< Back to H.R. 4170 (98th Congress, 1983–1984)

Text of the Deficit Reduction Act of 1984

This bill was enacted after being signed by the President on July 18, 1984. The text of the bill below is as of Jul 18, 1984 (Passed Congress/Enrolled Bill).

98 STAT. 494                             PUBLIC LAW 98-369—JULY 18, 1984

                     Public Law 98-369
                     98th Congress
                                                              An Act
  July 18, 1984
                                         To provide for tax reform, and for deficit reduction.
   [H.R. 4170]
                      Be it enacted by the Senate and House of Representatives of the
Deficit              United States of America in Congress assembled,
Reduction Act of
1984.                SECTION 1. SHORT TITLE.
26 u s e 1 note.
                      (a) SHORT TITLE.—This Act may be cited as the "Deficit Reduction
                     Act of 1984".
                       (b) ACT DIVIDED INTO 2 DIVISIONS.—This Act consists of 2 divisions
                     as follows:
                            (1) DIVISION A.—Tax Reform Act of 1984.
                                  (2) DIVISION B.—Spending Reduction Act of 1984.
Tax Reform Act                         DIVISION A—TAX REFORM ACT OF 1984
of 1984.
26 u s e 1 note.     SEC. 5. SHORT TITLE; ETC.
                       (a) SHORT TITLE.—This division may be cited as the "Tax Reform
                     Act of 1984".
                       (b) AMENDMENT OF 1954 CODE.—Except as otherwise expressly
                     provided, whenever in this division 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
26 u s e 1 et seq.   section or other provision of the Internal Revenue Code of 1954.
                     SEC. 10. TABLE OF CONTENTS.
                     Section 1. Short title.
                                           DIVISION A—TAX REFORM ACT OF 1984
                     Sec. 5. Short title, etc.
                                       TITLE I—TAX FREEZE; TAX REFORMS GENERALLY
                     Sec. 10. Table of contents.
                                          Subtitle A—Deferral of Certain Tax Reductions
                                                   PART I—INCOME TAX PROVISIONS
                     Sec.   11.   Amount of used property eligible for investment tax credit.
                     Sec.   12.   Finance lease provisions.
                     Sec.   13.   Election to expense certain depreciable business assets.
                     Sec.   14.   Employee stock ownership credit.
                     Sec.   15.   Cost-of-living adjustments in pension plan limitations.
                     Sec.   16.   Repeal of partial interest exclusion.
                     Sec.   17.   Foreign earned income of individuals.
                     Sec.   18.   Effective date.
                                                PART II—ESTATE AND GIFT TAX RATES
                     Sec. 21. Maximum rate.
                                                       PART III—EXCISE TAXES
                     Sec. 25. Tax rate on newly discovered oil.
                     Sec. 26. Excise tax on communications services.
                     Sec. 27. Excise tax on distilled spirits.

PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 495 Subtitle B—Tax-Exempt Entity Leasing Sec. 31. Denial of tax incentives for property leased to governments and other tax- exempt entities. Sec. 32. Motor vehicle operating leases. Subtitle C—Treatment of Bonds and Other Debt Instruments Sec. 41. Treatment of bonds and other debt instruments. Sec. 42. Technical and conforming amendments related to original issue discount changes. Sec. 43. Technical and conforming amendments related to treatment of market dis- count and acquisition discount. Sec. 44. Effective dates. Subtitle D—Corporate Provisions PART I—LIMITATIONS ON DIVIDENDS RECEIVED DEDUCTION Sec. 51. Dividends received deduction reduced where portfolio stock is debt fi- nanced. Sec. 52. Treatment of dividends from regulated investment companies. PART II—TREATMENT OF CERTAIN DISTRIBUTIONS Sec. 53. Corporate shareholder's basis in stock reduced by nontaxed portion of ex- traordinary dividends. Sec. 54. Distribution of appreciated property by corporations. Sec. 55. Extension of holding period for losses attributable to capital gain dividends of regulated investment companies or real estate investment trusts. PART III—MISCELLANEOUS PROVISIONS Sec. 56. Denial of deductions for certain expenses incurred in connection with short sales. Sec. 57. Nonrecognition of gain or loss by corporation on options with respect to its stock. Sec. 58. Amendments to accumulated earnings tax. Sec. 59. Repeal of stock for debt exception for purposes of determining income from discharge of indebtedness. Sec. 60. Affiliated group defined. Sec. 61. Provisions relating to earnings and profits. Sec. 62. 2-year delay in application of the net operating loss rules added by the Tax Reform Act of 1976. Sec. 63. Target corporation must distribute assets after reorganization described in section 368(aXlXC). Sec. 64. Definition of control for purposes of nondivisive reorganizations under sec- tion 368(aXlXD). Sec. 65. Collapsible corporations. Sec. 66. Phsise-out of graduated rates for large corporations. Sec. 67. Restrictions on golden parachute payments. Sec. 68. Increase in reduction in certain corporate preference items from 15 percent to 20 percent. Subtitle E—Partnership Provisions Sec. 71. Partnership allocations with respect to contributed property. Sec. 72. Determination of distributive shares when partner's interest changes. Sec. 73. Payments to partners for property or certain services. Sec. 74. Contributions to a partnership of unrealized receivables, inventory items, or capital loss property. Sec. 75. Transfers of partnership and trust interests by corporations. Sec. 76. Application of section 751 in the case of tiered partnerships. Sec. 77. Section 1031 not applicable to partnership interests; limitation on the period during which like kind exchanges may be made. Sec. 78. Elimination of basis strips under section 734(b). Sec. 79. Overruling of Raphan case. Subtitle F—Trust Provisions Sec. 81. Treatment of property distributed in kind. Sec. 82. Treatment of multiple trusts. Subtitle G—Accounting Changes Sec. 91. Certain amounts not treated as incurred before economic performance. Sec. 92. Treatment of certain deferred payments for use of property or services.
98 STAT. 496 PUBLIC LAW 98-369—JULY 18, 1984 Sec. 93. Amortization of construction period interest and taxes for residential real property held by corporations. Sec. 94. Capitalization of start-up expenditures. Sec. 95. LIFO conformity rules applied on controlled group basis. Subtitle H—Provisions Relating to Tax Straddles Sec. 101. Repeal of exception from straddle rules for stock options and certain stock. Sec. 102. Section 1256 extended to certain options. Sec. 103. Regulations under section 1092(b). Sec. 104. Limitation on losses from hedging transactions. Sec. 105. Clarification that section 1234 applies to options on regulated futures con- tracts and cash settlement options. Sec. 106. Wash sale rules to apply to losses on certain short sales. Sec. 107. Time for identification by taxpayer of certain transactions. Sec. 108. Treatment of certain losses on straddles entered into before effective date of Economic Recovery Tax Act of 1981. Subtitle I—Depreciation Sec. 111. Recovery period for certain real property extended to 18 years. Sec. 112. Recapture in case of installment sales. Sec. 113. Provisions relating to sound recordings and films. Sec. 114. Definition of section 38 property in sale-leaseback transactions. Subtitle J—Foreign Provisions PART I—CHANGES IN SOURCE AND CHARACTER RULES Sec. 121. Certain amounts treated as derived from United States sources for pur- poses of limitation on foreign tax credit. Sec. 122. Certain amounts treated as interest for purposes of the limitation on the foreign tax credit. Sec. 123. Treatment of related person factoring income. Sec. 124. Treatment of certain transportation income. Sec. 125. Treatment of certain distributions received by United States-owned for- eign corporations. Sec. 126. Allocation under section 861 of research and experimental expenditures. PART II—WITHHOLDING PROVISIONS Sec. 127. Repeal of 30 percent tax on interest received by foreign persons on certain portfolio investments. Sec. 128. Treatment of United States source original issue discount in case of for- eign persons. Sec. 129. Withholding of tax on dispositions of United States real property inter- ests. Sec. 130. Treatment of payments to Guam and Virgin Islands corporations. PART III—TAXATION OF CERTAIN TRANSFERS OF PROPERTY OUTSIDE THE UNITED STATES Sec. 131. Taxation of certain transfers of property outside the United States. PART IV—MISCELLANEOUS FOREIGN CORPORATE PROVISIONS Sec. 132. Amendments related to foreign personal holding companies. Sec. 133. Amendments related to section 1248. Sec. 134. Definition of foreign investment company. Sec. 135. Application of collapsible corporation rules to foreign corporations. Sec. 136. Stapled stock; stapled entities. Sec. 137. Services relating to insurance policies are treated as performed in country of risk. PART V—TREATMENT OF A U E N INDIVIDUALS Sec. 138. Definition of resident alien and nonresident alien. Sec. 139. Treatment of community income. Subtitle K—Reporting, Penalty, and Other Provisions PART I—PROVISIONS RELATING TO TAX SHELTERS Sec. 141. Registration of tax shelters. Sec. 142. Organizers and sellers of potentially abusive tax shelters must keep lists of investors.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 497 Sec. 143. Increase in penalty for promoting abusive tax shelters; injunction against aiding or abetting understatement of tax liability. Sec. 144. Increased rate of interest on substantial underpayments attributable to certain tax motivated transactions. PART II—INFORMATION REPORTING PROVISIONS Sec. 145. Returns relating to mortgage interest received in trade or business from individuals. Sec. 146. Returns relating to cash received in trade or business. Sec. 147. Provisions relating to individual retirement accounts. Sec. 148. Returns relating to foreclosures and abandonments of security. Sec. 149. Returns relating to exchanges of partnership interests where unrealized receivables, etc., involved. Sec. 150. Statements required in case of certain substitute payments. Sec. 151. Reporting of State and local refunds not required with respect to non- itemizers. Sec. 152. Furnishing of TIN under backup withholding. PART III—OTHER C!OMPUANCE PROVISIONS Sec. 155. Substantiation of charitable contributions; modifications of incorrect valu- ation penalty. Sec. 156. Authorization to disregard appraisals of persons penalized for aiding in understatements of tax liability. Sec. 157. Limitation on mailing of deposits of taxes. Sec. 158. Interest on certain additions to tax. Sec. 159. Penalty for fraudulent withholding exemption certificate or failure to supply information. Sec. 160. Application of penalty for frivolous proceedings to pending Tax G)urt pro- ceedings. Sec. 161. Failure to request change of method of accounting. Sec. 162. Clarification of change of venue for certain tax offenses. Sec. 163. Extension of statute of limitations with respect to certain expenditures relating to contributions in aid of construction. Subtitle L—Miscellaneous Provisions Sec. 171. Inclusion of tax benefit items in income. Sec. 172. Loans with below-market interest rates. Sec. 173. Eligibility for income averaging. Sec. 174. Amendments to section 267. - ^ • Sec. 175. Amendments to section 1239. Sec. 176. Recapture of net ordinary losses under section 1231. Sec. 177. Repeal of exemption from Federal tax of the Federal Home Loan Mort- gage Corporation. Sec. 178. Special rule relating to sales or exchanges of certain economic interests in coal between related parties. Sec. 179. Limitation on amount of depreciation and investment tax credit for luxury automobiles; limitation where certain property used for personal purposes. TITLE II—LIFE INSURANCE PROVISIONS Sec. 201. Table of sections for part I of subchapter L. ^, . „ , ^r. «a. 4«. «i« Subtitle A—Taxation of Life Insurance Companies ^' '~'^' PART I—AMENDMENT O^ SUBCHAPTER L Sec. 211. Amendment of subchapter L. Sec. 212. Certain reinsurance agreements. PART II—EFFECTIVE DATE; TRANSITIONAL RULES ' SUBPART A — E F F E C T I V E DATE Sec. 215. Effective date. SUBPART B—TRANSITIONAL RULES ^t; Sec. 216. Reserves computed on new basis; fresh start. Sec. 217. Other special rules. ,o Sec. 218. Underpayments of estimated tax for 1984. Sec. 219. Clarification of authority to require certain information. 31 194 0 - 86 - 18 : QL, 3 P a r t 1
98 STAT. 498 PUBLIC LAW 98-369—JULY 18, 1984 Subtitle B—Taxation of Life Insurance Products Sec. 221. Definition of life insurance contract. Sec. 222. Treatment of certeiin annuity contracts. Sec. 223. Group-term life insurance purchased for employees. Sec. 224. Treatment of certain exchanges of insurance policies. Subtitle C—Studies Sec. 231. Studies. TITLE III—REVISION OF PRIVATE FOUNDATION PROVISIONS Sec. 301. Limitations on deduction for contributions to private foundations. Sec. 302. Exemption for certain operating foundations from excise tax on invest- ment income. Sec. 303. Reduction in excise tax on investment income where private foundation meets certain distribution requirements. Sec. 304. Amendment to taxes on failure to distribute income. Sec. 305. Abatement of first tier taxes in certain cases. Sec. 306. Miscellaneous amendments. Sec. 307. 5-year extension of retjuirement to dispose of certain excess holdings at- tributable to large gifts and bequests. Sec. 308. Decreases attributable to stock issuances not to reduce permitted percent- age of holdings where decrease is 2 percent or less. Sec. 309. Aggregation of stock holdings of private foundation and disqualified per- sons in applying 95 percent ownership test. Sec. 310. 5-year period to dispose of excess holdings resulting from certain acquisi- tions by disqualified persons. Sec. 311. The conducting of certain games of chance not treated as unrelated trade or business. Sec. 312. Tax on self-dealing not to apply to certain stock purchases. Sec. 313. Person ceases to be substantial contributor after 10 years with no connec- tion to foundation. Sec. 314. Technical amendments. TITLE IV—TAX SIMPLIFICATION Subtitle A—Revision and Simplification of Estimated Income Tax for Individuals Sec. 411. Revision of penalty for failure to pay estimated income tax. Sec. 412. Repeal of requirement of declarations, etc. Sec. 413. Crediting of income tax overpayment against estimated tax liability. Sec. 414. Effective dates. Subtitle B—Domestic Relations Sec. 421. Treatment of transfers of property between spouses or incident to divorce. Sec. 422. Tfix treatment of alimony and separate maintenance payments. Sec. 423. Dependency exemption in the case of child of divorced parents, etc. Sec. 424. Innocent spouse relieved of liability in certain cases. Sec. 425. Treatment of certain property settlements for purposes of estate and gift taxes. Sec. 426. Income from sheltered workshops not taken into account in determining dependency exemption. Subtitle C—Revision of At-Risk Rules Sec. 431. Revision of investment credit at-risk rules. Sec. 432. Exclusion of active businesses of qualified C corporations from at-risk rules, etc. Subtitle D—Miscellaneous Treasury Administrative Provisions PART I—PROVISIONS NOT RELATING TO DISTILLED SPIRPTS TAX Sec. 441. Simplification of certain reporting requirements. Sec. 442. Removal of $1,000,000 limitation on working capital fund. Sec. 443. Increase in limitation on revolving fund for redemption of real property. Sec. 444. Removal of $1,000,000 limitation on special authority to dispose of obligations. Sec. 445. Secretary of the Treasury authorized to accept gifts and bequests. Sec. 446. Extension of period for court review of jeopardy assessment where prompt service not made on the United States. Sec. 447. Extension of period during which additional tax shown on amended return may be assessed.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 499 Sec. 448. Treatment of certain guaranteed drafts issued by flnancial institutions. Sec. 449. Disclosure of windfall profit tax information to State tax officials. Sec. 450. Finsincial reporting of investment tax credits. PART II—PROVISIONS RELATING TO DISTILLED SPIRFTS Sec. 451. Repeal of occupational tax on manufacturers of stills and condensers; no- tices of manufacture and set up of stills. Sec. 452. Allowance of drawback claims even where certain requirements not met. Sec. 453. Disclosure of alcohol fuel producers to administrators of State alcohol laws. Sec. 454. Repeal of stamp requirement for distilled spirits. Sec. 455. Cooking wine may be fortified using distilled spirits. Sec. 456. Effective dates. Subtitle E—Tax Court Provisions Sec. 461. Increase in jurisdictional limit for small cases. Sec. 462. Annuities to survivors of Tsix Court judges. Sec. 463. Proceedings which may be assigned to commissioners. Sec. 464. Special trial judges. Sec. 465. Pliblicity of Tax Court proceedings. Subtitle F—Simplification of Income Tjix Credits Sec. 471. Credits grouped together in more logical order. Sec. 472. Uniform limitation on personal nonrefundable credits. Sec. 473. Uniform carryover provisions for business-related credits. Sec. 474. Technical and conforming amendments. Sec. 475. Effective dates. ;' Subtitle G—Miscellaneous Simplification Provisions Sec. 481. Preferred stock eligible under section 1244. Sec. 482. Medical care deduction allowed for lodging away from home in certain cases. Subtitle H—Repeal of Certain Obsolete Provisions Sec. 491. Termination of rules relating to qualified bond purchase plans and retire- ment bonds with respect to bonds issued after December 31, 1983. Sec. 492. Repeal of rules relating to gains from disposition of property used in farm- ing where farm losses offset nonfarm income. TITLE V—EMPLOYEE BENEFIT PROVISIONS Subtitle A—Welfare Benefit Plans Sec. 511. Treatment of funded welfare benefit plans. Sec. 512. Treatment of unfunded deferred benefits. Sec. 513. Additioned requirements for tax-exempt status of certain organizations. Subtitle B—Provisions Relating to Pension Plans Sec. 521. Required distributions. Sec. 522. Rollover of certain partial distributions permitted. Sec. 523. Treatment of distributions where substantially all contributions are em- ployee contributions. Sec. 524. Provisions relating to top-heavy plans. Sec. 525. Repeal of estate tax exclusion for qualified pension plan benefits. Sec. 526. Affiliated service groups, employee leasing arrangements, and collective bargaining agreements. Sec. 527. Provisions relating to cash or deferred arrangements. Sec. 528. Treatment of certain medical, etc., benefits under section 415. Sec. 529. Certain alimony treated as compensation. Subtitle C—Tax Treatment of Fringe Benefits Sec. 531. Exclusion of certain fringe benefits from gross income. Sec. 532. Exclusion of certain reductions in tuition from gross income. Subtitle D—Employee Stock Ownership Plans Sec. 541. Nonrecognition of gain on stock sold to employee stock ownership plans or certain cooperatives if qualified replacement property acquired. Sec. 542. Deductibility of certain dividend distributions from employee stock owner- ship plans.
98 STAT. 500 PUBLIC LAW 98-369—JULY 18, 1984 Sec. 543. Exclusion of interest on loans used to finance acquisition of employer se- curities by an ESOP. Sec. 544. Assumption of estate tax liability by employer stock ownership plan or co- operative receiving employer securities. Sec. 545. Excise tax on certain dispositions of employer securities by employee stock ownership plans and certain cooperatives. Subtitle E—Miscellaneous Sec. 551. Treatment of certain distributions from a qualified terminated plan. Sec. 552. Partial termination for certain pension plans. Sec. 553. Distribution requirements for accounts and annuities of an insurer in a rehabilitation proceeding. Sec. 554. Extension of time for repayment of qualified refunding loans. Sec. 555. Technical amendments to the incentive stock option provisions. Sec. 556. Time for making certain section 83(b) elections. Sec. 557. Employer and employee benefit association treated as related persons under section 1239. Sec. 558. Elimination of retroactive application of amendments made by Multiem- ployer Pension Plan Amendments Act of 1980. Sec. 559. Telecomniunication employees. Sec. 560. Study of employee welfare benefit plans. Sec. 561. Limitation accrual of vacation pay. TITLE VI—TAX-EXEMPT BOND PROVISIONS Subtitle A—Mortgage Subsidy Bonds Sec. 611. 4-year extension of mortgage subsidy bond authority. Sec. 612. Mortgage credit certificates. Sec. 613. Authority to borrow from Federal Financing Bank. Sec. 614. Elimination of certain exceptions to the application of the Mortgage Subsidy Bond Tax Act of 1980. Subtitle B—Private Activity Bonds PART I—GENERAL RESTRICTIONS Sec. 621. Limitation on aggregate amount of private activity bonds. Sec. 622. Tax exemption denied where obligation directly or indirectly guaranteed by Federal Government. Sec. 623. Aggregate limit per taxpayer for small issue exception. PART II—ARBITRAGE LIMITATIONS * Sec. 624. Arbitrage on nonpurpose obligations. Sec. 625. Student loan bonds. PART III—OTHER RESTRICTIONS Sec. 626. Denial of tax exemption to consumer loan bonds. Sec. 627. Limitations on acquisitions of land, existing facilities, etc. Sec. 628. Miscellaneous industrial development bond provisions. Sec. 629. Certain public utilities treated as exempted persons under section 103(b); special rules for certain railroads. Sec. 630. Extension of small issue industrial development bond exception. Sec. 631. Effective dates. Sec. 632. Miscellaneous exceptions and special rules. Subtitle C—Miscellaneous Provisions Sec. 641. Clarification of treatment of certain exemptions for purposes of the Federal estate and gift taxes. Sec. 642. Reports with transfers of public housing bonds. Sec. 643. Tax-exempt status of obligations of certain educational organizations. Sec. 644. Local furnishing of electricity or gas. Sec. 645. Local furnishing of electricity or gas where facility initially authorized by Federal Government. Sec. 646. Treasury Department decisions affecting tax-exempt bonds. Sec. 647. Special rule for possessions and District of Columbia. Sec. 648. Special arbitrage rule. TITLE VII—TECHNICAL CORRECTIONS Sec. 701. Coordination with other titles.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 501 Subtitle A—Amendments Related to the Tax Equity and Fiscal Responsibility Act of 1982 Sec. 711. Technical corrections of provisions relating to individuals. Sec. 712. Technical corrections of provisions primarily relating to businesses. Sec. 713. Technical corrections of pension provisions. Sec. 714. Miscellaneous provisions. Sec. 715. Effective date. Subtitle B—Amendments Related to Subchapter S Revision Act of 1982; Etc. Sec. 721. Technical corrections of Subchapter S Revision Act of 1982. Sec. 722. Miscellaneous provisions. Subtitle C—Amendments Relating to Highway Revenue Act of 1982 Sec. 731. Value of used components furnished by first user not taken into account in determining price. Sec. 732. Clarification of application of gasoline excise tax to gasohol, etc. Sec. 733. Certain chain operators of retail gasoline stations treated as producers. Sec. 734. Other technical amendments. Sec. 735. Repeal of certain provisions made obsolete by Highway Revenue Act of 1982. Sec. 736. Effective date. TITLE VIII—FOREIGN SALES CORPORATIONS w8 Sec. 801. Foreign sales corporations. Sec. 802. Interest charge DISC. Sec. 803. Taxable year of DISC and FSC required to conform to taxable year of ma- jority shareholder. Sec. 804. Reporting requirements. Sec. 805. Effective date; transition rules. TITLE IX—HIGHWAY REVENUE PROVISIONS Subtitle A—Provisions Relating to Heavy Vehicle Use Tax Sec. 901. Reduction of heavy vehicle use tax. Sec. 902. Special rule for trucks used in logging. ^ Sec. 903. Special rule for certain agricultural vehicles. Subtitle B—Provisions Relating to Fuel Taxes Sec. 911. Increase in diesel fuel tax. Sec. 912. Decrease in tax imposed on gasohol. Sec. 913. Modification of tax imposed on methanol and ethanol. Sec. 914. Extension of reduction in tax for fuel used by taxicabs. Sec. 915. 3 cent tax on diesel fuel, etc., used in certain buses. Subtitle C—Temporary Reduction in Retail Tax on Certain Piggyback Trailers Sec. 921. Temporary reduction in tax. ^i^^r f - Subtitle D—Studies PART I—STUDIES RELATING TO HEAVY VEHICLE USE TAX Sec. 931. Whether heavy vehicles bear fair share of highway costs. Sec. 932. Trans-border trucking. Sec. 933. Weight-distance teixes. Sec. 934. Reports, etc. PART II—OTHER STUDIES Sec. 935. Study of reduced fuel taxes for taxicabs. Sec. 936. Study of piggyback trailers. TITLE X—MISCELLANEOUS REVENUE PROVISIONS Subtitle A—Capital Gains and Losses Sec. 1001. Decrease in holding period required for long-term capital gain treatment. Sec. 1002. Repeal of special rule for pre-1970 losses.
98 STAT. 502 PUBLIC LAW 98-369—JULY 18, 1984 1 Subtitle B—Excise Tax Provisions -jsn Jwis,! / - A ^L-itsiyE PART I—BOATING SAFETY AND SPORT FISH RESTORATION SUBPART A—BOATING SAFETY AMENDMENTS Sec. 1010. Policy. Sec. 1011. General amendments to title 46. Sec. 1012. Authorization of funds for boating safety. Sec. 1013. Effective date. SUBPART B—SPORT FISH RESTORATION PROGRAM Sec. 1014. Amendments to the sport fish restoration program. Subpart C—Taxes on Sales of Sport Fishing Equipment, Etc. Sec. 1015. Tax on sale of sport fishing equipment. Sec. 1016. Establishment of Aquatic Resources Trust Fund. Sec. 1017. Tax on certain arrows. PART II—OTHER EXCISE TAXES Sec. 1018. Exemption from aviation excise tax for certain helicopter operations. Sec. 1019. Technical amendments to the Hazardous Substance Response Revenue Act of 1980. Subtitle C—Estate and Gift Tax Provisions Sec. 1021. Deferral of estate taxes for interest in holding company which owns stock in closely held operating company. Sec. 1022. Permanent rules for reforming governing instruments creating charita- ble remainder trusts and other charitable interests. Sec. 1023. Alternate valuation election available only where it results in reduction of gross estate and estate tax. Sec. 1024. Alternate valuation election available on certain late returns. Sec. 1025. Modification of election or agreement under section 2082A. Sec. 1026. No gain recognized from net gifts made before March 4, 1981. Sec. 1027. Marital deduction for a usufruct. Sec. 1028. Credit against estate tax for transfers to Toiyabe National Forest. Subtitle D—Charitable Contributions and Exempt Organizations Sec. 1031. Increase in charitable volunteer mileage. Sec. 1032. Certain organizations providing child care included within the definition of tax-exempt organizations. Sec. 1033. Restrictions on church tax inquiries and examinations. Sec. 1034. Acquisition indebtedness of certain educational institutions. Sec. 1035. Transitional rule relating to the definition of qualified conservation contributions. Subtitle E—Income Tax Credits Sec. 1041. 1-year extension of targeted jobs credit. Sec. 1042. Increase in earned income credit. Sec. 1043. Alternative test for definition of qualified rehabilitated building. Subtitle F—Miscellaneous Housing Provisions Sec. 1051. Disaster loss deduction where taxpayer ordered to demolish or relocate residence in disaster area because of disaster. Sec. 1052. Allocation of expenses to parsonage allowances. Sec. 1053. Armed Forces overseas quarters. Sec. 1054. Treatment of home won in local radio contest and specially designed for handicapped foster child. Subtitle G—Extension of Existing Provisions and Transition Rules Sec. 1061. Extension of Payment-in-Kind Tax Treatment Act of 1983 to wheat for 1984 crop year. Sec. 1062. Extension of increased deduction for eliminating architectural and trans- portation barriers to the handicapped. Sec. 1063. Permanent disallowance of deduction for expenses of demolition of cer- tain structures. Sec. 1064. Amortization of expenditures to rehabilitate low-income rental housing. Sec. 1065. Rules treating Indian tribal governments as States made permanent. Sec. 1066. Transitional rule for treatment of certain income from S corporations. Sec. 1067. Special leasing rules for certain coal gasification facilities.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 503 Subtitle H—Additional Provisions "? i Sec. 1071. Tax treatment of regulated investment companies. Sec. 1072. Technical modifications to tip reporting requirements. Sec. 1073. Tips treated as wages for purposes of Federal unemployment tax. ? Sec. 1074. Exclusion of certain services from the Federal Unemployment Tax Act. Sec. 1075. Taxation of unemployment compensation not to apply to compensation paid for weeks of unemployment ending before December 1, 1978. Sec. 1076. Exclusion from gross income of cancellations of certain student loans. Sec. 1077. Migratory bird hunting stamps. Sec. 1078. Exclusion from gross income of payments from the United States Forest Service as a result of restricting motorized traffic in the boundary waters canoe area. Sec. 1079. Tax exemption of corporations organized under Acts of Congress. Subtitle I—Studies Sec. 1081. Study of alternative income tax systems. Sec. 1082. Study of taxation by foreign countries on services performed in the United States. Subtitle A—Deferral of Certain Tax Reductions PART I—INCOME TAX PROVISIONS SEC. 11. AMOUNT OF USED PROPERTY ELIGIBLE FOR INVESTMENT TAX CREDIT. (a) GENERAL RULE,—Subparagraph (A) of section 48(cX2) (relating 26 use 48. to dollar limitation on amount of used section 38 property) is amended— (1) by striking out "$150,000 ($125,000 for taxable years begin- ning in 1981, 1982, 1983, or 1984)" and inserting in lieu thereof "$125,000 ($150,000 for taxable years beginning after 1987)", and (2) by striking out "$150,000 (or $125,000" each place it ap- pears and inserting in lieu thereof "$125,000 (or $150,000^'. (b) TECHNICAL AMENDMENT.—Subparagraph (B) of section 48(cX2) is amended by striking out "$75,000 ($62,500 for taxable years beginning in 1981,1982, 1983, or 1984)" and inserting in lieu thereof "$62,500 ($75,000 for taxable years beginning after 1987)". SEC. 12. FINANCE LEASE PROVISIONS. (a) FOUR-YEAR DEFERRAL OF FINANCE LEASE PROVISIONS.— (1) I N GENERAL.—Subparagraph (A) of section 209(dXl) of the Tax Equity and Fiscal Responsibility Act of 1982 is amended by 26 use 168 note. striking out "December 31, 1983" and inserting in lieu thereof "December 31,1987". (2) FINANCE LEASE PROVISIONS CONTINUE TO APPLY TO FARM PROPERTY.—Clause (i) of section 209(dXlXB) of such Act is 26 use 168 note. amended by striking out "January 1, 1984" and inserting in lieu thereof "January 1,1988". (3) TECHNICAL AMENDMENTS.— (A) Subclause (I) of section 168(fX8XBXii) (relating to re- 26 use 168. quirement that only 40 percent of lessee's property may be treated as qualified), as amended by section 209 of the Tax Equity and Fiscal Responsibility Act of 1982, is amended by striking out "1986" and inserting in lieu thereof "1990 . b (B) Paragraph (4) of section 168(i) (relating to limitations), as so amended, is amended by striking out "1985" each place it appears and inserting in lieu thereof "1989".
98 STAT. 504 . PUBLIC LAW 98-369—JULY 18, 1984 26 use 168 note. Ot)) TERMINATION OF SAFE HARBOR LEASING RuLES.—Paragraph (8) of section 168(f) of the Internal Revenue Code of 1954 (relating to special rules for leasing), as in effect after the amendments made by 96 Stat. 432. section 208 of the Tax Equity and Fiscal Responsibility Act of 1982 96 Stat. 442. but before the amendments made by section 209 of such Act, shall not apply to agreements entered into after December 31, 1983. The preceding sentence shall not apply to property described in para- Post, p. 1048. graph (3)(G) or (5) of section 208(d) of such Act. 26 u s e 168 note. (c) TRANSITIONAL RULES.— (1) IN GENERAL.—The amendments made by subsection (a) shall not apply with respect to any property if— (A) a binding contract to acquire or to construct such property was entered into by or for the lessee before March 7,1984, or (B) such property was acquired by the lessee, or the construction of such property was begun, by or for the lessee, before March 7,1984. (2) SPECIAL RULE FOR CERTAIN AUTOMOTIVE PROPERTY.— (A) IN GENERAL.—The amendments made by subsection (a) shall not apply to property which is placed in service before January 1,1988— (i) which is automotive manufacturing property, and Y (ii) with respect to which the lessee is a qualified lessee (within the meaning of section 208(d)(6) of the 26 use 168 note. Tax Equity and Fiscal Responsibility Act of 1982). (B) $150,000,000 LIMITATION.—The provisions of subpara- graph (A) shall not apply to any agreement if the sum of— (i) the cost basis of the property subject to the agree- ment, plus (ii) the cost basis of any property subject to an agree- ment to which subparagraph (A) previously applied and with respect to which the lessee was the lessee under the agreement described in clause (i) (or any related person within the meaning of section 168(eX4)(D) of the Internal Revenue Code of 1954), exceeds $150,000,000. (C) AUTOMOTIVE MANUFACTURING PROPERTY.—For pur- poses of this paragraph, the term "automotive manufactur- ing property' means— (i) property used principally by the taxpayer directly in connection with the trade or business of the taxpay- , er of the manufacturing of automobiles or trucks (other than truck tractors) with a gross vehicle weight of 13,000 pounds or less, (ii) machinery, equipment, and special tools of the type included in former depreciation range guideline classes 37.11 and 37.12, and (iii) any special tools owned by the taxpayer which are used by a vendor solely for the production of compo- nent parts for sale to the taxpayer. (3) SPECIAL RULE FOR CERTAIN COGENERATION FACIUTIES.—The amendments made by subsection (a) shall not apply with respect to any property which is part of a coal-fired cogeneration facility— (A) for which an application for certification was filed with the Federal Energy Regulatory Commission on Decem- ber 30,1983,
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 505 (B) for which an application for a construction permit was filed with a State environmental protection agency on Feb- ruary 20,1984, and (C) which is placed in service before January 1, 1988. ,., ,, SEC. 13. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS. Paragraph (1) of section 1790)) (relating to dollar limitation) is 26 USC 179. amended by striking out the table contained therein and inserting in lieu thereof the following: "If the taxable year begins in: The applicable amount is: 1983,1984, 1985,1986, or 1987 $5,000 1988 or 1989 7,500 1990 or thereafter 10,000." SEC. 14. EMPLOYEE STOCK OWNERSHIP CREDIT. Subparagraph (B) of section 44GKaX2) (relating to employee stock 26 USC 44G. ownership credit), as in effect before the amendments made by title rV of this Act, is amended by striking out the table contained Post, p. 788. therein and inserting in lieu thereof the following: "For aggregate compensation paid or accrued during a portion of the taxable year occurring in calendar ]u(f^ "fe^u fe yean The applicable percentage is: ^j- » 1983, 1984, 1985, 1986, or 1987 0.5 " 1988 or thereafter 0." SEC. 15. COST-OF-LIVING ADJUSTMENTS IN PENSION PLAN LIMITATIONS. (a) GENERAL RULE.—Paragraph (3) of section 415(d) (relating to 26 use 415. freeze on adjustment to defined contribution and benefit plan limits) is amended by striking out "January 1, 1986" and inserting in lieu , thereof "January 1,1988". (b) TECHNICAL AMENDMENT.—Subparagraph (A) of section 415(dX2) (defining base periods), as amended by section 235(bX2XB) of the Tax Equity and Fiscal Responsibility Act of 1982, is amended by striking 96 Stat. 505. out "October 1, 1984" and inserting in lieu thereof "October 1, 1986". SEC. 16. REPEAL OF PARTIAL INTEREST EXCLUSION. (a) GENERAL RULE.—Subsections (a) and (c) of section 302 of the 26 USC 46, loi. Economic Recovery Tax Act of 1981 are hereby repealed, and the 128 and note, ^ Internal Revenue Code of 1954 shall be applied and administered as ^^^^^21'^' if such subsections (and the amendments made by such subsections) 26 use 1 etseq. had not been enacted. (b) CONFORMING AMENDMENT.—Paragraph (1) of section 57(a) is 26 use 57. amended to read as follows: "(1) EXCLUSION OF DIVIDENDS.—Any amount excluded from gross income for the taxable year under section 116." SEC. 17. FOREIGN EARNED INCOME OF INDIVIDUALS. Subparagraph (A) of section 911(bX2) (relating to limitation on 26 USC 911. foreign earned income) is amended by striking out the table con- tained therein and inserting in lieu thereof the following: "In the case of taxable years beginning in: The annual rate is: 1983, 1984, 1985, 1986, or 1987 $80,000 . . . 1988 85,000 - ''' 1989 90,000 1990 and thereafter 95,000."
98 STAT. 506 PUBLIC LAW 98-369—JULY 18, 1984 26 u s e 48 note. SEC. 18. EFFECTIVE DATE. (a) GENERAL RULE.—The amendments made by this part shall apply to taxable years ending after December 31,1983. Ante, p. 505. (b) SPECIAL RuLE FOR SECTION 14.—The amendment made by section 14 shall not apply in the case of a tax credit employee stock ownership plan if— (1) such plan was favorably approved on September 23, 1983, by employees, and (2) not later than January 11, 1984, the employer of such employees was 100 percent owned by such plan. PART II—ESTATE AND GIFT TAX RATES SEC. 21. MAXIMUM RATE. 26 use 2001. (a) GENERAL RULE.—Paragraph (2) of section 2001(c) (relating to phase-in of 50 percent maximum rate) is amended— (1) by striking out "1985" in subparagraph (A) and inserting in lieu thereof "1988", and (2) by striking out "1984" each place it appears in subpara- graph (D) and inserting in lieu thereof "1984, 1985, 1986, or 1987". 26 use 2001 (b) EFFECTIVE DATE.—The amendments made by subsection (a) note. shall apply to the estates of decedents dying after, and gifts made after, December 31,1983. PART III—EXCISE TAXES ' SEC. 25. TAX RATE ON NEWLY DISCOVERED OIL. 26 use 4987. (a) GENERAL RuLE.—Subparagraph (B) of section 4987(b)(3) (relat- ing to rate of tax on newly discovered oil) is amended by striking out the table contained therein and inserting in lieu thereof the following: "For taxable periods beginning in: The applicable percentage is: 1984, 1985, 1986, or 1987 22^! 1988 20 1989 aiid thereafter!!!!!"!!!!!!!"^ 15." (b) CONTINUATION OF PERCENTAGE DEPLETION FOR OIL AND GAS FROM SECONDARY OR TERTIARY PROCESS.— 26 use 613A. (1) Paragraph (2) of section 613A(c) (relating to exemption for independent producers and royalty owners) is amended by strik- ing out the last sentence. (2) Subparagraph (A) of section 613A(c)(3) (defining depletable oil quantity) is amended by adding at the end thereof the following new sentence: "Clause (ii) shall not apply after December 31,1983." (3) Subparagraph (E) of section 613A(c)(7) is amended by adding at the end thereof the following new sentence: "This subparagraph shall not apply after December 31,1983." (4) Subparagraph (A) of section 613A(c)(9) (relating to transfer of oil or gas property) is amended by striking out "paragraph (1)" and inserting in lieu thereof "this subsection". (c) EFFECTIVE DATES.— 26 use 4987 (1) SUBSECTION (a).—The amendment made by subsection (a) note. shall apply to taxable periods beginning after December 31, 1983.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 507 1^ (2) SUBSECTION (b).—The amendments made by subsection (b) 26 use 613A. shall take effect on January 1,1984. SEC. 26. EXCISE TAX ON COMMUNICATIONS SERVICES. Paragraph (2) of section 4251(b) (relating to rate of tax on commu- 26 USC 4251. nications services) is amended by striking out the table contained therein and inserting in lieu thereof the following: "With respect to amount paid pursu- ant to bills first rendered: The applicable percentage is: During 1983, 1984, 1986, or 1987 3 During 1988 or thereafter 0." SEC. 27. EXCISE TAX ON DISTILLED SPIRITS. (a) IMPOSITION OF TAX.— (1) IN GENERAL.—Paragraphs (1) and (3) of section 5001(a) 26 use 5001. (relating to rate of tax on distilled spirits) are each amended by I striking out "$10.50" and inserting in lieu thereof "$12.50'\ (2) TECHNICAL AMENDMENT.—Paragraphs (1) and (2) of section 5010(a) (relating to credit for wine content and for flavors 26 USC 5010. content) are each amended by striking out "$10.50" and insert- ing in lieu thereof "$12.50". * Ot>) FLOOR STOCKS TAXES ON DISTILLED SPIRITS.— 26 use 500i (1) IMPOSITION OF TAX.—On distilled spirits on which tax was note. imposed under section 5001 or 7652 of the Internal Revenue Code of 1954 before October 1, 1985, and which were held on such date for sale by any person, there shall be imposed a tax at the rate of $2.00 for each proof gallon and a proportionate tax at the like rate on all fractional parts of a proof gallon. (2) EXCEPTION FOR CERTAIN SMALL WHOLESALE OR RETAIL DEAL- ERS.—No tax shall be imposed by paragraph (1) on distilled spirits held on October 1,1985, by any dealer if— (A) the aggregate liquid volume of distilled spirits held by such dealer on such date does not exceed 500 wine gallons, and (B) such dealer submits to the Secretary (at the time and f: in the manner required by the Secretary) such information as the Secretary shall require for purposes of this paragraph. (3) CREDIT AGAINST TAX.—Each dealer shall be allowed as a credit against the taxes imposed by paragraph (1) an amount equal to $800. Such credit shall not exceed the amount of taxes imposed by paragraph (1) for which the dealer is liable. (4) LlABIUTY FOR TAX AND METHOD OF PAYMENT.— j= (A) LIABILITY FOR TAX.—A person holding distilledspirits on October 1, 1985, to which the tax imposed by paragraph ..;r, (1) applies shall be liable for such tax. " ' (B) METHOD OF PAYMENT.—The tax imposed by paragraph (1) shall be paid in such manner as the Secretary shall by regulations prescribe. (C) T I M E FOR PAYMENT.— (i) IN GENERAL.—Except as provided in clause (ii), the tax imposed by paragraph (1) shall be paid on or before - - '-^ • April 1, 1986. (ii) INSTALLMENT PAYMENT OF TAX IN CASE OF SMALL ^" OR MIDDLE-SIZED DEALERS.—In the case of any small or - middle-sized dealer, the tax imposed by paragraph (1) may be paid in 3 equal installments due as follows:
98 STAT. 508 PUBLIC LAW 98-369—JULY 18, 1984 (I) The first installment shall be paid on or before April 1,1986. (II) The second installment shall be paid on or before July 1,1986. (III) The third installment shall be paid on or before October 1,1986. If the taxpayer does not pay any installment under this clause on or before the date prescribed for its payment, the whole of the unpaid tax shall be paid upon notice and dememd from the Secretary. (iii) SMALL OR MIDDLE-SIZED DEALER.—For purposes of clause (ii), the term "smsdl or middle-sized dealer" means any dealer if the aggregate gross sales receipts of such dealer for its most recent taxable year ending before October 1,1985, does not exceed $500,000. (5) CONTROLLED GROUPS.— (A) CONTROLLED GROUPS OF CORPORATIONS.—In the case of a controlled group— (i) the 500 wine gallon amount specified in paragraph (2), (ii) the $800 amount specified in paragraph (3), and (iii) the $500,000 amount specified in paragraph (4)(C)(iii), shall be apportioned among the dealers who are component members of such group in such manner as the Secretary shall by regulations prescribe. For purposes of the preced- ing sentence, the term "controlled group" has the meaning given to such term by subsection (a) of section 1563 of the Internal Revenue Code of 1954; except that for such pur- poses the phrase "more than 50 percent" shall be substi- t; tuted for the phrase "at least 80 percent" each place it 1 If : appears in such subsection. (B) NONINCORPORATED DEALERS UNDER COMMON CON- TROL.—Under regulations prescribed by the Secretary, prin- ciples similar to the principles of subparagraph (A) shall apply to a group of dealers under common control where 1 or more of such dealers is not a corporation. (6) OTHER LAWS APPUCABLE.—All provisions of law, including penalties, applicable with respect to the taxes imposed by sec- tion 5001 of the Internal Revenue Code of 1954 shall, insofar as applicable and not inconsistent with the provisions of this subsection, apply in respect of the taxes imposed by paragraph (1) to the same extent as if such taxes were imposed by such section 5001. (7) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— (A) DEALER.—The term "dealer" means— (i) any wholesale dealer in liquors (as defined in .J section 5112(b) of the Internal Revenue Code of 1954), and (ii) any retail dealer in liquors (as defined in section 5122(a) of such Code). (B) DISTILLED SPIRITS.—The term "distilled spirits" hsis the meaning given such term by section 5002(a)(8) of the Internal Revenue Code of 1954. ,
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 509 "' '• (C) PERSON.—The term "person" includes any State or political subdivision thereof, or any agency or instrumental- ity of a State or political subdivision thereof. (D) SECRETARY.—The term "Secretary" means the Secre- tary of the Treasury or his delegate. (E) TREATMENT OF IMPORTED PERFUMES CONTAINING DIS- TILLED SPIRITS.—Any article described in section 5001(aX3) of such Code shall be treated as distilled spirits; except that the tax imposed by paragraph (1) shall be imposed on a wine gallon basis in lieu of a proof gallon basis. To the extent provided in regulations prescribed by the Secretary, ' the preceding sentence shall not apply to any article held on October 1, 1985, on the premises of a retail establishment. (c) REQUIREMENT OF ELECTRONIC FUNDS TRANSFER FOR ALCOHOL AND TOBACCO EXCISE TAXES.— (1) ALCOHOL TAXES.—Section 5061 (relating to method of col- 26 use 5061. lecting tax on distilled spirits) is amended by adding at the end thereof the following new subsection: "(e) PAYMENT BY ELECTRONIC FUND TRANSFER.— "(1) IN GENERAL.—Any person who in any 12-month period ending December 31, was liable for a gross amount equal to or exceeding $5,000,000 in taxes imposed on distilled spirits, wines, or beer by sections 5001, 5041, and 5051 (or 7652), respectively, shall pay such taxes during the succeeding calendar year by electronic fund transfer to a Federal Reserve Bank. "(2) ELECTRONIC FUND TRANSFER.—The term 'electronic fund transfer' means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or author- ize a financial institution to debit or credit an account." (2) TOBACCO TAXES.—Subsection (b) of section 5703 (relating to 26 use 5703. method of payment of tobacco taxes) is amended by adding at the end thereof the following new paragraph: "(3) PAYMENT BY ELECTRONIC FUND TRANSFER.—Any person who in any 12-month period, ending December 31, was liable for a gross amount equal to or exceeding $5,000,000 in taxes im- posed on tobacco products and cigarette papers and tubes by section 5701 (or 7652) shall pay such taxes during the succeeding calendar year by electronic fund transfer (as defined in section 5061(e)(2)) to a Federal Reserve Bank." Supra. (d) EFFECTIVE DATES.— 26 use 500i (1) IN GENERAL.—Except as provided in paragraph (2), the note. amendments made by this section shall take effect on October 1, ; 1985. (2) ELECTRONIC TRANSFER PROVISIONS.—The amendments made by subsection (c) shall apply to taxes required to be paid on or after September 30,1984. Subtitle B—Tax-Exempt Entity Leasing SEC. 31. DENIAL OF TAX INCENTIVES FOR PROPERTY LEASED TO GOV- "^^.k ERNMENTS AND OTHER TAX-EXEMPT ENTITIES. (a) GENERAL RULE.—Section 168 (relating to accelerated cost re- 26 use 168. covery system) is amended by redesignating subsection (j) as subsec-
98 STAT. 510 PUBLIC LAW 98-369—JULY 18, 1984 tion (k) and by inserting after subsection (i) the following new subsection: "(j) PROPERTY LEASED TO GOVERNMENTS AND OTHER TAX-EXEMPT ENTITIES.— "(1) IN GENERAL.—Notwithstanding any other provision of this section, the deduction allowed under subsection (a) (and any other deduction allowable for depreciation or amortization) for any taxable year with respect to tax-exempt use property shall be determined— "(A) by using the straight-line method (without regard to salvage value), and "(B) by using a recovery period determined under the following table: "In the case of: The recovery period shall be: (I) Property not described in sub- clause (II) or subclause (III) The present class life. (II) Personal property with no present class life 12 years. (III) 18-year real property 40 years. "(2) OPERATING RULES.— "(A) RECOVERY PERIOD MUST AT LEAST EQUAL 125 PERCENT OF LEASE TERM.—In the case of any tax-exempt use prop- erty, the recovery period used for purposes of paragraph (1) shall not be less than 125 percent of the lease term. "(B) CONVENTIONS.— "(i) PROPERTY OTHER THAN 18-YEAR REAL PROPERTY.— In the case of property other than 18-year real prop- erty, the half-year convention shall apply for purposes of paragraph (1). (ii) 18-YEAR REAL PROPERTY.—In the case of 18-year real property, the amount determined under paragraph (1) shall be determined on the basis of the number of months (using a mid-month, convention) in the year in which the property is in service. "(C) EXCEPTION WHERE LONGER RECOVERY PERIOD AP- PLIES.—Paragraph (1) shall not apply to any recovery prop- erty if the recovery period which applies to such property (without regard to this subsection) exceeds the recovery period for such property determined under this subsection. "(D) DETERMINATION OF CLASS FOR REAL PROPERTY WHICH IS NOT RECOVERY PROPERTY.—In the case of any real prop- erty which is not recovery property, for purposes of this subsection, the determination of whether such property is 18-year real property shall be made as if such property were recovery property. " ( E ) COORDINATION WITH SUBSECTION (f) (12) .—Paragraph (12) of subsection (f) shall not apply to any tax-exempt use property to which this subsection applies. "(F) 18-YEAR REAL PROPERTY.—For purposes of this subsec- tion, the term '18-year real property' includes— "(i) low-income housing, and "(ii) any property which was treated as 15-year real property under this section (as in effect before the Ante, p. 494. . jros ifi - : amendments made by the Tax Reform Act of 1984).
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 511 "(3) TAX-EXEMPT USE PROPERTY.—For purposes of this subsection— "(A) PROPERTY OTHER THAN i 8-YEAR REAL PROPERTY.— Except as otherwise provided in this subsection, the term 'tax-exempt use property' means that portion of any tangi- ble property (other than 18-year real property) leased to a tax-exempt entity. "(B) 18-YEAR REAL PROPERTY.— "(i) IN GENERAL.—In the case of 18-year real prop- erty, the term 'tax-exempt use property' means that portion of the property leased to a tax-exempt entity in a disqualified lease. "(ii) DiSQUAUFiED LEASE.—For purposes of this sub- paragraph, the term 'disqualified lease' means any lease of the property to a tax-exempt entity, but only if— "(I) part or all of the property was financed ji / : o (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103 and W' such entity (or a related entity) participated in such financing, "(II) under such lease there is a fixed or deter- minable price purchase or sale option which in- volves such entity (or a related entity) or there is the equivalent of such an option, "(III) such lease has a lease term in excess of 20 years, or "(IV) such lease occurs after a. sale (or other transfer) of the property by, or lease of the prop- erty from, such entity (or a related entity) and such i*:\ property has been used by such entity (or a related entity) before such sale (or other transfer) or lease, "(iii) 35-PERCENT THRESHOLD TEST.—Clause (i) shall apply to any property only if the portion of such prop- erty leased to tax-exempt entities in disqualified leases is more than 35 percent of the property. "(iv) TREATMENT OF IMPROVEMENTS.—For purposes of this subparagraph, improvements to a property (other than land) shall not be treated as a separate property. "(v) LEASEBACKS DURING IST 3 MONTHS OF USE NOT TAKEN INTO ACCOUNT.—Subclause (IV) of clause (ii) *" • i ^""^^• shall not apply to any property which is leased within 3 months after the date such property is first used by the tax-exempt entity (or a related entity). "(C) EXCEPTION FOR SHORT-TERM LEASES.— "(i) IN GENERAL.—Property shall not be treated as '••" ' tax-exempt use property merely by reason of a short- term lease. "(ii) SHORT-TERM LEASE.—For purposes of clause (i), the term 'short-term lease' means any lease the term of ' which is— "(I) less than 3 years, and *: ^^ *^^ "(II) less than the greater of 1 year or 30 percent of the property's present class life. In the case of 18-year real property and property with no present class life, subclause (II) shall not apply.
98 STAT. 512 PUBLIC LAW 98-369—JULY 18, 1984 "(D) EXCEPTION WHERE PROPERTY USED IN UNRELATED TRADE OR BUSINESS.—The term 'tax-exempt use property' shall not include any portion of a property if such portion is predominantly used by the tax-exempt entity (directly or through a partnership of which such entity is a partner) in an unrelated trade or business the income of which is subject to tax under section 511. "(4) TAX-EXEMPT ENTITY.— "(A) IN GENERAL.—For purposes of this subsection, the term 'tax-exempt entity' means— "(i) the United States, any State or political subdivi- sion thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing, "(ii) an organization (other than a cooperative de- scribed in section 521) which is exempt from tax im- posed by this chapter, and "(iii) any foreign person or entity. "(B) EXCEPTIONS FOR CERTAIN PROPERTY USED BY FOREIGN PERSON OR ENTITY.— "(i) INCOME FROM PROPERTY SUBJECT TO UNITED STATES TAX.—Clause (iii) of subparagraph (A) shall not apply with respect to any property if more than 50 percent of the gross income for the taxable year derived by the foreign person or entity from the use of such property is— "(I) subject to tax under this chapter, or "(II) included under section 951 in the gross income of a United States shareholder for the tax- able year with or within which ends the taxable year of the controlled foreign corporation in which such income was derived. For purposes of the preceding sentence, any exclusion or exemption shall not apply for purposes of determin- ing the amount of the gross income so derived, but shall apply for purposes of determining the portion of such gross income subject to tax under this chapter. "(ii) MOVIES AND SOUND RECORDINGS.—Clause (iii) of subparagraph (A) shall not apply with respect to any qualified film (as defined in section 48(k)(l)(B)) or any Post, p. 635. sound recording (as defined in section 48(r)). "(C) FOREIGN PERSON OR ENTITY.—For purposes of this paragraph, the term 'foreign person or entity' means— "(i) any foreign government, any international orga- nization, or any agency or instrumentality of any of the foregoing, and "(ii) any person who is not a United States person. Such term does not include any foreign partnership or other foreign pass-thru entity. Ck)rporations. "(D) TREATMENT OF CERTAIN TAXABLE INSTRUMENTAL- ITIES.—For purposes of this subsection and paragraph (5) of Post, p. 635. section 48(a), a corporation shall not be treated as an instrumentality of the United States or of any State or political subdivision thereof if— "(i) all of the activities of such corporation are subject to tax under this chapter, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 513 "(ii) a majority of the board of directors of such corporation is not selected by the United States or any State or political subdivision thereof. "(E) CERTAIN PREVIOUSLY TAX-EXEMPT ORGANIZATIONS.— "(i) IN GENERAL.—For purposes of this subsection and paragraph (4) of section 48(a), an organization shall be treated as an organization described in subparagraph (A)(ii) with respect to any property of which such orga- nization is the lessee if such organization was an orga- nization (other than a cooperative described in section 521) exempt from tax imposed by this chapter at any time during the 5-year period ending on the date such property was first leased to such organization. The preceding sentence shall not apply to the Federal Home Loan Mortgage Corporation, "(ii) ELECTION NOT TO HAVE CLAUSE (i) APPLY.— "(I) IN GENERAL.—In the case of an organization formerly exempt from tax under section 501(a) as I, an organization described in section 501(c)(12), clause (i) shall not apply to such organization with . . respect to any property of which such organization • is the lessee if such organization elects not to be ^ exempt from tax under section 501(a) during the tax-exempt use period with respect to such property. "(II) TAX-EXEMPT USE PERIOD.—For purposes of '^"^^^ ' subclause (I), the term 'tax-exempt use period' means the period beginning with the taxable year ' in which the property described in subclause (I) is J placed in service under the lease and ending with Sim;' ^jjg close of the 15th taxable year following the last taxable year of the recovery period of such property. = ' "(III) ELECTION.—Any election under subclause ,,, (I), once made, shall be irrevocable, "(iii) TREATMENT OF SUCCESSOR ORGANIZATIONS.—Any organization which is engaged in activities substan- tially similar to those engaged in by a predecessor organization shall succeed to the treatment under this subparagraph of such predecessor organization. "(5) SPECIAL RULES FOR CERTAIN HIGH TECHNOLOGY EQUIP- MENT.— "(A) EXEMPTION WHERE LEASE TERM IS 5 YEARS OR LESS.— For purposes of this subsection, the term 'tax-exempt use property' shall not include any qualified technological equipment if the lease to the tax-exempt entity has a lease term of 5 years or less. "(B) RECOVERY PERIOD WHERE LEASE TERM IS GREATER I THAN 5 YEARS.—In the case of any qualified technological equipment not described in subparagraph (A) and which is not property to which subsection (fX2) applies, the recovery period used for purposes of paragraph (1) shall be 5 years. "(C) QUAUFIED TECHNOLOGICAL EQUIPMENT.—For pur- ^ poses of this paragraph— "(i) IN GENERAL.—Except as otherwise provided in this subparagraph, the term 'qualified technological equipment' means—
98 STAT. 514 PUBLIC LAW 98-369—JULY 18, 1984 "(I) any computer or peripheral equipment, "(II) any high technology telephone station equipment installed on the customer's premises, and "(III) any high technology medical equipment, "(ii) EXCEPTION FOR CERTAIN PROPERTY.—The term 'qualified technological equipment' shall not include any property leased to a tax-exempt entity if— "(I) part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103, "(II) such lease occurs after a sale (or other transfer) of the property by, or lease of such prop- erty from, such entity (or related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease, or "(III) such tax-exempt entity is the United States or any agency or instrumentality of the United States. "(iii) LEASEBACKS DURING 1ST 3 MONTHS OF USE NOT TAKEN INTO ACCOUNT.—Subclause (II) of clause (ii) shall not apply to any property which is leased within 3 months after the date such property is first used by the tax-exempt entity (or a related entity). "(iv) PROPERTY NOT SUBJECT TO RAPID OBSOLESCENCE MAY BE EXCLUDED.—The term 'qualified technological equipment' shall not include any equipment described in subclause (II) or (III) of clause (i)— "(I) which the Secretary determines by regula- tions is not subject to rapid obsolescence, and Federal "(II) which is placed in service after the date on Register, which final regulations implementing such deter- publication. mination are published in the Federal Register. "(D) COMPUTER OR PERIPHERAL EQUIPMENT DEFINED.—For purposes of this paragraph— "(i) IN GENERAL.—The term 'computer or peripheral equipment' means— "(I) any computer, and "(II) any related peripheral equipment, "(ii) COMPUTER.—The term 'computer' means a pro- grammable electronically activated device which— "(I) is capable of accepting information, applying prescribed processes to the information, and sup- plying the results of these processes with or with- out human intervention, and "(II) consists of a central processing unit contain- ing extensive storage, logic, arithmetic, and control capabilities, "(iii) RELATED PERIPHERAL EQUIPMENT.—The term 're- lated peripheral equipment' means any auxiliary ma- chine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer. "(iv) EXCEPTIONS.—The term 'computer or peripheral equipment' shall not include—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 515 "(I) any equipment which is an integral part of other property which is not a computer, "(II) typewriters, calculators, adding and ac- counting machines, copiers, duplicating equipment, and similar equipment, and "(III) equipment of a kind used primarily for amusement or entertainment of the user. "(E) HIGH TECHNOLOGY MEDICAL EQUIPMENT.—For pur- poses of this paragraph, the term 'high technology medical equipment' means any electronic, electromechanical, or computer-based high technology equipment used in the screening, monitoring, observation, diagnosis, or treat- ment of patients in a laboratory, medical, or hospital environment. "(6) OTHER SPECIAL RULES.—For purposes of this subsection— "(A) LEASE.—The term 'lease' includes any grant of a right to use property. "(B) LEASE TERM.—In determining a lease term— "(i) there shall be taken into account options to renew, and ; u. "(ii) 2 or more successive leases which are part of the same transaction (or a series of related transactions) with respect to the same or substantially similar prop- erty shall be treated as 1 lease. "(C) SPECIAL RULE FOR FAIR RENTAL OPTIONS ON 18-YEAR REAL PROPERTY.—For purposes of clause (i) of subparagraph (B), in the case of 18-year real property, there shall not be taken into account any option to renew at fair market value, determined at the time of renewal. "(7) RELATED ENTITIES.—For purposes of this subsection— "(A)(i) Each governmental unit and each agency or in- strumentality of a governmental unit is related to each other such unit, agency, or instrumentality which directly or indirectly derives its powers, rights, and duties in whole or in part from the same sovereign authority. "(ii) For purposes of clause (i), the United States, each State, and each possession of the United States shall be treated as a separate sovereign authority. "(B) Any entity not described in subparagraph (A)(i) is related to any other entity if the 2 entities have— "(i) significant common purposes and substantial lijfcfi,, common membership, or ,. ^ ., ^^i "(ii) directly or indirectly substantial common direc- , * ^^ tion or control. "(C)(i) An entity is related to another entity if either entity owns (directly or through 1 or more entities) a 50 percent or greater interest in the capital or profits of the other entity. "(ii) For purposes of clause (i), entities treated as related under subparagraph (A) or (B) shall be treated as 1 entity. "(D) An entity is related to another entity with respect to a transaction if such transaction is part of an attempt by such entities to avoid the application of this subsection, section 46(e), paragraph (4) or (5) of section 48(a), or clause Post, p. 517. (vi) of section 48(g)(2)(B). Post, p. 518.
98 STAT. 516 PUBLIC LAW 98-369—JULY 18, 1984 "(8) TAX-EXEMPT USE OF PROPERTY LEASED TO PARTNERSHIPS, ETC., DETERMINED AT PARTNER LEVEL.—For purposes of this sub- Post, p. 517. section and paragraphs (4) and (5) of section 48(a)— "(A) I N GENERAL.—In the case of any property which is leased to a partnership, the determination of whether any portion of such property is tax-exempt use property shall be made by treating each tax-exempt entity partner's propor- tionate share (determined under paragraph (9)(C)) of such property as being leased to such partner. "(B) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules similar to the rules of subparagraph (A) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. "(C) PRESUMPTION WITH RESPECT TO FOREIGN ENTITIES.— Unless it is otherwise established to the satisfaction of the Secretary, it shall be presumed that the partners of a foreign partnership (and the beneficiaries of any other foreign pass-thru entity) are persons who are not United States persons. "(9) TREATMENT OF PROPERTY OWNED BY PARTNERSHIPS, ETC.— "(A) IN GENERAL.—For purposes of this subsection and paragraphs (4) and (5) of section 48(a), if— "(i) any property which (but for this subparagraph) is not tax-exempt use property is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, and "(ii) any allocation to the tax-exempt entity of part- nership items is not a qualified allocation, an amount equal to such tax-exempt entity's proportionate share of such property shall (except as provided in para- graph (3)(D)) be treated as tax-exempt use property. "(B) QuAUFiED ALLOCATION.—For purposes of subpara- graph (A), the term 'qualified allocation' means any alloca- tion to a tax-exempt entity which— "(i) is consistent with such entity's being allocated the same distributive share of each item of income, gain, loss deduction, credit, and basis and such share remains the same during the entire period the entity is a partner in the partnership, and "(ii) has substantial economic effect within the mean- ing of section 704(b)(2). For purposes of this subparagraph, items allocated under Post, p. 589. section 704(c) shall not be taken into account. "(C) DETERMINATION OF PROPORTIONATE SHARE.— "(i) IN GENERAL.—For purposes of subparagraph (A), a tax-exempt entity's proportionate share of any prop- erty owned by a partnership shall be determined on the basis of such entity's share of partnership items of income or gain (excluding gain allocated under section 704(c)), whichever results in the largest proportionate share. "(ii) DETERMINATION WHERE ALLOCATIONS VARY.—For purposes of clause (i), if a tax-exempt entity's share of partnership items of income or gain (excluding gain allocated under section 704(c)) may vary during the period such entity is a partner in the partnership, such
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 517 share shall be the highest share such entity may receive. "(D) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules similar to the rules of subparagraphs (A), (B), and (C) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. "(E) REGULATIONS.—For purposes of determining whether there is a qualified allocation under subparagraph (B), the regulations prescribed under paragraph (10) for purposes of this paragraph— "(i) shall set forth the proper treatment for partner- ship guaranteed payments, and "(ii) may provide for the exclusion or segregation of items. "(10) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary or appropriate to carry out the purposes of this subsection." Ob) DENIAL OF INVESTMENT TAX CREDIT FOR PROPERTY USED BY FOREIGN GOVERNMENTS AND OTHER FOREIGN PERSONS.—Paragraph * ^" (5) of section 48(a) (relating to property used by governmental units) 26 USC 48. is amended to read as follows: "(5) PROPERTY USED BY GOVERNMENTAL UNITS OR FOREIGN ,, PERSONS OR ENTITIES.— > "(A) IN GENERAL.—Property used— "(i) by the United States, any State or political subdi- vision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing, or "(ii) by any foreign person or entity (as defined in section 168(j)(4)(C)), but only with respect to property to Ante, p. 509. which section 168(jX4)(AXiii) applies (determined after the application of section 168(jX4)(B)), * K cr *jh.i\ shall not be treated as section 38 property. "(B) EXCEPTION FOR SHORT-TERM LEASES.— "(i) IN GENERAL.—This paragraph and paragraph (4) shall not apply to any property by reason of use under a lease with a term of less than 6 months (determined under section 168(jX6)). "(ii) EXCEPTION FOR CERTAIN OIL DRILLING PROPERTY AND CERTAIN CONTAINERS.—For purposes of this para- ^ graph and paragraph (4), clause (i) shall be applied by substituting the lease term limitation in section 168(jX3XC)(ii) for the lease term limitation in clause (i) in the case of property which is leased to a foreign ' > >C;L ^;S person or entity and— "(I) which is used in offshore drilling for oil and gas (including drilling vessels, barges, platforms, and drilling equipment) and support vessels with respect to such property, or "(II) which is a container described in section 48(a)(2)(BXv) (without regard to whether such con- tainer is used outside the United States) or con- tainer chassis or trailer but only if such container, chassis, or trailer has a present class life of not more than 6 years, "(iii) EXCEPTION FOR CERTAIN AIRCRAFT.—
98 STAT. 518 PUBLIC LAW 98-369—JULY 18, 1984 "(I) IN GENERAL.—In the case of any aircraft used under a qualifying lease (as defined in section 47(a)(7)(C)) and which is leased to a foreign person or entity before January 1, 1990, clause (i) shall be applied by substituting '3 years' for '6 months'. "(II) RECAPTURE PERIOD EXTENDED.—For purposes of applying subparagraph (B) of section 47(a)(5) and paragraph (1) of section 47(a), there shall not be taken into account any period of a lease to which subclause (I) applies. "(C) EXCEPTION FOR QUAUFIED REHABILITATED BUILDINGS LEASED TO GOVERNMENTS, ETC.—If any qualified rehabili- tated building is leased to a governmental unit (or a foreign person or entity), this paragraph shall not apply to that portion of the basis of such building which is attributable to qualified rehabilitation expenditures. "(D) CROSS REFERENCE.— "For provisions providing special rules for the application of this para- Ante, p. 509. graph and paragraph (4), see section 168(j)." (c) REHABILITATION CREDIT NOT TO APPLY WHERE PROPERTY USED BY TAX-EXEMPT ENTITY.— 26 use 48. (1) IN GENERAL.—Subparagraph (B) of section 48(g)(2) (relating to certain expenditures not treated as qualified rehabilitation expenditures) is amended by adding at the end thereof the following new clause: "(vi) TAX-EXEMPT USE PROPERTY.— "(I) IN GENERAL.—Any expenditure in connection with the rehabilitation of a building which is allo- cable to that portion of such building which is (or may reasonably be expected to be) tax-exempt use Ante, p. 509. property (within the meaning of section 168(j)(3)). "(II) CLAUSE NOT TO APPLY FOR PURPOSES OF PARA- GRAPH (i)(c).—This clause shall not apply for purposes of determining under paragraph (IXC) whether a building has been substantially rehabili- tated." (2) TECHNICAL AMENDMENT.—Clause (i) of section 48(g)(2)(B) is amended by adding at the end thereof the following new sen- tence: "The preceding sentence shall not apply to any expendi- ture to the extent subsection (f)(12) or (j) of section 168 applies to such expenditure." (d) AUTHORITY T O PRESCRIBE PRESENT CLASS LIFE FOR CERTAIN 26 use 168. PROPERTY.—Paragraph (2) of section 168(g) (defining present class life) is amended by adding at the end thereof the following new sentence: "If any property (other than section 1250 class property) does not have a present class life within the meaning of the preced- ing sentence, the Secretary may prescribe a present class life for such property which reasonably reflects the anticipated useful life of such property to the industry or other group." (e) TREATMENT OF CERTAIN CONTRACTS FOR PROVIDING SERVICES, 26 use 7701. ETC.—Section 7701 (relating to definitions), as amended by this Act, Post, p. 672. is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e) TREATMENT OF CERTAIN CONTRACTS FOR PROVIDING SERVICES, 26 use 1 et seq. ETC.—For purposes of chapter 1—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 519 "(1) IN GENERAL.—A contract which purports to be a service contract shall be treated as a lease of property if such contract is properly treated as a lease of property, taking into account all relevant factors including whether or not— "(A) the service recipient is in physical possession of the property, J: t "(B) the service recipient controls the property, "(C) the service recipient has a significant economic or possessory interest in the property, "(D) the service provider does not bear any risk of sub- stantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract, "(E) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and "(F) the total contract price does not substantially exceed the rental value of the property for the contract period. "(2) OTHER ARRANGEMENTS.—An arrangement (including a partnership or other pass-thru entity) which is not described in paragraph (1) shall be treated as a lease if such arrangement is properly treated as a lease, taking into account all relevant factors including factors similar to those set forth in paragraph (1). "(3) SPECIAL RULES FOR CONTRACTS OR ARRANGEMENTS INVOLVING SOLID WASTE DISPOSAL, ENERGY, AND CLEAN WATER FACILITIES.— "(A) I N GENERAL.—Notwithstanding paragraphs (1) and (2), and except as provided in paragraph (4), any contract or arrangement between a service provider and a service re- ' cipient— "(i) with respect to— "(I) the operation of a qualified solid waste dis- posal facility, .'!!.. i jc "(ij) the sale to the service recipient of electrical or thermal energy produced at a cogeneration or i^AF; *' alternative energy facility, or "(III) the operation of a water treatment works • facility, and "(ii) which purports to be a service contract, shall be treated as a service contract. "(B) QUALIFIED SOLID WASTE DISPOSAL FACILITY.—For pur- poses of subparagraph (A), the term 'qualified solid waste disposal facility' means any facility if such facility provides solid waste disposal services for residents of part or all of 1 or more governmental units and substantially all of the solid waste processed at such facility is collected from the general public. "(C) COGENERATION FACIUTY.—For purposes of subpara- graph (A), the term 'cogeneration facility means a facility which uses the same energy source for the sequential gen- eration of electrical or mechanical power in combination with steam, heat, or other forms of useful energy. "(D) ALTERNATIVE ENERGY FACIUTY.—For purposes of sub- paragraph (A), the term 'alternative energy facility' means a facility for producing electrical or thermal energy if the
98 STAT. 520 PUBLIC LAW 98-369—JULY 18, 1984 primary energy source for the facility is not oil, natural gas, coal, or nuclear power. "(E) WATER TREATMENT WORKS FACILITY.—For purposes of subparagraph (A), the term 'water treatment works facility' means any treatment works within the meaning of section 33 use 1292. 212(2) of the Federal Water Pollution Control Act. "(4) PARAGRAPH (3) NOT TO APPLY IN CERTAIN CASES.— i I "(A) IN GENERAL.—Paragraph (3) shall not apply to any qualified solid waste disposal facility, cogeneration facility, alternative energy facility, or water treatment works faci- lity used under a contract or arrangement if^ "(i) the service recipient (or a related entity) operates such facility, "(ii) the service recipient (or a related entity) bears s-^i ij ;:, any significant financial burden if there is nonperform- ance under the contract or arrangement (other than for reasons beyond the control of the service provider), "(iii) the service recipient (or a related entity) re- ceives any significant financial benefit if the operating costs of such facility are less than the standards of performance or operation under the contract or ar- rangement, or ^ "(iv) the service recipient (or a related entity) has an ' option to purchase, or may be required to purchase, all or a part of such facility at a fixed and determinable jj' price (other than for fair market value). "(B) SPECIAL RULES FOR APPLICATION OF SUBPARAGRAPH (A) WITH RESPECT TO CERTAIN RIGHTS AND ALLOCATIONS UNDER THE CONTRACT.—For purposes of subparagraph (A), ^•^ there shall not be taken into account— "(i) any right of a service recipient to inspect any facility, to exercise any sovereign power the service .»"lTi ,' recipient may possess, or to act in the event of a breach of contract by the service provider, or r "(ii) any allocation of any financial burden or bene- fits in the event of any change in any law. "(C) SPECIAL RULES FOR APPLICATION OF SUBPARAGRAPH f. 7r V J <A) IN THE CASE OF CERTAIN E V E N T S . — "(i) TEMPORARY SHUT-DOWNS, ETC.—For purposes of clause (ii) of subparagraph (A), there shall not be taken into account any temporary shut-down of the facility for repairs, maintenance, or capital improvements, or any financial burden caused by the bankruptcy or similar financial difficulty of the service provider. "(ii) REDUCED COSTS.—For purposes of clause (iii) of subparagraph (A), there shall not be taken into account any significant financial benefit merely because pay- ments by the service recipient under the contract or arrangement are decreased by reason of increased pro- duction or efficiency or the recovery of energy or other products. "(5) EXCEPTION FOR CERTAIN LOW-INCOME HOUSING.—This sub- section shall not apply to any low-income housing (within the Post, p. 682. meaning of section 168(C)(2)(F)) if— "(A) such property is operated by or for an organization described in paragraph (3) or (4) of section 501(c), and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 521 "(B) at least 80 percent of the units in such property are leased to low-income tenants (within the meaning of section 167(k)(3)(B)). "(6) REGULATIONS.—The Secretary may prescribe such regula- tions as may be necessary or appropriate to carry out the provisions of this subsection." (f) INVESTMENT TAX CREDIT FOR PROPERTY LEASED BY CERTAIN PERSONS NOT T O EXCEED CREDIT ALLOWED IF SUCH PERSONS OWNED PROPERTY.—Section 46(e) (relating to limitations with respect to 26 USC 46. certain persons) is amended by adding at the end thereof the following new paragraph: "(4) SPECIAL RULES WHERE SECTION 593 ORGANIZATION IS "(A) IN GENERAL.—For purposes of paragraph (1)(A), if an organization described in section 593 is the lessee of any section 38 property, the lessor of such property shall be treated as an organization described in section 593 with respect to such property. "(B) EXCEPTION FOR SHORT-TERM LEASES.—This paragraph shall not apply to any property by reason of use under a lease with a term of less than 6 months (determined under s e c t i o n 168(j)(6)). Ante, p. 509. "(C) ELECTION NOT TO HAVE SUBPARAGRAPH (A) APPLY.— Subparagraph (A) shall not apply for any taxable year to an organization described in section 593 if such organization elects to compute for such year and all subsequent taxable years the amount of the deduction for a reasonable addition to a reserve for bad debts on the basis of actual experience. Any such election shall apply to any successor organization engaged in substantially similar activities and, once made, shall be irrevocable." (g) EFFECTIVE DATES.— 26 use 168 note. (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply— (A) to property placed in service by the taxpayer after May 23, 1983, in taxable years ending after such date, and (B) to property placed in service by the taxpayer on or before May 23, 1983, if the lease to the tax-exempt entity is entered into after May 23,1983. (2) LEASES ENTERED INTO ON OR BEFORE MAY 23, 1983.—The amendments made by this section shall not apply with respect to any property leased to a tax-exempt entity if the property is leased pursuant to— (A) a lease entered into on or before May 23, 1983 (or a sublease under such a lease), or (B) any renewal or extension of a lease entered into on or before May 23, 1983, if such renewal or extension is pursu- ant to an option exercisable by the tax-exempt entity which was held by the tax-exempt entity on May 23,1983. (3) BINDING CONTRACTS, ETC.— (A) The amendments made by this section shall not apply with respect to any property leased to a tax-exempt entity if such lease is pursuant to 1 or more written binding con- tracts which, on May 23, 1983, and at all times thereafter, required—
98 STAT. 522 PUBLIC LAW 98-369—JULY 18, 1984 (i) the taxpayer (or his predecessor in interest under f the contract) to acquire, construct, reconstruct, or reha- biUtate such property, and (ii) the tax-exempt entity (or a tax-exempt predeces- sor thereof) to be the lessee of such property. (B) The amendments made by this section shall not apply with respect to any property owned by a partnership if— (i) such property was acquired by such partnership M , on or before October 21, 1983, or (ii) such partnership entered into a written binding contract which, on October 21, 1983, and at all times m i^/ thereafter, required the partnership to acquire or con- struct such property. (C) The amendments made by this section shall not apply with respect to any property leased to a tax-exempt entity (other than any foreign person or entity)— ^i-iv, ,. (i)if^ (I) on or before May 23, 1983, the taxpayer (or his predecessor in interest under the contract) or the , tax-exempt entity entered into a written binding contract to acquire, construct, reconstruct, or reha- (iO?, Q AJv bilitate such property and such property had not previously been used by the tax-exempt entity, or (II) the taxpayer or the tax-exempt entity ac- quired the property after June 30, 1982, and on or * before May 23,1983, or completed the construction, reconstruction, or rehabilitation of the property after December 31, 1982, and on or before May 23, 1983, and (ii) if such lease is pursuant to a written binding contract entered into before January 1, 1985, which , ., „ requires the tax-exempt entity to be the lessee of such property. (4) OFFICIAL GOVERNMENTAL ACTION ON OR BEFORE NOVEMBER 1, 1983.— (A) IN GENERAL.—The amendments made by this section shall not apply with respect to any property leased to a tax- exempt entity (other than the United States, any agency or instrumentality thereof, or any foreign person or entity) -^'"' (i) on or before November 1, 1983, there was signifi- cant official governmental action with respect to the project or its design, and (ii) the lease to the tax-exempt entity is pursuant to a ^ '5 written binding contract entered into before January 1, 1985, which requires the tax-exempt entity to be the lessee of the property. (B) SIGNIFICANT OFFICIAL GOVERNMENTAL ACTION.—For i' purposes of subparagraph (A), the term "significant official governmental action" does not include granting of permits, zoning changes, environmental impact statements, or simi- lar governmental actions. (5) MASS COMMUTING VEHICLES.—The amendments made by this section shall not apply to any qualified mass commuting vehicle (as defined in section 103(b)(9) of the Internal Revenue Code of 1954) which is financed in whole or in part by obliga-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 523 tions the interest on which is excludable from gross income under section 103(a) of such Code if— (A) such vehicle is placed in service before January 1, 1988, or ^^ (B) such vehicle is placed in service on or after such L.^.. date— (i) pursuant to a binding contract or commitment •itm] entered into before April 1, 1983, and (ii) solely because of conditions which, as determined by the Secretary of the Treasury or his delegate, are not within the control of the lessor or lessee. (6) CERTAIN TURBINES AND BOILERS.—The amendments made by this section shall not apply to any property described in J section 208(d)(3)(E) of the Tax Equity and Fiscal Responsibility Act of 1982. 96 Stat. 439. (7) CERTAIN FACILITIES FOR WHICH RULING REQUESTS FILED ON OR BEFORE MAY 23, 1983.—The amendments made by this section shall not apply with respect to any facilities described in clause (ii) of section 168(f)(12)(C) of the Internal Revenue Code of 1954 (relating to certain sewage or solid waste disposal facilities), as in effect on the day before the date of the enactment of this Act, if a ruling request with respect to the lease of such facility to ., . the tax-exempt entity was filed with the Internal Revenue ''•'• "''* Service on or before May 23,1983. (8) RECOVERY PERIOD FOR CERTAIN QUALIFIED SEWAGE FACILITIES.— (A) IN GENERAL.—In the case of any property (other than 15-year real property) which is part of a qualified sewage facility, the recovery period used for purposes of paragraph (1) of section 168(j) of the Internal Revenue Code of 1954 (as Ante, p. 509. added by this section) shall be 12 years. For purposes of the preceding sentence, the term "15-year real property" in- cludes 18-year real property. (B) QUALIFIED SEWAGE FACILITY.—For purposes of sub- paragraph (A), the term "qualified sewage facility" means any facility which is part of the sewer system of a city, if— (i) on June 15, 1983, the City Council approved a resolution under which the city authorized the procure- '^' ment of equity investments for such facility, and ^ ^ ^ (ii) on July 12, 1983, the Industrial Development •"*" *"' Board of the city approved a resolution to issue a $100,000,000 industrial development bond issue to pro- vide funds to purchase such facility. (9) PROPERTY USED BY THE POSTAL SERVICE.—In the case of property used by the United States Postal Service, paragraphs (1) and (2) shall be applied by substituting "October 31" for "May 23". (10) EXISTING APPROPRIATIONS.—The amendments made by this section shall not apply to personal property leased to or used by the United States if^ (A) an express appropriation has been made for rentals under such lease for the fiscal year 1983 before May 23, 1983, and (B) the United States or an agency or instrumentality thereof has not provided an indemnification against the loss of all or a portion of the tax benefits claimed under the lease or service contract.
98 STAT. 524 PUBLIC LAW 98-369—JULY 18, 1984 ^„^,. (11) SPECIAL RULE FOR CERTAIN PARTNERSHIPS.— (A) PARTNERSHIPS FOR WHICH QUAUFYiNG ACTION EXISTED r BEFORE OCTOBER 21, 1983.—Paragraph (9) of section 168(j) of Ante, p. 509. the Internal Revenue Code of 1954 (as added by this section) shall not apply to any property acquired, directly or indi- rectly, before January 1,1985, by any partnership described in subparagraph (B). (B) APPLICATION FILED BEFORE OCTOBER 21, 1983.—A part- nership is described in this subparagraph if— (i) before October 21, 1983, the partnership was orga- nized, a request for exemption with respect to such partnership w£is filed with the Department of Labor, and a private placement memorandum stating the maximum number of units in the partnership that Mt- Jf;.' V would be offered had been circulated, (ii) the interest in the property to be acquired, di- rectly or indirectly (including through acquiring an interest in another partnership) by such partnership was described in such private placement memorandum, and Federal (iii) the marketing of partnership units in such part- Register, nership is completed not later than two years after the publication. .^ jg^^gj. Qf ^j^g jjg^^g Qf ^j^g enactment of this Act or the date of publication in the Federal Register of such r*'?/;w."- exemption by the Department of Labor and the aggre- gate number of units in such partnership sold does not exceed the amount described in clause (i). (C) PARTNERSHIPS FOR WHICH QUAUFYING ACTION EXISTED BEFORE MARCH 6, 1984.—Paragraph (9) of section 168(j) of Ante, p. 509. the Internal Revenue Code of 1954 (as added by this section) shall not apply to any property acquired directly or indi- rectly, before January 1, 1986, by any partnership described in subparagraph (D). For purposes of this subparagraph, property shall be deemed to have been acquired prior to January 1, 1986, if the partnership had entered into a written binding contract to acquire such property prior to January 1,1986 and the closing of such contract takes place within 6 months of the date of such contract (24 months in the case of new construction). (D) PARTNERSHIP ORGANIZED BEFORE MARCH 6, 1984.—A partnership is described in this subparagraph if— '"''* (i) before March 6, 1984, the partnership was orga- nized and publicly announced the maximum amount (as shown in the registration statement, prospectus or ^^ partnership agreement, whichever is greater) of inter- ests which would be sold in the partnership, and (ii) the marketing or partnership interests in such partnership was completed not later than the 90th day after the date of the enactment of this Act and the gf. ,,,. aggregate amount of interest in such partnership sold does not exceed the maximum amount described in clause (i). (12) SPECIAL RULE FOR AMENDMENT MADE BY SUBSECTION (c) (2).—The amendment made by subsection (c)(2) to the extent it relates to subsection (f)(12) of section 168 of the Internal Revenue Code of 1954 shall take effect as if it had been included
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 525 in the amendments made by section 216(a) of the Tax Equity and Fiscal Responsibility Act of 1982. 96 Stat. 470. (13) SPECIAL RULE FOR SERVICE CONTRACTS NOT INVOLVING TAX- EXEMPT ENTITIES.—In the case of a service contract or other arrangement described in section 7701(e) of the Internal Reve- nue Code of 1954 (as added by this section) with respect to which Ante, p. 518. no party is a tax-exempt entity, such section 7701(e) shall not apply to— (A) such contract or other arrangement if such contract or other arrangement was entered into before November 5, 1983, or (B) any renewal or other extension of such contract or other arrangement pursuant to an option contained in such contract or other arrangement on November 5,1983. (14) PROPERTY LEASED TO SECTION 593 ORGANIZATIONS.—For purposes of the amendment made by subsection (f), paragraphs (1), (2), and (4) shall be applied by substituting— (A) "November 5, 1983" for "May 23, 1983" and "Novem- ber 1,1983", as the case may be, and (B) "organization described in section 593 of the Internal Revenue Code of 1954" for "tax-exempt entity". (15) SPECIAL RULES RELATING TO FOREIGN PERSONS OR ENTITIES— (A) IN GENERAL.—In the case of tax-exempt use property which is used by a foreign person or entity, the amend- ments made by this section shall not apply to any property which— ^ (i) is placed in service by the taxpayer before January ^ ' 1,1984, and (ii) is used by such foreign person or entity pursuant to a lease entered into before January 1,1984. (B) SPECIAL RULE FOR SUBLEASES.—If tax-exempt use prop- erty is being used by a foreign person or entity pursuant to a sublease under a lease described in subparagraph (A)(ii), subparagraph (A) shall apply to such property only if such property was used before January 1, 1984, by any foreign person or entity pursuant to such lease. (C) BINDING CONTRACTS, ETC.—The amendments made by this section shall not apply with respect to any property (other than aircraft described in subparagraph (D)) leased to a foreign person or entity— (i) i f - (I) on or before May 23, 1983, the taxpayer (or a predecessor in interest under the contract) or the foreign person or entity entered into a written binding contract to acquire, construct, or rehabili- tate such property and such property had not pre- viously been used by the foreign person or entity, or (II) the taxpayer or the foreign person or entity acquired the property or completed the construc- tion, reconstruction, or rehabilitation of the prop- erty after December 31, 1982 and on or before May 23, 1983, and (ii) if such lease is pursuant to a written binding contract entered into before January 1, 1984, which
98 STAT. 526 PUBLIC LAW 98-369—JULY 18, 1984 ^itupH requires the foreign person or entity to be the lessee of .O'^i .teja "rt^ such property. (D) CERTAIN AIRCRAFT.—The amendments made by this section shall not apply with respect to any wide-body, four- engine, commercial aircraft used by a foreign person or >i^ q "*':,! entity if— (i) on or before November 1, 1983, the foreign person or entity entered into a written binding contract to ; ,^. > acquire such aircraft, and % (ii) such aircraft is placed in service before January 1, 1986. (E) U S E AFTER 1983.—Qualified container equipment placed in service before January 1, 1984, which is used before such date by a foreign person shall not, for purposes of section 47 of the Internal Revenue Code of 1954, be treated as ceasing to be section 38 property by reason of the use of such equipment before January 1, 1985, by a foreign person or entity. For purposes of this subparagraph, the term "qualified container equipment" means any con- tainer, container chassis, or container trailer of a United States person with a present class life of not more than 6 , , years. (16) O R G A N I Z A T I O N S E L E C T I N G E X E M P T I O N F R O M R U L E S R E L A T - I N G TO PREVIOUSLY TAX-EXEMPT ORGANIZATIONS MUST ELECT TAX- ATION OF EXEMPT ARBITRAGE PROFITS.— (A) IN GENERAL.—An organization may make the election under section 168(j)(4)(E)(ii) of the Internal Revenue Code of Ante, p. 509. ^ 1954 (relating to election not to have rules relating to '®' previously tax-exempt organizations apply) only if such organization elects the tax treatment of exempt arbitrage tiif profits described in subparagraph (B). (B) TAXATION OF EXEMPT ARBITRAGE PROFITS.— (i) IN GENERAL.—In the case of an organization which elects the application of this subparagraph, there is hereby imposed a tax on the exempt arbitrage profits of such organization. (ii) RATE OF TAX, ETC.—The tax imposed by clause (i)- (I) shall be the amount of tax which would be imposed by section 11 of such Code if the exempt arbitrage profits were taxable income (and there were no other taxable income), and (II) shall be imposed for the first taxable year of the tax-exempt use period (as defined in section 168(j)(4)(E)(ii) of such Code). (C) EXEMPT ARBITRAGE PROFITS.— (i) I N GENERAL.—For purposes of this paragraph, the term exempt arbitrage profits means the aggregate amount described in clauses (i) and (ii) of subparagraph Post, p. 922. (D) of section 103(c)(6) of such Code for all taxable years ':: for which the organization was exempt from tax under section 501(a) of such Code with respect to obligations— (I) associated with property described in section 168(j)(4)(E)(i)(I), and (II) issued before January 1,1985. (ii) APPLICATION OF SECTION IO3 (B) (6).—For purposes of this paragraph, section 103(b)(6) of such Code shall
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 527 yj apply to obligations issued before January 1, 1985, but the amount described in clauses (i) and (ii) of subpara- si a graph (D) thereof shall be determined without regard to clauses (iXII) and (ii) of subparagraph (F) thereof. (D) OTHER LAWS APPLICABLE.— (i) IN GENERAL.—Except as provided in clause (ii), all provisions of law, including penalties, applicable with ' ' respect to the tax imposed by section 11 of such Code shall apply with respect to the tax imposed by this ^- ' * paragraph. (ii) No CREDITS AGAINST TAX, ETC.—The tax imposed by this paragraph shall not be treated as imposed by section 11 of such Code for purposes of— '^ '• (I) part VI of subchapter A of chapter 1 of such Code (relating to minimum tax for tax prefer- 26 USC 55. ences), and (II) determining the amount of any credit allow- able under subpart A of part IV of such sub- ; - . ^ chapter. 26 USC 31. M. - , (E) ELECTION.—Any election under subparagraph (A)— (i) shall be made at such time and in such manner as the Secretary may prescribe, 1„ ,, (ii) shall apply to any successor organization which is engaged in substantially similar activities, and (iii) once made, shall be irrevocable. (17) CERTAIN TRANSITIONAL LEASED PROPERTY.—The amend- ments made by this section shall not apply to property described in section 168(c)(2)(D) of the Internal Revenue Code of 1954, as in effect on the day before the date of the enactment of this Act, and which is described in any of the following subparagraphs: (A) Property is described in this subparagraph if such ^ property is leased to a university, and— (i) on June 16, 1983, the Board of Administrators of the university adopted a resolution approving the reha- bilitation of the property in connection with an overall campus development program; and ' (ii) the property houses a basketball arena and uni- versity offices. (B) Property is described in this subparagraph if such *' property is leased to a charitable organization, and— (i) on August 21, 1981, the charitable organization "'^--'•- acquired the property, with a view towards rehabilitat- r<r-. : j . ing the property; and (ii) on June 12, 1982, an arson fire caused substantial r:-''- T. damage to the property, delaying the planned rehabili- tation. (C) Property is described in this subparagraph if such *, property is leased to a corporation that is described in section 501(c)(3) of the Internal Revenue Code of 1954 (relat- ing to organizations exempt from tax) pursuant to a con- tract— (i) which was entered into on August 3, 1983; and d -» * (ii) under which the corporation first occupied the property on December 22,1983. (D) Property is described in this subparagraph if such ^1 property is leased to an educational institution for use as an Arts and Humanities Center and with respect to which—
98 STAT. 528 PUBLIC LAW 98-369—JULY 18, 1984 (i) in November 1982, an architect was engaged to design a planned renovation; (ii) in January 1983, the architectural plans were completed; (iii) in December 1983, a demolition contract was entered into; and (iv) in March 1984, a renovation contract was entered into. (E) Property is described in this subparagraph if such property is used by a college as a dormitory, and— (i) in October 1981, the college purchased the prop- erty with a view towards renovating the property; (ii) renovation plans were delayed because of a zoning dispute; and (iii) in May 1983, the court of highest jurisdiction in the State in which the college is located resolved the zoning dispute in favor of the college. ,I':.''JPA; ( F ) Property is described in this subparagraph if such property is a fraternity house related to a university with respect to which— (i) in August 1982, the university retained attorneys to advise the university regarding the rehabilitation of the property; (ii) on January 21, 1983, the governing body of the university established a committee to develop rehabili- tation plans; (iii) on January 10, 1984, the governor of the state in which the university is located approved historic dis- trict designation for an area that includes the property; and (iv) on February 2, 1984, historic preservation certifi- cation applications for the property were filed with a historic landmarks commission. (G) Property is described in this subparagraph if such property is leased to a retirement community with respect to which— (i) on January 5, 1977, a certificate of incorporation was filed with the appropriate authority of the state in which the retirement community is located; and (ii) on November 22, 1983, the Board of Trustees adopted a resolution evidencing the intention to begin immediate construction of the property. (H) Property is described in this subparagraph if such property is used by a university, and— (i) in July 1982, the Board of Trustees of the univer- sity adopted a master plan for the financing of the property; and .i..j .. (ii) as of August 1, 1983, at least $60,000 in private expenditures had been expended in connection with the property. (I) Property is described in this subparagraph if such property is used by a university as a fine arts center and the Board of Trustees of such university authorized the sale-leaseback agreement with respect to such property on March 7,1984.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 529 (J) Property is described in this subparagraph if such property is used by a tax-exempt entity as an international trade center, and (i) prior to 1982, an environmental impact study for such property was completed; (ii) on June 24, 1981, a developer made a written commitment to provide one-third of the financing for the development of such property; and (iii) on October 20, 1983, such developer was approved by the Board of Directors of the tax-exempt entity. (K) Property is described in this subparagraph if such property is used by university of osteopathic medicine and health sciences, and on or before December 31, 1983, the Board of Trustees of such university approved the construc- tion of such property. (L) Property is described in this subparagraph if such property is used by a tax-exempt entity, and— (i) such use is pursuant to a lease with a taxpayer fO.; a ^%s^i-, which placed substantial improvements in service; (ii) on May 23, 1983, there existed architectural plans and specifications (within the meaning of sec. 48(g)(l)(C)(ii) of the Internal Revenue Code of 1954); and (iii) prior to May 23, 1983, at least 10 percent of the total cost of such improvements was actually paid or incurred. .nm'ji .^j i- (M) Property is described in this subparagraph if such property is used as a convention center and on June 2,1983, the City Council of the city in which the center is located provided for over $6 million for the project. ML IBU iS (18) SPECIAL RULE FOR AMENDMENT MADE BY SUBSECTION (c)(1).— (A) IN GENERAL.—The amendment made by subsection (c)(1) shall not apply to property— (i) leased by the taxpayer on or before November 1, 1983, or (ii) leased by the taxpayer after November 1, 1983, if on or before such date the taxpayer entered into a written binding contract requiring the taxpayer to lease such property. (B) LIMITATION.—Subparagraph (A) shall apply to the amendment made by subsection (c)(1) only to the extent such amendment relates to property described in subclause (II), (III), or (IV) of section 168(j)(3)(B)(ii) of the Internal Revenue Code of 1954 (as added by this section). Ante, p. 509. (19) SPECIAL RULE FOR CERTAIN ENERGY MANAGEMENT CONTRACTS.— (A) IN GENERAL.—The amendments made by subsection (e) shall not apply to property used pursuant to an energy management contract that was entered into prior to May 1, 1984. (B) DEFINITION OF ENERGY MANAGEMENT CONTRACT.—For purposes of subparagraph (A), the term "energy manage- ment contract" means a contract for the providing of energy conservation or energy management services. (20) DEFINITIONS.—For purposes of this subsection— (A) TAX-EXEMPT ENTITY.—The term "tax-exempt entity" has the same meaning as when used in section 168(j) of the 31-194 0 - 86 - 19 : OL 3 Part 1
98 STAT. 530 PUBLIC LAW 98-369—JULY 18, 1984 Internal Revenue Code of 1954 (as added by this section), except that such term shall include any related entity (within the meaning of such section). (B) TREATMENT OF IMPROVEMENTS.— (i) IN GENERAL.—For purposes of this subsection, an improvement to property shall not be treated as a separate property unless such improvement is a sub- stantial improvement with respect to such property. (ii) SUBSTANTIAL IMPROVEMENT.—For purposes of clause (i), the term "substantial improvement' has the meaning given such term by section 168(f)(1)(C) of such Code determined— (I) by substituting "20 percent" for "25 percent" in clause (ii) thereof, and (II) without regard to clause (iii) thereof. (C) FOREIGN PERSON OR ENTITY.—The term "foreign person or entity" has the meaning given to such term by Ante, p. 509. subparagraph (C) of section 168(j)(4) of such Code (as added by this section). For purposes of this subparagraph and subparagraph (A), such subparagraph (C) shall be applied without regard to the last sentence thereof. (D) LEASES AND SUBLEASES.—The determination of whether there is a lease or sublease to a tax-exempt entity shall take into account sections 168(j)(6)(A), 168(j)(8)(A), and Ante, p. 518. 7701(e) of the Internal Revenue Code of 1954 (as added by this section). SEC. 32. MOTOR VEHICLE OPERATING LEASES. 26 use 168. (a) I N GENERAL.—Section 168(f) (relating to special rules) is amended by adding at the end thereof the following new paragraph: "(13) MOTOR VEHICLE OPERATING LEASES.— "(A) IN GENERAL.—For purposes of this title, in the case of a qualified motor vehicle operating agreement which con- tains a terminal rental adjustment clause— "(i) such agreement shall be treated as a lease if (but for such terminal rental adjustment clause) such agree- ment would be treated as a lease under this title, and "(ii) the lessee shall not be treated as the owner of the property subject to an agreement during any period such agreement is in effect. "(B) QUAUFIED MOTOR VEHICLE OPERATING AGREEMENT DEFINED.—For purposes of this paragraph— "(i) IN GENERAL.—The term qualified motor vehicle .€!u'; q ,/i.K operating agreement' means any agreement with re- spect to a motor vehicle (including a trailer) which meets the requirements of clauses (ii), (iii), and (iv) of this subparagraph. "(ii) MINIMUM LIABILITY OF LESSOR.—An agreement meets the requirements of this clause if under such agreement the sum of— "(I) the amount the lessor is personally liable to repay, and (II) the net fair market value of the lessor's interest in any property pledged as security for property subject to the agreement, equals or exceeds all amounts borrowed to finance the acquisition of property subject to the agreement. There dH ~ 0 f'CI-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 531 shall not be taken into account under subclause (II) any property pledged which is property subject to the agree- ment or property directly or indirectly financed by indebtedness secured by property subject to the agreement. "(iii) CERTIFICATION BY LESSEE; NOTICE OF TAX OWNER- SHIP.—An agreement meets the requirements of this clause if such agreement contains a separate written statement separately signed by the lessee— "(I) under which the lessee certifies, under ys -re sie? penalty of perjury, that it intends that more than 50 percent of the use of the property subject to such agreement is to be in a trade or business of the lessee, and -irmBi Mo "(II) which clearly and legibly states that the lessee has been advised that it will not be treated as the owner of the property subject to the agree- g|4 ment for Federal income tax purposes. rr ^ o j dk "(iv) LESSOR MUST HAVE NO KNOWLEDGE THAT CERTIFI- CATION IS FALSE.—An agreement meets the require- ments of this clause if the lessor does not know that the certification described in clause (iii)(I) is false. "(C) TERMINAL RENTAL ADJUSTMENT CLAUSE DEFINED.— 1 "(i^ I^ GENERAL.—For purposes of this paragraph, the -iMJ V) term 'terminal rental adjustment clause' means a pro- vision of an agreement which permits or requires the rental price to be adjusted upward or downward by reference to the amount realized by the lessor under the agreement upon sale or other disposition of such property. "(ii) SPECIAL RULE FOR LESSEE DEALERS.—The term 'terminal rental adjustment clause' also includes a pro- vision of an agreement which requires a lessee who is a ^^. q ^_,^^ dealer in motor vehicles to purchase the motor vehicle for a predetermined price and then resell such vehicle where such provision achieves substantially the same results as a provision described in clause (i).' (b) TERMINATION OF SECTION 210.—Section 210(a) of the Tax 26 use 168 note. Equity and Fiscal Responsibility Act of 1982 is amended by inserting "entered into on or before the 90th day after the date of the enactment of the Tax Reform Act of 1984" after "agreement" the first place it appears. (c) EFFECTIVE DATE.—The amendment made by subsection (a) shall 26 use 168 note. apply to agreements described in section 168(6(13) of the Internal Revenue Code of 1954 (as added by subsection (a)) entered into more than 90 days after the date of the enactment of this Act. Subtitle C—Treatment of Bonds and Other Debt Instruments SEC. 41. TREATMENT OF BONDS AND OTHER DEBT INSTRUMENTS. (a) GENERAL RULE.—Subchapter P of chapter 1 (relating to special rules for capital gains and losses) is amended by adding at the end thereof the following new part:
98 STAT. 532 PUBLIC LAW 98-369—JULY 18, 1984 "PART V—SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS "Subpart A. Original issue discount. "Subpart B. Market discount. "Subpart C. Discount on short-term obligations. "Subpart D. Miscellaneous provisions. '^' "Subpart A—Original Issue Discount "Sec. 1271. Treatment of amounts received on retirement or sale or ex- change of debt instruments. "Sec. 1272. Current inclusion in income of original issue discount. "Sec. 1273. Determination of amount of original issue discount. "Sec. 1274. Determination of issue price in the case of certain debt instru- I ments issued for property. "Sec. 1275. Other definitions and special rules. 26 u s e 1271. "SEC. 1271. TREATMENT OF AMOUNTS RECEIVED ON RETIREMENT OR SALE OR EXCHANGE OF DEBT INSTRUMENTS. "(a) GENERAL RULE.—For purposes of this title— "(1) RETIREMENT.—Amounts received by the holder on retire- ment of any debt instrument shall be considered as amounts received in exchange therefor. "(2) ORDINARY INCOME O N SALE OR EXCHANGE W H E R E I N T E N - TION TO CALL BEFORE MATURITY.— "(A) I N GENERAL.—If at the time of original issue there was an intention to call a debt instrument before maturity, any gain realized on the sale or exchange thereof which does not exceed an amount equal to— "(i) the original issue discount, reduced by "(ii) the portion of original issue discount previously includible in the gross income of any holder (without Post, p. 533. regard to subsection (aX6) or (b)(4) of section 1272 (or the corresponding provisions of prior law)), shall be treated as ordinary income. "(B) EXCEPTIONS.—This paragraph (and paragraph (2) of subsection (c)) shall not apply to— » "(i) any tax-exempt obligation, or "(ii) any holder who has purchased the debt instru- ment at a premium. "(3) CERTAIN SHORT-TERM GOVERNMENT OBUGATIONS.— "(A) I N GENERAL.—On the sale or exchange of any short- term Government obligation, any gain realized which does not exceed an amount equal to the ratable share of the acquisition discount shall be treated as ordinary income. "(B) SHORT-TERM GOVERNMENT OBUGATION.—For purposes of this paragraph, the term 'short-term Government obliga- tion' means any obligation of the United States or any of its possessions, or of a State or any political subdivision there- of, or of the District of Columbia which is— "(i) issued on a discount basis, and "(ii) payable without interest at a fixed maturity date not more than 1 year from the date of issue. Such term does not include any tax-exempt obligation. i. "(C) ACQUISITION DISCOUNT.—For purposes of this para- graph, the term 'acquisition discount' means the excess of
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 533 the stated redemption price at maturity over the taxpayer's basis for the obligation. "(D) RATABLE SHARE.—For purposes of this paragraph, the ratable share of the acquisition discount is an amount which bears the same ratio to such discount as— f^- V "(i) the number of days which the taxpayer held the obligation, bears to ?i^.' "(ii) the number of days after the date the taxpayer acquired the obligation and up to (and including) the date of its maturity. "(b) EXCEPTIONS.—This section shall not apply to— "(1) NATURAL PERSONS.—Any obligation issued by a natural person. "(2) OBLIGATIONS ISSUED BEFORE JULY 2, 1982, BY CERTAIN ISSUERS.—Any obligation issued before July 2, 1982, by an issuer which— "(A) is not a corporation, and "(B) is not a government or political subdivision thereof. "(c) TRANSITION RULES.— "(1) SPECIAL RULE FOR CERTAIN OBLIGATIONS ISSUED BEFORE JANUARY 1, 1955.—Paragraph (1) of subsection (a) shall apply to a debt instrument issued before January 1, 1955, only if such instrument was issued with interest coupons or in registered form, or was in such form on March 1, 1954. "(2) SPECIAL RULE FOR CERTAIN OBLIGATIONS WITH RESPECT TO WHICH O R I G I N A L ISSUE DISCOUNT NOT CURRENTLY INCLUDIBLE.— i,; "(A) IN GENERAL.—On the sale or exchange of debt instru- ments issued by a government or political subdivision thereof after December 81, 1954, and before July 2, 1982, or by a corporation after December 31, 1954, and on or before May 27, 1969, any gain realized which does not exceed— "(i) an amount equal to the original issue discount, or "(ii) if at the time of original issue there was no iv> > intention to call the debt instrument before maturity, an amount which bears the same ratio to the original t issue discount as the number of complete months that the debt instrument was held by the taxpayer bears to the number of complete months from the date of origi- nal issue to the date of maturity, shall be considered as ordinary income. "(B) SUBSECTION (a) (2) (A) NOT TO APPLY.—Subsection (a)(2)(A) shall not apply to any debt instrument referred to j^ j in subparagraph (A) of this paragraph. "(C) CROSS REFERENCE.— "For current inclusion of original issue discount, see section 1272. "(d) DOUBLE INCLUSION IN INCOME NOT REQUIRED.—This section and sections 1272 and 1286 shall not require the inclusion of any Post, p. 551. amount previously includible in gross income. "SEC. 1272. CURRENT INCLUSION IN INCOME OF ORIGINAL ISSUE DIS- 26 USC 1272. COUNT. "(a) ORIGINAL ISSUE DISCOUNT ON DEBT INSTRUMENTS ISSUED AFTER JULY 1, 1982, INCLUDED IN INCOME ON BASIS OF CONSTANT INTEREST RATE.— "(1) GENERAL RULE.—For purposes of this title, there shall be included in the gross income of the holder of any debt instru-
98 STAT. 534 PUBLIC LAW 98-369—JULY 18, 1984 ment having original issue discount issued after July 1, 1982, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to— "(A) TAX-EXEMPT OBLIGATIONS.—Any tax-exempt obliga- tion. "(B) UNITED STATES SAVINGS BONDS.—Any United States savings bond. "(C) SHORT-TERM OBUGATIONS.—Any debt instrument which has a fixed maturity date not more than 1 year from the date of issue. "(D) OBUGATIONS ISSUED BY NATURAL PERSONS BEFORE MARCH 2, 1984.—Any obligation issued by a natural person before March 2,1984. "(E) LOANS BETWEEN NATURAL PERSONS.— ' "(i) IN GENERAL.—Any loan made by a natural person to another natural person if— "(I) such loan is not made in the course of a trade or business of the lender, and "(II) the amount of such loan (when increased by the outstanding amount of prior loans by such natural person to such other natural person) does not exceed $10,000. "(ii) CLAUSE (i) NOT TO APPLY WHERE TAX AVOIDANCE A PRINCIPAL PURPOSE.—Clause (i) shall not apply if the loan has as 1 of its principal purposes the avoidance of any Federal tax. "(iii) TREATMENT OF HUSBAND AND WIFE.—For pur- poses of this subparagraph, a husband and wife shall be treated as 1 person. The preceding sentence shall not apply where the spouses lived apart at all times during the taxable year in which the loan is made. "(3) DETERMINATION OF DAILY PORTIONS.—For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price of the debt instrument. For purposes of the preceding sentence, the increase in the adjusted issue price for any accrual period shall be an amount equal to the excess (if any) of— "(A) the product of^ "(i) the adjusted issue price of the debt instrument at the beginning of such accrual period, and "(ii) the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), .LfC. " 'I'-H \a., .- :• over "(B) the sum of the amounts payable as interest on such <- ^ , debt instrument during such accrual period. "(4) ADJUSTED ISSUE PRICE.—For purposes of this subsection, the adjusted issue price of any debt instrument at the beginning '• of any accrual period is the sum of— "(A) the issue price of such debt instrument, plus "(B) the adjustments under this subsection to such issue price for all periods before the first day of such accrual period.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 535 "(5) ACCRUAL PERIOD.—Except as otherwise provided in regu- ' lations prescribed by the Secretary, the term 'accrual period' means a 6-month period (or shorter period from the date of original issue of the debt instrument) which ends on a day in the calendar year corresponding to the maturity date of the debt instrument or the date 6 months before such maturity date. ^ "(6) REDUCTION WHERE SUBSEQUENT HOLDER PAYS ACQUISITION PREMIUM.— 1 "(A) REDUCTION.—For purposes of this subsection, in t h e f, case of a n y purchase after its original issue of a debt , f,Q3 i n s t r u m e n t to which this subsection applies, t h e daily por- tion for a n y day shall be reduced by a n a m o u n t equal to t h e a m o u n t which would b e t h e daily portion for such d a y g; y (without regard to this paragraph) multiplied by t h e frac- tion determined u n d e r s u b p a r a g r a p h (B). "(B) DETERMINATION O F FRACTION.—For purposes of sub- . p a r a g r a p h (A), t h e fraction determined under this subpara- r, graph is a fraction— "(i) the numerator of which is the excess (if any) of^ "(I) the cost of such debt instrument incurred by . ^.j,,,, ,^ the purchaser, over ^ "(11) the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this para- graph), and "(ii) the denominator of which is th^ sum of the daily ,Otv portions for such debt instrument for all days after the date of such purchase and ending on the stated matu- rity date (computed without regard to this paragraph). "(b) RATABLE INCLUSION RETAINED FOR CORPORATE DEBT INSTRU- MENTS ISSUED BEFORE JULY 2,1982.— "(1) GENERAL RULE.—There shall be included in the gross income of the holder of any debt instrument issued by a corpora- tion after May 27,1969, and before July 2,1982— --» "(A) the ratable monthly portion of original issue dis- count, multiplied by "(B) the number of complete months (plus any fractional part of a month determined under paragraph (3)) such holder held such debt instrument during the taxable year. "(2) DETERMINATION OF RATABLE MONTHLY PORTION.—Except as provided in paragraph (4), the ratable monthly portion of original issue discount shall equal— "(A) the original issue discount, divided by "(B) the number of complete months from the date of original issue to the stated maturity date of the debt instru- ment. 1 "(3) MONTH DEFINED.—For purposes of this subsection— "(A) COMPLETE MONTH.—A complete month commences with the date of original issue and the corresponding day of each succeeding calendar month (or the last day of a calen- dar month in which there is no corresponding day). "(B) TRANSFERS DURING MONTH.—In any case where a debt instrument is acquired on any day other than a day s; ; determined under subparagraph (A), the ratable monthly portion of original issue discount for the complete month
98 STAT. 536 PUBLIC LAW 98-369—JULY 18, 1984 (or partial month) in which such acquisition occurs shall be allocated between the transferor and the transferee in accordance with the number of days in such complete (or partial) month each held the debt instrument. "(4) REDUCTION WHERE SUBSEQUENT HOLDER PAYS ACQUISITION PREMIUM.— "(A) REDUCTION.—For purposes of this subsection, the ratable monthly portion of original issue discount shall not include its share of the acquisition premium. "(B) SHARE OF ACQUISITION PREMIUM.—For purposes of subparagraph (A), any month's share of the acquisition premium is an amount (determined at the time of the purchase) equal to— "(i) the excess of— "(I) the cost of such debt instrument incurred by the holder, over "(II) the issue price of such debt instrument, increased by the portion of original issue discount previously includible in the gross income of any holder (computed without regard to this para- graph), "(ii) divided by the number of complete months (plus any fractional part of a month) from the date of such purchase to the stated maturity date of such debt instrument. "(c) EXCEPTIONS.—This section shall not apply to any holder— "(1) who has purchased the debt instrument at a premium, or Post, p. 740. "(2) which is a life insurance company to which section 811(b) applies. "(d) DEFINITION AND SPECIAL RULE.— "(1) PURCHASE DEFINED.—For purposes of this section, the term 'purchase' means— "(A) any acquisition of a debt instrument, where "(B) the basis of the debt instrument is not determined in whole or in part by reference to the adjusted basis of such debt instrument in the hands of the person from whom acquired. "(2) BASIS ADJUSTMENT.—The basis of any debt instrument in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to this section. 26 use 1273. "SEC. 1273. DETERMINATION OF AMOUNT OF ORIGINAL ISSUE DISCOUNT. "(a) GENERAL RULE.—For purposes of this subpart— "(1) IN GENERAL.—The term 'original issue discount' means the excess (if any) of— "(A) the stated redemption price at maturity, over "(B) the issue price. "(2) STATED REDEMPTION PRICE AT MATURITY.—The term 'stated redemption price at maturity' means the amount fixed by the last modification of the purchase agreement and includes interest and other amounts payable at that time (other than any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument). "(3) V* OF 1 PERCENT DE MINIMIS RULE.—If the Original issue discount determined under paragraph (1) is less than—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 537 "(A) Vi of 1 percent of the stated redemption price at maturity, multiplied by "(B) the number of complete years to maturity, then the original issue discount shall be treated as zero. "(b) ISSUE PRICE.—For purposes of this subpart— "(1) PUBUCLY OFFERED DEBT INSTRUMENTS NOT ISSUED FOR PROPERTY.—In the case of any issue of debt instruments— "(A) publicly offered, and "(B) not issued for property, the issue price is the initial offering price to the public (exclud- ing bond houses and brokers) at which price a substantial amount of such debt instruments was sold. "(2) OTHER DEBT INSTRUMENTS NOT ISSUED FOR PROPERTY.—In the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument. "(3) DEBT INSTRUMENTS ISSUED FOR PROPERTY WHERE THERE IS PUBUC TRADING.—In the case of a debt instrument which is ! issued for property and which— "(A) is part of an issue a portion of which is traded on an m.^. established securities market, or "(B) is issued for stock or securities which are traded on an established securities market, the issue price of such debt instrument shall be the fair market value of such property. "(4) OTHER CASES.—Except in any case— "(A) to which paragraph (1), (2), or (3) of this subsection applies, or •' "(B) to which section 1274 applies. Post, p. 538. the issue price of a debt instrument which is issued for property ^ shall be the stated redemption price at maturity. "(5) PROPERTY.—In applying this subsection, the term 'prop- erty' includes services and the right to use property, but such term does not include money. "(c) SPECIAL RULES FOR APPLYING SUBSECTION (b).—For purposes of subsection (b)— "(1) INITIAL OFFERING PRICE; PRICE PAID BY THE FIRST BUYER.— The terms 'initial offering price' and 'price paid by the first buyer' include the aggregate payments made by the purchaser under the purchase agreement, including modifications thereof. "(2) TREATMENT OF INVESTMENT UNITS.—In the case of any debt instrument and an option, security, or other property issued together as an investment unit— "(A) the issue price for such unit shall be determined in accordance with the rules of this subsection and subsection iitu (b) as if it were a debt instrument, "(B) the issue price determined for such unit shall be allocated to each element of such unit on the basis of the relationship of the fair market value of such element to the I fair market value of all elements in such unit, and "(C) the issue price of any debt instrument included in such unit shall be the portion of the issue price of the unit allocated to the debt instrument under subparagraph (B).
98 STAT. 538 PUBLIC LAW 98-369—JULY 18, 1984 26 use 1274. "SEC. 1274. DETERMINATION OF ISSUE PRICE IN THE CASE OF CERTAIN DEBT INSTRUMENTS ISSUED FOR PROPERTY. "(a) IN GENERAL.—In the case of any debt instrument to which this section appHes, for purposes of this subpart, the issue price shall be— "(1) where there is adequate stated interest, the stated princi- pal amount, or "(2) in any other CEise, the imputed principal amount. "(h) IMPUTED PRINCIPAL AMOUNT.—For purposes of this section— "(1) IN GENERAL.—Except as provided in paragraph (3), the imputed principal amount of any debt instrument shall be equal to the sum of the present values of all payments due under such debt instrument. "(2) DETERMINATION OF PRESENT VALUE.—For purposes of paragraph (1), the present value of a payment shall be deter- mined in the manner provided by regulations prescribed by the Secretary— "(A) as of the date of the sale or exchange, and "(B) by using a discount rate equal to 120 percent of the applicable Federal rate, compounded semiannually. "(3) FAIR MARKET VALUE RULE IN POTENTIALLY ABUSIVE SITUATIONS.— "(A) IN GENERAL.—In the case of any potentially abusive situation, the imputed principal amount of any debt instru- ment received in exchange for property shsill be the fair market value of such property adjusted to take into account other consideration involved in the transaction. "(B) POTENTIALLY ABUSIVE SITUATION DEFINED.—For pur- ,c,, poses of subparagraph (A), the term 'potentially abusive situation' means— "(i) a tax shelter (as defined in section 6661(b)(2)(C)(ii)), and "(ii) any other situation which, by reason of— "(I) recent sales transactions, ,^ "(II) nonrecourse financing, '•^ "(III) financing with a term in excess of the economic life of the property, or "(IV) other circumstances, is of a type which the Secretary specifies by regulations as having potential for tax avoidance. "(c) DEBT INSTRUMENTS TO WHICH SECTION APPLIES.— "(1) In GENERAL.—Except as otherwise provided in this subsec- tion, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if— "(A) the stated redemption price at maturity for such debt instrument exceeds— "(i) where there is adequate stated interest, the stated principal amount, or "(ii) in any other case, the testing amount, and "(B) some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange. "(2) ADEQUATE STATED INTEREST.—For purposes of this section, there is adequate stated interest with respect to any debt instrument if the stated principal amount for such debt instru- ment is less than or equal to the testing amount.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 539 "(3) TESTING AMOUNT.—For purposes of this section, the term 'testing amount' means, with respect to any debt instrument, •« the imputed principal amount of such debt instrument which would be determined under subsection (b) (including paragraph (3) thereof) if a discount rate equal to 110 percent of the applicable Federal rate were used. "(4) EXCEPTIONS.—This section shall not apply to— "(A) SALES FOR LESS THAN $1,000,000 OF FARMS BY INDIVID- UALS OR SMALL BUSINESSES.— "(i) I N GENERAL.—Any debt instrument arising from the sale or exchange of a farm (within the meaning of '; section 6420(c)(2))— "(I) by an individual, estate, or testamentary .:; •! :. - - . trUSt, "(II) by a corporation which as of the date of the sale or exchange is a small business corporation (as f.ib i''>('L defined in section 1244(c)(3)), or "(III) by a partnership which as of the date of the . *( 1 :/ sale or exchange meets requirements similar to those of section 1244(cX3). i'-u/i. !^ "(ii) $1,000,000 UMITATION.—Clause (i) shall apply only if it can be determined at the time of the sale or ^ exchange that the sales price cannot exceed $1,000,000. For purposes of the preceding sentence, all sales and u,. . exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange. "(B) SALES OF PRINCIPAL RESIDENCES.—Any debt instru- ment arising from the sale or exchange by an individual of his principal residence (within the meaning of section 1034). "(C) SALES INVOLVING TOTAL PAYMENTS OF $250,000 OR LESS.— "(i) I N GENERAL.—Any debt instrument arising from -ivM ' the sale or exchange of property if the sum of the following amounts does not exceed $250,000: r ' ' "(I) the aggregate amount of the payments due under such debt instrument and all other debt instruments received as consideration for the sale or exchange, and "(II) the aggregate amount of any other consider- ation to be received for the sale or exchange. *»'^' "(ii) CONSIDERATION OTHER THAN DEBT INSTRUMENT t TAKEN INTO ACCOUNT AT FAIR MARKET VALUE.—For pur- j .. poses of clause (i), any consideration (other than a debt instrument) shall be taken into account at its fair market value. "(iii) AGGREGATION OF TRANSACTIONS.—For purposes of this subparagraph, all sales and exchanges which are part of the same transaction (or a series of related I transactions) shall be treated as 1 sale or exchange. "(D) DEBT INSTRUMENTS WHICH ARE PUBLICLY TRADED OR t;: ISSUED FOR PUBUCLY TRADED PROPERTY.—Any debt instru- ment to which section 1273(b)(3) applies. Ante, p. 536. "(E) CERTAIN SALES OF PATENTS.—In the case of any trans- fer described in section 1235(a) (relating to sale or exchange of patents), any amount contingent on the productivity, use, or disposition of the property transferred.
98 STAT. 540 PUBLIC LAW 98-369—JULY 18, 1984 "(F) SALES OR EXCHANGES TO WHICH SECTION 483(e) AP- POSE, p. 553. PLIES.—Any debt instrument to the extent section 483(e) (relating to certain land transfers between related persons) applies to such instrument. "(d) DETERMINATION OF APPLICABLE FEDERAL RATE.—For purposes of this section— "(1) APPLICABLE FEDERAL RATE.— "(A) IN GENERAL.— "In the case of a debt instrument The applicable Federal rate is: with a term of: Not over 3 years The Federal short-term rate. Over 3 years but not over 9 The Federal mid-term rate, years. Over 9 years The Federal long-term rate. "(B) DETERMINATION OF RATES.—Within 15 days after the close of— "(i) the 6-month period ending on September 30 of any calendar year, or "(ii) the 6-month period ending on March 31 of any calendar year, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate for such 6-month period. "(C) EFFECTIVE DATE OF DETERMINATION.—Any Federal rate determined under subparagraph (A) shall— "(i) apply during the 6-month period beginning on January 1 of the succeeding calendar year in the case of a determination made under subparagraph (B)(i), and ,,. "(ii) apply during the 6-month period beginning on July 1 of the calendar year in the case of a determina- tion made under subparagraph (B)(ii). "(D) FEDERAL RATE FOR ANY 6-MONTH PERIOD.—For pur- poses of this paragraph— "(i) FEDERAL SHORT-TERM RATE.—The Federal short- term rate for any 6-month period shall be the rate determined by the Secretary based on the average market yield (during such 6-month period) on outstand- ing marketable obligations of the United States with remaining periods to maturity of 3 years or less. "(ii) FEDERAL MID-TERM AND LONG-TERM RATES.—The Federal mid-term rate and long-term rate shall be determined in accordance with the principles of clause (i). "(2) RATE APPLICABLE TO ANY SALE OR EXCHANGE.—In the case of any sale or exchange, the determination of the applicable Federal rate shall be made as of the first day on which there is a binding contract in writing for the sale or exchange. "(3) TERM OF DEBT INSTRUMENT.—In determining the term of a debt instrument for purposes of this subsection, under regula- tions prescribed by the Secretary, there shall be taken into account options to renew or extend. 26 u s e 1275. "SEC. 1275. OTHER DEFINITIONS AND SPECIAL RULES. "(a) DEFINITIONS.—For purposes of this subpart— "(1) DEBT INSTRUMENT.—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 541 "(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'debt instrument' means a bond, debenture, note, or certificate or other evidence of indebtedness. "(B) EXCEPTION FOR CERTAIN ANNUITY CONTRACTS.—The term 'debt instrument' shall not include any annuity con- tract to which section 72 applies and which— "(i) depends (in whole or in substantial part) on the life expectancy of 1 or more individuals, or "'- "(ii) is issued by an insurance company subject to tax ^ A under subchapter L— "(I) in a transaction in which there is no consid- eration other than cash or another annuity con- '- ^ *^ tract meeting the requirements of this clause, "(II) pursuant to the exercise of an election under an insurance contract by a beneficiary ''' ' thereof on the death of the insured party under such contract, or "(III) in a transaction involving a qualified pen- sion or employee benefit plan. "(2) ISSUE DATE.— in' '-1 "^^^ PUBUCLY OFFERED DEBT INSTRUMENTS.—In t h e CaSe of any debt instrument which is publicly offered, the term 'date of original issue' means the date on which the issue .^ ,^. was first issued to the public. "(B) ISSUES NOT PUBUCLY OFFERED AND NOT ISSUED FOR PROPERTY.—In the case of any debt instrument to which section 1273(b)(2) applies, the term 'date of Original issue' Ante, p. 536. f.- means the date on which the debt instrument was sold by the issuer. ,-j, "(C) OTHER DEBT INSTRUMENTS.—In the case of any debt n ?. \-.^'^ instrument not described in subparagraph (A) or (B), the term 'date of original issue' means the date on which the debt instrument was issued in a sale or exchange. "(3) TAX-EXEMPT OBUGATION.—The term 'tax-exempt obliga- tion' means any obligation if— "(A) the interest on such obligation is not includible in gross income under section 103, or "(B) the interest on such obligation is exempt from tax (without regard to the identity of the holder) under any other provision of law. "(4) SPECIAL RULE FOR DETERMINATION OF ISSUE PRICE IN CASE OF EXCHANGE OF DEBT INSTRUMENTS IN REORGANIZATIONS.— "(A) I N GENERAL.—If— "(i) any debt instrument is issued pursuant to a plan feufi jiiuo of reorganization (within the meaning of section 368(a)(1)) for another debt instrument (hereinafter in this paragraph referred to as the 'old debt instrument'), and "(ii) the amount which (but for this paragraph) would be the issue price of the debt instrument so issued is less than the adjusted issue price of the old debt instru- ment, then the issue price of the debt instrument so issued shall be treated as equal to the adjusted issue price of the old ' debt instrument. "(B) DEFINITIONS.—For purposes of this paragraph—
98 STAT. 542 PUBLIC LAW 98-369—JULY 18, 1984 "(i) DEBT INSTRUMENT.—The term 'debt instrument' includes an investment unit. "(ii) ADJUSTED ISSUE PRICE.— "(I) IN GENERAL.—The adjusted issue price of the old debt instrument is its issue price, increased by the portion of any original issue discount previ- ously includible in the gross income of any holder (without regard to subsection (a)(6) or (b)(4) of sec- Ante, p. 533. tion 1272 (or the corresponding provisions of prior law)). "(II) SPECIAL RULE FOR APPLYING SECTION Pos«, pp. 556,654. 163(e).—For purposes of section 163(e), the ad- justed issue price of the old debt instrument is its issue price, increased by any original issue dis- count previously allowed as a deduction. "(b) TREATMENT OF BORROWER IN THE CASE OF CERTAIN LOANS FOR PERSONAL USE.— "(1) SECTIONS 1274 AND 483 NOT TO APPLY.—In the case of the obligor under any debt instrument given in consideration for Ante, p. 538. the sale or exchange of property, sections 1274 and 483 shall not Post, p. 553. apply if such property is personal use property. "(2) ORIGINAL ISSUE DISCOUNT DEDUCTED ON CASH BASIS IN CERTAIN CASES.—In the case of any debt instrument, if— "(A) such instrument— "(i) is incurred in connection with the acquisition or carrying of personal use property, and "(ii) has original issue discount (determined after the application of paragraph (1)), and "(B) the obligor under such instrument uses the cash receipts and disbursements method of accounting, Posf, pp. 556,654. notwithstanding section 163(e), the original issue discount on such instrument shall be deductible only when paid. "(3) PERSONAL USE PROPERTY.—For purposes of this subsection, the term 'personal use property' means any property substan- tially all of the use of which by the taxpayer is not in connection with a trade or business of the taxpayer or an activity described in section 212. The determination of whether property is de- scribed in the preceding sentence shall be made as of the time of issuance of the debt instrument. "(c) INFORMATION REQUIREMENTS.— "(1) INFORMATION REQUIRED TO BE SET FORTH ON INSTRU- MENT.— "(A) IN GENERAL.—In the case of any debt instrument having original issue discount, the Secretary may by regu- lations require that— "(i) the amount of the original issue discount, and "(ii) the issue date, be set forth on such instrument. "(B) SPECIAL RULE FOR INSTRUMENTS NOT PUBLICLY OF- FERED.—In the case of any issue of debt instruments not publicly offered, the regulations prescribed under subpara- graph (A) shall not require the information to be set forth on the debt instrument before any disposition of such in- strument by the first buyer. "(2) INFORMATION REQUIRED TO BE SUBMITTED TO SECRETARY.— In the case of any issue of publicly offered debt instruments having original issue discount, the issuer shall (at such time and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 543 in such manner as the Secretary shall by regulation prescribe) furnish the Secretary the following information: "(A) The amount of the original issue discount. "(B) The issue date. "(C) Such other information with respect to the issue as the Secretary may by regulations require. For purposes of the preceding sentence, any person who makes a public offering of stripped bonds (or stripped coupons) shall be treated as the issuer of a publicly offered debt instrument having original issue discount. , "(3) EXCEPTIONS.—This subsection shall not apply to any obli- gation referred to in section 1272(a)(2) (relating to exceptions Ante, p. 533. from current inclusion of original issue discount). "(4) CROSS REFERENCE.— "For civil penalty for failure to meet requirements of this subsection, see section 6706. Post, p. 555. "(d) REGULATION AUTHORITY.—The Secretary may prescribe regu- lations providing that where, by reason of varying rates of interest, put or call options, indefinite maturities, contingent payments, as- sumptions of debt instruments, or other circumstances, the tax treatment under this subpart (or section 163(e)) does not carry out Post, pp. 556, the purposes of this subpart (or section 163(e)), such treatment shall 654. be modified to the extent appropriate to carry out the purposes of this subpart (or section 163(e)). "Subpart B—Market Discount on Bonds SiJ; "Sec. 1276. Disposition gain representing accrued market discount treated as ordinary income. "Sec. 1277. Deferral of interest deduction allocable to accrued market dis- count. "Sec. 1278. Definitions and special rules. "SEC. 1276. DISPOSITION GAIN REPRESENTING ACCRUED MARKET DIS- 26 USC 1276. COUNT TREATED AS ORDINARY INCOME. "(a) ORDINARY INCOME.— "(1) I N GENERAL.—Except as otherwise provided in this sec- tion, gain on the disposition of any market discount bond shall be treated as ordinary income to the extent it does not exceed the accrued market discount on such bond. Such gain shall be recognized notwithstanding any other provision of this subtitle. "(2) DISPOSITIONS OTHER THAN SALES, ETC.—For purposes of paragraph (1), a person disposing of any market discount bond in any transaction other than a sale, exchange, or involuntary conversion shall be treated as realizing an amount equal to the fair market value of the bond. "(3) GAIN TREATED AS INTEREST FOR CERTAIN PURPOSES.— Except for purposes of sections 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount treated as ordinary income under paragraph (1) shall be treated as interest for purposes of this title. "(b) ACCRUED MARKET DISCOUNT.—For purposes of this section— "(1) RATABLE ACCRUAL.—Except as otherwise provided in this subsection or subsection (c), the accrued market discount on any bond shall be an amount which bears the same ratio to the market discount on such bond as— "(A) the number of days which the taxpayer held the bond, bears to
98 STAT. 544 PUBLIC LAW 98-369—JULY 18, 1984 "(B) the number of days after the date the taxpayer acquired the bond and up to (and including) the date of its maturity. "(2) ELECTION OF ACCRUAL ON BASIS OF CONSTANT INTEREST RATE (IN LIEU OF RATABLE ACCRUAL).— "(A) IN GENERAL.—At the election of the taxpayer with respect to any bond, the accrued market discount on such bond shall be the aggregate amount which would have been includible in the gross income of the taxpayer under section Ante, p. 533. 1272(a) (determined without regard to paragraph (2) there- of) with respect to such bond for all periods during which the bond was held by the taxpayer if such bond had been— "(i) originally issued on the date on which such bond was acquired by the taxpayer, "(ii) for an issue price equal to the basis of the taxpayer in such bond immediately after its acquisition. "(B) COORDINATION WHERE BOND HAS ORIGINAL ISSUE DIS- COUNT.—In the case of any bond having original issue discount, for purposes of applying subparagraph (A)— "(i) the stated redemption price at maturity of such bond shall be treated as equal to its revised issue price, and "(ii) the determination of the portion of the original issue discount which would have been includible in the gross income of the taxpayer under section 1272(a) shall be made under regulations prescribed by the Secretary. "(C) ELECTION IRREVOCABLE.—An election under subpara- graph (A), once made with respect to any bond, shall be irrevocable. "(c) TREATMENT OF NONRECOGNITION TRANSACTIONS.—Under regu- lations prescribed by the Secretary— "(1) TRANSFERRED BASIS PROPERTY.—If a market discount bond is transferred in a nonrecognition transaction and such bond is transferred basis property in the hands of the transferee, for purposes of determining the amount of the accrued market discount with respect to the transferee— "(A) the transferee shall be treated as having acquired the bond on the date on which it was acquired by the transferor for an amount equal to the basis of the transfer- or, and "(B) proper adjustments shall be made for gain recog- nized by the transferor on such transfer (and for any origi- nal issue discount or market discount included in the gross income of the transferor). "(2) EXCHANGED BASIS PROPERTY.—If any market discount bond is disposed of by the taxpayer in a nonrecognition transac- tion and paragraph (1) does not apply to such transaction, any accrued market discount determined with respect to the prop- erty disposed of to the extent not theretofore treated as ordi- nary income under subsection (a)— "(A) shall be treated as accrued market discount with respect to the exchanged basis property received by the taxpayer in such transaction if such property is a market discount bond, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 545 "(B) shall be treated as ordinary income on the disposi- tion of the exchanged basis property received by the tax- payer in such exchange if such property is not a market discount bond. "(3) PARAGRAPH (i) TO APPLY TO CERTAIN DISTRIBUTIONS BY CORPORATIONS OR PARTNERSHIPS.—For purposes of paragraph (1), if the basis of any market discount bond in the hands of a transferee is determined under section 334(c), 732(a), or 732(b), such property shall be treated as transferred basis property in the hands of such transferee. "(d) SPECIAL RULES.—Under regulations prescribed by the Secretary— "(1) rules similar to the rules of subsection (b) of section 1245 shall apply for purposes of this section; except that— "(A) paragraph (1) of such subsection shall not apply, and "(B) an exchange qualifying under section 354(a), 355(a), or 356(a) (determined without regard to subsection (a) of j„. this section) shall be treated as an exchange described in paragraph (3) of such subsection, and "(2) appropriate adjustments shall be made to the basis of any property to reflect gain recognized under subsection (a). frrs q :i\nk. "(e) SECTION NOT TO APPLY TO MARKET DISCOUNT BONDS ISSUED ON OR BEFORE DATE OF ENACTMENT OF SECTION.—This section shall not apply to any market discount bond issued on or before the date of the enactment of this section. "SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO AC- 26 USC 1277. CRUED MARKET DISCOUNT. "(a) GENERAL RULE.—Except as otherwise provided in this section, the net direct interest expense with respect to any market discount bond shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the portion of the market discount allocable to the days during the taxable year on which such bond was held by the taxpayer (as determined under the rules of section 1276(b)). Ante, p. 543. "(b) DISALLOWED DEDUCTION ALLOWED FOR LATER YEARS.— "(1) ELECTION TO TAKE INTO ACCOUNT IN LATER YEAR WHERE NET INTEREST INCOME FROM BOND.— "(A) I N GENERAL.—If— "(i) there is net interest income for any taxable year with respect to any market discount bond, and "(ii) the taxpayer makes an election under this sub- paragraph with respect to such bond, any disallowed interest expense with respect to such bond shall be treated as interest paid or accrued by the taxpayer during such taxable year to the extent such disallowed interest expense does not exceed the net interest income with respect to such bond. "(B) DETERMINATION OF DISALLOWED INTEREST EXPENSE.— ' " ''*^' For purposes of subparagraph (A), the amount of the disal- lowed interest expense— "(i) shall be determined as of the close of the preced- ing taxable year, and "(ii) shall not include any amount previously taken into account under subparagraph (A). "(C) NET INTEREST INCOME.—For purposes of this para- gaph, the term 'net interest income' means the excess of the
98 STAT. 546 PUBLIC LAW 98-369—JULY 18, 1984 amount determined under paragraph (2) of subsection (c) over the amount determined under paragraph (1) of subsec- tion (c). "(2) REMAINDER OF DISALLOWED INTEREST EXPENSE ALLOWED FOR YEAR OF DISPOSITION.— "(A) IN GENERAL.—Except as otherwise provided in this paragraph, the amount of the disallowed interest expense with respect to any market discount bond shall be treated as interest paid or accrued by the taxpayer in the taxable year in which such bond is disposed of. "(B) NONRECOGNITION TRANSACTIONS.—If any market dis- count bond is disposed of in a nonrecognition transaction— "(i) the disallowed interest expense with respect to such bond shall be treated as interest paid or accrued in the year of disposition only to the extent of the amount of gain recognized on such disposition, and "(ii) the disallowed interest expense with respect to such property (to the extent not so treated) shall be treated as disallowed interest expense— "(I) in the case of a transaction described in Ante, p. 543. section 1276(c)(1), of the transferee with respect to the transferred basis property, or "(II) in the case of a transaction described in • section 1276(c)(2), with respect to the exchanged basis property. "(C) DISALLOWED INTEREST EXPENSE REDUCED FOR AMOUNTS PREVIOUSLY TAKEN INTO ACCOUNT UNDER PARA- GRAPH 1.—For purposes of this paragraph, the amount of the disallowed interest expense shall not include any amount previously taken into account under paragraph (1). "(3) DISALLOWED INTEREST EXPENSE.—For purposes of this sub- section, the term 'disallowed interest expense' means the aggre- gate amount disallowed under subsection (a) with respect to the market discount bond. "(c) NET DIRECT INTEREST EXPENSE.—For purposes of this section, the term 'net direct interest expense' means, with respect to any market discount bond, the excess (if any) of— "(1) the amount of interest paid or accrued during the taxable year on indebtedness which is incurred or continued to pur- chase or carry such bond, over "(2) the aggregate amount of interest (including original issue discount) includible in gross income for the taxable year with respect to such bond. In the case of any financial institution to which section 585 or 593 applies, the determination of whether interest is described in para- graph (1) shall be made under principles similar to the principles of section 291(eXl)(B)(ii). Under rules similar to the rules of section Post, p. 574. 265(5), short sale expenses shall be treated as interest for purposes of determining net direct interest expense. "(d) SPECIAL RULE FOR GAIN RECOGNIZED ON DISPOSITION OF MARKET DISCOUNT BONDS ISSUED ON OR BEFORE DATE OF ENACTMENT OF SECTION.—In the case of a market discount bond issued on or before the date of the enactment of this section, any gain recognized by the taxpayer on any disposition of such bond shall be treated as ordinary income to the extent the amount of such gain does not exceed the amount allowable with respect to such bond under
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 547 subsection (bX2) for the taxable year in which such bond is disposed of. "SEC. 1278. DEFINITIONS AND SPECIAL RULES. 26 USC 1278. "(a) IN GENERAL.—For purposes of this part— "(1) MARKET DISCOUNT BOND.— "(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'market discount bond' means any bond having market discount. "(B) EXCEPTIONS.—The term 'market discount bond' shall not include— "(i) SHORT-TERM OBLIGATIONS.—Any obligation with a fixed maturity date not exceeding 1 year from the date of issue. "(ii) TAX-EXEMPT OBUGATIONS.—Any tax-exempt obli- gation (as defined in section 1275(aX3)). Ante, p. 540. "(iii) UNITED STATES SAVINGS BONDS.—Any United States savings bond. "(iv) INSTALLMENT OBLIGATIONS.—Any installment obligation to which section 453B applies. mif "(2) M A R K E T DISCOUNT.— ,.;< "(A) IN GENERAL.—The term 'market discount' means the excess (if any) of— yJ "(i) the stated redemption price of the bond at matu- ;? rity, over "(ii) the basis of such bond immediately after its ' *" acquisition by the taxpayer. "(B) COORDINATION WHERE BOND HAS ORIGINAL ISSUE DIS- COUNT.—In the case of any bond having original issue discount, for purposes of subparagraph (A), the stated re- demption price of such bond at maturity shall be treated as equal to its revised issue price. ii J- »<^Q) j)g MINIMIS RULE.—If the market discount is less than Vi of 1 percent of the stated redemption price of the iv f bond at maturity multiplied by the number of complete ,r^^ years to maturity (after the taxpayer acquired the bond), ' *^ then the market discount shall be considered to be zero. "(3) BOND.—The term 'bond' means any bond, debenture, note, certificate, or other evidence of indebtedness. "(4) REVISED ISSUE PRICE.—The term 'revised issue price' ; , means of the sum of— "(A) the issue price of the bond, and :,a^r-- "(B) the aggregate amount of the original issue discount includible in the gross income of all holders for periods before the acquisition of the bond by the taxpayer (deter- mined without regard to section 1272 (a)(6) or (b)(4)). Ante, p. 533. "(5) ORIGINAL ISSUE DISCOUNT, ETC.—The terms 'original issue discount', 'stated redemption price at maturity', and 'issue price' have the respective meanings given such terms by sub- part A of this part. "(b) ELECTION TO INCLUDE MARKET DISCOUNT CURRENTLY.— "(1) IN GENERAL.—If the taxpayer makes an election under this subsection— "(A) sections 1276 and 1277 shall not apply, and Ante, pp. 543, "(B) market discount on any market discount bond shall 545. be included in the gross income of the taxpayer for the
98 STAT. 548 PUBLIC LAW 98-369—JULY 18, 1984 taxable years to which it is attributable (as determined Ante, p. 543. under the rules of subsection (b) of section 1276). Except for purposes of sections 871(a), 881, 1441, 1442, and 6049 (and such other provisions as may be specified in regulations), any amount included in gross income under subparagraph (B) shall be treated as interest for purposes of this title. "(2) SCOPE OF ELECTION.—An election under this subsection shall apply to all market discount bonds acquired by the tax- payer on or after the 1st day of the 1st taxable year to which such election applies. "(3) PERIOD TO WHICH ELECTION APPLIES.—An election under this subsection shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. "(c) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subpart. "Subpart C—Discount on Short-Term Obligations "Sec. 1281. Current inclusion in income of discount on certain short-term obligations. "Sec. 1282. Deferral of interest deduction allocable to accrued discount. "Sec. 1283. Definitions and special rules. 26 u s e 1281. "SEC. 1281. CURRENT INCLUSION IN INCOME OF DISCOUNT ON CERTAIN SHORT-TERM OBLIGATIONS. "(a) IN GENERAL.—In the case of any short-term obligation to which this section applies, for purposes of this title, there shall be included in the gross income of the holder an amount equal to the sum of the daily portions of the acquisition discount for each day during the taxable year on which such holder held such obligation. "(b) SHORT-TERM OBLIGATIONS TO WHICH SECTION APPLIES.— "(1) IN GENERAL.—This section shall apply to any short-term obligation which— "(A) is held by a taxpayer using an accrual method of accounting, "(B) is held primarily for sale to customers in the ordi- nary course of the taxpayer's trade or business, "(C) is held by a bank (as defined in section 581), "(D) is held by a regulated investment company or a common trust fund, or "(E) is identified by the taxpayer under section 1256(e)(2) as being part of a hedging transaction. "(2) TREATMENT OF OBUGATIONS HELD BY PASS-THRU ENTITIES.— "(A) IN GENERAL.—This section shall apply also to— "(i) any short-term obligation which is held by a pass- thru entity which is formed or availed of for purposes of avoiding the provisions of this section, and "(ii) any short-term obligation which is acquired by a pass-thru entity (not described in clause (i)) during the required accrual period. "(B) REQUIRED ACCRUAL PERIOD.—For purposes of sub- paragraph (A), the term 'required accrual period' means the period— "(i) which begins with the first taxable year for which the ownership test of subparagraph (C) is met
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 549 with respect to the pass-thru entity (or a predecessor), and "(ii) which ends with the first taxable year after the taxable year referred to in clause (i) for which the ownership test of subparagraph (C) is not met and with respect to which the Secretary consents to the termina- tion of the required accrual period. "(C) OWNERSHIP TEST.—The ownership test of this sub- ' ^ *^ paragraph is met for any taxable year if, on at least 90 days during the taxable year, 20 percent or more of the value of the interests in the pass-thru entity are held by persons described in paragraph (1) or by other pass-thru entities to ^ ' q vtk which subparagraph (A) applies. "(D) PASS-THRU ENTITY.—The term 'pass-thru entity' " means any partnership, S corporation, trust, or other pass- thru entity. "(c) CROSS REFERENCE.— "For special rules limitinf^ the application of this section to ori^^inal issue discount in the case of nonj^overnmental obli^^ations, see section 1283(c). "SEC. 1282. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO AC- 26 USC 1282. CRUED DISCOUNT. "(a) GENERAL RULE.—Except as otherwise provided in this section, the net direct interest expense with respect to any short-term obligation shall be allowed as a deduction for the taxable year only to the extent that such expense exceeds the sum of the daily portions of the acquisition discount for each day during the taxable year on which the taxpayer held such obligation. "(b) SECTION NOT TO APPLY TO OBLIGATIONS TO WHICH SECTION 1281 APPLIES.— Ante, p. 548. "(1) IN GENERAL.—This section shall not apply to any short- term obligation to which section 1281 applies. "(2) E L E C T I O N TO H A V E S E C T I O N 1 2 8 1 A P P L Y TO A L L OBLIGA- TIONS.— "(A) IN GENERAL.—A taxpayer may make an election under this paragraph to have section 1281 apply to all ,• , {^. * short-term obligations acquired by the taxpayer on or after the 1st day of the 1st taxable year to which such election applies. ,Hr "(B) PERIOD TO WHICH ELECTION APPLIES.—An election under this paragraph shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. "(c) CERTAIN RULES MADE APPLICABLE.—Rules similar to the rules of subsections (b) and (c) of section 1277 shall apply for purposes of Ante, p. 545. this section. "(d) CROSS REFERENCE.— "For special rules limiting the application of this section to original issue discount in the case of nongovernmental obligations, see section 1283(c). "SEC. 1283. DEFINITIONS AND SPECIAL RULES. 26 USC 1283. "(a) DEFINITIONS.—For purposes of this subpart— "(1) SHORT-TERM OBLIGATION.—
98 STAT. 550 PUBLIC LAW 98-369—JULY 18, 1984 "(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'short-term obUgation' means any bond, de- benture, note, certificate, or other evidence of indebtedness which has a fixed maturity date not more than 1 year from the date of issue. "(B) EXCEPTIONS FOR TAX-EXEMPT OBLIGATIONS.—The term 'short-term obUgation' shall not include any tax-exempt Ante, p. 540. obligation (as defined in section 1275(a)(3)). "(2) ACQUISITION DISCOUNT.—The term 'acquisition discount' means the excess of— "(A) the stated redemption price at maturity (as defined Ante, p. 536. in section 1273), over "(B) the taxpayer's basis for the obligation. "(b) DAILY PORTION.—For purposes of this subpart— "(1) RATABLE ACCRUAL.—Except as otherwise provided in this subsection, the daily portion of the acquisition discount is an amount equal to— "(A) the amount of such discount, divided by "(B) the number of days after the day on which the taxpayer acquired the obligation and up to (and including) the day of its maturity. "(2) ELECTION OF ACCRUAL ON BASIS OF CONSTANT INTEREST RATE (IN UEU OF RATABLE ACCRUAL).— "(A) IN GENERAL.—At the election of the taxpayer with respect to any obligation, the daily pjortion of the acquisi- tion discount for any day is the portion of the acquisition discount accruing on such day determined (under regula- tions prescribed by the Secretary) on the basis of— "(i) the taxpayer's yield to maturity based on the taxpayer's cost of acquiring the obligation, and "(ii) compounding daily. "(B) ELECTION IRREVOCABLE.—An election under subpara- graph (A), once made with respect to any obligation, shall be irrevocable. "(c) SPECIAL RULES FOR NONGOVERNMENTAL OBUGATIONS.— "(1) IN GENERAL.—In the case of any short-term obligation which is not a short-term Government obligation (£is defined in Ante, p. 532. section 1271(aX3)(B))— Ante, pp. 548, "(A) sections 1281 and 1282 shall be applied by taking 549. into account original issue discount in lieu of acquisition discount, and "(B) appropriate adjustments shall be made in the appli- cation of subsection (b) of this section. "(2) ELECTION TO HAVE PARAGRAPH ( D NOT APPLY.— "(A) IN GENERAL.—A taxpayer may make an election under this paragraph to have paragraph (1) not apply to all obligations acquired by the taxpayer on or after the first day of the first taxable year to which such election applies. "(B) PERIOD TO WHICH ELECTION APPLIES.—An election under this paragraph shall apply to the taxable year for which it is made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. "(d) OTHER SPECIAL RULES.— "(1) BASIS ADJUSTMENTS.—The basis of any short-term obliga- tion in the hands of the holder thereof shall be increased by the amount included in his gross income pursuant to section 1281.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 551 "(2) DOUBLE INCLUSION IN INCOME NOT REQUIRED.—Section 1281 shall not require the inclusion of any amount previously Ante, p. 548. includible in gross income. "(3) COORDINATION WITH OTHER PROVISIONS.—Section 454(b) and section 1271(aX3) shall not apply to any short-term obliga- Ante, p. 532. tion to which section 1281 applies. "Subpart D—Miscellaneous Provisions "Sec. 1286. Tax treatment of stripped bonds. "Sec. 1287. Denial of capital geiin treatment for gains on certain obligations not in registered form. "Sec. 1288. Treatment of original issue discount on tax-exempt obligations. "SEC. 1286. TAX TREATMENT OF STRIPPED BONDS. 26 USC 1286. "(a) INCLUSION IN INCOME AS IF BOND AND COUPONS WERE ORIGI- NAL ISSUE DISCOUNT BONDS.—If any person purchases after July 1, 1982, a stripped bond or a stripped coupon, then such bond or coupon while held by such purchaser (or by any other person whose ;,;.., . ,..,\ basis is determined by reference to the basis in the hands of such purchaser) shall be treated for purposes of this part as a bond originally issued on the purchase date and having an original issue discount equal to the excess (if any) of— "(1) the stated redemption price at maturity (or, in the case of coupon, the amount payable on the due date of such coupon), over "(2) such bond's or coupon's ratable share of the purchase price. For purposes of paragraph (2), ratable shares shall be determined on the basis of their respective fair market values on the date of purchase. "(b) TAX TREATMENT OF PERSON STRIPPING BOND.—For purposes of this subtitle, if any person strips 1 or more coupons from a bond and after July 1,1982, disposes of the bond or such coupon— "(1) such person shall include in gross income an amount equal to the interest accrued on such bond while held by such person and before the time that such coupon or bond was «h disposed of (to the extent such interest has not theretofore been included in such person's gross income), "(2) the basis of the bond and coupons shall be increased by the amount of the accrued interest described in paragraph (1), "(3) the basis of the bond and coupons immediately before the disposition (as adjusted pursuant to paragraph (2)) shall be allocated among the items retained by such person and the items disposed of by such person on the basis of their respective fair market values, and "(4) for purposes of subsection (a), such person shall be treated as having purchased on the date of such disposition each such item which he retains for an amount equal to the basis allocated to such item under paragraph (3). A rule similar to the rule of paragraph (4) shall apply in the case of any person whose basis in any bond or coupon is determined by reference to the basis of the person described in the preceding sentence. "(c) RETENTION OF EXISTING LAW FOR STRIPPED BONDS PURCHASED BEFORE JULY 2, 1982.—If a bond issued at any time with interest coupons—
98 STAT. 552 PUBLIC LAW 98-369—JULY 18, 1984 "(1) is purchased after August 16, 1954, and before January 1, , , ., ,. -, 1958, and the purchaser does not receive all the coupons which first become payable more than 12 months after the date of the purchase, or "(2) is purchased after December 31, 1957, and before July 2, 1982, and the purchaser does not receive all the coupons which first become payable after the date of the purchase, then the gain on the sale or other disposition of such bond by such purchaser (or by a person whose basis is determined by reference to the basis in the hands of such purchaser) shall be considered as ordinary income to the extent that the fair market value (deter- mined as of the time of the purchase) of the bond with coupons attached exceeds the purchase price. If this subsection and section Ante, p. 532. 1271(a)(2)(A) apply with respect to gain realized on the sale or exchange of any evidence of indebtedness, then section 1271(a)(2)(A) shall apply with respect to that part of the gain to which this subsection does not apply. "(d) SPECIAL RULES FOR TAX-EXEMPT OBLIGATIONS.—In the case of Ante, p. 540. any tax-exempt obligation (as defined in section 1275(a)(3))— "(1) subsections (a) and (b)(1) shall not apply, "(2) the rules of subsection (b)(4) shall apply for purposes of subsection (c), and "(3) subsection (c) shall be applied without regard to the requirement that the bond be purchased before July 2, 1982. "(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) BOND.—The term 'bond' means a bond, debenture, note, or certificate or other evidence of indebtedness. "(2) STRIPPED BOND.—The term 'stripped bond' means a bond issued at any time with interest coupons where there is a separation in ownership between the bond and any coupon which has not yet become payable. "(3) STRIPPED COUPON.—The term 'stripped coupon' means any coupon relating to a stripped bond. "(4) STATED REDEMPTION PRICE AT MATURITY.—The term 'stated redemption price at maturity' has the meaning given Ante, p. 536. such term by section 1273(a)(2). "(5) COUPON.—The term 'coupon' includes any right to receive interest on a bond (whether or not evidenced by a coupon). This paragraph shall apply for purposes of subsection (c) only in the case of purchases after July 1,1982. "(6) PURCHASE.—The term 'purchase' has the meaning given Ante, p. 533. such term by section 1272(d)(1). "(f) REGULATION AUTHORITY.—The Secretary may prescribe regu- lations providing that where, by reason of varying rates of interest, put or call options, or other circumstances, the tax treatment under this section does not accurately reflect the income of the holder of a stripped coupon or stripped bond, or of the person disposing of such bond or coupon, as the case may be, for any period, such treatment shall be modified to require that the proper amount of income be included for such period. 26 u s e 1287. "SEC. 1287. DENIAL OF CAPITAL GAIN TREATMENT FOR GAINS ON CER- TAIN OBLIGATIONS NOT IN REGISTERED FORM. "(a) IN GENERAL.—If any registration-required obligation is not in registered form, any gain on the sale or other disposition of such
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 553 obligation shall be treated as ordinary income (unless the issuance of such obligation was subject to tax under section 4701). j "(b) DEFINITIONS.—For purposes of subsection (a)— "(1) REGISTRATION-REQUIRED OBLIGATION.—The term 'registra- tion-required obligation' has the meaning given to such term by section 163(f)(2) except that clause (iv) of subparagraph (A), and subparagraph (B), of such section shall not apply. "(2) REGISTERED FORM.—The term 'registered form' has the same meaning as when used in section 163(f). "SEC. 1288. TREATMENT OF ORIGINAL ISSUE DISCOUNT ON TAX-EXEMPT 26 USC 1288. OBLIGATIONS. "(a) GENERAL RULE.—Original issue discount on any tax-exempt obligation shall be treated as accruing— "(1) for purposes of section 163, in the manner provided by section 1272(a) (determined without regard to paragraph (6) Ante, p. 533. thereof), and "(2) for purposes of determining the adjusted basis of the holder, in the manner provided by section 1272(a) (determined with regard to paragraph (6) thereof). "(b) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ORIGINAL ISSUE DISCOUNT.—The term 'original issue dis- count' has the meaning given to such term by section 1273(a) Ante, p. 536. without regard to paragraph (3) thereof. In applying section 483 Infra. or 1274, under regulations prescribed by the Secretary, appro- Ante, p. 538. priate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation. "(2) TAX-EXEMPT OBLIGATION.—The term 'tax-exempt obliga- tion' has the meaning given to such term by section 1275(a)(3). Ante, p. 540. "(3) SHORT-TERM OBLIGATIONS.—In applying this section to obligations with maturity of 1 year or less, rules similar to the rules of section 1283(b) shall apply." Ante, p. 549. (b) AMENDMENT OF SECTION 483.—Section 483 (relating to interest 26 use 483. on certain deferred payments) is amended to read as follows: "SEC. 483. INTEREST ON CERTAIN DEFERRED PAYMENTS. "(a) AMOUNT CONSTITUTING INTEREST.—For purposes of this title, in the case of any payment— "(1) under any contract for the sale or exchange of any property, and "(2) to which this section applies, there shall be treated as interest that portion of the total unstated interest under such contract which, as determined in a manner consistent with the method of computing interest under section 1272(a), is properly allocable to such payment. "(b) TOTAL UNSTATED INTEREST.—For purposes of this section, the term 'total unstated interest' means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of— "(1) the sum of the payments to which this section applies ^, , which are due under the contract, over "(2) the sum of the present values of such payments and the present values of any interest payments due under the contract. For purposes of the preceding sentence, the present value of a payment shall be determined under the rules of section 1274(b)(2) Ante, p. 538.
98 STAT. 554 PUBLIC LAW 98-369—JULY 18, 1984 using a discount rate equal to 120 percent of the applicable Federal Ante, p. 538. rate determined under section 1274(d). "(c) PAYMENTS TO WHICH SUBSECTION (a) APPLIES.— "(1) IN GENERAL.—Except as provided in subsection (d), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract— "(A) under which some or all of the payments are due more than 1 year after the date of such sale or exchange, and "(B) under which, using a discount rate equal to 110 percent of the applicable Federal rate determined under section 1274(d), there is total unstated interest. "(2) TREATMENT OF OTHER DEBT INSTRUMENTS.—For purposes of this section, a debt instrument of the purchaser which is given in consideration for the sale or exchange of property shall not be treated as a payment, and any payment due under such debt instrument shall be treated as due under the contract for the sale or exchange. "(3) DEBT INSTRUMENT DEFINED.—For purposes of this subsec- tion, the term 'debt instrument' has the meaning given such Ante, p. 540. term by section 1275(a)(1). "(d) EXCEPTIONS AND LIMITATIONS.— "(1) COORDINATION WITH ORIGINAL ISSUE DISCOUNT RULES.— This section shall not apply to any debt instrument to which Ante, p. 533. section 1272 applies. "(2) SALES PRICES OF $3,000 OR LESS.—This section shall not apply to any payment on account of the sale or exchange of property if it can be determined at the time of such sale or exchange that the sales price cannot exceed $3,000. "(3) CARRYING CHARGES.—In the case of the purchaser, the tax treatment of amounts paid on account of the sale or exchange of property shall be made without regard to this section if any such amounts are treated under section 163(b) as if they included interest. "(4) CERTAIN SALES OF PATENTS.—In the case of any transfer described in section 1235(a) (relating to sale or exchange of patents), this section shall not apply to any amount contingent on the productivity, use, or disposition of the property transferred. "(e) INTEREST RATES IN CASE OF SALES OF PRINCIPAL RESIDENCES OR FARM LANDS.— "(1) I N GENERAL.—In the case of any debt instrument arising from a sale or exchange to which this subsection applies, subsec- tions (b) and (c)(1)(B) shall be applied by using, in lieu of the discount rates determined under such subsections, discount rates determined under subsections (b) and (cXD, respectively, of this section as it was in effect before the amendments made by Ante, p. 494. the Tax Reform Act of 1984. "(2) SALES OR EXCHANGES TO WHICH SUBSECTION APPUES.—This subsection shall apply— "(A) to any sale or exchange by an individual of his principal residence (within the meaning of section 1034), Mn,H'A:st. .- ^nd
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 555 "(B) to any sale or exchange by a person of land used by such person as a farm (within the meaning of section 6420(cX2)). "(3) LIMITATION.—Paragraph (1) shall apply to any sale or exchange by an individual of his principal residence (within the meaning of section 1034), only to the extent the purchase price of such residence does not exceed $250,000. For purposes of the preceding sentence, the purchase price of a residence shall be determined without regard to this section. "(0 MAXIMUM RATE OF INTEREST ON CERTAIN TRANSFERS OF LAND BETWEEN RELATED PARTIES.— "(1) I N GENERAL.—In the case of any qualified sale, the dis- count rate used in determining the total unstated interest rate under subsection 0?) shall not exceed 7 percent, compounded semiannually. "(2) QUALIFIED SALE.—For purposes of this subsection, the term 'qualified sale' means any sale or exchange of land by an individual to a member of such individual's family (within the meaning of section 267(cX4)). "(3) $500,000 LIMITATION.—Paragraph (1) shall not apply to any qualified sale between individuals made during any calen- dar year to the extent that the sales price for such sale (when added to the aggregate sales price for prior qualified sales between such individuals during the calendar year) exceeds $500,000. "(4) NONRESIDENT AUEN INDIVIDUALS.—Paragraph (1) shall * not apply to any sale or exchange if any party to such sale or exchange is a nonresident alien individual. "(g) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this section including regulations providing for the application of this section in the case of— "(1) any contract for the sale or exchange of property under which the liability for, or the amount or due date of, a payment cannot be determined at the time of the sale or exchange, or "(2) any change in the liability for, or the amount or due date of, £my payment (including interest) under a contract for the sale or exchange of property, i "(h) CROSS REFERENCE.— "For special rules in the case of the borrower under certain loans for 2 personal use, see section 1275(b)." Ante, p. 540. (c) PENALTY FOR FAILURE T O MEET INFORMATION REQUIREMENTS.— < (1) I N GENERAL.—Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the following new section: "SEC. 6706. ORIGINAL ISSUE DISCOUNT INFORMATION REQUIREMENTS. 26 u s e 6706. "(a) FAILURE T O SHOW INFORMATION ON DEBT INSTRUMENT.—In Penalty. the case of a failure to set forth on a debt instrument the informa- tion required to be set forth on such instrument under section 1275(cXl), unless it is shown that such failure is due to reasonable Ante, p. 540. cause and not to willful neglect, the issuer shall pay a penalty of $50 for each instrument with respect to which such a failure exists. "Ot)) FAILURE T O FURNISH INFORMATION TO SECRETARY.—Any Penalty. issuer who fails to furnish information required under section 1275(cX2) with respect to any issue of debt instruments on the date prescribed therefor (determined with regard to any extension of
98 STAT. 556 PUBLIC LAW 98-369—JULY 18, 1984 time for filing) shall pay a penalty equal to 1 percent of the aggregate issue price of such issue, unless it is shown that such failure is due to reasonable cause and not willful neglect. The amount of the penalty imposed under the preceding sentence with respect to any issue of debt instruments shall not exceed $50,000 for such issue. "(c) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B of 26 use 6211. chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by this section." (2) CLERICAL AMENDMENT.—The table of sections for subchap- ter B of chapter 68 is amended by adding at the end thereof the following new item: "Sec. 6706. Original issue discount information requirements." SEC. 42. TECHNICAL AND CONFORMING AMENDMENTS RELATED TO ORIGINAL ISSUE DISCOUNT CHANGES. (a) I N GENERAL.— Repeals. (1) Sections 1232, 1232A, and 1232B are hereby repealed. 26 u s e 1232, (2) Clause (i) of section 103A(i)(2)(C) (defining yield on the 1232A, 1232B. 26 u s e 103A. issue) is amended by striking out "section 1232(b)(2)" and insert- ing in lieu thereof "sections 1273(b) and 1274". 26 u s e 163. (3) Subsection (e) of section 163 (relating to original issue Post, p. 654. discount) is amended to read as follows: "(e) ORIGINAL ISSUE DISCOUNT.— "(1) I N GENERAL.—In the case of any debt instrument issued after July 1,1982, the portion of the original issue discount with respect to such debt instrument which is allowable as a deduc- tion to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year. "(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— "(A) DEBT INSTRUMENT.—The term 'debt instrument' has Ante, p. 540. the meaning given such term by section 1275(a)(1). "(B) DAILY PORTIONS.—The daily portion of the original issue discount for any day shall be determined under sec- Ante, p. 533. tion 1272(a) (without regard to paragraph (6) thereof and Ante, p. 536. without regard to section 1273(a)(3)). "(3) EXCEPTIONS.—This subsection shall not apply to any debt instrument described in— "(A) subparagraph (D) of section 1272(a)(2) (relating to obligations issued by natural persons before March 2, 1984), and "(B) subparagraph (E) of section 1272(a)(2) (relating to loans between natural persons). '<; te-' *' ^ "(4) CROSS REFERENCES.— "For provision relating to deduction of original issue discount on tax- Ante, p. 553. exempt obligation, see section 1288. "For special rules in the case of the borrower under certain loans for Ante, p. 540. personal use, see section 1275(b)." 26 use 165. (4) Paragraph (3) of section 165(j) (relating to denial of deduc- tions for losses on certain obligations not in registered form) is amended by striking out "subsection (d) of section 1232" and inserting in lieu thereof "section 1287".
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 557 (5) Paragraph (1) of section 249(b) (relating to limitation on 26 USC 249. deduction of bond premium on repurchase) is amended by strik- ing out "section 1232(b)" and inserting in lieu thereof "sections 1273(b) and 1274". (6) Paragraph (1) of section 405(d) (relating to taxability of 26 USC 405. beneficiary of qualified bond purchase plan) is amended by striking out "section 1232 (relating to bonds and other evidences of indebtedness)" and inserting in lieu thereof "section 1271 (relating to treatment of amounts received on retirement or sale or exchange of debt instruments)". (7) Paragraph (1) of section 409(b) (relating to income tax 26 use 409. treatment of bonds) is amended by striking out "section 1232 P^^t, p. 852. (relating to bonds and other evidences of indebtedness)" and inserting in lieu thereof "section 1271 (relating to treatment of amounts received on retirement or sale or exchange of debt instruments)". (8) Paragraph (3) of section 811(b) (relating to amortization of Post, p. 740. premium and accrual of discount), as amended by this Act, is amended by striking out "section 1232(b)" and inserting in lieu thereof "section 1273". (9) Subparagraph (A) of section 871(a)(1) (relating to income 26 use 871. other than capital gains) is amended by striking out "section 1232(b)" and inserting in lieu thereof "section 1273". (10) Paragraph (1) of section 881(a) (relating to imposition of 26 use 881. tax) is amended by striking out "section 1232(b)" and inserting in lieu thereof "section 1273". (11) Subsection (b) of section 1037 (relating to application of 26 use 1037. section 1232) is amended— (A) by striking out "section 1232(a)(2XB)" In paragraph (1) '- and inserting in lieu thereof "section 1271(cX2)", (B) by striking out "section 1232" in paragraphs (1) and (2) and inserting in lieu thereof "subpart A of part V of subchapter P", and (C) by striking out "SECTION 1232" in the subsection heading and inserting in lieu thereof "ORIGINAL ISSUE DIS- COUNT RULES". (12) Subsection (h) of section 1351 (relating to special rule for 26 use 1351. evidences of indebtedness) is amended by striking out "section 1232(a)(2)" and inserting in lieu thereof "section 1273(a)". (13) Subsection (b) of section 1441 (relating to withholding of 26 use 1441. tax on nonresident alien) is amended by striking out "section 1232(b)" and inserting in lieu thereof "section 1273". (14) Paragraph (6) of section 6049(d) (relating to treatment of 26 use 6049. original issue discount) is amended— (A) by striking out "section 1232A" each place it appears in subparagraph (A) and inserting in lieu thereof "section 1272", and (B) by striking out "section 1232(bXl)" and inserting in lieu thereof "section 1273(a)". (b) CLERICAL AMENDMENTS.— (1) The table of parts for subchapter P of chapter 1 is amended by adding at the end thereof the following new item: "PART V. Special rules for bonds and other debt instruments." (2) The table of sections for part IV of subchapter P of chapter 1 is amended by striking out the items relating to sections 1232, 1232A, and 1232B.
98 STAT. 558 PUBLIC LAW 98-369—JULY 18, 1984 SEC. 43. TECHNICAL AND CONFORMING AMENDMENTS RELATED TO TREATMENT OF MARKET DISCOUNT AND ACQUISITION DIS- COUNT. (a) DEFINITION OF SUBSTITUTED BASIS PROPERTY; ETC.— 97 Stat. 379. (1) IN GENERAL.—Section 7701(a) (relating to definitions) is 26 use 7701. amended by adding at the end thereof the following new paragraphs: "(42) SUBSTITUTED BASIS PROPERTY.—The term 'substituted basis property' means property which is— "(A) transferred basis property, or "(B) exchanged basis property. "(43) TRANSFERRED BASIS PROPERTY.—The term 'transferred basis property' means property having a basis determined under any provision of subtitle A (or under any corresponding provision of prior income tax law) providing that the basis shall be determined in whole or in part by reference to the basis in the hands of the donor, grantor, or other transferor. "(44) EXCHANGED BASIS PROPERTY.—The term 'exchanged basis property' means property having a basis determined under any provision of subtitle A (or under any corresponding provision of prior income tax law) providing that the basis shall be deter- mined in whole or in part by reference to other property held at any time by the person for whom the basis is to be determined. "(45) NoNRECOGNiTioN TRANSACTION.—The term 'nonrecogni- tion transaction' means any disposition of property in a transac- tion in which gain or loss is not recognized in whole or in part for purposes of subtitle A." 26 use 1016. (2) TECHNICAL AMENDMENT.—Subsection (b) of section 1016 is amended by striking out the last sentence. 26 u s e 7805. (b) ELECTIONS M A D E IN MANNER PRESCRIBED BY SECRETARY.— Section 7805 (relating to rules and regulations) is amended by adding at the end thereof the following new subsection: "(d) MANNER OF MAKING ELECTIONS PRESCRIBED BY SECRETARY.— Except to the extent otherwise provided by this title, any election under this title shall be made at such time and in such manner as the Secretary shall by regulations or forms prescribe." (c) OTHER TECHNICAL AMENDMENTS.— 26 use 341. (1) Paragraph (12) of section 341(e) (related to nonapplication of section 1254(a)) is amended by striking out "and 1254(a)" and inserting in lieu thereof "1254(a), and 1276(a)". 26 use 453B. (2) Paragraph (2) of section 453B(d) (relating to liquidations to which section 337 applies) is amended by striking out "or 1254(a)" and inserting in lieu thereof "1254(a), or 1276(a)". 26 use 751. (3) Subsection (c) of section 751 (defining unrealized receiv- ables) is amended by adding at the end thereof the following new sentence: "For purposes of this section and sections 731, 736, and 741, such term also includes any market discount bond Ante, p. 547. (as defined in section 1278) and any short-term obligation (as Ante, p. 549. defined in section 1283) but only to the extent of the amount which would be treated as ordinary income if (at the time of the transaction described in this section or section 731, 736, or 741, as the case may be) such property had been sold by the partnership."
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 559 SEC. 44. EFFECTIVE DATES. 26 USC 1271 (a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this subtitle shall apply to taxable years . SAI. ending after the date of the enactment of this Act. (b) TREATMENT OF DEBT INSTRUMENTS RECEIVED IN EXCHANGE FOR PROPERTY.— (1) I N GENERAL.— (A) Except as otherwise provided in this subsection, sec- Ante, p. 538. "'- tion 1274 of the Internal Revenue Code of 1954 (as added by section 41) and the amendment made by section 41(b) (relat- ing to amendment of section 483) shall apply to sales or Ante, p. 553. exchanges after December 31,1984. (B) Section 1274 of such Code and the amendment made by section 41(b) shall not apply to any sale or exchange pursuant to a written contract which was binding on March ilk 1, 1984, and at all times thereafter before the sale or ' ' ' exchange. (2) REVISION OF SECTION 482 REGULATIONS.—Not later than 180 days after the date of the enactment of this Act, the Secretary of the Treasury or his delegate shall modify the safe harbor interest rates applicable under the regulations prescribed under section 482 of the Internal Revenue Code of 1954 so that such rates are consistent with the rates applicable under section 483 of such Code by reason of the amendments made by section 41. Ante, p. 531. (3) CLARIFICATION OF INTEREST ACCRUAL; FAIR MARKET VALUE RULE IN CASE OF POTENTIALLY ABUSIVE SITUATIONS.— (A) I N GENERAL.— (i) CLARIFICATION OF INTEREST ACCRUAL.—In the case of any sale or exchange— (I) after March 1, 1984, and before January 1, 1985, nothing in section 483 of the Internal Reve- nue Code of 1954 shall permit any interest to be Ante, p. 553. deductible before the period to which such interest ; is properly allocable, or (II) after June 8, 1984, and before January 1, i( ;;, 1985, notwithstanding section 483 of the Internal Revenue Code of 1954 or any other provision of ': law, no interest shall be deductible before the &,. . period to which such interest is properly allocable. (ii) FAIR MARKET RULE.—In the case of any sale or exchange after March 1, 1984, and before January 1, 1985, such section 483 shall be treated as including l&mrKm ' provisions similar to the provisions of section 1274(b)(3) of such Code (as added by section 41). Ante, p. 538. (B) EXCEPTION FOR BINDING CONTRACTS.—Subparagraph 'iri (A) shall not apply to any sale or exchange pursuant to a written contract which was binding on March 1, 1984, and at all times thereafter before the sale or exchange. (C) INTEREST ACCRUAL RULE NOT TO APPLY WHERE SUBSTAN- TIALLY EQUAL ANNUAL PAYMENTS.—Clause (i) of subpara- graph (A) shall not apply to any debt instrument with substantially equal annual payments. (c) MARKET DISCOUNT RULES.— (1) ORDINARY INCOME TREATMENT.—Section 1276 of the Inter- nal Revenue Code of 1954 (as added by section 41) shall apply to Ante, p. 543.
98 STAT. 560 PUBLIC LAW 98-369—JULY 18, 1984 obligations issued after the date of the enactment of this Act in taxable years ending after such date. Ante, p. 545. (2) INTEREST DEFERRAL RULES.—Section 1277 of such Code (as added by section 41) shall apply to obligations acquired after the date of the enactment of this Act in taxable years ending after such date. (d) RULES RELATING TO DISCOUNT ON SHORT-TERM OBLIGATIONS.— Ante, p. 548. Subpart C of part V of subchapter P of chapter 1 of such Code (as added by section 41) shall apply to obligations acquired after the date of the enactment of this Act. (e) 5-YEAR SPREAD OF ADJUSTMENTS REQUIRED BY REASON OF AC- CRUAL OF DISCOUNT ON CERTAIN SHORT-TERM OBUGATIONS.— (1) ELECTION TO HAVE SECTION 1281 APPLY TO ALL OBUGATIONS HELD DURING TAXABLE YEAR.—A taxpayer may elect for his first taxable year ending after the date of the enactment of this Act Ante, p. 548. to have section 1281 of the Internal Revenue Code of 1954 apply to all short-term obligations described in subsection (b) of such section which were held by the taxpayer at any time during such first taxable year. (2) 5-YEAR SPREAD.— (A) IN GENERAL.—In the case of any taxpayer who makes an election under paragraph (1)— (i) the provisions of section 1281 of the Internal Reve- nue Code of 1954 (as added by section 41) shall be treated £is a change in the method of accounting of the taxpayer, (ii) such change shall be treated as having been made with the consent of the Secretary, and (iii) the net amount of the adjustments required by section 481(a) of such Code to be taken into account by the taxpayer in computing taxable income (hereinafter in this paragraph referred to as the "net adjustments") shall be taken into account during the spread period with the amount taken into account in each taxable year in such period determined under subparagraph (B). (B) AMOUNT TAKEN INTO ACCOUNT DURING EACH YEAR OF SPREAD PERIOD.— (i) FIRST YEAR.—The amount taken into account for the first taxable year in the spread period shall be the sum of^ (I) one-fifth of the net adjustments, and (II) the excess (if any) of— (a) the cash basis income over the accrual ,... ,. ,j,,|. basis income, over (b) one-fifth of the net adjustments. (ii) FOR SUBSEQUENT YEARS IN SPREAD PERIOD.—The amount taken into account in the second or any suc- ceeding taxable year in the spread period shall be the sum of^ (I) the portion of the net adjustments not taken into account in the preceding taxable year of the spread period divided by the number of remaining taxable years in the spread period (including the year for which the determination is being made), * "* (II) the excess (if any) of—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 561 V (a) the excess of the cash basis income over ^*i' •' the accrual basis income, over (b) one-fifth of the net adjustments, multi- "* ' plied by 5 minus the number of years remain- ing in the spread period (not including the current year). .^^ The excess described in subparagraph (B)(ii)(II)(a) 'let shall be reduced by any amount taken into account under this subclause or clause (i)(II) in any prior (C) SPREAD PERIOD.—For purposes of this paragraph, the term "spread period" means the period consisting of the 5 * ' taxable years beginning with the year for which the elec- tion is made under paragraph (1), (D) CASH BASIS INCOME.—For purposes of this paragraph, ^y.. the term "cash basis income" means for any taxable year /;'*> -j jiv the aggregate amount which would be includible in the gross income of the taxpayer with respect to short-term ^' " obligations described in subsection (b) of section 1281 of such Code if the provisions of section 1281 of such Code did Ante, p. 548. not apply to such taxable year and all prior taxable years within the spread period. (E) ACCRUAL BASIS INCOME.—For purposes of this para- graph, the term "accrual basis income" means for any " taxable year the aggregate amount includible in gross • income under section 1281(a) of such Code for such a tax- able year and all prior taxable years within the spread period. (f) TREATMENT OF ORIGINAL ISSUE DISCOUNT ON TAX-EXEMPT OBLI- GATIONS.—Section 1288 of such Code (as added by section 41) shall Ante, p. 553. apply to obligations issued after September 3, 1982, and acquired after March 1,1984. (g) REPEAL OF CAPITAL ASSET REQUIREMENT.—Section 1272 of such Code (as added by section 41) shall not apply to any obligation issued Ante, p. 533. before December 31, 1984, which is not a capital asset in the hands of the taxpayer. (h) REPORTING REQUIREMENTS.—Section 1275(c) of such Code (as Ante, p. 540. added by section 41) and the amendments made by section 41(c) shall Ante, p. 531. take effect on the day 30 days after the date of the enactment of this Act. (i) OTHER MISCELLANEOUS CHANGES.— (1) ACCRUAL PERIOD.—In the case of any obligation issued after July 1, 1982, and before January 1, 1985, the accrual period, for purposes of section 1272(a) of the Internal Revenue Ante, p. 533. s Code of 1954 (as amended by section 41(a)), shall be a 1-year period (or shorter period to maturity) beginning on the day in the calendar year which corresponds to the date of original issue of the obligation. (2) CHANGE IN REDUCTION FOR PURCHASE AFTER ORIGINAL ISSUE.—Section 1272(a)(6) of such Code (as so amended) shall not apply to any purchase on or before the date of the enactment of this Act, and the rules of section 1232A(a)(6) of such Code (as in effect on the day before the date of the enactment of this Act) shall continue to apply to such purchase. (j) CLARIFICATION THAT PRIOR EFFECTIVE DATE RULES NOT AF- FECTED.—Nothing in the amendment made by section 41(a) shall Ante, p. 531. affect the application of any effective date provision (including any 31-194 0 - 86 - 20 : OL. 3 Part- 1
98 STAT. 562 PUBLIC LAW 98-369—JULY 18, 1984 transitional rule) for any provision which was a predecessor to any provision contained in part V of subchapter P of chapter 1 of the Ante, p. 531. Internal Revenue Code of 1954 (as added by section 41). Subtitle D—Corporate Provisions PART I—LIMITATIONS ON DIVIDENDS RECEIVED DEDUCTION SEC. 51. DIVIDENDS RECEIVED DEDUCTION REDUCED WHERE PORTFOLIO STOCK IS DEBT FINANCED. (a) GENERAL RULE.—Part VIII of subchapter B of chapter 1 (relat- ing to special deductions for corporations) is amended by inserting after section 246 the following new section: 26 use 246A. "SEC. 246A. DIVIDENDS RECEIVED DEDUCTION REDUCED WHERE PORT- FOLIO STOCK IS DEBT FINANCED. "(a) GENERAL RULE.—In the case of any dividend on debt-financed portfolio stock, there shall be substituted for the percentage which (but for this subsection) would be used in determining the amount of the deduction allowable under section 243, 244, or 245 a percentage equal to the product of— "(1) 85 percent, and "(2) 100 percent minus the average indebtedness percentage. "(b) SECTION NOT To APPLY TO DIVIDENDS FOR WHICH 100 PERCENT DIVIDENDS RECEIVED DEDUCTION ALLOWABLE.—Subsection (a) shall not apply to— "(1) qualifying dividends (as defined in section 2430t)) without regard to section 243(c)(4)), and "(2) dividends received by ^a small business investment com- pany operating under the Small Business Investment Act of 15 use 661 note. 1958. "(c) DEBT FINANCED PORTFOLIO STOCK.—For purposes of this section— "(1) IN GENERAL.—The term 'debt financed portfolio stock' means any portfolio stock if at some time during the base period there is portfolio indebtedness with respect to such stock. "(2) PoRTFOuo STOCK.—The term 'portfolio stock' means any stock of a corporation unless— "(A) as of the beginning of the ex-dividend date, the taxpayer owns stock of such corporation— "(i) possessing at least 50 percent of the total voting Mb /I *3. i power of the stock of such corporation, and "(ii) having a value equal to at least 50 percent of the total value of the stock of such corporation, or "(B) as of the beginning of the ex-dividend date— "(i) the taxpayer owns stock of such corporation which would meet the requirements of subparagraph (A) if '20 percent' were substituted for '50 percent' each place it appears in such subparagraph, and "(ii) stock meeting the requirements of subparagraph (A) is owned by 5 or fewer corporate shareholders. "(3) SPECIAL RULE FOR STOCK IN A BANK OR BANK HOLDING COMPANY.— ;;f; , Sill "(A) IN GENERAL.—If, as of the beginning of the ex- dividend date, the taxpayer owns stock of any bank or bank ii e. - Q ^ei-it
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 563 rii c ^ holding company having a value equal to at least 80 percent of the total value of the stock of such bank or bank holding company, for purposes of paragraph (2XAXi), the taxpayer shall be treated as owning any stock of such bank or bank ; q ;;,rf\ holding company which the taxpayer has an option to acquire. ^ "(B) DEFINITIONS.—For purposes of subparagraph (A)— "(i) BANK.—The term 'bank' has the meaning given If, \:T>r such term by section 581. .,' "(ii) BANK HOLDING COMPANY.—The term 'bank hold- ing company' means a bank holding company (within the meaning of section 2(a) of the Bank Holding Compa- •Ai / > ny Ac|. Qf 1956). 12 u s e 1841. "(4) TREATMENT OF CERTAIN PREFERRED STOCK.—For purposes of determining whether the requirements of subparagraph (A) *"'^ ^ '' '*i^' or (B) of paragraph (2) or of subparagraph (A) of paragraph (3) are met, stock described in section 1504(a)(4) shall not be taken Post, p. 577. into account. "(d) AVERAGE INDEBTEDNESS PERCENTAGE.—For purposes of this section— "(1) I N GENERAL.—Except as provided in paragraph (2), the ' term 'average indebtedness percentage' means the percentage obtained by dividing— >58r>8Tj Jjt: "(A) the average amount (determined under regulations prescribed by the Secretary) of the portfolio indebtedness ol s with respect to the stock during the base period, by "(B) the average amount (determined under regulations prescribed by the Secretary) of the adjusted basis of the ^ stock during the base period. "(2) SPECIAL RULE WHERE STOCK NOT HELD THROUGHOUT BASE PERIOD.—In the case of any stock which was not held by the taxpayer throughout the base period, paragraph (1) shall be applied as if the base period consisted only of that portion of the base period during which the stock was held by the taxpayer. "(3) PORTFOUO INDEBTEDNESS.— "(A) IN GENERAL.—The term 'portfolio indebtedness' means any indebtedness directly attributable to investment "J^f *v in the portfolio stock. '^ "(B) CERTAIN AMOUNTS RECEIVED FROM SHORT SALE p TREATED AS INDEBTEDNESS.—For purposes of subparagraph (A), any amount received from a short sale shall be treated as indebtedness for the period beginning on the day on which such amount is received and ending on the day the short sale is closed. "(4) BASE PERIOD.—The term 'base period' means, with respect to any dividend, the shorter of— "(A) the period beginning on the ex-dividend date for the most recent previous dividend on the stock and ending on the day before the ex-dividend date for the dividend in- volved, or "(B) the 1-year period ending on the day before the ex- dividend date for the dividend involved. "(e) REDUCTION IN DIVIDENDS RECEIVED DEDUCTION NOT TO EXCEED ALLOCABLE INTEREST.—Under regulations prescribed by the Secretary, any reduction under this section in the amount allowable as a deduction under section 243, 244, or 245 with respect to any dividend shall not exceed the amount of any interest deduction
98 STAT. 564 PUBLIC LAW 98-369—JULY 18, 1984 (including any deductible short sale expense) allocable to such dividend. "(f) REGULATIONS.—The regulations prescribed for purposes of this Post, p. 567. section under section 7701(f) shall include regulations providing for the disallowance of interest deductions or other appropriate treat- ment (in lieu of reducing the dividend received deduction) where the obligor of the indebtedness is a person other than the person receiving the dividend." (b) CLERICAL AMENDMENT.—The table of sections for part VIII of subchapter B of chapter 1 is amended by inserting after the item relating to section 246 the following new item: "Sec. 246A. Dividends received deduction reduced where portfolio stock is debt financed." 26 use 246A (c) EFFECTIVE DATE.—The amendments made by this section shall "°*^- apply with respect to stock the holding period for which begins after the date of the enactment of this Act in taxable years ending after such date. SEC. 52. TREATMENT OF DIVIDENDS FROM REGULATED INVESTMENT COMPANIES. (a) INCREASE IN REQUIRED AMOUNT OF DIVIDENDS.—Paragraph (1) 26 use 854. of section 854(b) (relating to other dividends) is amended to read as follows: "(1) AMOUNT TREATED AS DIVIDEND.— "(A) DEDUCTION UNDER SECTION 243.—In any case in which— "(i) a dividend is received from a regulated invest- ment company (other than a dividend to which subsec- tion (a) applies), and "(ii) such investment company meets the require- ments of section 852(a) for the taxable year during which it paid such dividend, then, in computing any deduction under section 243, there shall be taken into account only that portion of such divi- dend designated under this subparagraph by the regulated investment company. "(B) EXCLUSION UNDER SECTION II6.—If the aggregate dividends received by a regulated investment company during any taxable year are less than 95 percent of its gross income, then, in computing the exclusion under section 116, rules similar to the rules of subparagraph (A) shall apply. "(C) LIMITATION.—The aggregate amount which may be designated as dividends under subparagraph (A) or (B) shall not exceed the aggregate dividends received by the com- pany for the taxable year." (b) CERTAIN DIVIDENDS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF COMPUTING DEDUCTION UNDER SECTION 243.—Subsection (b) of section 854 is amended by adding at the end thereof the following new paragraph: "(4) SPECIAL RULE FOR COMPUTING DEDUCTION UNDER SECTION 243.—For purposes of subparagraph (A) of paragraph (1), an amount shall be treated as a dividend for the purpose of para- graph (1) only if a deduction would have been allowable under section 243 to the regulated investment company determined— "(A) as if section 243 applied to dividends received by a regulated investment company,
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 5(35 m et "(B) after the application of section 246 (but without regard to subsection (b) thereof), and "(C) after the appHcation of section 246A." Ante, p. 562. (c) GROSS INCOME INCLUDES N E T SHORT-TERM CAPITAL GAIN.— Paragraph (3)(A) of section 854(b) is amended to read as follows: 26 use 854. "(A) In the case of 1 or more sales or other dispositions of stock and securities, the term 'gross income' includes only the excess of^ "(i) the net short-term capital gain from such sales or g,,. dispositions, over "(ii) the net long-term capital loss from such sales or dispositions." (d) EFFECTIVE DATE.—The amendments made by this section shall 26 use 854 note. apply to taxable years of regulated investment companies beginning after the date of the enactment of this Act. PART II—TREATMENT OF CERTAIN DISTRIBUTIONS SEC. 53. CORPORATE SHAREHOLDER'S BASIS IN STOCK REDUCED BY NON- TAXED PORTION OF EXTRAORDINARY DIVIDENDS. (a) GENERAL RULE.—Part IV of subchapter O of chapter 1 (relating to special rules for gain or loss on disposition of property) is amended by redesignating section 1059 as section 1060 and by 26 use 1060. inserting after section 1058 the following new section: "SEC. 1059. CORPORATE SHAREHOLDER'S BASIS IN STOCK REDUCED BY 26 USC 1059. NONTAXED PORTION OF EXTRAORDINARY DIVIDENDS. "(a) GENERAL RULE.—If any corporation— "(1) receives an extraordinary dividend with respect to any share of stock, and "(2) sells or otherwise disposes of such stock before such stock has been held for more than 1 year, the basis of such corporation in such stock shall be reduced by the nontaxed portion of such dividend. If the nontaxed portion of such dividend exceeds such basis, such excess shall be treated as gain from the sale or exchange of such stock. "(b) NONTAXED PORTION.—For purposes of this section— "(1) IN GENERAL.—The nontaxed portion of any dividend is the excess (if any) of— "(A) the amount of such dividend, over "(B) the taxable portion of such dividend. "(2) TAXABLE PORTION.—The taxable portion of any dividend is— "(A) the portion of such dividend includible in gross income, reduced by "(B) the amount of any deduction allowable with respect to such dividend under section 243, 244, or 245. "(c) EXTRAORDINARY DIVIDEND DEFINED.—For purposes of this section— "(1) I N GENERAL.—The term 'extraordinary dividend' means any dividend with respect to a share of stock if the amount of such dividend equals or exceeds the threshold percentage of the taxpayer's adjusted basis in such share of stock (determined without regard to this section). I "(2) THRESHOLD PERCENTAGE.—The term 'threshold percent- age' means—
98 STAT. 566 PUBLIC LAW 98-369—JULY 18, 1984 jiiorf ; "(A) 5 percent in the case of stock which is preferred as to dividends, and AHH -/na'. "(B) 10 percent in the case of any other stock. "(3) AGGREGATION OF DIVIDENDS.— to- )6U 02 "(A) AGGREGATION WITHIN 85-DAY PERIOD.—All divi- dends— "(i) which are received by the taxpayer (or a person described in subparagraph (O) with respect to any ic ;3! i share of stock, and "(ii) which have ex-dividend dates within the same TO ' ' period of 85 consecutive days, ^, shall be treated as 1 dividend. aionit^'Fii Bi i: "(B) AGGREGATION WITHIN i YEAR WHERE DIVIDENDS EXCEED 20 PERCENT OF ADJUSTED BASIS.—All dividends— "(i) which are received by the taxpayer (or a person described in subparagraph (O) with respect to any share of stock, and "(ii) which have ex-dividend dates during the same •my period of 365 consecutive days, shall be treated as extraordinary dividends if the aggregate of such dividends exceeds 20 percent of the taxpayer's adjusted basis in such stock (determined without regard to this section). "(C) SUBSTITUTED BASIS TRANSACTIONS.—In the case of any ^, stock, a person is described in this subparagraph if— .eaoi :)BL' m "(i) the basis of such stock in the hands of such person is determined in whole or in part by reference to the basis of such stock in the hands of Ihe taxpayer, or '^^-" ^ ' "(ii) the basis of such stock in the hands of the taxpayer is determined in whole or in part by reference to the basis of such stock in the hands of such person. "(d) SPECIAL RULES.—For purposes of this section— "(1) TIME FOR REDUCTION.—Any reduction in basis under sub- section (a) by reason of any distribution which is an extraordi- nary dividend shall occur at the beginning of the ex-dividend date for such distribution. "(2) DISTRIBUTIONS IN KIND.—To the extent any dividend con- sists of property other than cash, the amount of such dividend shall be treated as the fair market value of such property (as of the date of the distribution) reduced as provided in section 301(bX2). "(3) DETERMINATION OF HOLDING PERIOD.—For purposes of determining the holding period of stock under subsection (aX2), rules similar to the rules of paragraphs (3) and (4) of section 246(c) shall apply; except that '1 year' shall be substituted for the number of days specified in subparagraph (B) of section 246(cX3). "(4) EX-DIVIDEND DATE.—The term 'ex-dividend date' means the date on which the share of stock becomes ex-dividend. "(5) EXTENSION TO CERTAIN PROPERTY DISTRIBUTIONS.—In the case of any distribution of property (other than cash) to which section 301 applies— "(A) such distribution shall be treated as a dividend J J.. without regard to whether the corporation has earnings and profits, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 567 f "(B) the amount so treated shall be reduced by the •' amount of any reduction in basis under section 301(c)(2) by reason of such distribution. "(e) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be appropriate to carry out the purposes of this section, including regulations providing for the application of this section in the case of stock dividends, stock splits, reorganizations, and other :ii • J>T '•s similar transactions." (b) HOLDING PERIODS.— (1) 45-DAY HOLDING PERIOD.—Subsection (c) of section 246 (re- 26 use 246. lating to the exclusion of certain dividends) is amended by striking out "15" each place it appears and inserting in lieu thereof "45". (2) R U L E S FOR COMPUTING HOLDING PERIODS.—Subsection (c) of section 246 (relating to t h e exclusion of c e r t a i n dividends) is • a m e n d e d by a d d i n g a t t h e e n d thereof t h e following n e w p a r a - I'-r, ,; •:>• graph: "(4) HOLDING PERIOD REDUCED FOR PERIODS WHERE RISK OF LOSS • • DIMINISHED.—The holding periods determined under paragraph (3) shall be appropriately reduced (in the manner provided in regulations prescribed by the Secretary) for any period (during such periods) in which— '' "(A) the taxpayer has an option to sell, is under a contrac- tual obligation to sell, or has made (and not closed) a short sale of, substantially identical stock or securities, "(B) the taxpayer is the grantor of an option to buy substantially identical stock or securities, or .i-^: "(C) under regulations prescribed by the Secretary, a ., taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property. ., .r ^. The preceding sentence shall not apply in the case of any qualified covered call (as defined in section 1092(c)(4) but with- Post, p. 616. out regard to the requirement that gain or loss with respect to ,.; the option not be ordinary income or loss)." j (3) Subparagraph (B) of section 246(c)(1) is amended to read as follows: .. "(B) to the extent that the taxpayer is under an obliga- tion (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substan- tially similar or related property." (4) Paragraph (3) of section 246(c) is amended by striking out the last sentence. (c) APPLICATION OF RELATED PERSON RULES TO SECTION 246(c) AND CERTAIN OTHER PROVISIONS.—Section 7701 is amended by redesig- nating subsection (f) as (g) and by inserting after subsection (e) the Ante, p. 518. following new subsection: "(f) USE OF RELATED PERSONS OR PASS-THRU ENTITIES.—The Secre- Regulations, tary shall prescribe such regulations as may be necessary or appro- priate to prevent the avoidance of those provisions of this title which deal with— "(1) the linking of borrowing to investment, or "(2) diminishing risks, through the use of related persons, pass-thru entities, or other intermediaries." (d) CONFORMING AMENDMENTS.—
98 STAT. 568 PUBLIC LAW 98-369—JULY 18, 1984 (1) The table of sections for part IV of subchapter O of chapter 1 is amended by striking out the item relating to section 1059 and inserting in lieu thereof the following new items: "Sec. 1059. Corporate shareholder's basis in stock reduced by nontaxed por- tion of extraordinary dividends. "Sec. 1060. Cross references." 26 use 246. (2) Paragraph (1) of section 246(b) (relating to limitation on aggregate amount of deduction) is amended by striking out "and without regard" and inserting in lieu thereof "without regard to any adjustment under section 1059, and without regard". 26USC1016. (3) Section 1016(a) (relating to adjustments to basis) is amended by striking out "and" at the end of paragraph (24), by striking out the period at the end of paragraph (25) and insert- ing in lieu thereof ", and" and by adding at the end thereof the following new paragraph: Ante, p. 565. "(26) to the extent provided in section 1059 (relating to reduc- tion in basis for extraordinary dividends)." 26 u s e 1059 (e) EFFECTIVE DATE.— note. (1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to distributions after March 1, 1984, in taxable years ending after such date. (2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to stock acquired after the date of the enactment of this Act in taxable years ending after such date. (3) RELATED PERSON PROVISIONS.—The amendment made by subsection (c) shsdl take effect on the date of the enactment of this Act. SEC. 54. DISTRIBUTIONS OF APPRECIATED PROPERTY BY CORPORATIONS. (a) GAIN RECOGNIZED ON DISTRIBUTIONS OF APPRECIATED PROPERTY.— 26 use 311. (1) IN GENERAL.—Paragraph (1) of section 311(d) (relating to ^ , appreciated property used to redeem stock) is amended to read -d . -. as follows: -- • "(1) I N GENERAL.—If— "(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distri- bution to which subpart A applies, and "(B) the fair market value of such property exceeds its adjusted bsisis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. This subsection shall be applied after the application of subsections (b) and (c)." (2) EXCEPTIONS.— (A) Paragraph (2) of section 311(d) is amended by striking ' ' > ^ *i out subparagraphs (A) and (B) and inserting in lieu thereof the following: .taAm'-i>j-<^iil "(A) a distribution which is made with respect to quali- fied stock if— "(i) section 302(b)(4) applies to such distribution, or "(ii) such distribution is a qualified dividend;". (B) Paragraph (2) of section 311(d) is amended by redesig- nating subparagraphs (C), (D), (E), and (F) as subparagraphs T'jiito (B), (C), (D), and (E), respectively. / (C) Subsection (e) of section 311 is amended by adding at the end thereof the following new paragraph:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 569 "(3) QUALIFIED DIVIDEND.—The term 'qualified dividend' means any distribution of property to a shareholder other than a corporation if— "(A) such distribution is a dividend, "(B) such property was used by the distributing corpora- f' tion in the active conduct of a qualified business (as defined in paragraph (2)), and "(C) such property is not property described in paragraph (Dor (4) of section 1221." (3) CLERICAL AMENDMENT.—The subsection heading of subsec- tion (d) of section 311 is amended to read as follows: 26 use 311. "(d) DISTRIBUTIONS OF APPRECIATED PROPERTY.—". (b) HOLDING PERIOD OF CORPORATE DISTRIBUTEE OF APPRECIATED PROPERTY.—Section 301 (relating to distributions of property) is 26 USC 301. amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e) SPECIAL RULE FOR HOLDING PERIOD OF APPRECIATED PROPERTY DISTRIBUTED TO CORPORATION.—For purposes of this subtitle— "(1) WHERE GAIN RECOGNIZED UNDER SECTION 3ii(d).—If— "(A) property is distributed to a corporation, and "(B) gain is recognized on such distribution under para- ' graph (1) of section 311(d), Ante, p. 568. then such corporation's holding period in the distributed prop- l erty shall begin on the date of such distribution. "(2) WHERE GAIN NOT RECOGNIZED UNDER SECTION 3ii(d).— If— i "(A) property is distributed to a corporation, ; "(B) gain is not recognized on such distribution under ja^ ,-. t. A paragraph (1) of section 311(d), and "(C) the basis of such property in the hands of such J corporation is determined under subsection (d)(2)(B), c then (except for purposes of section 1248) such corporation shall not be treated as holding the distributed property during any period before the date on which such corporation's holding period in the stock began." (c) CROSS REFERENCE.—Paragraph (13) of section 1223 (relating to Post, p. 890. holding period of property) is amended to read as follows: "(13) CROSS REFERENCES.— "(A) For special holding period provision relating to certain partnership distributions, see section 735(b). "(B) For special holding period provision relating to distributions of ap- preciated property to corporations, see section 301(e)." Supra. (d) EFFECTIVE DATES.— 26 use 3ii note. (1) SUBSECTION (a).—Except as otherwise provided in this subsection, the amendments made by subsection (a) shall apply to distributions declared on or after June 14, 1984, in taxable years ending after such date. (2) SUBSECTION (b).—The amendment made by subsection (b) f shall apply to distributions after the date of the enactment of this Act in taxable years ending after such date. (3) EXCEPTION FOR DISTRIBUTIONS BEFORE JANUARY i, 1985, TO ( 80-PERCENT CORPORATE SHAREHOLDERS.— (A) IN GENERAL.—The amendments made by subsection (a) shall not apply to any distribution before January 1, 1985, to an 80-percent corporate shareholder if the basis of
98 STAT. 570 PUBLIC LAW 98-369—JULY 18, 1984 the property distributed is determined under section . . 301(d)(2) of the Internal Revenue Code of 1954. (B) 80-PERCENT CORPORATE SHAREHOLDER.—The t e r m "80- percent corporate shareholder" means, with respect to any distribution, any corporation which owns— (i) stock in the corporation making the distribution possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and (ii) at least 80 percent of the total number of shares , J. of all other classes of stock of the distributing corpora- i 1 'jj^. 1 ai. tion (except nonvoting stock which is limited and pre- ferred as to dividends). (C) SPECIAL RULE FOR AFFILIATED GROUP FIUNG CONSOLI- ,,,. ,fp J J DATED RETURN.—For purposes of this paragraph and para- graph (4), all members of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1954) which file a consolidated return for the taxable year which includes the date of the distribution shall be treated as 1 corporation. (4) EXCEPTION FOR CERTAIN DISTRIBUTIONS WHERE TENDER OFFER COMMENCED ON MAY 23, 1984.— (A) IN GENERAL.—The amendments made by subsection ^' * " —"'" (a) shall not apply to any distribution made before Septem- ber 1,1986, if— (i) such distribution consists of qualified stock held " '^' * (directly or indirectly) on June 15, 1984, by the distrib- uting corporation, (ii) control of the distributing corporation (as defined Post, p. 584. lebnrj r in section 368(c) of the Internal Revenue Code of 1954) is acquired other than in a tax-free transaction after (^ 3' f^. • January 1,1984, but before January 1,1985, (iii) a tender offer for the shares of the distributing corporation was commenced on May 23, 1984, and was amended on May 24,1984, and 3iiK> , (iv) the distributing corporation and the distributee corporation are members of the same affiliated group ,; 8 - cA r* (as defined in section 1504 of such Code) which filed a consolidated return for the taxable year which includes the date of the distribution. If the common parent of any affiliated group filing a consoli- dated return meets the requirements of clauses (ii) and (iii), , each other member of such group shall be treated as meeting .«,>!i ' such requirements. (B) QUALIFIED STOCK.—For purposes of subparagraph (A), -4o; : :< ki i ifii the term "qualified stock" means any stock in a corporation which on June 15, 1984, was a member of the same affili- ated group as the distributing corporation and which filed a consolidated return with the distributing corporation for the taxable year which included June 15,1984. (5) EXCEPTION FOR CERTAIN DISTRIBUTIONS.— (A) IN GENERAL.—The amendments made by this section shall not apply to distributions before February 1,1986, if— or , '.Si (i) the distribution consists of property held on March 7, 1984 (or property acquired thereafter in the ordinary nc.; + «>" course of a trade or business) by— (I) the controlled corporation, or (II) any subsidiary controlled corporation,
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 571 ?3r - (ii) a group of 1 or more shareholders (acting in i• concert)— h (I) acquired, during the 1-year period ending on February 1, 1984, at least 10 percent of the out- 10 > } r : standing stock of the controlled corporation, (II) held at least 10 percent of the outstanding sr> ''A-jHS ?>"^eoq '• stock of the common parent on February 1, 1984, lo I and ; (III) submitted a proposal for distributions of r^a A? .'«;. interests in a royalty trust from the common r. parent or the controlled corporation, and (iii) the common parent acquired control of the con- K;,o >,. trolled corporation during the 1-year period ending on •;- February 1,1984. (B) DEFINITIONS.—For purposes of this paragraph— (i) The term "common parent" has the meaning given such term by section 1504(a) of the Internal j^ Revenue Code of 1954. Post, p. 577. , (ii) The term "controlled corporation" means a corpo- ration with respect to which 50 percent or more of the outstanding stock of its common parent is tendered for ;, pursuant to a tender offer outstanding on March 7, 1984. ; , ^, 1, (iii) The term "subsidiary controlled corporation" ^''. means any corporation with respect to which the con- „. ,,,, .,^, trolled corporation has control (within the meaning of section 368(c) of such Code) on March.7,1984. ^''-' "'^' (6) EXCEPTION FOR CERTAIN DISTRIBUTION OF PARTNERSHIP IN- TERESTS.—The amendments made by this section shall not apply to any distribution before February 1, 1986, of an interest in a partnership the interests of which were being traded on a national securities exchange on March 7,1984, if— (A) such interest was owned by the distributing corpora- tion (or any member of an affiliated group within the meaning of section 1504(a) of such Code of which the distrib- '• uting corporation was a member) on March 7,1984, • (B) the distributing corporation (or any such affiliated member) owned more than 80 percent of the interests in !<) such partnership on March 7,1984, and (C) more than 10 percent of the interests in such partner- ship was offered for sale to the public during the 1-year 'i »*«" period ending on March 7,1984. SEC. 55. EXTENSION OF HOLDING PERIOD FOR LOSSES ATTRIBUTABLE TO CAPITAL GAIN DIVIDENDS OF REGULATED INVESTMENT COM- PANIES OR REAL ESTATE INVESTMENT TRUSTS. (a) REGULATED INVESTMENT COMPANIES.— (1) I N GENERAL.—Subparagraph (A) of section 852(bX4) (relat- 26 USC 852. ing to loss attributable to capital gain dividend) is amended to 1 read as follows: "(A) Loss ATTRIBUTABLE TO CAPITAL GAIN DIVIDEND.—If— ihu'- "(i) subparagraph (B) or (D) of paragraph (3) provides y MJ i that any amount with respect to any share is to be treated as long-term capital gain, and "(ii) such share is held by the taxpayer for 6 months or less,
98 STAT. 572 PUBLIC LAW 98-369—JULY 18, 1984 fii . then any loss (to the extent not disallowed under subpara- graph (B)) on the sale or exchange of such share shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss." (2) DETERMINATION OF HOLDING PERIODS.—Subparagraph (C) of 26 use 852. section 852(b)(4) is amended to read as follows: "(C) DETERMINATION OF HOLDING PERIODS.—For purposes of this paragraph, the rules of paragraphs (3) and (4) of Ante, p. 567. section 246(c) shall apply in determining the period for which the taxpayer held any share of stock; except that for the number of days specified in subparagraph (B) of section 246(c)(3) there shall be substituted— "(i)'6 months'for purposes of subparagraph (A), and "(ii) '30 days' for purposes of subparagraph (B)." (3) EXCEPTION FOR LOSSES INCURRED UNDER PERIODIC LIQUIDA- TION PLANS.—Paragraph (4) of section 852(b) is amended by adding at the end thereof the following new subparagraph: ' ' -^'- "(D) LOSSES INCURRED UNDER A PERIODIC LIQUIDATION PLAN.—To the extent provided in regulations, subparagraph (A) shall not apply to losses incurred on the sale or ex- change of shares of stock in a regulated investment compa- ny pursuant to a plan which provides for the periodic liquidation of such shares." (b) REAL ESTATE INVESTMENT TRUST.—Paragraph (7) of section 26 use 857. 857(b) (relating to loss on sale or exchange of stock in real estate investment trust) is amended to read as follows: "(7) Loss ON SALE OR EXCHANGE OF STOCK HELD 6 MONTHS OR LESS.— "(A) IN GENERAL.—If— "(i) subparagraph (B) of paragraph (3) provides that any amount with respect to any share or beneficial interest is to be treated as a long-term capital gain, and "(ii) the taxpayer has held such share or interest for 6 months or less, then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss. "(B) DETERMINATION OF HOLDING PERIOD.—For purposes of this paragraph, the rules of paragraphs (3) and (4) of section Ante, p. 567. 246(c) shall apply in determining the period for which the taxpayer has held any share of stock or beneficial interest; except that '6 months' shall be substituted for the number of days specified in subparagraph (B) of section 246(c)(3). "(C) EXCEPTION FOR LOSSES INCURRED UNDER PERIODIC LIQ- UIDATION PLANS.—To the extent provided in regulations, subparagraph (A) shall not apply to any loss incurred on . >«; OHi- f ^ the sale or exchange of shares of stock of, or beneficial '.. v^i interest in, a real estate investment trust pursuant to a plan which provides for the periodic liquidation of such shares or interests." 26 use 852 note. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to losses incurred with respect to shares of stock and benefi- cial interests with respect to which the taxpayer's holding period begins after the date of the enactment of this Act.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 573 PART III—MISCELLANEOUS PROVISIONS SEC. 56. DENIAL OF DEDUCTIONS FOR CERTAIN EXPENSES INCURRED IN CONNECTION WITH SHORT SALES. (a) SHORT SALE PAYMENTS ATTRIBUTABLE TO DIVIDENDS.—Section 263 (relating to capital expenditures) is amended by adding at the 26 USC 263. end thereof the following new subsection: "(h) PAYMENTS IN LIEU OF DIVIDENDS IN CONNECTION WITH SHORT SALES.— "(1) IN GENERAL.—If— "(A) a taxpayer makes any payment with respect to any stock used by such taxpayer in a short sale and such payment is in lieu of a dividend payment on such stock, and , "(B) the closing of such short sale occurs on or before the 45th day after the date of such short sale, . then no deduction shall be allowed for such payment. The basis Mii :j^ro '-,'-. of the stock used to close the short sale shall be increased by the amount not allowed as a deduction by reason of the preceding sentence. 5 "(2) LONGER PERIOD IN CASE OF EXTRAORDINARY DIVIDENDS.—If the payment described in paragraph (1)(A) is in respect of an extraordinary dividend, paragraph (1)(B) shall be applied by substituting 'the day 1 year after the date of such short sale' for 'the 45th day after the date of such short sale'. "(3) EXTRAORDINARY DIVIDEND.—For purposes of this subsec- i tion, the term 'extraordinary dividend' has the meaning given to such term by section 1059(c); except that such section shall be Ante, p. 565. applied by treating the amount realized by the taxpayer in the short sale as his adjusted basis in the stock. "(4) SPECIAL RULE WHERE RISK OF LOSS DIMINISHED.—The run- ning of any period of time applicable under paragraph (1)(B) (as •' modified by paragraph (2)) shall be suspended during any period in which— "(A) the taxpayer holds, has an option to buy, or is under \: a contractual obligation to buy, substantially identical stock -too fjBl 'JSII K rw . H Qj. securities, or "(B) under regulations prescribed by the Secretary, a .*fO H taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or ^^ . . related property. "(5) DEDUCTION ALLOWABLE TO EXTENT OF ORDINARY INCOME FROM AMOUNTS PAID BY LENDING BROKER FOR USE OF COL- LATERAL.— "(A) I N GENERAL.—Paragraph (1) shall apply only to the extent that the payments or distributions with respect to any short sale exceed the amount which— "(i) is treated as ordinary income by the taxpayer, and "(ii) is received by the taxpayer as compensation for the use of any collateral with respect to any stock used in such short sale. "(B) EXCEPTION NOT TO APPLY TO EXTRAORDINARY DIVI- DENDS.—Subparagraph (A) shall not apply if one or more payments or distributions is in respect of an extraordinary dividend.
98 STAT. 574 PUBLIC LAW 98-369—JULY 18, 1984 "(6) APPUCATION OF THIS SUBSECTION WITH SUBSECTION (g).— In the case of any short sale, this subsection shall be applied before subsection (g)." (b) INVESTMENT INTEREST TO INCLUDE CERTAIN EXPENSES INVOLV- 26 use 163. iNG SHORT SALES.—Subparagraph (D) of section 163(d)(3) (defining investment interest) is amended to read as follows: "(D) INVESTMENT INTEREST.— "(i) I N GENERAL.—The term 'investment interest' means interest paid or accrued on indebtedness in- curred or continued to purchase or carry property held for investment. "(ii) CERTAIN EXPENSES INCURRED IN CONNECTION WITH SHORT SALES.—For purposes of clause (i), the term 'interest' includes any amount allowable as a deduction in connection with personal property used in a short sale." 26 use 265. (c) APPUCATION OF SECTION 265(2) TO SHORT SALES.—Section 265 (relating to denial of deduction of interest relating to tax-exempt income) is amended by adding at the end thereof the following new paragraph: "(5) SPECIAL RULES FOR APPUCATION OF PARAGRAPH (2) IN THE CASE OF SHORT SALES.—For purposes of paragraph (2)— "(A) I N GENERAL.—The term 'interest' includes any amount paid or incurred— "(i) by any person making a short sale in connection with personal property used in such short sale, or "(ii) by any other person for the use of any collateral .:? • q ittk with respect to such short sale. y,; "(B) EXCEPTION WHERE NO RETURN ON CASH COLLATERAL.— If— "(i) the taxpayer provides cash as collateral for any short sale, and "(ii) the taxpayer receives no material earnings on such cash during the period of the sale, subparagraph (A)(i) shall not apply to such short sale." 26 use 163 note. (d) EFFECTIVE DATE.—The amendments made by this section shall apply to short sales after the date of the enactment of this Act in taxable years ending after such date. SEC. 57. NONRECOGNITION OF GAIN OR LOSS BY CORPORATION ON OP- TIONS WITH RESPECT TO ITS STOCK. 26 use 1032. (a) GENERAL RULE.—Subsection (a) of section 1032 (relating to exchange of stock of property) is amended by adding at the end thereof the following new sentence: "No gain or loss shall be recog- nized by a corporation with respect to any lapse or acquisition of an option to buy or sell its stock (including treasury stock)." 26 u s e 1032 (b) EFFECTIVE DATE.—The amendment made by subsection (a) ^°^^- shall apply to options acquired or lapsed after the date of the enactment of this Act in taxable years ending after such date. SEC. 58. AMENDMENTS TO ACCUMULATED EARNINGS TAX. (a) CLARIFICATION THAT TAX APPUES TO CORPORATIONS WHICH ARE 26 use 532. NOT CLOSELY HELD.—Section 532 (relating to corporations subject to accumulated earnings tax) is amended by adding at the end thereof the following new subsection: "(c) APPUCATION DETERMINED WITHOUT REGARD TO NUMBER OF SHAREHOLDERS.—The application of this part to a corporation shall
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 575 be determined without regard to the number of shareholders of such corporation." (b) TREATMENT OF CAPITAL GAINS AND LOSSES.—Subsection (b) of section 535 (defining accumulated taxable income) is amended by 26 USC 535. striking out paragraphs (5), (6), and (7) and inserting in lieu thereof the following: "(5) CAPITAL LOSSES.— "(A) I N GENERAL.—Except as provided in subparagraph (B), there shall be allowed as a deduction an amount equal to the net capital loss for the taxable year (determined ,. ,/ ,^ without regard to paragraph (7)(A)). ^ ".., ,. "(B) RECAPTURE OF PREVIOUS DEDUCTIONS FOR CAPITAL GAINS.—The aggregate amount allowable as a deduction under subparagraph (A) for any taxable year shall be re- Hi) •: duced by the lesser of— "(i) the nonrecaptured capital gains deductions, or "(ii) the amount of the accumulated earnings and crrDStja' ,,,^1 profits of the corporation as of the close of the preced- ing taxable year. "(C) NONRECAPTURED CAPITAL GAINS DEDUCTIONS.—For purposes of subparagraph (B), the term'nonrecaptured cap- ital gains deductions' means the excess of— "(i) the aggregate amount allowable as a deduction under paragraph (6) for preceding taxable years begin- ning after the date of the enactment of the Tax Reform '' ' ' Act of 1984, over >irate, p. 494. "(ii) the aggregate of the reductions under subpara- graph (B) for preceding taxable years. ;' "(6) NET CAPITAL GAINS.— \<» 10 i '?8iJ n ^' * "(A) I N GENERAL.—There shall be allowed as a deduction— J "(i) the net capital gain for the taxable year (deter- ^\ "• mined with the application of paragraph (7)), reduced -n:. by '(ii) the taxes attributable to such net capital gain. — ar "(B) ATTRIBUTABLE TAXES.—For purposes of subparagraph 'c'QQ (A), the taxes attributable to the net capital gain shall be an amount equal to the difference between— "(i) the taxes imposed by this subtitle (except the tax imposed by this part) for the taxable year, and tc .:,;.',, "(ii) such taxes computed for such year without in- cluding in taxable income the net capital gain for the taxable year (determined without the application of I paragraph (7)). "(7) CAPITAL LOSS CARRYOVERS.— "(A) UNLIMITED CARRYFORWARD.—The net capital loss for '^^:•^ any taxable year shall be treated as a short-term capital loss in the next taxable year. "(B) SECTION 1212 INAPPLICABLE.—No allowance shall be made for the capital loss carryback or carryforward pro- vided in section 1212. "(8) SPECIAL RULES FOR MERE HOLDING OR INVESTMENT COMPA- NIES.—In the case of a mere holding or investment company— "(A) CAPITAL LOSS DEDUCTION, ETC., NOT ALLOWED.—Para- graphs (5) and (7)(A) shall not apply. r»> "(B) DEDUCTION FOR CERTAIN OFFSETS.—There shall be allowed as a deduction the net short-term capital gain for
98 STAT. 576 PUBLIC LAW 98-369—JULY 18, 1984 the taxable year to the extent such gain does not exceed the amount of any capital loss carryover to such taxable year under section 1212 (determined without regard to para- .Sgd:>P-jn graph (7)(B)). "(C) EARNINGS AND PROFITS.—For purposes of subchapter C, the accumulated earnings and profits at any time shall not be less than they would be if this subsection had applied to the computation of earnings and profits for all taxable years beginning after the date of the enactment of the T^x Ante, p. 494. Reform Act of 1984." 26 use 532 note. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act. SEC. 59. REPEAL OF STOCK FOR DEBT EXCEPTION FOR PURPOSES OF DETERMINING INCOME FROM DISCHARGE OF INDEBTEDNESS. 26 u s e 108. (a) GENERAL RULE.—Subsection (e) of section 108 (relating to income from discharge of indebtedness) is amended by adding at the end thereof the following new paragraph: "(10) INDEBTEDNESS SATISFIED BY CORPORATION'S STOCK.— "(A) IN GENERAL.—For purposes of determining income of a debtor from discharge of indebtedness, if a debtor corpora- tion transfers stock to a creditor in satisfaction of its indebt- edness, such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the fair "* • market value of the stock. "(B) EXCEPTION FOR TITLE i i CASES AND INSOLVENT DEBT- ORS.—Subparagraph (A) shall not apply in the case of a 11 use 101 et ,, debtor in a title 11 case or to the extent the debtor is s^9- " insolvent." (b) EXCEPTION FOR CERTAIN WORKOUTS.— (1) I N G E N E R A L . — P a r a g r a p h (10) of section 108(e) (as added by subsection (a)) is a m e n d e d by adding a t t h e e n d thereof t h e following n e w s u b p a r a g r a p h : "(C) EXCEPTION FOR TRANSFERS I N CERTAIN WORKOUTS.— "(i) I N G E N E R A L . — S u b p a r a g r a p h (A) shall n o t apply to a n y t r a n s f e r of stock in a qualified workout. "(ii) QUALIFIED WORKOUT.—For purposes of clause (i), t h e t e r m 'qualified workout' m e a n s a n y plan u n d e r which stock is t r a n s f e r r e d to creditors in satisfaction of indebtedness if— K ;; "(I) because of cash flow a n d credit problems, t h e corporation making such transfer will have trouble in meeting liabilities coming due during the next f- ^ ' 12 months to such an extent that there is a sub- stantial threat of involuntary proceedings relating to insolvency or bankruptcy, "(II) such corporation in any report to its share- -w holders for the period during which such transfer occurs includes a statement that such corporation believes it meets the requirement of subclause (I) and that it is availing itself of the workout provi- -fc sions of this subparagraph, "(III) the holders of more than 50 percent of the total indebtedness of the corporation approve such plan, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 577 "(IV) at least 25 percent of the total indebtedness of the corporation is extinguished by transfers pur- suant to such plan." 26 u s e 108 note. (2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall take effect as if it had been included in the amendments made by subsections (e) and (f) of section 806 of the Tax Reform 26 u s e 368, 382, Act of 1976. 383. (b) EFFECTIVE DATE.— 26 u s e 108 note. (1) I N GENERAL.—Except as otherwise provided in this subsec- tion, the amendment made by subsection (a) shall apply to transfers after the date of the enactment of this Act in taxable years ending after such date. (2) TRANSITIONAL RULE.—The amendment made by subsection (a) shall not apply to the transfer by a corporation of its stock in exchange for debt of the corporation after the date of the enactment of this Act if such transfer is— (A) pursuant to a written contract requiring such transfer which was binding on the corporation at all times on June 7, 1984, and at all times after such date but only if the transfer takes place before January 1, 1985, and only if the transferee held the debt at all times on June 7, 1984, or (B) pursuant to the exercise of an option to exchange debt for stock but only if such option was in effect at all times on June 7, 1984, and at all times after such date and only if at all times on June 7,1984, the option and the debt were held by the same person. (3) CERTAIN TRANSFERS TO CONTROLLING SHAREHOLDER.—The amendment made by subsection (a) shall not apply to any transfer before January 1, 1985, by a corporation of its stock in exchange for debt of such corporation if— (A) such transfer is to another corporation which at all times on J u n e 7,1984, owned 75 percent or more of the total value of the stock of the corporation making such transfer, and (B) immediately after such transfer, the transferee corpo- ration owns 80 percent or more of the total value of the stock of the transferor corporation. (4) CERTAIN TRANSFERS PURSUANT TO DEBT RESTRUCTURE AGREEMENT.—The amendment made by subsection (a) shall not apply to the transfer by a corporation of its stock in exchange for debt of the corporation after the date of the enactment of this Act and before January 1,1985, if— (A) such transfer is covered by a debt restructure agree- ment entered into by the corporation during November 1983, and (B) such agreement was specified in a registration state- ment filed with the Securities and Exchange Commission by the corporation on March 7,1984. SEC. 60. AFFILIATED GROUP DEFINED. (a) I N GENERAL.—Subsection (a) of section 1504 (defining affiliated 26 u s e 1504. group) is amended to read as follows: "(a) AFFILIATED GROUP DEFINED.—For purposes of this subtitle— "(1) I N GENERAL.—The term 'affiliated group' means— "(A) 1 or more chains of includible corporations con- nected through stock ownership with a common parent corporation which is an includible corporation, but only if—
98 STAT. 578 PUBLIC LAW 98-369—JULY 18, 1984 J "(B)(i) the common parent owns directly stock meeting the requirements of paragraph (2) in at least 1 of the other a o. includible corporations, and "(ii) stock meeting the requirements of paragraph (2) in each of the includible corporations (except the common ^6Z parent) is owned directly by 1 or more of the other includ- ible corporations. .9 » ^ - • "(2) 80-PERCENT VOTING AND VALUE TEST.—The Ownership of stock of any corporation meets the requirements of this para- graph if it— "(A) possesses at least 80 percent of the total voting power of the stock of such corporation, and "(B) has a value equal to at least 80 percent of the total value of the stock of such corporation. "(3) 5 YEARS MUST ELAPSE BEFORE RECONSOLIDATION.— "(A) IN GENERAL.—If— "(i) a corporation is included (or required to be in- cluded) in a consolidated return filed by an affiliated group for a taxable year which includes any period • after December 31,1984, and "(ii) such corporation ceases to be a member of such group in a taxable year beginning after December 31, 1984, with respect to periods after such cessation, such corpora- tion (and any successor of such corporation) may not be included in any consolidated return filed by the affiliated group (or by another affiliated group with the same common parent or a successor of such common parent) before the 61st month beginning after its first taxable year in which it ceased to be a member of such affiliated group. "(B) SECRETARY MAY WAIVE APPLICATION OF SUBPARA- GRAPH (A).—The Secretary may waive the application of subparagraph (A) to any corporation for any period subject to such conditions as the Secretary may prescribe. "(4) STOCK NOT TO INCLUDE CERTAIN PREFERRED STOCK.—For purposes of this subsection, the term 'stock' does not include any stock which— "(A) is not entitled to vote, "(B) is limited and preferred as to dividends and does not ; participate in corporate growth to any significant extent, "(C) has redemption and liquidation rights which do not exceed the paid-in capital or par value represented by such stock (except for a reasonable redemption premium in excess of such paid-in capital or par value), and "(D) is not convertible into another class of stock. "(5) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary or appropriate to carry out the purposes of this subsection, including (but not limited to) regulations— t i . )^ "(A) which treat warrants, obligations convertible into stock, and other similar interests as stock, and stock as not stock, "(B) which treat options to acquire or sell stock as having .f.A'. been exercised, "(C) which provide that the requirements of paragraph (2XB) shall be treated as met if the affiliated group, in
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 579 reliance on a good faith determination of value, treated such requirements as met, "(D) which disregard an inadvertent ceasing to meet the requirements of paragraph (2XB) by reason of changes in relative values of different classes of stock, "(E) which provide that transfers of stock within the group shall not be taken into account in determining whether a corporation ceases to be a member of an affili- to b-r ated group, and "(F) which disregard changes in voting power to the oi extent such changes are disproportionate to related changes in value." (b) EFFECTIVE DATE.— 26 u s e 1504 ^. .„ (1) IN GENERAL.—Except as otherwise provided in this subsec- note. tion, the amendment made by subsection (a) shedl apply to taxable years beginning after December 31,1984. (2) SPECIAL RULE FOR CORPORATIONS AFFIUATED ON JUNE 22, 1984.—In the case of a corporation which on June 22, 1984, is a bm member of an affiliated group which files a consolidated return ;v:! • for such corporation's taxable year which includes June 22, 1984, for purposes of determining whether such corporation continues to be a member of such group for taxable years r beginning before January 1, 1988, the amendment made by subsection (a) shall not apply. (3) SPECIAL RULE NOT TO APPLY TO SELL-DOWNS AFTER JUNE 22, 1984.—If— (A) the requirements of subsection (bX2) are satisfied with respect to a corporation, (B) more than a de minimis amount of the stock of such corporation is sold or exchanged (including in a redemp- tion), or issued (other than in the ordinary course of busi- KroiTi ffc ness) after June 22,1984, and (C) the requirements of the amendment made by subsec- /^rfJQ.Krd tion (a) are not satisfied after such sale, exchange, or issu- ance, then the amendments made by subsection (a) shall apply for purposes of determining whether such corpora- tion continues to be a member of such group. (4) EXCEPTION FOR CERTAIN SELL-DOWNS.—Subsection (bX2) (and not subsection (bX3)) will apply to a corporation if such corporation issues or sells stock after June 22,1984, pursuant to a registration statement filed with the Securities and Exchange Commission on or before June 22, 1984, but only if the require- ments of the amendment made by subsection (a) (substituting "more than 50 percent" for "at least 80 percent" in paragraph (2XB) of section 1504(a) of the Internal Revenue Code of 1954) Ante, p. 577. «fi* are satisfied immediately after such issuance or sale and at all times thereafter until the first day of the first taxable year ?rt; beginning after December 31,1987. (5) NATIVE CORPORATIONS.—The amendments made by subsec- i)u tion (a) shall not apply to any Native Corporation established under the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.) during any taxable year beginning before 1992 or any part thereof in which such Corporation is subject to the provi- sions of section 7(hXl) of such Act (43 U.S.C. 1606 (hXD). SEC. 61. PROVISIONS RELATING TO EARNINGS AND PROFITS. , , , (a) ADJUSTMENTS TO EARNINGS AND PROFITS.—
98 STAT. 580 PUBLIC LAW 98-369—JULY 18, 1984 26 use 312. (1) IN GENERAL.—Section 312 (relating to effect on earnings and profits) is amended by adding at the end thereof the follow- ing new subsection: "(n) ADJUSTMENTS TO EARNINGS AND PROFITS TO MORE ACCU- RATELY REFLECT ECONOMIC GAIN AND LOSS.—For purposes of com- puting the earnings and profits of a corporation, the following adjustments shall be made: "(1) CONSTRUCTION PERIOD CARRYING CHARGES.— "(A) IN GENERAL.—In the case of any amount paid or incurred for construction period carrying charges— "(i) no deduction shall be allowed with respect to such amount, and H'-, •.,:••. "(ii) the basis of the property with respect to which such charges are allocable shall be increased by such amount. "(B) CONSTRUCTION PERIOD CARRYING CHARGES DEFINED.— For purposes of this paragraph, the term 'construction period carrying charges means all— "(i) interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry property, "(ii) property taxes, and "(iii) similar carrying charges, to the extent such interest, taxes, or charges are attributa- ble to the construction period for such property and would be allowable as a deduction in determining taxable income under this chapter for the taxable year in which paid or incurred (determined without regard to section 189). "(C) CONSTRUCTION PERIOD.—The term 'construction period' has the meaning given such term by section 189(e)(2) (determined without regard to any real property limita- tion). "(2) INTANGIBLE DRILLING COSTS AND MINERAL EXPLORATION AND DEVELOPMENT COSTS.— "(A) INTANGIBLE DRILLING COSTS.—Any amount allowable as a deduction under section 263(c) in determining taxable income (other than costs incurred in connection with a nonproductive well)— "(i) shall be capitalized, and "(ii) shall be allowed as a deduction ratably over the 60-month period beginning with the month in which the production from the well begins. "(B) MINERAL EXPLORATION AND DEVELOPMENT COSTS.— Any amount allowable as a deduction under section 616(a) or 617 in determining taxable income— ,?T<' q ! "(i) shall be capitalized, and "(ii) shall be allowed as a deduction ratably over the 120-month period beginning with the later of— "(I) the month in which production from the 3 deposit begins, or "(II) the month in which such amount was paid or incurred. "(3) CERTAIN AMORTIZATION PROVISIONS NOT TO APPLY.—Sec- tions 173,177, and 248 shall not apply. "(4) CERTAIN UNTAXED APPRECIATION OF DISTRIBUTED PROP- ERTY.—In the case of any distribution of property by a corpora- Ante, p. 568. tion described in section 311(d), earnings and profits shall be increased by the amount of any gain which would be includible
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 581 in gross income for any taxable year if section 311(d)(2) did not Ante, p. 568. apply. "(5) LIFO INVENTORY ADJUSTMENTS.—Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount (determined under section 336(b)(3)) as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the first taxable year to which this *-^ .<i, M-.K paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary. "(6) INSTALLMENT SALES.—In the case of any installment sale, earnings and profits shall be computed as if the corporation did not use the installment method. "(7) COMPLETED CONTRACT METHOD OF ACCOUNTING.—In the case of a taxpayer who uses the completed contract method of accounting, earnings and profits shall be computed as if such taxpayer used the percentage of completion method of / r .^ aj^ accounting. "(8) REDEMPTIONS.—If a corporation distributes amounts in a redemption to which section 302(a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which is not in excess of the ratable share of the earnings and profits of such corporation accumu- lated after February 28, 1913, attributable to the stock so redeemed. "(9) SPECIAL RULE FOR CERTAIN FOREIGN CORPORATIONS.—In the case of a foreign corporation described in subsection (k)(4), paragraphs (5), (6), and (7) shall apply only in the case of taxable years beginning after December 31,1985." (2) CONFORMING AMENDMENTS.— (A) Section 312(j) (relating to earnings and profits of 26USC312. foreign investment companies) is amended by striking out paragraph (3). (B) Subsection (e) of section 312 is hereby repealed. (b) ADJUSTMENT TO EFFECT OF DEPRECIATION ON EARNINGS AND CQ^I?: w j a : PROFITS.—The table contained in section 312(k)(3)(A) (relating to recovery property), as amended by this Act, is amended by striking out "35 years" in the item relating to 15-year real property and 20- year real property and inserting in lieu thereof "40 years". .;}». ..i fiink (c) DISTRIBUTIONS OF OBUGATIONS HAVING ORIGINAL ISSUE DISCOUNT.— (1) EFFECT ON EARNINGS AND PROFITS.— (A) Paragraph (2) of section 312(a) (relating to effect of earnings and profits) is amended to read as follows: "(2) the principal amount of the obligations of such corpora- tion (or, in the case of obligations having original issue discount, ^-'^ • >sti the aggregate issue price of such obligations), and". (B) Section 312, as amended by subsection (a), is amended Ante, p. 580. by adding at the end thereof the following new subsection: "(o) DEFINITION OF ORIGINAL ISSUE DISCOUNT AND ISSUE PRICE FOR PURPOSES OF SUBSECTION (a)(2).—For purposes of subsection (a)(2), the terms 'original issue discount' and 'issue price' have the same respective meanings as when used in subpart A of part V of sub- chapter P of this chapter." Ante, p. 531. (2) TREATMENT UNDER ORIGINAL ISSUE DISCOUNT RULES.—Sub- section (a) of section 1275 (relating to other definitions and Ante, p. 540.
98 STAT. 582 PUBLIC LAW 98-369—JULY 18, 1984 - -; special rules), as added by this Act, is amended by adding at the end thereof the following new paragraph: "(4) TREATMENT OF OBUGATIONS DISTRIBUTED TO CORPORA- TIONS.—Any debt obligation of a corporation distributed by such corporation with respect to its stock shall be treated as if it had been issued by such corporation for property." (d) SPECIAL RULE IN CASE OF DISTRIBUTIONS RECEIVED BY 20 PER- Ante, p. 569. CENT CORPORATE SHAREHOLDER.—Scction 301 (relating to distribu- tions of property) is amended by redesignating subsection (0 as subsection (g) and by inserting after subsection (e) the following new subsection: "(f) SPECIAL RULE FOR CERTAIN DISTRIBUTIONS RECEIVED BY 20 PERCENT CORPORATE SHAREHOLDER.— "(1) I N GENERAL.—Except to the extent otherwise provided in regulations, solely for purposes of determining the taxable income of any 20 percent corporate shareholder (and its adjusted basis in the stock of the distributing corporation), Ante, p. 580. section 312 shall be applied with respect to the distributing corporation as if it did not contain subsection (n) thereof. "(2) 2 0 PERCENT CORPORATE SHAREHOLDER.—For purpOSeS of this subsection, the term '20 percent corporate shareholder' means, with respect to any distribution, any corporation which owns (directly or through the application of section 318)— "(A) stock in the corporation making the distribution possessing at least 20 percent of the total combined voting power of all classes of stock entitled to vote, or "(B) at least 20 percent of the total value of all stock of the distributing corporation (except nonvoting stock which is limited and preferred as to dividends), but only if, but for this subsection, the distributee corporation would be entitled to a deduction under section 243, 244, or 245 .£' 8 J with respect to such distribution. "(3) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary or appropriate to carry out the purposes of this section." 26 u s e 312 note. (e) EFFECTIVE D A T E S . — (1) ADJUSTMENTS TO EARNINGS AND PROFITS.— (A) PARAGRAPHS ( i ) , (2), AND (3) OF SECTION 3i2(n).— The provisions of paragraphs (1), (2), and (3) of section 312(n) Ante, p. 580. of the Internal Revenue Code of 1954 (as added by subsec- tion (a)) shall apply to amounts paid or incurred in taxable years beginning after September 30,1984. (B) PARAGRAPH (4) OF SECTION 3 1 2 (n).—The provisions of paragraph (4) of section 312(n) of such Code (as so added) shall apply to distributions after September 30,1984; except that such provisions shall not apply to any distribution to Ante, p. 568. which the amendments made by section 54(a) of this Act do not apply. i (C) LIFO INVENTORY.—The provisions of paragraph (5) of section 312(n) of such Code (as so added) shall apply to taxable years beginning after September 30,1984. (D) INSTALLMENT SALES.—The provisions of paragraph (6) of section 312(n) of such (Dode (as so added) shall apply to i sales after September 30, 1984, in taxable years ending IK5 i: Mnh after such date. (E) COMPLETED CONTRACT METHOD.—The provisions of ty ' , ^ i paragraph (7) of section 312(n) of such Code (as so added)
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 583 shall apply to contracts entered into after September 30, 1984, in taxable years ending after such date. (2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to property placed in service in taxable years begin- ning after September 30,1984. (3) SUBSECTION ( O .—The amendments made by subsection (c) shall apply with respect to distributions declared after March 15,1984, in taxable years ending after such date. (4) SUBSECTION (d).—The amendment made by subsection (d) 26 use 30i note, shall apply to distributions after the date of the enactment of this Act in taxable years ending after such date. SEC. 62. 2-YEAR DELAY IN APPLICATION OF THE NET OPERATING LOSS RULES ADDED BY THE TAX REFORM ACT OF 1976. '' 80 9; (a) IN GENERAL.—Subsection (g) of section 806 of the Tax Reform Act of 1976 (26 U.S.C. 382 note) (relating to effective dates for the amendments to sections 382 and 383 of the Internal Revenue Code of 1954) is amended— 26 use 382, 383. (1) by striking out "June 30, 1984" in paragraph (2) and v jv inserting in lieu thereof "December 31,1985"; (2) by striking out "January 1, 1984" in paragraph (2)(B) and inserting in lieu thereof "January 1,1986"; and (3) by striking out "January 1, 1984" in paragraph (3) and inserting in lieu thereof "January 1,1986". (b) TECHNICAL AMENDMENT.— (1) Paragraph (1) of section 382(b) (as amended by the Tax 26 use 382. Reform Act of 1976) is amended by striking out "section 368(a)(1) (A), (B), (C), (D) (but only if the requirements of section 354(b)(1) are met), or (F)" and inserting in lieu thereof "subpara- graph (A), (B), (C), or (F) of section 368(a)(1) or subparagraph (D) or (G) of section 368(a)(1) (but only if the requirements of section 354(b)(1) are met)". (2) The amendment made by paragraph (1) shall take effect as 26 USe 382 note. if included in the amendments made by section 4 of the Bank- ruptcy Tax Act of 1980. 94 Stat. 3401. i SEC. 63. TARGET CORPORATION MUST DISTRIBUTE ASSETS AFTER REOR- GANIZATION DESCRIBED IN SECTION 368(a)(1)(C). (a) I N GENERAL.—Paragraph (2) of section 368(a) (relating to spe- 26 use 368. cial rules for paragraph (1)) is amended by adding at the end thereof cS the following new subparagraph: "(G) DISTRIBUTION REQUIREMENT FOR PARAGRAPH (1) (C).— "(i) IN GENERAL.—A transaction shall fail to meet the requirements of paragraph (1)(C) unless the acquired corporation distributes the stock, securities, and other ' properties it receives, as well as its other properties, in pursuance of the plan of reorganization. "(ii) EXCEPTION.—The Secretary may waive the appli- cation of clause (i) to any transaction subject to any conditions the Secretary may prescribe." (b) ALLOCATION IN CERTAIN CORPORATE SEPARATIONS AND REORGA- NIZATIONS.—Subsection (h) of section 312 (relating to allocation in 26 use 312. certain corporate separations) is amended to read as follows: ^ "(h) ALLOCATION IN CERTAIN CORPORATE SEPARATIONS AND REOR- GANIZATIONS.—
98 STAT. 584 PUBLIC LAW 98-369—JULY 18, 1984 "(1) SECTION 355.—In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corpo- ration (or corporations) shall be made under regulations pre- scribed by the Secretary. "(2) SECTION 368(a) (i) (c) OR (D).—In the case of a reorgani- zation described in subparagraph (C) or (D) of section 368(a)(1), proper allocation with respect to the earnings and profits of the acquired corporation shall, under regulations prescribed by the Secretary, be made between the acquiring corporation and the acquired corporation (or any corporation which had control of the acquired corporation before the reorganization)." 26 use 312 note. (c) EFFECTIVE DATE.—The amendment made by this section shall apply to transactions pursuant to plans adopted after the date of the enactment of this Act. SEC. 64. DEFINITION OF CONTROL FOR PURPOSES OF NONDIVISIVE REOR- GANIZATIONS UNDER SECTION 368(a)(1)(D). 26 use 368. (a) IN GENERAL.—Subsection (c) of section 368 (defining control) is amended to read as follows: "(c) CONTROL DEFINED.— 26 use 301. "(1) IN GENERAL.—For purposes of part I (other than section 26 use 331, 351, 304), part II, this part, and part V, the term 'control' means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. "(2) SPECIAL RULE FOR DETERMINING WHETHER CERTAIN TRANS- ACTIONS ARE DESCRIBED IN SUBSECTION (a) (i) (D).—In the case of any transaction with respect to which the requirements of subparagraphs (A) and (B) of section •354(b)(1) are met, for purposes of determining whether such transaction is described in subparagraph (D) of subsection (a)(1), the term 'control' has the meaning given to such term by section 304(c)." 26 use 368 note. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to transactions pursuant to plans adopted after the date of the enactment of this Act. SEC. 65. COLLAPSIBLE CORPORATIONS. 26 use 341. (a) DEFINITION.—Subparagraph (A) of section 341(b)(1) (relating to collapsible corporations) is amended by striking out "a substantial part" and inserting in lieu thereof "%". (b) LIMITATIONS.—Subsection (d) of section 341 (relating to limita- tions on application of section) is amended by adding at the end thereof the following sentence: "In determining whether property is described in subsection (b)(1) for purposes of applying paragraph (2), all property described in section 1221(1) shall, to the extent provided in regulations prescribed by the Secretary, be treated as one item of property." (c) CONFORMING AMENDMENT.—Paragraph (2) of section 341(d) is amended by striking out "so manufactured, constructed, produced, or purchased" and inserting in lieu thereof "described in subsection (b)(1)". 26 use 341 note. (d) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to sales, exchanges, and distributions made after the date of the enactment of this Act.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 585 SEC. 66. PHASE-OUT OF GRADUATED RATES FOR LARGE CORPORATIONS. (a) IN GENERAL.—Subsection (b) of section 11 (relating to amount 26 use li. of tax imposed on corporations) is amended by adding at the end thereof the following new flush sentence: "In the case of a corpora- tion with taxable income in excess of $1,000,000 for any taxable year, the amount of tax determined under the preceding sentence for such taxable year shall be increased by the lesser of (A) 5 percent of such excess, or (B) $20,250." Ot)) C!oNFORMiNG AMENDMENT.—Section 1561(a) (relating to limita- 26 USC 1561. tions on certain multiple tax benefits in the case of certain control corporations) is amended by adding at the end thereof the following new sentence: "Notwithstanding paragraph (1), in applying the last sentence of section 11(b) to such component members, the taxable income of all such component members shall be taken into account and any increase in tax under such last sentence shall be divided among such component members in the same manner as amounts under paragraph (1)." (c) EFFECTIVE DATE.— 26 use ii note. (1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31,1983. (2) AMENDMENTS NOT TREATED AS CHANGED IN RATE OF TAX.— The amendments made by this subsection shall not be treated as a change in a rate of tax for purposes of section 21 of the Internal Revenue Code of 1954. Post, p. 830. SEC. 67. RESTRICTIONS ON GOLDEN PARACHUTE PAYMENTS. (a) DENIAL OF DEDUCTION.—Part IX of subchapter B of chapter 1 (relating to items not deductible) is amended by adding after section 280F the following new section: "SEC. 280G. GOLDEN PARACHUTE PAYMENTS. 26 USC 280G. "(a) GENERAL RULE.—No deduction shall be allowed under this chapter for any excess parachute payment. "(b) EXCESS PARACHUTE PAYMENT.—For purposes of this section— "(1) I N GENERAL.—The term 'excess parachute payment' means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment. "(2) PARACHUTE PAYMENT DEFINED.— "(A) I N GENERAL.—The term 'parachute payment' means g«A5 any payment in the nature of compensation to (or for the benefit of) a disqualified individual if— "(i) such payment is contingent on a change— "(I) in the ownership or effective control of the ; corporation, or "(II) in the ownership of a substantial portion of bmulBm- the assets of the corporation, and "(ii) the aggregate present value of the payments in i • ! the nature of compensation to (or for the benefit of) such individual which are contingent on such change equals or exceeds an amount equal to 3 times the base amount. a "(B) AGREEMENTS.—The term 'parachute payment' shall also include any payment in the nature of compensation to (or for the benefit of) a disqualified individual if such payment is pursuant to an agreement which violates any .&uli securities laws or regulations.
98 STAT. 586 PUBLIC LAW 98-369—JULY 18, 1984 "(C) TREATMENT OF CERTAIN AGREEMENTS ENTERED INTO WITHIN 1 YEAR BEFORE CHANGE OF OWNERSHIP.—For pur- poses of subparagraph (A)(i), any payment pursuant to— "(i) an agreement entered into within 1 year before the change described in subparagraph (A)(i), or "(ii) an amendment made within such 1-year period of a previous agreement, shall be presumed to be contingent on such change unless the contrary is established by clear and convincing evi- dence. "(3) BASE AMOUNT.— "(A) IN GENERAL.—The term 'base amount' means the individual's annualized includible compensation for the base period. "(B) ALLOCATION.—The portion of the base amount allo- cated to any parachute payment shall be an amount which bears the same ratio to the base amount as— "(i) the present value of such payment, bears to "(ii) the aggregate present value of all such pay- ments. "(4) EXCESS PARACHUTE PAYMENTS REDUCED TO EXTENT TAX- PAYER ESTABLISHES REASONABLE COMPENSATION.—In the case of any parachute payment described in paragraph (2)(A), the amount of any excess parachute payment shall be reduced by the portion of such payment which the taxpayer establishes by clear and convincing evidence is reasonable compensation for personal services actually rendered. For purposes of the preced- ing sentence, reasonable compensation shall be first offset against the base amount. "(c) DISQUALIFIED INDIVIDUALS.—For purposes of this section, the term 'disqualified individual' means any individual who is— "(1) an employee, independent contractor, or other person specified in regulations by the Secretary who performs personal services for any corporation, and "(2) is an officer, shareholder, or highly-compensated individ- ual. For purposes of this section, a personal service corporation (or similar entity) shall be treated as an individual. "(d) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ANNUALIZED INCLUDIBLE COMPENSATION FOR BASE PERIOD.—The term 'annualized includible compensation for the base period' means the average annual compensation which— "(A) was payable by the corporation with respect to which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs, and "(B) was includible in the gross income of the disqualified individual for taxable years in the base period. "(2) BASE PERIOD.—The term 'base period' means the period consisting of the most recent 5 taxable years ending before the date on which the change in ownership or control described in paragraph (2)(A) of subsection (b) occurs (or such portion of such period during which the disqualified individual was an em- ployee of the corporation). ' (3) PROPERTY TRANSFERS.—Any transfer of property— "(A) shall be treated as a payment, and "(B) shall be taken into account as its fair market value.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 587 M^ "(4) PRESENT VALUE.—Present value shall be determined in accordance with section 1274(bX2). ^nte, p. 538. "(e) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes ,•^, ,., ^^ of this section (including regulations for the application of this section in the case of related corporations and in the case of personal service corporations)." (b) EXCISE TAX ON AMOUNTS RECEIVED.— (1) I N GENERAL.—Subtitle D (relating to miscellaneous excise taxes) is amended by adding at the end thereof the following new chapter: S^O ,<| ^irAfl. 'CHAPTER 46—GOLDEN PARACHUTE PAYMENTS "Sec. 4999. Grolden parachute payments. "SEC. 4999. GOLDEN PARACHUTE PAYMENTS. 26 USC 4999. "(a) IMPOSITION OF TAX.—There is hereby imposed on any person who receives an excess parachute payment a tax equal to 20 percent of the amount of such paionent. "(b) EXCESS PARACHUTE PAYMENT DEFINED.—For purposes of this section, the term 'excess parachute payment' has the meaning given to such term by section 280Gr(b). Ante, p. 585. "(c) ADMINISTRATIVE PROVISIONS.— "(1) WITHHOLDING.—In the case of any excess parachute pay- ment which is wages (within the meaning of section 3401) the amount deducted and withheld under section 3402 shall be increased by the amount of the tax imposed by this section on such payment. "(2) OTHER ADMINISTRATIVE PROVISIONS.—For purposes of sub- title F, any tax imposed by this section shall be treated £is a tax 26 use 6001. imposed by subtitle A." 26 use l. (2) DENIAL OF DEDUCTION.—Paragraph (6) of section 275(a) 26 use 275. (relating to denial of deduction for certain taxes) is amended bv striking out "and 44" and inserting in lieu thereof "44, and 46'. (c) FICA TAXES.—Subparagraph (A) of section 3121(vX2) (relating 97 Stat 122. to treatment of certain nonqualified deferred compensation plans) is 26 USe 3121. amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to any excess parachute payment (as defined in section 280Gr(b))." (d) CLERICAL AMENDMENTS.— ^^ « -«- ^^'^ (1) The table of sections for part IX of subchapter B of chapter 1 is amended by adding after the item relating to section 280F the following new item: t "Sec. 280G. Golden parachute payments." ^ (2) The table of chapters for subtitle D is amended by adding at the end thereof the following new item: , "CHAPTER 46. Golden parachute payments." (e) EFFECTIVE DATES.— 26 use 280G (1) I N GENERAL.—The amendments made by this section shall note. apply to payments under agreements entered into or renewed after June 14, 1984, in taxable years ending after such date. (2) SPECIAL RULE FOR CONTRACT AMENDMENTS.—Any contract ' entered into before June 15, 1984, which is amended after June 14, 1984, in any significant relevant aspect shall be treated as a contract entered into after June 14,1984.
98 STAT. 588 PUBLIC LAW 98-369—JULY 18, 1984 SEC. 68. INCREASE IN REDUCTION IN CERTAIN CORPORATE PREFERENCE ITEMS FROM 15 PERCENT TO 20 PERCENT. (a) IN GENERAL.—Each subsection (other than subsection (a)(2)) of 26 use 291. section 291 (relating to special rules for corporate preference items) is amended by striking out "15 percent" each place it appears and inserting in lieu thereof "20 percent". (b) DEFERRED F S C INCOME.—Paragraph (4) of section 291(a) (relat- ing to certain deferred DISC income) is amended to read as follows: "(4) CERTAIN DEFERRED FSC INCOME.—If a corporation is a shareholder of the FSC, in the case of taxable years beginning Post, p. 986. after December 31, 1984, section 923(a) shall be applied with respect to such corporation by substituting— "(A) '30 percent' for '32 percent' in paragraph (2), and "(B) '15/23' for '16/23' in paragraph (3). (c) MINIMUM TAX.— 26 use 57. (1) IN GENERAL.—Paragraph (1) of section 57(b) is amended to read as follows: "(1) I N GENERAL.— "(A) POLLUTION CONTROL FACILITIES; BAD DEBT RESERVES.— In the case of any item of tax preference of a corporation described in paragraph (4) or (7) of subsection (a), only 59% percent of the amount of such item of tax preference (deter- mined without regard to this subsection) shall be taken into account as an item of tax preference. "(B) IRON ORE AND COAL.—In the case of any item of tax preference of a corporation described in paragraph (8) of subsection (a) (but only to the extent such item is allocable to a deduction for depletion for iron ore and coal (including legnite)), only 71.6 percent of the amount of such item of tax preference (determined without regard to this subsection) shall be taken into account as an item of tax preference.". (2) CERTAIN CAPITAL GAINS.—Paragraph (2) of section 57(h) (relating to capital gains) is amended by striking out "71.6 percent" and inserting in lieu thereof "59% percent". 26 u s e 995. (d) DEFERRED DISC INCOME.—Section 995(b)(l)(F)(i) (relating to deemed distributions) is amended by striking out "one/half and inserting in lieu thereof "one-seventeenth". 26 u s e 291 note. (e) EFFECTIVE D A T E S . — (1) I N GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1984. (2) 1250 GAIN.—The amendments made by this section to section 291(a)(1) of the Internal Revenue Code of 1954 shall apply to sales or other dispositions after December 31, 1984, in taxable years ending after such date. (3) POLLUTION CONTROL FACILITIES.—The amendments made by this section to section 291(a)(5) of such Code shall apply to property placed in service after December 31, 1984, in taxable years ending after such date. (4) DRILLING AND MINING COSTS.—The amendments made by this section to section 291(b) of such Code shall apply to expendi- tures after December 31, 1984, in taxable years ending after such date.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 589 Subtitle E—Partnership Provisions SEC. 71. PARTNERSHIP ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTY. (a) GENERAL RULE.—Subsection (c) of section 704 (relating to 26 u s e 704. contributed property) is amended to read as follows: "(c) CONTRIBUTED PROPERTY.—Under regulations prescribed by the Secretary, income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution. Under regulations prescribed by the Secretary, rules similar to the rules of the preceding sentence shall apply to contri- butions by a partner (using the cash receipts and disbursements method of accounting) of accounts payable and other accrued but unpaid items." (b) CONFORMING AMENDMENTS.—The fourth sentence of section 613A(c)(7)(D) and the third sentence of section 743(b) are each 26USC613A, amended by striking out "an agreement described in section 743. 704(c)(2) (relating to effect of partnership agreement on contributed property), such share shall be determined by taking such agreement into account" and inserting in lieu thereof "property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share". (c) EFFECTIVE DATE.—The amendments made by this section shall 26 use 704 note. apply with respect to property contributed to the partnership after March 31, 1984, in taxable years ending after such date. SEC. 72. DETERMINATION OF DISTRIBUTIVE SHARES WHEN PARTNER'S INTEREST CHANGES. (a) GENERAL RULE.—Section 706 (relating to taxable years of 26 use 706. partner and partnership) is amended by adding at the end thereof the following new subsection: "(d) DETERMINATION OF DISTRIBUTIVE SHARE W H E N PARTNER'S INTEREST CHANGES.— "(1) I N GENERAL.—Except as provided in paragraphs (2) and (3), if during any taxable year of the partnership there is a change in any partner's interest in the partnership, each part- ner's distributive share of any item of income, gain, loss, deduc- tion, or credit of the partnership for such taxable year shall be determined by the use of any method prescribed by the Secre- ^ tary by regulations which takes into account the varying inter- ests of the partners in the partnership during such taxable year. "(2) CERTAIN CASH BASIS ITEMS PRORATED OVER PERIOD TO WHICH ATTRIBUTABLE.— "(A) I N GENERAL.—If during any taxable year of the partnership there is a change in any partner's interest in the partnership, then (except to the extent provided in regulations) each partner's distributive share of any alloca- ble cash basis item shall be determined— "(i) by assigning the appropriate portion of each such item to each day in the period to which it is attributa- ble, and "(ii) by allocating the portion assigned to any such day among the partners in proportion to their interests in the partnership at the close of such day.
98 STAT. 590 PUBLIC LAW 98-369—JULY 18, 1984 "(B) ALLOCABLE CASH BASIS ITEM.—For purposes of this paragraph, the term 'allocable cash basis item' means any of the following items which are described in paragraph (1) and with respect to which the partnership uses the cash receipts and disbursements method of accounting: A-ifi ji^j i?' "(i)Interest. "(ii) Taxes. "(iii) Payments for services or for the use of property. "(iv) Any other item of a kind specified in regulations prescribed by the Secretary as being ein item with respect to which the application of this paragraph is appropriate to avoid significant misstatements of the income of the partners. "(C) ITEMS ATTRIBUTABLE TO PERIODS NOT WITHIN TAXABLE YEAR.—If any portion of any allocable cash basis item is attributable to— "(i) any period before the beginning of the taxable • year, such portion shall be assigned under subpara- -AJ^io graph (AXi) to the first day of such taxable year, or "(ii) any period after the close of the taxable year, such portion shall be assigned under subparagraph (AXi) to the last day of the taxable year. "(D) TREATMENT OF DEDUCTIBLE ITEMS ATTRIBUTABLE TO PRIOR PERIODS.—If any portion of a deductible cash basis item is assigned under subparagraph (C)(i) to the first day of ,:«0f) t-ftTOB^J^ any taxable year— "(i) such portion shall be allocated among persons who are partners in the partnership during the period RUtfi'Tif to which such portion is attributable in accordance with their varying interests in the partnership during SOV J 8 ' J 3S such period, and "(ii) any amount allocated under clause (i) to a person who is not a partner in the partnership on such first day shall be capitalized by the partnership and treated in the manner provided for in section 755. "(3) ITEMS ATTRIBUTABLE TO INTEREST I N LOWER TIER PARTNER- SHIP PRORATED OVER ENTIRE TAXABLE YEAR.—If— "(A) during any taxable year of the partnership there is a change in any partner's interest in the partnership (herein- after in this paragraph referred to as the 'upper tier part- nership'), and "(B) such partnership is a partner in another partnership (hereinafter in this paragraph referred to as the 'lower tier partnership'), then (except to the extent provided in regulations) each part- ner's distributive share of any item of the upper tier partner- ship attributable to the lower tier partnership shall be deter- mined by assigning the appropriate portion (determined by applying principles similar to the principles of subparagraphs (C) and (D) of paragraph (2)) of each such item to the appropriate days during which the upper tier partnership is a partner in the lower tier partnership and by allocating the portion assigned to any such day among the partners in proportion to their inter- ests in the upper tier partnership at the close of such day. "(4) TAXABLE YEAR DETERMINED WITHOUT REGARD TO SUBSEC- TION (c) (2) (A).—For purposes of this subsection, the taxable
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 591 year of a partnership shall be determined without regard to subsection (c)(2)(A)." (b) CONFORMING AMENDMENTS.—Paragraph (2) of section 706(c) is 26 u s e 706. amended— (1) by striking out the last sentence of subparagraph (A), and (2) by striking out ", but such partner's distributive share of items described in section 702(a) shall be determined by taking into account his varying interests in the partnership during the taxable year" in subparagraph (B). (c) EFFECTIVE DATE.—The amendments made by this section shall 26 u s e 706 note. apply— (1) in the case of items described in section 706(d)(2) of the Internal Revenue Code of 1954 (as added by subsection (a)), to Ante, p. 589. amounts attributable to periods after March 31, 1984, and (2) in the case of items described in section 706(d)(3) of such Code (as added by subsection (a)), to amounts paid or accrued by the other partnership after March 31,1984. SEC. 73. PAYMENTS TO PARTNERS FOR PROPERTY OR CERTAIN SERVICES. (a) GENERAL RULE.—Subsection (a) of section 707 (relating to 26 u s e 707. transactions between partner and partnership) is amended to read as follows: "(a) PARTNER NOT ACTING IN CAPACITY AS PARTNER.— "(1) IN GENERAL.—If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partner- ship and one who is not a partner. "(2) TREATMENT OF PAYMENTS TO PARTNERS FOR PROPERTY OR SERVICES.—Under regulations prescribed by the Secretary— "(A) TREATMENT OF CERTAIN SERVICES AND TRANSFERS OF PROPERTY.—If — "(i) a partner performs services for a partnership or transfers property to a partnership, "(ii) there is a related direct or indirect allocation - • '' ^ and distribution to such partner, and liST ORIJ 0'ii "(iii) the performance of such services (or such trans- fer) and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, such allocation and distribution shall be treated as a trans- action described in paragraph (1). "(B) TREATMENT OF CERTAIN PROPERTY TRANSFERS.—If— "(i) there is a direct or indirect transfer of money or ^flfc iO other property by a partner to a partnership, "(ii) there is a related direct or indirect transfer of money or other property by the partnership to such partner (or another partner), and "(iii) the transfers described in clauses (i) and (ii), when viewed together, are properly characterized as a sale of property, such transfers shall be treated either as a transaction described in paragraph (1) or as a transaction between 2 or more partners acting other than in their capacity as mem- bers of the partnership."
98 STAT. 592 PUBLIC LAW 98-369—JULY 18, 1984 26 u s e 707 note. (b) EFFECTIVE D A T E . — '"^'"---' ^^'' -'••'•*'' ->irir>vayi.m u .0 ^r,;.; (1) IN GENERAL.—The amendment made by subsection (a) shall apply— (A) in the case of arrangements described in section ^"te, P-591. 707(a)(2)(A) of the Internal Revenue Code of 1954 (as amended by subsection (a)), to services performed or prop- erty transferred after February 29, 1984, and (B) in the case of transfers described in section 707(a)(2)(B) of such Code (as so amended), to property transferred after ^•'> « • " • * • March 31,1984. (2) BINDING CONTRACT EXCEPTION.—The amendment made by subsection (a) shall not apply to a transfer of property described *• in section 707(aX2)(B)(i) if such transfer is pursuant to a binding contract in effect on March 31, 1984, and at all times thereafter before the transfer. (3) EXCEPTION FOR CERTAIN TRANSFERS.—The amendment made by subsection (a) shall not apply to a transfer of property described in section 707(a)(2)(B)(i) that is made before December 31,1984, if— rOT DS- (A) such transfer was proposed in a written private offer- ing memorandum circulated before February 28,1984; (B) the out-of-pocket costs incurred with respect to such offering exceeded $250,000 as of February 28,1984; (C) the encumbrances placed on such property in antici- pation of such transfer all constitute obligations for which neither the partnership nor any partner is liable; and (D) the transferor of such property is the sole general partner of the partnership. SEC. 74. CONTRIBUTIONS TO A PARTNERSHIP OF UNREALIZED RECEIV- ABLES, INVENTORY ITEMS, OR CAPITAL LOSS PROPERTY. (a) GENERAL RULE.—Subpart A of part II of subchapter K of chapter 1 (relating to contributions to a partnership) is amended by adding at the end thereof the following new section: 26 u s e 724. "SEC. 724. CHARACTER OF GAIN OR LOSS ON CONTRIBUTED UNREALIZED RECEIVABLES, INVENTORY ITEMS, AND CAPITAL LOSS PROP- ERTY. "(a) CONTRIBUTIONS OF UNREALIZED RECEIVABLES.—In the case of any property which— "(1) was contributed to the partnership by a partner, and "(2) was an unrealized receivable in the hands of such partner immediately before such contribution, any gain or loss recognized by the partnership on the disposition of such property shall be treated as ordinary income or ordinary loss, as the case may be. "(b) CONTRIBUTIONS OF INVENTORY ITEMS.—In the case of any property which— "(1) was contributed to the partnership by a partner, and "(2) was an inventory item in the hands of such partner immediately before such contribution, any gain or loss recognized by the partnership on the disposition of such property during the 5-year period beginning on the date of such contribution shall be treated as ordinary income or ordinary loss, as the case may be. "(c) CONTRIBUTIONS OF CAPITAL Loss PROPERTY.—In the case of any property which— .
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 593 "(1) was contributed by a partner to the partnership, and '' "(2) was a capital asset in the hands of such partner immedi- ately before such contribution, any loss recognized by the partnership on the disposition of such ' ' property during the 5-year period beginning on the date of such contribution shall be treated as a loss from the sale of a capital asset to the extent that, immediately before such contribution, the adjusted basis of such property in the hands of the partner exceeded the fair market value of such property. "(d) DEFINITIONS.—For purposes of this section— "(1) UNREALIZED RECEIVABLE.—The term 'unrealized receiva- ble' has the meaning given such term by section 751(c) (deter- mined by treating any reference to the partnership as referring to the partner). "(2) INVENTORY ITEM.—The term 'inventory item' has the meaning given such term by section 751(d)(2) (determined by treating any reference to the partnership as referring to the K sHfig partner and by applying section 1231 without regard to any holding period therein provided). "(3) SUBSTITUTED BASIS PROPERTY.— "(A) IN GENERAL.—If any property described in subsection (a), (b), or (c) is disposed of in a nonrecognition transaction, the tax treatment which applies to such property under such subsection shall also apply to any substituted basis 5 '• property resulting from such transaction. A similar rule shall also apply in the case of a series of non-recognition transactions. "(B) EXCEPTION FOR STOCK IN C CORPORATION.—Subpara- gaph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351." (b) AMENDMENT OF SECTION 735.—Section 735 (relating to charac- 26 use 735. ter of gain or loss on disposition of distributed property) is amended by adding at the end thereof the following new subsection: "(c) SPECIAL RULES.— "(1) WAIVER OF HOLDING PERIODS CONTAINED IN SECTION 1231.—For purposes of this section, section 751(d)(2) (defining inventory item) shall be applied without regard to any holding period in section 1231(b). "(2) SUBSTITUTED BASIS PROPERTY.— "(A) IN GENERAL.—If any property described in subsection (a) is disposed of in a nonrecognition transaction, the tax treatment which applies to such property under such sub- section shall also apply to any substituted basis property resulting from such transaction. A similar rule shall also apply in the case of a series of nonrecognition transactions. "(B) EXCEPTION FOR STOCK IN C CORPORATION.—Subpara- graph (A) shall not apply to any stock in a C corporation received in an exchange described in section 351." (c) CLERICAL AMENDMENT.—The table of sections for subpart A of part II of subchapter K of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 724. Character of gain or loss on contributed unrealized receivables, inventory items, and capital loss property." (d) EFFECTIVE DATES.— 31-194 O - 8fi - 91
98 STAT. 594 PUBLIC LAW 98-369—JULY 18, 1984 26 use 724 note. (1) SUBSECTION (a).—The amendment made by subsection (a) shall apply to property contributed to a partnership after March 31, 1984, in taxable years ending after such date. 26 use 735 note. (2) SUBSECTION (b).—The amendment made by subsection (b) shall apply to property distributed after March 31, 1984, in taxable years ending after such date. SEC. 75. TRANSFERS OF PARTNERSHIP AND TRUST INTERESTS BY CORPO- RATIONS. (a) GENERAL RULE.—Subchapter C of chapter 1 (relating to corpo- rate distributions and adjustments) is amended by adding at the end thereof the following new part: PART VII—MISCELLANEOUS CORPORATE PROVISIONS "Sec. 386. Transfers of partnership and trust interests by corporations. 26 u s e 386. "SEC. 386. TRANSFERS OF PARTNERSHIP AND TRUST INTERESTS BY COR- PORATIONS. "(a) CORPORATE DISTRIBUTIONS.—For purposes of determining the amount (and character) of gain recognized by a corporation on any distribution of an interest in a partnership, the distribution shall be treated in the same manner as if it included a property distribution consisting of the corporation's proportionate share of the recognition property of such partnership. "(b) SALES OR EXCHANGE TO WHICH SECTION 337 APPLIES.—For purposes of determining the amount (and character) of gain recog- nized on a sale or exchange described in section 337, any sale or exchange by a corporation of an interest in a partnership shall be treated as a sale or exchange of the corppration's proportionate share of the recognition property of such partnership. ,,j_.r') >: "(c) RECOGNITION PROPERTY.—For purposes of this section, the term 'recognition property' means any property with respect to which gain would be recognized to the corporation if such prop- erty— "(1) were distributed by the corporation in a distribution described in section 311 or 336, or "(2) were sold in a sale described in section 337, whichever is appropriate. In determining whether property of a partnership is recognition property, such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner. "(d) EXTENSION TO TRUSTS.—Under regulations, rules similar to the rules of this section shall also apply in the case of the distribu- tion or sale or exchange by a corporation of an interest in a trust." (b) DISTRIBUTIONS TREATED AS EXCHANGES FOR PURPOSES OF SUB- 26 use 761. CHAPTER K.—Section 761 (relating to definitions) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e) DISTRIBUTIONS TREATED AS EXCHANGES.—For purposes of— "(1) section 708 (relating to continuation of partnership), "(2) section 743 (relating to optional adjustment to basis of partnership property), and "(3) any other provision of this subchapter specified in regula- tions prescribed by the Secretary, any distribution (not otherwise treated as an exchange) shall be treated as an exchange." i^ei-.i£
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 595 (c) CLARIFICATION OF FAIR MARKET VALUE IN THE CASE OF NONRE- COURSE INDEBTEDNESS.—Section 7701 (relating to definitions), as 26 use 7701. amended by this Act, is amended by redesignating subsection (g) as ^nte, p. 567. subsection (h) and by inserting after subsection (f) the following new subsection: "(g) CLARIFICATION OF FAIR MARKET VALUE IN THE CASE OF NONRE- COURSE INDEBTEDNESS.—For purposes of subtitle A, in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, the fair market value of such property shall be treated as being not less than the amount of any nonrecourse indebtedness to which such property is subject." (d) CLERICAL AMENDMENT.—The table of parts for subchapter C of chapter 1 is amended by adding at the end thereof the following new item: "Part VII. Miscellaneous corporate provisions." (e) EFFECTIVE DATE.—The amendments made by this section shall 26 use 386 note. apply to distributions, sales, and exchanges made after March 31, 1984, in taxable years ending after such date. SEC. 76. APPLICATION OF SECTION 751 IN THE CASE OF TIERED PARTNER- r; r j . j ;< SHIPS. (a) GENERAL RULE.—Section 751 (relating to unrealized receiv- 26 use 751. ables and inventory items) is amended by adding at the end thereof the following new subsection: "(f) SPECIAL RULES IN THE CASE OF TIERED PARTNERSHIPS, ETC.—In determining whether property of a partnership is— "(1) an unrealized receivable, or "'"^"' ^ -^^''^ "(2) an inventory item, such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner. Under regulations, rules similar to the rules of the preceding sen- tence shall also apply in the case of interests in trusts.' (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 751 note. shall apply to distributions, sales, and exchanges made after March 31,1984, in taxable years ending after such date. SEC. 77. SECTION 1031 NOT APPLICABLE TO PARTNERSHIP INTERESTS; LIMITATION ON THE PERIOD DURING WHICH LIKE KIND EX- CHANGES MAY BE MADE. (a) IN GENERAL.—Subsection (a) of section 1031 (relating to nonrec- 26 use 1031. ognition of gain or loss from exchanges solely in kind) is amended to read as follows: "(a) NONRECOGNITION OF GAIN OR Loss FROM EXCHANGES SOLELY IN KIND.— "(1) IN GENERAL.—No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for produc- tive use in a trade or business or for investment. "(2) EXCEPTION.—This subsection shall not apply to any ex- change of— , "(A) stock in trade or other property held primarily for sale, "(B) stocks, bonds, or notes, "(C) other securities or evidences of indebtedness or inter- est, "(D) interests in a partnership,
98 STAT. 596 PUBLIC LAW 98-369—JULY 18, 1984 "(E) certificates of trust or beneficial interests, or '; "(F) choses in action. "(3) REQUIREMENT THAT PROPERTY BE IDENTIFIED AND THAT EXCHANGE BE COMPLETED NOT MORE THAN 180 DAYS AFTER TRANS- FER OF EXCHANGED PROPERTY.—For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if— "(A) such property is not identified as property to be received in the exchange before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or "(B) such property is received after the earlier of— "(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or "(ii) the due date (determined with regard to exten- sion) for the transferor's return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs." 26 use 1031 (b) EFFECTIVE DATES.— ^°^- (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendment made by subsection (a) shall apply to transfers made after the date of the enactment of this Act in taxable years ending after such date. (2) BINDING CONTRACT EXCEPTION FOR TRANSFER OF PARTNER- SHIP INTERESTS.—Paragraph (2)(D) of section 1031(a) of the Inter- Ante, p. 595. nal Revenue Code of 1954 (as amended by subsection (a)) shall not apply in the case of any exchange pursuant to a binding contract in effect on March 1, 1984, and at all times thereafter before the exchange. (3) REQUIREMENT THAT PROPERTY BE IDENTIFIED WITHIN 45 DAYS AND THAT EXCHANGE BE COMPLETED WITHIN 180 DAYS.—PARA- graph (3) of section 1031(a) of the Internal Revenue Code of 1954 (£is amended by subsection (a)) shall apply— (A) to transfers after the date of the enactment of this Act, and (B) to transfers on or before such date of enactment if the property to be received in the exchange is not received before January 1,1987. '^-•^ 'i • In the case of any transfer on or before the date of the enact- ment of this Act which the taxpayer treated as part of a like- kind exchange, the period for assessing any deficiency of tax attributable to the amendment made by subsection (a) shall not expire before January 1,1988. (4) SPECIAL RULE WHERE PROPERTY IDENTIFIED IN BINDING CON- TRACT.—If the property to be received in the exchange is identi- fied in a binding contract in effect on June 13, 1984, and at all times thereafter before the transfer, paragraph (3) shall be applied— (A) by substituting "January 1, 1989" for "January 1, 1987", and (B) by substituting "January 1, 1990" for "January 1, 1988". (5) SPECIAL RULE FOR LIKE-KIND EXCHANGE OF PARTNERSHIP INTERESTS.—Paragraph (2)(D) of section 1031(a) of the Internal Revenue Code of 1954 (as amended by subsection (a)) shall not apply to any exchange of an interest as general partner pursu-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 597 ant to a plan of reorganization of ownership interest under a contract which took effect on March 29, 1984, and which was executed on or before March 31, 1984, but only if all the exchanges contemplated by the reorganization plan are com- pleted on or before December 31,1984. SEC. 78. ELIMINATION OF BASIS STRIPS UNDER SECTION 734(b). (a) GENERAL RULE.—Subsection (b) of section 734 is amended by 26 use 734. adding at the end thereof the following new sentence: "Paragraph (IXB) shall not apply to any distributed property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect." (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 734 note. shall apply to distributions after March 1, 1984, in taxable years ending after such date. SEC. 79. OVERRULING OF RAPHAN CASE. (a) GENERAL RULE.—Section 752 of the Internal Revenue Code of 26 use 752 note. 1954 (and the regulations prescribed thereunder) shall be applied without regard to the result reached in the case of Raphan vs the United States, 3 CI. Ct. 457 (1983). (b) REGULATIONS.—In amending the regulations prescribed under section 752 of such Code to reflect subsection (a), the Secretary of the Treasury or his delegate shall prescribe regulations relating to liabilities, including the treatment of guarantees, assumptions, in- H;$ ;4U ; demnity agreements, and similar arrangements. Subtitle F—Trust Provisions SEC. 81. TREATMENT OF PROPERTY DISTRIBUTED IN KIND. (a) GENERAL RULE.—Section 643 (relating to definitions applicable 26 use 643. to subchapters A, B, C, and D) is amended by adding at the end Post, p. 975. thereof the following new subsection: "(d) TREATMENT OF PROPERTY DISTRIBUTED IN KIND.— "(1) BASIS OF BENEFICIARY.—The basis of any property re- ceived by a beneficiary in a distribution from an estate or trust shall be— -ac-ri s t a OH'}^>k "(A) the adjusted basis of such property in the hands of the estate or trust immediately before the distribution, adjusted for '(B) any gain or loss recognized to the estate or trust on the distribution. "(2) AMOUNT OF DISTRIBUTION.—In the case of any distribution of property (other than cash), the amount taken into account under sections 661(aX2) and 662(aX2) shall be the lesser of— . -i ' r.i . "(A) the basis of such property in the hands of the beneficiary (as determined under paragraph (1)), or iis*i "(B) the fair market value of such property. "(3) ELECTION TO RECOGNIZE GAIN.— x;:-:- "(A) IN GENERAL.—In the case of any distribution of ', property (other than cash) to which an election under this L paragraph applies— "(i) paragraph (2) shall not apply, "(ii) gain or loss shall be recognized by the estate or trust in the same manner as if such property had been sold to the distributee at its fair market value, and
98 STAT. 598 PUBLIC LAW 98-369—JULY 18, 1984 "(iii) the amount taken into account under sections 661(a)(2) and 662(a)(2) shall be the fair market value of such property. V "(B) ELECTION.—Any election under this paragraph shall be made by the estate or trust on its return for the taxable year for which the distribution was made. Any such election, once made, may be revoked only with the ^'' consent of the Secretary. "(4) EXCEPTION FOR DISTRIBUTIONS DESCRIBED IN SECTION 663(a).—This subsection shall not apply to any distribution described in section 663(a)." 26 u s e 643 note. (b) EFFECTIVE D A T E . — (1) IN GENERAL.—The amendment made by subsection (a) shall apply to distributions after June 1, 1984, in taxable years ending after such date. (2) TIME FOR MAKING ELECTION.—In the case of any distribu- tion before the date of the enactment of this Act— (A) the time for making an election under section Ante, p. 597. 643(dX3) of the Internal Revenue Code of 1954 (as added by this section) shall not expire before January 1, 1985, and (B) the requirement that such election be made on the return of the estate or trust shall not apply. SEC. 82. TREATMENT OF MULTIPLE TRUSTS. 26 use 643. (a) GENERAL RULE.—Section 643 (relating to definitions applicable to subparts A, B, C, and D) is amended by adding at the end thereof the following new subsection: "(e) TREATMENT OF MULTIPLE TRUSTS.—For purposes of this sub- chapter, under regulations prescribed by the Secretary, 2 or more trusts shall be treated as 1 trust if— "(1) such trusts have substantially the same grantor or gran- ^f > tors and substantially the same primary beneficiary or benefici- aries, and "(2) a principal purpose of such trusts is the avoidance of the tax imposed by this chapter. For purposes of the preceding sentence, a husbcuid and wife shall be treated as 1 person. 26 use 643 note. (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after March 1,1984. Subtitle G—Accounting Changes SEC. 91. CERTAIN AMOUNTS NOT TREATED AS INCURRED BEFORE ECO- NOMIC PERFORMANCE. 26 use 461. (a) IN GENERAL.—Section 461 (relating to general rule for taxable year of deduction) is amended by adding at the end thereof the following new subsections: "(h) CERTAIN LIABIUTIES NOT INCURRED BEFORE ECONOMIC PER- FORMANCE.— "(1) I N GENERAL.—For purpjoses of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs. "(2) TIME WHEN ECONOMIC PERFORMANCE OCCURS.—Except as provided in regulations prescribed by the Secretary, the time
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 599 •I' when economic performance occurs shall be determined under < the following principles: "(A) SERVICES AND PROPERTY PROVIDED TO THE TAX- PAYER.—If the liability of the taxpayer arises out of— ~ "(i) the providing of services to the taxpayer by an- "' other person, economic performance occurs as such person provides such services, "(ii) the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or "(iii) the use of property by the taxpayer, economic "tJ*7 ( I ii performance occurs as the taxpa3rer uses such property. "(B) SERVICES AND PROPERTY PROVIDED BY THE TAX- PAYER.—If the liability of the taxpayer requires the taxpay- er to provide property or services, economic performance ' '^ occurs as the taxpayer provides such property or services. •it; K : . w^Q^ WORKERS COMPENSATION AND TORT UABIUTIES OF THE ,, TAXPAYER.—If the liability of the taxpayer requires a pay- V !i, Vt 'i jjjgjj^ ^Q another person and— "(i) arises under any workers compensation act, or "(ii) arises out of any tort, economic performance occurs as the payments to such ' person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence. "(D) OTHER ITEMS.—In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary. "(3) EXCEPTION FOR CERTAIN RECURRING ITEMS.— "(A) I N GENERAL.—Notwithstanding paragraph (1) an ^ .,,, ,,^ , item shall be treated as incurred during any taxable year ;• " " if- "(i) the all events test with respect to such item is met during such taxable year (determined without ^. ' 1 regard to paragraph (1)), "(ii) economic performance with respect to such item occurs within the shorter of— "(I) a reasonable period after the close of such taxable year, or "(II) SVa months after the close of such taxable year, 5 "(iii) such item is recurring in nature and the tax- payer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause iAiiii.io J . (i) are met, and "(iv) either— "(I) such item is not a material item, or c "(II) the accrual of such item in the taxable year -i;«i3-;. in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in ~.% ^iji ^ which economic performance occurs. "(B) FINANCIAL STATEMENTS CONSIDERED UNDER SUBPARA- < GRAPH (A) (iv).—In making a determination under sub- paragraph (A)(iv), the treatment of such item on financial .V statements shall be taken into account.
98 STAT. 600 PUBLIC LAW 98-369—JULY 18, 1984 "(C) PARAGRAPH NOT TO APPLY TO WORKERS COMPENSATION AND TORT UABILITIES.—This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2). "(4) ALL EVENTS TEST.—For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy. "(5) SUBSECTION NOT TO APPLY TO CERTAIN CASES TO WHICH OTHER PROVISIONS OF THIS TITLE SPECIFICALLY APPLY.—This Sub- section shall not apply to any item to which any of the following provisions apply: "(A) Subsection (c) or (0 of section 166 (relating to re- serves for bad debts). "(B) Section 463 (relating to vacation pay). "(C) Section 466 (relating to discount coupons). "(D) Any other provisions of this title which specifically provides for a deduction for a reserve for estimated ex- penses, "(i) TAX SHELTERS MAY NOT DEDUCT ITEMS EARLIER THAN WHEN ECONOMIC PERFORMANCE OCCURS.— "(1) I N GENERAL.—In the case of a tax shelter computing taxable income under the cash receipts and disbursements method of accounting, such tax shelter shall not be allowed a deduction under this chapter with respect to any item any earlier than the time when such item would be treated as incurred under subsection (h) (determined without regard to paragraph (3) thereof). "(2) EXCEPTION (TO EXTENT OF CASH BASIS) WHEN ECONOMIC PERFORMANCE OCCURS WITHIN 90 DAYS AFTER THE CLOSE OF THE TAXABLE YEAR.— "(A) IN GENERAL.—Paragraph (1) shall not apply to any item if economic performance with respect to such item occurs within 90 days after the close of the taxable year. "(B) DEDUCTION LIMITED TO CASH BASIS.— "(i) TAX SHELTER PARTNERSHIPS.—In the case of a tax ^* shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term 'cash basis' shall be substi- tuted for the term 'adjusted basis'. "(ii) OTHER TAX SHELTERS.—Under regulations pre- scribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i). "(C) CASH BASIS DEFINED.—For purposes of subparagraph (B), a partner's cash basis in a partnership shall be equal to the adjusted basis of such partner's interest in the partner- ship, determined without regard to— "(i) any liability of the partnership, and "(ii) any amount borrowed by the partner with re- spect to such partnership which— "(I) was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 601 related to such person within the meaning of sec- 1 r tion 168(e)(4)), or "(II) was secured by any assets of the partner- ship. - "(D) SPECIAL CASH BASIS RULE FOR SPUDDING OF OIL OR GAS WELLS.—Solely for purposes of applying subparagraph (A), ,.^l economic performance with respect to the act of drilling of an oil or gas well shall be treated as occurring when the gj.^ ,, .4,6 drilling of the well is commenced. "(3) TAX SHELTER DEFINED.—For purposes of this subsection, the term 'tax shelter' means— "(A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offer- :8t SIB- ing of securities for sale, f^ "(B) any syndicate (within the meaning of section 1256(e)(3)(B)), and ,T/> "(C) any tax shelter (within the meaning of section 6661(b)(2)(C)(ii)). "(4) SPECIAL RULES FOR FARMING.—In the case of the trade or business of farming (as defined in section 464(e))— "(A) section 464 shall be applied to any tax shelter de- scribed in paragraph (3)(C), . - "(B) section 464 shall be applied before this subsection, 9, and "(C) in determining whether an entity is a tax shelter, the ijlf^i definition of farming syndicate in section 464(c) shall be substituted for subparagraphs (A) and (B) of paragraph (3). 31 "(5) ECONOMIC PERFORMANCE.—For purposes of this subsec- tion, the term 'economic performance' has the meaning given such term by subsection (h)." (b) SPECIAL RULES FOR MINING AND SOLID WASTE RECLAMATION AND CLOSING COSTS.— (1) IN GENERAL.—Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deduction taken), as amended by section 92, is amended by adding at the end thereof the following new section: "SEC. 468. SPECIAL RULES FOR MINING AND SOLID WASTE RECLAMATION 26 USC 468. AND CLOSING COSTS. "(a) ESTABLISHMENT OF RESERVES FOR RECLAMATION AND CLOSING COSTS.— "(1) ALLOWANCE OF DEDUCTION.—If a taxpayer elects the a p plication of this subsection with respect to any mining or solid waste disposal property, the amount of any deduction for quali- fied reclamation or closing costs for any taxable year to which such election applies shall be equal to the current reclamation '^ or closing costs allocable to— "(A) in the case of qualified reclamation costs, the portion of the reserve property which was disturbed during such taxable year, and "(B) in the case of qualified closing costs, the production from the reserve property during such taxable year. "(2) OPENING BALANCE AND ADJUSTMENTS TO RESERVE.— "(A) OPENING BALANCE.—The opening balance of any reserve for its first taxable year shall be zero.
98 STAT. 602 PUBLIC LAW 98-369—JULY 18, 1984 "(B) INCREASE FOR INTEREST.— "(i) IN GENERAL.—A reserve shall be increased each taxable year by an amount equal to the amount of interest which would be earned during such taxable year on the opening balance of such reserve for such taxable year if such interest were computed— "(I) at the Federal short-term rate or rates (de- Ante, p. 538. termined under section 1274) in effect, and "(II) by compounding semiannually, "(ii) PHASE-IN OF INTEREST RATE.—In the case of tax- able years ending before 1987, the rate determined under clause (i)(I) shall be equal to the following per- centage of such rate (determined without regard to this clause): "In the case of taxable years ending in: The percentage is: 1984 or 1985 70 1986 85. "(C) RESERVE TO BE CHARGED FOR AMOUNTS PAID.— Any amount paid by the taxpayer during any taxable year for qualified reclamation or closing costs allocable to portions of the reserve property for which the election under para- graph (1) was in effect shall be charged to the appropriate reserve as of the close of the taxable year. "(3) ALLOWANCE OF DEDUCTION FOR EXCESS AMOUNTS PAID.— There shall be allowed as a deduction for any taxable year the excess of— "(A) the amounts described in paragraph (2XC) paid during such taxable year, over "(B) the closing balance of the reserve for such taxable year (determined without regard to paragraph (2XC)). "(4) LIMITATION ON BALANCE AS OF THE CLOSE OF ANY TAXABLE YEAR.— "(A) RECLAMATION RESERVES.—In the case of any reserve for qualified reclamation costs, there shall be included in gross income for any tsixable year an amount equal to the excess of^ "(i) the closing balance of the reserve for such tax- ;r; ; >» able year, over "(ii) the current reclamation costs of the taxpayer for . ,^ all portions of the reserve property disturbed during any taxable year to which the election under para- graph (1) applies. "(B) CLOSING COSTS RESERVES.—In the case of any reserve for qualified closing costs, there shall be included in gross income for any taxable year an amount equal to the excess of- "(i) the closing balance of the reserve for such tax- able year, over "(ii) the current closing cost of the taxpayer with respect to the reserve property, determined as if all 01 production with respect to the reserve property for any taxable year to which the election under paragraph (1) applies had occurred in such taxable year. van lo
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 603 ^ "(C) ORDER OF APPLICATION.—This paragraph shall be • applied after all adjustments to the reserve have been made for the taxable year. , s f o; "(5) INCOME INCLUSIONS ON COMPLETION OR DISPOSITION.— " •' i Proper inclusion in income shall be made upon— t< "(A) the revocation of an election under paragraph (1), or "(B) completion of the closing, or disposition of any por- i2'^' >S'J J tion, of a reserve property. "(b) ALLOCATION FOR PROPERTY WHERE ELECTION NOT I N EFFECT FOR ALL TAXABLE YEARS.—If the election under subsection (a)(1) is not in effect for 1 or more taxable years in which the reserved property is disturbed (or production occurs), items with respect to the reserve property shall be allocated to the reserve in such manner as the Secretary may prescribe by regulations. "(c) REVOCATION OF ELECTION; SEPARATE RESERVES.— "(1) REVOCATION OF ELECTION.— "(A) I N GENERAL.—The taxpayer may revoke an election if ' under subsection (a)(1) with respect to any property. Such ihi- revocation, once made, shall be irrevocable. r«fei' -M'J Hu "(B) TIME AND MANNER OF REVOCATION.—Any revocation ''^' '• ' under subparagraph (A) shall be made at such time and in such manner as the Secretary may prescribe. "(2) SEPARATE RESERVES REQUIRED.—If a taxpayer makes an election under subsection (a)(1), the taxpayer shall establish ' with respect to the property for which the election was made— "(A) a separate reserve for qualified reclamation costs, and "(B) a separate reserve for qualified closing costs. "(d) DEFINITIONS AND SPECIAL RULES RELATING TO RECLAMATION AND CLOSING COSTS.—For purposes of this section— '''' ')'^-lJ SI "(1) CURRENT RECLAMATION AND CLOSING COSTS.— "(A) CURRENT RECLAMATION COSTS.—The-term 'current f reclamation costs' means the amount which the taxpayer o; would be required to pay for qualified reclamation costs if the reclamation activities were performed currently. ^ "(B) CURRENT CLOSING COSTS.— "(i) I N GENERAL.—The term 'current closing costs' means the amount which the taxpayer would be re- j^ai.%<*fo ?. B quired to pay for qualified closing costs if the closing activities were performed currently. -MooaCiXi "(ii) COSTS COMPUTED ON UNIT-OF-PRODUCTION OR CA- PACITY METHOD.—Estimated closing costs shall— > "(I) in the case of the closing of any mine site, be computed on the unit-of-production method of ac- ly '/.- .. counting, and "(II) in the case of the closing of any solid waste disposal site, be computed on the unit-of-capacity •'-''-'• method. .A.f!M)i'li ^n.: "(2) QUALIFIED RECLAMATION OR CLOSING COSTS.—The term 'qualified reclamation or closing costs' means any of the follow- ing expenses: "(A) MINING RECLAMATION AND CLOSING COSTS.—Any ex- penses incurred for any land reclamation or closing activity ti; which is conducted in accordance with a reclamation plan (including an amendment or modification thereof)— "(i) which—
98 STAT. 604 PUBLIC LAW 98-369—JULY 18, 1984 "(I) is submitted pursuant to the provisions of ^ - section 511 or 528 of the Surface Mining Control 30 use 1261, and Reclamation Act of 1977 (as in effect on Janu- 1278. -v^v^Ti. a r y 1,1984), a n d "(II) is p a r t of a surface mining a n d reclamation permit granted u n d e r t h e provisions of title V of 30 u s e 1251. such Act (as so in effect), or "(ii) which is submitted p u r s u a n t to a n y o t h e r Feder- al or State law which imposes surface mining reclama- tion and permit requirements substantially similar to the requirements imposed by title V of such Act (as so in effect). t, u-. "(B) SOUD WASTE DISPOSAL AND CLOSING COSTS.— "(i) IN GENERAL.—Any expenses incurred for any land reclamation or closing activity in connection with any solid waste disposal site which is conducted in accordance with any permit issued pursuant to— "(I) any provision of the Solid Waste Disposal 42 use 6901 Act (as in effect on January 1, 1984) requiring such note. ,, ....•'•- activity, or rj :Ksh *^ "(II) any other Federal, State, or local law which imposes requirements substantially similar to the requirements imposed by the Solid Waste Disposal Act (as so in effect). "(ii) EXCEPTION FOR CERTAIN HAZARDOUS WASTE ,<; . SITES.—Clause (i) shall not apply to that portion of any property which is disturbed after the property is listed in the national contingency plan established under section 105 of the Comprehensive Environmental, Com- 42 use 9605. pensation, and Liability Act of 1980. "(3) PROPERTY.—The term 'property' has the meaning given such term by section 614. "(4) RESERVE PROPERTY.—The term 'reserve property' means any property with respect to which a reserve is established under subsection (aXl).' (2) CONFORMING AMENDMENT.—The table of sections for sub- part C of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 468. Special rules for mining and solid waste reclamation and closing costs." (c) SPECIAL RULE FOR LIABILITIES I N CONNECTION WITH THE DECOM- MISSIONING OF A NUCLEAR POWERPLANT.— (1) I N GENERAL.—Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deduction taken), as amended by subsection (b), is amended by adding at the end thereof the following new section: 26 u s e 468A. "SEC. 468A. SPECIAL RULES FOR NUCLEAR DECOMMISSIONING COSTS. "(a) IN GENERAL.—If the taxpayer elects the application of this subsection, there shall be allowed as a deduction for any taxable year the amount of payments made by the taxpayer to a Nuclear Decommissioning Reserve Fund (hereinafter referred to as the 'Fund') during such taxable year. "Ot>) LIMITATION ON AMOUNTS PAID INTO FUND.—The amount which a taxpayer may pay into the Fund for any taxable year shall not exceed the lesser of—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 605 "(1) the amount of nuclear decommissioning costs allocable to the Fund which is included in the taxpayer's cost of service for ratemaking purposes for such taxable year, or "(2) the ruling amount applicable to such taxable year. "(c) INCOME AND DEDUCTIONS OF THE TAXPAYER.— "(1) INCLUSION OF AMOUNTS DISTRIBUTED.—There shall be in- cludible in the gross income of the taxpayer for any taxable year— "(A) any amount distributed from the Fund during such taxable year, other than any amount distributed to pay costs described in subsection (e)(2XB), and ' "(B) except to the extent provided in regulations, amounts properly includible in gross income in the case of p. any deemed distribution under subsection (e)(6), any termi- nation under subsection (e)(7), or the disposition of any interest in the nuclear powerplant. i "(2) DEDUCTION WHEN ECONOMIC PERFORMANCE OCCURS.—In addition to any deduction under subsection (a), there shall be allowable as a deduction for any taxable year the amount of the nuclear decommissioning costs with respect to which economic performance (within the meaning of section 461(hX2)) occurs Ante, p. 598. during such taxable year. f "(d) RuuNG AMOUNT.—For purposes of this subsection— "(1) REQUEST REQUIRED.—No deduction shall be allowed for any payment to the Fund unless the taxpayer requests, and receives, from the Secretary a schedule of ruling amounts. "(2) RuuNG AMOUNT.—The term 'ruling amount' means, with respect to any taxable year, the amount which the Secretary determines under paragraph (1) to be necessary to— "(A) fund that portion of the nuclear decommissioning costs of the taxpayer with respect to the nuclear power- -^ * plant which bears the same ratio to the total nuclear decommissioning costs with respect to such nuclear power- plant as the period for which the Fund is in effect bears to -sQ the estimated useful life of such nuclear powerplant, and "(B) prevent any excessive funding of such costs or the r funding of such costs at a rate more rapid than level ^: JJ- i funding, taking into account such discount rates as the Secretary deems appropriate. •; "(3) REVIEW OF AMOUNT.—The Secretary shall at least once during the useful life of the nuclear powerplant (or, more frequently, upon the request of the taxpayer) review, and revise if necessary, the schedule of ruling amounts determined under paragraph (1). ' "(e) NUCLEAR DECOMMISSIONING TRUST FUND.— "(1) IN GENERAL.—Each taxpayer who elects the application of this subsection shall establish a Nuclear Decommissioning Trust Fund with respect to each nuclear powerplant to which - • -^^^ f'^ such election applies. "(2) TAXATION OF FUND.—There is imposed on the gross income of the Fund for any taxable year a tax at a rate equal to the maximum rate in effect under section 11(b), except that— "(A) there shall not be included in the gross income of the Fund any payment to the Fund with respect to which a deduction is allowable under subsection (a), and
98 STAT. 606 PUBLIC LAW 98-369—JULY 18, 1984 "(B) there shall be allowed as a deduction any amount paid by the Fund described in paragraph (4)(B) (other than to the taxpayer). "(3) CONTRIBUTIONS TO FUND.—The Fund shall not accept any payments (or other amounts) other than payments with respect to which a deduction is allowable under subsection (a). "(4) USE OF FUND.—The Fund shall be used exclusively for— "(A) satisfying, in whole or in part, any liability of any person contributing to the Fund for the decommissioning of a nuclear powerplant (or unit thereof), and "(B) to pay administrative costs (including taxes) and other incidental expenses of the Fund (including legal, accounting, actuarial, and trustee expenses) in connection with the operation of the Fund. "(5) PROHIBITIONS AGAINST SELF-DEAUNG.—Under regulations prescribed by the Secretary, for purposes of section 4951 (and so much of this title as relates to such section), the Fund shall be treated in the same manner £is a trust described in section 501(c)(21). "(6) DiSQUAUFiCATiON OF FUND.—In any case in which the Fund violates any provision of this subsection or section 4951, the Secretary may disqualify such Fund from the application of this subsection. In any case to which this subparagraph applies, the Fund shall be treated as having distributed all of its funds on the date such determination takes effect. "(7) TERMINATION UPON COMPLETION.—Upon substantial com- pletion of the nuclear decommissioning of the nuclear* power- plant with respect to which a Fund relates, the taxpayer shall terminate such Fund. "(f) NUCLEAR POWERPLANT.—The term 'nuclear powerplant' in- cludes any unit thereof." (2) CONFORMING AMENDMENT.—The table of sections for sub- part C of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 468A. Special rules for nuclear decommissioning costs." (d) 10-YEAR NET OPERATING Loss CARRYBACK PERIOD FOR DE- FERRED STATUTORY OR TORT LIABIUTY DEDUCTIONS.— 26 use 172. (1) IN GENERAL.—Paragraph (1) of section 1720b) (relating to years to which loss may be carried) is amended by adding at the end thereof the following new subparagraph: "(K) SPECIAL RULE FOR DEFERRED STATUTORY OR TORT U - ABILITY LOSSES.—In the case of a taxpayer which has a deferred statutory or tort liability loss (as defined in subsec- tion (k)) for any taxable year beginning after December 31, 1983, the deferred statutory or tort liability loss shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss." (2) DEFERRED STATUTORY OR TORT LIABIUTY LOSSES.—Section 26 use 172. 172 is amended by redesignating subsection (k) as subsection (1) and by inserting after subsection (j) the following new subsec- tion: "(k) DEFINITIONS AND SPECIAL RULES RELATING TO DEFERRED STAT- UTORY OR TORT LIABIUTY LOSSES.—For purposes of this section— "(1) DEFERRED STATUTORY OR TORT UABILITY LOSS.—The term 'deferred statutory or tort liability loss' means, for any taxable year, the lesser of—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 607 "(A) the net operating loss for such taxable year, reduced by any portion thereof attributable to— "(i) a foreign expropriation loss, or "(ii) a product liability loss, or ,^,, ,^ "(B) the sum of the amounts allowable as a deduction " ?u under this chapter (other than any deduction described in 3r - subsection (j)(1 )(B)) which— "(i) is taken into account in computing the net oper- ating loss for such taxable year, and ; 4 i,,j "(ii) is for an amount incurred with respect to a liability which arises under a Federal or State law or out of any tort of the taxpayer and— ; , "(I) in the case of a liability arising out of a Federal or State law, the act (or failure to act) '• ate 5 aiik'o. giving rise to such liability occurs at least 3 years before the beginning of such taxable year, or muii ia|.D8lJf« "(II) in the case of a liability arising out of a tort, such liability arises out of a series of actions (or failures to act) over an extended period of time a substantial portion of which occurs at least 3 years before the beginning of such taxable year. A liability shall not be taken into account under the preceding sentence unless the taxpayer used an accrual method of ac- „,,. , counting throughout the period or periods during which the acts or failures to act giving rise to such liability occurred. "(2) SPECIAL RULE FOR NUCLEAR POWERPLANTS.—Except as ^o.. „ provided in regulations prescribed by the Secretary, that por- tion of a deferred statutory or tort liability loss which is attrib- utable to amounts incurred in the decommissioning of a nuclear powerplant (or any unit thereof) may, for purposes of subsection (b)(l)(K), be carried back to each of the taxable years during the period— "(A) beginning with the taxable year in which such plant (or unit thereof) was placed in service, and "(B) ending with the taxable year preceding the loss year. "(3) COORDINATION WITH SUBSECTION (b)(2).—In applying paragraph (2) of subsection (b), a deferred statutory or tort liability loss shall be treated in a manner similar to the manner in which a foreign expropriation loss is treated. "(4) No CARRYBACK TO TAXABLE YEARS BEGINNING BEFORE JAN- UARY 1, 1984.—No deferred statutory or tort liability loss may be carried back to a taxable year beginning before January 1, 1984, unless such loss may be carried back to such year without regard to subsection (b)(l)(K)." (3) CONFORMING AMENDMENTS.— (A) Clause (i) of section 172(b)(1)(A) is amended by striking 26 USC 172 out "and (J)" and inserting in lieu thereof "(J), and (K)". (B) Subsections (h) and (j) of section 172 are each amended by striking out "subsection (b)" in the matter preceding paragraph (1) and inserting in lieu thereof "this section". (e) (CONFORMING AMENDMENT.—Paragraph (4) of section 461(f) (re- 26 use 461 lating to contested liabilities) is amended by inserting "determined after application of subsection (h)" after "taxable year)". (f) INCLUSION IN INCOME OF NUCLEAR DECOMMISSIONING C!OSTS ''•6 .'• d& INCLUDED IN THE TAXPAYER'S RATE BASE.—
98 STAT. 608 PUBLIC LAW 98-369—JULY 18, 1984 (1) IN GENERAL.—Part II of subchapter B of chapter 1 (relating to items specifically included in gross income) is amended by adding at the end thereof the following new section: 26 u s e 88. "SEC. 88. CERTAIN AMOUNTS WITH RESPECT TO NUCLEAR DECOMMIS- SIONING COSTS. "In the case of any taxpayer who is required to include the amount of any nuclear decommissioning costs in the taxpayer's cost of service of ratemaking purposes, there shall be includible in the gross income of such taxpayer the amount so included for any taxable year." (2) CONFORMING AMENDMENT.—The table of sections for part II of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 88. Certain amounts with respect to nuclear decommissioning costs." 26 u s e 461 note. (g) EFFECTIVE D A T E S . — (1) IN GENERAL.—Except as provided in this subsection and subsections (h) and (i), the amendments made by this section shall apply to amounts with respect to which a deduction would be allowable under chapter 1 of the Internal Revenue Code of 26 use 1 et seq. 1954 (determined without regard to such amendments) after— (A) in the case of amounts to which section 461(h) of such Ante, p. 598. Code (as added by such amendments) applies, the date of the enactment of this Act, and (B) in the case of amounts to which section 461(i) of such Ante, p. 598. Code (as so added) applies, after March 31,1984. (2) TAXPAYER MAY ELECT EARLIER APPLICATION.— (A) IN GENERAL.—In the case of amounts described in paragraph (1)(A), a taxpayer may elect to have the amend- ments made by this section apply to amounts which— (i) are incurred before the date of the enactment of . this Act (determined without regard to such amend- "^ • ments), and (ii) are incurred on or after the date of the enactment of this Act (determined with regard to such amend- ments). (B) ELECTION TREATED AS CHANGE IN THE METHOD OF AC- COUNTING.—For purposes of section 481 of the Internal Revenue Code of 1954, if an election is made under subpara- graph (A) with respect to any amount, the application of the amendments made by this section shall be treated as a change in method of accounting— (i) initiated by the taxpayer, (ii) made with the consent of the Secretary of the Treasury, and •71 oau?!: (iii) with respect to which section 481 of such Code shall be applied by substituting a 3-year adjustment period for a 10-year adjustment period. (3) SECTION 461(h) TO APPLY IN CERTAIN CASES.—Notwith- standing paragraph (1), section 461(h) of the Internal Revenue Ante, p. 598. Code of 1954 (as added by this section) shall be treated as being in effect to the extent necessary to carry out any amendments made by this section which take effect before section 461(h). 26 u s e 461 note. (h) EXCEPTION FOR CERTAIN EXISTING ACTIVITIES AND CON- TRACTS.—If—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 609 (1) EXISTING ACCOUNTING PRACTICES.—If, on March 1, 1984, any taxpayer was regularly computing his deduction for mining reclamation activities under a current cost method of account- ing (as determined by the Secretary of the Treasury or his delegate), the liability for reclamation activities— (A) for land disturbed before the date of the enactment of this Act, or (B) to which paragraph (2) applies, shall be treated as having been incurred when the land was disturbed. (2) FIXED PRICE SUPPLY CONTRACT.— •»** (A) IN GENERAL.—In the case of any fixed price supply contract entered into before March 1, 1984, the amend- ments made by subsection (b) shall not apply to any miner- als extracted from such property which are sold pursuant to such contract. (B) No EXTENSION OR RENEGOTIATION.—Subparagraph (A) '^ shall not apply— ^, (i) to any extension of any contract beyond the period SIB J'- guch contract was in effect on March 1,1984, or f (ii) to any renegotiation of, or other change in, the •inc' It terms and conditions of such contract in effect on March 1,1984. (i) TRANSITIONAL RULE FOR ACCRUED VACATION PAY.— 26 use 461 note. (1) IN GENERAL.—In the case of any taxpayer— (A) with respect to whom a deduction was allowable (other than under section 463 of the Internal Revenue Code of 1954) for vested accrued vacation pay for the last taxable year ending before the date of the enactment of this Act, and (B) who elects the application of section 463 of such Code for the first taxable year ending after the date of the enactment of this Act, then, for purposes of section 463(b) of such Code, the opening balance of the taxpayer with respect to any vested accrued ,-; „,;•: - i vacation pay shall be determined under section 463(b)(1) of such Code. (2) VESTED ACCRUED VACATION PAY.—For purposes of this sub- section, the term "vested accrued vacation pay" means any amount allowable under section 162(a) of such Code with respect to vacation pay of employees of the taxpayer (determined with- out regard to section 463 of such Code). SEC. 92. TREATMENT OF CERTAIN DEFERRED PAYMENTS FOR USE OF PROPERTY OR SERVICES. (a) GENERAL RULE.—Subpart C of part II 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. 467. CERTAIN PAYMENTS FOR THE USE OF PROPERTY OR SERVICES. 26 USC 467. "(a) ACCRUAL METHOD ON PRESENT VALUE BASIS.—In the case of the lessor or lessee under any section 467 rental agreement, there shall be taken into account for purposes of this title for any taxable year the sum of— "(1) the amount of the rent which accrues during such taxable year as determined under subsection (b), and
98 STAT. 610 PUBLIC LAW 98-369—JULY 18, 1984 "(2) interest for the year on the amounts which were taken into account under this subsection for prior taxable years and which are unpaid. "(b) ACCRUAL OF RENTAL PAYMENTS.— "(1) ALLOCATION FOLLOWS AGREEMENT.—Except as provided in paragraph (2), the determination of the amount of the rent under any section 467 rental agreement which accrues during any taxable year shall be made— "(A) by allocating rents in accordance with the agree- ment, and "(B) by taking into account any rent to be paid after the close of the period in an amount determined under regula- tions which shall be based on present value concepts. "(2) CONSTANT RENTAL ACCRUAL IN CASE OF CERTAIN TAX AVOIDANCE TRANSACTIONS, ETC.—In the case of any section 467 rental agreement to which this paragraph applies, the portion of the rent which accrues during any taxable year shall be that portion of the constant rental amount with respect to such agreement which is allocable to such taxable year. "(3) AGREEMENTS TO WHICH PARAGRAPH (2) APPLIES.—Para- graph (2) applies to any rental payment agreement if— "(A) such agreement is a disqualified leaseback or long- term agreement, or "(B) such agreement does not provide for the allocation ^*^'' ' referred to in paragraph (1)(A). "(4) DISQUALIFIED LEASEBACK OR LONG-TERM AGREEMENT.—For purposes of this subsection, the term 'disqualified leaseback or long-term agreement' means any section 467 rental agreement if— "(A) such agreement is part of a leaseback transaction or such agreement is for a term in excess of 75 percent of the statutory recover period for the property, and "(B) a principal purpose for providing increasing rents under the agreement is the avoidance of tax imposed by this subtitle. Regulations. "(5) EXCEPTIONS TO DISQUALIFICATION IN CERTAIN CASES.—The Secretary shall prescribe regulations setting forth circum- stances under which agreements will not be treated as disquali- fied leaseback or long-term agreements, including circum- stances relating to— "(A) changes in amounts paid determined by reference to price indices, "(B) rents based on a fixed percentage of lessee receipts or similar amounts, "(C) reasonable rent holidays, or "(D) changes in amounts paid to unrelated 3rd parties. "(c) RECAPTURE OF PRIOR UNDERSTATED INCLUSIONS UNDER LEASE- BACK OR LONG-TERM AGREEMENTS.— "(1) IN GENERAL.—If— "(A) the lessor under any section 467 rental agreement ' disposes of any property subject to such agreement during the term of such agreement, and "(B) such agreement is a leaseback or long-term agree- ment to which paragraph (2) of subsection (b) did not apply, the recapture amount shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 611 "(2) RECAPTURE AMOUNT.—For purposes of paragraph (1), the term 'recapture amount' means the lesser of^ "(A) the prior understated inclusions, or "(B) the excess of the amount realized (or in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of the property) over the adjusted basis of such property. The amount determined under subparagraph (B) shall be re- duced by the amount of any gain treated as ordinary income on the disposition under any other provision of this subtitle. "(3) PRIOR UNDERSTATED INCLUSIONS.—For purposes of this subsection, the term 'prior understated inclusion' means the excess (if any) of^ "(A) the amount which would have been taken into ac- count by the lessor under subsection (a) for periods before the disposition if subsection (b)(2) had applied to the agree- ment, over "(B) the amount taken into account under subsection (a) by the lessor for periods before the disposition. "(4) LEASEBACK OR LONG-TERM AGREEMENT.—For purposes of this subsection, the term 'leaseback or long-term agreement' means any agreement described in subsection (b)(3)(A). "(5) SPECIAL RULES.—Under regulations prescribed by the Secretary— "(A) exceptions similar to the exceptions applicable under section 1245 or 1250 (whichever is appropriate) shall apply for purposes of this subsection, "(B) any transferee in a disposition excepted by reason of M'^- -Vi r;mk subparagraph (A) who has a transferred basis in the proper- ty shall be treated in the same manner as the transferor, and "(C) for purposes of sections 163(d), 170(e), 341(e)(12), i3ihi f.if 453B(d)(2), and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245 or 1250. "(d) SECTION 467 RENTAL AGREEMENTS.— "(1) I N GENERAL.—Except as otherwise provided in this sub- section, the term 'section 467 rental agreements' means any rental agreement for the use of tangible property under which— "(A) there is at least one amount allocable to the use of property during a calendar year which is to be paid after the close of the calendar year following the calendar year in which such use occurs, or "(B) there are increases in the amount to be paid as rent under the agreement. "(2) SECTION NOT TO APPLY TO AGREEMENTS INVOLVING PAY- MENTS OF $250,000 OR LESS.—This section shall not apply to any amount to be paid for the use of property if the sum of the following amounts does not exceed $250,000— "(A) the aggregate amount of payments received as con- sideration for such use of property, and 1. "(B) the aggregate value of any other consideration to be received for such use of property. For purposes of the preceding sentence, rules similar to the rules of clauses (ii) and (iii) of section 1274(c)(2)(C) shall apply. Ante, p. 538.
98 STAT. 612 PUBLIC LAW 98-369—JULY 18, 1984 "(e) DEFINITIONS.—For purposes of this section— "(1) CONSTANT RENTAL AMOUNT.—The term 'constant rental amount' means, with respect to any section 467 rental agree- ment, the amount which, if paid as of the close of each lease period under the agreement, would result in an aggregate present value equal to the present value of the aggregate pay- ments required under the agreement. "(2) LEASEBACK TRANSACTION.—A transaction is a leaseback transaction if it involves a leaseback to any person who had an interest in such property at any time within 2 years before such leaseback (or to a related person). "(3) STATUTORY RECOVERY PERIOD.— ;> "(A) IN GENERAL.— "In the case of property which is: The statutory recovery period is: 3-year property 3 years 5-year property 5 years 10-year property 10 years Low-income housing 15 years 15-year public utility property 15 years 18-year real property 18 years "(B) SPECIAL RULE FOR PROPERTY WHICH IS NOT RECOVERY PROPERTY.—In the case of any property which is not recov- ery property, subparagraph (A) shall be applied as if such property were recovery property. "(4) DISCOUNT AND INTEREST RATE.—For purposes of comput- ing present value and interest under subsection (a)(2), the rate used shall be equal to 110 percent of the applicable Federal rate Ante, p. 538. determined under section 1274(d) (compounded semiannually) which is in effect at the time the agreement is entered into with respect to debt instruments having a maturity equal to the term of the agreement. "(5) RELATED PERSON.—The term 'related person' has the meaning given to such term by section 168(d)(4)(D). "(6) CERTAIN OPTIONS OF LESSEE TO RENEW NOT TAKEN INTO ACCOUNT.—Except as provided in regulations prescribed by the Secretary, there shall not be taken into account in computing the term of any agreement for purposes of this section any extension which is solely at the option of the lessee. "(f) COMPARABLE RULES WHERE AGREEMENT FOR DECREASING PAY- MENTS.—Under regulations prescribed by the Secretary, rules com- parable to the rules of this section shall also apply in the case of any agreement where the amount paid under the agreement for the use of property decreases during the term of the agreement. "(g) COMPARABLE RULES FOR SERVICES.—Under regulations pre- scribed by the Secretary, rules comparable to the rules of subsection (a)(2) shall also apply in the case of payments for services which meet requirements comparable to the requirements of subsection (d). "(h) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be appropriate to carry out the purposes of this section, including regulations providing for the application of this section in the case of contingent payments." (b) CLERICAL AMENDMENT.—The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: Sec. 467. Certain payments for use of property or servicee.' 26 u s e 467 note. (c) EFFECTIVE D A T E S . —
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 613 (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply with respect to agreements entered into after June 8,1984. (2) EXCEPTIONS.—The amendments made by this section shall not apply— (A) to any agreement entered into pursuant to a written agreement which was binding on June 8, 1984, and at all times thereafter, .-,., (B) subject to the provisions of paragraph (3), to any agreement to lease property if— (i) there was in effect a firm plan, evidenced by a board of directors' resolution, memorandum of agree- ment, or letter of intent on March 15, 1984, to enter 0; into such an agreement, and ff (ii) construction of the property was commenced (but i:i such property was not placed in service) on or before Ml March 15, 1984, and -csd a (C) to any agreement to lease property if— (i) the lessee of such property adopted a firm plan to lease the property, evidenced by a resolution of the Finance Committee of the Board of Directors of such lessee, on February 10, 1984, (ii) the sum of the present values of the rents payable , by the lessee under the lease at the inception thereof equals at least $91,223,034, assuming for purposes of this clause— (I) the annual discount rate is 12.6 percent, (II) the initial payment of rent occurs 12 months after the commencement of the lease, and (III) subsequent payments of rents occur on the anniversary date of the initial payment, and (iii) during— (I) the first 5 years of the lease, at least 9 percent of the rents payable by the lessee under the agree- ment are paid, and (II) the second 5 years of the lease, at least 16.25 percent of the rents payable by the lessee under the agreement are paid. ,v,r n- Paragraph (3)(B)(ii)(II) shall apply for purposes of -i >-^ d- clauses (ii) and (iii) of subparagraph (C), as if, as of the beginning of the last stage, the separate agreements were treated as 1 single agreement relating to all property covered by the agreements, including any property placed in service before the property to which =; «, the agreement for the last stage relates. If the lessor under the agreement described in subparagraph (C) leases the property from another person, this exception shall also apply to any agreement between the lessor irfi ; : . ' and such person which is integrally related to, and ,'!;}:'•& entered into at the same time as, such agreement, and which calls for comparable payments of rent over the primary term of the agreement. (3) SCHEDULE OF DEEMED RENTAL PAYMENTS.— (A) IN GENERAL.—In any case to which paragraph (2)(B) applies, for purposes of the Internal Revenue Code of 1954, 26 USC i et seq. the lessor shall be treated as having received or accrued
98 STAT. 614 PUBLIC LAW 98-369—JULY 18, 1984 (and the lessee shall be treated as having paid or incurred) rents equal to the greater of— (i) the amount of rents actually paid under the agree- ment during the taxable year, or (ii) the amount of rents determined in accordance " with the schedule under subparagraph (B) for such taxable year, (B) SCHEDULE.— (i) I N GENERAL.—The schedule under this subpara- graph is as follows: Cumulative percentage of total rent > Portion of lease term: deemed paid: 1st Vs 10 :. 2nd % 25 3rd 1/5 45 '•^.^,U\ 4^Jj ^ rjQ Last Vk 100. (ii) OPERATING RULES.—For purposes of this sched- ule— (I) the rent allocable to each taxable year within any portion of a lease term described in such sched- ule shall be a level pro rata amount properly allo- cable to such taxable year, and (II) any agreement relating to property which is to be placed in service in 2 or more stages shall be treated as 2 or more separate agreements. (C) PARAGRAPH NOT TO APPLY.—This paragraph shall not apply to any agreement if the sum of the present values of all payments under the agreement is greater than the sum of the present value of all the payments deemed to be paid or received under the schedule under subparagraph (B). For purposes of computing any present value under this sub- paragraph, the annual discount rate shall be equal to 12 percent, compounded semiannually. SEC. 93. AMORTIZATION OF CONSTRUCTION PERIOD INTEREST AND TAXES FOR RESIDENTIAL REAL PROPERTY HELD BY CORPO- RATIONS. 26 use 189. (a) I N GENERAL.—Subsection (d) of section 189 (relating to amorti- zation of real property construction period interest and taxes) is amended— (1) by striking out paragraph (2), and (2) by redesignating paragraph (3) as paragraph (2). 26 use 189 note. (b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1984, with respect to construction beginning after March 15,1984. SEC. 94. CAPITALIZATION OF START-UP EXPENDITURES. 26 use 195. (a) IN GENERAL.—Section 195 (relating to start-up expenditures) is amended to read as follows: "SEC. 195. START-UP EXPENDITURES. "(a) CAPITAUZATION OF EXPENDITURES.—Except as otherwise pro- vided in this section, no deduction shall be allowed for start-up \»t Vi i 3e expenditures. "(b) ELECTION TO AMORTIZE.— 3
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. (315 •3 J «Q) jjj GENERAL.—Start-up expenditures may, at the election of the taxpayer, be treated as deferred expenses. Such deferred expenses shall be allowed as a deduction prorated equally over such period of not less than 60 months as may be selected by the taxpayer (beginning with the month in which the active trade or business begins). "(2) DISPOSITIONS BEFORE CLOSE OF AMORTIZATION PERIOD.—In any case in which a trade or business is completely disposed of by the taxpayer before the end of the period to which paragraph (1) applies, any deferred expenses attributable to such trade or business which were not allowed as a deduction by reason of this section may be deducted to the extent allowable under section 165. "(c) DEFINITIONS.—For purposes of this section— "(1) START-UP EXPENDITURES.—The term 'start-up expenditure' means any amount— f . i«>. "(A) paid or incurred in connection with— 'O "(i) investigating the creation or acquisition of an active trade or business, or "(ii) creating an active trade or business, or to.-- )ri ? &. "(iii) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such >: activity becoming an active trade or business, and "(B) which, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the trade or business referred to in subpara- >"» graph (A)), would be allowable as a deduction for the tax- able year in which paid or incurred. The term 'start-up expenditure' does not include any amount with respect to which a deduction is allowable under section ..(, ,> . ..^ 163(a), 164, or 174. -rj "(2) BEGINNING OF TRADE OR BUSINESS.— ifii- "(A) I N GENERAL.—Except as provided in subparagraph (B), the determination of when an active trade or business begins shall be made in accordance with such regulations as the Secretary may prescribe. "(B) ACQUIRED TRADE OR BUSINESS.—An acquired active trade or business shall be treated as beginning when the taxpayer acquires it. "(d) ELECTION.— "(1) TIME FOR MAKING ELECTION.—An election under subsec- tion (b) shall be made not later than the time prescribed by law for filing the return for the taxable year in which the trade or business begins (including extensions thereof). "(2) SCOPE OF ELECTION.—The period selected under subsection (b) shall be adhered to in computing taxable income for the taxable year for which the election is made and all subsequent taxable years." (b) CONFORMING AMENDMENT.—The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 195 and inserting in lieu thereof the following: "Sec. 195. Start-up expenditures." (c) EFFECTIVE DATE.—The amendments made by this section shall 26 use 195 note. apply to taxable years beginning after June 30,1984.
98 STAT. 616 PUBLIC LAW 98-369—JULY 18, 1984 SEC. 95. LIFO CONFORMITY RULES APPLIED ON CONTROLLED GROUP BASIS. 26 u s e 472. (a) G E N E R A L RULE.—Section 472 (relating to last-in, flrst-out in- ventories) is a m e n d e d by a d d i n g a t t h e end thereof t h e following new subsection: "(g) CONFORMITY RULES APPLIED ON CONTROLLED GROUP BASIS.— "(1) IN GENERAL.—Except as otherwise provided in regula- tions, all members of the same group of financially related corporations shall be treated as 1 taxpayer for purposes of subsections (c) and (e)(2). "(2) GROUP OF FINANCIALLY RELATED CORPORATIONS.—For pur- poses of paragraph (1), the term 'group of financially related corporations' means— "(A) any affiliated group as defined in section 1504 deter- mined by substituting '50 percent' for '80 percent' each Ante, p. 577. place it appears in section 1504(a) and without regard to section 1504(b), and r. "(B) any other group of corporations which consolidate or combine for purposes of financial statements." 26 use 472 note. (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after the date of the enact- ment of this Act. Subtitle H—Provisions Relating to Tax Straddles SEC. 101. REPEAL OF EXCEPTION FROM STRADDLE RULES FOR STOCK OPTIONS AND CERTAIN STOCK. (a) REPEAL OF EXCEPTION FOR STOCK OPTIONS.— 26 use 1092. (1) I N GENERAL.—Paragraph (2) of section 1092(d) (defining position) is amended to read as follows: "(2) POSITION.—The term 'position' means an interest (in- cluding a futures or forward contract or option) in personal property." (2) SECTIONS IO92 AND 263(g) NOT TO APPLY TO STRADDLES CONSISTING OF QUAUFIED COVERED CALL OPTIONS AND THE OP- TIONED STOCK.—Subsection (c) of section 1092 (defining straddle) is amended by adding at the end thereof the following new paragraph: "(4) EXCEPTION FOR CERTAIN STRADDLES CONSISTING OF QUAU- FIED COVERED CALL OPTIONS AND THE OPTIONED STOCK.— "(A) I N GENERAL.—If^ "(i) all the offsetting positions making up any strad- dle consist of 1 or more qualified covered call options and the stock to be purchased from the taxpayer under such options, and "(ii) such straddle is not part of a larger straddle, such straddle shall not be treated as a straddle for purposes ;, of this section and section 263(g). "(B) QUAUFIED COVERED CALL OPTION DEFINED.—For pur- poses of subparagraph (A), the term 'qualified covered call option' means any option granted by the taxpayer to pur- chase stock held by the taxpayer (or stock acquired by the .mo<i 34 M : :u' %: isffe taxpayer in connection with the granting of the option) but only if—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 617 i - : "(i) such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Sec- retary determines has rules adequate to carry out the purposes of this paragraph, . • ci i A "(ii) such option is granted more than 30 days before , < the day on which the option expires, "(iii) such option is not a deep-in-the-money option, "(iv) such option is not granted by an options dealer (within the meaning of section 1256(g)(8)) in connection Post, p. 620. with his activity of dealing in options, and "(v) gain or loss with respect to such option is not ordinary income or loss. "(C) DEEP-IN-THE-MONEY OPTION.—For purposes of sub- paragraph (B), the term 'deep-in-the-money option' means , an option having a strike price lower than the lowest qualified bench mark. "(D) LOWEST QUALIFIED BENCH MARK.— "(i) I N GENERAL.—Except as otherwise provided in 5. . this subparagraph, for purposes of subparagraph (C), the term 'lowest qualified bench mark' means the high- est available strike price which is less than the applica- ble stock price. "(ii) SPECIAL RULE WHERE OPTION IS FOR PERIOD MORE ^, .^^ THAN 90 DAYS AND STRIKE PRICE EXCEEDS $50.—In t h e case of an option— "(I) which is granted more than 90 days before ; the date on which such option expires, and* i-joi r^ j H "(II) with respect to which the strike price is more than $50, the lowest qualified bench mark is the second highest available strike price which is less than the applicable stock price. "(iii) 85 PERCENT RULE WHERE APPUCABLE STOCK PRICE $25 OR LESS.—If— q. . . "(I) the applicable stock price is $25 or less, and "(II) but for this clause, the lowest qualified bench mark would be less than 85 percent of the applicable stock price, the lowest qualified bench mark shall be treated as equal to 85 percent of the applicable stock price. "(iv) LIMITATION WHERE APPLICABLE STOCK PRICE $ 1 5 0 OR LESS.—If— fjj^.;, T, , "(I) the applicable stock price is $150 or less, and "(II) but for this clause, the lowest qualified .^ bench mark would be less than the applicable stock ,. price reduced by $10, the lowest qualified bench mark shall be treated as equal to the applicable stock price reduced by $10. "(E) SPECIAL YEAR-END RULE.—Subparagraph (A) shall not apply to any straddle for purposes of section 1092(a) if— "(i) the qualified covered call options referred to in such subparagraph are closed during any taxable year, "(ii) gain on disposition of the stock to be purchased from the taxpayer under such options is includible in gross income for a later taxable year, and
98 STAT. 618 PUBLIC LAW 98-369—JULY 18, 1984 "(iii) such stock was not held by the taxpayer for 30 days or more after the closing of such options. For purposes of the preceding sentence, the rules of para- graphs (3) (other than subparagraph (B) thereof) and (4) of Ante, p. 567. section 246(c) shall apply in determining the period for which the taxpayer holds the stock. "(F) STRIKE PRICE.—For purposes of this paragraph, the term 'strike price' means the price at which the option is exercisable. ' - \ "(G) APPLICABLE STOCK PRICE.—For purposes of subpara- graph (D), the term 'applicable stock price' means, with respect to any stock for which an option has been granted— "(i) the closing price of such stock on the most recent day on which such stock was traded before the date on which such option was granted, or "(ii) the opening price of such stock on the day on which such option was granted, but only if such price is greater than 110 percent of the price determined under clause (i). "(H) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations may include modifications to the provisions of this paragraph which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes." Ot)) REPEAL OF EXCEPTION FOR STOCK.— 26 use 1092. (1) I N GENERAL.—Paragraph (1) of section 1092(d) (defining personal property) is amended by striking out "(other than stock)". (2) EXCEPTION WHERE STRADDLE CONSISTS OF HOLDING STOCK.— Subsection (d) of section 1092 is amended by redesignating paragraphs (3), (4), and (5) as paragraphs (4), (5), and (6), respec- tively, and by inserting after paragraph (2) the following new paragraph: "(3) SPECIAL RULES FOR STOCK.—For purposes of paragraph (D- "(A) I N GENERAL.—Except as provided in subparagraph (B), the term 'personal property' does not include stock. "(B) EXCEPTIONS.—The term 'personal property' includes— "(i) any stock which is part of a straddle at least 1 of the offsetting positions of which is— "(I) an option with respect to such stock or sub- stantially identical stock or securities, or "(II) under regulations, a position with respect to substantially similar or related property (other than stock), and "(ii) any stock of a corporation formed or availed of to take positions in personal property which offset posi- tions taken by any shareholder. "(C) SPECIAL RULES.— "(i) For purposes of subparagraph (B), subsection (c) and paragraph (4) shall be applied as if stock described in clause (i) or (ii) of subparagraph (B) were personal property.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 619 "(ii) For purposes of determining whether subsection (e) applies to any transaction with respect to stock 8i-4 ! TO described in clause (ii) of subparagraph (B), all includ- " ,{ ible corporations of an affiliated group (within the ff meaning of section 1504(a)) shall be treated £is 1 Ante, p. 517. taxpayer." (c) TREATMENT OF GAIN OR LOSS AND SUSPENSION OF HOLDING PERIOD WHERE TAXPAYER GRANTOR OF OPTION TO BUY STOCK.— Section 1092 is amended by redesignating subsection (f) as subsec- 26 use 1092. tion (g) and by inserting after subsection (e) the following new subsection: "(f) TREATMENT OF GAIN OR LOSS AND SUSPENSION OF HOLDING PERIOD WHERE TAXPAYER GRANTOR OF QUALIFIED COVERED CALL OPTION.—If a taxpayer holds any stock and grants a qualified covered call option to purchase such stock with a strike price less than the applicable stock price— "(1) TREATMENT OF LOSS.—Any loss with respect to such option : shall be treated as long-term capital loss if, at the time such loss is realized, gain on the sale or exchange of such stock would be treated as long-term capital gain. "(2) SUSPENSION OF HOLDING PERIOD.—Except for purposes of section 851(b)(3), the holding period of such stock shall not include any period during which the taxpayer is the grantor of such option." (d) TREATMENT OF IDENTIFIED STRADDLES INVOLVING SECTION 1256 CONTRACTS.—Paragraph (4) of subsection (d) of section 1092 is Ante, p. 618. amended to read as follows: "(4) SPECIAL RULE FOR SECTION 1256 CONTRACTS.— "(A) GENERAL RULE.—In the case of a straddle at least 1 (but not all) of the positions of which are section 1256 contracts, the provisions of this section shall apply to any * section 1256 contract and any other position making up such straddle. i "(B) SPECIAL RULE FOR IDENTIFIED STRADDLES.—For pur- poses of subsection (aX2) (relating to identified straddles), subparagraph (A) and section 1256(a)(4) shall not apply to a straddle all of the offsetting positions of which consist of section 1256 contracts." (e) EFFECTIVE DATES.— 26 use 1092 (1) IN GENERAL.—Except as otherwise provided in this subsec- "o^e. tion, the amendments made by this section shall apply to positions established after December 31, 1983, in taxable years ending after such date. (2) SPECIAL RULE FOR OFFSETTING POSITION STOCK.—In the case of any stock of a corporation formed or availed of to take positions in personal property which offset positions taken by any shareholder, the amendments made by this section shall apply to positions established on or after May 23, 1983, in taxable years ending on or after such date. (3) SUBSECTION (C) .—The amendment made by subsection (c) shall apply to positions established after June 30, 1984, in taxable years ending after such date. (4) SUBSECTION (d).—The amendment made by subsection (d) shall apply to positions established after the date of the enact- ment of this Act in taxable years ending after such date.
98 STAT. 620 PUBLIC LAW 98-369—JULY 18, 1984 SEC. 102. SECTION 1256 EXTENDED TO CERTAIN OPTIONS. (a) GENERAL RULE.— 26 use 1256. (1) Section 1256 (relating to regulated futures contracts marked to market) is amended— V; i.s-f (A) by striking out "regulated futures contract" each place it appears and inserting in lieu thereof "section 1256 contract", and (B) by striking out "regulated futures contracts" each -i; * place it appears and inserting in lieu thereof "section 1256 contracts". (2) Subsection (b) of section 1256 is amended to read as follows: "(b) SECTION 1256 CONTRACT DEFINED.—For purposes of this sec- tion, the term 'section 1256 contract' means— "(1) any regulated futures contract, "(2) any foreign currency contract, "(3) any nonequity option, and "(4) any dealer equity option." (3) Subsection (g) of section 1256 is amended to read as follows: "(g) DEFINITIONS.—For purposes of this section— "(1) REGULATED FUTURES CONTRACTS DEFINED.—The term 'reg- ulated futures contract' means a contract— "(A) with respect to which the amount required to be deposited and the amount which may be withdrawn de- pends on a system of marking to market, and "(B) which is traded on or subject to the rules of a i; .u qualified board or exchange. "(2) FOREIGN CURRENCY CONTRACT DEFINED.— "(A) FOREIGN CURRENCY CONTRACT.—The term 'foreign currency contract' means a contract— "(i) which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts, "(ii) which is traded in the interbank market, and "(iii) which is entered into at arm's length at a price determined by reference to the price in the interbank market. "(B) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes. "(3) NONEQUITY OPTION.—The term 'nonequity option' means any listed option which is not an equity option. "(4) DEALER EQUITY OPTION.—The term 'dealer equity option' means, with respect to an options dealer, any listed option £,. which— "(A) is an equity option, "(B) is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and "(C) is listed on the qualified board or exchange on which such options dealer is registered. "(5) LISTED OPTION.—The term 'listed option' means any , option (other than a right to acquire stock from the issuer)
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 621 which is traded on (or subject to the rules of) a qualified board or exchange. "(6) EQUITY OPTION.— "(A) I N GENERAL.—Except as provided in subparagraph (B), the term 'equity option' means any option— "(i) to buy or sell stock, or "(ii) the value of which is determined directly or ^-* indirectly by reference to any stock (or group of stocks) or stock index. ji 1^ «^g^ EXCEPTION FOR CERTAIN OPTIONS REGULATED BY COM- MODITIES FUTURES TRADING COMMISSION.—The term 'equity ^' option' does not include any option with respect to any group of stocks or stock index if— "(i) there is in effect a designation by the Commod- ... ,^,, ,. I ities Futures Trading Commission of a contract market ^ " ~ '^ ''" - for a contract based on such group of stocks, or index, or "(ii) the Secretary determines that such option meets the requirements of law for such a designation. "(7) QUALIFIED BOARD OR EXCHANGE.—The term 'qualified board or exchange' means— "(A) a national securities exchange which is registered with the Securities and Exchange Commission, "(B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or j^;, "(C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section. tjfl' g "(8) OPTIONS DEALER.— "(A) I N GENERAL.—The term 'options dealer' means any y^g Q .i^siu. person registered with an appropriate national securities exchange as a market maker or specialist in listed options. "(B) PERSONS TRADING IN OTHER MARKETS.—In any case in which the Secretary makes a determination under subpara- graph (C) of paragraph (7), the term 'options dealer' also includes any person whom the Secretary determines per- it forms functions similar to the persons described in subpara- graph (A). Such determinations shall be made to the extent SJ).« yji.. appropriate to carry out the purposes of this section." (b) CAPITAL GAIN TREATMENT FOR TRADERS IN SECTION 1256 CON- TRACTS.—Subsection (f) of section 1256 (relating to special rules) is 26 USC 1256. amended by adding at the end thereof the following new paragraphs: "(3) CAPITAL GAIN TREATMENT FOR TRADERS IN SECTION 1256 CONTRACTS.— "(A) I N GENERAL.—For purposes of this title, gain or loss •' from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset. "(B) EXCEPTION FOR CERTAIN HEDGING TRANSACTIONS.— Subparagraph (A) shall not apply to any section 1256 con- ^ tract to the extent such contract is held for purposes of hedging property if any loss with respect to such property ''' ' in the hands of the taxpayer would be ordinary loss. "(C) TREATMENT OF UNDERLYING PROPERTY.—For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the tax- payer is actively engaged in dealing in or trading section
98 STAT. 622 PUBLIC LAW 98-369—JULY 18, 1984 1256 contracts related to such property shall not be taken into account. "(4) SPECIAL RULE FOR DEALER EQUITY OPTIONS OF LIMITED PARTNERS OR LIMITED ENTREPRENEURS.—In the case of any gain or loss with respect to dealer equity options which are allocable to limited partners or limited entrepreneurs (within the mean- ing of subsection (e)(3))— "(A) paragraph (3) of subsection (a) shall not apply to any such gain or loss, and "(B) all such gains or losses shall be treated as short-term capital gains or losses, as the case may be." (c) APPLICATION OF SELF-EMPLOYMENT INCOME TAX TO OPTIONS AND COMMODITIES DEALERS.— (1) AMENDMENT TO THE INTERNAL REVENUE CODE OF 1954.— 26 use 1402. Section 1402 (relating to definitions for tax on self-employment income) is amended by adding at the end thereof the following new subsection: "(i) SPECIAL RULES FOR OPTIONS AND COMMODITIES DEALERS.— "(1) I N GENERAL.—In determining the net earnings from self- employment of any options dealer or commodities dealer— "(A) notwithstanding subsection (a)(3)(A), there shall not be excluded any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from section 1256 contracts or property related to such contracts, and "(B) the deduction provided by section 1202 shall not apply. "(2) DEFINITIONS.—For purposes of this subsection— "(A) OPTIONS DEALER.—The term 'options dealer' has the Ante, p. 620. meaning given such term by section 1256(g)(8). "(B) COMMODITIES DEALER.—The term 'commodities dealer' means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission. "(C) SECTION 1256 CONTRACTS.—The term 'section 1256 contract' has the meaning given to such term by section Ante, p. 620. 1256(b)." (2) AMENDMENT TO THE SOCIAL SECURITY ACT.—Section 211 of 42 use 411. the Social Security Act is amended by adding at the end thereof the following new subsection: "(h)(1) In determining the net earnings from self-employment of any options dealer or commodities dealer— "(A) notwithstanding subsection (a)(3)(A), there shall not be excluded any gain or loss (in the normal course of the taxpayer's 26 use 1256. activity of dealing in or trading section 1256 contracts) from section 1256 contracts or property related to such contracts, and "(B) the deduction provided by section 1202 of the Internal 26 u s e 1202. Revenue Code of 1954 shall not apply. "(2) For purposes of this subsection— "(A) The term 'options dealer' has the meaning given such Ante, p. 620. term by section 1256(g)(8) of such Code. "(B) The term 'commodities dealer' means a person who is actively engaged in trading section 1256 contracts and is regis- tered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 623 "(C) The term 'section 1256 contracts' has the meaning given to such term by section 1256(b) of such Code." Ante, p. 620. (d) TREATMENT UNDER SUBCHAPTER S OF OPTIONS AND COMMOD- ITIES DEALERS.— (1) TAX IMPOSED ON CERTAIN CAPITAL GAINS NOT TO APPLY.— Subsection (c) of section 1374 (relating to tax imposed on certain 26 USC 1374. capital gains) is amended by adding at the end thereof the following new paragraph: "(4) TREATMENT OF CERTAIN GAINS OF OPTIONS AND COMMOD- .':ji(n om fiu ITIES DEALERS.— "(A) EXCLUSION OF CERTAIN CAPITAL GAINS.—For purposes of this section, the net capital gain of any options dealer or \ f' commodities dealer shall be determined by not taking into ' account any gain or loss (in the normal course of the taxpayer's activity of dealing in or trading section 1256 contracts) from any section 1256 contract or property i. related to such a contract. "(B) DEFINITIONS.—For purposes of this paragraph— T' "(i) OPTIONS DEALER.—The term 'options dealer' has the meaning given to such term by section 1256(g)(8). Ante, p. 620. "(ii) COMMODITIES DEALER.—The term 'commodities dealer' means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a con- tract market by the Commodities Futures Trading -; Commission. "(iii) SECTION 1256 CONTRACTS.—The term 'section e^fiR )! '. j^256 contracts' has the meaning given to such term by * section 1256(b)." Ante, p. 620. (2) CERTAIN GAINS NOT TREATED AS PASSIVE INVESTMENT INCOME.—Subparagraph (D) of section 1362(d)(3) (defining pas- 26 use 1362. sive investment income) is amended by adding at the end thereof the following new clause: "(v) SPECIAL RULE FOR OPTIONS AND COMMODITIES DEALERS.—In the case of any options or commodities 4 dealer, passive investment income shall be determined by not taking into account any gain or loss described in section 1374(c)(4)(A)." Supra. (3) SUBCHAPTER S ELECTION.—If a commodities dealer or an 26 u s e 1362 options dealer— note. (A) becomes a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1954) at any time before the close of the 75th day after the date of the J enactment of this Act, and (B) makes the election under section 1362(a) of such Code before the close of such 75th day, then such dealer shall be treated as having received approval for and adopted a taxable year beginning on the first day during 1984 on which it was a small business corporation (as so defined) and ending on the date determined under section 1378 of such Code and such election shall be effective for such taxable year. (e) TECHNICAL AND CONFORMING AMENDMENTS.— (1) Subsection (c) of section 1256 (relating to terminations, etc.) is amended— (A) by striking out "by taking or making delivery," in paragraph (1) and inserting in lieu thereof "by taking or
98 STAT. 624 PUBLIC LAW 98-369—JULY 18, 19^4 making delivery, by exercise or being exercised, by assign- ment or being assigned, by lapse,", (B) by striking out "takes delivery under" in paragraph (2) and inserting in lieu thereof "takes delivery under or exercises", and (C) by striking out "TAKES DELIVERY ON" in the heading of paragraph (2) and inserting in lieu thereof "TAKES DELIVERY ON OR EXERCISES". 26 u s e 1092. (2) Paragraph (5) of section 1092(d) is amended to read as follows: "(5) SECTION 1256 CONTRACT.—The term 'section 1256 contract' Ante, p. 620. has the meaning given such term by section 1256(b)." 26 u s e 1212. (3) Subsection (c) of section 1212 (relating to carryback of losses from regulated futures contracts to offset prior gains from such contracts) is amended— (A) by striking out "net commodity futures loss" each place it appears (including in any headings) and inserting in lieu thereof "net section 1256 contracts loss", (B) by striking out "regulated futures contracts" each place it appears (including in any headings) and inserting in lieu thereof "section 1256 contracts", (C) by striking out "regulated futures contract" each place it appears in paragraph (7)(A) (including the heading) and inserting in lieu thereof "section 1256 contract", and (D) by striking out "net commodity futures gain" each place it appears (including in any headings) and inserting in lieu thereof "net section 1256 contract gain". 26 u s e 1234A. (4) Paragraph (2) of section 1234A (relating to gains or losses from certain terminations) is amended by striking out "a regu- lated futures contract" and inserting in lieu thereof "a section 1256 contract". 26 u s e 1256. (5) The section heading for section 1256 is amended by strik- ing out "REGULATED FUTURES CONTRACTS" and inserting in lieu thereof "SECTION 1256 CONTRACTS". (6) The table of sections for part IV of subchapter P of chapter 1 is amended by striking out "Regulated futures contracts' in the item relating to section 1256 and inserting in lieu thereof "Section 1256 contracts". 26 u s e 263. (7) Paragraph (2) of section 263(g) (defining interest and carry- ing charges) is amended to read as follows: "(2) INTEREST AND CARRYING CHARGES DEFINED.—For purposes of paragraph (1), the term 'interest and carrying charges' means the excess of— "(A) the sum of— "(i) interest on indebtedness incurred or continued to purchase or carry the personal property, and "(ii) all other amounts (including charges to insure, store, or transport the personal property) paid or in- curred to carry the personal property, over "(B) the sum of— "(i) the amount of interest (including original issue discount) includible in gross income for the taxable year with respect to the property described in subpara- graph (A), "(ii) any amount treated as ordinary income under Ante, pp. 532, section 1271(a)(3)(A), 1278, or 1281(a) with respect to 547, 548. such property for the taxable year, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 625 "(iii) the excess of any dividends includible in gross income with respect to such property for the taxable year over the amount of any deduction allowable with respect to such dividends under section 243, 244, or 245. For purposes of subparagraph (A), the term 'interest' includes • any amount paid or incurred in connection with personal prop- erty used in a short sale." (8) Subsection (g) of section 263 (relating to certain interest 26 u s e 263. and carrying charges in the case of straddles) is amended by adding at the end thereof the following new paragraph: "(4) APPLICATION WITH OTHER PROVISIONS.— "(A) SUBSECTION (C) .—In the case of any short sale, this subsection shall be applied after subsection (h). "(B) SECTION 1277 OR 1282.—In the case of any obligation to which section 1277 or 1282 applies, this subsection shall Ante, pp. 545, be applied after section 1277 or 1282." 549. (9) Section 1234A (relating to gains or losses from certain 26 u s e 1234A. terminations) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement)." (f) EFFECTIVE DATES.— 26 u s e 1256 (1) I N GENERAL.—Except as otherwise provided in this subsec- note. tion or subsection (g), the amendments made by this section shall apply to positions established after the date of the enact- ment of this Act, in taxable years ending after such date. (2) SPECIAL RULE FOR OPTIONS ON REGULATED FUTURES CON- TRACTS.—In the case of any option with respect to a regulated futures contract (within the meaning of section 1256 of the Internal Revenue Code of 1954), the amendments made by this section shall apply to positions established after October 31, 1983, in taxable years ending after such date. (3) SPECIAL RULE FOR SELF-EMPLOYMENT TAX.—Except as pro- vided in subsection (g)(2), the amendments made by subsection (c) shall apply to taxable years beginning after the date of the enactment of this Act. (4) GAINS OR LOSSES FROM CERTAIN TERMINATIONS.—The amendment made by subsection (d)(9) shall apply as if included in the amendment made by section 505(a) of the Economic Recovery Tax Act of 1981, as amended by section 105(e) of the 20 u s e 237 note, Technical Corrections Act of 1982. 238 (g) ELECTIONS WITH RESPECT TO PROPERTY HELD ON OR BEFORE THE 26 u s e 1234A. 26 u s e 1256 DATE OF THE ENACTMENT OF THIS ACT.—At the election of the note. taxpayer— (1) the amendments made by this section shall apply to all section 1256 contracts held by the taxpayer on the date of the enactment of this Act, effective for periods after such date in taxable years ending after such date, or (2) in lieu of an election under paragraph (1), the amendments made by this section shall apply to all section 1256 contracts held by the taxpayer at any time during the taxable year of the taxpayer which includes the date of the enactment of this Act. (h) ELECTIONS FOR INSTALLMENT PAYMENT OF TAX ATTRIBUTABLE 26 u s e 1256 TO STOCK OPTIONS.— note. (1) I N GENERAL.—If the taxpayer makes an election under subsection (g)(2) and under this subsection—
98 STAT. 626 PUBLIC LAW 98-369—JULY 18, 1984 (A) the taxpayer may pay part or all the tax for the taxable year referred to in subsection (g)(2) in 2 or more (but not exceeding 5) equal installments, and (B) the maximum amount of tax which may be paid in installments under this subsection shall be the excess of^ (i) the tax for such taxable year determined by taking into account subsection (g)(2), over (ii) the tax for such taxable year determined by taking into account subsection (g)(2) and by treating— (I) all section 1256 contracts which are stock options, and (II) any stock which was a part of a straddle including any such stock options, as having been acquired for a purchase price equal to their fair market value on the last business day of the preceding taxable year. Stock options and stock shall be taken into account under subparagraph (B)(ii) only if such options or stock were held on the last day of the preceding taxable year and only if income on such options or stock would have been ordinary income if such options or stock were sold at a gain on such last day. (2) DATE FOR PAYMENT OF INSTALLMENT.— (A) If an election is made under this subsection, the first installment under paragraph (1) shall be paid on or before the due date for filing the return for the taxable year described in paragraph (1), and each succeeding installment shall be paid on or before the date which is 1 year after the date prescribed for payment of the preceding installment. (B) If a bankruptcy case or insolvency proceeding involv- ing the taxpayer is commenced before the final installment is paid, the total amount of any unpaid installments shall be treated as due and payable on the day preceding the day on which such case or proceeding is commenced. (3) INTEREST IMPOSED.—For purposes of section 6601 of the Internal Revenue Code of 1954, the time for payment of any tax with respect to which an election is made under this subsection shall be determined without regard to this subsection. (4) FORM OF ELECTION.—An election under this subsection shall be made not later than the time for filing the return for the taxable year described in paragraph (1) and shall be made in the manner and form required by regulations prescribed by Secretary of the Treasury or his delegate. The election shall set forth— (A) the amount determined under paragraph (IXB) and the number of installments elected by the taxpayer, (B) the property described in paragraph (l)(B)(ii), and the date on which such property was acquired, (C) the fair market value of the property described in paragraph (l)(B)(ii) on the last business day of the taxable year preceding the taxable year described in paragraph (1), and (D) such other information for purposes of carrying out the provisions of this subsection as may be required by such regulations. (5) DELAY OF IDENTIFICATION REQUIREMENT.—Section 1256(e)(2)(C) of the Internal Revenue Code of 1954 shall not
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 627 apply to any stock option or stock acquired on or before the 60th day after the date of the enactment of this Act. (i) DEFINITIONS.—For purposes of subsections (g) and (h)— 26 use 1256 (1) SECTION 1256 CONTRACT.—The term "section 1256 contract" "ote. has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1954 (£is amended by this section). Ante, p. 620. (2) STOCK OPTION.—The term "stock option" means any option to buy or sell stock. ,v.. SEC. 103. REGULATIONS UNDER SECTION 1092(b). (a) GENERAL RULE.—Subsection (b) of section 1092 (relating to 26 use 1092. character of gain or loss; wash sales) is amended to read as follows: "(b) REGULATIONS.— "(1) I N GENERAL.—The Secretary shall prescribe such regula- ... -. . ,- tions with respect to gain or loss on positions which are a part of a straddle as may be appropriate to carry out the purposes of this section and section 263(g). To the extent consistent with such purposes, such regulations shall include rules applying the principles of subsections (a) and (d) of section 1091 and of subsections (b) and (d) of section 1233. "(2) REGULATIONS RELATING TO MIXED STRADDLES.— "(A) ELECTIVE PROVISIONS IN LIEU OF SECTION 1233(d) PRINCIPLES.—The regulations prescribed under paragraph (1) shall provide that— "(i) the taxpayer may offset gains and losses from positions which are part of mixed straddles— "(I) by straddle-by-straddle identification, or "(II) by the establishment (with respect to any class of activities) of a mixed straddle account for -'^" • which gains and losses would be recognized (and offset) on a periodic basis, "(ii) such offsetting will occur before the application of section 1256, and section 1256(a)(3) will only apply to net gain or net loss attributable to section 1256 con- tracts, and "(iii) the principles of section 1233(d) shall not apply with respect to any straddle identified under clause ;; (i)(I) or part of an account established under clause (i)(II). "(B) LIMITATION ON NET GAIN OR NET LOSS FROM MIXED STRADDLE ACCOUNT.—In the case of any mixed straddle account referred to in subparagraph (AXiXII)— "(i) NOT MORE THAN 50 PERCENT OF NET GAIN MAY BE TREATED AS LONG-TERM CAPITAL GAIN.—In nO e v e n t shall more than 50 percent of the net gain from such •= account for any taxable year be treated as long-term capital gain, "(ii) NOT MORE THAN 40 PERCENT OF NET LOSS MAY BE TREATED AS SHORT-TERM CAPITAL LOSS.—In nO e v e n t (. shall more than 40 percent of the net loss from such account for any taxable year be treated as short-term ji capital loss. "(C) AUTHORITY TO TREAT CERTAIN POSITIONS AS MIXED STRADDLES.—The regulations prescribed under paragraph ,- . ^ ^. (1) may treat as a mixed straddle positions not described in section 1256(d)(4)."
98 STAT. 628 PUBLIC LAW 98-369—JULY 18, 1984 26 use 1092 (b) REQUIREMENT THAT REGULATIONS B E ISSUED WITHIN 6 MONTHS ^°^- AFTER THE DATE OF ENACTMENT.—The Secretary of the Treasury or his delegate shall prescribe initial regulations under section 1092(b) Ante, p. 627. of the Internal Revenue Code of 1954 (including regulations relating to mixed straddles) not later than the date 6 months after the date of the enactment of this Act. 26 u s e 1092 (c) EFFECTIVE DATE OF REGULATIONS WITH RESPECT TO MIXED ^°^^- STRADDLES.—The regulations described in subsection (b) with respect to the application of section 1233 of the Internal Revenue Code of 1954 to mixed straddles shall not apply to mixed straddles all of the positions of which were established before January 1,1984. SEC. 104. LIMITATION ON LOSSES FROM HEDGING TRANSACTIONS. 26 use 1256. (a) GENERAL RULE.—Subsection (e) of section 1256 (relating to mark to market not to apply to hedging transactions) is amended by adding at the end thereof the following new paragraph: "(5) LIMITATION ON LOSSES FROM HEDGING TRANSACTIONS.— "(A) I N GENERAL.— "(i) LIMITATION.—Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions. "(ii) CARRYOVER OF DISALLOWED LOSS.—Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allow- able in the first succeeding taxable year. "(B) EXCEPTION WHERE ECONOMIC LOSS.—Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into. "(C) EXCEPTION FOR CERTAIN HEDGING TRANSACTIONS.—In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1). "(D) HEDGING LOSS.—The term 'hedging loss' means the excess of— "(i) the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (AXi)), over "(ii) income received or accrued by the taxpayer during such taxable year from such transactions. "(E) UNRECOGNIZED GAIN.—The term 'unrecognized gain' has the meaning given to such term by section 1092(a)(3)." 26 use 1256 (b) EFFECTIVE DATE.—The amendment made by subsection (a) note. shall apply to taxable years beginning after December 31, 1984.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 629 SEC. 105. CLARIFICATION THAT SECTION 1234 APPLIES TO OPTIONS ON REGULATED FUTURES CONTRACTS AND CASH SETTLEMENT OPTIONS. (a) GENERAL RULE.—Section 1234 (relating to options to buy or 26 use 1234. sell) is amended by adding at the end thereof the following new subsection: "(c) TREATMENT OF OPTIONS ON SECTION 1256 CONTRACTS AND CASH SETTLEMENT OPTIONS.— ; c i s "(1) SECTION 1256 CONTRACTS.—Gain or loss shall be recog- nized on the exercise of an option on a section 1256 contract (within the meaning of section 1256(b)). Ante, p. 620. "(2) TREATMENT OF CASH SETTLEMENT OPTIONS.— "(A) IN GENERAL.—For purposes of subsections (a) and (b), a cash settlement option shall be treated as an option to buy or sell property. -f»b i "(B) CASH SETTLEMENT OPTION.—For purposes of subpara- -^ >'^-J '- graph (A), the term 'cash settlement option' means any option which on exercise settles in (or could be settled in) cash or property other than the underlying property." (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 1234 shall apply to options purchased or granted after October 31, 1983, note. in taxable years ending after such date. SEC. 106. WASH SALE RULES TO APPLY TO LOSSES ON CERTAIN SHORT SALES. (a) I N GENERAL.—Section 1091 (relating to losses from w£ish sales 26 use 1091. of stock or securities) is amended by adding at the end thereof the following new subsection: „,. "(e) CERTAIN SHORT SALES OF STOCK OR SECURITIES.—Rules similar to the rules of subsection (a) shall apply to any loss realized on the closing of a short sale of stock or securities if, within a period beginning 30 days before the date of such closing and ending 30 days ' '•" after such date— "(1) substantially identical stock or securities were sold, or "(2) another short sale of substantially identical stock or securities was entered into." (b) LOSSES FROM WASH SALES ONLY IN CASE OF DEALER LOSSES.— Section 1091(a) (relating to disallowance of loss deduction for wash sales) is amended by striking out all that follows "then" and insert- ing in lieu thereof "no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business." (c) EFFECTIVE DATE.— 26 use I09i (1) SUBSECTION (a) .—The amendment made by subsection (a) ^°^- shall apply to short sales of stock or securities after the date of the enactment of this Act in taxable years ending after such date. (2) SUBSECTION (b).—The amendment made by subsection (b) shall apply to sales after December 31, 1984, in taxable years ending after such date. SEC. 107. TIME FOR IDENTIFICATION BY TAXPAYER OF CERTAIN TRANS- ACTIONS. (a) IDENTIFIED STRADDLES.—Clause (i) of section 1092(a)(2)(B) (defm- 26 use 1092. ing identified straddles) is amended to read as follows:
98 STAT. 630 PUBLIC LAW 98-369—JULY 18, 1984 "(i) which is clearly identified on the taxpayer's records ••-'••• as an identified straddle before the earlier of— "(I) the close of the day on which the straddle is M'&i 3PJi ys acquired, or "(II) such time as the Secretary may prescribe by regulations." (b) DEALERS IN SECURITIES.— " 26 use 1236. (1) Paragraph (1) of section 1236(a) (relating to capital gain of dealers in securities) is amended to read as follows: "(1) the security was, before the close of the day on which it 0£^) 4 .lij^k was acquired (or such earlier time as the Secretary may pre- scribe by regulations), clearly identified in the dealer's records as a security held for investment; and". (2) Paragraph (2) of section 1236(a) is amended by inserting "(or such earlier time)" after "such day". 26 use 1256. (c) MIXED STRADDLES.—Subparagraph (B) of section 1256(d)(4) (de- fining mixed straddles) is amended by inserting "(or such earlier time as the Secretary may prescribe by regulations)" after "acquired". km. >6i' Bi (d) HEDGING TRANSACTIONS.—Subparagraph (C) of section <:;t., 1256(eX2) (defining hedging transactions) is amended by inserting "(or such earlier time as the Secretary may prescribe by regula- tions)" after "entered into". 26 use 1092 (e) EFFECTIVE DATE.—The amendments made by this section shall note. apply to positions entered into after the date of the enactment of this Act, in taxable years ending after such date. 26 u s e 1092 SEC. 108. TREATMENT OF CERTAIN LOSSES ON STRADDLES ENTERED INTO note. BEFORE EFFECTIVE DATE OF ECONOMIC RECOVERY TAX ACT OF 1981. (a) GENERAL RULE.—For purposes of the Internal Revenue Code of 26 use 1 et seq. 1954, in the case of any disposition of 1 or more positions— (1) which were entered into before 1982 and form part of a straddle, and (2) to which the amendments made by title V of the Economic 95 Stat. 323. Recovery Tax Act of 1981 do not apply, any loss from such disposition shall be allowed for the taxable year of the disposition if such position is part of a transaction entered into for profit. (b) PRESUMPTION THAT TRANSACTION ENTERED INTO FOR PROFIT.— For purposes of subsection (a), any position held by a commodities dealer or any person regularly engaged in investing in regulated futures contracts shall be rebuttably presumed to be part of a i? Of OP'u ds transaction entered into for profit. -ijof (c) NET Loss ALLOWED WHETHER OR NOT TRANSACTION ENTERED INTO FOR PROFIT.—If any loss with respect to a position described in paragraphs (1) and (2) of subsection (a) is not allowable as a deduc- tion (after applying subsections (a) and (b)), such loss shall be allowed in determining the gain or loss from dispositions of other positions in the straddle to the extent required to accurately reflect the taxpayer's net gain or loss from all positions in such straddle, (d) OTHER RULES.—Except as otherwise provided in subsections (a) and (c) and in sections 1233 and 1234 of such Code, the determina- tion of whether there is recognized gain or loss with respect to a S®; "yF-'j. K: position, and the amount and timing of such gain or loss, and the treatment of such gain or loss as long-term or short-term shall be
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 631 made without regard to whether such position constitutes part of a straddle. J - (e) STRADDLE.—For purposes of this section, the term "straddle" has the meaning given to such term by section 1092(c) of the Internal Revenue Code of 1954 as in effect on the day after the date of the enactment of the Economic Recovery Tax Act of 1981, and 26 USC l note. shall include a straddle all the positions of which are regulated futures contracts. (f) COMMODITIES DEALER.—For purposes of this section, the term "commodities dealer" has the meaning given to such term by section 1402(i)(2)(B) of the Internal Revenue Code of 1954 (as added by this Ante, p. 622. subtitle). (g) REGULATED FUTURES CONTRACTS.—For purposes of this section, the term "regulated futures contracts" has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1954 Ante, p. 620. (as in effect before the date of enactment of this Act). (h) SYNDICATES.—Subsection (b) shall not apply to any syndicate (as defined in section 1256(e)(3)(B) of the Internal Revenue Code of 1954). 26 USC 1256. Subtitle I—Depreciation SEC. 111. RECOVERY PERIOD FOR CERTAIN REAL PROPERTY EXTENDED TO 18 YEARS. (a) IN GENERAL.—Paragraph (2) of section 168(b) (relating to 15- 26 use 168. year real property) is amended— (1) by striking out "15-year real property" each place it appears in the text and heading thereof and inserting in lieu thereof "18-year real property", (2) by striking out "15-year recovery period" in subparagraph (A)(i) and inserting in lieu thereof "18-year recovery period", and (3) by striking out "(200 percent declining balance method in the case of low-income housing)". (h) LOW-INCOME HOUSING.— (1) DETERMINATION OF RECOVERY PERCENTAGE.—Subsection (h) of section 168 (relating to the amount of deduction) is amended by adding at the end thereof the following new paragraph: "(4) LOW-INCOME HOUSING.— "(A) IN GENERAL.—In the case of low-income housing, the applicable percentage shall be determined in accordance with the table prescribed in paragraph (2) (without regard to the mid-month convention), except that in prescribing such table, the Secretary shall— "(i) assign to the property a 15-year recovery period, t and fci - "(ii) assign percentages generally determined in ac- cordance with use of the 200 percent declining balance method, switching to the method described in section V 167(b)(1) at a time to maximize the deduction allowable under subsection (a). "(B) SPECIAL RULE FOR YEAR OF DISPOSITION.—In the case of a disposition of low-income housing, the deduction allow- i able under subsection (a) for the taxable year in which the i disposition occurs shall reflect only the months during such year the property was placed in service."
98 STAT. 632 PUBLIC LAW 98-369—JULY 18, 1984 e ] (2) LOW-INCOME HOUSING DEFINED.—Paragraph (2) of section 26 use 168. 168(c) (defining recovery property) is amended by redesignating subparagraph (F) as subparagraph (G) and by inserting after subparagraph (E) the following new subparagraph: "(F) LOW-INCOME HOUSING.—The term 'low-income hous- iJo i .aiJ dJ: ing' means property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B)." (3) CONFORMING AMENDMENTS.— '"• (A) Subparagraph (A) of section 168(b)(2) is amended by striking out the last sentence thereof. SSH c .\ ! (B) Subparagraph (D) of section 168(c)(2) is amended to read as follows: ' "(D) 18-YEAR REAL PROPERTY.—The term '18-year real property' means section 1250 class property which— (K; .q juvft "(i) does not have a present class life of 12.5 years or less, and "(ii) is not low-income housing." (c) TRANSITIONAL RULE FOR COMPONENTS.—Subparagraph (B) of ooSl DBli &S section 168(f)(1) is amended to read as follows: "(B) TRANSITIONAL RULES.— "(i) BUILDINGS PLACED IN SERVICE BEFORE 1981.—In the case of any building placed in service by the tax- frjfi/ T5 payer before January 1, 1981, for purposes of applying subparagraph (A) to components of such buildings placed in service after December 31, 1980, and before ;d( >f J w - - •" : March 16, 1984, the deduction allowable under subsec- tion (a) with respect to such components shall be com- jf i .:• puted in the same manner as the deduction allowable ^'-'' ' ' with respect to the first such component placed in service after December 31,1980. "(ii) BUILDINGS PLACED IN SERVICE BEFORE MARCH 16, 1984.—In the case of any building placed in service by n't b 't ^^® taxpayer before March 16, 1984, for purposes of " '^ applying subparagraph (A) to components of such buildings placed in service after March 15, 1984, the deduction allowable under subsection (a) with respect to such components shall be computed in the same manner as the deduction allowable with respect to the first such component placed in service after March 15, 1984. "(iii) FIRST COMPONENT TREATED AS SEPARATE BUILD- ING.—For purposes of clause (i) or (ii), the method of computing the deduction allowable with respect to the first component described in such clause shall be deter- mined as if it were a separate building." (d) USE OF MID-MONTH CONVENTION.—Subparagraphs (A) and (B) of section 168(b)(2) are each amended by inserting "(using a mid- month convention)" after "months". (e) CONFORMING AMENDMENTS.— (1) Subsections (b)(3)(B)(iii), (f)(2)(B), (f)(2)(C)(ii)(II), (f)(2)(E), and (f)(5) of section 168 are each amended by striking out "15-year 5«af real property" each place it appears and inserting in lieu thereof "18-year real property or low-income housing". (2) Clause (ii) of section 168(b)(3)(B) is amended by striking out iit»i "15-year real property" and inserting in lieu thereof "18-year real property or low-income housing,".
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 633 (3) Subparagraph (B) of section 168(d)(2) is amended by strik- 26 USC 168. ing out "15-year real property" and inserting in lieu thereof "18-year real property or low-income housing". (4) Clause (i) of section 168(f)(2)(C) (relating to recovery period for property used outside United States) is amended by striking out the item relating to 15-year real property in the table and inserting in lieu thereof the following new item: "18-year real property or low-income housing 35 or 45 years.". (5) Sections 57(a)(12)(A) and 312(k)(3)(A) and subparagraphs (A), (B), and (C) of section 1245(A)(5) are each amended by 26 use 57, 312, striking out "15-year real property" each place it appears in the 1245. text and headings and inserting in lieu thereof "18-year real property and low-income housing". (6) Subparagraph (B) of section 57(a)(12) (relating to items of 26 use 57. t tax preference) is amended to read as follows: "(B) 18-YEAR REAL PROPERTY AND LOW-INCOME HOUSING.— With respect to each recovery property which is 18-year ^ real property or low-income housing, the amount (if any) by J which the deduction allowed under section 168(a) for the taxable year exceeds the deduction which would have been allowable for a taxable year had the property been depreci- ated using the straight-line method (without regard to sal- vage value) over a recovery period of— "(i) 18 years in the case of 18-year real property, and n':«. . "(ii) 15 years in the case of low-income housing property." (7) Subparagraph (E) of section 57(aX12) is amended by strik- ing out " '15-year real property'," and inserting in lieu thereof s " '18-year real property , 'low-income housing',". (8) Paragraph (2) of section 48(g) (relating to qualified rehabili- 26 USC 48. tation expenditure) is amended— (A) by striking out "property" each place it appears in subparagraph (A)(i) and inserting in lieu thereof "real property", l'^^ (B) by striking out "15" in subparagraph (AXi) and insert- ing in lieu thereof "18 (15 years in the case of low-income , ,,. housing), (C) by striking out "15 years" in subparagraph (B)(v) and cf-.^,{.^ inserting in lieu thereof "18 years (15 years in the case of low-income housing)", and .^ (D) by adding at the end thereof the following new sub- paragraph: "(D) Low-iNCOME HOUSING.—For purposes of subpara- graph (B), the term 'low-income housing has the meaning given such term by section 168(cX2)(F)." Ante, p. 632. (9) Subparagraph (A) of section 168(b)(3) (relating to election 26 USC 168. of different recovery percentage) is amended— (A) by striking out "under paragraphs (1) and (2)" and inserting in lieu thereof "under paragraph (1), (2), or (4)", 10 and (B) by striking out the item in the table relating to 15- year real property and inserting in lieu thereof the follow- ing new item: "18-year real property and low-income housing 18, 35, or 45." (10) Section 1245(aX5XD) is amended to read as follows: 26 USC 1245.
98 STAT. 634 PUBLIC LAW 98-369—JULY 18, 1984 "(D) low-income housing (within the meaning of section Ante, p. 632. 168(c)(2)(F))." 26 u s e 168 note. (g) EFFECTIVE D A T E . — (1) I N GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply with respect to property placed in service by the taxpayer after March 15,1984. (2) EXCEPTION.—The amendments made by this section shall not apply to property placed in service by the taxpayer before . , ,. January 1,1987, if— (A) the taxpayer or a qualified person entered into a binding contract to purchase or construct such property before March 16,1984, or (B) construction of such property was commenced by or for the taxpayer or a qualified person before March 16, 1984. For purposes of this paragraph the term "qualified person" means any person who transfers his rights in such a contract or such property to the taxpayer, but only if such property is not placed in service by such person before such rights are trans- ferred to the taxpayer. ( 3 ) S P E C I A L R U L E S F 0 R A P P L I C A T I O N OF PARAGRAPH ( 2 ) . — (A) CERTAIN INVENTORY.—In the case of any property which— (i) is held by a person as property described in section 1221(1), and (ii) is disposed of by such person before January 1, 1985, such person shall not, for purposes of paragraph (2), be •' 3fr,f treated as having placed such property in service before such property is disposed of merely because such person rented such property or held such property for rental. No deduction for depreciation or amortization shall be allowed to such person with respect to such property, (B) CERTAIN PROPERTY FINANCED BY BONDS.—In the C£ise of any property with respect to which— (i) bonds were issued to finance such property before 1984, and (ii) an architectural contract was entered into before March 16,1984, paragraph (2) shall be applied by substituting "May 2" for "March 16". (4) SPECIAL RULE FOR COMPONENTS.—For purposes of applying Ante, p. 632. section 168(f)(1)(B) of the Internal Revenue Code of 1954 (as amended by this section) to components placed in service after December 31, 1986, property to which paragraph (2) applies shall be treated as placed in service by the taxpayer before March 16,1984. (5) SPECIAL RULE FOR MID-MONTH CONVENTION.—In the case of the amendment made by subsection (d)— (A) paragraph (1) shall be applied by substituting "June 22,1984" for "March 15,1984", and ,.., , (B) paragraph (2) shall be applied by substituting "June 23, 1984" for "March 15, 1984" each place it appears.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 635 SEC. 112. RECAPTURE IN CASE OF INSTALLMENT SALES. (a) GENERAL RULE.—Subsection (i) of section 453 (relating to in- 26 u s e 453. stallment method) is amended to read as follows: "(i) RECOGNITION OF RECAPTURE INCOME IN YEAR OF DISPOSITION.— "(1) I N GENERAL.—In the case of any installment sale of :H.i ? property to which subsection (a) applies— "(A) notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, ^;-;; and i!i !>4i «(g) ^jjy gg^jjj jj^ excess of the recapture income shall be taken into account under the installment method. "(2) RECAPTURE INCOME.—For purposes of paragraph (1), the ' term 'recapture income' means, with respect to any installment sale, the aggregate amount which would be treated as ordinary ^ income under section 1245 or 1250 for the taxable year of the - disposition if all pajrments to be received were received in the taxable year of disposition." (b) EFFECTIVE DATE.— 26 use 453 note. (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply with respect to dispositions made after June 6,1984. ; (2) EXCEPTION.—The amendments made by this section shall not apply with respect to any disposition conducted pursuant to a contract which was binding on March 22, 1984, and at all ^ times thereafter. (3) SPECIAL RULE FOR CERTAIN DISPOSITIONS BEFORE OCTOBER i, 1984.—The amendments made by this section shall not apply to any disposition before October 1, 1984, of all or substantially all of the personal property of a cable television business pursuant to a written offer delivered by the seller on June 20, 1984, but only if the last payment under the installment contract is due no later than October 1,1989. SEC. 113. PROVISIONS RELATING TO SOUND RECORDINGS AND FILMS. (a) SOUND RECORDINGS.— (1) I N GENERAL.—Section 48 (defining section 38 property) is 26 use 48. 'i amended by redesignating subsection (r) as subsection (s) and by ' inserting after subsection (q) the following new subsection: "(r) SPECIAL RULES RELATING TO SOUND RECORDINGS.— "(1) IN GENERAL.—For purposes of this title, in the case of any sound recording, the original use of which commences with the taxpayer, the taxpayer may elect to treat such recording as ' recovery property which is 3-year property to the extent that the taxpayer has an ownership interest in such recording. * "(2) FAILURE TO MAKE ELECTION.—If a taxpayer does not make an election under paragraph (1) with respect to any sound recording— "(A) no credit shall be allowed under section 38 with Post, p. 827. 'J respect to such recording, and "(B) such recording shall not be treated as recovery s i»5 w property. I "(3) PREDOMINANT USE TEST AND AT RISK RULES NOT TO APPLY; ^ ; au QUALIFIED INVESTMENT.—In the case of any sound recording— "(A) sections 46(c)(8), 46(c)(9), and 48(a)(2) shall not apply. Post, p. 807. and "(B) in determining the qualified investment under sec- tion 46(cXl), there shall be used (in lieu of the basis of the i a J oi
98 STAT. 636 PUBLIC LAW 98-369—JULY 18, 1984 property) an amount equal to the production costs which ft^j -;; are allocable to the United States (as determined under rules similar to the rules of section 48(k)(5)(D)). "(4) OWNERSHIP INTEREST.—For purposes of determining the Post, p. 827. credit allowable under section 38, the ownership interest of any person in a sound recording shall be determined on the basis of his proportionate share of any loss which may be incurred with respect to the production costs of such sound recording. "(5) SOUND RECORDING.—For purposes of this subsection, the term 'sound recording' means any sound recording described in section 280(c)(2). "(6) PRODUCTION COSTS— "(A) I N GENERAL.—For purposes of this subsection, the term 'production costs' includes— "(i) a reasonable allocation of general overhead costs, "(ii) compensation for services performed by song writers, artists, production personnel, directors, produc- , ,,; f ers, and similar personnel, "(iii) costs of 'first' distribution of records or tapes, and "(iv) the cost of the material being recorded. "(B) CERTAIN COSTS NOT TAKEN INTO ACCOUNT.—Except as provided in subparagraph (C), the term 'production costs' shall not include— "(i) 'residuals' payable under contracts with labor organizations, or "(ii) participations or royalties payable as compensa- tion to song writers, artists, production personnel, directors, producers, and similar personnel, or "(iii) any other contingent amounts. "(C) CERTAIN CONTINGENT AMOUNTS TAKEN INTO ACCOUNT.—In the case of any amount which is described in subparagraph (B) and which is incurred in the taxable year in which the sound recording is placed in service or the next taxable year— j^i OE .; s ^ "(i) subparagraph (B) shall not apply, and "(ii) for purposes of sections 38 and 168, the taxpayer shall be treated as having placed in service in each such taxable year 3-year recovery property with a basis equal to the amount so incurred in such taxable year. "(7) ELECTION MADE SEPARATELY.—An election under para- graph (1) shall be made separately with respect to each sound recording and must be made by all persons having an ownership interest in such recording. "(8) UNITED STATES.—For purposes of this subsection, the term 'United States' includes the possessions of the United States." 26 use 168. (2) CONFORMING AMENDMENTS.—Section 168(f) (relating to spe- cial rules), as amended by this Act, is amended by adding at the end thereof the following new paragraph: "(14) SPECIAL RULES FOR SOUND RECORDINGS.—In the case of a Ante, p. 635. sound recording (within the meaning of section 48(r)), the unad- justed basis of such property shall be equal to the production . - Ai,!. t - costs (within the meaning of section 48(r)(6))." (b) FILMS AND OTHER PROPERTY.— (1) FILMS AND VIDEO TAPES NOT TREATED AS RECOVERY PROP- 26 use 168. ERTY.—Section 168(e) (relating to property excluded from appli-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 637 cation of this section) is amended by adding at the end thereof the following new paragraph: "(5) FILMS AND VIDEO TAPES NOT RECOVERY PROPERTY.—The term 'recovery property' shall not include any motion picture film or video tape." (2) APPLICATION OF RECOVERY PROPERTY EXCEPTIONS.— (A) Section 168(e) is amended by striking out "section" 26 USC 168. and inserting in lieu thereof "title" in the matter preceding paragraph (1). (B) Subparagraph (A) of section 46(c)(7) is amended by 26 use 46. inserting "recovery" before "property" the first place it - appears. (3) FILMS NOT SUBJECT TO INVESTMENT CREDIT AT-RISK RULES.— Paragraph (4) of section 48(k) is amended— 26 use 48. (A) by inserting ", section 46(c)(8), or section 46(c)(9)" after "section 48(a)(2)" in subparagraph (A), ;' (B) by inserting "or at-risk rules" after "test" in the it.. heading thereof, and (C) by striking out "issued" and inserting in lieu thereof il3ii "used". (4) BASIS ADJUSTMENT FOR FILMS.—Section 48(q) (relating to basis adjustment) is amended by adding at the end thereof the following new paragraph: "(6) SPECIAL RULE FOR QUALIFIED FILMS.—If a credit is allowed under section 38 with respect to any qualified film (within the Post, p. 827. meaning of subsection (k)(l)(B)) then, in lieu of any reduction ' under paragraph (1)— j "(A) to the extent that the credit is determined with respect to any amount described in clause (v) or (vi) of . subsection (k)(5)(B), any deduction allowable under this chapter with respect to such amount shall be reduced by 50 '; percent of the amount of the credit so determined, and '^ "(B) the basis of the taxpayer's ownership interest (within ^ the meaning of subsection (k)(l)(C)) shall be reduced by the ^ excess of^ "(i) 50 percent of the amount of the credit determined under subsection (k), over "(ii) the amount of the reduction under subparagraph (A)." (c) EFFECTIVE DATES.— , (1) SOUND RECORDINGS.—The amendments made by subsection 26 use 48 note. t (a) shall apply to property placed in service after March 15, * 1984, in taxable years ending after such date. (2) FILMS AND OTHER PROPERTY.— 26 use 168 note. (A) The amendments made by paragraphs (1) of subsec- tion (b) shall apply to any motion picture film or video tape placed in service before, on, or after the date of the enact- ment of this Act, except that such amendment shall not apply to— (i) any qualified film placed in service by the tax- > payer before March 15, 1984, if the taxpayer treated such film as recovery property for purposes of section 168 of the Internal Revenue Code of 1954 on a return of tax under chapter 1 of such Code filed before March 16, 26 USC l et sea. 1984, or '•" (ii) any qualified film placed in service by the tax- payer before January 1,1985, if—
98 STAT. 638 PUBLIC LAW 98-369—JULY 18, 1984 tc-j^ (I) 20 percent or more of the production costs of such film were incurred before March 16,1984, and (II) the taxpayer treats such film as recovery property for purposes of section 168 of such Code. Post, p. 827. No credit shall be allowable under section 38 of such Code with respect to any qualified film described in clause (ii), except to the extent provided in section 48(k) of such Code. (B) The amendment made by paragraph (2) and (3) of subsection (b) shall apply as if included in the amendments made by section 201(a), 211(aXl), and 211(f)(1) of the Eco- 26 use 168, 46. nomic Recovery Tax Act of 1981. (C) The amendment made by paragraph (4) of subsection (b) shall take effect as if included in the amendments made by section 205(a)(1) of the Tax Equity and Fiscal Responsi- 26 use 48. bility Act of 1982. (D) For purposes of this paragraph, the terms "qualified film" and "production costs" have the same respective meanings as when used in section 48(k) of the Internal Revenue Code of 1954. SEC. 114. DEFINITION OF SECTION 38 PROPERTY IN SALE-LEASEBACK TRANSACTIONS. 26 use 48. (a) IN GENERAL.—Subsection (b) of section 48 (defining new section 38 property) is amended to read as follows: "(b) N E W SECTION 38 PROPERTY.—For purposes of this subpart— Post, p. 827. "(1) I N GENERAL.—The term 'new section 38 property' means section 38 property the original use of which commences with the taxpayer. "(2) SPECIAL RULE FOR SALE-LEASEBACKS.—For purposes of paragraph (1), in the case of any section 38 property which— "(A) is originally placed in service by a person, and "(B) is sold and leased back by such person, or is leased to such person, within 3 months of the date such property was originally placed in service, such property shall be treated as originally placed in service not earlier than the date on which such property is used under the lease. "(3) SPECIAL RULE FOR ENERGY PROPERTY.—The principles of paragraph (2) shall be applicable in determining whether the original use of property commences with the taxpayer for pur- poses of section 48(l)(2)(B)(ii)." 26 use 48 note. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to property originally placed in service after April 11, 1984 '33f>a ?<> (determined without regard to such amendment). Subtitle J—Foreign Provisions PART I—CHANGES IN SOURCE AND CHARACTER RULES SEC. 121. CERTAIN AMOUNTS TREATED AS DERIVED FROM UNITED STATES SOURCES FOR PURPOSES OF LIMITATION ON FOR- EIGN TAX CREDIT. 26 use 904. (a) GENERAL RULE.—Section 904 (relating to limitation on foreign Post, p. 843. tax credit) is amended by redesignating subsections (g) and (h) as subsections (h) and (i), respectively, and by inserting after subsection (f) the following new subsection:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 639 "(g) SOURCE RULES IN CASE OF UNITED STATES-OWNED FOREIGN CORPORATIONS.— "(1) IN GENERAL.—The following amounts which are derived from a United States-owned foreign corporation and which would be treated as derived from sources outside the United States without regard to this subsection shall, for purposes of this section, be treated as derived from sources within the United States to the extent provided in this subsection: "(A) Any amount included in gross income under— "(i) section 951(a) (relating to amounts included in gross income of United States shareholders), or "(ii) section 551 (relating to foreign personal holding company income taxed to United States shareholders). "(B) Interest. "(C) Dividends. "(2) SUBPART F AND FOREIGN PERSONAL HOLDING COMPANY INCLUSIONS.—Any amount described in subparagraph (A) of paragraph (1) shall be treated as derived from sources within the United States to the extent such amount is attributable to income of the United States-owned foreign corporation from sources within the United States. "(3) CERTAIN INTEREST ALLOCABLE TO UNITED STATES SOURCE INCOME.—Any interest which— "(A) is paid or accrued by a United States-owned foreign corporation during any taxable year, "(B) is paid or accrued to a United States shareholder (as E defined in section 951(b)) or a related person (within the meaning of section 267(b)) to such a shareholder, and "(C) is properly allocable (under regulations prescribed by ti m i u ) sj a& the Secretary) to income of such foreign corporation for the taxable year from sources within the United States, shall be treated as derived from sources within the United States. "(4) DIVIDENDS.— "(A) IN GENERAL.—The United States source ratio of any dividend paid or accrued by a United States-owned foreign corporation shall be treated as derived from sources within the United States. .bm q d\ni "(B) UNITED STATES SOURCE RATIO.—For purposes of sub- paragraph (A), the term 'United States source ratio' means, with respect to any dividend paid out of the earnings and if, profits for any taxable year, a fraction— "(i) the numerator of which is the portion of the earnings and profits for such taxable year from sources bjvi ij^ within the United States, and "(ii) the denominator of which is the total amount of earnings and profits for such taxable year. "(5) EXCEPTION WHERE UNITED STATES-OWNED FOREIGN CORPO- RATION HAS SMALL AMOUNT OF UNITED STATES SOURCE INCOME.— Paragraph (3) shall not apply to interest paid or accrued during any taxable year (and paragraph (4) shall not apply to any dividends paid out of the earnings and profits for such taxable year) if— "(A) the United States-owned foreign corporation has earnings and profits for such taxable year, and "(B) less than 10 percent of such earnings and profits is attributable to sources within the United States.
98 STAT. 640 PUBLIC LAW 98-369—JULY 18, 1984 For purposes of the preceding sentence, earnings and profits shall be determined without any reduction for interest de- scribed in paragraph (3) (determined without regard to subpara- graph (C) thereof). "(6) UNITED STATES-OWNED FOREIGN CORPORATION.—For pur- poses of this subsection, the term 'United States-owned foreign corporation' means any foreign corporation if 50 percent or more of— "(A) the total combined voting power of all classes of stock of such corporation entitled to vote, or "(B) the total value of the stock of such corporation, is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)). "(7) DIVIDEND.—For purposes of this subsection, the term 'dividend' includes any gain treated as ordinary income under section 1246 or as a dividend under section 1248. "(8) COORDINATION WITH SUBSECTION (f).—This subsection shall be applied before subsection (D. "(9) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary or appropriate for purposes of this subsection, including— "(A) regulations for the application of this subsection in the case of interest or dividend payments through 1 or more entities, and "(B) regulations providing that this subsection shall apply to interest paid or accrued to any person (whether or not a United States shareholder)." 26 u s e 904 note. (b) EFFECTIVE D A T E . — (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendment made by subsection (a) shall take effect on the date of the enactment of this Act. In the case of any tsixable year of any United States-owned foreign corporation ending after the date of the enactment of this Act— (A) only income received or accrued by such foreign corporation after such date of enactment shall be taken into account under section 904(g) of the Internal Revenue Code Ante, p. 638. of 1954 (as added by subsection (a)); except that (B) paragraph (5) of such section 904(g) (relating to excep- tion where small amount of United States source income) shall be applied by taking into account all income received or accrued by such foreign corporation during such taxable year. (2) SPECIAL RULE FOR APPUCABLE CFC.— (A) IN GENERAL.—In the case of qualified interest received or accrued by an applicable CFC before January 1, 1992— (i) such interest shall not be taken into account under section 904(g) of the Internal Revenue Code of 1954 (as added by subsection (a)), except that (ii) such interest shall be taken into account for purposes of applying paragraph (5) of such section •^i-.i.,.- > 904(g) (relating to exception where small amount of United States source income). 8Brs (B) QUALIFIED INTEREST.—For purposes of subparagraph (A), the term "qualified interest" means— Bi Biil^..J. (i) the aggregate amount of interest received or ac- crued during any taxable year by an applicable CFC on
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 641 United States affiliate obligations held by such applica- ble CFC, multiplied by, (ii) a fraction (not in excess of 1)— (I) the numerator of which is the sum of the aggregate principal amount of United States affili- ate obligations held by the applicable CFC on March 31, 1984, but not in excess of the applicable limit, and (II) the denominator of which is the average daily principal amount of United States affiliate obligations held by such applicable CFC during the ^„ ^ taxable year. -^H q,>*n.i Proper adjustments shall be made to the numerator de- scribed in clause (ii)(I) for original issue discount accruing after March 31, 1984, on CFC obligations and United States affiliate obligations. i (C) ADJUSTMENT FOR RETIREMENT OF CFC OBLIGATIONS.— The amount described in subparagraph (B)(ii)(I) for any taxable year shall be reduced by the sum of— ^ -I, (i) the excess of (I) the aggregate principal amount of « ' CFC obligations which are outstanding on March 31, 1984, but only with respect to obligations issued before March 8, 1984, or issued after March 7, 1984, by the applicable CFC pursuant to a binding commitment in effect on March 7, 1984, over (II) the average daily ,j, outstanding principal amount during the teixable year of the CFC obligations described in subclause (I), and (ii) the portion of the equity of such applicable CFC allocable to the excess described in clause (i) (deter- ^gy ,, ,, mined on the basis of the debt-equity ratio of such applicable CFC on March 31,1984). (D) APPLICABLE CFC.—For purposes of this paragraph, the term "applicable CFC" means any controlled foreign corpo- ration (within the meaning of section 957)— (i) which was in existence on March 31, 1984, and (ii) the principal purpose of which on such date con- sisted of the issuing of CFC obligations or the holding of short-term obligations and lending the proceeds of such obligations to affiliates. (E) AFFIUATES; UNITED STATES AFFILIATES.—For purposes >"rof this paragraph— (i) AFFIUATE.—The term "affiliate" means any person who is a related person (within the meaning of section 482 of the Internal Revenue Code of 1954) to the applicable CFC. y.n •• - (ii) UNITED STATES AFFILIATE.—The term "United States affiliate" means any United States person which , f:." ' is an affiliate of the applicable CFC. (F) UNITED STATES AFFILIATE OBLIGATIONS.—For purposes of this paragraph, the term "United States affiliate obliga- tions" means any obligation of (and payable by) a United States affiliate. (G) CFC OBUGATiON.—For purposes of this paragraph, the term "CFC obligation" means any obligation of (and issued by) a CFC if—
98 STAT. 642 PUBLIC LAW 98-369—JULY 18, 1984 (i) the requirements of clause (i) of section 163(f)(2)(B) of the Internal Revenue Code of 1954 are met with respect to such obligation, and (ii) in the case of an obligation issued after December 31, 1982, the requirements of clause (ii) of such section 163(f)(2)(B) are met with respect to such obligation. (H) TREATMENT OF OBLIGATIONS WITH ORIGINAL ISSUE DIS- COUNT.—For purposes of this paragraph, in the case of any obligation with original issue discount, the principal amount of such obligation as of any day shall be treated as equal to the revised issue price as of such day (as defined in Ante, p. 547. section 1278(a)(4) of the Internal Revenue Code of 1954). (I) APPUCABLE UMIT.—For purposes of subparagraph (BXii)(I), the term "applicable limit" means the sum of— (i) the equity of the applicable CFC on March 31, 1984, and (ii) the aggregate principal amount of CFC obliga- tions outstanding on March 31,1984, which were issued by an applicable CFC— (I) before March 8,1984, or (II) after March 7, 1984, pursuant to a binding commitment in effect on March 7,1984. (3) EXCEPTION FOR CERTAIN TERM OBLIGATIONS.—The amend- ments made by subsection (a) shall not apply to interest on any term obligations held by a foreign corporation on March 7,1984. The preceding sentence shall not apply to any United States affiliate obligation (as defined in paragraph (2)(F)) held by an applicable CFC (as defined in paragraph (2)(D)). (4) DEFINITIONS.—Any term used in this subsection which is Ante, p. 638. also used in section 904(g) of the Internal Revenue Code of 1954 (£is added by subsection (a)) shall have the meaning given such term by such section 904(g). (5) SEPARATE APPUCATION OF SECTION 904 IN CASE OF INCOME COVERED BY TRANSITIONAL RULES.—Subsections (a), (b), and (c) of section 904 of the Internal Revenue Code of 1954 shall be applied separately to any amount not treated as income derived from sources within the United States but which (but for the provisions of paragraph (2) or (3) of this subsection) would be so treated under the amendments made by subsection (a). Any such separate application shall be made before any separate application required under section 904(d) of such Code. (6) APPLICATION OF PARAGRAPH (5) DELAYED IN CERTAIN CASES.—In the case of a foreign corporation— (A) which is a subsidiary of a domestic corporation which has been engaged in manufacturing for more than 50 years, and (B) which issued certificates with respect to obligations on— (i) September 24, 1979, denominated in French francs, (ii) September 10, 1981, denominated in Swiss francs, (iii) July 14, 1982, denominated in Swiss francs, and (iv) December 1, 1982, denominated in United States dollars, with a total principal amount of less than 200,000,000 United States dollars.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 643 then paragraph (5) shall not apply to the proceeds from relend- ing such obligations or related capital before January 1, 1986. SEC. 122. CERTAIN AMOUNTS TREATED AS INTEREST FOR PURPOSES OF THE LIMITATION ON THE FOREIGN TAX CREDIT. (a) GENERAL RULE.—Subsection (d) of section 904 (relating to 26 use 904. limitation on foreign tax credit) is amended by adding at the end thereof the following new paragraph: "(3) CERTAIN AMOUNTS ATTRIBUTABLE TO UNITED STATES-OWNED FOREIGN CORPORATIONS, ETC., TREATED AS INTEREST.— "(A) I N GENERAL.—For purposes of this subsection, divi- dends and interest— J "(i) paid or accrued by a designated payor corpora- tion, and ,»,.^,,* "(ii) attributable to any taxable year of such corpora- tion, ~_p^£ji^ shall be treated as interest income described in paragraph (2) to the extent that the aggregate amount of such divi- j,-»;^ dends and interest does not exceed the separate limitation interest of the designated payor corporation for such tax- able year. "(B) SEPARATE LIMITATION INTEREST.—For purposes of this I subsection, the term 'separate limitation interest' means, with respect to any taxable year— 0 "(i) the aggregate amount of the interest income described in paragraph (2) (including amounts treated as so described by reason of this paragraph) which is received or accrued by the designated payor corpora- tion during the taxable year, reduced by "(ii) the deductions properly allocable (under regula- . . tions prescribed by the Secretary) to such income. "(C) EXCEPTION WHERE DESIGNATED CORPORATION HAS SMALL A M O U N T OF SEPARATE LIMITATION INTEREST.—Sub- i^" ) il* .ft: (E ' paragraph (A) shall not apply to any amount attributable to t:- the taxable year of a designated payor corporation, if^ "(i) such corporation has earnings and profits for such taxable year, and "(ii) less than 10 percent of such earnings and profits is attributable to separate limitation interest. "(D) TREATMENT OF CERTAIN INTEREST.—For purposes of this paragraph, the amount of the separate limitation inter- est and the earnings and profits of any designated payor corporation shall be determined without any reduction for interest paid or accrued to a United States shareholder (as defined in section 951(b)) or a related person (within the meaning of section 267(b)) to such a shareholder. "(E) DESIGNATED PAYOR CORPORATION.—For purposes of this paragraph, the term 'designated payor corporation' means— "(i) any United States-owned foreign corporation (within the meaning of subsection (g)(6)), ^ s 'iVrtie. •^" "(ii) any other foreign corporation in which a United States person is a United States shareholder (as defined in section 9510>)) at any time during the taxable year of such foreign corporation, and , ., ^ « "(iii) any regulated investment company. " '"
98 STAT. 644 PUBLIC LAW 98-369—JULY 18, 1984 "(F) DETERMINATION OF YEAR TO WHICH AMOUNT IS ATTRIB- UTABLE.—For purposes of determining whether an amount is attributable to a taxable year of a designated payor corporation— "(i) any amount includible in gross income under *' section 551 or 951 in respect of such taxable year, "(ii) any interest paid or accrued by such corporation during such taxable year, and "(iii) any dividend paid out of the earnings and prof- its of such corporation for such taxable year, shall be treated as attributable to such taxable year. "(G) ORDERING RULES.—Subparagraph (A) shall be ap- plied to amounts described therein in the order in which such amounts are described in subparagraph (F). "(H) DIVIDEND.—For purposes of this paragraph, the term 'dividend' includes— "(i) any amount includible in gross income under section 551 or 951, and "(ii) any gain treated as ordinary income under sec- tion 1246 or as a dividend under section 1248. "(I) DISTRIBUTIONS THROUGH OTHER ENTITIES.—The Secre- tary shall prescribe such regulations as may be necessary to carry out the purposes of this paragraph in the case of distributions or payments through 1 or more entities. "(J) INTEREST FROM MEMBERS OF SAME AFFILIATED GROUP.—For purposes of this paragraph, interest received or accrued by the designated payor corporation from an- other member of the same affiliated group (determined under section 1504 without regard to subsection (b)(3) thereof) shall not be treated as separate limitation interest, unless such interest is attributable directly or indirectly to separate limitation interest of such other member." 26 u s e 904 note. (b) EFFECTIVE D A T E . — (1) IN GENERAL.—The amendment made by subsection (a) shall take effect on the date of the enactment of this Act. (2) SPECIAL RULES FOR INTEREST INCOME.— (A) I N GENERAL.—Interest income received or accrued by a designated payor corporation shall be taken into account for purposes of the amendment made by subsection (a) only in taxable years beginning after the date of the enactment of this Act. (B) EXCEPTION FOR INVESTMENT AFTER JUNE 22, 1984.— Notwithstanding subparagraph (A), the amendment made by subsection (a) shall apply to interest income received or accrued by a designated payor corporation after the date of enactment of this Act if it is attributable to investment in > the designated payor corporation after June 22,1984. (3) TERM OBLIGATIONS OF DESIGNATED PAYOR CORPORATION WHICH IS NOT APPLICABLE CFC.—In the case of any designated payor corporation which is not an applicable CFC (as defined in Ante, p. 638. section 121(b)(2)(D)), any interest received or accrued by such corporation on a term obligation held by such corporation on March 7,1984, shall not be taken into account. SEC. 123. TREATMENT OF RELATED PERSON FACTORING INCOME. 26 use 864. (a) GENERAL RULE.—Section 864 (relating to source definitions) is amended by adding at the end thereof the following new subsection:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 645 '(d) TREATMENT OF RELATED PERSON FACTORING INCOME.— "(1) IN GENERAL.—For purposes of the provisions set forth in paragraph (2), if any person acquires (directly or indirectly) a trade or service receivable from a related person, any income of such person from the trade or service receivable so acquired shall be treated as if it were interest on a loan to the obligor under the receivable. "(2) PROVISIONS TO WHICH PARAGRAPH ( D APPLIES.—The provi- sions set forth in this paragraph are as follows: "(A) Part III of subchapter G of this chapter (relating to 26 USC 551. foreign personal holding companies). "(B) Section 904 (relating to limitation on foreign tax i credit). "(C) Subpart F of part III of this subchapter (relating to 26 use 951. controlled foreign corporations). "(3) TRADE OR SERVICE RECEIVABLE.—For purposes of this sub- section, the term 'trade or service receivable' means any ac- count receivable or evidence of indebtedness arising out of— "(A) the disposition by a related person of property de- scribed in section 1221(1), or "(B) the performance of services by a related person. "(4) RELATED PERSON.—For purposes of this subsection, the term 'related person' means— "(A) any person who is a related person (within the meaning of section 267(b)), and "(B) any United States shareholder (as defined in section 951(b)) and any person who is a related person (within the meaning of section 267(b)) to such a shareholder. "(5) CERTAIN PROVISIONS NOT TO APPLY.— "(A) CERTAIN EXCEPTIONS.—The following provisions shall not apply to any amount treated as interest under para- graph (1) or (6): "(i) Subparagraphs (A), (B), (C), and (D) of section 904(d)(2) (relating to interest income to which separate limitation applies). "(ii) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 10 percent). "(iii) Subparagraph (B) of section 954(c)(3) (relating to certain income derived in active conduct of trade or business). "(iv) Subparagraphs (A) and (B) of section 954(c)(4) (relating to exception for certain income received from related persons). "(B) SPECIAL RULES FOR POSSESSIONS.— "(i) PUERTO RICO AND POSSESSIONS TAX CREDIT.—Any amount treated as interest under paragraph (1) shall not be treated as income described in subparagraph (A) or (B) of section 936(a)(1) unless such amount is from ;M; JB' f ^: sources within a possession of the United States (deter- mined after the application of paragraph (1)). "(ii) VIRGIN ISLANDS CORPORATIONS.—Subsection (b) of section 934 shall not apply to any amount treated as interest under paragraph (1) unless such amount is from sources within the Virgin Islands (determined after the application of paragraph (1)).
98 STAT. 646 PUBLIC LAW 98-369—JULY 18, 1984 "(6) SPECIAL RULE FOR CERTAIN INCOME FROM LOANS OF A CONTROLLED FOREIGN CORPORATION.—Any income of a controlled foreign corporation (within the meaning of section 957(a)) from a loan to a person for the purpose of financing— "(A) the purchase of property described in section 1221(1) of a related person, or "(B) the payment for the performance of services by a related person, shall be treated as interest described in paragraph (1). I • ")HU i "(7) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary to prevent the avoidance of the Infra. provisions of this subsection or section 956(b)(3)." (h) TREATMENT AS UNITED STATES PROPERTY.—Subsection (b) of 26 use 956. section 956 (defining United States property) is amended by adding at the end thereof the following new paragraph: "(3) CERTAIN TRADE OR SERVICE RECEIVABLES ACQUIRED FROM RELATED UNITED STATES PERSONS.— "(A) I N GENERAL.—Notwithstanding paragraph (2), the term 'United States property' includes any trade or service receivable if— "(i) such trade or service receivable is acquired (di- rectly or indirectly) from a related person who is a United States person, and .tfj- "(ii) the obligor under such receivable is a United States person. "(B) DEFINITIONS.—For purposes of this paragraph, the term 'trade or service receivable' and 'related person' have the respective meanings given to such terms by section Ante, p. 644. 864(d)." 26 u s e 864 note. (c) EFFECTIVE D A T E . — (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to accounts re- ceivable and evidences of indebtedness transferred after March 1,1984, in taxable years ending after such date. (2) TRANSITIONAL RULE.—The amendments made by this sec- tion shall not apply to accounts receivable and evidences of indebtedness acquired after March 1, 1984, and before March 1, 1994, by a Belgian corporation in existence on March 1, 1984, in any taxable year ending after such date, but only to the extent that the amount includible in gross income by reason of section 956 of the Internal Revenue Code of 1954 with respect to such corporation for all such taxable years is not reduced by reason of this paragraph by more than the lesser of— (A) $15,000,000 or (B) the amount of the Belgian corporation's adjusted basis on March 1, 1984, in stock of a foreign corporation formed to issue bonds outside the United States to the public. SEC. 124. TREATMENT OF CERTAIN TRANSPORTATION INCOME. 26 use. 863. (a) GENERAL RULE.—Section 863 (relating to items not specified in section 861 or 862) is amended by adding at the end thereof the following new subsection: "(c) SOURCE RULE FOR CERTAIN TRANSPORTATION INCOME.— "(1) TRANSPORTATION BEGINNING AND ENDING IN THE UNITED STATES.—All transportation income attributable to transporta- tion which begins and ends in the United States shall be treated as derived from sources within the United States.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 647 "(2) TRANSPORTATION BETWEEN UNITED STATES AND ANY POSSES- SION.— "(A) I N GENERAL.—50 percent of all transportation income attributable to transportation which— "(i) begins in the United States and ends in a posses- - •* sion of the United States, or "(ii) begins in a possession of the United States and ends in the United States, shall be treated as derived from sources within the United States. "(B) SPECIAL RULE FOR CERTAIN LESSORS OF AIRCRAFT.—If— -ICW^ "(i) the taxpayer owns an aircraft which is section 38 Post, p. 827. ,. property and leases such aircraft to a United States person (other than a member of the same controlled fone group of corporations (as defined in section 1563) as the taxpayer), and "(ii) such United States person is a regularly sched- uled air carrier, subparagraph (A) shall be applied by substituting '100 per- cent'for'50 percent'. "(3) TRANSPORTATION INCOME.—For purposes of this subsec- tion, the term 'transportation income' means any income de- rived from, or in connection with— "(A) the use (or hiring or leasing for use) of a vessel or aircraft, or "(B) the performance of services directly related to the use of a vessel or aircraft. For purposes of the preceding sentence, the term 'vessel or aircraft' includes any container used in connection with a vessel or aircraft." (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 863 note. shall apply with respect to transportation beginning after the date of the enactment of this Act in taxable years ending after such date. SEC. 125. TREATMENT OF CERTAIN DISTRIBUTIONS RECEIVED BY UNITED STATES-OWNED FOREIGN CORPORATIONS. (a) GENERAL RULE.—Section 535 (defining accumulated taxable 26 use 535. income) is amended by adding at the end thereof the following new subsection: "(d) INCOME DISTRIBUTED TO UNITED STATES-OWNED FOREIGN COR- PORATION RETAINS UNITED STATES CONNECTION.— "(1) I N GENERAL.—For purposes of this part, if 10 percent or more of the earnings and profits of any foreign corporation for any taxable year— '- "(A) is derived from sources within the United States, or ^ "(B) is effectively connected with the conduct of a trade or business within the United States, any distribution out of such earnings and profits (and any interest payment) received (directly or through 1 or more other entities) by a United States-owned foreign corporation shall be treated as derived by such corporation from sources within the United States. "(2) UNITED STATES-OWNED FOREIGN CORPORATION.—The term 'United States-owned foreign corporation' has the meaning given to such term by section 904(g)(6)." Ante, p. 638. (b) EFFECTIVE DATE.— 26 use 535 note.
98 STAT. 648 PUBLIC LAW 98-369—JULY 18, 1984 (1) I N GENERAL.—Except as provided in paragraph (2), the amendment made by subsection (a) shall apply to distributions and interest payments received by a United States-owned for- eign corporation (within the meaning of section 535(d) of the Ante, p. 647. Internal Revenue Code of 1954) on or after May 23, 1983, in taxable years ending on or after such date. (2) CORPORATIONS IN EXISTENCE ON MAY 23, 1983.—In the case of a United States-owned foreign corporation (as so defined) in existence on May 23, 1983, the amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1984. 26 u s e 861 note. SEC. 126. ALLOCATION UNDER SECTION 861 OF RESEARCH AND EXPERI- MENTAL EXPENDITURES. (a) I N GENERAL.—For purposes of section 861(b), section 862(b), and section 863(b) of the Internal Revenue Code of 1954, all amounts allowable as a deduction for qualified research and experimental expenditures shall be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States. (b) QUALIFIED RESEARCH AND EXPERIMENTAL EXPENDITURES.—For purposes of this section— (1) IN GENERAL.—The term "qualified research and experi- mental expenditures" means amounts— (A) which are research and experimental expenditures within the meaning of section 174 of such Code, and (B) which are attributable to activities conducted in the United States. (2) TREATMENT OF DEPRECIATION, ETC.—Rules similar to the rules of subsection (c) of section 174 of such Code shall apply. (c) EFFECTIVE DATES.— (1) I N GENERAL.—This section shall apply to taxable years beginning after August 13, 1983, and on or before August 1, 1985. (2) SPECIAL RULE.—If the taxpayer's 3rd taxable year begin- ning after August 13, 1981, is not described in paragraph (1), this section shall apply also to such 3rd taxable year. PART II—WITHHOLDING PROVISIONS SEC. 127. REPEAL OF THE 30 PERCENT TAX ON INTEREST RECEIVED BY FOREIGNERS ON CERTAIN PORTFOLIO INVESTMENTS. (a) REPEAL OF TAX ON NONRESIDENT INDIVIDUALS.— 26 use 871. (1) IN GENERAL.—Section 871 (relating to 30 percent tax on Post, p. 653. income not connected with United States business), as amended by this Act, is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection: "(h) REPEAL OF TAX ON INTEREST OF NONRESIDENT ALIEN INDIVID- UALS RECEIVED FROM CERTAIN PORTFOUO DEBT INVESTMENTS.— "(1) I N GENERAL.—In the case of any portfolio interest re- ceived by a nonresident individual from sources within the United States, no tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a). "(2) PORTFOLIO INTEREST.—For purposes of this subsection, the .J term 'portfolio interest' means any interest (including original
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 649 i^v issue discount) which is described in any of the following sub- paragraphs: "(A) CERTAIN OBUGATIONS WHICH ARE NOT REGISTERED.— Interest which is paid on any obligation which— "(i) is not in registered form, and "(ii) is described in section 163(f)(2)(B). "(B) CERTAIN REGISTERED OBLIGATIONS.—Interest which is paid on an obligation— "(i) which is in registered form, and "(ii) with respect to which the United States person who would otherwise be required to deduct and with- hold tax from such interest under section 1441(a) has received a statement (which meets the requirements of paragraph (4)) that the beneficial owner of the obliga- tion is not a United States person. "(3) PORTFOUO INTEREST NOT TO INCLUDE INTEREST RECEIVED BY 10-PERCENT SHAREHOLDERS.— For purposes of this subsection— "(A) I N GENERAL.—The term 'portfolio interest' shall not „ ,.,i,, include any interest described in subparagraph (A) or (B) of paragraph (2) which is received by a 10-percent share- holder. . i,. "(B) 10-PERCENT SHAREHOLDER.—The term '10-percent shareholder'means— "(i) in the case of an obligation issued by a corpora- tion, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or IT- ;-:; f-s "(ii) in the case of an obligation issued by a partner- , ship, any person who owns 10 percent or more of the capital or profits interest in such partnership. "(C) ATTRIBUTION RULES.—For puiT)oses of determining %,. & ownership of stock under subparagraph (BXi) the rules of i.-j;- • section 318(a) shall apply, except that— "(i) section 318(aX2XC) shall be applied without 'c.^y , j , . regard to the 50-percent limitation therein, and "(ii) any stock which a person is treated as owning gwft rAgr after application of section 318(aX4) shall not, for pur- poses of applying paragraphs (2) and (3) of section 318(a), be treated as actually owned by such person. Under regulations prescribed by the Secretary, rules simi- lar to the rules of the preceding sentence shall be applied in determining the ownership of the capital or profits interest in a partnership for purposes of subparagraph (BXii). "(4) CERTAIN STATEMENTS.—A statement with respect to any obligation meets the requirements of this paragraph if such statement is made by— "(A) the beneficial owner of such obligation, or "(B) a securities clearing organization, a bank, or other financial institution that holds customers' securities in the 'M .q ,S5*!;i\ ordinary course of its trade or business. The preceding sentence shall not apply to any statement with respect to pajonent of interest on any obligation by any person if, at least one month before such payment, the Secretary has published a determination that any statement from such person (or any class including such person) does not meet the require- ments of this paragraph.
98 STAT. 650 PUBLIC LAW 98-369—JULY 18, 1984 "(5) SECRETARY MAY PROVIDE SUBSECTION N O T TO APPLY I N CASES OF INADEQUATE INFORMATION EXCHANGE.— "(A) I N GENERAL.—If the Secretary determines that the exchange of information between the United States and a foreign country is inadequate to prevent evasion of the United States income tax by United States persons, the Secretary may provide in writing (and pubUsh a statement) that the provisions of this subsection shall not apply to payments of interest to any person within such foreign country (or payments addressed to, or for the account of, persons within such foreign country) during the period— "(i) beginning on the date specified by the Secretary, and "(ii) ending on the date that the Secretary deter- mines that the exchange of information between the i' United States and the foreign country is adequate to prevent the evasion of United States income tax by United States persons. "(B) EXCEPTION FOR CERTAIN OBUGATIONS.—Subpara- graph (A) shall not apply to the payment of interest on any obligation which is issued on or before the date of the > publication of the Secretary's determination under such subparagraph. "(6) REGISTERED FORM.—For purposes of this subsection, the term 'registered form' has the same meaning given such term by section 163(f).". 26 use 871. (2) CJONFORMING AMENDMENT.—Paragraph (1) of section 871(a) (relating to tax on income other than capital gains) is amended by striking out "There" and inserting in lieu thereof "Except as provided in subsection (i), there", (b) FOREIGN CORPORATIONS.— 26 use 881. (1) I N GENERAL.—Section 881 (relating to tax on income of Post, p. 654. foreign corporations not connected with United States business), as amended by this Act, is amended by redesignating subsection (c) as subsection (d) and by adding after subsection (b) the following new subsection: "(c) REPEAL OF TAX ON INTEREST OF FOREIGN CORPORATIONS RECEIVED FROM CERTAIN PORTFOUO DEBT INVESTMENTS.— "(1) I N GENERAL.—In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a). "(2) PORTFOUO INTEREST.—For purposes of this subsection, the term 'portfolio interest' means any interest (including original issue discount) which is described in any of the following sub- paragraphs: "(A) CERTAIN OBUGATIONS WHICH ARE NOT REGISTERED.— Interest which is paid on any obligation which is described Ante, p. 648. in section 871(h)(2)(A). "(B) CERTAIN REGISTERED OBLIGATIONS.—Interest which is paid on an obligation— "(i) which is in registered form, and "(ii) with respect to which the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) has received a state- Ante, p. 648. ment which meets the requirements of section 871(hX4)
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 651 -t'^t" = that the beneficial owner of the obligation is not a United States person. "(3) PORTFOLIO INTEREST SHALL NOT INCLUDE INTEREST RE- CEIVED BY CERTAIN PERSONS.—For purposes of this subsection, the term 'portfolio interest' shall not include any portfolio interest which— "(A) except in the case of interest paid on an obligation of ^^'* <3 '^J.^i* the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business, "(B) is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or Ante, p. 648. = "(C) is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4). Ante, p. 644. "(4) SPECIAL RULES FOR CONTROLLED FOREIGN CORPORATIONS.— -^ ' "(A) I N GENERAL.—In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply: ^*** -5 '"^ ^' "(i) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 10 percent), "(ii) Paragraph (4) of section 954(b) (relating to corpo- ooiS'Sti.^ rations not formed or availed of to avoid tax). "(iii) Subparagraph (B) of section 954(c)(3) (relating to •^^^'i "-^^ ^ certain income derived in active conduct of trade or business), "(iv) Subparagraph (C) of section 954(c)(3) (relating to S« certain income derived by an insurance company). "(v) Subparagraphs (A) and (B) of section 954(c)(4) ^' (relating to exception for certain income received from ' related persons). Ml "(B) CONTROLLED FOREIGN CORPORATION.—For purposes of this subsection, the term 'controlled foreign corporation' has the meaning given to such term by section 957(a). "(5) SECRETARY MAY CEASE APPLICATION OF THIS SUBSECTION.— Under rules similar to the rules of section 871(h)(5), the Secre- Ante, p. 648. tary may provide that this subsection shall not apply to pay- ments of interest described in section 871(h)(5). "(6) REGISTERED FORM.—For purposes of this subsection, the term 'registered form' has the meaning given such term by i-^ -y section 163(f)." (2) CONFORMING AMENDMENT.—Subsection (a) of section 881 26 u s e 881. (relating to imposition of tax) is amended by striking out "There' and inserting in lieu thereof "Except as provided in subsection (c), there". (c) AMENDMENT OF SECTION 864(c)(2).—Paragraph (2) of section 26 use 864. 864(c) (relating to effectively connected income, etc.) is amended by striking out "section 871(a)(1) or section 881(a)" and inserting in lieu thereof "section 871(a)(1), section 871(h) section 881(a), or section 881(c)". (d) AMENDMENT OF SECTION 2105.—Subsection (b) of section 2105 26 use 2105. (relating to property without the United States) is amended to read as follows: "(b) BANK DEPOSITS AND CERTAIN OTHER DEBT OBUGATIONS.—For purposes of this subchapter— "(1) amounts described in section 861(c), if any interest thereon would be treated by reason of section 861(a)(1)(A) as
98 STAT. 652 PUBLIC LAW 98-369—JULY 18, 1984 income from sources without the United States were such inter- est received by the decedent at the time of his death, "(2) deposits with a foreign branch of a domestic corporation or domestic partnership, if such branch is engaged in the com- mercial banking business, and "(3) debt obligations, if, without regard to whether a state- Ante, p. 648. ment meeting the requirements of section 871(h)(4) has been received, any interest thereon would be eligible for the exemp- tion from tax under section 871(h)(1) were such interest received by the decedent at the time of his death, shall not be deemed property within the United States.". (e) WITHHOLDING.— 26 use 1441. (1) NONRESIDENT ALIENS.—Subsection (c) of section 1441 (relat- ing to withholding of tax on nonresident aliens) is amended by adding at the end thereof the following new paragraph: "(9) INTEREST INCOME FROM CERTAIN PORTFOLIO DEBT INVEST- MENTS.—In the case of portfolio interest (within the meaning of Ante, p. 648. 871(h)(2)), no tax shall be required to be deducted and withheld from such interest unless the person required to deduct and withhold tax from such interest knows, or h£is reason to know, that such interest is not portfolio interest by reason of section 871(h)(3).". (2) FOREIGN CORPORATIONS.—The last sentence of section 26 use 1442. 1442(a) is amended— (A) by striking out "and" after "section 881(a)(4)," and (B) by inserting before the period at the end thereof the following: ", and the references in section 1449(c)(9) to sections 871(h)(2) and 871(h)(3) shall be treated as referring to sections 881(c)(2) and 881(c)(3)". (f) REGISTERED OBUGATIONS.—Subparagraph (C)(i) of section 26 use 163. 163(f)(2) (relating to authority to include other obligations) is amended to read as follows: "(i) in the case of— "(I) subparagraph (A), such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, or "(II) subparagraph (B), such obligation is of a type specified by the Secretary in regulations, and". 26 u s e 871 note. (g) EFFECTIVE D A T E S . — (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply to interest received after the date of the enactment of this Act with respect to obligations issued after such date, in taxable years ending after such date. (2) SUBSECTION (d).—The amendment made by subsection (d) shall apply to obligations issued after the date of the enactment of this Act with respect to the estates of decedents dying after such date. (3) SPECIAL RULE FOR CERTAIN UNITED STATES AFFILIATE OBLIGATIONS.— (A) I N GENERAL.—For purposes of the Internal Revenue 26 use 1 et seq. Code of 1954, payments of interest on a United States affiliate obligation to an applicable CFC in existence on or before June 22, 1984, shall be treated as payments to a resident of the country in which the applicable CFC is incorporated. „, -: - s.*:«5,;.:.>-ij ^t--* DIJ-OV;' i!i.-:i«nT
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 653 (B) EXCEPTION.—Subparagraph (A) shall not apply to any applicable CFC which did not meet requirements which are based on the principles set forth in Revenue Rulings 69-501, 69-377, 70-645, and 73-110. " > (C) DEFINITIONS.— (i) The term "applicable CFC" has the meaning given f such term by section 121(b)(2)(D) of this Act, except that Ante, p. 638. such section shall be applied by substituting "the date of interest payment" for "March 31, 1984," in clause (i) thereof. (ii) The term "United States affiliate obligation" lox LJ .'-?- means an obligation described in section 121(b)(2)(F) of this Act which was issued before June 22,1984. SEC. 128. TREATMENT OF UNITED STATES SOURCE ORIGINAL ISSUE DIS- COUNT IN CASE OF FOREIGN PERSONS. , . ,5,,, .„ (a) NONRESIDENT A U E N INDIVIDUALS.— (1) I N GENERAL.—Subparagraph (C) of section 871(a)(1) (relat- 26 USC 871. ing to income not connected with United States business) is amended to read as follows: "(C) in the case of— "(i) a sale or exchange of an original issue discount obligation, the amount of any gain not in excess of the •; original issue discount accruing while such obligation was held by the nonresident alien individual (to the K extent such discount was not theretofore taken into account under clause (ii)), and "(ii) the payment of interest on an original issue discount obligation, an amount equal to the original issue discount accrued on such obligation since the last payment of interest thereon (except that such origmal J, , issue discount shall be taken into account under this clause only to the extent that the tax thereon does not exceed the interest payment less the tax imposed by subparagraph (A) thereon), and". (2) DEFINITIONS AND SPECIAL RULES.—Section 871 is amended by redesignating subsection (g) as subsection (h) and by insert- ing after subsection (f) the following new subsection: "(g) SPECIAL RULES FOR ORIGINAL ISSUE DISCOUNT.—For purposes of this section and section 881— •'*•' '^ "'* ' "(1) ORIGINAL ISSUE DISCOUNT OBUGATION.— "(A) I N GENERAL.—Except as provided in subparagraph i .3 J fx (B), the term 'original issue discount obligation' means any bond or other evidence of indebtedness having original issue discount (within the meaning of section 1273). Ante, p. 536. •'1 "(B) EXCEPTIONS.—The term 'original issue discount obli- gation' shall not include— "(i) CERTAIN SHORT-TERM OBUGATIONS.—Any obliga- tion payable 183 days or less from the date of original issue (without regard to the period held by the tax- paver). '(ii) TAX-EXEMPT OBLIGATIONS.—Any obligation the interest on which is exempt from tax under section 103 or under any other provision of law without regard to the identity of the holder. "(2) DETERMINATION OF PORTION OF ORIGINAL ISSUE DISCOUNT ACCRUING DURING ANY PERIOD.—The determination of the
98 STAT. 654 PUBLIC LAW 98-369—JULY 18, 1984 amount of the original issue disfcount which accrues during any Ante, p. 533. period shall be made under the rules of section 1272 (or the corresponding provisions of prior law) without regard to any exception for short-term obligations. "(3) SOURCE OF ORIGINAL ISSUE DISCOUNT.—Except to the extent provided in regulations prescribed by the Secretary, the K?: q ,,a determination of whether any amount described in subsection (a)(1)(C) is from sources within the United States shall be made at the time of the payment (or sale or exchange) as if such payment (or sale or exchange) involved the payment of interest. Ante, p. 551. "(4) STRIPPED BONDS.—The provisions of section 1286 (relating to the treatment of stripped bonds and stripped coupons as obligations with original issue discount) shall apply for purposes of this section." (b) FOREIGN CORPORATIONS.— 26 use 881. (1) I N GENERAL.—Paragraph (3) of section 881(a) (relating to tax on income of foreign corporations not connected with United States business) is amended to read as follows: "(3) in the case of— "(A) a sale or exchange of an original issue discount obligation, the amount of any gain not in excess of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not therefore taken into account under subparagraph (B)), and "(B) the payment of interest on an original issue discount obligation, an amount equal to the original issue discount accrued on such obligation since the last payment of inter- est thereon (except that such original issue discount shall be taken into account under this subparagraph only to the extent that the tax thereon does not exceed the interest payment less the tax imposed by paragraph (1) thereon), and". (2) CROSS REFERENCE.—Subsection (c) of section 881 (relating to doubling of tax) is amended to read as follows: "(c) CROSS REFERENCE.— "For doubling of tax on corporations of certain foreign countries, see section 891. Ante, p. 653. "For special rules for original issue discount, see section 871(g)." (c) DEDUCTION FOR ORIGINAL ISSUE DISCOUNT HELD BY RELATED Ante, p. 556. FOREIGN PERSON.—Subsection (e) of section 163 (relating to original issue discount), as amended by this Act, is amended by redesignating paragraph (3) as paragraph (4), and by inserting after paragraph (2) a<,c the following new paragraph: "(3) SPECIAL RULE FOR ORIGINAL ISSUE DISCOUNT ON OBLIGATION HELD BY RELATED FOREIGN PERSON.— "(A) IN GENERAL.—If any debt instrument having original issue discount is held by a related foreign person, any portion of such original issue discount shall not be allow- able as a deduction to the issuer until paid. "(B) RELATED FOREIGN PERSON.—For purposes of subpara- graph (A), the term 'related foreign person' means any person— "(i) who is not a United States person, and "(ii) who is related (within the meaning of section Oiii w im.. 267(b)) to the issuer."
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 655 (d) EFFECTIVE DATE.— 26 use 871 note. (1) I N GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to payments made on or after the 60th day after the date of the enactment of this Act with respect to obligations issued after March 31, 1972. (2) SUBSECTION (C).—The amendment made by subsection (c) shall apply to obligations issued after June 9,1984. SEC. 129. WITHHOLDING OF TAX ON DISPOSITIONS OF UNITED STATES REAL PROPERTY INTERESTS. (a) WITHHOLDING OF TAX.— (1) IN GENERAL.—Subchapter A of chapter 3 (relating to with- holding of tax on nonresident aliens and foreign corporations) is amended by adding at the end thereof the following new section: "SEC. 1445. WITHHOLDING OF TAX ON DISPOSITIONS OF UNITED STATES 26 USC 1445. REAL PROPERTY INTERESTS. "(a) GENERAL RULE,—Except as otherwise provided in this section, in the case of any disposition of a United States real property interest (as defined in section 897(c)) by a foreign person, the trans- feree shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition. "(b) EXEMPTIONS.— "(1) I N GENERAL.—No person shall be required to deduct and withhold any amount under subsection (a) with respect to a disposition if paragraph (2), (3), (4), (5), or (6) applies to the transaction. "(2) TRANSFEROR FURNISHES NONFOREIGN AFFIDAVIT.—Except as provided in paragraph (7), this paragraph applies to the disposition if the transferor furnishes to the transferee an affidavit by the transferor stating, under penalty of perjury, the transferor's United States taxpayer identification number and that the transferor is not a foreign person. "(3) NONPUBLICLY TRADED DOMESTIC CORPORATION FURNISHES AFFIDAVIT THAT IT IS NOT A UNITED STATES REAL PROPERTY HOLD- ING CORPORATION.—Except as provided in paragraph (7), this paragraph applies in the case of a disposition of any interest in any domestic corporation, if the domestic corporation furnishes to the transferee an affidavit by the domestic corporation stat- ing, under penalty of perjury, that the domestic corporation is not and has not been a United States real property holding corporation (as defined in section 897(c)(2)) during the applicable period specified in section 897(c)(l)(AXii). "(4) TRANSFEREE RECEIVES QUAUFYING STATEMENT.— "(A) I N GENERAL.—This paragraph applies to the disposi- tion if the transferee receives a qualifying statement at such time, in such manner, and subject to such terms and conditions as the Secretary may by regulations prescribe. "(B) QUAUFYING STATEMENT.—For purposes of subpara- y^ 5 graph (A), the term 'qualifying statement' means a state- ment by the Secretary that— "(i) the transferor either— "(I) has reached agreement with the Secretary (or such agreement has been reached by the trans- feree) for the payment of any tax imposed by sec- tion 871(bXl) or 882(aXl) on any gain recognized by
98 STAT. 656 PUBLIC LAW 98-369—JULY 18, 1984 the transferor on the disposition of the United States real property interest, or "(II) is exempt from any tax imposed by section 871(b)(1) or 882(a)(1) on any gain recognized by the transferor on the disposition of the United States real property interest, and "(ii) the transferor or transferee has satisfied any transferor's unsatisfied withholding liability or has pro- vided adequate security to cover such liability. "(5) RESIDENCE WHERE AMOUNT REALIZED DOES NOT EXCEED $300,000.—This paragraph applies to the disposition if^ "(A) the property is acquired by the transferee for use by him as a residence, and "(B) the amount realized for the property does not exceed $300,000. "(6) STOCK REGULARLY TRADED ON ESTABLISHED SECURITIES MARKET.—This paragraph applies if the disposition is of a share of a class of stock that is regularly traded on an established securities market. "(7) SPECIAL RULES FOR PARAGRAPHS (2) AND (3).—Paragraph (2) or (3) (as the case may be) shall not apply to any disposition— "(A) i f - "(i) the transferee has actual knowledge that the affidavit referred to in such paragraph is false, or "(ii) the transferee receives a notice (as described in subsection (d)) from a transferor's agent or a trans- feree's agent that such affidavit is false, or "(B) if the Secretary by regulations requires the trans- feree to furnish a copy of such affidavit to the Secretary and the transferee fails to furnish a copy of such affidavit to the Secretary at such time and in such manner as required by such regulations. "(c) LIMITATIONS ON AMOUNT REQUIRED TO B E WITHHELD.— "(1) CANNOT EXCEED TRANSFEROR'S MAXIMUM TAX LIABILITY.— "(A) I N GENERAL.—The amount required to be withheld under this section with respect to any disposition shall not exceed the amount (if any) determined under subparagraph (B) as the transferor's maximum tax liability. "(B) REQUEST.—At the request of the transferor or trans- feree, the Secretary shall determine, with respect to any disposition, the transferor's maximum tax liability. "(C) REFUND OF EXCESS AMOUNTS WITHHELD.—Subject to such terms and conditions as the Secretary may by regula- tions prescribe, a transferor may seek and obtain a refund of any amounts withheld under this section in excess of the transferor's maximum tax liability. "(2) AUTHORITY OF SECRETARY TO PRESCRIBE REDUCED AMOUNT.—At the request of the transferor or transferee, the Secretary may prescribe a reduced amount to be withheld under this section if the Secretary determines that to substitute such reduced amount will not jeopardize the collection of the tax imposed by section 871(b)(1) or 882(a)(1). "(3) PROCEDURAL RULES.— "(A) REGULATIONS.—Requests for— "(i) qualifying statements under subsection (b)(4), "(ii) determinations of transferor's maximum tax li- <.; ability under paragraph (1), and
PUBLIC LAW 98-369-JULY 18, 1984 98 STAT. 657 "(iii) reductions under paragraph (2) in the amount required to be withheld, shall be made at the time and manner, and shall include such information, as the Secretary shall prescribe by regulations. "(B) REQUESTS TO BE HANDLED WITHIN 90 DAYS.—The Sec- retary shall take action with respect to any request de- scribed in subparagraph (A) within 90 days after the -' Secretary receives the request. "(d) LiABiuTY OF TRANSFEROR'S AGENTS OR TRANSFEREE'S AGENTS.— "(1) NOTICE OF FALSE AFFIDAVIT; FOREIGN CORPORATIONS.—If— t "(A) the transferor furnishes the transferee an affidavit described in paragraph (2)(A) of subsection (b) or a domestic sd. t corporation furnishes the transferee an affidavit described in paragraph (3) of subsection (b), and aomm. "(B) in the case of— "(i) any transferor's agent, the transferor is a foreign corporation or such agent has actual knowledge that such affidavit is false, or "(ii) any transferee's agent, such agent has actual knowledge that such affidavit is false, such agent shall so notify the transferee at such time and in such manner as the Secretary shall require by regulations. "(2) FAILURE TO FURNISH NOTICE.— "(A) IN GENERAL.—If any transferor's agent or transfer- ee's agent is required by paragraph (1) to furnish notice, but fails to furnish such notice at such time or times and in such manner as may be required by regulations, such agent shall have the same duty to deduct and withhold that the transferee would have had if such agent had complied with •>•[] paragraph (1). "(B) LIABILITY LIMITED TO AMOUNT OF COMPENSATION.—An agent's liability under subparagraph (A) shall be limited to the amount of compensation the agent derives from the transaction. "(3) TRANSFEROR'S AGENT.—For purposes of this subsection, the term 'transferor's agent' means any person who represents the transferor— "(A) in any negotiation with the transferee or any trans- feree's agent related to the transaction, or "(B) in settling the transaction. "(4) TRANSFEREE'S AGENT.—For purposes of this subsection, the term 'transferee's agent' means any person who represents the transferee— "(A) in any negotiation with the transferor or any trans- feror's agent related to the transaction, or "(B) in settling the transaction. "(5) SETTLEMENT OFFICER NOT TREATED AS TRANSFEROR'S AGENT.—For purposes of this subsection, a person shall not be treated as a transferor's agent or transferee's agent with respect to any transaction merely because such person performs 1 or more of the following acts: "(A) The receipt and the disbursement of any portion of the consideration for the transaction. "(B) The recording of any document in connection with the transaction. 31-194 0 - 86 - 23 : QL. 3 Part 1
98 STAT. 658 PUBLIC LAW 98-369—JULY 18, 1984 "(e) SPECIAL RULES RELATING TO DISTRIBUTIONS, ETC., BY CORPORA- TIONS, PARTNERSHIPS, TRUSTS, OR ESTATES.— "(1) CERTAIN DOMESTIC PARTNERSHIPS, TRUSTS, AND ESTATES.— A domestic partnership, the trustee of a domestic trust, or the executor of a domestic estate shall be required to deduct and withhold under subsection (a) a tax equal to 10 percent of any amount of which such partnership, trustee, or executor has custody which is— "(A) attributable to the disposition of a United States real property interest (as defined in section 897(c), other than a disposition described in paragraph (4) or (5)), and "(B) either— "(i) includible in the distributive share of a partner of the partnership who is a foreign person, "(ii) includible in the income of a beneficiary of the trust or estate who is a foreign person, or "(iii) includible in the income of a foreign person under the provisions of section 671. "(2) CERTAIN DISTRIBUTIONS BY FOREIGN CORPORATIONS.—In the case of any distribution by a foreign corporation on which gain is recognized under subsection (d) or (e) of section 897, the foreign corporation shall deduct and withhold under subsection (a) a tax equal to 28 percent of the amount of gain recognized on such distribution under such subsection. "(3) DISTRIBUTIONS BY CERTAIN DOMESTIC CORPORATIONS TO FOREIGN SHAREHOLDERS.—If a domestic corporation which is or has been a United States real property holding corporation (as defined in section 897(c)(2)) during the applicable period speci- fied in section 897(c)(l)(A)(ii) distributes property to a foreign person in a transaction to which section 302 or part II of 26 use 331. subchapter C applies, such corporation shall deduct and with- hold under subsection (a) a tax equal to 10 percent of the amount realized by the foreign shareholder. "(4) TAXABLE DISTRIBUTIONS BY DOMESTIC OR FOREIGN PARTNER- SHIPS, TRUSTS, OR ESTATES.—A domestic or foreign partnership, the trustee of a domestic or foreign trust, or the executor of a domestic or foreign estate shall be required to deduct and withhold under subsection (a) a tax equal to 10 percent of the fair market value (as of the time of the taxable distribution) of any United States real property interest distributed to a part- ner of the partnership or a beneficiary of the trust or estate, as the case may be, who is a foreign person in a transaction which would constitute a taxable distribution under the regulations promulgated by the Secretary pursuant to section 897(g). "(5) RULES RELATING TO DISPOSITIONS OF INTEREST IN PARTNER- SHIPS, TRUSTS, OR ESTATES.—To the extent provided in regula- tions, the transferee of a partnership interest or of a beneficial interest in a trust or estate shall be required to deduct and withhold under subsection (a) a tax equal to 10 percent of the amount realized on the disposition. "(6) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary to carry out the purposes of this subsection, including regulations providing for exceptions from provisions of this subsection. "(f) DEFINITIONS.—For purposes of this section— "(1) TRANSFEROR.—The term 'transferor' means the person disposing of the United States real property interest. i J"S:s1 t ,JC
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 659 "(2) TRANSFEREE.—The term 'transferee' means the person acquiring the United States real property interest. "(3) FOREIGN PERSON.—The term 'foreign person' means any person other than a United States person. "(4) TRANSFEROR'S MAXIMUM TAX LIABILITY.—The term 'trans- feror's maximum tax liability' means, with respect to the dispo- sition of any interest, the sum of— "(A) the maximum amount which the Secretary deter- j, mines could be imposed as tax under section 871(b)(1) or 882(a)(1) by reason of the disposition, plus "(B) the amount the Secretary determines to be the transferor's unsatisfied withholding liability with respect to such interest. "(5) TRANSFEROR'S UNSATISFIED WITHHOLDING LIABILITY.—The term 'transferor's unsatisfied withholding liability' means the withholding obligation imposed by this section on the transfer- or's acquisition of the United States real property interest or on the acquisition of a predecessor interest, to the extent such obligation has not been satisfied." (2) CLERICAL AMENDMENT.—The table of sections for subchap- ter A of chapter 3 is amended by adding at the end thereof the following new item: "Sec. 1445. Withholding of tax on dispositions of United States real prop- erty interests." (b) REPORTING REQUIREMENTS LIMITED TO FOREIGN PERSONS HOLD- ING DIRECT INVESTMENTS IN UNITED STATES REAL PROPERTY.— (1) IN GENERAL.—Section 6039C (relating to returns with re- 26 USC 6039C. spect to United States real property interests) is amended to read as follows: "SEC. 6039C. RETURNS WITH RESPECT TO FOREIGN PERSONS HOLDING DIRECT INVESTMENTS IN UNITED STATES REAL PROPERTY INTERESTS. "(a) GENERAL RULE.—To the extent provided in regulations, any foreign person holding direct investments in United States real property interests for the calendar year shall make a return setting forth— "(1) the name and address of such person, "(2) a description of all United States real property interests s. c: held by such person at any time during the calendar year, and .: -.i "(3) such other information as the Secretary may by regula- . „ ,, ,. tions prescribe. 5,r "(b) DEFINITION OF FOREIGN PERSONS HOLDING DIRECT INVEST- MENTS IN UNITED STATES REAL PROPERTY INTERESTS.—For purposes of this section, a foreign person shall be treated as holding direct investments in United States real property interests during any calendar year if— HU m "(1) such person did not engage in a trade or business in the United States at any time during such calendar year, and "(2) the fair market value of the United States real property interests held directly by such person at any time during such year equals or exceeds $50,000. "(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) UNITED STATES REAL PROPERTY INTEREST.—The term 'United States real property interest' has the meaning given to such term by section 897(c).
98 STAT. 660 PUBLIC LAW 98-369—JULY 18, 1984 "(2) FOREIGN PERSON.—The term 'foreign person' means any person who is not a United States person. "(3) ATTRIBUTION OF OWNERSHIP.—For purposes of subsection (b)(2)- "(A) INTERESTS HELD BY PARTNERSHIPS, ETC.—United States real property interests held by a partnership, trust, or estate shall be treated as owned proportionately by its partners or beneficiaries. "(B) INTERESTS HELD BY FAMILY MEMBERS.—United States real property interests held by the spouse or any minor child of an individual shall be treated as owned by such individual. "(4) TIME AND MANNER OF FIUNG RETURN.—All returns re- quired to be made under this section shall be made at such time and in such manner as the Secretary shall by regulations prescribe. "(d) SPECIAL RULE FOR UNITED STATES INTEREST AND VIRGIN ISLANDS INTEREST.—A nonresident alien individual or foreign corpo- ration subject to tax under section 897(a) shall pay any tax and file any return required by this title— "(1) to the United States, in the case of any interest in real property located in the United States and an interest (other than an interest solely as a creditor) in a domestic corporation (with respect to the United States) described in section 897(c)(lXAXii), and "(2) to the Virgin Islands, in the case of any interest in real property located in the Virgin Islands and an interest (other than an interest solely as a creditor) in a domestic corporation (with respect to the Virgin Islands) described in section 897(cXlXAXii)." (2) CLERICAL AMENDMENT.—The table of sections for subpart A of part III of subchapter A of chapter 61 is amended by striking out the item relating to section 6039C and inserting in lieu thereof the following: "Sec. 6039C. Returns with respect to foreign persons holding direct invest- ments in United States real property interests." (c) EFFECTIVE DATES.— 26 use 1445 (1) I N GENERAL.—The amendments made by subsection (a) note. shall apply to any disposition on or after January 1, 1985. 26USC6039C (2) REPORTING REQUIREMENTS.—The amendments made by note. subsection (b) shall apply to calendar year 1980 and subsequent calendar years. SEC. 130. TREATMENT OF PAYMENTS TO GUAM AND VIRGIN ISLANDS CORPORATIONS. 26 u s e 881. (a) GENERAL RULE.—Subsection (b) of section 881 (relating to exception for Guam corporations) is amended to read as follows: "(b) EXCEPTION FOR CERTAIN GUAM AND VIRGIN ISLANDS CORPORATIONS.— "(1) I N GENERAL.—For purposes of this section, a corporation created or organized in Guam or the Virgin Islands or under the law of Guam or the Virgin Islands shall not be treated as a foreign corporation for any taxable year if— "(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is owned (directly or indirectly) by foreign persons, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 661 "(B) at least 20 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to have been derived from sources within Guam or the Virgin 3! I Islands (as the case may be) for the 3-year period ending with the close of the preceding taxable year of such corpora- tion (or for such part of such period as the corporation has • '-> • - r been in existence). "(2) PARAGRAPH (i) NOT TO APPLY TO TAX IMPOSED IN GUAM.— For purposes of applying this subsection with respect to income tax liability incurred to Guam— "(A) Paragraph (1) shall not apply, and "(B) for purposes of this section, the term 'foreign corpo- ; ration' does not include a corporation created or organized in Guam or under the law of Guam. "(3) DEFINITIONS.— 0 ^ "(A) FOREIGN PERSON.—For purposes of paragraph (1), the term 'foreign person' means any person other than— 1 "(i) a United States person, or "(ii) a person who would be a United States person if references to the United States in section 7701 included Ki ij^A':- > references to a possession of the United States. "(B) INDIRECT OWNERSHIP RULES.—For purposes of para- graph (1), the rules of section 318(a)(2) shall apply except that '5 percent' shall be substituted for *50 percent' in subparagraph (C) thereof. "(4) CROSS REFERENCE.— "For tax imposed in the Virgin Islands, see sections 934 and 934A." Co) WITHHOLDING OF TAX.—Subsection (c) of section 1442 (relating 26 USC 1442. to exception for Guam corporations) is amended to read as follows: "(c) EXCEPTION FOR CERTAIN GUAM AND VIRGIN ISLANDS CORPORA- TIONS.— "(1) I N GENERAL.—For purposes of this section, the term 'foreign corporation' does not include a corporation created or organized in Guam or the Virgin Islands or under the law of Guam or the Virgin Islands if the requirements of subpara- graphs (A) and (B) of section 881(b)(1) are met with respect to Ante, p. 660. such corporation. "(2) PARAGRAPH (i) NOT TO APPLY TO TAX IMPOSED IN GUAM.— For purposes of applying this subsection with respect to income tax liability incurred to Guam— "(A) paragraph (1) shall not apply, and "(B) for purposes of this section, the term 'foreign corpo- ration' does not include a corporation created or organized in Guam or under the law of Guam. "(3) CROSS REFERENCE.— "For tax imposed in the Virgin Islands, see sections 934 and 934A." (c) TECHNICAL AMENDMENT.—Subparagraph (B) of section 7651(5) 26 use 7651. is amended by inserting "(other than section 881(b)(1))" after "For purposes of this title". (d) EFFECTIVE DATE.—The amendments made by this section shall 26 use 881 note. apply to payments made after March 1, 1984, in taxable years ending after such date.
98 STAT. 662 PUBLIC LAW 98-369—JULY 18, 1984 PART III—TAXATION OF CERTAIN TRANSFERS OF PROPERTY OUTSIDE THE UNITED STATES SEC. 131. TAXATION OF CERTAIN TRANSFERS OF PROPERTY OUTSIDE THE UNITED STATES. 26 use 367. (a) I N GENERAL.—Subsection (a) of section 367 (relating to trans- fers of property from the United States) is amended to read as follows: "(a) TRANSFERS OF PROPERTY FROM THE UNITED STATES.— "(1) GENERAL RULE.—If, in connection with any exchange described in section 332, 351, 354, 355, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation. "(2) EXCEPTION FOR CERTAIN STOCK OR SECURITIES.—Except to the extent provided in regulations, paragraph (1) shall not apply to the transfer of stock or securities of a foreign corporation which is a party to the exchange or a party to the reorganiza- tion. "(3) EXCEPTION FOR TRANSFERS OF CERTAIN PROPERTY USED IN THE ACTIVE CONDUCT OF A TRADE OR BUSINESS.— "(A) I N GENERAL.—Except as provided in regulations pre- scribed by the Secretary, paragraph (1) shall not apply to any property transferred to a foreign corporation for use by such foreign corporation in the active conduct of a trade or business outside of the United States. "(B) PARAGRAPH NOT TO APPLY TO CERTAIN PROPERTY.— Except as provided in regulations prescribed by the Secre- tary, subparagraph (A) shall not apply to any— "(i) property described in paragraph (1) or (3) of section 1221 (relating to inventory and copyrights, etc.), "(ii) installment obligations, accounts receivable, or similar property, "(iii) foreign currency or other property denominated in foreign currency, - I •' "(iv) intangible property (within the meaning of sec- tion 936(h)(3)(B)), or "(v) property with respect to which the transferor is a lessor at the time of the transfer, except that this clause shall not apply if the transferee was the lessee. "(C) TRANSFER OF FOREIGN BRANCH WITH PREVIOUSLY DE- DUCTED LOSSES.—Except as provided in regulations pre- scribed by the Secretary, subparagraph (A) shall not apply to gain realized on the transfer of the assets of a foreign branch of a United States person to a foreign corporation in an exchange described in paragraph (1) to the extent that— Afk "(i) the sum of losses— "(I) which were incurred by the foreign branch before the transfer, and "(II) with respect to which a deduction was al- D8I lowed to the taxpayer, exceeds "(ii) the sum of— "(I) any taxable income of such branch for a taxable year after the taxable year in which the
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 663 loss was incurred and through the close of the taxable year of the transfer, and "(11) the amount which is recognized under sec- tion 904(f)(3) on account of the transfer. Any gain recognized by reason of the preceding sentence shall be treated for purposes of this chapter as income from sources outside the United States having the same charac- ter as such losses had. "(4) SPECIAL RULE FOR TRANSFER OF PARTNERSHIP INTERESTS.— Except as provided in regulations prescribed by the Secretary, a transfer by a United States person of an interest in a partner- ship to a foreign corporation in an exchange described in para- s' graph (1) shall, for purposes of this subsection, be treated as a r transfer to such corporation of such person's pro rata share of the assets of the partnership. "(5) SECRETARY MAY EXEMPT CERTAIN TRANSACTIONS FROM AP- pucATiON OF THIS SUBSECTION.—Paragraph (1) shall not apply to the transfer of any property which the Secretary, in order to carry out the purposes of this subsection, designates by regula- tion." (b) SPECIAL RULES FOR TRANSFERS OF INTANGIBLES.—Subsection (d) of section 367 (relating to special rule for transfer of intangibles by 26 USC 367. possession corporations) is amended to read as follows: "(d) SPECIAL RULES RELATING TO TRANSFERS OF INTANGIBLES.— "(1) IN GENERAL.—Except as provided in regulations pre- scribed by the Secretary, if a United States person transfers any intangible property (within the meaning of section 936(h)(3XB)) to a foreign corporation in an exchange described in section 351 or 361— "(A) subsection (a) shall not apply to the transfer of such property, and "(B) the provisions of this subsection shall apply to such transfer. "(2) TRANSFER OF INTANGIBLES TREATED AS TRANSFER PURSU- ANT TO SALE OF CONTINGENT PAYMENTS.— "(A) I N GENERAL.—If paragraph (1) applies to any trans- fer, the United States person transferring such property shall be treated as— ;' "(i) having sold such property in exchange for pay- ments which are contingent upon the productivity, use, ^ or disposition of such property, and "(ii) receiving amounts which reasonably reflect the amounts which would have been received— . , "(I) annually in the form of such payments over ' *;\, the useful life of such property, or "(II) in the case of a disposition following such ^f transfer (whether direct or indirect), at the time of the disposition. ^ "(B) EFFECT ON EARNINGS AND PROFITS.—For purposes of ^' .his chapter, the earnings and profits of a foreign corpora- tion to which the intangible property was transferred shall be reduced by the amount required to be included in the income of the transferor of the intangible property under subparagraph (A)(ii). "(C) AMOUNTS RECEIVED TREATED AS UNITED STATES SOURCE ORDINARY INCOME.—For purposes of this chapter, any amount included in gross income by reason of this subsec-
98 STAT. 664 PUBLIC LAW 98-369—JULY 18, 1984 siii iu tion shall be treated as ordinary income from sources within the United States." 26 use 367. (c) TREATMENT OF LIQUIDATIONS UNDER SECTION 336.—Section 367 is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e) TREATMENT OF LIQUIDATIONS UNDER SECTION 336.—In the case of any distribution described in section 336 by a domestic corpora- tion which is made to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of this section." (d) SECRETARY MUST B E NOTIFIED OF TRANSACTIONS DESCRIBED IN SECTION 367.— (1) NOTIFICATION REQUIREMENT.—Subpart A of part III of 'subchapter A of chapter 61 is amended by adding after section 6038A the following new section: 26USC6038B. "SEC. 6038B. NOTICE OF CERTAIN TRANSFERS TO FOREIGN PERSONS. "(a) IN GENERAL.—Each United States person who— "(1) transfers property to a foreign corporation in an ex- change described in section 332, 351, 354, 355, 356, or 361, or "(2) makes a distribution described in section 336 to a person ?&f >r a : ^j^Q jg j^Q^ a United States person, shall furnish to the Secretary, at such time and in such manner as the Secretary shall by regulations prescribe, such information with respect to such exchange or distribution as the Secretary may require in such regulations. "(b) PENALTY FOR FAILURE TO FURNISH INFORMATION.— "(1) IN GENERAL.—If any United States person fails to furnish the information described in subsection (a) at the time and in the manner required by regulations, such person shall pay a penalty equal to 25 percent of the amount of the gain realized on the exchange. "(2) REASONABLE CAUSE EXCEPTION.—Paragraph (1) shall not apply to any failure if the United States person shows such failure is due to reasonable cause and not to willful neglect." (2) EXTENSION OF PERIOD FOR ASSESSMENT AND COLLECTION Post, p. 817. WHERE SECRETARY NOT NOTIFIED.—Subsection (c) of section 6501 26 use 6501. (relating to exceptions to limitations on assessment and collec- tion) is amended by adding at the end thereof the following new paragraph: ^5, "(8) FAILURE TO NOTIFY SECRETARY UNDER SECTION 6038B.—In ^^' the case of any tax imposed on any exchange by reason of Ante, pp. 662, subsection (a) or (d) of section 367, the time for assessment of 663. such tax shall not expire before the date which is 3 years after the date on which the Secretary is notified of such exchange under section 6038B(a)." (3) CONFORMING AMENDMENT.—The table of sections for sub- part A of part III of subchapter A of chapter 61 is amended by adding after the item relating to section 6038A the following new item: "Sec. 6038B. Notice of certain transfers to foreign persons." (e) REPEAL OF DECLARATORY JUDGMENT PROVISIONS INVOLVING TRANSFERS OF PROPERTY FROM THE UNITED STATES.— 26 use 7477. (1) IN GENERAL.—Section 7477 is hereby repealed. (2) CONFORMING AMENDMENTS.—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 665 (A) Section 7482(b)(1) (relating to venue for review of Tax 26 use 7482. Court decisions) is amended by striking out subparagraph (D) and by redesignating subparagraphs (E) and (F) as •<' subparagraphs (D) and (E), respectively. (B) The table of sections for part IV of subchapter C of chapter 76 is amended by striking out the item relating to section 7477. - (f) TRANSFERS TO AVOID INCOME TAX.— f (1) I N GENERAL.—Section 1492 (relating to nontaxable trans- 26 use 1492. fers) is amended— (A) by striking out paragraphs (2) and (3) and by inserting ^!. in lieu thereof— "(2) To a transfer— "(A) described in section 367, or "(B) not described in section 367 but with respect to which the taxpayer elects (before the transfer) the application of principles similar to the principles of section 367, or", and (B) by redesignating paragraph (4) as paragraph (3). (2) CONFORMING AMENDMENT.—Subsection (b) of section 1494 26 u s e 1494. (relating to abatement or refund) is amended to read as follows: "(b) ABATEMENT OR REFUND.—Under regulations prescribed by the Secretary, the tax may be abated, remitted, or refunded if the taxpayer, after the transfer, elects the application of principles similar to the principles of section 367." (g) EFFECTIVE DATES.— 26 use 367 note'. (1) I N GENERAL.—The amendments made by this section shall apply to transfers or exchanges after December 31, 1984, in taxable years ending after such date. i* (2) SPECIAL RULE FOR CERTAIN TRANSFERS OF INTANGIBLES.— (A) I N GENERAL.—If, after June 6, 1984, and before Janu- ary 1,1985, a United States person transfers any intangible property (within the meaning of section 936(h)(3)(B) of the Internal Revenue Code of 1954) to a foreign corporation or in a transfer described in section 1491, such transfer shall be treated for purposes of sections 367(a), 1492(2), and Ante, p. 662. '> 1494(b) of such Code as pursuant to a plan having as 1 of its -Supra. principal purposes the avoidance of Federal income tax. ol (B) WAIVER.—Subject to such terms and conditions as the -: J c '' Secretary of the Treasury or his delegate may prescribe, the Secretary may waive the application of subparagraph (A) with respect to any transfer. (3) RuuNG REQUEST BEFORE MARCH 1, 1984.—The amendments made by this section (and the provisions of paragraph (2) of this subsection) shall not apply to any transfer or exchange of property described in a request filed before March 1, 1984, under section 367(a), 1492(2), or 1494(b) of the Internal Revenue Code of 1954 (as in effect before such amendments). PART IV—MISCELLANEOUS FOREIGN CORPORATE W. ;^:U Si; PROVISIONS SEC. 132. AMENDMENTS RELATED TO FOREIGN PERSONAL HOLDING COM- PANIES. (a) ATTRIBUTION FROM FAMILY MEMBERS AND PARTNERSHIPS.— Section 554 (relating to stock ownership) is amended by adding at 26 USC 554. the end thereof the following new subsection:
98 STAT. 666 PUBLIC LAW 98-369—JULY 18, 1984 , - -,J "(c) SPECIAL RULES FOR APPLICATION OF SUBSECTION (a) (2).—For purposes of the stock ownership requirement provided in section 552(a)(2)— "(1) stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered by reason of so much of subsection (a)(2) as relates to attribution through family membership as owned by a citizen or by a resident alien individual who is not the spouse of the nonresi- 1 4 >s J :fi, dent individual and who does not otherwise own stock in such corporation (determined after the application of subsection (a), other than attribution through family membership), and "(2) stock of a corporation owned by any foreign person shall not be considered by reason of so much of subsection (a)(2) as relates to attribution through partners as owned by a citizen or resident of the United States who does not otherwise own stock in such corporation (determined after application of subsec- tion (a) and paragraph (1), other than attribution through partners)." (b) INCLUSION IN INCOME OF UNITED STATES PERSONS HOLDING 26 use 551. INTEREST THROUGH FOREIGN ENTITY.—Section 551 (relating to for- eign personal holding company income taxed to United States share- holders) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: "(f) STOCK HELD THROUGH FOREIGN ENTITY.—For purposes of this -£',.« as' ai m section, stock of a foreign personal holding company owned (directly or through the application of this subsection) by— "(1) a partnership, estate, or trust which is not a United States shareholder, or "(2) a foreign corporation which is not a foreign personal holding company, shall be considered as being owned proportionately by its partners, beneficiaries, or shareholders. In any case to which the preceding sentence applies, the Secretary may by regulations provide for such adjustments in the application of this part as may be necessary to r.,^. carry out the purposes of the preceding sentence." (c) COORDINATION OF SUBPART F WITH FOREIGN PERSONAL HOLDING COMPANY PROVISIONS.— 26 use 951. (1) I N GENERAL.—Subsection (d) of section 951 (relating to coordination with foreign personal holding company provisions) is amended to read as follows: "(d) COORDINATION WITH FOREIGN PERSONAL HOLDING COMPANY PROVISIONS.—If, but for this subsection, an amount would be included in the gross income of a United States shareholder for any taxable year both under subsection (a)(l)(A)(i) and under section 551(b) (relating to foreign personal holding company income in- cluded in gross income of United States shareholder), such amount shall be included in the gross income of such shareholder only under subsection (a)(1)(A)." (2) CERTAIN DIVIDENDS AND INTEREST NOT TAKEN INTO ACCOUNT 26 u s e 552. FOR PERSONAL HOLDING COMPANY DETERMINATION.—Section 5 5 2 (defining foreign personal holding company) is amended by adding at the end thereof the following new subsection: "(c) CERTAIN DIVIDENDS AND INTEREST NOT TAKEN INTO AC- COUNT.—For purposes of subsection (a)(1) and section 553(a)(1), gross income and foreign personal holding company income shall not K' fc ^ ii*i include any dividends and interest which— "(1) are described in subparagraph (A) of section 954(c)(4), and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 667 "(2) are received from a related person which is not a foreign personal holding company (determined without regard to this subsection)." (d) EFFECTIVE DATES.— 26 use 551 note. (1) SUBSECTIONS (a) AND (b).— (A) IN GENERAL.—Except as provided in subparagraph (B), ^ the amendments made by subsections (a) and (b) shall apply to taxable years of foreign corporations beginning after December 31,1983. (B) 1-YEAR EXTENSION FOR CERTAIN TRUSTS CREATED BEFORE JUNE 30, 1953.— (i) IN GENERAL.—The amendment made by subsection ^ (b) shall apply to taxable years of a foreign corporation beginning after December 31, 1984, with respect to "• "^ ^ - • stock of such corporation which is held (directly or ?'i u n ? indirectly, within the meaning of section 554 of the Internal Revenue Code of 1954) by a trust created . - before June 30,1953, if— (I) none of the beneficiaries of such trust was a citizen or resident of the United States at the time of its creation or within 5 years thereafter, and ^iu > J :. (II) such trust does not, after July 1, 1983, ac- quire (directly or indirectly) stock of any foreign personal holding company other than a company 'f- described in clause (ii). i-j : < 'i ; (ii) DESCRIPTION OF COMPANY.—A company is de- scribed in this clause if— "-- ' (I) substantially all of the assets of such company > . > • are stock or assets previously held by such trust, or (II) such company ceases to be a foreign personal c- holding company before January 1,1985. (2) SUBSECTION (C).— (A) The amendment made by paragraph (1) of subsection 26 USC 951 note, (c) shall apply to taxable years of United States sharehold- ers beginning after the date of the enactment of this Act. (B) The amendment made by paragraph (2) of subsection 26 use 552 note, (c) shall apply to taxable years of foreign corporations beginning after March 15,1984. SEC. 133. AMENDMENTS RELATED TO SECTION 1248. (a) SECTION 1248 To APPLY TO CERTAIN INDIRECT TRANSFERS OF STOCK IN A FOREIGN CORPORATION.—Section 1248 (relating to gain 26 use 1248. from certain sales or exchanges of stock in foreign corporations) is amended by adding at the end thereof the following new subsection: "(i) TREATMENT OF CERTAIN INDIRECT TRANSFERS.— "(1) IN GENERAL.—If any shareholder of a 10-percent corpo- rate shareholder of a foreign corporation exchanges stock of the 10-percent corporate shareholder for stock of the foreign corpo- ration, for purposes of this section, the stock of the foreign corporation received in such exchange shall be treated as if it had been— "(A) issued to the 10-percent corporate shareholder, and "(B) then distributed by the 10-percent corporate share- holder to such shareholder in redemption of his stock. ''(2) 10-PERCENT CORPORATE SHAREHOLDER DEFINED.—For pur- '' poses of this subsection, the term '10-percent corporate share- - ;u <?; holder' means any domestic corporation which, as of the day
98 STAT. 668 PUBLIC LAW 98-369—JULY 18, 1984 before the exchange referred to in paragraph (1), satisfies the stock ownership requirements of subsection (a)(2) with respect to the foreign corporation." (b) EUMINATION OF DoUBLE TAXATION OF EARNINGS AND PROFITS OF CERTAIN FOREIGN CORPORATIONS.— 26 use 959. (1) Section 959 (relating to exclusion from gross income of previously taxed earnings and profits) is amended by adding at the end thereof the following new subsection: "(e) COORDINATION WITH AMOUNTS PREVIOUSLY TAXED UNDER SEC- TION 1248.—For purposes of this section and section 960(b), any amount included in the gross income of any person as a dividend by reason of subsection (a) or (f) of section 1248 shall be treated as an amount included in the gross income of such person under section 951(a)(1)(A)." Ante, p. 667. (2) Section 1248 is amended by adding at the end thereof the following new subsection: "(j) CROSS REFERENCE.— "For provision excluding amounts previously taxed under this section Supra. from gross income when subsequently distributed, see section 959(e)." (c) CLARIFICATION OF SECTION 1248(cX2)(D).—Subparagraph (D) of 26 use 1248. section 1248(c)(2) (relating to earnings and profits of subsidiaries of foreign corporations) is amended by striking out "section 958(a)(2)" and inserting in lieu thereof "section 958(a)". (d) EFFECTIVE DATES.— 26 use 1248 (1) SUBSECTION (a).—The amendment made by subsection (a) note. • shall apply to exchanges after the date of the enactment of this Act in taxable years ending after such date. 26 use 959 note. (2) SUBSECTIONS (b) AND (c) .—Except as provided in para- graph (3), the amendments made by subsections (b) and (c) shall apply with respect to transactions to which subsection (a) or (f) of section 1248 of the Internal Revenue Code of 1954 applies occurring after the date of the enactment of this Act. 26 u s e 959 note. (3) ELECTION OF EARUER DATE FOR CERTAIN TRANSACTIONS.— (A) I N GENERAL.—If the appropriate election is made under subparagraph (B), the amendments made by subsec- .«t.-r laa r)3U ?;: tion (b) shall apply with respect to transactions to which s.r? subsection (a) or (f) of section 1248 of such Code applies occurring after October 9,1975. (B) ELECTION.— (i) Subparagraph (A) shall apply with respect to transactions to which subsection (a) of section 1248 of ^Hi&l •MU 8£ such Code applies if the foreign corporation described in such subsection (or its successor in interest) so elects. (ii) Subparagraph (A) shall apply with respect to transactions to which subsection (f) of section 1248 of such Code applies if the domestic corporation described in section 1248(f)(1) of such Code (or its successor) so elects. (iii) Any election under clause (i) or (ii) shall be made T >. . not later than 180 days after the date of the enactment of this Act and shall be made in such manner as the Secretary of the Treasury or his delegate shall prescribe. SEC. 134. DEFINITION OF FOREIGN INVESTMENT COMPANY. 26 use 1246. (a) GENERAL RULE.—Paragraph (2) of section 1246(b) (defining foreign investment company) is amended to read as follows:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 669 "(2) engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in— "(A) securities (as defined in section 2(a)(36) of the Invest- ment Company Act of 1940, as amended), 15 USC 80a-2. "(B) commodities, or "(C) any interest (including a futures or forward contract or option) in property described in subparagraph (A) or (B), ? at a time when 50 percent or more of the total combined voting power of all classes of stock entitled to vote, or the total value of all classes of stock, was held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30))." (b) EFFECTIVE DATES.— 26 USC 1246 (1) IN GENERAL.—Except as provided in paragraph (2), the note. amendment made by subsection (a) shall apply to sales and exchanges (and distributions) on or after September 29, 1983, in .;> taxable years ending on or after such date. (2) STOCK HELD ON SEPTEMBER 29, 1983.—In the case of a sale or exchange (or distribution) not later than the date which is 1 year after the date of the enactment of this Act, the amendment made by subsection (a) shall not apply with respect to stock held by the taxpayer continuously from September 29, 1983, to the date of such sale or exchange (or distribution). SEC. 135. APPLICATION OF COLLAPSIBLE CORPORATION RULES TO FOR- EIGN CORPORATIONS. (a) IN GENERAL.—Subsection (f) of section 341 (relating to collapsi- 26 USC 341. ble corporations) is amended by adding at the end thereof the following new paragraph: '' ''^y "(8) SPECIAL RULE FOR FOREIGN CORPORATIONS.—Except to the extent provided in regulations prescribed by the Secretary— "(A) any consent given by a foreign corporation under paragraph (1) shall not be effective, and "(B) paragraph (3) shall not apply if the transferee is a foreign corporation." (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 USC 341 note, shall take effect on the date of the enactment of this Act. SEC. 136. STAPLED STOCK; STAPLED ENTITIES. (a) GENERAL RULE.—Part IX of subchapter B of chapter 1 is amended by inserting after section 269A the following new section: "SEC. 269B. STAPLED ENTITIES. 26 USC 269B. "(a) GENERAL RULE.—Except as otherwise provided by regulations, for purposes of this title— "(1) if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation shall be treated as a Bi- domestic corporation. "(2) in applying section 1563, stock in a second corporation which constitutes a stapled interest with respect to stock of a first corporation shall be treated as owned by such first corpora- tion, and "(3) in applying subchapter M for purposes of determining whether any stapled entity is a regulated investment company or a real estate investment trust, all entities which are stapled entities with respect to each other shall be treated as 1 entity.
98 STAT. 670 PUBLIC LAW 98-369—JULY 18, 1984 "(b) SECRETARY TO PRESCRIBE REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to prevent avoidance or evasion of Federal income tax through the use of stapled entities. £ jwd'iBU < Such regulations may include (but shall not be limited to) regula- tions providing the extent to which 1 of such entities shall be treated as owning the other entity (to the extent of the stapled interest). "(c) DEFINITIONS.—For purposes of this section— "(1) ENTITY.—The term 'entity' means any corporation, part- nership, trust, association, estate, or other form of carrying on a business or activity. "(2) STAPLED ENTITIES.—The term 'stapled entities' means any group of 2 or more entities if more than 50 percent in value of the beneficial ownership in each of such entities consists of dhSl ')a= stapled interests. "(3) STAPLED INTERESTS.—Two or more interests are stapled interests if, by reason of form of ownership, restrictions on transfer, or other terms or conditions, in connection with the transfer of 1 of such interests the other such interests are also transferred or required to be transferred. "(d) SPECIAL RULE FOR TREATIES.—Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provi- sions of this section." (b) CLERICAL AMENDMENT.—The table of sections for part IX of subchapter B of chapter 1 is amended by inserting after the item relating to section 269A the following new item": '^" " "Sec. 269B. Stapled entities." "• , . 26 u s e 269B (c) EFFECTIVE D A T E S . — (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall take effect on the date of the enactment of this Act. (2) INTERESTS STAPLED AS OF JUNE 30, 1983.—Except as other- ,i wise provided in this subsection, in the case of any interests which on June 30, 1983, were stapled interests (as defined in Ante, p. 669. fi ^ B] section 269B(c)(3) of the Internal Revenue Code of 1954 (as added by this section)), the amendments made by this section shall take effect on January 1, 1985 (January 1, 1987, in the case of stapled interests in a foreign corporation). (3) CERTAIN STAPLED ENTITIES WHICH INCLUDE REAL ESTATE INVESTMENT TRUST.—Paragraph (3) of section 269B(a) of such Code shall not apply in determining the application of the 26 use 856. provisions of part II of subchapter M of chapter 1 of such Code to any real estate investment trust which is part of a group of stapled entities if— (A) all members of such group were stapled entities as of June 30,1983, and (B) as of June 30, 1983, such group included one or more real estate investment trusts. (4) CERTAIN STAPLED ENTITIES WHICH INCLUDE PUERTO RICAN CORPORATIONS.— (A) Paragraph (1) of section 269B(a) of such Code shall not apply to a domestic corporation and a qualified Puerto Rican corporation which, on June 30, 1983, were stapled entities.
PUBLIC LAW 98-369-JULY 18, 1984 98 STAT. 671 (B) For purposes of subparagraph (A), the term "qualified , Puerto Rican corporation" means any corporation orga- nized in Puerto Rico— (i) which is described in section 957(c) of such Code or ': would be so described if any dividends it received from any other corporation described in such section 957(c) were treated as gross income of the type described in ^., ^uiT'> such section 957(c), and (ii) does not, at any time during the taxable year, own (within the meaning of section 958 of such Code but before applying paragraph (2) of section 269B(a) of such Ante, p. 669. Code) any stock of any corporation which is not de- scribed in such section 957(c). (5) TREATY RULE NOT TO APPLY TO STAPLED ENTITIES ENTITLED TO TREATY BENEFITS AS OF JUNE 30, 1983.—In the case of any it q n r \ entity which was a stapled entity as of June 30, 1983, subsection (d) of section 269B of such Code shall not apply to any treaty ; benefit to which such entity was entitled as of June 30, 1983. J (6) ELECTIONS TO TREAT STAPLED FOREIGN ENTITIES AS r; T ,q v*^ SUBSIDIARIES.— (A) IN GENERAL.—In the case of any foreign corporation ^^^H :^P QH • ;i£ ^ and domestic corporation which as of June 30, 1983, were stapled entities, such domestic corporation may elect (in lieu of applying paragraph (1) of section 269B(a) of such Code) to be treated as owning all interests in the foreign corporation which constitute stapled interests with respect to stock of the domestic corporation. (B) ELECTION.—Any election under subparagraph (A) i shall be made not later than 180 days after the date of the ;^i; ° - !,^, * enactment of this Act and shall be made in such manner as '' '-^ -^ B. the Secretary of the Treasury or his delegate shall prescribe. (C) ELECTION IRREVOCABLE.—Any election under subpara- graph (A), once made, may be revoked only with the con- sent of the Secretary of the Treasury or his delegate. r (7) OTHER STAPLED ENTITIES WHICH INCLUDE REAL ESTATE INVESTMENT TRUST.— (A) IN GENERAL.—Paragraph (3) of section 269B(a) of such Code shall not apply in determining the application of the :; . provisions of part II of subchapter M of chapter 1 of such 26 USC 856. Code to any qualified real estate investment trust which is I. a part of a group of stapled entities— (i) which was created pursuant to a written board of |,., ..,, directors resolution adopted on April 5,1984, and (ii) all members of such group were stapled entities as of June 16,1985. (B) QUALIFIED REAL ESTATE INVESTMENT TRUST.—The term "qualified real estate investment trust" means any real estate trust— — YC, (i) at least 75 percent of the gross income of which is derived from interest on obligations secured by mort- t: gages on real property (as defined in section 856 of such Code), (ii) with respect to which the interest on the obliga- tions described in clause (i) made or acquired by such trust (other than to persons who are independent con- 7 tractors, as defined in section 856(d)(3) of such Code) is
98 STAT. 672 PUBLIC LAW 98-369—JULY 18, 1984 at an arm's length rate or a rate not more than 1 percentage point greater than the associated borrowing cost of the trust, and t-> " • (iii) with respect to which any real property held by the trust is not used in the trade or business of any other member of the group of stapled entities. SEC. 137. SERVICES RELATING TO INSURANCE POLICIES ARE TREATED AS PERFORMED IN COUNTRY OF RISK. 26 use 954. (a) I N GENERAL.—Subsection (e) of section 954 (defining foreign base company services income) is amended by adding at the end thereof the following new sentence: "For purposes of paragraph (2), any services performed with respect to any policy of insurance or reinsurance with respect to which the primary insured is a related Ante, p. 644. person (within the meaning of section 864(d)(4)) shall be treated as having been performed in the country within which the insured hazards, risks, losses, or liabilities occur, and except as provided in regulations prescribed by the Secretary, rules similar to the rules of Post, p. 755. section 953(b) shall be applied in determining the income from such services." 26 use 954 note. (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to taxable years of controlled foreign corporations begin- ning after the date of the enactment of this Act. PART V—TREATMENT OF ALIEN INDIVIDUALS SEC. 138. DEFINITION OF RESIDENT ALIEN AND NONRESIDENT ALIEN. Ante, p. 518. (a) GENERAL RuLE.—Section 7701 (relating to definitions) is 26 use 7701. amended by redesignating subsections (b), (c), and (d) as subsections (c), (d), and (e), respectively, and by inserting after subsection (a) the following new subsection: "(b) DEFINITION OF RESIDENT ALIEN AND NONRESIDENT ALIEN.— "(1) I N GENERAL.—For purposes of this title (other than sub- title B)— "(A) RESIDENT ALIEN.—An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i) or (ii): JJ3J, "(i) LAWFULLY ADMITTED FOR PERMANENT RESI- DENCE.—Such individual is a lawful permanent resi- dent of the United States at any time during such calendar year. "(ii) SUBSTANTIAL PRESENCE TEST.—Such individual meets the substantial presence test of paragraph (3). "(B) NONRESIDENT ALIEN.—An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)). "(2) SPECIAL RULES FOR FIRST AND LAST YEAR OF RESIDENCY.— "(A) F I R S T YEAR O F RESIDENCY.— n "(i) IN GENERAL.—If an alien individual is a resident of the United States under paragraph (1)(A) with re- spect to any calendar year, but was not a resident of the United States at any time during the preceding calendar year, such alien individual shall be treated as a resident of the United States only for the portion of
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 673 such calendar year which begins on the residency start- ing date. "(ii) R E S I D E N C Y S T A R T I N G D A T E F O R I N D I V I D U A L S L A W - FULLY ADMITTED FOR PERMANENT RESIDENCE.—In t h e f' case of an individual who is a lawfully permanent resident of the United States at any time during the 0' calendar year, but does not meet the substantial pres- I ence test of paragraph (3), the residency starting date r shall be the first day in such calendar year on which he was present in the United States while a lawful perma- nent resident of the United States. aoi-K "(iii) RESIDENCY STARTING DATE FOR INDIVIDUALS MEETING SUBSTANTIAL PRESENCE TEST.—In the case of an individual who meets the substantial presence test of paragraph (3) with respect to any calendar year, the rbjja i»j residency starting date shall be the first day during such calendar year on which the individual is present -isiitba in the United States. "(B) LAST YEAR OF RESIDENCY.—An alien individual shall i( not be treated as a resident of the United States during a b .J portion of any calendar year if— "(i) such portion is after the last day in such calendar r: year on which the individual was present in the United States (or, in the case of an individual described in paragraph (l)(A)(i), the last day on which he was so ffo0e i f described), "(ii) during such portion the individual has a closer \y.,-,i,^\s connection to a foreign country than to the United r States, and . "(iii) the individual is not a resident of the United States at any time during the next calendar year. .,j,,,. , , ^ 5 "(C) CERTAIN NOMINAL PRESENCE DISREGARDED.— "(i) I N GENERAL.—For purposes of subparagraphs IBiiv (A)(iii) and (B), an individual shall not be treated as present in the United States during any period for which the individual establishes that he has a closer connection to a foreign country than to the United States. "(ii) NOT MORE THAN lO DAYS DISREGARDED.—Clause mXV- .Af. (i) shall not apply to more than 10 days on which the individual is present in the United States. '(3) SUBSTANTIAL PRESENCE TEST.— "(A) IN GENERAL.—Except as otherwise provided in this paragraph, an individual meets the substantial presence test of this paragraph with respect to any calendar year (hereinafter in this subsection referred to as the 'current year') if— iF."iOrc. "(i) such individual was present in the United States on at least 31 days during the calendar year, and "(ii) the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days* "In the case of days in: The applicable multiplier is: Current year 1 1st preceding year Vs 2nd preceding year Ve
98 STAT. 674 PUBLIC LAW 98-369—JULY 18, 1984 . .4 "(B) EXCEPTION WHERE INDIVIDUAL IS PRESENT IN THE UNITED STATES DURING LESS THAN ONE-HALF OF CURRENT YEAR AND CLOSER CONNECTION TO FOREIGN COUNTRY IS ESTAB- LISHED.—An individual shall not be treated as meeting the J, substantial presence test of this paragraph with respect to any current year if— "(i) such individual is present in the United States on '; fewer than 183 days during the current year, and "(ii) it is established that for the current year such ., individual has a tax home (as defined in section 911(d)(3) without regard to the second sentence thereof) in a foreign country and has a closer connection to such foreign country than to the United States. "(C) SUBPARAGRAPH (B) NOT TO APPLY IN CERTAIN CASES.— Subparagraph (B) shall not apply to any individual with respect to any current year if at any time during such year— "(i) such individual had an application for adjust- ' # ment of status pending, or u "(ii) such individual took other steps to apply for status as a lawful permanent resident of the United States. i "(D) EXCEPTION FOR EXEMPT INDIVIDUALS OR FOR CERTAIN MEDICAL CONDITIONS.—An individual shall not be treated as being present in the United States on any day if— "(i) such individual is an exempt individual for such ;^ day, or ^ "(ii) such individual was unable to leave the United States on such day because of a medical condition which arose while such individual was present in the United States. "(4) EXEMPT INDIVIDUAL DEFINED.—For purposes of this sub- section— "(A) IN GENERAL.—An individual is an exempt individual for any day if, for such day, such individual is— . "(i) a foreign government-related individual, ^''' "(ii) a teacher or trainee, or "(iii) a student. ^^ "(B) FOREIGN GOVERNMENT-RELATED INDIVIDUAL.—The ^ term 'foreign government-related individual' means any individual temporarily present in the United States by reason of— "(i) diplomatic status, or a visa which the Secretary ^ (after consultation with the Secretary of State) deter- mines represents full-time diplomatic or consular status for purposes of this subsection, "(ii) being a full-time employee of an international organization, or "(iii) being a member of the immediate family of an individual described in clause (i) or (ii). y, "(C) TEACHER OR TRAINEE.—The term 'teacher or trainee' '. means any individual— '^ "(i) who is temporarily present in the United States ' under subparagraph (J) of section 101(15) of the Immi-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 675 gration and Nationality Act (other than as a student), 8 use iioi. and "(ii) who substantially complies with the require- ments for being so present. "(D) STUDENT.—The term 'student' means any indi- vidual— "(i) who is temporarily present in the United States— "(I) under subparagraph (F) of section 101(15) of the Immigration and Nationality Act, or 8 USC llOl. ^'' "(II) as a student under subparagraph (J) of such section 101(15), and "(ii) who substantially complies with the require- ments for being so present. "(E) SPECIAL RULES FOR TEACHERS, TRAINEES, AND STUDENTS.— "(i) LIMITATION ON TEACHERS AND TRAINEES.—An in- dividual shall not be treated as an exempt individual by reason of clause (ii) of subparagraph (A) for the current year if, for any 2 calendar years during the preceeding 6 calendar years, such person was an exempt person under clause (ii) or (iii) of subparagraph (A). "(ii) LIMITATION ON STUDENTS.—For any calendar year after the 5th calendar year for which an individ- ual was an exempt individual under clause (ii) or (iii) of subparagraph (A), such individual shall not be treated as an exempt individual by reason of clause (iii) of "^'^ • subparagraph (A), unless such individual establishes to the satisfaction of the Secretary that such individual does not intend to permanently reside in the United States and that such individual meets the requirements ' of subparagraph (D)(ii). "(5) LAWFUL PERMANENT RESIDENT.—For purposes of this sub- section, an individual is a lawful permanent resident of the United States at any time if— "(A) such individual has the status of having been law- fully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and "(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). "(6) PRESENCE IN THE UNITED STATES.—For purposes of this subsection— "(A) I N GENERAL.—Except as provided in subparagraph (B) or (C), an individual shall be treated as present in the .. j- United States on any day if such individual is physically ' : ' present in the United States at any time during such day. "(B) COMMUTERS FROM CANADA OR MEXICO.—If an individ- ual regularly commutes to employment (or self-employ- ment) in the United States from a place of residence in Canada or Mexico, such individual shall not be treated as present in the United States on any day during which he so commutes. "(C) TRANSIT BETWEEN 2 FOREIGN POINTS.—If an individ- . .^ ^^^^.._ ual, who is in transit between 2 points outside the United '^ ^ * *
98 STAT. 676 PUBLIC LAW 98-369—JULY 18, 1984 States, is physically present in the United States for less than 24 hours, such individual shall not be treated as present in the United States on any day during such transit. "(7) ANNUAL STATEMENTS.—The Secretary may prescribe reg- ulations under which an individual who (but for subparagraph (B) or (D) of paragraph (3)) would meet the substantial presence test of paragraph (3) is required to submit an annual statement I ,, setting forth the basis on which such individual claims the '' benefits of subparagraph (B) or (D) of paragraph (3), as the case maybe. "(8) TAXABLE YEAR.— "(A) IN GENERAL.—For purposes of this title, an alien P^, individual who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year. "(B) FISCAL YEAR TAXPAYER.—If— "(i) an individual is treated under paragraph (1) as a resident of the United States for any calendar year, and , "(ii) after the application of subparagraph (A), such individual has a taxable year other than a calendar year, he shall be treated as a resident of the United States with respect to any portion of a taxable year which is within such calendar year. "(9) COORDINATION WITH SECTION 877.—If— "(A) an alien individual was treated as a resident of the United States during any period which includes at least 3 consecutive calendar years (hereinafter referred to as the 'initial residency period'), and "(B) such individual ceases to be treated as a resident of the United States but subsequently becomes a resident of the United States before the close of the 3rd calendar year beginning after the close of the initial residency period, such individual shall be taxable for the period after the close of the initial residency period and before the day on which he subsequently became a resident of the United States in the manner provided in section 877(b). The preceding sentence shall apply only if the tax imposed pursuant to section 877(b) exceeds the tax which, without regard to this paragraph, is imposed pursuant to section 871. "(10) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary or appropriate to carry out the purposes of this subsection." 26 use 7701 (b) EFFECTIVE DATES.— note. (1) IN GENERAL.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1984. (2) TRANSITIONAL RULE FOR APPLYING SUBSTANTIAL PRESENCE TEST.— (A) If an alien individual was not a resident of the United States as of the close of calendar year 1984, the determina- tion of whether such individual meets the substantial pres- ence test of section 7701(b)(3) of the Internal Revenue Code Ante, p. 672. of 1954 (as added by this section) shall be made by only taking into account presence after 1984.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 677 (B) If an alien individual was a resident of the United States as of the close of calendar year 1984, but was not a resident of the United States as of the close of calendar year 1983, the determination of whether such individual meets such substantial presence test shall be made by only taking into account presence in the United States after 1983. (3) TRANSITIONAL RULE FOR APPLYING LAWFUL RESIDENCE TEST.—In the case of any individual who— "(A) was a lawful permanent resident of the United States (within the meaning of section 7701(b)(5) of the Inter- nal Revenue Code of 1954, as added by this section) through- Ante, p. 672. out calendar year 1984, or ^ (B) was present in the United States at any time during 1984 while such individual was a lawful permanent resident of the United States (within the meaning of such section 7701(b)(5)), for purposes of section 7701(b)(2)(A) of such Code (as so added), such individual shall be treated as a resident of the United States during 1984. SEC. 139. TREATMENT OF COMMUNITY INCOME. (a) GENERAL RULE.—Subsection (a) of section 879 (relating to tax 26 use 879. 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) is amended by striking out so much of such subsection as precedes paragraph (1) thereof and inserting in lieu thereof the following: "(a) GENERAL RULE.—In the case of a married couple 1 or botli of whom are nonresident alien individuals and who have community income for the taxable year, such community income shall be treated as follows:". (b) CLERICAL AMENDMENTS.— (1) The heading of section 879 is amended to read as follows: "SEC. 879. TAX TREATMENT OF CERTAIN COMMUNITY INCOME IN THE CASE OF NONRESIDENT ALIEN INDIVIDUALS." (2) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 879 and inserting in lieu thereof the following: "Sec. 879. Tax treatment of certain community income in the case of non- resident alien individuals." (c) EFFECTIVE DATE.—The amendments made by this section shall 26 use 879 note. apply to taxable years beginning after December 31,1984. Subtitle K—Reporting, Penalty, and Other Provisions PART I—PROVISIONS RELATING TO TAX SHELTERS SEC. 141. REGISTRATION OF TAX SHELTERS. (a) IN GENERAL.—Subchapter B of chapter 61 (relating to miscella- neous provisions involving information and returns) is amended by redesignating section 6111 as section 6112 and by inserting after 26 USC 6112. section 6110 the following new section: Post, p. 681.
98 STAT. 678 PUBLIC LAW 98-369—JULY 18, 1984 26 u s e 6111. "SEC. 6111. REGISTRATION OF TAX SHELTERS. "(a) REGISTRATION.— "(1) IN GENERAL.—Any tax shelter organizer shall register the tax shelter with the Secretary (in such form and in such manner as the Secretary may prescribe) not later than the day on which the first offering for sale of interests in such tax shelter occurs. "(2) INFORMATION INCLUDED IN REGISTRATION.—Any registra- tion under paragraph (1) shall include— , "(A) information identifying and describing the tax " "^ shelter, "(B) information describing the tax benefits of the tax :' shelter represented (or to be represented) to investors, and "(C) such other information as the Secretary may prescribe. "(b) FURNISHING OF TAX SHELTER IDENTIFICATION NUMBER; INCLU- SION ON RETURN.— "(1) SELLERS, ETC.—Any person who sells (or otherwise trans- fers) an interest in a tax shelter shall (at such times and in such manner as the Secretary shall prescribe) furnish to each inves- ,, tor who purchases (or otherwise acquires) an interest in such tax shelter from such person the identification number assigned by the Secretary to such tax shelter. "(2) INCLUSION OF NUMBER ON RETURN.—Any person claiming any deduction, credit, or other tax benefit by reason of a tax shelter shall include (in such manner as the Secretary may prescribe) on the return of tax on which such deduction, credit, or other benefit is claimed the identification number assigned by the Secretary to such tax shelter. "(c) TAX SHELTER.—For purposes of this section— "(1) IN GENERAL.—The term 'tax shelter' means any investment— "(A) with respect to which any person could reasonably •"' infer from the representations made, or to be made, in connection with the offering for sale of interests in the investment that the tax shelter ratio for any investor as of oj the close of any of the first 5 years ending after the date on which such investment is offered for sale may be greater than 2 to 1, and ''""'•' "(B) which is— , ., "(i) required to be registered under a Federal or State law regulating securities, "(ii) sold pursuant to an exemption from registration requiring the filing of a notice with a Federal or State 1 agency regulating the offering or sale of securities, or "(iii) a substantial investment. "(2) TAX SHELTER RATIO DEFINED.—For purposes of this subsec- tion, the term 'tax shelter ratio' means, with respect to any year, the ratio which— "(A) the aggregate amount of the deductions and 200 percent of the credits which are represented to be potential- ly allowable to any investor under subtitle A for all periods up to (and including) the close of such year, bears to ? 105 "(B) the investment base as of the close of such year. "(3) INVESTMENT BASE.—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 679 "(A) IN GENERAL.—Except as provided in this paragraph, the term 'investment base' means, with respect to any year, the amount of money and the adjusted basis of other prop- erty (reduced by any habiUty to which such other property ar jg subject) contributed by the investor as of the close of such year. "(B) CERTAIN BORROWED AMOUNTS EXCLUDED.—For pur- poses of subparagraph (A), there shall not be taken into account any amount borrowed from any person— "(i) who participated in the organization, sale, or management of the investment, or "(ii) who is a related person (as defined in section 168(e)(4)) to any person described in clause (i), J5fK unless such amount is unconditionally required to be repaid ' by the investor before the close of the year for which the determination is being made. , ; '. "(C) CERTAIN OTHER AMOUNTS INCLUDED OR EXCLUDED.— "(i) AMOUNTS HELD IN CASH EQUIVALENTS, ETC.—No «• ,. ^i amount shall be taken into account under subpara- graph (A) which is to be held in cash equivalent or ' * ' marketable securities. "(ii) AMOUNTS INCLUDED OR EXCLUDED BY SECRE- TARY.—The Secretary may by regulation— "(I) exclude from the investment base any ' "^ =» amount described in subparagraph (A), or "(II) include in the investment base any amount not described in subparagraph (A), if the Secretary determines that such exclusion or inclusion is necessary to carry out the purposes of this section. "(4) SUBSTANTIAL INVESTMENT.—An investment is a substan- tial investment if— "(A) the aggregate amount which may be offered for sale exceeds $250,000, and "(B) there are expected to be 5 or more investors. "(d) OTHER DEFINITIONS.—For purposes of this section— "(1) TAX SHELTER ORGANIZER.—The term 'tax shelter orga- nizer' means— "(A) the person principally responsible for organizing the , tax shelter, "(B) if the requirements of subsection (a) are not met by a person described in subpargraph (A) at the time prescribed . ^.. therefor, any other person who participated in the organiza- tion of the tax shelter, and "(C) if the requirements of subsection (a) are not met by a person described in subparagraph (A) or (B) at the time in" prescribed therefor, any person participating in the sale or management of the investment at a time when the tax shelter was not registered under subsection (a). "(2) YEAR.—The term 'year' means— "(A) the taxable year of the tax shelter, or "(B) if the tax shelter has no taxable year, the calendar year. "(e) REGULATIONS.—The Secretary may prescribe regulations which provide— ' :^
98 STAT. 680 PUBLIC LAW 98-369—JULY 18, 1984 "(1) rules for the aggregation of similar investments offered by the same person or persons for purposes of applying subsec- tion (c)(4), "(2) that only 1 person shall be required to meet the require- ments of subsection (a) in cases in which 2 or more persons would otherwise be required to meet such requirements, "(3) exemptions from the requirements of this section, and "(4) such rules as may be necessary or appropriate to carry out the purposes of this section in the case of foreign tax shelters." (b) PENALTIES.—Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the following new section: 26 u s e 6707. "SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING TAX SHEL- TERS. "(a) FAILURE TO REGISTER TAX SHELTER.— "(1) IMPOSITION OF PENALTY.—If a person who is required to Ante, p. 677. register a tax shelter under section 6111(a)— "(A) fails to register such tax shelter on or before the date described in section 6111(a)(1), or "(B) files false or incomplete information with the Secre- tary with respect to such registration, such person shall pay a penalty with respect to such registra- tion in the amount determined under paragraph (2). No penalty shall be imposed under the preceding sentence with respect to any failure which is due to reasonable cause. "(2) AMOUNT OF PENALTY.—The penalty imposed under para- graph (1) with respect to any tax shelter shall be an amount equal to the greater of— "(A) $500, or "(B) the lesser of (i) 1 percent of the aggregate amount invested in such tax shelter, or (ii) $10,000. The $10,000 limitation in subparagraph (B) shall not apply where there is an intentional disregard of the requirements of section 6111(a). "(b) FAILURE TO FURNISH TAX SHELTER IDENTIFICATION NUMBER.— "(1) SELLERS, ETC.—Any person who fails to furnish the identi- fication number of a tax shelter which such person is required to furnish under section 6111(b)(1) shall pay a penalty of $100 for each such failure. "(2) FAILURE TO INCLUDE NUMBER ON RETURN.—Any person who fails to include an identification number on a return on which such number is required to be included under section 6111(b)(2) shall pay a penalty of $50 for each such failure, unless such failure is due to reasonable cause." (c) CONFORMING AMENDMENTS.— (1) The table of sections for subchapter B of chapter 61 is amended by striking out the item relating to section 6111 and inserting in lieu thereof the following new items: "Sec. 6111. Registration of tax shelters. "Sec. 6112. Cross references." (2) The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new item: "Sec. 6707. Failure to furnish information regarding tax shelters." 26 u s e 6111 (d) E F F E C T I V E D A T E . — „ j 1^ note.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 681 (1) I N GENERAL.—The amendments made by this section shall apply to any tax shelter (within the meaning of section 6111 of the Internal Revenue Code of 1954, as added by this section) any Ante, p. 677. interest in which is first sold to any investor after August 31, 1984. (2) SUBSTANTIAL INVESTMENT TEST.—For purposes of determin- ing whether any investment is a tax shelter by reason of section 6111(c)(l)(B)(iii) of such Code (as added by this section), only ^to offers for sale after August 31, 1984, shall be taken into account. (3) FURNISHING OF SHELTER IDENTIFICATION NUMBER FOR INTER- ESTS SOLD BEFORE SEPTEMBER 1, 1984.—With respect to interests sold before September 1, 1984, any liability to act under para- graph (1) of section 6111(b) of such Code (as added by this section) which would (but for this sentence) arise before such date shall be deemed to arise on December 31,1984. SEC. 142. ORGANIZERS AND SELLERS OF POTENTIALLY ABUSIVE TAX SHELTERS MUST KEEP LISTS OF INVESTORS. (a) IN GENERAL.—Subchapter B of chapter 61 (relating to miscella- neous provisions involving information and returns) is amended by redesignating section 6112 as section 6113 and by inserting after Ante, p. 677. section 6111 the following new section: ^^ USC 6113. "SEC. 6112. ORGANIZERS AND SELLERS OF POTENTIALLY ABUSIVE TAX 26 USC 6112. SHELTERS MUST KEEP LISTS OF INVESTORS. "(a) IN GENERAL.—Any person who— "(1) organizes any potentially abusive tax shelter, or ^ • r;- Or' i "(2) sells any interest in such a shelter, -^ shall maintain (in such manner as the Secretary may by regulations prescribe) a list identifying each person who was sold an interest in such shelter and containing such other information as the Secretary may by regulations require. "(b) POTENTIALLY ABUSIVE TAX SHELTER.—For purposes of this section, the term 'potentially abusive tax shelter' means— "(1) any tax shelter (as defined in section 6111) with respect to Ante, p. 677. which registration is required under section 6111, and "(2) any entity, investment plan or arrangement, or other plan or arrangement which is of a type which the Secretary determines by regulations as having a potential for tax avoid- ,a5>? D8i> ance or evasion. "(c) SPECIAL RULES.— "(1) AVAILABILITY FOR INSPECTION; RETENTION OF INFORMATION ON LIST.—Any person who is required to maintain a list under subsection (a)— "(A) shall make such list available to the Secretary for inspection upon request by the Secretary, and ; "(B) except as otherwise provided under regulations pre- ,.,. i ; scribed by the Secretary, shall retain any information which is required to be included on such list for 7 years. "(2) LISTS WHICH WOULD BE REQUIRED TO BE MAINTAINED BY 2 OR MORE PERSONS.—The Secretary shall prescribe regulations Regulations. which provide that, in cases in which 2 or more persons are required under subsection (a) to maintain the same list (or portion thereof), only 1 person shall be required to maintain such list (or portion)."
98 STAT. 682 PUBLIC LAW 98-369—JULY 18, 1984 (b) PENALTY FOR FAILURE T O MAINTAIN LIST.—Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at "': the end thereof the following new section: 26 u s e 6708. "SEC. 6708. FAILURE TO MAINTAIN LISTS OF INVESTORS IN POTENTIALLY Post, p. 912. ABUSIVE TAX SHELTERS. "(a) IN GENERAL.—Any person who fails to meet any requirement Ante, p. 681. imposed by section 6112 shall pay a penalty of $50 for each person with respect to whom there is such a failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection for any calendar year shall not exceed $50,000. "(b) PENALTY IN ADDITION TO OTHER PENALTIES.—The penalty imposed by this section shall be in addition to any other penalty provided by law." (c) CONFORMING AMENDMENTS.— (1) The table of sections for subchapter B of chapter 61 is amended by striking out the item relating to section 6112 and inserting in lieu thereof the following new items: "Sec. 6112. Organizers and sellers of potentially abusive tax shelters must keep lists of investors. "Sec. 6113. Cross reference." (2) The table of sections for subchapter B of chapter 68 is .S.J «: XA* amended by adding at the end thereof the following new item: "Sec. 6708. Failure to maintain lists of investors in potentially abusive tax shelters." 26 use 6112 (d) EFFECTIVE DATE.—The amendments made by this section shall note. apply to any interest which is first sold to any investor after August 31, 1984. SEC. 143. INCREASE IN PENALTY FOR PROMOTING ABUSIVE TAX SHEL- TERS; INJUNCTION AGAINST AIDING OR ABETTING UNDER- STATEMENT OF TAX LIABILITY. (a) INCREASE IN PROMOTER PENALTY.—Subsection (a) of section 26 use 6700. 6700 (relating to promotion of abusive tax shelters) is amended bv striking out "10 percent" and inserting in lieu thereof "20 percent'. (b) INJUNCTION AGAINST AIDING OR ABETTING UNDERSTATEMENTS OF TAX LIABIUTY.— 26 use 7408. (1) Subsections (a) and Ot>) of section 7408 (relating to action to enjoin promoters of abusive tax shelters, etc.) are each amended by inserting "or section 6701 (relating to penalties for aiding and abetting understatement of tax liability)" after "etc.)". (2) Subsection (a) of section 7408 is amended by inserting "or section 6701" before the period at the end of the second sentence. (3) Subsection (b) of section 7408 is amended by inserting before the period "or section 6701". 26 use 6700 (c) EFFECTIVE DATE.—The amendments made by this section shall note. take effect on the day after the date of the enactment of this Act. SEC. 144. INCREASED RATE OF INTEREST ON SUBSTANTIAL UNDER- _ . n PAYMENTS ATTRIBUTABLE TO CERTAIN TAX MOTIVATED TRANSACTIONS. 26 use 6621. (a) GENERAL RULE.—Section 6621 (relating to determination of rate of interest) is amended by adding at the end thereof the following new subsection:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 683 "(d) INTEREST ON SUBSTANTIAL UNDERPAYMENTS ATTRIBUTABLE TO TAX MOTIVATED TRANSACTIONS.— "(1) IN GENERAL.—In the case of interest payable under sec- tion 6601 with respect to any substantial underpayment attrib- utable to tax motivated transactions, the annual rate of interest established under this section shall be 120 percent of the adjusted rate established under subsection (b). "(2) SUBSTANTIAL UNDERPAYMENT ATTRIBUTABLE TO TAX MOTI- " VATED TRANSACTIONS.—For purposes of this subsection, the term 'substantial underpayment attributable to tax motivated trans- actions' means any underpayment of taxes imposed by subtitle A for any taxable year which is attributable to 1 or more tax V motivated transactions if the amount of the underpayment for such year so attributable exceeds $1,000. .^ "(3) TAX MOTIVATED TRANSACTIONS.— •'iU "(A) IN GENERAL.—For purposes of this subsection, the term 'tax motivated transaction' means— "(i) any valuation overstatement (within the meaning of section 6659(c)), Post, p. 693. '"'• "^•- ' ' "(ii) any loss disallowed by reason of section 465(a) •" ' and any credit disallowed under section 46(c)(8), Post, pp. 805,810. "(iii) any straddle (as defined in section 1092(c) with- out regard to subsections (d) and (e) of section 1092), and "(iv) any use of an accounting method specified in -; ; ;.^\: ". regulations prescribed by the Secretary as a use which may result in a substantial distortion of income for any period. "(B) REGULATORY AUTHORITY.—The Secretary may by reg- ulations specify other types of transactions which will be treated as tax motivated for purposes of this subsection and may by regulations provide that specified transactions being treated as tax motivated will no longer be so treated. X^w In prescribing regulations under the preceding sentence, the Secretary shall take into account— -^' • "(i) the ratio of tax benefits to cash invested, "(ii) the methods of promoting the use of this type of v_fis k- transaction, and "(iii) other relevant considerations. ' "(C) EFFECTIVE DATE FOR REGULATIONS.—Any regulations prescribed under subparagraph (A)(iv) or (B) shall apply SffI <v only to interest accruing after a date (specified in such regulations) which is after the date on which such regula- '•'• tions are prescribed. "(4) JURISDICTION OF TAX COURT.—In the case of any proceed- ing in the Tax Court for a redetermination of a deficiency, the Tax Court shall also have jurisdiction to determine the portion (if any) of such deficiency which is a substantial underpayment attributable to tax motivated transactions." Ob) CROSS REFERENCE.—Section 6214 (relating to determinations by 26 u s e 6214. Tax Court) is amended by adding at the end thereof the following new subsection: "(e) CROSS REFERENCE.—
98 STAT. 684 PUBLIC LAW 98-369—JULY 18, 1984 (Yf "For provision giving Tax Court jurisdiction to determine whether any portion of deficiency is a substantial underpayment attributable to tax Ante, p. 682. motivated transactions, see section 6621(d)(4)." notY^^ ^^^^ ^^^ EFFECTIVE DATE.—The amendments made by this section shall apply with respect to interest accruing after December 31, 1984. PART II—INFORMATION REPORTING PROVISIONS SEC. 145. RETURNS RELATING TO MORTGAGE INTEREST RECEIVED IN TRADE OR BUSINESS FROM INDIVIDUALS. (a) I N GENERAL.—Subpart B of part III of subchapter A of chapter 61 (relating to information concerning transactions with other per- sons) is amended by adding at the end thereof the following new section: 26 u s e 6050H. "SEC. 6050H. RETURNS RELATING TO MORTGAGE INTEREST RECEIVED IN TRADE OR BUSINESS FROM INDIVIDUALS. "(a) MORTGAGE INTEREST OF $600 OR MORE.—Any person— 'I M" "(1) who is engaged in a trade or business, and "(2) who, in the course of such trade or business, receives from 01 . " any individual interest aggregating $600 or more for any calen- dar year on any mortgage, shall make the return described in subsection (b) with respect to each individual from whom such interest was received at such time as the Secretary may by regulations prescribe. "(b) FORM AND MANNER OF RETURNS.—A return is described in this subsection if such return— "(1) is in such form as the Secretary may prescribe, "(2) contains— "(A) the name and address of the individual from whom the interest described in subsection (a)(2) was received, "(B) the amount of such interest received for the calendar year, and "(C) such other information as the Secretary may prescribe. "(c) APPLICATION TO GOVERNMENTAL UNITS.—For purposes of sub- section (a)— "(1) TREATED AS PERSONS.—The term 'person' includes any governmental unit (and any agency or instrumentality thereof). "(2) SPECIAL RULES.—In the case of a governmental unit or any agency or instrumentality thereof^ "(A) subsection (a) shall be applied without regard to the trade or business requirement contained therein, and "(B) any return required under subsection (a) shall be made by the officer or employee appropriately designated for the purpose of making such return. "(d) STATEMENTS TO B E FURNISHED TO INDIVIDUALS WITH RESPECT TO WHOM INFORMATION IS FURNISHED.—Every person making a return under subsection (a) shall furnish to each individual whose MS;> ) I ' name is set forth in such return a written statement showing— "(1) the name and address of the person making such return, and "(2) the aggregate amount of interest described in subsection (aX2) received by the person making such return from the individual to whom the statement is furnished.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 685 The written statement required under the preceding sentence shall be furnished on or before January 31 of the year following the calendar year for which the return under subsection (a) was made. "(e) MORTGAGE DEFINED.—For purposes of this section, except as provided in regulations prescribed by the Secretary, the term 'mort- gage' means any obligation secured by real property. "(f) RETURNS WHICH WOULD B E REQUIRED TO B E MADE BY 2 OR MORE PERSONS.—Except to the extent provided in regulations pre- scribed by the Secretary, in the case of interest received by any person on behalf of another person, only the person first receiving such interest shall be required to make the return under subsection (a)." (b) PENALTIES— (1) Subparagraph (B) of section 6652(a)(1) (relating to failure to 26 USC 6652. ^ file certain information returns, etc.) is amended— (A) by striking out "or" at the end of clause (iii), (B) by inserting "or" at the end of clause (iv), and aoilc (C) by inserting after clause (iv) the following new clause: '(v) section 6050H(a) (relating to mortgage interest received in trade or business from individuals),". (2) Clause (iii) of section 6652(a)(3)(A) (relating to penalty in 97 Stat. 381. case of intentional disregard) is amended by inserting "or sec- tion 6050H" after "section 6041A(b)". (3) Paragraph (1) of section 6678(a) (relating to failure to 26 use 6678. furnish certain statements) is amended— (A) by striking out "or 6052(b)" and inserting in lieu thereof "6052(b), or 6050H(d)", and (B) by striking out "or 6052(a)" and inserting in lieu thereof "6052(a), or 6050H(a)". (c) CONFORMING AMENDMENT.—The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: "Sec. 6050K. Returns relating to mortgage interest received in trade or business from individuals." (d) EFFECTIVE D A T E S . — 26 u s e 6050H (1) IN GENERAL.—Except as provided in paragraph (2), the note. amendments made by this section shall apply to amounts re- ceived after December 31,1984. (2) SPECIAL RULE FOR OBUGATIONS IN EXISTENCE ON DECEMBER 31, 1984.—In the case of any obligation in existence on Decem- ber 31, 1984, no penalty shall be imposed under section 6652 of the Internal Revenue Code of 1954 by reason of the amendments made by this section on any failure to supply a taxpayer identification number with respect to amounts received before January 1,1986. .-^ ,, ^v.vl^ SEC. 146. RETURNS RELATING TO CASH RECEIVED IN TRADE OR BUSI- NESS. (a) I N GENERAL.—Subpart B of part III of subchapter A of chapter 61 (relating to information concerning transactions with other per- sons) is amended by adding at the end thereof the following new section: ;, ^, ^ "SEC. 60501. RETURNS RELATING TO CASH RECEIVED IN TRADE OR BUSI- 26 USC 60501. NESS. "(a) CASH RECEIPTS OF MORE THAN $10,000.—Any person— "(1) who is engaged in a trade or business, and
98 STAT. 686 PUBLIC LAW 98-369—JULY 18, 1984 "(2) who, in the course of such trade or business, receives more than $10,000 in cash in 1 transaction (or 2 or more related transactions), shall make the return described in subsection (b) with respect to such transaction (or related transactions) at such time as the Secre- tary may by regulations prescribe. "(b) FORM AND MANNER OF RETURNS.—A return is described in this subsection if such return— "(1) is in such form as the Secretary may prescribe, "(2) contains— "(A) the name, address, and TIN of the person from whom the cash was received, "(B) the amount of cash received, , - . <; . i "(C!) the date and nature of the transaction, and "(D) such other information as the Secretary may prescribe. "(c) EXCEPTIONS.— "(1) CASH RECEIVED BY FINANCIAL INSTITUTIONS.—Subsection (a) shall not apply to— "(A) cash received in a transaction reported under title ,j^, , 31, United States Code, if the Secretary determines that reporting under this section would duplicate the reporting to the Treasury under title 31, United States Code, or "(B) cash received by any financial institution (as defined .SV3(J •>«-" in subparagraphs (A), (B), (C), (D), (E), (F), (G), (J), (K), (R), and (S) of section 5312(a)(2) of title 31, United States Code). "(2) TRANSACTIONS OCCURRING OUTSIDE THE UNITED STATES.— Except to the extent provided in regulations prescribed by the Secretary, subsection (a) shall not apply to any transaction if the entire transaction occurs outside the United States. "(d) CASH INCLUDES FOREIGN CURRENCY.—For purposes of this section, the term 'cash' includes foreign currency. "(e) STATEMENTS TO B E FURNISHED TO PERSONS WITH RESPECT TO WHOM INFORMATION IS FURNISHED.—Every person making a return under subsection (a) shall furnish to each person whose name is set forth in such return a written statement showing— "(1) the name and address of the person making such return, and "(2) the aggregate amount of cash described in subsection (a) received by the person making such return. The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was made." (b) PENALTIES— Ante, p. 685. (1) Subparagraph (B) of section 6652(a)(1) (relating to failure t:o file certain information returns, etc.) is amended— (A) by striking out "or" at the end of clause (iv), (B) by inserting "or" at the end of clause (v), and (C) by inserting after clause (v) the following new clause: "(vi) section 60501(a) (relating to cash received in trade or business),". Ante, p. 685. (2) Clause (iii) of section 6652(a)(3)(A) (relating to penalty in ;• .-i case of intentional disregard) is amended by striking out "or section 6050H" and inserting in lieu thereof ", 6050H or 60501". Ante, p. 685. (3) Paragraph (1) of section 6678(a) (relating to failure to furnish certain statements) is amended—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 687 (A) by striking out "or 6050H(d)" and inserting in lieu thereof "6050H(d), or 60501(e)", and (B) by striking out "or 6050H(a)" and inserting in lieu thereof "6050H(a), or 60501(a)". (c) CONFORMING AMENDMENT.—The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: "Sec. 60501. Returns relating to cash received in trade or business." (d) EFFECTIVE DATE.—The amendments made by this section shall 26 use 6050i apply to amounts received after December 31,1984. note. SEC. 147. PROVISIONS RELATING TO INDIVIDUAL RETIREMENT AC- COUNTS. (a) CLARIFICATION THAT REGULATIONS MAY REQUIRE REPORTS T O IDENTIFY YEARS TO WHICH CONTRIBUTIONS RELATE.—Subsection (i) of section 408 (relating to individual retirement accounts) is amended 26 USC 408. by inserting "(and the years to which they relate)" after "contributions". (b) INCREASE IN PENALTY FOR FAILURE T O FILE REPORTS.—Subsec- tion (a) of section 6693 (relating to failure to provide reports on 26 use 6693. individual retirement accounts and annuities) is amended by strik- ing out "$10" and inserting in lieu thereof "$50". (c) CONTRIBUTIONS REQUIRED TO B E MADE ON OR BEFORE UNEX- TENDED RETURN F I U N G DATE.—Subparagraph (A) of section 219(f)(3) 26 u s e 219. (relating to time when contributions deemed made) is amended by striking out "including" and inserting in lieu thereof "not including". (d) EFFECTIVE DATES.— 26 use 219 not(3. (1) I N GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to contributions made after December 31,1984. (2) SUBSECTION (b).—The amendment made by subsection (b) shall apply to failures occurring after the date of the enactment of this Act. SEC. 148. RETURNS RELATING TO FORECLOSURES AND ABANDONMENTS OF SECURITY. (a) I N GENERAL.—Subpart B of part III of subchapter A of chapter 61 (relating to information concerning transactions with other per- sons) is amended by adding at the end thereof the following new section: "SEC. 6050J. RETURNS RELATING TO FORECLOSURES AND ABANDON- 26 USC 6050J. MENTS OF SECURITY. "(a) I N GENERAL.—Any person who, in connection with a trade or business conducted by such person, lends money secured by property and who— "(1) in full or partial satisfaction of any indebtedness, ac- -gj^ ^ .^t quires an interest in any property which is security for such indebtedness, or "(2) has reason to know that the property in which such person has a security interest has been abandoned, shall make a return described in subsection (c) with respect to each of such acquisitions or abandonments, at such time as the Secretary may by regulations prescribe. ni. "(b) EXCEPTION.—Subsection (a) shall not apply to any loan to an individual secured by an interest in tangible personal property
98 STAT. 688 PUBLIC LAW 98-369—JULY 18, 1984 which is not held for investment and which is not used in a trade or business. "(c) FORM AND MANNER OF RETURN.—The return required under subsection (a) with respect to any acquisition or abandonment of property— , "(1) shall be in such form as the Secretary may prescribe, ^ "(2) shall contain— "(A) the name and address of each person who is a W", ;; "i* V i borrower with respect to the indebtedness which is secured, .,: "(B) a general description of the nature of such property and such indebtedness, "(C) in the case of a return required under subsection (a)(1)- "(i) the amount of such indebtedness at the time of such acquisition, and "(ii) the amount of indebtedness satisfied in such acquisition, "(D) in the case of a return required under subsection (a)(2), the amount of such indebtedness at the time of such abandonment, and "(E) such other information as the Secretary may prescribe. "(d) APPLICATIONS TO GOVERNMENTAL UNITS.—For purposes of this • section— "(1) TREATED AS PERSONS.—The term 'person' includes any governmental unit (and any agency or instrumentality thereof). "(2) SPECIAL RULES.—In the case of a governmental unit or '' any agency or instrumentality thereof— "(A) subsection (a) shall be applied without regard to the trade or business requirement contained therein, and "(B) any return under this section shall be made by the officer or employee appropriately designated for the pur- pose of making such return. "(e) STATEMENTS TO B E FURNISHED TO PERSONS WITH RESPECT TO WHOM INFORMATION IS REQUIRED TO B E FURNISHED.—Every person required to make a return under subsection (a) shall furnish to each person whose name is required to be set forth in such return a written statement showing the name and address of the person required to make such return. The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was made. "(0 TREATMENT OF OTHER DISPOSITIONS.—To the extent provided by regulations prescribed by the Secretary, any transfer of the property which secures the indebtedness to a person other than the lender shall be treated as an abandonment of such property." (b) PENALTIES.— Ante, p. 686. (1) Subparagraph (B) of section 6652(a)(1) (relating to failure to file certain information returns, etc.) is amended— (A) by striking out "or" at the end of clause (v), (B) by adding "or" at the end of clause (vi), and (C) by inserting after clause (vi) the following new clause: "(vii) section 6050J(a) (relating to foreclosures and abandonments of security),". Ante, p. 686. (2) Clause (iii) of section 6652(a)(3)(A) (relating to penalty in case of intentional disregard) is amended by striking out "or 60501" and inserting in lieu thereof ", 60501, or 6050J".
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 689 (3) Paragraph (1) of section 6678(a) (relating to failure Ante, p. 686. to furnish certain statements) is amended— (A) by striking out "or 60501(e)" and inserting in lieu thereof "60501(e), or 6050J(e)", and (B) by striking out "or 60501(a)" and inserting in lieu thereof "60501(a), or 6050J(a)". (c) CONFORMING AMENDMENT.—The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: "' •' "Sec.6050J. Returns relating to foreclosures and abandonments of security." (d)EFFECTIVE DATE.—The amendments made by this section shall 26 use 6050J apply with respect to acquisitions of property and abandonments of note. property after December 31,1984. SEC. 149. RETURNS RELATING TO EXCHANGES OF PARTNERSHIP INTER- ESTS WHERE UNREALIZED RECEIVABLES, ETC., INVOLVED. (a) IN GENERAL.—Subpart B of part III of subchapter A of chapter 61 (relating to information and returns) is amended by adding at the end thereof the following new section. "SEC. 6050K. RETURNS RELATING TO EXCHANGES OF CERTAIN PARTNER- 26 USC 6050K. SHIP INTERESTS. "(a) IN GENERAL.—Except as provided in regulations prescribed by the Secretary, if there is an exchange described in section 751(a) of any interest in a partnership during any calendar year, such part- nership shall make a return for such calendar year stating— "(1) the name and address of the transferee and transferor in ^' -"^ such exchange, and "(2) such other information as the Secretary may by regula- tions prescribe. Such return shall be made at such time and in such manner as the Secretary may require by regulations. "(b) STATEMENT TO B E FURNISHED TO TRANSFEROR AND TRANS- FEREE.—Every partnership making a return under subsection (a) shall furnish to each person whose name is set forth in such return a written statement showing— "(1) the name and address of the partnership making the return, and "(2) the information shown on the return with respect to such person. The statement required under the preceding sentence shall be fur- nished to the person on or before January 31 following the calendar year for which the return under subsection (a) was made. "(c) REQUIREMENT THAT TRANSFEROR NOTIFY PARTNERSHIP.— "(1) I N GENERAL.—In the case of any exchange described in subsection (a), the transferor of the partnership interest shall promptly notify the partnership of such exchange. "(2) PARTNERSHIP NOT REQUIRED TO MAKE RETURN UNTIL NOTICE.—A partnership shall not be required to make a return under this subsection with respect to any exchange until the partnership is notified of such exchange." Ot)) PENALTIES.— (1) Subparagraph (B) of section 6652(a)(1) (relating to failure to Ante, p. 688. file certain information returns, etc.) is amended by striking out "or" at the end of clause (vi), by adding "or" at the end of clause (vii), and by inserting after clause (vii) the following new clause: 31-194 0 - 86 - 24 : QL. 3 P a r t 1
98 STAT. 690 PUBLIC LAW 98-369—JULY 18, 1984 'fy "(viii) section 6050K (relating to exchanges of certain partnership interests),". Ante, p. 689. (2) Paragraph (1) of section 6678(a) (relating to failure to furnish certain statements) is amended— (A) by striking out "or 6050J(e)" and inserting in lieu thereof "6050J(e), or 6050K(b)", and (B) by striking out "or 6050J(a)" and inserting in lieu thereof "6050J(a), or 6050K(a)". 97 Stat. 381. (3) Section 6678 (relating to failure to furnish certain state- ments) is amended by adding at the end thereof the following new subsection: "(c) FAILURE TO NOTIFY PARTNERSHIP OF EXCHANGE OF PARTNER- SHIP INTEREST.—In the case of any person who fails to furnish the Ante, p. 689. notice required by section 6050K(c)(l) on the date prescribed there- for, unless it is shown that such failure is due to reasonable cause and not to willful neglect, such person shall pay a penalty of $50 for each such failure." (c) CONFORMING AMENDMENT.—The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: "Sec. 6050K. Returns relating to exchanges of certain partnership inter- ests." 26 u s e 6050K (d) EFFECTIVE DATE.—The amendments made by this section shall note. apply with respect to exchanges after December 31,1984. SEC. 150. STATEMENTS REQUIRED IN CASE OF CERTAIN SUBSTITUTE PAY- MENTS. 26 u s e 6045. (a) I N GENERAL.—Section 6045 (relating to returns of brokers) is amended by adding at the end thereof the following new subsection: "(d) STATEMENTS REQUIRED IN CASE OF CERTAIN SUBSTITUTE PAY- MENTS.—If any broker— "(1) transfers securities of a customer for use in a short sale or similar transaction, and "(2) receives (on behalf of the customer) a payment in lieu of— "(A) a dividend, "(B) tax-exempt interest, or "(C) such other items as the Secretary may prescribe by regulations, during the period such short sale or similar transaction is open, the broker shall furnish such customer a written statement (at such time and in the manner as the Secretary shall prescribe by regula- tions) identifying such payment as being in lieu of the dividend, tax- exempt interest, or such other item. The Secretary may prescribe regulations which require the broker to make a return which in- cludes the information contained in such written statement." 26 u s e 6045 Ot)) EFFECTIVE DATE.—The amendment made by this section shall note. apply to payments received after December 31,1984. SEC. 151. REPORTING OF STATE AND LOCAL REFUNDS NOT REQUIRED WITH RESPECT TO NON-ITEMIZERS. 26 u s e 6050E. (a) IN GENERAL.—Subsection Ot)) of section 6050E (relating to State and local income tax refunds) is amended by adding at the end thereof the following: "No statement shall be required under this subsection with respect to any individual if it is determined (in the manner provided by regulations) that such individual did not claim 26 u s e 1 et seq. itemized deductions under chapter 1 for the taxable year giving rise to the refund, credit, or offset." :J76^ i u i^ei i*^
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 691 (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 u s e 6050E shall apply to payments of refunds, and credits and offsets made, note. after December 31,1982. SEC. 152. FURNISHING OF TIN UNDER BACKUP WITHHOLDING. (a) IN GENERAL.—Section 3406(e)(1) (relating to backup withhold- 97 Stat. 371. ing) is amended by inserting at the end thereof the following new 26 u s e 3406. sentence: "The Secretary may require that a TIN required to be furnished under subsection (a)(1)(A) be provided under penalties of perjury only with respect to interest, dividends, patronage divi- dends, and amounts subject to broker reporting." (b) EFFECTIVE DATE.—The amendment made by this section shall 26 u s e 3406 take effect on the date of the enactment of this Act. note. PART III—OTHER COMPLIANCE PROVISIONS SEC. 155. SUBSTANTIATION OF CHARITABLE CONTRIBUTIONS; MODIFICA- 26 u s e 170 note. TIONS OF INCORRECT VALUATION PENALTY. (a) SUBSTANTIATION OF CONTRIBUTIONS OF PROPERTY.— (1) IN GENERAL.—Not later than December 31,1984, the Secre- Regulations. tary shall prescribe regulations under section 170(a)(1) of the Corporations. Internal Revenue Code of 1954, which require any individual, closely held corporation, or personal service corporation claim- ing a deduction under section 170 of such Code for a contribu- tion described in paragraph (2)— (A) to obtain a qualified appraisal for the property con- tributed, ix^ (B) to attach an appraisal summary to the return on which such deduction is first claimed for such contribution, and (C) to include on such return such additional information (including the cost basis and acquisition date of the contrib- uted property) as the Secretary may prescribe in such regulations. Such regulations shall require the taxpayer to retain any quali- fied appraisal. (2) CONTRIBUTIONS TO WHICH PARAGRAPH (i) APPLIES.—For purposes of paragraph (1), a contribution is described in this paragraph— (A) if such contribution is of property (other than publicly traded securities), and (B) if the claimed value of such property (plus the claimed value of all similar items of property donated to 1 or more donees) exceeds $5,000. In the case of any property which is nonpublicly traded stock, subparagraph (B) shall be applied by substituting "$10,000" for "$5,000". (3) APPRAISAL SUMMARY.—For purposes of this subsection, the appraisal summary shall be in such form and include such information as the Secretary prescribes by regulations. Such summary shall be signed by the qualified appraiser preparing the qualified appraisal and shall contain the TIN of such ap- praiser. Such summary shall be acknowledged by the donee of the property appraised in such manner as the Secretary pre- scribes in such regulations.
98 STAT. 692 PUBLIC LAW 98-369—JULY 18, 1984 (4) QUALIFIED APPRAISAL,—The term "qualified appraisal" means an appraisal prepared by a qualified appraiser which includes— (A) a description of the property appraised, (B) the fair market value of such property on the date of contribution and the specific basis for the valuation, (C) a statement that such appraisal was prepared for income tax purposes, (D) the qualifications of the qualified appraiser, (E) the signature and TIN of such appaiser, and (F) such additional information as the Secretary pre- scribes in such regulations. (5) QUAUFIED APPRAISER.— (A) IN GENERAL.—For purposes of this subsection, the term "qualified appraiser" means an appraiser qualified to make appraisals of the type of property donated, who is •^ ^ >i - •• not— (i) the taxpayer, (ii) a party to the transaction in which the taxpayer acquired the property, (iii) the donee, (iv) any person employed by any of the foregoing persons or related to any of the foregoing persons under section 267(b) of the Internal Revenue Code of 1954, or (v) to the extent provided in such regulations, any person whose relationship to the taxpayer would cause a reasonable person to question the independence of such appraiser. (B) APPRAISAL FEES.—For purposes of this subsection, an appraisal shall not be treated £is a qualified appraisal if all or part of the fee paid for such appraisal is based on a percentage of the appraised value of the property. The preceding sentence shall not apply to fees based on a sliding scale that are paid to a generally recognized association regulating appraisers. (6) OTHER DEFINITIONS.—For purposes of this subsection— (A) CLOSELY HELD CORPORATION.—The term "closely held corporation" means any corporation (other than an S corpo- ration) with respect to which the stock ownership require- ment of paragraph (2) of section 542(a) of such Code is met. (B) PERSONAL SERVICE CORPORATION.—The term "personal service corporation" means any corporation (other than an S corporation) which is a service organization (within the meaning of section 414(m)(3) of such Code). (C) PuBUCLY TRADED SECURITIES.—The term "publicly traded securities" means securities for which (as of the date of the contribution) market quotations are readily available on an established securities market. (D) NoNPUBLiCLY TRADED STOCK.—The term "nonpublicly traded stock" means any stock of a corporation which is not a publicly traded security. (E) THE SECRETARY.—The term "Secretary" means the Secretary of the Treasury or his delegate. (b) INFORMATION REPORT REQUIRED ON DISPOSITION BY DONEE.—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 693 (1) I N GENERAL.—Subpart B of part III of subchapter A of chapter 61 (relating to information and returns) is amended by adding at the end thereof the following new section: "SEC. 6050L. RETURNS RELATING TO CERTAIN DISPOSITIONS OF DONATED 26 USC 6050L. PROPERTY. "(a) GENERAL RULE.—If the donee of any charitable deduction property sells, exchanges, or otherwise disposes of such property A; within 2 years after its receipt, the donee shall make a return (in accordance with forms and regulations prescribed by the Secretary) showing— "(1) the name, address, and TIN of the donor, "(2) a description of the property, "(3) the date of the contribution, "(4) the amount received on the disposition, and "(5) the date of such disposition. "(b) CHARITABLE DEDUCTION PROPERTY.—For purposes of this sec- tion, the term 'charitable deduction property' means any property (other than publicly traded securities) contributed in a contribution for which a deduction was claimed under section 170 if the claimed value of such property (plus the claimed value of all similar items of property donated by the donor to 1 or more donees) exceeds $5,000, "(c) STATEMENT TO B E FURNISHED TO DONORS.—Every person making a return under subsection (a) shall furnish a copy of such return to the donor at such time and in such manner as the Secretary may by regulations prescribe. "(d) DEFINITION OF PUBLICLY TRADED SECURITIES.—The term 'pub- licly traded securities' means securities for which (as of the date of the contribution) market quotations are readily available on an established securities market." (2) PENALTIES.— (A) Subparagraph (B) of section 6652(a)(1) (relating to 26 use 6652. failure to file certain information returns, etc.) is amended— (i) by striking out "or" at the end of clause (vii), (ii) by adding "or" at the end of clause (viii), and (iii) by inserting after clause (viii) the following new -qe clause: 1 "(ix) section 6050L (relating to returns relating to Supra. certain dispositions of donated property),". .«!«.-•' (B) Paragraph (1) of section 6678(a) (relating to failure to 26 USC 6678. furnish certain statements) is amended— (i) by striking out "or 6050K(b)" and inserting in lieu iy ,., thereof "6050K(b), or 6050L(c)", and (ii) by striking out "or 6050K(a)" and inserting in lieu thereof "6050K(a), or 6050L(a)". (3) CLERICAL AMENDMENT.—The table of sections of subpart B ^w '' of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item: "Sec. 6050L. Returns relating to certain dispositions of donated property." »' '. 'j' 'i (c) MODIFICATIONS OF INCORRECT VALUATION PENALTY.— (1) MODIFICATIONS OF SECTION 6659.— (A) EUMINATION OF REQUIREMENT THAT PROPERTY BE AC- QUIRED WITHIN THE LAST 5 YEARS.—Subsection (c) of section 6659 is amended to read as follows: 26 USC 6659.
98 STAT. 694 PUBLIC LAW 98-369—JULY 18, 1984 "(c) VALUATION OVERSTATEMENT DEFINED.—For purposes of this section, there is a valuation overstatement if the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be)." (B) SPECIAL RULES FOR OVERSTATEMENT OF CHARITABLE 26 use 6659. DEDUCTION.—Section 6659 is amended by redesignating sub- section (f) as subsection (g) and by inserting after subsection (e) the following new subsection: "(f) SPECIAL RULES FOR OVERSTATEMENT OF CHARITABLE DEDUCTION.— "(1) AMOUNT OF APPLICABLE PERCENTAGE.—In the case of any underpayment attributable to a valuation overstatement with respect to charitable deduction property, the applicable percent- age for purposes of subsection (a) shall be 30 percent. "(2) LIMITATION ON AUTHORITY TO WAIVE.—In the case of any underpayment attributable to a valuation overstatement with respect to charitable deduction property, the Secretary may not waive any portion of the addition to tax provided by this section unless the Secretary determines that— "(A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and "(B) in addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contrib- uted property. "(3) DEFINITIONS.—For purposes of this subsection— "(A) CHARITABLE DEDUCTION PROPERTY.—The term 'chari- table deduction property' means any property contributed by the taxpayer in a contribution for which a deduction was claimed under section 170. For purposes of paragraph (2), '•'- --' such term shall not include any securities for which (as of the date of the contribution) market quotations are readily available on an established securities market. "(B) QUAUFIED APPRAISER.—The term 'qualified ap- praiser' means any appraiser meeting the requirements of the regulations prescribed under section 170(a)(1). "(C) QUALIFIED APPRAISAL.—The term 'qualified ap- praisal' means any appraisal meeting the requirements of the regulations prescribed under section 170(a)(1)." (2) EXTENSION OF INCORRECT VALUATION PENALTY TO ESTATE AND GIFT TAX.— (A) Subchapter A of chapter 68 (relating to additions to the tax and additional amounts) is amended by inserting after section 6659 the following new section: 26 use 6660. "SEC. 6660. ADDITION TO TAX IN THE CASE OF VALUATION UNDERSTATE- MENT FOR PURPOSES OF THE ESTATE OR GIFT TAXES. "(a) ADDITION TO THE TAX.—In the case of any underpayment of a 26 use 2001. tax imposed by subtitle B (relating to estate and gift taxes) which is attributable to a valuation understatement, there shall be added to the tax an amount equal to the applicable percentage of the under- payment so attributed. "(b) APPLICABLE PERCENTAGE.—For purposes of subsection (a), the *:3) [:c'j m applicable percentage shall be determined under the following table:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 695 "If the valuation claimed is the following percent of The applicable the correct valuation— percentage is: ., j v,r< 50 percent or more but not more than 66% percent 10 " ' 40 percent or more but less than 50 percent 20 Less than 40 percent 30. "(c) VALUATION UNDERSTATEMENT DEFINED.—For purposes of this section, there is a valuation understatement if the value of any property claimed on any return is 66% percent or less of the amount determined to be the correct amount of such valuation. "(d) UNDERPAYMENT MUST B E AT LEAST $1,000.—This section shall not apply if the underpajnnent is less than $1,000 for any taxable period (or, in the case of the tax imposed by chapter 11, with respect 26 use 2001 et to the estate of the decedent). ^^Q- "(e) AUTHORITY TO WAIVE.—The Secretary may waive all or any part of the addition to the tax provided by this section on a showing by the taxpayer that there was a reasonable basis for the valuation claimed on the return and that such claim was made in good faith." (B) CLERICAL AMENDMENT.—The table of sections for sub- chapter A of chapter 68 is amended by inserting after the item relating to section 6659 the following new item: "Sec. 6660. Addition to tax in the case of valuation understatement for pur- poses of estate or gift taxes." (d) EFFECTIVE DATES.— (1) SUBSECTIONS (a) AND (b).—The amendments made by 26USC6050L subsections (a) and Ot>) shall apply to contributions made after note. December 31, 1984, in taxable years ending after such date. (2) SUBSECTION (C) .—The amendments made by subsection (c) 26 use 6659 shall apply to returns filed after December 31,1984. note. SEC. 156. AUTHORIZATION TO DISREGARD APPRAISALS OF PERSONS PENALIZED FOR AIDING IN UNDERSTATEMENTS OF TAX LIABILITY. vr . ^ f a (a) IN GENERAL.—Section 330 of title 31, United States Code, is amended by adding at the end thereof the following new subsection: "(c) After notice and opportunity for a hearing to any appraiser with respect to whom a penalty has been assessed under section 6701(a) of the Internal Revenue Code of 1954, the Secretary may— 26 USC 6701. "(1) provide that appraisals by such appraiser shall not have any probative effect in any administrative proceeding before the Department of the Treasury or the Internal Revenue Service, and "(2) bar such appraiser from presenting evidence or testimony in any such proceeding." (b) EFFECTIVE DATE.—The amendment made by subsection (a; 31 USC 330 note, shall apply to penalties assessed after the date of the enactment of this Act. SEC. 157. LIMITATION ON MAILING OF DEPOSITS OF TAXES. (a) IN GENERAL.—Subsection (e) of section 7502 (relating to mail- 26 use 7502. ing of deposits) is amended by adding at the end thereof the follow- ing new paragraph: "(3) N O APPLICATION TO CERTAIN DEPOSITS.—Paragraph (1) ^< ' shall not apply with respect to any deposit of $20,000 or more by any person who is required to deposit the tax more than once a month." (b) EFFECTIVE DATE.—The amendment made by this section shall 26 USC 7502 apply to deposits required to be made after July 31, 1984. note.
98 STAT. 696 PUBLIC LAW 98-369—JULY 18, 1984 SEC. 158. INTEREST ON CERTAIN ADDITIONS TO TAX. 26 u s e 6601. (a) I N GENERAL,—Paragraph (2) of section 6601(e) (relating to interest on penalties and additions to tax) is amended to read as follows: "(2) INTEREST O N PENALTIES, ADDITIONAL AMOUNTS, OR ADDI- TIONS TO THE TAX.— "(A) I N GENERAL.—Interest shall be imposed under sub- section (a) in respect of any assessable penalty, additional amount, or addition to the tax (other than an addition to Ante, p. 694. tax imposed under section 6651(a)(1), 6659, 6660, or 6661) only if such assessable penalty, additional amount, or addi- tion to the tax is not paid within 10 days from the date of notice and demand therefor, and in such case interest shall be imposed only for the period from the date of the notice and demand to the date of payment. "(B) INTEREST ON CERTAIN ADDITIONS TO TAX.—Interest shall be imposed under this section with respect to any addition to tax imposed by section 6651(a)(1), 6659, 6660, or 6661 for the period which— "(i) begins on the date on which the return of the tax :~ . with respect to which such addition to tax is imposed is required to be filed (including any extensions), and "(ii) ends on the date of payment of such addition to tax." 26 u s e 6601 Ot)) EFFECTIVE DATE.—The amendment made by this section shall note. apply to interest accrued after the date of the enactment of this Act, except with respect to additions to tax for which notice and demand is made before such date. SEC. 159. PENALTY FOR FRAUDULENT WITHHOLDING EXEMPTION CER- TIFICATE OR FAILURE TO SUPPLY INFORMATION. 26 u s e 7205. (a) I N GENERAL.—Section 7205 (relating to penalty for fraudulent withholding exemption certificate) is amended— (1) by striking out "in lieu o f each place it appears and inserting in lieu thereof "in addition to", and (2) by striking out "(except the penalty provided by section 6682)" each place it appears. 26 u s e 7205 (b) EFFECTIVE DATE.—The amendments made by this section shall note. apply to actions and failures to act occurring after the date of the enactment of this Act. SEC. 160. APPLICATION OF PENALTY FOR FRIVOLOUS PROCEEDINGS TO PENDING TAX COURT PROCEEDINGS. Paragraph (2) of section 292(e) of the Tax Equity and Fiscal 26 use 7430 Responsibility Act of 1982 is amended to read as follows: note. "(2) PENALTY.—The amendments made by subsections (b) and (d)(2) shall apply to any action or proceeding in the United States Tax Court which— "(A) is commenced after December 31,1982, or "(B) is pending in the United States Tax Court on the day which is 120 days after the date of the enactment of the Tax Ante, p. 494. Reform Act of 1984." SEC. 161. FAILURE TO REQUEST CHANGE OF METHOD OF ACCOUNTING. 26 use 446. (a) IN GENERAL.—Section 446 (relating to general rule for methods of accounting) is amended by adding at the end thereof the following new subsection:
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 697 "(f) FAILURE TO REQUEST CHANGE OF METHOD OF ACCOUNTING.—If the taxpayer does not file with the Secretary a request to change the method of accounting, the absence of the consent of the Secretary to a change in the method of accounting shall not be taken into account— "(1) to prevent the imposition of any penalty, or the addition of any amount to tax, under this title, or "(2) to diminish the amount of such penalty or addition to '= tax." (b) EFFECTIVE DATE.—The amendment made by this section shall 26 use 446 note. apply to taxable years beginning after the date of the enactment of this Act. - SEC. 162. CLARIFICATION OF CHANGE OF VENUE FOR CERTAIN TAX OF- FENSES. , . .-M -.^-j-.j,; Section 3237(b) of title 18 of the United States Code is amended to read as follows: "(b) Notwithstanding subsection (a), where an offense is described in section 7203 of the Internal Revenue Code of 1954, or where venue 26 use 7203. for prosecution of an offense described in section 7201 or 7206 (1), (2), or (5) of such Code (whether or not the offense is also described in 26 use 7201, another provision of law) is based solely on a mailing to the Internal 7206. Revenue Service, and prosecution is begun in a judicial district other than the judicial district in which the defendant resides, he may * upon motion filed in the district in which the prosecution is begun, elect to be tried in the district in which he was residing at the time the alleged offense was committed: Provided, That the motion is filed within twenty days after arraignment of the defendant upon indictment or information." SEC. 163. EXTENSION OF STATUTE OF LIMITATIONS WITH RESPECT TO CERTAIN EXPENDITURES RELATING TO CONTRIBUTIONS IN AID OF CONSTRUCTION. (a) I N GENERAL.—Section 118 (relating to contributions to the 26 use 118. capital of a corporation) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: "(c) STATUTE OF LIMITATIONS.—If the taxpayer for any taxable year treats an amount as a contribution to the capital of the taxpayer described in subsection (b), then— "(1) the statutory period for the assessment of any deficiency attributable to any part of such amount shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may pre- scribe) of— "(A) the amount of the expenditure referred to in sub- paragraph (A) of subsection (b)(2), "(B) the taxpayer's intention not to make the expendi- tures referred to in such subparagraph, or "(C) a failure to make such expenditure within the period described in subparagraph (B) of subsection (b)(2); and K "(2) such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assess- ment." (b) TECHNICAL AMENDMENTS.—
98 STAT. 698 PUBLIC LAW 98-369—JULY 18, 1984 26 use 6501. (1) Section 6501 is amended by striking out subsections (1) and (o) and by redesignating subsection (m), (n), and (p) as subsec- tions (k), (1), and (m), respectively, and by inserting after subsec- tion (m) (as so redesignated) the following new subsection: "(n) CROSS REFERENCES.— "(1) For period of limitations for assessment and collection in the case of a joint income return filed after separate returns have been filed, see section 6013(b) (3) and (4). "(2) For extension of period in the case of partnership items (as defined in section 6231(a)(3)), see section 6229. "(3) For extension of period in the case of certain contributions in aid Ante, p. 697. of construction, see section 118(c)." 26 use 6511. (2) Subsection (f) of section 6511 is amended by striking out "section 6501(nXl)" and inserting in lieu thereof "section 6501(1X1)". 26 use 118 note. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to expenditures with respect to which the second taxable year described in section 118(bX2)(B) of the Internal Revenue Code of 1954 ends after December 31,1984. Subtitle L—Miscellaneous Provisions SEC. 171. INCLUSION OF TAX BENEFIT ITEMS IN INCOME. 26 use 111. (a) IN GENERAL.—Section 111 (relating to recovery of bad debts, prior taxes, and delinquency amounts) is amended to read as follows: "SEC. 111. RECOVERY OF TAX BENEFIT ITEMS. "(a) DEDUCTIONS.—Gross income does not include income attribut- able to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce income subject to tax. "(b) CREDITS.— "(1) I N GENERAL.—If—• "(A) a credit was allowable with respect to any amount • for any prior tsixable year, and "(B) during the taxable year there is a downward price adjustment or similar adjustment, the tax imposed by this chapter for the taxable year shall be increased by the amount of the credit attributable to the adjustment. (2) EXCEPTION WHERE CREDIT DID NOT REDUCE TAX.—Para- graph (1) shall not apply to the extent that the credit allowable for the recovered amount did not reduce the amount of tax imposed by this chapter. "(3) EXCEPTION FOR INVESTMENT TAX CREDIT AND FOREIGN TAX CREDIT.—This subsection shall not apply with respect to the credit determined under section 46 and the foreign tax credit. "(c) TREATMENT OF CARRYOVERS.—For purposes of this section, an increase in a carryover which has not expired before the beginning of the taxable year in which the recovery or adjustment takes place shall be treated as reducing income subject to tax or reducing tax imposed by this chapter, as the case may be. "(d) SPECIAL RULES FOR ACCUMULATED EARNINGS TAX AND FOR PERSONAL HOLDING COMPANY TAX.—In applying subsection (a) for the purpose of determining the accumulated earnings tax under section 531 or the tax under section 541 (relating to personal holding companies)—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 699 "(1) any excluded amount under subsection (a) allowed for the purposes of this subtitle (other than section 531 or section 541) shall be allowed whether or not such amount resulted in a reduction of the tax under section 531 or the tax under section 541 for the prior taxable year; and "(2) where any excluded amount under subsection (a) was not allowable as a deduction for the prior taxable year for purposes of this subtitle other than of section 531 or section 541 but was allowable for the same taxable year under section 531 or section 541, then such excluded amount shall be allowable if it did not result in a reduction of the tax under section 531 or the tax under section 541." (b) CLERICAL AMENDMENT.—The table of sections for part III of subchapter B of chapter 1 (relating to items specifically excluded from gross income) is amended by striking out the item relating to section 111 and inserting in lieu thereof: "Sec. 111. Recovery of tax benefit items." '•- (c) EFFECTIVE DATE.—The amendments made by this section shall 26 use ill note, apply to amounts recovered after December 31, 1983, in taxable years ending after such date. SEC. 172. LOANS WITH BELOW-MARKET INTEREST RATES. (a) GENERAL RULE.—Subchapter C of chapter 80 (relating to provi- sions affecting more than 1 subtitle) is amended by adding at the end thereof the following new section: "SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST 26 USC 7872. RATES. "(a) TREATMENT OF GIFT LOANS AND DEMAND LOANS.— "(1) IN GENERAL.—For purposes of this title, in the case of any below-market loan to which this section applies and which is a gift loan or a demand loan, the foregone interest shall be treated as— "(A) transferred from the lender to the borrower, and "(B) retransferred by the borrower co the lender as interest. "(2) TIME WHEN TRANSFERS MADE.—Except as otherwise pro- vided in regulations prescribed by the Secretary, any foregone interest attributable to periods during any calendar year shall I- be treated as transferred (and retransferred) under paragraph (1) on the last day of such calendar year. , "(b) TREATMENT OF OTHER BELOW-MARKET LOANS.— "(1) I N GENERAL.—For purposes of this title, in the case of any below-market loan to which this section applies and to which subsection (a)(1) does not apply, the lender shall be treated as having transferred on the date the loan was made (or, if later, on the first day on which this section applies to such loan), and the borrower shall be treated as having received on such date, cash in an amount equal to the excess of— "(A) the amount loaned, over "(B) the present value of all payments which are required to be made under the terms of the loan. "(2) OBLIGATION TREATED AS HAVING ORIGINAL ISSUE DIS- COUNT.—For purposes of this title— "(A) IN GENERAL.—Any below-market loan to which para- graph (1) applies shall be treated £is having original issue
98 STAT. 700 PUBLIC LAW 98-369—JULY 18, 1984 discount in an amount equal to the excess described in paragraph (1). "(B) AMOUNT IN ADDITION TO OTHER ORIGINAL ISSUE DIS- COUNT.—Any original issue discount which a loan is treated as having by reason of subparagraph (A) shall be in addi- tion to any other original issue discount on such loan (determined without regard to subparagraph (A)). "(c) BELOW-MARKET LOANS TO WHICH SECTION APPLIES.— "(1) I N GENERAL.—Except as otherwise provided in this sub- section, this section shall apply to— "(A) GIFTS.—Any below-market loan which is a gift loan. "(B) COMPENSATION-RELATED LOANS.—Any below-market loan directly or indirectly between— "(i) an employer and an employee, or "(ii) an independent contractor and a person for whom such independent contractor provides services. "(C) CORPORATION-SHAREHOLDER LOANS.—Any below- market loan directly or indirectly between a corporation and any shareholder of such corporation. "(D) TAX AVOIDANCE LOANS.—Any below-market loan 1 of the principal purposes of the interest arrangements of which is the avoidance of any Federal tax. "(E) OTHER BELOW-MARKET LOANS.—To the extent pro- vided in regulations, any below-market loan which is not described in subparagraph (A), (B), or (C) if the interest arrangements of such loan have a significant effect on any Federal tax liability of the lender or the borrower. "(2) $10,000 DE MINIMIS EXCEPTION FOR GIFT LOANS BETWEEN INDIVIDUALS.— "(A) IN GENERAL.—In the case of any gift loan directly between individuals, this section shall not apply to any day on which the aggregate outstanding amount of loans be- tween such individuals does not exceed $10,000. "(B) D E MINIMIS EXCEPTION NOT TO APPLY TO LOANS ATTRIB- UTABLE TO ACQUISITION OF INCOME-PRODUCING ASSETS.—Sub- paragraph (A) shall not apply to any gift loan directly attributable to the purchase or carrying of income-produc- ing assets. "(C) CROSS REFERENCE.— "For limitation on amount treated as interest where loans do not exceed $100,000, see subsection (d)(1). "(3) $ 1 0 , 0 0 0 DE MINIMIS EXCEPTION FOR COMPENSATION-RELATED AND CORPORATE-SHAREHOLDER LOANS.— "(A) IN GENERAL.—In the case of any loan described in subparagraph (B) or (C) of paragraph (1), this section shall not apply to any day on which the aggregate outstanding amount of loans between the borrower and lender does not exceed $10,000. "(B) EXCEPTION NOT TO APPLY WHERE i OF PRINCIPAL PURPOSES IS TAX AVOIDANCE.—Subparagraph (A) shall not apply to any loan the interest arrangements of which have as 1 of their principal purposes the avoidance of any Fed- eral tax. "(d) SPECIAL RULES FOR GIFT LOANS.— "(1) LIMITATION ON INTEREST ACCRUAL FOR PURPOSES OF I N C O M E TAXES WHERE LOANS DO NOT EXCEED $100,000.—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 701 "(A) I N GENERAL.—For purposes of subtitle A, in the case of a gift loan directly between individuals, the amount treated as retransferred by the borrower to the lender as of the close of any year shall not exceed the borrower's net investment income for such year. "(B) LIMITATION NOT TO APPLY WHERE i OF PRINCIPAL PURPOSES IS TAX AVOIDANCE.—Subparagraph (A) shall not apply to any loan the interest arrangements of which have as 1 of their principal purposes the avoidance of any Fed- -^' eral tax. "(C) SPECIAL RULE WHERE MORE THAN i GIFT LOAN OUT- STANDING.—For purposes of subparagraph (A), in any case ^' in which a borrower has outstanding more than 1 gift loan, the net investment income of such borrower shall be allo- cated among such loans in proportion to the respective amounts which would be treated as retransferred by the borrower without regard to this paragraph. ,, ,j- ^ii^ "(D) LIMITATION NOT TO APPLY WHERE AGGREGATE AMOUNT t- * •! • OF LOANS EXCEED $100,000.—This paragraph shall not apply to any loan made by a lender to a borrower for any day on ' which the aggregate outstanding amount of loans between the borrower and lender exceeds $100,000. "(E) N E T INVESTMENT INCOME.—For purposes of this " paragraph— "(i) IN GENERAL.—The term 'net investment income' ,,^l has the meaning given such term by section 163(d)(3). -' " "(ii) D E MINIMIS RULE.—If the net investment income of any borrower for any year does not exceed $1,000, the net investment income of such borrower for such year shall be treated as zero. "(iii) ADDITIONAL AMOUNTS TREATED AS INTEREST.—In determining the net investment income of a person for any year, any amount which would be included in the gross income of such person for such year by reason of J' section 1272 if such section applied to all deferred Ante, p. 533. payment obligations shall be treated as interest re- IJ/TJ >^ ceived by such person for such year. "(iv) DEFERRED PAYMENT OBLIGATIONS.—The term - 'deferred payment obligation' includes any market dis- u ^,i count bond, short-term obligation. United States sav- . q, A ings bond, annuity, or similar obligation. sc, "(2) SPECIAL RULE FOR GIFT TAX.—In the case of any gift loan which is a term loan, subsection (b)(1) (and not subsection (a)) shall apply for purposes of chapter 12. 26 USC 2501 et "(e) DEFINITIONS OF BELOW-MARKET LOAN AND FOREGONE INTER- S^9- EST.—For purposes of this section— "(1) BELOW-MARKET LOAN.—The term 'below-market loan' means any loan if— "(A) in the case of a demand loan, interest is payable on the loan at a rate less than the applicable Federal rate, or "(B) in the case of a term loan, the amount loaned exceeds the present value of all payments due under the loan. "(2) FOREGONE INTEREST.—The term 'foregone interest' means, with respect to any period during which the loan is outstanding, the excess of—
98 STAT. 702 PUBLIC LAW 98-369—JULY 18, 1984 "(A) the amount of interest which would have been pay- able on the loan for the period if interest accrued on the loan at the applicable Federal rate and were payable annu- ally on the day referred to in subsection (a)(2), over "(B) any interest payable on the loan properly allocable to such period. "(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) PRESENT VALUE.—The present value of any payment shall be determined in the manner provided by regulations pre- scribed by the Secretary— "(A) as of the date of the loan, and "(B) by using a discount rate equal to the applicable Federal rate. "(2) APPLICABLE FEDERAL RATE.— "(A) TERM LOANS.—In the case of any term loan, the applicable Federal rate shall be the applicable Federal rate Ante, p. 538. in effect under section 1274(d) (as of the day on which the loan was made), compounded semiannually. "(B) DEMAND LOANS.—In the case of a demand loan, the applicable Federal rate shall be the Federal short-term rate in effect under section 1274(d) for the period for which the amount of foregone interest is being determined. "(3) GIFT LOAN.—The term 'gift loan' means any below- market loan where the foregoing of interest is in the nature of a gift. "(4) AMOUNT LOANED.—The term 'amount loaned' means the amount received by the borrower. "(5) DEMAND LOAN.—The term 'demand loan' means any loan which is payable in full at any time on the demand of the lender. Such term also includes (for purposes other than deter- mining the applicable Federal rate under paragraph (2)) any loan which is not transferable and the benefits of the interest arrangements of which is conditioned on the future perform- ance of substantial services by an individual. "(6) TERM LOAN.—The term 'term loan' means any loan which is not a demand loan. "(7) HUSBAND AND WIFE TREATED AS i PERSON.—A husband and wife shall be treated as 1 person. "(8) LOANS TO WHICH SECTION 483 OR 1274 APPLIES.—This Ante, pp. 553, section shall not apply to any loan to which section 483 or 1274 538. applies. "(9) No WITHHOLDING.—No amount shall be withheld under 26 use 3401 et chapter 24 with respect to any amount treated as transferred or «^9- retransferred under subsection (a). "(10) SPECIAL RULE FOR TERM LOANS.—If this section applies to any term loan on any day, this section shall continue to apply to such loan notwithstanding paragraphs (2) and (3) of subsection (c). In the case of a gift loan, the preceding sentence shall only 26 use 2501 et apply for purposes of chapter 12. seg. "(g) REGULATIONS.— "(1) IN GENERAL.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this section, including— "(A) regulations providing that where, by reason of vary- ing rates of interest, conditional interest payments, waivers of interest, disposition of the lender's or borrower's interest
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 703 in the loan, or other circumstances, the provisions of this section do not carry out the purposes of this section, adjust- ,, ments to the provisions of this section will be made to the extent necessary to carry out the purposes of this section, ^nj i<: "(B) regulations for the purpose of assuring that the positions of the borrower and lender are consistent as to the application (or nonapplication) of this section, and "(C) regulations exempting from the application of this section any class of transactions the interest arrangements of which have no significant effect on any Federal tax If • liability of the lender or the borrower. "(2) ESTATE TAX COORDINATION.—Under regulations pre- scribed by the Secretary, any loan which is made with donative '"' I intent and which is a term loan shall be taken into account for purposes of chapter 11 in a manner consistent with the provi- 26 USC 2001 et sions of subsection (b)." seq. (b) CLERICAL AMENDMENT.—The table of sections for subchapter C of chapter 80 is amended by adding at the end thereof the following new item: "Sec. 7872. Treatment of loans with below-market interest rates." < (c) EFFECTIVE DATES.— 26 use 7872 (1) I N GENERAL.—Except as provided in paragraph (2), the note. ^ amendments made by this section shall apply to— (A) term loans made after June 6,1984, and (B) demand loans outstanding after June 6,1984. (2) EXCEPTION FOR DEMAND LOANS OUTSTANDING ON JUNE 6, 1984, AND R E P A I D WITHIN 60 DAYS AFTER DATE OF ENACTMENT.— The amendments made by this section shall not apply to any demand loan which— ',. •^jau i' (A) was outstanding on June 6,1984, and (B) was repaid before the date 60 days after the date of the enactment of this Act. ? (3) EXCEPTION FOR CERTAIN EXISTING LOANS TO CONTINUING CARE FACILITIES.—Nothing in this subsection shall be construed to apply the amendments made by this section to any loan made before June 6,1984, to a continuing care facility by a resident of such facility which is contingent on continued residence at such facility. (4) A P P U C A B L E FEDERAL RATE FOR PERIODS BEFORE JANUARY 1, J 1985.—For periods before January 1, 1985, the applicable Fed- eral rate under paragraph (2) of section 7872(f) of the Internal Revenue Code of 1954, as added by this section, shall be 10 Ante, p. 699. percent, compounded semiannually. (5) TREATMENT OF RENEGOTIATIONS, ETC.—For purposes of this subsection, any loan renegotiated, extended, or revised after June 6, 1984, shall be treated as a loan made after such date. (6) DEFINITION OF TERM AND DEMAND LOANS.—For purposes of this subsection, the terms 'demand loan' and 'term loan' have the respective meanings given such terms by paragraphs (5) and (6) of section 7872(f) of the Internal Revenue Code of 1954, as added by this section, but the second sentence of such para- graph (5) shall not apply. SEC. 173. ELIGIBILITY FOR INCOME AVERAGING. (a) BASE PERIOD SHORTENED TO 3 YEARS.—Paragraph (2) of section 1302(c) (relating to definition of averagable income; related defini- 26 USC 1302.
98 STAT. 704 PUBLIC LAW 98-369—JULY 18, 1984 tions) is amended by striking out "4 taxable years" and inserting in lieu thereof "3 taxable years". (b) INCREASE IN PERCENTAGE OF AVERAGE BASE INCOME TAKEN 26 use 1301. INTO ACCOUNT.—Section 1301 (relating to limitation on tax) is amended by striking out "120 percent" and inserting in lieu thereof "140 percent". (c) TECHNICAL AND CONFORMING AMENDMENTS,— (1) Section 1301 (relating to limitation on tax) is amended— (A) by striking out "5 times" and inserting in lieu thereof "4 times", and (B) by striking out "20 percent" and inserting in lieu thereof "25 percent". 26 use 1302. (2) Paragraph (1) of section 1302(a) (defining averagable income) is amended by striking out "120 percent" and inserting in lieu thereof "140 percent". (3) Paragraph (1) of section 1302(b) (defining average base period income) is amended by striking out "one-fourth" and inserting in lieu thereof "Va". (4) Paragraph (3) of section 1302(c) is amended by striking out "4 taxable years" and inserting in lieu thereof "3 taxable years". 26 use 1302 (d) EFFECTIVE DATE.—The amendments made by this section shall note. apply to computation years beginning after December 31, 1983, and to base period years applicable to such computation years. SEC. 174. AMENDMENTS TO SECTION 267. (a) ALLOWANCE OF DEDUCTION WHERE EXPENSES AND INTEREST ARE PAID TO RELATED CASH-BASIS TAXPAYERS AFTER 2y2-MoNTH PERIOD.— 26 use 267. (1) I N GENERAL.—Subsection (a) of section 267 (relating to losses, expenses, and interest with respect to transactions be- tween related taxpayers) is amended to read as follows: "(a) I N GENERAL.— "(1) DEDUCTION FOR LOSSES DISALLOWED.—No deduction shall be allowed in respect of any loss from the sale or exchange of property (other than a loss in case of a distribution in corporate liquidation), directly or indirectly, between persons specified in any of the paragraphs of subsection (b). "(2) MATCHING OF DEDUCTION AND PAYEE INCOME ITEM IN THE CASE OF EXPENSES AND INTEREST.—If— "(A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and "(B) at the close of the taxable year of the taxpayer for which Ot>ut for this paragraph) the amount would be deduct- ible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph)." (2) CONFORMING AMENDMENT.—Subsection (e) of section 267 (relating to rule where last day of 2y2-month period falls on Sunday, etc.) is hereby repealed.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 705 (b) EXTENSION OF SECTION 267 TO CERTAIN RELATED ENTRIES.— (1) PASS-THRU ENTITIES.—Section 267 is amended by striking 26 use 267. out subsection (f) and inserting in lieu thereof the following: "(e) SPECIAL RULES FOR PASS-THRU ENTITIES.— "(1) IN GENERAL.—In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)— "(A) such entity, "(B) in the case of— "(i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or "(ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation, to ~ "(C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest ' or profits interest, and "(D) any person related (within the meaning of subsection (b) of this section or section 707(bXl)) to a person described in subparagraph (B) or (C), shall be treated as persons specified in a paragraph of subsec- tion (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the • partnership described in such subparagraph or to an interest in such partnership. "(2) PASS-THRU ENTITY.—For purposes of this section, the term 'pass-thru entity' means— "(A) a partnership, and "(B) an S corporation. "(3) CONSTRUCTIVE OWNERSHIP IN THE CASE OF PARTNERSHIPS.— For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that— -^-^-'r': (A) paragraph (3) of subsection (c) shall not apply, and "(B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any tos' shareholder only if such shareholder owns (directly or indi- rectly) 5 percent or more in value of the stock of such ^'^ corporation. "(4) SUBSECTION (a) (2) NOT TO APPLY TO CERTAIN GUARANTEED PAYMENTS OF PARTNERSHIPS.—In the case of any amount paid or incurred by a partnership, subsection (aX2) shall not apply to the extent that section 707(c) applies to such amount. "(5) EXCEPTION FOR CERTAIN EXPENSES A N D INTEREST OF PART- NERSHIPS OWNING LOW-INCOME HOUSING.— "(A) I N GENERAL.—This subsection shall not apply with , respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to— "(i) any qualified 5-percent or less partner of such partnership, or "(ii) any person related (within the meaning of sub- section Ot>) of this section or section 7070t)Xl)) to any qualified 5-percent or less partner of such partnership. "(B) QUAUFIED 5-PERCENT OR LESS PARTNER.—For pur- poses of this paragraph, the term 'qualified 5-percerit or less partner' means any partner who has (directly or indirectly)
98 STAT. 706 PUBLIC LAW 98-369—JULY 18, 1984 an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if^ "(i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or "(ii) such partnership acquired the low-income hous- ing pursuant to a purchase, assignment, or other trans- fer from the Department of Housing and Urban Development or any State or local housing authority. For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner. "(C) QUAUFIED EXPENSES AND INTEREST.—For purpOSe of this paragraph, the term 'qualified expenses and interest' means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but— "(i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and "(ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent. "(D) LOW-INCOME HOUSING.—For purposes of this para- graph, the term 'low-income housing' means— "(i) any interest in low-income housing (as defined in paragraph (5) of section 189(e)), and "(ii) any interest in a partnership owning low-income housing (as so defined)." (2) CERTAIN CONTROLLED GROUPS.— 26 use 267. (A) Paragraph (3) of section 267(b) is amended to read as follows: "(3) Two corporations which are members of the same con- trolled group (as defined in subsection (f));". (B) Section 267 is amended by adding at the end thereof the following new subsection: "(f) CONTROLLED GROUP DEFINED; SPECIAL RULES APPUCABLE TO CONTROLLED GROUPS.— "(1) CONTROLLED GROUP DEFINED.—For purposes of this sec- tion, the term 'controlled group' has the meaning given to such term by section 1563(a), except that— (A) 'more than 50 percent' shall be substituted for 'at least 80 percent' each place it appears in section 1563(a), and "(B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. "(2) DEFERRAL (RATHER THAN DENIAL) OF LOSS FROM SALE OR EXCHANGE BETWEEN MEMBERS.—In the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))— "(A) subsections (aXD and (d) shall not apply to such loss, but
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 707 "(B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations. "(3) Loss DEFERRAL RULES NOT TO APPLY IN CERTAIN CASES.— "(A) TRANSFER TO DISC.—For purposes of applying subsec- tion (a)(1), the term 'controlled group' shall not include a DISC. "(B) CERTAIN SALES OF INVENTORY.—Except to the extent provided in regulations prescribed by the Secretary, subsec- tion (a)(1) shall not apply to the sale or exchange of prop- erty between members of the same controlled group if^ "' ' "(i) such property in the hands of the transferor is property described in section 1221(1), •^ "(ii) such sale or exchange is in the ordinary course of the transferor's trade or business, "(iii) such property in the hands of the transferee is ^ • "^ property described in section 1221(1), and "(iv) the transferee or the transferor is a foreign -rtre.f; corporation. "(C) CERTAIN FOREIGN CURRENCY LOSSES.—To the extent ^'^^ " provided in regulations, subsection (a)(1) shall not apply to '^ any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denomi- nated in such a currency and such loss is attributable to a reduction in value of such foreign currency." (3) CORPORATION AND PARTNERSHIP OWNED BY SAME PERSONS.— Paragraph (10) of section 2670t)) is amended— 26 USC 267. (A) by striking out "An S corporation" and inserting in lieu thereof "A corporation", and (B) by striking out "the S corporation" and inserting in lieu thereof "the corporation". (4) S CORPORATION AND C CORPORATION OWNED BY SAME PER- SONS.—Paragraph (12) of section 2670?) is amending by striking ' V out "the same individual" and inserting in lieu thereof "the same persons". (5)'TECHNICAL AMENDMENTS.— (A) Paragraph (3) of section 170(a) is amended by striking 26 use 170. out "section 267(b)" and inserting in lieu thereof "section 267(b) or 707(b)". (B) Clause (iii) of section 514(c)(9)(B) is amended by strik- Post, p. 1039. .«a ing out "section 2670t))" and inserting in lieu thereof "sec- ;; tion 267(b) or 707(b)". j^^, , (C) Subsection (d) of section 1235 is amended— 26 use 1235. (i) by striking out "section 267(b)" in the matter preceding paragraph (1) and inserting in lieu thereof K-,;^ jr "section 267(b) or persons described in section 70703)", (ii) by striking out "section 267 (b) and (c)" and ., inserting in lieu thereof "section 267 (b) and (c) and section 707(b)", and (iii) by striking out "section 2670t))" in paragraph (1) and inserting in lieu thereof "section 267(b) or 7070t))". (D) Subparagraph (F) of section 368(a)(2) is amended by 26 use 368. striking out clause (viii). (c) EFFECTIVE DATES.— 26 use 267 note.
98 STAT. 708 PUBLIC LAW 98-369—JULY 18, 1984 (1) SUBSECTIONS (a) AND (b) (i).—The amendments made by subsections (a) and (b)(1) shall apply to amounts allowable as deductions under chapter 1 of the Internal Revenue Code of 26 use 1 et seq. 1954 for taxable years beginning after December 31, 1983. For purposes of the preceding sentence, the allowability of a deduc- tion shall be determined without regard to any disallowance or postponement of deductions under section 267 of such Code. (2) SUBSECTION (b) (OTHER THAN PARAGRAPH ( D ) . — (A) IN GENERAL.—Except as provided in subparagraph (B), the amendments made by subsection (b) (other than para- graph (1) thereof) shall apply to transactions after Decem- ber 31,1983, in taxable years ending after such date. (B) EXCEPTION FOR TRANSFERS TO FOREIGN CORPORATIONS ON OR BEFORE MARCH 1, 1984.—The amendments made by subsection (b)(2) shall not apply to property transferred to a foreign corporation on or before March 1,1984. (3) EXCEPTION FOR EXISTING INDEBTEDNESS, ETC.— (A) I N GENERAL.—The amendments made by this section shall not apply to any amount paid or incurred— (i) on indebtedness incurred on or before Septem- ber 29, 1983, or (ii) pursuant to a contract which was binding on September 29, 1983, and at all times thereafter before the amount is paid or incurred. (B) TREATMENT OF RENEGOTIATIONS, EXTENSIONS, ETC.—If any indebtedness (or contract described in subparagraph (A)) is renegotiated, extended, renewed, or revised after September 29, 1983, subparagraph (A) shall not apply to any amount paid or incurred on such indebtedness (oi pursuant to such contract) after the date of such renegoti ation, extension, renewal, or revision. SEC. 175. AMENDMENTS TO SECTION 1239. (a) PATENT APPLICATIONS TREATED AS DEPRECIABLE PROPERTY.— Post, p. 898. Section 1239 (relating to gain from sale of depreciable property between certain related taxpayers) is amended by adding at the end thereof the following new subsection: "(e) PATENT APPUCATIONS TREATED AS DEPRECIABLE PROPERTY.— For purposes of this section, a patent application shall be treated as property which, in the hands of the transferee, is of a character which is subject to the allowance for depreciation provided in sec- tion 167." (b) TAXPAYER AND CERTAIN TRUSTS TREATED AS RELATED PER- SONS.—Subsection (b) of section 1239 is amended to read as follows: "(b) RELATED PERSONS.—For purposes of subsection (a), the term 'related persons' means— "(1) a husband and wife, "(2) a person and all entities which are 80-percent owned entities with respect to such person, "(3) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary's interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(BXi))." 26 use 1239 (c) EFFECTIVE DATE.—The amendments made by this section shall note. apply to sales or exchanges after March 1, 1984, in taxable years ending after such date.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 709 SEC. 176. RECAPTURE OF NET ORDINARY LOSSES UNDER SECTION 1231. (a) GENERAL RULE.—Section 1231 (relating to property used in the 26 use 1231. trade or business and involuntary conversions) is amended by adding at the end thereof the following new subsection: "(c) RECAPTURE OF NET ORDINARY LOSSES.— "(1) I N GENERAL.—The net section 1231 gain for any taxable - year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses. "(2) NON-RECAPTURED NET SECTION 1231 LOSSES.—For purpOSes of this subsection, the term 'non-recaptured net section 1231 losses' means the excess of— "(A) the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years beginning • after December 31,1981, over 3i "(B) t h e portion of such losses t a k e n into account u n d e r paragraph (1) for such preceding taxable years. ' "(3) NET SECTION 1231 GAIN.—For purposes of this subsection, t the term 'net section 1231 gain' means the excess of— "(A) the section 1231 gains, over J ^ •< "(B) the section 1231 losses. "(4) NET SECTION 1231 LOSS.—For purposes of this subsection, the term 'net section 1231 loss' means the excess of^ "(A) the section 1231 losses, over "(B) the section 1231 gains. "(5) SPECIAL RULES.—For purposes of determining the amount 1 of the net section 1231 gain or loss for any taxable year, the Post, p. 944. • rules of paragraph (4) of subsection (a) shall apply." (b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use I23i shall apply to net section 1231 gains for taxable years beginning note. after December 31,1984. SEC. 177. REPEAL OF EXEMPTION FROM FEDERAL TAX OF THE FEDERAL HOME LOAN MORTGAGE CORPORATION. (a) REPEAL OF EXEMPTION.—Subsection (d) of section 303 of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1452(d)) is amended— (1) by striking out "by the United States,", - (2) by striking out "possession thereof," and inserting in lieu thereof "possession of the United States", and (3) by striking out the last sentence. - - (b) TREATMENT OF DIVIDENDS PAID BY FEDERAL HOME LOAN BANK WHICH ARE ALLOCABLE TO DIVIDENDS FROM THE FEDERAL HOME LOAN MORTGAGE CORPORATION.—Subsection (a) of section 246 (relat- 26 use 246. ing to denial of dividends received deduction for dividends from certain corporations) is amended to read as follows: "(a) DEDUCTION NOT ALLOWED FOR DIVIDENDS FROM CERTAIN CORPORATIONS.— "(1) IN GENERAL.—The deductions allowed by sections 243, 244, and 245 shall not apply to any dividend from a corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers' cooperative associations). "(2) SUBSECTION NOT TO APPLY TO CERTAIN DIVIDENDS OF FED- ERAL HOME LOAN BANKS.—
98 STAT. 710 PUBLIC LAW 98-369—JULY 18, 1984 "(A) DIVIDENDS OUT OF CURRENT EARNINGS AND PROFITS,— In the case of any dividend paid by any FHLB out of earnings and profits of the FHLB for the taxable year in which such dividend was paid, paragraph (1) shall not apply to that portion of such dividend which bears the same ratio to the total dividend as— "(i) the dividends received by the FHLB from the FHLMC during such taxable year, bears to "(ii) the total earnings and profits of the FHLB for such taxable year. "(B) DIVIDENDS OUT OF ACCUMULATED EARNINGS AND PROF- ITS.—For purposes of subparagraph (A), in the case of any dividend which is paid out of any accumulated earnings and profits of any FHLB, paragraph (1) shall not apply to that portion of the dividend which bears the same ratio to the total dividend as— "(i) the amount of dividends received by such FHLB from the FHLMC which are out of earnings and profits of the FHLMC— "(I) for taxable years ending after December 31, 1984, and "(II) which were not taken into account under subparagraph (A), bears to "(ii) the total accumulated earnings and profits of the FHLB as of the time such dividend is paid. For purposes of clause (ii), the accumulated earnings and profits of the FHLB as of January 1, 1985, shall be treated £is equal to its retained earnings as of such date. "(C) DEFINITIONS.—For purposes of this paragraph— "(i) FHLB.—The term 'FHLB' means any Federal Home Loan Bank. "(ii) FHLMC—The term 'FHLMC means the Fed- eral Home Loan Mortgage Corporation. "(iii) TAXABLE YEAR OF FHLB.—The taxable year of an FHLB shall, except as provided in regulations pre- scribed by the Secretary, be treated as the calendar year." (c) TREATMENT OF NET OPERATING LOSSES OF THE FEDERAL HOME LOAN MORTGAGE CORPORATION.— 26 use 172. (1) I N GENERAL.—Subparagraph (H) of section 172(b)(1) (relat- ing to years to which net operating losses may be carried) is amended— (A) by inserting ", or a net operating loss of the Federal Home Loan Mortgage Corporation for any taxable year beginning after December 31,1984" after "1981", (B) by striking out "the FNMA mortgage disposition loss (within the meaning of subsection (i))" in clause (i) and inserting in lieu thereof "the mortgage disposition loss (within the meaning of subsection (i))", and (C) by striking out "FNMA mortgage disposition loss" in clause (ii) and inserting in lieu thereof "mortgage disposi- tion loss". (2) CONFORMING AMENDMENT.—Subsection (i) of section 172 is amended— (A) by striking out "FNMA mortgage disposition loss" each place it appears in paragraphs (1) and (2) (including in
^PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 711 headings) and inserting in lieu thereof "mortgage disposi- tion loss", and (B) by striking out "FNMA MORTGAGE DISPOSITION Loss" in the subsection heading and inserting in lieu thereof • "MORTGAGE DISPOSITION LOSS OF THE FEDERAL NATIONAL MORTGAGE ASSOCIATION OR THE FEDERAL HOME LOAN MORT- GAGE CORPORATION". (d) EFFECTIVE DATES.— 26 use 172 note. (1) IN GENERAL.—The amendments made by this section shall take effect on January 1,1985. (2) ADJUSTED BASIS OF ASSETS.— (A) I N GENERAL.—Except as otherwise provided in sub- paragraph (B), the adjusted basis of any asset of the Federal Home Loan Mortgage Corporation held on January 1, 1985, shall— , (i) for purposes of determining any loss, be equal to the lesser of the adjusted basis of such asset or the fair market value of such asset as of such date, and ^- ' (ii) for purposes of determining any gain, be equal to '^-'^ ^<^ ' " the higher of the adjusted basis of such asset or the fair ri-" market value of such asset as of such date. (B) SPECIAL RULE FOR TANGIBLE DEPRECIABLE PROPERTY.— In the case of any tangible property which— ^' ' 3 / ; ->* • (i) is of a character subject to the allowance for B' depreciation provided by section 167 of the Internal Revenue Code of 1954, and (ii) is held by the Federal Home Loan Mortgage !iu f* : - Corporation on January 1,1985, the adjusted basis of such property shall be equal to the I lesser of the basis of such property or the fair market value of such property as of such date. diiv/ (3) TREATMENT OF PARTICIPATION CERTIFICATES.— (A) IN GENERAL.—Paragraph (2) shall not apply to any right to receive income with respect to any mortgage pool participation certificate or other similar interest in any mortgage (not including any mortgage). (B) TREATMENT OF CERTAIN SALES AFTER MARCH 15, 1984, AND BEFORE JANUARY 1, 1985.—If any gain is realized on the ;.,. sale or exchange of any right described in subparagraph (A) after March 15, 1984, and before January 1, 1985, the gain f— shall not be recognized when realized but shall be recog- nized on January 1,1985. (4) N O ACCUMULATED EARNINGS AND PROFITS ON JANUARY i, 1985.—For purposes of the Internal Revenue Code of 1954, the 26 use i et seq. accumulated profits of the Federal Home Loan Mortgage Corpo- ration as of January 1,1985, shall be treated as zero. (5) ADJUSTED BASIS.—For purposes of this subsection, the ad- justed basis of any asset shall be determined under part II of subchapter O of the Internal Revenue Code of 1954. , » >;^ j ,« (6) No CARRYBACKS FOR YEARS BEFORE 1985.—No net Operating loss, capital loss, or excess credit of the Federal Home Loan Mortgage Corporation for any taxable year beginning after December 31, 1984, shall be allowed as a carryback to any taxable year beginning before January 1,1985. (7) N o DEDUCTION ALLOWED FOR INTEREST ON REPLACEMENT OBLIGATIONS.—
98 STAT. 712 PUBLIC LAW 98-369—JULY 18, 1984 (A) IN GENERAL.—The Federal Home Loan Mortgage Cor- poration shall not be allowed any deduction for interest accruing after December 31, 1984, on any replacement obligation. (B) REPLACEMENT OBLIGATION DEFINED.—For purposes of subparagraph (A), the term "replacement obligation" means any obligation to any person created after March 15, 1984, which the Secretary of the Treasury or his delegate determines replaces any equity or debt interest of a Federal Home Loan Bank or any other person in the Federal Home Loan Mortgage Corporation existing on such date. The preceding sentence shall not apply to any obligation with respect to which the Federal Home Loan Mortgage Corpo- ration establishes that there is no tax avoidance effect. SEC. 178. SPECIAL RULE RELATING TO SALES OR EXCHANGES OF CER- TAIN ECONOMIC INTERESTS IN COAL BETWEEN RELATED PARTIES. 26 use 631. (a) IN GENERAL.—The last sentence of section 631(c) (relating to disposal of coal or domestic iron ore with a retained economic interest) is amended by inserting "or coal" after "iron ore" each place it appears. 26 u s e 631 note. (b) EFFECTIVE D A T E S . — (1) IN GENERAL.—Except as provided in paragraph (2), the amendment made by subsection (a) shall apply to dispositions after September 30,1985. (2) SPECIAL RULE FOR FIXED CONTRACTS.— (A) IN GENERAL.—The amendment made by subsection (a) shall not apply to any disposition of an interest in coal by a person to a related person if such coal is subsequently sold before January 1,1990, by either such person— (i) to a person who is not a related person with respect to either such person, and (ii) pursuant to a qusdified fixed contract. (B) ALLOCATION WHERE MORE THAN i CONTRACT.—If, for any taxable year, there is a disposition described in sub- paragraph (A) which is not specifically allocable to a quali- fied fixed contract or to a contract which is not a qualified fixed contract, such disposition shall be treated as first allocable to the qualified fixed contract. (C) QuAUFiED FIXED CONTRACT DEFINED.—The term "qualified fixed contract" means any contract for the sale of coal which— (i) was entered into before June 12,1984, (ii) is binding at all times thereafter, and (iii) cannot be adjusted to reflect to any extent the increase in liabilities of the person disposing of the coal for tax under chapter 1 of the Internal Revenue Code of 26 use 1 et seq. 1954 by reason of the amendment made by subsection (a). (D) RELATED PERSON.—For purposes of this paragraph, the term "related person" means a person who bears a relation- ship to another person described in the last sentence of section 631(c).
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 713 SEC. 179. LIMITATION ON AMOUNT OF DEPRECIATION AND INVESTMENT TAX CREDIT FOR LUXURY AUTOMOBILES; LIMITATION WHERE CERTAIN PROPERTY USED FOR PERSONAL PURPOSES. (a) IN GENERAL.—Part IX of subchapter B of chapter 1 (relating to items not deductible) is amended by adding after section 280E the following new section: "SEC. 280F. LIMITATION ON INVESTMENT TAX CREDIT AND DEPRECIA- 26 USC 280F. TION FOR LUXURY AUTOMOBILES; LIMITATION WHERE CERTAIN PROPERTY USED FOR PERSONAL PURPOSES. "(a) LIMITATION ON AMOUNT OF INVESTMENT TAX CREDIT AND DEPRECIATION FOR LUXURY AUTOMOBILES.— "(1) INVESTMENT TAX CREDIT.—The amount of the credit deter- mined under section 46(a) for any passenger automobile shall Post, p. 834. not exceed $1,000. "(2) DEPRECIATION.— mm:-'' "(A) LIMITATION.—The amount of the recovery deduction for any taxable year for any passenger automobile shall not r exceed— "(i) $4,000 for the first taxable year in the recovery period, and "(ii) $6,000 for each succeeding taxable year in the recovery period. r "(B) DISALLOWED DEDUCTIONS ALLOWED FOR YEARS AFTER * RECOVERY PERIOD.— f "(i) I N GENERAL.—Except as provided in clause (ii), the unrecovered basis of any passenger automobile shall be treated as an expense for the 1st taxable year after the recovery period. Any excess of the unreco- V vered basis over the limitation of clause (ii) shall be • treated as an expense in the succeeding taxable year. "(ii) $6,000 LIMITATION.—The amount treated £is an expense under clause (i) for any taxable year shall not exceed $6,000. "(iii) PROPERTY MUST BE DEPRECIABLE.—No amount shall be allowable as a deduction by reason of this subparagraph with respect to any property for any taxable year unless a depreciation deduction would be allowable with respect to such property for such tax- able year. "(iv) AMOUNT TREATED AS RECOVERY DEDUCTION.—For purposes of this subtitle, any amount allowable as a deduction by reason of this subparagraph shall be treated as a recovery deduction allowable under section ( 168. "(3) COORDINATION WITH REDUCTIONS IN AMOUNT ALLOWABLE BY REASON OF PERSONAL USE, ETC.—This subsection shall be applied before— "(A) the application of subsection (b), and "(B) the application of any other reduction in the amount of the credit determined under section 46(a) or any recovery deduction allowable under section 168 by reason of any use not qualifying the property for such credit or recovery deduction. "(4) SPECIAL RULE WHERE ELECTION OF REDUCED CREDIT IN UEU OF THE BASIS ADJUSTMENT.—In the case of any election under section 48(qX4) with respect to any passenger automobile, the
98 STAT. 714 PUBLIC LAW 98-369—JULY 18, 1984 limitation of paragraph (1) applicable to such passenger automo- bile shall be % of the amount which would be so applicable but for this paragraph. "(b) LIMITATION WHERE BUSINESS USE OF LISTED PROPERTY NOT GREATER THAN 50 PERCENT.— "(1) INVESTMENT TAX CREDIT.—For purposes of this subtitle, Post, p. 827. any listed property shall not be treated as section 38 property for any taxable year unless such property is predominantly used in a qualified business use for such taxable year. "(2) DEPRECIATION.—If any listed property is not predomi- nantly used in a qualified business use for any taxable year, the deduction allowed under section 168 with respect to such prop- erty for such taxable year and any subsequent taxable year shall be determined under the straight line method over the earnings and profits life for such property. "(3) RECAPTURE.— "(A) WHERE BUSINESS USE PERCENTAGE DOES NOT EXCEED 50 PERCENT.—If— "(i) property is predominantly used in a qualified business use in a taxable year in which it is placed in service, and "(ii) such property is not predominantly used in a qualified business use for any subsequent taxable year, then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the recovery deduction for the taxable year referred to in clause (ii) and any subsequent taxable years shall be deter- mined under the straight line method over the earnings and profits life. "(B) EXCESS DEPRECIATION.—For purposes of subpara- graph (A), the term 'excess depreciation means the excess (if any) of— "(i) the amount of the recovery deductions allowable with respect to the property for taxable years before the 1st taxable year in which the property was not predominantly used in a qualified business use, over "(ii) the amount which would have been so allowable if the property had not been predominantly used in a qualified business use for the taxable year in which it was placed in service. "(4) DEFINITIONS.—For purposes of this subsection— "(A) PROPERTY PREDOMINANTLY USED IN QUALIFIED BUSI- NESS USE.—Property shall be treated as predominantly used in a qualified business use for any taxable year if the business use percentage for such taxable year exceeds 50 percent. "(B) STRAIGHT LINE METHOD OVER EARNINGS AND PROFITS LIFE.—The amount determined under the straight line method over the earnings and profits life with respect to any property shall be the amount which would be deter- mined with respect to such property under the principles of section 312(k)(3). If the recovery period applicable to any property under section 168 is longer than the recovery period applicable to such property under section 312(k)(3), such longer recovery period shall be used for purposes of the preceding sentence. "(c) TREATMENT OF LEASES.—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 715 "(1) LESSOR'S CREDITS AND DEDUCTIONS NOT AFFECTED.—This section shall not apply to any listed property leased or held for leasing by any person regularly engaged in the business of leasing such property. "(2) LESSEE'S DEDUCTIONS REDUCED.—For purposes of deter- mining the amount allowable as a deduction under this chapter for rentals or other payments under a lease for a period of 30 days or more of listed property, only the allowable percentage of such payments shall be taken into account. "(3) ALLOWABLE PERCENTAGE.—For purposes of paragraph (2), the allowable percentage shall be determined under tables pre- scribed by the Secretary. Such tables shall be prescribed so that the reduction in the deduction under paragraph (2) is substan- tially equivalent to the applicable restrictions contained in subsections (a) and (b). "(4) LEASE TERM.—In determining the term of any lease for purposes of paragraph (2), the rules of section 168(j)(6)(B) shall Ante, p. 509. apply. "(5) LESSEE RECAPTURE.—Under regulations prescribed by the Secretary, rules similar to the rules of subsection (b)(3) shall apply to any lessee to which paragraph (2) applies. "(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) COORDINATION WITH SECTION 179.—Any deduction allow- able under section 179 with respect to any listed property shall be subject to the limitations of subsections (a) and (b) in the same manner as if it were a recovery deduction allowable under section 168. "(2) SUBSEQUENT DEPRECIATION DEDUCTIONS REDUCED FOR DE- DUCTIONS ALLOCABLE TO PERSONAL USE.—Solely for purposes of determining the amount of the recovery deduction for subse- quent taxable years, if less than 100 percent of the use of any listed property during any taxable year is not use described in section 168(c)(1) (defining recovery property), all of the use of such property during such taxable year shall be treated as use so described. "(3) DEDUCTIONS OF EMPLOYEE.— "(A) I N GENERAL.—Any employee use of listed property "o r shall not be treated as use in a trade or business for purposes of determining the amount of any credit allowable i under section 38 to the employee or the amount of any Post, p. 827. J recovery deduction allowable to the employee unless such use is for the convenience of the employer and required as a condition of employment. "(B) EMPLOYEE USE.—For purposes of subparagraph (A), the term 'employee use' means any use in connection with the performance of services as an employee. "(4) LISTED PROPERTY.— "(A) IN GENERAL.—Except as provided in subparagraph -^ Ok i (B), the term 'listed property' means— y»« "(i) any passenger automobile, "(ii) any other property used as a means of transpor- tation, "(iii) any property of a type generally used for pur- poses of entertainment, recreation, or amusement, "(iv) any computer or peripheral equipment (as de- fined in section 168(jX5)(D)), and Ante, p. 509.
98 STAT. 716 PUBLIC LAW 98-369—JULY 18, 1984 "(v) any other property of a type specified by the Secretary by regulations. "(B) ExciSPTiON FOR CERTAIN COMPUTERS.—The term 'listed property' shall not include any computer or periph- eral equipment (as so defined) used exclusively at a regular business establishment. For purposes of the preceding sen- tence, any portion of a dwelling unit shall be treated as a regular business establishment if (and only if) the require- ments of section 280A(c)(l) are met with respect to such portion. "(5) PASSENGER AUTOMOBILE.— "(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'passenger automobile' means any 4-wheeled vehicle— "(i) which is manufactured primarily for use on public streets, roads, and highways, and "(ii) which is rated at 6,000 pounds gross vehicle weight or less. "(B) EXCEPTION FOR CERTAIN VEHICLES.—The term 'pas- senger automobile' shall not include— "(i) any ambulance, hearse, or combination ambu- lance-hearse used by the taxpayer directly in a trade or business, "(ii) any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire, and "(iii) under regulations, any truck or van. "(6) BUSINESS USE PERCENTAGE.— "(A) I N GENERAL.—The term 'business use percentage' means the percentage of the use of any listed property during any taxable year which is a qualified business use. "(B) QuAUFiED BUSINESS USE.—Exccpt as provided in sub- paragraph (C), the term 'qualified business use' means any- use in a trade or business of the taxpayer. "(C) EXCEPTION FOR CERTAIN USE BY 5-PERCENT OWNERS AND RELATED PERSONS.— "(i) I N GENERAL.—The term 'qualified business use' shall not include— "(I) leasing property to any 5-percent owner or related person, "(II) use of property provided as compensation for the performance of services by a 5-percent owner or related person, or "(III) use of property provided as compensation for the performance of services by any person not described in subclause (II) unless an amount is included in the gross income of such person with respect to such use, and, where required, there was 26 use 3401 et withholding under chapter 24. seq. "(ii) SPECIAL RULE FOR AIRCRAFT.—Clause (i) shall not apply with respect to any aircraft if at least 25 percent of the total use of the aircraft during the taxable year consists of qualified business use not described in claused). "(D) DEFINITIONS.—For purposes of this paragraph— "(i) 5-PERCENT OWNER.—The term '5-percent owner' .evS : ,i si' means any person who is a 5-percent owner with re-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 717 spect to the taxpayer (as defined in section -' - 416(i)(l)(B)(i)). "(ii) RELATED PERSON.—The term 'related person' means any person related to the taxpayer (within the meaning of section 267(b)). "(7) AUTOMOBILE PRICE INFLATION ADJUSTMENT,— "(A) I N GENERAL.—In the case of any passenger automo- bile, subsection (a) shall be applied by increasing each dollar amount contained in such subsection by the automo- bile price inflation adjustment for the calendar year in which such automobile is placed in service. Any increase under the preceding sentence shall be rounded to the near- est multiple of $100 (or if the increase is a multiple of $50, such increase shall be increased to the next higher multiple of $100). "(B) AUTOMOBILE PRICE INFLATION ADJUSTMENT.—For pur- •> ' poses of this paragraph— "(i) IN GENERAL.—The automobile price inflation ad- '' -' - justment for any calendar year is the percentage (if any) by which— "(I) the CPI automobile component for October of the preceding calendar year, exceeds "(II) the CPI automobile component for October of 1983. In the case of calendar year 1984, the automobile price ^ inflation adjustment shall be zero. '^' "(ii) CPI AUTOMOBILE COMPONENT.—The term 'CPI automobile component' means the automobile compo- nent of the Consumer Price Index for All Urban Con- **'-^ sumers published by the Department of Labor. "(8) UNRECOVERED BASIS.—For purposes of subsection (a)(2), the term 'unrecovered basis' means the excess (if any) of— "(A) the unadjusted basis (as defined in section 168(d)(1)(A)) of the passenger automobile, over "(B) the amount of the recovery deductions which would have been allowable for taxable years in the recovery -'^ 'HS. period determined after the application of subsection (a) and as if all use during the recovery period were use described in section 168(c)(1). "(9) ALL TAXPAYERS HOLDING INTERESTS IN PASSENGER AUTOMO- BILE TREATED AS 1 TAXPAYER.—All taxpayers holding interests in any passenger automobile shall be treated as 1 taxpayer for purposes of applying subsection (a) to such automobile, and the limitations of subsection (a) shall be allocated among such taxpayers in proportion to their interests in such automobile, "(10) SPECIAL RULE FOR PROPERTY ACQUIRED IN NONRECOGNI- TION TRANSACTIONS.—For purposes of subsection (a)(2), notwith- standing any regulations prescribed under section 168(f)(7), any property acquired in a nonrecognition transaction shall be treated as a single property originally placed in service in the taxable year in which it was placed in service after being so acquired. "(e) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this section, including regulations with respect to items properly included in, or excluded from, the adjusted basis of any listed property."
98 STAT. 718 PUBLIC LAW 98-369—JULY 18, 1984 (b) COMPLIANCE PROVISIONS.— 26 use 274. (1) AMENDMENT OF SECTION 274 (d).—Subsection (d) of section 274 (relating to substantiation requirements) is amended— (A) by striking out "No deduction" and inserting in lieu thereof "No deduction or credit", (B) by striking out "or" at the end of paragraph (2), by inserting "or" at the end of paragraph (3), and by inserting after paragraph (3) the following new paragraph: "(4) with respect to any listed property (as defined in section 280F(d)(4)),", (C) by striking out "adequate records or by sufficient evidence corroborating his own statement" and inserting in lieu thereof "adequate contemporaneous records", and (D) by striking out "the facility" each place it appears following paragraph (4) (as added by subparagraph (B)) and inserting in lieu thereof "the facility or property . (2) DUTIES OF RETURN PREPARERS.—Subsection (b) of section 26 use 6695. 6695 (relating to failure to sign return) is amended to read as follows: "(b) FAILURE T O INFORM TAXPAYER OF CERTAIN RECORDKEEPING REQUIREMENTS OR T O SIGN RETURN.—Any person who is an income tax return preparer with respect to any return or claim for refund and who is required by regulations to sign such return or claim— "(1) shall advise the taxpayer of the substantiation require- ments of section 274(d) and obtain written confirmation from the taxpayer that such requirements were met with respect to any deduction or credit claimed on such return or claim for refund, and "(2) shall sign such return or claim for refund. Any person who fails to comply with the requirements of the preceding sentence with respect to any return or claim shall pay a penalty of $25 for such failure, unless it is shown that such failure is due to reasonable cause and not to willful neglect." (3) UNDERPAYMENT ATTRIBUTABLE TO FAILURE TO MEET SUB- STANTIATION REQUIREMENTS TREATED AS DUE TO NEGLIGENCE.— 26 use 6653. Section 6653 (relating to failure to pay tax) is amended by adding at the end thereof the following new subsection: "(h) SPECIAL RULE IN THE CASE OF UNDERPAYMENT ATTRIBUTABLE TO FAILURE T O MEET CERTAIN SUBSTANTIATION REQUIREMENTS.— "(1) IN GENERAL.—Any portion of an underpayment attributa- ble to a failure to comply with the requirements of section 274(d) shall be treated, for purposes of subsection (a), as due to negligence in the absence of clear and convincing evidence to the contrary. "(2) PENALTY TO APPLY ONLY TO PORTION OF UNDERPAYMENT DUE TO F A I L U R E TO MEET SUBSTANTIATION REQUIREMENTS.—If a n y penalty is imposed under subsection (a) by reason of paragraph (1), the amount of the penalty imposed by paragraph (1) of subsection (a) shall be 5 percent of the portion of the underpay- ment which is attributable to the failure described in paragraph (1)." (c) CLERICAL AMENDMENT.—The table of sections for part IX of subchapter B of chapter 1 is amended by adding after the item relating to section 280E the following new item: "Sec. 280F. Limitation on investment tax credit and depreciation for luxury automobiles; limitation where certain property used for per- sonal purposes."
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 719 (d) EFFECTIVE DATES.— 26 use 280F (1) IN GENERAL.— note. (A) Except as provided in subparagraph (B), the amend- ments made by subsections (a) and (c) shall apply to— (i) property placed in service after June 18, 1984, in taxable years ending after such date, and (ii) property leased after June 18, 1984, in taxable years ending after such date. (B) The amendments made by subsections (a) and (c) shall not apply to any property— (i) acquired by the taxpayer pursuant to a binding '4 ^ contract in effect on June 18, 1984, and at all times thereafter (or under construction on such date) but only if the property is placed in service before Janu- ary 1, 1985 (January 1, 1987, in the case of 15-year real property), or (ii) of which the taxpayer is the lessee but only if the lease is pursuant to a binding contract in effect on June 18, 1984, and at all times thereafter and only if the taxpayer first uses such property under the lease before January 1, 1985 (January 1, 1987, in the case of 15-year real property). For purposes of the preceding sentence, the term "15-year real property" includes 18-year real property. (2) CoMPUANCE PROVISIONS.—The amendments made by sub- section (b) shall apply to taxable years beginning after Decem- > • >SIJ 'fH ber 31,1984. TITLE II—LIFE INSURANCE PROVISIONS SEC. 201. TABLE OF SECTIONS FOR PART I OF SUBCHAPTER L. Under the amendment to part I of subchapter L made by section 211(a), the subparts and sections of such part I will be as follows: PART I—LIFE INSURANCE COMPANIES SUBPART A—TAX IMPOSED Sec. 801. Tax imposed. SUBPART B — L I F E INSURANCE GROSS INCOME Sec. 803. Life insurance gross income. SUBPART C — L I F E INSURANCE DEDUCTIONS Sec. 804. Life insurance deductions. Sec. 805. Greneral deductions. Sec. 806. Special deductions. Sec. 807. Rules for certain reserves. Sec. 808. Policyholder dividends deduction. Sec. 809. Reduction in certain deductions of mutual life insurance companies. Sec. 810. Operations loss deduction. SUBPART D—ACCOUNTING, ALLOCATION, AND FOREIGN PROVISIONS , ... , „ .;--•.-'• .q ,-•,«"=. Sec. 811. Accounting provisions. Sec. 812. Definition of company's share and policyholders' share. Sec. 813. Foreign life insurance companies. Sec. 814. Contiguous country branches of domestic life insurance companies. Sec. 815. Distributions to shareholders from pre-1984 policyholders surplus account. SUBPART E—DEFINITIONS AND SPECIAL RULES Sec. 816. Life insurance company defined.
98 STAT. 720 PUBLIC LAW 98-369—JULY 18, 1984 Sec. 817. Treatment of variable contracts. " -8 Sec. 818. Other definitions and special rules. Subtitle A—Taxation of Life Insurance Companies PART I—AMENDMENT OF SUBCHAPTER L SEC. 211. AMENDMENT OF SUBCHAPTER L. (a) GENERAL RULE.—Part I of subchapter L of chapter 1 is amended to read as follows: "PART I—LIFE INSURANCE COMPANIES "Subpart A. Tax imposed. "Subpart B. Life insurance gross income. ^'; "Subpart C. Life insurance deductions. "Subpart D. Accounting, allocation, and foreign provisions. '-' "Subpart E. Definitions and special rules. "Subpart A—Tax Imposed "Sec. 801. Tax imposed. 26 u s e 801. "SEC. 801. TAX IMPOSED. "(a) TAX IMPOSED.— "(1) I N GENERAL.—A tax is hereby imposed for each taxable year on the life insurance company taxable income of every life insurance company. Such tax shall consist of a tax computed as provided in section 11 as though the life insurance company taxable income were the taxable income referred to in section 11- "(2) ALTERNATIVE TAX IN CASE OP CAPITAL GAINS.— "(A) I N GENERAL.—If a life insurance company has a net capital gain for the taxable year, then (in lieu of the tax imposed by paragraph (1)), there is hereby imposed a tax (if such tax is less than the tax imposed by paragraph (1)). "(B) AMOUNT OF TAX.—The amount of the tax imposed by this paragraph shall be the sum of— "(i) a partial tax, computed as provided by paragraph (1), on the life insurance company taxable income re- duced by the amount of the net capital gain, and "(ii) an amount determined as provided in section 1201(a) on such net capital gain. "(C) N E T CAPITAL GAIN NOT TAKEN INTO ACCOUNT IN DE- TERMINING SPECIAL U F E INSURANCE COMPANY DEDUCTION AND SMALL U F E INSURANCE COMPANY DEDUCTION.—For p u r - poses of subparagraph (B)(i), the amounts allowable as de- Post, p. 722. ductions under paragraphs (2) and (3) of section 804 shall be determined by reducing the tentative LICTI by the amount of the net capital gain (determined without regard to items attributable to noninsurance businesses). "(b) LIFE INSURANCE COMPANY TAXABLE INCOME.—For purposes of this part, the term 'life insurance company taxable income' means— "(1) life insurance gross income, reduced by "(2) life insurance deductions.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 721 "(c) TAXATION OF DISTRIBUTIONS FROM PRE-1984 POLICYHOLDERS '^ SURPLUS ACCOUNT.— "For provision taxing distributions to shareholders from pre-1984 pol- icyholders surplus account, see section 815. Post, p. 747. "Subpart B—Life Insurance Gross Income ... "Sec. 803. Life insurance gross income. "SEC. 803. LIFE INSURANCE GROSS INCOME. 26 USC 803. "(a) IN GENERAL.—For purposes of this part, the term 'life insur- ance gross income' means the sum of the following amounts: "(1) PREMIUMS.— -3 "(A) The gross amount of premiums and other consider- ation on insurance and annuity contracts, less -'^ "(B) return premiums, and premiums and other consider- ation arising out of indemnity reinsurance. "(2) DECREASES IN CERTAIN RESERVES.—Each net decrease in reserves which is required by section 807(a) to be taken into Post, p. 726. account under this paragraph. "(3) OTHER AMOUNTS.—All amounts not includible under ' paragraph (1) or (2) which under this subtitle are includible in gross income. "(b) SPECIAL RULES FOR PREMIUMS.— "(1) CERTAIN ITEMS INCLUDED.—For purposes of subsection (a)(1)(A), the term 'gross amount of premiums and other consid- eration' includes— "(A) advance premiums, "(B) deposits, "(C) fees, "(D) assessments, • "(E) consideration in respect of assuming liabilities under j_ contracts not issued by the taxpayer, and Of It <<^p) ^Yie amount of policyholder dividends reimbursable to the taxpayer by a reinsurer in respect of reinsured '^ policies, on insurance and annuity contracts. "(2) POLICYHOLDER DIVIDENDS EXCLUDED FROM RETURN PREMI- UMS.—For purposes of subsection (a)(1)(B)— "(A) I N GENERAL.—Except as provided in subparagraph (B), the term'return premiums'does not include any policy- "' ' holder dividends. "(B) EXCEPTION FOR INDEMNITY REINSURANCE.—Subpara- ' * graph (A) shall not apply to amounts of premiums or other consideration returned to another life insurance company in respect of indemnity reinsurance. "Subpart C—Life Insurance Deductions "Sec. 804. Life insurance deductions. "Sec. 805. General deductions. "Sec. 806. Special deductions. "Sec. 807. Rules for certain reserves. "Sec. 808. Policyholder dividends deduction. "Sec. 809. Reduction in certain deductions of mutual life insurance compa- ' ' , nies. "Sec. 810. Operations loss deduction. 31-194 0 - 8 6 25 : QL. 3 P a r t 1
98 STAT. 722 PUBLIC LAW 98-369—JULY 18, 1984 26 u s e 804. "SEC. 804. LIFE INSURANCE DEDUCTIONS. "For purposes of this part, the term 'life insurance deductions' means— Tf V q JMA "(1) the general deductions provided in section 805, "(2) the special life insurance company deduction determined Post, p. 724. under section 806(a), and "(3) the small life insurance company deduction (if any) deter- mined under section 806(b). 26 u s e 805. "SEC. 805. GENERAL DEDUCTIONS. "(a) GENERAL RULE.—For purposes of this part, there shall be allowed the following deductions: "(1) DEATH BENEFITS, ETC.—All claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and annuity contracts. "(2) INCREASES IN CERTAIN RESERVES.—The net increase in Post, p. 726. reserves which is required by section 807(b) to be taken into account under this paragraph. "(3) POLICYHOLDER DIVIDENDS.—The deduction for policy- Post, p. 732. holder dividends (determined under section 808(c)). "(4) DIVIDENDS RECEIVED BY COMPANY.— "(A) I N GENERAL.—The deductions provided by sections 243, 244, and 245 (as modified by subparagraph (B))— "(i) for 100 percent dividends received, and "(ii) for the life insurance company's share of the dividends (other than 100 percent dividends) received. "(B) APPLICATION OF SECTION 246 (b).—In applying section 246(b) (relating to limitation on aggregate amount of deduc- tions for dividends received) for purposes of subparagraph (A), the limit on the aggregate amount of the deductions allowed by sections 243(a)(1), 244(a), and 245 shall be 85 percent of the life insurance company taxable income, com- puted without regard to— "(i) the special life insurance company deduction and the small life insurance company deduction, "(ii) the operations loss deduction provided by section 810, "(iii) the deductions allowed by sections 243(a)(1), 244(a), and 245, and "(iv) any capital loss carryback to the taxable year under section 1212(a)(1), but such limit shall not apply for any taxable year for which there is a loss from operations. "(C) 100 PERCENT DIVIDEND.—For purposes of subpara- graph (A), the term '100 percent dividend' means any divi- dend if the percentage used for purposes of determining the deduction allowable under section 243 or 244 is 100 percent. Such term does not include any dividend to the extent it is a distribution out of tax-exempt interest or out of dividends which are not 100 percent dividends (determined with the application of this sentence). "(D) CERTAIN DIVIDENDS RECEIVED BY FOREIGN CORPORA- TIONS.—Subparagraph (A)(i) (and not subparagraph (A)(ii)) shall apply to any dividend received by a foreign corpora- tion from a domestic corporation which would be a 100 percent dividend if section 1504(b)(3) did not apply for purposes of applying section 243(b)(5). jl t ..;-) : .:: -C - 0 i-^'l-Jc
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 723 "(5) OPERATIONS LOSS DEDUCTION.—The operations loss deduc- - tion (determined under section 810). Post, p. 738. "(6) ASSUMPTION BY ANOTHER PERSON OF LIABILITIES UNDER INSURANCE, ETC., CONTRACTS.—The consideration (other than consideration arising out of indemnity reinsurance) in respect of the assumption by another person of liabilities under insurance and annuity contracts. "(7) REIMBURSABLE DIVIDENDS.—The amount of policyholder dividends which— *; "(A) are paid or accrued by another insurance company in respect of policies the taxpayer has reinsured, and "(B) are reimbursable by the taxpayer under the terms of the reinsurance contract. "(8) OTHER DEDUCTIONS.—Subject to the modifications pro- vided by subsection (b), all other deductions allowed under this subtitle for purposes of computing taxable income. Except as provided in paragraph (3), no amount shall be allowed as a deduction under this part in respect of policyholder dividends. "(b) MODIFICATIONS.—The modifications referred to in subsection (aX8) are as follows: "(1) INTEREST.—In applying section 163 (relating to deduction for interest), no deduction shall be allowed for interest in i respect of items described in section 807(c). Post, p. 726. "(2) BAD DEBTS.—Section 166(c) (relating to reserve for bad -i debts) shall not apply. "(3) CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.—In applying 1' section 170— "(A) the limit on the total deductions under such section t? provided by section 170(b)(2) shall be 10 percent of the life ii> 1 . insurance company taxable income computed without regard to— iiMA £ "(i) the deduction provided by section 170, "(ii) the deductions provided by paragraphs (3) and (4) 3fi loo of subsection (a), "(iii) the special life insurance company deduction and the small life insurance company deduction, "(iv) any operations loss carryback to the taxable year under section 810, and "(v) any capital loss carryback to the taxable year under section 1212(a)(1), and u- , " "(B) under regulations prescribed by the Secretary, a rule similar to the rule contained in section 170(d)(2)(B) (relating biiK ,; to special rule for net operating loss carryovers) shall be applied. "(4) AMORTIZABLE BOND PREMIUM.— "(A) I N GENERAL.—Section 171 shall not apply. '> "(B) CROSS REFERENCE.— "For rules relating to amortizable bond premium, see section 811(b). Post, p. 740. "(5) N E T OPERATING LOSS DEDUCTION.—Except as provided by section 844, the deduction for net operating losses provided in section 172 shall not be allowed. "(6) DIVIDENDS RECEIVED DEDUCTION.—Except as provided in subsection (aX4), the deductions for dividends received provided by sections 243, 244, and 245 shall not be allowed.
98 STAT. 724 PUBLIC LAW 98-369—JULY 18, 1984 26 u s e 806. "SEC. 806. SPECIAL DEDUCTIONS. "(a) SPECIAL LIFE INSURANCE COMPANY DEDUCTION.—For purposes Ante, p. 722. of section 804, the special life insurance company deduction for any taxable year is 20 percent of the excess of the tentative LICTI for such taxable year over the small life insurance company deduction (if any). "(h) SMAIX LIFE INSURANCE COMPANY DEDUCTION.— "(1) I N GENERAL.—For purposes of section 804, the small life insurance company deduction for any taxable year is 60 percent of so much of the tentative LICTI for such taxable year as does not exceed $3,000,000. "(2) PHASEOUT BETWEEN $3,OOO,OOO A N D $15,000,000.—The amount of the small life insurance company deduction deter- mined under paragraph (1) for any taxable year shall be re- duced (but not below zero) by 15 percent of so much of the tentative LICTI for such taxable year as exceeds $3,000,000. "(3) SMALL U F E INSURANCE COMPANY DEDUCTION NOT ALLOW- ABLE TO COMPANY WITH ASSETS OP $500,000,000 OR MORE.— "(A) I N GENERAL.—The small life insurance company deduction shall not be allowed for any taxable year to any life insurance company which, at the close of such taxable year, has assets equal to or greater than $500,000,000. "(B) ASSETS.—For purposes of this paragraph, the term 'assets' means all assets of the company. "(C) VALUATION OF ASSETS.—For purposes of this para- graph, the amount attributable to— "(i) real property and stock shall be the fair market value thereof, and "(ii) any other asset shall be the adjusted basis of such asset for purposes of determining gain on sale or other disposition. "(D) SPECIAL RULE FOR INTERESTS IN PARTNERSHIPS AND TRUSTS.—For purposes of this paragraph— "(i) an interest in a partnership or trust shall not be treated as an asset of the company, but "(ii) the company shall be treated as actually owning its proportionate share of the assets held by the part- nership or trust (as the case may be). "(c) TENTATIVE LICTI.—For purposes of this part— "(1) I N GENERAL.—The term 'tentative LICTI' means life in- surance company taxable income determined without regard to— "(A) the special life insurance company deduction, and "(B) the small life insurance company deduction. "(2) EXCLUSION OF ITEMS ATTRIBUTABLE TO NONINSURANCE BUSINESSES.—The amount of the tentative LICTI for any taxable year shall be determined without regard to all items attributa- ^, ^ ble to noninsurance businesses. ' ' * ••' " " "(3) NONINSURANCE BUSINESS.— "v "(A) I N GENERAL.—The term 'noninsurance business' *' means any activity which is not an insurance business. "(B) CERTAIN ACTIVITIES TREATED AS INSURANCE BUSI- NESSES.—For purposes of subparagraph (A), any activity which is not an insurance business shall be treated as an insurance business if—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 725 rWj|,, «^^ -^ j^g Q£ ^ ^ypg traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of such activity (other than in the ^' case of real estate) does not constitute the active con- duct of a trade or business, or "(ii) it involves the performance of administrative services in connection with plans providing life insur- ance, pension, or accident and health benefits. ^ "(C) LIMITATION ON AMOUNT OF LOSS FROM NONINSURANCE BUSINESS WHICH MAY OFFSET INCOME FROM INSURANCE BUSI- NESS.—In computing the life insurance company taxable c>i income of any life insurance company, any loss from a noninsurance business shall be limited under the principles of section 1503(c). "(d) SPECIAL RULE FOR CONTROLLED GROUPS.— "(1) SPECIAL LIFE INSURANCE COMPANY DEDUCTION AND SMALL LIFE INSURANCE COMPANY DEDUCTION DETERMINED ON CON- TROLLED GROUP BASIS.—For purposes of subsections (a) and (b)— "(A) all life insurance companies which are members of the same controlled group shall be treated as 1 life insur- „, \ ance company, and !i "(B) any special life insurance company deduction and any small life insurance company deduction determined ^ic with respect to such group shall be allocated among the life insurance companies which are members of such group in proportion to their respective tentative LICTI's. "(2) NONUFE INSURANCE MEMBERS INCLUDED FOR ASSET TEST.— For purposes of subsection (b)(3), all members of the same controlled group (whether or not life insurance companies) shall be treated as 1 company. , .,,;. "(3) CONTROLLED GROUP.—For purposes of this subsection, the term 'controlled group' means any controlled group of corpora- tions (as defined in section 1563(a)); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply. "(4) ELECTION WITH RESPECT TO LOSS FROM OPERATIONS OF MEMBER OF GROUP.— "(A) IN GENERAL.—Any life insurance company which is a ,j^, member of a controlled group may elect to have its loss from operations for any taxable year not taken into account iLV vij .a't.r J".. ^ for purposes of determining the amount of the special life insurance company deduction for the life insurance compa- nies which are members of such group and which do not file a consolidated return with such life insurance company for the taxable year. "(B) LIMITATION ON AMOUNT OF LOSS WHICH MAY OFFSET NONLiFE INCOME.—In the case of that portion of any loss from operations for any taxable year of a life insurance company which (but for subparagraph (A)) would have reduced tentative LICTI of other life insurance companies for such taxable year— '" "(i) only 80 percent of such portion may be used to offset nonlife income, and "(ii) to the extent such portion is used to offset nonlife income, the loss shall be treated as used at a rate of $1 for each 80 cents of income so offset. For purposes of the preceding sentence, any such portion shall be used before the remaining portion of the loss from
98 STAT. 726 PUBLIC LAW 98-369—JULY 18, 1984 the same year and shall be treated as first being offset against income which is not nonlife income. "(C) NONUFE INCOME.— "(i) I N GENERAL.—The term 'nonlife income' means the portion of the life insurance company's taxable income for which the special life insurance company deduction was not allowable and any income of a corpo- ration not subject to tax under this part. "(ii) SPECIAL RULE FOR TAXABLE YEARS BEGINNING BEFORE JANUARY 1, 1984.—In the case of a taxable year beginning before January 1, 1984, all life insurance company taxable income shall be treated as nonlife income. "(5) ADJUSTMENTS TO PREVENT EXCESS DETRIMENT OR BENE- FIT.—Under regulations prescribed by the Secretary, proper adjustments shall be made in the application of this subsection to prevent any excess detriment or benefit (whether from year- to-year or otherwise) arising from the application of this subsec- tion. 26 use 807. "SEC. 807. RULES FOR CERTAIN RESERVES. "(a) DECREASE TREATED AS GROSS INCOME.—If for any taxable year— "(1) the opening balance for the items described in subsection (c), exceeds "(2)(A) the closing balance for such items, reduced by "(B) the sum of (i) the amount of the policyholders' share of tax-exempt interest, plus (ii) any excess described in section Post, p. 733. 809(a)(2) for the taxable year. Ante, p. 721. such excess shall be included in gross income under section 803(aX2). "(b) INCREASE TREATED AS DEDUCTION.—If for any teixable year— "(1)(A) the closing balance for the items described in subsec- tion (c), reduced by "(B) the sum of (i) the amount of the policyholders' share of tax-exempt interest, plus (ii) any excess described in section 809(a)(2) for the taxable year, exceeds "(2) the opening balance for such items, such excess shall be taken into account as a deduction under section Ante, p. 722. 805(a)(2). "(c) ITEMS TAKEN INTO ACCOUNT.—The items referred to in subsec- tions (a) and (b) are as follows: Post, p. 748. "(1) The life insurance reserves (as defined in section 816(b)). "(2) The unearned premiums and unpaid losses included in total reserves under section 816(c)(2). "(3) The amounts (discounted at the appropriate rate of inter- est) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies. "(4) Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts. "(5) Premiums received in advance, and liabilities for pre- mium deposit funds. "(6) Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provi-
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 727 5 sion of insurance on retired lives, for premium stabilization, or for a combination thereof. For purposes of paragraph (3), the appropriate rate of interest for any obligation is the higher of the prevailing State assumed interest rate as of the time such obligation first did not involve life, accident, or health contingencies or the rate of interest assumed by the company (as of such time) in determining the guaranteed benefit. "(d) METHOD OF COMPUTING RESERVES FOR PURPOSES OF DETERMIN- ING INCOME.— "(1) I N GENERAL.—For purposes of this part (other than sec- tion 816), the amount of the life insurance reserves for any Post, p. 748. contract shall be the greater of— "(A) the net surrender value of such contract, or ^ "(B) the reserve determined under paragraph (2). In no event shall the reserve determined under the preceding g sentence for any contract as of any time exceed the amount which would be taken into account with respect to such contract 3 as of such time in determining statutory reserves (as defined in -1, section 809(b)(4)(B)). Post, p. 733. "(2) AMOUNT OF RESERVE.—The amount of the reserve deter- mined under this paragraph with respect to any contract shall J be determined by using— "(A) the tax reserve method applicable to such contract, "(B) the prevailing State assumed interest rate, and "(C) the prevailing commissioners' standard tables for mortality and morbidity adjusted as appropriate to reflect the risks (such as substandard risks) incurred under the contract which are not otherwise taken into account. "(3) TAX RESERVE METHOD.—For purposes of this subsection— "(A) I N GENERAL.—The term 'tax reserve method' means— "(i) LIFE INSURANCE CONTRACTS.—The CRVM in the case of a contract covered by the CRVM. "(ii) ANNUITY CONTRACTS.—The CARVM in the case j ix. • of a contract covered by the CARVM. "(iii) NONCANCELLABLE ACCIDENT AND HEALTH INSUR- ANCE CONTRACTS.—In the case of any noncancellable accident and health insurance contract, a 2-year full preliminary term method. "(iv) OTHER CONTRACTS.—In the case of any contract not described in clause (i), (ii), or (iii)— "(I) the reserve method prescribed by the Na- tional Association of Insurance Commissioners which covers such contract (as of the date of issu- ance), or "(II) if no reserve method has been prescribed by -m f *ti>1- the National Association of Insurance Commission- ers which covers such contract, a reserve method Vi which is consistent with the reserve method re- quired under clause (i), (ii), or (iii) or under sub- clause (I) of this clause as of the date of the issu- ance of such contract (whichever is most appropri- ate). "(B) DEFINITION OF CRVM AND CARVM.—For purposes of this paragraph— "(i) CRVM.—The term 'CRVM' means the Commis- sioners' Reserve Valuation Method prescribed by the
98 STAT. 728 PUBLIC LAW 98-369—JULY 18, 1984 •1' National Association of Insurance Commissioners which is in effect on the date of the issuance of the "(ii) CARVM.—The term 'CARVM' means the Com- missoners' Annuities Reserve Valuation Method pre- scribed by the National Association of Insurance Com- missioners which is in effect on the date of the issuance of the contract. "(C) No ADDITIONAL RESERVE DEDUCTION ALLOWED FOR DEFICIENCY RESERVES.—Nothing in any reserve method de- scribed under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) ex- ceeds the actual premiums or other consideration charged for the benefit. "(4) PREVAILING STATE ASSUMED INTEREST RATE.—For purposes of this subsection— "(A) IN GENERAL.—The term 'prevailing State assumed ^« " ' ' interest rate' means, with respect to any contract, the highest assumed interest rate permitted to be used in com- puting life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. For purposes of the preceding sentence, the effect of the nonforfeiture laws of a State on interest rates for reserves shall not be taken into account. "(B) W H E N RATE DETERMINED.—Except as provided in subparagraph (C), the prevailing State assumed rate with respect to any contract shall be determined as of the begin- ning of the calendar year in which the contract was issued. "(C) ELECTION FOR NONANNUITY CONTRACTS.—In the case of a contract other than an annuity contract, the issuer may elect (at such time and in such manner as the Secre- tary shall by regulations prescribe) to determine the pre- vailing State assumed rate as of the beginning of the calen- dar year preceding the calendar year in which the contract was issued. "(D) RATE FOR NONCANCELLABLE ACCIDENT AND HEALTH INSURANCE CONTRACTS.—If there is no prevailing State as- sumed^ interest rate applicable under subparagraph (A) to any noncancellable accident and health insurance contract when it is issued, the prevailing State assumed interest rate for such contract shall be the prevailing State assumed interest rate which would be determined under subpara- graph (A) for a whole life insurance contract issued on the date on which the noncancellable accident and health in- surance contract is issued. "(5) PREVAILING COMMISSIONERS' STANDARD TABLES.—For pur- poses of this subsection— "(A) I N GENERAL.—The term 'prevailing commissioners' standard tables' means, with respect to any contract, the most recent commissioners' standard tables prescribed by the National Association of Insurance Commissioners which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 States when the contract was issued. "(B) INSURER MAY USE OLD TABLES FOR 3 YEARS WHEN TABLES CHANGE.—If the prevailing commissioners' standard
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 729 tables as of the beginning of any calendar year (hereinafter in this subparagraph referred to as the 'year of change') is different from the prevailing commissioners' standard tables as of the beginning of the preceding calendar year, the issuer may use the prevailing commissioners' standard tables as of the beginning of the preceding calendar year with respect to any contract issued after the change and before the close of the 3-year period beginning on the first day of the year of change. (C) SPECIAL RULE FOR CONTRACTS FOR WHICH THERE ARE NO COMMISSIONERS' STANDARD TABLES.—If there are no com- missioners' standard tables applicable to any contract when it is issued, the mortality and morbidity tables used for purposes of paragraph (2)(C) shall be determined under regulations prescribed by the Secretary. it "(D) SPECIAL RULE FOR CONTRACTS ISSUED BEFORE 1948.— If— 10 iut: "(i) a contract was issued before 1948, and "(ii) there were no commissioners' standard tables > applicable to such contract when it was issued, the mortality and morbidity tables used in computing statu- tory reserves for such contracts shall be used for purposes -1 of paragraph (2)(C). "(E) SPECIAL RULE WHERE MORE THAN i TABLE OR OPTION APPLICABLE.—If, with respect to any category of risks, there are 2 or more tables (or options under 1 or more tables) which meet the requirements of subparagraph (A) (or, where applicable, subparagraph (B) or (O), the table (and option thereunder) which generally yields the lowest re- serves shall be used for purposes of paragraph (2)(C). "(e) SPECIAL RULES FOR COMPUTING RESERVES.— "(1) N E T SURRENDER VALUE.—For purposes of this section— "(A) I N GENERAL.—The net surrender value of any con- tract shall be determined— "(i) with regard to any penalty or charge which would be imposed on surrender, but "(ii) without regard to any market value adjustment on surrender. "(B) SPECIAL RULE FOR PENSION PLAN CONTRACTS.—In the case of a pension plan contract, the balance in the policy- holder's fund shall be treated as the net surrender value of such contract. For purposes of the preceding sentence, such balance shall be determined with regard to any penalty or forfeiture which would be imposed on surrender but with- out regard to any market value adjustment. "(2) ISSUANCE DATE IN CASE OF GROUP CONTRACTS.—For pur- poses of this section, in the case of a group contract, the date on which such contract is issued shall be the date as of which the master plan is issued (or, with respect to a benefit guaranteed to a participant after such date, the date as of which such benefit is guaranteed). 'f^' "(3) SUPPLEMENTAL BENEFITS.— "(A) QUAUFIED SUPPLEMENTAL BENEFITS TREATED SEPA- RATELY.—For purposes of this part, the amount of the life insurance reserve for any qualified supplemental benefit— "(i) shall be computed separately as though such benefit were under a separate contract, and
98 STAT. 730 PUBLIC LAW 98-369—JULY 18, 1984 "(ii) shall, except to the extent otherwise provided in regulations, be the reserve taken into account for purposes of the annual statement approved by the Na- tional Association of Insurance Commissioners. "(B) SUPPLEMENTAL BENEFITS WHICH ARE NOT QUALIFIED SUPPLEMENTAL BENEFITS.—In the case of any supplemental benefit described in subparagraph (D) which is not a quali- fied supplemental benefit, the amount of the reserve deter- mined under paragraph (2) of subsection (d) shall, except to the extent otherwise provided in regulations, be the reserve taken into account for purposes of the annual statement approved by the National Association of Insurance Commis- sioners. "(C) QUALIFIED SUPPLEMENTAL BENEFIT.—For purposes of this paragraph, the term 'qualified supplemental benefit' means any supplemental benefit described in subparagraph (D)if- "(i) there is a separately identified premium or I '.,-7 charge for such benefit, and "(ii) any net surrender value under the contract attributable to any other benefit is not available to fund such benefit. "(D) SUPPLEMENTAL BENEFITS.—For purposes of this para- graph, the supplemental benefits described in this subpara- graph are any— "(i) guaranteed insurability, "(ii) accidental death or disability benefit, "(iii) convertibility, "(iv) disability waiver benefit, or "(v) other benefit prescribed by regulations, which is supplemental to a contract for which there is a reserve described in subsection (c). "(4) CERTAIN CONTRACTS ISSUED BY FOREIGN BRANCHES OF DOMESTIC LIFE INSURANCE COMPANIES.— "(A) IN GENERAL.—In the case of any qualified foreign contract, the amount of the reserve shall be not less than the minimum reserve required by the laws, regulations, or administrative guidance of the regulatory authority of the foreign country referred to in subparagraph (B) (but not to exceed the net level reserves for such contract). "(B) QUALIFIED FOREIGN CONTRACT.—For purposes of sub- paragraph (A), the term 'qualified foreign contract' means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if— (i) such contract is issued on the life or health of a resident of such country, "(ii) such domestic life insurance company was re- quired by such foreign country (as of the time it began .^ operations in such country) to operate in such country through a branch, and "(iii) such foreign country is not contiguous to the United States. "(5) T R E A T M E N T OF SUBSTANDARD RISKS.— "(A) SEPARATE COMPUTATION.—Except to the extent pro- vided in regulations, the amount of the life insurance re- serve for any qualified substandard risk shall be computed
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 731 separately under subsection (dXl) from any other reserve under the contract. ^ "(B) QUALIFIED SUBSTANDARD RISK.—For purposes of sub- paragraph (A), the term 'qualified substandard risk' means any substandard risk if— "(i) the insurance company maintains a separate ^ reserve for such risk, * "(ii) there is a separately identified premium or - charge for such risk, e* "(iii) the amount of the net surrender value under the contract is not increased or decreased by reason of --^ i 3i»f ff' such risk, and "(iv) the net surrender value under the contract is not regularly used to pay premium charges for such !;, risk. "(C) LIMITATION ON AMOUNT OF LIFE INSURANCE RE- ii.i < anK gfj SERVE.—The amount of the life insurance reserve deter- mined for any qualified substandard risk shall in no event exceed the sum of the separately identified premiums charged for such risk plus interest less mortality charges for such risk. "(D) LIMITATION ON AMOUNT OF CONTRACTS TO WHICH PARAGRAPH APPUES.—The aggregate amount of insurance in force under contracts to which this paragraph applies < c 'Sii -L shall not exceed 10 percent of the insurance in force (other than term insurance) under life insurance contracts of the company. "(6) SPECIAL RULES FOR CONTRACTS ISSUED BEFORE JANUARY i, 1989, UNDER EXISTING PLANS OF INSURANCE, WITH TERM INSUR- ANCE OR ANNUITY BENEFITS.—For purposes of this part— "(A) IN GENERAL.—In the case of a life insurance contract issued before January 1, 1989, under an existing plan of insurance, the life insurance reserve for any benefit to which this paragraph applies shall be computed separately under subsection (d)(1) from any other reserve under the contract. "(B) BENEFITS TO WHICH THIS PARAGRAPH APPLIES.—This paragraph applies to any term insurance or annuity benefit with respect to which the requirements of clauses (i) and (ii) of paragraph (3)(C) are met. :< "(C) EXISTING PLAN OF INSURANCE.—For purposes of this paragraph, the term 'existing plan of insurance' means, with respect to any contract, any plan of insurance which was filed by the company using such contract in one or more States before January 1, 1984, and is on file in the appropriate State for such contract. s>gi o •leo* "(f) ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES.— "(1) 10-YEAR SPREAD,— "(A) IN GENERAL.—For purposes of this part, if the basis ^.4 for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such .^ determination as of the close of the preceding taxable year, *^" then so much of the difference between— "(i) the amount of the item at the close of the taxable year, computed on the new basis, and "(ii) the amount of the item at the close of the taxable year, computed on the eld basis.
98 STAT. 732 PUBLIC LAW 98-369—JULY 18, 1984 as is attributable to contracts issued before the taxable year shall be taken into account under the method provided in subparagraph (B). "(B) METHOD.—The method provided in this subpara- graph is as follows: "(i) if the amount determined under subparagraph (A)(i) exceeds the amount determined under subpara- graph (A)(ii), Vio of such excess shall be taken into account, for each of the succeeding 10 taxable years, as Ante, p. 722. a deduction under section 805(aX2); or "(ii) if the amount determined under subparagraph (A)(ii) exceeds the amount determined under subpara- graph (A)(i), Vio of such excess shall be included in gross income, for each of the 10 succeeding taxable Ante, p. 721. years, under section 803(a)(2). "(2) TERMINATION AS U F E INSURANCE COMPANY.—Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if for any taxable year the taxpayer is not a life insurance company, the balance of any adjustments under this subsection shall be taken into account for the preced- ing taxable year. 26 u s e 808. "SEC. 808. POLICYHOLDER DIVIDENDS DEDUCTION. "(a) POLICYHOLDER DIVIDEND DEFINED.—For purposes of this part, the term 'policyholder dividend' means any dividend or similar distribution to policyholders in their capacity as such. "(b) CERTAIN AMOUNTS INCLUDED.—For purposes of this part, the term 'policyholder dividend' includes— "(1) any amount paid or credited (including as an increase in benefits) where the amount is not fixed in the contract but depends on the experience of the company or the discretion of the management, "(2) excess interest, "(3) premium adjustments, and "(4) experience-rated refunds. "(c) AMOUNT OF DEDUCTION.— "(1) I N GENERAL.—Except as limited by paragraph (2), the deduction for policyholder dividends for any taxable year shall be an amount equal to the policyholder dividends paid or ac- crued during the taxable year. "(2) REDUCTION IN CASE OF MUTUAL COMPANIES.—In the case of a mutual life insurance company, the deduction for policyholder dividends for any taxable year shall be reduced by the amount Post, p. 733. determined under section 809. "(d) DEFINITIONS.—For purposes of this section— "(1) EXCESS INTEREST.—The term 'excess interest' means any amount in the nature of interest— "(A) paid or credited to a policyholder in his capacity as such, and "(B) determined at a rate in excess of the prevailing State assumed interest rate for such contract. "(2) PREMIUM ADJUSTMENT.—The term 'premium adjustment' means any reduction in the premium under an insurance or annuity contract which (but for the reduction) would have been required to be paid under the contract.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 733 "(3) EXPERIENCE-RATED REFUND.—The term 'experience-rated refund' means any refund or credit based on the experience of the contract or group involved. "(e) TREATMENT OF POLICYHOLDER DIVIDENDS.—For purposes of this part, any policyholder dividend which— "(1) increases the cash surrender value of the contract or other benefits payable under the contract, or "(2) reduces the premium otherwise required to be paid, shall be treated as paid to the policyholder and returned by the policyholder to the company as a premium. . "SEC. 809. REDUCTION IN CERTAIN DEDUCTIONS OF MUTUAL LIFE INSUR- 26 USC 809. ANCE COMPANIES. "(a) GENERAL RULE.— ^ "(1) PoucYHOLDER DIVIDENDS.—In the case of any mutual life c insurance company, the amount of the deduction allowed under section 808 shall be reduced (but not below zero) by the differen- Ante, p. 732. , tial earnings amount. r "(2) REDUCTION IN RESERVE DEDUCTION IN CERTAIN CASES.—In the case of any mutual life insurance company, if the differen- j tial earnings amount exceeds the amount allowable as a deduc- tion under section 808 for the taxable year (determined without regard to this section), such excess shall be taken into account under subsections (a) and (b) of section 807. Ante, p. 726. "(3) DIFFERENTIAL EARNINGS AMOUNT.—For purposes of this section, the term 'differential earnings amount' means, with I respect to any taxable year, an amount equal to the product of— "(A) the life insurance company's average equity base for the taxable year, multiplied by "(B) the differential earnings rate for such taxable year. . "(b) AVERAGE EQUITY BASE.—For purposes of this section— "(1) IN GENERAL.—The term 'average equity base' means, with « respect to any taxable year, the average of^ "(A) the equity base determined as of the close of the taxable year, and "(B) the equity base determined as of the close of the „. preceding taxable year. "(2) EQUITY BASE.—The term 'equity base' means an amount determined in the manner prescribed by regulations equal to— "(A) the surplus and capital, "(B) adjusted as provided in paragraphs (3), (4), (5), and (6) of this subsection. "(3) INCREASE FOR NONADMITTED FINANCIAL ASSETS.— fejiic "(A) IN GENERAL.—The amount of the surplus and capital shall be increased by the amount of the nonadmitted finan- ni tjf cial assets. "(B) NONADMITTED FINANCIAL ASSETS.—For purposes of subparagraph (A), the term 'nonadmitted financial asset' means any nonadmitted asset of the company which is— "(i) a bond, "(ii) stock, - ; "(iii) real estate, "(iv) a mortgage loan on real estate, or "(v) any other invested asset. "(4) INCREASE WHERE STATUTORY RESERVES EXCEED TAX RE- SERVES.—
98 STAT. 734 PUBLIC LAW 98-369—JULY 18, 1984 "(A) IN GENERAL.—If^ "(i) the aggregate amount of statutory reserves, exceeds iO ?-i "(ii) the aggregate amount of tax reserves, the amount of the surplus and capital shall be increased by ID the amount of such excess. "(B) DEFINITIONS.—For purposes of this paragraph— "(i) STATUTORY RESERVES.—The term 'statutory re- serves' means the aggregate amount set forth in the annual statement with respect to items described in Ante, p. 726. -BUfJKt ^: section 807(c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted Post, p. 740. under section 811(c). "(ii) TAX RESERVES.—The term 'tax reserves' means the aggregate of the items described in section 807(c) as determined for purposes of section 807. "(5) INCREASE BY AMOUNT OF CERTAIN OTHER RESERVES.—The amount of the surplus and capital shall be increased by the sum of— "(A) the amount of any mandatory securities valuation reserve, "(B) the amount of any deficiency reserve, and "(C) the amount of any voluntary reserve or similar liability not described in subparagraph (A) or (B). "(6) ADJUSTMENT FOR NEXT YEAR'S POLICYHOLDER DIVIDENDS.— The amount of the surplus and capital shall be increased by 50 percent of the amount of any provision for policyholder divi- dends (or other similar liability) payable in the following tax- able year. (c) DIFFERENTIAL EARNINGS RATE.— "(1) IN GENERAL.—For purposes of this section, the differen- tial earnings rate for any taxable year is the excess of— "(A) the imputed earnings rate for the taxable year, over "(B) the average mutual earnings rate for the second calendar year preceding the calendar year in which the srf',? taxable year begins. "(2) TRANSITIONAL RULE.—The differential earnings rate— "(A) for any taxable year beginning in 1984, or "(B) for purposes of computing the amount of underpay- ment under section 6655 (including the application of sec- tion 6655(d)(3)) for any taxable year beginning in 1985, shall be equal to 7.8 percent. (d) IMPUTED EARNINGS RATE.— "(1) IN GENERAL.—For purposes of this section, the imputed earnings rate for any taxable year is— "(A) 16.5 percent in the case of taxable years beginning in 1984, and "(B) in the case of taxable years beginning after 1984, an - amount which bears the same ratio to 16.5 percent as the current stock earnings rate for the taxable year bears to the base period stock earnings rate. "(2) CURRENT STOCK EARNINGS RATE.—For purposes of this subsection, the term 'current stock earnings rate' means, with respect to any taxable year, the average of the stock earnings •^B rates determined under paragraph (4) for the 3 calendar years preceding the calendar year in which the taxable year begins.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 735 "(3) BASE PERIOD STOCK EARNINGS RATE.—For purposes of this subsection, the base period stock earnings rate is the average of the stock earnings rates determined under paragraph (4) for - calendar years 1981,1982, and 1983. "(4) STOCK EARNINGS RATE.— - "(A) IN GENERAL.—For purposes of this subsection, the J stock earnings rate for any calendar year is the numerical I, average of the earnings rates of the 50 largest stock 1 companies. "(B) EARNINGS RATE.—For purposes of subparagraph (A), ^•. the earnings rate of any stock company is the percentage (determined by the Secretary) which— "(i) the statement gain or loss from operations for the ^ calendar year of such company, is of "(ii) such company's average equity base for such pr . year. "(C) 50 LARGEST STOCK COMPANIES.—For purposes of this •iiu ). paragraph, the term '50 largest stock companies' means a : group (as determined by the Secretary) of stock life insur- er ance companies which consists of the 50 largest stock life insurance companies which are subject to tax under this "O0e t part. The Secretary may by regulations provide for exclu- sion from the group determined under the preceding sen- ffrie^ tence of any stock life insurance company if (i) the equity of 4 such company is not great enough for such company to be 1 :, of the 50 largest stock life insurance companies if the determination were made on the basis of equity, and (ii) by gj. f reason of the small equity base of such company, it has an jj earnings rate which would seriously distort the stock earn- r; -^ _^, ,^jj.| ings rate. fsrijfc "(D) TREATMENT OF AFFILIATED GROUPS.—For purposes of this paragraph, all stock life insurance companies which aamol ^^^ members of the same affiliated group shall be treated as one stock life insurance company. "(e) AVERAGE MUTUAL EARNINGS RATE.—For purposes of this section, the average mutual earnings rate for any calendar year is the percentage (determined by the Secretary) which— "(1) the aggregate statement gain or loss from operations for such year of mutual life insurance companies, is of "(2) their aggregate average equity bases for such year. "(f) RECOMPUTATION IN SUBSEQUENT YEAR.— "(1) INCLUSION IN INCOME WHERE RECOMPUTED AMOUNT '•^ GREATER.—In the case of any mutual life insurance company, if— «. "(A) the recomputed differential earnings amount for any taxable year, exceeds "(B) the differential earnings amount determined under this section for such taxable year, such excess shall be included in life insurance gross income for the succeeding taxable year. "(2) DEDUCTION WHERE RECOMPUTED AMOUNT SMALLER.—In the case of any mutual life insurance company, if— "(A) the differential earnings amount determined under this section for any taxable year, exceeds "(B) the recomputed differential earnings amount for such taxable year.
98 STAT. 736 PUBLIC LAW 98-369—JULY 18, 1984 such excess shall be allowed as a life insurance deduction for the succeeding taxable year. "(3) RECOMPUTED DIFFERENTIAL EARNINGS AMOUNT.—For pur- poses of this subsection, the term 'recomputed differential earn- ings amount' means, with respect to any taxable year, the amount which would be the differential earnings amount for such taxable year if the average mutual earnings rate taken into account under subsection (c)(2) were the average mutual earnings rate for the calendar year in which the taxable year begins. "(4) SPECIAL RULE WHERE COMPANY CEASES TO BE MUTUAL U F E INSURANCE COMPANY.—Except as provided in section 381(cX22), if— "(A) a life insurance company is a mutual life insurance company for any taxable year, but "(B) such life insurance company is not a mutual life insurance company for the succeeding taxable year, any adjustment under paragraph (1) or (2) by reason of the recomputed differential earnings amount for the first of such taxable years shall be taken into account for the first of such taxable years. "(g) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec- tion— "(1) STATEMENT GAIN OR LOSS FROM OPERATIONS.—The term 'statement gain or loss from operations' means the net gain or loss from operations required to be set forth in the annual statement— "(A) determined with regard to policyholder dividends (£is Ante, p. 732. defined in section 808) but without regard to Federal income taxes, "(B) determined on the basis of the tax reserves rather than statutory reserves, and "(C) properly adjusted for realized capital gains and losses and other relevant items. "(2) OTHER TERMS.—Except as otherwise provided in this sec- tion, the terms used in this section shall have the same respec- tive meanings as when used in the annual statement. "(3) DETERMINATIONS BASED ON AMOUNT SET FORTH IN ANNUAL STATEMENT.—Except as otherwise provided in this section or in regulations, all determinations under this section shall be made on the basis of the amounts required to be set forth on the annual statement. "(4) ANNUAL STATEMENT.—The term 'annual statement' means the annual statement for life insurance companies ap- proved by the National Association of Insurance Commission- ers. "(5) REDUCTION IN EQUITY BASE FOR PORTION OF EQUITY ALLOCA- BLE TO LIFE INSURANCE BUSINESS IN NONCONTIGUOUS WESTERN HEMISPHERE COUNTRIES.—The equity base of any mutual life insurance company shall be reduced by an amount equal to the portion of the equity base attributable to the life insurance business multiplied by a fraction— <H "(A) the numerator of which is the portion of the tax reserves which is allocable to life insurance contracts issued foj Qj^ ^jjg jjfg Qf residents of countries in the Western Hemi- sphere which are not contiguous to the United States, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 737 jfil : "(B) the denominator of which is the amount of the tax reserves allocable to life insurance contracts. The preceding sentence shall not apply unless the fraction determined under the preceding sentence exceeds V20. "(6) SPECIAL RULE FOR CERTAIN CONTRACTS ISSUED BEFORE JAN- UARY 1, 1985.—In determining the amount of tax reserves of a subsidiary of a mutual insurance company for purposes of subsection (b)(4), section 811(d) shall not apply with respect to Post, p. 740. any life insurance contract issued before January 1, 1985, under a plan of life insurance in existence on July 1,1983. "(h) TREATMENT OF STOCK COMPANIES OWNED BY MUTUAL LIFE INSURANCE COMPANIES.— "(1) TREATMENT AS MUTUAL LIFE INSURANCE COMPANIES FOR PURPOSES OF DETERMINING STOCK EARNINGS RATES AND MUTUAL EARNINGS RATES.—Solely for purposes of subsections (d) and (e), a stock life insurance company shall be treated as a mutual life insurance company if stock possessing— "(A) at least 80 percent of the total combined voting power of all classes of stock of such stock life insurance •^ company entitled to vote, or :!*; "(B) at least 80 percent of the total value of shares of all classes of stock of such stock life insurance company, is owned at any time during the calendar year directly (or through the application of section 318) by one or more mutual life insurance companies. "(2) TREATMENT OF AFFILIATED GROUP WHICH INCLUDES MUTUAL PARENT AND STOCK SUBSIDIARY,—In the case of an affili- ated group of corporations which includes a common parent which is a mutual life insurance company and one or more stock life insurance companies, for purposes of determining the average equity base of such common parent (and the statement gain or loss from operations)— "(A) stock in such stock life insurance companies held by such common parent (and dividends on such stock) shall not be taken into account, and In •> "(B) such common parent and such stock life insurance companies shall be treated as though they were one mutual fc * life insurance company. "(3) ADJUSTMENT WHERE STOCK COMPANY NOT MEMBER OF AF- FILIATED GROUP.—In the case of any stock life insurance com- pany which is described in paragraph (1) but is not a member of an affiliated group described in paragraph (2), under regula- tions, proper adjustments shall be made in the average equity bases (and statement gains or losses from operations) of mutual (,, y ^: 1 ^v life insurance companies owning stock in such company as may be necessary or appropriate to carry out the purposes of this section. "(i) TRANSITIONAL RULE FOR CERTAIN HIGH SURPLUS MUTUAL LIFE INSURANCE COMPANIES.— "(1) IN GENERAL.—For purposes of subsection (a)(3), the aver- age equity base of a high surplus mutual life insurance com- pany for any taxable year shall not include the applicable percentage of the excess equity base of such company for such taxable year. "(2) DEFINITIONS.—For purposes of this subsection— "(A) EXCESS EQUITY BASE.—The term 'excess equity base' means the excess of—
98 STAT. 738 PUBLIC LAW 98-369—JULY 18, 1984 yjii mi ; "(i) the average equity base of the company for the taxable year, over fioftfifiil "(ii) the amount which would be its average equity base if its equity percentage equaled the following K ' T, Tfjfc percentage: "For taxable years beginning in: The percentage is: 1984 14.5 0fc, .. V.-; 1985 or 1986 14 • • '" 1987 or 1988 13.5 In no case shall the excess equity base for any taxable year be greater than the excess equity base for the company's first taxable year beginning in 1984. "(B) APPLICABLE PERCENTAGE.—The term 'applicable per- centage' means the percentage determined in accordance with the following table: "For taxable years The applicable beginning in: percentage is: 1984 100 1985 80 1986 60 1987 40 1988 20 1989 or thereafter 0. "(C) HIGH SURPLUS MUTUAL LIFE INSURANCE COMPANY.— The term 'high surplus mutual life insurance company' means any mutual life insurance company if, for the tax- able year beginning in 1984, its equity percentage exceeded 14.5 percent. "(D) EQUITY PERCENTAGE.—The term 'equity percentage' means, with respect to any mutual life insurance company, the percentage which— "(i) the average equity base of such company (deter- mined under this section without regard to this subsec- tion) for a taxable year bears to "(ii) the average of— "(I) the assets of such company as of the close of the preceding taxable year, and "(II) the assets of such company as of the close of the taxable year. For purposes of the preceding sentence, the assets of a company shall include all assets taken into account under this section in determining its equity base (after applying the principles of subsection (h)). 26 u s e 810. "SEC. 810. OPERATIONS LOSS DEDUCTION. "(a) DEDUCTION ALLOWED.—There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of— "(1) the operations loss carryovers to such year, plus "(2) the operations loss carrybacks to such year. For purposes of this part, the term 'operations loss deduction' means the deduction allowed by this subsection. "(b) OPERATIONS Loss CARRYBACKS AND CARRYOVERS.— "(1) YEARS TO WHICH LOSS MAY BE CARRIED.—The loss from operations for any taxable year (hereinafter in this section referred to as the 'loss year') shall be— "(A) an operations loss carryback to each of the 3 taxable years preceding the loss year, , „ _ . _ ^. _
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 739 -le :; "(B) an operations loss carryover to each of the 15 taxable years following the loss year, and "(C) if the life insurance company is a new company for the loss year, an operations loss carryover to each of the 3 t-. ^ ,, -•. r taxable years following the 15 taxable years described in subparagraph (B). "(2) AMOUNT OF CARRYBACKS AND CARRYOVERS.—The entire amount of the loss from operations for any loss year shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess (if any) of the amount of such loss over the sum of the offsets (as defined in subsection (d)) for each of the prior taxable years to which such loss may be carried. "(3) ELECTION FOR OPERATIONS LOSS CARRYBACKS.—In the case of a loss from operations for any taxable year, the taxpayer may elect to relinquish the entire carryback period for such loss. Such election shall be made by the due date (including exten- 'H 33U m sions of time) for filing the return for the taxable year of the loss from operations for which the election is to be in effect, and, once made for any taxable year, such election shall be irrevoca- ble for that taxable year. "(c) COMPUTATION OF Loss FROM OPERATIONS.—For purposes of this section— "(1) IN GENERAL.—The term 'loss from operations' means the excess of the life insurance deductions for any taxable year over the life insurance gross income for such taxable year. "(2) MODIFICATIONS.—For purposes of paragraph (1)— wv. "(A) the operations loss deduction shall not be allowed, and "(B) the deductions allowed by sections 243 (relating to dividends received by corporations), 244 (relating to divi- dends received on certain preferred stock of public utilities), and 245 (relating to dividends received from certain foreign * corporations) shall be computed without regard to section 246(b) as modified by section 805(a)(4). Ante, p. 722. "(d) OFFSET DEFINED.— "(1) IN GENERAL.—For purposes of subsection (b)(2), the term 1 'offset' means, with respect to any taxable year, an amount equal to that increase in the operations loss deduction for the I taxable year which reduces the life insurance company taxable income (computed without regard to paragraphs (2) and (3) of section 804) for such year to zero. . Ante, p. 722. "(2) OPERATIONS LOSS DEDUCTION.—For purposes of paragraph (1), the operations loss deduction for any taxable year shall be computed without regard to the loss from operations for the loss year or for any taxable year thereafter. "(e) N E W COMPANY DEFINED.—For purposes of this part, a life insurance company is a new company for any taxable year only if such taxable year begins not more than 5 years after the first day on which it (or any predecessor, if section 381(c)(22) applies) was author- ized to do business as an insurance company. "(f) APPLICATION OF SUBTITLES A AND F IN RESPECT OF OPERATION LOSSES.—Except as provided in section 805(b)(5), subtitles A and F 26 USC l, 6001. shall apply in respect of operation loss carrybacks, operation loss carryovers, and the operations loss deduction under this part, in the same manner and to the same extent as such subtitles apply in
98 STAT. 740 PUBLIC LAW 98-369—JULY 18, 1984 respect of net operating loss carrybacks, net operating loss car- ryovers, and the net operating loss deduction. "(g) TRANSITIONAL RULE.—For purposes of this section and section Post, p. 741. 812 (as in effect before the enactment of the Life Insurance Tax Act of 1984), this section shall be treated as a continuation of such section 812. "Subpart D—Accounting, Allocation, and Foreign Provisions "Sec. 811. Accounting provisions. "Sec. 812. Definition of company's share and policyholders' share. "Sec. 813. Foreign life insurance companies. "Sec. 814. Contiguous country branches of domestic hfe insurance compa- nies. "Sec. 815. Distributions to shareholders from pre-1984 policyholders sur- plus account. 26 u s e 811. "SEC. 811. ACCOUNTING PROVISIONS. "(a) METHOD OF ACCOUNTING.—All computations entering into the determination of the taxes imposed by this part shall be made— "(1) under an accrual method of accounting, or "(2) to the extent permitted under regulations prescribed by the Secretary, under a combination of an accrual method of accounting with any other method permitted by this chapter (other than the cash receipts and disbursements method). To the extent not inconsistent with the preceding sentence or any other provision of this part, all such computations shall be made in a manner consistent with the manner required for purposes of the annual statement approved by the National Association of Insur- ance Commissioners. "(b) AMORTIZATION OF PREMIUM AND ACCRUAL OF DISCOUNT.— "(1) IN GENERAL.—The appropriate items of income, deduc- tions, and adjustments under this part shall be adjusted to reflect the appropriate amortization of premium and the appro- priate accrual of discount attributable to the taxable year on £< , ,v bonds, notes, debentures, or other evidences of indebtedness held by a life insurance company. Such amortization and ac- crual shall be determined— "(A) in accordance with the method regularly employed by such company, if such method is reasonable, and "(B) in all other cases, in accordance with regulations prescribed by the Secretary. -irv G > t r » "(2) SPECIAL RULES.— "(A) AMORTIZATION OF BOND PREMIUM.—In the case of any bond (£is defined in section 171(d)), the amount of bond premium, and the amortizable bond premium for the tax- able year, shall be determined under section 171(b) as if the election set forth in section 171(c) had been made. "(B) CONVERTIBLE EVIDENCE OF INDEBTEDNESS.—In no case shall the amount of premium on a convertible evidence of indebtedness include any amount attributable to the con- version features of the evidence of indebtedness. "(3) EXCEPTION.—No accrual of discount shall be required i>¥'-). »^'i m under paragraph (1) on any bond (as defined in section 171(d)), except in the case of discount which is— "(A) interest to which section 103 applies, or "(B) original issue discount (as defined in section 1232(b)).
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 741 "(c) No DOUBLE COUNTING.—Nothing in this part shall permit— "(1) a reserve to be established for any item unless the gross amount of premiums and other consideration attributable to such item are required to be included in life insurance gross income, "(2) the same item to be counted more than once for reserve purposes, or "(3) any item to be deducted (either directly or as an increase in reserves) more than once. "(d) METHOD OF COMPUTING RESERVES ON CONTRACT WHERE INTER- EST Is GUARANTEED BEYOND END OF TAXABLE YEAR.—For purposes of this part (other than section 816), amounts in the nature of Post, p. 748. interest to be paid or credited under any contract for any period ^J^ which is computed at a rate which— "' "(1) exceeds the prevailing State assumed interest rate for the contract for such period, and "(2) is guaranteed beyond the end of the taxable year on which the reserves are being computed, shall be taken into account in computing the reserves with respect to such contract as if such interest were guaranteed only up to the end of the taxable year. "(e) SHORT TAXABLE YEARS.—If any return of a corporation made under this part is for a period of less than the entire calendar year (referred to in this subsection as 'short period'), then section 443 shall not apply in respect to such period, but life insurance company taxable income shall be determined, under regulations prescribed by the Secretary, on an annual basis by a ratable daily projection of the appropriate figures for the short period. "SEC. 812. DEFINITION OF COMPANY'S SHARE AND POLICYHOLDERS' 26 USC 812. SHARE. i "(a) G E N E R A L R U L E . — "(1) COMPANY'S SHARE.—For purposes of section 805(a)(4), the Ante, p. 722. term 'company's share' means, with respect to any taxable year, the percentage obtained by dividing— "(A) the company's share of the net investment income ^; for the taxable year, by "(B) the net investment income for the taxable year. t "(2) POLICYHOLDERS' SHARE.—For purposes of section 807, the Ante, p. 726. t term 'policyholders' share' means, with respect to any taxable year, the excess of 100 percent over the percentage determined 1 under paragraph (1). "(b) COMPANY'S SHARE OF NET INVESTMENT INCOME.— "(1) IN GENERAL.—For purposes of this section, the company's share of net investment income is the excess (if any) of— "(A) the net investment income for the taxable year, over "(B) the sum of^ "(i) the policy interest, for the taxable year, plus "(ii) the gross investment income's proportionate share of policyholder dividends for the taxable year. "(2) POLICY INTEREST.—For purposes of this subsection, the term 'policy interest' means— "(A) required interest (at the prevailing State assumed rate) on reserves under section 807(c) (other than paragraph (2) thereof), "(B) the deductible portion of excess interest, and
98 STAT. 742 PUBLIC LAW 98-369—JULY 18, 1984 —*f' "(C) the deductible portion of any amount (whether or not a poUcyholder dividend), and not taken into account under subparagraph (A) or (B), credited to— "(i) a poHcyholder's fund under a pension plan con- tract for employees (other than retired employees), or "(ii) a deferred annuity contract before the annuity starting date. "(3) GROSS INVESTMENT INCOME'S PROPORTIONATE SHARE OF POLICYHOLDER DIVIDENDS.—For purposes of paragraph (1), the gross investment income's proportionate share of policyholder dividends is— "(A) the deduction for policyholders' dividends deter- Ante, pp. 732, mined under sections 808 and 809 for the taxable year, but "^33. not including— "(i) the deductible portion of excess interest, "(ii) the deductible portion of policyholder dividends „. on contracts referred to in clauses (i) and (ii) of para- graph (2)(C), and "(iii) the deductible portion of the premium and mor- tality charge adjustments with respect to contracts paying excess interest for such year, multiplied by "(B) the fraction— "(i) the numerator of which is gross investment income for the taxable year (reduced by the policy interest for such year), and "(ii) the denominator of which is life insurance gross income (including tax-exempt interest) reduced by the excess (if any) of the closing balance for the items Ante, p. 726. described in section 807(c) over the opening balance for such items for the taxable year. "(c) NET INVESTMENT INCOME.—For purposes of this section, the term 'net investment income' means 90 percent of gross investment .S«ii .1., income. "(d) GROSS INVESTMENT INCOME.—For purposes of this section, the term 'gross investment income' means the sum of the following: "(1) INTEREST, ETC.—The gross amount of income from— "(A) interest (including tax-exempt interest), dividends, rents, and royalties, * <i ' "(B) the entering into of any lease, mortgage, or other instrument or agreement from which the life insurance company derives interest, rents, or royalties, and "(C) the alteration or termination of any instrument or agreement described in subparagraph (B). "(2) SHORT-TERM CAPITAL GAIN.—The amount (if any) by which the net short-term capital gain exceeds the net long-term cap- ital loss. "(3) TRADE OR BUSINESS INCOME.—The gross income from any trade or business (other than an insurance business) carried on by the life insurance company, or by a partnership of which the life insurance company is a partner. In computing gross income under this paragraph, there shall be excluded any item de- scribed in paragraph (1). Except as provided in paragraph (2), in computing gross investment income under this subsection, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset. ^^
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 743 "(e) DIVIDENDS FROM CERTAIN SUBSIDIARIES NOT INCLUDED IN GROSS INVESTMENT INCOME.—For purposes of this section, the term 'gross investment income' shall not include any dividend received by the life insurance company which is a 100-percent dividend (as defined in section 805(a)(4)(C)). Such term also shall not include any Ante, p. 722. . dividend described in section 805(a)(4)(D) (relating to certain divi- dends in the case of foreign corporations). "(f) No DOUBLE COUNTING.—Under regulations, proper adjust- ments shall be made in the application of this section to prevent an item from being counted more than once. "SEC 813. FOREIGN LIFE INSURANCE COMPANIES. 26 USC 813. "(a) ADJUSTMENT WHERE SURPLUS HELD IN THE UNITED STATES IS LESS THAN SPECIFIED MINIMUM.— "(1) IN GENERAL.—In the case of any foreign company taxable under this part, if— "(A) the required surplus determined under paragraph (2), exceeds "(B) the surplus held in the United States, then its income effectively connected with the conduct of an insurance business within the United States shall be increased by an amount determined by multiplying such excess by such company's current investment yield. "(2) REQUIRED SURPLUS.—For purposes of this subsection— "(A) IN GENERAL.—The term 'required surplus' means the gj;: a ,>v > h amount determined by multiplying the taxpayer's total insurance liabilities on United States business by a percent- age for the taxable year determined and proclaimed by the Secretary under subparagraph (B). "(B) DETERMINATION OF PERCENTAGE.—The percentage de- •mmk termined and proclaimed by the Secretary under this sub- paragraph shall be based on such data with respect to domestic life insurance companies for the preceding taxable .|i{?i 'fSfJ ^te year as the Secretary considers representative. Such per- I ,^ centage shall be computed on the basis of a ratio the ^" numerator of which is the excess of the assets over the total insurance liabilities, and the denominator of which is the j^ total insurance liabilities. * "(3) CURRENT INVESTMENT YIELD.—For purposes of this subsec- tion— "(A) I N GENERAL.—The term 'current investment yield' [- means the percent obtained by dividing— "(i) the net investment income on assets held in the ^ - United States, by "(ii) the mean of the assets held in the United States during the taxable year. "(B) DETERMINATIONS BASED ON AMOUNT SET FORTH IN THE p ANNUAL STATEMENT.—Except as otherwise provided in regu- lations, determinations under subparagraph (A) shall be , made on the basis of the amounts required to be set forth on the annual statement approved by the National Association of Insurance Commissioners. "(4) OTHER DEFINITIONS.—For purposes of this subsection— "(A) SURPLUS HELD IN THE UNITED STATES.—The surplus held in the United States is the excess of the assets (deter- mined under section 8060t)X3XC)) held in the United States Ante, p. 724.
98 STAT. 744 PUBLIC LAW 98-369—JULY 18, 1984 Ml 0 over the total insurance liabilities on United States busi- ness. "(B) TOTAL INSURANCE LIABILITIES.—For purposes of this subsection, the term 'total insurance liabilities' means the Post, p. 748. sum of the total reserves (as defined in section 816(c)) plus " (to the extent not included in total reserves) the items Ante, p. 726. referred to in paragraphs (3), (4), (5), and (6) of section 807(c). "(5) REDUCTION OF SECTION 881 TAXES.—In the case of any foreign company taxable under this part, there shall be deter- mined— ; ' ) J 5 * J ;•!<; "(A) the amount which would be subject to taxes under section 881 if the amount taxable under such section were 8l m determined without regard to sections 103 and 894, and "(B) the amount of the increase provided by paragraph The tax under section 881 (determined without regard to this paragraph) shall be reduced (but not below zero) by an amount which is the same proportion of such tax as the amount referred to in subparagraph (B) is of the amount referred to in subpara- graph (A); but such reduction in taxes shall not exceed the increase in taxes under this part by reason of the increase provided by paragraph (1). "(b) ADJUSTMENT TO LIMITATION ON DEDUCTION FOR POLICYHOLDER DIVIDENDS IN THE CASE OF FOREIGN MUTUAL LIFE INSURANCE COMPA- Ante, p. 733. NiES.—For purposes of section 809, the equity base of any foreign mutual life insurance company as of the close of any taxable year shall be increased by the amount of any excess determined under paragraph (1) of subsection (a) with respect to such taxable year. "(c) CROSS REFERENCE.— "For taxation of foreign corporations carrying on life insurance busi- ness within the United States, see section 842. 26 u s e 814. "SEC. 814. CONTIGUOUS COUNTRY BRANCHES OF DOMESTIC LIFE INSUR- ANCE COMPANIES. "(a) EXCLUSION OF ITEMS.—In the case of a domestic mutual insurance 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 item involved in the determina- tion of life insurance company taxable income the items separately accounted for in accordance with subsection (c). "(b) CONTIGUOUS COUNTRY LIFE INSURANCE BRANCH.—For pur- 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 contiguous to the United States, "(2) h£is its principal place of business in such contiguous country, and "(3) would constitute a mutual life insurance company if such branch were a separate domestic insurance company. For purposes of this section, the term 'insurance contract' means any life, health, accident, or annuity contract or reinsurance con- .i^ST q M tract or any contract relating thereto.
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 745 "(c) SEPARATE ACCOUNTING REQUIRED.—Any taxpayer which makes the election provided by subsection (g) shall establish and maintain a separate account for the various income, exclusion, deduction, asset, reserve, liability, and surplus items properly attrib- utable to the contracts 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, and the other items attributable to, the contracts de- scribed in subsection (b), and "(2) in all other cases, in accordance with regulations pre- scribed by the Secretary. ,^ . ,,,, ,g "(d) RECOGNITION OF GAIN ON ASSETS IN BRANCH ACCOUNT.—If the " ' ' aggregate fair market value of all the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account established pursuant to subsection (c) exceeds the aggregate adjusted basis of such £issets 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 taxable year for which the election is in effect at 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 BETWEEN CONTIGUOUS COUNTRY BRANCH AND DOMESTIC LIFE INSURANCE COMPANY.— "(1) REIMBURSEMENT FOR HOME OFFICE SERVICES, ETC.—Any payment, transfer, reimbursement, credit, or allowance which is made from a separate account established pursuant to subsec- tion (c) to one or more other accounts of a domestic life insur- ance company as reimbursement for costs incurred for or with respect to the insurance (or reinsurance) of risks accounted for in such separate account shall be taken into account by the domestic life insurance company in the same manner as if such payment, transfer, reimbursement, credit, or allowance had been received from a separate person. "(2) REPATRIATION OF INCOME.— "(A) IN GENERAL.—Except as provided in subparagraph (B), any amount directly or indirectly transferred or cred- ited from a branch account established pursuant to subsec- tion (c) to one or more other accounts of such company shall, unless such transfer or credit is a reimbursement to which paragraph (1) applies, be added to the income of the domestic life insurance company. "(B) LIMITATION.—The addition provided by subpara- graph (A) for the taxable year with respect to any contigu- ous country life insurance branch shall not exceed the amount by which— "(i) the aggregate decrease in the tentative LICTI of the domestic life insurance company for the taxable year and for all prior taxable years resulting solely from the application of subsection (a) of this section with respect to such branch, exceeds "(ii) the amount of additions to tentative LICTI pur- suant to subparagraph (A) with respect to such contigu- ous country branch for all prior taxable years.
98 STAT. 746 PUBLIC LAW 98-369—JULY 18, 1984 "(C) TRANSITIONAL RULE.—For purposes of this para- ; graph, in the case of a prior taxable year beginning before January 1, 1984, the term 'tentative LICTI' means Hfe insurance company taxable income determined under this part (as in effect for such year) without regard to this paragraph. "(f) OTHER RULES.— J.±-. ?. ^^. J "(1) TREATMENT OF FOREIGN TAXES.— "(A) IN GENERAL.—No income, war profits, or excess prof- its taxes paid or accrued to any foreign country or posses- .^, sion of the United States which is attributable to income ^ excluded under subsection (a) shall be taken into account 26 use 901. for purposes of subpart A of part III of subchapter N (relating to foreign tax credit) or allowable as a deduction, "(B) TREATMENT OF REPATRIATED AMOUNTS.—For purposes of sections 78 and 902, where any amount is added to the life insurance company taxable income of the domestic life insurance company by reason of subsection (e)(2), the con- tiguous country life insurance branch shall be treated as a foreign corporation. Any amount so added shall be treated as a dividend paid by a foreign corporation, and the taxes paid to any foreign country or possession of the United States with respect to such amount shall be deemed to have been paid by such branch. "(2) UNITED STATES SOURCE INCOME ALLOCABLE TO CONTIGUOUS ^'-^•'' COUNTRY BRANCH.—For purposes of sections 881, 882, and 1442, each contiguous country life insurance branch shall be treated as a foreign corporation. Such sections shall be applied to each such branch in the same manner as if such sections contained the provisions of any treaty to which the United States and the contiguous country are parties, to the same extent such provi- sions would apply if such branch were incorporated in such contiguous country. "(g) ELECTION.—A taxpayer may make the election provided by this subsection with respect to any contiguous country for any taxable year. An election made under this subsection for any tax- able year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary. The election provided by this subsection shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made, and such election and any approved revocation thereof shall be made in the manner provided by the Secretary. "(h) SPECIAL RULE FOR DOMESTIC STOCK LIFE INSURANCE COMPA- NIES.—At the election of a domestic stock life insurance company which has a contiguous country life insurance branch described in subsection (b) (without regard to the mutual requirement in subsec- tion (b)(3)), the assets of such branch may be transferred to a foreign corporation organized under the laws of the contiguous country without the application of section 367 or 1491. Subsection (a) shall apply to the stock of such foreign corporation as if such domestic company were a mutual company and as if the stock were an item described in subsection (c). Subsection (e)(2) shall apply to amounts transferred or credited to such domestic company as if such domes- tic company and such foreign corporation constituted one domestic mutual life insurance company. The insurance contracts which may be transferred pursuant to this subsection shall include only those
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 747 which are similar to the types of insurance contracts issued by a mutual life insurance company. Notwithstanding the first sentence of this subsection, if the aggregate fair market value of the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account exceeds the aggregate adjusted basis of such assets for purposes of determin- ing gain, the domestic life insurance company shall be deemed to have sold all such assets on the first day of the taxable year for which the election under this subsection applies and the net gain shall be recognized to the domestic life insurance company on the deemed sale, but not in excess of the proportion of such net gain which equals the proportion which the aggregate fair market value of such assets which are transferred pursuant to this subsection is of the aggregate fair market value of all such assets. : 3^»^^ "SEC. 815. DISTRIBUTIONS TO SHAREHOLDERS FROM PRE.1984 POLICY- 26 USC 815. HOLDERS SURPLUS ACCOUNT. "(a) GENERAL RULE.—In the case of a stock life insurance company which has an existing policyholders surplus account, the tax im- posed by section 801 for any taxable year shall be the amount which Ante, p. 720. would be imposed by such section for such year on the sum of— "(1) life insurance company taxable income for such year (but *" not less than zero), plus "(2) the amount of direct and indirect distributions during such year to shareholders from such account. "(b) ORDERING RULE.—For purposes of this section, any distribu- tion to shareholders shall be treated as made— "(1) first out of the shareholders surplus account, to the extent thereof, "(2) then out of the policyholders surplus account, to the extent thereof, and "(3) finally, out of other accounts. "(c) SHAREHOLDERS SURPLUS ACCOUNT.— 'H3 )8U di "(1) IN GENERAL.—Each stock life insurance company which has an existing policyholders surplus account shall continue its shareholders surplus account for purposes of this part. "(2) ADDITIONS TO ACCOUNT.—The amount added to the share- holders surplus account for any taxable year beginning after December 31,1983, shall be the excess of— "(A) the sum of— "(i) the life insurance company's taxable income (but *• not below zero), f "(ii) the special deductions provided by section 806, Ante, p. 724. and "(iii) the deductions for dividends received provided by sections 243, 244, and 245 (as modified by section •'* 805(a)(4)) and the amount of interest excluded from Ante, p. 722. gross income under section 103, over "(B) the t£ixes imposed for the taxable year by section 801 Ante, p. 720. (determined without regard to this section). "(3) SUBTRACTIONS FROM ACCOUNT.—There shall be subtracted from the shareholders surplus account for any taxable year the amount which is treated under this section as distributed out of such account. "(d) POUCYHOLDERS SURPLUS ACCOUNT.—
98 STAT. 748 PUBLIC LAW 98-369—JULY 18, 1984 "(1) IN GENERAL.—Each stock life insurance company which has an existing policyholders surplus account shall continue such account. "(2) No ADDITIONS TO ACCOUNT.—No amount shall be added to the policyholders surplus account for any taxable year begin- ning after December 31,1983. "(3) SUBTRACTIONS FROM ACCOUNT.—There shall be subtracted from the policyholders surplus account for any taxable year an amount equal to the sum oJF— "(A) the amount which (without regard to subparagraph (B)) is treated under this section as distributed out of the policyholders surplus account, and "(B) the amount by which the tax imposed for the taxable Ante, p. 720. year by section 801 is increeised by reason of this section. "(e) EXISTING POUCYHOLDERS SURPLUS ACCOUNT.—For purposes of ' ' this section, the term 'existing policyholders surplus account means any policyholders surplus account which has a balance as of the close of December 31,1983. "(f) OTHER RULES APPUCABLE TO POUCYHOLDERS SURPLUS AC- COUNT CONTINUED.—Except to the extent inconsistent with the pro- visions of this part, the provisions of subsections (d), (e), (f), and (g) of Ante, p. 747. section 815 (and of sections 6501(c)(6), 6501(k), 6511(d)(6), 6601(d)(3), and 6611(fK4)) as in effect before the enactment of the Tax Reform Act of 1984 are hereby made applicable in respect of any policyhold- ers surplus account for which there was a balance as of December 31,1983. ••'•ail ...„ "Subpart E—Dennitions and Special Rules "Sec. 816. Life insurance company defined. sni "Sec. 817. Treatment of variable contracts. "Sec. 818. Other definitions and special rules. 26 u s e 816. "SEC. 816. LIFE INSURANCE COMPANY DEFINED. "(a) LIFE INSURANCE COMPANY DEFINED.—For purposes of this subtitle, the term 'life insurance company' means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or combined with accident and health insurance), or noncancellable contracts of health and accident insurance, if^ "(1) its life insurance reserves (as defined in subsection (b)), plus "(2) unearned premiums, and unpaid losses (whether or not ^s; I v>ft/ ascertained), on noncancellable life, accident, or health policies not included in life insurance reserves, comprise more than 50 percent of its total reserves (as defined in subsection (c)). For purposes of the preceding sentence, the term V. „, 'insurance company means any company more than half of the business of which during the taxable year is the issuing of insurance MV J. or annuity contracts or the reinsuring of risks underwritten by insurance companies. "(b) LIFE INSURANCE RESERVES DEFINED.— "(1) IN GENERAL.—For purposes of this part, the term 'life insurance reserves' means amounts— "(A) which are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 749 "(B) which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health '^ contingencies. "(2) RESERVES MUST BE REQUIRED BY LAW.—Except— -ir K "(A) in the case of policies covering life, accident, and health insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, and "(B) as provided in paragraph (3), in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law. "(3) ASSESSMENT COMPANIES.—In the case of an assessment life insurance company or association, the term 'life insurance reserves' includes— "(A) sums actually deposited by such company or associa- tion with State officers pursuant to law as guaranty or reserve funds, and "(B) any funds maintained, under the charter or articles .; , ^^%-,^h^ of incorporation or eissociation (or bylaws approved by a State insurance commissioner) of such company or associa- tion, exclusively for the payment of claims arising under certificates of membership or policies issued on the assess- ment plan and not subject to any other use. "(4) AMOUNT OF RESERVES.—For purposes of this subsection, subsection (a), and subsection (c), the amount of any reserve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year. "(c) TOTAL RESERVES DEFINED.—For purposes of subsection (a), the term 'total reserves' means— "(1) life insurance reserves, "(2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and "(3) all other insurance reserves required by law. & "(d) ADJUSTMENTS IN RESERVES FOR POUCY LOANS.—For purposes only of determining under subsection (a) whether or not an insur- ance company is a life insurance company, the life insurance re- serves, and the total reserves, shall each be reduced by an amount equal to the mean of the eiggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to con- tracts for which life insurance reserves are maintained. "(e) GUARANTEED RENEWABLE CONTRACTS.—For purposes of this part, guaranteed renewable life, accident, and health insurance shall be treated in the same manner as noncancellable life, accident, and health insurance. "(f) AMOUNTS NOT INVOLVING LIFE, ACCIDENT, OR HEALTH CONTIN- GENCIES.—For purposes only of determining under subsection (a) whether or not an insurance company is a life insurance company, amounts set aside and held at interest to satisfy obligations under contracts which do not contain permanent guarantees with respect to life, accident, or health contingencies shall not be included in reserves described in paragraph (1) or (3) of subsection (c).
98 STAT. 750 PUBLIC LAW 98-369—JULY 18, 1984 "(g) BURIAL AND FUNERAL BENEFIT INSURANCE COMPANIES.—A burial or funeral benefit insurance company eng£iged directly in the manufacture of funeral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 821 or section 831. 26 u s e 817. "SEC. 817. TREATMENT OF VARIABLE CONTRACTS. "(a) INCREASES AND DECREASES IN RESERVES.—For purposes of Ante, p. 726. subsections (a) and (b) of section 807, the sum of the items described in section 807(c) taken into account as of the close of the taxable year with respect to any variable contract shall, under regulations prescribed by the Secretary, be adjusted— "(1) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves separately accounted for in accordance with subsec- tion (c) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and "(2) by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the tsixable year) from such reserves by reason of depreciation in value of assets (whether or not the assets have been disposed of). The deduction allowable for items described in paragraphs (1) and Ante, p. 722. (6) of section 805(a) with respect to variable contracts shall be reduced to the extent that the amount of such items is increased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by deprecia- tion) not reflected in adjustments under the preceding sentence. "(b) ADJUSTMENT TO BASIS OF ASSETS HELD IN SEGREGATED ASSET ACCOUNT.—In the case of variable contracts, the basis of each asset in a segregated asset account shall (in addition to all other adjust- ments to basis) be— "(1) increased by the amount of any appreciation in value, and "(2) decreased by the amount of any depreciation in value, to the extent such appreciation and depreciation are from time to time reflected in the increases and decreases in reserves or other items referred to in subsection (a) with respect to such contracts. "(c) SEPARATE ACCOUNTING.—For purposes of this part (other than Ante, p. 733. section 809), a life insurance company which issues variable con- tracts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attribut- able to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made— "(1) in accordance with the method regularly employed by such company, if such method is reasonable, and "(2) in all other cases, in accordance with regulations pre- scribed by the Secretary. "(d) VARIABLE CONTRACT DEFINED.—For purposes of this part, the term 'variable contract' means a contract— "(1) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company, "(2) which— "(A) provides for the payment of annuities, or 1. "(B) is a life insurance contract, and "(3) under which—
PUBLIC LAW 98-369—JULY 18, 1984 98 STAT. 751 "(A) in the case of an annuity contract, the amounts paid in, or the amount paid out, reflect the investment return and the market value of the segregated asset account, or "(B) in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account. If a contract ceases to reflect current investment return and current market value, such contract shall not be considered as meeting the requirements of paragraph (3) after such cessation. "(e) PENSION PLAN CONTRACTS TREATED AS PAYING ANNUITY.—A pension plan contract which is not a life, accident, or health, property, casualty, or liability insurance contract shall be treated as a contract which provides for the payments of annuities for purposes of subsection (d). r^ inn <)<: "(f) OTHER SPECIAL RULES.— "(1) LIFE INSURANCE RESERVES.—For purposes of subsection (b)(1)(A) of section 816, the reflection of the investment return Ante, p. 748. and the market value of the segregated asset account shall be considered an assumed rate of interest. "(2) ADDITIONAL SEPARATE COMPUTATIONS.—Under regulations prescribed by the Secretary, such additional separate computa- KS.- tions shall be made, with respect to the items separately ac- counted for in accordance with subsection (c), as may be neces- sary to carry out the purposes of this section and this part. "(g) VARIABLE ANNUITY CONTRACTS TREATED AS ANNUITY CON- TRACTS.—For purposes of this part, the term 'annuity contract' includes a contract which provides for the payment of a variable annuity computed on the basis of^ "(1) recognized mortality tables, and "(2)(A) the investment experience of a segregated asset account, or "(B) the company-wide investment experience of the company. Paragraph (2)(B) shall not apply to any company which issues contracts which are not variable contracts. "(h) TREATMENT OF CERTAIN NONDIVERSIFIED CONTRACTS.— "(1) IN GENERAL.—For purposes of subchapter L, section 72 (relating to annuities), and section 7702(a) (relating to definition Post, p. 767 of life insurance contract), a variable contract (other than a pension plan contract) which is otherwise described in this section and which is based on a segregated asset account shall not be treated as an annuity, endowment, or life insurance contract for any period (and any subsequent period) for which the investments made by such account are not, in accordance with regulations prescribed by the Secretary, adequately diver- sified. For purposes of this paragraph and paragraph (2), benefi- cial interests in a regulated investme