section 443 (re- 26 USC 443. lating to adjustment in exclusion for computing minimum t a x for t a x preferences) is amended by striking out "$30,000" a n d inserting in lieu thereof "$10,00O". (f) SECTION 21 N O T T o A P P L Y . — F o r purposes of section 21 of t h e 26 USC 56 note. I n t e r n a l Revenue Code of 1954, t h e amendments made by this section shall not be treated as a change in a r a t e of tax. ( g ) EFFEGTRTS D A T E . — 26 USC 56 note. (1) I N GENERAL.—Except as provided by p a r a g r a p h ( 4 ) , t h e amendments made by this section shall apply to items of t a x pref- erence for taxable years beginning after December 31,1975. (2) T A X CARRYOVER.—Except as provided in p a r a g r a p h (4) and in section 56(e) of t h e I n t e r n a l Revenue Code of 1954, ^»'e, p. 1552. the amount of any t a x carryover under section 56 (c) of such Code ^"^e, p. 1550. from a taxable year beginning before J a n u a r y 1, 1976, shall n o t be allowed as a t a x carryover for any taxable year beginning after December 31,1975. (3) SPECIAL RULE FOR TAXABLE YEAR I 9 7 6 I N T H E CASE OF A COR- PORATION.—Notwithstanding any provision of the Internal Reve- nue Code of 1954 t o t h e contrary, i n t h e case of a corporation 26 USC 1 et seq. which is n o t an electing small business corporation or a personal holding company the t a x imposed by section 56 of such Code for taxable years beginning in 1976, is an amount equal to t h e sum of— ( A ) t h e amount of the t a x which would have been imposed for such taxable year under such section as such section was in effect on t h e d a y before t h e date of t h e enactment of t h e Ante p 1520 T a x Reform Act of 1976, and ( B ) one-half of t h e amount by which t h e amount of t h e t a x which would be imposed for such taxable year under such
90 STAT. 1554 PUBLIC LAW 94-455—OCT. 4, 1976 Ante, p. 1520. section as amended by t h e T a x Reform A c t of 1976 (but for this p a r a g r a p h ) exceeds t h e amount determined under sub- paragraph ( A ) . (4) CERTAIN FINANCIAL I N S T I T U T I O N S . — I n the case of a t a x p a y e r which is a financial institution t o which section 585 or 593 of t h e I n t e r n a l Revenue Code of 1954 applies, t h e amendments made by this section shall apply only t o taxable years beginning after .'" ' December 31, 1977, a n d p a r a g r a p h (2) shall be applied by sub- stituting " J a n u a r y 1, 1978" for " J a n u a r y 1, 1976" a n d by sub- stituting "December 31,1977" for "December 31,1975". SEC. 302. MAXIMUM TAX. (a) I N GENERAL.—Section 1348 (relating t o 50-percent maximum rate on earned income) is amended to read as follows: 26 u s e 1348. "SEC. 1348. 50-PERCENT MAXIMUM RATE ON PERSONAL SERVICE IN- COME. "(a) GENERAL R U L E . — I f for any t a x a b l e y e a r an i n d i v i d u a l h a s personal service taxable income which exceeds t h e amount of taxable income specified in p a r a g r a p h ( 1 ) , t h e t a x imposed by section 1 for 26 u s e 1301. such year shall, unless t h e t a x p a y e r chooses the benefits of p a r t I (relating to income a v e r a g i n g ) , be the sum of— " ( 1 ) the tax imposed by section 1 on the highest amount of tax- able income on which the rate of t a x does not exceed 50 percent, " (2) 50 percent of the amount by which his personal service tax- able income exceeds t h e amount of taxable income specified in p a r a g r a p h (1) of this subsection, and " ( 3 ) t h e excess of t h e t a x computed under section 1 without regard t o this section over the t a x so computed with refei-ence solely to his personal service taxable income. " ( b ) D E F I N I T I O N S . — F o r purposes of this section— " ( 1 ) PERSONAL SERVICE INCOME.— .t. " ( A ) I N GENERAL.—The term 'personal service income' means any income which is earned income within the mean- ing of section 4 0 1 ( c ) ( 2 ) ( C ) or section 911(b) or which is M < • •. . ; an amount received as a pension or annuity. " ( B ) EXCEPTIONS.—The term 'personal service income* does not include any amount— " ( i ) to which section 7 2 ( m ) ( 5 ) , 4 0 2 ( a ) ( 2 ) , 402(e), 4 0 3 ( a ) ( 2 ) , 4 0 8 ( e ) ( 2 ) , 4 0 8 ( e ) ( 3 ) , 4 0 8 ( e ) ( 4 ) , 408(e) ,, . ( 5 ) , 4 0 8 ( f ) , o r 409(c) applies; or pj; " ( i i ) which is includible i n gross income under section 409(b) because of t h e redemption of a bond which was not tendered before the close of the taxable year in which the registered owner attained age 70^4. " ( 2 ) PERSONAL SERVICE TAXABLE I N C O M E . — T h e personal service taxable income of an individual is the excess of— . ,^ " ( A ) the amount which bears the same ratio ( b u t not in * excess of 100 percent) to his taxable income as his personal service net income bears to his adjusted gross income, over " ( B ) the sum of t h e items of t a x preference (as defined in section 57) for the taxable year. F o r purposes of s u b p a r a g r a p h ( A ) , the t e r m 'personal service net income' means personal service income reduced by any deductions allowable under section 62 which are properly allocable to or '^ ' chargeable against such earned income. " ( c ) MARRIED INDIVIDUALS.—This section shall apply to a married individual only if such individual and his spouse make a single return jointly for the taxable year."
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1555 (b) CLERICAL A M E N D M E N T . — T h e table of sections for p a r t V I of subchapter Q of chapter 1 is amended by striking out the item relating to section 1348 and inserting in lieu thereof the following: "Sec. 1348. 50-percent maximum rate on personal service income." (c) CONFORMING A M E N D M E N T S . — S e c t i o n 1304(b) (5) is amended by 26 USC 1304. striking out "earned" a n d inserting i n lieu thereof "personal service". (d) EFFECTIVE D A T E . — T h e amendments made by this section apply 26 USC 1348 to taxable years beginning after December 31,1976. note. TITLE IV—EXTENSIONS OF INDIVIDUAL INCOME TAX REDUCTIONS SEC. 401. EXTENSIONS OF INDIVIDUAL INCOME TAX REDUCTIONS. ( a ) GENERAL T A X CREDIT.— (1) 1-YEAR EXTENSION OF CREDIT.—Sectiou 3 ( b ) of the Revenue Adjustment Act of 1975 is amended by striking out "December 31, 26 USC 42 note. 1976" and inserting in lieu thereof "December 31,1977". (2) T E C H N I C A L AMENDMENTS.— (A) T h e heading and subsection ( a ) of section 42 (relat- ing t o allowance of taxable income credit) a r e amended t o read as follows: "SEC. 42. GENERAL TAX CREDIT. 26 USC 42. " ( a ) ALLOWANCE OF C R E D I T . — I n the case of an individual, t h e r e shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the greater of— " ( 1 ) 2 percent of so much of the taxpayer's taxable income for the taxable year as does not exceed $9,000; o r " ( 2 ) $35 multiplied by each exemption for which the taxpayer is entitled to a deduction for t h e taxable year under subsection (b) or (e) of section 151." ( B ) P a r a g r a p h (1) of section 42(c) (relating to special rule for married individuals filing separate returns) is amended t o read as follows: " ( 1 ) I N GENERAL.—Notwithstanding subscctiou ( a ) , in the case of a married individual who files a separate return for the tax- able year, the amount of the credit allowable under subsection ( a ) for the taxable year shall be equal to either— " ( A ) the amount determined under p a r a g r a p h (1) of sub- section ( a ) ; or " ( B ) if this s u b p a r a g r a p h applies t o the individual for the taxable year, t h e amount determined under p a r a g r a p h (2) of subsection ( a ) . F o r purposes of t h e preceding sentence, p a r a g r a p h (1) of sub- section ( a ) shall be applied by substituting '$4,500' for '$9,000'." (C) Section 6096(b) (relating to designation of income 26 USC 6096. tax payments to Presidential Election Campaign F u n d ) , as in effect on the day before the date of the enactment of the Tax Keduction A c t of 1975, is amended by striking out "and 4 1 " ^«'e, p. 1520. and inserting in lieu thereof "41, and 42". ( D ) T h e table of sections for subpart A of p a r t I V of subchapter A of chapter 1 is amended by striking out t h e item relating to section 42 and inserting in lieu thereof t h e following: "Sec. 42. General tax credit."
90 STAT. 1556 PUBLIC LAW 94-455—OCT. 4, 1 9 7 6 26 u s e 141. (b) STANDARD D E D U C T I O N . — (1) L o w INCOME ALLOWANCE.—Subsection (c) of section 141 (relating to low income allowance) is amended t o read as follows: " ( c ) L o w INCOME A L L O W A N C E . — T h e low income allowance is— " ( 1 ) $2,100 in the case of— " ( A ) a joint return under section 6013, or " ( B ) a surviving spouse (as defined in section 2 ( a ) ) , " (2) $1,700 in t h e case of an individual who is not married a n d who is not a surviving spouse (as so defined), or " (3) $1,050 in the case of a married individual filing a separate return.". (2) PERCENTAGE STANDARD DEDUCTION.—Subsection (b) of sec- tion 141 (relating t o percentage s t a n d a r d deduction) is amended to read as follows: "(b) PERCENTAGE STANDARD D E D U C T I O N . — T h e percentage s t a n d a r d deduction is an amount equal t o 16 percent of adjusted gross income, but not more t h a n — " ( 1 ) $2,800 in t h e case of— " ( A ) a joint return under section 6013, or " ( B ) a surviving spouse (as defined in section 2 ( a ) ) , " ( 2 ) $2,400 in t h e case of an individual who is not married and who is not a surviving spouse (as so defined), or " ( 3 ) $1,400 in the case of a married individual filing a separate return." 26 u s e 6012. (3) F I L I N G REQUIREMENTS.—So m u c h of p a r a g r a p h (1) of sec- tion 6012(a) (relating t o persons required to make returns of income) as precedes s u b p a r a g r a p h ( C ) thereof is amended to read as follows: " ( 1 ) ( A ) E v e r y individual having for the taxable year a gross income of $750 or more, except t h a t a return shall not be i-equired of an individual (other t h a n an individual referred to in section . r 142(b)) — " ( i ) who is n o t married (determined by applying section 143), is not a surviving spouse (as defined in section 2 ( a ) ) , and for t h e taxable vear h a s a gross income of less t h a n $2,450, " (ii) who is a surviving spouse (as so Refined) and for t h e taxable year has a gross income of less than $2,850, or " ( i i i ) who is entitled to make a joint r e t u r n under section 6013 a n d whose gross income, when combined with the gross income of his spouse, is, for t h e taxable year, less t h a n $3,600 but only if such individual a n d his spouse, a t t h e close of the taxable year, h a d t h e same household as their home. Clause (iii) shall not apply if for the taxable year such spouse makes a separate return or any other taxpayer is entitled t o an exemption for such spouse under section 151 ( e ) . " ( B ) T h e amount specified in clause (i) or (ii) of subpara- g r a p h ( A ) shall be increased by $750 i n the case of a n individual i entitled t o an additional personal exemption under section 151 (c) ( 1 ) , and t h e amount specified in clause (iii) of s u b p a r a g r a p h ( A ) shall be increased bv $750 for each additional personal exemption t o which the individual or his spouse is entitled under section 1 5 1 ( c ) ; " . (c) E A R N E D I N C O M E C R E D I T . — (1) E X T E N S I O N OF CREDIT.— ?»*;•=; /
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1557 ( A ) Section 209(b) of t h e T a x Reduction A c t of 1975 is 26USC43note. amended by striking out " J a n u a r y 1, 1977" a n d inserting i n lieu thereof " J a n u a r y 1, 1978". ( B ) Subsections ( a ) a n d ( b ) of section 43 (relating t o 26 USC 43. earned income credit,) are amended to read as follows: "(a) ALLOWANCE o r C R E D I T . — I n t h e case of a n eligible i n d i v i d u a l , there is allowed as a credit against t h e t a x imposed by this chapter for t h e taxable year a n amount equal t o 10 percent of so much of t h e earned income for t h e taxable year as does n o t exceed $4,000. " ( b ) L I M I T A T I O N . — T h e amount of t h e credit allowable t o a tax- p a y e r under subsection ( a ) for a n y taxable year shall be reduced ( b u t n o t below zero) by a n amount equal t o 10 percent of so much of t h e adjusted gross income (or, if greater, the earned income) of the t a x p a y e r for the taxable year as exceeds $4,000." (2) D E F I N I T I O N OF ELIGIBLE INDIVIDUAL.—Subparagraph (A^ of section 43(c) (1) (relating to definition of eligible individual) is amended to read as follows: " ( A ) maintains a household (within t h e meaning of sec- tion 4 4 A ( f ) ( 1 ) ) i n the United States which is the principal Post, p. 1563. place of abode of t h a t individual and— " ( i ) a child of t h a t individual if such child meets t h e requirements of section 151(e) (1) ( B ) (relating to addi- tional exemptions for dependents), or " ( i i ) a child of t h a t individual who is disabled (within t h e meaning of section 7 2 ( m ) ( 7 ) ) a n d with respect t o whom t h a t individual is entitled to claim a deduction under section 1 5 1 ; and", (d) WITHHOLDING AMENDMENTS.— (1) Subsection ( a ) of section 3402 (relating to income t a x 26 USC 3402. collected a t source) is amended to read as follows: "(a) R E Q U I R E M E N T o r W I T H H O L D I N G . — E x c e p t as otherwise p r o - vided i n this section, every employer m a k i n g payment of wages shall deduct a n d witlihold upon such wages a t a x determined i n accordance with tables prescribed by the Secretary. W i t h respect to wages paid p r i o r to J a n u a r y 1, 1978, the tables so prescribed shall be t h e same as the tables prescribed under this section which were in eifect on J a n u a r y 1, 1976. W i t h respect to wages paid after Decem- ber 31,1977, the Secretary shall prescribe new tables which shall be the same as t h e tables prescribed under this subsection which were in effect on J a n u a r y 1, 1975, except t h a t such tables shall be modified to t h e extent necessary to reflect t h e amendments made t o subsections (b) a n d (c) of section 141 by the T a x Reform A c t of 1976. F o r Ante, p. 1556. purposes of applying such taliles, t h e term 'the amount of wages' "The amount of means t h e amount by which t h e wages exceed t h e number of with- wages." holding exemptions claimed, multiplied by t h e amount of one such exemption as shown in the table in subsection ( b ) ( 1 ) . " (2) P a r a g r a p h (6) of section 3402(c) (relating t o wage bracket w i t h h o l d i n g ) , as such p a r a g r a p h was in effect on t h e d a y before t h e date of t h e enactment of t h e T a x Reduction A c t of 1975, is amended by striking out "table 7 contained in sub- 26 USC 1 note, section ( a ) " a n d inserting in lieu thereof " t h e table for a n annual payroll period prescribed p u r s u a n t t o subsection ( a ) " . (3) S u b p a r a g r a p h ( B ) of section 3402(m) (1) (relating t o withholding allowance based on itemized deductions) is amended to read as follows: " ( B ) an amount equal to t h e lesser of ( i ) 16 percent of his estimated wages, or ( i i ) $2,800 ($2,400 i n the case of an individual
90 STAT. 1558 PUBLIC LAW 94-455—OCT. 4 , 1976 who is not married (within the meaning of section 143) and who is n o t a surviving spouse (as defined in section 2 ( a ) ) ) . " 26 u s e 42 note. (e) EFFECTIVE DATES.—The amendments made by subsections ( a ) and (c) shall apply t o taxable years ending after December 31, 1975, and shall cease t o apply to taxable years ending after December 31, 1977. T h e amendments made by subsection ( b ) shall apply to taxable years ending after December 31, 1975. T h e amendments made by subsection ( d ) shall apply to wages paid after September 14, 1976. SEC. 402. REFUNDS OF EARNED INCOME CREDIT DISREGARDED IN THE ADMINISTRATION OF FEDERAL PROGRAMS AND FED- ERALLY ASSISTED PROGRAMS. (a) Subsection ( d ) of section 2 of t h e Revenue Adjustment Act of 26 u s e 43 note. 1975 jg amended by striking out "which begins prior to J u l y 1,1976,". 26 u s e 43 note. (b) Subsection ( g ) of section 2 of such A c t is amended to read as follows: " ( g ) EFFECTIVE DATES.—The amendments made by this section (other t h a n by subsection ( d ) ) apply to taxable years ending after 1^ „ December 31,1975, and before J a n u a r y 1,1978. Subsection ( d ) applies to taxable years ending after December 31,1975." TITLE V—TAX SIMPLIFICATION IN THE INDIVIDUAL INCOME TAX SEC. 501. REVISION OF TAX TABLES FOR INDIVIDUALS. 26 u s e 3. ( a ) I N GENERAL.—Section 3 (relating to optional t a x tables for individuals) is amended to read as follows: "SEC. 3. TAX TABLES FOR INDIVIDUALS HAVING TAXABLE INCOME OF LESS THAN $20,000. "(a) GENERAL R U L E . — I n lieu of the t a x imposed by section 1, there is hereby imposed for each taxable year on t h e taxable income of every individual whose taxable income for such year does not exceed $20,000, a t a x determined under tables, applicable t o such taxable year, which shall be prescribed by the Secretary. I n t h e tables so prescribed, t h e amounts of t a x shall be computed on t h e basis of t h e rates prescribed by section 1. " ( b ) T A X TREATED AS IMPOSED BY SECTION 1.—For purposes of this title, t h e t a x imposed by this section shall be treated as t a x imposed b y section 1." ( b ) CONFORMING A M E N D M E N T S . — 26 u s e 4. (1) Section 4 (relating to rules for optional t a x ) is hereby repealed. 26 u s e 36. (2) Section 36 (relating to credits not allowed t o individuals paying optional t a x or taking standard deduction) is amended— ( A ) by striking out "PAYING OPTIONAL TAX OR" in t h e h e a d i n g ; and ( B ) by striking out "elects to pay the optional t a x imposed by section 3, or if he'* in such section. 26 u s e 144. (3) Subsection ( a ) of section 144 (relating to election of stand- ard deduction) is amended to read as follows: " ( a ) METHOD OF E L E C T I O N . — T h e standard deduction shall be allowed if the taxpayer so elects in his return, and the Secretary shall prescribe the manner of signifying such election in the return. . (4) Subsection (c) of section 144 is amended— ( A ) by striking out p a r a g r a p h ( 2 ) ; ( B ) by inserting "or" at the end of p a r a g r a p h (1) ; a n d
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1559 (C) by redesignating p a r a g r a p h (3) as p a r a g r a p h ( 2 ) . (5) Subsection ( d ) of section 144 is hereby repealed. 26 USC 144. (6) Section 1211(b)(3) (relating to computation of taxable 26 USC 1211. income for purposes of limitation on capital losses) is amended by striking out the last sentence thereof. (7) Section 1304(b) (relating to certain provisions inapplicable 26 USC 1304. for income averaging) is amended by striking out p a r a g r a p h (1) a n d by redesignating p a r a g r a p h s ( 2 ) , ( 3 ) , ( 4 ) , a n d (5) as para- g r a p h s ( 1 ) , ( 2 ) , ( 3 ) , and ( 4 ) , respectively. (8) Section 6014(a) (relating to tax not computed by taxpayer) 26 USC 6014. is amended— ( A ) by striking out in the first sentence "entitled to elect to p a y t h e tax imposed by section 3 " and inserting in lieu ^'»'«' P- 1558. thereof "entitled to take t h e standard deduction provided by section 141 (other than an individual described in section 141(e))"; and ( B ) by striking out in the second sentence " p a y the t a x imposed by section 3"' and inserting in lieu thereof "take the standard deduction*'. (9) P a r a g r a p h (5) of section 6014(b) is amended t o read as follows: " ( 5 ) t o cases where t h e taxpayer does not elect the standard deduction or where t h e taxpayer elects the standard deduction but is subject to the provisions of section 141(e) (relating t o limitations in case of certain dependent t a x p a y e r s ) . " (c) CLERICAL A M E N D M E N T S . — (1) T h e table of sections for p a r t I of subchapter A of chap- ter 1 is amended by striking out the items relating to sections 3 and 4 and inserting in lieu thereof: "Sec. 3. Tax tables for individuals having taxable income of less than $20,000." (2) T h e table of sections for p a r t I V of subchapter A of chapter 1 is amended by striking out "paying optional t a x o r " in the item relating to section 36. SEC. 502. DEDUCTION FOR ALIMONY ALLOWED IN DETERMINING ADJUSTED GROSS INCOME. (a) I N GENERAL.—Section 62 (defining adjusted gross income) is 26 USC 62. amended by inserting after p a r a g r a p h (12) the following new paragraph: "(13) ALI3IONY.—The deduction allowed by section 215." (b) CONFORMING A M E N D M E N T . — T h e first sentence of s u b p a r a g r a p h ( A ) of section 3402(m) (2) (relating to withholding allowances based 26 USC 3402. on itemized deductions) is amended by striking out "under section 62" and inserting in lieu thereof "under section 62 (other than p a r a g r a p h (13) thereof)". (c) EFFECTIVE DATE.—The amendments made by this section shall 26 USC 62 note, apply t o taxable years beginning after December 31,1976. SEC. 503. REVISION OF RETIREMENT INCOME CREDIT. (a) I N GENERAL.—Section 37 (relating to retirement income) is 26 USC 37, amended to read as follows: "SEC. 37. CREDIT FOR THE ELDERLY. " ( a ) GENERAL R U L E . — I n t h e case of an individual who has attained age €5 before t h e close of t h e taxable year, there shall be allowed as a credit against t h e t a x imposed by this chapter for the taxable year an amount equal t o 15 percent of such individual's section 37 amount for such taxable year.
9 0 STAT. 1560 PUBLIC LAW 94-455—OCT. 4, 1 9 7 6 " ( b ) SECTION 37 A M O U N T . — F o r purposes of subsection ( a ) — " ( 1 ) I N GENERAL.—An individual's section 37 amount for the taxable year is t h e applicable initial amount determined under p a r a g r a p h ( 2 ) , reduced as provided i n p a r a g r a p h (3) a n d in subsection ( c ) . " ( 2 ) I N I T I A L AMOUNT.—The i n i t i a l a m o u n t is— " ^ A ) $2,500 in t h e case of a single individual, " ( B ) $2,500 in the case of a joint return where only one spouse is eligible for t h e credit under subsection ( a ) , " ( C ) $3,750 in the case of a joint return where both spouses are eligible for the credit under subsection ( a ) , or " ( D ) $1,875 in the case of a married individual filing a separate return. " ( 3 ) REDUCTION.—The reduction under this p a r a g r a p h is an amount equal t o t h e sum of t h e amounts received by t h e indi- vidual (or, in t h e case of a joint return, by either spouse) as a pension or annuity— 42 u s e 401. " ( A ) under title I I of the Social Security Ac t , 45 u s e 215— " ( B ) under t h e Railroad Retirement A c t of 1935 or 1937, 228 notes, 228a. or " ( C ) otherwise excluded from gross income. No reduction shall be made under this p a r a g r a p h for any amount 26 u s e 72. excluded from gross income under section 72 (relating to annui- ties), 101 (relating to life insurance proceeds), 104 (relating to compensation for injuries or sickness), 105 (relating to amounts Post, p. 1926. received under accident a n d health p l a n s ) , 120 (relating t o amounts received under qualified g r o u p legal services p l a n s ) , 402 (relating t o taxability of beneficiary of employees' t r u s t ) , 403 (relating to taxation of employee annuities), or 405 (relating t o qualified bond purchase p l a n s ) . "(c) LIMITATIONS.— " ( 1 ) ADJUSTED GROSS INCOME L I M I T A T I O N . — I f the adjusted gross income of the taxpayer exceeds— " ( A ) $7,500 in the case of a single individual, " ( B ) $10,000 in t h e case of a joint return, or " ( C ) $5,000 in the case of a married individual filing a separate return, the section 37 amount shall be reduced by one-half of the excess of t h e adjusted gross income over $7,500, $10,000, or $5,000, as the case may be. " ( 2 ) L I M I T A T I O N BASED ON AMOUNT o r TAX.—The a m o u n t of the credit allowed by this section for the taxable year shall n o t 26 u s e 1. exceed t h e amount of the t a x imposed by this chapter for such taxable year. "(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— " ( 1 ) MARRIED COUPLE MUST FILE J O I N T R E T U R N . — E x c e p t in t h e case of a husband a n d wife who live a p a r t a t all times during the taxable year, if the taxpayer is married a t the close of t h e tax- able year, the credit provided by this section shall be allowed only if t h e taxpayer a n d his spouse file a joint r e t u r n for t h e taxable year. " (2) MARITAL STATUS.—Marital status shall be determined under section 143. "Joint return. " ( 3 ) J O I N T RETURN.—The term 'joint r e t u r n ' means t h e joint r e t u r n of a husband a n d wife made under section 6013.
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1561 " (e) ELECTION OF PRIOR L A W W I T H RESPECT TO P U B L I C RETIREMENT SYSTEM I N C O M E . — " ( 1 ) I N GENERAL.—In t h e case of a taxpayer who h a s not ' attained age 65 before t h e close of the taxable year (other t h a n a married individual whose spouse h a s attained age 65 before the close of t h e taxable y e a r ) , his credit (if any) under this section shall be determined under this subsection. "(2) O N E SPOUSE AGE 65 OR OVER.—In t h e case of a m a r r i e d individual who has not attained age 65 before the close of the tax- able year b u t whose spouse has attained such age, this p a r a g r a p h shall apply for the taxable year only if both spouses elect, at such time and in such manner as the Secretary shall by regulations pre- scribe, t o have this p a r a g r a p h apply. I f this p a r a g r a p h applies for the taxable year, the credit (if any) of each spouse under this section shall be determined under this subsection. "(3) COMPUTATION OF CREDIT.—In t h e case of an i n d i v i d u a l whose credit under this section for the taxable year is determined v under this subsection, there shall be allowed as a credit against the t a x imposed by this chapter for t h e taxable year an amount equal to 15 percent of t h e amount received by such individual as retirement income (as defined in p a r a g r a p h (4) and as limited by p a r a g r a p h ( 5 ) ) . " (4) RETIREMENT INCOME.—For purposes of this subsection, the "Retirement term 'retirement income' means— income. " ( A ) in the case of an individual who has attained age 65 before the close of the taxable year, income from— " ( i ) pensions and annuities (including, in t h e case of an individual w h o is, o r h a s been, an employee within the meaning of section 401 (c) ( 1 ) , distributions by a trust 26 USC 401. described in section 401(a) which is exempt from t a x under section 501 ( a ) ) , " ( i i ) interest, " ( i i i ) rents, . •: • • " ( i v ) dividends, " ( v ) bonds described in section 405(b) (1) which are received under a qualified bond purchase plan described in section 405(a) or i n a distribution from a t r u s t described i n section 401(a) which is exempt from t a x under section 5 0 1 ( a ) , or retirement bonds described in section 409, and " ( v i ) a n individual retirement account described i n section 408(a) o r a n individual retirement annuity described in section 408 ( b ) , or " ( B ) in the case of an individual who has not attained age 65 before the close of the taxable year, income from pensions and annuities under a public retirement system (as defined in p a r a g r a p h (8) ( A ) ) , to t h e extent included in gross income without reference t o this subsection, b u t only to t h e extent such income does not represent compensation for personal services rendered d u r i n g t h e taxable year. " (5) L I M I T A T I O N ON RETIREMENT I N C O M E . — F o r purposes of t h i s subsection, the amount of retirement income shall n o t exceed $2,500 less— " ( A ) t h e reduction provided by subsection ( b ) ( 3 ) , a n d " ( B ) i n t h e case of a n y individual who h a s n o t attained age 72 before t h e close of t h e taxable year—
90 STAT. 1562 PUBLIC LAW 94-455—OCT. 4, 1976 ';i:; " ( i ) if such individual has not attained age 62 before the close of t h e taxable year, any amount of earned income (as defined in p a r a g r a p h ( 8 ) ( B ) ) in excess of $900 received by such individual in the taxable year, or " ( i i ) if such individual has attained age 62 before t h e close of the taxable year, the sum of one-half the amount of earned income received by such individual in the tax- able year in excess of $1,200 b u t not in excess of $1,700, and t h e amount of earned income so received in excess of $1,700. " ( 6 ) LiMiTATLOx IX CASE OF MAKiuED INDIVIDUALS.—In the case of a joint return, p a r a g r a p h (5) shall be applied by substituting '$3,750' for '$2,500'. The $3,750 provided by the preceding sentence shall be divided between t h e spouses in such amounts as may be agreed on by them, except that not more t h a n $2,500 m a y be assigned to either spouse. " (7) L I M I T A T I O N I X T H E CASE OF SEPARATE RETURNS.—In the case of a married individual filing a separate return, p a r a g r a p h (5) shall be applied by substituting '$1,875' for '$2,500'. " ( 8 ) D E F I N I T I O N S . — F o r purposes of this subsection— " ( A ) P U B L I C RETIREMENT SYSTJ^I DEFINED.—The t e r m ' p u b - lic retirement system' means a pension, annuity, retirement, ' or similar fund o r system established by the United States, a State, a possession of the United States, any political sub- division of any of the foregoing, or the District of Columbia. " ( B ) EARNED INCOME.—The term 'earned income' has t h e meaning assigned to such term by section 9 1 1 ( b ) , except that such term does not include any amount received a s a pension or annuity. "(f) NONRESIDENT A L I E N INELIGIBLE FOR CREDIT.—No credit shall be allowed under this section to any nonresident alien." (b) T E C H N I C A L A M E N D M E N T S . — 26 u s e 904. (1) Section 904 (relating t o limitation on foreign t a x c r e d i t ) , as amended by this Act, is amended by redesignating subsection (g) as subsection ( h ) , a n d by inserting after subsection (f) the following new subsection: " ( g ) COORDINATION "WITH CREDIT FOR THE E L D E R L Y . — I n t h e case of an individual, for purposes of subsection ( a ) the tax against which the credit is taken is such tax reduced by the amount of the credit (if any) Ante, p. 1559. for the taxable year allowable under section 37 (relating to credit for the elderly)." 26 u s e 6014. (2) Section 6014(a) (relating to t a x not computed by tax- payer) is amended by striking out the last sentence thereof. (3) Section 6014(b) is amended— (xV) by striking out p a r a g r a p h ( 4 ) , ( B ) by redesignating p a r a g r a p h (5) (as amended by sec- ' tion 501(b) ( 9 ) ) as p a r a g r a p h ( 4 ) , and (C) by inserting "or" at the end of p a r a g r a p h ( 3 ) . 26 u s e 41, 42, (4) Sections 41(b) ( 2 ) , 42(b) ( 2 ) , 46(a) (3) ( C ) , a n d 5 0 A ( a ) '*^' ^0^- (3) (C) are each amended by striking o u t "retirement income" and inserting in lieu thereof "credit for the elderly". (5) The table of sections for subpart A of p a r t I V of subchapter A of chapter 1 is amended by striking out the item relating to section 37 and inserting in lieu thereof the following: "Sec. 37. Credit for the elderly."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1563 SEC. 504. CREDIT FOR CHILD CARE EXPENSES. ( a ) ALLOWANCES OF CREDIT FOR C H I L D CARE E X P E N S E S . — (1) I N GENERAL.—Subpart A of p a r t I V of subchapter A of chapter 1 (relating t o credits allowable) is amended by inserting before section 45 the following new section: "SEC. 44A. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERV- 26 USC 44A. ICES NECESSARY FOR GAINFUL EMPLOYMENT. "(a) ALLOWANCE OF C R E D I T . — I n t h e case of a n i n d i v i d u a l who maintains a household which includes as a member one or more quali- fying individuals (as defined in subsection ( c ) ( 1 ) ) , there shall be allowed as a credit against t h e t a x imposed b y this chapter for the taxable year an amount equal to 20 percent of the employment-related expenses (as defined in subsection ( c ) ( 2 ) ) paid by such individual d u r i n g the taxable year. " ( b ) APPLICATION W I T H O T H E R CREDITS.—The credit allowed by subsection ( a ) shall n o t exceed the amount of the t a x imposed b y this chapter for the taxable year reduced b y the sum of the credits allow- able under— " (1) section 33 (relating to foreign tax c r e d i t ) , Post, P- 1643. " (2) section 37 (relating to credit for the elderly), ^"^^' P- l^^^- " ( 3 ) section 38 (relating t o investment in certain depreciable property), " ( 4 ) section 40 (relating to expenses of work incentive programs), " ( 5 ) section 41 (relating to contributions to candidates for public office), " ( 6 ) section 42 (relating to general t a x c r e d i t ) , a n d " ( 7 ) section 44 (relating to purchase of new principal residence). " ( c ) D E F I N I T I O N S OF QUALIFYING INDIVIDUAL AND E M P L O Y M E N T - EELATED E X P E N S E S . — F o r purposes of t h i s section— " ( 1 ) QUALIFYING INDIVIDUAL.—The t e r m 'qualifying individ- ual' means— " ( A ) a dependent of the taxpayer who is under the age of 15 a n d with respect to whom the taxpayer is entitled to a deduction under section 151 ( e ) , " ( B ) a dependent of t h e taxpayer w h o is physically or mentally incapable of caring for himself, or " ( C ) the spouse of tlie taxpayer, if he is physically or mentally incapable of caring for himself. " ( 2 ) EMPLOYMENT-RELATED EXPENSES.— " ( A ) I N GENERAL.—The term 'employment-related ex- penses' means amounts paid for the following expenses, b u t only if such expenses a r e incurred to enable the taxpayer t o be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the t a x p a y e r : " (i) expenses for household services, and " ( i i ) expenses for the care of a qualifying individual. " ( B ) EXCEPTION.—Employment-related expenses described in s u b p a r a g r a p h ( A ) which are incurred for services outside the taxpayer's household shall be taken into account only if incurred for t h e care of a qualifying individual described in p a r a g r a p h (1) ( A ) . " ( d ) DOLLAR L I M I T ON A M O U N T CREDITABLE.—The a m o u n t of t h e employment-related expenses incurred d u r i n g any taxable year which ^ m a y be taken into account u n d e r subsection ( a ) shall n o t exceed—
90 STAT. 1564 PUBLIC LAW 94-455—OCT. 4, 1976 " ( 1 ) $2,000 if there is 1 qualifying individual with respect to the taxpayer for such taxable year, or " ( 2 ) $4,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year. "(e) EARNED I N C O M E L I M I T A T I O N . — " ( 1 ) I N GENERAL.—Except as otherwise provided in this sub- section, t h e amount of t h e employment-related expenses incurred d u r i n g any taxable year which may be taken into account under subsection (a) shall not exceed— " ( A ) in the case of an individual who is not married at the close of such year, such individual's earned income for such year, or " ( B ) in the case of an individual who is married at the close of such year, the lesser of such individual's earned income or the earned income of his spouse for such year. "(2) SPECIAL RULE FOR SPOUSE WHO IS A STUDENT OR INCAPABLE OF CARING FOR HIMSELF.—In t h e case of a spouse who is a student or a qualifying individual described in subsection ( c ) ( 1 ) ( C ) , for purposes of p a r a g r a p h ( 1 ) , such spouse shall be deemed for each m o n t h d u r i n g which such spouse is a full-time student at an ed- ucational institution, or is such a qualifying individual, to be gainfully employed and to have earned income of not less than— " ( A ) $166 if subsection ( d ) ( 1 ) applies for t h e taxable year, or " ( B ) $333 if subsection ( d ) ( 2 ) applies for t h e taxable year. I n t h e case of any husband and wife, this p a r a g r a p h shall apply with respect to only one spouse for any one month. " ( f ) SPECIAL R U L E S . — F o r purposes of this section— " (1) MAINTAINING HOUSEHOLD.—An individual shall be treated as maintaining a household for any period only if over half the cost of maintaining t h e household for such period is furnished by such individual (or, if such individual is married d u r i n g such period, is furnished by such individual and his spouse). "(2) MARRIED COUPLES MUST FILE J O I N T RETURN.—If the tax- payer is married at the close of the taxable year, the credit shall be allowed under subsection (a) only if the t a x p a y e r and his spouse file a joint return for the taxable year. " ( 3 ) MARITAL STATUS.—An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married. "(4) CERTAIN MARRIED INDIVIDUALS LIVING APART.—If— " ( A ) an individual who is married and who files a sep- arate return— " ( i ) maintains as his home a household which con- stitutes for more t h a n one-half of the taxable year t h e principal place of abode of a qualifying individual, and " ( i i ) furnishes over half of the cost of maintaining such household d u r i n g the taxable year, and " ( B ) d u r i n g t h e last 6 months of such taxable year such individual's spouse is not a member of such household, such individual shall not be considered as married. "(5) SPECIAL DEPENDENCY TEST I N CASE OF DIVORCED PARENTS, ETC. If 26 u s e 151. " ( A ) a child (as defined in section 1 5 1 ( e ) ( 3 ) ) who is under t h e age of 15 or who is physically or mentally incapable
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1565 of caring for himself receives over half of his support d u r i n g the calendar year from his parents who a r e divorced or legally separated under a decree of divorce or separate main- tenance or who a r e separated under a written separation agreement, a n d " ( B ) such child is i n t h e custody of one or both of his p a r e n t s for more t h a n one-half of t h e calendar year, in t h e case of a n y taxable year beginning i n such calendar year such child shall be treated as being a qualifying individual described in subparagraph ( A ) or ( B ) of subsection (c) ( 1 ) , as t h e case m a y be, with respect to t h a t p a r e n t who has custody for a longer period d u r i n g such calendar year t h a n t h e other parent, and shall not be treated as being a qualifying individual with respect t o such other parent. "(6) P A Y M E X T S TO RELATED INDIVIDUALS.— " ( A ) I N GENERAL.—Except as provided in s u b p a r a g r a p h ( B ) , no credit shall be allowed under subsection ( a ) for a n y amount paid by t h e t a x p a y e r t o an individual bearing a rela- tionship to the taxpayer described in p a r a g r a p h s (1) t h r o u g h (8) of section 152(a) (relating to definition of dependent) or to a dependent described in p a r a g r a p h (9) of such section. " ( B ) E X C E P T I O N . — S u b p a r a g r a p h ( A ) shall not apply t o any amount p a i d by t h e t a x p a y e r to an individual with respect t o whom, for the taxable year of the t a x p a y e r in which the service is performed, neither the t a x p a y e r n o r his spouse is entitled to a deduction under section 151(e) (relating to deduction for personal exemptions for dependents), but only if the service with respect to which such amount is paid con- stitutes employment within the meaning of section 3121(b). " ( 7 ) STUDENT.—The t e r m 'student' means an individual who 'Student." d u r i n g each of 5 calendar months d u r i n g t h e taxable year is a full-time student a t an educational organization. " ( 8 ) EDUCATIONAL ORGANIZATION.—The t e r m 'educational orga- "Educational nization' means an educational organization described in section organization." 170(b)(1) (A) (ii). ' (g) EEGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section." (2) CLERICAL A M E N D M E N T . — T h e table of sections for s u b p a r t A of p a r t I V of subchapter A of chapter 1 is amended by insert- i n g before t h e item relating to section 45 t h e following new i t e m : "Sec. 44A. Expenses for household and dependent care services neces- sary for gainful emploj'ment." ( b ) E E P E A L OF DEDUCTION FOR C H I L D CARE E X P E N S E S . — (1) I N GENERAL.—Section 214 (relating to expenses for house- 26 u s e 214. hold and dependent care services necessary for gainful employ- ment) is hereby repealed. (2) CLERICAL AMENDMENT.—The table of sections for p a r t V I I of subchapter B of chapter 1 is amended by striking out t h e item relating t o section 214. (c) T E C H N I C A L A M E N D M E N T S . — (1) Section 213(f) (relating to exclusion of amounts allowed 26 u s e 213. for care of certain dependents) is amended by striking o u t " a deduction under section 214" a n d inserting in lieu thereof "a credit under section 44A". Ante, p. 1563. (2) Section 6096(b) (defining income t a x liability) is amended 26 u s e 6096. by striking out " a n d 44" a n d inserting i n lieu thereof " , 44, a n d 44A". ' ' 89-194 O—78—pt. 2 jT
90 STAT. 1566 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 3402. (3) P a r a g r a p h (4) of section 3402(m) (relating to withholding allowances based on itemized deductions) is amended by striking out " a n d " a t the end of s u b p a r a g r a p h ( A ) , by striking out the period at the end of s u b p a r a g r a p h ( B ) and inserting in lieu thereof ", and", and by adding at the end thereof the following new s u b p a r a g r a p h : " ( C ) may take into account tax credits to which employees are entitled." SEC. 505. CHANGES IN EXCLUSIONS FOR SICK PAY AND CERTAIN MILITARY, ETC, DISABILITY PENSIONS; CERTAIN DIS- ABILITY INCOME. 26 u s e 105. (a) S I C K PAY.—Subsection ( d ) of section 105 (relating to amounts excluded from gross income under wage continuation plans) is amended to read as follows: "(d) CERTAIN DISABILITY P A Y M E N T S . — " (1) I N GENEKAL.—In the case of a taxpayer who— " ( A ) h a s not attained age 65 before the close of the tax- able year, and "(13) retired on disability and, when he retired, was per- manently and totally disabled, gross income does not include amounts referred to in subsection (a) if such amounts constitute wages or payuients in lieu of wages for a period d u r i n g which the employee is absent from work on account of permanent and total disability. " ( 2 ) LIMITATION.—This subsection shall n o t a p p l y to t h e extent t h a t the amounts referred to in p a r a g r a p h (1) exceed a weekly rate of $100. " ( 3 ) PHASEOUT OVER $I5,000.—If the adjusted gross income of the t a x p a y e r for t h e taxable year (determined without regard to this subsection) exceeds $15,000, the amount which b u t for this p a r a g r a p h would be excluded u n d e r this subsection for the tax- able year shall be reduced by an amount equal t o t h e excess of the adjusted gross income (as so determined) over $15,000. " (4) MARRIED COUPLE MUST FILE J O I N T RETURN.—Except in the case of a husband and wife who live a p a r t at all times d u r i n g the taxable year, if the t a x p a y e r is married a t the close of the taxable year, the exclusion provided by this subsection shall be allowed only if the t a x p a y e r and his spouse file a joint return for the taxable year. F o r purposes of this subsection, marital status shall be determined under section 143. "(5) P E R M A N E N T AND TOTAL DISAIULTTY DEFINED.—For pur- poses of this subsection, an individual is permanently and totally disabled if he is unable to engage in any substantial gainful ' activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less t h a n 12 months. A n individual shall not be considered to be permanently and totally disabled unless he fui'nishos proof of the existence thereof in such form and manner, and at such times, as the Secretary may require. " (6) J O I N T RETURN.—For purposes of this subsection, t h e term 'joint retuiTi' means the joint return of a husband and wife made u n d e r section 6013. " (7) COORDINATION W^ITII SECTION 72.—In the case of an individ- ual described in s u b p a r a g r a p h s ( A ) and ( B ) of p a r a g r a p h (1), for purposes of section 72 the annuity starting date shall not
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1567 be deemed t o occur before t h e beginning of t h e taxable year in which t h e t a x p a y e r attains age 65, or before t h e beginning of a n earlier taxable year for which t h e t a x p a y e r makes an irrevocable election n o t t o seek t h e benefits of this' subsection for such y e a r a n d all subsequent years." ( b ) CERTAIN M I L I T A R T , E T C . , DISABILITY P E N S I O N S . — S e c t i o n 104 26 USC 104. (relating t o compensation for injuries or sickness) is amended by redesignating subsection ( b ) as subsection (c) a n d by inserting after subsection ( a ) t h e following new subsection: " ( b ) TERMINATION o r APPLICATION OF SUBSECTION ( a ) ( 4 ) I N CER- TAIN C A S E S . — " ( 1 ) I N GENERAL.—Subsection ( a ) ( 4 ) shall not apply in t h e case of a n y individual who is n o t described i n p a r a g r a p h ( 2 ) . "(2) INDIVIDUALS TO WHOM SUBSECTION ( a ) ( 4 ) CONTINUES TO APPLY,—An individual is described in this p a r a g r a p h if— •.< . " ( A ) on or before September 24, 1975, he was entitled t o " ' receive a n y amount described in subsection ( a ) ( 4 ) , " ( B ) on September 24, 1975, he was a member of a n y organization (or reserve component thereof) referred t o in subsection ( a ) (4) or u n d e r a binding written commitment to become such a member, " ( C ) he receives a n amount described in subsection ( a ) (4) by reason of a combat-related injury, or " ( I ) ) on application therefor, he would be entitled to receive disability compensation from the Veterans' Adminis- tration. "(3) SPECIAL RULES FOR COMBAT-RELATED I N J U R I E S . — F o r p u r - "Combat-related poses of this subsection, t h e t e r m 'combat-related injury' means '^^J^T- personal injury or sickness— " ( A ) which is incurred— " (^i) as a direct result of armed conflict, " ( i i ) while engaged i n extrahazardous service, or " (iii) under conditions sinnilating w a r ; or " ( B ) which is caused by an instrumentality of war. I n t h e case of a n individual who is n o t described i n s u b p a r a g r a p h ( A ) o r ( B ) of p a r a g r a p h ( 2 ) , except as provided in p a r a g r a p h (4), the only amounts taken into account u n d e r subsection ( a ) (4) shall be t h e amounts which he receives by reason of a combat- related injury. "(4) A M O U N T EXCLUDED TO BE NOT LESS THAN VETERANS' DIS- ABILITY COMPENSATION.—In t h e case of a n y individual described in p a r a g r a p h ( 2 ) , t h e amounts excludable u n d e r subsection ( a ) (4) for any period with respect t o any individual shall n o t be less t h a n the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from t h e Veterans' Administration." (c) SPECIAL E U L E FOR E X I S T I N G P E R M A N E N T AND TOTAL DISABILITY ^ ^ ^ ^ ^ ^^^ CASES.—In t h e case of a n y individual who— °°*®" (1) retired before J a n u a r y 1, 1976, (2) either retired on disability or was entitled t o retire on dis- ability, a n d (3) on J a n u a r y 1, 1976, was permanently a n d totally disabled (within t h e meaning of section 105(d) (5) of t h e I n t e r n a l Reve- nue Code of 1954), ^'»^«' P- l^^^-
90 STAT. 1568 PUBLIC LAW 94-455—OCT. 4, 1976 such, individual shall be deemed to have met the requirements of sec- Ante, p. 1566. tion 105(d) (1) ( B ) of such Code (as amended by subsection (a) of this section). 26 u s e 105 (d) SPECIAL R U L E FOR COORDINATION W I T H SECTION 72.—In the note. case of an individual who— (1) retired on disability before J a n u a r y 1,1976, and (2) on December 31, 1975, was entitled to exclude any amount with respect to such retirement disability from gross income under section 105(d) of the I n t e r n a l Revenue Code of 1954, for purposes of section 72 the annuity starting date shall not be deemed to occur before the beginning of the taxable year in which t h e t a x p a y e r attains age 65, or before the beginning of an earlier taxable year for which the taxpayer makes an irrevocable election not to seek the bene- fits of this subsection for such year and all subsequent years, (e) CERTAIN DISABILITY INCOME.— 26 u s e 104 (1) I K GENERAL.—Section 104(a) (relating to compensation for injuries or sickness) is amended— ( A ) by striking out " a n d " at the end of p a r a g r a p h ( 3 ) ; ( B ) by striking out the period at the end of p a r a g r a p h (4) a n d inserting in lieu thereof a semicolon and the word " a n d " ; and (C) by a d d i n g a t the end thereof the following new paragraph: " ( 5 ) amounts received by an individual as disability income attributable to injuries incurred as a direct result of a violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such individual was an employee of the United States engaged in the performance of his official duties outside the U n i t e d States." 26 u s e 104 (2) EFFECTIVE DATE.—The amendments made by this subsection note. shall apply to taxable years beginning after December 31,1976. SEC. 506. MOVING EXPENSES. (a) DECREASE I N MILEAGE T E S T F R O M 50 M I L E S TO 35 M I L E S . — P a r a - 26 u s e 217. g r a p h (1) of section 217(c) (relating to conditions for allowance of deduction for moving expenses) is amended by striking out "50 miles'* each place it appears and inserting in lieu thereof "35 miles". (b) INCREASE I N DOLLAR A M O U N T S . — (1) CERTAIN EXPENSES OF TRAVELING, MEALS, AND LODGING AFTER OBTAINING EMPLOYMENT.—The first senteucc of s u b p a r a g r a p h ( A ) of section 2 1 7 ( b ) ( 3 ) (relating to dollar limits) is amended by striking out "$1,000" and inserting in lieu thereof "$1,500". (2) AGGREGATE DOLLAR L I M I T . — T h e second sentence of subpara- g r a p h ( A ) of section 217(b) (3) is amended by striking out "$2,500" and inserting in lieu thereof "$3,000". (3) SEPARATE RETURNS.—The second sentence of subparagraph ( B ) of section 217(b) (3) (relating to dollar limits in the case of husband and wife) is amended to read as follows: " I n the case of a husband and wife filing separate returns, s u b p a r a g r a p h ( A ) shall be applied by substituting '$750' for '$1,500', and by sub- stituting '$1,500' for '$3,000'." (c) R U L E S FOR MEMBERS OF T H E ARMED FORCES OF T H E U N I T E D STATES.—Section 217 is amended by redesignating subsection ( g ) as subsection ( h ) and by inserting after subsection (f) t h e following new subsection: "(g) R U L E S FOR MEMBERS OF T H E ARMED FORCES OF T H E U N I T E D STATES.—In the case of a member of the A r m e d Forces of the U n i t e d
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1569 States on active duty who moves pursuant to a military order a n d incident to a permanent change of station— " ( 1 ) t h e limitations under subsection (c) shall not a p p l y ; " ( 2 ) any moving and storage expenses which are furnished in kind (or for which reimbursement or an allowance is provided, but only to the extent of the expenses paid o r incurred) to such member, his spouse, or his dependents, shall not be includible in gross income, a n d n o reporting with respect t o such expenses shall be required by the Secretary of Defense or the Secretary of T r a n s - portation, as the case m a y b e ; and " ( 3 ) if moving and storage expenses are furnished in kind (or if reimbursement or an allowance for such expenses is provided) to such member's spouse and his dependents with regard t o moving to a location other t h a n t h e one t o which such member moves (or from a location other t h a n t h e one from which such member moves), this section shall apply with respect to t h e moving expenses of his spouse and dependents— " ( A ) as if his spouse commenced work as an employee at a new principal place of work at such location; " ( B ) for purposes of subsection (b) ( 3 ) , as if such place of work was within t h e same general location as the member's new principal place of work, a n d " ( C ) without regard to the limitations under subsection (c)." ( d ) EFFECTIVE D A T E . — T h e amendments m a d e by subsections ( a ) 26 USC 217 note. and (b) shall apply to taxable years beginning after December 31, 1976. SEC. 507. TAX REVISION STUDY. 26 USC 8022 note. (a) STUDY.—The J o i n t Committee on Taxation shall make a full and complete study and investigation with respect to simplifying and indexing t h e t a x laws of the United States. Such study a n d investiga- tion shall include a consideration of whether the rates of t a x can be reduced by repealing a n y or all t a x deductions, exemptions, or credits. (b) REPORT.—Before J u l y 1, 1977, the J o i n t Committee on Taxa- Report to tion shall submit t o the Committee on Finance of the Senate and to congressional the Committee on W a y s and Means of the House of Representatives committees. a report of its study and investigation together with its recommenda- tions, including recommendations for legislation. SEC. 508. EFFECTIVE DATE. 26 USC 3 note. E x c e p t a s other-wise provided, the amendments made by this title shall a p p l y to taxable years beginning after December 31,1975. ^ TITLE VI—BUSINESS RELATED INDIVIDUAL INCOME TAX PROVISIONS SEC. 601. DEDUCTIONS FOR EXPENSES ATTRIBUTABLE TO BUSINESS USE OF HOMES, RENTAL OF VACATION HOMES, ETC. ( a ) NoNDEDucABILITY OF CERTAIN E X P E N S E S . — P a r t I X of subchap- ter B of chapter 1 (relating to items not deductible) is amended by a d d i n g a t the end thereof the following new section: "SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION 26 USC 280A. WITH BUSINESS USE OF HOME, RENTAL OF VACATION HOMES, ETC. " ( a ) GENERAL R U L E . — E x c e p t as otherwise provided in this section, in t h e case of a taxpayer who is a n individual o r an electing small
90 STAT. 1570 PUBLIC LAW 94-455—OCT. 4, 1976 business corporation, no deduction otherwise allowable u n d e r t h i s chapter shall be allowed with respect to the use of a dwelling unit which is used by the t a x p a y e r d u r i n g the taxable year as a residence. "(b) EXCEPTION FOR INTEREST, TAXES, CASUALTY LOSSES, E T C . — S u b - section ( a ) shall not apply to any deduction allowable to the tax- payer without regard to its connection with his trade or business (or with his income-producing activity). " ( c ) EXCEPTIONS FOR CERTAIN B U S I N E S S OR R E N T A L U S E ; L I M I T A - TION ON DEDUCTIONS FOR S U C H U S E . — " ( 1 ) CERTAIN BUSINESS USE.—Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis— " ( A ) as the taxpayer's principal place of business, " ( B ) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his t r a d e or business, or " ( C ) in the case of a separate structure which is not attached to the dwelling unit, in connection with the tax- payer's trade or business. I n the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. " ( 2 ) CERTAIN STORAGE USE.—Subsection ( a ) shall not a p p l y t o any item to the extent such item is allocable to space within t h e dwelling unit which is used on a regular basis as a storage u n i t for the inventory of the taxpayer held for use in the taxpayer's t r a d e or business of selling products at retail or wholesale, b u t only if t h e dwelling unit is the sole fixed location of such t r a d e or business. " ( 3 ) RENTAL USE.—Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection ( e ) ) . " (4) LIMITATION ON DEDUCTIONS.—In the case of a use described in p a r a g r a p h (1) or ( 2 ) , and in the case of a use described in p a r a g r a p h (3) where the dwelling unit is used by the taxpayer d u r i n g the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attrib- uted to such use shall not exceed the excess of— " ( A ) the gross income derived from such use for the tax- able year, over " ( B ) the deductions allocable to such use which are allow- able under this chapter for the taxable year whether or not such unit (or portion thereof) was so used. "(d) U S E AS RESIDENCE.— " ( 1 ) I N GENERAL.—For purposes of this section, a t a x p a y e r uses a dwelling imit d u r i n g the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of— " ( A ) 14 days, or " ( B ) 10 percent of the number of days d u r i n g such year for which such Tinit is rented at a fair rental. F o r purposes of s u b p a r a g r a p h ( B ) , a unit shall not be treated as rented at a fair rental for any day for which it is used for per- sonal purposes. " ( 2 ) PERSONAL USE OF UNIT.—For purposes of this section, the t a x p a y e r shall be deemed to have used a dwelling u n i t for per-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1571 sonal purposes for a day if, for any p a r t of such day, the u n i t is used— " ( A ) for personal purposes by the t a x p a y e r or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c) ( 4 ) ) of the tax- 26 USC 267. payer or such other person; " ( B ) by any individual who uses the unit under a n a r r a n g e m e n t which enables the t a x p a y e r to use some other dwelling u n i t (whether or not a rental is charged for the use of such other u n i t ) ; or " ( C ) by any individual (other t h a n an employee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental. T h e Secretary shall prescribe regulations with respect to the cir- Regulations, cumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this p a r a g r a p h . "(e) E X P E N S E S ATTRIBUTABLE TO R E N T A L . — " ( 1 ) I N GENERAL.—In any case where a taxpayer who is an : ,is individual or an electing small business corporation uses a dw^ell- i n g unit for personal purposes on any d a y d u r i n g the taxable year (whether or not he is treated under this section as using such u n i t as a residence), the amount deductible u n d e r this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days d u r i n g each year t h a t the unit (or portion thereof) is rented a t a fair rental bears to the total number of days d u r i n g such year t h a t the unit (or portion thereof) is used. "(2) EXCEPTION FOR DEDUCTIONS OTHERWISE ALLOWABLE.—This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented. "(f) D E F I N I T I O N S AND SPECIAL R U L E S . — " ( 1 ) DWELLING UNIT DEFINED.—For purposes of this section— " ( A ) I N GENERAL.—The term 'dwelling unit' includes a house, apartment, condominium, mobile home, boat, or simi- l a r property, and all structures or other p r o p e r t y appur- tenant to such dwelling unit. " ( B ) EXCEPTION.—The term 'dwelling unit' does not include t h a t portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. " (2) PERSONAL USE BY ELECTING SMALL BUSINESS CORPORATION.— I n the case of an electing small business corporation, subpara- g r a p h s (A) and ( B ) of subsection (d) (2) shall be applied by substituting 'any shareholder of the electing small business corpo- ration' for 'the t a x p a y e r ' each place it appears. "(3) COORDINATION WITH SECTION IS3.—If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year— " ( A ) section 183 (relating to activities not engaged in for profit) shall not a p p l y to such unit (or portion thereof) for such year, but " ( B ) such year shall be taken into account as a taxable year for purposes of a p p l y i n g subsection ( d ) of section 183 (relating to 5-year p r e s u m p t i o n ) .
9 0 STAT. 1572 PUBLIC LAW 94-455—OCT. 4 , 1976 "(g) SPECIAL R U L E FOR CERTAIN R E N T A L U S E . — N o t w i t h s t a n d i n g any other provision of this section or section 183, if a dwelling u n i t is used d u r i n g t h e taxable year by t h e taxpayer as a residence and such dwelling unit is actually rented for less t h a n 15 days d u r i n g t h e tax- able year, then— " ( 1 ) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and " ( 2 ) t h e income derived from such use for t h e taxable year shall not be included in the gross income of such taxpayer u n d e r section 6 1 . " (b) CLERICAL A M E N D M E N T . — T h e table of sections for such p a r t I X is amended by adding at the end thereof the following new item: "SEC. 2S0A. Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc." 26 u s e 280A (c) EFFECTIVE D A T E . — T h e amendments made by this section shall note. apply to taxable years beginning after December 31, 1975. SEC. 602. DEDUCTIONS FOR ATTENDING FOREIGN CONVENTIONS. 26 u s e 274. ( a ) NONDEDUCTIBILITY OF CERTAIN EXPENSES.—Section 274 (relat- ing t o disallowance of certain entertainment, etc., expenses) is amended b y redesignating subsection ( h ) as subsection (i) a n d by inserting after subsection (g) t h e following new subsection: "(h) FOREIGN CONVENTIONS.— " ( 1 ) DEDUCTIONS W I T H RESPECT TO NOT MORE THAN 2 FOREIGN CONVENTIONS PER YEAR ALLOWED.—If any individual a t t e n d s more t h a n 2 foreign conventions d u r i n g his taxable year— " ( A ) he shall select not more t h a n 2 of such conventions to be taken into account for purposes of this subsection, and " ( B ) no deduction allocable t o his attendance at any for- eign convention d u r i n g such taxable year (other t h a n a foreign convention selected under s u b p a r a g r a p h ( A ) ) shall be allowed under section 162 or 212. "(2) DEDUCTIBLE TRANSPORTATION COST CANNOT EXCEED COST OF COACH OR ECONOMY AIR FARE.—In the case of any foreign conven- tion, no deduction for t h e expenses of transportation outside t h e U n i t e d States to a n d from t h e site of such convention shall be allowed under section 162 or 212 in an amount which exceeds the lowest coach or economy rate a t the time of travel charged by a commercial airline for transportation t o and from such site d u r i n g the calendar month in which such convention begins. I f there is no such coach or economy rate, t h e preceding sentence shall be applied by substituting 'first class' for 'coach or economy'. " ( 3 ) TRANSPORTATION COSTS DEDUCTIBLE I N FULL ONLY I F AT LEAST ONE-HALF OF T H E DAYS ARE DEVOTED TO BUSINESS RELATED ACTIVITIES.—In t h e case of any foreign convention, a deduction for the full expenses of transportation (determined after t h e applica- tion of p a r a g r a p h ( 2 ) ) t o and from t h e site of such convention shall be allow^ed only if more t h a n one-half of the total days of t h e t r i p , excluding the days of transportation t o a n d from t h e site of such convention, are devoted t o business related activities. I f less t h a n one-half of t h e total days of the t r i p , excluding t h e days of transportation to and from t h e site of the convention, are devoted to business related activities, no deduction for t h e expenses of transportation shall be allowed which exceeds t h e percentage of the days of t h e t r i p devoted to business related activities.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1573 "(4) DEDUCTIONS FOR SUBSISTENCE EXPENSES NOT ALLOWED UNLESS THE INDIVIDUAL ATTENDS TWO-THIRDS OF BUSINESS ACTIVI- TIES.—In t h e case of a n y foreign convention, no deduction for subsistence expenses shall be allowed except as follows: " ( A ) a deduction for a full d a y of subsistence expenses while a t t h e convention shall be allowed if there are at least 6 hours of scheduled business activities d u r i n g such d a y a n d the individual attending the convention has attended a t least two-thirds of these activities, and " ( B ) a deduction for one-half day of subsistence expenses ^ while a t t h e convention shall be allowed if there are at least 3 hours of scheduled business activities during such day a n d t h e individual attending the convention has attended a t least two-thirds of these activities. Notwithstanding subparagraphs ( A ) and ( B ) , a deduction for subsistence expenses for all of the days or half days, as t h e case m a y be, of t h e convention shall be allowed if t h e individual attending t h e convention h a s attended at least two-thirds of t h e scheduled business activities, and each such full day consists of a t least 6 hours of scheduled business activities a n d each such half day consists of a t least 3 hours of scheduled business activities. "(5) DEDUCTIBLE SUBSISTENCE COSTS CANNOT EXCEED PER DIEM RATE FOR UNITED STATES CIVIL SERVANTS.—In the casc of a n y for- eign convention, no deduction for subsistence expenses while a t t h e convention or traveling to or fI'om such convention shall be allowed a t a rate in excess of the dollar per diem rate for the site of the convention which has been established under section 5702(a) of title 5 of the United States Code and which is in effect for t h e calendar month in which t h e convention begins. "(6) D E F I N I T I O N S AND SPECIAL RULES.—For purposes of t h i s subsection— "(A) FOREIGN CONVENTION DEFINED.—The term 'foreign convention' means a n y convention, seminar, or similar meet- i n g held outside t h e United States, its possessions, a n d t h e T r u s t T e r r i t o r y of the Pacific. "(B) SUBSISTENCE EXPENSES DEFINED.—The term 'subsist- ence expenses' means lodging, meals, a n d other necessary expenses for t h e personal sustenance a n d comfort of t h e traveler. Such term includes tips a n d taxi a n d other local transportation expenses. " ( C ) ALLOCATION OF EXPENSES I N CERTAIN CASES.—In a n y case where t h e transportation expenses or t h e subsistence expenses are not separately stated, or where there is reason t o believe t h a t the stated charge for transportation expenses or subsistence expenses or both does not properly reflect t h e amounts properly allocable to such purposes, all amounts paid for transportation expenses a n d subsistence expenses shall be treated as having been paid solely for subsistence expenses. "(D) SUBSECTION TO APPLY TO EMPLOYER AS WELL AS TO TRAVELER.—This subscctiou shall apply to deductions other- 26 USC 162, wise allowable under section 162 or 212 to any person, whether 212. or not such person is the individual attending the foreign con- vention. F o r purposes of t h e preceding sentence such person shall be treated, with respect to each individual, as h a v i n g selected t h e same 2 foreign conventions as were selected by such individual.
90 STAT. 1574 PUBLIC LAW 94-455—OCT. 4, 1976 " ( 7 ) REPORTING REQUIREMENTS.—No deduction shall be allowed under section 162 or 212 for transportation or subsistence expenses allocable to attendance at a foreign convention unless t h e tax- payer claiming t h e deduction attaches to t h e return of t a x on which the deduction is claimed— " ( A ) a written statement signed b y the individual attend- ing the convention w^hich includes— " ( i ) information with respect t o the total days of t h e t r i p , excluding t h e days of transportation t o a n d from the site of such convention, a n d the number of hours of each d a y of the t r i p which such individual devoted t o scheduled business activities, " ( i i ) a p r o g r a m of the scheduled business activities of the convention, and " ( i i i ) such other information as m a y be required i n regulations prescribed by the Secretary; a n d " ( B ) a written statement signed by an officer of the organi- zation or group sponsoring t h e convention which includes— " (i) a schedule of the business activities of each day of the convention, " ( i i ) the number of hours which the individual attend- ing t h e convention attended such scheduled business activities, and " ( i i i ) such other information as may be required in regulations prescribed by the Secretary. 26 u s e 274 (b) EFFECTIVE D A T E . — T h e amendments made by this section shall note. apply to conventions begining after December 31,1976. SEC. 603. CHANGE IN TAX TREATMENT OF QUALIFIED STOCK OPTIONS. 26 u s e 422. ( a ) I N GENERAL.—Section 422(b) (defining qualified stock option) is amended by inserting "and before May 21, 1976 (or, if it meets the requirements of subsection ( c ) ( 7 ) , granted to an individual after May 20,1976)," after "section 424(c) (3) ( A ) ) , " . (b) CERTAIN O P T I O N S GRANTED A F T E R M A Y 20,1976.—Section 422 (c) (relating to special rules) is amended by adding at the end thereof t h e following new p a r a g r a p h : " ( 7 ) CERTAIN OPTIONS GRANTED AFTER MAY 20, 197c.—For p u r - poses of subsection ( b ) , an option granted after M a y 20, 1976, meets the requirements of this p a r a g r a p h — " ( A ) if such option is granted to an individual p u r s u a n t to a written plan adopted before May 21,1976, or " ( B ) if such option is a new option substituted, in a transac- tion t o which section 425(a) applies, for an old option which was granted before May 21, 1976, or which met t h e require- ments of s u b p a r a g r a p h ( A ) . A n option described in the preceding sentence shall be treated as ceasing to meet t h e requirements of this p a r a g r a p h if it is n o t exercised before May 21,1981." (c) BESTRICTED STOCK O P T I O N S M U S T B E EXERCISED BEFORE M A Y 2 1 , 26 u s e 424. 1981.—Section 424(c) (3) (relating to special rules for restricted stock options) is amended by adding at t h e end thereof t h e following new sentence: " A n option described in t h e preceding sentence shall be treated as ceasing to meet t h e requirements of this p a r a g r a p h if it is not exercised before May 21,1981." 26 u s e 422 (d) EFFECTIVE D A T E . — T h e amendments made b y this section shall note. apply to taxable years ending after December 31,1975.
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1575 SEC. 604. STATE LEGISLATORS' TRAVEL EXPENSES AWAY FROM HOME. (a) I N GENERAL.—For purposes of section 162(a) of the I n t e r n a l 26 USC 162 Revenue Code of 1954, i n the case of any individual who was a State "o**'- legislator at any time d u r i n g any taxable year beginning before J a n u - a r y 1, 1976, a n d who elects the application of this section, for a n y period d u r i n g such a taxable year in which he was a State legislator— (1) t h e place of residence of such individual within the legis- lative district which he represented shall be considered his home, and (2) he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual d u r i n g the taxable year by the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for p e r diem while away from home but serving in the United States. ( b ) LEGISLATIVE D A Y S . — F o r purposes of subsection ( a ) , a legisla- tive d a y during any taxable year for a n y individual shall be any day d u r i n g such year on which (1) t h e legislature was in session (including a n y d a y in which the legislature was not in session for a period of 4 consecutive days o r less), o r (2) the legislature was not i n session b u t t h e physical presence of the individual was formally recorded a t a meeting of a committee of such legislature. (c) LIMITATION.—The amount taken into account as living expenses attributable to a trade or business as a State legislator for a n y tax- able year under an election made under this section shall not exceed the amount claimed for such purpose under a return (or amended return) filed before May 21,1976. (d) M A K I N G AND E F F E C T OF E L E C T I O N . — A n election u n d e r this Regulations, section shall be made a t such time and in such manner as the Secretary of the Treasury or his delegate shall by regulations prescribe. A n y such election shall apply to all taxable years beginning before J a n u - ary 1,1976, for which the period for assessing or collecting a deficiency has not expired before the date of t h e enactment of this Act. SEC. 605. DEDUCTION FOR GUARANTEES OF BUSINESS BAD DEBTS TO GUARANTORS NOT INVOLVED IN BUSINESS. ( a ) REPEAL OF SECTION 166(f) .—Section 166 ( r e l a t i n g to bad debts) 26 USC 166. is amended by striking out subsection (f) and by redesignating sub- sections ( g ) and ( h ) as subsections (f) a n d ( g ) , respectively. (b) CONFORMING A M E N D M E N T . — P a r a g r a p h (1) of section 81 (relat- 26 USC 81. ing t o certain increases in suspense accounts) is amended by strik- ing o u t "section 1 6 6 ( g ) " in t h e text a n d inserting in lieu thereof "section 166(f)". (c) EFFECTIVE DATE..—The amendments made by this section shall 26 USC 166 apply t o guarantees made after December 31, 1975, in taxable years °o*^- beginning after such date, / TITLE VII—ACCUMULATION TRUSTS SEC. 701. ACCUMULATION TRUSTS. ( a ) REVISION o r METHOD o r T A X I N G ACCUMULATION DISTRIBUTION FROM TRUSTS.— (1) Section 667 (relating to denial of refund t o t r u s t s ; author- 26 USC 667. ization of credit t o beneficiaries) is amended to read as follows:
90 STAT. 1576 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 667. "SEC. 667. TREATMENT OF AMOUNTS DEEMED DISTRIBUTED BY TRUST IN PRECEDING YEARS. " ( a ) GENERAL, R U L E . — T h e total of the amounts which a r e treated under section 666 as havinjr been distributed by a trust in a preceding taxable year shall be included in t h e income of a beneficiary of t h e trust when paid, credited, or required t o be distributed to the extent t h a t such total would have been included in t h e income of such bene- ficiary under section 662(a) (2) (and, with respect to any tax-exempt interest t o which section 103 applies, under section 662(b)) if such total had been paid to such beneficiary on the last day of such preced- ing taxable year. T h e t a x imposed by this subtitle on a beneficiary for a taxable year in which any such amount is included in his income shall be determined only as provided in this section a n d shall consist of the sum of— " ( 1 ) a partial t a x computed on the taxable income reduced by an amount equal to t h e total of such amounts, a t the rate a n d in the manner as if this section h a d not been enacted, a n d " ( 2 ) a partial t a x determined as provided in subsection ( b ) of this section. "(b) T A X ON DiSTKiBUTiON.— " ( 1 ) I N GENERAL.—The partial t a x imposed by subsection ( a ) (2) shall be determined— " ( A ) by determining the number of preceding taxable years of t h e trust on t h e last d a y of which a n amount is deemed under section 666(a) to have been distributed, " ( B ) by t a k i n g from the 5 taxable years immediately pre- ceding the year of the accumulation distribution the 1 taxable year for which the beneficiary's taxable income was the highest and the 1 taxable year for which his taxable income was t h e lowest, " ( C ) by adding to the beneficiary's taxable income for each of t h e 3 taxable years remaining after the application of sub- p a r a g r a p h ( B ) an amount determined by dividing t h e amount deemed distributed under section 666 a n d required to be included in income under subsection ( a ) by the number of preceding taxable years determined under subparagraph (A), and " ( D ) by determining t h e average increase in t a x for t h e 3 taxable years referred to in s u b p a r a g r a p h ( C ) resulting from the application of such subparagraph. T h e partial t a x imposed by subsection ( a ) (2) shall be the excess (if a n y ) of the average increase in t a x determined under subpar- a g r a p h ( D ) , multiplied by t h e number of preceding taxable years determined under subparagraph ( A ) , over the amount of taxes deemed distributed to the beneficiary under sections 666(b) and ( c ) . " ( 2 ) TREATMENT o r LOSS YEARS.—For purposes of paragraph ( 1 ) , t h e taxable income of the beneficiary for any taxable year shall be deemed not to be less than zero. "(3) CERTAIN PRECEDING TAXABLE YEARS NOT TAKEN INTO ACCOUNT.—For purposes of p a r a g r a p h ( 1 ) , if t h e amount of t h e undistributed net income deemed distributed in any preceding tax- able year of t h e trust is less t h a n 25 percent of the amount of the accumulation distribution divided by the number of preceding taxable years to which t h e accumulation distribution is allocated under section 6 6 6 ( a ) , t h e number of preceding taxable years of
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1577 the t r u s t with respect t o which an amount is deonied distributed to a beneficiary under section 666(a) shall be determined without regard t o such year. " ( 4 ) E F F E C T OF OTHER ACCUMULATION DISTRIBUTIONS.—In com- p u t i n g t h e p a r t i a l t a x under p a r a g r a p h (1) for any beneficiary, t h e income of such beneficiary for each of his prior taxable years shall include amounts previously deemed distributed to such beneficiary in such year under section 666 as a result of prior accu- mulation distributions (whether from t h e same or another t r u s t ) . "(5) M U L T I P L E DISTRIBUTIONS I N T H E SAME TAXABLE YEAR.— I n t h e case of accumulation distributions made from more t h a n one t r u s t which a r e includible in t h e income of a beneficiary in the same taxable year, t h e distributions shall be deemed to have been made consecutively in whichever order the beneficiary shall determine. "(c) SPECIAL R U L E FOR M U L T I P L E T R U S T S . — " ( 1 ) I N GENERAL.—If, in t h e same p r i o r taxable year of t h e beneficiary in which any p a r t of t h e accumulation distribution from a t r u s t (hereinafter in this p a r a g r a p h referred to as ' t h i r d t r u s t ' ) is deemed under section 666(a) to have been distributed t o such beneficiary, some p a r t of prior distributions by each of 2 or more other trusts is deemed under section 666(a) to have been distributed t o such beneficiary, then subsections ( b ) a n d (c) of section 666 shall not apply with respect to such p a r t of the accu- mulation distribution from such t h i r d trust. " ( 2 ) ACCUMULATION DISTRIBUTIONS FRoar TRUST NOT TAKEN INTO ACCOUNT UNLESS THEY EQUAL OR EXCEED $1,000.—For purposes of p a r a g r a p h ( 1 ) , an accumulation distribution from a trust to a beneficiary shall be taken into account only if such distribution, when added t o a n y p r i o r accumulation distributions from such t r u s t which a r e deemed under section 666(a) to have been dis- t r i b u t e d to such beneficiary for t h e same p r i o r taxable y e a r of the beneficiary, equals or exceeds $1,000." (2) Section 666 (relating to accumulation distribution alio- 26 USC 666. cated t o preceding years) is amended by adding at the end thereof the following new subsection: " ( e ) D E N I A L o r R E F U N D TO TRUSTS AND BENEFICIARIES.—No refund or credit shall be allowed to a t r u s t or a beneficiary of such t r u s t for any preceding taxable year by reason of a distribution deemed to have been made by such trust in such year under this section." (3) Section 668 (relating to treatment of amounts deemed 26 USC 668. distributed in preceding years) is hereby repealed. (b) INCOME ACCUMUI-4TED BEFORE C H I L D AT'TAINS A G E OF 21 YEARS N O T T O B E S U B J E C T TO T H E THROWBACK RULE.—Subsection (b) of section 665 (defining accumulation distribution) is amended by adding 26 USC 665. a t t h e end thereof the following new sentence: " F o r purposes of sec- tion 667 (other t h a n subsection (c) thereof, relating to multiple ^nte, p. 1575. t r u s t s ) , the amounts specified in p a r a g r a p h (2) of section 661(a) shall not include amounts properly paid, credited, or required to be distributed to a beneficiary from a trust (other t h a n a foreign trust) as income accumulated before t h e birth of such beneficiary or before such beneficiary attains t h e age of 2 1 . " (c) No ACCUMULATION DISTRIBUTION W H E R E DISTRIBUTIONS D o N O T EXCEED ACCOUNTING INCOME.—Section 665 (b) (defining accumulation distribution), as amended by subsection ( b ) , is amended by a d d i n g a t the end thereof t h e following new sentence: " I f the amounts properly paid, credited, or required to be distributed by t h e trust for t h e taxable
90 STAT. 1578 PUBLIC LAW 94-455—OCT. 4, 1976 year do not exceed the income of the trust for such year, there shall be n o accumulation distribution for such year." (d) R E P E A L OF SPECIAL CAPITAL G A I N T H R O W B A C K . — 26 u s e 669. (1) Section 669 (relating to treatment of capital gain deemed distributed in preceding years) is hereby repealed. 26 u s e 665. (2) P a r a g r a p h (1) of section 665(e) (defining preceding tax- able year) is amended— ( A ) by striking out s u b p a r a g r a p h ( C ) , ( B ) by inserting " o r " a t the end of subparagraph ( A ) , and ( C ) by striking o u t " , or" at the end of subparagraph ( B ) and inserting in lieu thereof " ; and". (3) Section 665 (definitions applicable to subpart D ) is amended by striking out subsections (f) and ( g ) . (e) SPECIAL R U L E FOR G A I N ON PROPERTY TRANSFERRED TO T R U S T AT L E S S T H A N F A I R M A R K E T V A L U E . — (1) I n GENERAL.—Subpart A of p a r t I of subchapter J of chapter 1 (relating to general rules for taxation of estates and trusts) is amended by adding at the end thereof the following new section: 26 u s e 644. "SEC. 644. SPECIAL RULE FOR GAIN ON PROPERTY TRANSFERRED TO TRUST AT LESS THAN FAIR MARKET VALUE. "(a) IMPOSITION OF T A X . — " ( 1 ) I N GENERAL.—If— " ( A ) a t r u s t (or another trust to which the property is distributed) sells or exchanges property at a gain not more t h a n 2 years after the date of the initial transfer of the prop- erty in trust by the transferor, and " ( B ) the fair market value of such property at the time of t h e initial transfer in trust by t h e transferor exceeds the adjusted basis of such property immediately after such transfer, there is hereby imposed a tax determined in accordance with para- g r a p h (2) on the includible gain realized 021 such sale or exchange. " (2) A M O U N T OF TAX.—The amount of the tax imposed by para- g r a p h (1) on any includible gain realized on the sale or exchange of any property shall be equal to the sum of— " ( A ) the excess of— " ( i ) the tax which would have been imposed under this chapter for the taxable year of the transferor in which the sale or exchange of such property occurs h a d the amount of the includible gain realized on such sale or exchange, reduced by any deductions properly allocable to such gain, been included in the gross income of the transferor for such taxable year, over " ( i i ) t h e t a x actually imposed under this chapter for such taxable year on the transferor, plus " ( B ) if such sale or exchange occurs in a taxable year of t h e transferor which begins after the beginning of t h e taxable year of the trust in which such sale or exchange occurs, an amount equal to the amount determined under sub- p a r a g r a p h ( A ) multiplied by the annual rate established under section 6621. "(3) TAXABLE YEAR FOR W H I C H TAX IMPOSED.—The tax imposed by p a r a g r a p h (1) shall be imposed for the taxable year of t h e trust which begins with or within the taxable year of the trans- feror in which t h e sale or exchange occurs.
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1579 " (4) T A X TO BE I N ADDITION TO OTHER TAXES.—The t a x imposed by this subsection for any taxable year of t h e t r u s t shall be i n addition to any other tax imposed by this chapter for such taxable year. " ( b ) D E F I N I T I O N OF INCLUDIBLE G A I N . — F o r purposes of t h i s section, the term 'includible gain' means t h e lesser of— " ( 1 ) t h e gain realized by t h e trust on t h e sale or exchange of any property, or " (2) the excess of the fair market value of such property a t t h e time of the initial transfer in trust by t h e transferor over t h e adjusted basis of such property immediately after such transfer. " ( c ) CHARACTER OF INCLUDIBLE G A I N . — F o r purposes of subsection (a)- . . . " ( 1 ) t h e character of t h e includible g a m shall be determined as if t h e property h a d actually been sold or exchanged by t h e transferor, a n d any activities of the trust with respect to t h e sale or exchange of the property shall be deemed to be activities of the transferor, and " (2) the portion of the includible gain subject t o the provisions of section 1245 and section 1250 shall be determined in accordance with regulations prescribed by t h e Secretary. " ( d ) SPECIAL R U L E FOR SHORT S A L E S . — I f the t r u s t sells t h e p r o p - erty referred to in subsection ( a ) in a short sale within the 2-year period referred to in such subsection, such 2-year period shall be extended t o the date of the closing of such short sale. " ( e ) EXCEPTIONS.—Subsection ( a ) shall not apply to property— " ( 1 ) acquired by the trust from a decedent or which passed , to a trust from a decedent (within the meaning of section 1014), or " ( 2 ) acquired by a pooled income fund (as defined in section 6 4 2 ( c ) ( 5 ) ) , or " ( 3 ) acquired by a charitable remainder annuity t r u s t (as defined in section 664(d) (1)) or a charitable remainder unitrust (as defined in sections 664(d) (2) and ( 3 ) ) , or " ( 4 ) if the sale or exchange of the property occurred after the death of the transferor. "(f) SPECIAL R U L E FOR INSTALLMENT SALES.^—If the t r u s t elects to report income under section 453 on any sale or exchange to which sub- section ( a ) applies, under regulations prescribed by t h e Secretary— " ( 1 ) subsection ( a ) shall be applied as if each installment were a separate sale or exchange of proj^erty to which such subsection applies, a n d " ( 2 ) the term 'includible gain' shall not include any portion of "Includible an installment received by the t r u s t after t h e death of t h e gain." transferor." (2) EXCLUSION OF INCLUDIBLE GAIN FROM TAXABLE INCOME.—Sec- tion 641 (relating to imposition of tax) is amended by inserting 26 USC 641. after subsection (b) the following new subsection: " ( c ) EXCLUSION OF INCLUDIBLE G A I N F R O M TAXABLE I N C O M E . — " ( 1 ) GENERAL RULE.—For purposes of this part, t h e taxable income of a trust does not include the amount of any includible gain as defined i n section 644(b) reduced by a n y deductions properly allocable thereto. " ( 2 ) CROSS REFERENCE.—• "For the taxation of any includible gain, see section 644.",
90 STAT. 1580 PUBLIC LAW 94-455—OCT. 4 , 1976 (f) CONFORMING A M E N D M E N T S . — (1) S u b p a r a g r a p h ( B ) of subsection ( a ) ( 2 ) , a n d subpara- 26 u s e 1302. g r a p h ( B ) of subsection ( b ) ( 2 ) , of section 1302 (definition of averageable income; related definitions) are each amended by striking out " 6 6 8 ( a ) " a n d inserting in lieu thereof " 6 6 7 ( a ) " . 26 u s e 6401. (2) Section 6401(b) (relating to excessive credits), as in effect on t h e d a y before the date of the enactment of the T a x Reduction 26 u s e 1 note. A c t of 1975, is amended by striking out " w a g e s ) , " and inserting in lieu thereof "wages) a n d " , a n d by striking out " a n d 667(b) (relatiiig to taxes paid by certain t r u s t s ) " . (3) Section 6401 (b) (relating to excessive credits), as amended by t h e T a x Reduction Act of 1975, is amended by striking out "lubricating o i l ) , " a n d inserting in lieu thereof "lubricating o i l ) , and", a n d by striking out " a n d section 667(b) (relating to taxes paid by certain t r u s t s ) " . ( g ) CLERICAL A M E N D M E N T S . — (1) T h e table of sections for subpart D of p a r t I of subchapter J of chapter 1 is amended by striking out the items relating t o sec- tions 667, 668, a n d 669 a n d inserting in lieu thereof the following: "Sec. 667. Treatment of amounts deemed distributed by trust in pre- ceding years." (2) T h e table of sections for subpart A of p a r t I of subchapter J of chapter 1 is amended by a d d i n g at the end thereof the following new item: "Sec. 644. Special rule for gain on property transferred to trust at less tlian fair market value.". 26 u s e 667 ( h ) EFFECTIVE D A T E S . — T h e a m e n d m e n t s m a d e by subsections ( a ) , ^°^^- ( b ) , ( c ) , ( d ) , and (f) of this section shall apply t o distributions made in taxable years beginning after December 31, 1975. T h e amendments made by subsection (e) of this section shall apply t o transfers in trust made after May 21,1976. TITLE VIII—CAPITAL FORMATION SEC. 801. EXTENSION OF $100,000 LIMITATION ON USED PROPERTY FOR 4 YEARS. 26 u s e 48 note. P a r a g r a p h (2) of section 301 (c) of the T a x Reduction A c t of 1975 is amended by striking out " J a n u a r y 1, 1977" a n d inserting in lieu thereof " J a n u a r y 1, 1981". SEC. 802. EXTENSION OF 10 PERCENT CREDIT FOR 4 YEARS AND FIRST- IN-FIRST-OUT TREATMENT OF INVESTMENT TAX CREDIT. 26 u s e 46. ( a ) I N GENERAL.—Subsection ( a ) of section 46 (relating to deter- mination of amount of investment credit) is amended— (1) by redesignating p a r a g r a p h s (2) t h r o u g h (6) as (3) t h r o u g h ( 7 ) , respectively, a n d (2) by striking out so much of such subsection as precedes para- g r a p h (3) (as redesignated by p a r a g r a p h (1) of this subsection) and inserting in lieu thereof the following: " ( a ) GENERiVL R U L E . — " ( 1 ) FIRST-IN-FIRST-OUT RULE.—The amount of the credit allowed by section 38 for t h e taxable year shall be an amount equal t o the sum of— " ( A ) t h e investment credit carryovers carried t o such tax- able year,
PUBLIC LAW 94-455—OCT. 4, 1976 9 0 STAT. 1581 " ( B ) the amount of the credit determined under p a r a g r a p h (2) for such taxable year, plus " ( C ) t h e investment credit carrybacks carried t o such tax- able year. " ( 2 ) A M O U N T o r CREDIT FOR CURRENT TAXABLE YEAR.— " ( A ) 10 PERCENT CREDIT.—Exccpt as otherwise provided in s u b p a r a g r a p h ( B ) , i n t h e case of a property described in subparagraph ( D ) , t h e amount of the credit determined under this p a r a g r a p h for the taxable year shall be an amount equal to 10 percent of the qualified investment (as determined under subsections (c) a n d ( d ) ) . "(B) ADDITIONAL CREDIT.—In the case of a corporation which elects ( a t such time, in such form, and in such manner as the Secretary prescribes) to have t h e provisions of this s u b p a r a g r a p h apply, the amount of the credit determined under this p a r a g r a p h shall be an amount equal to— " ( i ) 11 percent of the qualified investment (as deter- mined under subsections (c) a n d ( d ) ) , plus " ( i i ) a n additional percent (not in excess of one-half percent) of t h e qualified investment (as determined under such subsections) equal in amount to the amount determined under section 301(e) of t h e T a x Reduction Act of 1975. Post, p. 1587. A n election may not be made to have t h e provisions of this s u b p a r a g r a p h apply unless the corporation meets the require- ments of section 301(d) of the T a x lleduction A c t of 1975. 26USC46note. "(C) 7 PERCENT CREDIT.—In the case of property not described in s u b p a r a g r a p h ( D ) , the amount of credit deter- mined under this p a r a g r a p h for the taxable year shall be a n amount equal to 7 percent of t h e qualified investment (as determined under subsections (c) a n d ( d ) ) . "(D) TRANSITIONAL RULES.—The provisions of subpara- g r a p h s ( A ) a n d ( B ) shall apply only to— " ( i ) property t o which subsection ( d ) does not apply, the construction, reconstruction, or erection of which is completed by t h e taxpayer after J a n u a r y 21, 1975, b u t only to the extent of the basis thereof attributable to the construction, reconstruction, or erection after J a n u - ary 21, 1975, a n d before J a n u a r y 1, 1981, " ( i i ) property to which subsection ( d ) does not apply, ticquired by the taxpayer after J a n u a r y 21, 1975, a n d before J a n u a r y 1, 1981, a n d placed in service by t h e taxpayer before J a n u a r y 1, 1981, a n d " ( i i i ) property to which subsection ( d ) applies, b u t only t o t h e extent of t h e qualified investment (as deter- mined under subsections (c) a n d ( d ) ) with respect t o qualified progress expenditures made after J a n u a r y 21, 1975, a n d before J a n u a r y 1, 1981. F o r purposes of a p p l y i n g clause (ii) of subparagraph ( B ) , the date 'December 31, 1976,' shall be substituted for the date ' J a n u a r y 2 1 , 1975,' each place it appears in this subparagraph." ( b ) CONFORMING A M E N D M E N T S . — (1) P a r a g r a p h s ( 4 ) , ( 5 ) , ( 6 ) , a n d (7) of section 4 6 ( a ) (as 26 USC 46. redesignated by subsection ( a ) ) are each amended b y striking out " p a r a g r a p h ( 2 ) " and inserting in lieu thereof " p a r a g r a p h ( 3 ) " . 89-19^ n—7fl-
90 STAT. 1582 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 46. (2) Subsection (b) of section 46 (relating t o carryback a n d carryover of unused credits) is amended t o read as follows: "(b) CARRYBACK AND CARRYOVER OF U N U S E D CREDITS.— " (1) I N GENERAL.—If the sum of the amount of the investment credit carryovers t o t h e taxable year under subsection (a) (1) ( A ) plus the amount determined under subsection ( a ) ( 1 ) ( B ) for the taxable year exceeds the amount of the limitation imposed by subsection (a) (3) for such taxable year (hereinafter i n t h i s subsection referred to as t h e 'unused credit y e a r ' ) , such excess attributable t o the amount determined under subsection (a) (1) ( B ) shall be— " ( A ) an investment credit carryback to each of the 3 tax- able years preceding the unused credit year, a n d " ( B ) a n investment credit carryover t o each of t h e 7 tax- able years following the unused credit year, and, subject to the limitations imposed by p a r a g r a p h s (2) a n d (3), shall be taken into account under t h e provisions of subsec- tion ( a ) (1) in the manner provided in such subsection. T h e entire amount of the unused credit for an unused credit year shall be carried t o t h e earliest of t h e 10 taxable years to which (by reason of subparagraphs ( A ) a n d ( B ) ) such credit m a y be carried and then to each of the other 9 taxable years to the extent, because of the limitations imposed by p a r a g r a p h s (2) a n d ( 3 ) , such unused credit may not be taken into account under subsec- tion (a) (1) for a prior taxable year t o which such unused credit m a y be carried. I n t h e case of an unused credit for an unused credit year ending before J a n u a r y 1,1971, which is an investment credit carryover to a taxable year beginning after December 31, 1970 (determined without regard to this sentence), this para- g r a p h shall be applied— " ( C ) by substituting '10 taxable years' for '7 taxable years' in s u b p a r a g r a p h ( B ) , a n d by substituting '13 taxable years' for '10 taxable years', a n d '12 taxable years' for '9 taxable years' in t h e preceding sentence, a n d " ( D ) by carrying such an investment credit carryover to a later taxable year (than t h e taxable year to which it would, b u t for this subparagraph, be carried) t o which it m a y be carried if, because of t h e amendments made by section 802 (b) (2) of the T a x Reform Act of 1976, carrying such carry- over t o t h e taxable year t o which i t would, b u t for this subparagraph, be carried would cause a portion of an unused credit from an unused credit year ending after December 31, 1970 to expire. " ( 2 ) L I M I T A T I O N ON CARRYBACKS.—The a m o u n t of the unused credit which may be taken into account under subsection (a) (1) for any preceding taxable year shall not exceed t h e amount by which the limitation imposed by subsection ( a ) (3) for such tax- able year exceeds the sum of— " ( A ) t h e amounts determined under subparagraphs ( A ) and ( B ) of subsection ( a ) (1) for such taxable year, plus " ( B ) the amounts which (by reason of this subsection) are carried back t o such taxable year and are attributable t o tax- able years preceding the unused credit year. " ( 3 ) LIMITATION ON CARRYOVERS.—The amount of tlie unused credit which m a y be taken into account under subsection ( a ) ( 1 ) ( A ) for any succeeding taxable year shall not exceed the
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1583 amount by which the limitation imposed by subsection ( a ) ( 3 ) for such taxable year exceeds the sum of the amounts which, by reason of this subsection, are carried to such taxable year and are attribut- able to taxable years preceding the unused credit year." (3) S u b p a r a g r a p h ( A ) of section 46(c) (3) (relating to public 26 USC 46. utility p r o p e r t y ) is amended by striking out "subsection (a) (1) ( C ) " a n d inserting in lieu thereof "subsection (a) (2) ( C ) " . (4) P a r a g r a p h (1) of section 46(e) (relating to limitations with respect to certain persons) is amended by striking out "sub- section (a) ( 2 ) " and inserting in lieu thereof "subsection (a) ( 3 ) " . (5) T h e first sentence of section 46 (f) (8) (relating to prohibi- tion of immediate flowthrough of investment credit) is amended by inserting after "the T a x Reduction Act of 1975" the following: "and the T a x Reform Act of 1976". (6) Subsection (f) of section 48 (relating to estates and trusts) 26 USC 48. is amended by striking o u t "section 46(a) ( 2 ) " a n d inserting in lieu thereof "section 46(a) ( 3 ) " . (7) Section 301(d) of the T a x Reduction A c t of 1975 is 26 USC 46 note, amended by striking out "section 4 6 ( a ) ( 1 ) ( B ) " each place i t appears a n d inserting in lieu thereof "section 46(a) (2) ( B ) " . (c) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 46 note, apply to taxable years beginning after December 31, 1975. SEC. 803. EMPLOYEE STOCK OWNERSHIP PLANS; STUDY OF EXPANDED STOCK OWNERSHIP. ( a ) A M E N D M E N T OF T H E INTERNAL R E V E N U E CODE o r 1954.—Sec- tion 4 6 ( f ) (relating to limitation in case of certain regulated com- 26 USC 46. panies) is amended by a d d i n g a t t h e end thereof the following new paragraph: "(9) SPECIAL RULE FOR ADDITIONAL CREDIT.—If the taxpayer makes an election under s u b p a r a g r a p h ( B ) of subsection ( a ) ( 2 ) , for a taxable year beginning after December 31, 1975, then, not- withstanding the prior p a r a g r a p h s of this subsection, n o credit shall be allowed by section 38 in excess of the amount which would be allowed without regard to the provisions of subpara- g r a p h ( B ) of subsection (a) (2) if— " ( A ) t h e taxpayer's cost of service for ratemaking pur- poses or in its regulated books of account is reduced by rea- son of any portion of such credit which results from t h e transfer of employer securities or cash to an employee stock ownership plan which meets t h e requirements of section 301(d) of t h e T a x Reduction A c t of 1976; " ( B ) t h e base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of a n y portion of such credit which results from a transfer described in s u b p a r a g r a p h ( A ) to such employee stock ownership p l a n ; or " ( C ) a n y portion of t h e amount of such credit which results from a transfer described in subparagraph ( A ) t o such employee stock ownership plan is treated for ratemaking purposes in a n y way other than as though it h a d been con- tributed by t h e taxpayer's common shareholders." (b) SPECIAL R U L E S . — (1) P a r a g r a p h (4) of section 46(f) is amended— ( A ) by striking out " p a r a g r a p h s (1) a n d ( 2 ) " i n sub- p a r a g r a p h ( A ) a n d inserting in lieu thereof " p a r a g r a p h s (1),(2),and (9)";
90 STAT. 1584 PUBLIC LAW 94-455—OCT. 4, 1976 (B) by striking out "paragraph (1) or (2)" each place it appears in subparagraph (A) and inserting in lieu thereof "paragraph (1), (2),or (9)"; and (C) by striking out "paragraph (2)," in subparagraph (B) (ii) and inserting in lieu thereof "paragraph (2) or the election described in paragraph (9),". 26 use 401. (2) Section 401(a) (relating to qualified pension, etc., plans) is amended by adding after paragraph (20) the following new paragraph: "(21) A trust forming part of an employee stock ownership plan which satisfies the requirements of section 301 (d) of the Tax Reduction Act of 1975 shall not fail to be considered a permanent program merely because employer contributions under the plan are determined solely by reference to the amount of credit which would be allowable under section 46(a) if the employer made the ^ra. transfer described in subsection (d) (6) or (e) (3) of section 301 Post, p. 1587 of the Tax Reduction Act of 1975." 26 use 1504. (3) Section 1504(a) is amended by striking out "dividends." at the end thereof and inserting in lieu thereof "dividends, employer securities wdthin the meaning of section 301(d) (9) (A) of the Tax Reduction Act of 1975, or qualifying employer securi- ties within the meaning of section 4975(e) (8) while such securi-' ties are held under an employee stock ownership plan which meets the requirements of section 301(d) of such Act or section 4975 (e) (7), respectively." 26 use 415. (4) Section 415(e) (5) is amended by striking out "For pur- poses of this subsection," and inserting in lieu thereof "For pur- poses of this section,", (c) PLAN REQUIREMENTS FOR TAXPAYERS ELECTING ADDITIONAL 26 use 46 note. CREDIT.—Section 301(d) of the Tax Reduction Act of 1975 is amended— (1) by adding at the end of paragraph (3) the following sentence: "For purposes of this paragraph, the amount of com- pensation paid to a participant for a year is the amount of such participant's compensation within the meaning of section 415 (c) (3) of such Code for such year.", (2) by striking out paragraph (6) and inserting in lieu thereof the following: "(6) On making a claim for credit, adjustment, or refund under section 38 of the Internal Revenue Code of 1954, the employer states in such claim that it agrees, as a condition of receiving any such credit, adjustment, or refund— " (A) in the case of a taxable year beginning before Janu- ary 1, 1977, to transfer employer securities forthwith to the plan having an aggregate value at the time of the claim of 1 percent of the amount of the qualified investment (as deter- mined under section 46 (c) and (d) of such Code) of the taxpayer for the taxable year, and "(B) in the case of a taxable year beginning after December 31,1976— " (i) to transfer employer securities to the plan having an aggregate value at the time of the claim of 1 percent of the amount of the qualified investment (as determined under section 46 (c) and (d) of such Code) of the employer for the taxable year,
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1585 "(ii) except as provided in clause (iii), to effect the transfer not later than 30 days after the time (including extensions) for filing its income tax return for a taxable year, and "(iii) in the case of an employer whose credit (as determined under section 46(a)(2)(B) of such Code) Ante, p. 1580. for a taxable year beginning after December 31, 1976, exceeds the limitations of paragraph (3) of section 46(a) of such Code— " ( I ) to effect that portion of the transfer allo- cable to investment credit carrybacks of such excess credit at the time required under clause (ii) for the unused credit year (within the meaning of section 46(b) of such Code), and " ( I I ) to effect that portion of the transfer allocable to investment credit carryovers of such excess credit at the time required under clause (ii) for the taxable year to which such portion is carried over. For purposes of meeting the requirements of this paragraph, a transfer of cash shall be treated as a transfer of employer securities if the cash is, under the plan, used to purchase employer securities.", (3) by deleting paragraph (8) and inserting in lieu thereof the following: "(8) (A) Except as provided in subparagraph (B) (iii), if the amount of the credit determined under section 46(a)(2)(B) of the Internal Revenue Code of 1954 is recaptured or redetermined in accordance with the provisions of such Code, the amounts trans- ferred to the plan under this subsection and subsection (e) and allocated under the plan s'hall remain in the plan or in participant accounts, as the case may be, and continue to be allocated in accordance with the plan. " ( B ) If the amount of the credit determined under section 46(a) (2) (B) of the Internal Revenue Code of 1954 is recaptured in accordance with the provisions of such Code— "(i) the employer may reduce the amount required to be transferred to the plan under paragraph (6) of this subsec- tion, or under paragraph (3) of subsection (e), for the cur- rent taxable year or any succeeding taxable years by the portion of the amount so recaptured which is attributable to the contribution to such plan, "(ii) notwithstanding the provisions of paragraph (12), the employer may deduct such portion, subject to the limita- tions of section 404 of such Code (relating to deductions for 26 USC 404. contributions to an employees' trust or plan), or " (iii) if the requirements of subsection (f) (1) are met, the employer may withdraw from the plan an amount not in excess of such portion. "(C) If the amount of the credit claimed by an employer for a prior taxable year under section 38 of the Internal Revenue Code of 1954 is reduced because of a redetermination which becomes final during the taxable year, and the employer transferred arnounts to a plan which were taken into account for purposes of this subsection for that prior taxable year, then—
90 STAT. 1586 PUBLIC LAW 94-455—OCT. 4, 1976 "(i) the employer may reduce the amount it is required to transfer to the plan under paragraph (6) of this subsection, or under paragraph (3) of subsection (e), for the taxable year or any succeeding taxable year by the portion of the amount of such reduction in the credit or increase in tax which is attributable to the contribution to such plan, or "(ii) notwithstanding the provisions of paragraph (12), the employer may deduct such portion subject to the limitations of section 404 of such Code.", (4) by striking out "in control of the employer (within the meaning of section 368 (c) of the Internal Revenue Code of 1954)" in paragraph (9) (A) and inserting in lieu thereof "a member of a controlled group of corporations which includes the employer (within the meaning of section 1563(a) of the Internal Revenue Code of 1954, determined without regard to section 1563(a) (4) and (e) (3) (C) of such Code)", and (5) by adding at the end thereof the following new paragraphs: " (13) (A) As reimbursement for the expense of establishing the plan, the employer may withhold from amounts due the plan for the taxable year for which the plan is established, or the plan may pay, so much of the amounts paid or incurred in connection with the establishment of the plan as does not exceed the sum of 10 percent of the first $100,000 that the employer is required to transfer to the plan for that taxable year under paragraph ^6) (including any amounts transferred under subsection (e) (3)) and 5 percent of any amount in excess of the first $100,000 of such amount. "(B) As reimbursement for the expense of administering the plan, the employer may withhold from amounts due the plan, or the plan may pay, so much of the amounts paid or incurred during the taxable year as expenses of administering the plan as does not / , exceed the smaller of— "(i) the sum of 10 percent of the first $100,000 and 5 per- / cent of any amount in excess of $100,000 of the income from dividends paid to the plan with respect to stock of the employer during the plan year ending with or within the employer's taxable year, or "(ii) $100,000. "(14) The return of a contribution made by an employer to an employee stock ownership plan designed to satisfy the require- ments of this subsection or subsection (e) (or a provision for such a return) does not fail to satisfy the requirements of this subsection, subsection (e), section 401(a) of the Internal Revenue Code of 1954, or section 403(c) (1) of the Employee Retirement 29 use 1103. Income Security Act of 1974 if— "(A) the contribution is conditioned under the plan upon determination by the Secretary of the Treasury that such plan meets the applicable requirements of this subsection, subsection (e), or section 401(a) of such Code, "(B) the application for such a determination is filed with the Secretary not later than 90 days after the date on which the credit under section 38 is allowed, and "(C) the contribution is returned within one year after the date on which the Secretary issues notice to the employer that such plan does not satisfy the requirements of this sub- section, subsection (e), or section 401(a) of such Code."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1587 ( d ) P L A N EEQUIREMENTS FOR TAXPAYERS ELECTING ADDITIONAL O N E - H A L F PERCENT CREDIT.—Section 301 of the T a x Reduction A c t of 1975 (relating to increase in investment credit) is amended by adding 26 USC 46 note, a t the end thereof the following new subsections: " ( e ) P L A N REQUIREMENTS FOR TAXPAYERS ELECTING ADDITIONAL O N E - H A L F PERCENT CREDIT.— " ( 1 ) GENERAL RULE.—For purposes of clause (ii) of section 46 ( a ) ( 2 ) ( B ) of t h e I n t e r n a l Revenue Code of 1954, t h e amount determined under this subsection for a taxable year is an amount equal to t h e sum of t h e matching employee contributions for the taxable year which meet t h e requirements of this subsection. "(2) E L E C T I O N ; BASIC PLAN REQUIREMENTS.—No a m o u n t shall be determined under this subsection for the taxable year unless the corporation elects t o have this subsection apply for t h a t year. A corporation m a y n o t elect to have t h e provisions of this sub- section apply for a taxable year unless t h e corporation meets the requirements of subsection ( d ) a n d t h e requirements of this subsection. " ( 3 ) EMPLOYER CONTRIBUTION.—On m a k i n g a claim for credit, adjustment, or refund under section 38 of t h e I n t e r n a l Revenue Code of 1954, t h e employer shall state in such claim t h a t t h e employer agrees, as a condition of receiving any such credit, adjustment, or refund attributable t o t h e provisions of section 46 (a) (2) ( B ) (ii) of such Code, to transfer at t h e time described in subsection ( d ) ( 6 ) ( B ) employer securities (as defined in subsec- tion ( d ) ( 9 ) ( A ) ) to the plan having an aggregate value a t the time of the transfer of not more t h a n one-half of one percent of the amount of t h e qualified investment (as determined under sub- sections (c) a n d ( d ) of section 46 of such Code) of t h e t a x p a y e r for t h e taxable year. F o r purposes of meeting t h e requirements of this p a r a g r a p h , a transfer of cash shall be treated as a transfer of employer securities if t h e cash is, under t h e plan, used t o pur- chase employer securities. " ( 4 ) REQUIREMENTS RELATING TO MATCHING EMPLOYEE CONTRI- BUTIONS.— " ( A ) A n amount contributed by an employee under a plan described in subsection ( d ) for the taxable year may not be treated as a matching employee contribution for t h a t taxable year under this subsection unless— " ( i ) each employee w h o participates in the plan described in subsection ( d ) is entitled t o make such a contribution, " (ii) t h e contribution is designated by the employee as a contribution intended to be used for matching employer amounts transferred under p a r a g r a p h (3) to a plan which meets the requirements of this subsection, a n d " ( i i i ) t h e contribution is in the form of an amount paid in cash t o t h e employer or plan administrator not later t h a n 24 months after the close of t h e taxable year in which the portion of the credit allowed by section 38 of such Code ( a n d determined under clause (ii) of sec- tion 4 6 ( a ) (2) ( B ) of such Code which t h e contribution is to match) is allowed, a n d is invested forthwith in employer securities (as defined in subsection ( d ) (9) (A)). " ( B ) T h e sum of t h e amounts of matching employee con- tributions taken into account for purposes of this subsection
90 STAT. 1588 PUBLIC LAW 94-455—OCT. 4, 1976 for a n y taxable year m a y n o t exceed t h e value (at t h e time of transfer) of t h e employer securities transferred to the plan in accordance with t h e requirements of p a r a g r a p h (3) for the year for which t h e employee contributions are designated as matching contributions. " ( C ) T h e emploj-er m a y n o t make participation in t h e plan a condition of employment a n d the plan may not require matching employee contributions as a condition of participa- tion in the plan. " ( D ) Employee contributions under t h e plan must meet the requirements of section 401(a) (4) of such Code (relating to contributions). " (5) A plan must provide for allocation of all employer securi- ties transferred to it or purchased by i t under this subsection t o the account of each participant (who was a participant a t a n y time d u r i n g the plan year, whether or not he is a p a r t i c i p a n t a t the close of t h e plan year) as of the close of t h e plan year in a n amount equal to his matching employee contributions for the year. Matching employee contributions a n d amounts so allocated shall be deemed to be allocated under subsection ( d ) ( 3 ) . "(f) RECAPTURE.— " (1) GENERAL RULE.—Amounts transferred to a plan u n d e r sub- Ante, pp. 1584, section (d) (6) or (e) (3) m a y be w i t h d r a w n from t h e plan by 1^^'^- the employer if the plan provides t h a t while subject to recapture— " ( A ) amounts so transferred with respect t o a taxable year are segregated from other plan assets, and " ( B ) separate accounts are maintained for participants on whose behalf amounts so transferred have been allocated for a taxable year. "(2) COORDINATION W I T H OTHER LAW.—NotAvithstanding any other law or rule of law, an amount withdrawn by t h e employer will neither fail to be considered to be nonforfeitable nor fail to be for t h e exclusive benefit of participants or their beneficiaries merely because of t h e withdrawal from t h e plan of— " ( A ) amounts described in p a r a g r a p h ( 1 ) , or " ( B ) employer amounts transferred under*subsection (e) (3) to the plan which are n o t matched by matching employee contributions or which are in excess of t h e limitations of section 415 of such Code, nor will t h e withdrawal of any such amount be considered t o violate t h e provisions of section 4 0 3 ( c ) ( 1 ) of t h e Employee 29 u s e 1103. Eetirement Income Security Act of 1974." (e) CLERICAL A M E N D M E N T . — (1) T h e heading of section 301 ( d ) of t h e T a x Reduction Act of 26 u s e 46 note. 1975 is amended by striking out " 1 1 - P E R C E N T " and inserting in lieu thereof "ADDITIONAL". (2) Section 301(d) of the T a x Reduction A c t of 1975 is amended by— ( A ) striking out " A corporation" in p a r a g r a p h (1) a n d inserting in lieu thereof " E x c e p t as expressly provided in subsections (e) and ( f ) , a corporation", ( B ) inserting "or subsection (e) ( 3 ) " in p a r a g r a p h (7) ( A ) immediately after " ( 6 ) " , (C) striking out "this subsection" in p a r a g r a p h (10) a n d substituting in lieu thereof "this subsection and subsections (e) and ( f ) " , a n d
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1589 ( D ) striking out "this subsection" each time i t appears in p a r a g r a p h (11) a n d substituting in lieu thereof "this sub- section o r subsection (e) o r ( f ) " . ( f ) LIMITATIONS ON CONTRIBUTIONS.— (1) SPECIAL LIMITATION FOR EMPLOYEE STOCK OWNERSHIP PLANS.—Section 415(c) (relating t o limitation for defined con- 26 USC 4l5. tribution plans) is amended by adding a t the end thereof the fol- lowing new p a r a g r a p h : " ( 6 ) SPECIAL LIMITATION FOR EMPLOYEE STOCK OWNERSHIP PLAN.— " ( A ) I n t h e case of a n employee stock ownership plan ( a s defined in s u b p a r a g r a p h ( B ) ) , under which no more than one-third of t h e employer contributions for a year ai'e allo- cated to t h e group of employees consisting of officers, share- holders owning more t h a n 10 percent of the employer's stock (determined under s u b p a r a g r a p h ( B ) ( i v ) ) , or employees described in s u b p a r a g r a p h ( B ) ( i i i ) , the amount described in p a r a g r a p h (c) (1) ( A ) (as adjusted for such year pursuant to subsection ( d ) ( 1 ) ) for a year with respect to a n y partici- pant shall be equal to t h e sum of (i) the amount described in p a r a g r a p h (c) (1) ( A ) (as so adjusted) determined without regard to this p a r a g r a p h a n d (ii) t h e lesser of the amount determined under clause (i) or the amount of employer secu- rvities contributed to the employee stock ownership plan. " ( B ) F o r purposes of this p a r a g r a p h — Definitions, " ( i ) t h e term 'employee stock ownership plan' means a plan which meets the requirements of section 4975(6) (7) or section 301 (d) of t h e T a x Reduction Act of 1975, 26 USC 46 note. " ( i i ) the term 'employer securities' means, in the case of an employee stock ownership plan within the meaning of section 4 9 7 5 ( e ) ( 7 ) , qualifying employer securities within t h e meaning of section 4 9 7 5 ( e ) ( 8 ) , but only if they a r e described in section 301(d) (9) ( A ) of t h e T a x Reduction Act of 1975, or, in t h e case of an employee stock ownership plan described in section 3 0 1 ( d ) ( 2 ) of t h e T a x Reduction A c t of 1975, employer securities within the meaning of section 301 (d) (9) ( A ) of such Act, " ( i i i ) a n employee described in this clause is any par- ticipant whose compensation for a year exceeds an amount equal to twice the amount described in p a r a g r a p h (1) ( A ) for such year (as adjusted for such year pursuant to sub- section ( d ) ( 1 ) ) , determined without regard to subpara- g r a p h ( A ) of this p a r a g r a p h , and " ( i v ) a n individual shall be considered to own more than 10 percent of t h e employer's stock if, without regard to stock held under the employee stock ownership plan, he owns (after application of section 1563(e)) more than 10 percent of the total combined voting power of all classes of stock entitled to vote or more than 10 percent of t h e total value of shares of all classes of stock.". (2) CONFORMING A M E N D M E N T . — P a r a g r a p h (3) ( B ) of section 415 (e) (relating to defined contribution plan fraction) is amended by inserting "determined without regard t o p a r a g r a p h (6) of such subsection)" after "employer". ( g ) WAIVER o r P E N A L T Y FOR UNDERPAYMENT OF ESTIMATED T A X . — 26 USC 6655 [f— note.
90 STAT. 1590 PUBLIC LAW 94-455—OCT. 4, 1976 (1) a corporation made underpayments of estimated tax for a taxable year of the corporation which includes August 1, 1975, because the corporation intended to elect to have the provisions of s u b p a r a g r a p h ( B ) of section 46(a) (1) of the I n t e r n a l Revenue Code of 1954 (as it existed before the date of enactment of this Act) apply for such taxable year, and (2) the corporation does not elect to have the provisions of such s u b p a r a g r a p h apply for such taxable year because this Act does not contain the amendments made by section 804(a) (2) (relating to flowthrough of investment credit), or the provisions of sub- section (f) of such section (relating to grace period for certain Ante, p. 1520. plan transfers), of the bill H . E . 10612 (94th Congress, 2d Ses- sion), as amended by the Senate, then the provisions of section 6655 of such Code (relating to failure by corporation to pay estimated income tax) shall not apply to so much of any such underpayment as the corporation can establish, to the satisfaction of the Secretary of the Treasury, is properly attrib- utable to the inapplicability of such s u b p a r a g r a p h ( B ) for such taxable year. 26 u s e 4975 (h) I N T E N T OF CONGRESS CONCERNING EMPLOYEE STOCK O W N E R S H I P note. P L A N S . — T h e Congress, in a series of laws (the Regional Rail Reorga- 45 u s e 701 nization Act of 1973, the Employee Retirement Income Security Act of note. 1974, the T r a d e Act of 1974, and the T a x Reduction Act of 1975) and 29 u s e 1001 this Act has made clear its interest in encouraging employee stock own- note, ership plans as a bold and innovative method of strengthening the free 19 u s e 2101. private enterprise system which will solve the dual problems of secur- 26 u s e 1 note. jj^^ capital funds for necessary capital growth and of bringing about stock ownership by all corporate employees. The Congress is deeply concerned t h a t the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat employee stock ownership plans as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establish- ment and success of these plans. Because of the special purposes for which employee stock ownership plans are established, it is consistent with the intent of Congress to permit these plans (whether structured as pension, stock bonus, or profit-sharing plans) to distribute income on employer securities currently. (i) STUDY OF EXPANDED STOCK O W N E R S H I P . — (1) I N GENERAL.—Section 3022 (a) of the Employee Retirement 29 u s e 1222. Income Security Act of 1974 (relating to duties of J o i n t Pension Task Force) is amended— ( A ) by redesignating p a r a g r a p h s (4) and (5) as (5) and ( 6 ) , and ( B ) by inserting after p a r a g r a p h (3) the following new paragraph: " ( 4 ) the broadening of stock ownership, particularly with regard to employee stock ownership plans (as defined in sec- 26 u s e 4975. tion 4975(e) (7) of the I n t e r n a l Revenue Code of 1954 and 29 u s e 1107. section 407(d) (6) of this Act) and all other alternative meth- ods for broadening stock ownership to the American labor force and others;". (2) C H A N G E or TITLE.— ( A ) Subtitle B of title I I I of such Act is amended— (i) by striking out "Pension" in the caption of such subtitle and inserting in lieu thereof "Pension, Profit- sharing, and Employee Stock Ownership Plan",
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1591 (ii) by striking out " P E N S I O N " in the caption of p a r t 1 of such subtitle and inserting in lieu thereof t h e following: " P E N S I O N , P R O F I T - S H A R I N G , A N D E M P L O Y E E S T O C K O W N E R S H I P P L A N " , and (iii) by striking out " J o i n t Pension" each place it appears in sections 3021 and 3022 and inserting in lieu 29 USC 1221, thereof the following: " J o i n t Pension, Profit-sharing, 1222. and Employee Stock Ownership P l a n " . ( B ) T h e table of contents of such Act is amended— (i) by striking out "PENSION" in the item relating to title I I I and inserting in lieu thereof the following: "PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN", (ii) by striking out "PENSION" in the item relating to subtitle B of title I I I and inserting in lieu thereof the following: "PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN", and (iii) by striking out "PENSION" in the item relating to p a r t 1 of subtitle B of title I I I and inserting in lieu thereof "PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN". (j) EFFECTIATE D A T E S . — 26 USC 46 note. (1) GENERAL RULE.—Except as provided in p a r a g r a p h ( 2 ) , the amendments made by this section shall apply for taxable years beginning after December 31,1974. (2) EXCEPTIONS.— ( A ) Section 301(e) of the T a x Reduction A c t of 1975, as Ante, p. 1587. added by subsection ( d ) , shall apply for taxable years beginning after December 31,1976. ( B ) T h e amendments made by subsections (a) and (b) (1) shall apply for taxable years beginning after December 31, 1975. (C) T h e amendments made by subsections (b) (4) and (f) shall apply for years beginning after December 31, 1975. SEC. 804. INVESTMENT CREDIT IN THE CASE OF MOVIE AND TELEVI- SION FILMS. (a) SPECIAL R U L E S FOR MOVIE AND TELEVISION F I L M S . — S e c t i o n 48 26 USC 48. (relating to definitions and special rules for purposes of the invest- ment credit) is amended by redesignating subsection (k) as subsection (1) and by inserting after subsection (j) the following new subsection: "(k) MOVIE AND TELEVISION F I L M S . — " ( 1 ) E N T I T L E M E N T TO CREDIT.— _ " ( A ) I N GENERAL.—A credit shall be allowable under sec- tion 38 to a t a x p a y e r with respect to any motion picture film or video tape— " (i) only if such film or tape is new section 38 property (determined without regard to useful life) which is a qualified film, and " (ii) only to the extent t h a t the t a x p a y e r has an owner- ship interest in such film or tape. " ( B ) QUALIFIED FILM DEFINED.—For purposes of t h i s sub- section, the term 'qualified film' means any motion picture film or video t a p e created p r i m a r i l y for use as public entertain- ment or for educational purposes. Such term does not include any film or t a p e the market for which is p r i m a r i l y topical or is otherwise essentially transitory in nature.
90 STAT. 1592 PUBLIC LAW 94-455—OCT. 4, 1976 " ( C ) O W N E R S H I P IXTEREST.—For purposes of t h i s subsec- tion, a person's 'ownership interest' i n a qualified film shall be determined on the basis of his proportionate share of a n y loss which m a y be incurred with respect t o t h e production costs of such film. " ( 2 ) APPLICABLE PERCENTAGE TO BE 66%.—Except as provided in p a r a g r a p h ( 3 ) , t h e applicable percentage under section 46(c) (2) for any qualified film shall be 66% percent. " ( 3 ) ELECTION OF 9O-PERCENT RULE.— " ( A ) I N GENERAL.—If the taxpayer makes an election under this p a r a g r a p h , the applicable percentage under section 46 (c) (2) shall be determined as if the useful life of t h e film would have expired at the close of the first taxable year by the close of which the aggregate amount allowable as a deduction under section 167 would equal or exceed 90 percent of the basis of the film. " ( B ) M A K I N G o r ELECTION.—An election under this para- g r a p h shall be made a t such time a n d in such manner as the Secretary may by regulations prescribe. Such an election shall apply for the taxable year for which it is made and for all sub- sequent taxable years and may be revoked only with the con- sent of the Secretary. " ( C ) W H O MAY ELECT.—If for any prior taxable year para- g r a p h (2) of this subsection applied to the taxpayer or any related business entity, or if for the taxable year p a r a g r a p h (2) applies to any related business entity, an election under this p a r a g r a p h may be made by t h e taxpayer only with t h e consent of the Secretary. "(D) RELATED BUSINESS E N T I T Y . — T w o or more corpora- tions, partnerships, trusts, estates, proprietorships, or other entities shall be treated as related business entities if 50 per- cent or more of the beneficial interest in each of such entities is owned by the same or related persons (taking into account only persons who own at least 10 percent of such beneficial interest). F o r purposes of this subparagraph, a person is a related person to another person if— " ( i ) such persons are component members of a con- trolled group of corporations (within the meaning of section 1563(a), except that section 1563(b)(2) shall not apply a n d except t h a t 'more t h a n 50 percent' shall be substituted for ' a t least 80 percent' each place i t appears in section 1563 ( a ) ) , or " ( i i ) t h e relationship between such persons would result in a disallowance of losses under section 267 or 707 (b), except t h a t for these purposes a family of an indi- vidual includes only his spouse and minor children. "Beneficial F o r purposes of this subparagraph, the term 'beneficial interest." interest' means voting stock in t h e case of a corporation, profits interest or capital interest in the case of a partnership, or beneficial interest in the case of a trust or estate. "(4) PREDOMINANT USE TEST; QUALIFIED INVESTMENT.—In t h e case of any qualified film— " ( A ) section 48(a) (2) shall not apply, and " ( B ) in determining qualified investment under section 4 6 ( c ) ( 1 ) , there shall be issued (in lieu of t h e basis of t h e p r o p e r t y ) a n amount equal to t h e qualified United States production costs (as defined in p a r a g r a p h ( 5 ) ) .
PUBLIC LAW 94-455—OCT. 4, 1976 9 0 STAT. 1593 " ( 5 ) QUALIFIED UNITED STATES PRODUCTION COSTS.— " ( A ) I N GENERAL.—For purposes of this subsection, the term 'qualified United States production costs' means with respect to any film— " ( i ) direct production costs allocable to t h e United States, plus " ( i i ) if 80 percent or more of the direct production costs a r e allocable t o the United States, all other pro- duction costs other t h a n direct production costs allocable outside the United States. ;, " ( B ) PRODUCTION COSTS.—For purposes of t h i s subsection, the term 'production costs' includes— " ( i ) a reasonable allocation of general overhead costs, "(ii) compensation (other t h a n participations described in clause ( v i ) ) for services performed b y actors, production personnel, directors, a n d producers, ;| " ( i i i ) costs of 'first' distribution of prints, " ( i v ) the cost of the screen rights a n d other material being filmed, " ( v ) 'residuals' payable under contracts with labor organizations, a n d " (vi) participations payable as compensation to actors, production personnel, directors, and producers. Participations in all qualified films placed i n service by a tax- payer d u r i n g a taxable year shall be taken into account under clause (vi) only to t h e extent of the lesser of 25 percent of each such participation or 121/^ percent of the aggregate quali- fied United States production costs (other t h a n costs described in clauses ( v ) a n d (vi) of this s u b p a r a g r a p h ) for such films, b u t t a k i n g into account for both t h e 25 percent limit a n d 121/^ percent limit no more t h a n $1,000,000 in par- ticipations for any one individual with respect t o a n y one film. F o r purposes of this s u b p a r a g r a p h (other t h a n clauses (v) a n d (vi) a n d the preceding sentence), costs shall be taken into account only if they a r e capitalized. "(C) DIRECT PRODUCTION COSTS.—For purposes of this p a r a g r a p h , the term 'direct production costs' does not include items referred to in clause ( i ) , ( i v ) , ( v ) , or (vi) of subpara- g r a p h ( B ) . T h e term also does not include advertising a n d promotional costs a n d such other costs as may be provided m regulations prescribed by the Secretary. " ( D ) ALLOCATION OF DIRECT PRODUCTION COSTS.—For p u r - poses of this p a r a g r a p h — " ( i ) Compensation for services performed shall be allocated to the country in which the services a r e per- formed, except that payments to United States persons for services performed outside the United States shall be allocated to the United States. F o r purposes of the pre- ceding sentence, payments to a n electing small business corporation (within the meaning of section 1371) or a partnership shall be considered payments to a United States person only to the extent t h a t such payments a r e included in the gross income of a United States per- son other t h a n an electing small business corporation or partnership.
90 STAT. 1594 PUBLIC LAW 94-455—OCT. 4, 1976 " ( i i ) Amounts for equipment a n d supplies shall be allocated to the country i n which, with respect to the pro- duction of the film, the predominant use occurs. " ( i i i ) A l l other items shall be allocated under regula- tions prescribed by the Secretary which are consistent with t h e allocation principle set forth in clause ( i i ) . " ( 6 ) U N I T E D STATES.—For purposes of this subsection, the term 'United States' includes the possessions of the United States." ( b ) OVERESTIMATION OF USEFUL L i F E AND DISPOSITIONS W H E R E 9 0 26 u s e 47. P E R C E N T R U L E A P P L I E S . — S e c t i o n 4 7 ( a ) ( r e l a t i n g to certain disposi- tions, etc., of section 38 p r o p e r t y ) is amended by adding after para- g r a p h (6) the following new p a r a g r a p h : " ( 7 ) MOTION PICTURE FILMS AND VIDEO TAPES.— " ( A ) DISPOSITION WHERE DEPRECIATION EXCEEDS 90 PER- CENT OF BASIS OR COST.—A qualified film ( w i t h i n t h e m e a n i n g Ante, p. 1591. of section 48 (k) (1) ( B ) ) which has an applicable percentage determined under section 48(k) (3) shall cease to be section 38 property with respect to t h e taxpayer at t h e close of t h e first day on which t h e aggregate amount allowable as a deduc- tion under section 167 equals or exceeds 90 percent of the basis or cost of such film (adjusted for any partial dispositions). "(B) O T H E R DISPOSITIONS.—In the case of a disposition of the exclusive right to display a qualified film which has an applicable percentage determined under section 48 (k) (3) in one or more mediums of publication or exhibition in one or more specifically defined geographical areas over t h e remaining initial period of commercial exploitation of t h e film or tape in such geographical areas, the taxpayer shall be considered to have disposed of all or p a r t of such film or tape a n d shall recompute t h e credit earned on all of his basis or cost or on t h a t p a r t of t h e basis or cost properly allocable t o t h a t p a r t of t h e film or tape disposed of. I n t h e case of an affiliated group of corporations, a transfer within the affiliated group shall not be treated as a disposition until "Affiliated there is a transfer outside the group. F o r purposes of the group." preceding sentence, t h e term 'affiliated g r o u p ' h a s the mean- ing given to such term by section 1504 (determined as if sec- tion 1504(b) d i d not include p a r a g r a p h (3) thereof). F o r purposes of this p a r a g r a p h , section 1504(a) shall be applied by substituting '50 percent' for '80 percent' each place it appears.". 26 u s e 48 note. (c) ALTORNATI\'E METHODS OF COMPUTING CREDIT FOR P A S T PERIODS.— (1) GENERAL RULE FOR DETERMINING USEFUL LIFE, PREDOMI- NANT FOREIGN USE, E T C . — I n t h e case of a qualified film ( w i t h i n the meaning of section 4 8 ( k ) ( l ) ( B ) of t h e I n t e r n a l Revenue Ante, p. 1591. Code of 1954) placed in service in a taxable year beginning before J a n u a r y 1, 1975, with respect to which neither an election under p a r a g r a p h (2) of this subsection n o r an election under subsection ( e ) ( 2 ) applies— ( A ) t h e applicable percentage under section 4 6 ( c ) ( 2 ) of such Code shall be determined as if the useful life of the film would have expired a t t h e close of the first taxable year by the close of which the aggregate amount allowable as a
I PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1595 deduction under section 167 of such Code would equal or exceed 90 percent of the basis of such property (adjusted for any partial dispositions), ( B ) for purposes of section 4 6 ( c ) ( 1 ) of such Code, t h e 26 USC 46. basis of t h e p r o p e r t y shall be determined by t a k i n g into account t h e total production costs (within t h e meaning of section 4 8 ( k ) (5) ( B ) of such Code), (C) for purposes of section 48(a) (2) of such Code, such film shall be considered t o be used predominantly outside the United States in the first taxable year for which 50 percent or more of the gross revenues received or accrued d u r i n g the taxable year from showing the film were received or accrued from showing t h e film outside the United States, and ( D ) Section 4 7 ( a ) (7) of such Code shall apply. (2) ELECTION OF 4O-PERCENT METHOD.— ( A ) I N GENERAL.—A taxpayer may elect to have this para- g r a p h apply t o all (jualified films placed in service during taxable years beginning before J a n u a r y 1, 1975 (other than films to which an election under subsection (e) (2) of this section applies). ( B ) E F F E C T OF ELECTION.—If t h e taxpayer makes an elec- tion under this p a r a g r a p h , then section 48(k) of tlie Internal Revenue Code of 1954 shall apply t o all qualified films described in s u b p a r a g r a p h ( A ) with the following modifica- tions : (i) s u b p a r a g r a p h ( B ) of p a r a g r a p h (4) shall n o t apply, but in determining qualified investment under sec- tion 46(c) (1) of such Code, there shall be used (in lieu of t h e basis of such property) an amount equal to 40 percent of the aggregate production costs (witliin the meaning of p a r a g r a p h ( 5 ) ( B ) of such section 4 8 ( k ) ) , , , (ii) p a r a g r a p h (2) shall be applied by substituting : - "100 percent"' for "662/3 percent", and (iii) p a r a g r a p h (3) a n d p a r a g r a p h (5) (other t h a n s u b p a r a g r a p h ( B ) ) shall not apply. , ^„., (C) R U L E S RELATING TO ELECTIONS.—An election u n d e r Regulations, this p a r a g r a p h shall be made not later than t h e day which is 6 months after t h e date of the enactment of this A c t a n d shall be made in such manner as the Secretary of the Treas- u r y or his delegate shall by regulations prescribe. Such an election may be revoked only with the consent of the Secre- t a r y of the Treasury or his delegate, (D) T H E TAXPAYER MUST CONSENT TO J O I N I N CERTAIN PROCEEDINGS.—No election may be made under this p a r a g r a p h or subsection ( e ) ( 2 ) by a n y taxpayer unless he consents, under regulations prescribed by the Secretary of the Treas- u r y or his delegate, to treat the determination of the invest- ment credit allowable on each film subject to an election as a separate cause of action, and to join in any judicial proceeding ,• for determining the person entitled to, and the amount of, the credit allowable under section 38 of the I n t e r n a l Revenue Code of 1954 with respect to any film covered by such election. (3) ELECTION TO HAVE CREDIT DETERMINED I N ACCORDANCE W I T H PREVIOUS LITIGATION.— ( A ) I N GENERAL.—A t a x p a y e r described in s u b p a r a g r a p h ( B ) m a y elect to have this p a r a g r a p h apply to all films (whether o r not qualified) placed in service in taxable years
90 STAT. 1596 PUBLIC LAW 94-455—OCT. 4, 1976 beginning before J a n u a r y 1, 1975, a n d with respect t o which an election under subsection (e) (2) is not made. ( B ) W H O MAY ELECT.—A taxpayer may make an election under this p a r a g r a p h if he h a s filed an action in a n y court of competent jurisdiction, before J a n u a r y 1, 1976, for a determination of such taxpayer's rights to the allowance of a credit against t a x under section 38 of the I n t e r n a l Revenue Code of 1954 for a n y taxable year beginning before J a n u - ary 1,1975, with respect to any film. ( C ) E F F E C T OF ELECTION.—If t h e t a x p a y e r makes an elec- tion under this p a r a g r a p h — (i) p a r a g r a p h s (1) a n d (2) of this subsection, and subsection ( d ) shall not apply to any film placed in service by the taxpayer, and (ii) subsection 4 8 ( k ) of the I n t e r n a l Revenue Code Ante, p. 1591. of 1954 shall not apply to a n y film placed in service by the taxpayer in any taxable year beginning before J a n - u a r y 1,1975, a n d with respect to which an election under subsection (e) (2) is not made, and t h e r i g h t of the taxpayer t o the allowance of a credit against t a x under section 38 of such Code with respect to any film placed in service in any taxable year beginning before J a n u a r y 1,1975, a n d as to which an election under subsection (e) (2) is not made, shall be determined as though this section (other t h a n this p a r a g r a p h ) has not been enacted. ( D ) R U L E S RELATING TO ELECTIONS.—An election under this p a r a g r a p h shall be made n o t later t h a n t h e d a y which is 90 days after the date of t h e enactment of this Act, by fil- i n g a notification of such election with t h e national office of the I n t e r n a l Revenue Service. Such an election, once made, shall be irrevocable. 26 u s e 48 note. ( d ) E N T I T L E M E N T TO C R E D I T . — P a r a g r a p h (1) of section 48 ( k ) of t h e I n t e r n a l Revenue Code of 1954 (relating to entitlement t o credit) shall apply to a n y motion picture film or video tape placed in service in a n y taxable year beginning before J a n u a r y 1, 1975. 26 u s e 48 note. (e) EFFECTIVE D A T E S . — (1) I N GENERAL.—The amendments made by subsections ( a ) and (b) shall apply t o taxable years beginning after Decem- ber 31, 1974. (2) ELECTION MAY ALSO APPLY TO PROPERTY DESCRIBED I N SEC- TION 50(a).—At t h e election of t h e taxpayer, m a d e within 1 year after t h e date of t h e enactment of this A c t i n such manner as t h e Secretary of the Treasury or his delegate may by regulations pre- scribe, t h e amendments made by subsections ( a ) a n d ( b ) shall also apply to property which is property described in section 50(a) of the I n t e r n a l Revenue Code of 1954 a n d which is placed in service in taxable years beginning before J a n u a r y 1, 1975. SEC. 805. INVESTMENT CREDIT IN THE CASE OF CERTAIN SHIPS. 26 u s e 46. ( a ) I N GENERAL.—Section 46 (relating t o amount of credit) is amended by a d d i n g at t h e end thereof t h e following new subsection: " ( g ) 50 PERCENT CREDIT I N T H E CASE o r CERTAIN VESSELS.— " ( 1 ) I N GENERAL.—In t h e case of a qualified w i t h d r a w a l out of the untaxed portion of a capital gain account or o u t of a n ordinary income account in a capital construction fund estab- lished under section 607 of t h e Merchant Marine A c t , 1936 (46U.S.C.ll77),for—
» PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 15^7 " ( A ) t h e acquisition, construction, or reconstruction of a qualified vessel, or ; *' " ( B ) t h e acquisition, construction, or reconstruction of barges or containers which are p a r t of the complement of a qualified vessel a n d t o which subsection ( f ) ( 1 ) ( B ) of such section 607 applies, 46 USC 1177. for purposes of section 38 there shall be deemed to have been made (at t h e time of such withdrawal) a qualified investment (within the meaning of subsection ( c ) ) or qualified progress expenditures (within t h e meaning of subsection ( d ) ) , whichever is appropri- ate, with respect to property which is section 38 property. " ( 2 ) A M O U N T o r CREDIT.—For purposes of p a r a g r a p h ( 1 ) , t h e amount of t h e qualified investment shall be 50 percent of t h e applicable percentage of the qualified withdrawal referred t o in '*' 5 \ p a r a g r a p h ( 1 ) , or t h e amount of the qualified progress expendi- tures shall be 50 percent of such withdrawal, as the case may be. F o r purposes of determining the amount of the credit allowable by reason of this subsection for a n y taxable year, t h e limitation or subsection ( a ) (3) shall be determined without regard to sub- section ( d ) (1) ( A ) of such section 607. "'' '' ' " (3) COORDINATION W I T H SECTION 38.—The a m o u n t of t h e c r e d i t allowable by reason of this STibsection with respect t o any prop- erty shall be the minimum amount allowable under section 38 with respect t o such property. If, without regard t o this subsec- tion, a greater amount is allowable under section 38 with respect to such property, then such greater amount shall apply and this subsection shall not apply. "(4) COORDINATION W I T H SECTION 47.—Section 47 shall be applied— " ( A ) to a n y property to which this subsection applies, and " ( B ) t o t h e payment ( o u t of t h e untaxed portion of a ' .; .*,\ capital gain account or out of t h e ordinary income account of a capital construction fund established under section 607 of the Merchant Marine Act, 1936) of t h e principal of a n y indebtedness incurred in connection with property with respect t o which a credit was allowed under section 38. F o r purposes of section 47, a n y payment described in subpara- g r a p h ( B ) of the preceding sentence shall be treated as a dis- position occurring less t h a n 3 years after the property was placed in service; but, in the case of a credit allowable without regard to this subsection, the aggregate amount which may be recaptured b y reason of this sentence shall not exceed 50 percent of such credit. " ( 5 ) DEEINITIONS.—Any term used in section 607 of t h e Mer- chant Marine Act, 1970, shall have the same meaning when used 46 USC 1177. in this subsection. " ( 6 ) No INFERENCE.—Nothing in this subsection shall be con- strued to infer t h a t any property described in this subsection is or is not section 38 property, a n d any determination of such issue shall be made as if this subsection h a d not been enacted." ( b ) EFFECTIVE D A T E S . — 26 USC 46 note. (1) I N GENERAL.—Except as provided in s u b p a r a g r a p h ( B ) , the amendment made by subsection ( a ) shall apply to taxable years beginning after December 31, 1975, in the case of property placed in service after such date. -194 O—78—pt. 2 9
90 STAT. 1598 -^ PUBLIC LAW 94-455—OCT. 4, 1976 (2) SECTION 46(g)(4).—Section 4 6 ( g ) ( 4 ) of the I n t e r n a l Ante, p. 1596. Revenue Code of 1954 (as added by subsection ( a ) ) shall apply to taxable years beginning after December 31,1975. SEC. 806. ADDITIONAL NET OPERATING LOSS CARRYOVER YEARS; LIMITATIONS ON NET OPERATING LOSS CARRYOVERS. 26USC172. (a) I N GENERAL.—Section 1 7 2 ( b ) ( 1 ) ( B ) , as amended by section ^05^ p. 1755. 1606(b) of this Act, is amended by adding a t the end thereof the fol- lowing new sentence: " E x c e p t as provided in s u b p a r a g r a p h s ( C ) , ( D ) , ( E ) , and ( F ) , a net operating loss for any taxable year ending after December 31, 1975, shall be a net operating loss carryover to each of the 7 taxable years following the taxable year of such loss." (b) REGULATED TRANSPORTATION CORPORATIONS.— Post, p . 1769. (1) I N GENERAL.—Section 1 7 2 ( b ) ( 1 ) ( C ) is amended by add- ing at the end thereof the following new sentence: " F o r any taxable year ending after December 31, 1975, the preceding sen- tence shall be applied by substituting '9 taxable years' for '7 taxa- ble years'." (2) CONFORMING A M E N D M E N T . — P a r a g r a p h (3) of section 172 Post, p. 1769. ( g ) , as amended by section 1901 (a) (29) of this Act, is amended— ( A ) by striking " a n d " at the end of s u b p a r a g r a p h ( A ) ; ( B ) by striking the period at the end of subparagraph ( B ) and inserting in lieu thereof " ; a n d " ; and (C) by a d d i n g a t the end thereof the following new subparagraph: " (C) in the case of a net operating loss carryover from a loss year ending after December 31, 1'975, subparagraphs ( A ) and ( B ) shall be applied by substituting '8th taxable year' for t h e ' 6 t h taxable y e a r ' a n d ' 9 t h taxable y e a r ' f o r ' 7 t h taxable year.'" (c) ELECTION TO FOREGO CARRYBACK PERIOD.—Section 172 (b) (3), Post, p. 1769. ^s amended by section 1901 (a) (29) of this Act, is amended by adding a t the end thereof the following new s u b p a r a g r a p h : " ( E ) A n y t a x p a y e r entitled to a carryback period under p a r a g r a p h (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for t h a t taxable year." (d) INSURANCE C O M P A N I E S . — ( 1 ) L I F E I N S U R A N C E COMPANIES.— 26 u s e 812. ( A ) I N GENERAL.—Paragraph (1) of section 812(b) is amended by a d d i n g a t the end thereof the following new sentence: " I n the case of an operations loss for any taxable year ending after December 31,1975, this p a r a g r a p h shall be applied by substituting '7 taxable years' for '5 taxable years'." ., ^ (B) ELECTION TO FOREGO CARRYBACK PERIODS.—Section - 812(b) is amended by a d d i n g a t the end thereof the following new p a r a g r a p h : (3) ELECTION FOR OPERATIONS LOSS CARRYBACKS.—In the case of a loss from operations for any taxable year ending after Decem- ber 31,1975, the taxpayer may elect to relinquish the entire carry- K^t-m
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1599 back period for such loss. Such election shall be made by t h e due date (including extensions of time) for filnig t h e return for the taxable year of the loss from operations for which the election is t o be in effect, a n d once made for any taxable year, such elec- tion shall be irrevocable for t h a t taxable year." (2) M U T U A L iNsuRAisrcE COMPANIES.— ( A ) I N GENERAL.—Section 825(d) is amended t o read as 26 USC 825. follows: " ( d ) YEARS TO W H I C H CARRIED.— " ( 1 ) I N GENERAL.—The unused loss for any taxable year shall be— " ( A ) an unused loss carryback to each of t h e 3 taxable years preceding the loss year, and " ( B ) an unused loss carryover t o each of t h e 5 taxable years following the loss year. I n t h e case of an unused loss for a taxable year ending after December 31,1975, such unused loss shall be an unused loss carry- over t o each of the 7 taxable years following t h e loss year. " ( 2 ) ELECTION FOR UNUSED LOSS CARRYBACKS.—In t h e case of a n unused loss for any taxable year ending after December 31, 1975, the taxpayer may elect to relinquish the entire carryback period for such loss. Such election shall be made by the due date (includ- ing extensions of time) for filing t h e return for-the taxable year of the unused loss for which the election is to be in effect, and once made for a n y taxable year, such election shall be irrevocable for t h a t taxable year." (e) A M E N D M E N T o r SECTION 382.—Section 382 ( r e l a t i n g to special 26 USC 382. limitations on net operating loss carryovers) is hereby amended to read as follows: "SEC. 382. SPECIAL LIMITATIONS ON NET OPERATING LOSS CARRY- OVER. " ( a ) CERTAIN ACQUISITIONS o r STOCK o r A CORPORATION.— " ( 1 ) I N GENERAL.—If— " ( A ) on the last day of a taxable year of a corporation, " ( B ) any one or more of t h e persons described in para- g r a p h (4) ( B ) own, directly or indirectly, a percentage of the total fair market value of t h e participating stock or of all t h e stock of t h e corporation which exceeds by more t h a n 60 percentage points the percentage of such stock owned by such person or persons at— " ( i ) the beginning of such taxable year, or " ( i i ) the beginning of the first or second preceding taxable year, and " ( C ) such increase in percentage points is attributable to— " (i) a purchase by such person or persons of such stock, or of the stock of another corporation owning stock in such corporation, or of an interest in a partnership o r trust owning stock in such corporation, " ( i i ) an acquisition (by contribution, merger, or con- solidation) of an interest in a partnership owning stock in such corporation, or an acquisition (by contribution, merger, or consolidation) by a partnership of such stock, " ( i i i ) an exchange to which section 351 (relating to transfer to corporation controlled by transferor) applies, or a n acquisition by a corporation of such stock in an exchange i n which section 351 applies to t h e transferor,
90 STAT. 1600 , PUBLIC LAW 94-455—OCT. 4, 1976 ;5 :' i " ( i v ) a contribution to the capital of such corporation, " ( v ) a decrease in the amount of such stock outstand- ing or in the amount of stock outstanding of another cor- poration owning stock in such corporation (except a decrease resulting from a redemption to pay death taxes 26 u s e 303. to which section 303 applies), " ( v i ) a liquidation of the interest of a p a r t n e r in a partnership owning stock in such corporation, or " ( v i i ) any combination of the transactions described in clauses (i) t h r o u g h ( v i ) , then the net operating loss carryover, if any, from such taxable year and the net operating loss carryovers, if any, fi-om prior taxable years to such taxable year and subsequent taxable years of such corporation shall be reduced by the percentage determined under p a r a g r a p h ( 2 ) , "(2) REDUCTION OF NET OPERATING LOSS CARRYOVER.—The reduc- tion applicable under p a r a g r a p h (1) shall be the sum of the per- centages determined by multiplying— " ( A ) by three and one-half the increase in percentage points (including fractions thereof) in excess of 60 and up to and including 80, and " ( B ) by one and one-half the increase in percentage points (including fractions thereof) in excess of 80. T h e reduction under this p a r a g r a p h shall be determined by ref- erence to the increase in percentage points of the total fair market value of the participating stock or of all the stock, whichever increase is greater. "(3) M I N I M U M OWNERSHIP R U L E . — N o t w i t h s t a n d i n g the pro- visions of p a r a g r a p h ( 1 ) , a net operating loss carryover from a taxable year shall not be reduced under this subsection if, at all times d u r i n g the last half of such taxable year, any of the persons described in p a r a g r a p h (4) ( B ) (determined on the last day of the taxable year referred to in p a r a g r a p h (1) ( A ) ) owned at least 40 percent of the total fair market value of the participating stock and of all the stock of the corporation. F o r purposes of the preceding sentence, persons owning stock of a corporation on the last day of its first taxable year shall be considered to have owned such stock at all times during the last half of such first taxable year. " ( 4 ) OPERATING RULES.—For purposes of this subsection— "(A) DEFINITION OF PURCHASE.—The term 'purchase' means an acquisition of stock the basis of which is determined . ' by reference to its cost to the holder thereof. "(B) DESCRIPTION OF PERSON OR PERSONS.—The person or persons referred to in p a r a g r a p h (1) ( B ) shall be the 15 per- sons (or such lesser number as there are persons owning the stock on the last day of the taxable year) who own the greatest percentage of t h e total fair m a r k e t value of all the stock on the last day of t h a t year, except t h a t if any other person I owns the same percentage of such stock at such time as is owned by one of the 15 persons, t h a t other person shall also be included. If any of the persons are so related t h a t the stock owned by one is attributed to the other under the rules specified in s u b p a r a g r a p h ( C ) , such persons shall be con- sidered as only one person solely for the purpose of selecting the 15 persons (more or less) who own the greatest percentage of the total fair market value of all the stock.
'' PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1601 • "(C) CONSTRUCTIVE OWNERSHIP.—Section 318 ( r e l a t i n g to 26 USC 318. constructive ownership of stock) shall apply in determining the ownership of stock, except that section 3 1 8 ( a ) ( 2 ) ( C ) and 3 1 8 ( a ) ( 3 ) ( C ) shall be applied without regard to t h e 50 percent limitation contained therein. " ( D ) SHORT TAXABLE TEARS.—If one of t h e taxable years of the corporation referred t o in p a r a g r a p h ( 1 ) ( B ) is a short taxable year, then such p a r a g r a p h a n d p a r a g r a p h (6) shall be applied by substituting 'first, second, or t h i r d ' for 'first or second' each time such phrase occurs. " ( 5 ) EXCEPTIONS.—This subsection shall n o t apply t o a pur- chase or other acquisition of stock (or of an interest in a partner- ship or trust owning stock in the corporation) — " ( A ) from a person whose ownership of stock would be attributed t o the holder by application of p a r a g r a p h (4) ( C ) to the extent t h a t such stock would be so attributed; " ( B ) if (and to the extent) the basis thereof is determined under section 1014 or 1023 (relating to property acquired Post, p. 1872. from a decedent), or section 1015(a) or ( b ) (relating to property acquired by gift or transfers in t r u s t ) ; " ( C ) by a security holder or creditor in exchange for t h e relinquishment or extinguishment in whole or p a r t of a claim against the corporation, unless t h e claim was acquired for the purpose of acquiring such stock; " ( D ) by one or more persons who were full-time employees of t h e corporation at all times during the period of 36 months ending on the last day of the taxable year of the corporation (or at all times during the period of the corporation's exist- ence, if s h o r t e r ) ; , " ( E ) by a trust described in section 401 (a) which is exempt from t a x under section 501(a) and which benefits exclusively the employees (or their beneficiaries) of the corporation, including a member of a controlled group of corporations (within the meaning of section 1563(a) determined without regard to section 1563(a) (4) a n d (e) (3) ( C ) ) which includes such corporation; " ( F ) by an employee stock ownership plan meeting t h e requirements of section 301(d) of the T a x Reduction Act of 1975; or 26 USC 46 nole. " ( G ) i n a recapitalization described in section 368(a) (1) (E). "(6) SUCCESSIVE APPLICATIONS o r SUBSECTION.—If— " ( A ) a net operating loss carryover is reduced under this subsection at t h e end of a taxable year of a corporation, a n d " ( B ) a n y person described in p a r a g r a p h (4) ( B ) who owns stock of t h e corporation on the last day of such taxable year does not own, on the last day of the first or second suc- ceeding taxable year of the corporation, u greater percentage of the total fair market value of the participating stock or of all the stock of t h e corporation than such person owned on the last day of such taxable year, then, for purposes of applying this subsection as of the end of the first or second succeeding taxable year (as the case may be), stock owned by such person at the end of such succeeding taxable year shall be considered owned by such person a t the beginning of the first o r second preceding taxable year. Other rules relating Regulations.
90 STAT. 1602 PUBLIC LAW 94-455—OCT. 4, 1976 ;; y : to the manner and extent of successive applications of this section in the case of increases in ownership a n d transfers of stock by the persons described in p a r a g r a p h (4) ( B ) shall be prescribed by regulations issued by the Secretary. "(b) REORGANIZATIONS.— " ( 1 ) I N GENERAL.—If one corporation acquires the stock or assets of another corporation in a reorganization described in sec- 26USC368. tion 3 6 8 ( a ) ( 1 ) ( A ) , ( B ) , ( C ) , ( D ) (but only if the requirements of section 354(b) (1) are m e t ) , or ( F ) , and if— " ( A ) the acquiring or acquired corporation has a net oper- ating loss for the taxable year which includes the date of the acquisition, or a net operating loss carryover from a prior taxable year to such taxable year, and " ( B ) t h e shareholders (immediately before the reorgani- zation) of such corporation ( t h e 'loss corporation'), as t h e result of owning stock of the loss corporation, own (immedi- ately after the reorganization) less t h a n 40 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, then the net operating loss carryover (if any) of the loss corpora- tion from the taxable year which includes the date of the acquisi- tion, and the net operating loss carryovers (if any) of the loss corporation from prior taxable years to such taxable year a n d subsequent taxable years, shall be reduced by the percentage determined under p a r a g r a p h ( 2 ) . " ( 2 ) REDUCTION OF NET OPERATING LOSS CARRYOVER.— " ( A ) O W N E R S H I P OF 20 PERCENT OR MORE.—If such share- holders own less than 40 percent, but not less than 20 percent, of the total fair market value of the participating stock or of all t h e stock of t h e acquiring corporation, t h e reduction applicable under p a r a g r a p h (1) shall be the percentage equal to the number of percentage points (including fractions thereof) less t h a n 40 percent, multiplied by three and one- half. "(B) OWNERSHIP or LESS THAN 20 PERCENT.—If such shareholders own less than 20 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, t h e reduction applicable under p a r a g r a p h (1) shall be the sum of— ;.- " ( i ) the percentage that would be determined under subparagraph ( A ) if the shareholders owned 20 percent of such stock, plus " ( i i ) the percentage equal to the number of percentage points (including fractions thereof) of such stock less t h a n 20 percent, multiplied by one and one-half. The reduction under this p a r a g r a p h shall be determined by ref- erence to the lesser of the percentage of the total fair market value of the participating stock or of all the stock of the acquiring cor- poration owned by such shareholders. "(3) LOSSES o r CONTROLLED CORPORATIONS.—For purposes of this subsection— "(A) HOLDING COMPANIES.—If, immediately before the reorganization, the acquiring or acquired corporation controls a corporation which has a net operating loss for t h e taxable year which includes the date of the acquisition, or a net oper- ating loss carryover from a prior taxable year to such taxa- ... ble year, the acquiring or acquired corporation, as t h e case
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1603 may be, shall be treated as the loss corporation (whether or not such corporation is a loss corporation). The reduction, if any, so determined under p a r a g r a p h (2) shall be applied to the losses of such controlled corporation. " ( B ) TRIANGULAR REORGANIZATIONS.—Except as otherwise provided in p a r a g r a p h ( 5 ) , if t h e shareholders of the loss -^ ' 7: corporation (immediately before the reorganization) own, as a result of t h e reorganization, stock in a corporation con- trolling t h e acquiring corporation, such shareholders shall be treated as owning (immediately after t h e reorganization) a percentage of the total fair market value of t h e participating stock and of all the stock of the acquiring corporation owned by t h e controlling corporation equal to the percentage of the total fair market value of t h e participating stock a n d of all t h e stock, respectively, of the controlling corporation owned by such shareholders. " ( 4 ) SPECIAL RULES.—For purposes of applying p a r a g r a p h (1)(B)- "(A) CERTAIN RELATED TRANSACTIONS.—If, immediately before the reorganization— " ( i ) one or more shareholders of t h e loss corporation own stock of such corporation which such shareholder acquired d u r i n g the 36-month period ending on the date of the acquisition in a transaction described in p a r a g r a p h (1) or in subsection ( a ) ( 1 ) ( C ) (unless excepted by sub- section ( a ) ( 5 ) ) , a n d " ( i i ) such shareholders own more than 50 percent of the total fair market value of the stock of another cor- poration a p a r t y to the reorganization, or any such share- holder is a corporation controlled by another corporation a p a r t y to the reorganization, then such shareholders shall not be treated as shareholders of the loss corporation with respect to such stock. " ( B ) CERTAIN PRIOR OWNERSHIP or LOSS CORPORATION.—If, immediately before t h e reorganization, t h e acquiring or acquired corporation owns stock of the loss corporation, then p a r a g r a p h (1) ( B ) shall be applied by treating t h e share- holders of the loss corporation as owning an additional amount of t h e total fair market value of t h e participating stock a n d of all the stock of t h e acquiring corporation, as a ^ result of owning stock in the loss corporation, equal to the total fair market value of t h e participating stock a n d of all t h e stock, respectively, of t h e loss corporation owned (immedi- ately before the reorganization) by the acquiring or acquired corporation. This subparagraph shall not apply to stock of the loss corporation owned by the acquiring or acquired cor- poration if such stock was acquired by such corporation within the 36-month period ending on the date of the reorganization in a transaction described in subsection ( a ) ( 1 ) ( C ) (unless excepted by subsection ( a ) ( 5 ) ) ; or t o a reorganization described in section 368(a) (1) ( B ) or ( C ) to the extent the 26 USC 368. acquired corporation does not distribute the stock received by it to its own shareholders. "(C) CERTAIN ASSET ACQUISITIONS.—If a loss corporation receives stock of the acquiring corporation in a reorganization described in section 3 6 8 ( a ) ( 1 ) ( C ) a n d does not distribute such stock to i t s shareholders, p a r a g r a p h ( 1 ) ( B ) shall be
90 STAT. 1604 e PUBLIC LAW 94-455—OCT. 4, 1976 applied by treating t h e shareholders of t h e loss corporation as owning (immediately after the reorganization) such undis- tributed stock in proportion to the fair market value of t h e stock which such shareholders own in the loss corporation. "(5) CERTAIN STOCK-FOR-STOCK REORGANIZATIONS.—In t h e case 26 use 368. of a reorganization described in section 368(a) (1) ( B ) in which the acnuired corporation is a loss corporation— "(A) STOCK W H I C H IS E X C H A N G E D . — P a r a g r a p h s (1) ( B ) and (2) shall be applied by reference to the ownership of stock of t h e loss corporation ( r a t h e r t h a n t h e acquiring cor- poration) immediately after the reorganization. Shareholders of the loss corporation who exchange stock of t h e loss cor- poration shall be treated as owning (immediately after t h e reorganization) a percentage of t h e total fair market value of the participating stock and of all the stock of the loss cor- poration acquired in the exchange by t h e acquiring corpora- tion which is equal t o the percentage of the total fair market value of the participating stock a n d of all the stock, respec- tively, of the acquiring corporation owned (immediately after the reorganization) by such shareholders. , " ( B ) STOCK W H I C H IS NOT EXCHANGED.—Stock of t h e loss corporation owned by shareholders immediately before the reorganization which was not exchanged in t h e reorganiza- tion shall be taken into account in applying p a r a g r a p h (1) V ( B ) . F o r purposes of t h e preceding sentence, t h e acquir- ing corporation (or a corporation controlled by the acquiring corporation) shall not be treated as a shareholder of the loss corporation with respect to stock of the loss corporation acquired in a transaction described in p a r a g r a p h ( 1 ) , or in subsection (a) (1) (C) (unless excepted by subsection ( a ) ( 5 ) ) , during the 36-month period ending on the date of the exchange. " ( C ) TRIANGULAR EXCHANGES.—For purposes of a p p l y i n g the rules in this p a r a g r a p h , if the shareholders of the loss cor- poration receive stock of a corporation controlling the acquir- ing corporation, such shareholders shall be treated as owning a percentage of the participating stock and of all the stock of t h e acquiring corporation owned by the controlling cor- poration equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, which such shareholders own of the controlling corporation immediately after t h e reorganization. " ( 6 ) EXCEPTIONS.—The limitations in this subsection shall not apply— " ( A ) if the same persons own substantially all the stock of the acquiring corporation a n d of the other corporation in substantially the same proportions; or " ( B ) to a net operating loss carryover from a taxable year if the acquiring or acquired corporation owned at least 40 percent of t h e total fair market value of the participating J. .^ . . . stock a n d of all the stock of the loss corporation at all times '""' ' during the last half of such taxable year. F o r purposes of s u b p a r a g r a p h ( A ) , if the acquiring o r acquired corporation is controlled by another corporation, the share- holders of t h e controlling corporation shall be considered as also owning the stock owned by the controlling corporation in t h a t proportion which the total fair market value of the stock which
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1605 each shareholder owns in t h e controlling corporation bears t o the total fair market value of all the stock in t h e controlling , corporation. " ( c ) KuLES RELATING TO STOCK.—For purposes of this section— " ( 1 ) T h e term 'stock' means all shares of stock, except stock "Stock." which— " ( A ) is not entitled to vote, " ( B ) is fixed a n d preferred as to dividends and does not participate in corporate growth to any significant extent, " ( C ) h a s redemption a n d liquidation rights which do not exceed t h e paid-in capital or p a r value represented by such stock (except for a reasonable redemption premium in excess of such paid-in capital or p a r value), a n d " ( D ) is not convertible into another class of stock. " ( 2 ) T h e term 'participating stock' means stock (including "Participating common stock) which represents an interest in the earnings a n d stock." assets of the issuing corporation which is not limited to a stated amount of money or property or percentage of paid-in capital or p a r value, or by any similar formula. " ( 3 ) T h e Secretary shall prescribe regulations under which— Regulations. " ( A ) stock or convertible securities shall be treated as stock or participating stock, or " ( B ) stock (however denoted) shall not be treated as stock or participating stock, by reason of conversion a n d call rights, rights in earnings a n d assets, priorities a n d preferences as to distributions of earnings or assets, and similar factors."' (f) CONFORMING A M E N D M E N T S . — (1) A M E N D M E N T OF SECTION 368.—Section 368(c) ( r e l a t i n g to 26 USC 368. the definition of control) is amended by striking out " a n d this p a r t , " a n d inserting in lieu thereof "this part, and p a r t V,'\ (2) A M E N D M E N T OF SECTION 383.—Section 383 ( r e l a t i n g to 26 USC 383. special limitations on certain carryovers) is amended to read as follows: ' "SEC. 383. SPECIAL LIMITATIONS ON UNUSED INVESTMENT CREDITS, WORK INCENTIVE PROGRAM CREDITS, FOREIGN TAXES, AND CAPITAL LOSSES. " I n t h e case of a change of ownership of a corporation in the manner described in section 382 ( a ) or ( b ) , the limitations provided in section Ante, p. 1599, 382 in such cases with respect t o net operating losses shall apply i n the same manner, as provided under regulations prescribed by t h e Secre- tary, with respect to any unused investment credit of the corporation under section 4 6 ( b ) , to a n y unused work incentive program credit of Ante, p. 1582. the corporation under section 5 0 A ( b ) , to any excess foreign taxes of the corporation under section 9 0 4 ( d ) , and to any net capital loss of t h e Post, p. 1620. corporation under section 1212." ( g ) EFFECTIVE D A T E . — (1) T h e amendments made by subsections ( a ) , ( b ) , ( c ) , a n d 26 USC 172 (d) shall apply t o losses incurred in taxable years ending after note. December 31, 1975. (2) F o r purposes of applying sections 382(a) a n d 383 (as it 26 USC 382 relates t o section 3 8 2 ( a ) ) of the Internal Eevenue Code of 1954, note. as amended by subsections (e) a n d ( f ) , the amendments made by subsections (e) a n d (f) shall take effect for taxable years begin- ning after J u n e 30, 1978, except t h a t t h e beginning of t h e taxable years specified i n clause (ii) of section 382(a) (1) ( B ) of
90 STAT. 1606 PUBLIC LAW 94-455—OCT. 4 , 1976 26 u s e 382 such Code, as so amended, shall be considered t o be t h e later of: "°*^- ( A ) the beginning of such taxable years, or ( B ) J a n u a r y 1,1978. (3) Sections 382(b) a n d 383 (as it relates t o section 3 8 2 ( b ) ) Ante, p. 1599. of t h e I n t e r n a l Revenue Code of 1954, as amended by subsections (e) a n d ( f ) , shall apply ( a n d such sections as in effect prior to such amendment shall not apply) to reorganizations p u r s u a n t t o a p l a n of reorganization adopted by one or more of t h e parties thereto on or after J a n u a r y 1,1978. F o r purposes of the preceding sentence, a corporation shall be considered to have adopted a plan of reorganization on t h e date on which a resolution of t h e board of directors is passed adopting the plan or recommending its adop- tion t o t h e shareholders, or on the date on which the shareholders approve t h e plan of reorganization, whichever is earlier. 46 u s e 1177-1. SEC. 807. SMALL FISHING VESSEL CONSTRUCTION RESERVES. I n addition t o any other vessel which m a y be deemed an "eligible vessel" a n d a "qualified vessel" under section 607 of t h e Merchant Marine Act, 1936 (46 U.S.C. 1177), a commercial fishing vessel under five net tons b u t not u n d e r two net tons— (1) which is constructed in t h e U n i t e d States and, if recon- structed, is reconstructed in the U n i t e d S t a t e s ; (2) which is owned by a citizen of t h e United S t a t e s ; (3) which h a s a home port in t h e United States; and (4) which is operated i n t h e commercial fisheries of t h e U n i t e d States, shall be considered t o be a n "eligible vessel" a n d a "qualified vessel" for t h e purposes of such section 607. TITLE IX—SMALL BUSINESS PROVISIONS SEC. 901. EXTENSION OF CERTAIN CORPORATE INCOME TAX REDUC- TIONS. 26 u s e 11. (a) I N GENERAL.—Subsections ( a ) , ( b ) , ( c ) , a n d ( d ) of section 11 (relating t o t a x imposed on corporations) are amended to read as follows: " (a) CORPORATIONS I N G E N E R A L . — A t a x is hereby imposed for each ' taxable year on t h e taxable income of every corporation. T h e t a x shall consist of a normal t a x computed under subsection (b) and a surtax computed under subsection ( c ) . " (b) NORMAL T A X . — T h e n o r m a l t a x is equal t o — " ( 1 ) in t h e case of a taxable year ending after December 31, 1977,22 percent of the taxable income, and " ( 2 ) in the case of a taxable year ending after December 31, 1974, a n d before J a n u a r y 1,1978, the sum of— " ( A ) 20 percent of so much of the taxable income as does not exceed $25,000, plus " ( B ) 22 percent of so much of the taxable income as exceeds $25,000. " ( c ) SURTAX.—^The surtax is 26 percent of t h e amount by which t h e taxable income exceeds t h e surtax exemption for t h e taxable year. ^ " ( d ) SURTAX E X E M P T I O N . — F o r purposes of this subtitle, t h e surtax exemption for any taxable year is— " ( 1 ) $25,000 in the case of a taxable year ending after Decem- ber 31,1977, or " ( 2 ) $50,000 in the case of a taxable year ending after Decem- ber 31,1974, and before J a n u a r y 1,1978,
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1607 except that, with respect t o a corporation to which section 1561 (relat- ing t o certain m u h i p l e t a x benefits in t h e case of certain controlled corporations) applies for the taxable year, the surtax exemption for the taxable year is the amount determined under such section." (b) M U T U A L INSURANCE C O M P A N I E S . — . (1) I x GENERAL.—Sectiou 821(a) (1) (relating to mutual insur- 26 USC 821. ance companies) is amended to read as follows: " (1) XoRMAL T A X . — A normal tax equal to— " ( A ) in t h e case of a taxable year ending after December 31,1977, 22 percent of the mutual insurance company taxable income, or 44 percent of the amount by which such taxable income exceeds $6,000, whichever is lesser, or " ( B ) in the case of a taxable year ending after Decem- ber 31,1974, and before J a n u a r y 1,1978— " ( i ) 20 percent of so much of the mutual insurance company taxable income as does not exceed $25,000, plus " ( i i ) 22 percent of so much of the mutual insurance company taxable income as exceeds $25,000, or 44 percent of the amount by which such taxable income , exceeds $6,000, whichever is lesser; plus". (2) SMALL COMPANIES.—Section 8 2 1 ( c ) ( 1 ) ( A ) (relating to alternative t a x for certain small companies) is amended t o read as follows: " ( A ) NORMAL TAX.—A normal t a x equal t o — . . , " ( i ) in the case of a taxable year ending after Decem- ber 31,1977, 22 percent of the taxable investment income, or 44 percent of the amount by which such taxable income -"; . i ,;< exceeds $3,000, whichever is lesser, or " ( i i ) in the case of a taxable year ending after Decem- ber 31, 1974, and before J a n u a r y 1,1978, 20 percent of so much of the taxable investment income as does not exceed $25,000, plus 22 percent of so much of the taxable invest- ment income as exceeds $25,000, or 44 percent of t h e amount by which such taxable income exceeds $3,000, ' whichever is lesser; plus". (c) CONFORMING A M E N D M E N T S . — (1) Section 1561(a) (relating to certain multiple t a x benefits 26 USC 1561. in the case of certain controlled corporations) is amended by add- ing a t t h e end thereof the following ncAv sentence: " I n applying section 11(b) ( 2 ) , the first $25,000 of taxable income and t h e sec- ond $25,000 of taxable income shall each be allocated among t h e ' ' J^^^^ component members of a controlled group of corporations in t h e same manner as the surtax exemption is allocated." (2) Subsection (f) of section 21 (relating to change in surtax 26 USC 21. exemption treated as a change in a rate of t a x ) is amended by )t striking out " T a x Reduction Act of 1975" and all t h a t follows and inserting in lieu thereof t h e following: " T a x Reduction A c t of 1975 in the surtax exemption and any change under section 11(d) 26 USC 1 note, in t h e surtax exemption shall be treated as a change in a rate of tax." (3) Section 6154 (relating to installment payments of estimated 26 USC 6154. income t a x by corporations) is amended by striking out sub- section ( h ) . (d) EFFECTIVE DATES.—The amendment made by subsection ( a ) 26 USC 11 note, shall take effect on December 23, 1975. The amendments made by sub- section (b) shall apply t o taxable years ending after December 31,
9 0 STAT. 1608 PUBLIC LAW 94-455—OCT. 4, 1976 1974. T h e amendments made by subsection (c) shall apply t o taxable years ending after December 31,1975. SEC. 902. CHANGES IN SUBCHAPTER S RULES. ( a ) NUMBER OF SHAREHOLDERS.— 26 u s e 1371. (1) I N GENERAL.—Subscction ( a ) ( 1 ) of section 1371 (relating to the definition of small business corporation) is amended t o read as follows: " ( 1 ) have (except as provided in subsection ( e ) ) more than 10 shareholders;". (2) SPECIAL SHAREHOLDER RULES.—Section 1371 is amended by adding at the end thereof the following new subsection: " ( e ) SPECIAL SHAREHOLDER R U L E S . — " ( 1 ) A small business corporation which has been an electing small business corporation for a period of five consecutive taxable years may not have more t h a n 15 shareholders. " ( 2 ) If, d u r i n g t h e 5-year period set forth in p a r a g r a p h ( 1 ) , the number of shareholders of an electing small business corpora- tion increases to an amount in excess of 10 ( b u t not in excess of 15) solely by reason of additional shareholders who acquired their stock through inheritance, the corporation may have a number of additional shareholders equal to t h e number by which the inheriting shareholders cause the total number of shareholders of such corporation to exceed 10." 26 u s e 1371 (3) EFFECTIVE DATE.—The amendments made by this subsection "°*^- shall apply to taxable years beginning after December 31,1976. (b) DISTRIBUTIONS BY SUBCHAPTER S CORPORATIONS.— 26 u s e 1377. (1) I N GENERAL.—Section 1377 (relating t o special rules a p - plicable to earnings a n d profits of electing small business corpora- tions) is amended by a d d i n g at the end thereof the following new subsection: " ( d ) DISTRIBUTIONS OF UNDISTRIBUTED TAXABLE INCOME PREVIOUSLY TAXED TO SHAREHOLDERS.—For purposes of determining whether a distribution by an electing small business corporation constitutes a distribution of such corporation's undistributed taxable income pre- viously taxed to shareholders (as provided for in section 1375 ( d ) ) , the earnings a n d profits of such corporation for t h e taxable year in which the distribution is made shall be computed without regard to section 312 ( m ) . Such computation shall be made without regard to section 312(m) only for such purposes." 26 u s e 1377 (2) EFFECTIVE DATE.—The amendment made by this subsection note. shall apply to taxable years beginning after December 31, 1975. (c) ADDITIONAL CHANGES I N SUBCHAPTER S R U L E S . — (1) ESTATE OF DECEASED SPOUSE NOT TO BE TREATED AS SHARE- 26 u s e 1371. HOLDER.—Subsection (c) of section 1371 (relating to stock owned by husband and wife) is amended to read as follows: " ( c ) STOCK O W N E D BY HUSBAND AND W I F E . — F o r purposes of sub- „, , -. section ( a ) ( 1 ) stock which— " ( 1 ) is community property of a husband a n d wife (or t h e income from which is community income) under t h e applicable , ^ community property law of a State, " ( 2 ) is held by a husband a n d wife as joint tenants, tenants by the entirety, or tenants in common, .;,j, it . V " ( 3 ) was, on t h e date of death of a spouse, stock described in p a r a g r a p h (1) o r ( 2 ) , a n d is, by reason of such death, held by t h e estate of t h e deceased spouse a n d the surviving spouse, or by the estates of both spouses (by reason of their deaths on t h e same
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1609 d a t e ) , in the same proportion as held by the spouses before such death, or " ( 4 ) was, on the date of the death of a surviving spouse, stock described i n p a r a g r a p h ( 3 ) , and is, by reason of such death, held by the estates of both spouses in the same proportion as held by the spouses before their deaths, shall be treated as owned by one shareholder." (2) BROADENING CLASSES or PERMISSIBLE SHAREHOLDERS TO INCLUDE CERTAIN TRUSTS. ( A ) Section 1371 (relating to definitions for purposes of 26 USC 1371. subchapter S ) is amended b}^ a d d i n g at the end thereof t h e following new subsection: "(f) CERTAIN TRLTSTS PERMITTED AS SHAREHOLDERS.—For purposes of subsection ( a ) , the following trusts may be shareholders: " ( 1 ) A trust all of which is treated as owned by t h e grantor <: under subpart E of p a r t I of subchapter J of this chapter. 26 USC 671. " ( 2 ) A trust created primarily to exercise the voting power of stock transferred to it. " ( 3 ) A n y trust with respect to stock transferred t o i t pursuant to the terms of a will, but only for the 60-day period beginning on the day on which such stock is transferred to it. I n the case of a trust described in p a r a g r a p h ( 2 ) , each beneficiary of the trust shall, for purposes of subsection ( a ) ( 1 ) , be treated as a shareholder.". ( B ) P a r a g r a p h (2) of section 1371(a) is amended by striking out " ( o t h e r than an e s t a t e ) " a n d inserting in lieu thereof " ( o t h e r t h a n a n estate a n d other than a trust described in subsection ( f ) ) " . (3) N E W SHAREHOLDERS MUST ArriRMATivELy ELECT TO TERMI- NATE ELECTION.—Paragraph (1) of section 1372(e) (relating to 26 USC 1372. termination of election) is amended to read as follows: " ( 1 ) N E W SHAREHOLDERS.— " ( A ) A n election under subsection (a) made by a small business corporation shall terminate if any person who was not a shareholder in such corporation— " ( i ) on the first d a y of the first taxable year of t h e corporation for which the election is effective, if such election is made on or before such first day, or " ( i i ) on the day on which the election is made, if such election is made after such first day, becomes a shareholder in such corporation and affirmatively refuses (in such manner as the Secretary shall by regulations prescribe) to consent to such election on or before the 60th day after the day on which he acquires the stock. " ( B ) I f the person acquiring t h e stock is t h e estate of a decedent, t h e period under subparagraph ( A ) for affirma- tively refusing to consent to the election shall expire on t h e 60th day after whichever of the following is the earlier: " (i) The day on which the executor or administrator of the estate qualifies; or • >, " ( i i ) T h e last day of the taxable year of the corpora- tion in which the decedent died. " ( C ) A n y termination of a n election under subparagraph ( A ) by reason of the affirmative refusal of any person to con- sent to such election shall be effective for the taxable year of the corporation in which such person becomes a shareholder
90 STAT. 1610 PUBLIC LAW 94-455—OCT. 4, 1976 in the corporation and for all succeeding taxable years of the corporation.". 26 u s e 1371 (4) EFFECTIVE DATE.—The amendments made by this subsection note. shall apply to taxable years beginning after December 31,1976. TITLE X—CHANGES IN THE TREATMENT OF FOREIGN INCOME PART I—FOREIGN TAX PROVISIONS AFFECTING ' INDIVIDUALS ABROAD SEC. 1011. INCOME EARNED ABROAD BY UNITED STATES CITIZENS LIVING OR RESIDING ABROAD. ( a ) REDucTioisr OF LIMITATIONS ON A M O U N T EXCLUDABLE.—Para- 26 u s e 911. g r a p h (1) of section 911(c) relating to limitations on amount of exclusion) is amended to read as follows: " ( 1 ) L I M I T A T I O N S ON AMOUNT OF EXCLUSION.— " ( A ) I N GENERAL.—Except as provided in subparagraphs ( B ) a n d ( C ) , t h e amount excluded from the gross income of an individual under subsection ( a ) for any taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of $15,000. "(B) EMPLOYEES o r CHARITABLE ORGANIZATIONS.—If a n y individual performs qualified charitable services during any taxable year, the amount of t h e earned income attributable to such services excluded from t h e gross income of the indi- vidual under subsection ( a ) for the taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of $20,000. " ( C ) SPECIAL R U L E . — I f any i n d i v i d u a l p e r f o r m s qualified charitable services and other services during any taxable year, the amount of t h e earned income attributable to such other services excluded from t h e gross income of t h e individual under subsection ( a ) for the taxable year shall not (after the application of subparagraph ( A ) with respect to such earned income) exceed $15,000 reduced by the amount of the earned income attributable to qualified charitable services excluded from gross income under subsection ( a ) for the taxable year. "(D) QUALIFIED CHARITABLE SERVICES.—For purposes of this subsection, t h e term 'qualified charitable services' means services performed by an employee for an employer created or organized in t h e United States, or under t h e law of t h e United States, any State, or the District of Columbia, which meets the requirements of section 501 (c) ( 3 ) . " ( b ) ADDITIONAL L I M I T A T I O N S ON E X C L U S I O N . — (1) DISALLOWANCE o r FOREIGN TAX CREDIT W I T H RESPECT TO EXCLUDED AMOUNTS.—The last sentence of subsection ( a ) of sec- tion 911 (relating to earned income from sources without t h e United States) is amended to read as follows: " A n individual shall not be allowed as a deduction from his gross income a n y deductions (other t h a n those allowed by section 151, relating to personal exemptions), or as a credit against the t a x imposed by this chapter any credit for the amount of taxes paid or accrued to a foreign country or possession of the United States, to the extent t h a t such deductions o r credit is properly allocable t o or chargeable against amounts excluded from gross income under this subsection."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1611 (2) DISALLOWANCE OF EXCLUSION FOR INCOME RECEIVED OTHER THAN I N COUNTRY WHERE EARNED.—Section 911(c) (relating to 26USC911. special rules for earned income from sources without the United States) is amended by a d d i n g at the end thereof the following new p a r a g r a p h : "(8) R E Q U I R E M E N T AS TO PLACE OF RECEIPT.—N'o amount received by an individual during the taxable year which consti- tutes earned income (entitled to the exclusion under subsection ( a ) ) attributable to services performed in a foreign country or countries shall be excluded under subsection (a) if such amount is received by such individual outside of the foreign country or countries where such services were performed and if one of the purposes is the avoidance of any tax imposed by such foreign country or countries on such amount." ' ' (3) INCLUSION OF EARNED INCOME I N COMPUTATION OF RATE OF TAX.—Section 911 (relating to earned income from sources with- out the United States) is amended by redesignating subsection (d) as subsection- (f) and by inserting after subsection (c) the following new subsections: "(d) AMOTTNT EXCLUDED U N D E R SUBSECTION (a) INCLUDED I N COMPUTATION OF T A X . — " ( 1 ) COMPUTATION OF TAX.—If for any taxable year an indi- vidual has earned income which is excluded from gross income under subsection ( a ) , the tax imposed by section 1 or section 1201 Post, p. 1786. shall be the excess of— " ( A ) the tax imposed by section 1 or section 1201 (which- ever is applicable) on the amount of net taxable income, over " ( B ) the tax imposed by section 1 or section 1201 (which- ever is applicable) on the amount of net excluded earned income. " ( 2 ) D E F I N I T I O N S . — F o r purposes of this subsection— " ( A ) the term 'net taxable income' means an amount equal to the sum of the amount of taxable income for the taxable year plus the amount of net excluded earned income of such individual for such taxable y e a r ; and " ( B ) the term 'net excluded earned income' means the excess of the amount of earned income excluded under sub- section (a) for the taxable year over the amount of the deduc- tions disallowed with respect to such excluded earned income for such taxable year under subsection ( a ) . "(e) SECTION N O T TO A P P L Y . — " ( 1 ) I N GENERAL.—An individual entitled to the benefits of this section for a taxable year may elect, in such manner and at such time as shall be prescribed by the Secretary, not to have the provisions of this section apply^ " ( 2 ) EFFECT OF ELECTION.—An election under p a r a g r a p h (1) shall apply to the taxable year for which made and to all subse- quent taxable years. Such election may not be revoked except with the consent of the Secretary." (c) ALLOWANCE OF FOREIGN T A X CREDITS TO INDIVIDUALS T A K I N G STANDARD DEDUCTION.—Section 36 (relating to credits not allowed to 26 USC 36. individuals p a y i n g optional tax or t a k i n g standard deduction) is amended by striking out "sections 32, 33, a n d " and inserting in lieu thereof "sections 32 and". (d) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 911 apply to taxable years beginning after December 31, 1975. note.
90 STAT. 1612 PUBLIC LAW 94-455—OCT. 4, 1976 SEC. 1012. INCOME TAX TREATMENT OF NONRESIDENT ALIEN INDI- ? ;< V- VIDUALS WHO ARE MARRIED TO CITIZENS OR RESIDENTS OF THE UNITED STATES. (a) ELECTION T O B E TREATED AS RESIDENTS OF THE UNITED STATES.— 26 u s e 6013. (1) I N GENERAL.—Section 6013 (relating to joint returns of income t a x by husband a n d wife) is amended by a d d i n g a t t h e end thereof the following new subsections: Tc " ( g ) ELECTION T o TREAT NONRESIDENT A L I E N INDIVIDUAL AS R E S I - DENT OF THE U N I T E D STATES.— " (1) I N GENERAL.—A nonresident alien individual with respect to whom this subsection is i n effect for the taxable year shall be treated as a resident of t h e U n i t e d States for purposes of chap- 26 u s e 1. ter 1 for all of such taxable year. " ( 2 ) INDIVIDUALS WITH RESPECT TO WHOM THIS SUBSECTION IS IN EFFECT.—This subsection shall be in effect with respect t o a n y individual who, a t t h e time an election was made under this sub- section, was a nonresident alien individual married to a citizen or resident of the United States, if both of them made such election to have the benefits of this subsection apply to them. " ( 3 ) DURATION OF ELECTION.—An election under this subsec- tion shall apply to the taxable year for which made a n d to all subsequent taxable years until terminated under p a r a g r a p h (4) b or ( 5 ) ; except t h a t any such election shall not apply for any tax- able year if neither spouse is a citizen or resident of t h e United States a t any time d u r i n g such year. " ( 4 ) TERMINATION o r ELECTION.—An election under this sub- section shall terminate a t t h e earliest of t h e following t i m e s : "(A) REVOCATION BY TAXPAYERS.—If either taxpayer revokes the election, as of the first taxable year for which the last d a y prescribed by law for filing the r e t u r n of t a x under : chapter 1 has not yet occurred. " ( B ) D E A T H . — I n the case of t h e death of either spouse, as of the beginning of the first taxable year of the spouse who survives following t h e taxable year i n which such death occurred; except t h a t if the spouse who survives is a citizen or resident of t h e United States who is a surviving spouse entitled t o t h e benefits of section 2, t h e time provided by this s u b p a r a g r a p h shall be as of t h e close of the last taxable year for which such individual is entitled to the benefits of ^ section 2. " ( C ) LEGAL SEPARATION.—In the case of the legal separa- tion of the couple under a decree of divorce or of separate maintenance, as of the beginning of the taxable year in which such legal separation occurs. , "(D) TERMINATION BY SECRETARY.—At t h e time p r o v i d e d in p a r a g r a p h ( 5 ) . " ( 5 ) TERMINATION BY SECRETARY.—The Secretary may termi- nate any election under this subsection for any taxable year if he determines t h a t either spouse has failed— " ( A ) to keep such books and records, " ( B ) to g r a n t such access to such books and records, or " (C) to supply such other information, as m a y be reasonably necessary to ascertain t h e amount of lia- bility for taxes under chapter 1 of either spouse for such taxable year.
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1613 " ( 6 ) O N L Y ONE ELECTION.—If any election under this subsection for a n y two individuals is terminated under p a r a g r a p h (4) or (5) for any taxable year, such two individuals shall be ineligible to make an election under this subsection for any subsequent taxable year. " ( h ) J O I N T E E T U R N , E T C . , FOR YEAR I N W H I C H NONRESIDENT A L I E N BECOMES RESIDENT OF U N I T E D STATES.— " ( 1 ) I N GENERAL.—If— " ( A ) any individual is a nonresident alien individual a t the beginning of any taxable year b u t is a resident of the United States a t the close of such taxable year, " ( B ) a t the close of such taxable year, such individual is married to a citizen or resident of the United States, and " ( C ) both individuals elect the benefits of this subsection at the time a n d in the manner prescribed by the Secretary by regulation, ' *• then the individual referred to in subparagraph ( A ) shall be treated as a resident of the United States for purposes of chapter 1 26 USC 1. for all of such taxable year. " (2) O N L Y ONE ELECTION.—If any election under this subsection applies for any 2 individuals for any taxable year, such 2 individu- als shall be ineligible to make an election under this subsection for any subsequent taxable year." (2) CLERICAL AMENDMENT.—Section 871(g) ( r e l a t i n g to cross 26 USC 871. references) is amended by adding at the end thereof t h e follow- ing new p a r a g r a p h : "(7) For election to treat married nonresident alien individual as resident of United States in certain cases, see subsections (g) and (h) of section 6013." ( b ) T A X TREATMENT OF CERTAIN C O M M U N I T Y INCOME I N T H E CASE OF A RESIDENT OR C I T I Z E N OF T H E U N I T E D STATES W H O I S MARRIED TO A ' • "- ' ' NONRESIDENT A L I E N INDIVIDUAL.— (1) I N GENERAL.—Subpart A of p a r t I I of subchapter N of chapter 1 (relating to nonresident alien individuals) is amended by a d d i n g a t the end thereof the following new section: "SEC. 879. TAX TREATMENT OF CERTAIN COMMUNITY INCOME IN THE 26 USC 879. CASE OF A RESIDENT OR CITIZEN OF THE UNITED STATES WHO IS MARRIED TO A NONRESIDENT ALIEN INDIVIDUAI^ "(a) GENERAL R U L E . — I n the case of a citizen or resident of t h e United States who is married to a nonresident alien individual a n d who h a s community income for the taxable year, such community income shall be treated as follows: " ( 1 ) E a r n e d income (within the meaning of section 9 1 1 ( b ) ) , ^ - other than trade or business income and a partner's distributive share of partnership income, shall be treated as the income of the spouse who rendered the personal services, " ( 2 ) T r a d e or business income, a n d a partner's distributive ,1 : >;: share of partnership income, shall be treated as provided in sec- tion 1402(a) ( 5 ) , " ( 3 ) Cornmunity income not described in p a r a g r a p h (1) or (2) which is derived from the separate property (as determined under the applicable community property law) of one spouse shall be treated as the income of such spouse, and " ( 4 ) A l l other such community income shall be treated as pro- vided in the applicable community property law. 89-194 O—78—pt. 2 10
90 STAT. 1614 PUBLIC LAW 94-455—OCT. 4, 1976 Ante, p. 1612. " ( b ) EXCEPTION W H E R E ELECTION UNDER SECTION 6013(g) I s IN EFFECT.—Subsection (a) shall not apply for any taxable year for which an election under subsection ( g ) or ( h ) of section 6013 (relating to election to treat nonresident alien individual as resident of t h e United States) is in effect. "(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— " ( 1 ) COMMUNITY INCOME.—The term 'community income' means income which, under applicable community property laws, is treated as community income. " (2) COMMUNITY PROPERTY LAWS.—The t e r m 'community p r o p - erty laws' means the community property laws of a State, a for- eign country, or a possession of the U n i t e d States. " ( 3 ) DETERMINATION OF MARITAL STATUS.—The d e t e r m i n a t i o n of marital status shall be made under section 1 4 3 ( a ) . " 26 u s e 981. (2) REPEAL o r SECTION 9 8 1 . — S u b p a r t I I of p a r t I I I of sub- chapter N of chapter 1 (relating to election as to treatment of income subject to foreign community property laws) is hereby repealed. (3) CLERICAL AMENDMENTS.— ( A ) T h e table of sections for subpart A of p a r t I I of subchapter N of chapter 1 is amended by adding a t t h e end thereof the following new item : "Sec. 879. Tax treatment of certain community income in the case of a resident or citizen of the United States who is married to a nonresident alien individual." ( B ) T h e table of subparts for p a r t I I I of subchapter N of chapter 1 is amended by striking out t h e item relating to subpart G. (c) D U E D A T E FOR F I L I N G ESTIMATED T A X R E T U R N S I N T H E CASE OF 26 u s e 6073. CERTAIN NONRESIDENT ALIENS.—Subsection ( a ) of section 6073 (relat- ing to time for filing declarations of estimated t a x by individuals) is amended by adding at the end thereof the following sentence: " I n t h e case of a nonresident alien described in section 6072(c), t h e requirements of section 6015 shall be deemed to be first met no earlier t h a n after A p r i l 1 a n d before J u n e 2 of the taxable year.". 26 u s e 6013 ( d ) EFFECTIVE DATES.—The amendments made by subsection ( a ) note. shall apply to taxable years ending on or after December 31,1975. T h e amendments made by subsections ( b ) a n d (c) shall apply to taxable years beginning after December 31,1976. "SEC. 1013. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES TO BE TAXED CURRENTLY TO GANTOR. ( a ) TAXATION o r INCOME TO GRANTOR OF T R U S T . — S u b p a r t E of p a r t I of subchapter J of chapter 1 (relating to grantors and others treated as substantial owners) is amended by a d d i n g at the end thereof the following new section: 26 u s e 679. "SEC. 679. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES. " ( a ) TRANSFEROR TREATED AS O W N E R . — " ( 1 ) I N GENERAL.—A United States person who directly or indirectly transfers property t o a foreign t r u s t (other t h a n a t r u s t described i n section 404(a) ( 4 ) ) shall be treated as the owner for his taxable year of t h e portion of such t r u s t attributable to such p r o p e r t y if for such year there is a United States beneficiary of any portion of such trust. " ( 2 ) EXCEPTIONS.—Paragraph (1) shall not apply—
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1615 "(A) TRAXSFEKS BY REASON OF DEATH.—To any transfer by reason of the death of the transferor. "(B) TRANSFERS WHERE GAIN I S RECOGNIZED TO TRANS- FEROR.—To anj^ sale or exchange of t h e property at its fair market value in a transaction i n which all of t h e gain to t h e transferor is realized a t t h e time of the transfer and is recog- nized either at such time or is returned as provided in section 453. " ( b ) TRUSTS ACQUIRING U N I T E D STATES B E N E F I C I A R I E S . — I f — " ( 1 ) subsection (a) applies to a trust for the transferor's tax- able year, and " ( 2 ) subsection ( a ) would have applied t o t h e trust for his immediately preceding taxable year b u t for t h e fact that for such preceding taxable year there Avas no L^nited States beneficiar}^ for any portion of the trust, then, for purposes of this subtitle, the transferor shall be treated as h a v i n g income for t h e taxable year (in addition to his other income : for such year) equal to t h e undistributed n e t income ( a t t h e close of such immediately preceding taxable year) attributable to the portion of the trust referred to in subsection ( a ) . " ( c ) TRUSTS TREATED AS HAVING A U N I T E D STATES BENEFICIARY.— " ( 1 ) I N GENERAL.—For purposes of this section, a trust shall be treated as h a v i n g a United States beneficiary for t h e taxable year unless— " ( A ) under the terms of t h e trust, no p a r t of t h e income or corpus of t h e trust may be paid or accumulated d u r i n g the taxable year t o or for t h e benefit of a United States person, and " ( B ) if the trust were terminated a t any time d u r i n g t h e taxable year, n o p a r t of t h e income or corpus of such trust could be paid to or for the benefit of a United States person. " ( 2 ) ATTRIBUTION OF O W N E R S H I P . — F o r purposes of p a r a g r a p h (1), an amount shall be treated as paid or accumulated t o or for the benefit of a United States person if such amount is paid to or accumulated for a foreign corporation, foreign partnership, or foreign trust or estate, and— " ( A ) in t h e case of a foreign corporation, more t h a n 50 percent of t h e total combined voting power of all classes of stock entitled t o vote of such corporation is OAvned (within the meaning of section 9 5 8 ( a ) ) or is considered to be owned (Avithin t h e meaning of section 9 5 8 ( b ) ) by United States shareholders (as defined in section 9 5 1 ( b ) ) , " ( B ) in t h e case of a foreign partnership, a United States person is a p a r t n e r of such partnership, or " ( C ) in t h e case of a foreign trust or estate, such trust o r estate has a United States beneficiary (within t h e meaning of p a r a g r a p h ( 1 ) ) . " . ( b ) GRANTOR T o B E TREATED AS OWNER.—Subsection ( b ) of sec- tion 678 (relating to persons other t h a n grantors treated as substan- 26 USC 678. tial OAvners) is amended by striking out everything after "modified," and inserting in lieu thereof "if the g r a n t o r of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provisions of this subpart other t h a n this section.". (c) TREATMENT OF CAPITAL G A I N S AND LOSSES OF CERTAIN FOREIGN TRUSTS.— (1) FOREIGN TRUSTS CREATED BY UNITED STATES PERSONS TREATED LIKE OTHER FOREIGN TRUSTS.—Subparagraph ( C ) of section 643 26 USC 643.
90 STAT. 1616 PUBLIC LAW 94-455—OCT. 4, 1976 (a) (6) (relating to distributable net income in case of foreign trusts) is amended by striking out "foreign t r u s t created by a United States person" a n d inserting in lieu thereof "foreign trust". (2) TRAXSITIOXAL RULE FOR FOREIGN TRUSTS.—Section 643(a) 26 u s e 643. (6) is amended by adding a t the end thereof t h e following new subparagraph: " ( D ) Effective for distributions made in taxable years beginning after December 31, 1975, t h e undistributed n e t income of each foreign t r u s t for each taxable year beginning on or before December 31, 1975, remaining undistributed a t the close of the last taxable year beginning on or before December 31, 1975, shall be redetermined by t a k i n g into account the deduction allowed by section 1202." ( d ) RETURNS FOR FOREIGN TRUSTS HAVING O N E OR MORE U N I T E D STATES BENEFICIARIES.— 26 u s e 6048. (1) Section 6048 (relating to returns as to creation of or trans- fers to certain foreign trusts) is amended by redesignating sub- section (c) as subsection ( d ) a n d by inserting after subsection (b) the following new subsection: " ( c ) A N N U A L RETURNS FOR FOREIGN TRUSTS H A V I N G O N E OR MORE U N I T E D STATES B E N E F I C I A R I E S . — E a c h t a x p a y e r subject to t a x u n d e r section 679 (relating to foreign trusts h a v i n g one or more United States beneficiaries) for his taxable year with respect to any trust shall make a return with respect to such trust for such year at such time a n d in such manner, a n d setting forth such information, as t h e Secretary may by regulations prescribe.". 26 u s e 6677. (2) Section 6677(a) (relating to failure to file information returns with respect to certain foreign trusts) is amended by strik- ing out "to a t r u s t " a n d inserting in lieu thereof " t o a trust (or, in t h e case of a failure with respect t o section 6048(c), equal t o 5 percent of the value of the corpus of the trust at the close of t h e taxable y e a r ) " . (e) CONFORMING A M E N D M E N T S . — (1) T h e table of sections for subpart. E of p a r t I of subchapter J of chapter 1 is amended by adding at the end thereof t h e following new i t e m : I "Sec. 679. Foreign trusts having one or more United States bene- ficiaries." 26 u s e 643. (2) Subsection ( d ) of section 643 is hereby repealed. 26 u s e 6048. (3) Subsection ( d ) of section 6048 (as redesignated by sub- section ( d ) ) is amended to read as follows: "(d) CROSS R E F E R E N C E . — "For provisions relating to penalties for violation of this section, see sections 6677 and 7203." (4) T h e heading of section 6048 is amended to read as follows: "SEC. 6048. RETURNS AS TO CERTAIN FOREIGN TRUSTS.". (5) T h e table of sections for subpart B of p a r t I I I of 26 u s e 6041. subchapter A of chapter 61 is amended by striking out t h e item relating t o section 6048 a n d inserting in lieu thereof t h e following: "Sec. 6048. Returns as to certain foreign trusts." (f) EFFECTIVE D A T E S . — 26 u s e 679 (1) I N GENERAL.—The amendments made by this section (other ^°^- t h a n subsection ( c ) ) shall apply to taxable years ending after December 31,1975, b u t only in the case of—
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1617 ( A ) foreign trusts created after May 21, 1974, a n d .-^eA- ; W^S: ( B ) transfers of property to foreign trusts after M a y 21, 1974. (2) CHANGES IN CAPITAL GAIN RULES FOR FOREIGN TRUSTS.—The 26 USC 643 amendments made by subsection (c) shall apply to taxable years "ot^- beginning after December 31, 1975. SEC. 1014. INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS FROM FOREIGN TRUSTS. ( a ) T A X T O INCLUDE SPECIAL INTEREST CHARGE.—Section 667(a) ^"•^^> P- 1575. (as amended by section 701 of this A c t ) is amended by striking out ^"fi^- " a n d " at the end of p a r a g r a p h ( 1 ) , by striking out the period a t t h e end of p a r a g r a p h (2) a n d inserting in lieu thereof ", a n d '', a n d by a d d i n g at the end thereof the following new p a r a g r a p h : ,,,, ,,. " ( 3 ) in t h e case of a foreign trust, t h e interest charge deter- mined as provided in section 668." Infra. (b) COMPUTATION OF SPECIAL INTEREST C H A R G E . — S u b p a r t D of p a r t I of subchapter J of chapter 1 (relating to treatment of excess distributions by trusts) is amended by a d d i n g at the end thereof t h e following new section: "SEC. 668. INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS 26 USC 668. FROM FOREIGN TRUSTS. "(a) GENERAL R U L E . — F o r purposes of the t a x determined u n d e r section 6 6 7 ( a ) , t h e interest.charge is an amount equal to 6 percent of ; ,-;J ^ ^^„.., the p a r t i a l t a x computed under section 667(b) multiplied by a fraction— .. ... ^ ^. " (1) the numerator of which is the sum of the number of tax- * ' ; '''^ able years between each taxable year to which the distribution is ^ <j allocated under section 666(a) and the taxable year of the dis- tribution (counting in each case the taxable year t o which t h e distribution is allocated b u t not counting t h e taxable year of the distribution), a n d " ( 2 ) the denominator of which is the number of taxable years to which t h e distribution is allocated under section 6 6 6 ( a ) . " ( b ) LIMITATION.—The total amount of t h e interest charge shall not, when added t o t h e total partial t a x computed under section 667 ( b ) , exceed the amount of t h e accumulation distribution (other t h a n the amount of t a x deemed distributed by section 666 ( b ) or ( c ) ) in respect of which such p a r t i a l t a x was determined. " ( c ) SPECIAL R U L E S . — " ( 1 ) INTEREST CHARGE NOT DEDUCTIBLE,—The interest charge determined under this section shall not be allowed as a deduction for purposes of any tax imposed by this title. "(2) TRANSITIONAL RULE.—For purposes of this section, "'*'^ {^'^ undistributed net income existing in a trust as of J a n u a r y 1,1977, '^^*''" shall be treated as allocated under section 666(a) to the first tax- able year beginning after December 31,1976." (c) CLERICAL A M E N D M E N T . — T h e table of sections for s u b p a r t D of p a r t I of subchapter J of chapter 1 is amended by a d d i n g a t t h e end thereof of t h e following new i t e m : Sec. 668. Interest charge on accumulation distributions from foreign trusts." ( d ) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 668 a p p l y t o taxable years beginning after December 31, 1976. °°*®- SEC. 1015. EXCISE TAX ON TRANSFERS OF PROPERTY TO FOREIGN '^" PERSONS TO AVOID FEDERAL INCOME TAX, ( a ) A M E N D M E N T OF SECTION 1491.—Section 1491 ( r e l a t i n g t o im- 26 USC 1491. position of t a x ) is amended to read as follows:
90 STAT. 1618 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 1491. "SEC. 1491. IMPOSITION OF TAX. "There is hereby imposed on t h e transfer of property by a citizen or resident of the United States, or by a domestic corporation or partner- ship, or by a t r u s t which is not a foreign trust, to a foreign corpora- tion as paid-in surplus or as a contribution to capital, or to a foreign trust, or to a foreign partnership, an excise t a x equal to 35 percent of the excess of— " ( 1 ) the fair market value of t h e property so transferred, over " ( 2 ) the sum of— " ( A ) t h e adjusted basis (for determining gain) of such property in the hands of the transferor, plus " ( B ) the amount of the gain recognized to the transferor at the time of the transfer." 26 u s e 1492. (b) AMENDMENTS or SECTION 1492.—Section 1492 ( r e l a t i n g t o non- taxable transfers) is amended— (1) by striking out in p a r a g r a p h (3) "section 367(d) applies." and inserting in lieu thereof "section 367 applies; o r " and (2) by a d d i n g a t the end thereof the following new p a r a g r a p h : " ( 4 ) T o a transfer for which an election h a s been made under Infra. section 1057." (c) ELECTION T O TREAT AS TAXABLE E X C H A N G E . — P a r t I V of sub- chapter O of chapter 1 (relating to special rules for determining gain or loss on disposition of property) is amended by redesignating sec- Ante, p. 1545. tion 1057 as section 1058 and by inserting after section 1056 the follow- ing new section: 26 u s e 1057. "SEC. 1057. ELECTION TO TREAT TRANSFER TO FOREIGN TRUST, ETC., AS TAXABLE EXCHANGE. Supra. " I n lieu of payment of t h e t a x imposed by section 1491, t h e tax- payer m a y elect (for purposes of this subtitle), at such time and in such manner as t h e Secretary m a y prescribe, to treat a transfer described in section 1491 as a sale or exchange of property for an amount equal in value to t h e fair market value of the property trans- ferred and to recognize as gain the excess of— " ( 1 ) the fair market value of the property so transferred, over " ( 2 ) the adjusted basis (for determining gain) of such prop- erty in the hands of the tranferor.". (c) CLERICAL A M E N D M E N T . — T h e table of sections for p a r t I V of subchapter O of chapter 1 is amended by striking out the last item thereof and inserting in lieu thereof: "See. 1057. Election to treat transfer to foreign trust, etc., as taxable exchange. "Sec. 1058. Cross references." 26 u s e 1491 ( d ) EFFECTIVE D A T E . — T h e amendments made by this section shall note- apply to transfers of property after October 2,1975. PART II—AMENDMENTS AFFECTING TAX TREATMENT OF CONTROLLED FOREIGN CORPORATIONS A N D THEIR SHAREHOLDERS SEC. 1021. AMENDMENT OF PROVISION RELATING TO INVESTMENT IN UNITED STATES PROPERTY BY CONTROLLED FOREIGN CORPORATIONS. (a) EXCEPTIONS TO D E F I N I T I O N o r U N I T E D STATES PROPERTY.— 26 u s e 956. Section 9 5 6 ( b ) ( 2 ) (relating t o exceptions to definition of United States property) is amended by striking out " a n d " a t the end of sub-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1619 p a r a g r a p h ( E ) , by redesignating s u b p a r a g r a p h ( F ) as s u b p a r a g r a p h ( H ) , a n d by inserting after s u b p a r a g r a p h ( E ) the following new subparagraphs: " ( F ) the stock or obligations of a domestic corporation which is neither a United States shareholder (as defined in section 9 5 1 ( b ) ) of the controlled foreign corporation, n o r a domestic corporation, 25 percent or more of the total com- bined voting power of which, immediately after the acquisi- tion of any stock in such domestic corpoi-ation by the con- trolled foreign corporation, is owned, or is considered as being owned, by such United States shai-eholders in the a g g r e g a t e ; " ( G ) any movable property (other t h a n a vessel or air- craft) which is used for t h e purpose of exploring for, developing, removing, or t r a n s p o r t i n g resources from ocean waters or under such waters Avhen used on the Continental Shelf of the United S t a t e s ; and". (b) CONSTRUCTIVE O W N E R S H I P OF STOCK.—Section 958 ( b ) ( r e l a t i n g 26 USC 958. to rules for determining stock ownership) is amended— (1) by striking out "954(d) ( 3 ) , " the first place it appears a n d inserting in lieu thereof "954(d) ( 3 ) , 956(b) ( 2 ) , " ; (2) by striking out " 9 5 4 ( d ) ( 3 ) , " the second place i t appears and inserting in lieu thereof "954(d) ( 3 ) , to treat t h e stock of a domestic corporation as owned by a United States shareholder of the conti-olled foreign corporation for purposes of section 956(b) ( 2 ) , " ; and (3) by a d d i n g at the end thereof the following new sentence: " P a r a g r a p h s (1) a n d (4) shall not apply for purposes of section 956(b) (2) to treat stock of a domestic corporation as not owned by a United States shareholder." (c) EFFECTIVE DATE.—^The amendments made by this section shall 26 USC 956 apply to taxable years of foreign corporations beginning after Decern- "^'t^- ber 31, 1975, and to taxable years of L^nited States shareholders (within t h e meaning of section 951(b) of the I n t e r n a l Revenue Code of 1954) within which or with which such taxable years of such foreign corporations end. I n determining for purposes of any taxable year referred to in the preceding sentence the amount referred to in section 956(a) (2) ( A ) of the I n t e r n a l Revenue Code of 1954 for the last tax- able year of a corporation beginning before J a n u a r y 1, 1976, t h e amendments made by this section shall be deemed also to apply to such .., ' last taxable year. SEC. 1022. REPEAL OF EXCLUSION FOR EARNINGS OF LESS DEVEL- OPED COUNTRY CORPORATIONS FOR PURPOSES OF SEC- TION 1248. (a) A M E N D M E N T OF SECTION 1 2 4 8 ( d ) . — P a r a g r a p h (3) of section 26 USC 1248. 1248(d) (relathig to exclusion from earnings and profits of gain from certain sales or exchanges of stock in certain foreign corporations) is amended to read as follows: "(3) LESS DEVELOPED COUNTRY CORPORATIONS UNDER PRIOR EAw.—Earnings and profits of a foreign corporation which were accumulated d u r i n g any taxable year beginning before J a n u a r y 1, 1976, while such corporation was a less developed country cor- poration under section 902(d) as in effect before the enactment ^"-t^' P- 1626. of the T a x Reduction Act of 1975.". 26 USC 1 note. (b) EFFECTIVE D A T E . — T h e amendment made by subsection (a) 26 USC 1248 shall a p p l y to taxable years beginning after December 31, 1975. note.
90 STAT. 1620 PUBLIC LAW 94-455—OCT. 4, 1976 SEC. 1023. EXCLUSION FROM SUBPART F OF CERTAIN EARNINGS OF INSURANCE COMPANIES. 26 u s e 954. (a) I N G E N E R A L . — P a r a g r a p h (3) of section 954(c) (relating to foreign personal holding company income) is amended by striking out " o r " at the end of s u b p a r a g r a p h ( A ) , by striking out the period at the end of s u b p a r a g r a p h ( B ) and inserting in lieu thereof ", or", and by adding at the end thereof the following new s u b p a r a g r a p h : " ( C ) dividends, interest, and gains from the sale or exchange of stock or securities received from a person other t h a n a related person (within the meaning of subsection ( d ) ( 3 ) ) derived from investments made by an insurance com- p a n y of a n amount of its assets equal to one-third of its pre- miums earned on insurance contracts (other t h a n life insur- ance and annuity contracts) d u r i n g the taxable year (as defined in section 8 3 2 ( b ) ( 4 ) ) which are not directly or \~^,,,^, , ^, indirectly attributable to the insurance or reinsurance of risks of persons who are related persons (within the meaning of subsection ( d ) ( 3 ) ) . " . 26 u s e 954 (b) EFFECTIVE D A T E . — T h e amendment made by this section shall °°*^- apply to taxable years of foreign corporations beginning after Decem- ber 31, 1975, and to taxable years of United States shareholders ^^ (within the meaning of section 951(b) of the I n t e r n a l Revenue Code of 1954) within which or with which such taxable years of such for- eign corporations end. SEC. 1024. SHIPPING PROFITS OF FOREIGN CORPORATIONS. 26 u s e 954. (a) CERTAIN S H I P P I N G OPERATIONS.—Subsection (b) of section 954 (relating to foreign base company income) is amended by adding at the end thereof the following new p a r a g r a p h : .,4-i ,. , "C^) SPECIAL EXCLUSION FOR FOREIGN BASE COMPANY SHIPPING -afOi; INCOME.—Income of a corporation which is foreign base company shipping income under p a r a g r a p h (4) of subsection (a) (deter- mined without regard to the exclusion under p a r a g r a p h (2) of this subsection) shall be excluded from foreign base company income if derived by a controlled foreign corporation from, or in connection with, the use (or h i r i n g or leasing for use) of an air- craft or vessel in foreign commerce between two points within the foreign country in which such corporation is created or organized and such aircraft or vessel is registered." 26 u s e 954 (b) EFFECTIVE D A T E . — T h e amendment made by this section shall note. apply to taxable years of foreign corporations beginning after Decem- ber 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the I n t e r n a l Revenue Code of 1954) within which or with which such taxable years of such for- '*^ ' • eign corporations end. PART III—AMENDMENTS AFFECTING TREATMENT OF FOREIGN TAXES SEC. 1031. REQUIREMENT THAT FOREIGN TAX CREDIT BE DETER- MINED ON OVERALL BASIS. 26 u s e 904. (a) OVERALL LIMITATION ON FOREIGN T A X CREDIT.—Section 904 (relating to limitation on foreign tax credit) is amended to read as follows: "SEC. 904. LIMITATION ON CREDIT. " ( a ) LIMITATION.—The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1621 which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. " ( b ) TAXABLE INCOME FOR PURPOSES OF COMPUTIXG LIMITATION.—• F o r puri^oses of subsection ( a ) , the taxable income in the case of a n individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b). 26 USC 151, "(c) CARRYIiACK AND CARRYOVER OF ExCESS TAX PAID. ^Auy 642. amount by which all taxes paid or accrued t o foreign countries or possessions of t h e L^nited States for any taxable year for which t h e taxpayer chooses to have the benefits of this subpart exceed t h e limita- tion under subsection ( a ) shall be deemed taxes paid or accrued t o foreign countries or possessions of the United States in t h e second preceding taxable year, i n the first preceding taxable year, and i n t h e first, second, t h i r d , fourth, or fifth succeeding taxable years, i n t h a t order a n d to t h e extent n o t deemed taxes paid or accrued i n a p r i o r taxable year, in t h e amount by which the limitation under subsec- tion ( a ) for such preceding or succeeding taxable year exceeds t h e sum of the taxes paid o r accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year a n d t h e amount of the taxes for any taxable year earlier t h a n the current tax- able year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether o r n o t t h e taxpayer chooses t o have the benefits of this subpart with respect t o such earlier taxable y e a r ) . Such amount deemed paid or accrued i n any year m a y be availed of only as a t a x credit a n d n o t as a deduction a n d only if the taxpayer for such year chooses to have the benefits of this s u b p a r t as t o taxes paid or accrued for t h a t year to foreign countries or posses- sions of the United States. " ( d ) APPLICATION OP SECTION I N CASE OF CERTAIN INTEREST I N C O M E AND DIVIDENDS F R O M A D I S C OR FORMER D I S C . — " ( 1 ) I N GENERAL.—The provisious of subscctious ( a ) , ( b ) , and (c) shall be applied separately with respect t o each of the follow- ing items of income: " ( A ) the interest income described i n p a r a g r a p h ( 2 ) , " ( B ) dividends from a DIvSC or former D I S C (as defined in section 9 9 2 ( a ) ) to the extent such dividends are treated as income from sources without the United States, a n d " ( C ) income other than the interest income described in p a r a g r a p h (2) a n d dividends described in s u b p a r a g r a p h (B). " ( 2 ) INTEREST INCOME TO WHICH APPLICABLE.—For purposes of t h i s subsection, the interest income described in this p a r a g r a p h is interest other than interest— " ( A ) derived from a n y transaction which is directly related to the active conduct by the taxpayer of a trade or business i n a foreign country or a possession of the United States, " ( B ) derived i n the conduct by the taxpayer of a banking, financing, or similar business, iii " ( C ) received from a corporation in which the taxpayer • ,.'_ ,. (or one or more includible corporations in an affiliated group, • as defined in section 1504, of which the taxpayer is a mem- ber) owns, directly or indirectly, at least 10 percent of t h e voting stock, or
9 0 STAT. 1622 PUBLIC LAW 94-455—OCT. 4, 1976 " ( D ) received on obligations acquired as a result of t h e disposition of a t r a d e or business actively conducted b y t h e : taxpayer i n a foreign country or possession of t h e United States or as a result of the disposition of stock o r obligations of a corporation in which the taxpayer owned a t least 10 per- cent of the voting stock. F o r purposes of s u b p a r a g r a p h ( C ) , stock owned, directly o r indirectly, by or for a foreign corporation, shall be considered as being proportionately owned by its shareholders. " ( e ) TRANSITIONAL R U L E S FOR CARRYBACKS AND CARRYOVERS FOR TAXPAYERS ON T H E PER-COUNTRY L I M I T A T I O N . — / " ( 1 ) APPLICATION o r SUBSECTION.—This subsection shall a p p l y only to a taxpayer who is on the per-country limitation for his last taxable year beginning before J a n u a r y 1, 1976. " ( 2 ) CARRYOVERS TO YEARS BEGINNING AFTER DECEMBER SI, 1975.—In the case of a n y taxpayer t o whom this subsection applies, a n y carryover from a taxable year beginning before J a n - uary 1, 1976, m a y be used in taxaole years beginning after December 3 1 , 1975, to t h e extent provided in subsection ( c ) , but only t o t h e extent such carryover could have been used in such succeeding taxable years if the per-country limitation continued to apply to all taxable years beginning after Decem- ber 31,1975. " ( 3 ) CARRYBACKS TO YEARS BEGINNING BEFORE JANUARY i, 19 7 6.—In t h e case of any taxpayer to whom this subsection applies, a n y carryback from a taxable year beginning after December 31, 1975, m a y be used in taxable years beginning , • before J a n u a r y 1, 1976, to t h e extent provided in subsection ( c ) , but only to the extent such carryback could have been used i n such preceding taxable year if t h e per-country limitation con- tinued t o apply t o all taxable years beginning after December 31, 1975. " ( 4 ) APPLICATION OF LIMITATIONS.—For purposes of this subsection— " ( A ) the overall limitation shall be applied before the per- country limitation, a n d " ( B ) where the amount of any carryback or carryover is reduced by the overall limitation, t h e reduction shall be allo- cated to t h e amoimts carried from each country or possession in proportion to t h e taxes paid or accrued t o such country or possession in the taxable year from which such amount is being carried. " ( f ) CROSS REFERENCE.— "For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(b)." ( b ) CONFORMING A M E N D M E N T S . — 26 u s e 901, (1) Sections 901 ( a ) , 901 ( b ) , a n d 960(b) are amended by strik- 9^0- ing out "applicable limitation" each place i t appears and inserting in lieu thereof "limitation". 26 u s e 243. (2) S u b p a r a g r a p h ( B ) of section 2 4 3 ( b ) ( 3 ) is amended t o read as follows: " ( B ) t h e members of such affiliated group shall be treated as one taxpayer for purposes of m a k i n g t h e election under section 901(a) (relating t o allowance of foreign t a x credit), and".
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1623 (3) P a r a g r a p h (3) of section 1351(d) is amended to read as 26 USC 1351. follows: " ( 3 ) FOREIGN TAXES.—For purposes of this subsection, any choice made under subpart A of part I I I of subchapter N (relat- ing to foreign t a x credit) for any taxable year may be changed.". (4) Section 1503(b) (1) is amended by striking out ", a n d if 26 USC 1503. for t h e taxable year an election under section 904(b) (1) (relat- Post- p 1629. i n g t o election of overall limitation on foreign t a x credit) is in effect". (5) Sections 383, 6 0 3 8 ( b ) ( 1 ) ( A ) , a n d 6501 (i) are each ^nfe, p. 1605. amended by striking out "section 9 0 4 ( d ) " each place it appears 26 USC 6038, therein a n d inserting in lieu thereof "section 904(c)". 6501. (6) Subsection (e) of section 907 (relating to transitional rules) 26 USC 907. is amended— ( A ) by striking out " ( d ) a n d (e) of section 904" in para- g r a p h s (1) a n d (2) a n d inserting in lieu thereof " ( d ) a n d (e) of section 904 (as in effect on the d a y before the date of the enactment of the Tax Reform Act of 1976)"; Ante, p. 1520. ( B ) by striking out "section 904(a) ( 1 ) " in p a r a g r a p h (2) and inserting in lieu thereof "section 9 0 4 ( a ) ( 1 ) (as so in effect)"; a n d (C) by striking out "section 904(e) ( 2 ) " in p a r a g r a p h (2) . .- • ( A ) a n d inserting in lieu thereof "section 9 0 4 ( e ) ( 2 ) (as so in effect)". (c) EFFECTIVE D A T E S . — 26 USC 904 (1) I N GENERAL.—Except as provided in p a r a g r a p h s (2) a n d "^^^• (3), the amendments made by this section shall apply to taxable years beginning after December 31,1975. (2) EXCEPTION FOR CERTAIN M I N I N G OPERATIONS.—In the case of a domestic corporation or includible corporation in an affiliated group (as defined in section 1504 of the Internal Revenue Code of 1954) which has as of October 1.1975— ( A ) been engaged in the active conduct of the trade or business of the extraction of minerals (of a character with respect to which a deduction for depletion is allowable under section 613 of such Code) outside the United States or its possessions for less than 5 years preceding the date of enact- ment of this Act, ( B ) h a d deductions properly apportioned or allocated to its gross income from such trade or business in excess of such gross income in a t least 2 taxable years, ( C ) 80 percent of its gross receipts are from the sale of such minerals, a n d ( D ) made commitments for substantial expansion of such mineral extraction activities, the amendments made by this section shall apply to taxable years beginning after December 31, 1978. I n the case of losses sustained in taxable years beginning before J a n u a r y 1, 1979, by any corpo- ration to which this p a r a g r a p h applies, the provisions of section 904(f) of such Code shall be applied with respect to such losses under the principles of section 904(a) (1) of such Code as in effect before the enactment of this Act. (3) EXCEPTION FOR INCOME FROM POSSESSIONS.—In the case of gross income from sources within a possession of t h e United States (and the deductions properly apportioned or allocated t h e r e t o ) , the amendments made by this section shall apply to taxable years beginning after December 31,1978. I n the case of losses sustained
90 STAT. 1624 PUBLIC LAW 94-455—OCT. 4, 1976 in a possession of t h e United States in taxable years beginning before J a n u a r y 1, 1979, t h e provisions of section 904(f) of such Code shall be applied with respect to such losses under the prin- ciples of section 904(a) (1) of such Code as in effect before t h e enactment of this Act. • * • (4) CARRYBACKS AND CARRYOVERS I N T H E CASE OF M I N I N G OPERA- '• " TioNS AND INCOME FROM A POSSESSION.—In the casc of a taxpayer to whom p a r a g r a p h (2) or (3) of this subsection applies, section 904(e) of such Code shall apply except t h a t " J a n u a r y 1, 1979" shall be substituted for " J a n u a r y 1, 1976" each place it appears therein. I f such a taxpayer elects the overall limitation for a tax- able year beginning before J a n u a r y 1, 1979, such section 904(e) ff*' ; shall be applied by substituting "the J a n u a r y 1, of t h e last year for which such taxpayer is on t h e per-country limitation" for " J a n u a r y 1, 1976" each place it appears therein. SEC. 1032. RECAPTURE OF FOREIGN LOSSES. 26 u s e 904. ( a ) I N GENERAL.—Section 904 (as amended by section 1031 of this Act) is amended by redesignating subsection (f) as subsection ( g ) and by inserting after subsection (e) t h e following new subsection: " ( f ) RECAPTURE o r OVERALL FOREIGN Loss.— " ( 1 ) GENERAL R U L E . — F o r purposes of this subpart and Post, p. 1643. section 936, in t h e case of any taxpayer who sustains an overall foreign loss for any taxable year, t h a t portion of t h e taxpayer's taxable income from sources without the United States for each *^-'' ~ succeeding taxable year which is equal to the lesser of— " ( A ) the amount of such loss (to the extent not used under this p a r a g r a p h in prior taxable y e a r s ) , or "(13) 50 percent (or such larger percent as t h e taxpayer may choose) of the taxpayer's taxable income from sources without the United States for such succeeding taxable year, shall be treated as income from sources within the United States (and not as income from sources without the United States). "(2) OVERALL FOREIGN LOSS DEFINED.—For purposes of this subsection, the term 'overall foreign loss' means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the bene- fits of this subpart for such taxable year) for such year is exceeded by the sum of t h e deductions properly apportioned or allocated thereto, except t h a t there shall not be taken into account— " ( A ) a n y net operating loss deduction allowable for such year under section 172(a) or any capital loss carrybacks a n d carryovers to such year under section 1212, a n d " ( B ) any— " ( i ) foreign expropriation loss for such year, as defined in section 172 (k) ( 1 ) , or " ( i i ) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise. " ( 3 ) DISPOSITIONS.— " ( A ) I N GENERAL.—For purposes of this chapter, if prop- erty which has been used predominantly without the United States in a trade or business is disposed of d u r i n g any taxable '•, year— " ( i ) the taxpayer, notwithstanding any other provi- sion of this chapter (other than p a r a g r a p h ( 1 ) ) , shall be deemed t o have received a n d recognized taxable income
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1625 ' from sources without the United States in the taxable year of t h e disposition, by reason of such disposi- tion, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer's adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under p a r a g r a p h (1) for such taxable year or any prior taxable year, and " ( i i ) p a r a g r a p h (1) shall be applied with respect to such income by substituting '100 percent' for '50 percent'. I n determining for purposes of this s u b p a r a g r a p h whether the predominant use of any property has been without t h e United States, there shall be taken into account use d u r i n g the 3-year period ending on the date of the disposition (or, if shorter, t h e period d u r i n g which the p r o p e r t y h a s been used in the trade or business). , "(B) DISPOSITION DEFINED AND SPECIAL RULES.— " ( i ) F o r purposes of this subsection, the term 'dispo- sition' includes a sale, exchange, distribution, or gift of property w^hether or not gain or loss is recognized on the transfer. " ( i i ) A n y taxable income recognized solely by reason of s u b p a r a g r a p h ( A ) shall have the same characteriza- tion it would have h a d if the taxpayer h a d sold or exchanged the property. " ( i i i ) T h e Secretary shall prescribe such regula- Regulations, tions as he m a y deem necessary to provide for adjust- ments to the basis of p r o p e r t y to reflect taxable income recognized solely by reason of s u b p a r a g r a p h ( A ) . " ( C ) EXCEPTIONS.—Xotwithstanding s u b p a r a g r a p h ( B ) , t h e term 'disposition' does not include— " ( i ) a disposition of property which is not a material factor in the realization of income by the taxpayer, o r " ( i i ) a disposition of property to a domestic corpo- ration in a distribution or transfer described in section 381(a). 26 u s e 381. " (4) DETERMINATION OF FOREIGN OIL RELATED LOSS WHERE SECTION 907 APPLIES.—In the case of a corporation to which section 907 (b) (1) applies, the foreign oil related loss shall be the amount by Post, p. 1630. which the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the foreign oil related income for *^ such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except t h a t there shall not be taken into account— " ( A ) any net operating loss deduction allowable for such year under section 172(a) or any capital loss carrybacks and carryovers to such year under section 1212, and "(B) a n y - " (i) foreign expropriation loss for such year, as defined in section 172(k) ( 1 ) , or " ( i i ) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise.".
90 STAT. 1626 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 907. ( b ) COORDINATION W I T H SECTION 907.—Section 907 is amended— (1) by striking out t h e last sentence of subsection ( b ) (as amended by section 1 0 3 5 ( b ) ) , and (2) by striking out subsection ( f ) , and by redesignating subsec- tion ( g ) as subsection ( f ) . 26 u s e 904 (c) EFFECTIVE D A T E S . — note. (1) I N GENERAL.—Except as provided in p a r a g r a p h s (2) and ( 3 ) , the amendments made by subsections ( a ) a n d ( b ) ( 2 ) shall apply t o losses sustained in taxable years beginning after December 31,1975, and the amendment made by subsection (b) (1) shall apply to taxable years beginning after December 31, 1975. (2) OBLIGATIONS OF FOREIGN GOVERNMENTS.—The ameiidments made b y subsection ( a ) shall n o t apply t o losses on t h e sale, exchange, or other disposition of bonds, notes, or other evidences of indebtedness issued before M a y 14, 1976, by a foreign govern- ment or instrumentality thereof for t h e acquisition of property located in t h a t country or stock of a corporation (created or organized in or under t h e laws of that foreign country) or indebtedness of such corporation. (3) SUBSTANTIAL WORTHLESSNESS BEFORE ENACTMENT.—The amendments made b y subsection ( a ) shall not apply to losses in- curred on the loss from stock or indebtedness of a corporation in which the taxpayer owned a t least 10 percent of the voting stock and which has sustained losses i n 3 out of the last 5 taxable years beginning before J a n u a r y 1,1976, which h a s sustained a n overall loss for those 5 years, and with respect to which the taxpayer has terminated or will terminate all operations by reason of sale, liquidation, o r other disposition before J a n u a r y 1, 1977, of such corporation o r its assets. (4) L I M I T A T I O N BASED ON DEFICIT I N EARNINGS AND PROFITS.^—If p a r a g r a p h (3) would apply to a taxpayer b u t for t h e fact t h a t the loss is sustained after December 31, 1976, a n d if the loss is sustained in a taxable year beginning before J a n u a r y 1,1979, t h e amendments made by subsection ( a ) shall not apply to such loss to t h e extent t h a t there was on December 31, 1975, a deficit in earnings and profits in the corporation from which the loss arose. SEC. 1033. DIVIDENDS FROM LESS DEVELOPED COUNTRY CORPORA- TIONS TO BE GROSSED UP FOR PURPOSES OF DETERMIN- ING UNITED STATES INCOME AND FOREIGN TAX CREDIT AGAINST THAT INCOME. ( a ) FOREIGN TAXES D E E M E D P A I D BY DOMESTIC CORPORATIONS.— 26 u s e 902. Section 902 (relating to credit for corporate stockholders in foreign corporations) is amended to read as follows: "SEC. 902. CREDIT FOR CORPORATE STOCKHOLDER IN FOREIGN CORPORATION. " ( a ) TREATMENT OF TAXES P A I D BY FOREIGN CORPORATION.—For purposes of this subpart, a domestic corporation which owns a t least 10 percent of the voting stock of a foreign corporation from which i t receives dividends in any taxable year shall be deemed t o have paid the same proportion of any income, war profits, or excess profits taxes paid o r deemed t o be paid b y such foreign corporation t o any foreign country o r to any possession of the United States, on or with respect to t h e accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends (deter- mined without regard t o section 78) bears t o t h e amount of such
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1627 accumulated profits i n excess of such income, w a r profits, a n d excess profits taxes (other t h a n those deemed p a i d ) . ' " ( b ) FoEEiGN SUBSIDIARY OF FIRST AND SECOND FOREIGN CORPORATION.— " ( 1 ) O N E T2ER.—If t h e foreign corporation described in sub- section ( a ) (hereinafter i n this subsection referred t o as the 'first foreign corporation') owns 10 percent or more of the voting stock of a second foreign corporation from which i t receives dividends in any taxable year, i t shall be deemed to have paid the same pro- portion of any income, w a r profits, o r excess profits taxes paid or deemed to be paid by such second foreign corporation to any for- eign country or t o any possession of the United States, on or with respect to the accumulated profits of such second foreign corpora- tion from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other t h a n those deemed p a i d ) . ."•" •/ '• " " ( 2 ) T w o TIERS.—If such first foreign corporation owns 10 percent or more of t h e voting stock of a second foreign corpora- tion which, in turn, owns 10 percent or more of t h e voting stock of a t h i r d foreign corporation from which t h e second foreign corporation receives dividends in a n y taxable year, t h e second foreign corporation shall be deemed t o have paid the same pro- /'' •" ' '--"-^ portion of a n y income, w a r profits, or excess profits taxes paid by such t h i r d foreign corporation t o a n y foreign country o r t o any possession of t h e United States, on or with respect to the accumulated profits of such t h i r d foreign corporation from which such dividends were paid, which t h e amount of such dividends bears t o the amount of such accumulated profits in excess of such ^^f]? s^ , A: income, w a r profits, and excess profits taxes. " ( 3 ) VOTING STOCK REQUIREMENT.—For purposes of this subpart— " ( A ) p a r a g r a p h (1) shall not apply unless t h e percent- ^ dv age of voting stock owned by the domestic corporation in the first foreign corporation a n d t h e percentage of voting stock owned by t h e first foreign corporation in the second foreign corporation when multiplied together equal at least 5 percent, .; and r; " ( B ) p a r a g r a p h (2) shall not apply unless the percentage arrived at for purposes of a p p l y i n g p a r a g r a p h (1) when multiplied by the percentage of voting stock owned by the second foreign corporation in the t h i r d foreign corporation is equal t o a t least 5 percent. " ( c ) APPLICABLE R U L E S . — " ( 1 ) ACCUMULATED PROFITS DEFINED.—For purposes of this sec- tion, the t e n n 'accumulated profits' means, with respect to a n y foreign corporation, t h e amount of its gains, profits, or income computed without reduction by t h e amount of t h e income, w a r profits, a n d excess profits taxes imposed on or with respect t o such profits o r income by a n y foreign country or by a n y posses- sion of the United States. Tlie Secretary shall have full power t o determine from t h e accumulated profits of what year or years such dividends were paid, treating dividends paid in t h e first 60 days of any year as having been paid from the accumulated profits of t h e preceding year or years (unless t o his satisfaction shown otherwise), a n d i n other respects treating dividends as h a v i n g
90 STAT. 1628 PUBLIC LAW 94-455—OCT. 4, 1976 been paid from t h e most recently accumulated gains, profits, or earnings. " (2) ACCOUNTING PERIODS.—In the case of a foreign corporation i t h e income, war profits, and excess profits taxes of which are determined on the basis of an accounting period of less t h a n 1 year, the word 'year' as used in this subsection, shall be construed ' to mean such accounting period. "(d) CROSS R E F E R E N C E S . — "(1) For inclusion in gross income of an amount equal to taxes deemed paid under subsection (a), see section 78. "(2) For application of subsections (a) and (b) with respect to taxes deemed paid in a prior taxable year by a United States shareholder with respect to a controlled foreign corporation, see section 960. "(3) For reduction of credit with respect to dividends paid out of accumulated profits for years for which certain information is not furnished, see section 6038." (b) CONFORMING A M E N D M E N T S . — 26 u s e 78. (1) Section 78 (relating to dividends received from certain foreign corporations) is amended— ( A ) by striking out "section 902(a) ( 1 ) " and inserting in lieu thereof "section 902 ( a ) " , and ( B ) by striking out "section 960(a) (1) ( C ) " and inserting in lieu thereof "section 960(a) ( 1 ) " . 26 u s e 960. (2) P a r a g r a p h (1) of section 960(a) (relating to special rules for foreign t a x credit) is amended by striking out "bears t o — " and all t h a t follows down t h r o u g h the period at the end of such p a r a g r a p h and inserting in lieu thereof "bears to the entire amount of the earnings and profits of such foreign corporation for such taxable year.". 26 u s e 535. (3) Section 5 3 5 ( b ) ( 1 ) (relating to accumulated taxable income) is amended by striking out "section 902(a) (1) or 960(a) (1) ( C ) " and inserting in lieu thereof "section 902(a) or 960(a) 26 u s e 545. (4) Section 5 4 5 ( b ) ( 1 ) (relating to undistributed personal holding company income) is amended by striking out "section 902(a) (1) or 960(a) (1) ( C ) " and inserting in lieu thereof "sec- tion 902(a) or 960(a) ( 1 ) " . 26 u s e 902 (c) EFFECTIVE DATES.—The amendments made by this section shall note. apply— (1) in respect of any distribution received by a domestic cor- poration after December 31,1977, and (2) in respect of any distribution received by a domestic cor- poration before J a n u a r y 1,1978, in a taxable year of such corpora- tion beginning after December 31, 1975, but only to the extent t h a t such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corpora- tion) beginning after December 31,1975. F o r purposes of p a r a g r a p h ( 2 ) , a distribution made by a foreign corporation out of its profits which are attributable to a distribution Post, p. 1626. received from a foreign corporation to which section 902(b) of t h e I n t e r n a l Revenue Code of 1954 applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before J a n u a r y 1,1976, to t h e extent t h a t such distribution was paid out of t h e accumulated profits of such foreign corporation for a taxable year beginning before J a n u a r y 1,1976.
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1629 SEC. 1034. TREATMENT OF CAPITAL GAINS FOR PURPOSES OF FOR- EIGN TAX CREDIT. (a) IN" GENERAL.—Section ( b ) of section 904 (relating to taxable 26 USC 904. income for purposes of computing the foreign t a x credit limitation), as amended by section 1031 of this Act, is amended to read as follows: " ( b ) TAXABLE I N C O M E FOR PURPOSE OF COMPUTING L I M I T A T I O N . — " ( 1 ) PERSONAL EXEMPTIONS.—For p u r p o s e s of subsection ( a ) , t h e taxable income i n t h e case of a n individual, estate, or trust shall be computed without any deduction for personal exemptions - u n d e r section 151 or 6 4 2 ( b ) . " ( 2 ) CAPITAL G A I N S . — F o r purposes of subsection ( a ) — " ( A ) CORPORATIONS.—In t h e case of a corporation— " ( i ) t h e taxable income of such corporation from sources without t h e United States shall include gain from t h e sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by three-eighths of foreign source n e t capital S^^. . . . : r " ( i i ) the entire taxable income of such corporation shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by three-eights of net capital gain, and " ( i i i ) any net capital loss from sources without the United States t o the extent taken into account in deter- mining capital gain net income for t h e taxable year shall be reduced b y an amount equal t o three-eighths of t h e excess of net capital gain from sources within the United States over net capital gain. " ( B ) O T H E R TAXPAYERS.—In t h e case of a t a x p a y e r o t h e r t h a n a t a x p a y e r described in s u b p a r a g r a p h ( A ) , taxable income from sources without t h e United States shall include gain from t h e sale or exchange of capital assets only t o t h e extent of foreign source capital gain net income. " ( 3 ) D E F I N I T I O N S . — F o r purposes of this subsection— " ( A ) FOREIGN SOURCE CAPITAL GAIN NET INCOME.—The t e r m 'foreign source capital gain net income' means the lesser of— " ( i ) capital gain net income from sources without t h e United States, or " (ii) capital gain net income. " ( B ) FOREIGN SOURCE N E T CAPITAL G A I N . — T h e t e r m 'for- eign source net capital gain' means the lesser of— "(i) net capital gain from sources without the United States, or "(ii) net capital gain. " ( C ) EXCEPTION FOR GAIN FROM T H E SALE o r CERTAIN PER- SONAL PROPERTY.—For purposes of this p a r a g r a p h , there shall be included as gain from sources within t h e United States any gain from sources Avithout t h e United States from the sale or exchange of a capital asset which is personal property which— " ( i ) i n the case of an individual, is sold or exchanged outside of the country (or possession) of the individual's residence, " ( i i ) in t h e case of a corporation, is stock in a second corporation sold or exchanged other t h a n in a country (or possession) i n which such second corporation derived more than 50 percent of its gross income for t h e 3-year
9 0 STAT. 1630 PUBLIC LAW 94-455—OCT. 4, 1976 period ending with the close of such second corporation's taxable year immediately preceding the year d u r i n g which t h e sale or exchange occurred, or " ( i i i ) in the case of any taxpayer, is personal property (other t h a n stock in a corporation) sold or exchanged other t h a n in a country (or possession) in which such property is used in a t r a d e or business of the taxpayer or in which such taxpayer derived more t h a n 50 percent of its gross income for the 3-year period ending with the close of its taxable year immediately preceding the year d u r i n g which the sale or exchange occurred, unless such gain is subject to an income, war profits, or excess profits tax of a foreign country or possession of the United States, and the rate of tax applicable to such gain is 10 per- cent or more of the gain from the sale or exchange (com- "Gain from the puted under this c h a p t e r ) . sale or exchange " ( D ) SECTION I 2 3 I GAINS.—The term 'gain from t h e sale of capital or exchange of capital assets' includes any gain so treated assets." under section 1231." 26 u s e 904 (b) EFFECTIVE DATES.—The amendment made by this section shall note. apply to taxable years beginning after December 31, 1975, except t h a t Ante, p. 1620. the provisions of section 904(b) (3) (C) shall only apply to sales or exchanges made after November 12,1975. SEC. 1035. FOREIGN OIL AND GAS EXTRACTION INCOME. (a) REDUCTION I N L I M I T A T I O N ON FOREIGN T A X CREDITS ALLOWABLE 26 u s e 907. FOR O I L AND GAS EXTRACTION INCOME.—Subsection (a) of section 907 (relating t o reduction in amounts allowable as foreign t a x under sec- tion 901) is amended to read as follows: "(a) REDUCTION I N A M O U N T ALLOWED AS FOREIGN T A X UNDER S E C - TION 901.—In a p p l y i n g section 901, the amount of any oil and gas extraction taxes paid or accrued (or deemed to have been paid) d u r i n g the taxable year which would (but for this subsection) be taken into account for purposes of section 901 shall be reduced by the amount (if any) by which the amount of such taxes exceeds the product of— " ( 1 ) the amount of the foreign oil and gas extraction income for the taxable year, multiplied by " (2) the percentage which is the sum of the normal t a x rate and the surtax rate for the taxable year specified in section 1 1 . " (b) FOREIGN O I L RELATED INCOME EARNED BY INDIVIDUALS.— Subsection (b) of section 907 (relating to special rules in case of for- eign oil and gas income) is amended to read as follows: " (b) APPLICATION OF SECTION 904 L I M I T A T I O N . — " (1) CORPORATIONS.—In the case of a corporation, the pi-ovisions Ante, p. 1620. of section 904 shall be applied separately with respect to— " ( A ) foreign oil related income, and " ( B ) other taxable income. " ( 2 ) O T H E R TAXPAYERS.—In the case of a taxpayer other t h a n a corporation, the provisions of subsection ( a ) shall not apply a n d the provisions of section 904 shall be applied separately with respect to— " ( A ) foreign oil and gas extraction income, and " ( B ) other taxable income (including other foreign oil related income). I n t h e case of a corporation, with respect to foreign oil-related income, and in the case of a taxpayer other t h a n a corporation, with respect to foreign oil and gas extraction income, the overall limitation provided
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1631 by section 9 0 4 ( a ) ( 2 ) shall apply and the per-country limitation Ante, p. 1620. provided by subsection (a) (1) shall not apply." (c) T A X CREDIT FOR PRODUCTION-SHARING CONTRACTS.— 26 USC 907 (1) F o r purposes of section 901 of the I n t e r n a l Revenue Code note, of 1954. there shall be treated as income, w a r profits, and excess profits tuxes to be taken into account under section 907(a) of such Code amounts designated as income taxes of a foreign govern- ment by such government (which otherwise would not be treated as taxes for purposes of section 901 of such Code) with respect to production-sharing contracts for the extraction of foreign oil or gas. (2) The amounts specified in p a r a g r a p h (1) shall not exceed the lesser of— ( A ) the product of the foreign oil and gas extraction income with respect to all such production-sharing contracts multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code, or ( B ) t h e excess of t h e total amount of foreign oil and gas extraction income (as defined in section 907(c) (1) of such Code) for the taxable year multiplied by the sum of the nor- mal tax rate and the surtax rate for the taxable year specified ^ in section 11 of such Code over the amount of any income, war profits, and excess profits taxes paid or accrued (or deemed to have been p a i d ) without regard to p a r a g r a p h (1) d u r i n g the taxable year with respect to foreign oil a n d gas extraction income. (3) T h e production-sharing contracts taken into account for purposes of p a r a g r a p h (1) shall be those contracts which were entered into before A p r i l 8, 1976, for the sharing of foreign oil and gas production with a foreign government (or an entity owned by such government) with respect to which amounts claimed as taxes paid or accrued to such foreign government for taxable years beginning before J u n e 30, 1976, will not be dis- allowed as taxes. No such contract shall be taken into account for any taxable year ending after December 31,1977. (d) CARRYBACK AND CARRYOVER OF DISALLOWED CREDITS.— (1) I N GENERAL.—Section 907 (as amended by section 1032) is 26 USC 907. amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: "(f) CARRYBACK AND CARRYOVER OF DISALLOWED CREDITS.— " (1) I N GENERAL.—If the amount of the oil and gas extraction taxes paid or accrued d u r i n g any taxable year exceeds the limita- tion provided by subsection (a) for such taxable year (herein- after in this subsection referred to as the 'unused credit y e a r ' ) , SO much of such excess as does not exceed 2 percent of foreign oil and gas extraction income for such taxable year shall be deemed to be oil and gas extraction taxes paid or accrued in the second preceding taxable year, in the first preceding taxable year, and in the fii-st, second, t h i r d , fourth, or fifth succeeding taxable year, in t h a t order and to the extent not deemed t a x paid or accrued in a prior taxable year by reason of the limitation imposed by p a r a g r a p h ( 2 ) . Such amount deemed paid or accrued in any tax- able year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for t h a t year to foreign countries or possessions. F o r purposes of t h i s
90 STAT. 1632 PUBLIC LAW 94-455—OCT. 4, 1976 subsection, the terms 'second preceding taxable year', and 'first s preceding taxable year' do not include any taxable year ending before January 1, 1975. For purposes of determining the amount of such taxes which may be deemed paid or accrued in any taxable : year ending in 1975, 1976, or 1977, the first sentence of this para- graph shall be applied by substituting 'such excess' for 'so much of such excess as does not exceed 2 percent of the foreign oil and gas extraction income for such taxable year'. "(2) LIMITATION.—The amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued in any preceding or succeeding taxable year shall not exceed the lesser of— "(A) the amount by which the limitation provided by subsection (a) for such taxable year exceeds the sum of— "(i) the oil and gas extraction taxes paid or accrued during such taxable year, plus , "(ii) the amounts of the oil and gas extraction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to tax- able years preceding the unused credit year; or "(B) the amount by which the limitation provided by Ante, p. 1620. section 904 on taxes paid or accrued with respect to foreign oil-related income for such taxable year exceeds the sum of— " (i) the taxes paid or accrued (or deemed to have been Ante, p. 1626. paid under section 902 or 960) to all foreign countries and possessions of the United States with respect to such 26 use 960. income during such taxable year, "(ii) the amount of such taxes which were deemed paid or accrued in such taxable year under section 904(c) and which are attributable to taxable years preceding the unused credit year, plus "(iii) the amount of the oil and gas extraction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year. " ( 3 ) S P E C I A L RULES.— "(A) In the case of any taxable year which is an unused credit year under this subsection and which is an unused credit year under section 904(c) with respect to oil-related income, the provisions of this subsection shall be applied before section 904 (c). "(B) For purposes of determining the amount of oil- related taxes paid or accrued in any taxable year which may be deemed paid or accrued in a preceding or succeeding taxa- ble year under section 904 (c), any tax deemed paid or accrued in such preceding or succeeding taxable year under this sub- section shall be considered to be tax paid or accrued in such preceding or succeeding taxable year. "(C) For purposes of determining the amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued in any taxable year ending before January 1, 1977, subparagraph (A) of paragraph (2) shall be applied as if the amendment made by section 1035(a) of the Tax Reform Act of 1976 applied to such taxable year." (2) DEFINITION OF OIL AND GAS EXTRACTION TAXES.—Subsection 26 use 907. (c) of section 907 is amended by adding at the end thereof the following new paragraph:
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1633 "(5) O I L AND GAS EXTRACTIOX TAXES.—^The t e r m 'oil and gas extraction taxes' means any income, w a r profits, a n d excess profits tax p a i d or accrued (or deemed to have been p a i d under section 902 or 960) d u r i n g the taxable year with respect to foreign oil Ante, p. 1626. and gas extraction income (determined without regard to para- 26 USC 960. g r a p h ( 4 ) ) or loss which would be taken into account for purposes of section 901 without regard to this section." (3) TECHXICAL AMENDMENT.—Subsection (i) of section 6501, as amended by section 1031, (relating t o foreign t a x carrybacks) is 26 USC 6501. amended— ( A ) by striking out "excess foreign t a x e s ) " and inserting in lieu thereof "excess foreign taxes) or under section 907(f) ^'*^^» P- 1631. (relating to carryback and carryover of disallowed oil and gas extraction t a x e s ) " ; and ( B ) by striking out "section 9 0 4 ( c ) " t h e second place it appears a n d inserting in lieu thereof "section 904(c) or 907(f)". (e) EFTECTIVE D A T E S . — 26 USC 907 (1) T h e amendment made by subsection ( a ) shall apply t o tax- note, able years ending after December 31, 1976. (2) T h e amendment made by subsection (b) shall apply t o taxable years ending after December 31,1974; except t h a t t h e last sentence of section 907(b) of the I n t e r n a l Kevenue Code of 1954 Ante, p. 1630. shall only apply to taxable years ending after December 31,1975. (3) T h e amendment made by subsection (c) shall apply to tax- able years beginning after J u n e 29,1976. (4) T h e amendments made by subsection ( d ) shall apply to taxes p a i d or accrued d u r i n g taxable years ending after the date of the enactment of this Act. • - ' 'i SEC. 1036. UNDERWRITING INCOME. (a) TREATMENT AS INCOME F R O M SOURCES W I T H I N T H E U N I T E D STATES.—Section 861(a) (relating to gross income from sources 26 USC 861. within the U n i t e d States) is amended by a d d i n g t h e following new paragraph: " ( 7 ) Amounts received as underwriting income (as defined in section 832(b) ( 3 ) ) derived from t h e insurance of United States risks (as defined in section 9 5 3 ( a ) ) . " . (b) TREATMENT AS FOREIGN SOURCE INCOME.—Section 862(a) (relat- ing to gross income from sources without the United States) is 26 USC 862. amended by a d d i n g t h e following new p a r a g r a p h : " (7) U n d e r w r i t i n g income other t h a n t h a t derived from sources within the U n i t e d States as provided in section 861(a) ( 7 ) . " . (c) ErrECTRTE D A T E . — T h e amendments made by this section shall 26 USC 861 a p p l y t o taxable years beginning after December 31,1976. note. SEC. 1037. THIRD TIER FOREIGN TAX CREDIT WHEN SECTION 951 APPLIES. (a) FOREIGN TAXES D E E M E D P A I D BY FOREIGN CORPORATIONS.— Section 960(a) (1) (relating to special rules for foreign t a x credits), 26 USC 960. as amended in section 1033, is further amended to read as follows: " ( 1 ) GENERAL RULE.—For purposes of subpart A of this p a r t . if there is included, under section 9 5 1 ( a ) , in the gross income of a domestic corporation any amount attributable to earnings a n d profits— " ( A ) of a foreign corporation (hereafter in this subsection referred to as the 'first foreign corporation') at least 10 per-
90 STAT. 1634 PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 cent of t h e voting stock of which is owned by such domestic corporation, or " ( B ) of a second foreign corporation (hereinafter in this subsection referred t o as t h e 'second foreign corporation') a t least 10 percent of t h e voting stock of which is owned by t h e first foreign corporation, or " ( C ) of a t h i r d foreign corporation (hereinafter in t h i s subsection referred t o as t h e ' t h i r d foreign corporation') a t least 10 percent of the voting stock of which is owned by t h e second foreign corporation, then, under regulations prescribed by t h e Secretary, such domes- tic corporation shall be deemed t o have p a i d the same proportion of t h e total income, w a r profits, a n d excess profits taxes paid (or deemed paid) by such foreign corporation to a foreign country or possession of t h e United States for t h e taxable year on o r with respect t o the earnings a n d profits of such foreign corporation which the amount of earnings a n d profits of such foreign corpo- ration so included in gross income of t h e domestic corporation bears to the entire amount of t h e earnings a n d profits of such corporation for such taxable year. This p a r a g r a p h shall not apply with respect to any amount included in t h e gross income of such domestic corporation attributable to earnings a n d profits of t h e second foreign corporation or of t h e t h i r d foreign corporation unless, in the case of the second foreign corporation, the percent- age-of-voting-stock requirement of section 902(b) (3) ( A ) is satis- fied, and in the case of the t h i r d foreign corporation, t h e percent- age-of-voting-stock requirement of section 9 0 2 ( b ) ( 3 ) ( B ) is satisfied." 26 u s e 960 ( b ) EFFECTIVE D A T E . — T h e amendment made by this section shall note. ^PPly with respect to earnings a n d profits of a foreign corporation included, under section 951(a) of t h e I n t e r n a l Revenue Code of 1954, in t h e gross income of a domestic corporation in taxable years begin- ning after December 31,1976. P A R T I V — M O N E Y OR OTHER P R O P E R T Y MOVING O U T OF OR I N T O T H E U N I T E D S T A T E S SEC. 1041. PORTFOLIO DEBT INVESTMENTS IN UNITED STATES OF NONRESIDENT ALIENS AND FOREIGN CORPORATIONS. 26 u s e 861. The last sentence of section 861 (c) (relating to interest on deposits, etc.) is hereby repealed. SEC. 1042. CHANGES IN RULING REQUIREMENTS UNDER SECTION 367; CERTAIN CHANGES IN SECTION 1248. 26 u s e 367. ( a ) A M E N D M E N T OF SECTION 367.—Section 367 ( r e l a t i n g t o foreign corporations) is amended to read as follows: "SEC. 367. FOREIGN CORPORATIONS. "(a) TRANSFERS OF PROPERTY F R O M TPIE U N I T E D S T A T E S . — " ( 1 ) GENERAL RULE.—If, in connection w4th any exchange described i n section 332, 351, 354, 355, 356, or 361, there is a trans- fer of property (other t h a n stock or securities of a foreign cor- poration which is a p a r t y to the exchange or a p a r t y to the reorga- nization) by a United States person t o a foreign corporation, for purposes of determining t h e extent to which gain shall be recognized on such transfer, a foreign corporation shall not be considered to be a corporation unless, pursuant t o a request filed not later t h a n the close of the 183d day after the beginning of such
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1635 transfer ( a n d filed in such form and manner as may be prescribed by regulations by the S e c r e t a r y ) , it is established to the satisfac- - tion of the Secretary t h a t such exchange is not in pursuance of a p l a n h a v i n g as one of its principal purposes the avoidance of F e d e r a l income taxes. "(2) EXCEPTION FOR TRANSACTIONS DESIGNATED BY T H E SECRE- TARY.—Paragraph (1) shall not apply to any exchange (other- wise within p a r a g r a p h ( 1 ) ) , or to any type of property, which the Secretary by regulations designates as not requiring the filing of a request. "(b) O T H E R TRANSFERS.— " ( 1 ) E F F E C T o r SECTION TO BE DETERMINED UNDER REGULA- TIONS.—In the case of any exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer 26 USC 332, of property described in subsection (a) ( 1 ) , a foreign corporation 351, 354, 355, shall be considered to be a corporation except to the extent pro- 356, 361. vided in regulations prescribed by the Secretary which are neces- sary or appropriate to prevent the avoidance of Federal income taxes. "(2) REGULATIONS RELATING TO SALE OR EXCHANGE OF STOCK I N FOREIGN CORPORATIONS.—The regulations prescribed p u r s u a n t to p a r a g r a p h (1) shall include (but shall not be limited to) regula- tions dealing with the sale or exchange of stock or securities in a foreign corporation by a United States person, including regula- tions providing— " ( A ) the circumstances under which— " ( i ) gain shall be recognized currently, or amounts included in gross income currently as a dividend, or both, or " ( i i ) gain or other amounts may be deferred for inclu- sion in the gross income of a shareliolder (or his successor in interest) at a later date, and " ( B ) the extent to which adjustments shall be made to earnings and profits, basis of stock or securities, and basis of assets. "(c) TRANSACTIONS T o B E TREATED AS E X C H A N G E S . — " ( 1 ) SECTION 353 DISTRIBUTION.—For purposes of this section, any distribution described in section 355 (or so much of section 356 as relates to section 355) shall be treated as an exchange whether or not it is an exchange. "(2) CONTRIBUTION OF CAPITAL TO CONTROLLED CORPORATIONS.— F o r purposes of this chapter, any transfer of property to a foreign corporation as a contribution to the capital of such corporation by one or more persons who, immediately after the transfer, own (within the meaning of section 318) stock possessing at least 80 percent of the total combined voting power of all classes of stock of such corporation entitled to vote shall be treated as an exchange of such property for stock of the foreign corporation equal in value to the fair market value of the p r o p e r t y transferred. " ( d ) TRANSITIONAL R U L E . — I n the case of any exchange beginning before J a n u a r y 1,1978— " ( 1 ) subsection (a) shall be applied without regard to whether or not there is a transfer of p r o p e r t y described in subsection ( a ) ( 1 ) , and " ( 2 ) subsection (b) shall not apply.".
90 STAT. 1636 PUBLIC LAW 94-455—OCT. 4, 1976 (b) E A R N I N G S AND PROFITS OF SUBSIDIARIES OF FOREIGN CORPORA- 26 u s e 1248. TioNs FOR PURPOSES OF SECTION 1248.—Subparagraph (C) of section 1248(c) (2) is amended by striking out " ; a n d " a t the end thereof and inserting in lieu thereof the following: " (or on the date of any sale or exchange of the stock of such other foreign corporation occurring dur- i n g the 5-year period ending on the date of the sale or exchange of the stock of such foreign corporation, to the extent not otherwise taken into account under this section b u t not in excess of t h e fair m a r k e t value of the stock of such other foreign corporation sold or exchanged over the basis of such stock (for determining gain) in the h a n d s of the t r a n s f e r o r ) ; and". (c) CERTAIN SECTION 311, 336, OR 337 TRANSACTIONS.— (1) GENERAL RULE.—Section 1248 (relating to gain from cer- tain sales or exchanges of stock in certain foreign corporations) is amended by redesignating subsections (f) and ( g ) as subsec- tions (g) and ( h ) , respectively, and by inserting after subsection 'e) the following new subsection: "(fl ' ( f ) CERTAIN SECTION 311, 336, OR 337 TRANSACTIONS.— "(1) I N GENERAL.—If— " ( A ) a domestic corporation satisfies t h e stock ownership requirements of subsection (a) (2) with respect to a foreign corporation, and " ( B ) such domestic corporation distributes, sells, or exchanges stock of such foreign corporation in a transaction to which section 311, 336, or 337 applies, then, notwithstanding any other provision of this subtitle, an amount equal to the excess of the fair market value of such stock over its adjusted basis in the h a n d s of the domestic corporation shall be included in the gross income of the domestic corporation as a dividend to the extent of the earnings and profits of the for- eign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and d u r i n g the period or periods the stock was held by such domestic corporation while such foreign corporation was a con- trolled foreign corporation. F o r purposes of subsections (c) ( 2 ) , ( d ) , and ( h ) , a distribution, sale, or exchange of stock to which this subsection applies shall be treated as a sale of stock to which subsection (a) applies. " ( 2 ) ExcEiTioN FOR CERTAIN DISTRIBUTIONS.—In the casc of any distribution of stock of a foreign corporation, p a r a g r a p h (1) shall not apply if such distribution is to a domestic corporation— " ( A ) which is treated under this section as holding such stock for t h e period for which the stock was held by the dis- t r i b u t i n g corporation, and " ( B ) which, immediately after the distribution, satisfies the stock ownership requirements of subsection (a) (2) with respect to such foreign corporation. "(3) NONAPPLICATION OF PARAGRAPH ( 1 ) I N CERTAIN CASES. P a r a g r a p h (1) shall not apply to a sale or exchange to which section 337 applies if— " ( A ) throughout the period or periods the stock of the foreign corporation was held by the domestic corporation (or predecessor referred to in p a r a g r a p h ( 2 ) ) all the stock of such domestic corporation was owned by United States persons who satisfied the 10-percent stock ownership require-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1637 ments of subsection (a) (2) with respect to such domestic cor- poration, and " ( B ) subsection ( a ) applies t o t h e proceeds of t h e sale or exchange a n d also applied t o all transactions described i n subsection (e) (1) which took place d u r i n g t h e period or periods referred t o in subparagraph ( A ) . " ( 4 ) APPLICATION TO CASES DESCRIBED I N suBSECTioisr (e).—To t h e extent t h a t earnings and profits are taken into account under this subsection, they shall be excluded and not taken into account for purposes of subsection ( e ) . " . (2) INTEREST I N PARTNERSHIP HOLDING STOCK I N CERTAIN FOR- EIGN CORPORATIONS.—The last sentence of section 751(c) (relating 26 USC 751. to unrealized receivables) is amended— ( A ) by striking out " ( a s defined in section 1245(a) ( 3 ) ) , " and inserting in lieu thereof " a s defined in section 1245(a) ( 3 ) ) , stock in certain foreign corporations (as described i n section 1248)," a n d ( B ) by striking o u t " 1 2 4 5 ( a ) , " a n d inserting in lieu thereof "1245(a), 1248(a),". (3) CONFORMING AMENDMENTS.— ( A ) S u b p a r a g r a p h ( A ) of p a r a g r a p h (2) of subsection (c) of section 1248 is amended by striking out "subsection ( a ) ^6 USC 1248. applies t o a sale o r exchange" a n d inserting i n lieu thereof "subsection ( a ) or ( f ) applies t o a sale, exchange, o r distribution". ( B ) S u b p a r a g r a p h ( A ) of p a r a g r a p h (3) of subsection (g) (as redesignated b y p a r a g r a p h (1) of this subsection) of section 1248 is amended to read as follows: " ( A ) a dividend (other than an amount treated as a divi- dend under subsection ( f ) ) , " . ( C ) Subsection ( h ) (as redesignated by p a r a g r a p h (1) of this subsection) of section 1248 is amended by striking o u t "subsection ( a ) " each place i t appears a n d inserting i n lieu thereof "subsection ( a ) or ( f ) " . ( d ) DECLARATORY J U D G M E N T PROCEDURE FOR R E V I E W B T T H E T A X COURT o r SECTION 367 D E T E R M I N A T I O N S . — Ante, p. 1634. (1) I N GENERAL.—Part I V of subchapter C of chapter 76 (relat- i n g t o declaratory judgments) is amended by a d d i n g a t t h e end thereof the following new section: "SEC. 7477. DECLARATORY JUDGMENTS RELATING TO TRANSFERS OF 26 USC 7477. PROPERTY FROM THE UNITED STATES. " ( a ) CREATION o r R E M E D Y . — " ( 1 ) I N GENERAL.—In a case of actual controversy involving— " ( A ) a determination by the Secretary— " ( i ) t h a t an exchange described in section 367(a) (1) , is in pursuance of a plan h a v i n g as one of its principal purposes t h e avoidance of Federal income taxes, o r " ( i i ) of t h e terms a n d conditions p u r s u a n t t o which an exchange described in section 367(a) (1) will be deter- mined n o t t o be i n pursuance of a plan having as one of its principal purposes the avoidance of Federal income ^ taxes, or " ( B ) a failure by t h e Secretary t o make a determination as t o whether an exchange described in section 367(a) (1) is in pursuance of a plan having as one of its principal pur- poses the avoidance of Federal income taxes,
9 0 STAT. 1638 PUBLIC LAW 94-455—OCT. 4, 1 9 7 6 upon the filing of an appropriate pleading, the T a x Court may make t h e a p p r o p r i a t e declaration referred to i n p a r a g r a p h ( 2 ) . Such declaration shall have t h e force a n d effect of a decision of the T a x Court a n d shall be reviewable as such. "(2) SCOPE OF DECLARATION.—The declaration r e f e r r e d to in p a r a g r a p h (1) shall be— " ( A ) in t h e case of a determination referred t o in sub- p a r a g r a p h ( A ) of p a r a g r a p h ( 1 ) , whether or not such deter- mination is reasonable, and, if it is n o t reasonable, a determination of the issue set forth in s u b p a r a g r a p h ( A ) (ii) of p a r a g r a p h ( 1 ) , and ^•.• ( B ) in t h e case of a failure described in s u b p a r a g r a p h ( B ) of p a r a g r a p h ( 1 ) , t h e determination of t h e issues set forth in s u b p a r a g r a p h ( A ) of p a r a g r a p h ( 1 ) . " ( b ) LIMITATIONS.— " ( 1 ) PETITIONER.—A pleading may be filed under this section only by a petitioner who is a transferor or transferee of stock, securities, or property transferred in an exchange described in Ante 1634 Section 367(a) ( 1 ) . ' ^' ' " (2) E X H A U S T I O N or ADMINISTRATIVE REMEDIES.—The T a x C o u r t shall not issue a declaratory judgment or decree under this section in a n y proceeding unless it determines t h a t t h e petitioner h a s exhausted administrative remedies available to h i m within t h e I n t e r n a l Revenue Service. A petitioner shall not be deemed to have exhausted his administrative remedies with respect t o a failure by the Secretary t o make a determination with respect t o whether o r not an exchange described in section 367(a) (1) is in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes before t h e expiration of 270 days after the request for such determination was made. "(3) E X C H A N G E SHALL HAVE BEGUN.—No proceeding m a y be maintained under this section unless the exchange is described i n section 3 6 7 ( a ) ( 1 ) with respect t o which a decision of the T a x Court is sought has begun before the filing of the pleading. "(4) T I M E TOR BRINGING ACTION.—If t h e Secretary sends by ; . certified or registered mail to the petitioners referred to in para- g r a p h (1) notice of his determination with respect to whether or not a n exchange described in section 367(a) (1) is in pursuance of a plan having as one of its principal purposes t h e avoidance ^'a-v \*< r, ^ ^^ Federal income taxes or with respect to the terms a n d condi- tions p u r s u a n t to which such an exchange will be determined not to be made in pursuance of such a plan, no proceeding may be initiated under this section by any petitioner unless t h e pleading is filed before t h e 91st day after t h e day after such notice is mailed to such petitioner. " (c) COMMISSIONERS.—The chief judge of the T a x Court may assign proceedings under this section to be heard by the commissioners of t h e court, a n d t h e court m a y authoiize a commissioner t o make t h e decision of t h e court with respect t o such proceeding, subject to such conditions and review as the court may by rule provide.". (2) T E C H N I C A L AND CONFORMING AMENDMENTS.— 26 u s e 7482. ( A ) Section 7482(b) (1) (relating to venue for review of T a x Court decisions) is amended by striking out "or" at t h e end of s u b p a r a g r a p h ( B ) , by striking o u t t h e period a t t h e end of subparagraph ( C ) and inserting in lieu thereof ", or ", and by inserting after subparagraph ( C ) the following new subparagraph:
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1639 * "(D) in the case of a person seeking a declaratory judg- ment under section 7477, the le^al residence of such person if Ante, p. 1637. such person is not a corporation, or the principal place of business or principal office or agency of such person if such person is a corporation,". (B) Section 7482 (b) (1) is further amended— 26 USC 7482. (i) by striking out "subparagraph (A), (B), and (C) do not apply" in the second sentence and inserting in lieu thereof "no subparagraph of the preceding sentence applies"; and (ii) by striking out "section 7476" in the last sentence and inserting in lieu thereof "section 7476 or 7477". (C) The heading for section 7476 is amended to read as follows: "SEC. 7476. DECLARATORY JUDGMENTS RELATING TO QUALIFICATION OF CERTAIN RETIREMENT PLANS." (D) The table of sections for part IV of subchapter C of chapter 76 is amended to read as follows: "Sec. 7476. Declaratory judgments relating to qualification of certain retirement plans. "Sec. 7477. Declaratory judgments relating to transfers of property from United States." (E) The heading of part I V of subchapter C of chapter 76 is amended to read as follows: "PART IV—DECLARATORY JUDGMENTS**. (F) The table of parts for subchapter C of chapter 76 is amended by striking out the item relating to part IV and inserting in lieu thereof the following : "Part IV. Declaratory judgments." (e) EFFECTIVE DATES.— 26 USC 367 (1) The amendments made by this section (other than by sub- note, section (d)) shall apply to transfers beginning after October 9, 1975, and to sales, exchanges, and distributions taking place after such date. The amendments made by subsection (d) shall apply with respect to pleadings filed with the Tax Court after the date of the enactment of this Act but only with respect to transfers beginning after October 9, 1975. (2) In the case of any exchange described in section 367 of the Internal Revenue Code of 1954 (as in effect on December 31,1974) in any taxable year beginning after December 31,1962, and before the date of the enactment of this Act, which does not involve the transfer of property to or from a United States person, a taxpayer shall have for purposes of such section until 183 days after the date of the enactment of this Act to file a request with the Secre- tary of the Treasury or his delegate seeking to establish to the satisfaction of the Secretary of the Treasury or his delegate that such exchange was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes and that for purposes of such section a foreign corporation is to be treated as a foreign corporation. SEC. 1043. CONTIGUOUS COUNTRY BRANCHES OF DOMESTIC LIFE INSURANCE COMPANIES. (a) AMENDMENT OF SUBCHAPTER L.—Subpart E of part I of sub- chapter L of chapter 1 (relating to life insurance companies) is amended by inserting after section 819 the following new section:
90 STAT. 1640 PUBLIC LAW 94-455—OCT. 4 , 1976 26 u s e 819A. "SEC. 819A. CONTIGUOUS COUNTRY BRANCHES OF DOMESTIC LIFE INSURANCE COMPANIES. " ( a ) EXCLUSION OF I T E M S . — I n the case of a domestic mutual insur- ance company which— " (1) is a life insurance company, ~ " (2) has a contiguous country life insurance branch, and " (3) makes the election provided by subsection ( g ) with respect to such branch, there shall be excluded from each and every item involved in the determination of life insurance company taxable income the items sep- arately accounted for in accordance with subsection ( c ) . "(b) CONTIGUOUS COUNTRY L I F E INSURANCE B R A N C H . — F o r p u r - poses of this section, the term 'contiguous country life insurance branch' means a branch which— " ( 1 ) issues insurance contracts insuring risks in connection with the lives or health of residents of a country which is contigu- ous to the United States, " ( 2 ) has its principal place of business in such contiguous coun- t r y , and " ( 3 ) would constitute a mutual life insurance company if such branch were a separate domestic insurance company. "Insurance F o r purposes of this section, t h e term 'insurance contract' means any contract." jjfe^ health, accident, or annuity contract or reinsurance contract or / any contract relating thereto. (c) SEPARATE ACCOUNTING R E Q U I R E D . — A n y t a x p a y e r which makes the election provided by subsection ( g ) shall establish and maintain a separate account for the various income, exclusion, deduction, asset, reserve, liability, a n d surplus items properly attributable t o t h e con- tracts described in subsection ( b ) . Such separate accounting shall be made— " (1) in accordance with the method regularly employed by such company, if such method clearly reflects income derived from, .5? and the other items attributable to, the contracts described in sub- section ( b ) , and " (2) in all other cases, in accordance with regulations prescribed by the Secretary. " ( d ) RECOGNITION OF G A I N ON ASSETS I N B R A N C H A C C O U N T . — I f t h e aggregate fair market value of all t h e invested assets a n d tangible property which are separately accounted for by the domestic life insur- ance company in the branch account established pursuant to subsection (c) exceeds t h e aggregate adjusted basis of such assets for purposes of determining gain, then the domestic life insurance company shall be treated as having sold all such assets on the first day of the first tax- able year for which t h e election is in effect a t their fair market value on such first day. Notwithstanding any other provision of this chapter, the net gain shall be recognized to the domestic life insurance company on the deemed sale described in the preceding sentence. ^ " ( e ) TRANSACTIONS B E T W E E N CONTIGUOUS COUNTRY B R A N C H AND DOMESTIC L I F E INSURANCE C O M P A N Y . — " (1) REIMBURSEMENT FOR HOME OFFICE SERVICES, ETC.—Any p a y - ^' ment, transfer, reimbursement, credit, or allowance which is made from a separate account established pursuant to subsection (c) to one or more other accounts of a domestic life insurance company as reimbursement for costs incurred for or with respect to t h e insurance (or reinsurance) of risks accounted for i n such separate account shall be taken into account by the domestic life insurance -^ company i n t h e same manner as if such payment, transfer, reim-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1641 bursement, credit, or allowance had been received from a separate person. " (2) EEPATRIATION OF I ^ COME.— " ( A ) I N GENERAL.—Except as provided in subparagraph ( B ) , a n y amount directly or indirectly transferred or cred- ' , ^ ited from a branch account established p u r s u a n t to subsection (c) t o one or more other accounts of such company shall, unless such transfer or credit is a reimbursement to which p a r a g r a p h (1) applies, be added to the life insurance com- p a n y taxable income of the domestic life insurance company (as computed without regard to this p a r a g r a p h ) . " ( B ) LIMITATION.—The addition provided by subpara- g r a p h ( A ) for the taxable year with respect to any contigu- ous country life insurance branch shall n o t exceed the amount by which— " ( i ) t h e aggregate decrease in the life insurance company taxable income of the domestic life insurance company for t h e taxable year a n d for all prior taxable years resulting solely from the application of subsection ( a ) of this section with respect to such branch, exceeds " ( i i ) the amount of additions to life insurance com- pany taxable income pursuant to subparagraph ( A ) with respect to such contiguous country branch for all prior taxable years. "(f) OTHER RULES.— " ( 1 ) TREATMENT o r FOREIGN TAXES.— " ( A ) I N GENERAL.—No iucomc, war profits, or excess prof- its taxes paid or accrued to any foreign country or possession of the United States which is attributable to income excluded under subsection ( a ) shall be taken into account for purposes of s u b p a i t A of p a r t I I I of subchapter N (relating to foreign 26 USC 901. tax credit) or allowable as a deduction. "(B) TREATMENT OF REPATRIATED A3IOFNTS.—P^or purposes of sections 78 and 902, where any amount is added to the life insurance company taxable income of the domestic life insur- ance company by reason of subsection (e) ( 2 ) , the contiguous country life insurance branch shall be treated as a foreign corporation. A n y amount so added shall be treated as a divi- ; •, H . dend paid by a foreign corporation, and the taxes paid to any ;. foreign country or possession of t h e United States with respect t o such amount shall be deemed to have been paid by such branch. "(2) IGNITED STATES SOURCE INCOME ALLOCABLE TO CONTIGUOUS COUNTRY BRANCH.—For purposes of sections 881, 882, a n d 1442, each contiguous country life insurance branch shall be treated as a foreign corporation. Such sections shall be applied to each such branch in t h e same manner as if such sections contained the provisions of a n y treaty to which the United States and t h e contiguou'^ country are parties, t o the same extent such provisions would apply if such branch were incorporated in such contiguous country. " ( g ) ELECTION.—A taxpayer m a y make the election provided by this subsection with respect to any contiguous country for any taxable year beginning after December 31, 1975. A n election made under this subsection for any taxable year shall remain in effect for all subse- quent taxable years, except t h a t it m a y be revoked with the consent of t h e Secretary. T h e election provided by this subsection shall be
90 STAT. 1642 PUBLIC LAW 94-455—OCT. 4, 1976 inado not later tlian tlu> time, proscribed by law for filina" tlie i-e(iirii for the taxable year (inchidino- extensions thereof) ^vith respe<'t" t o AYliicli sncli election is made, and snch election and any ap])rove(l I'ev- ' ocation thereof shall be made in the manner pro\ided l)y the Seci'etary. "(h) Srix'iAiv IviLK FOK I)O:MKSTI(^ STOCK L I F K I x s r i i A x n : Co:\r- pAxiKs.^—At the election of a domestic stock life insurance comi)any Avliich h a s a contiguous country life insurance l)i'anch descrilx'd in subsection (b) (M-ithout reo-ard to the mutual re(}uirement in subsec- tion (b) ( 3 ) ) . the assets of such branch may be transfei'red to a forei<:'u corporation or<iani/ed under the laws of tlie contiguous counti'V Ante, pp. 1634, "witliout the application of section ^\Vu or 14i)l. Subsection (a) shall 1617. aj^ply to the stock of such foreiiiii coi-poration as if such donu'stic company Avere a mutual comi)any and as if the stock were an item described in subsection ( c ) . Subsection (e)("2) shall ai)ply to amounts transferi'cd or ci'edited to such domestic comi)any as if s\ich domestic company and such forei<i."n corpoi'ation constituted one domc'stic mutual "life insui-ance com])any. Tlie insurance conti-acts which m a y b e transferred ])ursuant to this subsection shall include only those which are similar to the types of insui-ance contracts issued by a nuitual life insurance company. Xotwithstandiuii.- the lii'st sentence of this sub- section, if the ao-<>-i'(>o;)te fair market value of the in\ested assets and tan<>-il)le ])roperty which are sepai'ately accomited foi- by the domestic life insurance com])any in the bi-anch account exceeds th{> <'i<j;:<rrefiate odpisted basis of such assets for ])Ui'poses of determinin«i' <iain. tlu\ domestic life insui'ance c()m|)any shall be deemed to h a \ e sold all such assets on the first day of the taxable^ yeai' foi' which the election muler this subsection api)lies and the net i>ain shall be recoii-ni/ed to the domestic life insurance company on the deeuunl sale, but not in. excess of the ])roi)ortion of such net f>aii) which ecpials the pr()])or- tion which the a<i;ar(\iiate fair market value of snch assets which aiv. transfei'i-ed ])ursuant to this subsection is of the aa'jii'eaate fair market value of all such assets." (b) C'LKincAr A^MKNUMKNT.—The table of sections for such subpart E is amended l)y iiiserting after the item I'elatinii' to section 810 the following new item: "Soc. 81!)A. Coiiti.iriioiis country lirnnches of domestic life iiisurnnco couipiUiics." 26 u s e 819A (c) KFFKcrn K DATK.—The amendment made by this section shall note. f^Ppl.v ^^o taxable yeai's beginning after I)eceiiil)ei' o l . ^!)7.^. SEC. 1044. TRANSITIONAL lUTLE FOR BOND, ETC., LOSSES OF FOREIGN BANKS. 26 use 582. ( a ) GF.XKI^M. IJn.K.—Section r)82(c) (relating to bond. etc.. losses and gains of financial institutions) is amended l)y adding at the end thereof the following new paragi'aph : " ( 4 ) TiiAXsrrioxAi. VA \A: FOU I?AXKS.—In the case of a corpora- tion which would be a bank exce])t foi' tlu> fact that it is a foivign cor]ioi'ation, the net gain, if any. for the taxabl(> year on sales and exchanges described in paragra])h (1) shall be considered as gain from t h e sale or exchange of a capital asset to the (>xti'nt such net gain does not exceed the ])oi'tion of any capital loss canwover to such taxable year which is attributable to capital lossc's on sales oi- exchanges desci'ibed in paragi'aph (1) for a taxable^ year begin- ning b(>foi'e duly 12, 19()i). F o r purposes of tlie i)rece([ing sentence, the portion of a net capital loss for a taxable yeai'wliicli is attribut- able to capital losses on sales or exchanges dcscrilied in i)aragra))li (1) is t h e amount of the net cajiital loss on such sal(>s or exchanges
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1643 for such taxable year (but not in excess of the net capital loss for such taxable y e a r ) . ' ' (b) EFFKcrrvE D A T E . — 26 USC 582 (1) T h e amendment made by subsection (a) shall apply with "^te. res])ect to taxable years beginning after J u l y 11, 1900. (2) If the refund or credit of any overpayment atti'ibutablo to the application of the amendment made by subsection (a) to any taxable year is otherAvise prevented by the oi)eration of any law or rule of law (other than section 7122 of the I n t e r n a l Eevenue (^ode of 1954, relating to compromises) on the day wliich is one year aftei- the date of the enactment of this Act. such credit or refund shall be nevertheless allowed or made if claim therefor is filed on or before such day. PART V—SPECIAL CATEGORIES OF FOREIGN TAX TREATMENT SEC. 1051. TAX TREATMENT OF CORPORATIONS CONDUCTING TRADE OR BUSINESS IN PUERTO RICO AND POSSESSIONS OF THE UNITED STATES. ( a ) ALLOAVAXCE OV PrKnro R I C A X AXD Possicssiox T A X CKKuri.— Section 33 (relating to taxes of foreign countries and possessions of ^6 USC 33. the United States) is amended to read as follows: "SEC. 33. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF THE UNITED STATES; POSSESSION TAX CREDIT. " ( a ) FoREUJX TAX Cin.niT.—The amount of taxes imposed by foi'- eign counti'ies and possessions of the United States shall be allowed as a ci'edit against the tax im])osed by this chapter to the extent pro- vided in section 901. " ( b ) SECTIOX 936 CiiEmT.—In the case of a domestic cori)oration. the amount provided by section 936 (relating to l*uei'to Rico and pos- Infra. session tax credit) shall be allowed as a credit against the tax imposed by this chapter." (b) IvUEES ox PossESsu)X' T A X CREDIT.—Subpart I) of p a r t I I I of subchapter IST of chapter 1 (relating to possessions of the United \ • States) is amended b_y adding at the end thereof the following new section: "SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT. 26 USC 936. "(a) ALLOWAXCE or CREDIT.— ' ' ( 1 ) I x GEXEKAL.—Except as ])rovided in paragra])h ( 2 ) , in the case of a domestic corporation which elects the application of this section, there shall be alloAved as a credit against the tax imposed by this chapter an amount equal to the j^oi'tion of the tax whicli is attributable to taxable income, from sources without the United States, from the active conduct of a trade or busi- ness within a possession of the United States, and from qualified ^ possession source investment income, if the conditions of both s u b p a r a g r a p h ( A ) and subpai-agrapli ( B ) are satisfied: " ( A ) 3-YEAU PERTOD.—If 80 pcrccjit Or more of the gross income of such domestic corporation for the 3-3'ear pei-iod immediately preceding the close of the taxable year (or for such p a i t of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States (determined without i-egard to sectioji 904 ( f ) ) ; and ^"'«' P- 1^24.
90 STAT. 1644 PUBLIC LAW 94-455—OCT. 4, 1976 * ''(1^) TRADK OK BusiNKSS."—If T)!) percent oi- more of the <rros.s income of such domestic coi'poration for such period or -•* '•• ' •' such p a r t tlieieof was deiived fi-om t h e active conduct of a t r a d e or business AvitJiin a possession of t h e United States. "(2) CltEDIT XOT ALLOWKU AGAIXST CEKTAIX TAXKS. T h e Credit provided by paragrapli (1) sliall not be allowed against the t a x imposed by— Ante, p. 1549. ' ' ( A ) section 56 (relating to minimum t a x ) , 26 use 531. "(J^) section 531 (relating to t h e t a x on accumulated earnings), " ( C ) section 541 (relating to personal holding companv tax), " ( D ) section 1.3-33 (relating to w a r loss recoveries), or "(p]) section 1351 (relating t o recoveries of foreign expropriation losses). '"(b) AAFOUXTS RECEIVED I X I J X I T E D S T A T E S . — I n d e t e r m i n i n g t a x - able income for purposes of subsection ( a ) , there shall not be taken into account as income fi'om soui'ces without the United States a n y gi'oss income which was received by such dcmiestic corporation within the United States, Avhether derived from sources within or Avithout ,, o t h e United States! "(c) TREAT.AIEXT OF CERTAIX FOKEKJX T A X E S . — F o r purposes of t h i s title, any tax of a foreign country or a possession of the United States which is paid or acci'ued Avith respect to taxable income Avhich is taken into account in computing the credit under subsection ( a ) shall not be treated as income, Avar profits, oi- excess profits taxes paid oi- accrued to a foreign country or possession of the United States, and no deduction shall be alloAved under this title Avith respect to any amounts so paid or accrued. " ( d ) D E F I X I T I O X S . — F o r purposes of this section— " ( 1 ) PossEssiox.—The term 'possession of t h e United Slates' includes the CommouAvealth of Puerto Eico, but does not include the Virgin Islands of t h e Ignited States. "(2) Q l ' A L I F I E D POSSESSIOX' SOVRCE INAESTMEXT INCOME. The term 'qualified possession source investment income' means gross income Avhich— " ( A ) is from sources Avithin a possession of the United ..jf'-O'vu i^S ' States in AA-hich a trade oi- business is actiA^ely conducted, and " ( B ) t h e taxpayer establishes to t h e satisfaction of the Secretary is attributable to the investment in such possession (for use therein) of funds derived from the actiA^e conduct of a trade or business in such possession, or from such investment, ' less the deductions properly apportioned or allocated thereto. "(e) ELECTIOX'.— " ( 1 ) PERIOD OF ET.ECTIOX'.—The election provided in subsection (a) shall be made at such time and in such manner as the Secre- t a r y may by regulations prescribe. A n y such election shall apply to the first taxable year for Avhich such election Avas made and for Avhich the domestic corporation satisfied t h e conditions of sub- p a r a g r a p h s ( A ) a n d ( B ) of subsection ( a ) ( 1 ) and foi-each tax- able year thereafter until such election is revoked by the domestic corporation under p a r a g r a p h ( 2 ) . I f any such election is revoked by t h e domestic corporation under p a r a g r a p h ( 2 ) , such domestic , ,,. corporation m a y make a subsequent election under subsection (a) for any taxable year thereafter for AA-hich such domestic cor-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1645 poratioji satisfies the. conditions of sub])ai'agrai)hs ( A ) and ( B ) of subsection ( a ) (1) and any sucli subsequent election sliall reniaiji in efl'ect until revoked by such domestic corporatioji under pa]-a<^rapli ( 2 ) . " ( 2 ) KKVOCATIOX.—An electicjn under subsection (a) — " ( A ) m a y be revoked for any taxable year beginning before the expiration of the 9tli taxable year following the taxable year for which such election first applies only with the consent of tlie Secretary; a n d " ( B ) may be revoked for any taxable year beginning after the expiration of such 9th taxable year without the consent of the Secretar}'. " ( f ) DLSC OK FomiEH D I S C CoitPoRATiox INELIGIBLE FOR CREDIT.— Xo credit shall be allowed under this section to a corporation for a taxable year foi" which it is a D I S C or former D I S C (as defined in section 9 9 2 ( a ) ) or in which it owns at any time stock in a D I S C or foinierDISC. "(g) ExcErriON TO A C C I M I LATKD EARXINGS T A X . — " ( 1 ) F o r pui'poses of section 535, the term 'accumulated taxable "Accumulated income' shall not include taxable income entitled to the credit taxable income. under subsection ( a ) . " ( 2 ) F o r purposes of section 587, the term 'reasonable needs "Reasonable of tlie business' includes assets which jjroduce income eligible for needs of the the credit under subsection (a).-" business." (c) AMEXDMEXTS OF SECTIOX 981.— (1) Subsection ( a ) of section 981 (relating to general rule in 26 use 931. the case of income from souives within possessions of the United States) is amended to read as follows: "(a) (TEXERAL K I L E . — I n the case of individual citizens of the United States, gross income means only gross income from sources within the United States if the conditions of both paragraph (1) and ])aragrap]i (2) are satisfied : " ( 1 ) 8-yEAR PERIOD.—If 80 ])ercent or more of the gross income of such citizen (computed without the benefit of this section) foi- the 8-year period immediately preceding the close of the taxable year (or for such part of such period inmiediately preced- ing th(! close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and " ( 2 ) TRADE OR BUSIXESS.—If 50 p e i r e n t or more of his gross income (computed without the benefit of this section) for sucli period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another.''. (2) Subsection (c) of section 981 (defining t h e term "posses- sion") is amended to read as follows: " ( c ) DEFIX'ITIOX.—For }nir])oses of this section, the term 'possession of the United States' does not include the Commonwealth of Puerto Rico, the Virgin Islands of the ITnited States, or Guam.". (8) Subsections ( d ) . ( e ) , and (f) of section 981 are each amended by striking out "))ersons" each place it a])pears and insei'ting in lieu thereof "a citizen of the United States". (d) A M E X D M E X T S OF SECTIOX' 901.— (1) Section 901 ( d ) (relating to certain coi-porations treated as 26 use 901. foreign corporations) is amended t o read as follows: " ( d ) TREATMEXT OF DIVIDENDS F R O M A D I S C OR FORMER D I S C . — Foi- ])urposes of this subpart, dividends from a D I S C or former D I S C 89-194 n — 7n_nt 9 10
90 STAT. 1646 PUBLIC LAW 94-455—OCT. 4, 1976 (as defined in section 9 9 2 ( a ) ) shall be treated as dividends from a foreion corporation to the extent such dividends are treated under p a r t 1 as income from sources without t h e United States."'. 26 use 901. (^2) Section 901 (relating t o taxes of foreign countries a n d possessions of the United States) is amended by redesignating subsection ( g ) as ( h ) a n d by inserting after subsection (f) t h e following new subsection: " ( g ) CEIITAIX TAXES P A I D W I T H RESPECT TO DISTRIBUTIOXS F R O M POSSESSIOXS COUPOIUTIOXS.—• "'(l) I x GEXERAE.—For purposcs of this chapter, any t a x of a foreign country or possession of the United States which is paid or accrued with respect to any distribution from a corporation, to the extent tliat such distribution is atti'ibutable to periods dur- ing which such corporation is a possessions corporation, shall n o t be treated as income, w a r profits, or excess profits taxes paid or accrued to a foreign country or possession of t h e United States, and no deduction shall be allowed under this title witli respect to any amoimt so paid or accrued. " ( 2 ) PossEssioxs coRPORATiox.—For purposes of p a r a g r a p h (1), a corporation shall be treated as a possessions corporation Ante, p. 1643. for any period d u r i n g which an election vnider section 9;'>() applied to such corporation or during whicfi section 9;]1 (as in effect on the day before the date of the enactment of the T a x Reform Act of 197()) applied to such corporation." 26 u s e 904. (e) AMEXOMEXT o r SECTIOX 904(b).—Section 904(b) (as amended Ante, p. 1629. b y sections 1031 a n d 1034(a) of this Act) is amended by adding at the end thereof the following new p a r a g r a p h : " ( 4 ) CooPtDiXATiox wrrii SECTIOX D.-^C.—For puri)oses of sub- section ( a ) , in the case of a corporation, the taxable income shall not include a n y portion thereof taken into account for purposes of the credit (if a n y ) allowed by section 936." (f) DiviDEXDs R E ( E I \ E D DEDUCTIOX ALLOWED.— 26 use 243. (1) Section 2 4 3 ( b ) ( 1 ) (defining qualifying dividends) is amended by adding "either" a t the end of s u b p a r a g r a p h ( A ) , by striking out the period a t the end of subparagraph ( B ) (ii) a n d inserting in lieu thereof a comma a n d "or", and by adding at the end thereof the following ncAv s u b p a r a g r a p h : " ( C ) such dividends are paid by a cor-poration with respect to which an election undei- section 936 is in effect for the tax- able vear in which such dividends are paid.". 26 u s e 243. (2) Section 243(b) (5) (defining affiliated g r o u p ) is amended by inserting '% ir)04(b) ( 4 ) , " immediately after "1504(1)) ( 2 ) " . 26 u s e 246. " (3) Section 246(a) (relating to dividends from certain corpo- rations) is amended to read as follows: "(a) DEDICTTOX X O T ALLOWED FOR DniDEXDs F R O M CERTATX COR- PORATJOXS.—The deductions allowed by sections 243, 244, a n d 245 shall not apply to any dividend from a coi-poi-ation which, foi- t h e taxable year of t h e corpoi-ation in whicli the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from t a x undei- section 501 (relating t o cei'tain charitable, etc.. organizations) oi- section 521 (I'elating to farmei-s' cooperative associations)." 26 use 1504. (g) (V)XsoLTDATED R E T I H X TREATMEXT.—Section 1504(1)) (4) (de- fining includible cor))()ration) is amended to read as follows: " ( 4 ) CorpoT-ations with respect t o which an election under sec- tion 936 (relating to ])ossession t a x credit) is in effect for the tax- able vear.".
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 164' (h) CoNFOK.ALlNC A.MKND.MKN TS. (1) Section 48(a) (-2) ( B ) ( v i i ) (ivlatiiig to definition of sec- 26 USC 48. tion 38 property) is amended by sti-iking out " ( o t h e r tlian a corporation entitled to the benefits of section 031 or 0 3 4 ( b ) ) ' ' and insertin<i- in lieu thei'eof the f'oll()\vin<r: " ( o t h e r than a coi'po- ration which has an election in effect under section 03() or which is entitled to the benefits of section 0 3 4 ( b ) ) " . (2) Pai'ao-raph (2) of subsection IK)(t>) (relatinf,^ to certain 26 USC 116. dividends excluded from partial exclusion of dividends ivceived by indivi(bials) is amended to read as follows: •' " ( 2 ) a corporation which, for the taxable year of the corpo- ration in which the distribution is made, oi' for the next ])recedin,ii' taxable year of the corporation, is a corporation exempt from t a x under section 501 (relating to certain char-itable, etc., organiza- tions) or section r)21 (relating to farmers' cooperative associa- a: tions) ; or". (3) Section 8f)l(a) (2) ( A ) (relating to income fi-om sources 26 USC 861. within the Tinted States) is amended by striking out "othei- tlum a corpoi-ation entitled to the benefits of section 031," and inserting in lieu thei-eof the following: "other than a corpoi-ation which has an election in effect under section 03(5,". (4) Section 0001 (b) (2) (H) (ii) (relating to place of filing foi' Post, p. 1648. corporations) is amended by striking out "section 031 (relating to income from sources within possessions of the United S t a t e s ) , " - v and inserting in lieu fhei'eof the following: "section 036 (relating to possession tax credit),", (i) P]FFE(TIVE D A T E . — 26 USC 33 note. (1) Except as provided by pai'agraph ( 2 ) , t h e amendments made by this section shall apply to taxable years beginning after .- , . Decembv'r 31, 107;"), except that "(jualified possession source invest- ment income" as defined in section 03()(d)(2) of the Internal Revenue Code of 1054 shall include income from any source out- ^"^^' P- 1643. side the United States if the taxpayer establishes to the satisfac- tion of the Secretary of the Treasury or his delegate t h a t the income from such sources was earned before October 1, 1076. (2) T h e amendment made by subsection ( d ) (2) shall not apj)ly to any t a x imposed by a possession of the United States with respect t o t h e complete liquidation occurring before fJanuai'y 1. • >' 1070, of a corporation to the extent that such t a x is attributable to earnings and profits accmnulated by such corporation d u r i n g periods ending before J a n u a r y 1, 1076. SEC. 1052. WESTERN HEIVIISPHERE TRADE CORPORATIONS. ( a ) PiiASEouT OF SPECIAL DEDUCTION FOR W E S T E R X H E M I S P H E R E TRADE CORPORATIOXS.—Section 022 (special deduction for Westei-n 26 USC 922. Hemisphere trade corporations) is amended by adding at tlie end thereof the following new subsection: " ( b ) PiiASEOUT OF DEDUCTIOX.—In the case of a taxable year beginning after December 31, 1075. and before J a n u a r y 1, 1080," the percent specified in subsection ( a ) (2) ( A ) shall be (in lieu of 14 per- cent) t h e pei'cent specified in the following t a b l e : ' -' "For a taxable year The percentage beginning in— shall be— 1976 n 1977 S 1978 o 1979 _ 2".
90 STAT. 1648 PUBLIC LAW 94-455—OCT. 4, 1976 ( b ) KKPEAL OF WKSTKRN Hf:MrspiiERE THADE (.'oRroRAxiox DEDUC- , Tiox FOR TAXABLE YEARS B E G I X X I X G A F T E R 1979.—Subpart C of part I I I of subfliaptor N of chapter 1 (relating to AVestern Hejiiisphere 26 u s e 921, t r a d e corporations) is hereby repealed, ^22. (c) CONFORMING A M E N D M E N T S . — 26 u s e 922. (1) T h e first sentence of section 922 (relatinjEi: to special deduc- tion) is amended by striking out " I n t h e case of* and inserting in lieu thereof t h e following: "(a) (TENERAE R U L E . — I n the case of". 26 u s e 170. (2) Section 170(b) (2) (relating to pejcentage limitations on charitable conti'ibutions in the case of corporations) is amended by adding "'and" at the end of subparagraph ( C ) . by sti'iking out subpai-agraph ( D ) , a n d by redesignating subparagi-aph ( E ) as subparagraph ( D ) . 26 u s e 172. (.3) Section 172(d) (relating t o modifications for purposes of the net operating loss deduction) is amended by striking out para- g r a p h (T)) and by redesignating p a r a g r a p h (6) as p a r a g r a p h ( 5 ) . Repeal. (4) Subsection ( g ) of section 907 is hereby i-epealed. 26 u s e 907. (5) Section 1503 (relating t o computation and paj'ment of tax 26 u s e 1503. jj^ ^j^p p.^gp ^f consolidated returns) is amended by striking out subsection (b) and bv s t r i k i n g out " ( a ) GENERAL R U L E . — " . 26 u s e 6091. (6) Section ()091(b) (2) ( B ) (ii) (relating to place for filing returns of coi'poi-ations) is amended to I'ead as follows: Ante, p. 1643. " ( i i ) corporations which claim t h e benefits of section 936 (relating to possession tax c r e d i t ) , and''. (7) T h e table of subparts for part I I I of subchapter X of chapter 1 is amended l)v striking out the item relating to sub- part C. 26 u s e 922 ( d ) EFFECTIVE D A T E S . — T h e a m e n d m e n t s made by subsection (a) note. and p a r a g r a p h (1) of subsection (c) shall apply with respect to tax- able years beginning after December 31, 197.5. T h e amendments made by subsecti(m (b) and by subsection (c) (other than p a r a g r a p h ( 1 ) ) shall apply with respect to taxable r e a r s beginning after December 31, 1979. SEC. 1053. REPEAL OF PROVISIONS RELATING TO CHINA TRADE ACT CORPORATIONS. 26 u s e 941. ( a ) PiiASEouT o r SECTION 941,—Section 941 (relating to special deductions for (!'hina T r a d e Act corporations) is amended by adding the following new subsection: " ( d ) PiiAsEouT OF DEDUCTION.—In the case of a taxable year begin- ning after December 31, 1975, and before J a n u a r y 1, 1978, the amount of tlie special deduction under subsection ( a ) (determined without regard to this subsection) shall be reduced by the percentage reduc- tion specified in the following t a b l e : "For a taxable year The percentage re- beginning in— duction shall be— 1976 33% 1977 66%.'" 26 u s e 943. (b) PHASEOUT OF SECTION 943.—Section 943 ( r e l a t i n g t o the exclu- sion of certain dividends to residents of Formosa or H o n g Kong) is amended by adding at the end thereof the following new sentence: " I n the case of a taxable year beginning after December 31, 1975. and before J a n u a r y 1, 1978, t h e amount of t h e distributions which are excludable from gross income imder this section (determined without
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1649 regard to this sentence) shall be reduced by the percentage reduction specified in the following t a b l e : "For a taxable year The percentage re- beginning in— duction shall be— 1976 331/3 1977 66%." (c) EEPEAL.—Subpart E of p a r t I I I of subchapter X of chapter J 26 USC 941, (relating to China T r a d e Act corporations) is hereby repealed. ^^2, 943. ( d ) T E C H X I C A I . AXD COXFORMIKG A M E X D M E X T S . — (1) Section 116(b) is amended by striking out p a r a g r a p h (1) 26 USC 116. and redesignating p a r a g r a p h s (2) a n d (3) as p a r a g r a p h s (1) and ( 2 ) , respectively. (2) Section 1504(b) is amended by striking out p a r a g r a p h ( 5 ) . 26 USC 1504. (3) Section 6072 is amended by sti'iking out subsection ( e ) . 26 USC 6072. (4) Section 6091(b) (2) ( B ) (ii) is amended by striking out 26 USC 6091. the comma after "trade corporations)" and inserting in lieu thereof "or'" a n d by striking out " o r section 941 (relating to the special deduction for China Trade Act corporations),". (5) T h e table of subparts for part I I I of subchapter N of chapter 1 is amended by striking out the item relating to sub- part E. (e) EFFECTIVE D A T E S . — T h e amendments m a d e by subsections ( a ) 26 USC 941 and ( b ) shall apply with respect to taxable years beginning after "°*^- December 31, 1975. The amendments n)ade by subsections (c) a n d ( d ) shall apply with respect to taxable years beginning after Decem- ber 31, 1977. "^ .• , P A R T V I — D E N I A L OF C E R T A I N T A X B E N E F I T S FOR . COOPERATION WITH OR P A R T I C I P A T I O N I N I N T E R - N A T I O N A L BOYCOTTS A N D I N C O N N E C T I O N WITH T H E P A Y M E N T OF C E R T A I N B R I B E S SEC. 1061. DENIAL OF FOREIGN TAX CREDIT. (a) I N GENERAL.—Subpart A of p a r t I I I of subchapter N (relat- ing to income from sources without the United States) is amended by adding at the end thereof the following new section: "SEC. 908. REDUCTION OF CREDIT FOR PARTICIPATION IN OR CO- 26 USC 908. OPERATION WITH AN INTERNATIONAL BOYCOTT. " ( a ) I N GENERAL.—If a person, or a member of a controlled group (within the meaning of section 993(a) ( 3 ) ) which includes such per- son, participates in or cooperates with an international boycott during the taxable year (within the meaning of section 9 9 9 ( b ) ) , the amount ^^^'^^ P- 1^50. of the credit allowable under section 901 to such person, or under sec- tion 902 or 960 to United States shareholders of such person, for for- ^"'e, p. 1626. eign taxes paid d u r i n g the taxable year shall be reduced by an amount equal to the product of— " ( 1 ) the amount of the credit which, but for this section, would i be allowed under section 901 for the taxable year, multiplied by " ( 2 ) the international boycott factor (determined under sec- tion 999). " ( b ) APPLICATION W I T H SECTIONS 2 7 5 ( a ) (4) AND 78.—Section 275 (a) (4) a n d section 78 shall not apply to any amount of taxes denied credit under subsection ( a ) . "
90 STAT. 1650 PUBLIC LAW 94-455—OCT. 4, 1976 (b) (YKHICAL AMKNDMKXT.—Tho table of s('<'tioiis for sncli subpart is amended by addhifr at the end tliei'eof tlie following new itejn : "Sec. 908. Rfductioo of credit for i)articii)atiou in or cooperation witl) an international boycott." SEC. 1062. D E N I A L O F D E F E R R A L O F INTERNATIONAL BOYCOTT AMOUNTS. 26 u s e 952. (a) D E X I A L OF DEFERUAr..—Section 1)52(a) (relating to general definition of subpart F income) is amended— (1) by striking out ''and'" at the end of p a r a g r a p h ( 1 ) . (2) by striking out the period a t the end of p a r a g r a p h (2) a n d inserting in lieu thereof a comma, and the word "and", and (3) by adding at the end thereof the following new p a r a g r a p h : •'(?>) an amount ecjual to the pi'oduct of— " ( A ) the income of such coi'poration other t h a n income wliich— " ( i ) is attributable to eai'nings and profits of the foreign co]'[)oration included in the gross income of a United States person undei- section 951 (other t h a n by \ reason of this p a r a g r a p h ) , or " ( i i ) is desci'ibed in subsection ( b ) , multii)lied by " ( B ) the international boycott factor (as determined Infra. under section 999)." SEC. 1063. DENIAL OF DISC BENEFITS. (a) INTERXATIONAE BOYCOTT A C T I V I T Y . — S u b p a r a g r a p h (D) of 26 u s e 995. section 9 9 5 ( b ) ( 1 ) (relating t o distributions in qualified years) is amended to read as follows: " ( D ) the sum of— " (i) one-half of the excess of the taxable income of the DISC; for the taxable year, before i-eduction for any dis- tributions d u r i n g the year, over tlie sum of t h e amounts deemed distributed for the taxable year under subpara- g r a p h s ( A ) , ( B ) , and ( C ) . an d " ( i i ) an amount equal to the amount determined under clause (i) multiplied by t h e international boycott factor determined under section 999, and'-. SEC. 1064. DETERMINATIONS AS TO PARTICIPATION IN OR COOPERA- TION WITH AN INTERNATIONAL BOYCOTT. (a) I N GENERVL.—Subchapter X of chapter 1 (relating to t a x based on income fiom soui'ces within oi- without the U n i t e d States) is amended by adding at the end thereof the following new p a r t : "PART V — I N T E R N A T I O N A L BOYCOTT DETERMINATIONS •'Sec. 95]S). Reports by taxpayers : determinations. 26 u s e 999. "SEC. 999. REPORTS BY TAXPAYERS; DETERMINATIONS. " ( a ) IXTERNATIOXAL BOYCOTT EFFORTS BY TAXPAYERS.— " ( 1 ) REPORT REQUIRED.—If any person, or a member of a con- trolled group (within the meaning of section 993(a) ( 3 ) ) which includes t h a t person, has operations in, or related to— " ( A ) a country (or with t h e government, a company, or a national of a country) which is on the list maintained by t h e Secretary under p a r a g r a p h ( 3 ) , or
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1651 ' " ( B ) a n y other country (or with the government, a com- pany, or a national of t h a t country) in which such person or such member had operations d u r i n g the taxable year if such person (or, if such person is a foreign corporation, any United States shareholder of tliat corporation) knows or has reason to know t h a t participation in or cooperation with an international boycott is required as a condition of doing busi- ness within such country or with such government, company, or national, Lhat person or shareholder (within the meaning of section 951(b)) shall report such operations to the Secretary at such 26 USC 951. time and in such manner as the Secretary prescribes, except that in the case of a foreign corporation such report shall be required only of a United States shareholder (within the meaning of such section) of such corporation. "(2) P A R T I C I P A T I O N A X O COOI'EKATIOX ; KEQUEST riiEREFOR.—A taxpayer shall report wliether he, a foreign corporation of which he is a United States shareholder, or any member of a controlled group which includes t h e taxpayer or such foreign corporation has participated in or cooperated with an international boycott at any time d u r i n g the taxable year, or has been requested to participate in or cooperate with sucli a l)oycott, and, if so, the nature of any o))eration in connection with which there was par- ticipation in or cooperation with such boycott (or there was a request to participate or cooperate). " ( 3 ) L I S T TO KE MAINTAINED.—The S e c r e t a r y shall m a i n t a i n and publish not less frequently than fjuarterly a cur-rent list of countries which reijuire or may require participation in or cooperation with an international boycott (within the meaning of subsection ( b ) ( 3 ) ) . " ( b ) PARTICIPATION I N OR COOPERATION A\'rrn AX INTERNATIOXAI, BOYCOTT.— " ( 1 ) GENERAL RULE.—If the person or a member of a con- trolled group (within the meaning of section 993(a) ( 3 ) ) which includes t h e person participates in or cooperates with an inter- national boycott in the taxable year, all operations of the tax- payer or such group in tliat country and in any other country which requires participation in or cooperation vvith tlie boycott as a condition of doing business witliin that country, oi- with the government, a company, or a national of that country, sliall be treated as operations in connection with which such ])articipation of cooperation occurred, except to the extent that the person can clearly demonstrate that a particular operation is a clearly separate a n d identifiable oj)eration in connec^tion with which there was no participation in or cooperation with an international boycott. " ( 2 ) S P E C I A I , RILE. " ( A ) XoNHOvcorr OPERATIONS.—A cleai'ly sepaiate and identifiable operation of a person, or of a member of the controlled grouf) (within the meaning of section 993(a) ( 3 ) ) wliich includes that person, in or related to any countr7 within the group of countries referred to in p a r a g r a p h (1) shall not be treated as an operation in or related to a group of countries associated in carrying out an international boycott if the per-son can clearly demonstrate that he, or that such jnember. did not participate in or cooperate with the international boycott in connection with that operation.
90 STAT. 1652 PUBLIC LAW 94-455—OCT. 4, 1976 " ( B ) SEPARATE AND IDENTIFIABLE OPERATIONS.—A taxpayer m a y show t h a t different operations within t h e same country, or operations in different countries, are clearly separate a n d identifiable operations. " ( 3 ) DEFINITION OF BOYCOTT PARTICIPATION AND COOPERATION.— F o r purposes of this section, a person participates in or cooperates with an international boycott if he agrees— " ( A ) as a condition of doing business directly or indi- rectly within a country or with t h e government, a company, or a national of a country— •'(i) to refrain from doing business with or in a country which is t h e object of t h e boycott or with t h e government, companies, or nationals of t h a t country; " ( i i ) to refrain from doing business with any United States person engaged in trade in a country which is the object of the boycott or with the government, companies, or nationals of t h a t country; " ( i i i ) t o refrain from doing business with a n y company whose ownership or management is made u p , all or in part, of individuals of a particular nationality, race, or religion, or to remove (or refrain from selecting) corporate directors who are individuals of a particular nationality, race, or religion; or " ( i v ) to refrain from employing individuals of a particular nationality, race, or religion; or " ( B ) as a condition of the sale of a product to the government, a company, or a national of a country, t o refrain from shipping or insuring t h a t product on a carrier owned, leased, or operated by a person who does not participate in or cooperate with an international boycott (within the meaning of subparagraph ( A ) ) . " ( 4 ) COMPLIANCE W I T H CERTAIN LAWS.—This section shall n o t apply t o any agreement by a person (or such member) — " ( A ) to meet requirements imposed by a foreign country with respect to an international boycott if United States law or regulations, or an Executive Order, sanctions participation in, or cooperation with, t h a t international boycott, " ( B ) to comply with a prohibition on the importation of goods produced in whole or in p a r t in any country which is the object of an international boycott, or " ( C ) to comply with a prohibition imposed by a country on t h e exportation of products obtained in such country to any country which is t h e object of an international boycott. " ( c ) INTERNATIONAL BOYCOTT FACTOR.— " ( 1 ) INTERNATIONAL BOYCOTT FACTOR.—For purposes of sec- ^nte, pp. 1649, tions 9 0 8 ( a ) , 9 5 2 ( a ) ( 3 ) , a n d 9 9 5 ( b ) ( 3 ) , the international 1650. boycott factor is a fraction, determined under regulations pre- Post, p. 1655. scribed by the Secretary, the numerator of which reflects the world-wide operations of a person (or, in the case of a controlled 26 u s e 993. g r o u p (within the meaning of section 993(a) (3)) which includes t h a t person, of the group) which are operations in or related t o a group of countries associated in carrying out an international boycott in or with which t h a t person or a member of that con- trolled group has participated or cooperated in t h e taxable year, and the denominator of which reflects the world-wide operations of t h a t person or group.
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1653 "(2) SPECIFICALLY ATTRIBUTABLE TAXES AND I N C O M E . — I f the taxpayer clearly demonstrates t h a t t h e foreign taxes paid a n d income earned for the taxable year are attributable to specific oper- ' - ations, then, in lieu of a p p l y i n g t h e international boycott factor for such taxable year, the amount of the credit disallowed under section 9 0 8 ( a ) , the addition to subpart F income under section Ante, p. 1649. 952(a) ( 3 ) , and t h e amount of deemed distribution under section Ante, p. 1650. 9 9 5 ( b ) ( 1 ) ( D ) (ii) for t h e taxable year, if any, shall be t h e amount specifically attributable t o t h e operations in which there was participation in or cooperation with an international boycott under section 999 ( b ) ( 1 ) . ^ ^ ^rete, p. 1650. " ( 3 ) WORLD-WIDE OPERATIONS.—For purposes of this subsection, the term 'world-wide operations' means operations i n o r related to countries other than the United States. " ( d ) DETERMINATIONS W I T H RESPECT TO PARTICULAR OPERATIONS.— U p o n a request made by the taxpayer, the Secretary shall issue a determination with respect to whether a particular operation of a person, or of a member of a controlled group Avhich includes t h a t person, constitutes participation in o r cooperation with an inter- national boycott. T h e Secretary m a y issue such a determination in advance of such operation in cases which are of such a nature t h a t a n ' '. . advance determination is possible a n d appropriate under the circum- ... . stances. I f the request is made before t h e operation is commenced, or before the end of a taxable year in which the operation is carried out, the Secretary may decline to issue such a determination before close of the taxable year. " ( e ) PARTICIPATION OR COOPERATION BY RELATED P E R S O N S . — I f a per- son controls (within t h e meaning of section 304(c)) a corporation— ' " ( 1 ) participation in or cooperation with an international boycott by such corporation shall be presumed t o be such partic- ipation or cooperation by such person, and " ( 2 ) participation in or cooperation with such a boycott b y such person shall be presumed to be such participation or cooper a- *< tion by such corporation. " ( f ) W I L L F U L FAILURE TO REPORT.—Any person ( w i t h i n the mean- ing of section 6671 ( b ) ) required to report under this section wlio will- fully fails to make such report shall, in addition to other penalties provided by law, be fined n o t more t h a n $25,000, imprisoned for n o t more than one year, or both.". (b) CLERICAL A M E N D M E N T . — T h e table of p a r t s for such subchapter is amended by adding a t t h e end thereof the following new item: "Part V. International boycott determinations." ; / .; ^ SEC. 1065. FOREIGN BRIBES. (a) D E N I A L OF DEFERRAL.— (1) CONTROLLED FOREIGN CORPORATIONS.—Section 952(a) (relat- 26 USC 952. i n g t o general definition of subpart F income) is amended— ( A ) b y striking out " a n d " a t the end of p a r a g r a p h ( 2 ) , ( B ) b y striking out t h e period at t h e end of p a r a g r a p h (3) a n d inserting in lieu thereof a comma a n d t h e word "and", and (C) by adding at the end thereof t h e following new paragraph: " ( 4 ) t h e sum of the amounts of any illegal bribes, kickbacks, or other payments (within t h e meaning of section 162(c)) paid by or on behalf of the corporation during the taxable year of
90 STAT. 1654 PUBLIC LAW 94^455—OCT. 4, 1976 the corporation directly or indirectly to an official, employee, or agent in fact of a government." 26 use 995. (2) DISC'S.—Subparagraph (D) of section 995(b)(1) (relat- ing to distributions in qualified years) is amended— (A) by striking out "and" at the end of clause (i), (B) by adding at the end thereof the following new clause: "(iii) any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the DISC directly or indirectly to an official, employee, or agent in fact of a government, and", (b) BRIBES NOT To REDUCE FOREIGN EARNINGS AND PROFITS.—Sec- 26 use 964. tion 964(a) (relating to earnings and profits of foreign corpora- tions) is amended by adding at the end thereof the following sentence,: "In determining such earnings and profits, or the deficit in such earnings and profits, the amount of any illegal bribe, kick- back, or other payment (within the meaning of section 162(c)) shall not be taken into account to decrease such earnings and profits or to increase such deficit.". SEC. 1066. EFFECTIVE DATES. 26 use 908 (a) INTERNATIONAL BOYCOTTS.— note. (1) GENERAL RULE.—The amendments made by this part (other than by section 1065) apply to participation in or cooperation with an international boycott more than 30 days after the date of enactment of this Act. (2) EXISTING CONTRACTS.—In the case of operations which con- stitute participation in or cooperation with an international boy- cott and which are carried out in accordance with the terms of a binding contract entered into before September 2,1976, the amend- ments made by this part (other than by section 1065) apply to such participation or cooperation after December 31, 1977. 26 use 952 (b) FOREIGN BRIBES..—The amendments made by section 1065 apply "ot«- to payments described in section 162(c) of the Internal Revenue Code of 1954 made more than 30 days after the date of enactment of this Act. SEC. 1067. REPORTS BY SECRETARY. 26 use 999 (a) REPORTS TO THE CONGRESS.—As soon after the close of each note. calendar year as the data become available, the Secretary shall trans- mit a report to the Committee on Ways and Means of the House of Representatives and to the Committee on Finance of the Senate setting forth, for that calendar year— (1) the number of reports filed under section 999(a) of the Ante, p. 1650. Internal Revenue Code of 1954 for taxable years ending with or within such taxable year, (2) the number of such rep>orts on which the taxpayer indicated international boycott participation or cooperation (within the meaning of section 999 (b)(3) of such Code), and (3) a detailed description of the manner in which the provisions of such Code relating to international boycott activity have been administered during such calendar year. (b) INITIAL LIST.—The Secretary of^the Treasury shall publish an initial list of those countries which may require participation in or cooperation with an international boycott as a condition of doing business within such country, or with the go^'^ernment, a company, or a national of such country (within the meaning of section 999(b) of the Internal Revenue Code of 1954) within 30 days after the enactment of this Act.
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1655 TITLE XI—AMENDMENTS AFFECTING DISC SEC. 1101. AMENDMENTS AFFECTING DISC. (a) I N GENERAL.—Section 995 (relating t o taxation of D I S C 26 USC 995. income to shareholders) is amended— (1) in p a r a g r a p h (1) of subsection (b) thereof, by redesignat- ing subparagraphs ( D ) a n d ( E ) as subparagraphs ( F ) a n d ( G ) , respectively, by striking out "and ( C ) " in s u b p a r a g r a p h ( F ) (as so redesignated) a n d inserting in lieu thereof " ( C ) , ( D ) , a n d ( E ) " , and by inserting after subparagraph ( C ) the following new subparagraphs: " ( D ) 50 percent of the taxable income of the D I S C for t h e taxable year attributable to military property, " ( E ) t h e taxable income for the taxable year attributable to base period export gross receipts (as defined i n subsection (2) in p a r a g r a p h (2) ( B ) of subsection (b) thereof, by s t r i k m g out "more than t h e n u m b e r " a n d inserting in lieu thereof "more t h a n twice the n u m b e r " ; (3) by a d d i n g a t the end of subsection ( b ) thereof the follow- ing new p a r a g r a p h : "(3) TAXABLE INCOME ATTRIBUTABLE TO MILITARY PROPERTY.— " ( A ) I N GENERAL.—For purposes of p a r a g r a p h ( 1 ) ( D ) , taxable income of a D I S C for the taxable year attributable t o military property shall be determined by only t a k i n g into account— " ( i ) t h e gross income of t h e D I S C for t h e taxable year which is attributable to military property, a n d " ( i i ) t h e deductions which are properly apportioned or allocated to such income. " ( B ) MILITARY PROPERTY.—For purposes of s u b p a r a g r a p h ( A ) , t h e term 'military property' means any property which is an arm, ammunition, or implement of w a r designated i n the munitions list published p u r s u a n t to the Military Security Act of 1954 (22 U.S.C. 1934)."; and (4) by a d d i n g a t t h e end thereof t h e following new subsections: " ( e ) D E F I N I T I O N S AND SPECIAL R U L E S RELATING TO COMPUTATION OF TAXABLE INCOME ATTRIBUTABLE TO B A S E PERIOD EXPORT GROSS RECEIPTS.— " ( 1 ) TAXABLE INCOME ATTRIBUTABLE TO BASE PERIOD EXPORT GROSS RECEIPTS.—For purposes of this section, t h e taxable income attributable t o base period export gross receipts shall be a n amount equal to t h a t portion of t h e adjusted taxable income of a D I S C which— " ( A ) t h e amount of the adjusted base period export gross receipts, bears to " ( B ) t h e amount of the export gross receipts of t h e D I S C for the taxable year. " ( 2 ) ADJUSTED TAXABLE INCOME.—For purposes of this section, the term 'adjusted taxable income' means t h e income of a D I S C for t h e taxable year, reduced by t h e amounts described in s u b p a r a g r a p h s ( A ) , ( B ) , ( C ) , and ( D ) of p a r a g r a p h (1) of sub- section ( b ) .
90 STAT. 1656 PUBLIC LAW 94-455—OCT. 4 , 1976 " ( 3 ) ADJUSTED BASE PERIOD EXPORT GROSS RECEIPTS.—For purposes of this section, t h e term 'adjusted base period export gross receipts' means 67 percent of the average of the export gross receipts of the D I S C for taxable years during the base period ( a s defined in p a r a g r a p h ( 5 ) ) . F o r purposes of t h e preceding sen- tence, if any p r o p e r t y would not qualify during the taxable year 26 u s e 993. as export property by reason of section 993(c) ( 2 ) , gross receipts from such property shall be excluded from export gross receipts d u r i n g the taxable years in the base period. "(4) EXPORT GROSS RECEIPTS.—For purposes of t h i s section, t h e t e r m 'export gross receipts' means— " ( A ) qualified export receipts described in subparagraphs ( A ) , ( B ) , ( C ) , ( G ) , a n d ( H ) of section 993(a) ( 1 ) , reduced by " ( B ) 50 percent of such qualified export receipts which are attributable to military property (as defined in subsection (b)(3)(B)). " (5) B A S E PERIOD.—For purposes of p a r a g r a p h (3) — " ( A ) for any taxable year beginning before 1980, the base period shall be t h e taxable years beginning in 1972, 1973, 1974, and 1975, and " ( B ) for any taxable year be2:inmng in any calendar year after 1979, t h e base period shall be the taxable years begin- n i n g in t h e fourth, fifth, sixth, a n d seventh calendar years preceding such calendar year. " ( 6 ) No BASE PERIOD YEAR.—If a D I S C did not have a taxable year beginning in a calendar year specified in p a r a g r a p h ( 5 ) , then, for purposes of computing the adjusted base period export gross receipts, such D I S C is deemed to have a taxable year and export gross receipts of zero for t h a t year. Regulations. "(7) SHORT TAXABLE YEAR.—The S e c r e t a r y shall prescribe such regulations as he deems necessary with respect to a short taxable year for purposes of computing base period export gross receipts of a D I S C , or a short taxable year in which deemed distributions (as described in subsection ( b ) ) are made, including t h e circum- stances under which the short taxable year shall be annualized, and the proper method of annualization. " ( 8 ) CONTROLLED GROUP.—If more t h a n one member of a con- trolled group (as defined in section 993(a) ( 3 ) ) for t h e taxable year qualifies as a D I S C , then subsection (b) (1) ( E ) , this sub- section, and subsection (f) shall each be applied in a manner pro- vided by regulations prescribed by the Secretary by aggregating the export gross receipts a n d taxable income of such D I S C s for t h e taxable year a n d by aggregating the export gross receipts of such D I S C s for each taxable year in the base period. " ( 9 ) SPECIAL RULE WHERE T H E OWNERSHIP OP DISC STOCK AND THE T R A D E O R B U S I N E S S GIVING RISE TO EXPORT GROSS RECEIPTS OF T H E DISC ARE SEPARATED. " ( A ) I N GENERAL.—If, a t any time after t h e beginning of the base period, there has been a separation of the ownership of the stock in the D I S C from the ownership of the t r a d e or business which ( d u r i n g the base period) produced the export gross receipts of t h e D I S C , then t h e persons who own t h e t r a d e or business d u r i n g t h e taxable year shall be treated as h a v i n g had additional export gross receipts d u r i n g the base period attributable to such t r a d e or business.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1657 "(B) ExcEFnoNS.—Subparagraph (A) shall not apply— "(i) where the stock in the DISC and the trade or busi- ness are owned throughout the taxable year by members of the same controlled group, and "(ii) to the extent that the taxpayer's ownership of the stock in the DISC for the taxable year is propor- tionate to his ownership during the taxable year of the trade or business. " ( 1 0 ) D I S C BASE PERIOD ATTRIBUTED THROUGH SHAREHOLDERS IN CERTAIN CASES.— " ( A ) I N GENERAL.—If— Regulations. "(i) any person owns 5 percent or more of the stock of a DISC (hereinafter in this paragraph referred to as 'first D I S C ) , and "(ii) such person at any time during the base period of the first DISC owned 5 percent or more of the stock of a second DISC, then, to the extent provided in such regulations as the Sec- retary may prescribe to prevent circumvention of the application of subsection ( b ) ( 1 ) ( E ) , an amount equal to such shareholder's share of the base period export gross receipts of the second DISC shall be added to the base period export gross receipts of the first DISC. "(B) OWNERSHIP OF STOCK.—For purposes of subpara- graph (A), the ownership of stock shall be determined under section 318. 26 USC 318. "(f) SMALL DISCS.— " ( 1 ) ADJUSTED TAXABLE INCOME OF $100,000 OR LESS.—If a DISC has adjusted taxable income of $100,000 or less for a tax- able year, subsection (b) (1) ( E ) shall not apply with respect to such year. " (2) SPECIAL RULE.—If a DISC has adjusted taxable income of more than $100,000 for a taxable year, then the amount taken into account under subsection (b) (1) (E) shall be deemed to be an amount equal to the excess (if any) of— "(A) the amount which would (but for this paragraph) be taken into account under subsection ( b ) ( 1 ) ( E ) , over "(B) twice the excess (if any) of $150,000 over the adjusted taxable income. "(g) CERTAIN TRANSFERS OF DISC ASSETS.—If— "(1) a corporation owns, directly or indirectly, all of the stock of a subsidiary and a DISC, ^ "(2) the subsidiary has been engaged in the active conduct of a trade or business (within the meaning of section 355(b)) throughout the 5-year period ending on the date of the transfer and continues to be so engaged thereafter, and "(3) during the taxable year of the subsidiary in which its stock is transferred and its preceding taxable year, such trade or business gives rise to qualified export receipts of the subsidiary and the DISC, then, under such terms and conditions as the Secretary by regulations Regulations. shall prescribe, transfers of assets, stock, or both, will be deemed to be a reorganization within the meaning of section 368, a transaction to which section 355 applies, an exchange of stock to which section 351 applies, or a combination thereof. The preceding sentence shall apply only to the extent that the transfer or transfers involved are for the purpose of preventing the separation of the ownership of the stock in
90 STAT. 1658 PUBLIC LAW 94-455—OCT. 4 , 1976 the D I S C from the ownership of the trade or business which ( d u r i n g the base period) produced t h e export gross receipts of the D I S C . " 26 u s e 993. ^ (b) A M E N D M E N T o r SECTION 993 (c) (2) .—Section 993 (c) (2) (relat- ing t o property excluded from export property) is amended— f l ) by striking out "or" a t the end of s u b p a r a g r a p h ( B ) , and (2) b y striking out "under section 611" in s u b p a r a g r a p h ( C ) and inserting in lieu thereof "under section 613 or 613A". (c) AMENDMENTS TO SECTION 993(d).—Section 993(d) (relating to definition of producer's loans) is amended— (1) by inserting in p a r a g r a p h (1) (C) immediately after "export property", t h e following: "determined without regard to s u b p a r a g r a p h (C) or ( D ) of subsection (c) (2),". (2) by inserting i n p a r a g r a p h (2) immediately after "of prop- erty which would be export p r o p e r t y " the following: "(deter- mined without regard to s u b p a r a g r a p h ( C ) or ( D ) of subsection (c)(2))". ( d ) RECAPTURE OF ACCUMULATED D I S C INCOME ON DISPOSITION OF STOCK I N A D I S C OR FORMER D I S C — 26 u s e 995. (1) Section 995(c) is amended to read as follows: "(c) G A I N ON DISPOSITION OF STOCK I N A D I S C . — " (1) I N GENERAL.—If— " ( A ) a shareholder disposes of stock in a D I S C or former D I S C a n y gain recognized on such disposition shall be included in gross income as a dividend to the extent provided in p a r a g r a p h ( 2 ) , " ( B ) stock of a D I S C or former D I S C is disposed of i n a transaction in which the separate corporate existence of the D I S C or former D I S C is terminated other t h a n by a mere change in place of organization, however effected, a n y gain realized o n t h e disposition of such stock in t h e transaction shall be recognized notwithstanding any other provision of this title t o t h e extent provided in p a r a g r a p h (2) a n d t o the extent so recognized shall be included in gross income as a dividend, or " ( C ) a shareholder distributes, sells, or exchanges stock in a D I S C or former D I S C in a transaction to which sec- tion 311, 336, or 337 applies, then an amoimt ec[ual t o t h e excess of the fair market value of such stock over its adjusted basis i n the hands of the shareholder shall, notwithstanding any provision of this title, be included in gross income of the shareholder as a dividend to the extent provided i n paragraph (2). " (2) A M O U N T INCLUDED.—^The amounts described in p a r a g r a p h (1) shall be included i n gross income as a dividend to the extent of the accumulated D I S C income of the D I S C or former D I S C which is attributable t o t h e stock disposed of a n d which was accumulated in taxable years of such corporation d u r i n g t h e period or periods the stock disposed of was held by the shareholder which disposed of such stock." (2) INTEREST I N A PARTNERSHIP HOLDING STOCK I N A DISC.— 26 u s e 751. T h e last sentence of section 751(c) (relating to unrealized receiv- ables) is amended— ( A ) by striking out " ( a s defined in section 617(f) ( 2 ) ) , " and inserting in lieu thereof " ( a s defined in section 617(f) (2), stock in a D I S C (as described in section 9 9 2 ( a ) ) , " a n d ( B ) b y striking out " 6 1 7 ( d ) ( 1 ) , 124:5(a)," a n d inserting in lieu thereof "617(d) ( 1 ) , 995(c), 1245(a),''.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1659 ' (e) R U L E S FOR ALLOCATING DISTRIBUTIONS M A D E T O M E E T Q U A L I - FICATION REQUIREMENTS.—Paragraph (2) of section 996(a) (relating 26 USC 996. t o rules for actual distributions and certain deemed distributions) is amended by adding at the end thereof the following new sentence: " I n the case of any amount of any actual distribution made p u r s u a n t to section 992(c) which is required to satisfy the condition of section 992(a) (1) ( A ) , the preceding sentence shall apply to one-half of such amount, and p a r a g r a p h (1) shall apply to the remaining one-half of such amount." (f) A M E N D M E N T OF SECTION 603(b) OF T A X REDUCTION A C T or 1975.—Section 603(b) of the T a x Reduction Act of 1975 (relating to 26 USC 993 effective date) is amended to read as follows: no^. "(b) EFFECTIVE D A T E S . — " ( 1 ) I N GENERAL.—Except as provided in p a r a g r a p h ( 2 ) , the amendments made by subsection (a) shall apply to sales, exchanges, and other dispositions made after March 18, 1975, in taxable years ending after such date. " ( 2 ) BINDING CONTRACT.—The amendments made by subsection (a) shall not apply to sales, exchanges, and other dispositions made after March 18, 1975, but before March 19, 1980, if such sales, exchanges, and other dispositions are made p u r s u a n t to a fixed contract. T h e term 'fixed contract' means a contract which "Fixed was, on March 18, 1975, and is a t all times thereafter binding on contract." t h e D I S C or a t a x p a y e r which was a member of the same con- trolled g r o u p (within the meaning of section 9 9 3 ( a ) ( 3 ) of the I n t e r n a l Revenue Code of 1954) as the D I S C , which was entered into after the date on which the D I S C qualified as a D I S C and t h e D I S C and the taxpayer became members of the same con- trolled g r o u p , and under which the price and quantity of the products sold, exchanged, or otherwise disposed of cannot be increased." (g) EFFECTIVE D A T E S . — (1) F O R SUBSECTIONS (a) AND (e).—The amendments made by 26 USC 995 subsections (a) and (e) shall apply to taxable years beginning note. , after December 31,1975. (2) F O R SUBSECTION ( b ) . — T h e amendments made by subsection 26 USC 993 (b) shall apply to sales, exchanges, and other dispositions made note, after March 18,1975, in taxable years ending after such date. (3) F O R SUBSECTIONS ( C ) AND (f).—The amendments made by 26 USC 993 subsections (c) and (f) shall apply to taxable years ending after note. March 18,1975. (4) F O R SUBSECTION ( d ) . — T h e amendments made by subsection 26 USC 995 ( d ) shall apply to sales, exchanges, or other dispositions after note. December 31, 1975, in taxable years ending after such date. (5) PRORATION OF BASE PERIOD I N CASE OF FIXED CONTRACTS.— 26 USC 995 F o r purposes of determining adjusted base period export gross note, receipts (under section 995(e) (3) of the I n t e r n a l Revenue Code of 1954, as amended by this section), if any D I S C has export gross receipts from export property by reason of p a r a g r a p h (2) of section 603(b) of the T a x Reduction Act of 1975, then the export gross receipts of such D I S C for the taxable years of the base period shall be increased by a n amount equal to the amount of gross receipts which were excluded from export gross receipts d u r i n g each taxable year of the base period by reason of the last sentence of section 993(e) (3) of such Code multiplied by a frac- tion, the numerator of which is the amount of the gross receipts in the taxable year which are export gross receipts by reason of
90 STAT. 1660 PUBLIC LAW 94-455—OCT. 4, 1976 p a r a g r a p h (2) of section 603(b) of t h e T a x Reduction A c t of 26 u s e 993 1975 and the denominator of which is t h e amount of total gross °°*®- receipts which are excluded from export gross receipts in t h e taxable year by reason of s u b p a r a g r a p h ( C ) or ( D ) of p a r a g r a p h (2) of section 993(c) (determined without regard to p a r a g r a p h (2) of section 603(b) of the T a x Reduction Act of 1975). TITLE XII—ADMINISTRATIVE PROVISIONS SEC. 1201. PUBLIC INSPECTION OF WRITTEN DETERMINATIONS BY INTERNAL REVENUE SERVICE. ( a ) R E Q U I R E M E N T T H A T W R I T T E N DETERMINATIONS B E O P E N TO PUBLIC INSPECTION.—Subchapter B of chapter 61 (relating to mis- cellaneous provisions) is amended by redesignating section 6110 as 6111 and by inserting after section 6109 the following new section: 26 u s e 6110. "SEC. 6110. PUBLIC INSPECTION OF WRITTEN DETERMINATIONS. Regulations. " ( a ) GENERAL KuLE.—Except as otherwise provided in this section, t h e text of any written determination a n d any background file docu- ment relating t o such written determination shall be open to public inspection a t such place as the Secretary may by regulations prescribe. " ( b ) DEFiNmoNs.—For purposes of this section— " ( 1 ) W R I T T E N DETERMINATION.—The t e r m ' w r i t t e n determina- tion' means a ruling, determination letter, o r technical advice memorandum. " ( 2 ) BACKGROUND FILE DOCUMENT.—The t e r m ' b a c k g r o u n d file document' w i t h respect t o a written determination includes t h e request for t h a t written determination, any written material submitted in support of t h e request, a n d a n y communication (written or otherwise) between the I n t e r n a l Revenue Service and If persons outside the I n t e r n a l Revenue Service i n connection with such written determination (other than any communication between the D e p a r t m e n t of Justice and the I n t e r n a l Revenue Serv- ice relating to a pending civil or criminal case or investigation) received before issuance of the written determination. ' " (3) REFERENCE AND GENERAL WRITTEN DETERMINATIONS.— . " ( A ) REFERENCE WRITTEN DETERMINATION.—The t e r m ' r e f - erence written determination' means a n y written determina- tion which has been determined by the Secretary to have sig- nificant reference value. " ( B ) GENERAL WRITTEN DETERMINATION.—The t e r m 'gen- eral written determination' means any written determination •i other t h a n a reference written determination. " ( c ) E X E M P T I O N S F R O M DISCLOSURE.—Before m a k i n g any w r i t t e n determination or background file document open or available to public inspection under subsection ( a ) , the Secretary shall delete— " ( 1 ) the names, addresses, a n d other identifying details of t h e person t o whom t h e written determination pertains a n d of any other person, other t h a n a person with respect to,whom a notation is made under subsection (d) ( 1 ) , identified in t h e written deter- mination or any background file document; " ( 2 ) information specifically authorized u n d e r criteria estab- lished by an Executive order to be kept secret in t h e interest of national defense or foreign policy, a n d which is i n fact properly classified p u r s u a n t to such Executive o r d e r ;
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1661 " ( 3 ) information specifically exempted from disclosure by any statute (other t h a n this title) which is applicable t o the I n t e r n a l Revenue Service; " ( 4 ) t r a d e secrets a n d commercial or financial information obtained from a person and privileged or confidential; " ( 5 ) information t h e disclosure of which would constitute a clearly u n w a r r a n t e d invasion of personal p r i v a c y ; " ( 6 ) information contained in or related to examination, operating, or condition reports prepared by, or on behalf of, or for use of an agency responsible for the regulation or supervision of financial institutions; a n d " ( 7 ) geological and geophysical information a n d data, includ- ing maps, concerning wells. T h e Secretary shall determine t h e appropriate extent of such dele- tions and, except in the case of intentional or willful disregard of this subsection, shall not be required to make such deletions (nor be liable for failure t o make deletions) unless the Secretary has agreed to such deletions or has been ordered by a court (in a proceeding under sub- section (f) ( 3 ) ) to make such deletions. "(d) PROCEDURES W I T H REGARD TO T H I R D P A R T Y CONTACTS.— " (1) NOTATIONS.—If, before the issuance of a written determi- nation, the I n t e r n a l Revenue Service receives any communication (written o r otherwise) concerning such written determin- ation, a n y request for such determination, or any other matter involving such written determination from a person other t h a n an employee of the I n t e r n a l Revenue Service or the person to whom such written determination pertains (or his authorized repre- sentative with regard to such written determination), the I n t e r n a l Revenue Service shall indicate, on the written determination open to public inspection, the category of the person making such com- munication and the date of such communication. " ( 2 ) E X C E P T I O N . — P a r a g r a p h (1) shall not apply to any com- munication made by the Chief of Staff of tl:e Joint Committee on Taxation. "(3) DISCLOSURE OF I D E N T I T Y . — I n the case of any written determination to which paragrapli (1) applies, any person may file a petition i n the United States Tax Court or file a complaint in t h e United States District Court for the District of Columbia for an order requiring t h a t the identity of any person to Avhom the written determination pertains be disclosed. T h e court shall order disclosure of such identity if there is evidence in the record from which one could reasonably conclude that an impropriety occurred or undue influence w a s exercised with respect t o such written determination by or on behalf of such person. The court may also direct the Secretary to disclose any portion of any other deletions made in accordance with subsection (c) where such disclosure is in the public interest. I f a proceeding is commenced under this p a r a g r a p h , the person whose identity is subject to being disclosed a n d t h e person about whom a notation is made under p a r a g r a p h (1) shall be notified of the proceeding in accord- ance with t h e procedures described in subsection (f) (4) ( B ) a n d shall have the r i g h t to intervene in the proceeding (anonymously, if a p p r o p r i a t e ) . " ( 4 ) PERIOD I N W H I C H TO BRING ACTION.—Xo proceeding shall be commenced under p a r a g r a p h (3) unless a petition is filed before t h e expiration of 36 months after the first day t h a t the written determination is open t o public inspection. 89-194 O—78—pt. 2 13
90 STAT. 1662 PUBLIC LAW 94-455—OCT. 4, 1976 "(e) BACKGROUND FILE DOCUMENTS.—^Whenever the Secretary makes a written determination open to public inspection under this section, he shall also make available to any person, but only upon the written request of that person, any background file document relating to the written determination. "(f) RESOLUTION OF DISPUTES RELATING TO DISCLOSURE.— "(1) NOTICE or INTENTION TO DISCLOSE.—The Secretary shall upon issuance of any written determination, or upon receipt of a request for a background file document, mail a notice of intention to disclose such determination or document to any person to whom the written determination pertains (or a successor in interest, executor, or other person authorized by law to act for or on behalf of such person). Regulations. " (2) ADMINISTRATIVE REMEDIES.—The Secretary shall prescribe regulations establishing administrative remedies with respect to— "(A) requests for additional disclosure of any written determination of any background file document, and "(B) requests to restrain disclosure. " ( 3 ) A C T I O N TO RESTRAIN DISCLOSURE.— "(A) CREATION OF REMEDY.—Any person— "(i) to whom a written determination pertains (or a successor in interest, executor, or other person authorized by law to act for or on behalf of such person), or who has a direct interest in maintaining the confidentiality of any such written determination or background file document (or portion thereof), "(ii) who disagrees with any failure to make a dele- tion with respect to that portion of any written deter- mination or any background file document which is to be open or available to public inspection, and "(iii) who has exhausted his administrative remedies as prescribed pursuant to paragraph (2), may, within 60 days after the mailing by the Secretary of a notice of intention to disclose any written determination or background file document under paragraph (1), together with the proposed deletions, file a petition in the United States Tax Court (anonymously, if appropriate) for a deter- mination with respect to that portion of such written deter- mination or background file document which is to be open to public inspection. "(B) NOTICE TO CERTAIN PERSONS.—The Secretary shall notify any person to whom a written determination pertains (unless such person is the petitioner) of the filing of a peti- tion under this paragraph with respect to such written deter- mination or related background file document, and any such person may intervene (anonymously, if appropriate) in any proceeding conducted pursuant to this paragraph. The Sec- retary shall send such notice by registered or certified mail to the last known address of such person within 15 days after such petition is served on the Secretary. No person who has received such a notice may thereafter file any petition under this paragraph with respect to such written determination or background file document with respect to which such notice was received. "(4) ACTION TO OBTAIN ADDITIONAL DISCLOSURE.— " (A) CREATION OF REMEDY.—Any person who has exhausted the administrative remedies prescribed pursuant to para-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1663 graph (2) with respect to a request for disclosure may file a petition in the United States Tax Court or a complaint in the United States District Court for the District of Columbia for an order requiring that any written determination or back- ground file document (or portion thereof) be made open or available to public inspection. Except where inconsistent with subparagraph ( B ) , the provisions of subparagraphs (C), (D), ( E ) , ( F ) , and (G) of section 552(a)(4) of title 5, United States Code, shall apply to any proceeding under this paragraph. The Court shall examine the matter de novo and without regard to a decision of a court under paragraph (3) with respect to such written determination or background file document, and may examine the entire text of such written determination or background file document in order to deter- mine whether such written determination or background file document or any part thereof shall be open or available to public inspection under this section. The burden of proof with respect to the issue of disclosure of any information shall be on the Secretary and any other person seeking to restrain disclosure. "(B) INTERVENTION.—If a proceeding is commenced under Notice, this paragraph with respect to any written determination or background file document, the Secretary shall, within 15 days after notice of the petition filed under subparagraph (A) is served on him, send notice of the commencement of such pro- ceeding to all persons who are identified by name and address in such written determination or background file docimient. The Secretary shall send such notice by registered or certified mail to the last known address of such person. Ajiy person to whom such determination or background file document per- tains may intervene in the proceeding (anonymously, if ap- propriate). If such notice is sent, the Secretary shall not be required to defend the action and shall not be liable for public disclosure of the written determination or background file document (or any portion thereof) in accordance with the final decision of the court. "(5) EXPEDITION OF DETERMINATION.—^The Tax Court shall make a decision with respect to any petition described in para- graph (3) at the earliest practicable date and the Court of Appeals shall expedite any review of such decision in every way possible. "(6) PUBLICITY OF TAX COURT PROCEEDINGS.—Notwithstanding sections 7458 and 7461, the Tax Court may, in order to preserve 26 USC 7458, the anonymity, privacy, or confidentiality of any person under 7461. this section, provide by rules adopted under section 7453 that portions of hearings, testimony, evidence, and reports in connec- tion with pi-oceedings under this section may be closed to the public or to inspection by the public. "(g) TIME FOR DISCLOSURE.— "(1) I N GENERAL.—Except as otherwise provided in this sec- tion, the text of any written determination or any background file document (as modified under subsection (c)) shall be open or available to public inspection— "(A) no earlier than 75 days, and no later than 90 days, after the notice provided in subsection (f) (1) is mailed, or, if later.
90 STAT. 1664 PUBLIC LAW 94-455—OCT. 4, 1976 "(B) within 30 days after the date on which a court decision under subsection (f) (3) becomes finaL " (2) POSTPONEMENT BY ORDER or COURT.—The court may extend the period referred to in paragraph (1) (B) for such time as the court finds necessary to allow the Secretary to comply with its decision. "(3) POSTPONEMENT OF DISCLOSURE FOR UP TO 9O DAYS.—^At the written request of the person by whom or on whose behalf the request for the written determination was made, the period referred to in paragraph (1) (A) shall be extended (for not to exceed an additional 90 days) until the day which is 15 days after the date of the Secretary's determination that the transaction set forth in the written determination has been completed. "(4) ADDITIONAL I 8 0 DAYS.—If— "(A) the transaction set forth in the written determination is not completed during the period set forth in paragraph (3), and "(B) the person by whom or on whose behalf the request for the written determination was made establishes to the satisfaction of the Secretary that good cause exists for addi- tional delay in opening the written determination to public inspection, the period referred to in paragraph (3) shall be further extended (for not to exceed an additional 180 days) until the day which is 15 days after the date of the Secretary's determination that the transaction set forth in the written determination has been com- pleted. "(5) SPECIAL RULES FOR CERTAIN WRITTEN DETERMINATIONS, ETC.—Notwithstanding the provisions of paragraph (1), the Sec- retary shall not be required to make available to the public— "(A) any technical advice memorandum and any related background file document involving any matter which is the subject of a civil fraud or criminal investigation or jeopardy or termination assessment until after any action relating to such investigation or assessment is completed, or "(B) any general written determination and any related background file document that relates solely to approval of the Secretary of any adoption or change of— "(i) the funding method or plan year of a plan under 26 use 412. section 412, "(ii) a taxpayer's annual accounting period under sec- tion 442, "(iii) a taxpayer's method of accounting under sec- tion 446(e), or "(iv) a partnership's or partner's taxable year under section 706, but the Secretary shall make any such written determination and related background file document available upon the written request of any person after the date on which (except for this subparagraph) such determination would be open to public inspection. " (,h) DISCLOSURE OF PRIOR WRITTEN DETERMINATIONS AND RELATED BACKGROUND FILE DOCUMENTS.— "(1) I N GENERAL.—Except as otherwise provided in this sub- section, a written determination issued pursuant to a request made
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1665 before November 1,1976, a n d any background file document relat- ing to such written determination shall be open or available to public inspection in accordance with this section. " ( 2 ) T I M E FOR DISCLOSURE.—In the case of any written deter- mination or background file document which is to be made open or available to j)ublic inspection u n d e r p a r a g r a p h ( 1 ) — " ( A ) subsection ( g ) shall not apply, but " ( B ) such written determination or background file docu- ment shall be made open or available to public inspection a t the earliest practicable date after funds for t h a t purpose have been ai:)propriated a n d made available t o the Internal Reve- nue Service. " ( 3 ) ORDER OF RELEASE.—Any written determination or back- ground file document described in p a r a g r a p h (1) shall be open or available t o public inspection in t h e following order s t a r t i n g with the most recent written determination in each category: " ( A ) reference written determinations issued under this title; " ( B ) general written determinations issued after J u l y 4, 1967 r a n d " ( C ) reference written determinations issued under the IiiL^nnal Kevenue Code of 1939 or corresponding provisions 53 Stat. 1. of prior law. General written determinations not described in s u b p a r a g r a p h ( B ) shall be open to public inspection on written request, b u t n o t until after the written determinations referred to in subpara- g r a p h s ( A ) , ( B ) , a n d ( C ) are open to public inspection. " ( 4 ) NOTICE THAT PRIOR WRITTEN DEn-:RMiXATioNS ARE OPEN TO PUBLIC INSPECTION.—Notwithstanding t h e provisions of subsec- Publication in tions (f) (1) a n d (f) (3) ( A ) , not less t h a n 90 days before making Federal Register, any ^^ortion of a written determination described in this sub- section open to public inspection, the Secretary shall issue public notice in the Federal Register t h a t such written determination is to be made open to public inspection. T h e person who received a written determination may, within 75 days after the date of publi- cation of notice under this jDaragraph, file a petition in t h e United States Tax Court (anonymously, if appropi-iate) for a determina- tion witli respect to that portion of such written determination ^ which is to be made open to public inspection. The provisions of subsections ( f ) ( 3 ) ( B ) , ( 5 ) , and (6) shall apply if such a peti- tion is filed. I f no petition is filed, the text of a n y written deter- mination shall be open to public inspection no earlier than 90 days, and no later t h a n 120 days, after notice is published in t h e Fed- eral Register. " ( 5 ) EXCLUSION.—Subsection ( d ) shall n o t apply to any writ- ten determination described in p a r a g r a p h ( 1 ) . " ( i ) CIVIL R E M E D I E S . — " (1) CIVIL ACTION.—Whenever the Secretary— " ( A ) fails to make deletions required in accordance with subsection ( c ) , or " ( B ) fails to follow t h e procedures in subsection ( g ) , the recipient of t h e written determination or any person identified in the written determination shall have as an exclusive civil rem- edy an action against the Secretary in the Court of Claims, which shall have jurisdiction to hear a n y action under this p a r a g r a p h . " ( 2 ) DAMAGES.—In any suit brought under t h e provisions of p a r a g r a p h (1) ( A ) in which the Court determines t h a t an em-
90 STAT. 1666 PUBLIC LAW 94-455—OCT. 4 , 1976 ployee of the I n t e r n a l Revenue Service intentionally or willfully failed t o delete in accordance with subsection ( c ) , or in any suit brought under s u b p a r a g r a p h (1) ( B ) in which t h e Court deter- mines t h a t a n employee intentionally o r willfully failed t o act in accordance with subsection ( g ) , t h e United States shall be liable to the person in an amount equal to the sum of— " ( A ) actual damages sustained by the person b u t in n o case shall a person be entitled t o receive less t h a n t h e sum of $1,000, and " ( B ) the costs of the action together with reasonable attorney's fees as determined by the Court, " ( j ) SPECIAL JE^RovisioNS.— " (1) F E E S . — T h e Secretary is authorized to assess actual costs— " ( A ) for duplication of any written determination or back- ground file document made open or available t o t h e public under this section, and " ( B ) incurred in searching for and making deletions required under subsection (c) from any written determination or background file document which is available to public inspection only upon written request. T h e Secretary shall furnish any written determination o r back- ground file document without charge or a t a reduced charge if he determines t h a t waiver or reduction of the fee is in the public interest because furnishing such determination or background file document can be considered as primarily benefiting t h e general public. "(2) RECORDS DISPOSAL PROCEDURES.—Nothing in t h i s section shall prevent t h e Secretary from disposing of any general written determination or background file document described in subsec- tion (b) in accordance with established records disposition proce- dures, b u t such disposal shall, except as provided in t h e following sentence, occur not earlier t h a n 3 years after such written deter- mination is first made open to public inspection. I n the case of any general written determination described in subsection ( h ) , t h e Secretary may dispose of such determination a n d any related background file document in accordance with such procedures but such disposal shall not occur earlier t h a n 3 years after such writ- ten determination is first made open to public inspection if funds are appropriated for such purpose before J a n u a r y 20,1979, or not earlier than J a n u a r y 20, 1979, if funds are n o t appropriated before such date. T h e Secretary shall n o t dispose of any reference written determinations and related background file documents. "(3) PRECEDENTIAL STATUS.—Unless t h e Secretary otherwise establishes by regulations, a written determination m a y not be used or cited as precedent. T h e preceding sentence shall not apply t o change t h e precedential status (if a n y ) of written determinations with regard to taxes imposed by subtitle D of this title, "(k) SECTION N O T T o A P P L Y . — T h i s section shall not a p p l y to— 26 u s e 6104. " (1) any matter to which section 6104 applies, or « ( 2 ) any— " ( A ) written determination issued p u r s u a n t to a request made before November 1, 1976, with respect t o t h e exempt status under section 501(a) of a n organization described in section 501 (c) or ( d ) , t h e status of a n organization as a private foundation under section 5 0 9 ( a ) , or t h e status of
PUBLIC LAW 94-455—OCT. 4, 1976 9 0 STAT. 1667 an organization as an operating foundation under section 4942(j)(3), " ( B ) written determination described in subsection ( g ) (5) ( B ) issued p u r s u a n t to a request made before November 1, 1976, " ( C ) determination letter not otherwise described in sub- p a r a g r a p h ( A ) , ( B ) , or ( E ) issued p u r s u a n t t o a request made before November 1,1976, " ( D ) background file document relating to any general written determination issued before J u l y 5, 1967, or " ( E ) letter or other document described in section 6104 (a) (1) ( B ) (iv) issued before September 2, 1974. "(1) EXCLUSIVE REMEDY.—Except as otherwise provided in this title, or with respect to a discovery order made in connection with a judicial proceeding, the Secretary shall not be required by a n y Court to make any written determination or background file document open or available to public inspection, or t o refrain from disclosure of a n y such documents." (b) E F F E C T U P O N P E X D I X G REQUESTS.—Any w r i t t e n d e t e r m i n a t i o n 26 USC 6110 or background file document which is t h e subject of a judicial p r o - note, ceeding p u r s u a n t t o section 552 of title 5, United States Code, com- menced before J a n u a r y 1, 1976, shall not be treated as a written determination subject to subsection ( h ) ( 1 ) , but shall be available to the complainant along with t h e background file document, if requested, as soon as practicable after J u l y 1,1976. (c) CLERICAL A M E N D M E N T . — T h e table of sections for subchapter B of chapter 61 is amended by striking out t h e item relating to section 6110 a n d inserting in lieu thereof the following: ^"'c P- 1660. "Sec. 6110. Public inspection of written determinations. "Sec. 6111. Cross references." ( d ) LETTERS MADE P U B L I C . — (1) Section 6 1 0 4 ( a ) ( 1 ) ( A ) (relating to inspection of appli- 26 USC 6104. cations for tax exemption) is amended— (A) by inserting after "such application," in t h e first sen- tence thereof t h e following: " a n d any letter or other docu- ment issued by t h e I n t e r n a l Revenue Service with respect t o such application"; a n d t f''^ ( B ) by inserting after "such application" in t h e second sentence thereof the following: "and such letter or document". (2) T h e amendments made by this subsection apply to a n y 26 USC 6104 letter or other document issued with respect to applications filed note, after October 31,1976. (e) EFFECTIVE D A T E . — E x c e p t as otherwise provided in this section, 26 USC 6110 the amendments made bv this section shall take effect on Novem- note. ber 1, 1976. SEC. 1202. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN INFORMATION. ( a ) CONFIDENTIALITY.— (1) I N GENERAL.—Section 6103 (relating to publicity of t a x 26 USC 6103. returns a n d disclosure of information as t o persons filing t a x returns) is amended to read as follows: "SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN INFORMATION. " ( a ) GENERAL R U L E . — R e t u r n s a n d return information shall be confidential, and except as authorized by this title—
90 STAT. 1668 PUBLIC LAW 94^55—OCT. 4, 1976 " (1) no officer or employee of the United States, "(2) no officer or employee of any State or of any local child support enforcement agency who has or had access to returns or return information under this section, and "(3) no other person (or officer or employee thereof) who has or had access to returns or return information under subsection (e) (1) (D) (iii) or subsection (n), shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee "Officer or or otherwise or under the provisions of this section. For purposes of employee." this subsection, the term 'officer or employee' includes a former officer or employee. " (b) DEFINITIONS.—For purposes of this section— "(1) RETURN.—The term 'return' means any tax or information return, declaration of estimated tax, or claim for refund required by, or provided for or permitted under, the provisions of this title which is filed with the Secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, includ- ing supporting schedules, attachments, or lists which are sup- plemental to, or part of, the return so filed. "(2) RETURN INFORMATION.—The term 'return information' means— "(A) a taxpayer's identity, the nature, source, or amount of his income, paj^ments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax with- held, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or sub- ject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or col- lected by the Secretary witn respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense, and " ( B ) any part of any written determination or any back- ground file document relating to such written determination Ante, p. 1660. (as such terms are defined in section 6110(b)) which is not open to public inspection under section 6110, but such term does not include data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer. "(3) TAXPAYER RETURN INFORMATION.—The term 'taxpayer return information' means return information as defined in para- graph (2) which is filed with, or furnished to, the Secretary by or on behalf of the taxpayer to whom such return information relates. "(4) TAX ADMINISTRATION.—The term 'tax administration'— "(A) means— "(i) the administration, management, conduct, direc- tion, and supervision of the execution and application of the internal revenue laws or related statutes (or equiv- alent laws and statutes of a State) and tax conventions to which the United States is a party, and "(ii) the development and formulation of Federal tax policy relating to existing or proposed internal revenue laws, related statutes, and tax conventions, and
PUBLIC LAW 94-455—OCT. 4, 1976 9 0 STAT. 1669 " ( B ) includes assessment, collection, enforcement, litiga- tion, publication, a n d statistical gathering functions under such laws, statutes, or conventions. " ( 5 ) STATE.—The term 'State' means a n y of t h e 50 States, t h e District of Columbia, t h e Commonwealth of P u e r t o Kico, t h e Virgin Islands, t h e Canal Zone, Guam, American Samoa, t h e Commonwealth of t h e N o r t h e r n M a r i a n a Islands, a n d t h e T r u s t Territory of the Pacific Islands. " ( 6 ) TAXPAYER HJENTITY.—The term 'taxpayer identity' means the name of a person with respect to whom a return is filed, his mailing address, his taxpayer identifying number (as described in section 6109), or a combination thereof. 26 USC 6109. " ( 7 ) INSPECTION.—The terms 'inspected' and 'inspection' mean any examination of a return or return information. " ( 8 ) DISCLOSURE.—The term 'disclosure' means t h e making known to any person in any manner whatever a return or return information. " ( 9 ) FEDERAL AGENCY.—The t e r m 'Federal agency' means a n agency within t h e meaning of section 551(1) of title 5, United States Code. " (c) DISCLOSURE o r R E T U R N S AND R E T U R N INFORMATION T o DESIG- NEE o r TAXPAYER.—The Secretary may, subject to such requirements Regulations. and conditions as he may prescribe by regulations, disclose the return of a n y taxpayer, or return information with respect t o such tax- payer, t o such person or persons as t h e taxpayer m a y designate in a written request for or consent to such disclosure, or t o any other per- son a t t h e taxpayer's request to t h e extent necessary t o comply with a request for information or assistance made by the taxpayer to such other person. However, return information shall not be disclosed to such person or persons if the Secretary determines t h a t such disclosure would seriously impair Federal tax administration. " ( d ) DiscLOSLTiE TO STATE T A X O F F I C I A L S . — R e t u r n s and return information with respect to taxes imposed by chapters 1, 2, 6, 11, 12, 26USC1,1401, 21, 23, 24, 44, 51, and 52 and subchapter D of chapter 36, shall be open 1501, 2001, to inspection by or disclosure t o a n y State agency, body, or commis- ^^^J' \^h sion, or its legal representative, which is charged under the laws of p , ' 1754 such State with responsibility for the administration of State tax laws 26 USC 5001 for t h e purpose of, and only t o t h e extent necessary in, the admin- 5701, 4481. istration of such laws, including any procedures with respect t o locat- ing any person who may be entitled t o a refund. Such inspection shall be permitted, or such disclosure made, only upon written request by the head of such agency, body, or commission, and only to the representa- tives of such agency, body, or commission designated in such written request as t h e individuals who are to inspect or t o receive t h e return or return information on behalf of such agency, body, or commission. Such representatives shall not include any individual who is the chief executive officer of such State or who is neither an employee or legal representative of such agency, body, or commission n o r a person described in subsection ( n ) . However, such return information shall not be disclosed to the extent t h a t t h e Secretary determines that such disclosure would identify a confidential informant or seriously impair any civil or criminal tax investigation. " (e) DISCLOSURE TO PERSONS H A V I N G MATERIAL INTEREST.— " ( 1 ) I N GENERAL.—The return of a person shall, upon written request, be open to inspection by or disclosure to— " ( A ) in the case of the return of an individual—
90 STAT. 1670 PUBLIC LAW 94-455—OCT. 4, 1976 "(i) that individual, "(ii) if property transferred by that individual to a trust is sold or exchanged in a transaction described in Ante, p. 1578. Section 644, the trustee or trustees, jointly or separately, of such trust to the extent necessary to ascertain any amount of tax imposed upon the trust by section 644, or "(iii) the spouse of that individual if the individual and such spouse have signified their consent to consider a gift reported on such return as made one-half by him and one-half by the spouse pursuant to the provisions of 26 use 2513. section 2513; "(B) in the case of an income tax return filed jointly, either of the individuals with respect to whom the return is filed; "(C) in the case of the return of a partnership, any person who was a member of such partnership during any part of the period covered by the return; "(D) in the case of the return of a corporation or a sub- sidiary thereof— "(i) any person desi^ated by resolution of its board of directors or other similar governing body, "(ii) any officer or employee of such corporation upon written request signed by any principal officer and attested to by the secretary or other officer, "(iii) any bona fide shareholder of record owning 1 percent or more of the outstanding stock of such corpora- tion, " (iv) if the corporation was a foreign personal holding company, as defined by section 552, any person who was a shareholder during any part of a period covered by such return if with respect to that period, or any part thereof, such shareholder was required under section 551 to include in his gross income undistributed foreign per- sonal holding company income of such company, "(v) if the corporation was an electing small business 26 use 1371. corporation under subchapter S of chapter 1, any person who was a shareholder during any part of the period cov- ered by such return during which an election was in effect, or "(vi) if the corporation has been dissolved, any per- son authorized by applicable State law to act for the corporation or any person who the Secretary finds to have a material interest which will be affected by infor- mation contained therein; " (E) in the case of the return of an estate— "(i) the administrator, executor, or trustee of such estate, and "(ii) any heir at law, next of kin, or beneficiary under the will, of the decedent, but only if the Secretary finds that such heir at law, next of kin, or beneficiary has a material interest which will be affected by information contained therein; and " (F) in the case of the return of a trust— "(i) the trustee or trustees, jointly or separately, and "(ii) anv beneficiary of such trust, but only if the Secretary 'finds that such beneficiary has a material interest which will be affected by information contained therein.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1671 " ( 2 ) INCOMPETENCY.—If an individual described in p a r a g r a p h (1) is legally incompetent, t h e applicable return shall, upon written request, be open t o inspection by or disclosure t o the com- mittee, trustee, or guardian of his estate. " ( 3 ) DECEASED INDIVIDUALS.—The r e t u r n of a decedent shall, upon written request, be open t o inspection by or disclosure to— " ( A ) t h e administrator, executor, o r trustee of h i s estate, and " ( B ) any heir a t law, next of kin, or beneficiary under the will, of such decedent, or a donee of property, but only if t h e Secretary finds t h a t such heir a t law, next of kin, beneficiary, or donee h a s a material interest which will be affected by information contained therein. " (4) BANKRUPTCY.—If substantially all of t h e property of t h e person with respect to whom t h e return is filed is in t h e h a n d s of a trustee in bankruptcy or receiver, such return or returns for prior years of such person shall, upon written request, be open t o inspection by or disclosure t o such trustee or receiver, b u t only if the Secretary finds t h a t such receiver or trustee, in h i s fiduciary capacity, has a material interest which will be affected b y infor- mation contained therein. " ( 5 ) ATTORNEY IN FACT.—^Any r e t u r n t o which this subsection applies shall, upon written request, also be open to inspection by or disclosure t o t h e attorney in fact duly authorized i n writ- ing b y any of t h e persons described in p a r a g r a p h ( 1 ) , ( 2 ) , ( 3 ) , or (4) to inspect t h e return or receive the information on h i s behalf, subject t o t h e conditions provided in such p a r a g r a p h s . "(6) R E T U R N INFORMATION.—Return information with respect to any t a x p a y e r may be open t o inspection b y or disclosure to any person authorized by this subsection t o inspect any return of such t a x p a y e r if t h e Secretary determines t h a t such disclosure would not seriously i m p a i r Federal t a x administration. " (f) DISCLOSURE TO COMMITTEES OF CONGRESS.— " ( 1 ) COMMITTEE ON WAYS AND MEANS, COMMITTEE O N FINANCE, AND J O I N T COMMITTEE ON TAXATION.—^TJpon Written request from t h e chairman of t h e Committee on W a y s and Means of the House of Representatives, t h e chairman of t h e Committee on Finance of the Senate, or t h e chairman of the J o i n t Committee on Taxa- tion, t h e Secretary shall furnish such committee with any r e t u r n or return information specified in such request, except t h a t a n y r e t u r n or return information which can be associated with, o r otherwise identify, directly or indirectly, a particular taxpayer shall be furnished to such committee only when sitting in closed executive session unless such taxpayer otherwise consents in writ- ing to such disclosure. " (2) C H I E F OF STAFF OF J O I N T COMMITTEE ON TAXATION.—Upon written request by t h e Chief of Staff of t h e J o i n t Committee on Taxation, the Secretary shall furnish him with any return or return information specified in such request. Such Chief of Staff may submit such return or return information t o any committee described in p a r a g r a p h ( 1 ) , except t h a t a n y return o r return information which can be associated with, or otherwise identify, directly or indirectly, a particular t a x p a v e r shall be furnished t o such committee only when sitting in closed executive session unless such taxpayer otherwise consents in w r i t i n g t o such disclosure. " ( 3 ) O T H E R COMMITTEES.—Pursuant t o an action by, a n d upon
90 STAT. 1672 PUBLIC LAW 94-455—OCT. 4, 1976 written request by the chairman of, a committee of the Senate or the House of Representatives (other than a committee specified in paragraph (1)) specially authorized to inspect any return or return information by a resolution of the Senate or the House of Representatives or, in the case of a joint committee (other than the joint committee specified in paragraph (1)) by concurrent resolution, the Secretary shall furnish such committee, or a duly authorized and designated subcommittee thereof, sitting in closed executive session, with any return or return information which such resolution authorizes the committee or subcommittee to inspect. Any resolution described in this paragraph shall specify the purpose for which the return or return information is to be furnished and that such information cannot reasonably be obtained from any other source. "(4) AGENTS or COMMITTEES AND SUBMISSION or INFORMATION TO SENATE OR HOUSE OF REPRESENTATIVES. " ( A ) COMMITTEES DESCRIBED I N PARAGRAPH ( D . — A n y committee described in paragraph (1) or the Chief of Staff of the Joint Committee on Taxation shall have the authority, acting directly, or by or through such examiners or agents as the chairman of such committee or such chief of staff may designate or appoint, to inspect returns and return informa- tion at such time and in such manner as may be determined by such chairman or chief of staff. Any return or return informa- tion obtained by or on behalf of such committee pursuant to the provisions of this subsection may be submitted by the committee to the Senate or the House of Representatives, or to both. The Joint Committee on Taxation may also submit such return or return information to any other committee described in paragraph (1), except that any return or return information which can be associated with, or otherwise iden- tify, directly or indirectly, a particular taxpayer shall be fur- nished to such committee only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclosure. " ( B ) OTHER COMMITTEES.—Any committee or subcommittee described in paragraph (3) shall have the right, acting? directly, or by or through no more than four examiners or agents, designated or appointed in writing in equal numbers by the chairman and ranking minority member of such com- mittee or subcommittee, to inspect returns and return infor- mation at such time and in such manner as may be determined by such chairman and ranking minority member. Any return or return information obtained by or on behalf of such com- mittee or subcommittee pursuant to the provisions of this sub- section may be submitted by the committee to the Senate or the House of Representatives, or to both, except that any return or return information which can be associated with, or otherwise identify, directly or indirectly, a particular tax- payer, shall be furnished to the Senate or the House of Repre- sentatives only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclo- sure. " ( g ) DISCLOSURE TO PRESIDENT AND CERTAIN OTHER PERSONS.—- "(1) I N GENERAL.—^ITpon written request by the President, signed by him personally, the Secretary shall furnish to the Presi-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1673 dent, or to such employee or employees of the W h i t e House Office as the President m a y designate by name in such request, a return or return information with respect to any taxpayer named in such request. A n y such request shall state— " ( A ) t h e name a n d address of t h e taxpayer whose return or return information is to be disclosed, " ( B ) t h e kind of return or return information which is to be disclosed, " ( C ) t h e taxable period or periods covered by such return or return information, and " ( D ) the specific reason why the inspection or disclosure is requested. " ( 2 ) DISCLOSURE OF RETURN INFORMATION AS TO PRESIDENTIAL APPOINTEES AND CERTAIN OTHER FEDERAL GOVERNMENT APPOINT- EES.—The Secretary may disclose t o a duly authorized represent- ative of the Executive Office of the President or to the head of any Federal agency, upon written request by the President or head of such agency, or t o t h e Federal Bureau of Investigation on behalf of a n d upon written request by t h e President or such head, return information with respect to an individual who is designated as being under consideration for appointment to a position i n t h e executive or judicial branch of the Federal Gov- ernment. Such return information shall be limited to whether such individual— " ( A ) h a s filed returns with respect t o t h e taxes imposed under chapter 1 for not more than the immediately preceding 26 u s e 1. 3 years; " ( B ) has failed to pay any tax within 10 days after notice and demand, or has been assessed any penalty under this title for negligence, in t h e current year or immediately preceding 3 years; " ( C ) has been or is under investigation for possible crimi- nal offenses under the internal revenue laws and the results of any such investigation; or " ( D ) h a s been assessed any civil penalty under this title for fraud. W i t h i n 3 days of the receipt of any request for any return infor- Notification. mation with respect t o any individual under this p a r a g r a p h , the Secretary shall notify such individual in writing t h a t such infor- mation has been requested under the provisions of this p a r a g r a p h . "(3) RESTRICTION ON DISCLOSURE.—The employees to whom returns and return information are disclosed under this subsection shall n o t disclose such returns and return information to any other person except the President or the head of such agency with- out the personal written direction of the President or the head of such agency. " ( 4 ) RESTRICTION ON DISCLOSURE TO CERTAIN EMPLOYEES.—Dis- closure of returns a n d return information under this subsection shall not be made to any employee whose annual rate of basic pay is less t h a n t h e annual rate of basic p a y specified for positions subject to section 5316 of title 5, United States Code. " ( 5 ) REPORTING REQUIREMENTS.—Within 30 d a y s after the close Report to of each calendar quarter, the President and the head of any agency congressional requesting returns a n d return information under this subsection committee. shall each file a report with the J o i n t Committee on Taxation set- t i n g forth the taxpayers with respect to whom such requests were
90 STAT. 1674 PUBLIC LAW 94-455—OCT. 4, 1976 made during such quarter under this subsection, the returns or return information involved, and the reasons for such requests. The President shall not be required to report on any request for returns and return information pertaining to an individual who was an officer or employee of the executive branch of the Federal Government at the time such request was made. Reports filed pur- suant to this paragraph shall not be disclosed unless the Joint Committee on Taxation determines that disclosure thereof (including identifying details) would be in the national interest. Such reports shall be maintained by the Joint Committee on Taxation for a period not exceeding 2 years unless, within such period, the Joint Committee on Taxation determines that a dis- closure to the Congress is necessary. "(h) DISCLOSURE TO CERTAIN FEDERAL OFFICERS AND EMPLOYEES FOR PURPOSES OF TAX ADMINISTRATION, ETC.— "(1) DEPARTMENT OF THE TREASURY.—Returns and return information shall, without written request, be open to inspection by or disclosure to officers and employees of the Department of the Treasury whose official duties require such inspection or disclosure for tax administration purposes. "(2) DEPARTMMENT OP JUSTICE.—^A return or return informa- tion shall be open to inspection by or disclosure to attorneys of the Department of Justice (including United States attorneys) personally and directly engaged in, and solely for their use in, preparation for any proceeding (or investigation which may result in such a proceeding) before a Federal grand jury or any Federal or State court in a matter involving tax administration, but only if— (A) the taxpayer is or may be a party to such proceeding; " ( B ) the treatment of an item reflected on such return is or may be related to the resolution of an issue in the pro- ceeding or investigation; or "(C) such return or return information relates or may relate to a transactional relationship between a person who is or may be a party to the proceeding and the taxpayer which affects, or may affect, the resolution of an issue in such pro- ceeding or investigation. "(3) FORM OF REQUEST.—In any case in which the Secretary is authorized to disclose a return or return information to the Department of Justice pursuant to the provisions of this subsection— " ( A ) if the Secretary has referred the case to the Depart- ment of Justice, or if the proceeding is authorized by sub- 26 use 7421. chapter B of chapter 76, the Secretary may make such disclosure on his own motion, or " ( B ) if the Secretary receives a written request from the Attorney General, the Deputy Attorney General, or an Assistant Attorney General for a return of, or return infor- mation relating to, a person named in such request and set- ting forth the need for the disclosure, the Secretary shall disclose return or return the information so requested. "(4) DISCLOSURE IN JUDICIAL AND ADMINISTRATIVE TAX PROCEEDINGS.—A return or return information may be disclosed in a Federal or State judicial or administrative proceeding per- taining to tax administration, but only— "(A) if the taxpayer is a party to such proceeding;
PUBLIC LAW 94-455—OCT. 4, 1976 9 0 STAT. 1675 " ( B ) if t h e treatment of an item reflected on such return is directly related t o t h e resolution of a n issue i n the proceed- ing; " ( C ) if such return or r e t u r n information directly relates to a transactional relationship between a person who is a p a r t y to the proceeding a n d the taxpayer which directly affects t h e resolution of an issue in the proceeding; or " ( D ) to t h e extent required by order of a court p u r s u a n t to section 3500 of title 18, United States Code, or rule 16 of the Federal Rules of Criminal Procedure, such court being 18 USC app. authorized in t h e issuance of such order to give due consider- ation to congressional policy favoring t h e confidentiality of returns a n d r e t u r n information as set forth in this title. However, such return or return information shall not be disclosed as provided in s u b p a r a g r a p h ( A ) , ( B ) , or ( C ) if t h e Secretary determines t h a t such disclosure would identify a confidential informant or seriously i m p a i r a civil or criminal tax investigation. " ( 5 ) PROSPECTIVE JURORS.—In connection with any judicial proceeding described in p a r a g r a p h (4) to which the United States IS a p a r t y , t h e Secretary shall respond to a written inquiry from an attorney of t h e D e p a r t m e n t of Justice (including a United States attorney) involved i n such proceeding or any person (or his legal representative) w h o is a p a r t y to such proceeding as t o whether an individual who is a prospective j u r o r in such proceed- ing h a s or h a s n o t been the subject of a n y audit or other t a x investigation by the I n t e r n a l Revenue Service. T h e Secretary shall limit such response to an affirmative or negative reply to such inquiry, " ( i ) DISCLOSURE TO FEDERAL OFFICERS OR EMPLOYEES FOR ADMINISTRATION OF FEDERAL L A W S N O T RELATING TO T A X ADMINISTRATION.— " ( 1 ) NONTAX CRIMINAL INVESTIGATION.— " ( A ) INFORMATION FROM TAXPAYER.—A r e t u r n or tax- payer return information shall, pursuant t o , a n d upon t h e g r a n t of, an ex p a r t e order b y a Federal district court judge as provided by this p a r a g r a p h , be open, but only t o t h e extent necessary as provided in such order, t o officers and employees of a Federal agency personally a n d directly engaged in a n d solely for their use in, preparation for anv administrative or judicial proceeding (or investigation which m a y result in such a proceeding) pertaining to the enforcement of a specifi- cally designated Federal criminal statute (not involving t a x administration) t o Avhich t h e United States or such agency is or m a y be a p a r t y . " ( B ) APPLICATION FOR ORDER.—The head of a n y Federal aarency described in s u b p a r a g r a p h ( A ) or, in t h e case of the Department of Justice, t h e Attornev General, the Deputy Attorney General, or an Assistant Attornev General, m a y authorize an application t o a Federal district court judge for t h e order referred to in subparagraph (A^. Upon such application, such judge may grant such order if he dptermines on the basis of the facts submitted bv the applicant t h a t — " ( i ) there is reasonable cause t o believe, based upon information believed t o be reliable, t h a t a specific crimi- nal act has been committed; "(ii)_ there is_ reason t o believe t h a t such return or return information is probative evidence of a matter in
90 STAT. 1676 PUBLIC LAW 94-455—OCT. 4, 1976 issue related to t h e commission of such criminal act; and " ( i i i ) the information sought to be disclosed cannot reasonably be obtained from any other source, unless it is determined that, notwithstanding the reasonable availa- bility of t h e information from another source, t h e r e t u r n or return information sought constitutes the most p r o - bative evidence of a matter in issue relating to t h e commission of such criminal act. However, the Secretary shall not disclose any r e t u r n or return information under this p a r a g r a p h if he determines and certifies to the court t h a t such disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation. "(2) RETURN INFORMATION OTHER T H A N TAXPAYER RETURN INFORMATION.—Upou written request from the head of a Federal agency described in p a r a g r a p h ( 1 ) ( A ) , or in t h e case of t h a Department of Justice, t h e Attorney General, the Deputy Attor- ney General, or an Assistant Attorney General, t h e Secretary shall disclose return information (other than taxpayer return information) to officers and employees of such agency personally and directly engaged in, and solely for their use in, preparation for any administrative or judicial proceeding (or investigation which may result in such a proceeding) described in p a r a g r a p h (1) (A^. Such request shall set forth— " ( A ) the name and address of t h e taxpayer with respect to whom such r e t u r n information relates; " ( B ) t h e taxable period or periods to which t h e r e t u r n information relates; " ( C ) the statutory authority under which the proceeding or investigation is being conducted; and " ( D ) the specific reason or reasons why such disclosure is or may be material to t h e proceeding or investigation. However, the Secretary shall not disclose any r e t u r n or return information under this p a r a g r a p h if he determines t h a t such disclosure would identify a confidential informant or seriously impair a civil o r criminal t a x investigation. "(3) DISCLOSURE or RETURN INFORMATION CONCERNING POSSIBLE CRIMINAL ACTIVITIES.—The Secretary may disclose in w r i t i n g return information, other t h a n t a x p a y e r return information, which may constitute evidence of a violation of Federal criminal laws to the extent necessary to apprise the head of the appropriate Federal agency charged with the responsibility for enforcing such laws. "(4) U S E I N JUDICIAL OR ADMINISTRATIVE PROCEEDING.—Any r e t u r n or r e t u r n information obtained under p a r a g r a p h ( 1 ) , ( 2 ) , or (3) m a y be entered into evidence in any administrative or judicial proceeding pertaining to enforcement of a specifically designated Federal criminal statute (not involving tax adminis- t r a t i o n ) t o which t h e United States or an agency described in p a r a g r a p h (1) ( A ) is a p a r t y but, in the case of any return or r e t u r n information obtained under p a r a g r a p h ( 1 ) , only if the court finds t h a t such return or return information is probative of a m a t t e r in issue relevant in establishing the commission of a crime or the guilt of a p a r t y . However, any return or return information obtained under p a r a g r a p h ( 1 ) , ( 2 ) , or (3) shall not be admitted into evidence in such proceeding if t h e Secretary determines and
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1677 notifies t h e Attorney General or his delegate or the head of such agency t h a t such admission would identify a confidential inform- ant or seriously i m p a i r a civil or criminal t a x investigation. T h e admission into evidence of any return or return information contrary to the provisions of this p a r a g r a p h shall not, as such, constitute reversible error upon appeal of a judgment in such proceeding. " ( 5 ) RENEGOTIATIOX OF CONTR^VCTS.—A r e t u r n o r r e t u r n infor- mation with respect t o the t a x imposed by chapter 1 upon a tax- 26 u s e 1. payer subject t o the provisions of the Renegotiation A c t of 1951 50 u s e app. shall, upon request in writing by the Chairman of the Renegotia- 1211 note. tion Board, be open to officers and employees of such board person- ally and directly engaged in, and solely for their use in, verifying or analyzing financial information required b y such A c t t o be filed with, or otherwise disclosed t o , t h e board, or t o t h e extent necessary to implement the provisions of section 1481 o r 1482. T h e 26 u s e 1481, Chairman of the Renegotiation Board may, upon referral of any 1482. matter with respect to such Act to the Department of Justice for further legal action, disclose such return a n d return information to any employee of such department charged with the responsi- bility for h a n d l i n g such matters. " ( 6 ) C O M P T R O L L E R GENERAL.— " ( A ) R E T U R N S AVAILABLE FOR IXSPECTIOX.—Except as p r o - vided in s u b p a r a g r a p h ( B ) , upon written request by the Comptroller General of the LTnited States, returns a n d return information shall be open to inspection by, or disclo- sure to, officers a n d employees of t h e General Accounting Office for the purpose of, a n d to the extent necessary in, making— " ( i ) an audit of t h e I n t e r n a l Revenue Service o r t h e Bureau of Alcohol, Tobacco and F i r e a r m s which m a y be required by section 117 of the Budget a n d Accounting Procedures Act of 1950 (31 U.S.C. 67), or " ( i i ) a n y audit authorized by subsection ( p ) ( 6 ) , except t h a t no such officer or empioyee shall, except t o the extent authorized b y subsection ( f ) o r ( p ) ( 6 ) , disclose t o any person, other than another officer or employee of such office whose official duties require such disclosure, any return or return information described in section 4424(a) in a form which can be associated with, o r otherwise identify, directly or indirectly, a particular taxpayer, n o r shall such officer or employee disclose a n y other return or r e t u r n informa- tion, except as otherwise expressly provided by law, to a n y person other t h a n such other officer o r employee of such office in a form which can be associated with, or otherwise identify, directly o r indirectly, a particular taxpayer. "(B) DISAPPROVAL BY J O I N T COMMITTEE ON TAXATION.— Returns a n d return information shall not be open t o inspec- Notification of tion or disclosed under subparagraph ( A ) with respect t o an congressional audita— committee. " ( i ) unless t h e Comptroller General of t h e United Statics notifies in w r i t i n g t h e J o i n t Committee on Taxa- tion of such audit, a n d " (ii) if t h e J o i n t Committee on T a x a t i o n disapproves such audit by a vote of at least two-thirds of its members within t h e 30-day period beginning on t h e d a y t h e J o i n t Committee on Taxation receives such notice. 89-194 O—78—pt. 2 14
9 0 STAT. 1678 PUBLIC LAW 94-455—OCT. 4 , 1976 *'(j) STATISTICAL U S E . — Regulations. " ( 1 ) DEPARTMENT OF COMMERCE.—^Upon request i n w r i t i n g b y the Secretary of Commerce, t h e Secretary shall furnish— " ( A ) such returns, or return information reflected thereon, t o officers a n d employees of t h e Bureau of t h e Census, a n d " ( B ) such return information reflected on returns of cor- porations t o officers a n d employees of t h e Bureau of Eco- nomic Analysis, as t h e Secretary may prescribe by regulation for the purpose of, but only t o the extent necessary in, t h e structuring of censuses and national economic accounts a n d conducting related statistical activities authorized by law. " ( 2 ) FEDERAL TRADE COMMISSION.—^Upon request i n w r i t i n g b y t h e C h a i r m a n of t h e Federal T r a d e Commission, t h e Secretary shall furnish such return information reflected on a n y r e t u r n of 26 u s e 1. a corporation with respect t o the t a x imposed by chapter 1 t o offi- cers a n d employees of t h e Division of Financial Statistics of t h e Bureau of Economics of such commission as t h e Secretary m a y prescribe by regulation for the purpose of, but only t o the extent necessary in, administration by such division of legally author- ized economic surveys of corporations. " ( 3 ) D E P A R T M E N T o r TREASURY.—Returns a n d r e t u r n informa- tion shall be open to inspection by o r disclosure t o officers a n d employees of the D e p a r t m e n t of t h e Treasury whose official duties require such inspection or disclosure for the purpose of, b u t only to t h e extent necessary in, p r e p a r i n g economic o r financial fore- casts, projections, analyses, and statistical studies and conducting related activities. Such inspection or disclosure shall be permitted only upon written request which sets forth t h e specific reason or reasons why such inspection or disclosure is necessary a n d which is signed by t h e head of the bureau or office of the D e p a r t m e n t of the Treasury requesting t h e inspection or disclosure. "(4) A N O N Y M O U S FORM.—No person w h o receives a return or r e t u r n information under t h i s subsection shall disclose such return or return information t o any person other t h a n t h e taxpayer t o whom i t relates except in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer, " ( k ) DISCLOSURE OF CERTAIN R E T U R N S AND R E T U R N INFORMATION FOR T A X ADMINISTRATION PURPOSES.— " ( 1 ) DISCLOSURE OF ACCEPTED OFFERS-IN-COMPROMISE.—Return information shall be disclosed t o members of t h e general public to the extent necessary to permit inspection of any accepted offer- 26 u s e 7122. in-compromise under section 7122 relating t o t h e liability for a t a x imposed by this title. " (2) DISCLOSURE OF AMOUNT OF OUTSTANDING L I E N . — I f a notice of lien has been filed pursuant to section 6323(f), t h e amount of the outstanding obligation secured by such lien may be disclosed to a n y person Avho furnishes satisfactory written evidence t h a t he has a r i g h t i n t h e property subject t o such lien or intends t o obtain a right in such property. "(3) DISCLOSURE OF RETURN INFORMATION TO CORRECT M I S - STATEMENTS OF FACT.—The Secretary may, b u t only following approval by t h e J o i n t Committee on Taxation, disclose such return information or any other information with respect t o any specific t a x p a y e r t o t h e extent necessary for t a x administration purposes t o correct a misstatement of fact published or disclosed
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1679 with respect to such taxpayer's r e t u r n or any transaction of t h e taxpayer with the I n t e r n a l Revenue Service. "(4) DISCLOSURE TO COMPETENT AUTHORITY UNDER INCOME TAX CONVENTION.—A return or return information m a y be disclosed to a competent authority of a foreign government which has an income t a x convention with t h e United States b u t only to the extent provided in, and subject to the terms and conditions of, such convention. "(5) STATE AGENCIES REGULATING TAX RETURN PREPARERS.— T a x p a y e r identity information with respect to any income t a x return preparer, and information as to whether or not any penalty has been assessed against such income t a x return preparer under section 6694, 6695, or 7216, may be furnished to any agency, body, Post, pp. 1689, or commission lawfully charged under any State or local law 1692. with the licensing, registration, or regulation of income t a x return 26 u s e 7216. preparers. Such information may be furnished only upon written request by the head of such agency, body, or commission desig- n a t i n g the officers or employees to whom such information is to be furnished. Information may be furnished and used under this p a r a g r a p h only for purposes of the licensing, registration, or regulation of income tax return preparers. "• (6) DISCLOSURE BY INTERNAL REVENUE OFFICERS AND EMPLOYEES FOR INVESTIGATIVE PURPOSES.—An internal revenue officer or employee may, in connection with his official duties relating to any audit, collection activity, or civil or criminal tax investigation or any other offense under the internal revenue laws, disclose r e t u r n information to the extent t h a t such disclosure is necessary in obtaining information, which is not otherwise reasonably avail- able, with respect to the correct determination of tax, liability for tax, or the amount to be collected or with respect to the enforce- ment of any other provision of this title. Such disclosures shall be Regulations. made only in such situations and under such conditions as the Secretary may prescribe by regulation. "(1) DISCLOSURE OF R E T U R N S AND R E T U R N INFORMATION FOR P U R - POSES O T H E R T H A N T A X ADMINISTRATION.— " ( 1 ) DISCLOSURE OF CERTAIN RETURNS AND RETURN INFORMA- TION TO SOCIAL SECURITY ADMINISTRATION AND RAILROAD RETIRE- MENT BOARD.—The Secretary may, upon written request, disclose returns and return information with respect to— " ( A ) taxes imposed by chapters 2, 21, and 24, to t h e Social 26 use 1401, Security Administration for purposes of its administration 3101, 3401. of the Social Security A c t ; 42 use 1305. " ( B ) a plan to which p a r t I of subchapter D of chapter 1 26 use 401. applies, to the Social Security Administration for purposes of carrying out its responsibility under section 1131 of the Social Security Act, limited, however to return information 42 use described in section 6 0 5 7 ( d ) ; and 1320b-l. 26 use 6057. " ( C ) taxes imposed by chapter 22, to the Railroad Retire- 26 use 3201. ment B o a r d for purposes of its administration of the Railroad Retirement Act. 45 use 215 "(2) DISCLOSURE OF RETURNS AND RETURN INFORMATION TO T H E note. DEPARTMENT OF LABOR AND PENSION BENEFIT GUARANTY CORPORA- TION.—The Secretary may, upon written request, furnish returns and return information to the proper officers and employees of the D e p a r t m e n t of Labor and the Pension Benefit G u a r a n t y Corpora- tion for purposes of, but only to the extent necessary in, the
90 STAT. 1680 PUBLIC LAW 94-455—OCT. 4, 1976 administration of titles I and IV of the Employee Retirement 29 use 1001 Income Security Act of 1974. °®*®* " ( 3 ) DISCLOSURE OF RETURNS AND RETURN INFORMATION TO PRI- VACY PROTECTION STUDY COMMISSION.—The Secretary m a y , upon written request, disclose returns and return information to t h e Privacy Protection S t u d y Commission, or to such members, ojK- cers, o r employees of such commission as m a y be named in such written request, t o t h e extent provided under section 5 of t h e 5 u s e 552a Privacy Act of 1974. °°*®' " ( 4 ) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR USE IN PERSONNEL OR CLAIMANT REPRESENTATIVE MATTERS.—The Sec- retary m a y disclose returns a n d r e t u r n information— " ( A ) upon written request— " (i) t o an employee or former employee of the Depart- ment of t h e Treasury, or t o t h e duly authorized legal representative of such employee or former emploj^ee, who is or m a y be a p a r t y to any administrative action or proceeding affecting t h e personnel rights of such employee or former employee; or " ( i i ) t o any person, or t o t h e duly authorized legal representative of such person, whose rights are or m a y be affected by an administrative action or proceeding under section 3 of t h e A c t of J u l y 7,1884 (23 Stat. 258; 31 U.S.C. 1026), solely for use in t h e action or proceeding, or in preparation for the action or proceeding, b u t only t o t h e extent t h a t t h e Secretary determines t h a t such returns or return information is or m a y be relevant and material t o t h e action or proceed- ing; or " ( B ) to officers and employees of the Department of the Treasury for use in any action or proceeding described in subparagraph (A), or in preparation for such action or pro- ceeding, to the extent necessary to advance or protect the interests of the United States. "(5) DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE.— Upon written request by the Secretary of Health, Education, and 26 usr fio'ii Welfare, the Secretarv may disclose information returns filed pursuant to part I I I oi subchapter A of chapter 61 of this subtitle for the purpose of carrying out, in accordance with an agreement 42 use 432. entered into pursuant to section 232 of the Social Security Act, an effective return processing program. "(6) DISCLOSURE OF RETURN INFORMATION TO FEDERAL, STATE, AND LOCAL CHILD SUPPORT ENFORCEMENT AGENCIES.— "(A) RETURN INFORMATION FROM INTERNAL REVENUE SERV- ICE.—^The Secretary may, upon written request, disclose to the appropriate Federal, State, or local child support enforce- ment agency— "(i) available return information from the master files of the Internal Revenue Service relating to the address, filing status, amounts and nature of income, and the number of dependents reported on an^ return filed by, or with respect to, any individual with respect to whom child support obligations are sought to be estab- lished or enforced pursuant to the provisions of part D 42 use 651. of title I V of the Social Security Act and with respect
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1681 : t o a n y individual to whom such support obligations are ' owing, a n d " ( i i ) available r e t u r n information reflected on a n y r e t u r n filed by, or with respect to, a n y individual described in clause (i) relating to t h e amount of such 96 IJSC 61 individual's gross income (as defined in section 61) or consisting of t h e names a n d addresses of payors of such income a n d t h e names of any dependents reported on such return, b u t only if such return information is not reasonably available from any other source. "(B) RESTRICTION ON DISCLOSURE.—The Secretary shall disclose return information under s u b p a r a g r a p h ( A ) only for purposes of, a n d to t h e extent necessary in, establishing and collecting child support obligations from, and locating, individuals owing such obligations, "(m) DISCLOSURE or TAXPAYER IDENTII-Y INFORMATION.—The Secretary is authorized— " (1) to disclose taxpayer identity information to t h e press a n d other media for purposes of notifying persons entitled to t a x refunds when t h e Secretary, after reasonable eifort a n d lapse of time, has been unable to locate such persons, and " ( 2 ) upon written request, to disclose t h e mailing address of a t a x p a y e r t o officers a n d employees of an agency personally a n d directly engaged in, and solely for their use in, preparation for any administrative or judicial proceeding (or investigation which m a y result i n such a proceeding) pertaining t o t h e collection o r compromise of a Federal claim against such taxpayer in accord- ance with t h e provisions of section 3 of t h e Federal Claims Col- on iicn QI;9 lection Act of 1966. 31 UbL 952. Regulations. " ( n ) CERTAIN O T H E R P E R S O N S . — P u r s u a n t to regulations prescribed by t h e Secretary, returns a n d return information may be disclosed to any person, including a n y person described in section 7513(a), t o t h e extent necessary in connection with t h e processing, storage, transmis- sion, a n d reproduction of such returns a n d return information, a n d the p r o g r a m m i n g , maintenance, repair, testing, and procurement of equipment, for purposes of tax administration. " ( o ) DISCLOSURE OF RETURNS AND R E T U R N INFORMATION W I T H RESPECT TO CERTAIN T A X E S . — " ( 1 ) TAXES IMPOSED BY SUBTITLE E.—Returns a n d r e t u r n information with respect to taxes imposed by subtitle E (relating 26 USC 5001. to taxes on alcohol, tobacco, a n d firearms) shall be open t o inspec- tion by or disclosure to officers and employees of a Federal agency whose official duties require such inspection or disclosure. "(2) TAXES IMPOSED BY CHAPTER 3 5.—Returns and return 26 USC 4401. information with respect to taxes imposed by chapter 35 (relating to taxes on wagering) shall, notwithstanding any other provision- of this section, be open t o inspection by or disclosure only to such person or persons a n d for such purpose or purposes as a r e pre- scribed by section 4424. " ( p ) PROCEDURE AND RECORDKEEPING.— " ( 1 ) M A N N E R , TIME, AND PLACE OF INSPECTIONS.—Requests for the inspection or disclosure of a r e t u r n or r e t u r n information a n d such inspection or disclosure shall be made in such manner a n d a t such time and place as shall be prescribed by the Secretary. " ( 2 ) PROCEDURE.— " ( A ) REPRODUCTION OF RETURNS.—A reproduction or certified reproduction of a return shall, upon written request, be furnished t o a n y person t o whom disclosure o r inspection
90 STAT. 1682 PUBLIC LAW 94-455—OCT. 4, 1976 Fee. of such return is authorized under this section. A reasonable fee may be prescribed for furnishing such reproduction or certified reproduction. " ( B ) DISCLOSURE OF RETURN INFORMATION.—Return infor- mation disclosed to any person under the provisions of this title may be provided in the form of written documents, reproductions of such documents, films or photoimpressions, or electronically produced tapes, disks, or records, or by any other mode or means which the Secretary determines neces- Fee. sary or appropriate. A reasonable fee may be prescribed for furnishing such return information. "(C) USE OF REPRODUCTIONS.—Any reproduction of any return, document, or other matter made in accordance with this paragraph shall have the same legal status as the origi- nal, and any such reproduction shall, if properly authen- ticated, be admissible in evidence in any judicial or administrative proceeding as if it were the original, whether or not the original is in existence. "(3) RECORDS OF INSPECTION AND DISCLOSURE.— "(A) SYSTEM OF RECORDKEEPING.—Except as otherwise provided by this paragraph, the Secretary shall maintain a permanent svstem of standardized records or accountings of all requests tor inspection or disclosure of returns and return information (including the reasons for and dates of such requests) and of returns and return information inspected or disclosea under this section. Notwithstanding the provisions of section 552a (c) of title 5, United States Code, the Secretary shall not be required to maintain a record or accounting of requests for inspection or disclosure of returns and return information, or of returns and return information inspected or disclosed, under the authority of subsections (c), (e), (h) (1), (3) (A), or (4), (i) (4) or (6) (A) (ii), (k) (1), (2), or (6), (1)(1) or (4)(B) or (5), (m), or (n). The records or accountings required to be maintained under this paragraph shall be available for examination by the Joint Committee on Taxation or the Chief of Staff of such joint committee. Such record or accounting shall also be available for examination by such person or persons as may be, but only to the extent, authorized to make such examination under section 552a(c) (3) of title 5, United States Code. Report to " ( B ) REPORT BY THE SECRETARY.—The Secretary shall, <^o^F®^sional within 90 days after t h e close of each calendar year, furnish committee. """ t o t h e J o i n t Committee on Taxation a report with respect to, o r summary of, t h e records or a c c o u n t i n g described in s u b p a r a g r a p h ( A ) in such form and containing such infor- mation as such joint committee or the Chief of Staff of such joint committee m a y designate. Such report or summary shall not, however, include a record or accounting of any request by t h e President under subsection (g) for, or t h e disclosure in response to such request of, any return or return informa- tion with respect to any individual who, a t t h e time of such request, was an officer or employee of the executive branch of the Federal Government. Such report or summary, or any p a r t thereof, m a y be disclosed by such joint committee to such persons a n d for such purposes as t h e joint committee may,
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1683 by record vote of a majority of the members of the joint com- mittee, determine. " (C) PUBLIC REPOKT ON DISCLOSURES.—The Secretary shall, Report to within 90 days after the close of each calendar year, furnish to congressional committee. the Joint Committee on Taxation for disclosure to the public a report with respect to the records or accountings described in subparagraph (A) which— " (i) provides with respect to each Federal agency, each agency, body, or commission described in subsection (d) or (1) (3) or (6), and the General Accounting Office the number of— " ( I ) requests for disclosure of returns and return information, " ( I I ) instances in which returns and return information were disclosed pursuant to such requests, " ( I I I ) taxpayers whose returns, or return infor- mation with respect to whom, were disclosed pursu- ant to such requests, and "(ii) describes the general purposes for which such requests were made, "(4) SArEGUARDS.—Any Federal agency described in subsection ( h ) ( 2 ) , (i) (1), (2) or (5), ( j ) ( l ) or (2), (1) (1), (2), or (5), or (o) (1), the General Accounting Office, or any agency, body, or commission described in subsection (d) or (1) (3) or (6) shall, as a condition for receiving returns or return information— "(A) establish and maintain, to the satisfaction of the Sec- Record retary, a permanent system of standardized records with maintenance. respect to any request, the reason for such request, and the date of such request made by or of it and any disclosure of return or return information made by or to it; "(B) establish and maintain, to the satisfaction of the Sec- retary, a secure area or place in which such returns or return information shall be stored; "(C) restrict, to the satisfaction of the Secretary, access to the returns or return information only to persons whose duties or responsibilities require access and to whom dis- closure may be made under the provisions of this title; "(D) provide such other safeguards which the Secretary determines (and which he prescribes in regulations) to be necessary or appropriate to protect the confidentiality of the returns or return information; " ( E ) furnish a report to the Secretary, at such time and Report. containing such information as the Secretary may prescribe, which describes the procedures established and utilized by such agency, body, or commission or the General Accounting Office for ensuring the confidentialty of returns and return information required by this paragraph; and " ( F ) upon completion of use of such returns or return Report. information— "(i) in the case of an agency, body, or commission described in subsection (d) or (1) (6), return to the Secre- t&Tj such returns or return information (along with any copies made therefrom) or make such returns or return information undisclosable in any manner and furnish a written report to the Secretary describing such manner; and
90 STAT. 1684 PUBLIC LAW 94-455—OCT. 4, 1976 "(ii) in the case of an agency described in subsections ( h ) ( 2 ) , (i) (1), (2), or (5), ( j ) ( l ) or (2), (1) (1), (2), o r ( 5 ) , o r ( o ) ( l ) , the commission described in subsection (1) (3), or the General Accounting Office, either— " ( I ) return to the Secretary such returns or return information (along with any copies made therefrom), " ( I I ) otherwise make such returns or return information widisclosable, or " ( I I I ) to the extent not so returned or made undisclosable, ensure that the conditiees ef subpapa- graphs (A), (B), (C), (D), and (E) of this para- graph continue to be met with respect to such returns or return information, except that the conditions of subparagraphs (A), (B), (C), (D), and (E) shall cease to apply with respect to any return or return information if, and to the extent that, such return or return information is disclosed in the course of any judicial or administra- tive proceeding and made a part of the public record thereof. If the Secretary determines that any such agency, body, or com- mission or the General Accounting Office has failed to, or does not, meet the requirements of this paragraph, he may, after any proceedings for review established under paragraph (7), take such actions as are necessary to ensure such requirements are met, including refusing to disclose returns or return information to such agency, body, or commission or the General Accounting Office until he determines that such requirements have been or will be met. "(5) REPORT ON PROCEDURES AND SAFEGUARDS.—After the close of each calendar quarter, the Secretary shall furnish to each committee described in subsection (f) (1) a report which describes the procedures and safeguards established and utilized by such agencies, bodies, or commissions and the General Accounting Office for ensuring the confidentiality of returns and return infor- mation as required by this subsection. Such report shall also describe instances of deficiencies in, and failure to establish or utilize, such procedures. " (6) AUDIT or PROCEDURES AND SAFEGUARDS.— " ( A ) AUDIT BY COMPTROLLER GENERAL.—The Comptroller General may audit the procedures and safeguards established by such agencies, bodies, or commissions pursuant to this subsection to determine whether such safeguards and pro- cedures meet the requirements of this subsection and ensure the confidentiality of returns and return information. The Comptroller General shall notify the Secretary before any such audit is conducted, " ( B ) RECORDS OF INSPECTION AND REPORTS BY THE COMP- TROLLER GENERAL.—The Comptroller General shall— "(i) maintain a permanent system of standardized records and accountings of returns and return informa- tion inspected by officers and employees of the General Accounting Office under subsection ( i ) ( 6 ) ( A ) ( i i ) and shall, within 90 days after the close of each calendar year, furnish to the Secretary a report with respect to, or summary of, such records or accountings in such form and containing such information as the Secretary may prescribe, and
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1685 "(ii) furnish an annual report to each committee Report to described in subsection (f) and to the Secretary setting congressional forth his findings with respect to any audit conducted committees, pursuant to subparagraph (A). The Secretary may disclose to the Joint Committee any report furnished to him under clause (i). " (7) ADMINISTRATIVE REVIEW.—The Secretary shall by regula- Regulations, tions prescribe procedures which provide for administrative review of any determination under paragraph (4) that any agency, body, or commission described in subsection (d) has failed to meet the requirements of such paragraph. " ( 8 ) S T A T E LAW REQUIREMENTS.— " ( A ) SAFEGUARDS.—Notwithstanding any other provision of this section, no return or return information shall be dis- closed after December 31, 1978, to any oflGlcer or employee of any State which requires a taxpayer to attach to, or include in, any State tax return a copy of any portion of his Federal return, or information reflected on such Federal return, unless such State adopts provisions of law which protect the confi- dentiality of the copy of the Federal return (or portion thereof) attached to, or the Federal return information reflected on, such State tax return. "(B) DISCLOSURE or RETURNS OR RETURN INFORMATION I N STATE RETURNS.—Nothing in subparagraph (A) shall be con- strued to prohibit the disclosure by an officer or employee of any State of any copy of any portion of a Federal return or any information on a Federal return which is required to be attached or included in a State return to another ofiicer or employee of such State (or political subdivision of such State) if such disclosure is specifically authorized by State law. "(q) REGULATIONS.—The Secretary is authorized to prescribe such Regulations, other regulations as are necessary to carry out the provisions of this section." (2) CONFORMING AMENDMENT.—The table of sections for sub- chapter B of chapter 61 is amended by striking out the item relating to section 6103 and inserting in lieu thereof the following : "Sec. 6103. Confidentiality and disclosure of returns and return information." (b) STATISTICAL PUBLICATIONS AND STUDIES.—Section 6108 (relating 26 USC 6108. to publication of statistics of income) is amended to read as follows: •SEC. 6108. STATISTICAL PUBLICATIONS AND STUDIES. " ( a ) PUBLICATION OR OTHER DISCLOSURE OF STATISTICS OF INCOME.— The Secretary shall prepare and publish not less than annually statistics reasonably available with respect to the operations of the internal revenue laws, including classifications of taxpayers and of income, the amounts claimed or allowed as deductions, exemptions, and credits, and any other facts deemed pertinent and valuable. "(b) SPECIAL STATISTICAL STUDIES.—The Secretary may, upon writ- ten request by any party or parties, make special statistical studies and compilations involving return information (as defined in section 6103(b) (2)) and furnish to such party or parties transcripts of any such special statistical study or compilation. A reasonable fee may be Fee. prescribed for the cost of the work or services performed for such party or parties.
9 0 STAT. 1686 PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 " ( c ) ANONTMOUS F O R M . — N o publication or other disclosure of statistics o r other information required o r authorized by subsection (a) o r special statistical study authorized by subsection ^b) shall i n any manner permit t h e statistics, study, o r any information so pub- lished, furnished, or otherwise disclosed t o be associated with, o r otherwise identify, directly o r indirectly, a particular t a x p a y e r . " (c) INSPECTION OF CERTAIN RECORDS BY LOCAL O F F I C E R S . — 26 u s e 4102. (1) I N GENERAL.—Section 4102 (relating t o inspection of rec- ords, returns, etc., by local officers) is amended to read as follows: *SEC. 4102. INSPECTION OF RECORDS BY LOCAL OFFICERS. Regulations. " U n d e r regulations prescribed by t h e Secretary, records required to be kept with respect t o taxes under this p a r t shall be open t o inspec- tion by such officers of a State, o r a political subdivision of any such State, as shall be charged w i t h t h e enforcement o r collection of any t a x on gasoline o r lubricating oils." (2) CONFORMING AMENDMENT.—The table of sections for sub- p a r t B of p a r t I I I of chapter 32 is amended by striking out t h e item relating t o section 4102 a n d inserting i n lieu thereof t h e following: "Sec. 4102. Inspection of records by local officers." (d) P E N A L T Y FOR UNAUTHORIZED DISCLOSURE OF I N F O R M A T I O N . — 26 u s e 7213. Section 7213 (relating t o unauthorized disclosure of information) is amended by striking o u t subsection ( c ) , redesignating subsections ( d ) a n d (e) as (c) a n d ( d ) , respectively, a n d by amending subsec- tion ( a ) t o read as follows: "(a) R E T U R N S AND R E T U R N I N F O R M A T I O N . — " ( 1 ) FEDERAL EMPLOYEES AND OTHER PERSONS.—It shall be unlawful for any officer o r employee of the U n i t e d States or any Ante, p. 1681. person described in section 6103 (n) (or a n officer or employee of any such person), o r any former officer o r employee, t o disclose t o any person, except as authorized i n this title, any r e t u r n o r r e t u r n Ante, p. 1668. information (as defined in section 6 1 0 3 ( b ) ) . A n y violation of this p a r a g r a p h shall be a felony punishable upon conviction by a fine in any amount n o t exceeding $5,000, o r imprisonment of not more t h a n 5 years, or both, together with the costs of prosecution, and if such offense i s committed by any officer o r employee of t h e U n i t e d States, h e shall, i n addition t o any other punishment, be dismissed from office or discharged from employment upon con- viction for such offense. "(2) STATE AND OTHER EMPLOYEES.—It shall be unlawful for any officer, employee, o r agent, o r former officer, employee, o r agent, of a n y State ( a s defined i n section 6 1 0 3 ( b ) ( 5 ) ) o r a n y local child support enforcement agency t o disclose t o any person, except as authorized in this title, a n y return or r e t u r n informa- tion (as defined i n section 6103(b)) acquired b y h i m o r another person under section 6103(d) or ( 1 ) ( 6 ) . A n y violation of t h i s p a r a g r a p h shall be a felony punishable b y a fine i n a n y amount not exceeding $5,000, o r imprisonment of n o t more t h a n 5 years, or both, together with the costs of prosecution. " ( 3 ) OTHER PERSONS.—It shall be unlawful f o r a n v person t o whom any r e t u r n o r r e t u r n information ( a s defined i n section 6103(b)) is disclosed in a manner unauthorized by this title t o thereafter p r i n t or publish i n a n y m a n n e r not provided by law any such r e t u r n or return information. A n y violation of this p a r a g r a p h shall be a felony punishable b y a fine i n a n y amount
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1687 n o t exceeding $5,000, or imprisonment of n o t more t h a n 5 years, or both, together with t h e costs of prosecution. " (4) SOLICITATION.—It shall be unlawful for any person to offer any item of material value in exchange for any return or return information (as defined i n section 6103(b)) a n d t o receive as a ^nte, p. 1668. result of such solicitation a n y such return or return information. A n y violation of this p a r a g r a p h shall be a felony punishable by a fine i n any amount not exceeding $5,000, or imprisonment of n o t more t h a n 5 years, or both, together with the costs of prosecution. " ( 5 ) SHAREHOLDERS.—It shall be unlawful for a n y person to whom a return or return information (as defined in section 6103 ( b ) ) is disclosed p u r s u a n t to the provisions of section 6103(e) (1) ( D ) (iii) to disclose such return or return information in a n y i manner not provided by law. A n y violation of this p a r a g r a p h shall be a felony punishable by a fine in any amount not t o exceed $5,000, or imprisonment of not more t h a n 5 years, or both, together with the costs of prosecution." (e) CrviL DAMAGES FOR UNAUTHORIZED DISCLOSURE OF R E T U R N S AND R E T U R N INFORMATION.— (1) I N GENERAL.—Part I of subchapter A of chapter 75 (relat- i n g to miscellaneous penalties a n d forfeitures) is amended by a d d i n g a t t h e end thereof t h e following new section: "SEC. 7217. CIVIL DAMAGES FOR UNAUTHORIZED DISCLOSURE OF 26 USC 7217. RETURNS AND RETURN INFORMATION. " (a) GENERAL RULE.—Whenever any person knowingly, or by reason of negligence, discloses a return or r e t u r n information (as defined in section 6103(b)) with respect t o a taxpayer in violation of the provi- sions of section 6103, such taxpayer may bring a civil action for dam- ages against such person, a n d t h e district courts of t h e United States shall have jurisdiction of a n y action commenced under t h e provisions of this section. " ( b ) DAMAGES.—In any suit brought under the provisions of sub- section ( a ) , upon a finding of liability on the p a r t of the defendant, the defendant shall be liable to t h e plaintiff in an amount equal to t h e sum of— " ( 1 ) actual damages sustained by the plaintiff as a result of the unauthorized disclosure of t h e r e t u r n or return information a n d , in the case of a willful disclosure or a disclosure which is the result of gross negligence, punitive damages, but in no case shall a plain- tiff entitled t o recovery receive less t h a n the sum of $1,000 with respect to each instance of such unauthorized disclosure; and " ( 2 ) the costs of the action. " ( c ) A n action t o enforce any liability created under this section may be brought, without regard t o t h e amount in controversy, within 2 years from the date on which the cause of action arises or at any time within 2 years after discovery by the plaintiff of the unauthorized disclosure." (2) CONFORMING AMENDMENT.—The table of sections for such p a r t is amended by a d d i n g at t h e end thereof the following new item: "Sec. 7217. Civil damages for unauthorized disclosure of returns and return information." (f) PROCESSING OF R E T U R N S , R E T U R N INFORMATION, AND O T H E R DOCUMENTS.—Section 7513 (relating to reproduction of returns a n d 26 USC 7513. other documents) is amended by striking out subsection (c) a n d redes- i g n a t i n g subsection ( d ) as subsection ( c ) .
90 STAT. 1688 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 7852. ( g ) O T H E R APPLICABLE R U L E S . — S e c t i o n 7852 ( r e l a t i n g t o other rules applicable under title 26) is amended by a d d i n g at the end thereof t h e following new subsection: " ( e ) PRIVACY A C T OF 1974.—The provisions of subsections ( d ) ( 2 ) , ( 3 ) , a n d ( 4 ) , a n d ( g ) of section 552a of title 5, United States Code, shall not be applied, directly or indirectly, t o t h e determination of t h e existence or possible existence of liability ( o r t h e amount thereof) of any person for any tax, penalty, interest, fine, forfeiture, or other impo- sition or offense to which the provisions of this title apply." ( h ) T E C H N I C A L AND CONFORMING A M E N D M E N T S . — (1) Section 6106 (relating t o publicity of unemployment t a x 26 use 6106. returns) is hereby repealed. 26 use 6323. (2) Section 6323 (relating to validity a n d priority of t a x liens against certain persons) is amended by striking out p a r a g r a p h (3) of subsection ( i ) . 26 use 7213. (3) Subsection ( d ) of section 7213 (relating to cross references) is amended by striking out p a r a g r a p h (1) a n d inserting i n lieu thereof: "(1) Penalties for disclosure of information by preparers of returns.—For penalty for disclosure or use of information by preparers of returns, see section 7216." 26 use 7515. (4) Section 7515 (relating to special statistical studies and com- pilations a n d other services on request) is hereby repealed, 26 use 7809. (5) Subsection (c) of section 7809 (relating t o deposit of col- lections) is amended by striking out in p a r a g r a p h (1) "section 7515 (relating to special statistical studies a n d compilations for other services on r e q u e s t ) " a n d inserting in lieu thereof "section 6103(p) (relating t o furnishing of copies of returns or of r e t u r n i n f o r m a t i o n ) , a n d section 6108(b) (relating t o special statistical studies and compilations)". 26 use 4424. (6) Subsection ( d ) of section 4424 (relating to disclosure of wagering t a x information) is amended by striking out " 6 1 0 3 ( d ) " and inserting in lieu thereof "6103 ( f ) " . 26 u s e 6103 (i) EFFECTIVE D A T E . — T h e amendments made by this section take note. effect J a n u a r y 1, 1977. SEC. 1203. INCOME TAX RETURN PREPARERS. 26 u s e 7701. (a) DEFINITION.—Section 7701(a) (relating t o definitions) is amended by a d d i n g at t h e end thereof t h e following new p a r a g r a p h : " ( 3 6 ) INCOME TAX RETURN PREPARER.— "Income tax " ( A ) I N GENERAL.—The t e r m 'income t a x r e t u r n p r e p a r e r ' return means a n y person who prepares for compensation, or who preparer." employs one or more persons t o prepare for compensation, 26 use 1. any r e t u r n of t a x imposed by subtitle A or any claim for refund of t a x imposed by subtitle A. F o r purposes of t h e pre- ceding sentence, the preparation of a substantial portion of a r e t u r n or claim for refund shall be treated as if it were t h e p r e p a r a t i o n of such r e t u r n or claim for refund. " ( B ) EXCEPTIONS.—A person shall not be an 'income t a x return p r e p a r e r ' merely because such person— " ( i ) furnishes t y p i n g , reproducing, or other mechani- cal assistance, " ( i i ) prepares a r e t u r n or claim for refund of t h e employer (or of a n officer or employee of t h e employer) by whom he is regularly a n d continuously employed, " ( i i i ) prepares a return or claim for refund for any trust or estate with respect t o which he is a fiduciary, or
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1689 " ( i v ) prepares a claim lor refund for a t a x p a y e r in response to any notice of deficiency issued t o such tax- p a y e r or in response t o any waiver of restriction after the commencement of an a u d i t of such t a x p a y e r o r another t a x p a y e r if a determination in such audit of such other t a x p a y e r directly or indirectly affects the t a x liability of such t a x p a y e r . " (b) ASSESSABLE P E N A L T I E S W H E R E PREPARER UNDERSTATES TAX- PAYER'S L I A B I L I T Y . — (1) I N GENERAL.—Subchapter B of chapter 68 (relating t o assessable penalties) is amended by a d d i n g a t t h e end thereof t h e following new section: "SEC. 6694. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME 26 USC 6694. TAX RETURN PREPARER. " ( a ) NEGLIGENT OR INTENTIONAL DISREGARD o r R U L E S AND REGULA- Penalties. TioNS.—If a n y p a r t of a n y understatement of liability with respect to a n y return or claim for refund is due t o the negligent or intentional disregard of rules a n d regulations by any person who is an income tax return preparer with respect t o such return or claim, such person shall pay a penalty of $100 with respect t o such return or claim. " ( b ) W I L L F U L UNDERSTATEMENT OF L I A B I L I T Y . — I f a n y p a r t of a n y understatement of liability with respect to any return o r claim for refund is due to a willful attempt in any m a n n e r t o understate the lia- bility for a t a x by a person who is a n income t a x return p r e p a r e r with respect t o such return or claim, such person shall pay a penalty of $500 with respect t o such return or claim. W i t h respect t o any return o r claim, t h e amount of the penalty payable by any person by reason of this subsection shall be reduced by t h e amount of the penalty paid by such person by reason of subsection ( a ) . , " ( c ) E X T E N S I O N OF PERIOD OF COLLECTION W H E R E PREPARER P A Y S 15 P E R C E N T OF P E N A L T Y . — " ( 1 ) I N GENERAL.—If, within 30 days after t h e d a y on which notice a n d demand of a n y penalty under subsection ( a ) o r ( b ) is made against a n y person w h o is an income t a x return preparer, such person pays a n amount which is not less t h a n 15 percent of t h e amount of such penalty a n d files a claim for rfefund of t h e amount so paid, no levy or proceeding in court for t h e collection of t h e remainder of such penalty shall be made, begun, o r prose- cuted until t h e final resolution of a proceeding begun as provided in p a r a g r a p h ( 2 ) . N o t w i t h s t a n d i n g t h e provisions of section 7421 ( a ) , t h e beginning of such proceeding o r levy d u r i n g t h e time such prohibition is in force m a y be enjoined by a proceeding in the proper court. " (2) PREPARER MUST BRING SUIT I N DISTRICT COURT TO DETERMINE H I S LIABILITY FOR PENALTY.—If, within 30 days after t h e d a y on which his claim for refund of any partial payment of any penalty u n d e r subsection ( a ) o r ( b ) is denied (or, if earlier, within 30 days after t h e expiration of 6 months after t h e d a y on which he filed the claim for r e f u n d ) , t h e income t a x r e t u r n p r e p a r e r fails to begin a proceeding i n t h e a p p r o p r i a t e United States district court for the determination of his liability for such penalty, p a r a - g r a p h (1) shall cease to a p p l y with respect to such penalty, effec- tive on the d a y following the close of the applicable 30-day period referred t o i n this p a r a g r a p h . " ( 3 ) SUSPENSION OF R U N N I N G OF PERIOD OF LIMITATIONS ON COL- LECTION.—The r u n n i n g of t h e period of limitations provided i n
90 STAT. 1690 PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 section 6502 on t h e collection b y levy or by a proceeding i n court in respect of a n y penalty described i n p a r a g r a p h (1) shall be suspended for t h e period d u r i n g which t h e Secretary is prohibited from collecting by levy o r a proceeding i n court. "(d) ABATEMENT o r P E N A L T Y W H E R E TAXPAYER'S LIABILITY N O T UNDERSTATED.—If at any time there is a final administrative determi- nation or a final judicial decision t h a t there was no understatement of liability i n t h e case of a n y r e t u r n o r claim for refund w i t h respect to which a penalty u n d e r subsection ( a ) o r ( b ) h a s been assessed, such assessment shall be abated, a n d if a n y portion of such penalty h a s been paid t h e amount so paid shall be refunded to t h e person who made such payment as a n overpayment of t a x without r e g a r d t o a n y period of limitations which, b u t for t h i s subsection, would a p p l y t o t h e m a k i n g of such refund. " (e) UNDERSTATEMENT OF LIABILITY D E F I N E D . — F o r purposes of t h i s section, t h e t e r m 'understatement of liability' means a n y understate- ment of t h e n e t amount payable with respect t o a n y t a x imposed by 26 u s e 1. subtitle A or a n y overstatement of t h e net amount creditable or refundable with respect to any such tax. Except as otherwise provided in subsection ( d ) , t h e determination of whether or n o t there is a n J understatement of liability shall be made without r e g a r d to a n y administrative or judicial action involving t h e taxpayer. " ( f ) CROSS R E F E R E N C E . — "For definition of income tax return preparer, see section 7701 Ante, p. 1688. (a)(36)." (2) BURDEN OF PROOF UNDER 0694(b).— ( A ) Subchapter B of chapter 76 (relating t o proceedings by taxpayers a n d t h i r d parties) is amended by redesignating 26 u s e 7428. section 7427 as section 7428 a n d by inserting after section 7426 the following new section: 26 u s e 7427. "SEC. 7427. INCOME TAX RETURN PREPARERS. " I n any proceeding involving the issue of whether or not an income tax return preparer has willfully attempted in any manner to under- Ante, p. 1689. state the liability for t a x (within t h e meaning of section 6 6 9 4 ( b ) ) , t h e burden of proof in respect t o such issue shall be upon t h e Secretary." ( B ) T h e table of sections for such subchapter B is amended by striking out t h e last item a n d inserting in lieu thereof the following: "Sec. 7427. Income tax return preparers. "Sec. 7428. Cross references." (c) PREI'ARER M U S T FUTINISH C O P Y OF R E T U R N TO TAXPAYER AND M U S T R E T A I N COPY OR L I S T . — S u b c h a p t e r B of c h a p t e r 61 ( r e l a t i n g to information a n d returns) is amended by inserting after section 6106 t h e following new section: 26 u s e 6107 "SEC. 6107. INCOME TAX RETURN PREPARER MUST FURNISH COPY OF RETURN TO TAXPAYER AND MUST RETAIN A COPY OR LIST. "(a) FuKxisiiiNG COPY TO TAXPAYER.—Any person who is an income t a x return p i e p a r e r with respect to any return or claim for refund shall furnish a completed copy of such r e t u r n or claim t o t h e taxpayer not later t h a n t h e time such return or claim is presented for such taxpayer's signature. "(b) COPY OR L I S T T o B E RETAINED BY I N C O M E T A X RETURN PREPARER.—Any person w h o is an income t a x r e t u r n preparer with
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1691 respect t o a r e t u r n or claim for refund shall, for t h e period ending 3 years after t h e close of t h e r e t u r n period— " (1) retain a completed copy of such r e t u r n or claim, o r retain, on a list, t h e n a m e a n d t a x p a y e r identification number of t h e t a x - p a y e r for whom such r e t u r n or claim was prepared, a n d " ( 2 ) make such copy o r list available for inspection upon request by the Secretary. " ( c ) EEGULATIONS.—The Secretary shall prescribe regulations u n d e r which, in cases where 2 o r more persons a r e income t a x r e t u r n preparers with respect to the same return or claim for refund, com- pliance with t h e requirements of subsection ( a ) or ( b ) , as t h e case m a y be, of one such person shall be deemed to be compliance with t h e requirements of such subsection by t h e other persons. , . " ( d ) D E F I N I T I O N S . — F o r purposes of this section, t h e t e r m s ' r e t u r n ' and 'claim for refund' have t h e respective meanings given to such t e r m s by section 6696 ( e ) , a n d the term ' r e t u r n period' h a s t h e meaning Post, p. 1693. given t o such t e r m by section 6060(c)." infra. (d) TAXPAYER IDENTIFYING NUMBER OF PREPARER T o B E FUR- NISHED.—Section 6109(a) (relating t o supplying of identifying n u m - 26 USC 6109. bers) is amended b y a d d i n g a t t h e end thereof t h e following: "(4) F U R N I S H I N G IDENTIFYING NUMBER OF INCOME TAX RETURN PREPARER.—Any r e t u r n o r claim for refund prepared by a n income t a x r e t u r n p r e p a r e r shall b e a r such identifying number for securing p r o p e r identification of such preparer, his employer, or both, as may be prescribed. F o r purposes of this p a r a g r a p h , t h e Definitions, terms ' r e t u r n ' a n d 'claim for refund' have the respective mean- ings given to such terms by section 6696 ( e ) . F o r purposes of this subsection, the identifying number of an indi- vidual (or his estate) shall be such individual's social security account number." (e) PREPARER M U S T F I L E A N N U A L INFORMATION R E T U R N . — P a r t I I I of subchapter A of chapter 61 (relating to information returns) is amended by a d d i n g at the end thereof the following new s u b p a r t : "Subpart F—Information Concerning Income T a x Return Preparers "Sec. 6060. Information returns of income tax return preparers. "SEC. 6060. INFORMATION RETURNS OF INCOME TAX RETURN 26 USC 6060. PREPARERS. " ( a ) GENERAL R U L E . — A n y person w h o employs a n income t a x r e t u r n p r e p a r e r to p r e p a r e a n y return or claim for refund other t h a n for such person a t a n y time d u r i n g a return period shall make a return setting forth t h e name, t a x p a y e r identification number, a n d place of work of each income t a x return preparer employed by him a t any time d u r i n g such period. F o r purposes of this section, a n y individual who in acting as an income t a x return p r e p a r e r is n o t the employee of another income t a x return preparer shall be treated as his own employer. T h e return required by this section shall be filed, in such Regulations, m a n n e r as the Secretary may by regulations prescribe, on or before t h e first J u l y 31 following the end of such return period. " ( b ) ALTERNATIVE REPORTING.—In lieu of the return required by subsection ( a ) , t h e Secretary m a y approve an alternative reporting method if he determines t h a t the necessary information is available t o h i m from other sources. " ( c ) R E T U R N PERIOD D E F I N E D . — F o r purposes of subsection (a), the term 'return period' means t h e 12-month period beginning on
9 0 STAT. 1692 PUBLIC LAW 94-455—OCT. 4, 1 9 7 6 J u l y 1 of each year, except t h a t t h e first r e t u r n period shall be the 6-month period beginning on J a n u a r y 1,1977, a n d ending on J u n e 30, 1977." (f) O T H E R ASSESSABLE PENALTIES W I T H RESPECT TO T H E PREPARA- TION OF INCOME T A X R E T U R N S FOR O T H E R P E R S O N S . — S u b c h a p t e r B of chapter 68 (relating to assessable penalties) is amended by a d d i n g a t t h e end thereof the following new sections: 26 u s e 6695. "SEC. 6695. OTHER ASSESSABLE PENALTIES WITH RESPECT TO THE PREPARATION OF INCOME TAX RETURNS FOR OTHER PERSONS. "(a) FAILURE T o F U R N I S H COPY TO TAXPAYER.—^Any person who is an income t a x r e t u r n p r e p a r e r with respect t o a n y return or claim Ante, p. 1690. for refund who fails to comply with section 6107(a) with respect t o such return or claim shall p a y a penalty of $25 for such failure, unless it is shown t h a t such failure is due to reasonable cause a n d n o t due t o willful neglect. Regulations. " ( b ) FAILURE T o SiGN RETURN.—Any persou who is an income t a x r e t u r n preparer with respect t o any return or claim for refund, w h o is required by regulations prescribed by t h e Secretary t o sign such r e t u r n or claim, a n d who fails t o comply with such regulations with respect t o such r e t u r n or claim shall p a y a penalty of $25 for such failure, unless i t is shown t h a t such failure is due t o reasonable cause and not due t o willful neglect. " ( c ) F A I L U R E T o F U R N I S H IDENTIFYING N U M B E R . — A n y person who *' is a n income t a x r e t u r n p r e p a r e r with respect to any r e t u r n o r claim for refund a n d who fails t o comply with section 6109(a) (4) w i t h respect to such r e t u r n or claim shall p a y a penalty of $25 for such failure, unless i t is shown t h a t such failure is due t o reasonable cause a n d n o t due t o willful neglect. "(d) F A I L U R E T o R E T A I N COPY OR L I S T . — A n y person w h o is a n income t a x return p r e p a r e r with respect to any r e t u r n or claim for refund who fails to comply with section 6107(b) with respect t o such r e t u r n or claim shall p a y a penalty of $50 for each such failure, unless it is shown t h a t such failure is due to reasonable cause a n d n o t due t o willful neglect. T h e m a x i m u m penalty imposed under this subsection on any person with respect t o any return period shall n o t exceed $25,000. ^ " ( e ) F A I L U R E T o F I L E CORRECT INFORMATION R E T U R N . — A n y person required t o make a r e t u r n under section 6060 who fails t o comply with the requirements of such section shall pay a penalty of— " ( 1 ) $100 for each failure to file a return as required under such section, a n d " ( 2 ) $5 for each failure t o set forth an item in t h e return as required u n d e r such section, unless it is shown t h a t such failure is due t o reasonable cause a n d n o t due t o willful neglect. T h e m a x i m u m penalty imposed u n d e r this sub- section on a n y person with respect to a n y return period shall n o t exceed $20,000. " ( f ) NEGOTIATION OF C H E C K . — A n y person w h o is an income t a x r e t u r n p r e p a r e r w h o endorses or otherwise negotiates (directly o r t h r o u g h a n agent) a n y check made in respect of t h e taxes imposed b y 26 u s e 1. subtitle A which is issued t o a t a x p a y e r (other t h a n t h e income t a x r e t u r n p r e p a r e r ) shall p a y a penalty of $500 with respect to each such check.
PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 9 0 STAT. 1693 "SEC. 6696. RULES APPLICABLE WITH RESPECT TO SECTIONS 6694 AND 26 USC 6696. 6695. " ( a ) P E N A L T I E S T O B E ADDITIONAL TO A N Y O T H E R P E N A L T I E S . — T h e penalties provided by section 6694 a n d 6695 shall be in addition t o a n y ^"^^' P- 1689. other penalties provided by law. J^^' P' ^"'°" "(b) D E F I C I E N C Y PROCEDURES N O T T O A P P L Y . — S u b c h a p t e r B of ^"^^' P- l^^^. chapter 63 (relating to deficiency procedures for income, estate, gift, 26 USC 6211. and certain excise taxes) shall not apply with respect to the assessment or collection of the penalties provided by sections 6694 and 6695. "(c) PROCEDURE FOR CLAIMING R E F U N D . — A n y claim for credit or Regulations, refund of a n y penalty paid u n d e r section 6694 o r 6695 shall be filed in accordance with regulations prescribed by t h e Secretary. " ( d ) PERIODS OF L I M I T A T I O N . — " ( 1 ) ASSESSMENT.—The amount of any penalty under section 6694(a) or under section 6695 shall be assessed within 3 years after t h e r e t u r n o r claim for refund with respect t o which t h e penalty is assessed w a s filed, a n d n o proceeding in court without assessment for the collection of such t a x shall be begun after t h e expiration of such period. I n the case of any penalty under section 6694 ( b ) , t h e penalty may be assessed, or a proceeding in court for the collection of t h e penalty m a y be begun without assessment, at any time. " ( 2 ) CLAIM FOR REFUND,—Except as provided in section 6694 ( d ) , a n y claim for refund of an overpayment of a n y penalty assessed under section 6694 or 6695 shall be filed within 3 years from the time the penalty was paid. " ( e ) D E F I N I T I O N S . — F o r purposes of sections 6694 a n d 6695— " ( 1 ) R E T U R N . — T h e t e r m ' r e t u r n ' means a n y r e t u r n of a n y t a x imposed by subtitle A . " ( 2 ) CLAIM FOR REFUND.—The term 'claim for refund' means a j^ , claim for refund of, o r credit against, a n y t a x imposed by sub- title A . " ( g ) A U T H O R I T Y T O S E E K I N J U N C T I O N A G A I N S T INCOME T A X R E T U R N PREPARERS.—Subchapter A of chapter 76 (relating t o civil actions b y ^ ^,, the United States) is amended by redesignating section 7407 as section 7408 a n d by inserting after section 7406 t h e following new section: "SEC. 7407. ACTION TO ENJOIN INCOME TAX RETURN PREPARERS. 26 USC 7407. " ( a ) A U T H O R I T Y T O S E E K I N J U N C T I O N . — E x c e p t as p r o v i d e d in sub- section ( c ) , a civil action in t h e name of t h e United States to enjoin any person who is an income t a x r e t u r n p r e p a r e r from further engag- i n g in a n y conduct described in subsection ( b ) or from further acting as a n income t a x r e t u r n p r e p a r e r m a y be commenced a t t h e request of t h e Secretary. A n y action under this section shall be b r o u g h t i n the District Court of t h e United States for t h e district in which t h e income t a x p r e p a r e r resides or h a s his principal place of business or in which t h e t a x p a y e r with respect to whose income t a x return t h e action is brought resides. T h e court m a y exercise i t s jurisdiction over such action (as provided in section 7 4 0 2 ( a ) ) separate a n d a p a r t from any other action brought by t h e U n i t e d States against such income tax p r e p a r e r or any taxpayer. " ( b ) ADJUDICATION AND DECREES.—In any action under subsection ( a ) , if the court finds— " (1) t h a t a n income t a x r e t u r n p r e p a r e r has— " ( A ) engaged in a n y conduct subject t o penalty under section 6694 or 6695, o r subject to a n y criminal penalty p r o - vided by this title,
90 STAT. 1694 PUBLIC LAW 94-455—OCT. 4, 1976 Off , • " ( B ) misrepresented his eligibility to practice before t h e I n t e r n a l Eevenue Service, or otherwise misrepresented his experience or education as an income t a x r e t u r n preparer, A-m' ^ - " ( C ) guaranteed the payment of any t a x refund or the allowance of any t a x credit, or " ( D ) engaged in any other fraudulent or deceptive con- .' . - > • • , duct which substantially interferes with the proper adminis- tration of the I n t e r n a l Revenue laws, and " ( 2 ) t h a t injunctive relief is a p p r o p r i a t e to prevent the recur- jfi.- 'i. vi.;-' rence of such conduct, the court may enjoin such person from further engaging in such conduct. I f the court finds t h a t an income tax return preparer has continually or repeatedly engaged in any conduct described in sub- p a r a g r a p h s ( A ) t h r o u g h ( D ) of this subsection and t h a t an injunc- tion prohibiting such conduct would not be sufficient to prevent such person's interference with t h e proper administration of this title, t h e court may enjoin such person from acting as an income tax return preparer. " ( c ) BOND T O STAY iNJUNCTioisr.—No action to enjoin under sub- section ( b ) ( 1 ) ( A ) shall be commenced or pursued with respect to any income tax return preparer who files and maintains, with the Secretary in the internal revenue district in which is located such preparer's legal residence or principal place of business, a bond in a sum of $50,000 as surety for the payment of penalties under section Ante, p. 1689; 6694 and 6695." Post, p. 1878; (h) CROSS REFERENCES.— Ante, p. 1692. (1) Section 6503(h), as redesignated by this Act, is amended 26 use 6503. by adding at t h e end thereof t h e following new p a r a g r a p h : "(4) Income tax return preparers, see section 6694(c)(3)." 26 u s e 6504. (2) Section 6504, as amended by this Act, is amended by a d d i n g ' at the end thereof t h e following new p a r a g r a p h : "(11) Assessment of civil penalties under section 6694 or 6695, see section 6696(d)(1)." 26 u s e 6511. (3) Section 6511(g) is amended by adding at the end thereof the following new p a r a g r a p h : "(7) For a period of limitations for refund of an overpayment of ' ' >'"• ' ' ' penalties imposed under section 6694 or 6695, see section 6696(d)(2).'' (i) CONFORMING A M E N D M E N T S . — (1) T h e table of subparts for p a r t I I I of suchapter A of chap- ter 61 is amended by adding at the end thereof t h e following new item: "Subpart F. Information concerning income tax return preparers." (2) T h e table of sections for subchapter B of chapter 61 is amended by inserting immediately after the item relating to sec- tion 6106 the following new item: "Sec. 6107. Income tax return preparer must furnish copy of return to taxpayer and must retain a copy or list." (3) T h e table of sections for subchapter B of chapter 68 is amended by adding at the end thereof t h e following new items: * "Sec. 6694. Understatement of taxpayer's liability by income tax return preparer. "Sec. 6695. Other assessable penalties with respect to the preparation of •i., income tax returns for other persons. "Sec. 6696. Rules applicable with respect to sections 6694 and 6695."
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1695 (4) T h e table of sections for subchapter A of chapter 76 is amended by striking out the last item a n d inserting in lieu thereof the following: "Sec. 7407. Action to enjoin income tax return preparers. "Sec. 7408. Cross references." (j) EFFECTIVE D A T E . — T h e amendments made b y this section shall 26 USC 7701 apply to documents prepared after December 31,1976. °°*^" SEC. 1204. JEOPARDY AND TERMINATION ASSESSMENTS. (a) R E V I E W OF JEOPARDY AND T E R M I N A T I O N ASSESSMENTS.—Sub- chapter B of chapter 76 (relating to proceedings by taxpayers and t h i r d parties) is amended by inserting after section 7428 the following new section: "SEC. 7429. REVIEW OF JEOPARDY ASSESSMENT PROCEDURES. 26 USC 7429. " ( a ) ADMINISTRATIVE R E V I E W . — " ( 1 ) INFORMATION TO TAXPAYER.—Within 5 days after t h e d a y on which an assessment is made under section 6851(a), 6861(a), or 6862, t h e Secretary shall provide t h e taxpayer with a written statement of the information upon which the Secretary relies in m a k i n g such assessment. " ( 2 ) REQUEST FOR REVIEW.—Within 30 days after the day on which the taxpayer is furnished the written statement described in p a r a g r a p h ( 1 ) , or within 30 days after t h e last d a y of t h e period within which such statement is required to be furnished, t h e tax- payer m a y request the Secretary to review the action taken. "(3) REDETERMINATION BY SECRETARY.—After a request for review is made under p a r a g r a p h ( 2 ) , t h e Secretary shall deter- mine whether or not— " ( A ) t h e m a k i n g of t h e assessment under section 6851, 6861, or 6862, as t h e case mfiy be, is reasonable under t h e circumstances, a n d " ( B ) the amount so assessed or demanded as a result of the action taken u n d e r section 6851, 6861, or 6862 is a p p r o p r i a t e under the circumstances. " ( b ) JUDICIAL R E V I E W . — '; " ( 1 ) ACTIONS PERMITTED.—Within 30 days after the earlier of— " ( A ) t h e d a y the Secretary notifies the taxpayer of his determination described in subsection (a) ( 3 ) , or " ( B ) the 16th day after the request described in subsection (a) (2) was made, the t a x p a y e r m a y b r i n g a civil action against the United States in a district court of the United States for a determination u n d e r this subsection. " (2) DETERMINATION BY DISTRICT COURT.—^Within 20 days after an action is commenced under p a r a g r a p h ( 1 ) , t h e district court shall determine whether or not— " ( A ) t h e m a k i n g of t h e assessment under section 6851, 6861, or 6862, as the case m a y be, is reasonable under the cir- cumstances, and " ( B ) t h e amount so assessed or demanded as a result of the action taken under section 6851, 6861, or 6862, is appropriate under t h e circumstances. " ( 3 ) ORDER OF DISTRICT COURT.—If t h e court determines t h a t the m a k i n g of such assessment is unreasonable or t h a t the amount assessed or demanded is inappropriate, the court m a y order t h e Secretary to abate such assessment, t o redetermine (in whole or
90 STAT. 1696 PUBLIC LAW 94-455—OCT. 4, 1976 in p a r t ) t h e amount assessed or demanded, or t o take such other action as the court finds appropriate. " ( c ) EXTENSION o r 2 0 - D A Y PERIOD W H E R E TAXPAYER So R E Q U E S T S . — If the taxpayer requests an extension of the 20-day period set forth i n subsection (b) (2) and establishes reasonable grounds why such exten- . ji;; sion should be granted, the district court may g r a n t an extension of not more t h a n 40 additional days. " ( d ) COMPUTATION OF D A Y S . — F o r purposes of this section, Satur- day, Sunday, or a legal holiday in t h e District of Columbia shall n o t be counted as the last day of any period. " ( e ) V E N U E . — A civil action under subsection ( b ) shall be com- menced only in t h e judicial district described in section 1402(a) (1) or (2) of title 28, United States Code. .'. ', " ( f ) F I N A L I T Y OF D E T E R M I N A T I O N . — A n y d e t e r m i n a t i o n m a d e by a district court under this section shall be final and conclusive a n d shall not be reviewed by any other court. " ( g ) BURDEN OF P R O O F . — " ( 1 ) REASONABLENESS OF TERMINATION OR JEOPARDY ASSESS- M E N T . — I n an action under subsection (b) involving t h e issue of whether the making of an assessment under section 6851, 6861, or 6862 is reasonable under the circumstances, the burden of proof in respect to such issue shall be upon the Secretary. " ( 2 ) REASONABLENESS OF AMOUNT OF ASSESSMENT.—In an action under subsection ( b ) involving t h e issue of whether a n amount assessed or demanded as a result of action taken under section 6851, 6861, or 6862 is a p p r o p r i a t e under t h e circumstances, t h e Secretary shall provide a written statement which contains any information with respect to which his determination of t h e amount assessed was based, but the burden of proof in respect of such issue shall be upon the taxpayer." (b) JEOPARDY ASSESSMENT OF INCOME T A X . — (1) T E R M I N A T I O N ASSESSMENTS.—So much of section 6851 (relating to termination of taxable year) as precedes subsection (c) is amended to read as follows: 26 u s e 6851. "SEC. 6851. TERMINATION ASSESSMENTS OF INCOME TAX. " ( a ) AUTHORITY FOR M A K I N G . — " ( 1 ) I N GENERAL.—If the Secretary finds t h a t a taxpayer designs quickly to depart from the United States or to remove his property therefrom, or to conceal liiiPself or his pi-operty therein, or to do any other act (including in the case of a corporation dis- ' t r i b u t i n g all or a p a r t of its assets in liquidation or otherwise) tending to prejudice or to render wholly or partially ineffectual proceedings to collect the income tax for the current or the imme- diately preceding taxable year unless such proceeding be brought without delay, t h e Secretary shall immediately make a determination of t a x for the current taxable year or for t h e pre- . ceding taxable year, or both, as t h e case may be, a n d notwith- standing a n y other provision of law, such t a x shall become immediately due and payable. T h e Secretary shall immediately assess t h e amount of t h e t a x so determined (together with all interest, additional amounts, a n d additions t o t h e t a x provided by law) for t h e current taxable year or such preceding taxable year, or both, as the case may be, a n d shall cause notice of such determination a n d assessment t o be given t h e taxpayer, together with a demand for immediate payment of such tax.
PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 9 0 STAT. 1697 " ( 2 ) COMPUTATION OF T A X . — I n t h e case of a c u r r e n t t a x a b l e year, t h e Secretary shall determine t h e t a x for t h e period begin- n i n g on t h e first d a y of such current taxable year a n d ending on t h e date of t h e determination under p a r a g r a p h (1) as though such period were a taxable year of t h e taxpayer, a n d shall take into account a n y p r i o r determination made under this subsection with respect t o such current taxable year. "(3) TREATMENT OF AMOUNTS COLLECTED.—Any a m o u n t s col- lected as a result of a n y assessments under this subsection shall, • t o the extent thereof, be treated as a payment of t a x for such tax- able year. " ( 4 ) T H I S SECTION INAPPLICABLE WHERE SECTION e s e i APPLIES.— T h i s section shall not authorize a n y assessment of t a x for t h e pre- ceding taxable year which is made after the due date of t h e t a x p a y e r ' s return for such taxable year (determined with regard to a n y extensions). " ( b ) NOTICE OF D E F I C I E N C Y . — I f a n assessment of t a x is m a d e u n d e r t h e authority of subsection ( a ) , t h e Secretary shall mail a notice under section 6212(a) for t h e taxpayer's full taxable year (determined with- out regard t o a n y action taken under subsection ( a ) ) with respect t o which such assessment was made within 60 days after t h e later of ( i ) the due date of the taxpayer's return for such taxable year (determined with regard t o any extensions), or ( i i ) the date such t a x p a y e r files such return. Such deficiency m a y be in a n amount greater or less t h a n t h e amount assessed under subsection ( a ) . " (2) BONDS.—Section 6851 is amended by striking out subsection 26 USC 6851. (e) (relating to bonds) and inserting in lieu thereof the following: " ( e ) SECTIONS 6861 ( f ) AND ( g ) T o A P P L Y . — T h e provisions of sec- tion 6861(f) (relating t o collection of u n p a i d amounts) a n d 6861(g) (relating t o abatement if jeopardy does not exist) shall a p p l y with respect t o a n y assessment made under subsection ( a ) . " ( f ) CROSS REFERENCES.— "(1) For provisions permitting immediate levy in case of jeopardy, see section 6331(a). "(2) For provisions relating to the review of jeopardy, see section , ,^^^ 7429." Ante, p. 1695. (c) T E C H N I C A L AND CONFORMING A M E N D M E N T S . — (1) Section 1346(e) of title 28, United States Code (relat- i n g t o jurisdiction of district courts with t h e United States a s defendant) is amended by inserting " o r section 7429" immedi- ately after "section 7426". (2) Section 4 4 3 ( a ) ( 3 ) (relating to returns for terminated 26 USC 443. period) is repealed. (3) Section 6091(b) (relating t o place for filing returns) is 26 USC 6091. amended— ( A ) by striking out " a n d " a t the end of p a r a g r a p h (1) ( B ) (iii) thereof, and by striking out p a r a g r a p h (1) ( B ) (iv) a n d the m a t t e r following such p a r a g r a p h a n d inserting i n lieu thereof t h e following: " ( i v ) nonresi(fent alien persons, a n d Regulations. " ( v ) persons with respect t o whom a n assessment was made under section 6851(a) (relating t o termination assessments) with respect t o t h e taxable year, shall be made at such place as the Secretary m a y by regulations designate."; a n d ( B ) by striking out " a n d " a t the end of p a r a g r a p h (2) ( B ) ( i i ) , a n d by s t r i k i n g out p a r a g r a p h (2) ( B ) (iii) a n d t h e
90 STAT. 1698 PUBLIC LAW 94-455—OCT. 4, 1976 matter following such paragraph and inserting in lieu thereof the following: Regulations. "(iii) foreign corporations, and " (iv) corporations with respect to which an assessment was made under section 6851(a) (relating to termina- tion assessments) with respect to the taxable year, shall be made at such place as the Secretary may by regulations designate." 26 use 6211. (4) Section 6211(b) (1) (relating to rules for determining defi- ciencies) is amended by striking out "and" after "31," and by inserting before the period at the end thereof the following: ", and without regard to any credits resulting from the collection of amounts assessed under section 6851 (relating to termination assessments)". 26 use 6212. (5) Section 6212(c) (relating to restrictions on further defi- ciency letters) is amended by inserting after "errors)," the follow- ing: "in section 6851 (relating to termination assessments),". 26 use 6213. (6) Section 6213(a) (relating to time for filing petition with the Tax Court) is amended by inserting "section 6851 or" before "section 6861". 26 use 6863. (7) Section 6863(a) (relating to bond to stay collection) is amended— (A) by striking out "6861" and inserting in lieu thereof "6851, 6861," j (B) by striking out "a jeopardy assessment" in the first sentence thereof and inserting in lieu thereof "an assess- ment"; and (C) by striking out "the jeopardy assessment" each place it appears therein and inserting in lieu thereof "such assessment". (8) Section 6863(b) (3) (A) (relating to stay of sale of seized property) is amended to read as follows: "(A) GENERAL RULE.—^Where, notwithstanding the provi- "^' sions of section 6213(a), an assessment has been made under fij,- section 6851 or 6861, the property seized for collection of the tax shall not be sold— "(i) before the expiration of the periods described in subsection (c)(1) (A) and (B), "(ii) before the issuance of the notice of deficiency described in section 6851 (b) or 6861 (b), and the expira- tion of the period provided in section 6213(a) for filing a petition with the Tax Court, and " (iii) if a petition is filed with the Tax Court (whether before or after the making of such assessment), before the expiration of the period during which the assessment of the deficiency would be prohibited if neither sections 6851(a) nor 6861(a) were applicable. Clauses (ii) and (iii) shall not apply in the case of a termina- tion assessment under section 6851 if the taxpayer does not file a return for the taxable year by the due date (determined ^ with regard to any extensions)." (9) Section 6863 (relating to stay of collection of jeopardy assessments) is amended by adding at the end thereof the follow- ing new subsection: "(c) STAY OF SALE or SEIZED PROPERTY PENDING DISTRICT COURT Ante, p. 1695. DETERMINATION UNDER SECTION 7429.—
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1699 " ( 1 ) GENERAL RULE.—Where a jeopardy assessment has been made under section 6 8 6 2 ( a ) , t h e property seized for the collection of t h e t a x shall not be sold— " ( A ) if a civil action is commenced in accordance with sec- tion 7429(b), on or before the day on which the district court Ante, p. 1695. judgment in such action becomes j&nal, or " ( B ) if s u b p a r a g r a p h ( A ) does not apply, before the day after the expiration of the period provided in section 7429(a) for requesting an administrative review, and if such review is requested, before the day after the expiration of the period provided in section 7 4 2 9 ( b ) , for commencing an action in the district court. " ( 2 ) EXCEPTIONS.—With respect to any property described in p a r a g r a p h ( 1 ) , the exceptions provided by subsection (b) (3) ( B ) shall a p p l y . " (10) Section 7 1 0 3 ( a ) ( 4 ) (relating to a cross reference) is 26 USC 7103. repealed. (11) Section 7421(a) (relating to prohibition of suits to 26 USC 7421. restrain assessment or collection of taxes) is amended by striking out " a n d 7426 (a) and ( b ) ( 1 ) " and inserting in lieu thereof "7426 (a) and ( b ) ( 1 ) , and 7429(b)". (12) T h e table of sections for p a r t I of subchapter A of chapter 70 is amended to read as follows: "Sec. 6851. Termination assessments of income tax." (13) T h e table of sections for subchapter B of chapter 76 is amended by inserting after the item relating to section 7428 t h e following: "Sec. 7429. Review of jeopardy assessment procedures." ( d ) EFFECTIVE D A T E . — T h e amendments made by this section apply 26 USC 6851 w i t h respect to action taken under section 6851, 6861, or 6862 of t h e note. I n t e r n a l Revenue Code of 1954 where the notice and demand takes place after December 31,1976. SEC. 1205. ADMINISTRATIVE SUMMONS. (a) R E Q U I R E M E N T T H A T NOTICE B E SERVED ON PERSON W H O S E BOOKS, E T C . , A R E B E I N G S U M M O N E D . — S u b c h a p t e r A of c h a p t e r 78 (relating to examination and inspection) is amended by redesignating section 7609 as section 7611 and by inserting after section 7608 the following new sections: "SEC. 7609. SPECIAL PROCEDURES FOR THIRD-PARTY SUMMONSES. 26 USC 7609. "(a) NOTICE.— " (1) I N GENERAL.—If— " ( A ) any summons described in subsection (c) is served on any person who is a t h i r d - p a r t y recordkeeper, and " ( B ) the summons requires the production of any portion of records made or kept of the business transactions or affairs of any person (other t h a n the person summoned) who is identified in the description of the records contained in the summons, then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later t h a n the 14th day before the day fixed in the sum- mons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain directions for staying compli- ance with the summons under subsection (b) ( 2 ) .
9 0 STAT. 1700 PUBLIC LAW 94-455—OCT. 4, 1976 " ( 2 ) SurnciENCY OF NOTICE.—Such notice shall be sufficient if, on o r before such t h i r d day, such notice is served in t h e m a n n e r 26 u s e 7603. provided in section 7603 (relating to service of summons) upon the person entitled to notice, or is mailed by certified or registered mail to t h e last known address of such person, or, in the absence of a last known address, is left with the person summoned. I f such notice is mailed, it shall be sufficient if mailed to t h e last known address of t h e person entitled to notice or, in the case of notice to the Secretary under section 6903 of the existence of a fiduciary relationship, to the last known address of t h e fiduciary of such person, even if such person o r fiduciary is then deceased, u n d e r a legal disability, or no longer i n existence. " (3) THIRD-PAKTY RECORDKEEPER DEFINED.—For purposes of this subsection, t h e term ' t h i r d - p a r t y recordkeeper' means— " ( A ) any m u t u a l savings bank, cooperative bank, domestic ' '• building a n d loan association, or other savings institution chartered a n d supervised as a savings a n d loan or similar •" •^'- •• association under Federal or State law, any bank (as defined in section 581), or any credit union (within the meaning of section 501(c) (14) ( A ) ) ; " ( B ) any consumer reporting agency (as defined under sec- •' : tion 603(d) of t h e F a i r Credit R e p o r t i n g A c t (15 U.S.C. 1681a(f))); " ( C ) any person extending credit t h r o u g h the use of credit . cards or similar devices; V " ( D ) any broker (as defined in section 3 ( a ) ( 4 ) of the . Securities E x c h a n g e A c t of 1934 (15 U.S.C. 78c(a) ( 4 ) ) ) ; " ( E ) any a t t o r n e y ; a n d " ( F ) any accountant. ' " ( 4 ) E X C E P T I O N S . — P a r a g r a p h (1) shall not apply to any summons— " ( A ) served on t h e person with respect to whose liability the summons is issued, or any officer or employee of such person, " ( B ) to determine whether or not records of t h e business transactions or affairs of an identified person have been made or kept, or " ( C ) described in subsection ( f ) . " ( 5 ) NATURE OF SUMMONS.—^Any summons to which this sub- t%/ ;i section applies ( a n d any summons in aid of collection described in subsection ( c ) ( 2 ) ( B ) ) shall identify t h e t a x p a y e r to whom t h e summons relates o r the other person to whom t h e records p e r t a i n and shall provide such other information as will enable the person summoned to locate the records required under the summons. "(b) R I G H T T O I N T E R V E N E ; R I G H T T o STAY C O M P L I A N C E . — " (1) INTERVENTION.—Notwithstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection ( a ) shall have t h e r i g h t to intervene in any proceeding with respect to the enforcement of such summons under section 7604. " ( 2 ) R I G H T TO STAY COMPLIANCE.—Notwithstanding any other law or rule of law, any person who is entitled to notice of a sum- mons under subsection ( a ) shall have t h e right to stay compliance w i t h the summons if, not later t h a n the 14th d a y after t h e day such notice is given in t h e m a n n e r provided i n subsection ( a ) (2)-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1701 " ( A ) notice in w r i t i n g is given to t h e person summoned not to comply with the summons, and " ( B ) a copy of such notice not to comply with t h e summons is mailed by registered o r certified mail t o such person a n d to such office as t h e Secretary m a y direct i n t h e notice re- ferred to in subsection ( a ) ( 1 ) . " (c) S U M M O N S TO W H I C H SECTION A P P L I E S . — " ( 1 ) I N GENERAL.—Except as provided i n p a r a g r a p h ( 2 ) , a summons is described in this subsection if it is issued under para- g r a p h (2) of section 7602 or under section 6420(e) ( 2 ) , 6421(f) 26 USC 7602, (2), 6424(d) ( 2 ) , or 6427(e) (2) a n d requires t h e production of 6420, 6421, records. ^ 2 ^ ' ^•^^• " (2) EXCEPTIONS.—A summons shall not be treated as described in this subsection if— * " ( A ) it is solely t o determine t h e identity of a n y person h a v i n g a numbered account (or similar arrangement) with a bank or other institution described in subsection (a) (3) ( A ) , or " ( B ) it is i n aid of the collection of— " ( i ) t h e liability of a n y person against whom an assessment has been made or judgment rendered, or " (ii) t h e liability a t law or i n equity of any transferee or fiduciary of any person referred t o in clause ( i ) . " ( 3 ) RECORDS; CERTAIN RELATED TESTIMONY.—For purposes of this section— " ( A ) t h e term 'records' includes books, papers, or other "Records." data, and " ( B ) a summons requiring the giving of testimony relating to records shall be treated as a summons requiring t h e pro- duction of such records. "(d) RESTRICTION ON E X A M I N A T I O N OF RECORDS.—No examination of any records required to be produced under a summons as t o which notice is required under subsection ( a ) may be made— " (1) before the expiration of the 14-day period allowed for the notice not to comply under subsection (b) ( 2 ) , or " ( 2 ) when t h e requirements of subsection ( b ) ( 2 ) have been met, except in accordance with an order issued by a court of com- petent jurisdiction authorizing examination of such records or with the consent of the person staying compliance. " (e) SUSPENSION o r STATUTE o r L I M I T A T I O N S . — I f a n y person t a k e s any action as provided in subsection ( b ) and such person is the person with respect to whose liability the summons is issued (or is the agent, nominee, or other person acting under t h e direction or control of such p e r s o n ) , then the running of any period of limitations under sec- tion 6501 (relating to t h e assessment a n d collection of t a x ) or under section 6531 (relating to criminal prosecutions) with respect t o such person shall be suspended for t h e period d u r i n g which a proceeding, and appeals therein, with respect to t h e enforcement of such sum- mons is pending. "(f) ADDITIONAL REQUIREMENT I N T H E CASE OF A J O H N D O E SUMMONS.—Any summons described i n subsection (c) which does not identify t h e person with respect to whose liability t h e summons is issued m a y be served only after a court proceeding i n which t h e Secre- t a r y establishes that— " ( 1 ) the summons relates t o t h e investigation of a particular person or ascertainable group or class of persons.
90 STAT. 1702 PUBLIC LAW 94-455—OCT. 4, 1976 " ( 2 ) there is a reasonable basis for believing t h a t such person or group or class of persons may fail or may have failed to comply witn any provision of any internal revenue law, a n d " ( 3 ) t h e information sought to be obtained from the examina- tion of the records (and the identity of the person or persons with respect to whose liability t h e summons is issued) is not readily available from other sources. " (g) SPECIAL EXCEPTION FOR CERTAIN S U M M O N S E S . — I n t h e case of any summons described i n subsection ( c ) , the provisions of subsections ;v, ( a ) (1) a n d ( b ) shall not apply if, upon petition by the Secretary, the court determines, on t h e basis of t h e facts a n d circumstances alleged, t h a t there is reasonable cause to believe the giving of notice may lead to attempts t o conceal, destroy, or alter records relevant to the exami- nation, t o prevent t h e communication of information from other per- sons through intimidation, bribery, or collusion, o r t o flee to avoid* prosecution, testifying, or production of records. "(h) JURISDICTION o r DISTRICT C O U R T . — " ( 1 ) T h e United States district court for t h e district within which t h e person t o be summoned resides or is found shall have :.:, jurisdiction t o hear a n d determine proceedings b r o u g h t under subsections (f) or ( g ) . T h e determinations required t o be made under subsections (f) a n d ( g ) shall be made ex parte and shall be made solely upon the petition a n d supporting affidavits. A n order denying t h e petition shall be deemed a final order which may be appealed. ,5, . , " ( 2 ) Except as to cases t h e court considers of greater impor- tance, a proceeding brought for the enforcement of any summons, or a proceeding under this section, a n d appeals, take precedence on the docket over all cases and shall be assigned for hearing and decided a t the earliest practicable date. 26 u s e 7610. "SEC. 7610. FEES AND COSTS FOR WITNESSES. Regulations. «^a) j j ^ GENERAL.—The Secretary shall by regulations establish the rates and conditions under which payment may be made of— " ( 1 ) fees and mileage t o persons who are summoned t o appear before the Secretary, a n d " ( 2 ) reimbursement for such costs t h a t a r e reasonably neces- sary which have been directly incurred in searching for, reproduc- ing, or t r a n s p o r t i n g books, papers, records, or other data required to be produced by summons. " ( b ) EXCEPTIONS.—No payment m a y be made under p a r a g r a p h (2) of subsection ( a ) if— " ( 1 ) t h e person with respect to whose liability t h e summons is issued has a proprietary interest in t h e books, papers, records or other data required t o be produced, o r " ( 2 ) the person summoned is t h e person with respect to whose liability t h e summons is issued or a n officer, employee, agent, accountant, or attorney of such person who, a t t h e time the sum- mons is served, is acting as such. " ( c ) S U M M O N S TO W H I C H SECTION A P P L I E S . — T h i s section applies with respect t o a n y summons authorized under section 6 4 2 0 ( e ) ( 2 ) , 6421(f) ( 2 ) , 6424(d) ( 2 ) , 6427(e) ( 2 ) , o r 7602." (b) CLERICAL AMENDMENT.—^The table of sections for such subchap- ter A is amended by striking out the item relating to section 7609 and inserting i n lieu thereof t h e following:
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1703 "Sec. 7609. Special procedures for third-party summonses. "Sec. 7610. Fees and costs for witnesses. "Sec. 7611. Cross references." (c) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 7609 a p p l y with respect t o a n y summons issued after December 31, 1976. note. SEC. 1206. ASSESSMENTS IN CASE OF MATHEMATICAL OR CLERICAL ERRORS. (a) I N GENERAL.—Section 6213(b) (relating t o exceptions to 26 USC 6213. restrictions on assessment i n certain cases) is amended— (1) by redesignating p a r a g r a p h s (2) a n d (3) as p a r a g r a p h s (3) a n d ( 4 ) , respectively, a n d (2) by striking out p a r a g r a p h (1) and inserting in lieu thereof the following new p a r a g r a p h s : " ( 1 ) ASSESSMENTS ARISING OUT o r MATHEMATICAL OR CLERICAL ERRORS.—If the taxpayer is notified that, on account of a mathe- matical or clerical error appearing on the return, an amount of t a x in excess of t h a t shown on the r e t u r n is due, and t h a t an assessment of the tax has been or will be made on the basis of what would have been the correct amount of tax but for the mathematical or clerical error, such notice shall not be considered as a notice of deficiency for t h e purposes of subsection ( a ) (prohibiting assessment a n d collection until notice of t h e deficiency has been m a i l e d ) , or of section 6212(c) (1) (restricting further deficiency letters), or of section 6512(a) (prohibiting credits or refunds after petition t o the T a x C o u r t ) , a n d the taxpayer shall have no right to file a petition with t h e T a x Court based on such notice, nor shall such assessment o r collection be prohibited by the provisions of sub- section ( a ) of this section. E a c h notice under this p a r a g r a p h shall set forth t h e error alleged a n d an explanation thereof. " ( 2 ) ABATEMENT OF ASSESSMENT OF MATHEMATICAL OR CLERICAL ERRORS. " ( A ) REQUEST FOR ABATEMENT.—Notwithstanding section 6404(b), a taxpa;^er m a y file with the Secretary within 60 days after notice is sent under p a r a g r a p h (1) a request for an abatement of any assessment specified in such notice, a n d upon receipt of such request, t h e Secretary shall abate t h e assessment. A n y reassessment of the t a x with respect to which an abatement is made under this s u b p a r a g r a p h shall be sub- ject to the deficiency procedures prescribed by this subchapter. " ( B ) S T A Y OF COLLECTION.—In t h e case of a n y assessment referred to in p a r a g r a p h ( 1 ) , notwithstanding p a r a g r a p h ( 1 ) , no levy or proceeding in court for the collection of such assessment shall be made, begun, or prosecuted d u r i n g t h e period in which such assessment m a y be abated under this paragraph." ( b ) D E F I N I T I O N S RELATING TO MATHEMATICAL OR CLERICAL ERRORS.— Section 6213 is amended by redesignating subsection (f) as subsection 26 USC 6213. ( g ) , a n d by inserting immediately after subsection (e) t h e following new subsection: " ( f ) D E F I N I T I O N S . — F o r purposes of this section— " ( 1 ) R E T U R N . — T h e term 'return' includes a n y return, state- ment, schedule, or list, and any amendment or supplement thereto, filed with respect t o any t a x imposed by subtitle A or B , or chap- ^6 USC 1,2001. t e r 42 o r 43. 26 USC 4940, " ( 2 ) MATHEMATICAL OR CLERICAL ERROR.—The t e r m ' m a t h e m a t i - 4971. cal o r clerical error' means—
90 STAT. 1704 PUBLIC LAW 94-455—OCT. 4, 1976 " ( A ) an error in addition, subtraction, multiplication, or division shown on any return, " ( B ) a n incorrect use of any table provided by t h e I n t e r n a l ^''-' Revenue Service with respect to any return if such incorrect use is a p p a r e n t from t h e existence of other information on the return, " ( C ) an entry on a return of an item which is inconsistent ; with another entry of the same or another item on such return, " ( D ) an omission of information which is required t o be supplied on the return t o substantiate an entry on the return, and " ( E ) an entry on a r e t u r n of a deduction or credit i n a n amount which exceeds a statutory limit imposed by subtitle 26 u s e 1,2001, A or B , or chapter 42 or 43, if such limit is expressed— 4940, 4971. " ( i ) as a specified monetary amount, or " ( i i ) as a percentage, ratio, or fraction, and if t h e items entering into t h e application of such limit appear on such return." (c) T E C H N I C A L AND CONFORMING A M E N D M E N T S . — 26 u s e 6213. (1) Section 6213(b) (3) (relating to assessments arising out of tentative carryback adjustments), as redesignated by subsection ( a ) , is amended— ( A ) by striking out "he may assess" a n d inserting in lieu thereof " h e m a y assess without regard t o t h e provisions of paragraph (2)", and ( B ) by striking out "mathematical e r r o r " a n d inserting in lieu thereof "mathematical or clerical error". 26 u s e 6201. (2) Section 6 2 0 1 ( a ) ( 3 ) (relating t o assessments r e g a r d i n g erroneous income t a x prepayment credits) a n d section 6201(a) (4) (relating t o assessments regarding erroneous credit under section 39 or 43) a r e each amended— ( A ) by striking out "mathematical e r r o r " a n d inserting in lieu thereof "mathematical or clerical error", a n d ( B ) b y inserting immediately before the period a t the end thereof the following: ", except t h a t the provisions of section 6213(b) (2) (relating t o abatement of mathematical or cleri- cal error assessments) shall n o t apply with regard t o a n y assessment under this p a r a g r a p h " . 26 u s e 6212. (3) Section 6212(c)(1) (relating t o deficiency letters) i s amended by striking out " ( r e l a t i n g to mathematical e r r o r s ) " and inserting i n lieu thereof " ( r e l a t i n g to mathematical or clerical errors)". 26 u s e 6213 ( d ) EFFECTIVE D A T E . — T h e amendments made by this section shall note. a p p l y with respect t o returns (within t h e meaning of section 6213 (f) (1) of the I n t e r n a l Revenue Code of 1954) filed after December 31, 1976. > U SEC. 1207. WITHHOLDING. ( a ) W I T H H O L D I N G STATE AND DISTRICT I N C O M E T A X E S F R O M C O M - PENSATION OF MEMBERS OF A R M E D FORCES W H O A R E RESIDENTS OF T H E STATE OR DISTRICT OF COLUMBIA.— (1) W I T H H O L D I N G OF STATE INCOME TAXES.—The last sentence of section 5517(a) of title 5, U n i t e d States Code, is amended t o read as follows: " I n t h e case of p a y for service as a member of t h e armed forces, t h e preceding sentence shall be applied by substituting 'who are residents of the State with which the agree-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1705 ment is made' for 'whose regular place of F e d e r a l employment is within the State with which the agreement is made'." (2) W I T H H O L D I N G OF DISTRICT INCOME TAXES.—Subsection (a) of section 5516 of title 5, U n i t e d States Code, is amended— ( A ) by striking out in the t h i r d sentence " p a y for service as a member of t h e armed forces, or t o " ; and ( B ) by a d d i n g after t h e t h i r d sentence the following new sentence: " I n the case of p a y for service as a member of t h e armed forces, the second sentence of this subsection shall be applied by substituting 'who are residents of the District of Columbia for 'whose regular place of employment is within the District of Columbia'." (b) W I T H H O L D I N G STATE AND C I T Y I N C O M E T A X E S F R O M T H E C O M - PENSATION or MEMBERS OF T H E NATIONAL GUARD OR T H E READY R E - SERVE.—Section 5517 of title 5, U n i t e d States Code, is amended by a d d i n g at t h e end thereof the following new subsection: " ( d ) F o r t h e purpose of this section and sections 5516 and 5520, t h e Definitions, terms 'serve as a member of the armed forces' and 'service as a member 5 USC 5516, of t h e A r m e d Forces' do not include— 5520. " ( 1 ) participation in exercises or the performance of d u t y under section 502 of title 32, United States Code, by a member of the National G u a r d ; and " ( 2 ) participation in scheduled drills or t r a i n i n g periods, or service on active duty for t r a i n i n g , under section 270(a) of title 10, United States Code, by a member of the Ready Reserve." (c) VOLUNTARY W I T H H O L D I N G OF STATE I N C O M E TAXES F R O M T H E COMPENSATION OF FEDERAL E M P L O Y E E S . — P a r a g r a p h s (1) and (2) of section 5517(a) of title 5, U n i t e d States Code, are amended to read as follows: " ( 1 ) provides for the collection of a tax either by imposing on employers generally the duty of withholding sums from the p a y of employees and m a k i n g returns of t h e sums to the State, or by r a n t i n g to employers generally the authority to withhold sums from t h e p a y of employees if a n y employee voluntarily elects to have such sums withheld; and " ( 2 ) imposes the d u t y or g r a n t s the authority to withhold generally with respect to the p a y of employees who are residents of the S t a t e ; " . ( d ) W I T H H O L D I N G T A X ON CERTAIN GAMBLING W I N N I N G S . — S e c t i o n 3402 (relating to income t a x collected a t source) is amended by a d d i n g 26 USC 3402. a t the end thereof the following new subsection: " ( q ) EXTENSION or W I T H H O L D I N G TO C E R T A I N GAMBLING WIN- NINGS.— " ( 1 ) GENERAL RULE.—Every person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, m a k i n g any payment of winnings which are subject to withholding shall deduct and with- hold from such payment a t a x in an amount equal to 20 percent of such payment. "(2) E X E M P T I O N WHERE TAX OTHERWISE W I T H H E L D . — I n the case of any payment of winnings which are subject to withholding made to a nonresident alien individual or a foreign corporation, the t a x imposed under p a r a g r a p h (1) shall not apply to any such payment subject to tax under section 1441 (a) (relating to with- holding on nonresident aliens) or tax under section 1442(a) (relating to withholding on foreign corporations).
90 STAT. 1706 PUBLIC LAW 94-455—OCT. 4 , 1 9 7 6 Definition. "(3) W I N N I N G S W H I C H ARE SUBJECT TO W I T H H O L D I N G . — F o r purposes of this subsection, t h e term 'winnings which are subject to withholding' means proceeds from a wager determined in accordance with the following: " ( A ) I N GENERAL.—Except as provided i n s u b p a r a g r a p h s ( B ) and ( C ) , proceeds of more t h a n $1,000 from a wagering transaction, if t h e amount of such proceeds is a t least 300 times as large as the amount wagered. " ( B ) STATE-CONDUCTED LOTTERIES.—Proceeds of more t h a n $5,000 from a wager placed in a lottery conducted by a n agency of a S t a t e acting under authority of S t a t e law, b u t only if such wager is j)laced with the State agency conducting such lottery, or with its authorized employees or agents. "(C) SWEEPSTAKES, WAGERING POOLS, AND OTHER LOTTER- IES.—Proceeds of more t h a n $1,000 from a wager placed in a sweepstakes, wagering pool, or lottery (other t h a n a wager described in s u b p a r a g r a p h ( B ) ) . "(4) R U L E S FOR DETERMINING PROCEEDS FROM A WAGER.—For purposes of this subsection— " ( A ) proceeds from a wager shall be determined by reducing the amount received by t h e amount of the wager, and " ( B ) proceeds which are not money shall be taken into account a t their fair market value. "(5) E X E M P T I O N FOR BINGO, KENO, AND SLOT M A C H I N E S . — T h e tax imposed under p a r a g r a p h (1) shall n o t apply to winnings from a slot machine, keno, and bingo. " ( 6 ) STATEMENT BY RECIPIENT.—Every person who is to receive a payment of winnings which are subject t o withholding shall furnish the person m a k i n g such payment a statement, made under the penalties of perjury, containing t h e name, address, a n d tax- payer identification number of t h e person receiving t h e payment and of each person entitled t o a n y portion of such payment. "(7) COORDINATION W I T H OTHER SECTIONS.—For purposes of 26 u s e 3403, sections 3403 a n d 3404 a n d for purposes of so much of subtitle 3404. F (except section 7205) as relates t o this chapter, payments t o 26 u s e 6001, a n y person of winnings which a r e subject t o withholding shall 7205. be treated as if they were wages paid by an employer t o a n employee." (e) W I T H H O L D I N G OF FEDERAL TAXES ON CERTAIN INDIVIDUALS ENGAGED I N F I S H I N G . — (1) I N GENERAL.— 26 u s e 3121. ( A ) Section 3121(b) (defining employment) is amended by striking out " o r " at t h e end of p a r a g r a p h (18), by strik- ing out the period a t the end of p a r a g r a p h (19) and inserting in lieu thereof " ; or", and by adding after p a r a g r a p h (19) the following new p a r a g r a p h : "(20) service performed by an individual on a boat engaged in catching fish o r other forms of aquatic animal life under an arrangement with t h e owner or operator of such boat p u r s u a n t to which— " ( A ) such individual does not receive any cash remunera- tion (other t h a n as provided in s u b p a r a g r a p h ( B ) ) , " ( B ) such individual receives a share of t h e boat's ( o r t h e boats' in t h e case of a fishing operation involving more t h a n one boat) catch of fish or other forms of aquatic animal
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1707 life or a share of the proceeds from the sale of such catch, and "(C) the amount of such individual's share depends on the amount of the boat's (or the boats' in the case of a fishing operation involving more than one boat) catch of fish or other forms of aquatic animal life, but only if the operating crew of such boat (or each boat from which the individual receives a share in the case of a fishing opera- tion involving more than one boat) is normally made up of fewer than 10 individuals." (B) Section 1402(c)(2) (defining trade or business) is 26 USC 1402. amended by striking out "and" at the end of subparagraph (D), by striking out the semicolon at the end of subpara- graph (E) and inserting in lieu thereof ", and", and by adding after subparagraph (E) the following new subpara- graph : " ( F ) service described in section 3121(b) (20);". Ante, p. 1706. (C) Section 3401(a) (defining wages for purposes of 26 USC 3401. withholding) is amended by striking out the period at the end of paragraph (16) and inserting in lieu thereof "; or", and by adding after paragraph (16) the following new paragraph: " (17) for service described in section 3121 (b) (20)." ( 2 ) C O N F O R M I N G AMENDMENTS.— (A) Section 210(a) of the Social Security Act is amended 42 USC 410. by striking out "or" at the end of paragraph (18), by striking out the period at the end of paragraph (19) and inserting in lieu thereof "; or," and by adding after paragraph (19) the following new paragraph: "(20) Service performed by an individual on a boat engaged in catching fish or other forms of aquatic animal life under an arrangement with the owner or operator of such boat pursuant to which— "(A) such individual does not receive any cash remunera- tion (other than as provided in subparagraph ( B ) ) , "(B) such individual receives a share of the boat's (or the boats' in the case of a fishing operation involving more than ,, one boat) catch of fish or other forms of aquatic animal life or a share of the proceeds from the sale of such catch, and "(C) the amount of such individual's share depends on the amount of the boat's (or boats' in the case of a fishing operation involving more than one boat) catch of fish or other forms of aquatic animal life, but only if the operating crew of such boat (or each boat from which the individual receives a share in the case of a fishing opera- tion involving more than one boat) is normally made up of fewer than 10 individuals." (B) Section 211(c) (2) of such Act is amended by striking 42 USC 411. out "and" at the end of subparagraph (D), by striking out the semicolon at the end of subparagraph ( E ) , and inserting in lieu thereof ", and" and by adding after subparagraph (E) the following new paragraph: " ( F ) service described in section 210(a) (20);". ( 3 ) R E P O R T I N G REQUIREMENT.— (A) Subpart B of part I I I of subchapter A of chapter 61 (relating to information concerning transactions with other
90 STAT. 1708 PUBLIC LAW 94-455—OCT. 4 , 1976 persons) is amended by adding a t the end thereof the follow- ing new section: 26 u s e 6050A. "SEC. 6050A. REPORTING REQUIREMENTS OF CERTAIN FISHING BOAT OPERATORS. " ( a ) REPORTS.—The operator of a boat on which one o r more indi- viduals, during a calendar year, perform services described in section Ante, p. 1706. f^l21(b) (20) shall submit to the Secretary ( a t such time, a n d in such manner a n d form, as the Secretary shall by regulations prescribe) information respecting— r,.,f i , " ( 1 ) t h e identity of each individual performing such services; " ( 2 ) the percentage of each such individual's share of t h e catches of fish or other forms of aquatic animal life, and the per- centage of the operator's share of such catches; " ( 3 ) if such individual receives his share in kind, the type a n d weight of such share, together with such other information as the Secretary m a y prescribe by regulations reasonably necessary to determine the value of such share; and " (4) if such individual receives a share of the proceeds of such catches, the amount so received. " ( b ) W R I T T E N STATEMENT.—Every pereon making a return under subsection (a) shall furnish to each person whose name is set forth in such return a written statement showing the information relating to such person contained in such return. T h e written statement required under t h e preceding sentence shall be furnished to t h e person on or before J a n u a r y 31 of the year following t h e calendar year for which the return under subsection (a) was made." 26 u s e 6652. ( B ) Section 6652(b) (relating to failure to file certain information returns) is amended by inserting after "with- h e l d ) , " t h e following: " i n the case of each failure to make a Supra. return required by section 6050A(a) (relating to reporting requirements of certain fishing boat operators),". (C) Section 6652(b) is further amended by inserting after " t i p s ) , " t h e following: " o r section 6050A(b) (relating to statements furnished by certain fishing boat operators),", (f) EFFECTIVE D A T E S . — 5 u s e 5516 (1) SUBSECTION (a).—The amendments made by subsection ( a ) note. shall apply to wages withheld after the 120-day period following any request for a n agreement after t h e date of t h e enactment of this Act. 5 u s e 5517 (2) SUBSECTIONS (b) AND (C).—The a m e n d m e n t s m a d e by sub- note, sections (b) and (c) shall apply to wages withheld after the 120- day period following the date of the enactment of this Act. 26 u s e 3402 (3) SUBSECTION (d).—The amendments made by subsec+ion ( d ) note. shall apply to payments of winnings made after tlie 90th day after the date of the enactment of this Act. 26 u s e 3121 (4) SUBSECTION (e) . — note. ( A ) T h e amendments made by p a r a g r a p h s (1) ( A ) a n d (2) ( A ) of subsection (e) shall apply to services performed after December 31, 1971. T h e amendments made by para- g r a p h s (1) ( B ) , (1) ( C ) , and (2 U B ) of such subsection shall apply to taxable years ending after December 31, 1971. T h e amendments made by p a r a g r a p h (3) of such subsection shall apply to calendar years beginning after t h e date of tlie enactment of this Act. ( B ) Notwithstanding subparagraph ( A ) , if t h e owner or operator of any boat treated a share of the boat's catch of fish
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1709 or other aquatic animal life (or a share of t h e proceeds there- from) received by an individual after December 31, 1971, and before t h e date of t h e enactment of this A c t for services performed by such individual after December 31, 1971, on such boat as being subject to the t a x under chapter 21 of the I n t e r n a l Revenue Code of 1954, then t h e amendments made 26 USC 3101. by p a r a g r a p h s (1) ( A ) a n d ( B ) and (2) of subsection (e) shall not apply with respect to such services performed by such individual ( a n d the share of t h e catch, o r proceeds therefrom, received by him for such services). SEC. 1208. STATE-CONDUCTED LOTTERIES. (a) E X E M P T I O N F R O M WAGERING T A X . — P a r a g r a p h (3) of section 4402 (relating t o State-conducted sweepstakes) is amended t o read as 26 USC 4402. follows: " ( 3 ) STAI^-CONDUCTED LOTTERIES, ETC.—On any wager placed in a sweepstakes, wagering pool, or lottery which is conducted by an agency of a State acting under authority of State law, b u t only if such wager is placed with the S t a t e agency conducting such sweepstakes, wagering pool, or lottery, or with its authorized employees or agents." (b) EXEMPTION FROM OCCUPATIONAL T A X ON COIN-OPERATED DEVICES.—Section 4462(b) (relating to exclusions from definition of 26 USC 4462. coin-operated g a m i n g devices) is amended— (1) by striking out " o r " a t t h e end of p a r a g r a p h ( 1 ) , (2) by striking out the period at the end of p a r a g r a p h (2) and inserting in lieu thereof " ; or", and (3) by a d d i n g a t the end thereof t h e following new p a r a g r a p h : " ( 3 ) a vending machine which— " ( A ) dispenses tickets on a sweepstakes, wagering pool, or lottery which is conducted by an agency of a State acting under authority of State law, and " ( B ) is maintained by t h e State agency conducting such sweepstakes, wagering pool, or lottery, or by its authorized employees or agents." (c) EFFECTIVE D A T E S . — (1) T h e amendment made by subsection ( a ) shall apply with 26 USC 4402 respect to wagers placed after M a r c h 10, 1964. note. (2) T h e amendments made by subsection ( b ) shall a p p l y w i t h 26 USC 4462 respect to periods after March 10, 1964. note- SEC. 1209. MINIMUM EXEMPTION FROM LEVY FOR WAGES, SALARY, AND OTHER INCOME. (a) GENERAL RULE.—Subsection ( a ) of section 6334 (relating to 26 USC 6334. p r o p e r t y exempt from levy) is amended by a d d i n g at the end thereof t h e following new p a r a g r a p h : "(9) MINIMUM EXEMPTION FOR WAGES, SALARY, AND OTHER INCOME —Any amoimt payable to or received by an individual as wages or salary for personal services, o r as income derived from other sources, d u r i n g any period, to t h e extent t h a t t h e total of such amounts payable to or received by h i m d u r i n g such period does not exceed t h e applicable exempt amount determined under subsection ( d ) . " (b) DETERMINATION o r E X E M P T AMOUNT.—Section 6334 is amended by a d d i n g at the end thereof the following new subsection: "(d) E X E M P T A M O U N T OF W A G E S , SALARY, OR O T H E R I N C O M E . — " ( 1 ) INDIVIDUALS ON WEEKLY BASIS.—In t h e case of a n individ- ual who is paid o r receives all of his wages, salary, a n d other in- 89-194 O—78—pt. 2 16
90 STAT. 1710 PUBLIC LAW 94-455—OCT. 4, 1976 come on a weekly basis, the amount of the wages, salary, and other income payable t o or received by h i m d u r i n g a n y week which is exempt from levy under subsection ( a ) (9) shall be— " ( A ) $50, plus " ( B ) $15 for each individual who is specified in a written •' statement which is submitted to the person on whom notice of levy is served and which is verified in such manner as t h e Sec- retary shall prescribe b y regulations and— " (i) over half of whose support for t h e payroll period was received from the taxpayer, " (ii) who is t h e spouse of t h e taxpayer, or who bears a relationship t o t h e t a x p a y e r specified in p a r a g r a p h s (1) t h r o u g h (9) of section 152(a) (relating to definition of dependents), and " ( i i i ) who is not a minor child of t h e taxpayer with respect to whom amounts are exempt from levy under subsection ( a ) (8) for t h e payroll period. F o r purposes of s u b p a r a g r a p h ( B ) (ii) of the preceding sentence, 'payroll period' shall be substituted for 'taxable year' each place it appears in p a r a g r a p h (9) of section 152(a). Regulations. " ( 2 ) iNDrVIDUALS ON BASIS OTHER THAN WEEKLY.—In t h e Case of any individual n o t described in paratrraph ( 1 ) , the ainoinit o^" ' h e wages, salary, and other income payable t o or received by him dur- ing any applicable p a y period or other fiscal period (as determined under regulations prescribed by t h e Secretary) which is exempt from levy under subsection (a) (9) shall be an amount (deter- mined under such regulations) which as nearly as possible will result in the same total exemption from levy for such individual over a period of time as he would have under p a r a g r a p h (1) if ( d u r i n g such period of time) he were paid or received such wages, salary, and other income on a regular weekly basis." (c) CONFORMING A M E N D M E N T . — T h e p a r a g r a p h h e a d i n g for p a r a - g r a p h (8) of section 6334(a) is amended t o read as follows: " ( 8 ) J U D G M E N T S FOR SUPPORT OF MINOR CHILDREN.—". ( d ) LEVY ON WAGES, E T C . , T o B E C O N T I N U I N G . — 26 u s e 6331. (1) Subsection ( d ) of section 6331 (relating to levy on salaries and wages) is amended b y a d d i n g a t the end thereof t h e following new p a r a g r a p h : "(3) C O N T I N U I N G LEVY ON SALARY AND WAGES.— " ( A ) E F F E C T OF LEVY.—The effect of a levy on salary or wages payable t o or received by a taxpayer shall be con- tinuous from the date such levy is first made until the lia- *t(,v5 '•: bility out of which such levy arose is satisfied or becomes unenforceable by reason of lapse of time. "(B) REI^EASE AND NOTICE o r REUIASE.—With respect t o a levy described in subparagraph ( A ) , t h e Secretary shall promptly release the lev^y when the liability out of which such levy arose is satisfied or becomes unenforceable by reason of lapse of time, and shall promptly notify t h e person upon whom such levy was made t h a t such levy has been released." (2) T h e second sentence of section 6331 (b) (relating t o seizure and sale of property) is amended by striking out " A levy" a n d inserting in lieu thereof "Except as otherwise provided in sub- section ( d ) ( 3 ) , a levy". 26 u s e 6332. (3) T h e first sentence of section 6332(c) (1) (relating t o enforcement of levy) is amended by striking out "from the date of such levy" and inserting in lieu thereof "from the date of such levy
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1711 (or, in t h e case of a levy described in section 6331 ( d ) ( 3 ) , from t h e Ante, p. 1710. date such person would otherwise have been obligated to pay over such amounts to t h e t a x p a y e r ) " . (4) P a r a g r a p h (1) of section 6331(d) (relating to levy on 26 u s e 6331. salaries a n d wages) is amended by striking out the last sentence, (e) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 u s e 6334 apply only with respect to levies made after December 31, 1976. note. SEC. 1210. JOINT COMMITTEE REFUND CASES. (a) I N GENERAL.—Section 6405(a) (relating to reports of refunds 26 u s e 6405. and credits) is amended t o read as follows: " ( a ) B Y TREASURY TO J O I N T COMMITTEE.—No refund or credit of any income, w a r profits, excess profits, estate, or gift tax, or any t a x imposed with respect to private foundations and pension plans under chapters 42 and 43, in excess of $200,000 shall be made until after the 26 u s e 4940, expiration of 30 days from t h e date upon which a report giving t h e 4971. name of the person to whom the refund or credit is to be made, t h e amount of such refund or credit, a n d a summary of the facts and t h e decision of the Secretary, is submitted to the J o i n t Conmiittee on Taxation." (b) TENTATIVE REFUNDS.—Section 6405(c) is amended by striking out "$100,000" and inserting in lieu thereof "$200,000". (c) AUDIT.—Section 8023(a) (relating to powers to obtain 26 u s e 8023. information from the I n t e r n a l Revenue Service) is amended by a d d i n g at the end thereof the following new sentence: " I n t h e investigation by the J o i n t Committee on Taxation of the administra- tion of the internal revenue taxes by the I n t e r n a l Revenue Service, the Chief of Staflf of t h e J o i n t Committee on T a x a t i o n is authorized to secure directly from the I n t e r n a l Revenue Service such t a x returns, or copies of t a x returns, a n d other relevant information, as t h e Chief of Staff deems necessary for such investigation, a n d the I n t e r n a l Revenue Service is authorized a n d directed to furnish such t a x returns a n d information to the Chief of Staff together with a brief report, with respect to each return, as to any action taken or proposed to be taken by t h e Service as a result of any audit of t h e return." ( d ) EFFECTIVE D A T E S . — (1) T h e amendments made by subsections ( a ) a n d (b) shall 26 u s e 6405 take effect on the date of the enactment of this Act, except t h a t note. such amendments shall not apply with respect to any refund or credit with respect to which a report has been made before the date of the enactment of this A c t under subsection (a) or (c) of section 6405 of t h e I n t e r n a l Revenue Code of 1954, (2) T h e amendment made by subsection (c) shall take effect 26 u s e 8023 on J a n u a r y 1,1977. note. SEC. 1211. SOCIAL SECURITY ACCOUNT NUMBERS. (a) Section 208(g) of t h e Social Security A c t is amended, in t h e 42 USe 408. m a t t e r preceding clause (1) thereof, by striking out "entitled—" a n d inserting in lieu thereof "entitled, or for any other purpose—". (b) Section 205(c) (2) of such Act is amended by a d d i n g at the end 42 USe 405. thereof t h e following new s u b p a r a g r a p h s : " ( C ) ( i ) I t is the policy of t h e United States t h a t any State (or political subdivision thereof) may, in the administration of any tax, general public assistance, driver's license, or motor vehicle registration law within its jurisdiction, utilize the social security account numbers issued by t h e Secretary for the purpose of establishing t h e identifica- tion of individuals affected by such law, a n d may require any individ-
90 STAT. 1712 PUBLIC LAW 94-455—OCT. 4, 1976 ual who is or appears to be so affected t o furnish to such State (or political subdivision thereof) or any agency thereof h a v i n g adminis- trative responsibility for the law involved, t h e social security account number (or numbers, if he has more than one such number) issued t o him by the Secretary. " ( i i ) I f and to the extent t h a t any provision of Federal law hereto- fore enacted is inconsistent with the policy set forth in clause ( i ) of this subparagraph, such provision shall, on a n d after the date of t h e enactment of this subparagraph, be null, void, and of no effect. " ( i i i ) F o r purposes of clause (i) of this subparagraph, an agency of a State ( o r political subdivision thereof) charged with t h e admin- istration of a n y general public assistance, driver's license, o r motor vehicle registration law which did not use t h e social security account number for identification under a law or regulation adopted before J a n u a r y 1,1975, may require an individual to disclose his or her social security number to such agency solely for the purpose of administer- ing t h e laws referred to in clause ( i ) above a n d for t h e purpose of responding to requests for information from an agency operating pur- suant to the provisions of p a r t A or D of title I V of the Social Security 42 u s e 601, Act. 651. " ( i v ) F o r purposes of this subparagraph, the term 'State' includes "State." the District of Columbia, t h e Commonwealth of P u e r t o Rico, the V i r g i n Islands, Guam, t h e Commonwealth of t h e N o r t h e r n Mari- anas, and the T r u s t Territory of the Pacific Islands." 26 u s e 6109. (c) Section 6109 (relating to identifying numbers) is amended by adding at the end thereof the following new subsection: Regulations. " ( d ) UsE OF SociAL SECURITY AccouNT NuMBER.—The social secu- rity account number issued to a n individual for purposes of section 42 u s e 405. 205(c) (2) (A) of the Social Security Act shall, except as shall other- wise be specified under regulations of t h e Secretary, be used as t h e identifying number for such individual for purposes of this title." 42 u s e 408. (d) (1) Section 208 of the Social Security Act is amended by insert- ing after subsection ( g ) the following new subsection: " ( h ) discloses, uses, or compels the disclosure of t h e social security number of any person in violation of t h e laws of t h e United S t a t e s ; " (2) section 208(g) (2) of such Act is amended by a d d i n g "or" a t the end thereof. SEC. 1212. ABATEMENT OF INTEREST WHEN RETURN IS PREPARED FOR TAXPAYER BY THE INTERNAL REVENUE SERVICE. 26 u s e 6404. ( a ) I N GENERAL.—Section 6404 (relating to abatements) is amended by adding at t h e end thereof the following new subsection: " ( d ) ASSESSMENTS ATTRIBUTABLE TO CERTAIN MATHEMATICAL ERRORS BY INTERNAL REVENUE SEI^VICE.—In the case of an assessment of a n y tax imposed by chapter 1 attributable in whole or in p a r t t o a mathe- matical error described in section 6213(f) (2) ( A ) , if t h e return was prepared by an officer or employee of t h e I n t e r n a l Revenue Service acting in his official capacity to provide assistance to taxpayers in t h e > preparation of income tax returns, the Secretary is authorized t o abate the assessment of all or any p a r t of any interest on such deficiency for any period ending on or before the 30th day following t h e date of notice a n d demand by the Secretary for payment of t h e deficiency." 26 u s e 6404 (b) EEFECTIVE D A T E . — T h e amendment made by subsection ( a ) "lote. shall apply with respect to returns filed for taxable years ending after the date of the enactment of this Act.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1713 TITLE XIII—TAX EXEMPT ORGANIZATIONS SEC. 1301. DISPOSITION OF PRIVATE FOUNDATION PROPERTY UNDER TRANSITION RULES OF TAX REFORM ACT OF 1969. (a) I N GENERAL.—Paragraph (2) of section 101(1) of the Tax Reform Act of 1969 (relating to private foundations savings provi- 26 USC 4940 sions) is amended— "°*®" (1) by striking out "and" at the end of subparagraph (D) ; (2) by striking out the period at the end of subparagraph (E) and inserting in lieu thereof " ; and"; and (3) by adding at the end thereof the following new subpara- graph: " ( F ) the sale, exchange, or other disposition (other than by lease) of property which is owned by a private foundation to a disqualified person if— "(i) such foundation is leasing substantially all of such property under a lease to which subparagraph (C) applies. " (ii) the disposition to such disqualified person occurs before January 1,1978, and "(iii) such foundation receives in return for the dis- position to such disqualified person an amount which equals or exceeds the fair market value of such property at the time of the disposition or at the time (after June 30, 1976) a contract for the disposition was previ- ously executed in a transaction which would not consti- tute a prohibited transaction (within the meaning of section 503(b) or any corresponding provision of prior law).". (b) EFFECTIVE DATE.—The amendments made by subsection (a) 26 USC 4940 shall apply to dispositions after the date of the enactment of this Act °°*^- in taxable years ending after such date. SEC. 1302. NEW PRIVATE FOUNDATION SET-ASIDES. (a) I N GENERAL.—Section 4942(g)(2) (relating to definition of 26 USC 4942. qualifying distributions) is amended to read as follows: "(2) CERTAIN SET-ASIDES.— "(A) I N GENERAL.—^For all taxable years beginning ou or Effective date, after January 1, 1975, subject to such terms and conditions as may be prescribed by the Secretary, an amount set aside for a specific project which comes within one or more pur- poses described in section 170(c)(2)(B) may be treated as a qualifying distribution if it meets the requirements of sub- paragraph (B). "(B) REQUIREMENTS.—An amount set aside for a specific proj- ect shall meet the requirements of this subparagraph if at the time of the set-aside the foundation establishes to the satisfaction of the Secretary that the amount will be paid for the specific project within 5 years, and either— "(i) at the time of the set-aside the private foundation establishes to the satisfaction of the Secretary that the proj- ect is one which can better be accomplished by such set-aside than by immediate payment of funds, or " ( i i ) ( I ) the project will not be completed before the end of the taxable year of the foundation in which the set-aside is made,
90 STAT. 1714 PUBLIC LAW 94-455—OCT. 4, 1976 " ( I I ) t h e private foundation in each taxable year begin- ning after December 31, 1975 ( o r after the end of the fourth taxable year following t h e year of its creation, whichever is l a t e r ) , distributes amounts, in cash or its equivalent, equal to not less t h a n the distributable amount determined under sub- section ( d ) (without regard t o subsection ( i ) ) for purposes described in section 170(c) (2) ( B ) ( i n c l u d i n g b u t not limited to payments with respect t o set-asides which were treated as qualifying distributions in one or more prior y e a r s ) , a n d " ( I I I ) t h e private foundation h a s distributed (including but not limited to payments with respect to set-asides which were treated as qualifying distributions in one or more prior years) d u r i n g t h e four taxable years immediately preceding its first taxable year beginning after December 31, 1975, o r the fifth taxable year following t h e year of its creation, whichever is later, a n aggregate amount, in cash or its equiva- lent, of not less t h a n the sum of the following: 80 percent of the first preceding taxable year's distributable a m o u n t ; 60 percent of the second preceding taxable year's distributable a m o u n t ; 40 percent of the t h i r d preceding taxable year's dis- tributable a m o u n t ; a n d 20 percent of the fourth preceding taxable year's distributable amount. "(C) CERTAIN FAILURES TO DISTRIBUTE.—If, for a n y taxable year t o which clause (ii) ( I I ) of s u b p a r a g r a p h ( B ) applies, t h e private foundation fails to distribute in cash or its equivalent amounts n o t less t h a n those required by such clause and— " ( i ) t h e failure t o distribute such amounts was not willful a n d was due to reasonable cause, and " ( i i ) t h e foundation distributes an amount in cash or its equivalent which is n o t less t h a n the difference between t h e amounts required to be distributed under clause (ii) ( I I ) of s u b p a r a g r a p h ( B ) a n d t h e amounts actually distributed in cash or its equivalent d u r i n g t h a t taxable year within t h e initial correction period provided i n subsection (j) ( 2 ) , such distribution in cash or its equivalent shall be treated for the purposes of this s u b p a r a g r a p h as made d u r i n g such year. " ( D ) REDUCTION IN DISTRIBUTION AMOUNT.—If, d u r i n g t h e taxable years in the adjustment period for which the organi- zation is a private foundation, t h e foundation distributes amounts i n cash or i t s equivalent which exceed t h e amount required to be distributed under clause (ii) ( I I ) of subpara- g r a p h ( B ) (including b u t n o t limited to payments with respect to set-asides which were treated as qualifying distri- butions in prior y e a r s ) , then for purposes of this subsection the distribution required under clause (ii) ( I I ) of subpara- g r a p h ( B ) for the taxable year shall be reduced by an amount equal to such excess. " ( E ) A D J U S T M E N T PERIOD.—For purposes of s u b p a r a g r a p h ( D ) , with respect to any taxable year of a private founda- tion, t h e taxable years i n t h e adjustment period are t h e tax- able years ( n o t exceeding 5) beginning after December 31, 1975, and immediately preceding the taxable year. I n the case of a set-aside which satisfies t h e requirements of clause (i) of s u b p a r a g r a p h ( B ) , for good cause shown, t h e period for p a y i n g t h e amount set aside may be extended by t h e Secretary." 26 u s e 6501. ( b ) STATUTE o r LIMITATIONS.—Subsection ( n ) of "section 6501 (re- l a t i n g t o limitations on assessments a n d collections) is amended b y adding a t the end thereof the following new p a r a g r a p h :
PUBLIC LAW 94^55—OCT. 4, 1976 90 STAT. 1715 " ( 3 ) CERTAIN SET-AsroEs DESCRIBED I N SECTION 4942(g) ( 2 ) . — I n the case of a deficiency attributable to the failure of an amount set aside by a private foundation for a specific project to be treated as a qualifying distribution under the provisions of sec- tion 4942(g) (2) ( B ) (i) ( I I ) , such deficiency m a v be assessed at any time before the expiration of 2 years after the expiration of the period within which a deficiency may be assessed for the taxa- ble year to which t h e amount set aside relates." (c) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 4942 ^PPly to taxable years beginning after December 31, 1974. note. SEC. 1303. MINIMUM DISTRIBUTION AMOUNT FOR PRIVATE FOUN- DATIONS. (a) I N GENERAL.—Subsection (e) of section 4942 (relating to mini- 26 USC 4942. mum investment r e t u r n ) is amended to read as follows: " ( e ) M I N I M U M INVESTMENT R E T U R N . — " ( 1 ) I N GENERAL.—For purposes of subsection ( d ) , t h e mini- ..,.-;; m u m investment r e t u r n for any p r i v a t e foundation for any tax- able year is 5 percent of t h e excess of— " ( A ) the aggregate fair market value of all assets of the foundation other t h a n those which a r e used (or held for use) directly in carrying out the foundation's exempt purpose, over " ( B ) the acquisition indebtedness with respect to such assets (determined under section 614(c) (1) without regard to the taxable year in which the indebtedness was i n c u r r e d ) . "(2) VALUATION.— " ( A ) I N GENERAL.—For purposes of p a r a g r a p h ( 1 ) ( A ) , the fair market value of securities for which market quota- tions are readily available shall be determined on a monthly basis. F o r all other assets, t h e fair market value shall be deter- Regulations, mined at such times and in such manner as the Secretary shall by regulations prescribe. "(B) REDUCTIONS I N VALUE FOR BLOCKAGE OR SIMILAR FAC- TORS.—In determining the value of a n y securities under this p a r a g r a p h , the fair market value of such securities (deter- mined without regard to any reduction in value) shall not be reduced unless, and only to the extent t h a t , the private foun- dation establishes t h a t as a result of— " (i) the size of the block of such securities, " ( i i ) the fact t h a t the securities held are securities in a closely held corporation, or " ( i i i ) the fact t h a t the sale of such securities would result in a forced or distress sale, the securities could not be liquidated within a reasonable period of time except at a price less t h a n such fair market value. A n y reduction in value allowable under this subpara- g r a p h shall not exceed 10 percent of such fair market value." (b) EFFECTIVE D A T E . — T h e amendment made by this section applies 26 USC 4942 to taxable years beginning after December 31,1975. "o*^- SEC. 1304. EXTENSION OF TIME TO AMEND CHARITABLE REMAINDER TRUST GOVERNING INSTRUMENT. (a) EXTENSION OF TIME.—Section 2055(e) (3) ( r e l a t i n g t o the allow- 26 USC 2055. ance of deductions in certain cases) is amended— (1) by striking out "Sentember 21, 1974," and inserting in lieu thereof "December 31,1977,", and (2) by striking: out "December 31, 1975" each place it appears a n d inserting in lieu thereof "December 31.1977".
90 STAT. 1716 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 2055 ( b ) E X T E N S I O N OF PERIOD FOR F I L I N G C L A I M FOR R E F U N D OF ESTATE '^°*®- T A X P A I D . — A claim for refund or credit of a n overpayment of the t a x Post, p. 1846. imposed by section 2001 of the I n t e r n a l Revenue Code of 1954 allow- 26 u s e 2055. able under section 2055(e) (3) of such Code (as amended.by subsec- tion ( a ) ) shall not be denied because of the expiration of the time for filing such a claim under section 6511(a) if such claim is filed not later t h a n J u n e 30,1978. 26 u s e 2055 (c) ErrECTiVE D A T E . — T h e amendments made by this section shall "ot®- apply in the case of decedents dying after December 31, 1969. SEC. 1305. UNRELATED TRADE OR BUSINESS INCOME OF TRADE SHOWS, STATE FAIRS, ETC. 26 u s e 513. ( a ) I N GENERAL.—Section 513 (relating to unrelated trade or busi- ness) is amended by adding a t the end thereof the following new subsection: "(d) CERTAIN ACTIVITIES OF TRADE S H O W S , STATE F A I R S , E T C . — Definitions. " ( 1 ) GENERAL RULE.—The term 'unrelated t r a d e or business' does n o t include qualified public entertainment activities of an organization described in p a r a g r a p h (2) ( C ) , or qualified conven- tion a n d t r a d e show activities of a n organization described in p a r a g r a p h (3) ( C ) . " ( 2 ) QUALIFIED PUBLIC ENTERTAINMENT ACTIVITIES.—For p u r - poses of this subsection— " ( A ) P U B L I C ENTERTAINMENT ACTIVITY.—The t e r m 'public entertainment activity' means any entertainment or recrea- tional activity of a kind traditionally conducted a t fairs or expositions promoting agricultural and educational purposes, including, b u t n o t limited to, a n y activity one of t h e pur- poses of which is to attract the public to fairs or expositions or t o promote the breeding of animals or the development of products or equipment. "(B) QUALIFIED PUBLIC ENTERTAINMENT ACTIVITY.—The term 'qualified public entertainment activity' means a public entertainment activity which is conducted by a qualifying organization described in subparagraph ( C ) in— " ( i ) conjunction with an international, national. State, regional, or local fair or exposition, " ( i i ) accordance with the provisions of State law which permit t h e activity to be operated or conducted solely by such an organization, or by an agency, instru- mentality, or political subdivision of such State, or " ( i i i ) accordance with t h e provisions of State law which permit such an organization to be granted a license to conduct n o t more t h a n 20 days of such activity on payment t o t h e State of a lower percentage of t h e reve- nue from such licensed activity than the State requires from organizations not described in section 501(c) ( 3 ) , ( 4 ) , or ( 5 ) . "(C) Q U A L I F Y I N G ORGANIZATION.—For purposes of this p a r a g r a p h , t h e t e r m 'qualifying organization' means an orga- nization which is described in section 501(c) ( 3 ) , ( 4 ) , or (5) which regularly conducts, as one of its substantial exempt purposes, a n agricultural and educational fair or exposition. " ( 3 ) QUALIFIED CONVENTION AND TRADE SHOW ACTIVITIES.— " ( A ) CONVENTION AND TRADE SHOW ACTIVITY.—^The t e r m 'convention and t r a d e show activity' means any activity of a kind traditionally conducted at conventions, annual meetings, or t r a d e shows, including, but not limited to, any activity one
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1717 - •' • of the purposes of which is t o attract persons in an industry generally (without regard to membership in t h e sponsoring organization) as well as members of the public to t h e show for the purpose of displaying industry products or to stimu- late interest in, and demand for, industry products o r serv- ices, or to educate persons engaged in the industry in t h e development of new products and services or new rules and regulations affecting the industry. "(B) Q l T A L i r i E D CONVENTION AND TRADE SHOW ACTIVITY.— T h e term 'qualified convention and t r a d e show activity' means a convention and t r a d e show activity carried out by a qualify- ing organization described in s u b p a r a g r a p h (C) in conjunc- tion with an international, national. State, regional, or local convention, annual meeting, or show conducted by an orga- nization described in s u b p a r a g r a p h ( C ) if one of t h e purposes of such organization in sponsoring the activity is t h e promo- tion and stimulation of interest in, and demand for, the prod- ucts and services of t h a t industry in general, and t h e show is designed to achieve such purpose t h r o u g h the character of the exhibits and the extent of the industry products displayed. "(C) QUALIFYING ORGANIZATION.—For purposes of this p a r a g r a p h , the term 'qualifying organization' means an orga- nization described in section 5 0 1 ( c ) ( 5 ) or (6) which regu- larly conducts as one of its substantial exempt purposes a show which stimulates interest in, and demand for, t h e prod- ucts of a particular industry or segment of such industry. " ( 4 ) S U C H ACTIVITIES NOT TO AFEECT EXEMPT STATUS.—An Orga- nization described in section 501(c) ( 3 ) , ( 4 ) , or (5) shall not be considered as not entitled t o the exemption allowed under section 501(a) solely because of qualified public entertainment activities conducted by it." (b) EFFECTIVE DATES.—The amendments made by subsection (a) 26 USC 513 ripply to qualified public entertainment activities in taxable years ""*^- beginning after December 31, 1962, and to qualified convention and trade show activities in taxable years beginning after the date of enactment of this Act. SEC. 1306. DECLARATORY JUDGMENTS WITH RESPECT TO SECTION 501(c)(3) STATUS AND CLASSIFICATION. (a) GENERAL RULE.—Subchapter B of chapter 76 (relating to pro- ceedings by taxpayers and t h i r d parties) is amended by redesignating section 7428 as 7430, and by inserting after section 7427 the following new section: "SEC. 7428. DECLARATORY JUDGMENTS RELATING TO STATUS AND 26 USC 7428. CLASSIFICATION OF ORGANIZATIONS UNDER SECTTION 501(c)(3), ETC. " ( a ) CREATION OF R E M E D Y . — I n a case of actual controversy involving— " (1) a determination by the Secretary— " ( A ) with respect to the initial qualification or continuing qualification of an organization as an organization described in section 501(c) (3) which is exempt from t a x under section 501(a) or as an organization described in section 170(c) ( 2 ) , " ( B ) with respect to the initial classification or continuing classification of an organization as a private foundation (as defined in section 509 ( a ) ) , or
90 STAT. 1718 PUBLIC LAW 94-455—OCT. 4 , 1976 " ( C ) with respect t o the initial classification or continu- ing classification of an organization as a private operating 26 u s e 4942. foundation (as defined in section 4942(j) ( 3 ) ) , or " ( 2 ) a failure b y t h e Secretary to make a determination with respect to an issue referred to in p a r a g r a p h ( 1 ) , upon t h e filing of a n a p p r o p r i a t e pleading, t h e United States T a x Court, t h e United States Court of Claims, o r t h e district court of t h e United States for t h e District of Columbia may make a declaration with respect to such initial qualification or continuing qualification or with respect t o such initial classification o r continuing classification. A n y such declaration shall have t h e force a n d efi^ect of a decision of the T a x Court or a final judgment or decree of t h e district court or t h e Court of Claims, as t h e case m a y be, a n d shall be reviewable as such. " ( b ) LIMITATIONS.— " ( 1 ) PETITIONER.—A pleading may be filed under this section only by t h e organization the qualification or classification of which is a t issue. " (2) E X H A U S T I O N OF ADMINISTRATIVE R E M E D I E S . — A declaratory judgment or decree under this section shall not be issued in any proceeding unless the T a x Court, t h e Court of Claims, or t h e dis- trict court of the United States for t h e District of Columbia deter- mines that the organization involved has exhausted administrative remedies available t o it within the I n t e r n a l Revenue Service. A n organization requesting the determination of a n issue referred t o in subsection (a) (1) shall be deemed to have exhausted its admin- istrative remedies with respect to a failure by t h e Secretary t o make a determination with respect to such issue a t t h e expiration of 270 days after t h e date on which t h e request for such deter- mination was made if t h e organization h a s taken, i n a timely manner, all reasonable steps to secure such determination. " (3) T I M E FOR BRINGING ACTION.—If t h e S e c r e t a r y sends b y cer- tified or registered mail notice of his determination with respect to a n issue referred to in subsection (a) (1) to t h e organization referred t o i n p a r a g r a p h ( 1 ) , n o proceeding m a y be initiated under this section by such organization unless t h e pleading is filed before t h e 91st day after t h e date of such mailing. " ( c ) VALIDATION OF CERTAIN CONTRIBUTIONS MADE D U R I N G P E N D - ENCY o r PROCEEDINGS.— " ( 1 ) I N GENERAL.—If— " ( A ) t h e issue referred to i n subsection ( a ) ( 1 ) involves the revocation of a determination t h a t t h e organization is described in section 170(c) ( 2 ) , " ( B ) a proceeding under this section is initiated within the time provided by subsection ( b ) ( 3 ) , a n d " ( C ) either— "'- * " ( i ) a decision of t h e T a x Court h a s become final (within t h e meaning of section 7481), or " ( i i ) a judgment of t h e district court of t h e United States for the District of Columbia has been entered, or " ( i i i ) a judgment of the Court of Claims h a s been entered,", and such decision or judgment, as t h e case m a y be, deter- mines t h a t t h e organization was n o t described i n section 170(c)(2),
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1719 then, notwithstanding such decision or judgment, such organiza- tion shall be treated as having been described in section 170 (c) (2) ' * for purposes of section 170 for the period beginning on the date on which the notice of the revocation was published and ending on the date on which the court first determined in such proceed- i ing that the organization was not described in section 170(c) (2). "(2) LIMITATION.—Paragraph (1) shall apply only— "(A) with respect to individuals, and only to the extent that the aggregate of the contributions made by any individ- ual to or for the use of the organization during the period specified in paragraph (1) does not exceed $1,000 (for this purpose treating a husband and wife as one contributor), and , "(B) with respect to organizations described in section V; 170(c) (2) which are exempt from tax under section 501(a) (for this purpose excluding any such organization with respect to which there is pending a proceeding to revoke the determination under section 170 (c)(2)). "(3) ExcEPTiOK-.—This subsection shall not apply to any indi- vidual who was responsible, in whole or in part, for the activities (or failures to act) on the part of the organization which were the basis for the revocation.", (b) TECHNICAL AND CONFORMING AMENDMENTS.— '* (1) Section 7451 (relating to fee for filing petition) is amended 26 USC 7451. by inserting before the period at the end thereof the following: "or under section 7428". Ante, p. 1717. (2) Section 7459(c) (relating to date of decision) is amended 26 USC 7459. by inserting after "under part IV of this subchapter" the follow- ing : "or under section 7428". (3) Section 7476(c) (relating to use of Tax Court commission- 26 USC 7476. ers) is amended by striking out "this section" and inserting in lieu thereof "this section or section 7428". (4) Section 7482(b) (1) (relating to venue for review of Tax 26 USC 7482. Court decisions) is amended by striking out "or" at the end of subparagraph (C), by striking out the period at the end of sub- paragraph (D) and inserting in lieu thereof ", or", and by insert- ing after subparagraph (D) the following new subparagraph: " ( E ) in the case of an organization seeking a declaratory decision under section 7428, the principal office or agency of the organization.". (5) Section 7482(b)(1) is further amended by striking out , . "section 7476" in the last sentence and inserting in lieu thereof "^' "section 7428,7476,". (6) The table of sections for subchapter B of chapter 76 is amended by striking out the item relating to section 7428 and inserting in lieu thereof the following: "Sec. 7428. Declaratory judgments relating to status and classification of organizations under section 5 0 1 ( c ) ( 3 ) , etc. "Sec. 7430. Cross references." (7) Section 1346(e) of title 28, United States Code (relating to jurisdiction of district courts with the United States as defendant), is amended by inserting "or section 7428 (in the case of the United States district court for the District of Columbia)" immediately after "section 7426". (8) Section 2201 of title 28, United States Code (relating to creation of declaratory judgment remedy), is amended by strik- ing out "taxes" and inserting in lieu thereof "taxes other than
90 STAT. 1720 PUBLIC LAW 94-455—OCT. 4 , 1976 actions brought under section 7428 of t h e I n t e r n a l Eevenue Code Ante, p. 1717. of 1954". (9) ( A ) Chapter 92 of title 28, United States Code, is amended by adding at t h e end thereof the following new section: 28 u s e 1507. "§ 1507. Jurisdiction for certain declaratory judgments " T h e Court of Claims shall have jurisdiction to hear a n y suit for and issue a declaratory judgment under section 7428 of t h e I n t e r n a l Kevenue Code of 1954.". ( B ) The table of sections for such chapter is amended by add- ing a t the end thereof the following new i t e m : "1507. Jurisdiction for certain declaratory judgments." 26 use 7428 (c) EFFECTIVE DATE.—The amendments made by this section shall "°*^- apply with respect to pleadings filed with the United States T a x Court, the district court of the United States for the District of Colum- bia, or the L^nited States Court of Claims more t h a n 6 months after t h e date of the enactment of this Act but only with respect to determina- tions (or requests for determinations) made after J a n u a r y 1, 1976. SEC. 1307. LOBBYING BY PUBLIC CHARITIES. ( a ) Loss OF E X E M P T S T A T U S . — ( 1 ) L o s s OF EXEMPT STATUS BECAUSE OF SUBSTANTIAL LOBBY- 26 u s e 501. iNG.—Section 501 (relating to exemption from income t a x ) is amended by redesignating subsection ( h ) as subsection (i) and by inserting after subsection ( g ) the following new subsection: "(h) EXPENDITURES BY P U B L I C CHARITIES T o INFLUENCE LEGISLATION.— " ( 1 ) GENERAL R U L E . — I n t h e case of a n organization to which this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial p a r t of the activities of such organization consists of carrying on propaganda, or other- wise attempting, to influence legislation, b u t only if such organi- zation normally— " ( A ) makes lobbying expenditures in excess of the lobbying ceiling amount for such organization for each taxable year, or " ( B ) makes grass roots expenditures in excess of the grass roots ceiling amount for such organization for each taxable year. " ( 2 ) D E F I N I T I O N S . — F o r purposes of this subsection— "(A) LOBBYING EXPENDITURES.—The term 'lobbying expenditures' means expenditures for the purpose of infiu- Post, p. 1723. encing legislation (as defined in section 4911 ( d ) ) . "(B) LOBBYING CEILING AMOUNT.—The lobbying ceiling amount for any organization for any taxable year is 150 per- cent of the lobbying nontaxable amount for such organiza- tion for such taxable year, determined under section 4911. "(C) GRASS ROOTS EXPENDITURES.—The term 'grass roots expenditures' means expenditures for the purpose of influ- encing legislation (as defined in section 4911(d) without regard to p a r a g r a p h ( 1 ) ( B ) thereof). " ( D ) GRASS ROOTS CEILING AMOUNT.—The g r a s s roots ceiling amount for any organization for any taxable year is 150 per- cent of the grass roots nontaxable amount for such organiza- tion for such taxable year, determined under section 4911. " ( 3 ) ORGANIZATIONS TO W H I C H THIS SUBSECTION APPLIES.—This subsection shall apply to any organization which h a s elected (in such manner a n d at such time as the Secretary may prescribe) to have the provisions of this subsection apply to such organiza-
PUBLIC LAW 94-455—OCT. 4, 1976 9 0 STAT. 1721 tion a n d which, for the taxable year which includes t h e date the election is made, is described in subsection (c) (3) and— " ( A ) is described in p a r a g r a p h ( 4 ) , and " ( B ) is not a disqualified organization under p a r a g r a p h (5). "(4) ORGANIZATIOXS PERMITI'ED TO ELECT TO HAVE THIS SUB- SECTION APPLY.—An organization is described in this p a r a g r a p h if it is described in— " ( A ) section 170(b) (1) ( A ) (ii) (relating to educational institutions), " ( B ) section 1 7 0 ( b ) ( 1 ) ( A ) (iii) ( r e l a t i n g t o hospitals and medical research organizations), " ( C ) section 1 7 0 ( b ) ( 1 ) ( A ) (iv) (relating to organizations supporting government schools), " ( D ) section 170(b) (1) ( A ) (vi) (relating to organizations publicly supported by charitable contributions), " ( E ) section 509(a) (2) ( r e l a t i n g t o organizations publicly supported by admissions, sales, etc.), or " ( F ) section 5 0 9 ( a ) ( 3 ) (relating t o organizations sup- p o r t i n g certain types of public charities) except t h a t for pur- poses of this subparagraph, section 5 0 9 ( a ) ( 3 ) shall be applied without regard to the last sentence of section 509(a). "(5) DISQUALIFIED ORGANIZATIONS.—For purposes of p a r a g r a p h (3) an organization is a disqualified organization if it is— " ( A ) described in section 170(b) (1) ( A ) (i) (relating to churches), " ( B ) an integrated auxiliary of a church or of a conven- tion or association of churches, or " ( C ) a member of an affiliated group of organizations (within t h e meaning of section 4911(f) ( 2 ) ) if one or more Post, p.l723. Z members of such group is described in subparagraph ( A ) or ( B ) . "(6) YEARS FOR W H I C H ELECTION IS EFFECTIVE.—An election by an organization under this subsection shall be effective for all taxable years of such organization which— " ( A ) end after the date the election is made, and " ( B ) begin before the date the election is revoked by such Regulations, organization (under regulations prescribed by the Secretary). "(7) No EFFECT ON CERTAIN ORGANIZATIONS.—With respect to any organization for a taxable year for which— ' " ( A ) such organization is a disqualified organization (within the meaning of p a r a g r a p h ( 5 ) ) , or " ( B ) an election under this subsection is not in effect for such organization, nothing in this subsection or in section 4911 s' all bo construed to affect the interpretation of the phrase, 'no substantial p a r t of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation,' under subsection (c) ( 3 ) . " ( 8 ) AFFILIATED ORGANIZATIONS.— "For rules regarding affiliated organizations, see section 4911(f).". (2) STATUS OF ORGANIZATION W H I C H CEASES TO QUALIFY FOR 26 USC 504. E X E M P T I O N U N D E R SECTION 5 0 1 ( C ) ( 3 ) BECAUSE O F S U B S T A N T I A L LOBBYING.—Part I of subchapter F of chapter 1 (relating to gen- eral rules as to exempt organizations) is amended by adding at the end thereof the following new section:
90 STAT. 1722 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 504. "SEC. 504. STATUS AFTER ORGANIZATION CEASES TO QUALIFY FOR EXEMPTION UNDER SECTION 501(c)(3) BECAUSE OF SUB- STANTIAL LOBBYING. " ( a ) GENERAL RULE.—^An organization which— " ( 1 ) was exempt (or was determined by the Secretary to be exempt) from taxation under section 501(a) by reason of being an organization described in section 501(c) ( 3 ) , a n d " ( 2 ) is not a n organization described in section 5 0 1 ( c ) ( 3 ) by reason of c a r r y i n g on p r o p a g a n d a , or otherwise attempting, to influence legislation, shall not at any time thereafter be treated as a n organization described in section 501 (c) ( 4 ) . " ( b ) REGULATIONS T o PREVENT AVOIDANCE.—The Secretary shall prescribe such regulations as m a y be necessary or a p p r o p r i a t e to pre- vent the avoidance of subsection ( a ) , including regulations relating to a direct or indirect transfer of all or p a r t of the assets of an organi- zation to a n organization controlled (directly or indirectly) by t h e same person or persons who control the transferor organization. " ( c ) CHURCHES, ETC.—Subsection ( a ) shall not apply to any orga- nization which is a disqualified organization within t h e meaning of section 5 0 1 ( h ) ( 5 ) (relating to churches, etc.) for the taxable year immediately preceding t h e first taxable year for which such organiza- tion is described in p a r a g r a p h (2) of subsection ( a ) . " . 26 u s e 504 (3) R U L E S OF INTERPRETATION.—It is the intent of Congress t h a t note. enactment of this section is not to be regarded in any way as a n approval or disapproval of the decision of the Court of Appeals for the T e n t h Circuit in Christian Echoes National Ministry, Inc. versus United States, 470 F.2d 849 (1972), or of the reason- ing in any of t h e opinions leading to t h a t decision. 26 u s e 6033. (4) DISCLOSURE.—Section 6033(b) (relating to information required to be furnished annually by certain exempt organiza- tions) is amended by striking out " a n d " at the end of p a r a g r a p h (6), by striking out the period at t h e end of p a r a g r a p h (7) a n d inserting in lieu thereof ", and", a n d by a d d i n g at m e end thereof the following: " ( 8 ) in t h e case of an organization with respect to which a n Ante, p. 1720. election under section 501 ( h ) is effective for t h e taxable year, t h e following amounts for such organization for such taxable y e a r : " ( A ) the lobbying expenditures (as defined in section 4911 Post, f.1723. (c)(1)), " ( B ) the lobbying nontaxable amount (as defined in sec- tion 4911(c) ( 2 ) ) , " ( C ) t h e grass roots expenditures (as defined in section 4911(c) ( 3 ) ) , and " ( D ) t h e grass roots nontaxable amount (as defined in sec- tion 4911(c) ( 4 ) ) . F o r purposes of p a r a g r a p h ( 8 ) , if section 4911 (f) applies to t h e orga- nization for t h e taxable year, such organization shall furnish t h e amounts with respect to t h e alfiliated g r o u p as well as with respect to such organization.". ( b ) TAXES ON EXCESS EXPENDITURES T O I N F L U E N C E LEGISLATION.— Subtitle D (relating t o miscellaneous excise taxes) is amended b y inserting before chapter 42 the following new c h a p t e r :
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1723 "CHAPTER 41—PUBLIC CHARITIES "Sec. 4911. Tax on excess expenditures to influence legislation. "SEC. 4911. TAX ON EXCESS EXPENDITURES TO INFLUENCE LEGISLA- 26 USC 4911 TION. " ( a ) T A X IMPOSED.— " (1) I N GENERAL.—There is hereby imposed on t h e excess lobby- i n g expenditures of a n y organization t o which this section applies a t a x equal to 25 percent of t h e amount of t h e excess lobbying expenditures for the taxable year. "(2) ORGANIZATIONS TO W H I C H T H I S SECTION APPLIES.—This section applies to any organization with respect to which an elec- tion under section 501(h) (relating to lobbying expenditures by ^nte, p. 1720 public charities) is in effect for t h e taxable year. " ( b ) EXCESS LOBBYING E X P E N D I T U R E S . — F o r purposes of t h i s section, "Excess the term 'excess lobbying expenditures' means, for a taxable year, the lobbying expenditures." greater of— " ( 1 ) t h e amount by which t h e lobbying expenditures made by the organization d u r i n g the taxable year exceed t h e lobbying non- taxable amount for such organization for such taxable year, or " ( 2 ) t h e amount by which t h e grass roots expenditures made by t h e organization d u r i n g the taxable year exceed the grass roots nontaxable amount for such organization for such taxable year. " ( c ) D E F I N I T I O N S . — F o r purposes of this section— " ( 1 ) LOBBYING EXPENDITURES.—The t e r m 'lobbying expendi- tures' means expenditures for t h e purpose of influencing legisla- tion (as defined in subsection ( d ) ) . " ( 2 ) LOBBYING NONTAXABLE AMOUNT.—The lobbying nontaxable amount for a n y organization for any taxable year is the lesser of ( A ) $1,000,000 or ( B ) t h e amount determined under the follow- ing table: "If the proposed ex- The lobbying nontaxable penditures are— amount is— Not over $500,000 20 percent of the exempt purpose expenditures. Over $500,000 but not over $1,000,000— $100,000, plus 15 percent of the excess of the exempt puriwse expenditures over $500,000. Over $1,000,000 but not over $1,500,000__ $175,000 plus 10 percent of the excess of the exempt purpose expenditures over $1,000,000. Over $1,500,000 $225,000 plus 5 percent of the excess of the exempt purpose expenditures over $1,500,000. "(3) GRASS ROOTS EXPENDITURES.—The term 'grass roots expenditures' means expenditures for t h e purpose of influencing legislation (as defined in subsection ( d ) without regard t o para- g r a p h (1) ( B ) thereof). " (4) GRASS ROOTS NONTAXABLE A M O U N T . — T h e g r a s s roots non- taxable amount for a n y organization for a n y taxable year is 25 percent of t h e lobbying nontaxable amount (determined under p a r a g r a p h ( 2 ) ) for such organization for such taxable year. " ( d ) INFLUENCING LEGISLATION.— " ( 1 ) GENERAL RULE.—Except as otherwise provided in para- "Influencing g r a p h ( 2 ) , for purposes of this section, t h e term 'influencing leg- legislation." islation' means— " ( A ) any a t t e m p t to influence a n y legislation t h r o u g h an attempt t o affect t h e opinions of t h e general public or a n y segment thereof, a n d
90 STAT. 1724 PUBLIC LAW 94-455—OCT. 4 , 1976 " ( B ) any attempt to influence any legislation through com- munication with any member or employee of a legislative body, or with any government official or employee who may participate in t h e formulation of t h e legislation. "Influencing " (2) EXCEPTIONS.—For purposes of this section, the term 'influ- legislation." encing legislation', with respect to a n organization, does n o t include— " ( A ) m a k i n g available t h e results of nonpartisan analysis, study, or research; " ( B ) providing of technical advice or assistance (where such advice would otherwise constitute the influencing of leg- islation) t o a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case m a y be; " ( C ) appearances before, or communications to, any legis- lative body with respect to a possible decision of such body which might affect the existence of the organization, its pow- ers a n d duties, tax-exempt status, or t h e deduction of con- tributions to t h e organization; " ( D ) communications between t h e organization a n d i t s bona fide members with respect t o legislation or proposed legislation of direct interest t o t h e organization a n d such members, other t h a n communications described in p a r a g r a p h (3^ ; and ( E ) any communication with a government official or employee, other t h a n — " (i) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or " ( i i ) a communication the principal purpose of which is to influence legislation. "(3) COMMUNICATIONS W I T H MEMBERS.— " ( A ) A communication between an organization a n d any bona fide member of such organization to directly encourage such member to communicate as provided in p a r a g r a p h (1) ( B ) shall be treated as a communication described in para- graph ( 1 ) ( B ) . " ( B ) A communication between an organization and any bona fide member of such organization t o directly encourage such member t o urge persons other than members t o com- municate as provided m either s u b p a r a g r a p h ( A ) or sub- p a r a g r a p h ( B ) of p a r a g r a p h (1) shall be treated as a communication described in p a r a g r a p h ( 1 ) ( A ) . " ( e ) O T H E R D E F I N I T I O N S AND SPECIAL R U L E S . — F o r purposes of t h i s section— . " ( 1 ) E X E M P T PURPOSE EXPENDITURES.— " ( A ) I N GENERAL.—The term 'exempt purpose expendi- tures' means, with respect to any organization for any taxable year, the total of the amounts paid or incurred by such orga- nization t o accomplish purposes described in section 170(c) 26 u s e 170. (2) ( B ) (relating to religious, charitable, educational, etc., purposes). " ( B ) CERTAIN AMOUNTS INCLUDED.—The t e r m 'exempt p u r - pose expenditures' includes— " ( i ) administrative expenses paid or incurred for pur- poses described in section 1 7 0 ( c ) ( 2 ) ( B ) , and
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1725 ' "(ii) amounts paid or incurred for the purpose of influencing legislation (whether or not for purposes described in section 170(c) (2) ( B ) ) . 26 USC 170. "(C) CERTAIN" AMOUNTS EXCLUDED.—The term 'exempt pur- pose expenditures' does not include amounts paid or incurred to or for— "(i) a separate fundraising unit of such organization, or "(ii) one or more other organizations, if such amounts are paid or incurred primarily for fundraising. "(2) LEGISLATION.—The term 'legislation' includes action with respect to Acts, bills, resolutions, or similar items by the Congress, any State legislature, any local council, or similar governing body, or by the public in a referendum, initiative, constitutional amend- ment, or similar procedure. "(3) ACTION,—The term 'action' is limited to the introduction, amendment, enactment, defeat, or repeal of Acts, bills, resolutions, . ,, or similar items. "(4) DEPRECIATION, ETC., TREATED AS EXPENDITURES.—In com- puting expenditures paid or incurred for the purpose of influ- encing legislation (within the meaning of subsection (b) (1) or (b)(2)) or exempt purpose expenditures (as defined in para- graph (1)), amounts properly chargeable to capital account shall not be taken into account. There shall be taken into account a rea- sonable allowance for exhaustion, wear and tear, obsolescence, or amortization. Such allowance shall be computed only on the basis of the straight-line method of depreciation. For purposes of this section, a determination of whether an amount is properly charge- able to capital account shall be made on the basis of the principles that apply under subtitle A to amounts which are paid or incurred 26 USC 1. in a trade or business. "(f) AFFILIATED ORGANIZATIONS.— "(1) I N GENERAL.—^Except as otherwise provided in paragraph (4), if for a taxable year two or more organizations described in section 501(c) (3) are members of an affiliated group of orga- nizations as defined in paragraph (2), and an election under sec- tion 501(h) is effective for at least one such organization for Ante, p. 1720. such year, then— "(A) the determination as to whether excess lobbying expenditures have been made and the determination as to whether the expenditure limits of section 501(h)(1) have been exceeded shall be made as though such affiliated group is one organization, " ( B ) if such group has excess lobbying expenditures, each such organization as to which an election under section 501(h) is effective for such year shall be treated as an orga- nization which has excess lobbying expenditures in an amount which equals such organization's proportionate share of such group's excess lobbying expenditures, ^- "(C) if the expenditure limits of section 501(h)(1) are exceeded, each such organization as to which an election under section 501 (h) is effective for such year shall be treated as an organization which is not described in section 501(c) (3) by reason of the application of 501 (h), and "(i)) subparagraphs (C) and (D) of subsection ( d ) ( 2 ) , paragraph (3) of subsection (d), and clause (i) of subsec- 89-194 O—78—nt 9 17
90 STAT. 1726 PUBLIC LAW 94-455—OCT. 4, 1976 tion (e) (1) (C) shall be applied as if such affiliated group were one organization. " (2) DEFINITION OF AFFILIATION.—For purposes of paragraph (1), two organizations are members of an affiliated group of organizations but only if— "(A) the governing instrument of one such organization requires it to be bound by decisions of the other organization on legislative issues, or "(B) the governing board of one such organization includes persons who— "(i) are specifically designated representatives of another such organization or are members of the governing board, officers, or paid executive staff members of such other organization, and " (ii) by aggregating their votes, have sufficient voting power to cause or prevent action on legislative issues by the first such organization. Regulations. "(3) DrFFERENT TAXABLE YEARS.—If members of an affiliated group of organizations have different taxable years, their expend- itures shall be computed for purposes of this section in a manner to be prescribed by regulations promulgated by the Secretary. "(4) LIMITED CONTROL.—If two or more organizations are members of an affiliated group of organizations (as defined in paragraph (2) without regard to subparagraph (B) thereof), no two members of such affiliated group are affiliated (as defined in paragraph (2) without regard to subparagraph (A) thereof), and the governing instrument of no such organization requires it to be bound by decisions of any of the other such organizations on legislative issues other than as to action with respect to Acts, bills, resolutions, or similar items by the Congress, then— " (A) in the case of any organization whose decisions bind one or more members of such affiliated group, directly or indirectly, the determination as to whether such organization has paid or incurred excess lobbying expenditures and the determination as to whether such organization has exceeded Ante, p. 1720. f]^Q expenditure limits of section 501(h) (1) shall be made as though such organization has paid or incurred those amounts paid or incurred by such members of such affiliated group to influence legislation with respect to Acts, bills, resolutions, or similar items by the Congress, and "(B) in the case of any organization to which subpara- graph (A) does not apply, but which is a member of such affiliated group, the determination as to whether such organi- zation has paid or incurred excess lobbying expenditures and the determination as to whether such organization has exceeded the expenditure limits of section 501(h) (1) shall be made as though such organization is not a member of such affiliated group.", (c) DISALLOWING OF DEDUCTION FOR CONTRIBUTION To INFLUENCE 26 use 170. LEGISLATION.—Section 170(f) (relating to disallowance of charitable contribution deductions in certain cases) is amended by striking out paragraph (6) and inserting in lieu thereof the following: " (6) DEDUCTIONS FOR OUT-OF-POCKET EXPENDITURES.—No deduc- tion shall be allowed under this section for an out-of-pocket expenditure made by any person on behalf of an organization described in subsection (c) (other than an organization described in section 501(h) (5) (relating to churches, etc.)) if the expendi-
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1727 ture is made for the purpose of influencing legislation (within the meaning of section 501 (c) (3)).". (d) TECHNICAL AMENDMENTS.— (1) AMENDMENTS CONFORMING TO NEW SECTION 501(h).— Ante, p. 1720. (A) Section 501 (c) (3) is amended by striking out "no sub- 26 USC 501. stantial part of the activities of which is carrying on propa- ganda, or otherwise attempting, to influence legislatioUj" and inserting in lieu thereof "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in sub' section (h)),". (B) The following sections are amended by striking out ' 'N-- >:•) - 3 "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legisla- tion," each place it appears and inserting in lieu thereojp in - («s each such place "which is not disqualified for tax exemption under section 501(c) (3) by reason of attempting to influence .1 legislation,": (i) section 170(c)(2)(D) (relating to the definition of 26 USC 170. charitable contributions); ; . (ii) section 2055(a) (2) (relatingto transfers for pub- 26 USC 2055. lie, charitable, and religious uses); (iii) section 2106(a) (2) (A) (ii) (relatingto transfers 26 USC 2106. for public, charitable, and religious uses); (iv) section 2522(a)(2) (relating to charitable and 26 USC 2522. similar gifts of citizens or residents); and (v) section 2522(b) (2) (relating to charitable and similar gifts of nonresidents). (C) Sections 2055(a) (3) and 2106(a) (2) (A) (iii) (relat- 26 USC 2055, ing to transfers for public, charitable, and religious uses) are 2106. amended by striking out "no substantial part of the activities of such trustee or trustees, or of such fraternal society, order, or association, is carrying on propaganda, or otherwise attempting, to influence legislation," each place it appears and inserting m lieu thereof in each such place "such trust, fra- ternal society, order, or association would not be disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation,". (2) AMENDMENTS CONFORMING TO NEW CHAPTER 41.— (A) Paragraph (6) of section 275 (a) (denying deductions 26 USC 275. for certain taxes), as amended by this Act, is amended to read as follows: " (6) Taxes imposed by chapters 41, 42, 43, and 44." !n.^^?,?^^^' (B) Section 6104(c)(1)(B) (relating to notification of t '^7^, state officers regarding taxes imposed on certain exempt orga- '*^' P' nizations), is amended by striking out "chapter 42" and ^6 USC 6104. inserting in lieu thereof "chapter 41 or 42". (C) Section 6161 ('b) (relating to extensions of time for 26 USC 6161. paying tax) is amended— (i) in paragraph (1) by striking out "12" and insert- ing in lieu thereof "12, 41"; and (ii) in the second sentence by striking out "42," and inserting in lieu thereof "41, 42,". (D) Section 6201(d) (relating to assessment authority) 26 USC 6201. is amended by striking out "chapter 42, and chapter 43 taxes" and inserting in lieu thereof "and certain excise taxes".
90 STAT. 1728 PUBLIC LAW 94-455—OCT. 4, 1976 26 use 6211. (E) Section 6211(a) (defining deficiency) is amended by striking out "chapters 42" and inserting in lieu thereof "chapters 41, 42,''. (F) The following sections are amended by striking out "chapter 42" each place it appears and inserting in lieu thereof in each such place "chapter 41,42,"; (i) subsections (a) and (b) (2) of section 6211 (defin- ing deficiency); 26 use 6212. (ii) section 6212(a) (relating to notice of deficiency); 26 use 6213. (iii) section 6213(a) (relating to restrictions appli- cable to deficiencies and petitions to Tax Court); 26 use 6214. (iv) subsections (c) and (d) of section 6214 (relating to determinations by Tax Court); 26 use 6344. (v) section 6344(a) (1) (relating to cross references); 26 use 6501. (vi) section 6501(e)(3) (relating to limitations on assessment and collection); 26 use 6512. (vii) subsections (a) and (b) (1) of section 6512 (relat- ing to limitations in case of petition to Tax Court); and 26 use 7422. (viii) section 7422(e) (relating to civil actions for refund). 26 use 6212. (G) Section 6212 (relating to notice of deficiency) is amended— (i) in subsection (b) (1) by striking out "chapter 42" each place it appears and inserting in lieu thereof in each place "chapter 41, chapter 42"; and (ii) in subsection (c) (1) by striking out "of chapter 43 tax for the same taxable years," and inserting in lieu thereof "of chapter 41 tax for the same taxable year, of chapter 43 tax for the same taxable year,". (H) The headings of section 6214(c) (relating to determi- nations by Tax Court) and 6601(c) (relating to interest on underpayments, etc.) are amended by striking out "Chapter 42" and inserting in lieu thereof in each such place "Chapter 41, 42.". (3) AMENDMENTS TO TABLES OF CHAPTERS AND SECTIONS.— (A) The table of chapters for subtitle D is amended by inserting before the item relating to chapter 42 the following: "Chapter 41. Public charities." (B) The table of sections for part I of subchapter F of chapter 1 is amended by adding at the end thereof the fol- lowing : "Sec. 504. Status after organization ceases to qualify for exemp- tion under section 501(c)(3) because of substantial lobbying." 26 use 501 (e) EFFECTIVE DATE.—^The amendments made by this section shall note. a-pply— (1) except as otherwise specified in paragraph (2), in the case of 26 use 1. amendments to subtitle A, to taxable years beginning after Decem- ber 31,1976; (2) in the case of the amendments made by subsection (a) (2), to activities occurring after the date of the enactment of this Act; 26 use 2001. (3) in the case of amendments to chapter 11, to the estates of decedents dying after December 31,1976; 26 use 2501. (4) in the case of amendments to chapter 12, to gifts in calendar years beginning after December 31,1976;
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1729 (5) i n t h e case of amendments t o subtitle D , t o taxable years 26 USC 4001. beginning after December 31,1976; a n d (6) in t h e case of amendments to subtitle F , on a n d after t h e 26 USC 6001. date of t h e enactment of t h i s Act. SEC. 1308. TAX LIENS, ETC., NOT TO CONSTITUTE ACQUISITION INDEBTEDNESS. (a) GENERAL KULE.—Section 5 1 4 ( c ) ( 2 ) (relating to p r o p e r t y 26 USC 514. acquired subject to mortgages, etc.) is amended by a d d i n g a t the end thereof t h e following new s u b p a r a g r a p h : " ( C ) L I E N S FOR TAXES OR ASSESSMENTS.—^Where S t a t e law .. » provides t h a t — " ( i ) a lien for taxes, or ,j " (ii) a lien for assessments, m a d e by a S t a t e or a political subdivision thereof attaches t o p r o p e r t y p r i o r to t h e time when such taxes or assessments become due a n d payable, t h e n such lien shall be treated as similar t o a mortgage (within t h e meaning of s u b p a r a g r a p h , ,,,. ( A ) ) b u t only after such taxes or assessments become due and payable a n d t h e organization h a s h a d a n opportunity t o p a y such taxes or assessments i n accordance w i t h S t a t e law.". (b) EFFECTIVE D A T E . — T h e amendment made by this section shall 26 u s e 514 apply to taxable years ending after December 31,1969. note. SEC. 1309. EXTENSION OF SELF-DEALING TRANSITION RULES FOR PRIVATE FOUNDATIONS. (a) EXTENSION OF RULE.—Section 101 (1) (2) ( B ) of t h e T a x Reform 26 u s e 4940 A c t of 1969 is amended by striking out " J a n u a r y 1, 1975" a n d insert- note. ing in lieu thereof " J a n u a r y 1, 1977". (b) EFFECTIVE D A T E . — T h e amendment m a d e by this section shall a p p l y to dispositions made after t h e date of t h e enactment of this Act. SEC. 1310. IMPUTED INTEREST. (a) GENERAL RULE.—Section 4942(f) (2) (relating to income modi- 26 USC 4942. fications) is amended— (1) by striking out " a n d " a t the end of s u b p a r a g r a p h ( B ) , (2) b y striking out t h e period a t t h e end of s u b p a r a g r a p h ( C ) and inserting in lieu thereof " ; a n d " , a n d (3) by a d d i n g at the end thereof t h e following new sub- paragraph : " ( D ) section 483 (relating to imputed interest) shall n o t ^Pply ill the case of a binding contract made in a taxable year beginning before J a n u a r y 1, 1970.". (b) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 4942 a p p l y to taxable years ending after t h e date of t h e enactment of note. this Act. SEC. 1311. CERTAIN HOSPITAL SERVICES. (a) I N GENERAL.—Section 513 (relating to unrelated t r a d e o r 26 USC 513. business) is amended by a d d i n g a t t h e end thereof t h e following new subsection: "(e) CERTAIN HOSPITAL SERVICES.—In t h e case of a hospital "Unrelated trade described in section 170(b) (1) ( A ) ( i i i ) , t h e term 'unrelated t r a d e o r or business." business' does not include t h e furnishing of one or more of t h e services described in section 501(e) (1) ( A ) to one or more hospitals described in section 170(b) (1) ( A ) (iii) if—
90 STAT. 1730 PUBLIC LAW 94-455—OCT. 4, 1976 " ( 1 ) such services are furnished solely to such hospitals which have facilities to serve not more t h a n 100 i n p a t i e n t s ; " ( 2 ) such services, if performed on its own behalf by t h e recipient hospital, would constitute activities in exercising or performing t h e purpose or function constituting the basis for its exemption; and " ( 3 ) such services are provided at a fee or cost which does not exceed the actual cost of providing such services, such cost includ- ing straight line depreciation and a reasonable amount for r e t u r n on capital goods used to provide such services," 26 u s e 513 (b) ErrECTivE D A T E . — T h e amendment made by this section shall note. a,pply to all taxable years to which the I n t e r n a l Revenue Code of 26 u s e 1. 1954 applies. SEC. 1312. CLINICAL SERVICES OF COOPERATIVE HOSPITALS. 26 u s e 501. (a) I N GENERAL.—Section 501(e) (1) ( A ) (relating to cooperative hospital service organizations) is amended by inserting "clinical," after "food,". 26 u s e 501 (b) EFFECTIVE D A T E . — T h e amendment made by this section shall note. apply to taxable years ending after December 31, 1976. SEC. 1313. EXEMPTION OF CERTAIN AMATEUR ATHLETIC ORGANIZA- TIONS FROM TAX. 26 u s e 501. (a) I N G E N E R A L . — P a r a g r a p h (3) of section 501(c) (relating to exempt religious, charitable, etc., organizations) is amended by insert- i n g after "or educational purposes," the following: "or to foster national or international amateur sports competition (but only if no p a r t of its activities involve the provision of athletic facilities or equipment),". (b) TREATMENT OF G I F T S TO S U C H ORGANIZATIONS FOR INCOME, ESTATE AND G I F T T A X PURPOSES.— 26 u s e 170. (1) S u b p a r a g r a p h ( B ) of section 170(c) (2) (relating to defi- nition of charitable contribution) is amended by inserting after "or educational purposes" the following: ", or to foster national or international amateur sports competition (but only if no p a r t of its activities involve t h e provision of athletic facilities or equipment),". 26 u s e 2055. (2) P a r a g r a p h (2) of section 2055(a) (relating to transfers for public, charitable, and religious uses) is amended by inserting after "the encouragement of a r t " the following: ", or to foster national or international amateur sports competition (but only if no p a r t of its activities involve the provision of athletic facili- ties or equipment),". 26 u s e 2522. (3) P a r a g r a p h (2) of section 2522(a) (relating to charitable and similar gifts) is amended by inserting after "or educational purposes" the following: ", or to foster national or international amateur sports competition (but only if no p a r t of its activities involve the provision of athletic facilities or equipment),". 26 u s e 501 (c) A n organization which (Avithout regard to the amendments "°^- made by this section) is an organization described in section 170(c) (2) ( B ) , 501(c) ( 3 ) , 2055(a) ( 2 ) , or 2522(a) (2) of the I n t e r n a l Revenue Code of 1954 shall not be treated as an organization not so described as a result of the amendments made by this section. 26 u s e 501 (d) EFFECTIVE D A T E . — T h e amendments made by this section shall note. apply on the d a y following the date of the enactment of this Act.
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1731 TITLE XIV—TREATMENT OF CERTAIN CAPITAL LOSSES; HOLDING PERIOD FOR CAPITAL GAINS AND LOSSES ' SEC. 1401. INCREASE IN AMOUNT OF ORDINARY INCOME AGAINST WHICH CAPITAL LOSS MAY BE OFFSET. (a) GENERAL R U L E . — S u b p a r a g r a p h ( B ) of section 1211(b)(1) 26 USC1211. (relating t o limitation on capital losses for taxpayers other t h a n cor- porations) is amended by striking out "$1,000" a n d inserting in lieu . „ , .- thereof "the applicable amount". (b) APPLICABLE AMOUNT DEFINED.—Paragraph (2) of section , ^ 1211(b) (relating to limitation on capital losses for taxpayers other t h a n corporations) is amended to read as follows: " (2) APPLICABLE AMOUNT.—For purposes of p a r a g r a p h (1) ( B ) , the term 'applicable amount' means— " ( A ) $2,000 in t h e case of any taxable year beginning in -...-• 1977; a n d " (]3) $3,000 in t h e case of any taxable year beginning after 1977. I n t h e case of a separate return by a husband or wife, t h e appli- cable amount shall be one-half of t h e amount determined under the preceding sentence." »£ (c) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 1211 apply to taxable years beginning after December 31,1976. note. SEC. 1402. INCREASE IN HOLDING PERIOD REQUIRED FOR CAPITAL GAIN OR LOSS TO BE LONG TERM. ( a ) INCREASE I N T w o S T E P S F R O M 6 M O N T H S TO 1 Y E A R . — .i. (1) TAXABLE YEARS BEGINNING I N 1977.—Effective with respect to taxable years beginning in 1977, p a r a g r a p h s ( 1 ) , ( 2 ) , ( 3 ) , a n d (4) of section 1222 (relating to other terms relating to capital 26 USC 1222. gains a n d losses) a r e each amended by striking out "6 m o n t h s " and inserting in lieu thereof "9 months . (2) TAXABLE YEARS BEGINNING AFTER 1977.—Effective w i t h ; respect to taxable years beginning after December 31, 1977, para- g r a p h s ( 1 ) , ( 2 ) , ( 3 ) , a n d (4) of section 1222 are each amended by striking out "9 m o n t h s " a n d inserting in lieu thereof "1 year". S ^ eg (b) CONFORMING A M E N D M E N T S . — (1) TAXABLE YEARS BEGINNING I N 1977.—Effective with respect -^ " ''"^ to taxable years beginning in 1977, the following provisions are each amended by striking out "6 m o n t h s " each place it appears and inserting in lieu thereof "9 m o n t h s " : ( A ) P a r a g r a p h (1) ( B ) of section 166(d) (relating to non- 26 USC 166. business debts). ( B ) Subsection ( a ) of section 341 (relating to treatment 26 USC 341. of gain to shareholders in the case of collapsible corpora- tions). •' (C) P a r a g r a p h (2) of subsection ( a ) of section 402 (relat- 26 USC 402. ing t o capital gains treatment for certain distributions in the case of a beneficiary of an exempt employees' trust) and sub- p a r a g r a p h ( L ) of p a r a g r a p h (4) of section 402(e) (relating , v- to election t o t r e a t pre-1974 participation as post-1973 par- ticipation). ( D ) S u b p a r a g r a p h ( A ) of section 403(a) (2) (relating to 26 USC 403. capital gains treatment for certain distributions in the case of a beneficiary under a qualified a n n u i t y p l a n ) .
90 STAT. 1732 PUBLIC LAW 94-455—OCT. 4, 1976 26 use 423. (E) Paragraph (1) of section 423 (a) (relating to employee stock purchase plans). (F) Paragraph (1) of subsection (a) and paragraphs (1) 26 use 424. and (2) of subsection (c) of section 424 (relating to restricted stock options). 26 use 582. (G) Paragraph (2) of section 582(c) (relating to capital gains of banks). 26 use 584. (H) Subparagraphs (A) and (B) of section 584(c)(1) (relating to inclusions in taxable income of participants in common trust funds). 26 use 631. (I) Section 631 (relating to gain or loss in the case of timber, coal, or domestic iron ore). 26 use 642. (J) Paragraphs (3) and (4) of section 642(c) (relating to charitable deductions for certain trusts). 26 use 644. (K) Section 644 (relating to special holding period rules for gain on property transferred to trust at less than fair market value). 26 use 702. (L) Paragraphs (1) and (2) of section 702(a) (relating to income and credits of partner). 26 use 817. (M) Subparagraph (A) of section 817(a) (1) (relating to certain gains and losses in the case of life insurance companies). (N) Subparagraph (B) of paragraph (3). and paragraph 26 use 852. (4), of section 852 (b) (relating to taxation or shareholders of regulated investment companies). 26 use 856. (O) Subparagraph (A) of section 856(c) (4) (relating to definition of real estate investment trust). (P) Subparagraph (B) of paragraph (3), and paragraph 26 use 857. (5), of section 857(b) (relating to taxation of shareholders of real estate investment trusts). 26 use 1223. (Q) Paragraph (11) of section 1223 (relating to holding period of property). 26 use 1231. (R) Section 1231 (relating to property used in the trade or business and involuntary conversions). 26 use 1232. (S) Paragraph (2) of section 1232(a) (relating to sale or exchange in the case of bonds and other evidences of indebtedness). 26 use 1233. (T) Subsections (b), (d), and (e) of section 1233 (relat- ing to gains and losses from short sales). Post, p. 1929. (U) Paragraph (1) of section 1234(b) (relating to special rule for gain on lapse of an option granted as part of a straddle), as amended by this Act. 26 use 1235. (V) Subsection (a) of section 1235 (relating to sale or exchange of patents). 26 use 1246. (W) Paragraph (4) of section 1246(a) (relating to hold- ing period in the case of gain on foreign investment company stock). 26 use 1247. (X) Subsection (i) of section 1247 (relating to loss on sale or exchange of certain stock in the case of foreign investment companies electing to distribute income currently). (Y) Subsection (b), and subparagraph (C) of subsection 26 use 1248. ("f) C^)? of section 1248 (relating to gain from certain sales or exchanges of stock in certain foreign corporations). 26 use 1251. '^Z) Paragraph (1) of section 1251(6) (defining farm recapture property). (2) TAXABLE TEARS BEGINNING AFTER 1977.—^Effective with respect to taxable years beginning after December 31, 1977, each
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1733 provision referred to in p a r a g r a p h (1) is amended by striking out Ante, p. 1731. "9 m o n t h s " each place it appears and inserting in lieu thereof " 1 year". (3) TECHNICAL AMENDMENT.—Effective with respect to taxable years beginning after December 31,1976, section 631 (a) (relating 26 USC 631. to gain or loss in the case of timber) is amended by striking out "before the beginning of such year". (c) TRANSITIONAL R U L E FOR CERTAIN INSTALLMENT OBLIGATIONS.— 26 USC 453 I n t h e case of amounts received from sales or other dispositions of note, capital assets p u r s u a n t to binding contracts, including sales or other dispositions t h e income from which is returned on t h e basis and in the m a n n e r prescribed in section 453(a) (1) of the I n t e r n a l Revenue Code of 1954, if t h e gain or loss was treated as long-term for t h e taxable year for which the amount was realized, such gain or loss shall be treated a s long-term for t h e taxable year for which t h e g a i n or loss is returned o r otherwise recognized. (d) R E T E N T I O N OF 6 - M O N T H PERIOD FOR F U T U R E S TRANSACTIONS IN COMMODITIES.—Section 1222 (relating to other terms relating to 26 USC 1222. capital gains and losses) is amended by a d d i n g at t h e end thereof t h e following new sentence: " F o r purposes of this subtitle, in the case of futures transactions in any commodity subject to the rules of a board of t r a d e or com- modity exchange, t h e length of t h e holding period taken into account u n d e r this section or under any other section amended by section 1402 of t h e T a x Reform Act of 1976 shall be determined without regard to the amendments made by subsections (a) and (b) of such section 1402." SEC. 1403. ALLOWANCE OF 8-YEAR CAPITAL LOSS CARRYOVER IN CASE OF REGULATED INVESTMENT COMPANIES. (a) GENERAL R U L E . — P a r a g r a p h (1) of section 1212(a) (relating to 26 USC 1212. capital loss carrybacks and carryovers for corporations) is amended by striking out " a n d " at the end of s u b p a r a g r a p h ( A ) and by striking out s u b p a r a g r a p h ( B ) and inserting in lieu thereof t h e following: " ( B ) except as provided in s u b p a r a g r a p h ( C ) , a capital loss carryover to each of the 5 taxable years succeeding the loss y e a r ; and " ( C ) a capital loss carryover— " (i) in the case of a regulated investment company (as defined in section 851) to each of the 8 taxable years succeeding the loss year, and " (ii) to the extent such loss is attributable to a foreign exproj)riation capital loss, to each of the 10 taxable years exceeding the loss year." (b) EFFECTIVE D A T E . — T h e amendments made by this section shall 26 USC 1212 a p p l y to loss years (within the meaning of section 1212(a) (1) of the note. I n t e r n a l Revenue Code of 1954) ending on or after J a n u a r y 1, 1970. SEC. 1404. SALE OF RESIDENCE BY ELDERLY. (a) I N GENERAL.—Section 121(b) (1) (relating to gain from sale 26 USC 121. or exchange of residence of individual who has attained age 65) is amended by striking out "$20,000" each place it appears therein and inserting in lieu thereof "$35,000". (b) EFFECTIVE D A T E . — T h e amendment made by subsection (a) 26 USC 121 shall a p p l y to taxable years beginning after December 31, 1976. note.
90 STAT. 1734 PUBLIC LAW 94-455—OCT. 4, 1976 TITLE XV—PENSION AND INSURANCE TAXATION *^3;iSEC. 1501. RETIREMENT SAVINGS FOR CERTAIN MARRIED INDIVID- UALS. (a) ALLOWANCE OF DEDUCTION.—Part V I I of subchapter B of chap- a 4„ ; ter 1 (relating to additional itemized deductions for individuals) is ; amended by redesignating section 220 as 221 and by inserting after section 219 the following new section: 26 use 220. «SEC. 220. RETIREMENT SAVINGS FOR CERTAIN MARRIED INDIVID- UALS. "(a) DEDUCTION ALLOWED.—In the case of an individual, there is allowed as a deduction amounts paid in cash for a taxable year by or on behalf of such individual for the benefit of himself and his spouse— "(1) to an individual retirement account described in section 408(a), ~ *'"' ' "(2) for an individual retirement annuity described in section 408(b),or "(3) for a retirement bond described in section 409 (but only if the bond is not redeemed within 12 months of the date of its issuance). For purposes of this title, any amount paid by an employer to such a retirement account or for such a retirement annuity or retirement bond constitutes payment of compensation to the employee (other than a self-employed individual who is an employee within the meaning of section 401(c) (1)) includible in his gross income, whether or not a deduction for such payment is allowable under this section to the employee after the application of subsection (b). ^ J -. i "(b) LIMITATIONS AND RESTRICTIONS.— "(1) MAXIMUM DEDUCTION.—The amount allowable as a deduc- tion under subsection (a) to an individual for any taxable year may not exceed— "(A) twice the amount paid to the account or annuity, or for the bond, established for the individual or for his spouse to or for which the lesser amount was paid for the taxable year, "(B) an amount equal to 15 percent of the compensation includible in the individual's gross income for the taxable year, or "(C) $1,750, whichever is the smallest amount. " (2) ALTERNATIVE DEDUCTION.—No deduction is allowed under ,,, subsection (a) for the taxable year if the individual claims the deduction allowed by section 219 for the taxable year. "(3) COVERAGE UNDER CERTAIN OTHER PLANS.—No deduction is allowed under subsection (a) for an individual for the taxable year if for any part of such year— '* -•' * ^ "(A.) he or his spouse was an active participant in— "(i) a plan described in section 401(a) which includes a trust exempt from tax under section 501 (a), " (ii) an annuity plan described in section 403 (a), '• * " (iii) a qualified bond purchase plan described in sec- "*^' - tion 405(a), or , - -
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1735 . -^ " (iv) a plan established for its employees by the United States, b y a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing, or " ( B ) amounts were contributed by his employer, or his spouse's employer, for a n annuity contract described i n sec- tion 403 (b) (whether or not his, o r his spouse's, rights in such 26 USC 403. contract are nonforfeitable). " ( 4 ) CONTRIBUTIONS AFTER AGE 70^/4.—No deduction is allowed under subsection ( a ) with respect t o any payment which is made for a taxable year of a n individual if either the individual or his spouse has attained age 701/^ before t h e close of such taxable year. " (5) EECONTRIBUTED AMOUNTS.—No deduction is allowed under this section with respect t o a rollover contribution described i n section 4 0 2 ( a ) ( 5 ) , 4 0 3 ( a ) ( 4 ) , 4 0 8 ( d ) ( 3 ) , or 4 0 9 ( b ) ( 3 ) ( C ) . " ( 6 ) A M O U N T S CONTRIBUTED UNDER ENDOWMENT CONTRACT.—In the case of an endowment contract described i n section 4 0 8 ( b ) , no deduction is allowed under subsection ( a ) for t h a t portion of t h e amounts paid under the contract for t h e taxable year properly allocable, under regulations prescribed by t h e Secretary, t o t h e cost of life insurance. " ( 7 ) EMPLOYED SPOUSES.—No deduction is allowed under sub- section ( a ) with respect to a payment described in subsection ( a ) made for any taxable year of the individual if t h e spouse of t h e individual h a s a n y compensation (determined without regard t o section 911) for t h e taxable year of such spouse ending with or within such taxable year. " ( c ) D E F I N I T I O N S AND SPECIAL R U L E S . — " ( 1 ) COMPENSATION.—For purposes of this section, t h e t e r m 'compensation' includes earned income as defined in section 401 • <•••> (c)(2). " ( 2 ) MARRIED INDIVIDUALS.—This section shall be applied with- out regard t o a n y community p r o p e r t y laws. " (3) DETERMINATION OF MARITAL STATUS.—The d e t e r m i n a t i o n of whether an individual is married for purposes of this section shall be made i n accordance with the provisions of section 143(a). " (4) T I M E W H E N CONTRIBUTIONS DEEMED MADE.—-For purposes of this section, a taxpayer shall be deemed to have made a contribu- tion on t h e last d a y of t h e preceding taxable year if t h e contri- ] " bution is made on account of such taxable year a n d is made n o t later t h a n 45 days after the end of such taxable year. " ( 5 ) PARTICIPATION I N GOVERNMENTAL PLANS BY CERTAIN INDI- VIDUALS.—A member of a reserve component of the armed forces or a volunteer firefighter is not considered to be a n active p a r - * ticipant in a plan described in subsection (b) (3) ( A ) (iv) if, under section 2 1 9 ( c ) ( 4 ) , he is n o t considered to be a n active participant in such a plan." ( b ) CONFORMING A M E N D M E N T S . — (1) P a r a g r a p h (10) of section 62 (relating to retirement sav- 26 USC 62. ings) is amended by inserting before t h e period t h e following: "and the deduction allowed by section 220 (relating to retirement savings for certain married individuals)". (2) P a r a g r a p h (2) of section 408(c) is amended by inserting 26 USC 408. " ( o r spouse of a n employee or m e m b e r ) " after "member". (3) Subsection ( a ) of section 415 (relating to limitations on 26 USC 415. benefits a n d contributions under qualified plans) is amended— ( A ) by striking out " I n t h e case" i n p a r a g r a p h (2) a n d inserting i n lieu thereof " E x c e p t as provided i n p a r a g r a p h (3), in the case", and
90 STAT. 1736 PUBLIC LAW 94-455—OCT. 4, 1976 (B) by adding at the end thereof the following new para- graph : " ( 3 ) ACCOUNTS, ETC., ESTABLISHED FOR NON-EMPLOYED SPOUSE.— Paragraph (2) shall not apply for any year to an account, annuity, or bond described in section 408(a), 408(b), or 409, >• respectively, established for the benefit of the spouse of the indi- vidual contributing to such account, or for such annuity or bond. Ante, p. 1734. if a deduction is allowed under section 220 to such individual with respect to such contribution for such year.". 26 use 219. (4) Section 219 (relating to retirement savings) is amended— (A) by striking out "during" in subsection (a) and inserting in lieu thereof "for", (B) by adding at the end of subsection (b) the following new paragraph: "(6) ALTERNATIVE DEDUCTION.—No deduction is allowed under subsection (a) for the taxable year if the individual claims the deduction allowed by section 220 for the taxable year.", (C) by adding at the end of subsection (c) (2) the follow- ing new sentence: "For purposes of this section, the deter- mination of whether an individual is married shall be made in accordance with the provisions of section 143(a).", and (D) by adding at the end of subsection (c) the following new paragraph: "(3) T I M E WHEN CONTRIBUTIONS DEEMED MADE.—For purposes of this section, a taxpayer shall be deemed to have made a contri- bution on the last day of the preceding taxable year if the contri- bution is made on account of such taxable year and is made not later than 45 days after the end of such taxable year." 26 use 408. (5) Paragraph (4) of section 408(d) (relating to excess con- tributions returned before due date of return) is amended— (A) by inserting "or 220" after "219", and (B) by striking out the last sentence and inserting in lieu thereof the following: "In the case of such a distribution, for purposes of section 61, any net income described in subpara- graph (C) shall be deemed to have been earned and receiv- able in the taxable year in which such excess contribution is made." 26 use 409. (6) Paragraph (4) of section 409(a) (relating to retirement bonds) is amended by striking out "in any taxable year" and inserting in lieu thereof "for any taxable year". 26 use 3401. (7) Paragraph (12) of section 3401(a) (relating to definition of wages) is amended by inserting "or 220(a)" after "219(a)". 26 use 4973. (8) Section 4973 (relating to tax on excess contributions to individual retirement accounts, etc.) is amended— (A) by striking out "such individual" in the last sentence of subsection (a) and inserting in lieu thereof the following: "the individual to whom a deduction is allowed for the tax- '.«..'. ' able year under section 219 (determined without regard to subsection (b) (1) thereof) or section 220 (determined with- out regard to subsection (b) (1) thereof), wnichever is appro- priate" ; -n- (B) by inserting "or 220" after "219" in subsection (b) (1) (B);and ;; - - (C) by striking out paragraph (2) of subsection (b) and inserting in lieu thereof the following: "(2) the amount determined under this subsection for the preceding taxable year, reduced by the excess (if any) of the maximum amount allowable as a deduction under section 219
PUBLIC LAW 94-455—OCT. 4 , 1976 90 STAT. 1737 or 220 for t h e taxable year over t h e amount contributed to t h e Ante, p. 1734. accounts or for t h e annuities or bonds for the taxable year a n d reduced by t h e sum of t h e distributions o u t of t h e account ( f o r the taxable year and all prior taxable years) which were included in t h e gross income of t h e payee under section 408(d) ( 1 ) . F o r purposes of this subsection, any contribution which is distributed from t h e individual retirement account, individual retirement annu- ity, or bond in a distribution to which section 4 0 8 ( d ) ( 4 ) applies - shall be treated as an amount not contributed if such distribution con- sists of an excess contribution solely because of employer contributions to a plan or contract described in section 219(b) (2) or by reason of the application of section 2 1 9 ( b ) ( 1 ) (without regard to t h e $1,500 limitation) or section 220(b) (1) (without regard t o the $1,750 limi- tation) a n d only if such distribution does not exceed t h e excess of $1,500 or $1,750 if applicable, over the amount described in p a r a g r a p h (1)(B)." (9) Subsection ( d ) of section 6047 (relating t o other p r o - 26 USC 6047. grams) is amended by inserting "or 2 2 0 ( a ) " after " 2 1 9 ( a ) " . (10) P a r a g r a p h (1) of section 408(d) (relating to t a x treat- 26 USC 408. ment of distributions) is amended by striking out the second sen- tence and inserting in lieu thereof the following: "Notwithstand- ing a n y other provision of this title (including chapters 11 a n d 12), the basis any person in such a n account or annuity is zero.". (c) CLERICAL A M E N D M E N T . — T h e table of sections for p a r t V I I of subchapter B of chapter 1 is amended by striking out the item relat- ing to section 220 a n d inserting in lieu thereof t h e following: "Sec. 220. Retirement savings for certain married individuals. "Sec. 221. Cross references.". (d) EFFECTIVE D A T E . — T h e amendments made by this section, other 26 USC 220 t h a n t h e amendment made by subsection (b) ( 3 ) , shall apply t o taxa- note. ble years beginning after December 31, 1976. T h e amendment made I by subsection (b) (3) shall apply to years beginning after December 31, 1976. SEC. 1502. LIMITATION ON CONTRIBUTIONS TO CERTAIN PENSION, ETC., PLANS. " (a) I N GENERAL.— (1) L I M I T ON CONTRIBUTIONS.—Section 415 (c) ( r e l a t i n g to limi- 26 USC 415. tation for defined contribution plans) is amended by adding a t the end thereof the following new p a r a g r a p h : / " ( 5 ) APPLICATION W I T H SECTION 404(e) ( 4 ) . — I n the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401 ( c ) ( 1 ) , t h e amount determined under p a r a g r a p h (1) ( B ) with respect to any participant shall not be less t h a n the amount deduct- ible under section 404(e) with respect t o any individual who is an employee within t h e meaning of section 4 0 1 ( c ) ( 1 ) . " (2) M I N I M U M DEDUCTION LIMITATION.—Section 4 0 4 ( e ) ( 4 ) of 26 USC 404. such Code (relating to minimum deductible amount for pension plan contributions by self-employed individuals) is amended by ,; a d d i n g after s u b p a r a g r a p h ( B ) t h e following: " T h i s p a r a g r a p h does not apply for any taxable year to a n y employee whose adjusted gross income for such taxable year (determined sepa- rately for each individual, without regard to any community property laws, a n d without regard t o the deduction allowable under subsection ( a ) ) exceeds $15,000,"
9 0 STAT. 1738 PUBLIC LAW 94-455—OCT. 4, 1976 26 u s e 415 (b) EFFECTIVE D A T E . — T h e amendment made by subsection ( a ) (1) note. sball apply to years beginning after December 31, 1975. T h e amend- ment made by subsection ( a ) (2) shall apply to taxable years beginning after December 31, 1975. SEC. 1503. PARTICIPATION BY MEMBERS OF RESERVES OR NATIONAL GUARD, AND VOLUNTEER FIREFIGHTERS IN INDIVIDUAL RETIREMENT ACCOUNTS, ETC. 26 u s e 219. ( a ) GENERAL EULE.—Section 219(c) (relating t o definitions a n d special rules for retirement savings deduction) is amended by adding at the end thereof the following new p a r a g r a p h : " ( 4 ) PARTICIPATION I N GOVERNMENTAL PLANS BY CERTAIN INDIVIDUALS. " ( A ) MEMBERS o r RESERVE COMPONENTS.—A member of a reserve component of the armed forces (as defined in section 261 (a) of title 10) is not considered to be an active participant in a p l a n described in subsection ( b ) ( 3 ) ( A ) ( i v ) for a taxable •""^ *~' '"- year solely because he is a member of a reserve component unless he has served in excess of 90 days on active duty (other *' '• "- t h a n active duty for t r a i n i n g ) d u r i n g the year. "(B) VOLUNTEER FIREFIGHTERS.—An individual whose participation in a plan described in subsection (b) (3) ( A ) (iv) is based solely upon his activity as a volunteer firefighter and whose accrued benefit as of the beginning of t h e taxable year is n o t more t h a n an annual benefit of $1,800 (when expressed as a single life annuity commencing at age 65) is not considered to be an active participant in such a plan for the taxable year." 26 u s e 219 (b) EFFECTIVE D A T E . — T h e amendment made by this section shall °<*t®- a.pply to taxable years beginning after December 31, 1975. SEC. 1504. CERTAIN INVESTMENTS BY ANNUITY PLANS. 26 u s e 403. ( a ) I N G E N E R A L . — P a r a g r a p h (7) of section 403(b) (relating to custodial accounts for regulated investment company stock) is amended by striking out ", a n d which issues only redeemable stock" in subparagraph ( C ) . 26 u s e 403 (b) EFFECTIVE D A T E . — T h e amendment made by this section °°*®' applies t o taxable j^ears beginning after December 3 1 , 1975. . ; ' SEC. 1505. SEGREGATED ASSET ACCOUNTS. ( a ) SEGREGATED ASSET ACCOUNTS OF L I F E INSURANCE C O M P A N I E S . — 26 u s e 801. P a r a g r a p h (1) ( B ) of section 801(g) is amended— (1) by striking out clause (ii) a n d inserting in lieu thereof t h e following: " ( i i ) which is described in s u b p a r a g r a p h ( A ) , ( B ) , ( C ) , ( D ) , o r ( E ) of section 805(d) (1) ( o t h e r t h a n a l i f e , health or accident, property, casualty, or liability insur- ance contract) or which provides for t h e p a y m e n t of annuities, a n d " , a n d ?,{•;. >; ^': (2) by striking out "as annuities" i n clause (iii) a n d inserting i n lieu thereof "out". 26 u s e 401. ( b ) CONFORMING AMENDMENT.—Section 401 (relating t o qualified pension, etc. plans) is amended by striking out subsection (f) a n d inserting in lieu thereof the following: " (f) CERTAIN CUSTODIAL ACCOUNTS AND CONTRACTS.—For purposes of this title, a custodial account, an a n n u i t y contract, o r a contract (other t h a n a life, health o r accident, property, casualty, o r liability insurance contract) issued by a n insurance company qualified to d o
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1739 business in a State shall be treated as a qualified t r u s t u n d e r this section if— " ( 1 ) the custodial account or contract would, except for the fact t h a t i t is not a trust, constitute a qualified trust under this section, and " ( 2 ) in t h e case of a custodial account the assets thereof are held by a bank (as defined in subsection ( d ) ( 1 ) ) or another per- son who demonstrates, t o t h e satisfaction of t h e Secretary, t h a t the manner in which he will hold the assets will be consistent with the requirements of this section. , . * ' . <: F o r purposes of this title, in the case of a custodial account or contract treated as a qualified trust under this section by reason of this subsec- tion, the person holding the assets of such account or holding such contract shall be treated as the trustee thereof.". (c) EFFECTIVE D A T E . — T h e amendments made by this section apply 26 USC 801 for taxable years beginning after December 31, 1975. note. SEC. 1506. STUDY OF SALARY REDUCTION PENSION PLANS. Section 2006 of the Employee Retirement Income Security Act of 1974 is amended— 26 USC 401 (1) by striking out " J a n u a r y 1,1977" each place it appears and note, inserting in lieu thereof " J a n u a r y 1, 1978", and (2) by striking out "December 31, 1976" in subsection (d) and inserting in lieu thereof "December 31, 1977". SEC. 1507. CONSOLIDATED RETURNS FOR LIFE AND OTHER INSUR- ANCE COMPANIES. (a) I N GENERAL.—Section 1504(c) (relating to the definition of 26 USC 1504. includible insurance companies) is amended to read as follows: " (c) INCLUDIBLE INSURANCE COMPANIES.—Notwithstanding the pro- visions of p a r a g r a p h (2) of subsection (b) — " ( 1 ) T w o or more domestic insurance companies each of which is subject to t a x under section 802 shall be treated as includible corporations for purposes of applying subsection (a) to such insurance companies alone. " ( 2 ) ( A ) I f an affiliated g r o u p (determined without regard to subsection (b) (2) includes one o r more domestic insurance com- panies taxed under section 802 or 821, the common parent of such g r o u p may elect (pursuant to regulations prescribed by the Sec- r e t a r y ) to treat all such companies as includible corporations for purposes of a p p l y i n g subsection (a) except t h a t no such company shall be so treated until it has been a member of the affiliated g r o u p for the 5 taxable years immediately preceding the taxable year for which the consolidated return is filed. " ( B ) I f an election under this p a r a g r a p h is in effect for a taxable year— " ( i ) section 243(b) (6) and t h e exception provided under section 243(b) (5) with respect to subsections (b) (2) and (c) of this section, " ( i i ) section 542(b) ( 5 ) , and " ( i i i ) subsection ( a ) ( 4 ) and ( b ) ( 2 ) ( D ) of section 1563, and the reference to section 1563 (b) (2) ( D ) contained in sec- tion 1563(b) (3) ( C ) , shall not be effective for such taxable vear. (b) SPECIAL R U L E S AND CONFORMING A M E N D M E N T S , — (1) Section 821 (relating to tax on mutual insurance companies 26 USC 821. t o which p a r t I I applies, as amended by section 1901(a) (104) (C) of this Act,) is amended by redesignating subsection (e) as sub- Post, p. 1764.
9 0 STAT. 1740 PUBLIC LAW 94-455—OCT. 4, 1976 i section ( f ) , and by a d d i n g after subsection ( d ) the following new subsection: "(e) T A X APPLICABLE TO MEMBER o r GROUP F I L I N G CONSOLIDATED RETURN.—Notwithstanding a n y other provision of this section, if a mutual insurance company to which this section applies joins in t h e filing of a consolidated return (or is required to so file), the applicable tax shall consist of a normal tax and a surtax computed as provided Ante, p. 1606. i^^ section 11 as t h o u g h the mutual insurance company taxable income of such company were the taxable income referred to in section 11.". 26 u s e 843. (2) Section 843 (relating to annual accounting period) is amended by a d d i n g at the end thereof the following sentence: " U n d e r regulations prescribed by the Secretary, an insurance company which joins in the filing of a consolidated r e t u r n (or is required to so file) may adopt the taxable year of the common parent corporation even though such year is not a calendar year." 26 u s e 1503. (3) Section 1503 (relating to computation and p a y m e n t of t a x ) is amended by adding the following new subsection: " ( c ) SPECIAL R U L E FOR APPLICATION o r CERTAIN LOSSES A G A I N S T INCOME OF INSURANCE COMPANIES TAXED U N D E R SECTION 802.— " ( 1 ) I N GENERAL.—If an election under section 1504(c) (2) is in effect for the taxable year and the consolidated taxable income of the members of the group not taxed under section 802 results in a consolidated net operating loss for such taxable year, then under regulations prescribed by the Secretary, the amount of such loss which cannot be absorbed in the applicable carryback periods against the taxable income of such members not taxed under sec- tion 802 shall be taken into account in determining the consoli- dated taxable income of the affiliated g r o u p for such taxable year to the extent of 35 percent of such loss or 35 percent of the taxable income of the members taxed under section 802, whichever is less. T h e unused portion of such loss shall be available as a carryover, . subject to the same limitations (applicable to the sum of the loss for the carryover year and the loss (or losses) carried over to such y e a r ) , in applicable carryover years. F o r purposes of this subsec- tion, in determining the taxable income of each insurance com- pany subject to t a x under section 802, section 802(b) (3) shall not be taken into account. F o r taxable years ending with or within calendar year 1981, '25 percent' shall be substituted for '35 per- cent' each place it appears in the first sentence of this subsection. F o r taxable years ending with or within calendar year 1982, '30 percent' shall be substituted for '35 percent' each place it appears in t h a t sentence. "(2) LOSSES o r RECENT NONLIFE AFFILIATES.—Notwithstanding the provisions of p a r a g r a p h ( 1 ) , a net operating loss for a taxable year of a member of the g r o u p not taxed under section 802 shall not be taken into account in determining the taxable income of a member taxed under section 802 (either for the taxable year or as a carryover or carryback) if such taxable year precedes the sixth taxable year such members have been members of the same affili- ated g r o u p (determined without regard to section 1504(b) ( 2 ) ) . " 26 u s e 1504 (c) EFFECTIVE D A T E AND TRANSITIONAL R U L E S . — note. (1) EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall apply to taxable years beginning after Decem- ber 31, 1980. (2) TRANSITION RULES W I T H RESPECT TO CARRYOVERS OR CARRY- BACKS RELATING TO PRE-ELECTION TAXABLE YEARS AND NONTERMINA- *'«>T> i. 1 TiON O F G R O U P . —
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1741 (A) L I M I T A T I O N S ON CARRYOVERS OR CARRYBACKS FOR GROUPS ELECTING UNDER SECTION 1504(c) (2).—If an affiliated g r o u p elects to file a consolidated r e t u r n p u r s u a n t to section 1504 (c) (2) of the I n t e r n a l Revenue Code of 1954, a carryover of a loss or credit from a taxable year ending before J a n u a r y 1, 1981, and losses or credits which may be carried back to t a x - able years ending before such date, shall be taken into account - as if this section h a d not been enacted. ( B ) NoNTERMiNATioN OF AFFILIATED GROUP.—The mere election to file a consolidated return p u r s u a n t to such sec- tion 1504(c) (2) shall not cause the termination of an affiliated g r o u p filing consolidated returns. SEC. 1508. TREATMENT OF CERTAIN LIFE INSURANCE CONTRACTS GUARANTEED RENEWABLE. (a) I N G E N E R A L . — P a r a g r a p h ( d ) (5) of section 809 (relating to 26 USC 809. certain nonparticipating contracts) is amended by a d d i n g a t the end thereof the following sentence: " F o r purposes of this p a r a g r a p h , the period for which any contract is issued or renewed includes the period for which such contract is guaranteed renewable." (b) EFFECTIVE D A T E . — T h e amendment made by subsection (a) 26 USC 809 shall apply to taxable years beginning after December 31, 1957. note. SEC. 1509. STUDY OF EXPANDED PARTICIPATION IN INDIVIDUAL 26 USC 8022 RETIREMENT ACCOUNTS. note- T h e J o i n t Committee on Taxation shall carry out a study with respect t o broadening the class of individuals who are eligible t o claim a deduction for retirement savings u n d e r section 219 or 220 of the I n t e r n a l Revenue Code of 1954 to include individuals who are partici- 26 USC 219. p a n t s in pension plans described in section 401(a) of such Code Ante, p. 1734. (relating to qualified pension, profit-sharing, and stock bonus plans) or similar plans established for its employees by the United States, by a S t a t e or political division thereof, or by an agency or instru- mentality of the United States or a State or political division thereof. T h e J o i n t Committee shall report its findings to the Committee on Report to W a y s and Means of the House of Representatives and to t h e Commit- congressional tee on Finance of the Senate. committees. SEC. 1510. TAXABLE STATUS OF PENSION BENEFIT GUARANTY CORPORATION. (a) I N GENERAL.—Section 4002(g) (1) of t h e Employee Retirement ' Income Security Act of 1974 (29 U.S.C. 1302(f) ( 1 ) ) is amended by inserting "by the U n i t e d States (other t h a n taxes imposed under chapter 21 of the I n t e r n a l Revenue Code of 1954, relating to Federal 26 USC 3101. Insurance Contributions Act, and chapter 23 of such Code, relating to 26 USC 3301. Federal Unemployment T a x A c t ) , o r " immediately after "imposed". (b) EFFECTIVE D A T E . — T h e amendment made by subsection (a) sliall 29 USC 1302 take effect on September 2,1974. note. SEC. 1511. LEVEL PREMIUM PLANS COVERING OWNER-EMPLOYEES. ( a ) I N GENERAL.—Section 415(c) (relating to limitation for defined 26 USC 415. contribution plans) is amended by a d d i n g after p a r a g r a p h (6) t h e following new p a r a g r a p h : " ( 7 ) C E R T A I N LEVEL PREMIUM A N N U I T Y CONTRACTS UNDER P L A N S BENEFITING OWNER-EMPLOYEES.—Paragraph (1) ( B ) shall not a p p l y to a contribution described in section 401 (e) which is made on behalf of a p a r t i c i p a n t for a year to a plan Avhich benefits an owner-employee (within the meaning of section 401(c) ( 3 ) ) , if— 89-194 O—78—pt. 2 18
90 STAT. 1742 PUBLIC LAW 94-455—OCT. 4, 1976 •i^^'C""'' • " ( A ) t h e annual addition determined under this section with respect to the participant for such year consists solely of such contribution, and " ( B ) the participant is not an active participant at any time d u r i n g such year in a defined benefit plan maintained by the employer. 26 u s e 401. F o r purposes of this section a n d section 401(e), in t h e case of a plan which provides contributions or benefits for employees who are not owner-employees, such plan will not be treated as failing to satisfy section 4 0 1 ( a ) ( 4 ) merely because contributions made on behalf of employees w h o a r e n o t owner-employees a r e n o t permitted to exceed the limitations of p a r a g r a p h (1) ( B ) . " 26 u s e 415 ( b ) ErrECTivE D A T E . — T h e amendment made by this section shall note. apply for years beginning after December 31, 1975. SEC. 1512. LUMP-SUM DISTRIBUTIONS FROM QUALIFIED PENSION, ETC., PLANS. 26 u s e 402. ( a ) I N GENERAL.—Section 4 0 2 ( e ) ( 4 ) (relating to definitions a n d special rules) is amended by a d d i n g a t t h e end thereof t h e following new s u b p a r a g r a p h : f»,)p;^;. ! " ( L ) ELECTION TO TREAT P R E - I 9 74 PARTICIPATION AS POST- 1 9 7 3 PARTICIPATION.—For purposes of s u b p a r a g r a p h ( E ) , V., subsection ( a ) ( 2 ) , and section 403 (a) ( 2 ) , if a taxpayer elects (at t h e time a n d in t h e manner provided under regulations prescribed by the Secretary), all calendar years of an employ- ee's active participation in all plans in which t h e employee has been an active participant shall be considered years of active participation by such employee after December 31, 1973. A n election made under this subparagraph, once made, shall be irrevocable a n d shall apply t o all lump-sum distri- butions received by t h e t a x p a y e r with respect to the employee. This s u b p a r a g r a p h shall not apply if the t a x p a y e r received a lump-sum distribution in a previous taxable year of t h e ^ employee beginning after December 31, 1975, unless no por- tion of such lump-sum distribution was treated under sub- section (a) (2) or section 403(a) (2) as gain from t h e sale or exchange of a capital asset held for more t h a n 6 months." 26 u s e 402 (^) EFFECTIVE D A T E . — T h e amendment made by this section shall note apply to distributions and payments made after December 31,1975, in taxable years beginning after such date. TITLE XVI—REAL ESTATE INVESTMENT TRUSTS ' " SEC. 1601. DEFICIENCY DIVIDEND PROCEDURE. (a) I N GENERAL.— (1) P a r t I I of subchapter M of chapter 1 (relating t o real ;?J.# v*^j ii^ estate investment trusts) is amended by adding a t the end thereof the following new section: 26 u s e 859. "SEC. 859. DEDUCTION FOR DEFICIENCY DIVIDENDS. "(a) GENERAL R U L E . — I f a d e t e r m i n a t i o n (as defined in subsec- tion ( c ) ) with respect t o a real estate investment t r u s t results in any adjustment (as defined in subsection ( b ) ( 1 ) ) for any taxable year, a deduction shall be allowed to such t r u s t for t h e amount of deficiency dividends (as defined in subsection ( d ) ) for purposes of determining
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1743 the deduction for dividends paid (for purposes of section 857) for 26 USC 857. such year. " ( b ) R U L E S FOR A P P U C A T I O N OF S E C T I O N . — " ( 1 ) A D J U S T M E N T . — F o r purposes of this section, t h e term "Adjustment." 'adjustment' means— " ( A ) any increase in the sum of— " ( i ) t h e real estate investment t r u s t taxable income .,,!:, t,;' of t h e real estate investment trust (determined without regard t o t h e deduction for dividends paid ( a s defined in section 561) a n d by excluding any n e t capital g a i n ) , and " ( i i ) the excess of the n e t income from foreclosure property (as defined in section 857(b) (4) ( B ) ) over t h e tax on such income imposed by section 8 5 7 ( b ) ( 4 ) ( A ) , " ( B ) a n y increase in t h e amount of t h e excess described in section 857(b) (3) ( A ) (ii) (relating t o t h e excess of the Post, p. 1756. net capital gain over the deduction for capital gains dividends p a i d ) , and " ( C ) any decrease in the deduction for dividends paid (as defined i n section 561) determined without regard t o capital gains dividends. "(2) INTEREST AND ADDITIONS TO TAX DETERMINED W I T H RESPECT TO T H E AMOUNT OF DEFICIENCY DIVIDEND DEDUCTION ALLOWED.—For purposes of determining interest, additions to tax, and additional amounts— " ( A ) t h e t a x imposed by this chapter (after t a k i n g into account the deduction allowed by subsection ( a ) ) on t h e real estate investment trust for t h e taxable year with respect to which t h e determination is made shall be deemed t o be increased by a n amount equal to the deduction allowed by subsection (a) with respect to such taxable year, " ( B ) the last date prescribed for payment of such increase in t a x shall be deemed t o have been t h e last date prescribed for t h e payment of t a x (determined i n the manner provided by section 6601 ( c ) ) for the taxable year with respect t o which the determination is made, and " ( C ) such increase in t a x shall be deemed to be paid as of t h e date t h e claim for the deficiency dividend deduction is filed. "(3) CREDIT OR REFUND.—If t h e allowance of a deficiency dividend deduction results in an overpayment of t a x for any tax- able year, credit or refund with respect to such overpayment shall be made as if on the date of t h e determination 2 years remained before t h e expiration of the period of limitations on the filing of claim for refund for t h e taxable year t o which t h e overpayment relates. " ( c ) DETERMINATION.—For purposes of this section, the term "Determina- 'determination' means— tion." " ( 1 ) a decision by t h e T a x Court, or a judgment, decree, or other order by a n y court of competent jurisdiction, which h a s become final; " (2) a closing agreement made under section 7121; or " ( 3 ) under regulations prescribed by t h e Secretary, an agree- Regulations. ment signed by t h e Secretary a n d by, or on behalf of, t h e real estate investment trust relating t o t h e liability of such trust for tax.
9 0 STAT. 1 7 4 4 PUBLIC LAW 94-455—OCT. 4, 1 9 7 6 " ( d ) D E F I C I E N C T DIVIDENDS.— ' . ~ ..^ " ( 1 ) D E F I N I T I O N . — F o r purposes of this section, t h e term 'deficiency dividends' means a distribution of property made by '"' t h e real estate investment t r u s t on or after t h e date of t h e determi- nation a n d before filing claim u n d e r subsection ( e ) , which would have been includible in the computation of the deduction for divi- 26 u s e 561. dends paid under section 561 for t h e taxable year with respect t o which t h e liability for t a x resulting from t h e determination exists, if distributed d u r i n g such taxable year. N o distribution of prop- erty shall be considered as deficiency dividends for purposes of subsection ( a ) unless distributed within 90 days after t h e deter- mination, a n d unless a claim for a deficiency dividend deduction with respect t o such distribution is filed p u r s u a n t t o subsection (e). ^ " ( 2 ) LIMITATIONS.— M.?( "(A) ORDINARY DIVIDENDS.—The amount of deficiency dividends (other t h a n deficiency dividends qualifying as capital gain dividends) paid by a real estate investment t r u s t for t h e taxable year with respect t o which t h e liability for t a x resulting from t h e determination exists shall n o t exceed t h e sum of— " ( i ) t h e excess of t h e amount of increase referred t o in s u b p a r a g r a p h ( A ) of subsection ( b ) (1) over t h e amount of a n y increase i n t h e deduction for dividends paid (computed without regard to capital gain divi- dends) for such taxable year which results from such determination, a n d " ( i i ) t h e amount of decrease referred t o i n subpara- g r a p h ( C ) of subsection ( b ) ( 1 ) . " ( B ) CAPITAL GAIN DIVIDENDS.—The a m o u n t of deficiency dividends qualifying as capital gain dividends paid by a real estate investment t r u s t for t h e taxable year with respect t o which t h e liability for t a x resulting from t h e determination exists shall not exceed t h e amount by which ( i ) t h e increase referred to in s u b p a r a g r a p h ( B ) of subsection ( b ) (1) exceeds (ii) t h e amount of any dividends paid d u r i n g such taxable year which are designated as capital gain dividends after such determination. " (3) E F F E C T ON DIVIDENDS PAID DEDUCTION.— " ( A ) F O R TAXABLE YEAR I N W H I C H PAID.—Deficiency dividends p a i d i n a n y taxable year shall n o t be included i n the amount of dividends paid for such year for purposes of computing t h e dividends paid deduction for such year. " ( B ) F O R PRIOR TAXABLE YEAR.—Deficiency dividends p a i d in a n y taxable year shall not be allowed for purposes of section 858 (a) in t h e computation of the dividends p a i d deduc- tion for t h e taxable year preceding t h e taxable year i n which paid. " ( e ) CLAIM REQUIRED.—No deficiency dividend deduction shall be allowed under subsection ( a ) unless (under regulations prescribed b y the Secretary) claim therefor is filed within 120 days after t h e date of t h e determination. " ( f ) SUSPENSION OF STATUTE OF LIMITATIONS AND S T A Y OF COL- LECTION.— " ( 1 ) SUSPENSION OF R U N N I N G OF STATUTE.—If t h e r e a l estate investment t r u s t files a claim as provided i n subsection ( e ) , t h e
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1745 r u n n i n g of the statute of limitations provided i n section 6501 on the making of assessments, a n d t h e bringing of distraint or a proceeding in court for collection, in respect of the deficiency established by a determination under this section, and all interest, additions to t a x , additional amounts, or assessable penalties i n respect thereof, shall be suspended for a period of 2 years after the date of the determination. " ( 2 ) STAY o r COLLECTION.—In the case of any deficiency estab- lished by a determination under this section— " ( A ) the collection of the deficiency, and all interest, addi- v r'*' C tions to tax, additional amounts, a n d assessable penalties i n respect thereof, shall, except i n cases of jeopardy, be stayed until t h e expiration of 120 days after t h e date of t h e deter- mination, a n d " ( B ) if claim for a deficiency dividend deduction is filed under subsection ( e ) , the collection of such p a r t of t h e deficiency as is not reduced by t h e deduction for deficiency dividends provided i n subsection ( a ) shall be stayed u n t i l ' j. the date the claim is disallowed (in whole or in p a r t ) , and if disallowed i n p a r t collection shall be made only with respect to t h e p a r t disallowed. No distraint or proceeding in court shall be begun for t h e collection of a n amount t h e collection of which is stayed under s u b p a r a g r a p h ( A ) or ( B ) d u r i n g t h e period for which t h e collection of such amount is stayed. " ( g ) DEDUCTION D E N I E D I N CASE OF F R A U D . — N o deficiency dividend deduction shall be allowed under subsection ( a ) if t h e determination contains a finding t h a t any p a r t of any deficiency attributable to an adjustment with respect to the taxable year is due to fraud with intent to evade t a x o r t o willful failure t o file a n income t a x return within the time prescribed by law or prescribed by the Secretary i n pursuance r' ,., iv of law. "(h) PENALTY.— "For assessable penalty with respect to liability for tax of real estate investment trust which is allowed a deduction under subsection (a), see section 6697." (2) The table of sections for such p a r t I I is amended by a d d i n g at t h e end thereof the following new item: "Sec. 859. Deduction for deficiency dividends." (b) PENALTY.— (1) Subchapter B of chapter 68 (relating t o assessable penal- ties) is amended by a d d i n g a t the end thereof the following new section: "SEC. 6697. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR 26 USC 6697. TAX OF REAL ESTATE INVESTMENT TRUSTS. " ( a ) CIVIL P E N A L T Y . — I n addition to any other penalty provided by law, a n y real estate investment t r u s t whose t a x liability for any tax- able year is deemed to be increased pursuant to section 859(b) (2) ( A ) Anu, p. 1742. (relating t o interest a n d additions to t a x determined with respect to t h e amount of t h e deduction for deficiency dividends allowed) shall p a y a penalty in an amount equal to t h e amount of interest for which such t r u s t is liable t h a t is attributable solely t o such increase. " ( b ) 50-PERCENT LIMITATION.—The penalty payable under this section w i t h respect t o a n y determination shall not exceed one-half of t h e amount of t h e deduction allowed by section 859(a) for such taxable year.
9 0 STAT. 1746 PUBLIC LAW 94-455—OCT. 4, 1976 "(c) D E F I C I E N C Y PROCEDURES N O T T O A P P L Y . — S u b c h a p t e r B of 26 u s e 6211. chapter 63 (relating to deficiency procedure for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty^ imposed by subsection ( a ) . " (2) T h e table of sections for such subchapter B is amended by a d d i n g at the end thereof t h e following: "Sec. 6697. Assessable penalties with respect to liability for tax of real ( estate investment trusts." (c) L A T E DESIGNATION AND P A Y M E N T OF CAPITAL G A I N DIVIDEND.— 26 u s e 857. The first sentence of s u b p a r a g r a p h (C) of section 857(b) (3) (defin- ing capital g a i n dividend) is amended by inserting before the period at the end thereof the following: " ; except that, if there is an increase in the excess described in s u b p a r a g r a p h ( A ) (ii) of this p a r a g r a p h for such year which results from a determination (as defined in sec- tion 8 5 9 ( c ) ) , such designation may be made with respect to such increase at any time before the expiration of 120 days after the date of such determination". 26 u s e 316. (d) DEFINITION OF DIVIDEND.—Subsection (b) of section 316 (relating to the definition of dividend) is amended by a d d i n g a new p a r a g r a p h (3) at the end thereof, to read as follows: "(3) D E F I C I E N C Y DIVIDEND DISTRIBUTIONS BY A REAL ESTATE INVESTMENT TRUST.—The t e r m 'dividend' also means any distribu- tion of property (whether or not a dividend as defined in subsection ( a ) ) which constitutes a 'deficiency dividend' as defined in section 8 5 9 ( d ) . " 26 u s e 381. (e) CARRYOVER OF DEFICIENCY DIVIDEND.—Section 381(c) ( r e l a t i n g to carryovers in certain corporate acquisitions) is amended by a d d i n g a new p a r a g r a p h (25) at the end thereof, to read as follows: " (25) D E F I C I E N C Y DIVIDEND OF REAL ESTATE INVESTMENT TRUST.— I f the acquiring corporation pays a deficiency dividend (as Ante, p. 1742. defined in section 8 5 9 ( d ) ) with respect to the distributor or trans- feror corporation, such distributor or transferor corporation shall, with respect to such payments, be entitled to the deficiency divi- dend deduction provided in section 859." (f) T E C H N I C A L A M E N D M E N T S . — 26 u s e 6422. (1) Section 6422 (relating to certain cross references) is amended by a d d i n g a new p a r a g r a p h (14) at the end thereof to read as follows: "(14) for credit or refund in case of deficiency dividends paid by a real estate investment trust, see section 859." 26 u s e 6503. (2) Section 6503(i) (relating to certain cross references) is amended by a d d i n g a new p a r a g r a p h (5) at the end thereof, to read as follows: "(5) Deficiency dividends of a real estate investment trust, see section 859(f).'' 26 u s e 6515. (3) Section 6515 (relating to certain cross references) is amended by a d d i n g a new p a r a g r a p h (8) a t t h e end thereof, to ^,_ read as follows: "(8) Deficiency dividends of a real estate investment trust, see section 859." SEC. 1602. TRUST NOT DISQUALIFIED IN CERTAIN CASES WHERE INCOME TESTS WERE NOT MET. 26 u s e 856. (a) DISQUALIFICATION N o r APPLIED.—Section 856(c) (relating to limitations) is amended by a d d i n g a t the end thereof t h e following new p a r a g r a p h : , ,
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1747 " (7) A corporation, trust, or association which fails to meet the requirements of paragraph (2) or (3), or of both such para- graphs, for any taxable year shall nevertheless be considered to S nave satisfied the requirements of such paragraphs for such tax- able year if— "(A) the nature and amount of each item of its gross income described in such paragraphs is set forth in a schedule attached to its income tax return for such taxable year; "(B) the inclusion of any incorrect information in the schedule referred to in subparagraph (A) is not due to fraud with intent to evade tax; and "(C) the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, is due to reasonable cause and not due to willful neglect.", (b) IMPOSITION or SPECIAL TAXES.— (1) Section 857(b) (relating to method of taxation of real 26 USC 857. estate investment trusts, etc.) is amended by redesignating para- graph (5) as paragraph (7) and by inserting after paragraph (4) the following new paragraph: "(6) IMPOSITION or TAX IN CASE or FAILURE TO MEET CERTAIN REQUIREMENTS.—If section 856(c)(7) applies to a real estate Ante, p. 174-2. investment trust for any taxable year, there is hereby imposed on such trust a tax in an amount equal to the greater of— "(A) the excess of— " (i) 95 percent (90 percent in the case of taxable years beginning before January 1, 1980) of the gross income (excluding gross income from prohibited transactions) of the real estate investment trusty over " (ii) the amount of such gross income which is derived from sources referred to in section 856(c) ( 2 ) ; or ; ^ "(B) the excess of— "(i) 75 percent of the gross income (excluding gross income from prohibited transactions) of the real estate investment trust, over " (ii) the amount of such gross income which is derived from sources referred to in section 856(c) (3), multiplied by a fraction the numerator of which is the real estate investment trust taxable income for the taxable year (determined without regard to the deductions provided in paragraphs (2) (B) and (2) ( E ) , without regard to any net operating loss deduction, and by excluding any net capital gain) and the denominator of which is the gross income for the taxable year (excluding gross income from prohibited transactions; gross income and gain from foreclosure prop- erty (as defined in section 856 (e), but only to the extent such gross income and gain is not described in subparagraph (A), (B), (C), (D), ( E ) , or (G) of section 856(c)(3)); long- 26 USC 856. term capital gain; and short-term capital gain to the extent Post, p. 1750. of any short-term capital loss)." (2) Section 857(b)(2) (relating to real estate investment trust 26 USC 857. taxable income) is amended by inserting after subparagraph (D) (as redesignated by section 1606(a) of this Act) the following new subparagraph: " ( E ) There shall be deducted an amount equal to the tax imposed by paragraph (5) for the taxable year.".
90 STAT. 1748 PUBLIC LAW 94-455—OCT. 4, 1976 SEC. 1603. TREATMENT OF PROPERTY HELD FOR SALE TO CUSTOMERS. (a) ELIMINATION OF HOLDING FOR SALE RULE AS QUALIFICATION 26 use 856. REQUIREMENT.—Section 856 (a) (defining real estate investment trust) is amended by striking out paragraph (4). (b) TAX ON INCOME FROM PROPERTY DESCRIBED IN SECTION 1221(1) 26 use 857. THAT I S NOT FORECLOSURE PROPERTY.—Section 857(b) (relating to method of taxation of real estate investment trusts, etc.) is amended by inserting after paragraph (5) (as added by section 1602(b) (1) of this Act) the following new paragraph: " ( 6 ) I N C O M E FROM P R O H I B I T E D TRANSACTIONS.— "(A) IMPOSITION OF TAX.—There is hereby imposed for each taxable year of every real estate investment trust a tax equal to 100 percent of the net income derived from pro- hibited transactions. " ( B ) DEFINITIONS.—For purposes of this part— *""'' "(i) the term 'net income derived from prohibited transactions' means the excess of the gain from prohib- ited transactions over the deductions allowed by this chapter which are directly connected with prohibited transactions; i»> • t? '>.i. "(ii) the term 'net loss derived from prohibited trans- actions' means the excess of the deductions allowed by this chapter which are directly connected with prohib- ited transactions over the gain from prohibited trans- actions; and "(iii) the term 'prohibited transaction' means a sale or other disposition of property described in section 1221 (1) which is not foreclosure property." (c) TECHNICAL AMENDMENTS.— 26 use 856. (1) So much of paragraph (3) of section 856(c) (relating to limitations) as precedes subparagraph (A) thereof is amended to read as follows: "(3) at least 75 percent of its gross income (excluding gross income from prohibited transactions) is derived from—". (2) Section 856(c) (2) (relating to limitations) is amended by inserting before the semicolon m subparagraph (D) thereof "which is not property described in section 1221(1)". (3) Section 856(c) (3) (relating to limitations) is amended by inserting before the semicolon in subparagraph (C) thereof "which IS not property described in section 1221(1)". (4) Section 856(e)(1) (defining foreclosure property) is amended by adding at the end thereof the following sentence: "Such term does not include property acquired by the real estate investment trust as a result of indebtedness arising from the sale or other disposition of property of the trust described in section 1221(1) which was not originally acquired as foreclosure property." 26 use 857. (5) Section 857(b) (2) (relating to real estate investment trust taxable income) is amended by adding a new subparagraph (F) immediately after subparagraph (E) (as added by section 1602 (b) (2) of this Act), to read as follows: " ( F ) There shall be excluded an amount equal to any net income derived from prohibited transactions and there shall be included an amount equal to any net loss derived from pro- hibited transactions."
PUBLIC LAW 94-455—OCT. 4 , 1976 9 0 STAT. 1749 SEC. 1604. OTHER CHANGES IN LIMITATIONS AND REQUIREMENTS. (a) INCREASE I N 9 0 - P E R C E N T GROSS INCOME R E Q U I R E M E N T TO 95 PERCENT.—Section 856(c) (2) (relating t o limitations) is amended by 26USC856. striking out "90 percent of its gross income" a n d inserting in lieu thereof "95 percent (90 percent for taxable years beginning before J a n u a r y 1, 1980) of its gross income (excluding gross income from prohibited transactions)". ( b ) APPORTIONMENT OF R E N T A L INCOME AND CHARGES FOR CUSTOM- ARY SERVICES ; C H A N G E I N D E F I N I T I O N OF INDEPENDENT CONTRACTOR.— Subsection ( d ) of section 856 (defining rents from real property) is amended to read as follows: " ( d ) R E N T S F R O M R E A L PROPERTY D E F I N E D . — " ( 1 ) A M O U N T S INCLUDED.—For purposes of p a r a g r a p h s (2) a n d (3) of subsection ( c ) , the term 'rents from real property' includes (subject t o p a r a g r a p h ( 2 ) ) — " (A) rents from interests in real property, " ( B ) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and " ( C ) rent attributable to personal property which is leased under, or in connection with, a lease of real property, b u t only if t h e rent attributable t o such personal property 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, o r in connection with, such lease. F o r purposes of s u b p a r a g r a p h ( C ) , with respect t o each lease of real property, rent attributable t o personal property for t h e tax- able year is t h a t amount which bears the same ratio t o total rent for t h e taxable year as t h e average of t h e adjusted bases of t h e personal property a t the beginning and at the end of the taxable year beai-s t o the average of the aggregate adjusted bases of both the real property and the personal property a t t h e beginning and at the end of such taxable year. " ( 2 ) A M O U N T S EXCLUDED.—For purposes of p a r a g r a p h s (2) a n d (3) of subsection ( c ) , the term 'rents from real property' does not include— " ( A ) except as provided i n p a r a g r a p h ( 4 ) , a n y amount - •'- received or accrued, directly or indirectly, with respect to any real or personal property, if t h e determination of such amount depends in whole or in part on the income o r profits derived by any person from such property (except t h a t any amount so received o r accrued shall n o t be excluded from t h e t e r m 'rents from real property' solely by reason of being based on a fixed percentage or percentages of receipts or s a l e s ) ; " ( B ) any amount received or accrued directly or indirectly from any person if t h e real estate investment t r u s t owns, directly or indirectly— *'(i) i n the case of any person which is a corporation, stock of such person possessing 10 percent o r more of t h e total combined voting power of all classes of stock entitled t o vote, o r 10 percent or more of the total number of shares of all classes of stock of such person; or " ( i i ) i n the case of any person which is not a corpora- tion, an interest of 10 percent or more i n t h e assets or net profits of such person; and " ( C ) any amount received or accrued, directly or indirectly, with respect t o a n y real or personal property if t h e real
90 STAT. 1750 PUBLIC LAW 94-455—OCT. 4, 1976 estate investment t r u s t furnishes or renders services to the ten- a n t s of such property, o r manages or operates such property, ,«»ft8 ><• f ')<; other t h a n t h r o u g h an independent contractor from whom t h e t r u s t itself does not derive or receive any income. " ( 3 ) INDEPENDENT CONTRACTOR DEFINED.—For purposes of t h i s subsection and subsection ( e ) , the t e r m 'independent contractor' means any person— " ( A ) who does not own, directly or indirectly, more t h a n 35 percent of the shares, or certificates of beneficial interest, in the real estate investment t r u s t ; and " ( B ) if such person is a corporation, not more t h a n 35 per- cent of the total combined voting power of whose stock (or 35 percent of t h e total shares of all classes of whose stock), or, if such person is not a corporation, not more t h a n 35 percent of t h e interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. "(4) SPECIAL RULE FOR CERTAIN CONTINGENT RENTS.—^Where a real estate investment t r u s t receives or accrues, with respect to real or personal property, any amount which would be excluded from t h e t e r m 'rents from real p r o p e r t y ' solely because the t e n a n t of the real estate investment trust receives or accrues, directly or indi- rectly, from subtenants any amount the determination of which depends in whole or in p a r t on the income or profits derived by any person from such property, only a proportionate p a r t (deter- mined p u r s u a n t to regulations prescribed by the Secretary) of the amount received or accrued by t h e real estate investment t r u s t from t h a t t e n a n t will be excluded from t h e t e r m 'rents from real property'. " ( 5 ) CONSTRUCTIVE OWNERSHIP OF STOCK.—For purposes of this subsection, the rules prescribed by section 318(a) for determining t h e ownership of stock shall apply in determining the ownership of stock, assets, or net profits of any person; except t h a t '10 per- cent' shall be substituted for '50 percent' in s u b p a r a g r a p h (C) of section 318(a) (2) a n d 318 (a) ( 3 ) . " (c) C O M M I T M E N T F E E S . — 26 u s e 856. (1) I N GENERAL.—Paragraphs (2) and (3) of section 856(c) (relating to limitations) are each amended by striking out " a n d " after the semicolon a t the end of s u b p a r a g r a p h ( E ) , by inserting " a n d " after the semicolon at the end of s u b p a r a g r a p h ( F ) , and by a d d i n g a t t h e end thereof the following new s u b p a r a g r a p h : " ( G ) amounts (other t h a n amounts the determination of ^^ which depends in whole or in p a r t on t h e income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to pur- chase or lease real property (including interests in real prop- erty a n d interests in mortgages on real p r o p e r t y ) ; " . 26 u s e 857. (2) CONFORMING AMENDMENT.—Section 857(b) (4) ( B ) (relat- i n g to net income from foreclosure property) is amended by strik- i n g out " ( D ) , or ( E ) " in subdivision (i) and inserting in lieu thereof " ( D ) , ( E ) , o r ( G ) " . ( d ) INCOME F R O M SALE OF MORTGAGES H E L D L E S S T H A N 4 Y E A R S . — Section 8 5 6 ( c ) ( 4 ) (relating to limitations) is amended to read as follows: . . n . , n " ( 4 ) less t h a n 30 percent of its gross income is derived from t h e sale or other disposition of— . ,..
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1751 %;'• " ( A ) stock or securities held for less t h a n 6 m o n t h s ; " ( B ) section 1221(1) p r o p e r t y (other t h a n foreclosure p r o p e r t y ) ; and " ( C ) real property (including interests in real property and interests in mortgages on real p r o p e r t y ) held for less t h a n 4 years other t h a n — " ( i ) property compulsorily or involuntarily converted within the meaning of section 1033, and " ( i i ) property which is foreclosure property within the definition of section 856 ( e ) ; and". (e) OPTIONS To PURCHASE R E A L PROPERTY TREATED AS INTERESTS IN REAL PROPERTY.—Section 856(c) (6) (C) (relating to limitations) is 26 USC 856. amended to read as follows: " (C) T h e term 'interests in real p r o p e r t y ' includes fee own- "Interests in real ership and co-ownership of land or improvements thereon, property." leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire lease- holds of land or improvements thereon, but does not include mineral, oil, or gas royalty interests." (f) R E A L ESTATE INVESTMENT TRUSTS M A Y B E INCORPORATED.— (1) I N GENERAL.—So much of subsection (a) of section 856 (defining real estate investment t r u s t ) as precedes p a r a g r a p h (3) thereof is amended to read as follows: " ( a ) I N GENERAL.—For purposes of this title, the term 'real estate "Real estate investment t r u s t ' means a corporation, trust, or association— investment " ( 1 ) which is managed by one or more trustees or directors; trust," " ( 2 ) the beneficial ownership of which is evidenced by t r a n s - ferable shares, or by transferable certificates of beneficial interest;". (2) EXCEPTION FOR FINANCIAL INSTITUTIONS AND INSURANCE COM- PANIES.—Section 856(a) (defining real estate investment trust) Ante, p. 1748 is amended by inserting after p a r a g r a p h (3) t h e following new paragraph: " ( 4 ) which is neither ( A ) a financial institution to which sec- tion 585, 586, or 593 applies, nor ( B ) an insurance company to which subchapter L applies;". 26 USC 801. (3) CONFORMING AMENDMENTS.— ( A ) So much of section 856(c) (relating to limitations) as precedes p a r a g r a p h (1) thereof is amended by striking out " A t r u s t or association" and inserting in lieu thereof " A cor- poration, trust, or association". ( B ) T h e second sentence of section 857(d) (relating to 26 USC 857. earnings and profits) is amended by striking out "a domestic unincorporated t r u s t " and inserting in lieu thereof "a domes- tic corporation, trust,". ( g ) INTEREST.—Section 856 (relating to definition of real estate investment trust) is amended by adding after subsection (e) the following new subsection: " ( f ) INTEREST.—For purposes of p a r a g r a p h s (2) ( B ) and (3) ( B ) of "Interest." subsection ( c ) , the term 'interest' does not include any amount received or accrued, directly or indirectly, if the determination of such amount depends in whole or in p a r t on the income or profits of any person except t h a t : " ( 1 ) 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 " ( 2 ) where a real estate investment t r u s t receives or accrues any amount which would be excluded from the term 'interest'
90 STAT. 1752 PUBLIC LAW 94-455—OCT. 4, 1976 solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursuant to regulations pre- scribed by the Secretary) of the amount received or accrued by the real estate investment trust from such debtor will be excluded from the term'interest'. The provisions of this subsection shall apply only with respect to amounts received or accrued pursuant to loans made after May 27, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28,1976, if such loan is made pursuant to a binding commitment entered into before May 28,1976." 26 use 858. (h) CERTAIN DIVIDENDS.—The first sentence of section 858 (a) (relat- ing to dividends paid by real estate investment trust after close of taxable year) is amended— (1) by inserting "(and specifies in dollar amounts)" after "to the extent the trust elects in such return", and (2) by striking out "paid during such taxable year" and insert- ing in lieu thereof "paid only during such taxable year". (i) ADOPTION or ANNUAL ACCOUNTING PERIOD.— (1) Part I I of subchapter M of chapter 1 (relating to real estate investment trusts) is amended by adding at the end thereof the following new section: 26 u s e 860. "SEC. 860. ADOPTION OF ANNUAL ACCOUNTING PERIOD. "For purposes of this subtitle, a real estate investment trust shall not change to or adopt any annual accounting period other than the calendar year." (2) The table of sections for such part I I is amended by adding at the end thereof the following: " ' "Sec. 860, Adoption of annual accounting period." 26 use 857. (j) CHANGE I N DISTRIBUTION KEQUIREMENTS.—Section 857(a)(1) (relating to requirements applicable to real estate investment trusts) is amended to read as follows: "(1) the deduction for dividends paid during the taxable year • ' (as defined in section 561, but determined without regard to capi- tal gains dividends) equals or exceeds— "(A) the sum of— "(i) 95 percent (90 percent for taxable years begin- ning before January 1,1980) of the real estate investment trust taxable income for the taxable year (determined •'•''': ' without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain); and "(ii) 95 percent (90 percent for taxable years begin- ing before January 1, 1980) of the excess of the net income from foreclosure property over the tax imposed on such income by subsection ( b ) ( 4 ) ( A ) ; minus '^"'^" •' " ( B ) the sum of— "(i) the amount of any penalty imposed on the real Ante, p. 1745. estate investment trust by section 6697 which is paid by such trust during the taxable year; and " (ii) the net loss derived from prohibited transactions, and", (k) MANNER AND EFFECT OF TERMINATION OR REVOCATION OF ELECTION.—
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1753 (1) I N GENERAL.—Section 856 (relating to definition of real 26USC856. estate investment trust) is amended by adding after subsection (f) (as added by section 1604(g) of this Act) the following new subsection: "(g) TERMINATION OF ELECTION.— " (1) FAILURE TO QUALIEY.—^An election under subsection (c) (1) made by a corporation, trust, or association shall terminate if the corporation, trust, or association is not a real estate invest- ment trust to which the provisions of this part apply for the tax- able year with respect to which the election is made, or for any succeeding taxable year. Such termination shall be effective for the taxable year for which the corporation, trust, or association is not a real estate investment trust to which the provisions of this part apply, and for all succeeding taxable years. "(2) REVOCATION.—An election under subsection (c)(1) made by a corporation, trust, or association may be revoked by it for any taxable year after the first taxable year for which the elec- tion is effective. A revocation under this paragraph shall be effec- tive for the taxable year in which made and for all succeeding taxable years. Such revocation must be made on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. Such revocation shall be made in such Regulations, manner as the Secretary shall prescribe by regulations. "(3) ELECTION AFTER TERMINATION OR REVOCATION.—Except as provided in paragraph (4), if a corporation, trust, or association has made an election under subsection (c) (1) and such election has been terminated or revoked under paragraph (1) or para- graph (2), such corporation, trust, or association (and any suc- cessor corporation, trust, or association) shall not be eligible to make an election under subsection (c)(1) for any taxable year prior to the fifth taxable year which begins after the first taxable .; ? .^ year for which such termination or revocation is effective. "(4) EXCEPTION.—If the election of a corporation, trust, or association has been terminated under paragraph (1), paragraph (3) shall not apply if— ^ .m d*i " ( A ) the corporation, trust, or association does not will- fully fail to file within the time prescribed by law an income tax return for the taxable year with respect to which thei ter- mination of the election under subsection (c) (1) occurs; "(B) the inclusion of any incorrect information in the return referred to in subparagraph (A) is not due to fraud with intent to evade tax; and , . j ^y. "(C) the corporation, trust, or association establishes to the satisfaction of the Secretary that its failure to qualify as a real estate investment trust to which the provisions of this part apply is due to reasonable cause and not due to willful neglect." , ^ (2) CONFORMING AMENDMENTS.— (A) Section 856(c)(1) (relating to limitations) is amended by striking out the semicolon at the end and inserting in lieu thereof ", and such election has not been terminated or revoked under subsection (g);". (B) Section 857 (a) (relating to requirements applicable to real 26 USC 857. estate investment trust) is amended by striking out "(other than subsection (d) of this section)" and inserting in lieu thereof "(other than subsection (d) of this section and subsection (g) of section 856)".
90 STAT. 1754 PUBLIC LAW 94-455—OCT. 4, 1976 .;:^t^.... ^ SEC. 1605. EXCISE TAX. ,....,..,.„» ...i / i \ (a) IMPOSITION OF TAX.—Subtitle D (relating to miscellaneous excise taxes) is amended by a d d i n g at the end thereof the following new chapter: "CHAPTER 44—REAL ESTATE INVEST- MENT TRUSTS "Sec. 4981. Excise tax based on certain real estate investment trust taxable income not distributed during the taxable year. 26 u s e 4981. "SEC. 4981. E X a S E TAX BASED ON CERTAIN REAL ESTATE INVEST- MENT TRUST TAXABLE INCOME NOT DISTRIBUTED DURING THE TAXABLE YEAR. "Effective with respect t o taxable years beginning after Decem- ber 31, 1979, there is hereby imposed on each real estate investment t r u s t for t h e taxable year a t a x equal to 3 percent of t h e amount (if any) by which 75 percent of the real estate investment t r u s t taxable income (as defined in section 8 5 7 ( b ) ( 2 ) , b u t determined without regard to section 857(b) (2) ( B ) , and by excluding any net capital gain for the taxable year) exceeds the amount of the dividends paid deduc- tion (as defined in section 561, but computed without regard t o capital gains dividends as defined in section 8 5 7 ( b ) ( 3 ) ( C ) and without regard to any dividend paid after the close of the taxable year) for the taxable year. F o r purposes of the preceding sentence, the determina- tion of t h e real estate investment t r u s t taxable income shall be made by t a k i n g into account only t h e amount and character of the items of income and deduction as reported b y such t r u s t i n its r e t u r n for t h e taxable year." (b) TECHNICAL AMENDMENTS.— 26 u s e 275. (1) P a r a g r a p h (6) of section 275(a) (relating to denial of deduction for certain taxes) is amended by s t r i k i n g out " a n d chapter 43." a n d inserting in lieu thereof ", chapter 43, and chap- t e r 44." 26 u s e 857. (2) Section 857 (relating to taxation of real estate investment trusts and their beneficiaries) is amended by a d d i n g at the end thereof the following new subsection: "(e) CROSS R E F E R E N C E . — "For provisions relating to excise tax based on certain real estate investment trust taxable income not distributed during the taxable year, see section 4981." 26 u s e 6161. (3) Section 6161(b) (1) relating to extensions of time for pay- ment of t a x ) , as amended by this Act, is amended by striking out "42 or 4 3 " and inserting in lieu thereof "42, 43, or 44". T h e second sentence of section 6161 (b) is amended by striking out " o r chapter 4 3 " and inserting in lieu thereof "43, or 44". 26 u s e 6211. (4) Section 6211 (defining deficiency) is amended— ( A ) by s t r i k m g out " a n d 4 3 " in subsection (a) and insert- i n g in lieu thereof "43, and 44", ( B ) by striking out "or 4 3 " in subsection (a) and insert- i n g in lieu thereof "43, or 44", and (C) by striking out "or 4 3 " in subsection (b) (2) and i' inserting in lieu thereof "43, or 44". 26 u s e 6212. (5) Section 6212 (relating to notice of deficiency) is amended— ( A ) by striking out "or 4 3 " in subsection (a) and insert- „=, i n g in lieu thereof "43, or 44",
PUBLIC LAW 94-455—OCT. 4, 1976 90 STAT. 1755 .,:, (B) by striking out "or chapter 43" in subsection (b) (1) and inserting in lieu thereof "chapter 43, or chapter 44", 26 USC 4971, ^ (C) by striking out "chapter 43, and this chapter" in sub- ^"^' P- ^'^^^ section (b) (1) and inserting in lieu thereof "chapter 43, chap- ter 44, and this chapter", and (D) by striking out "of chapter 43 tax for the same tax- able years," in subsection (c) (1) and inserting in lieu thereof "of chapter 43 tax for the same taxable years, of chapter 44 tax for the same taxable years,". (6) Section 6213(a) (relating to restrictions applicable to defi- 26 USC 6213. ciencies and petition to Tax Court) is amended by striking out "or 43" and inserting in lieu thereof "43, or 44". (7) Section 6214 (relating to determinations by Tax Court) is 26 USC 6214. amended— (A) by striking out "or 43" in the heading of subsection (c) and inserting in lieu thereof "43, or 44", and (B) by striking out "or 43" each place it appears in sub- section (c) and inserting in lieu thereof "43, or 44", and (C) by striking out "or 43" in subsection (d) and insert- ing in lieu thereof "43, or 44". (8) Section 6344(a)(1) (relating to cross references) is 26 USC 6344. amended by striking out "or 43" and inserting in lieu thereof "43, or 44". (9) Section 6512 (relating to limitations in case of petition to 26 USC 6512. Tax Court) is amended by striking out "or 43" each place it appears and inserting in lieu thereof "43, or 44". (10) Section 6601(c) (relating to suspension of interest in cer- 26 USC 6601. tain income, etc. tax cases) is amended by striking out in the head- ing thereof "or 43" and inserting in lieu thereof "43, or 44". (11) Section 7422 (relating to civil actions for refund) is 26 USC 7422. amended by striking out "or 43" in subsection (e) and inserting in lieu thereof "43, or 44". (c) CLERICAL AMENDMENT.—The table of chapters for subtitle D is amended by adding at the end thereof the following: "Chapter 44. Real estate investment trusts." SEC. 1606. ALLOWANCE OF NET OPERATING LOSS CARRYOVER. (a) ALLOWANCE OF DEDUCTION.—Section 857(b)(2) (relating to 26 USC 857. real estate investment trust taxable income) is amended by striking out subparagraph (E) and by redesignating subparagraph ( F ) as subparagraph ( D ) . (b) YEARS TO W H I C H LOSS MAY B E CARRIED.—Section 172(b) (1) 26 USC 172. (relating to years to which a net operating loss may be carried) is amended by inserting after subparagraph (D) thereof the following: " ( E ) In the case of a taxpayer which has a net operating loss for any taxable year for which the provisions of part I I of subchapter M (relating to real estate investment trusts) apply to such taxpayer, such loss shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss and shall be a net operating loss carryover to ' '* each of the 8 taxable years following the taxable year of such loss, except, in the case of a net operating loss for a taxable year ending before January 1,1976, such loss shall not be car- ried to the 6th, 7th, or 8th taxable year following the taxable year of such loss unless part I I of subchapter M applied to the 26 USC 856. taxpayer for the taxable year to which the loss is carried and for all intervening taxable years following the year of loss.
90 STAT, 1756 PUBLIC LAW 94-455—OCT. 4, 1976 A net operating loss shall not be carried back to a taxable 26 use 856. year for which part I I of subchapter M applied to the taxpayer." (c) DETERMINATION or THE AMOUNT OF THE NET OPERATING LOSS 26 use 172. AND THE CARRYOVER.—Section 172(d) (relating to modifications in computing net operating loss) is amended by adding a new paragraph (7) at the end thereof, to read as follows: " (7) In the case of any taxable year for which part I I of sub- chapter M (relating to real estate investment trusts) applies to the taxpayer— "(A) the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b) (2) (other than the deduction for dividends paid described in section 857 (b) (2) ( B ) ) ; and "(B) where such taxable year is a 'prior taxable year' referred to in paragraph (2) of subsection (b), the term 'taxable income' in such paragraph shall mean 'real estate investment trust taxable income' (as defined in section 857 (b)(2))." (d) CONFORMING AMENDMENT.—Subparagraph (B) of section 857 26 use 857. (b)(2) (relating to real estate investment trust taxable income), as redesignated by section 1607(b) of this Act, is amended by striking out "subparagraph ( F ) " and inserting in lieu thereof "subparagraph (D)". SEC. 1607. ALTERNATIVE TAX IN CASE OF CAPITAL GAINS. 26 use 857. (a) ALTERNATIVE TAX.—Section 857(b) (3) (A) (relating to imposi- tion of tax on capital gain) is amended to read as follows: "(A) ALTERNATIVE TAX IN CASE OF CAPITAL GAINS.—If for any taxable year a real estate investment trust has a net capital gain, then, in lieu of the tax imposed by subsection (b) (1), there is hereby imposed a tax (if such tax is less than the tax imposed by such subsection) which shall con- sist of the sum of— " (i) a tax, computed as provided in subsection (b) (1), on the real estate investment trust taxable income (deter- mined by excluding such net capital gain and by com- puting the deduction for dividends paid without regard to capital gain dividends), and " (ii) a tax of 30 percent of the excess of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gains dividends only." (b) CONFORMING AMENDMENTS.— (1)(A) Section 857(b)(2) (relating to method of taxation of real estate investment trust taxable income) is amended by deleting subparagraph (A) and redesignating subparagraphs (B), (C), and (D) as subparagraphs (A), ( B ) , and (C), respec- tively. 26 use 46. (B) Subsection (e)(2) of section 46 (relating to investment credit) is amended— (i) by striking out "857(b) (2) ( C ) " in subparagraph (B)