< Back to H.R. 3838 (99th Congress, 1985–1986)

Text of the Tax Reform Act of 1986

This bill was enacted after being signed by the President on October 22, 1986. The text of the bill below is as of Oct 22, 1986 (Passed Congress/Enrolled Bill).

PUBLIC LAW 99-514—OCT. 22, 1986                                          100 STAT. 2085

Public Law 99-514
99th Congress
                                      An Act
                To reform the internal revenue laws of the United States.                         —     "   ' „ ^ —

 Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,                  Tax Reform Act
                                                                                                  of 1986.
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.                                                        26 USC 1 et seq.
   (a) SHORT TITLE.—This Act may be cited as the "Tax Reform Act of
1986".
   (b) TABLE OF CONTENTS.—

       "    '    TITLE I-INDIVIDUAL INCOME TAX PROVISIONS
       Subtitle A—Rate Reductions; Increase in Standard Deduction and Personal
                                      Exemptions
Sec.   101. Rate reductions.
Sec.   102. Increase in standard deduction.
Sec.   103. Increase in personal exemptions.
Sec.   104. Technical amendments.
                    Subtitle B—Provisions Related to Tax Credits
Sec. 111. Increase in earned income credit.
Sec. 112. Repeal of credit for contributions to candidates for public office.
                    Subtitle C—Provisions Related to Exclusions                            ""
Sec. 121. Taxation of unemployment compensation.
Sec. 122. Prizes and awards.                                                   ,,    ,.     ,;
Sec. 123. Scholarships.                                                         '    "    "*^'
                      Subtitle D—Provisions Related to Deductions
Sec.   131. Repeal of deduction for 2-earner married couples.                   -     .- ,^,,,
Sec.   132. 2-percent floor on miscellaneous itemized deductions.      •            •-"•' " « -
Sec.   133. Medical expense deduction limitation increased.
Sec.   134. Repeal of deduction for State and local sales tax.
Sec.   135. Repeal of deduction for adoption expenses.
                          Subtitle E—Miscellaneous Provisions
Sec.   141. Repeal of income averaging.
Sec.   142. Limitations on deductions for meals, travel, and entertainment.
Sec.   143. Changes in treatment of hobby loss, etc.
Sec.   144. Deduction for mortgage interest and real property taxes allowable where
              parsonage allowance or military housing allowance received.
                               Subtitle F—Effective Dates
Sec. 151. Effective dates.
                TITLE II-PROVISIONS RELATING TO CAPITAL COST
                         Subtitle A—Depreciation Provisions
Sec. 201. Modification of accelerated cost recovery system.
Sec. 202. Expensing of depreciable assets.                                     .,
Sec. 203. Effective dates; general transitional rules.                     "    = - '"        -
                Subtitle B—Repeal of Regular Investment Tax Credit
Sec. 211. Repeal of regular investment tax credit.
Sec. 212. Effective 15-year carryback of existing carryforwards of steel companies.
Sec. 213. Effective 15-year carryback of existing carryforwards of qualified farmers.

100 STAT. 2086 PUBLIC LAW 99-514—OCT. 22, 1986 Subtitle C—General Business Credit Reduction r^ Sec. 221. Reduction in tax liability which may be offset by business credit from 85 percent to 75 percent. Subtitle D—Research and Development Provisions Sec. 231. Amendments relating to credit for increasing research activities. ; t .. !.«: Sec. 232. Extension of credit for clinical testing expenses for certain drugs. Subtitle E—Changes in Certain Amortization Provisions '•'^ * Sec. 241. Repeal of 5-year amortization of trademark and trade name expenditures. . Sec. 242. Repeal of amortization of railroad grading and tunnel bores. •^^"^ ' ' Sec. 243. Deduction for bus and freight forwarder operating authority. Sec. 244. Treatment of expenditures for removal of architectural barriers to the handicapped and elderly made permanent. Subtitle F—Provisions Relating to Real Estate Sec. 251. Modification of investment tax credit for rehabilitation expenditures. Sec. 252. Low-income housing credit. Subtitle G—Merchant Marine Capital Construction Funds Sec. 261. Provisions relating to merchant marine capital construction funds. TITLE III—CAPITAL GAINS ; Subtitle A—Individual Capital Gains ' Sec. 301. Repeal of exclusion for long-term capital gains of individuals. Sec. 302. 28-percent capital gains rate for taxpayers other than corporations. ^ ,. Subtitle B—Repeal of Corporate Capital Gains Treatment i- •<*- Sec. 311. Repeal of corporate capital gains treatment. Subtitle C—Incentive Stock Options Sec. 321. Repeal of requirement that incentive stock options are exercisable only in chronological order; modification of $100,000 limitation. Subtitle D—Straddles Sec. 331. Year-end rule expanded. TITLE IV—AGRICULTURE. ENERGY, AND NATURAL RESOURCES Subtitle A—Agriculture Sec. 401. Limitation on expensing of soil and water conservation expenditures. Sec. 402. Repeal of special treatment for expenditures for clearing land. Sec. 403. Treatment of dispositions of converted wetlands or highly erodible croplands. Sec. 404. Limitation on certain prepaid farming expenses. Sec. 405. Tax treatment of discharge of certain indebtedness of solvent farmers. Subtitle B—Treatment of Oil, Gas, Geothermal, and Hard Minerals Sec. 411. Treatment of intangible drilling costs and mineral exploration and devel- opment costs. Sec. 412. Modification of percentage depletion rules. Sec. 413. Gain from disposition of interests in oil, g£is, geothermal, or other mineral properties. Subtitle C—Other Provisions • '^'' ;» , ;: Sec. 421. Extension of energy investment credit for solar, geothermal, ocean ther- mal, and biomass property. Sec. 422. Provisions relating to excise tax on fuels. Sec. 423. Ethyl alcohol and mixtures thereof for fuel use. ^j ,.,4-, , ^ ; « TITLE V—TAX SHELTER LIMITATIONS; INTEREST LIMITATIONS ;'-; Subtitle A—Limitations on Tax Shelters Sec. 501. Limitations on losses and credits from passive activities. Sec. 502. Transitional rule for low-income housing. Sec. 503. Extension of at risk limitations to real property.
PUBLIC LAW 99-514-OCT. 22, 1986 100 STAT. 2087 Subtitle B—Interest Expense Sec. 511. Limitations on deduction for nonbusiness interest. TITLE VI—CORPORATE PROVISIONS Subtitle A—Corporate Rate Reductions Sec. 601. Corporate rate reductions. Subtitle B—Treatment of Stock and Stock Dividends Sec. 611. Reduction in dividends received deduction. Sec. 612. Repeal of partial exclusion of dividends received by individuals. Sec. 613. Nondeductibility of stock redemption expenses. Sec. 614. Reduction in stock basis for nontaxed portion of extraordinary dividends. Subtitle C—Limitation on Net Operating Loss Carryforwards and Excess Credit Carryforwards Sec. 621. Limitation on net operating loss carryforwards. Subtitle D—Recognition of Gain and Loss on Distributions of Property in Liquidation Sec. 631. Recognition of gain and loss on distributions of property in liquidation. Sec. 632. Treatment of C corporations electing subchapter S status. Sec. 633. Effective dates. Sec. 634. Study of corporate provisions. Subtitle E—Other Corporate P*rovisions ,., Sec. 641. Special allocation rules for certain asset acquisitions. Sec. 642. Modification of definition of related party. Sec. 643. Treatment of amortizable bond premium as interest. Sec. 644. Provisions relating to cooperative housing corporations. Sec. 645. Special rules relating to personal holding company tax. Sec. 646. Certain entitles not treated as corporations. Sec. 647. Special rule for disposition of stock of subsidiary. Subtitle F—Regulated Investment Companies Sec. 651. Excise tax on undistributed income of r^ulated investment companies. Sec. 652. Treatment of business development companies. Sec. 653. Amendments to qualification rules. Sec. 654. Treatment of series funds as separate corporations. .. Sec. 655. Extension of period for mailing notices to shareholders. ^* Sec. 656. Protection of mutual funds receiving third-party summonses. Sec. 657. Certain distributions not treated as preferential dividends. Subtitled—Real Estate Investment Trusts j^, Sec. 661. General qualification requirements. Sec. 662. Asset and income requirements. Sec. 663. Definition of rents. Sec. 664. Distribution requirements. Sec. 665. Treatment of capital gains. Sec. 666. Modifications of prohibited transaction rules. Sec. 667. Deficiency dividends of real estate investment trusts not subject to penalty under section 6697. Sec. 668. Excise tax on undistributed income of real estate investment trusts. Sec. 669. Effective dates. Subtitle H—Taxation of Interests in Entities Holding Real Estate Mortgages Sec. 671. Taxation of real estate mortgage investment conduits. Sec. 672. Rules for accruing original issue discount on r^;ular interests and similar debt instruments. Sec. 673. Treatment of taxable mortgage pools. Sec. 674. Compliance provisions. Sec. 675. Effective dates. TITLE Vn—ALTERNATIVE MINIMUM TAX Sec. 701. Alternative minimum tax for individuals and corporations. Sec. 702. Study of book and earnings and profits adjustments.
100 STAT. 2088 PUBLIC LAW 99-514—OCT. 22, 1986 TITLE VIII-ACCOUNTING PROVISIONS Subtitle A—General Provisions Sec. 801. Limitation on use of cash method of accounting. Sec. 802. Simplified dollar-value LIFO method for certain small businesses. Sec. 803. Capitalization and inclusion in inventory costs of certain expenses. ., Sec. 804. Modifications of method of accounting for long-term contracts. Sec. 805. Repeal of reserve for bad debts of taxpayers other than financial institu- tions. Sec. 806. Taxable years of certain entities. Subtitle B—Treatment of Installment Obligations Sec. 811. Allocation of indebtedness as payment on installment obligation. Sec. 812. Disallowance of use of installment method for certain obligations. Subtitle C—Other Provisions ti,ori.Tf^^'.' •, > « •*' Sec. 821. Income attributable to utility services. Sec. 822. Repeal of application of discharge of indebtedness rules to qualified busi- ness indebtedness. Sec. 823. Repeal of deduction for qualified discount coupons. Sec. 824. Inclusion in gross income of contributions in aid of construction. . -, ' TITLE IX—FINANCIAL INSTITUTIONS '^^ Sec. 901. Limitations on bad debt reserves. Sec. 902. Interest incurred to carry tax-exempt bonds. Sec. 903. Termination of special 10-year carryback rules for certain financial insti- tutions; new special carryover rules for certain losses. Sec. 904. Repeal of special reorganization rules for financial institutions. Sec. 905. Treatment of losses on deposits or accounts in insolvent financial institu- tions. TITLE X-INSURANCE PRODUCTS AND COMPANIES Subtitle A—Policyholder Issues Sec. 1001. Repeal of exclusion for interest on installment payments of life insurance proceeds. Sec. 1002. Exclusion from income with respect to structured settlements limited to cases involving ph3rsical injury. Sec. 1003. Denial of deduction for interest on loans from certain life insurance contracts. Sec. 1004. Deduction for nonbusiness casualty losses covered by insurance allowable only if claim filed. Subtitle B—Life Insurance Companies Sec. 1011. Repeal of special life insursuice company deduction. Sec. 1012. Repeal of tax-exempt status for certain organizations providing commer- cial-type insurance. Sec. 1013. Operations loss deduction of insolvent companies may offset distributions from policyholders surplus account. Subtitle C—Property and Casualty Insurance Companies Sec. 1021. Inclusion in income of 20 percent of unearned premium reserve. Sec. 1022. Treatment of certain dividends and tax-exempt interest. Sec. 1023. Discounting of unpaid losses and certain unpaid expenses. Sec. 1024. Repeal of protection against loss account; revision of special treatment for small companies; combination of parts II and III. Sec. 1025. Study of treatment of property and casualty insurance companies. Subtitle D—Miscellaneous Provisions Sec. 1031. Physicians' and surgeons' mutual protection and interindemnity arrange- ments or associations.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2089 TITLE XI-PENSIONS AND DEFERRED COMPENSATION; EMPIOYEE BENEFITS; EMPLOYEE STOCK OWNERSHIP PLANS Subtitle A—Pensions and Deferred Compensation ijialft akiiit: PART I—LIMITATIONS ON TAX-DEFERRED SAVINGS SUBPART A—RULES APPLICABLE TO IRAS Sec. 1101. Limitations on IRA deductions for active participants in certain pension plans. Sec. 1102. Nondeductible contributions may be made to individual retirement plans. Sec. 1103. Spousal deduction allowed where spouse has small amount of earned income. SUBPART B—OTHER PROVISIONS Sec. 1105. $7,000 limitation on elective deferrals. Sec. 1106. Adjustments to limitations on contributions and benefits under qualified plans. Sec. 1107. Modifications of section 457. Sec. 1108. Special rules for simplified employee pensions. Sec. 1109. Deductible contributions permitted under section 501(cX18) plan. PART II—NONDISCRIMINATION REQUIREMENTS SUBPART A—GENERAL REQUIREMENTS Sec. 1111. Application of nondiscrimination rules to integrated plans. Sec. 1112. Minimum coverage requirements for qualified plans. Sec. 1113. Minimum vesting standards. Sec. 1114. Definition of highly compensated employee. Sec. 1115. Separate lines of business; compensation. SUBPART B — O T H E R PROVISIONS Sec. 1116. Cash or deferred arrangements. Sec. 1117. Nondiscrimination requirements for employer matching contributions and employee contributions. Sec. 1118. Benefits treated as accruing ratably for purposes of determining whether plan is top-heavy. Sec. 1119. Modification of rules for benefit forfeitures. Sec. 1120. Nondiscrimination requirements for tax-sheltered annuities. PART III—TREATMENT OF DISTRIBUTIONS ' Sec. 1121. Minimum distribution requirements. Sec. 1122. Taxation of distributions. Sec. 1123. Uniform additional tax on early distributions from qualified retirement plans. Sec. 1124. Election to treat certain lump sum distributions received during 1987 as received during 1986. PART IV—MISCELLANEOUS PROVISIONS Sec. 1131. Adjustments to section 404 limitations. Sec. 1132. Excise tax on reversion of qualified plan assets to employer. Sec. 1133. Tax on excess distributions. Sec. 1134. Treatment of loans. Sec. 1135. Deferred annuities available only to natural persons. Sec. 1136. Profits not required for profit-sharing plans. Sec. 1137. Requirement that collective bargaining agreements be bona fide. Sec. 1138. Penalty on underpayments attributable to overstatement of pension liabilities. Sec. 1139. Interest rate assumptions. Sec. 1140. Plan amendments not required under January 1, 1989. Sec. 1141. Issuance of final regulations. Sec. 1142. Secretary to accept applications with respect to section 401(k) plans. Sec. 1143. Treatment of certain fishermen as self-employed individuals. Sec. 1144. Acquisition of gold and silver coins by individual retirement accounts. Sec. 1145. Requirement of joint and survivor annuities and preretirement survivor annuities not to apply to certain plan. Sec. 1146. Treatment of leased employees. Sec. 1147. Tax treatment of Federal Thrift Savings Fund.
100 STAT. 2090 PUBLIC LAW 99-514—OCT. 22, 1986 Subtitle B—Employee Benefit Provisions PART I—NONDISCRIMINATION RULES FXJR CERTAIN STATUTORY EMPLOYEE BENEFIT PLANS Sec. 1151. Nondiscrimination rules for coverage and benefits under certain statu- tory employee benefit plans. PART II—OTHER PROVISIONS , Sec. 1161. Deductibility of health insurance costs of self-employed individuals. Sec. 1162. 2-year extension of exclusions for educational assistance programs and group legal plans. Sec. 1163. $5,000 limit on dependent care assistance exclusion. Sec. 1164. Tax treatment of faculty housing. Sec. 1165. Limitation on accrual of vacation pay. Sec. 1166. Treatment of certain full-time life insurance salesmen. "< -iif' ; JO Sec. 1167. Extension of due date for study of welfare benefit plans. .» /^ri' Sec. 1168. Exclusion from gross income of certain military benefits. Subtitle C—Changes Relating to Employee Stock Ownership Plans , -> Sec. 1171. Repeal of employee stock ownership credit. ft; Sec. 1172. Estate tax deduction for proceeds from sales of employer securities. Sec. 1173. Provisions relating to loans used to acquire employer securities. Sec. 1174. Requirements for employee stock ownership plans. Sec. 1175. Additional qualification requirements. Sec. 1176. Special ESOP requirements. ' Sec. 1177. Transition rules. TITLE XII—FOREIGN TAX PROVISIONS /> Subtitle A—Foreign Tax Credit Modifications Sec. 1201. Separate application of section 904 with respect to certain categories of income. Sec. 1202. Deemed paid credit under sections 902 and 960 determined on accumu- lated basis. Sec. 1203. Clarification of treatment of separate limitation losses. >;> >- Sec. 1204. Foreign taxes used to provide subsidies. Sec. 1205. Limitation on carryback of foreign tax credits to taxable years beginning before 1987. Subtitle B—Source Rules Sec. 1211. Determination of source in case of sales of personal property. ; Sec. 1212. Special rules for transportation income. Sec. 1213. Source rule for space and certain ocean activities. Sec. 1214. Limitations on special treatment of 80-20-corporations. Sec. 1215. Rules for allocating interest, etc., to foreign source income. Sec. 1216. 1-year modification in regulations providing for allocation of research and experimental expenditures. Subtitle C—Taxation of Income Earned Through Foreign Corporations Sec. 1221. Income subject to current taxation. Sec. 1222. Testing controlled foreign corporations and foreign personal holding com- pemies by value and voting power. Sec. 1223. Subpart F de minimis rule. Sec. 1224. Repeal of special treatment of possessions corporations. Sec. 1225. Only effectively connected capital gains and losses of foreign corporations taken into account for purposes of accumulated earnings tax and per- sonal holding company provisions. Sec. 1226. Deductions for dividends received from certain foreign corporations. Sec. 1227. Special rule for application of section 954 to certain dividends. Subtitle D—Special Tax Provisions for United States Persons Sec. 1231. Modifications to section 936. Sec. 1232. Treatment of certain persons in Panama. Sec. 1233. Provisions relating to section 911 exclusion. Sec. 1234. Foreign compliance provisions. ' - Sec. 1235. Treatment of certain passive foreign investment companies. Sec. 1236. Treatment of interest on obligations of the United States received by banks organized in Guam.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2091 Subtitle E—Treatment of Foreign Taxpayers Sec. 1241. Branch profits tax. Sec. 1242. Treatment of deferred payments and appreciation arising out of business conducted within the United States. Sec. 1243. Treatment under section 877 of property received in tax-free exchanges, etc. Sec. 1244. Study of United States reinsurance industry. Sec. 1245. Information with respect to certain foreign-owned corporations. Sec. 1246. Withholding tax on amounts paid by partnerships to foreign partners. Sec. 1247. Income of foreign governments. Sec. 1248. Limitation on cost of property imported from related persons. Sec. 1249. Treatment of dual residence corporations. Subtitle F—Foreign Currency Transactions Sec. 1261. Treatment of foreign currency transactions. Subtitle G—Tax Treatment of Possessions PART I—TREATMENT OF GUAM, AMERICAN SAMOA, AND THE NORTHERN MARIANA ISLANDS Sec. 1271. Authority of Guam, American Samoa, and the Northern Mariana Islands to enact revenue laws. Sec. 1272. Exclusion of possession source income from the gross income of certain individuals. Sec. 1273. Treatment of corporations organized in Guam, American Samoa, or the Northern Mariana Islands. PART II—TREATMENT OF THE VIRGIN ISLANDS Sec. 1274. Coordination of United States and Virgin Islands income taxes. Sec. 1275. Virgin Islands corporations allowed possession tax credit. PART III—COVER OVER OF INCOME TAXES Sec. 1276. Cover over of income taxes. PART IV—EFFECTIVE DATE Sec. 1277. Effective date. TITLE XIII—TAX-EXEMPT BONDS Subtitle A—Amendments of Internal Revenue Code of 1954 Sec. 1301. State and local bonds. Sec. 1302. Repeal of provisions relating to general stock ownership corporations. Subtitle B—Effective Dates and Transitional Rules Sec. 1311.General effective dates. :> Sec. 1312. Transitional rules for construction or binding agreements, etc. Sec. 1313. Transitional rules relating to refundings. Sec. 1314. Special rules for certain bonds issued before August 16, 1986. Sec. 1315. Transitional rules relating to volume cap. Sec. 1316. Provisions relating to bonds provided special rules under prior revenue acts. Sec. 1317. Other transitional rules. Sec. 1318. Transitional rules for specific facilities. Sec. 1319. Definitions, etc., relating to effective dates and transitional rules. TITLE XIV—TRUSTS AND ESTATES; UNEARNED INCOME OF CERTAIN MINOR CHILDREN; GIFT AND ESTATE TAXES; GENERATION-SKIPPING TRANSFER TAX Subtitle A—Income Taxation of Trusts and Estates Sec. 1401. Grantor treated as holding any power or interest of grantor's spouse. Sec. 1402. Limitations to reversionary interest rule exceptions. Sec. 1403. Taxable year of trusts to be calendar year. Sec. 1404. Trusts and certain estates to make estimated payments of income taxes. Subtitle B—Unearned Income of Certain Minor Children Sec. 1411. Unearned income of certain minor children.
100 STAT. 2092 PUBLIC LAW 99-514—OCT. 22, 1986 Subtitle C—Gift and Estate Taxes Sec. 1421. Information necessary for valid special use valuation election. Sec. 1422. Gift and estate tax deductions for certain conservation easement dona- tions. Sec. 1423. Conveyance of certain real and personal property of decedent to charita- ble foundation treated as charitable contribution. Subtitle D—Generation Skipping Transfers "' Sec. 1431. New tax on generation-skipping transfers. Sec. 1432. Related amendments. Sec. 1433. Effective dates. TITLE XV-COMPLIANCE AND TAX ADMINISTRATION Subtitle A—Revision of Certain Penalties, Etc. Sec. 1501. Penalty for failure to file information returns or statements. -' -* * Sec. 1502. Increase in penalty for failure to pay tax. Sec. 1503. Amendments to penalty for negligence and fraud. Sec. 1504. Increase in penalty for substantial understatement of liability. v^-, ^-^ Subtitle B—Interest Provisions Sec. 1511. Differential interest rate. Sec. 1512. Interest on accumulated earnings tax to accrue beginning on date return • -' is due. • Subtitle C—Information Reporting Provisions Sec. 1521. Requirement of reporting for real estate transactions. Sec. 1522. Information reporting on persons receiving contracts from certain Federal agencies. Sec. 1523. Returns regarding payments of royalties. Sec. 1524. TINS required for dependents claimed on tax returns. ,, .. Sec. 1525. Tax-exempt interest required to be shown on return. Subtitle D—Provisions Relating to Tax Shelters Sec. 1531. Modification of tax shelter ratio test for registration of tax shelters. Sec. 1532. Increased penalty for failure to register tax shelters. Sec. 1533. Penalty for failure to include tax shelter identification number on return increased to $250. Sec. 1534. Increased penalty for failure to maintain lists of investors in potentially abusive tax shelters. Sec. 1535. Clarification of treatment of sham or fraudulent transactions under sec- tion 6621(c). Subtitle E—Elstimated Tax Provisions ^^ Sec. 1541. Current year liability test increased from 80 to 90 percent for estimated tax payments by individuals. Sec. 1542. Certain tax-exempt organizations subject to corporate estimated tax rules. Sec. 1543. Waiver of estimated penalties for 1986 underpayments attributable to this Act. Subtitle F—Provisions Regarding Judicial Proceedings Sec. 1551. Limitations on awarding of court costs and certain fees modified. Sec. 1552. Failure to pursue administrative remedies. Sec. 1553. Tax Court practice fee. Sec. 1554. Clarification of jurisdiction over addition to tax for failure to pay amount of tax shown on return. Sec. 1555. Authority to require attendance of United States marshals at Tax Court sessions. Sec. 1556. Changes in certain provisions relating to special trial judges. Sec 1557. Effect on retired pay by election to practice law, etc., after retirement. Sec. 1558. Authorization for appeals from interlocutory orders of the Tax Court. Sec. 1559. Changes relating to annuities for surviving spouses and dependent chil- dren of Tax Court judges. Subtitle G—Tax Administration Provisions Sec. 1561. Suspension of statute of limitations if third-party records not produced within 6 months after service of summons. Sec. 1562. Authority to rescind notice of deficiency with taxpayer's consent. , :*3
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2093 Sec. 1563. Authority to abate interest due to errors or delays by the Internal Reve- nue Service. Sec. 1564. Suspension of compounding where interest on deficiency suspended. Sec 1565. Certain service-connected disability payments exempt from levy. Sec. 1566. Increase in value of personal property subject to certain listing and notice procedures. Sec 1567. Certain recordkeeping requirements. Sec 1568 Disclosure of returns and return information to certain cities. Sec 1.569. Treatment of certain forfeitures. Subtitle H—Miscellaneous Provisions Sec. 1571. Withholding allowances to reflect new rate schedules. Sec. 1572. Report on return-free system. TITLE XVI—EXEMPT AND NONPROFIT ORGANIZATIONS Sec 1601 Certain distributions of low cost articles and exchanges and rentals of member lists by certain organizations not to be treated as unrelated trade or business. Sec 1602. Educational activities at convention and trade shows. Sec 1603. Tax exemption for certain title-holding companies. Sec. 1604. Exception to membership organization deduction rules. Sec 1605 Tax-exempt status for an organization introducing into public use tech- nology developed by qualified organizations. Sec 1606 Definition of government official. Sec. 1607. Transition rule for acquisition indebtedness with respect to certain land. Sec 1608. Treatment of certain amounts paid to or for the benefit of certain institu- tions of higher education. TITLE XVII—MISCELLANEOUS PROVISIONS Sec. 1701 Extension and modification of targeted jobs credit. Sec. 1702 Certain diesel fuel taxes may be imposed on sales to retailers. Sec. 1703 Gasoline tax generally collected at terminal level. Sec 1704. Exemption from social security coverage for certain clergy. Sec 1705. Applicability of unemployment compensation tax to certain services per- formed for certain Indian tribal governments. Sec 1706. Treatment of certain technical personnel. Sec 1707. Exclusion for certain foster care payments. Sec. 1708. Extension of rules for spouses of individuals missing in action. Sec. 1709 Amendment to the Reindeer Industry Act of 1937. Sec. 1710 Quality control studies. Sec. 1711. Adoption assistance agreements under adoption assistance program: payment of nonrecurring expenses related to adoptions of children with special needs. TITLE XVIII—TECHNICAL CORRECTIONS Sec 1800. Coordination with other titles. ,j Subtitle A—Amendments Related to the Tax Reform Act of 1984 CHAPTER 1—AMENDMENTS RELATED TO TITLE I OF THE ACT Sec. 1801 Amendments related to deferral of certain tax reductions. Sec. 1802. Amendments related to tax-exempt entity leasing provisions. Sec 1803. Amendments related to treatment of bonds and other debt instruments. Sec. 1804. Amendments related to corporate provisions. Sec 1805. Amendments related to partnership provisions. Sec. 1806. Amendments related to trust provisions. Sec. 1807. Amendments related to accounting changes. Sec. 1808. Amendments related to tax straddle provisions. , -^ Sec. 1809. Amendments related to depreciation provisions. Sec. 1810. Amendments related to foreign provisions. Sec. 1811. Amendments related to reporting, penalty, and other provisions. Sec. 1812. Amendments related to miscellaneous provisions. CHAPTER 2—AMENDMENTS RELATED TO TITLE II OF THE ACT Sec. 1821. Amendments related to section 211 of the Act. Sec. 1822. Amendments related to section 216 of the Act. Sec. 1823. Amendment related to section 217 of the Act. Sec. 1824. Amendment related to section 218 of the Act. Sec. 1825. Amendments related to section 221 of the Act. Sec. 1826. Amendments related to section 222 of the Act.
100 STAT. 2094 PUBLIC LAW 99-514—OCT. 22, 1986 Sec. 1827. Amendments related to section 223 of the Act. v« >. iri , . , . . •:,'•>* Sec. 1828. Amendment related to section 224 of the Act. Sec. 1829. Waiver of interest on certain underpayments of tax. Sec. 1830. Scope of section 255 of the Tax Equity and Fiscal Responsibility Act of 1982. CHAPTER 3—AMENDMENTS RELATED TO TITLE III OF THE ACT Sec. 1831. Amendment related to section 301 of the Act. Sec. 1832. Amendment related to section 303 of the Act. Sec. 1833. Amendment related to section 305 of the Act. Sec. 1834. Amendment related to section 311 of the Act. CHAPTER 4—AMENDMENTS RELATED TO TITLE IV OP THE ACT ' Sec. 1841. Amendment related to section 311 of the Act. Sec. 1842. Amendments related to section 421 of the Act. Sec. 1843. Amendments related to section 422 of the Act. Sec. 1844. Amendments related to section 431 of the Act. Sec. 1845. Amendment related to section 452 of the Act. Sec. 1846. Amendments related to section 473 of the Act. ',' Sec. 1847. Amendments related to section 474 of the Act. Sec. 1848. Amendments related to section 491 of the Act. CHAPTER 5—AMENDMENTS RELATED TO SECTION 216 OF THE ACT Sec. 1851. Amendments related to welfare benefit plan provisions. ,,, Sec. 1852. Amendments related to pension plan provisions. ' i „ •. Sec. 1853. Amendments related to fringe benefit provisions. Sec. 1854. Amendments related to employee stock ownership plans. Sec. 1855. Amendments related to miscellaneous employee benefit provisions. CHAPTER 6—AMENDMENTS RELATED TO TITLE VI OF THE ACT Sec. 1861. Amendments related to section 611 of the Act. Sec. 1862. Amendment related to section 612 of the Act. Sec. 1863. Amendment related to section 613 of the Act. Sec. 1864. Amendments related to section 621 of the Act. Sec. 1865. Amendment related to section 622 of the Act. , ,-> Sec. 1866. Transitional rule for limit on small issue exception. Sec. 1867. Amendments related to section 624 of the Act. Sec. 1868. Amendment related to section 625 of the Act. Sec. 1869. Amendments related to section 626 of the Act. Sec. 1870. Amendment related to section 627 of the Act. Sec. 1871. Amendments related to section 628 of the Act. Sec. 1872. Amendments related to section 631 of the Act. Sec. 1873. Amendments related to section 632 of the Act. CHAPTER 7—MISCELLANEOUS PROVISIONS Sec. 1875. Amendments related to title VII of the Act. Sec. 1876. Amendments related to title VIII of the Act. Sec. 1877. Amendments related to title IX of the Act. Sec. 1878. Amendments related to title X of the Act. -' " Sec. 1879. Miscellaneous provisions. CHAPTER 8—EFFECTIVE DATE '" - Sec. 1881. Effective date. Subtitle B—Related to Other Programs Affected by the Deficit Reduction Act of 1984 CHAPTER 1—AMENDMENTS RELATED TO SOCIAL SECURITY ACT PROGRAMS Sec. 1882. Amendments related to coverage of church employees (section 2603 of the Deficit Reduction Act). Sec. 1883. Technical corrections in other provisions related to Social Security Act pn^rams. CHAPTER 2—AMENDMENTS RELATED TO UNEMPLOYMENT COMPENSATION PROGRAM Sec. 1884. Technical corrections in Federal Unemployment Tax Act. CHAPTER 3—AMENDMENTS RELATED TO TRADE AND TARIFF PROGRAMS Sec. 1885. Amendments to the tariff schedules. Sec. 1886. Technical corrections to countervailing and antidumping duty provisions.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2095 Sec. 1887. Amendments to the Trade Act of 1974. Sec. 1888. Amendments to the Tariff Act of 1930. Sec. 1890. Amendments to the Caribbean Basin Economic Recovery Act. Sec. 1891. Conforming amendments regarding customs brokers. Sec. 1892. Special effective date provisions for certain articles given duty-free treat- ment under the Trade and Tariff Act of 1984. Sec. 1893. Technical amendments relating to customs user fees. Subtitle C—Miscellaneous CHAPTER 1—AMENDMENTS RELATED TO THE CONSOLIDATED OMNIBUS BUDGET RECONCIUATION ACT OF 1985 Sec. 1895. COBRA technical corrections relating to Social Security Act programs. Sec. 1896. Extension of time for filing for credit or refund with respect to certain changes involving insolvent farmers. Sec. 1897. Correction of clerical error in amendments to coal tax. CHAPTER 2—AMENDMENTS RELATED TO THE RETIREMENT EQUITY ACT OF 1984 Sec. 1898. Technical corrections to the Retirement Equity Act of 1984. CHAPTER 3—AMENDMENT RELATED TO THE CHILD SUPPORT ENFORCEMENT AMENDMENTS OF 1984 Sec. 1899. Amendment related to the Child Support Enforcement Amendments of 1984. .v. CHAPTER 4—MISCELLANEOUS AMENDMENTS CORRECTING ERRORS OF SPELLING, PUNCTUATION, ETC. Sec. 1899A. Miscellaneous amendments correcting errors of spelling, punctuation, etc. SEC. 2. INTERNAL REVENUE CODE OF 1986. (a) REDESIGNATION OF 1954 CODE.—The Internal Revenue Title enacted August 16, 1954, as heretofore, hereby, or hereafter amended, may be cited as the "Internal Revenue Code of 1986". (b) REFERENCES IN LAWS, ETC.—Except when inappropriate, any reference in any law. Executive order, or other document— (1) to the Internal Revenue Code of 1954 shall include a reference to the Internal Revenue Code of 1986, and (2) to the Internal Revenue Code of 1986 shall include a reference to the provisions of law formerly known as the In- ternal Revenue Code of 1954. S E C 3. AMENDMENT OF 1986 CODE; COORDINATION WITH SECTION 15. (a) AMENDMENT OF 1986 CODE.—Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986. (b) COORDINATION WITH SECTION 15.— (1) IN GENERAL.—Except as provided in paragraph (2), for purposes of section 15 of the Internal Revenue Code of 1986, no amendment or repeal made by this Act shall be treated as a ' change in the rate of a tax imposed by chapter 1 of such Code. (2) EXCEPTION.—Paragraph (1) shall not apply to the amend- -j o ment made by section 601 (relating to corporate rate reduc- tions).
100 STAT. 2096 PUBLIC LAW 99-514—OCT. 22, 1986 TITLE I—INDIVIDUAL INCOME TAX PROVISIONS Subtitle A—Rate Reductions; Increase in Standard Deduction and Personal Exemptions SEC. 101. RATE REDUCTIONS. (a) GENERAL RULE.—Section 1 (relating to tax imposed on individ- uals) is amended to read as follows: "SECTION 1. TAX IMPOSED. "(a) MARRIED INDIVIDUALS F I U N G JOINT RETURNS AND SURVIVING SPOUSES.—There is hereby imposed on the taxable income of— "(1) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013, and "(2) every surviving spouse (as defined in section 2(a)), a tax determined in accordance with the following table: "If taxable income is The tax is: Not over $29,750 15% of taxable income. Over $29,750 $4,462.50, plus 28% of the excess over $29,750. "(h) HEADS OF HOUSEHOLDS.—There is hereby imposed on the taxable income of every head of a household (as defined in section 2(b)) a tax determined in accordance with the following table: "If taxable income is The tax is: Not over $23,900 15% of taxable income. Over $23,900 $3,585, plus 28% of the excess over $23,900. "(c) UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING SPOUSES AND HEADS OF HOUSEHOLDS).—There is hereby imposed on the tax- able income of every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(h)) who is not a married individual (as defined in section 7703) a tax determined in accordance with the following table: "If taxable income is The tax is: . Not over $17,850 15% of taxable income. Over $17,850 $2,677.50, plus 28% of the excess over $17,850. "(d) MARRIED INDIVIDUALS FILING SEPARATE RETURNS.—There is hereby imposed on the taxable income of every married individual (as defined in section 7703) who does not make a single return jointly with his spouse under section 6013, a tax determined in accordance with the following table: "If taxable income is The tax is: '' ,, Not over $14,875 15% of taxable income. ' Over $14,875 $2,231.25, plus 28% of the excess over •^ $14,875. "(e) ESTATES AND TRUSTS.—There is hereby imposed on the taxable income of— ..i.«s "(1) every estate, and "(2) every trust,
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2097 taxable under this subsection a tax determined in accordance with the following table: "If taxable income is The tax is: Not over $5,000 15% of taxable income. Over $5,000 $750, plus 28% of the excess over $5,000. "(f) ADJUSTMENTS IN TAX TABLES SO THAT INFLATION WILL NOT RESULT IN TAX INCREASES.— "(1) IN GENERAL.—Not later than December 15 of 1988, and each subsequent calendar year, the Secretary shall prescribe tables which shall apply in lieu of the tables contained in subsections (a), (b), (c), (d), and (e) with respect to taxable years beginning in the succeeding calendar year. "(2) METHOD OF PRESCRIBING TABLES.—The table which under paragraph (1) is to apply in lieu of the table contained in subsection (a), Ot)), (c), (d), or (e), as the case may be, with respect to taxable years beginning in any calendar year shall be pre- scribed— "(A) by increasing the minimum and maximum dollar amounts for each rate bracket for which a tax is imposed under such table by the cost-of-living adjustment for such calendar year, "(B) by not changing the rate applicable to any rate bracket as adjusted under subparagraph (A), and "(C) by adjusting the amounts setting forth the tax to the extent necessary to reflect the adjustments in the rate brackets. "(3) COST-OF-UVING ADJUSTMENT.—For purposes of paragraph (2), the cost-of-living adjustment for any calendar year is the percentage (if any) by which— "(A) the CPI for the preceding calendar year, exceeds "(B) the CPI for the calendar year 1987. "(4) CPI FOR ANY CALENDAR YEAR.—For purposes of pareigraph (3), the CPI for any calendar year is the average of the (Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year. "(5) (I!oNSUMER PRICE INDEX.—For purposes of paragraph (4), •- the term 'Consumer Price Index' means the last Consumer Price Index for all-urban consumers published by the Depart- ment of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the (Consumer Price Index for calendar year 1986 shall be used. "(6) ROUNDING.— "(A) I N GENERAL.—If any increase determined under paragraph (2XA), subsection (gX4), section 63(cX4), or section 151(dX3) is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50. -iv.) "(B) TABLE FOR MARRIED INDIVIDUALS FILING SEPA- RATELY.—In the case of a married individual filing a sepa- ..,,. rate return, subparagraph (A) (other than with respect to section 63(cX4)) shall be applied by substituting '$25' for '$50' each place it appears. "(g) PHASEOUT OF IS^PERCENT RATE AND PERSONAL EXEMPTIONS.— "(1) IN GENERAL.—The amount of tax imposed by this section (determined without regard to this subsection) shall be in- creased by 5 percent of the excess (if any) of—
100 STAT. 2098 PUBLIC LAW 99-514—OCT. 22, 1986 rlJiw : "(A) taxable income, over ••''..-ii'li, ,f -; - ' t:?^! "(B) the applicable dollar amount. "(2) LIMITATION.—The increase determined under paragraph (1) with respect to any taxpayer for any taxable year shall not :> exceed the sum of— "(A) 13 percent of the maximum amount of taxable * income to which the 15-percent rate applies under the table contained in subsection (a), (b), (c), or (e) (whichever applies), and "^ "(B) 28 percent of the deductions for personal exemptions allowable to the taxpayer for the taxable year under section 151. In the case of any individual taxable under subsection (d), ^' subparagraph (A) shall apply as if such individual were taxable " under subsection (a). "(3) APPLICABLE DOLLAR AMOUNT.—For purposes of paragraph *' (1), the applicable dollar amount shall be determined under the following table: "In the case of a taxpayer to which the following subsection of this section The applicable dollar ^' applies: amount is: Subsection (a) $71,900 yisV" 'f Subsection (b) 61,650 Subsection (c) 43,150 Subsection (d) 35,950 '• Subsection (e) 13,000. "(4) ADJUSTMENT FOR INFLATION.—In the case of any taxable ^ year beginning in a calendar year after 1988, each dollar "^ amount contained in paragraph (3) shall be increased by an amount equal to— . "(A) such dollar amount, multiplied by "(B) the cost-of-living adjustment determined under . subsection (f)(3) for the calendar year in which the taxable year begins. "(h) TAX SCHEDULES FOR TAXABLE YEARS BEGINNING IN 1987.—In the case of any taxable year beginning in 1987— "(1) subsection (g) shall not apply, and "(2) the following tables shall apply in lieu of the tables set forth in subsections (a), (b), (c), (d), and (e): g^^ "(A) MARRIED INDIVIDUALS FILING JOINT RETURNS AND ^^ SURVIVING SPOUSES.—The table to apply for purposes of subsection (a) is as follows: . "iiii'.it "If taxable income is The tax is: Not over $3,000 11% of taxable income. Over $3,000 but not over $28,000 $330, plus 15% of the excess over $3,000. Over $28,000 but not over $45,000 $4,080, plus 28% of the excess over $28 000 Over $45,000 but not over $90,000 $8,840, plus 35% of the excess over $45,000. Over $90,000 $24,590, plus 38.5% of the excess over $90,000. 0 "(B) HEADS OF HOUSEHOLDS.—The table to apply for pur- 1 poses of subsection (b) is as follows: "If taxable income is The tax is: Not over $2,500 11% of taxable income. Over $2,500 but not over $23,000 $275, plus 15% of the excess over $2,500. Over $23,000 but not over $38,000 $3,350, plus 28% of the excess over $23,000.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2099 "If taxable income is The tax is: Over $38,000 but not over $80,000 $7,550, plus 35% of the excess over $38,000. Over $80,000 $22,250, plus 38.5% of the excess over $80,000. "(C) UNMARRIED INDIVIDUALS OTHER THAN SURVIVING SPOUSES AND HEADS OF HOUSEHOLDS.—The table to apply for purposes of subsection (c) is as follows: "If taxable income is The tax is: Not over $1,800 11% of taxable income. Over $1,800 but not over $16,800 $198, plus 15% of the excess over $1,800. Over $16,800 but not over $27,000 $2,448, plus 28% of the excess over $16,800. Over $27,000 but not over $54,000 $5,304, plus 35% of the excess over $27,000. Over $54,000 $14,754, plus 38.5% of the excess over $54,000. "(D) MARRIED INDIVIDUALS FIUNG SEPARATE RETURNS.— The table to apply for purposes of subsection (d) is as '•• follows: "If taxable income is The tax is: Not over $1,500 11% of taxable income. Over $1,500 but not over $14,000 $165, plus 15% of the excess over $1,500. Over $14,000 but not over $22,500 $2,040, plus 28% of the excess over $14,000. Over $22,500 but not over $45,000 $4,420, plus 35% of the excess over $22,500. Over $45,000 $12,295, plus 38.5% of the excess over $45,000. ^' "(E) ESTATES AND TRUSTS.—The table to apply for pur- poses of subsection (e) is as follows: "If taxable income is The tax is: Not over $500 11% of taxable income. Over $500 but not over $4,700 $55, plus 15% of the excess over $500. Over $4,700 but not over $7,550 $685, plus 28% of the excess over $4,700. Over $7,550 but not over $15,150 $1,483, plus 35% of the excess over $7,550. Over $15,150 $4,143, plus 38.5% of the excess over $15,150." (b) AMENDMENT OF SECTION 15.—Subsection (d) of section 15 (relat- ing to effect of changes in rates during a taxable year) is amended to read as follows: "(d) SECTION NOT TO APPLY TO INFLATION ADJUSTMENTS.—This section shall not apply to any change in rates under subsection (f) of section 1 (relating to adjustments in tax tables so that inflation will not result in tax increases)." SEC. 102. INCREASE IN STANDARD DEDUCTION. (a) GENERAL RULE.—Section 63 (defining taxable income) is amended to read as follows: "SEC. 63. TAXABLE INCOME DEFINED. "(a) I N GENERAL.—Except as provided in subsection (b), for pur- poses of this subtitle, the term 'taxable income' means gross income minus the deductions allowed by this chapter (other than the stand- ard deduction). "(b) INDIVIDI/ALS WHO DO NOT ITEMIZE THEIR DEDUCTIONS.—In the case of an individual who does not elect to itemize his deductions for
100 STAT. 2100 PUBLIC LAW 99-514—OCT. 22, 1986 the taxable year, for purposes of this subtitle, the term 'taxable income' means adjusted gross income, minus— "(1) the standard deduction, and "(2) the deduction for personal exemptions provided in section 151. "(c) STANDARD DEDUCTION.—For purposes of this subtitle— "(1) IN GENERAL.—Except as otherwise provided in this subsection, the term 'standard deduction' means the sum of— "(A) the basic standard deduction, and "(B) the additional standard deduction. ?r? "(2) BASIC STANDARD DEDUCTION.—For purposes of paragraph **'*' (1), the basic standard deduction is— "(A) $5,000 in the case of— "(i) a joint return, or iHvo r- * "(ii) a surviving spouse (as defined in section 2(a)), "(B) $4,400 in the case of a head of household (as defined in section 20))), "(C) $3,000 in the case of an individual who is not married and who is not a surviving spouse or head of household, or "(D) $2,500 in the case of a married individual filing a separate return. "(3) ADDITIONAL STANDARD DEDUCTION FOR AGED AND BLIND.— For purposes of paragraph (1), the additional standard deduc- tion is the sum of each additional amount to which the taxpayer "*"" is entitled under subsection (f). ^ "(4) ADJUSTMENTS FOR INFLATION.—In the case of any taxable year beginning in a calendar year after 1988, each dollar ,,^ amount contained in paragraph (2) or (5)(A) or subsection (f) * shall be increased by an amount equal to— "(A) such dollar amount, multiplied by "(B) the cost-of-living adjustment determined under sec- tion 1(f)(3) for the calendar year in which the taxable year iM*.\^ begins. *]' "(5) LIMITATION ON STANDARD DEDUCTION IN THE CASE OF CERTAIN DEPENDENTS.—In the case of an individual with respect 19' to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in If which the individual's taxable year begins, the standard deduc- es) ^ion applicable to such individual for such individual's taxable year shall not exceed the greater of— "(A) $500, or "(B) such individual's earned income. "(6) CERTAIN INDIVIDUALS, ETC., NOT ELIGIBLE FOR STANDARD DEDUCTION.—In the case of— "(A) a married individual filing a separate return where either spouse itemizes deductions, m 's.c "(B) a nonresident alien individual, "(C) a citizen of the United States entitled to the benefits of section 931 (relating to income from sources within possessions of the United States), "(D) an individual making a return under section i 443(a)(1) for a period of less than 12 months on account of a J {*, change in his annual accounting period, or "(E) an estate or trust, common trust fund, or partner- ship, the standard deduction shall be zero.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2101 "(d) ITEMIZED DEDUCTIONS.—For purposes of this subtitle, the term 'itemized deductions' means the deductions allowable under this chapter other than— "(1) the deductions allowable in arriving at adjusted gross income, and "(2) the deduction for personal exemptions provided by sec- tion 151. "(e) ELECTION TO ITEMIZE.— "(1) IN GENERAL.—Unless an individual makes an election under this subsection for the taxable year, no itemized deduc- tion shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preced- ing sentence. "(2) TIME AND MANNER OF ELECTION.—Any election under this subsection shall be made on the taxpayer's return, and the Secretary shall prescribe the manner of signifying such election on the return. "(3) CHANGE OF ELECTION.—Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the tax- able year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations— "(A) the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and "(B) the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the p., filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law. This paragraph shall not apply if the tax liability of the tax- payer's spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122. "(f) AGED OR BLIND ADDITIONAL AMOUNTS.— "(1) ADDITIONAL AMOUNTS FOR THE AGED.—The taxpayer shall be entitled to an additional amount of $600— "(A) for himself if he has attained age 65 before the close of his taxable year, and "(B) for the spouse of the taxpayer if the spouse has attained age 65 before the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b). "(2) ADDITIONAL AMOUNT FOR BLIND.—The taxpayer shall be entitled to an additional amount of $600— "(A) for himself if he is blind at the close of the taxable year, and "(B) for the spouse of the taxpayer if the spouse is blind as of the close of the taxable year and an additional exemp- ; tion is allowable to the taxpayer for such spouse under section 151(b).
100 STAT. 2102 PUBLIC LAW 99-514—OCT. 22, 1986 • For purposes of subparagraph (B), if the spouse dies during the Sir taxable year the determination of whether such spouse is blind shall be made as of the time of such death. «» "(3) HIGHER AMOUNT FOR CERTAIN UNMARRIED INDIVIDUALS.— In the case of an individual who is not married and is not a > surviving spouse, paragraphs (1) and (2) shall be applied by substituting '$750' for '$600'. "(4) BUNDNESS DEFINED.—For purposes of this subsection, an ri individual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees. "(g) MARITAL STATUS.—For purposes of this section, marital status shall be determined under section 7703. "(h) TRANSITIONAL RULE FOR TAXABLE YEARS BEGINNING IN 1987.—In the case of any taxable year beginning in 1987, paragraph (2) of subsection (c) shall be applied— "(1) by substituting '$3,760' for '$5,000', "(2) by substituting'$2,540'for'$4,400', "(3) by substituting'$2,540'for'$3,000', and "(4) by substituting '$1,880' for '$2,500'. The preceding sentence shall not apply if the taxpayer is entitled to an additional amount determined under subsection (f) (relating to additional amount for aged and blind) for the taxable year." Ot)) TAX TABLES.—Section 3 (relating to tax tables for individuals) is amended by striking out subsection (a) and inserting in lieu thereof the following: "(a) IMPOSITION OF TAX TABLE TAX.— "(1) I N GENERAL.—In lieu of the tax imposed by section 1, there is hereby imposed for each taxable year on the taxable income of every individual— "(A) who does not itemize his deductions for the taxable ;" year, and ' "(B) whose taxable income for such taxable year does not exceed the ceiling amount, a tax determined under tables, applicable to such taxable year, which shall be prescribed by the Secretary and which shall be in such form as he determines appropriate. In the table so pre- scribed, the amounts of the tax shall be computed on the basis of the rates prescribed by section 1. ^' "(2) CEILING AMOUNT DEFINED.—For purposes of parstgraph (1), the term 'ceiling amount' means, with respect to any taxpayer, * the amount (not less than $20,000) determined by the Secretary for the tax rate category in which such taxpayer falls. "(3) AUTHORITY TO PRESCRIBE TABLES FOR TAXPAYERS WHO ITEM- IZE DEDUCTIONS.—The Secretary may provide that this section •; shall apply also for any taxable year to individuals who itemize their deductions. Any tables prescribed under the preceding sentence shall be on the basis of taxable income." SEC.103. INCREASE IN PERSONAL EXEMPTIONS. (a) GENERAL RULE.—Subsection (f) of section 151 (defining exemp- tion amount) is amended to read as follows: "(f) EXEMPTION AMOUNT.—For purposes of this section— "(1) I N GENERAL.—Except £is provided in paragraph (2), the term 'exemption amount' means—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2103 "(A) $1,900 for taxable years beginning during 1987, "(B) $1,950 for taxable years beginning during 1988, and "(C) $2,000 for taxable years beginning after December 31, 1988. "(2) EXEMPTION AMOUNT DISALLOWED IN THE CASE OF CERTAIN DEPENDENTS.—In the case of an individual with respect to whom a deduction under this section is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins, the exemption amount ap- plicable to such individual for such individual's taxable year shall be zero. "(3) INFLATION ADJUSTMENT FOR YEARS AFTER 1989.—In the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1)(C) shall be increased by an amount equal to— "(A) such dollar amount, multiplied by "(B) the cost-of-living adjustment determined under sec- tion 1(f)(3), for the calendar year in which the taxable year begins, by substituting 'calendar year 1988' for 'calendar year 1987' in subparagraph (B) thereof." (b) REPEAL OF ADDITIONAL EXEMPTIONS FOR TAXPAYERS OVER AGE 65 OR BUND.—Section 151 is amended by striking out subsections (c) and (d) and by redesignating subsections (e) and (f) as subsections (c) and (d), respectively. SEC. 104. TECHNICAL AMENDMENTS. (a) FILING REQUIREMENTS.— (1) SECTION 6O12.— (A) Paragraph (1) of section 6012(a) (relating to persons required to make returns of income) is amended to read as follows: "(1)(A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount, except that a return shall not be required of an individual— "(i) who is not married (determined by applying section 7703), is not a surviving spouse (as defined in section 2(a)), is .15i, not a head of a household (as defined in section 2(b)), and for the taxable year has gross income of less than the sum of isi: the exemption amount plus the basic standard deduction applicable to such an individual, V . "(ii) who is a head of a household (as so defined) and for the taxable year has gross income of less than the sum of the exemption amount plus the basic standard deduction applicable to such an individual, "(iii) who is a surviving spouse (as so defined) and for the taxable year has gross income of less than the sum of the exemption amount plus the basic standard deduction ap- plicable to such an individual, or "(iv) who is entitled to make a joint return and whose ^ gross income, when combined with the gross income of his spouse, is, for the taxable year, less than the sum of twice the exemption amount plus the basic standard deduction applicable to a joint return, but only if such individual and his spouse, at the close of the taxable year, had the same ' household as their home.
100 STAT. 2104 PUBLIC LAW 99-514—OCT. 22, 1986 Clause (iv) shall not apply if for the taxable year such spouse makes a separate return or any other taxpayer is entitled to an exemption for such spouse under section 151(c). "(B) The amount specified in clause (i), (ii), or (iii) of subpara- graph (A) shall be increased by the amount of 1 additional standard deduction (within the meaning of section 63(cX3)) in the case of an individual entitled to such deduction by reason of section 63(fKl)(A) (relating to individuals age 65 or more), and the amount specified in clause (iv) of subparagraph (A) shall be increased by the amount of the additional standard deduction for each additional standard deduction to which the individual or his spouse is entitled by reason of section 63(fXl). "(C) The exception under subparagraph (A) shall not apply to any individual— "(i) who is described in section 63(cX5) and who has— "(I) income (other than earned income) in excess of the amount in effect under section 63(cX5XA) (relating to limitation on standard deduction in the case of certain dependents), or "(II) total gross income in excess of the standard deduction, or •../ «^j) fQj, ^hom the standard deduction is zero under sec- tion 63(cX6). "(D) For purposes of this subsection— "(i) The terms 'standard deduction', 'basic standard deduction' and 'additional standard deduction' have the respective meanings given such terms by section 63(c). "(ii) The term 'exemption amount' has the meaning given such term by section 151(d). In the case of an individual described in section 151(dX2), the exemption amount shall ' be zero." (B) Paragraph (9) of section 6012(a) is amended by strik- ing out "$2,700 or more" and inserting in lieu thereof "not less than the sum of the exemption amount plus the basic standard deduction under section 63(cX2XD)". (2) SECTION 6013.—Subparagraph (A) of section 6013(bX3) (relating to when return deemed filed) is amended— (A) by striking out "(twice the exemption amount in case such spouse was 65 or over)" each place it appears, (B) by striking out "section 151(f)" and inserting in lieu thereof "section 151(d)", and (C) by adding at the end thereof the following new sen- tence: "For purposes of clauses (ii) and (iii), if the spouse whose gross income is being compared to the exemption amount is 65 or over, such clauses shall be applied by substituting 'the sum of the exemption amount and the additional standard deduction under section 63(cX2) by reason of section 63(fKlXA)' for 'the exemption amount'. Ot>) OTHER AMENDMENTS.— M) SECTION 21 ETTC. (A) Sections 21(bXlXA), 21(eX6XA), and 129(cXl) are each amended by striking out "section 151(e)" and inserting in lieu thereof "section 151(c)". (B) Sections 21(eX6XB), 32(cXlXAXi), 129(cX2), and ,^., 152(eXlXA) are each amended by striking out "section 151(eX3)" and inserting in lieu thereof "section 151(cX3)".
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2105 (2) SECTION I08.—Subparagraph (B) of section 108(b)(3) is amended by striking out "50 cents" and inserting in lieu thereof "331/3 cents". (3) SECTION 152, ETC.—Sections 152(d)(2) and 2032A(c)(7)(D) are each amended by striking out "section 151(e)(4)" and inserting in Heu thereof "section 151(c)(4)". (4) SECTION 172.—Subsection (d) of section 172 (relating to modifications) is amended by striking out paragraph (7). (5) SECTION 402.—Subparagraph (B) of section 402(e)(1), as amended by section 1222(b), is amended by striking out "the zero bracket amount applicable to such individual for the tax- able year plus". (6) SECTION 441.—Clause (iii) of section 441(f)(2)(B) (relating to change in accounting period) is amended by striking out "and by adding the zero bracket amount,". (7) SECTION 443.— (A) Paragraph (1) of section 443(b) (relating to computa- tion of tax on change of annual accounting period) is amended by striking out ", and adding the zero bracket amount". (B) Clause (ii) of section 443G))(2)(A) (relating to computa- tion based on 12-month period) is amended to read as follows: "(ii) the tax computed on the modified taxable income for the short period." (8) SECTION 541.—Section 541 is amended by striking out "50 percent" and inserting in lieu thereof "28 percent (38.5 percent in the case of taxable years beginning in 1987)". (9) SECTION 613A.—Paragraph (1) of section 613A(d) (relating to limitation on percentage depletion based on taxable income) is amended by striking out "(reduced in the case of an individ- ual by the zero bracket amount)". (10) SECTION 667.—Paragraph (2) of section 667(b) (relating to tax on amount deemed distributed by trust in preceding years) is amended to read as follows: "(2) TREATMENT OF LOSS YEARS.—For purposes of paragraph (1), the taxable income of the beneficiary for any taxable year shall be deemed to be not less than zero." (11) SECTION 86I.—Subsection (b) of section 861 (relating to taxable income from sources within the United States) is amended by striking out "the zero bracket amount" and insert- ing in lieu thereof "the standard deduction". (12) SECTION 862.—Subsection (b) of section 862 (relating to taxable income from sources without the United States) is amended by striking out "the zero bracket amount" and insert- ing in lieu thereof "the standard deduction". (13) SECTION 904.—Subsection (a) of section 904 (relating to limitation on foreign tax credit) is amended by striking out the last sentence. (14) SECTION 1398.—Subsection (c) of section 1398 (relating to computation and payment of tax; zero bracket amount) is amended— (A) by striking out "ZERO BRACKET AMOUNT" in the subsection heading and inserting in lieu thereof "BASIC STANDARD DEDUCTION", and (B) by striking out paragraph (3) and inserting in lieu thereof the following:
100 STAT. 2106 PUBLIC LAW 99-514—OCT. 22, 1986 ^:! "(3) BASIC STANDARD DEDUCTION.—In the case of an estate f'' which does not itemize deductions, the basic standard deduction for the estate for the taxable year shall be the same as for a married individual filing a separate return for such year." (15) SECTION 3402.— (A) Paragraph (1) of section 3402(f) (relating to withhold- I A»'' ing exemptions) is amended by striking out subparagraphs (B) and (C) and by redesignating subparagraphs (D), (E), (F), and (G) as subparagraphs (B), (C), (D), and (E), respectively. (B) Subparagraph (A) of section 3402(f)(1) is amended by inserting "unless he is an individual described in section 151(d)(2)" after "himself'. (C) Subparagraph (B) of section 3402(f)(1), as redesignated " ' by subparagraph (A), is amended by striking out "subpara- graph (A), (B), (C), or (F)" and inserting in lieu thereof .. "subparagraph (A) or (D)". (D) Subparagraph (C) of section 3402(D(1), as redesignated '.^ by subparagraph (A), is amended by striking out "section 151(e)" and inserting in lieu thereof "section 151(c)". - (E) Subparagraph (E) of section 3402(f)(1), as redesignated by subparagraph (A), is amended by striking out "zero bracket" and inserting in lieu thereof "standard deduc- sio.: . tion". (F) The last sentence of paragraph (1) of section 3402(f) is . <= ' amended— (i) by striking out "subparagraph (G)" and inserting in lieu thereof "subparagraph (E)", and -ii' (ii) by striking out "zero bracket" and inserting in lieu thereof "standard deduction". •'-'' (G) Paragraph (3) of section 3402(m) is amended by insert- ing "(including the additional standard deduction under » section 63(c)(3) for the aged and blind)" after "deductions". '«^ (16) SECTION 6014.— (A) Subsection (a) of section 6014 (relating to income tax return—tax not computed by taxpayer) is amended by strik- • ing out "who does not have an unused zero bracket amount (determined under section 63(e))" and inserting in lieu l'^ thereof "who is not described in section 6012(aXl)(C)(i)". (B) Paragraph (4) of section 6014(b) is amended to read as follows: "(4) to cases where the taxpayer itemizes his deductions or ' where the taxpayer claims a reduced standard deduction by reason of section 63(c)(5)." (17) SECTION 6212.—Subparagraph (A) of section 6212(c)(2) (relating to cross references) is amended to read as follows: -jj., "(A) Deficiency attributable to change of treatment with respect to itemized deductions, see section 63(e)(3)." (18) SECTION 6504.—Paragraph (2) of section 6504 (relating to cross references) is amended to read as follows: "(2) Change of treatment with respect to itemized deductions where tax- ^. payer and his spouse make separate returns, see section 63(e)(3)." bnB
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2107 Subtitle B—Provisions Related to Tax Credits SEC. 111. INCREASE IN EARNED INCOME CREDIT. (a) INCREASE IN AMOUNT OF CREDIT.—Subsection (a) of section 32 (relating to earned income credit) is amended— (1) by striking out "11 percent" and inserting in lieu thereof b "14 percent", and (2) by striking out "$5,000" and inserting in lieu thereof "$5,714". Oa) INCREASE IN INCOME LEVEL AT WHICH PHASEOUT BEGINS.— Subsection Ot>) of section 32 is amended to read as follows: "(b) LIMITATION.—The amount of the credit allowable to a tax- payer under subsection (a) for any taxable year shall not exceed the excess (if any) of— "(1) the maximum credit allowable under subsection (a) to any taxpayer, over "(2) 10 percent of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds $9,000. In the case of any taxable year beginning in 1987, paragraph (2) shall be applied by substituting '$6,500' for '$9,000'." (c) INFLATION ADJUSTMENTS.—Section 32 is amended by adding at the end thereof the following new subsection: "(i) INFLATION ADJUSTMENTS.— "(1) I N GENERAL.—In the case of any taxable year beginning after the applicable calendar year, each dollar amount referred to in paragraph (2)(B) shall be increased by an amount equal to— "(A) such dollar amount, multiplied by "(B) the cost-of-living adjustment determined under sec- tion 1(f)(3), for the calendar year in which the taxable year begins, by substituting 'calendar year 1984' for 'calendar year 1987' in subparagraph (B) thereof. "(2) DEFINITIONS, ETC.—For purposes of paragraph (1)— * "(A) APPLICABLE CALENDAR YEAR.—The term 'applicable calendar year' means— -,if 3 G "(i) 1986 in the case of the dollar amounts referred to in clause (i) or (ii) of subparagraph (B), and "(ii) 1987 in the case of the dollar amount referred to * ' in clause (iii) of subparagraph (B). "(B) DOLLAR AMOUNTS.—The dollar amounts referred to , J in this subparagraph are— "(i) the $5,714 amount contained in subsection (a), -e- Au "(ii) the $6,500 amount contained in the last sentence of subsection (b), and "(iii) the $9,000 amount contained in subsection (b)(2). "(3) ROUNDING.—If any increase determined under paragraph (1) is not a multiple of $10, such increase shall be rounded to the i nearest multiple of $10 (or, if such increase is a multiple of $5, such increase shall be increased to the next higher multiple of $10)." (d) CONFORMING AMENDMENTS.— (1) Paragraph (2) of section 32(f) (relating to amount of credit to be determined under tables) is amended by striking out subparagraphs (A) and (B) and inserting in lieu thereof the following:
100 STAT. 2108 PUBLIC LAW 99-514—OCT. 22, 1986 II; "(A) for earned income between $0 and the amount of earned income at which the credit is phased out under subsection Ot>), and "(B) for adjusted gross income between the dollar amount i& tiOii at which the phaseout begins under subsection (b) and the amount of adjusted gross income at which the credit is j ::•-' phased out under subsection (b)." (2) Subparagraph (B) of section 3507(c)(2) (relating to earned "^^ income advance amount) is amended by striking out clauses (i) and (ii) and inserting in lieu thereof the following: "(i) of not more than 14 percent of earned income not in excess of the amount of earned income taken into '• account under section 32(a), which "(ii) phases out between the amount of earned income at which the phaseout begins under subsection V ~ • (b) of section 32 and the amount of earned income at which the credit under section 32 is phased out under such subsection, or". (3) Subparagraph (C) of section 3507(cX2) is amended by strik- ing out clauses (i) and (ii) and inserting in lieu thereof the following: "(i) of not more than 14 percent of earned income not in excess of Vz of the amount of earned income taken into account under section 32(a), which "(ii) phases out between amounts of earned income which are V2 of the amounts of earned income de- scribed in subparagraph (B)(ii)." (e) EMPLOYEE NOTIFICATION.—The Secretary of the Treasury is directed to require, under regulations, employers to notify any employee who has not had any tax withheld from wages (other than an employee whose wages are exempt from withholding pursuant to section 3402(n) of the Internal Revenue Code of 1986) that such employee may be eligible for a refund because of the earned income credit. SEC. 112. REPEAL OF CREDIT FOR CONTRIBUTIONS TO CANDIDATES FOR PUBLIC OFFICE. (a) GENERAL RULE.—Section 24 (relating to contributions to can- didates for public office) is hereby repealed. (b) TECHNICAL AMENDMENTS.— (1) Subsection (g) of section 527 (relating to treatment of newsletter funds) is amended— (A) by striking out "section 24(c)(2)" in paragraph (1) and inserting in lieu thereof "paragraph (3)", and (B) by adding at the end thereof the following new para- graph: '^ "(3) CANDIDATE.—For purposes of paragraph (1), the term 'candidate' means, with respect to any Federal, State, or local elective public office, an individual who— "(A) publicly announces that he is a candidate for > nomination or election to such office, and "(B) meets the qualifications prescribed by law to hold such office." (2) Subsection (a) of section 642 (relating to credits against tax for estates and trusts) is amended to read as follows: "(a) FOREIGN TAX CREDIT ALLOWED.—An estate or trust shall be allowed the credit against tax for taxes imposed by foreign countries
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2109 and possessions of the United States, to the extent allowed by section 901, only in respect of so much of the taxes described in such section as is not properly allocable under such section to the bene- ficiaries." (3) Paragraph (3) of section 901(i) (relating to cross references) is amended by striking out "section 642(a)(1)" and inserting in lieu thereof "section 642(a)". (4) Paragraph (6) of section 7871(a) (relating to Indian tribal governments treated as States for certain purposes) is amended by striking out subparagraph (A) and by redesignating subpara- graphs (B), (C), (D), (E), and (F) as subparagraphs (A), (B), (C), (D), and (E), respectively. (5) The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by striking out the item relating to section 24. Subtitle C—Provisions Related to Exclusions SEC. 121. TAXATION OF UNEMPLOYMENT COMPENSATION. Section 85 (relating to unemployment compensation) is amended to read as follows: "SEC. 85. UNEMPLOYMENT COMPENSATION. "(a) GENERAL RULE.—In the case of an individual, gross income includes unemployment compensation. "(b) UNEMPLOYMENT COMPENSATION DEFINED.—For purposes of this section, the term 'unemployment compensation' means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation." SEC. 122. PRIZES AND AWARDS. (a) EXCLUSION FROM GROSS INCOME.— (1) IN GENERAL.—Section 74 (relating to prizes and awards) is amended— (A) by striking out "Except as provided in subsection (b) and" in subsection (a) and inserting in lieu thereof "Except as otherwise provided in this section or", :• (B) by striking out "EXCEPTION" in the heading for subsec- tion (b) and inserting in lieu thereof "EXCEPTION FOR CER- TAIN PRIZES AND AWARDS TRANSFERRED TO CHARITIES", (C) by striking out "and" at the end of subsection (b)(1), by striking out the period at the end of subsection (bX2) and inserting in lieu thereof "; and", and by adding after subsec- tion (bX2) the following new paragraph: "(3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.", and (D) by adding at the end thereof the following new subsec- tion: "(c) EXCEPTION FOR CERTAIN EMPLOYEE ACHIEVEMENT AWARDS.— "(1) IN GENERAL.—Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount
100 STAT. 2110 PUBLIC LAW 99-514-OCT. 22, 1986 "1 allowable as a deduction to the employer for the cost of the employee achievement award. "(2) EXCESS DEDUCTION AWARD.—If the cost to the employer of the employee achievement award received by the taxpayer '<;?) exceeds the amount allowable as a deduction to the employer, *\ then gross income includes the greater of— "(A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or "(B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer. The remaining portion of the value of such award shall not be included in the gross income of the recipient. "(3) TREATMENT OF TAX-EXEMPT EMPLOYERS.—In the case of an employer exempt from taxation under this subtitle, any ref- erence in this subsection to the amount allowable as a deduction ? to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle. "(4) CROSS REFERENCE.— "For provisions excluding certain de minimis fringes from gross income, see section 132(e)." (2) CONFORMING AMENDMENTS.— . - . .... .Hft (A) Clause (i) of section 4941(d)(2)(G) is a m e n d e d by strik- ing out "section 74(b)" a n d inserting in lieu thereof "section "*»> 74(b) (without regard to paragraph (3) thereof)". (B) Paragraph (2) of section 4945(g) is amended by strik- ing out "section 74(b)" and inserting in lieu thereof "section 74(b) (without regard to paragraph (3) thereof)". (b) AMOUNTS TRANSFERRED BY EMPLOYER NOT EXCLUDABLE AS GIFTS.—Section 102 (relating to gifts and inheritances) is amended by adding at the end thereof the following new subsection: "(c) EMPLOYEE GIFTS.— "(1) I N GENERAL.—Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee. "(2) CROSS REFERENCES.— "For provisions excluding certain employee achievement awards from gross income, see section 74(c). "For provisions excluding certain de minimis fringes from gross , income, see section 132(e)." (c) GIFTS.—Section 2740t)) (relating to gifts) is amended— (1) by adding "or" at the end of subparagraph (A) of para- graph (1), (2) by striking out "or" at the end of subparagraph (B) of paragraph (1), and inserting in lieu thereof a period, (3) by striking out subparagraph (C) of paragraph (1), and (4) by striking out paragraph (3). (d) DEDUCTION FOR COST OF EMPLOYEE ACHIEVEMENT AWARDS.— Section 274 (relating to certain entertainment, etc., expenses) is amended by redesignating subsection (j) as subsection (k) and by inserting after subsection (i) the following new subsection: "(j) EMPLOYEE ACHIEVEMENT AWARDS.— "(1) GENERAL RULE.—No deduction shall be allowed under section 162 or section 212 for the cost of an employee achieve-
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2111 ment award except to the extent that such cost does not exceed the deduction Hmitations of paragraph (2). "(2) DEDUCTION LIMITATIONS.—The deduction for the cost of an employee achievement award made by an employer to an employee— "(A) which is not a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year which are not qualified plan awards, shall not exceed $400, and "(B) which is a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year (including employee achievement awards which are not qualified plan awards), shall not exceed $1,600. "(3) DEFINITIONS.—For purposes of this subsection— "(A) EMPLOYEE ACHIEVEMENT AWARD.—The term 'em- ployee achievement award* means an item of tangible per- sonal property which is— "(i) transferred by an employer to an employee for length of service achievement or safety achievement, . .^ "(ii) awarded as part of a meaningful presentation, and "(iii) awarded under conditions and circumstances that do not create a significant likelihood of the pay ment of disguised compensation. "(B) QUALIFIED PLAN AWARD.— "(i) I N GENERAL.—The term 'qualified plan award' means an employee achievement award awarded as part of an established written plan or program of the taxpayer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)) as to eligibility or benefits. "(ii) LIMITATION.—An employee achievement award shall not be treated as a qualified plan award for any taxable year if the average cost of all employee achieve- ment awards which are provided by the employer during the year, and which would be qualified plan awards but for this subparagraph, exceeds $400. For i purposes of the preceding sentence, average cost shall be determined by including the entire cost of qualified plan awards, without taking into account employee achievement awards of nominal value. "(4) SPECIAL RULES.—For purposes of this subsection— "(A) PARTNERSHIPS.—In the case of an employee achieve- ment award made by a partnership, the deduction limita- tions contained in paragraph (2) shall apply to the partner- ship as well as to each member thereof. "(B) LENGTH OF SERVICE AWARDS.—An item shall not be treated as having been provided for length of service achievement if the item is received during the recipient's 1st 5 years of employment or if the recipient received a length of service achievement award (other than an award excludable under section 132(e)(1)) during that year or any of the prior 4 years.
100 STAT. 2112 PUBLIC LAW 99-514—OCT. 22, 1986 ';. ' "(C) SAFETY ACHIEVEMENT AWARDS.—An item provided by an employer to an employee shall not be treated as having ;>. : been provided for safety achievement if— r *i G, "(i) during the taxable year, employee achievement awards (other than awards excludable under section 132(e)(1)) for safety achievement have previously been awarded by the employer to more than 10 percent of the employees of the employer (excluding employees described in clause (ii)), or "(ii) such item is awarded to a manager, adminis- trator, clerical employee, or other professional employee.". (e) TREATMENT FOR PURPOSES OF EMPLOYMENT TAXES.—Each of the following provisions are amended by striking out "117 or" and inserting in lieu thereof "74(c), 117, or": (1) Section 3121(a)(20). (2) Section 3231(e)(5). (3) Section 3306(b)(16). (4) Section 3401(a)(20). (5) Section 209(s) of the Social Security Act. SEC. 123. SCHOLARSHIPS. (a) IN GENERAL.—Section 117 (relating to scholarship and fellow- ship grants) is amended to read as follows: "SEC. 117. QUALIFIED SCHOLARSHIPS. "(a) GENERAL RULE.—Gross income does not include any amount received as a qualified scholarship by an individual who is a can- didate for a degree at an educational organization described in section 170(b)(l)(A)(ii). "(b) QUALIFIED SCHOLARSHIP.—For purposes of this section— "(1) IN GENERAL.—The term 'qualified scholarship' means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accord- • ance with the conditions of the grant, such amount was used for qualified tuition and related expenses. "(2) QUALIFIED TUITION AND RELATED EXPENSES.—For purposes of paragraph (1), the term 'qualified tuition and related ex- penses' means— "(A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(l)(A)(ii), and "(B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization. "(c) LIMITATION.—Subsections (a) and (d) shall not apply to that portion of any amount received which represents payment for teach- ing, research, or other services by the student required as a condi- tion for receiving the qualified scholarship or qualified tuition reduction. "(d) QUALIFIED TUITION REDUCTION.— "(1) IN GENERAL.—Gross income shall not include any quali- fied tuition reduction. "(2) QUALIFIED TUITION REDUCTION.—For purposes of this subsection, the term 'qualified tuition reduction' means the ,, amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(l)(A)(ii) for the edu-
PUBLIC LAW 99-514-OCT. 22, 1986 100 STAT. 2113 cation (below the graduate level) at such organization (or an- other organization described in section 170(b)(l)(A)(ii)) of— "(A) such employee, or "(B) any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(f). "(3) REDUCTION MUST NOT DISCRIMINATE IN FAVOR OF HIGHLY COMPENSATED, ETC.—Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any officer, owner, or highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of officers, owners, or highlv compensated employees (within the meaning of section 414(q)).' (b) TECHNICAL AMENDMENTS.— (1) Subsection (a) of section 74 is amended by striking out "(relating to scholarship and fellowship grants)" and inserting in lieu thereof "(relating to qualified scholarships)". (2) The second sentence of section 1441(b) (relating to income items) is amended to read as follows: "The items of income referred to in subsection (a) from which tax shall be deducted and withheld at the rate of 14 percent are amounts which are received by a nonresident alien individual who is temporarily present in the United States as a nonimmigrant under subpara- graph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act and which are incident to a qualified scholar- ship to which section 117(a) applies, but only to the extent such amounts are includible in gross income." (3) Paragraph (6) of section 7871(a) (relating to Indian tribal governments treated as States for certain purposes), as amend- ed by section 112, is amended by striking out subparagraph (B) and by redesignating subparagraphs (C), (D), and (E) as subpara- graphs (B), (C), and (D), respectively. (4) The table of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 117 and inserting in lieu thereof the following new item: "Sec. 117. Qualified scholarships." Subtitle D—Provisions Related to Deductions SEC. 131. REPEAL OF DEDUCTION FOR 2-EARNER MARRIED COUPLES. (a) GENERAL RULE.—Section 221 (relating to deduction for 2-earner married couples) is hereby repealed. (b) CONFORMING AMENDMENTS.— (1) Section 62 is amended by striking out paragraph (16). (2) Subparagraph (A) of section 86(b)(2) is amended by striking out "sections 221," and inserting in lieu thereof "sections . (3) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out the item relating to section 221. SEC. 132. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS. (a) GENERAL RULE.—Part I of subchapter B of chapter 1 (defining gross income, adjusted gross income, etc.) is amended by adding at the end thereof the following new section:
100 STAT. 2114 PUBLIC LAW 99-514—OCT. 22, 1986 "SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS. "(a) GENERAL RULE.—In the case of an individual, the miscellane- ous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income. "(b) MISCELLANEOUS ITEMIZED DEDUCTIONS.—For purposes of this section, the term 'miscellaneous itemized deductions' means the itemized deductions other than— "(1) the deduction under section 163 (relating to interest), "(2) the deduction under section 164 (relating to taxes), "(3) the deduction under section 165(a) for losses described in subsection (c)(3) or (d) of section 165, "(4) the deduction under section 170 (relating to charitable, etc., contributions and gifts), "(5) the deduction under section 213 (relating to medical, dental, etc., expenses), "(6) the deduction under section 217 (relating to moving expenses), "(7) any deduction allowable for impairment-related work expenses, "(8) the deduction under section 691(c) (relating to deduction for estate tax in ceise of income in respect of the decedent), "(9) any deduction allowable in connection with personal property used in a short sale, "(10) the deduction under section 1341 (relating to computa- tion of tax where taxpayer restores substantial amount held under claim of right), "(11) the deduction under section 720t))(3) (relating to deduc- tion where annuity payments cease before investment recov- ered), "(l2) the deduction under section 171 (relating to deduction for amortizable bond premium), and "(13) the deduction under section 216 (relating to deductions in connection with cooperative housing corporations). "(c) DISALLOWANCE OF INDIRECT DEDUCTION THROUGH PASS-THRU ENTITY.—The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection. The preceding sentence shall not apply with respect to estates, trusts, cooperatives, and real estate investment trusts. "(d) IMPAIRMENT-RELATED WORK EXPENSES.—For purposes of this section, the term 'impairment-related work expenses means ex- penses— "(1) of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual's place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and "(2) with respect to which a deduction is allowable under section 162 (determined without regard to this section). "(e) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ES- TATES AND TRUSTS.—For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that the deductions for osts
P U B L I C L A W 9 9 - 5 1 4 — O C T . 22, 1986 100 S T A T . 2115 which a r e paid or incurred in connection with t h e a d m i n i s t r a t i o n of t h e estate or t r u s t a n d would not h a v e been incurred if t h e property were not held in such t r u s t or e s t a t e shall be t r e a t e d as allowable in a r r i v i n g a t adjusted gross income." (b) T R E A T M E N T O F T R A D E A N D B U S I N E S S DEDUCTIONS O F EMPLOY- EES.— (1) I N G E N E R A L . — P a r a g r a p h (2) of section 62 (defining ad- j u s t e d gross income) is a m e n d e d to read a s follows: "(2) CERTAIN TRADE AND BUSINESS DEDUCTIONS OF EMPLOY- EES.— "(A) REIMBURSED EXPENSES O F EMPLOYEES.—The deduc- tions allowed by p a r t VI (section 161 a n d following) which consist of expenses paid or incurred by t h e taxpayer, in connection with t h e performance by h i m of services as a n employee, u n d e r a r e i m b u r s e m e n t or o t h e r expense allow- ance a r r a n g e m e n t with his employer. ' - "(B) CERTAIN EXPENSES O F PERFORMING ARTISTS.—The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing a r t i s t in connec- tion with t h e performances by him of services in t h e performing a r t s a s a n employee." (2) D E F I N I T I O N OF Q U A U F I E D PERFORMING ARTIST.—Section 62 is amended— (A) by s t r i k i n g out " F o r purposes of t h i s s u b t i t l e " and inserting in lieu thereof "(a) GENERAL R U L E . — F o r purposes ^ of this subtitle", a n d (B) by a d d i n g a t t h e end thereof t h e following new subsec- tion: "(b) Q U A U F I E D P E R F O R M I N G A R T I S T . — "(1) I N GENERAL.—For purposes of subsection (aX2XB), t h e t e r m 'qualified performing a r t i s t ' m e a n s , with respect to a n y taxable year, a n y individual if— "(A) such individual performed services in t h e performing a r t s a s a n employee d u r i n g t h e taxable y e a r for a t least 2 employers, "(B) t h e aggregate a m o u n t allowable as a deduction u n d e r section 162 in connection with t h e performance of such services exceeds 10 percent of such individual's gross income a t t r i b u t a b l e to t h e performance of such services, and "(C) t h e adjusted gross income of such individual for t h e (STi k taxable y e a r (determined without regard to subsection (aX2XB)) does not exceed $16,000. "(2) NOMINAL EMPLOYER NOT TAKEN INTO ACCOUNT.—An individual shall not be t r e a t e d as performing services in t h e performing a r t s a s a n employee for a n y employer d u r i n g a n y taxable y e a r unless t h e a m o u n t received by such individual from such employer for t h e performance of such services d u r i n g t h e taxable y e a r equals or exceeds $200. "(3) SPECIAL RULES FOR MARRIED COUPLES.— "(A) I N GENERAL.—Except in t h e case of a h u s b a n d a n d wife who lived a p a r t a t all times d u r i n g t h e taxable year, if t h e t a x p a y e r is m a r r i e d a t t h e close of t h e taxable year, subsection (aX2XB) shall apply only if t h e t a x p a y e r and his spouse file a joint r e t u r n for t h e taxable year. "(B) A P P U C A T I O N O F PARAGRAPH (1).—In t h e case of a joint r e t u r n —
100 STAT. 2116 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each - ^ spouse, but "(ii) paragraph (1)(C) shall be applied with respect to / . ? their combined adjusted gross income. J "(C) DETERMINATION OF MARITAL STATUS.—For purposes of 'iM:, ^j^-g subsection, marital status shall be determined under section 7703(a). '' "(D) JOINT RETURN.—For purposes of this subsection, the term 'joint return' means the joint return of a husband and wife made under section 6013." (c) MOVING EXPENSE DEDUCTION NOT ALLOWABLE IN COMPUTING ADJUSTED GROSS INCOME.—Subsection (a) of section 62 (as amended by subsection (b)) is amended by striking out paragraph (8). (d) CLERICAL AMENDMENT.—The table of sections for part I of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 67. 2-percent floor on miscellaneous itemized deductions." SEC. 133. MEDICAL EXPENSE DEDUCTION LIMITATION INCREASED. Subsection (a) of section 213 (relating to deduction for medical, dental, etc., expenses) is amended by striking out "5 percent" and inserting in lieu thereof "7.5 percent". SEC. 134. REPEAL OF DEDUCTION FOR STATE AND LOCAL SALES TAXES. (a) GENERAL RULE.—Subsection (a) of section 164 (relating to deduction for taxes) is amended— (1) by striking out paragraph (4) and by redesignating para- graph (5) as paragraph (4), and (2) by adding at the end thereof the following new sentence: "Notwithstanding the preceding sentence, any tax (not de- scribed in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition." (b) CONFORMING AMENDMENTS.—Subsection (b) of section 164 is amended— (1) by striking out paragraphs (2) and (5), and (2) by redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively. SEC. 135. REPEAL OF DEDUCTION FOR ADOPTION EXPENSES. (a) GENERAL RULE.—Section 222 (relating to deduction for adop- tion expenses) is hereby repealed. (b) CONFORMING AMENDMENTS.— (1) Section 223 is redesignated as section 220. (2) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out the items relating to sections 222 and 223 and inserting in lieu thereof the following: "Sec. 220. Cross references."
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2117 Subtitle E—Miscellaneous Provisions SEC. 141. REPEAL OF INCOME AVERAGING. (a) GENERAL RULE.—Part I of subchapter Q of chapter 1 (relating to income averaging) is hereby repealed. (b) TECHNICAL AMENDMENTS.— (1) Subsection (b) of section 3 (relating to section inapplicable to certain individuals) is amended by striking out paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively. (2) Subsection (b) of section 5 (relating to cross references relating to tax on individuals) is amended by striking out •• paragraph (2) and by redesignating paragraph (3) as paragraph (2). (3) Subparagraph (B) of section 6511(dX2) (relating to special rules applicable to income taxes) is amended to read as follows: "(B) APPUCABLE RULES.— ' f "(i) IN GENERAL.—If the allowance of a credit or refund of an overpayment of tax attributable to a net operating loss carryback or a capital loss carryback is otherwise prevented by the operation of any law or rule of law other than section 7122 (relating to com- promises), such credit or refund may be allowed or made, if claim therefor is filed within the period pro- vided in subparagraph (A) of this paragraph. "(ii) TENTATIVE CARRYBACK ADJUSTMENTS.—If the allowance of an application, credit, or refund of a decrease in tax determined under section 6411(b) is otherwise prevented by the operation of any law or rule of law other than section 7122, such application, credit, or refund may be allowed or made if application for a tentative carryback adjustment is made within the period provided in section 6411(a). "(iii) DETERMINATIONS BY COURTS TO BE CONCLUSIVE.— In the case of any such claim for credit or refund or any such application for a tentative carryback adjustment, the determination by any court, including the Tax Court, in any proceeding in which the decision of the court has become final, shall be conclusive except with respect to— "(I) the net operating loss deduction and the effect of such deduction, and "(II) the determination of a short-term capital loss and the effect of such short-term capital loss, to the extent that such deduction or short-term capital loss is affected by a carryback which was not an issue in such proceeding." (c) CLERICAL AMENDMENT.—The table of parts for subchapter Q of chapter 1 is amended by striking out the item relating to part I. SEC. 142. LIMITATIONS ON DEDUCTIONS FOR MEALS. TRAVEL, AND ENTERTAINMENT. (a) BUSINESS MEALS.— (1) IN GENERAL.—Section 274 (relating to disallowance of cer- tain entertainment, etc. expenses), as amended by section 122(d), is amended by redesignating subsection (k) as subsection
100 STAT. 2118 PUBLIC LAW 99-514—OCT. 22, 1986 (o) and by inserting after subsection (j) the following new subsec- tion: "(k) BUSINESS MEALS.— "(1) IN GENERAL.—No deduction shall be allowed under this chapter for the expense of any food or beverages unless— "(A) such expense is not lavish or extravagant under the circumstances, and "(B) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to any ex- pense if subsection (a) does not apply to such expense by reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection (e)." (2) TECHNICAL AMENDMENTS.— (A) Subsection (e) of section 274 (relating to specific excep- tions to application of subsection (a)) is amended by striking out paragraph (1) and by redesignating paragraphs (2) through (10) as paragraphs (1) through (9), respectively. (B) Paragraph (3) of section 274(e), as redesignated by subparagraph (A), is amended bv striking out "paragraph (3)" and inserting in lieu thereof 'paragraph (2)". (b) ADDITIONAL RESTRICTIONS ON EXPENSES FOR MEALS, TRAVEL, AND ENTERTAINMENT.—Section 274 is amended by inserting after the subsection added by subsection (a) the following new subsections: "(1) ADDITIONAL LIMITATIONS ON ENTERTAINMENT TICKETS.— "(1) E N T E R T A I N M E N T TICKETS.— "(A) I N GENERAL.—In d e t e r m i n i n g t h e a m o u n t allowable as a deduction u n d e r t h i s c h a p t e r for a n y ticket for a n y activity or facility described in subsection (d)(2), t h e a m o u n t t a k e n into account shall n o t exceed t h e face value of such ticket. "(B) EXCEPTION FOR CERTAIN CHARITABLE SPORTS EVENTS.— S u b p a r a g r a p h (A) shall not apply to a n y ticket for a n y vi sports event— "(i) which is organized for t h e p r i m a r y purpose of benefiting a n organization which is described in section 501(c)(3) a n d exempt from t a x u n d e r section 501(a), "(ii) all of t h e n e t proceeds of which a r e contributed to such organization, a n d "(iii) which utilizes volunteers for substantially all of t h e work performed in c a r r y i n g o u t such event. "(2) SKYBOXES, ETC.— "(A) I N GENERAL.—In t h e case of a skybox or o t h e r pri- v a t e l u x u r y box leased for m o r e t h a n 1 event, t h e a m o u n t allowable a s a deduction u n d e r this c h a p t e r with respect to such events shall not exceed t h e s u m of t h e face value of non-luxury box seat tickets for t h e seats in such box cov- ered by t h e lease. For purposes of t h e preceding sentence, 2 or more related leases shall be t r e a t e d as 1 lease. f, "(B) P H A S E I N . — I n t h e case of— "(i) a taxable y e a r beginning in 1987, t h e a m o u n t disallowed u n d e r s u b p a r a g r a p h (A) shall be Va of t h e «»; H a m o u n t which would be disallowed w i t h o u t r e g a r d to this subparagraph, and "(ii) in the case of a taxable year beginning in 1988, . , the amount disallowed under subparagraph (A) shall be % of the amount which would have been disallowed without regard to this subparagraph."
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2119 "(m) ADDITIONAL LIMITATIONS ON TRAVEL EXPENSES.— "(1) LUXURY WATER TRANSPORTATION.— "(A) IN GENERAL.—No deduction shall be allowed under this chapter for expenses incurred for transportation by water to the extent such expenses exceed twice the aggre- gate per diem amounts for days of such transportation. For purposes of the preceding sentence, the term 'per diem amounts' means the highest amount generally allowable with respect to a day to employees of the executive branch of the Federal Government for per diem while away from '" ' home but sei'ving in the United States. "(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— "(i) any expense allocable to a convention, seminar, or other meeting which is held on any cruise ship, and I. . "(ii) any expense to which subsection (a) does not ' apply by reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection (e). "(2) TRAVEL AS FORM OF EDUCATION.—No deduction shall be allowed under this chapter for expenses for travel as a form of education, "(n) ONLY 80 PERCENT OF MEAL AND ENTERTAINMENT EXPENSES ALLOWED AS DEDUCTION.— "(1) IN GENERAL.—The amount allowable as a deduction under this chapter for— "(A) any expense for food or beverages, and "(B) any item with respect to an activity which is of a type generally considered to constitute entertainment, •' a amusement, or recreation, or with respect to a facility used in connection with such activity, shall not exceed 80 percent of the amount of such expense or j item which would (but for this paragraph) be allowable as a deduction under this chapter. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to any ex- pense if— "(A) subsection (a) does not apply to such expense by reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection • " (e), "(B) in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason of subsection (e) thereof (relat- ing to de minimis fringes), ?-! "(C) such expense is covered by a package involving a ?j ticket described in subsection (1)(1XB), or ft "(D) in the case of an expense for food or beverages before January 1, 1989, such expense is an integral part of a :', qualified meeting. "(3) QUALIFIED MEETING.—For purposes of paragraph (2)(D), %_ the term 'qualified meeting' means any convention, seminar, 5 annual meeting, or similar business program with respect to which— ij "(A) an expense for food or beverages is not separately stated, "(B) more than 50 percent of the participants are away from home, J' "(C) at least 40 individuals attend, and
100 STAT. 2120 PUBLIC LAW 99-514—OCT. 22, 1986 "(D) such food and beverages are part of a program which includes a speaker." (c) No DEDUCTION ALLOWED FOR SEMINARS, ETC., FOR SECTION 212 PURPOSES.— (1) IN GENERAL.—Subsection (h) of section 274 (relating to attendance at conventions, etc.) is amended by adding at the end thereof the following new paragraph: "(7) SEMINARS, ETC. FOR SECTION 212 PURPOSES.—No deduction shall be allowed under section 212 for expenses allocable to a convention, seminar, or similar meeting." (2) TECHNICAL AMENDMENTS.—Paragraphs (1), (2), (4), and (5) of section 274(h) are each amended— (A) by striking out "or 212" each place it appears, and (B) by striking out "or to an activity described in section 212 and" each place it appears. (d) DENIAL OF CHARITABLE CONTRIBUTION FOR CERTAIN TRAVEL EXPENSES.—Section 170 (relating to charitable, etc., contributions and gifts) is amended by redesignating subsections (k) and (1) as subsections (1) and (m), respectively, and by inserting after subsec- tion (j) the following new subsection: "(k) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL EXPENSES.—NO deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vaca- tion in such travel." SEC. 143. CHANGES IN TREATMENT OF HOBBY LOSS, ETC. (a) HOBBY Loss.—Subsection (d) of section 183 (relating to presumption) is amended— (1) by striking out "2 or more of the taxable years in the period of 5 consecutive taxable years" and inserting in lieu thereof "3 or more of the taxable years in the period of 5 consecutive taxable years", and (2) by striking out the last sentence and inserting in lieu thereof the following: "In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting '2'for'3'and T for'5'." (b) TREATMENT OF RENTAL TO EMPLOYER UNDER SECTION 280A.— Subsection (c) of section 280A (relating to exceptions for certain business or rental use; limitation on deductions for such use) is amended by adding at the end thereof the following new paragraph: "(6) TREATMENT OF RENTAL TO EMPLOYER.—Paragraphs (1) and (3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the tax- payer uses the dwelling unit (or portion) in performing services as an employee of the employer." (c) REVISION OF LIMITATION ON DEDUCTION FOR BUSINESS U S E OF HOME.—Paragraph (5) of section 280A(c) (relating to exceptions for certain business or rental use; limitation on deductions for such use) is amended by striking out subparagraph (B) and inserting in lieu thereof the following: "(B) the sum of— "(i) the deductions allocable to such use which are allowable under this chapter for the taxable year
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2121 whether or not such unit (or portion thereof) was so used, and "(ii) the deductions allocable to the trade or business in which such use occurs (but which are not allocable to such use) for such taxable year. Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year." SEC. 144. DEDUCTION FOR MORTGAGE INTEREST AND REAL PROPERTY TAXES ALLOWABLE WHERE PARSONAGE ALLOWANCE OR MILITARY HOUSING ALLOWANCE RECEIVED. Section 265 (relating to expenses and interest relating to tax- exempt income) is amended by adding at the end thereof the follow- ing new paragraph: "(6) SECTION NOT TO APPLY WITH RESPECT TO PARSONAGE AND MiuTARY HOUSING ALLOWANCES.—No deduction shall be denied under this section for interest on a mortgage on, or real prop- erty taxes on, the home of the taxpayer by reason of the receipt of an amount as-r "(A) a military housing allowance, or "(B) a parsonage allowance excludable from gross income under section 107." fi-i.' Subtitle F—Effective Dates SEC. 15L EFFECTIVE DATES. (a) GENERAL RULE.—Except £is otherwise provided in this section, the amendments made by this title shall apply to taxable years beginning after December 31,1986. (b) UNEMPLOYMENT COMPENSATION.—The amendment made by section 121 shall apply to amounts received after December 31,1986, in taxable years ending after such date. (c) PRIZES AND AWARDS.—The amendments made by section 122 shall apply to prizes and awards granted after December 31, 1986. (d) SCHOLARSHIPS.—The amendments made by section 123 shall apply to taxable years beginning after December 31, 1986, but only in the case of scholarships and fellowships granted after August 16, 1986. (e) PARSONAGE AND MIUTARY HOUSING ALLOWANCES.—The amendment made by section 144 shall apply to taxable years begin- ning before, on, or after, December 31,1986. TITLE II—PROVISIONS RELATING TO CAPITAL COST Subtitle A—Depreciation Provisions SEC. 201. MODIFICATION OF ACCELERATED COST RECOVERY SYSTEM. (a) GENERAL RULE.—Section 168 (relating to accelerated cost recovery system) is amended to read as follows:
100 STAT. 2122 PUBLIC LAW 99-514—OCT. 22, 1986 "SEC. 168. ACCELERATED COST RECOVERY SYSTEM. "(a) GENERAL RULE.—Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tan- gible property shall be determined by using— "(1) the applicable depreciation method, "(2) the applicable recovery period, and "(3) the applicable convention. "(b) APPUCABLE DEPRECIATION METHOD.—For purposes of this sec- tion— "(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), the applicable depreciation method is— "(A) the 200 percent declining balance method, "(B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance. "(2) 15-YEAR AND 20-YEAR PROPERTY.—In the case of 15-year and 20-year property, paragraph (1) shall be applied by substituting '150 percent' for '200 percent'. "(3) PROPERTY TO WHICH STRAIGHT U N E METHOD APPLIES.—The applicable depreciation method shall be the straight line method in the case of the following property: "(A) Nonresidential real property. "(B) Residential rental property. "(C) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this para- graph apply. "(4) SALVAGE VALUE TREATED AS ZERO.—Salvage value shall be treated as zero. "(5) ELECTION.—An election under paragraph (3XC) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable. "(c) APPLICABLE RECOVERY PERIOD.—For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: The applicable recovery period "In the case of: is: 3-year property 3 years 5-year property 5 years 7-year property 7 years 10-year property 10 years 15-year property 15 years 20-year property 20 years Residential rental property 27.5 years Nonresidential real property 31.5 years. "(d) APPLICABLE CONVENTION.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, the applicable convention is the half-year convention. "(2) REAL PROPERTY.—In the case of— "(A) nonresidential real property, and "(B) residential rental property, "K.- the applicable convention is the mid-month convention. "(3) SPECIAL RULE WHERE SUBSTANTIAL PROPERTY PLACED IN SERVICE DURING LAST 3 MONTHS OF TAXABLE YEAR.—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2123 in >* "(A) IN GENERAL.—Except as provided in regulations, if during any taxable year— "(i) the aggregate bases of property to which this section applies and which are placed in service during the last 3 months of the taxable year, exceed "(ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, - • the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention. tw'd «^g^ CERTAIN REAL PROPERTY NOT TAKEN INTO ACCOUNT.— For purposes of subparagraph (A), nonresidential real prop- erty and residential rental property shall not be taken into account. "(4) DEFINITIONS.— "(A) HALF-YEAR CONVENTION.—The half-year convention is a convention which treats all property placed in service . during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year. "(B) MID-MONTH CONVENTION.—The mid-month conven- tion is a convention which treats all property placed in service during any month (or disposed of during any month) |j,: as placed in service (or disposed of) on the mid-point of such month. "(C) MID-QUARTER CONVENTION.—The mid-quarter :k|<!" convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed :«> ' of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter. i "(e) CLASSIFICATION OF PROPERTY.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, property shall be classified under the following table: If such property has a class life (in years) "Property shall be treated as: of: 3-year property 4 or less 5-year property More than 4 but less than 10 7-year property 10 or more but less than 16 i 10-year property 16 or more but less than 20 15-year property 20 or more but less than 25 20-year property 25 or more. "(2) RESIDENTIAL RENTAL OR NONRESIDENTIAL REAL PROP- ERTY.— "(A) RESIDENTIAL RENTAL PROPERTY.—The term 'residen- tial rental property' has the meaning given such term by tw section 167(jX2XB). "(B) NONRESIDENTIAL REAL PROPERTY.—The term V 'nonresidential real property' means section 1250 property which is not— "(i) residential rental property, or of^b- "(ii) property with a class life of less than 27.5 years. "(3) CLASSIFICATION OF CERTAIN PROPERTY.— 'r "(A) 3-YEAR PROPERTY.—The term '3-year property' in- cludes—
100 STAT. 2124 PUBLIC LAW 99-514—OCT. 22, 1986 ,,'C'5 "(i) any race horse which is more than 2 years old at the time it is placed in service, and , .J ff',f - " "(ii) any horse other than a race horse which is more ^^a'l .r. ' than 12 years old at the time it is placed in service. "(B) 5-YEAR PROPERTY.—The term '5-year property' in- cludes— "(i) any automobile or light general purpose truck, "(ii) any semi-conductor manufacturing equipment, ,, J: "(iii) any computer-based telephone central office . switching equipment, "(iv) any qualified technological equipment, _ .-^.,^ , ., "(v) any property used in connection with research and experimentation, and "(vi) any property which— "(I) is described in paragraph (3)(A)(viii), (3)(A)(ix), or (4) of section 48(1), or "(II) is described in paragraph (15) of section 48(1) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Fed- eral Power Act (16 U.S.C. 796(17)(C)), as in effect on September 1,1986. "(C) 7-YEAR PROPERTY.—The term '7-year property' in- cludes— "(i) any railroad track, •' "(ii) any single-purpose agricultural or horticultural '- structure (within the meaning of section 48(p)), and "(iii) any property which— -ftj* = ,! or «<(j) (jQgg jjQ^ have a class life, and "(II) is not otherwise classified under paragraph (2) or this paragraph. ••>• >. "(D) 15-YEAR PROPERTY.—The term *15-year property' in- cludes— "(i) any municipal wastewater treatment plant, and ', "(ii) any telephone distribution plant and comparable . equipment used for 2-way exchange of voice and data communications. "(E) 20-YEAR PROPERTY.—The term '20-year property' in- cludes any municipal sewers. "(0 PROPERTY TO WHICH SECTION DOES NOT APPLY.—This section shall not apply to— "(1) CERTAIN METHODS OF DEPRECIATION.—Any property if— "(A) the taxpayer elects to exclude such property from the application of this section, and "(B) for the 1st taxable year for which a depreciation I ' * deduction would be allowable with respect to such property in the hands of the taxpayer, the property is properly pa: depreciated under the unit-of-production method or any •~rp, ( ri*: method of depreciation not expressed in a term of years (other than the retirement-replacement-betterment method or similar method). "(2) CERTAIN PUBLIC UTILITY PROPERTY.—Any public utility property (within the meaning of section 167(1X3XA)) if the tax- payer does not use a normalization method of accounting. 3-yi (3) FILMS AND VIDEO TAPE.—Any motion picture film or video tape. 0? "(4) SOUND RECORDINGS.—Any sound recording described in section 48(rX5).
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2125 "(5) CERTAIN PROPERTY PLACED IN SERVICE IN CHURNING TRANS- ACTIONS.— "(A) IN GENERAL.—Property— "(i) described in paragraph (4) of section 168(e) (as in effect before the amendments made by the Tax Reform Act of 1986), or "(ii) which would be described in such paragraph if such paragraph were applied by substituting '1987' for '1981' and '1986' for '1980' each place such terms appear. "(B) SUBPARAGRAPH (A) (ii) NOT TO APPLY.—Clause (ii) of subparagraph (A) shall not apply to— "(i) any residential rental property or nonresidential real property, or "(ii) any property if, for the 1st full taxable year in which such property is placed in service— "(I) the amount allowable as a deduction under this section (as in effect before the date of the enactment of this paragraph) with respect to such property is greater than, "(II) the amount allowable as a deduction under this section (as in effect on or after such date and using the half-year convention) for such taxable year. '(g) ALTERNATIVE DEPRECIATION SYSTEM FOR CERTAIN PROPERTY.— "(1) IN GENERAL.—In the case of— "(A) any tangible property which during the taxable year is used predominantly outside the United States, "(B) any tax-exempt use property, "(C) any tax-exempt bond financed property, "(D) any imported property covered by an Executive order under paragraph (6), and "(E) any property to which an election under paragraph (7) applies, the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system. "(2) ALTERNATIVE DEPRECIATION SYSTEM.—For purposes of paragraph (1), the alternative depreciation system is deprecia- tion determined by using— "(A) the straight line method (without regard to salvage value), "(B) the applicable convention determined under subsec- tion (d), and "(C) a recovery period determined under the following table: The recovery period "In the case of: shall be: (i) Property not described in clause (ii) or (iii) The class life. (ii) Personal property with no class life 12 years. (iii) Nonresidential real and residential rental prop- erty » 40 years. "(3) SPECIAL RULES FOR DETERMINING CLASS LIFE.— "(A) TAX-EXEMPT USE PROPERTY SUBJECT TO LEASE.—In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall in no event be less than 125 percent of the lease term.
100 STAT. 2126 PUBLIC LAW 99-514—OCT. 22, 1986 '4.1/-i "(B) SPECIAL RULE FOR CERTAIN PROPERTY ASSIGNED TO CLASSES.—For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as fol- lows: "If property is described .,,, The class •ji 4 in subparagraph: --* ; - life is: <: (BXii) ....:. 5 '^'*- (BXiii) 9.5 dr;K.' (CXi) 10 (CXii) 15 (DXi) 24 *.c ' (DXii) 24 (E) 50. "(C) QUALIFIED TECHNOLOGICAL EQUIPMENT.—In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years. "(D) AUTOMOBILES, ETC—In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years. "(E) CERTAIN REAL PROPERTY.—In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years. "(4) PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED STATES.—For purposes of this subsection, rules similar to the rules under section 48(a)(2) (including the exceptions contained in subparagraph (B) thereof) shall apply in determining whether property is used predominantly outside the United States. In addition to the exceptions contained in such subpara- graph (B), there shall be excepted any satellite or other space- craft (or any interest therein) held by a United States person if such satellite or spacecraft was launched from within the ^ United States. a "(5) TAX-EXEMPT BOND FINANCED PROPERTY.—For purposes of , this subsection— ^' "(A) IN GENERAL.—Except as otherwise provided in this paragraph, the term 'tax-exempt bond, financed property' ^' ^•''' means any property to the extent such property is financed ''" (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a). '' • "(B) ALLOCATION OF BOND PROCEEDS.—For purposes of subparagraph (A), the proceeds of any obligation shall be '^' treated as used to finance property acquired in connection with the issuance of such obligation in the order in which ' such property is placed in service. "(C) QUALIFIED RESIDENTIAL RENTAL PROJECTS.—The term • '' 'tax-exempt bond financed property' shall not include any qualified residential rental project (within the meaning of section 142(a)(7)). »•> "(6) IMPORTED PROPERTY.— "(A) COUNTRIES MAINTAINING TRADE RESTRICTIONS OR ' ENGAGING IN DISCRIMINATORY ACTS.—If the President deter- mines that a foreign country— .^ r,\ "(i) maintains nontariff trade restrictions, including Mf • variable import fees, which substantially burden •',/<; United States commerce in a manner inconsistent with provisions of trade agreements, or
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2127 "(ii) engages in discriminatory or other acts (includ- ing tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the ap- plication of paragraph (IXD) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order. '• "(B) IMPORTED PROPERTY.—For purposes of this subsec- tion, the term 'imported property' means any property if— "(i) such property was completed outside the United States, or "(ii) less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term 'United States' includes the Commonwealth of Puerto Rico and the posses- sions of the United States. "(7) ELECTION TO USE ALTERNATIVE DEPRECIATION SYSTEM.— "(A) I N GENERAL.—If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwith- standing the preceding sentence, in the case of >' nonresidential real property or residential rental property, such election may be made separately with respect to each property. "(B) ELECTION IRREVOCABLE.—An election under subpara- graph (A), once made, shall be irrevocable. '(h) TAX-EXEMPT USE PROPERTY.— "(1) IN GENERAL.—For purposes of this section— "(A) PROPERTY OTHER THAN NONRESIDENTIAL REAL PROP- ERTY.—Except as otherwise provided in this subsection, the term 'tax-exempt use property' means that portion of any tangible property (other than nonresidential real property) leased to a tax-exempt entity. "(B) NONRESIDENTIAL REAL PROPERTY.— "(i) I N GENERAL.—In the csise of nonresidential real property, 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 subparagraph, the term 'disqualified lease' means any ,rj .. lease of the property to a tax-exempt entity, but only 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(a) and 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-
100 STAT. 2128 PUBLIC LAW 99-514—OCT. 22, 1986 volves such entity (or a related entity) or there is the equivalent of such an option, "(HI) 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 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) 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 J- . "(II) less than the greater of 1 year or 30 percent of the property's present class life. In the case of nonresidential real property and prop- • ;,;>q ^ erty with no present class life, subclause (II) shall not apply. "(D) EXCEPTION WHERE PROPERTY USED IN UNRELATED TRADE OR BUSINESS.—The term 'tax-exempt use property' ioif 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. For purposes of subpara- graph (B)(iii), any portion of a property so used shall not be *4 IJ Seated as leased to a tax-exempt entity in a disqualified . lease. "(E) NONRESIDENTIAL REAL PROPERTY DEFINED.—For pur- poses of this paragraph, the term 'nonresidential real prop- t-i erty' includes residential rental property. "(2) TAX-EXEMPT ENTITY.— "(A) IN GENERAL.—For purposes of this subsection, the term 't£ix-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- -t 3, posed by this chapter, and "(iii) any foreign person or entity.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2129 "(B) EXCEPTIONS FOR CERTAIN PROPERTY SUBJECT TO UNITED STATES TAX AND 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(kXlXB)) or any sound recording (as defined in section 48(r)(5)). "(C) FOREIGN PERSON OR ENTITY.—For purposes of this paragraph, the term 'foreign person or entity' means— "(i) any foreign government, any international organization, 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. "(D) TREATMENT OF CERTAIN TAXABLE INSTRUMENTAL- ITIES.—For purposes of this subsection, 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 "(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, an organization shall be treated as an organization de- scribed in subparagraph (A)(ii) with respect to any property (other than property held by such organiza- tion) if such organization was an organization (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 used by such organization. The preceding sentence and subparagraph (D)(ii) 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 an organization described in section 501(c)(12),
100 STAT. 2130 PUBLIC LAW 99-514—OCT. 22, 1986 •- ' clause (i) shall not apply to such organization with ^' "f -' respect to any property if such organization elects not to be exempt from tax under section 501(a) i^' ^ 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 first used by the organization and ending with the " ' "' close of the 15th taxable year following the last taxable year of the applicable recovery period of such property. * -f*^^ - "(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. ''.- "(iv) FIRST USED.—For purposes of this subparagraph, property shall be treated as first used by the organiza- tion— "(I) when the property is first placed in service '^ under a lease to such organization, or "(II) in the case of property leased to (or held by) a partnership (or other pass-thru entity) in which the organization is a member, the later of when such property is first used by such partnership or '" • ' pass-thru entity or when such organization is first B' a member of such partnership or pass-thru entity. "(3) SPECIAL RULES FOR CERTAIN HIGH TECHNOLOGY EQUIP- MENT.— "(A) EXEMPTION WHERE LEASE TERM IS 5 YEARS OR LESS.— :© For purposes of this section, the term 'tax-exempt use property shall not include any qualified technological i:>t equipment if the lease to the tax-exempt entity has a lease term of 5 years or less. f >! ? "(B) EXCEPTION FOR CERTAIN PROPERTY.— {• "(i) I N GENERAL.—For purposes of subparagraph (A), 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(a), "(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 <i^* J - "(III) such tax-exempt entity is the United States or any agency or instrumentality of the United States. (if'} <»•' "(ii) LEASEBACKS DURING IST 3 MONTHS OF USE NOT TAKEN INTO ACCOUNT.—Subclause (II) of clause (i) shall not apply to any property which is leased within 3
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2131 months after the date such property is first used by the tax-exempt entity (or a related entity). "(4) RELATED ENTITIES.—For purposes of this subsection— "(A)(i) Each governmental unit and each agency or instrumentality 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 fsl treated as a separate sovereign authority. "(B) Any entity not described in subparagraph (AXi) is related to any other entity if the 2 entities have— t "(i) significant common purposes and substantial common membership, or "(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 -c such entities to avoid the application of this subsection. "(5) TAX-EXEMPT USE OF PROPERTY LEASED TO PARTNERSHIPS, ETC., DETERMINED AT PARTNER LEVEL.—For purposes of this subsection— "(A) IN 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 - i made by treating each tax-exempt entity partner's propor- 5- > tionate share (determined under paragraph (6XC)) 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 as. 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 to- Secretary, it shall be presumed that the partners of a foreign partnership (and the beneficiaries of any other I foreign pass-thru entity) are persons who are not United States persons. ::^;.. "(6) TREATMENT OF PROPERTY OWNED BY PARTNERSHIPS, ETC.— "(A) IN GENERAL.—For purposes of this subsection, if— • "(i) any property which Ot>ut for this subparagraph) is •f's- 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 paragraph (IXD)) be treated as tax-exempt use property.
100 STAT. 2132 PUBLIC LAW 99-514—OCT. 22, 1986 .:;,rQ "(B) QUALIFIED ALLOCATION.—For purposes of subpara- graph (A), the term 'qualified allocation' means any alloca- f, 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 t v|: "(ii) h a s s u b s t a n t i a l economic effect within t h e mean- cH ing of section 704(b)(2). For purposes of this s u b p a r a g r a p h , items allocated u n d e r section 704(c) shall not be t a k e n into account. "(C) DETERMINATION OF PROPORTIONATE SHARE.— • , ' "(i) I N GENERAL.—For purposes of s u b p a r a g r a p h (A), a tax-exempt entity's proportionate s h a r e of a n y prop- .;. ; erty owned by a p a r t n e r s h i p shall be d e t e r m i n e d on t h e basis of such entity's s h a r e of p a r t n e r s h i p items of (; income or gain (excluding gain allocated u n d e r section 704(c)), whichever results in t h e 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 share shall be the highest share such entity may receive. "(D) DETERMINATION OF WHETHER PROPERTY USED IN UN- RELATED TRADE OR BUSINESS.—For purposes of this subsec- tion, in the case of any property which is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, the determination of whether such property is used in an unre- lated trade or business of such an entity shall be made without regard to section 514. "(E) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules similar to the rules of subparagraphs (A), (B), (C), and (D) 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. "(F) TREATMENT OF CERTAIN TAXABLE ENTITIES.— "(i) IN GENERAL.—For purposes of this paragraph and paragraph (5), except as otherwise provided in this subparagraph, any tax-exempt controlled entity shall be treated as a tax-exempt entity. . ,i "(ii) ELECTION.—If a tax-exempt controlled entity makes an election under this clause— vj "(I) such entity shall not be treated as a tax- exempt entity for purposes of this paragraph and paragraph (5), and "(II) any gain recognized by a tax-exempt entity on any disposition of an interest in such entity (and any dividend or interest received or accrued by a ,y . , , ' , tax-exempt entity from such tax-exempt controlled -*-;. ' J,:* entity) shall be treated as unrelated business tax- able income for purposes of section 511.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2133 Any such election shall be irrevocable and shall bind all tax-exempt entities holding interests in such tax- exempt controlled entity. For purposes of subclause (II), there shall only be taken into account dividends which are properly allocable to income of the tax-exempt controlled entity which was not subject to tax under this chapter. "(iii) TAX-EXEMPT CONTROLLED ENTITY.— "(I) IN GENERAL.—The term 'tax-exempt con- trolled entity' means any corporation (which is not a tax-exempt entity determined without regard to this subparagraph and paragraph (2)(E)) if 50 per- cent or more (in value) of the stock in such corpora- tion is held by 1 or more tax-exempt entities (other than a foreign person or entity). "(II) ONLY 5-PERCENT SHAREHOLDERS TAKEN INTO ACCOUNT IN CASE OF PUBUCLY TRADED STOCK.—For purposes of subclause (I), in the case of a corpora- tion the stock of which is publicly traded on an established securities market, stock held by a tax- exempt entity shall not be taken into account unless such entity holds at least 5 percent (in value) of the stock in such corporation. For pur- poses of this subclause, related entities (within the meaning of paragraph (4)) shall be treated as 1 entity. "(Ill) SECTION 3 1 8 TO APPLY.—For purposes of this clause, a tax-exempt entity shall be treated as holding stock which it holds through application of section 318 (determined without regard to the 50- percent limitation contained in subsection (aX2XC) thereof). "(G) REGULATIONS.—For purposes of determining whether there is a qualified allocation under subparagraph (B), the regulations prescribed under paragraph (8) for pur- poses 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. "(7) LEASE.—For purposes of this subsection, the term 'le£ise' includes any grant of a right to use property. "(8) REGULATIONS.—The Secretary shall prescribe such regu- lations as may be necessary or appropriate to carry out the purposes of this subsection. "(i) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec- tion— "(1) CLASS LIFE.— "(A) IN GENERAL.—Except as provided in this section, the term 'class life' means the class life (if any) which would be applicable with respect to any property as of January 1, 1986, under subsection (m) of section 167 (determined with- out regard to paragraph (4) thereof and as if the taxpayer had made an election under such subsection). "(B) SECRETARIAL AUTHORITY.—The Secretary, through an office established in the Treasury—
100 STAT. 2134 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) shall monitor and analyze actual experience with respect to all depreciable assets, and "(ii) except in the case of residential rental property or nonresidential real property— "(I) may prescribe a new class life for any prop- erty, (II) in the case of assigned property, may modify any assigned item, or "(III) may prescribe a class life for any property which does not have a class life within the mean- ing of subparagraph (A). Any class life or assigned item prescribed or modified under the preceding sentence shall reasonably reflect the antici- pated useful life, and the anticipated decline in value over time, of the property to the industry or other group. "(C) EFFECT OF MODIFICATION.—Any class life or assigned item with respect to any property prescribed or modified under subparagraph (B) shall be used in classifying such property under subsection (e) and in applying subsection (g). "(D) No MODIFICATION OF ASSIGNED PROPERTY BEFORE JANUARY 1, 1992.— "(i) IN GENERAL.—Except as otherwise provided in this subparagraph, the Secretary may not modify an assigned item under subparagraph (B)(ii)(II) for any assigned property which is placed in service before January 1,1992. "(ii) EXCEPTION FOR SHORTER CLASS LIFE.—In the case of assigned property which is placed in service before January 1, 1992, and for which the assigned item re- flects a class life which is shorter than the class life under subparagraph (A), the Secretary may modify such assigned item under subparagraph (B)(ii)(II) if such modification results in an item which reflects a shorter class life than such assigned item. "(E) ASSIGNED PROPERTY AND ITEM.—For purposes of this paragraph— "(i) ASSIGNED PROPERTY.—The term 'assigned prop- erty' means property for which a class life, classifica- tion, or recovery period is assigned under subsection (eX3) or subparagraph (B), (C), or (D) of subsection (gX3). "(ii) ASSIGNED ITEM.—The term 'assigned item' means the class life, classification, or recovery period assigned under subsection (e)(3) or subparagraph (B), (C), or (D) of subsection (gX3). "(2) QUALIFIED TECHNOLOGICAL EQUIPMENT.— * (A) IN GENERAL.—The term 'qualified technological equipment' means— "(i) any computer or peripheral equipment, "(ii) any high technology telephone station equip- ment installed on the customer's premises, and "(iii) any high technology medical equipment. "(B) 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.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2135 "(ii) COMPUTER.—The term 'computer' means a programmable electronically activated device which— "(I) is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without 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— "(I) any equipment which is an integral part of other property which is not a computer, "(II) typewriters, calculators, adding and accounting machines, copiers, duplicating equip- ment, and similar equipment, and "(III) equipment of a kind used primarily for amusement or entertainment of the user. "(C) 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 treatment of patients in a laboratory, medical, or hospital environ- ment. "(3) LEASE TERM.— "(A) IN GENERAL.—In determining a lease term— "(i) there shall be taken into account options to renew, and "(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. "(B) SPECIAL RULE FOR FAIR RENTAL OPTIONS ON NONRESIDENTIAL REAL PROPERTY OR RESIDENTIAL RENTAL PROPERTY.—For purposes of clause (i) of subparagraph (A), in the case of nonresidential real property or residential rental property, there shall not be taken into account any option to renew at fair market value, determined at the time of renewal. "(4) GENERAL ASSET ACCOUNTS.—Under regulations, a tax- payer may maintain 1 or more general asset accounts for any property to which this section applies. Except as provided in regulations, all proceeds realized on any disposition of property in a general asset account shall be included in income as ordinary income. "(5) CHANGES IN USE.—The Secretary shall, by regulations, provide for the method of determining the deduction allowable under section 167(a) with respect to any tangible property for any taxable year (and the succeeding taxable years) during which such property changes status under this section but continues to be held by the same person.
100 STAT. 2136 PUBLIC LAW 99-514—OCT. 22, 1986 "(6) TREATMENTS OF ADDITIONS OR IMPROVEMENTS TO PROP- ERTY.—In the case of any addition to (or improvement of) any property— "(A) any deduction under subsection (a) for such addition or improvement shall be computed in the same manner as the deduction for such property would be computed if such property had been placed in service at the same time as such addition or improvement, and "(B) the applicable recovery period for such addition or improvement shall begin on the later of— "(i) the date on which such addition (or improvement) is placed in service, or "(ii) the date on which the property with respect to which such addition (or improvement) was made is placed in service. "(7) TREATMENT OF CERTAIN TRANSFEREES.— "(A) I N GENERAL.—In the case of any property trans- ferred in a transaction described in subparagraph (B), the transferee shall be treated as the transferor for purposes of computing the depreciation deduction determined under this section with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. "(B) TRANSACTIONS COVERED.—The transactions described in this subparagraph are any transaction described in sec- tion 332, 351, 361, 371(a), 374(a), 721, or 731. Subparagraph (A) shall not apply in the case of a termination of a partner- ship under section 708(b)(1)(B). "(C) PROPERTY REACQUIRED BY THE TAXPAYER.—Under regulations, property which is disposed of and then re- acquired by the taxpayer shall be treated for purposes of computing the deduction allowable under subsection (a) as if such property had not been disposed of. "(D) EXCEPTION.—This paragraph shall not apply to any transaction to which subsection (fK5) applies (relating to churning transactions). "(8) TREATMENT OF LEASEHOLD IMPROVEMENTS.—In the case of any building erected (or improvements made) on leased prop- erty, if such building or improvement is property to which this section applies, the depreciation deduction shall be determined under the provisions of this section. "(9) NORMAUZATION RULES.— "(A) I N GENERAL.—In order to use a normalization method of accounting with respect to any public utility property for purposes of subsection (fK2)— "(i) the taxpayer must, in computing its tax expense for purposes of establishing its cost of service for rate- making purposes and reflecting operating results in its regulated books of account, use a method of deprecia- tion with respect to such property that is the same as, and a depreciation period for such property that is no shorter than, the method and period used to compute its depreciation expense for such purposes; and "(ii) if the amount allowable as a deduction under this section with respect to such property differs from the amount that would be allowable as a deduction under section 167 (determined without regard to sec-
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2137 tion 167(1)) using the method (including the period, first and last year convention, and salvage value) used to compute regulated tax expense under clause (i), the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference. "(B) USE OF INCONSISTENT ESTIMATES AND PROJECTIONS, ETC.— "(i) I N GENERAL.—One way in which the require- ments of subparagraph (A) are not met is if the tax- payer, for ratemaking purposes, uses a procedure or adjustment which is inconsistent with the require- ments of subparagraph (A). "(ii) U S E OF INCONSISTENT ESTIMATES AND PROJEC- TIONS.—The procedures and adjustments which are to be treated as inconsistent for purposes of clause (i) shall include any procedure or adjustment for ratemaking purposes which uses an estimate or projection of the taxpayer's, tax expense, depreciation expense, or re- serve for deferred taxes under subparagraph (A)(ii) unless such estimate or projection is also used, for ratemaking purposes, with respect to the other 2 such items and with respect to the rate base. "(iii) REGULATORY AUTHORITY.—The Secretary may by regulations prescribe procedures and adjustments (in addition to those specified in clause (ii)) which are to be treated as inconsistent for purposes of clause (i). "(C) PUBLIC UTILITY PROPERTY WHICH DOES NOT MEET NORMALIZATION RULES.—In the case of any public utility property to which this section does not apply by reason of subsection (fK2), the allowance for depreciation under sec- tion 167(a) shall be an amount computed using the method and period referred to in subparagraph (A)(i). "(10) PUBLIC UTILITY PROPERTY.—The term 'public utility prop- erty' has the meaning given such term by section 167(1X3XA). "(11) RESEARCH AND EXPERIMENTATION.—The term 'research and experimentation' has the same meaning as the term re- search and experimental has under section 174. "(12) SECTION 1245 AND 1250 PROPERTY.—The terms 'section 1245 property' and 'section 1250 property' have the meanings given such terms by sections 1245(a)(3) and 1250(c), respec- tively." (b) SYSTEM USED FOR PURPOSES OF EARNINGS AND PROFITS.—Para- graph (3) of section 312(k) is amended to read as follows: "(3) EXCEPTION FOR TANGIBLE PROPERTY.— "(A) IN GENERAL.—Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for deprecia- tion for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168(g)(2)). "(B) TREATMENT OF AMOUNTS DEDUCTIBLE UNDER SECTION 179.—For purposes of computing the earnings and profits of a corporation, any amount deductible under section 179 shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179)."
100 STAT. 2138 PUBLIC LAW 99-514—OCT. 22, 1986 (c) CONTINUATION OF RULES RELATING TO MOTOR VEHICLE OPERAT- ING LEASES.—Section 7701 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the follow- ing new subsection: "(h) MOTOR VEHICLE OPERATING LEASES.— "(1) IN GENERAL.—For purposes of this title, in the case of a qualified motor vehicle operating agreement which contains a terminal rental adjustment clause— "(A) such agreement shall be treated as a lease if Ojut for such terminal rental adjustment clause) such agreement would be treated as a lease under this title, and "(B) the lessee shall not be treated as the owner of the property subject to an agreement during any period such agreement is in effect. "(2) QUALIFIED MOTOR VEHICLE OPERATING AGREEMENT DE- FINED.—For purposes of this subsection— "(A) IN GENERAL.—The term 'qualified motor vehicle operating agreement' means any agreement with respect to a motor vehicle (including a trailer) which meets the requirements of subparagraphs (B), (C), and (D) of this paragraph. "(B) MINIMUM UABIUTY OF LESSOR.—An agreement meets the requirements of this subparagraph if under such agree- ment 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 shall not be taken into account under clause (ii) any prop- erty pledged which is property subject to the agreement or property directly or indirectly financed by indebtedness secured by property subject to the agreement. "(C) CERTIFICATION BY LESSEE; NOTICE OF TAX OWNER- SHIP.—An agreement meets the requirements of this subparagraph if such agreement contains a separate writ- ten statement separately signed by the lessee— "(i) under which the lessee certifies, under 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 "(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 agreement for Federal income tax purposes. "(D) LESSOR MUST HAVE NO KNOWLEDGE THAT CERTIFI- CATION IS FALSE.—An agreement meets the requirements of this subparagraph if the lessor does not know that the certification described in subparagraph (CXi) is false. "(3) TERMINAL RENTAL ADJUSTMENT CLAUSE DEFINED.— "(A) IN GENERAL.—For purposes of this subsection, the term 'terminal rental adjustment clause' means a provision of an agreement which permits or requires the rental price to be adjusted upward or downward by reference to the
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2139 amount realized by the lessor under the agreement upon sale or other disposition of such property. "(B) SPECIAL RULE FOR LESSEE DEALERS.—The term 'termi- nal rental adjustment clause' also includes a provision of an agreement which requires a lessee who is a 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 de- scribed in subparagraph (A)." (d) TECHNICAL AND CONFORMING AMENDMENTS.— (1) SECTION 167.—Paragraph (4) of section 167(m) (relating to termination of class lives) is amended to read as follows: "(4) TERMINATION.—This subsection shall not apply with re- spect to any property to which section 168 applies." (2) SECTION 178.— (A) Section 178 is amended to read as follows: "SEC. 178. AMORTIZATION OF COST OF ACQUIRING A LEASE. "(a) GENERAL RULE.—In determining the amount of the deduction allowable to a lessee of a lease for any taxable year for amortization under section 167, 169, 179, 185, 190, 193, or 194 in respect of any cost of acquiring the lease, the term of the lease shall be treated as including all renewal options (and any other period for which the parties reasonably expect the lease to be renewed) if less than 75 percent of such cost is attributable to the period of the term of the lease remaining on the date of its acquisition. "Ob) CERTAIN PERIODS EXCLUDED.—For purposes of subsection (a), in determining the period of the term of the lease remaining on the date of acquisition, there shall not be taken into account any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee." (B) The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 178 and inserting in lieu thereof the following new item: "Sec. 178. Amortization of cost of acquiring a lease." (3) SECTION 179.—Paragraph (8) of section 179(d) is amended to read as follows: "(8) TREATMENT OF PARTNERSHIPS AND S CORPORATIONS.—In the case of a partnership, the limitations of subsection (b) shall apply with respect to the partnership and with respect to each partner. A similar rule shall apply in the case of an S corpora- tion and its shareholders." (4) SECTION 280F.— (A) Paragraph (2) of section 280F(a) (relating to deprecia- tion) is amended— (i) by striking out clauses (i) and (ii) of subparagraph (A) thereof and inserting in lieu thereof the following new clauses: "(i) $2,560 for the 1st taxable year in the recovery period, "(ii) $4,100 for the 2nd taxable year in the recovery period, "(iii) $2,450 for the 3rd taxable year in the recovery period, and
100 STAT. 2140 PUBLIC LAW 99-514—OCT. 22, 1986 **(iv) $1,475 for each succeeding taxable year in the recovery period.", and (ii) by striking out "$4,800" each place it appears in subparagraph (B) thereof and inserting in lieu thereof "$1,475". (B) Subparagraph (A) of section 280F(bX3) (relating to recapture) is amended by striking out "the straight line method over the earnings and profits life" and inserting in lieu thereof "section 168(g) (relating to alternative deprecia- tion system)". (C) Paragraph (4) of section 280FOt>) (relating to defini- tions) is amended to read as follows: "(4) PROPERTY PREDOMINANTLY USED IN QUALIFIED BUSINESS USE.—For purposes of this subsection, 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." (D) Paragraph (4) of section 280F(c) is amended by strik- ing out "section 168(j)(6)(B)" and inserting in lieu thereof "section 168(i)(3XA)". (E) Paragraph (1) of section 280F(d) is amended by strik- ing out "recovery deduction" and inserting in lieu thereof "depreciation deduction". (F) Paragraph (2) of section 280F(d) is amended— (i) by striking out "recovery deduction" and inserting in lieu thereof "depreciation deduction", and (ii) by striking out "use described in section 168(cXl) (defining recovery property)" and inserting in lieu thereof "use in a trade or business (including the hold- ing for the production of income)". (G) Clause (iv) of section 280F(dX4XA) is amended by striking out "section 168(jX5XD)" and inserting in lieu thereof "section 168(iX2XB)'\ (H) Paragraph (8) of section 280F(d) (defining unrecovered basis) is amended to read as follows: "(8) UNRECOVERED BASIS.—For purposes of subsection (aX2), the term 'unrecovered basis' means the adjusted basis of the passenger automobile determined after the application of subsection (a) and as if all use during the recovery period were use in a trade or business (including the holding of property for the production of income)." (I) Paragraph (10) of section 280F(d) is amended by strik- ing out ", notwithstanding any regulations prescribed under section 168(fK7),". (J) Paragraph (2) of section 280FOt>) is amended by strik- ing out "the straight line method over the earnings and profits life for such property" and inserting in lieu thereof 'section 168(g) (relating to alternative depreciation system)". (K) Subsections (a) and (b) of section 280F are amended by striking out "recovery deduction" each place it appears and inserting in lieu thereof "depreciation deduction'. (5) SECTION 291.— (A) Subparagraph (A) of section 291(aXl) is amended by striking out "or section 1245 recovery property". (B) Paragraph (1) of section 291(c) is amended to read as follows:
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2141 "(1) ACCELERATED COST RECOVERY DEDUCTION.—Section 168 shall apply with respect to that portion of the basis of any property not taken into account under section 169 by reason of subsection (a)(5)." (C) Section 291(e)(2) is amended by striking out ", 'section 1245 recovery property'," and ", section 1245(a)(5),". (6) SECTION 312.—Paragraph (4) of section 312(k) is amended by striking out the last sentence. (7) SECTION 465.— (A) Subparagraph (C) of section 46503)(3) is amended to read as follows: "(C) RELATED PERSON.—For purposes of this subsection, a person (hereinafter in this paragraph referred to as the 'related person') is related to any person if— "(i) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or "(ii) the related person and such person are engaged in trades or business under common control (within the meaning of subsections (a) and (b) of section 52). For purposes of clause (i), in applying section 267(b) or 7070t>Xl), '10 percent' shall be substituted for '50 percent'." (B) Section 46(c)(8)(D)(v) is amended by striking out "sec- tion 168(e)(4)" and inserting in lieu thereof "section 465(b)(3)(C)". (C) Section 4162(c)(3) is amended by striking out "section 168(e)(4)(D)" and inserting in lieu thereof "section 465(b)(3)(C)". (8) SECTION 467.— (A) Paragraph (3) of section 467(e) is amended to read as follows: "(3) STATUTORY RECOVERY PERIOD.— "(A) IN GENERAL.— The statutory recovery "In the case of: period is: 3-year property 3 years 5-year property 5 years 7-year property 7 years 10-year property 10 years 15-year and 20-year property 15 years Residential rental property and nonresidential real prop- erty 19 years. "(B) SPECIAL RULE FOR PROPERTY NOT DEPRECIABLE UNDER SECTION 168.—In the case of property to which section 168 does not apply, subparagraph (A) shall be applied as if section 168 applies to such property." (B) Paragraph (5) of section 467(e) (defining related person) is amended by striking out "section 168(e)(4)(D)" and inserting in lieu thereof "section 4650t))(3)(C)". (9) SECTION 5 14.—Subclause (II) of section 514(cX9)(BXvi) (relating to real property acquired by a qualified organization) is amended by striking out "section 168(jX9)" and inserting in lieu thereof "section 168(hX6)". (10) SECTION 751.—Subsection (c) of section 751 (defining un- realized receivables) is amended by striking out "section 1245 recovery property (as defined in section 1245(aX5)),". (11) SECTION 1245.—
100 STAT. 2142 PUBLIC LAW 99-514—OCT. 22, 1986 (A) Paragraph (1) of section 1245(a) (relating to gain from dispositions of certain depreciable property) is amended by striking out "during a taxable year beginning after Decem- ber 31,1962, or section 1245 recovery property is disposed of after December 31,1980,". (B) Paragraph (2) of section 1245(a) (defining recomputed basis) is amended to read as follows: "(2) RECOMPUTED BASIS.—For purposes of this section— "(A) IN GENERAL.—The term 'recomputed basis' means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the tax- payer or to any other person for depreciation or amortiza- tion. "(B) TAXPAYER MAY ESTABUSH AMOUNT ALLOWED.—For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed. "(C) CERTAIN DEDUCTIONS TREATED AS AMORTIZATION.— Any deduction allowable under section 179,190, or 193 shall be treated as if it were a deduction allowable for amortiza- tion." (C) Paragraph (3) of section 1245(a) (defining section 1245 property) is amended by striking out subparagraph (C) and by redesignating subparagraphs (D), (E), and (F) as subpara- graphs (C), (D), and (E), respectively. (D) Subsection (a) of section 1245 is amended by striking out paragraphs (5) and (6). (12) SECTION 4162.—Paragraph (3) of section 4162(c) (defining related person) is amended by striking out "section 168(eX4)(D)" and inserting in lieu thereof "section 4650t))(3XC)". (13) SECTION 6111.—Clause (ii) of section 6111(c)(3XB) (relating to certain borrowed amounts excluded) is amended by striking out "section 168(eX4)" and inserting in lieu thereof "section 465(bX3)(C)". (14) SECTION 7701.— (A) Subparagraph (A) of section 7701(eX4) is amended by striking out "section 168(j)" and inserting in lieu thereof "section 168(h)". (B) Paragraph (5) of section 7701(e) (relating to exception for certain low-income housing) is amended by striking out "low-income housing (section 168(cX2XF))" and inserting in lieu thereof "property described in clause (i), (ii), (iii), or (iv) of section 1250(aXlXB) (relating to low-income housing)". SEC. 202. EXPENSING OF DEPRECIABLE ASSETS. (a) LIMITATIONS ON EXPENSING.—Subsection (h) of section 179 (relating o election to expense certain depreciable assets) is amended to read £is follows: "Ot>) LIMITATIONS.— "(1) DOLLAR UMITATION.—Theaggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $10,000.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2143 "(2) REDUCTION IN UMITATION.—The limitation under para- graph (1) for any taxable year shall be reduced (but not below zero) by the amount by which the cost of section 179 property placed in service during such taxable year exceeds $200,000. "(3) LIMITATION BASED ON INCOME FROM TRADE OR BUSINESS.— "(A) IN GENERAL.—The aggregate cost of section 179 prop- erty taken into account under subsection (a) for any taxable year shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year. "(B) CARRYOVER OF UNUSED COST.—The amount of any cost which (but for subparagraph (A)) would have been allowed as a deduction under subsection (a) for any taxable year shall be carried to the succeeding taxable year and added to the amount allowable as a deduction under subsec- tion (a) for such succeeding taxable year. "(C) COMPUTATION OF TAXABLE INCOME.—For purposes of this paragraph, taxable income derived from the conduct of a trade or business shall be computed without regard to the cost of any section 179 property. "(4) MARRIED INDIVIDUALS FIUNG SEPARATELY.—In the case of a husband and wife filing separate returns for the taxable year— "(A) such individuals shall be treated as 1 tgixpayer for purposes of paragraphs (1) and (2), and "(B) unless such individuals elect otherwise, 50 percent of the cost which may be taken into account under subsection (a) for such taxable year (before application of paragraph (3)) shall be allocated to each such individual." (b) SECTION 179 PROPERTY.—Paragraph (1) of section 179(d) (defin- ing section 179 property) is amended by inserting "in the active conduct o f after "purchase for use". (c) RECAPTURE.—Section 179(dX10) (relating to recapture in certain cases) is amended by striking out all that follows "at any time" and inserting in lieu thereof a period. SEC. 203. EFFECTIVE DATES; GENERAL TRANSITIONAL RULES. (a) GENERAL EFFECTIVE DATES.— (1) SECTION 201.— (A) IN GENERAL.—Except as provided in this section, sec- tion 204, and section 251(d), the amendments made by section 201 shall apply to property placed in service after December 31, 1986, in taxable years ending after such date. (B) ELECTION TO HAVE AMENDMENTS MADE BY SECTION 201 APPLY.—A taxpayer may elect (at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe) to have the amendments made by section 201 apply to any property placed in service after July 31, 1986, and before January 1,1987. (2) SECTION 202.—The amendments made by section 202 shall apply to property placed in service after December 31, 1986, in taxable years ending after such date. (b) GENERAL TRANSITIONAL RULE.— (1) IN GENERAL.—The amendments made by section 201 shall not apply to—
100 STAT. 2144 PUBLIC LAW 99-514—OCT. 22, 1986 (A) any property which is constructed, reconstructed, or acquired by the taxpayer pursuant to a written contract which was binding on March 1,1986, (B) property which is constructed or reconstructed by the taxpayer if— (i) the lesser of (I) $1,000,000, or (II) 5 percent of the cost of such property has been incurred or committed by March 1,1986, and (ii) the construction or reconstruction of such prop- erty began by such date, or (C) an equipped building or plant facility if construction has commenced as of March 1, 1986, pursuant to a written specific plan and more than one-half of the cost of such equipped building or facility has been incurred or commit- ted by such date. (2) REQUIREMENT THAT CERTAIN PROPERTY BE PLACED IN SERV- ICE BEFORE CERTAIN DATE.— (A) IN GENERAL.—Paragraph (1) and section 204(a) (other than paragraph (8) or (12) thereof) shall not apply to any property unless such property has a class life of at legist 7 years and is placed in service before the applicable date determined under the following table: In the case of property The applicable with a class life of: date is: At least 7 but less than 20 years January 1, 1989 20 years or more January 1, 1991. (B) RESIDENTIAL RENTAL AND NONRESIDENTIAL REAL PROP- ERTY.—In the case of residential rental property and nonresidential real property, the applicable date is January 1,1991. (C) CLASS LIVES.—For purposes of subparagraph (A)— (i) the class life of property to which section 168(g)(3)(B) of the Internal Revenue Code of 1986 (as added by section 201) shall be the class life in effect on January 1, 1986, except that computer-based telephone central office switching equipment described in section 168(e)(3XB)(iii) of such Code shall be treated as having a class life of 6 years, (ii) property described in section 204(a) shall be treated as having a class life of 20 years, and (iii) property with no class life shall be treated as having a class life of 12 years. (D) SUBSTITUTION OF APPLICABLE DATES.—If any provision of this Act substitutes a date for an applicable date, this paragraph shall be applied by using such date. (3) PROPERTY QUALIFIES IF SOLD AND LEASED BACK IN 3 MONTHS.—Property shall be treated as meeting the require- ments of paragraphs (1) and (2) or section 204(a) with respect to any taxpayer if such property is acquired by the taxpayer from a person— (A) in whose hands such property met the requirements of paragraphs (1) and (2) or section 204(a), or (B) who placed the property in service before January 1, 1987, and such property is leased back by the taxpayer to such person not later than the earlier of the applicable date under para-
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2145 graph (2) or the day which is 3 months after such property was placed in service. (4) PLANT FACILITY.—For purposes of paragraph (1), the term "plant facility" means a facility which does not include any building (or with respect to which buildings constitute an insignificant portion) and which is— (A) a self-contained single operating unit or processing operation, (B) located on a single site, and (C) identified as a single unitary project as of March 1, 1986. (c) PROPERTY FINANCED WITH TAX-EXEMPT BONDS.— (1) IN GENERAL.—Subparagraph (C) of section 168(gXl) of the Internal Revenue Code of 1986 (as added by this Act) shall apply to property placed in service after December 31, 1986, in taxable years ending after such date, to the extent such property is financed by the proceeds of an obligation (including a refunding obligation) issued after March 1,1986. (2) EXCEPTIONS.— (A) CONSTRUCTION OR BINDING AGREEMENTS.—Subpara- graph (C) of section 168(g)(1) of such Code (as so added) shall not apply to obligations with respect to a facility— (i)(I) the original use of which commences with the taxpayer, and the construction, reconstruction, or re- habilitation of which began before March 2, 1986, and was completed on or after such date, (II) with respect to which a binding contract to incur significant expenditures for construction, reconstruc- tion, or rehabilitation was entered into before March 2, 1986, and some of such expenditures are incurred on or after such date, or (III) acquired on or after March 2, 1986, pursuant to a binding contract entered into before such date, and (ii) described in an inducement resolution or other comparable preliminary approval adopted by the issu- ing authority (or by a voter referendum) before March 2, 1986. (B) REFUNDING.— (i) I N GENERAL.—Except as provided in clause (ii), in the case of property placed in service after December 31, 1986, which is financed by the proceeds of an obliga- tion which is issued solely to refund another obligation which was issued before March 2, 1986, subparagraph (C) of section 168(g)(1) of such Code (as so added) shall apply only with respect to an amount equal to the basis in such property which has not been recovered before the date such refunded obligation is issued. (ii) SIGNIFICANT EXPENDITURES.—In the case of facili- ties the original use of which commences with the taxpayer and with respect to which significant expendi- tures are made before January 1, 1987, subparagraph (C) of section 168(g)(1) of such Code (as so added) shall not apply with respect to such facilities to the extent such facilities are financed by the proceeds of an obliga- tion issued solely to refund another obligation which was issued before March 2, 1986.
100 STAT. 2146 PUBLIC LAW 99-514—OCT. 22, 1986 (C) FACILITIES.—In the case of an inducement resolution or other comparable preliminary approval adopted by an issuing authority before March 2, 1986, for purposes of subparagraphs (A) and (BXii) with respect to obligations described in such resolution, the term "facilities" means the facilities described in such resolution. (D) SIGNIFICANT EXPENDITURES.—For purposes of this paragraph, the term "significant expenditures" means expenditures greater than 10 percent of the reasonably anticipated cost of the construction, reconstruction, or re- habilitation of the facility involved. (d) MID-QUARTER CONVENTION.—In the case of any taxable year in which property to which the amendments made by section 201 do not apply is placed in service, such property shall be taken into account in determining whether section 168(dX3) of the Internal Revenue Code of 1986 (as added by section 201) applies for such taxable year to property to which such amendments apply. (e) NORMAUZATION REQUIREMENTS.— (1) IN GENERAL.—A normalization method of accounting shall not be treated as being used with respect to any public utility property for purposes of section 167 or 168 of the Internal Revenue Code of 1986 if the taxpayer, in computing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, reduces the excess tax reserve more rapidly or to a greater extent than such reserve would be reduced under the average rate assumption method. (2) DEFINITIONS.—For purposes of this subsection— (A) EXCESS TAX RESERVE.—The term "excess tax reserve" means the excess of— (i) the reserve for deferred taxes (as described in section 167(lX3XGXii) or 168(eX3XBXii) of the Internal Revenue Code of 1954 as in effect on the day before the date of the enactment of this Act), over (ii) the amount which would be the balance in such reserve if the amount of such reserve were determined by assuming that the corporate rate reductions pro- vided in this Act were in effect for all prior periods. (B) AVERAGE RATE ASSUMPTION METHOD.—The average rate assumption method is the method under which the excess in the reserve for deferred taxes is reduced over the remaining lives of the property as used in its regulated books of account which gave rise to the reserve for deferred taxes. Under such method, if timing differences for the property reverse, the amount of the adjustment to the reserve for the deferred taxes is calculated by multiplying— (i) the ratio of the aggregate deferred taxes for the property to the aggregate timing differences for the property as of the beginning of the period in question, by (ii) the amount of the timing differences which re- verse during such period. SEC. 204. ADDITIONAL TRANSITIONAL RULES. (a) OTHER TRANSITIONAL RULES.— (1) URBAN RENOVATION PROJECTS.—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2147 (A) IN GENERAL.—The amendments made by section 201 shall not apply to any property which is an integral part of any qualified urban renovation project. (B) QUALIFIED URBAN RENOVATION PROJECT.—For purposes of subparagraph (A), the term "qualified urban renovation project" means any project— (i) described in subparagraph (C), (D), (E), or (G) which before March 1, 1986, was publicly announced by a political subdivision of a State for a renovation of an urban area within its jurisdiction, (ii) described in subparagraph (C), (D) or (G) which before March 1, 1986, was identified as a single unitary project in the internal financing plans of the primary developer of the project, and (iii) described in subparagraph (C) or (D), which is not substantially modified on or after March 1,1986. (C) PROJECT WHERE AGREEMENT O N DECEMBER 1 9 , I 9 8 4 . — A project is described in this subparagraph if— (i) a political subdivision granted on July 11, 1985, development rights to the primary developer-purchaser of such project, and (ii) such project was the subject of a development agreement between a political subdivision and a bridge authority on December 19,1984. For purposes of this subparagraph, subsection Ot)X2) shall be applied by substituting "January 1, 1994" for "January 1, 1991". (D) CERTAIN ADDITIONAL PROJECTS.—A project is described in this subparagraph if it is described in any of the follow- ing clauses of this subparagraph and the primary developer of all such projects is the same person: (i) A project is described in this clause if the develop- ment agreement with respect thereto was entered into during April 1984 and the estimated cost of the project is approximately $194,000,000. (ii) A project is described in this clause if the develop- ment agreement with respect thereto was entered into during May 1984 and the estimated cost of the project is approximately $190,000,000. (iii) A project is described in this clause if the project has an estimated cost of approximately $92,000,000 and at least $7,000,000 was spent before September 26,1985, with respect to such project. (iv) A project is described in this clause if the esti- mated project cost is approximately $39,000,000 and at least $2,000,000 of construction cost for such project were incurred before September 26,1985. (v) A project is described in this clause if the develop- ment agreement with respect thereto was entered into before September 26, 1985, and the estimated cost of the project is approximately $150,000,000. (vi) A project is described in this clause if the board of directors of the primary developer approved such project in December 1982, and the estimated cost of such project is approximately $107,000,000. (vii) A project is described in this clause if the board of directors of the primary developer approved such
100 STAT. 2148 PUBLIC LAW 99-514—OCT. 22, 1986 project in December 1982, and the estimated cost of such project is approximately $59,000,000. (viii) A project is described in this clause if the Board of Directors of the primary developer approved such project in December 1983, following selection of the developer by a city council on September 26, 1983, and the estimated cost of such project is approximately $107,000,000." (E) PROJECT WHERE PLAN CONFIRMED ON OCTOBER 4, 1984.—A project is described in this subparagraph if— (i) a State or an agency, instrumentality, or political subdivision thereof approved the filing of a general project plan on June 18, 1981, and on October 4, 1984, a State or an agency, instrumentality, or political sub- division thereof confirmed such plan, (ii) the project plan as confirmed on October 4, 1984, included construction or renovation of office buildings, a hotel, a trade mart, theaters, and a subway complex, and (iii) significant segments of such project were the sulbject of one or more conditional designations granted by a State or an agency, instrumentality, or political subdivision thereof to one or more developers before January 1,1985. The preceding sentence shall apply with respect to a prop- erty only to the extent that a building on such property site was identified as part of the project plan before September 26, 1985, and only to the extent that the size of the building on such property site was not substantially increased by reason of a modification to the project plan with respect to such property on or after such date. For purposes of this subparagraph, subsection Ot))(2) shall be applied by substituting "January 1,1998" for "January 1,1991". (F) A project is described in this paragraph if it is a sports and entertainment facility which— (i) is to be used by both a National Hockey League team and a National Basketball Association team; (ii) is to be constructed on a platform utilizing air rights over land acquired by a State authority and identified as site B in a report dated May 30, 1984, prepared for a State urban development corporation; and (iii) is eligible for real property tax, and power and energy benefits pursuant to the provisions of State legislation approved and effective July 7,1982, or (iv) the mixed-use development is— (I) to be constructed above a public railroad sta- tion utilized by the national railroad passenger corporation and commuter railroads serving two States; and (II) will include the reconstruction of such sta- tion so as to make it a more efficient transpor- tation center and to better integrate the station with the development above, such reconstruction plans to be prepared in cooperation with a State transportation authority.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2149 For purposes of this subparagraph, subsection (b)i2) shall be applied by substituting "January 1, 1993" for the applicable date that would otherwise apply. (G) A project is described in this subparagraph if— (i) an inducement resolution was passed on March 9, 1984, for the issuance of obligations with respect to such project, (ii) such resolution was extended by resolutions passed on August 14, 1984, April 2, 1985, August 13, 1985, and July 8,1986, (iii) an application was submitted on January 31, 1984, for an Urban Development Action Grant with respect to such project, and (iv) an Urban Development Action Grant was preliminarily approved for all or part of such project on July 3,1986. (H) A project is described in this subparagraph if it is a redevelopment project, with respect to which $10,000,000 in industrial revenue bonds were approved by a State Develop- ment Finance Authority on January 15, 1986, a village transferred approximately $4,000,000 of bond volume authority to the State in June 1986, and a binding Redevel- opment Agreement was executed between a city and the development team on July 1, 1986. (2) CERTAIN PROJECTS GRANTED FERC LICENSES, ETC.—The amendments made by section 201 shall not apply to any prop- erty which is part of a project— (A) which is certified by the Federal Energy Regulatory Commission before March 2, 1986, as a qualifying facility for purposes of the Public Utility Regulatory Policies Act of 1978, (B) which was granted before March 2, 1986, a hydro- electric license for such project by the Federal Energy Regulatory Commission, or (C) which is a hydroelectric project of less than 80 megawatts that filed an application for a permit, exemp- tion, or license with the Federal Energy Regulatory Commission before March 2, 1986. (3) SUPPLY OR SERVICE CONTRACTS.—The amendments made by section 201 shall not apply to any property which is readily identifiable with and necessary to carry out a written supply or service contract, or agreement to lease, which was binding on March 1, 1986. (4) PROPERTY TREATED UNDER PRIOR TAX ACTS.—The amend- ments made by section 201 shall not apply to property described in section 12(cX2) or 31(g)(5) and 31(g)(17)g) of the Tax Reform Act of 1984, to property described in section 209(d)(1)(B) of the Tax Equity and Fiscal Responsibility Act of 1982, as amended by the Tax Reform Act of 1984 and to property described in section 216(b)(3) of the Tax Equity and Fiscal Responsibility Act of 1982. (5) SPECIAL RULES FOR PROPERTY INCLUDED IN MASTER PLANS OF INTEGRATED PROJECTS.—The amendments made by section 201 shall not apply to any property placed in service pursuant to a master plan which is clearly identifiable as of March 1, 1986, for any project described in any of the following subparagraphs of this paragraph: (A) A project is described in this subparagraph if—
100 STAT. 2150 PUBLIC LAW 99-514—OCT. 22, 1986 (i) the project involves production platforms for off- shore drilling, oil and gas pipeline to shore, process and storage facilities, and a marine terminal, and (ii) at least $900,000,000 of the costs of such project were incurred Isefore September 26,1985. (B) A project is described in this subparagraph if— (i) such project involves a fiber optic network of at least 20,000 miles, and (ii) before September 26, 1985, construction com- menced pursuant to the master plan and at least $85,000,000 was spent on construction. (C) A project is described in this subparagraph if— (i) such project passes through at least 10 States and involves intercity communication links (including one or more repeater sites, terminals and junction stations for microwave transmissions, regenerators or fiber optics and other related equipment), (ii) the lesser of $150,000,000 or 5 percent of the total project cost has been expended, incurred, or committed before March 2, 1986, by one or more taxpayers each of which is a member of the same affiliated group (as defined in section 1504(a)), and (iii) such project consists of a comprehensive plan for meeting network capacity requirements as encom- passed within either: (I) a November 5, 1985, presentation made to and accepted by the Chairman of the Board and the president of the taxpayer, or (II) the approvals by the Board of Directors of the parent company of the taxpayer on May 3, 1985, and September 22, 1985, and of the executive committee of said board on December 23, 1985. (D) A project is described in this subparagraph if— (i) such project is part of a flat rolled product mod- ernization plan which was initially presented to the Board of Directors of the taxpayer on July 8, 1983, (ii) such program will be carried out at 3 locations, and (iii) such project will involve a total estimated mini- mum capital cost of at least $250,000,000. (E) A project is described in this subparagraph if the project is being carried out by a corporation engaged in the production of paint, chemicals, fiberglass, and glass, and if— (i) the project includes a production line which ap- plies a thin coating to glass in the manufacture of energy efficient residential products, if approved by the management committee of the corporation on January 29,1986, (ii) the project is a turbogenerator which was ap- proved by the president of such corporation and at least $1,000,000 of the cost of which was incurred or commit- ted before such date, (iii) the project is a waste-to-energy disposal system which was initially approved by the management committee of the corporation on March 29, 1982, and at
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2151 least $5,000,000 of the cost of which was incurred before September 26,1985, (iv) the project, which involves the expansion of an existing service facility and the addition of new lab facilities needed to accommodate topcoat and under- coat production needs of a nearby automotive assembly plant, was approved by the corporation's management committee on March 5,1986, or (v) the project is part of a facility to consolidate and modernize the silica production of such corporation and the project was approved by the president of such corporation on August 19, 1985. (F) A project is described in this subparagraph if— (i) such project involves a port terminal and oil pipe- line extending generally from the area of Los Angeles, California, to the area of Midland, Texas, and (ii) before September 26, 1985, there is a binding contract for dredging and channeling with respect thereto and a management contract with a construc- tion manager for such project. (G) A project is described in this subparagraph if— (i) the project is a newspaper printing and distribu- tion plant project with respect to which a contract for the purchase of 8 printing press units and related equipment to be installed in a single press line was entered into on January 8,1985, and (ii) the contract price for such units and equipment represents at least 50 percent of the total cost of such project. (H) A project is described in this subparagraph if it is the second phase of a project involving direct current trans- mission lines spanning approximately 190 miles from the United States-Canadian border to Ayer, Massachusetts, alternating current transmission lines in Massachusetts from Ayers to Millbury to West Medway, DC-AC converted terminals to Monroe, New Hampshire, and Ayer, Massachusetts, and other related equipment and facilities. (I) A project is described in this subparagraph if it in- volves not more than two natural gas-fired combined cycle electric generating units each having a net electrical capability of approximately 233 megawatts, and a sales contract for approximately one-half of the output of the 1st unit was entered into in December 1985. (J) A project is described in this subparagraph if— (i) the project involves an automobile manufacturing facility (including equipment and incidental appur- tenances) to be located in the United States, and (ii) either— (I) the project was the subject of a memorandum of understanding between 2 automobile manufac- turers that was signed before September 25, 1985, the automobile manufacturing facility (including equipment and incidental appurtenances) will in- volve a total estimated cost of approximately $750,000,000, and will have an annual production capacity of approximately 240,000 vehicles or
100 STAT. 2152 PUBLIC LAW 99-514—OCT. 22, 1986 (II) the Board of Directors of an automobile manufacturer approved a written plan for the conversion of an existing facility to produce a new model of a vehicle currently not produced in the United States, such facility will be placed in serv- ice by July 1, 1987, and such Board action occurred in July 1985, with respect to a $523,000,000 expenditure, in June 1983, with respect to a $475,000,000 expenditure, or in July 1984, with respect to a $312,000,000 expenditure. (K) A project is described in this subparagraph if either— (i) the project involves a joint venture between a utility company and a paper company for a super calendar paper mill, and at least $50,000,000 were in- curred or committed with respect to such project before March 1, 1986, or (ii) the project involves a paper mill for the manufac- ture of newsprint (including a cogeneration facility) is generally based on a written design and feasibility study that was completed on December 15, 1981, and will be placed in service before January 1, 1991, or (iii) the project is undertaken by a Maine corporation and involves the modernization of pulp and paper mills in Millinocket and/or East Millinocket, Maine, or (iv) the project involves the installation of a paper machine for production of coated publication papers, the modernization of a pulp mill, and the installation of machinery and equipment with respect to related proc- esses, as of December 31, 1985, in excess of $50,000,000 was incurred for the project, as of July 1986, in excess of $150,000,000 was incurred for the project, and the project is located in Pine Bluff, Arkansas, or (v) involves property of a type described in ADR classes 26.1, 26.2, 25, 00.3 and 00.4 included in a paper plant which will manufacture and distribute tissue, towel or napkin products; is located in Effingham County, Georgia; and is generally based upon a written General Description which was submitted to the Geor- gia Department of Revenue on or about June 13, 1985. (L) A project is described in this subparagraph if— (i) a letter of intent with respect to such project was executed on June 4,1985, and (ii) a 5-percent downpayment was made in connection with such project for 2 10-unit press lines and related equipment. (M) A project is described in this subparagraph if— (i) the project involves the retrofit of ammonia plants, (ii) as of March 1, 1986, more than $390,000 had been expended for engineering and equipment, and (iii) more than $170,000 was expensed in 1985 as a portion of preliminary engineering expense. (N) A project is described in this subparagraph if the project involves bulkhead intermodal flat cars which are placed in service before January 1, 1987, and either—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2153 (i) more than $2,290,000 of expenditures were made before March 1, 1986, with respect to a project involv- ing up to 300 platforms, or (ii) more than $95,000 of expenditures were made before March 1, 1986, with respect to a project involv- ing up to 850 platforms. (O) A project is described in this subparagraph if—- (i) the project involves the production and transpor- tation of oil and gas from a well located north of the Arctic Circle, and (ii) more than $200,000,000 of cost had been incurred or committed before September 26, 1985. (P) A project is described in this subparagraph if— (i) a commitment letter was entered into with a financial institution on January 23, 1986, for the financing of the project, (ii) the project involves intercity communication links (including microwave and fiber optics commu- nications systems and related property), (iii) the project consists of communications links be- tween— (I) Omaha, Nebraska, and Council Bluffs, Iowa, (II) Waterloo, Iowa and Sioux City, Iowa, (III) Davenport, Iowa and Springfield, Illinois, and (iv) the estimated cost of such project is approxi- mately $13,000,000. (Q) A project is described in this subparagraph if— (i) such project is a mining modernization project involving mining, transport, and milling operations, (ii) before September 26, 1985, at least $20,000,000 was expended for engineering studies which were ap- proved by the Board of Directors of the taxpayer on January 27, 1983, and (iii) such project will involve a total estimated mini- mum cost of $350,000,000. (R) A project is described in this subparagraph if— (i) such project is a dragline acquired in connection with a 3-stage program which began in 1980 to increase production from a coal mine, (ii) at least $35,000,000 was spent before September 26, 1985, on the 1st 2 stages of the program, and (iii) at least $4,000,000 was spent to prepare the mine site for the dragline. (S) A project is described in this subparagraph if—it is a project consisting of a mineral processing facility using a heap leaching system (including waste dumps, low-grade dumps, a leaching area, and mine roads) and if— (i) convertible subordinated debentures were issued in August 1985, to finance the project, (ii) construction of the project was authorized by the Board of Directors of the taxpayer on or before Decem- ber 31, 1985, (iii) at least $750,000 was paid or incurred with re- spect to the project on or before December 31, 1985, and (iv) the project is placed in service on or before December 31, 1986.
100 STAT. 2154 PUBLIC LAW 99-514—OCT. 22, 1986 (T) A project is described in this subparagraph if it is a plant facility on Alaska's North Slope and— (i) the approximate cost is $575,000,000 of which approximately $100,000,000 was spent on off-site construction or (ii) the approximate cost of which is $450,000,000, of which approximately $100,000,000 was spent on off-site construction, more than 50 percent of the project cost was spent prior to December 31, 1985, and which will be placed in service in 1987. (U) A project is described in this subparagraph if it involves the connecting of existing retail stores in the downtown area of a city to a new covered area, the total project will be 250,000 square feet, a formal Memorandum of Understanding relating to development of the project was executed with the city on July 2, 1986, and the esti- mated cost of the project is $18,186,424. (V) A project is described in this subparagraph if it includes a 200,000 square foot office tower, a 200-room hotel, a 300,000 square foot retail center, an 800-space parking facility, the total cost is projected to be $60,000,000, and $1,250,000 was expended with respect to the site before August 25,1986. (W) A project is described in this subparagraph if it is a joint use and development project including an integrated hotel, convention center, office, related retail facilities and public mass transportation terminal, and vehicle parking facilities which satisfies the following conditions: (i) is developed within certain air space rights and upon real property exchanged for such joint use and development project which is owned or acquired by a state department of transportation, a regional mass transit district in a county with a population of at least 5,000,000 and a community redevelopment agency; (ii) such project affects an existing, approximately 40 acre public mass transportation bus-way terminal facil- ity located adjacent to an interstate highway; (iii) a memorandum of understanding with respect to such joint use and development project is executed by a state department of transportation, such a county re- gional mass transit district and a community redevel- opment agency on or before December 31, 1986, and (iv) a major portion of such joint use and develop- ment project is placed in service by December 31, 1990. (X) A project is described in this subparagraph if^ (i) it is an $8,000,000 project to provide advanced control technology for adipic acid at a plant, which was authorized by the company's Board of Directors in October 1985, at December 31, 1985, $1,400,000 was committed and $400,000 expended with respect to such project, or (ii) it is an $8,300,000 project to achieve compliance with State and Federal regulations for particulates emissions, which was authorized by the company's Board of Directors in December 1985, by March 31, 1986, $250,000 was committed and $250,000 was ex- pended with respect to such project, or
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2155 (iii) it is a $22,000,000 project for the retrofit of a plant that makes a raw material for aspartame, which was approved in the company's December 1985 capital budget, if approximately $3,000,000 of the $22,000,000 was spent before August 1, 1986. (Y) A project is described in this subparagraph if such project passes through at least 9 States and involves an intercity communication link (including multiple repeater sites and junction stations for microwave transmissions and amplifiers for fiber optics); the link from Buffalo to New York/Elizabeth was completed in 1984; the link from Buf- falo to Chicago was completed in 1985; and the link from New York to Washington is completed in 1986. (6) NATURAL GAS PIPELINE.—The amendments made by section 201 shall not apply to any interstate natural gas pipeline (and related equipment) if— (A) 3 applications for the construction of such pipeline were filed with the Federal Energy Regulatory Commission before November 22, 1985 (and 2 of which were filed before September 26, 1985), and (B) such pipeline has 1 of its terminal points near Bakers- field, California. (7) CERTAIN LEASEHOLD IMPROVEMENTS.—The amendments made by section 201 shall not apply to any reasonable leasehold improvements, equipment and furnishings placed in service by a lessee or its affiliates if^ (A) the lessee or an affiliate is the original lessee of each building in which such property is to be used, (B) such lessee is obligated to lease the building under an agreement to lease entered into before September 26, 1985, and such property is provided for such building, and (C) such buildings are to serve as world headquarters of the lessee and its affiliates. For purposes of this paragraph, a corporation is an affiliate of another corporation if both corporations are members of a controlled group of corporations within the meaning of section 1563(a) of the Internal Revenue Code of 1954 without regard to section 1563(b)(2) of such Code. Such lessee shall include a securities firm that meets the requirements of subparagraph (A), except the lessee is obligated to lease the building under a lease entered into on June 18, 1986. (8) SOLID WASTE DISPOSAL FACILITIES.—The amendments made by section 201, and section 203(c), shall not apply to the tax- payer who originally places in service any qualified solid waste disposal facility (as defined in section 7701(e)(3)(B) of the In- ternal Revenue Code of 1986) if before March 2, 1986— (A) there is a binding written contract between a service recipient and a service provider with respect to the oper- ation of such facility to pay for the services to be provided by such facility, (B) a service recipient or governmental unit (or any entity related to such recipient or unit) made a financial commit- ment of at least $200,000 for the financing or construction of such facility, (C) such facility is the Tri-Cities Solid Waste Recovery Project involving Fremont, Newark, and Union City, California, and has received an authority to construct from
100 STAT. 2156 PUBLIC LAW 99-514—OCT. 22, 1986 ' the Environmental Protection Agency or from a State or local agency authorized by the Environmental Protection Agency to issue air quality permits under the Clean Air Act. (9) CERTAIN SUBMERSIBLE DRILLING UNITS.—In the case of a binding contract entered into on October 30, 1984, for the purchase of 6 semi-submersible drilling units at a cost of $425,000,000, such units shall be treated as having an applicable date under subsection 203(bX2) of January 1,1991. (10) WASTEWATER OR SEWAGE TREATMENT FACILITY.—The amendments made by section 201 shall not apply to any prop- erty which is part of a wastewater or sewage treatment facility if either— (A) site preparation for such facility commenced before September 1985, and a parish council approved a service agreement with respect to such facility on December 4, 1985; (B) a city-parish advertised in September 1985, for bids for construction of secondary treatment improvements for such facility, in May 1985, the city-parish received state- ments from 16 firms interested in privatizing the wastewater treatment facilities, and the metropolitan coun- cil selected a privatizer at its meeting on November 20, 1985, and adopted a resolution authorizing the Mayor to enter into contractual negotiation with the selected privatizer; r (Q the property is part of a wastewater treatment facility with respect to which a binding service agreement between a privatizer and the Western Carolina Regional Sewer Authority with respect to such facility was signed before January 1,1986; or (D) such property is part of a wastewater treatment facility (located in Cameron County, Texas, within one mile of the City of Harlingen), an application for a wastewater discharge permit was filed with respect to such facility on December 4, 1985, and a City Commission approved a letter of intent relating to a service agreement with respect to such facility on August 7, 1986; or a wastewater facility (located in Harlingen, Texas) which is a subject of the letter of intent and service agreement described in subparagraph (A)(2) of this paragraph and the design of which was con- tracted for in a letter of intent dated January 23, 1986. (11) CERTAIN AIRCRAFT.—The amendments made by section 201 shall not apply to any new aircraft with 19 or fewer passenger seats if— (A) the aircraft is manufactured in Kansas, Florida, Geor- gia, or Texas. For purposes of this subparsigraph, an air- craft is "manufactured' at the point of its final assembly, (B) the aircraft was in inventory or in the planned production schedule of the final assembly manufacturer, with orders placed for the engine(s) on or before August 16, 1986, and (C) the aircraft is purchased or subject to a binding contract on or before December 31, 1986, and is delivered and placed in service by the purchase, before July 1, 1987. Section 211(dX2XB) shall not apply to aircraft which meet the requirements of this subparagraph.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2157 (12) CERTAIN SATELLITES.—The amendments made by section 201 shall not apply to any satellite with respect to which— (A) on or before January 28, 1986, there wgis a binding contract to construct or acquire a satellite, and (i) an agreement to launch was in existence on that date, or (ii) on or before August 5, 1983, the Federal Commu- nications Commission had authorized the construction and for which the authorized party has a specific al- though undesignated agreement to launch in existence on January 28,1986; (B) by order adopted on July 25, 1985, the Federal Communications Commission granted the taxpayer an or bital slot and authorized the taxpayer to launch and oper- ate 2 satellites with a cost of approximately $300,000,000; or (C) the International Telecommunications Satellite Organization or the International Maritime Satellite Organization entered into written binding contracts before May 1,1985. (13) CERTAIN NONWIRE U N E CELLULAR TELEPHONE SYSTEMS.— The amendments made by section 201 shall not apply to prop- erty that is part of a nonwire line system in the Domestic Public Cellular Radio Telecommunications Service for which the Fed- eral Communications Commission has issued a construction permit before September 26, 1985, but only if such property is placed in service before January 1,1987. (14) CERTAIN COGENERATION FACILITIES.—The amendments made by section 201 shall not apply to projects consisting of 1 or more facilities for the cogeneration and distribution of elec- tricity and steam or other forms of thermal energy if— (A) at least $100,000 was paid or incurred with respect to the project before March 1, 1986, a memorandum of under- standing was executed on September 13, 1985, and the project is placed in service before January 1,1989, (B) at least $500,000 was paid or incurred with respect to the projects before May 6, 1986, the projects involve a 22- megawatt combined cycle gas turbine plant and a 45-mega- watt coal waste plant, and applications for qualifying facil- ity status were filed with the Federal Energy Regulatory Commission on March 5,1986, (C) the project cost approximates $125,000,000 to $140,000,000 and an application was made to the Federal Energy Regulatory Commission in July 1985, (D) an inducement resolution for such facility was adopted on September 10, 1985, a development authority was given an inducement date of September 10, 1985, for a loan not to exceed $80,000,000 with respect to such facility, and such facility is expected to have a capacity of approxi- mately 30 megawatts of electric power and 70,000 pounds of steam per hour, (E) at least $1,000,000 was incurred with respect to the project before May 6, 1986, the project involves a 52-mega- watt combined cycle gas turbine plant and a petition was filed with the Connecticut Department of Public Utility Control to approve a power sales agreement with respect to the project on March 27, 1986.
100 STAT. 2158 PUBLIC LAW 99-514—OCT. 22, 1986 r ' - (15) CERTAIN ELECTRIC GENERATING STATIONS.—The amend- ments made by section 201 shall not apply to a project consist- ; ing of a coal-fired electric generating station (including multiple generating units, coal mine equipment, and transmission facili- u, ties) if— (A) a tax-exempt entity will own an equity interest in all property included in the project (except the coal mine equipment), and (B) at least $72,000 was expended in the acquisition of coal leases, land and water rights, engineering studies, and other development costs before May 6,1986. For purposes of this subparagraph, subsection (b)(2) shall be applied by substituting "January 1, 1986" for "January 1, 1991." (16) SPORTS ARENAS.— (A) INDOOR SPORTS FACIUTY.—The amendments made by section 201 shall not apply to up to $20,000,000 of improve- ments made by a lessee of any indoor sports facility pursu- ant to a lease from a State commission granting the right to make limited and specified improvements (including planned seat explanations), if architectural renderings of the project were commissioned and received before Decem- ber 22,1985. (B) METROPOLITAN SPORTS ARENA.—The amendments made by section 201 shall not apply to any property which is part of an arena constructed for professional sports activities in a metropolitan area, provided that such arena ' is capable of seating no less than 18,000 spectators and a binding contract to incur significant expenditures for its construction was entered into before June 1,1986. (17) CERTAIN WASTE-TO-ENERGY FACILITIES.—The amendments made by section 201 shall not apply to 2 agricultural waste-to- energy powerplants (and required transmission facilities), in connection with which a contract to sell 100 megawatts of electricity to a city was executed in October 1984. (18) CERTAIN COAL-FIRED PLANTS.—The amendments made by section 201 shall not apply to one of three 540 megawatt coal- fired plants that are placed in service after a sale leaseback occurring after January 1,1986, if— (A) the Board of Directors of an electric power coopera- tion authorized the investigation of a sale leaseback of a nuclear generation facility by resolution dated January 22, 1985, and (B) a loan was extended by the Rural Electrification t' ' Administration on February 20, 1986, which contained a covenant with respect to used property leasing from unit II. (19) CERTAIN RAIL SYSTEMS.— (A) The amendments made by section 201 shall not apply to a light rail transit system, the approximate cost of which is $235,000,000, if, with respect to which, the board of directors of a corporation (formed in September 1984 for the purpose of developing, financing, and operating the system) authorized a $300,000 expenditure for a feasibility study in April 1985. (B) The amendments made by section 201 shall not apply to any project for rehabilitation of regional railroad rights of way and properties including grade crossings which was
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2159 authorized by the Board of Directors of such company prior to October 1985; and/or was modified, altered or enlarged as a result of termination of company contracts, but ap- proved by said Board of Directors no later than January 30, 1986, and which is in the public interest, and which is subject to binding contracts or substantive commitments by December 31,1987. (20) CERTAIN DETERGENT MANUFACTURING FACILITY.—The amendments made by section 201 shall not apply to a laundry detergent manufacturing facility, the approximate cost of which is $13,200,000, with respect to which a project agreement was fully executed on March 17,1986. (21) CERTAIN RESOURCE RECOVERY FACIUTY.—The amendments made by section 201 shall not apply to any of 3 resource recovery plants, the aggregate cost of which approximates $300,000,000, if an industrial development authority adopted a bond resolution with respect to such facilities on December 17, 1984, and the projects were approved by the department of commerce of a Commonwealth on December 27,1984. (22) The amendments made by section 201 shall not apply to a computer and office support center building in Minneapolis, with respect to which the first contract, with an architecture firm, was signed on April 30, 1985, and a construction contract was signed on March 12,1986. (23) CERTAIN DISTRICT HEATING AND COOUNG FACILITIES.—The amendments made by section 201 shall not apply to pipes, mains, and related equipment included in district heating and cooling facilities, with respect to which the development author- ity of a State approved the project through an inducement resolution adopted on October 8, 1985, and in connection with which approximately $11,000,000 of tax-exempt bonds are to be issued. (24) CERTAIN VESSELS.— (A) CERTAIN OFFSHORE VESSELS.—The amendments made by section 201 shall not apply to any offshore vessel the construction contract for which was signed on February 28, 1986, and the approximate cost of which is $9,000,000. (B) CERTAIN INLAND RIVER VESSEL.—The amendments made by section 201 shall not apply to a project involving the reconstruction of an inland river vessel docked on the Mississippi River at St. Louis, Missouri, on July 14, 1986, and with respect to which: (i) the estimated cost of reconstruction is approxi- mately $39,000,000; (ii) reconstruction was commenced prior to December 1,1985; (iii) at least $17,000,000 was expended before Decem- ber 31,1985; and (C) SPECIAL AUTOMOBILE CARRIER VESSELS.—The amend- ments made by section 201 shall not apply to two new automobile carrier vessels which will cost approximately $47,000,000 and will be constructed by a United States-flag carrier to operate, under the United States-flag and with an American crew, to transport foreign automobiles to the United States, in a case where negotiations for such transportation arrangements commenced in April 1985, formal contract bids were submitted prior to the end of
100 STAT. 2160 PUBLIC LAW 99-514—OCT. 22, 1986 1985, and definitive transportation contracts were awarded in May 1986. (D) The amendments made by section 201 shall not apply to a 562-foot passenger cruise ship, which was purchased in 1980 for the purpose of returning the vessel to United States service, the approximate cost of refurbishment of which is approximately $47,000,000. (25) CERTAIN WOOD ENERGY PROJECTS.—The amendments made by section 201 shall not apply to two wood energy prod- ucts for which applications with the Federal Energy Regulatory Commission were filed before January 1, 1986, which are de- scribed as follows: (A) a 26.5 megawatt plant in Fresno, California, and (B) a 26.5 megawatt plant in Rocklin, California. (26) The amendments made by section 201 shall not apply to property which is a geothermal project of less than 20 megawatts that was certified by the Federal Energy Regulatory Commission on July 14, 1986, as a qualifying small power production facility for purposes of the Public Utility Regulatory Policies Act of 1978 pursuant to an application filed with the Federal Energy Regulatory Commission on April 17,1986. (27) CERTAIN ECONOMIC DEVELOPMENT PROJECTS.—The amend- ments made by section 201 shall not apply to any of the following projects: (A) A mixed use development on the East River the total cost of which is approximately $400,000,000, with respect to which a letter of intent was executed on January 24, 1984, and with respect to which approximately $2.5 million had been spent by March 1,1986. . (B) A 356-room hotel, banquet, and conference facility (including 525,000 square feet of office space) the approxi- mate cost of which is $158,000,000, with respect to which a letter of intent was executed on June 1, 1984, and with respect to which an inducement resolution and bond resolu- tion was adopted on August 20,1985. (C) Phase 1 of a 4-phase project involving the construction of laboratory space and ground-floor retail space the esti- mated cost of which is $32,000,000 and with respect to which a memoradum of understanding was made before August 29,1983. (D) A project involving the development of a 490,000 square foot mixed-use building at 152 W. 57th Street and 7th Avenue, New York, New York, the estimated cost of which is $100,000,000, and with respect to which a building permit application was filed in May 1986. (E) A mixed-use project containing a 300 unit, 12-story hotel, garage, two multi-rise office buildings, and also in- cluded a park, renovated riverboat, and barge with festival marketplace, the capital outlays for which approximate $68,000,000. (F) The construction of a three-story office building that will serve as the home office for an insurance group and its affiliated companies, with respect to which a city agreed to transfer its ownership of the land for the project in a Redevelopment Agreement executed on September 18, 1985, once certain conditions are met.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2161 (G) A commercial bank formed under the laws of the State of New York which entered into an agreement on September 5, 1985, to construct its headquarters at 60 Wall Street, New York, New York, with respect to such head- quarters. (H) Any property which is part of a commercial and residential project, the first phase of which is currently under construction, to be developed on land which is the subject of an ordinance passed on July 20, 1981, by the city council of the city in which such land is located, designating such land and the improvements to be placed thereon as a residential-business planned development, which develop- ment is being financed in part by the proceeds of industrial development bonds in the amount of $62,000 issued on December 4,1985. (28) The amendments made by section 201 shall not apply to an $80,000,000 capital project steel seamless tubular casings minimill and melting facility located in Youngstown, Ohio, which was purchased by the taxpayer in April 1985, and— (A) the purchase and renovation of which was approved by a committee of the Board of Directors on February 22, 1985, and (B) as of December 31, 1985, more than $20,000,000 was incurred or committed with respect to the renovation. (29) The amendments made by section 201 shall not apply to any project for residential rental property if— (A) an inducement resolution with respect to such project was adopted by the State housing development authority on January 18,1985, and (B) such project was the subject of law suits filed on June 22,1984, and November 21,1985. (30) The amendments made by section 201 shall not apply to a 30 megawatt electric generating facility fueled by geothermal and wood waste, the approximate cost of which is $55,000,000, and with respect to which a 30-year power sales contract was executed on March 22, 1985. (31) The amendments made by section 201 shall not apply to railroad maintenance-of-way equipment, with respect to which a Boston bank entered into a firm binding contract with a major northeastern railroad before March 2, 1986, to finance $10,200,000 of such equipment, if all of the equipment was placed in service before August 1,1986. (32) The amendment made by section 201 shall not apply to— (A) a facility constructed on approximately seven acres of land located on Ogle's Poso Creek Oil field, the primary fuel of which will be bituminous coal from Utah or Wyoming, with respect to which an application for an authority to construct was filed on July 30, 1984, an authority to con- struct was issued on February 28, 1985, and a prevention of significant deterioration permit application was submitted on June 17,1985, (B) a facility constructed on approximately seven acres of land located on Teorco's Jasmin oil field, the primary fuel of which will be bituminous coal from Utah or Wyoming, with respect to which an authority to construct was filed on August 30, 1984, an authority to construct was issued on
100 STAT. 2162 PUBLIC LAW 99-514—OCT. 22, 1986 May 4, 1985, and a prevention of significant deterioration permit application was submitted on July 3,1985, (C) the Mountain View Apartments, in Hadley, Massachusetts, (D) a facility expected to have a capacity of not less than 65 megawatts of electricity, the steam from which is to be sold to a pulp and paper mill, with respect to which applica- tion was made to the Federal Regulatory Commission for certification as a qualified facility on November 1,1985, and received such certification on January 24,1986, (E) $2,200,000 of equipment ordered on January 27, 1986, in connection with a 60,000 square foot plant that was completed in 1983, (F) a magnetic resonance imaging machine, with respect to which a binding contract to purchase was entered into in April 1986, in connection with the construction of a mag- netic resonance imaging clinic with respect to which a Determination of Need certification was obtained from a State Department of Public Health on October 22, 1985, if such property is placed in service before December 31,1986, (G) a company located in Salina, Kansas, which has been engaged in the construction of highways and city streets since 1946, but only to the extent of $1,410,000 of invest- ment in new section 38 property, (H) a $300,000 project undertaken by a small metal finish- ing company located in Minneapolis, Minnesota, the first parts of which were received and paid for in January 1986, with respect to which the company received Board approval to purchase the largest piece of machinery it has ever ordered in 1985, (I) A $1,200,000 finishing machine that was purchased on April 2,1986 and placed into service in September 1986 by a company located in Davenport, Iowa, (J) A 25 megawatt small power production facility, with respect to which Qualifying Facility status numbered QF86-593-000 was granted on March 5,1986, (K) A $600,000,000, 250 megawatt plant placed in service by the Sierra Pacific Power Company, (L) 128 units of rental housing the Point Gloria Limited Partnership, (M) Kenosha Harbor, in Kenosha, Wisconsin, (N) Lakeland Park Phase II, in Baton Rouge, Louisiana, (O) the Santa Rosa Hotel, in New Orleans, Louisiana, (P) the Sheraton Baton Rouge, in Baton Rouge, Louisi- ana, (Q) $300,000 of equipment placed in service in 1986, in connection with the renovation of the Best Western Town- house Convention Center in Cedar Rapids, Iowa, (R) the segment of a nationwide fiber optics telecommuni- cations network placed in service by SouthernNet, the total estimated cost of which is $37,000,000, (S) two cogeneration facilities, placed in service by the Reading Anthracite Company, costing approximately $110,000,000 each, with respect to which filings were made with the Federal Energy Regulatory Commission on Decem- ber 31, 1985, and which are located in Pennsylvania,
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2163 (T) a fiber optics network placed in service by Kansas City Southern Industries, the total estimated cost of which is $25,000,000, (U) 3 newly constructed fishing vessels, and one vessel that is overhauled, placed in service by Mid Coast Marine, but only to the extent of $6,700,000 of investment, (V) $350,000 of equipment acquired in connection with the reopening of a plant in Bristol, Rhode Island, which plant was purchased by Button woods, Ltd., Associates on February 7,1986, (W) $4,046,000 of equipment placed in service by Brendle's Incorporated, acquired in connection with a Dis- tribution Center, (X) a multi-family mixed-use housing project located in a home rule city, the zoning for which was changed to resi- dential business planned development on November 26, 1985, and with respect to which both the home rule city and the State housing finance agency adopted inducement reso- lutions on December 20,1985, (Y) the Myrtle Beach Convention Center, in South Caro- lina, to the extent of $25,000,000 of investment, and (Z) railroad cars placed in service by the Pullman Leasing Company, pursuant to an April 3, 1986 purchase order, costing approximately $10,000,000. (33) The amendments made by section 201 shall not apply to— (A) $400,000 of equipment placed in service by Super Key Market, if such equipment is placed in service before Janu- ary 1,1987, (B) the Trolley Square project, the total project cost of which is $24,500,000, and the amount of depreciable real property of which is $14,700,000. (C) a waste-to-energy project in Derry, New Hampshire, costing approximtely $60,000,000, (D) the City of Los Angeles Co-composting project, the estimated cost of which is $62,000,000, with respect to which, on July 17, 1985, the California Pollution Control Financing Authority issued an initial resolution in the maximum amount of $75,000,000 to finance this project, (E) the St. Charles, Missouri Mixed-Use Center, (F) Oxford Place in Tulsa, Oklahoma, (G) an amount of investment generating $20,000,000 of investment tax credits attributable to property used on the Illinois Diversatech Campus, (H) $25,000,000 of equipment used in the Melrose Park Engine Plant that is sold and leased back by Navistar, (I) 80,000 vending machines, for a cost approximating $3,400,000 placed into service by Folz Vending Co., (J) a 24 megawatt alternative energy facility placed in service by Peat Products, with respect to which certification by the Federal Energy Regulatory Commission on April 3, 1986, and (K) Burbank Manors, in Illinois. Ot>) SPECIAL RULE FOR CERTAIN PROPERTY.—The provisions of sec- tion 168(f)(8) of the Internal Revenue Code of 1954 (as amended by section 209 of the Tax Equity and Fiscal Responsibility Act of 1982) shall continue to apply to any transaction permitted by reason of
100 STAT. 2164 PUBLIC LAW 99-514—OCT. 22, 1986 section 12(c)(2) of the Tax Reform Act of 1984 or section 209(d)(1)(B) of the Tax Equity and Fiscal Responsibility Act of 1982. (c) APPLICABLE DATE IN CERTAIN CASES.— (1) Section 203(b)(2) shall be applied by substituting "January 1, 1992" for January 1,1991" in the following cases. (A) in the case of a 2-unit nuclear powered electric generating plant (and equipment and incidental appur- tenances), constructed pursuant to contracts entered into by the owner operator of the facility before December 31, 1975, including contracts with the engineer/constructor and the nuclear steam system supplier, such contracts shall be treated as contracts described in section 2030t))(l)(A), (B) a cogeneration facility with respect to which an ap- plication with the Federal Energy Regulatory Commission was filed on August 2, 1985, and approved October 15, 1985. (C) in the case of a 1,300 megawatt coal-fired steam powered electric generating plant (and related equipment and incidental appurtenances), which the three owners determined in 1984 to convert from nuclear power to coal power and for which more than $600,000,000 had been incurred or committed for construction before September 25, 1985, except that no investment tax credit will be allowable under section 49(d)(3) added by section 211(a) of this Act for any qualified progress expenditures made after December 31,1990. (2) Section 203a))(2) shall be applied by substituting "April 1, 1992" for the applicable date that would otherwise apply, in the case of the second unit of a twin steam electric generating facility and related equipment which was granted a certificate of public convenience and necessity by a public service commis- sion prior to January 1, 1982, if the first unit of the facility was placed in service prior to January 1, 1985, and before September 26, 1985, more than $100,000,000 had been expended toward the construction of the second unit. (3) Section 203(b)(2) shall be applied by substituting "January 1, 1990," for the applicable date that would otherwise apply in the case of— (A) new commercial passenger aircraft used by a domestic airline, if a binding contract with respect to such aircraft was entered into before April 1, 1986, and such aircraft has a present class life of 12 years, (B) a pumped storage hydroelectric project with respect to which an application was made to the Federal Energy Regulatory Commission for a license on February 4, 1974, and license was issued August 1, 1977, the project number of which is 2740, (C) a facility for the manufacture of an improved particleboard, if—a binding contract to purchase such equipment was executed March 3, 1986, such equipment will be placed in service by January 1, 1988, and such facility is located in or near Moncure, North Carolina, and (D) a newsprint mill in Pend Oreille county, Washington, costing about $290,000,000. (4) The amendments made by section 201 shall not apply to a limited amount of the following property or a limited amount of property set forth in submission before September 16, 1986, by the following taxpayers—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2165 (A) Arena project, Michigan, (B) Campbell Soup Company, Pennsylvania and Califor- nia, (C) Overton, Florida, (D) Legett and Piatt, (E) East Bank Housing Project, (F) Standard Telephone Company, (G) Presidential Air, (H) Ann Arbor Railroad, (I) Ada, Michigan Cogeneration, (J) Anchor Store Project, Michigan, (K) Biogen Power, (L) $14,000,000 of television transmitting towers placed in service by Media General, Inc., which were subject to bind- ing contracts as of January 21, 1986, and will be placed in service before January 1,1988, (M) Hardage Company, (N) Mesa Airlines, (O) Yarn-spinning equipment used at Spring Cotton Mills, and (P) 328 units of low-income housing at Angelus Plaza. (d) RAILROAD GRADING AND TUNNEL BORES.— (1) IN GENERAL.—In the case of expenditures for railroad grading and tunnel bores which were incurred by a common carrier by railroad to replace property destroyed in a disaster occurring on or about April 17, 1983, near Thistle, Utah, such expenditures, to the extent not in excess of $15,000,000, shall be treated as recovery property which is 5-year property under section 168 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this Act) and which is placed in service at the time such expenditures were incurred. (2) BUSINESS INTERRUPTION PROCEEDS.—Business interruption proceeds received for loss of use, revenues, or profits in connec- tion with the disaster described in paragraph (1) and devoted by the taxpayer described in paragraph (1) to the construction of replacement track and related grading and tunnel bore expendi- tures shall be treated as constituting an amount received from the involuntary conversion of property under section 1033(a)(2) of such Code. (3) EFFECTIVE DATE.—This subsection shall apply to taxable years ending after April 17,1983. (e) TREATMENT OF CERTAIN DISASTER LOSSES.— (1) IN GENERAL.—In the case of a disaster described in para- graph (2), at the election of the taxpayer, the amendments made by section 201 of this Act— (A) shall not apply to any property placed in service during 1987 or 1988, or (B) shall apply to any property placed in service during 1985 or 1986, which is property to replace property lost, damaged, or de- stroyed in such disaster. (2) DISASTER TO WHICH SECTION APPUES.—This section shall apply to a flood which occurred on November 3 through 7, 1985, and which was declared a natural disaster area by the President of the United States.
100 STAT. 2166 PUBLIC LAW 99-514—OCT. 22, 1986 Subtitle B—Repeal of Regular Investment Tax Credit SEC. 211. REPEAL OF REGULAR INVESTMENT TAX CREDIT. (a) GENERAL RULE.—Subpart E of part IV of subchapter A of chapter 1 (relating to investment tax credit) is amended by adding at the end thereof the following new section: "SEC. 49. TERMINATION OF REGULAR PERCENTAGE. "(a) GENERAL RULE.—For purposes of determining the amount of the investment tax credit determined under section 46, the regular percentage shall not apply to any property placed in service after December 31,1985. "(b) EXCEPTIONS.—Subject to the provisions of subsections (c) and (d), subsection (a) shall not apply to the following: "(1) TRANSITION PROPERTY.—Property which is transition property (within the meaning of subsection (e)). "(2) QUALIFIED PROGRESS EXPENDITURE FOR PERIODS BEFORE JANUARY 1, 1986.—In the case of any taxpayer who has made an election under section 46(d)(6), the portion of the adjusted basis of any progress expenditure property attributable to qualified progress expenditures for periods before January 1,1986. "(3) QUALIFIED TIMBER PROPERTY.—The portion of the adjusted basis of qualified timber property which is treated as section 38 property under section 48 (a)(1)(F). "(c) 35-PERCENT REDUCTION IN CREDIT FOR TAXABLE YEARS AFTER 1986.— "(1) REDUCTION IN CURRENT YEAR INVESTMENT CREDIT.—Any portion of the current year business credit under section 38(b) for any taxable year beginning after June 30, 1987, which is attributable to the regular investment credit shall be reduced by 35 percent. "(2) UNEXPIRED CARRYFORWARDS TO IST TAXABLE YEAR BEGIN- NING AFTER JUNE 30, 1987.—Any portion of the business credit carryforward under section 38(a)(1) attributable to the regular investment credit which has not expired as of the close of the taxable year preceding the 1st taxable year of the taxpayer beginning after June 30, 1987, shall be reduced by 35 percent. "(3) SPECIAL RULE FOR TAXABLE YEARS BEGINNING BEFORE AND ENDING AFTER JULY 1, 1987.—In the case of any taxable year beginning before and ending after July 1, 1987— "(A) any portion of the current year business credit under section 3803) for such taxable year, or "(B) any portion of the business credit carryforward under section 38(a)(1) to such year, which is attributable to the regular investment credit shall be reduced by the applicable percentage. "(4) TREATMENT OF DISALLOWED CREDIT.— "(A) IN GENERAL.—The amount of the reduction of the regular investment credit under paragraphs (1) and (2) shall not be allowed as a credit for any taxable year. "(B) No CARRYBACK FOR YEAR STRADDLING JULY 1, 1987; GROSS UP OF CARRYFORWARDS.—The amount of the reduction of the regular investment credit under paragraph (3)— "(i) may not be carried back to any taxable year, but
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2167 "(ii) shall be added to the carryforwards from the taxable year before applying paragraph (2). "(5) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— "(A) APPUCABLE PERCENTAGE.—The term 'applicable percentage' means, with respect to a taxable year beginning before and ending after July 1, 1987, the percentage which bears the same ratio to 35 percent as— "(i) the number of months in such taxable year after June 30,1987, bears to "(ii) the number of months in such taxable year. "(B) REGULAR INVESTMENT CREDIT.— "(i) IN GENERAL.—The term 'regular investment credit' has the meaning given such term by section 48(0). "(ii) EXCEPTION FOR TIMBER PROPERTY.—The term 'regular investment credit' shall not include any por- tion of the regular investment credit which is attrib- utable to section 38 property described in section 48(aXlXF). "(C) PORTION OF CREDITS ATTRIBUTABLE TO REGULAR INVESTMENT CREDIT.—The portion of any current year busi- ness credit or business credit carryforward which is attrib- utable to the regular investment credit shall be determined on the basis that the regular investment credit is used first. '(d) FULL BASIS ADJUSTMENT.— "(1) IN GENERAL.—In the case of periods after December 31, 1985, section 48(q) (relating to basis adjustment to section 38 property) shall be applied with respect to transaction prop- erty— "(A) by substituting '100 percent' for '50 percent' in paragraph (1), and "(B) without regard to paragraph (4) thereof (relating to election of reduced credit in lieu of basis adjustment). "(2) SPECIAL RULE FOR QUAUFIED PROGRESS EXPENDITURES.—If the taxpayer made an election under section 48(qX4) with re- spect to any qualified progress expenditures for periods before Januarv 1,1986— ' (A) paragraph (1) shall not apply to the portion of the adjusted basis attributable to such expenditures, and '(B) such election shall not apply to such expenditures for periods after December 31,1985. '(e) TRANSITION PROPERTY.—For purposes of this section— "(1) TRANSITION PROPERTY.—The term 'transition property' means any property placed in service after December 31, 1985, and to which the amendments made by section 201 of the Tax Reform Act of 1986 do not apply, except that in making such determination— "(A) section 203(aXlXA) of such Act shall be applied by substituting '1985' for '1986', "(B) sections 2030^X1) and 204(aX3) of such Act shall be applied by substituting 'December 31, 1985' for 'March 1, 1986', "(C) in the case of transition property with a cltiss life of less than 7 years— "(i) section 203(bX2) of such Act shall apply, and "(ii) in the case of property with a class life—
100 STAT. 2168 PUBLIC LAW 99-514—OCT. 22, 1986 "(I) of less than 5 years, the appHcable date shall be July 1, 1986, and "(II) at least 5 years, but less than 7 years, the applicable date shall be January 1, 1987, and "(D) section 203(b)(3) shall be applied by substituting '1986' for '1987'. "(2) TREATMENT OF PROGRESS EXPENDITURES.—No progress expenditures for periods after December 31, 1985, with respect to any property shall be taken into account for purposes of applying the regular percentage unless it is reasonable to expect that such property will be transition property when placed in service. If any progress expenditures are taken into account by reason of the preceding sentence and subsequently there is not a reasonable expectation that such property would be transition property when placed in service, the credits attributable to progress expenditures with respect to such property shall be recaptured under section 47." (b) NORMALIZATION RULES.—If, for any taxable year beginning after December 31, 1985, the requirements of paragraph (1) or (2) of section 46(f) of the Internal Revenue Code of 1986 are not met with respect to public utility property to which the regular percentage applied for purposes of determining the amount of the investment tax credit— (1) all credits for open taxable years as of the time of the final determination referred to in section 46(f)(4)(A) of such Code shall be recaptured, and (2) if the amount of the taxpayer's unamortized credits (or the credits not previously restored to rate base) with respect to such property (whether or not for open years) exceeds the amount referred to in paragraph (1), the taxpayer's tax for the taxable year shall be increased by the amount of such excess. If any portion of the excess described in paragraph (2) is attributable to a credit which is allowable as a carryover to a taxable year beginning after December 31, 1985, in lieu of applying paragraph (2) with respect to such portion, the amount of such carryover shall be reduced by the amount of such portion. Rules similar to the rules of this subsection shall apply in the case of any property with respect to which the requirements of section 46(0(9) of such Code are met. (c) CONFORMING AMENDMENT.—The table of sections for subpart E of part IV of subchapter A of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 49. Termination of regular percentage." (d) EXCEPTION FOR CERTAIN AIRCRAFT USED IN ALASKA.— (1) The amendments made by subsection (a) shall not apply to property originally placed in service after December 29, 1982, and before August 1, 1985, by a corporation incorporated in Alaska on May 21,1953, and used by it— (A) in part, for the transportation of mail for the United States Postal Service in the State of Alaska, and (B) in part, to provide air service in the State of Alaska on routes which had previously been served by an air carrier that received compensation from the Civil Aeronautics Board for providing service. (2) In the case of property described in subparagraph (A)—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2169 (A) such property shall be treated as recovery property described in section 208(d)(5) of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"); (B) "48 months" shall be substituted for "3 months" each place it appears in applying— (i) section 48(b)(2)(B) of the Code, and (ii) section 168(f)(8)(D) of the Code (as in effect after the amendments made by the Technical Corrections Act of 1982 but before the amendments made by TEFRA); and (C) the limitation of section 168(D(8)(D)(iiXIII) (as then in effect) shall be read by substituting "the lessee's original cost basis.", for "the adjusted basis of the lessee at the time of the lease.". (3) The aggregate amount of property to which this paragraph shall apply shall not exceed $60,000,000. (e) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to property placed in service after December 31, 1985, in taxable years ending after such date. (2) EXCEPTIONS FOR CERTAIN FILMS.—For purposes of determin- ing whether any property is transition property within the meaning of section 49(e) of the Internal Revenue Code of 1986— (A) in the case of any motion picture or television film, construction shall be treated as including production for purposes of section 2030t)Xl) of this Act, and written contem- porary evidence of an agreement (in accordance with indus- try practice) shall be treated as a written binding contract for such purposes, (B) in the case of any television film, a license agreement or agreement for production services between a television network and a producer shall be treated as a binding contract for purposes of section 203(bXlXA) of this Act, and (C) a motion picture film shall be treated as described in section 203(bXlXA) of this Act if— (i) funds were raised pursuant to a public offering before September 26, 1985, for the production of such film, (ii) 40 percent of the funds raised pursuant to such public offering are being spent on films the production of which commenced before such date, and (iii) all of the films funded by such public offering are required to be distributed pursuant to distribution agreements entered into before September 26, 1985. (3) NORMALIZATION RULES.—The provisions of subsection 0^) shall apply to any violation of the normalization requirements under paragraph (1) or (2) of section 46(f) of the Internal Reve- nue Code of 1986 occurring in taxable years ending after Decem- ber 31,1985. (4) ADDITIONAL EXCEPTIONS.— (A) Paragraphs (c) and (d) of section 49 of the Internal Revenue Code of 1954 shall not apply to any continuous caster facility for slabs and blooms which is subject to a lease and which is part of a project the second phase of which is a continuous slab caster which was placed in service before December 31, 1935.
100 STAT. 2170 PUBLIC LAW 99-514—OCT. 22, 1986 (B) For purposes of determining whether an automobile manufacturing facility (including equipment and incidental appurtenances) is transition property within the meaning of section 49(e), property with respect to which the Board of Directors of an automobile manufacturer formally ap- proved the plan for the project on January 7, 1985 shall be treated as transition property, but only with respect to $70,000,000 of regular investment tax credits. SEC. 212. EFFECTIVE 15-YEAR CARRYBACK OF EXISTING CARRY- FORWARDS OF STEEL COMPANIES. (a) GENERAL RULE.—If a qualified corporation makes an election under this section for its 1st taxable year beginning after December 31, 1986, with respect to any portion of its existing carryforwards, the amount determined under subsectionflt>)shall be treated as a payment against the tax imposed by chapter 1 of the Internal Revenue Code of 1986 made by such corporation on the last day prescribed by law (without regard to extensions) for filing its return of tax under chapter 1 of such Code for such 1st taxable year. (b) AMOUNT.—For purposes of subsection (a), the amount deter- mined under this subsection shall be the lesser of— (1) 50 percent of the portion of the corporation's existing carryforwards to which the election under subsection (a) ap- plies, or (2) the corporation's net tax liability for the carryback period. (c) CORPORATION MAKING ELECTION MAY NOT USE SAME AMOUNTS UNDER SECTION 38.—In the case of a qualified corporation which makes an election under subsection (a), the portion of such corpora- tion's existing carryforwards to which such an election applies shall not be taken into account under section 38 of the Internal Revenue Code of 1986 for any taxable year beginning after December 31, 1986. (d) NET TAX LIABILITY FOR CARRYBACK PERIOD.—For purposes of this section— (1) IN GENERAL.—A corporation's net tax liability for the carryback period is the aggregate of such corporation's net tax liability for taxable years in the carryback period. (2) NET TAX UABIUTY.—The term "net tax liability" means, with respect to any taxable year, the amount of the tax imposed by chapter 1 of the Internal Revenue Code of 1954 for such taxable year, reduced by the sum of the credits allowable under part IV of subchapter A of such chapter 1 (other than section 34 thereof). For purposes of the preceding sentence, any tax treated as not imposed by chapter 1 of such Code under section 26(bX2) of such Code shall not be treated as tax imposed by such chapter 1. (3) CARRYBACK PERIOD.—The term "carryback period" means the period— (A) which begins with the corporation's 15th taxable year preceding the 1st taxable year from which there is an unused credit included in such corporation's existing carryforwards (but in no event shall such period begin before the corporation's 1st taxable year ending after December 31,1961), and (B) which ends with the corporation's last taxable year beginning before January 1, 1986.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2171 (e) No RECOMPUTATION OF MINIMUM TAX, ETC.—Nothing in this section shall be construed to affect— (1) the amount of the tax imposed by section 56 of the Internal Revenue Code of 1986, or (2) the amount of any credit allowable under such Code, for any taxable year in the carryback period. (0 REINVESTMENT REQUIREMENT.— (1) IN GENERAL.—Any amount determined under this section must be committed to reinvestment in, and modernization of the steel industry through investment in modern plant and equipment, research and development, and other appropriate projects, such as working capital for steel operations and pro- grams for the retraining of steel workers. (2) GENERAL RULE.—^If this section applies to LTV Corpora- tion, then, in lieu of the requirements of paragraph (1)— (A) such corporation shall place such refund in a separate account; and (B) amounts in such separate account— (i) shall only be used by the corporation— (I) to purchase an insurance policy which pro- vides that, in the event the corporation becomes involved in a title 11 or similar case (as defined in section 368(a)(3)(A) of the Internal Revenue Code of 1954), the insurer will provide life and health insurance coverage during the 1-year period begin- ning on the date such involvement begins to any individual with respect to whom the corporation would (but for such involvement) have been obli- gated to provide such coverage the coverage pro- vided by the insurer will be identical to the cov- erage which the corporation would (but for such involvement) have been obligated to provide, and provides that the payment of insurance premiums will not be required during such 1-year period to keep such policy in force, or (II) directly in connection with the trade or busi- ness of the corporation in the manufacturer or production of steel; and (ii) shall be used (or obligated) for purposes described in clause (i) not later than 3 months after the corpora- tion receives the refund, (g) DEFINITIONS.—For purposes of this section— (1) QUALIFIED CORPORATION.— (A) I N GENERAL.—The term 'qualified corporation" means any corporation which is described in section 806(b) of the Steel Import Stabilization Act and a company which was incorporated on February 11,1983, in Michigan. (B) CERTAIN PREDECESSORS INCLUDED.—In the case of any qualified corporation which has carr5^orward attributable to a predecessor corporation described in such section 806(b), the qualified corporation and the predecessor cor- poration shall be treated as 1 corporation for purposes of subsections (d) and (e). (2) EXISTING CARRYFORWARDS.—The term "existing carryforward" means the aggregate of the amounts which— (A) are unused business credit carryforwards to the tax- payer's 1st taxable year beginning after December 31, 1986
100 STAT. 2172 PUBLIC LAW 99-514—OCT. 22, 1986 (determined without regard to the limitations of section 38(c) and any reduction under section 49 of the Internal Revenue Code of 1986), and (B) are attributable to the amount of the regular invest- ment credit determined under section 46(a)(1) of such Code (relating to regular percentage), or any corresponding provi- sion of prior law, determined on the basis that the regular investment credit was used first. SEC. 213. EFFECTIVE 15-YEAR CARRYBACK OF EXISTING CARRY- FORWARDS OF QUALIFIED FARMERS. (a) GENERAL RULE.—If a taxpayer who is a qualified farmer makes an election under this section for its 1st taxable year beginning after December 31, 1986, with respect to any portion of its existing carryforwards, the amount determined under subsection (b) shall be treated as a payment against the tax imposed by chapter 1 of the Internal Revenue Code of 1986 made by such taxpayer on the last day prescribed by law (without regard to extensions) for filing its return of tax under chapter 1 of such Code for such 1st taxable year. (b) AMOUNT.—For purposes of subsection (a), the amount deter- mined under this subsection shall be equal to the smallest of— (1) 50 percent of the portion of the taxpayer's existing carryforwards to which the election under subsection (a) applies, (2) the taxpayer's net tax liability for the carryback period (within the meaning of section 212(d) of this Act), or (3) $750. (c) TAXPAYER MAKING ELECTION MAY NOT U S E SAME AMOUNTS UNDER SECTION 38.—In the case of a qualified farmer who makes an election under subsection (a), the portion of such farmer's existing carryforwards to which such an election applies shall not be taken into account under section 38 of the Internal Revenue Code of 1986 for any taxable year beginning after December 31,1986. (d) No RECOMPUTATION OF MINIMUM TAX, ETC.—Nothing in this section shall be construed to affect— (1) the amount of the tax imposed by section 56 of the Internal Revenue Code of 1954, or (2) the amount of any credit allowable under such Code, for any taxable year in the carryback period (within the meaning of section 212(dX3) of this Act). (e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— (1) QUAUFIED FARMER.—The term "qualified farmer" means any taxpayer who, during the 3-taxable year period preceding the taxable year for which an election is made under subsection (a), derived 50 percent or more of the taxpayer's gross income from the trade or business of farming. (2) EXISTING CARRYFORWARD.—The term "existing carryforward" means the aggregate of the amounts which— (A) are unused business credit carryforwards to the tax- payer's 1st taxable year beginning after December 31, 1986 (determined without regard to the limitations of section 38(c) of the Internal Revenue Code of 1986), and (B) are attributable to the amount of the investment credit determined under section 46(a) of such Code (or any corresponding provision of prior law) with respect to section 38 property which was used by the taxpayer in the trade or
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2173 business of farming, determined on the basis that such credit was used first. (3) FARMING.—The term "farming" has the meaning given such term by section 2032A(e) (4) and (5) of such Code. Subtitle C—General Business Credit Reduction SEC. 221. REDUCTION IN TAX LIABILITY WHICH MAY BE OFFSET BY BUSI- NESS CREDIT FROM 85 PERCENT TO 75 PERCENT. (a) IN GENERAL.—Subparagraph (B) of section 38(c)(1) (relating to limitation based on amount of tax) is amended by striking out "85 percent" and inserting in lieu thereof "75 percent". (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1985. Subtitle D—Research and Development Provisions SEC. 231. AMENDMENTS RELATING TO CREDIT FOR INCREASING RE- SEARCH ACTIVITIES. (a) 3-YEAR EXTENSION OF THE RESEARCH CREDIT.— (1) IN GENERAL.—Section 30 (relating to credit for increasing research activities) is amended by adding at the end thereof the following new subsection: "(h) TERMINATION.— "(1) IN GENERAL.—This section shall not apply to any amount paid or incurred after December 31,1988. "(2) COMPUTATION OF BASE PERIOD EXPENSES.—In the case of any taxable year which begins before January 1, 1989, and ends after December 31, 1988, any amount for any base period with respect to such taxable year shall be the amount which bears the same ratio to such amount for such base period as the number of days in such taxable year before January 1, 1989, bears to the total number of days in such taxable year." (2) CONFORMING AMENDMENT.—Subsection (d) of section 221 of the Economic Recovery Tax Act of 1981 is amended— (A) by striking out ", and before January 1, 1986" in paragraph (1), and (B) by striking out the last sentence of paragraph (2)(A). (b) DEFINITION OF QUALIFIED RESEARCH; CERTAIN RESEARCH NOT ELIGIBLE FOR CREDIT.—Subsection (d) of section 30 (defining qualified research) is amended to read as follows: "(d) QUALIFIED RESEARCH DEFINED.—For purposes of this section— "(1) IN GENERAL.—The term 'qualified research' means research— "(A) with respect to which expenditures may be treated as expenses under section 174, "(B) which is undertaken for the purpose of discovering information— "(i) which is technological in nature, and "(ii) the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and
100 STAT. 2174 PUBLIC LAW 99-514—OCT. 22, 1986 "(C) substantially all of the activities of which constitute elements of a process of experimentation for a purpose described in paragraph (3). Such term does not include any activity described in paragraph (4). "(2) TESTS TO BE APPLIED SEPARATELY TO EACH BUSINESS COMPO- NENT.—For purposes of this subsection— "(A) IN GENERAL.—Paragraph (1) shall be applied sepa- rately with respect to each business component of the taxpayer. "(B) BUSINESS COMPONENT DEFINED.—The term 'business component' means any product, process, computer software, technique, formula, or invention which is to be— "(i) held for sale, lease, or license, or "(ii) used by the taxpayer in a trade or business of the taxpayer. "(C) SPECIAL RULE FOR PRODUCTION PROCESSES.—Any plant process, machinery, or technique for commercial production of a business component shall be treated as a separate business component (and not as part of the business compo- nent being produced). "(3) PURPOSES FOR WHICH RESEARCH MAY QUALIFY FOR CREDIT.—For purposes of paragraph dXC)— "(A) IN GENERAL.—Research shall be treated as conducted for a purpose described in this paragraph if it relates to— "(i) a new or improved function, "(ii) performance, or "(iii) reliability or quality. "(B) CERTAIN PURPOSES NOT QUAUFIED.—Research shall in no event be treated as conducted for a purpose described in this paragraph if it relates to style, taste, cosmetic, or seasonal design factors. "(4) ACTIVITIES FOR WHICH CREDIT NOT ALLOWED.—The term 'qualified research' shall not include any of the following: "(A) RESEARCH AFTER COMMERCIAL PRODUCTION.—Any re- search conducted after the beginning of cornmercial produc- tion of the business component. "(B) ADAPTATION OF EXISTING BUSINESS COMPONENTS.— Any research related to the adaptation of an existing busi- ness component to a particular customer's requirement or need. "(C) DUPLICATION OF EXISTING BUSINESS COMPONENT.— Any research related to the reproduction of an existing business component (in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed specifications, or publicly available information with respect to such business component. "(D) SURVEYS, STUDIES, ETC.—Any— "(i) efficiency survey, "(ii) activity relating to management function or technique, "(iii) market research, testing, or development (including advertising or promotions), "(iv) routine data collection, or "(v) routine or ordinary testing or inspection for quality control.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2175 "(E) COMPUTER SOFTWARE.—Except to the extent provided in regulations, any research with respect to computer soft- ware which is developed by (or for the benefit of) the taxpayer primarily for internal use by the taxpayer, other than for use in— "(i) an activity which constitutes qualified research (determined with regard to this subparagraph), or "(ii) a production process with respect to which the requirements of paragraph (1) are met. "(F) FOREIGN RESEARCH.—Any research conducted outside the United States. "(G) SOCIAL SCIENCES, ETC.—Any research in the social sciences, arts, or humanities. "(H) FUNDED RESEARCH.—Any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity)." (c) REDUCTION IN CREDIT; CREDIT FOR BASIC RESEARCH PAYMENTS TO QUALIFIED ORGANIZATIONS.— (1) IN GENERAL.—Subsection (a) of section 30 is amended to read as follows: "(a) GENERAL RULE.—For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of— "(1) 20 percent of the excess (if any) of— "(A) the qualified research expenses for the taxable year, over "(B) the base period research expenses, and "(2) 20 percent of the basic research payments determined under subsection (e)(lXA)." (2) DEFINITIONS AND SPECIAL RULES RELATING TO PAYMENTS FOR BASIC RESEARCH.—Subsection (e) of section 30 (relating to credit available with respect to certain basic research by colleges, universities, and certain research organizations) is amended to read £is follows: "(e) CREDIT ALLOWABLE WITH RESPECT TO CERTAIN PAYMENTS TO QUALIFIED ORGANIZATIONS FOR BASIC RESEARCH.—For purposes of this section— "(1) I N GENERAL.—In the case of any taxpayer who makes basic research payments for any taxable year— "(A) the amount of basic research payments taken into account under subsection (aX2) shall be equal to the excess of- "(i) such basic research payments, over "(ii) the qualified organization base period amount, and "(B) that portion of such basic research payments which does not exceed the qualified organization base period amount shall be treated as contract research expenses for purposes of subsection (aXD. "(2) BASIC RESEARCH PAYMENTS DEFINED.—For purposes of this subsection— "(A) IN GENERAL.—The term 'basic research payment' means, with respect to any taxable year, any amount paid in cash during such taxable year by a corporation to any qualified organization for basic research but only if—
100 STAT. 2176 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) such payment is pursuant to a written agreement between such corporation and such qualified organiza- tion, and "(ii) such basic research is to be performed by such qualified organization. "(B) EXCEPTION TO REQUIREMENT THAT RESEARCH BE PER- FORMED BY THE ORGANIZATION.—In the case of a qualified organization described in subparagraph (C) or (D) of para- graph (6), clause (ii) of subparagraph (A) shall not apply. "(3) QUALIFIED ORGANIZATION BASE PERIOD AMOUNT.—For pur- poses of this subsection, the term 'qualified organization base period amount' means an amount equal to the sum of^ "(A) the minimum basic research amount, plus "(B) the maintenance-of-effort amount. "(4) MINIMUM BASIC RESEARCH AMOUNT.—For purposes of this subsection— "(A) IN GENERAL.—The term 'minimum basic research amount' means an amount equal to the greater of— "(i) 1 percent of the average of the sum of amounts paid or incurred during the base period for— "(I) any in-house research expenses, and "(II) any contract research expenses, or "(ii) the amounts treated as contract research ex- penses during the base period by reason of this subsec- tion (as in effect during the base period). "(B) FLOOR AMOUNT.—Except in the case of a taxpayer which was in existence during a taxable year (other than a short taxable year) in the base period, the minimum basic research amount for any base period shall not be less than 50 percent of the basic research payments for the taxable year for which a determination is being made under this subsection. "(5) MAINTENANCE-OF-EFFORT AMOUNT.—For purposes of this subsection— "(A) IN GENERAL.—The term 'maintenance-of-effort amount' means, with respect to any taxable year, an amount equal to the excess (if any) of— "(i) an amount equal to— "(I) the average of the nondesignated university contributions paid by the taxpayer during the base period, multiplied by "(II) the cost-of-living adjustment for the cal- endar year in which such taxable year begins, over "(ii) the amount of nondesignated university con- tributions paid by the taxpayer during such taxable year. "(B) NONDESIGNATED UNIVERSITY CONTRIBUTIONS.—For purposes of this paragraph, the term 'nondesignated university contribution' means any amount paid by a tax- payer to any qualified organization described in paragraph (6XA)- "(i) for which a deduction was allowable under sec- tion 170, and "(ii) which was not taken into account— "(I) in computing the amount of the credit under this section (as in effect during the base period) during any taxable year in the base period, or
PUBLIC LAW 99-514—OCT. 22, 1986 ' 100 STAT. 2177 "(II) as a basic research payment for purposes of this section. "(C) COST-OF-LIVING ADJUSTMENT DEFINED.— "(i) IN GENERAL.—The cost-of-living adjustment for any calendar year is the cost-of-living adjustment for such calendar year determined under section 1(f)(3). "(ii) SPECIAL RULE WHERE BASE PERIOD ENDS IN A CALENDAR YEAR OTHER THAN 1983 OR 1984.—If t h e b a s e period of any taxpayer does not end in 1983 or 1984, section 1(f)(3)(B) shall, for purposes of this paragraph, be applied by substituting the calendar year in which such base period ends for 1987. "(6) QUALIFIED ORGANIZATION.—For purposes of this subsec- tion, the term 'qualified organization' means any of the follow- ing organizations: "(A) EDUCATIONAL INSTITUTIONS.—Any educational organization which— "(i) is an institution of higher education (within the meaning of section 3304(f)), and "(ii) is described in section 170(b)(lKA)(ii). "(B) CERTAIN SCIENTIFIC RESEARCH ORGANIZATIONS.—Any organization not described in subparagraph (A) which— "(i) is described in section 501(cX3) and is exempt from tax under section 501(a), "(ii) is organized and operated primarily to conduct scientific research, and "(iii) is not a private foundation. "(C) SCIENTIFIC TAX-EXEMPT ORGANIZATIONS.—Any organization which— "(i) is described in— "(I) section 501(c)(3) (other than a private founda- tion), or "(II) section 501(c)(6), "(ii) is exempt from tax under section 501(a), "(iii) is organized and operated primarily to promote scientific research by qualified organizations described in subparagraph (A) pursuant to written research agreements, and "(iv) currently expends— "(I) substantially all of its funds, or "(II) substantially all of the basic research pay- ments received by it, for grants to, or contracts for basic research with, an organization described in subparagraph (A). "(D) CERTAIN GRANT ORGANIZATIONS.—Any organization not described in subparagraph (B) or (C) which— "(i) is described in section 501(c)(3) and is exempt from tax under section 501(a) (other than a private foundation), "(ii) is established and maintained by an organization established before July 10, 1981, which meets the requirements of clause (i), "(iii) is organized and operated exclusively for the purpose of making grants to organizations described in subparagraph (A) pursuant to written research agree- ments for purposes of basic research, and
100 STAT. 2178 * PUBLIC LAW 99-514—OCT. 22, 1986 "(iv) makes an election, revocable only with the con- sent of the Secretary, to be treated as a private founda- tion for purposes of this title (other than section 4940, relating to excise tax based on investment income). "(7) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— "(A) BASIC RESEARCH.—The term 'basic research' means any original investigation for the advancement of scientific knowledge not having a specific commercial objective, except that such term shall not include— "(i) basic research conducted outside of the United States, and "(ii) basic research in the social sciences, arts, or humanities. "(B) BASE PERIOD.—The term 'base period' means the 3- taxable-year period ending with the taxable year imme- diately preceding the 1st taxable year of the taxpayer beginning after December 31,1983. "(C) EXCLUSION FROM INCREMENTAL CREDIT CALCULA- TION.—For purposes of determining the amount of credit allowable under subsection (a)(1) for any taxable year, the amount of the basic research payments taken into account under subsection (a)(2)— "(i) shall not be treated as qualified research ex- penses under subsection (aXl)(A), and "(ii) shall not be included in the computation of base period research expenses under subsection (a)(1)(B). "(D) TRADE OR BUSINESS QUALIFICATION.—For purposes of applying subsection (bXD to this subsection, any basic re- search payments shall be treated as an amount paid in carrying on a trade or business of the taxpayer in the taxable year in which it is paid (without regard to the provisions of subsection (bX3)(B)). "(E) CERTAIN CORPORATIONS NOT ELIGIBLE.—The term 'cor- poration' shall not include— "(i) an S corporation, "(ii) a personal holding company (as defined in sec- tion 542), or "(iii) a service organization (as defined in section 414(mX3))." (d) RESEARCH CREDIT TREATED AS OTHER BUSINESS CREDITS.— (1) IN GENERAL.—Section 38(b) (relating to current year busi- ness credit), as amended by this Act, is amended by striking out "plus" at the end of paragraph (2), by striking out the period at the end of paragraph (3) and inserting in lieu thereof ", plus", and by adding at the end thereof the following new paragraph: "(4) the research credit determined under section 41(a)." (2) TRANSFER OF RESEARCH CREDIT TO SUBPART RELATING TO BUSINESS CREDITS.—Section 30 (relating to credit for increasing research activities) is hereby transferred to subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue (I!ode of 1986 (as amended by this Act), inserted after section 40 of such Code, and redesignated as section 41 of such Code. (3) TECHNICAL AND CONFORMING AMENDMENTS.— (AXi) Subsections (b) and (c) of section 28 are each amended by striking out "section 30" each place it appears and inserting in lieu thereof "section 41".
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2179 (ii) Paragraph (2) of section 28(c) is amended by striking out "section 30(b)" and inserting in lieu thereof "section 41(b)". (iii) Paragraph (4) of section 28(d) is amended by striking out "section 30(f)" and inserting in lieu thereof "section 41(f)". (iv) Subparagraph (D) of section 2803X1) is amended by striking out "1985" and inserting in lieu thereof "1988". (B) Subsection (d) of section 38, as amended by this Act, is amended by inserting "41(a)," after "40(a),". (CXi) Subsection (d) of section 39 (relating to carryback and carry forward of unused credits) is amended by adding at the end thereof the following new paragraph: "(3) SIMILAR RULES FOR RESEARCH CREDIT.—Rules similar to the rules of paragraphs (1) and (2) shall apply to the credit allowable under section 30 (as in effect before the date of the enactment of the Tax Reform Act of 1986) except that— "(A) 'December 31, 1985' shall be substituted for 'Decem- ber 31,1983' each place it appears, and "(B) 'January 1, 1986' shall be substituted for 'January 1, 1984'." (ii) Subsection (g) of section 41 (relating to limitation based on amount of tax), as redesignated by this section, is amended to read as follows: "(g) SPECIAL RULE FOR PASS-THRU OF CREDIT.—In the case of an individual who— "(1) owns an interest in an unincorporated trade or business, "(2) is a partner in a partnership, "(3) is a beneficiary of an estate or trust, or "(4) is a shareholder in an S corporation, the amount determined under subsection (a) for any taxable year shall not exceed an amount (separately computed with respect to such person's interest in such trade or business or entity) equal to the amount of tax attributable to that portion of a person's taxable income which is allocable or apportionable to the person's interest in such trade or business or entity." (D) Subparagraph (B) of section 10800X2) (relating to reduction of tax attributes in title 11 C£ise or insolvency), as amended by this Act, is amended to read as follows: "(B) GENERAL BUSINESS CREDIT.—Any carryover to or from the taxable year of a discharge of an amount for purposes for determining the amount allowable as a credit under section 38 (relating to general business credit)." (E) Paragraph (3) of section 280COt)) is amended— (i) by striking out "section 30(fK5)" and inserting in lieu thereof "section 41(0(5)", (ii) by striking out "section 30(fKlXB)" and inserting in lieu thereof "section 41(fKlXB)", and (iii) by striking out "section 30(fXl)" and inserting in lieu thereof "section 41(0(1)". (F) Subsection (c) of section 381 is amended by striking out paragraph (25) and by redesignating paragraph (26) £is paragraph (25). (G) Section 936(hX5XCXiXIXa) (defining product area re- search) is amended by striking out "section 3O0b)" and inserting in lieu thereof "section 41(b)".
100 STAT. 2180 PUBLIC LAW 99-514—OCT. 22, 1986 , i (H) Section 6411 (relating to tentative carryback and refund adjustments) is amended— (i) by striking out "by a research credit carryback provided in section 30(gX2)" in subsection (a), (ii) by striking out "a research credit carryback or" in subsection (a), (iii) by striking out "(or, with respect to any portion of a business credit carryback attributable to a re- search credit carryback from a subsequent taxable year within a period of 12 months from the end of such subsequent taxable year)" in subsection (a), and (iv) by striking out "unused research credit," each place it appears in subsections (a) and (b). (I) Subparagraph (C) of section 6511(dX6) (defining credit carryback) is amended by striking out "and any research credit carryback under section 30(gX2)". (J) The table of sections for subpart B of part IV of subchapter A of chapter 1 is amended by striking out the item relating to section 30. (K) The table of sections for subpart D of such part is amended by inserting after the item relating to section 40 the following new item: "Sec. 41. Credit for increasing research activities." (e) DENIAL OF CREDIT WITH RESPECT TO AMOUNTS FOR CERTAIN LEASED PERSONAL PROPERTY.—Clause (iii) of section 4103X2XA) (defining in-house research expenses), as redesignated by subsection (d), is amended to read as follows: "(iii) under regulations prescribed by the Secretary, any amount paid or incurred to another person for the right to use computers in the conduct of qualified research." (f) DEDUCTION FOR CERTAIN CONTRIBUTIONS OF SCIENTIFIC RE- SEARCH PROPERTY.—Clause (i) of section 170(eX4XB) (relating to spe- cial rule for contributions of scientific property used for research) is amended to read as follows: "(i) the contribution is to an organization described in subparagraph (A) or subparagraph (B) of section 41(eX6),". (g) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in this subsection (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1985. (2) SUBSECTION (a).—The amendments made by subsection (a) shall apply to taxable years ending after December 31, 1985. (3) BASIC RESEARCH.—Section 41(aX2) of the Internal Revenue Code of 1986 (as added by this section), and the amendments made by subsection (cX2), shall apply to taxable years beginning after December 31,1986. SEC. 232. EXTENSION OF CREDIT FOR CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS. Subsection (e) of section 28 (relating to termination) is amended by striking out "1987" and inserting in lieu thereof "1990".
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2181 Subtitle E—Changes in Certain Amortization Provisions SEC. 241. REPEAL OF 5-YEAR AMORTIZATION OF TRADEMARK AND TRADE NAME EXPENDITURES. (a) IN GENERAL.—Section 177 (relating to trademark and trade name expenditures) is hereby repealed. (b) TECHNICAL AND CONFORMING AMENDMENTS.— (1) Paragraph (3) of section 312(n) is amended by striking out ", 177,". (2) Subsection (a) of section 1016 (relating to adjustments to basis) is amended by striking out paragraph (16) and by re- designating paragraphs (17) through (27) as paragraphs (16) through (26), respectively. (3) The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 177. (c) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to expenditures paid or incurred after December 31, 1986. (2) TRANSITIONAL RULE.—The amendments made by this sec- tion shall not apply to any expenditure incurred— (A) pursuant to a binding contract entered into before March 2,1986, or (B) with respect to the development, protection, expan- sion, registration, or defense of a trademark or trade name commenced before March 2, 1986, but only if not less than the lesser of $1,000,000 or 5 percent of the aggregate cost of such development, protection, expansion, registration, or defense has been incurred or committed before such date. The preceding sentence shall not apply to any expenditure with respect to a trademark or trade name placed in service after December 31,1987. SEC. 242. REPEAL OF AMORTIZATION OF RAILROAD GRADING AND TUNNEL BORES. (a) IN GENERAL.—Section 185 (relating to amortization of railroad grading and tunnel bores) is hereby repealed. (b) TECHNICAL AND CONFORMING AMENDMENTS.— (1) Subparagraph (B) of section 1082(a)(2) is amended by strik- ing out", 185,^'. (2) Paragraph (3) of section 1250(b) (defining additional depre- ciation) is amended by inserting "(as in effect before its repeal by the Tax Reform Act of 1986)" after "185". (3) The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 185. (c) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to that portion of the basis of any property which is attributable to expenditures paid or incurred after December 31,1986. (2) TRANSITIONAL RULE.—The amendments made by this sec- tion shall not apply to any expenditure incurred— (A) pursuant to a binding contract entered into before March 2, 1986, or
100 STAT. 2182 PUBLIC LAW 99-514—OCT. 22, 1986 (B) with respect to any improvement commenced before March 2, 1986, but only if not less than the lesser of $1,000,000 or 5 percent of the aggregate cost of such improvement has been incurred or committed before such date. The preceding sentence shall not apply to any expenditure with respect to an improvement placed in service after December 31, 1987. SEC. 243. DEDUCTION FOR BUS AND FREIGHT FORWARDER OPERATING AUTHORITY. . ">. > (a) Bus OPERATING AUTHORITY.— (1) IN GENERAL.—Subject to the modifications contained in paragraph (2), section 266 of the Economic Recovery Tax Act of 1981 shall be applied as if the term "motor carrier operating authority" included a bus operating authority. (2) MODIFICATIONS.—For purposes of paragraph (1), section 266 of such Act shall be applied— (A) by substituting "November 19, 1982" for "July 1, 1980" each place it appears, and (B) by substituting "November 1982" for "July 1980" in subsection (a) thereof. (3) B u s OPERATING AUTHORITY DEFINED.—For purpOSeS of t h i s subsection and section 266 of such Act, the term "bus operating authority" means— (A) a certificate or permit held by a motor common or contract carrier of passengers which was issued pursuant to subchapter II of chapter 109 of title 49, United States Code, and (B) a certificate or permit held by a motor carrier au- thorizing the transportation of passengers, as a common carrier, over regular routes in intrastate commerce which was issued by the appropriate State agency. (b) FREIGHT FORWARDER OPERATING AUTHORITY.— (1) IN GENERAL.—Subject to the modifications contained in paragraph (2), section 266 of the Economic Recovery Tax Act of 1981 shall be applied as if subsection Ot)) thereof contained "or a freight forwarder" after "contract carrier of property". (2) MODIFICATIONS.—The modifications referred to in this paragraph are: (A) 60-MONTH PERIOD TO BEGIN IN 1987.—The 60-month period referred to in section 266(a) of such Act shall begin with the later of— (i) the deregulation month, or (ii) at the election of the taxpayer, the 1st month of the taxpayer's 1st taxable year beginning after the deregulation month. (B) AUTHORITY MUST BE HELD AS OF BEGINNING OF 60- MONTH PERIOD.—A motor carrier operating authority shall not be taken into account unless such authority is held by the taxpayer at the beginning of the 60-month period ap- plicable to the taxpayer under subparagraph (A). (C) ADJUSTED BASIS NOT TO EXCEED ADJUSTED BASIS AT BEGINNING OF 60-MONTH PERIOD.—The adjusted basis taken into account with respect to any motor carrier operating authority shall not exceed the adjusted basis of such
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2183 authority as of the beginning of the 60-month period ap- plicable to the taxpayer under subparagraph (A). (3) DEREGULATION MONTH.—For purposes of this section, the term "deregulation month" means the month in which the Secretary of the Treasury or his delegate determines that a Federal law has been enacted which deregulates the freight forwarding industry. (c) SPECIAL RULE FOR MOTOR CARRIER OPERATING AUTHORITY.—In the case of a corporation which was incorporated on December 29, 1969, in the State of Delaware, notwithstanding any other provision of law, there shall be allowed as a deduction for the taxable year of the taxpayer beginning in 1980 an amount equal to $2,705,188 for its entire loss due to a decline in value of its motor carrier operating authority by reason of deregulation. (d) EFFECTIVE DATES.— (1) Bus OPERATING AUTHORITY.— (A) IN GENERAL.—Subsection (a) shall apply to taxable years ending after November 18,1982. (B) STATUTE OF LIMITATIONS.—If refund or credit of any overpayment of tax resulting from subsection (a) is pre- vented at any time on or before the date which is 1 year after the date of the enactment of this Act by the operation of any law or rule of law (including res judicata), refund or credit of such overpayment (to the extent attributable to the application of such subsection) may, notwithstanding such law or rule of law, be made or allowed if claim therefore is filed on or before the date which is 18 months after such date of enactment. (2) FREIGHT FORWARDER OPERATING AUTHORITY.—Subsection (b) shall apply to taxable years ending after the month preced- ing the deregulation month. SEC. 244. TREATMENT OF EXPENDITURES FOR REMOVAL OF ARCHITEC- TURAL BARRIERS TO THE HANDICAPPED AND ELDERLY MADE PERMANENT. Paragraph (2) of section 190(d) (relating to expenditures to remove architectural and transportation barriers to the handicapped and elderly) is amended by striking out "1983, and before January 1, 1986" and inserting in lieu thereof "1983" Subtitle F—Provisions Relating to Real Estate SEC. 251. MODIFICATION OF INVESTMENT TAX CREDIT FOR REHABILITA- TION EXPENDITURES. (a) REDUCTION IN PERCENTAGE.—Paragraph (4) of section 460t>) (relating to rehabilitation percentage) is amended to read as follows: "(4) REHABILITATION PERCENTAGE.— "(A) IN GENERAL.—The term 'rehabilitation percentage' means— "(i) 10 percent in the case of qualified rehabilitation expenditures with respect to a qualified rehabilitated building other than a certified historic structure, and "(ii) 20 percent in the case of such expenditure with respect to a certified historic structure. "(B) REGULAR AND ENERGY PERCENTAGES NOT TO APPLY.— The regular percentage and the energy percentages shall
100 STAT. 2184 PUBLIC LAW 99-514—OCT. 22, 1986 not apply to that portion of the basis of any property which is attributable to qualified rehabilitation expenditures." (b) SPECIAL RULES FOR QUALIFIED REHABIUTATED BUILDINGS.— Subsection (g) of section 48 (relating to special rules for qualified rehabilitated buildings) is amended to read as follows: "(g) SPECIAL RULES FOR QUAUFIED REHABILITATED BUILDINGS.—For purposes of this subpart— "(1) QUAUFIED REHABIUTATED BUILDING.—For purposes of this subsection— "(A) IN GENERAL.—The term 'qualified rehabilitated building' means any building (and its structural compo- nents) if— "(i) such building has been substantially rehabili- tated, "(ii) such building was placed in service before the beginning of the rehabilitation, and "(iii) in the case of any building other than a certified historic structure, in the rehabilitation process— "(I) 50 percent or more of the existing external walls of such building are retained in place as external walls, "(II) 75 percent or more of the existing external walls of such building are retained in place as internal or external walls, and "(III) 75 percent or more of the existing internal structural framework of such building is retained in place. "(B) BUILDING MUST BE FIRST PLACED IN SERVICE BEFORE 1936.—In the case of a building other than a certified historic structure, a building shall not be a qualified re- habilitated building unless the building was first placed in service before 1936. "(C) SUBSTANTIALLY REHABIUTATED DEFINED.— "(i) IN GENERAL.—For purposes of subparagraph (AXi), a building shall be treated as having been substantially rehabilitated only if the qualified re- habilitation expenditures during the 24-month period selected by the taxpayer (at the time and in the manner prescribed by regulations) and ending with or within the taxable year exceed the greater of— "(I) the adjusted basis of such building (and its structural components), or "(II) $5,000. The adjusted basis of the building (and its structural components) shall be determined sis of the beginning of the 1st day of such 24-month period, or of the holding period of the building, whichever is later. For purposes of the preceding sentence, the determination of the beginning of the holding period shall be made without regard to any reconstruction by the taxpayer in connec- tion with the rehabilitation. "(ii) SPECIAL RULE FOR PHASED REHABILITATION.—In the case of any rehabilitation which may reasonably be expected to be completed in phases set forth in ar- chitectural plans and specifications completed before the rehabilitation begins, clause (i) shall be applied by substituting *60-month period' for '24-month period .
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2185 "(iii) LESSEES.—The Secretary shall prescribe by regulation rules for applying this subparagraph to les- sees. "(D) RECONSTRUCTION.—Rehabilitation includes re- construction. "(2) QUALIFIED REHABIUTATION EXPENDITURE DEFINED.—For purposes of this section— "(A) IN GENERAL.—The term 'qualified rehabilitation expenditure' means any amount properly chargeable to capital account— "(i) for property for which depreciation is allowable under section 168 and which is— "(I) nonresidential real property, "(II) residential rental property, "(III) real property which has a class life of more than 12.5 years, or "(IV) an addition or improvement to property or housing described in subclause (I), (II), or (III), and "(ii) in connection with the rehabilitation of a quali- fied rehabilitated building. "(B) CERTAIN EXPENDITURES NOT INCLUDED.—The term 'qualified rehabilitation expenditure' does not include— "(i) STRAIGHT LINE DEPRECIATION MUST BE USED.—Any expenditure with respect to which the taxpayer does not use the straight line method over a recovery period determined under subsection (c) or (g) of section 168. The preceding sentence shall not apply to any expendi- ture to the extent the alternative depreciation system of section 168(g) applies to such expenditure by reason of subparagraph (B) or (C) of section 168(gXl). "(ii) COST OF ACQUISITION.—The cost of acquiring any building or interest therein. "(iii) ENLARGEMENTS.—Any expenditure attributable to the enlargement of an existing building. "(iv) CERTIFIED HISTORIC STRUCTURE, ETC.—Any expenditure attributable to the rehabilitation of a cer- tified historic structure or a building in a registered historic district, unless the rehabilitation is a certified rehabilitation (within the meaning of subparagraph (O). The preceding sentence shall not apply to a build- ing in a registered historic district if— "(I) such building was not a certified historic structure, "(II) the Secretary of the Interior certified to the Secretary that such building is not of historic significance to the district, and "(III) if the certification referred to in subclause (II) occurs after the beginning of the rehabilitation of such building, the taxpayer certifies to the Sec- retary that, at the beginning of such rehabilitation, he in good faith was not aware of the requirement of subclause (II). "(v) TAX-EXEMPT USE PROPERTY.— "(I) IN GENERAL.—Any expenditure in connection with the rehabilitation of a building which is allocable to that portion of such building which is
100 STAT. 2186 PUBLIC LAW 99-514—OCT. 22, 1986 (or may reasonably be expected to be) tax-exempt use property (within the meaning of section 168(h)). "(II) CLAUSE NOT TO APPLY FOR PURPOSES OF PARA- GRAPH (i)(c).—This clause shall not apply for purposes of determining under paragraph dXC) whether a building has been substantially rehabili- tated, "(vi) EXPENDITURES OF LESSEE.—Any expenditure of a lessee of a building if, on the date the rehabilitation is completed, the remaining term of the lease (determined without regard to any renewal periods) is less than the recovery period determined under section 168(c). "(C) CERTIFIED REHABIUTATION.—For purposes of subpara- graph (B), the term 'certified rehabilitation' means any rehabilitation of a certified historic structure which the Secretary of the Interior has certified to the Secretary as being consistent with the historic character of such prop- erty or the district in which such property is located. ' (D) NONRESIDENTIAL REAL PROPERTY; RESIDENTIAL RENTAL PROPERTY; CLASS UFE.—For purposes of subparagraph (A), the terms 'nonresidential real property', 'residential rental property', and 'class life' have the respective meanings given such terms by section 168. "(3) CERTIFIED HISTORIC STRUCTURE DEFINED.—For purposes of this subsection— "(A) IN GENERAL.—The term 'certified historic structure' means any building (and its structural components) which— "(i) is listed in the National Register, or "(ii) is located in a registered historic district and is certified by the Secretary of the Interior to the Sec- retary as being of historic significance to the district. "(B) REGISTERED HISTORIC DISTRICT.—The term 'registered historic district' means— "(i) any district listed in the National Register, and "(ii) any district— "(I) which is designated under a statute of the appropriate State or local government, if such stat- ute is certified by the Secretary of the Interior to the Secretary as containing criteria which will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district, and "(II) which is certified by the Secretary of the Interior to the Secretary as meeting substantially all of the requirements for the listing of districts in the National Register. "(4) PROPERTY TREATED AS NEW SECTION 38 PROPERTY.—Prop- erty which is treated as section 38 property by reason of subsec- tion (aXlXE) shall be treated as new section 38 property." (c) BASIS ADJUSTMENT FOR CERTIFIED HISTORIC STRUCTURES.—Para- graph (3) of section 48(q) (relating to special rule for qualified rehabilitated buildings) is amended by striking out "other than a certified historic structure". (d) EFFECTIVE DATE.— (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply to
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2187 property placed in service after December 31, 1986, in taxable years ending after such date. (2) GENERAL TRANSITIONAL RULE.—The amendments made by this section and section 201 shall not apply to any property placed in service before January 1, 1994, if such property is placed in service as part of— (A) a rehabilitation which was completed pursuant to a written contract which was binding on March 1, 1986, or (B) a rehabilitation incurred in connection with property (including any leasehold interest) acquired before March 2, 1986, or acquired on or after such date pursuant to a written contract that was binding on March 1, 1986, if— (i) the rehabilitation was completed pursuant to a written contract that was binding on March 1, 1986, (ii) parts 1 and 2 of the Historic Preservation Certifi- cation Application were filed with the Department of the Interior (or its designee) before March 2, 1986, or (iii) the lesser of $1,000,000 or 5 percent of the cost of the rehabilitation is incurred before March 2, 1986, or is required to be incurred pursuant to a written con- tract which was binding on March 1,1986. (3) CERTAIN ADDITIONAL REHABIUTATIONS.—The amendments made by this section and section 201 shall not apply to— (A) the rehabilitation of 8 bathhouses within the Hot Springs National Park or of buildings in the CJentral Avenue Historic District at such Park, (B) the rehabilitation of the Upper Pontabla Building in New Orleans, Louisiana, (C) the rehabilitation of at least 60 buildings listed on the National Register at the Frankford Arsenal, (D) the rehabilitation of De Baliveriere Arcade, St. Louis (Dentre, and Drake Apartments in Missouri, (E) the rehabilitation of The Tides in Bristol, Rhode Island, (F) the rehabilitation and renovation of the Outlet Com- pany building and garage in Providence, Rhode Island, (G) the rehabilitation of 10 structures in Harrisburg, Pennsylvania, with respect to which the Harristown Devel- opment Corporation was designated redeveloper and re- ceived an option to acquire title to the entire project site for $1 on June 27,1984, (H) the rehabilitation of a project involving the renova- tion of 3 historic structures on the Minneapolis riverfront, with respect to which the developer of the project entered into a redevelopment agreement with a municipality dated January 4, 1985, and industrial development bonds were sold in 3 separate issues in May, July, and October 1985, (I) the rehabilitation of a bank's main office facilities of approximately 120,000 square feet, in connection with which the bank's board of directors authorized a $3,300,000 expenditure for the renovation and retrofit on March 20, 1984, (J) the rehabilitation of 10 warehouse buildings built between 1906 and 1910 and purchased under a contract dated February 17,1986, (K) the rehabilitation of a facility which is customarily used for conventions and sporting events if an analysis of
100 STAT. 2188 PUBLIC LAW 99-514—OCT. 22, 1986 operations and recommendations of utilization of such facil- ity was prepared by a certified public accounting firm pursuant to an engagement authorized on March 6, 1984, and presented on June 11, 1984, to officials of the city in which such facility is located, (L) Mount Vernon Mills in Columbia, South Carolina, (M) the Barbara Jordan II Apartments, (N) the rehabilitation of the Federal Building and Post Office, 120 Hanover Street, Manchester, New Hampshire, (0) the rehabilitation of the Charleston Waterfront project in South Carolina, (P) the Hayes Mansion in San Francisco, (Q) the renovation of a facility owned by the National Railroad Passenger Corporation ("Amtrak") for which project Amtrak engaged a development team by letter agreement dated August 23, 1985, as modified by letter agreement dated September 9,1985, (R) the rehabilitation of a structure or its components which is listed in the National Register of Historic Places, is located in Allegheny County, Pennsylvania, will be substan- tially rehabilitated (as defined in section 48(gXlXC) prior to amendment by this Act), prior to December 31, 1989; and was previously utilized as a market and an auto dealership, (S) The Bellevue Stratford Hotel in Philadelphia, Penn- sylvania, (T) the Dixon Mill Housing project in Jersey City, New Jersey, (U) Motor Square Garden, (V) the Blackstone Apartments, and the Shriver-Johnson building, in Sioux Falls, South Dakota, (W) the Holy Name Academy in Spokane, Washington, (X) the Nike/Clemson Mill in Exeter, New Hampshire, (Y) the Central Bank Building in Grand Rapids, Michi- gan, and (Z) the Heritage Hotel, in the City of Marquette, Michi- gan. (4) ADDITIONAL REHABILITATIONS.—The amendments made by this section and section 201 shall not apply to— (A) the Fort Worth Town Square Project in Texas, (B) the American Youth Hostel in New York, New York, (C) The Riverwest Loft Development (including all three phases, two of which do not involve rehabilitations), (D) the Gaslamp Quarter Historic District in California, (E) the Eberhardt & Ober Brewery, in Pennsylvania, (F) the Captain's Walk Limited Partnership-Harris Place Development, in Connecticut, (G) the Velvet Mills in Connecticut, (H) the Roycroft Inn, in New York, (1) Old Main Villeige, in Mankato, Minnesota, (J) the Washburn-Crosby A Mill, in Minneapolis, Min- nesota, (K) the Lakeland marbel Arcade in Lakeland, Florida, (L) the Willard Hotel, in Washington, D.C., (M) the H. P. Lau Building in Lincoln, Nebraska, (N) the Starks Building, in Louisville, Kentucky, (O) the Bellevue High School, in Bellevue, Kentucky,
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2189 (P) the Major Hampden Smith House, in Owensboro, Kentucky, (Q) the Doe Run Inn, in Brandenburg, Kentucky, (R) the State National Bank, in Frankfort, Kentucky, (S) the Captain Jack House, in Fleming, Kentucky, (T) the Elizabeth Arlinghaus House, in Louisville, Ken- tucky, (U) Limerick Shamrock, in Louisville, Kentucky, (V) the Robert Mills Project, in South Carolina, (W) the 620 Project, consisting of 3 buildings, in Ken- tucky, (X) the Warrior Hotel, Ltd., the first two floors of the Martin Hotel, and the 105,000 square foot warehouse con- structed in 1910, all in Sioux City, Iowa, (Y) the waterpark condominium residential project, to the extent of $2 million of expenditures, and (Z) the Apollo and Bishop Building Complex on 125th Street, the Bigelow-Hartford Carpet Mill in New York, New York. (5) REDUCTION IN CREDIT FOR PROPERTY UNDER TRANSITIONAL RULES.—In the case of property placed in service after Decem- ber 31, 1986, and to which the amendments made by this section do not apply, subparagraph (A) of section 460t>X4) of the Internal Revenue Code of 1954 (as in effect before the enactment of this Act) shall be applied— (A) by substituting "10 percent" for "15 percent", and (B) by substituting "13 percent" for "20 percent". (6) EXPENSING OF REHABIUTATION EXPENDITURES FOR THE FRANKFORD ARSENAL.—In the CEise of any expenditures paid or incurred in connection with the rehabilitation of the Frankford Arsenal during the 8-year period beginning on January 1, 1987, such expenditures (including expenditures for repair and maintenance of the building and property) shall be allowable as a deduction in the taxable year in which paid or incurred in an amount not in excess of the submissions made by the taxpayer before September 16,1986. SEC. 252. LOW-INCOME HOUSING CREDIT. (a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 1 (relating to business credits) is amended by adding at the end thereof the following new section: "SEC. 42. LOW-INCOME HOUSING CREDIT. "(a) IN GENERAL.—For purposes of section 38, the amount of the low-income housing credit determined under this section for any taxable year in the credit period shall be an amount equal to— "(1) the applicable percentage of "(2) the qualified basis of each qualified low-income building. "Ot)) APPUCABLE PERCENTAGE: 70 PERCENT PRESENT VALUE CREDIT FOR CERTAIN NEW BUILDINGS; 30 PERCENT PRESENT VALUE CREDIT FOR CERTAIN OTHER BUILDINGS.—For purposes of this section— "(1) BUILDING PLACED IN SERVICE DURING 1987.—In the case of any qualified low-income building placed in service by the taxpayer during 1987, the term 'applicable percentage' means— "(A) 9 percent for new buildings which are not federally subsidized for the taxable year, or "(B) 4 percent for—
100 STAT. 2190 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) new buildings which are federally subsidized for the taxable year, and "(ii) existing buildings. "(2) BUILDINGS PLACED IN SERVICE AFTER 1987.— "(A) I N GENERAL.—In the case of any qualified low- income building placed in service by the taxpayer after 1987, the term 'applicable percentage' means the appro- priate percentage prescribed by the Secretary for the month in which such building is placed in service. "(B) METHOD OF PRESCRIBING PERCENTAGES.—The percent- ages prescribed by the Secretary for any month shall be percentages which will yield over a 10-year period amounts of credit under subsection (a) which have a present value equal to— "(i) 70 percent of the qualified beisis of a building described in paragraph (IXA), and "(ii) 30 percent of the qualified basis of a building described in paragraph (IXB). "(C) METHOD OF DISCOUNTING.—The present value under subparagraph (B) shall be determined— "(i) as of the last day of the 1st year of the 10-year period referred to in subparagraph (B), "(ii) by using a discount rate equal to 72 percent of the average of the annual Federal mid-term rate and the annual Federal long-term rate applicable under section 1274(dXl) to the month in which the building w£is placed in service and compounded annually, and "(iii) by assuming that the credit allowable under this section for any year is received on the last day of such year. "(3) CROSS REFERENCE.— "For treatment of certain rehabilitation expenditures as separate new buildings, see subsection (e).— "(c)QUAUFIED BASIS; QUAUFIED LOW-INCOME BUILDING.—For pur- poses of this section— "(1) QUAUFIED BASIS.— "(A) DETERMINATION.—The qualified basis of any quali- fied low-income building for any taxable year is an amount equal to— "(i) the applicable fraction (determined as of the close of such t£ixable year) of "(ii) the eligible basis of such building (determined under subsection (dX5)). "(B) APPUCABLE FRACTION.—For purposes of subpara- graph (A), the term 'applicable fraction' means the smaller of the unit fraction or the floor space fraction. "(C) UNIT FRACTION.—For purposes of subparagraph (B), the term 'unit fraction' means the fraction— "(i) the numerator of which is the number of low- income units in the building, and "(ii) the denominator of which is the number of residential rental units (whether or not occupied) in such building. "(D) FLOOR SPACE FRACTION.—For purposes of subpara- graph (B), the term 'floor space fraction' means the frac- tion—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2191 "(i) the numerator of which is the total floor space of the low-income units in such building, and "(ii) the denominator of which is the total floor space of the residential rental units (whether or not occupied) in such building. "(2) QuAUFiED LOW-INCOME BUILDING.—The term 'qualified low-income building' means any building— "(A) which at all times during the compliance period with respect to such building is part of a qualified low-income housing project, and "(B) to which the amendments made by section 201(a) of the Tax Reform Act of 1986 apply. "(d) EuGiBLE BASIS.—For purposes of this section— "(1) NEW BUILDINGS.—The eligible basis of a new building is its adjusted basis. "(2) EXISTING BUILDINGS.— "(A) IN GENERAL.—The eligible basis of an existing build- ing is— "(i) in the case of a building which meets the require- ments of subparagraph (B), the sum of— "(I) the portion of its adjusted basis attributable to its acquisition cost, plus "(II) amounts chargeable to capital account and incurred by the taxpayer (before the close of the 1st taxable year of the credit period for such build- ing) for property (or additions or improvements to property) of a character subject to the allowance for depreciation, and "(ii) zero in any other case. "(B) REQUIREMENTS.—A building meets the requirements of this subparagraph if— "(i) the building is acquired by purchase (as defined in section 179(dX2)), "(ii) there is a period of at least 10 years between the date of its acquisition by the taxpayer and the later of— "(I) the date the building was last placed in service, or "(II) the date of the most recent nonqualified substantial improvement of the building, and "(iii) the building wgis not previously placed in serv- ice by the taxpayer or by any person who was a related person with respect to the taxpayer as of the time previously placed in service. "(C) ACQUISITION COST.—For purposes of subparsigraph (A), the cost of any building shall not include so much of the basis of such building as is determined by reference to the basis of other property held at any time by the person acquiring the building. "(D) SPECIAL RULES FOR SUBPARAGRAPH (B) .— "(i) NONQUAUFIED SUBSTANTIAL IMPROVEMENT.—For pur- poses of subparagraph (BXii)— "(I) IN GENERAL.—The term 'nonqualified substantial improvement' means any substantial improvement if section 167(k) was elected with respect to such improve- ment or section 168 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) applied to such improvement.
100 STAT. 2192 PUBLIC LAW 99-514—OCT. 22, 1986 "(ID DATE OF SUBSTANTIAL IMPROVEMENT.—The date of a substantial improvement is the last day of the 24- month period referred to in subclause (III). "(Ill) SUBSTANTIAL IMPROVEMENT.—The term 'substantial improvement' means the improvements added to capital account with respect to the building during any 24-month period, but only if the sum of the amounts added to such account during such period equals or exceeds 25 percent of the adjusted basis of the building (determined without regard to paragraphs (2) and (3) of section 1016(a)) as of the 1st day of such period. "(ii) SPECIAL RULE FOR NONTAXABLE EXCHANGES.—For pur- poses of determining under subparagraph (BXii) when a building was last placed in service, there shall not be taken into account any placement in service in connection with the acquisition of the building in a transaction in which the basis of the building in the hands of the person acquiring it is determined in whole or in part by reference to the adjusted basis of such building in the hands of the person from whom aquired. "(iii) RELATED PERSON, ETC.— "(I) APPLICATION OF SECTION 179.—For purposes of subparagraph (BXi), section 179(d) shall be applied by substituting '10 percent' for '50 percent' in section 267(b) and 707(b) and in section 179(bX7). "(II) RELATED PERSON.—For purposes of subpara- graph (BXiii), a person (hereinafter in this subclause referred to as the 'related person') is related to any person if the related person bears a relationship to such person specified in section 267(b) or 707(bXl), or the related person and such person are engEiged in trades or businesses under common control (within the mean- ing of subsections (a) and (b) of section 52). For purposes of the preceding sentence, in applying section 267(b) or 7070t)Xl), '10 percent' shall be substituted for '50 per- cent'. "(3) EUGIBLE BASIS REDUCED WHERE DISPROPORTIONATE STAND- ARDS FOR UNITS.—The eligible basis of any building shall be reduced by an amount equal to the portion of the adjusted basis of the building which is attributable to residential rental units in the building which are not low-income units and which are above the average quality standard of the low-income units in the building. "(4) SPECIAL RULES RELATING TO DETERMINATION OF ADJUSTED BASIS.—For purposes of this subsection— "(A) IN GENERAL.—Except as provided in subparagraph (B), the adjusted basis of any building shall be determined without regard to the adjusted basis of any property which is not residential rental property. "(B) BASIS OF PROPERTY IN COMMON AREAS, ETC., IN- CLUDED.—The adjusted basis of any building shall be deter- mined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation) used in common areas or provided 2is comparable amenities to all residential rental units in such building.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2193 "(C) No REDUCTION FOR DEPRECIATION.—The adjusted basis of any building shall be determined without regard to paragraphs (2) and (3) of section 1016(a). "(5) ELIGIBLE BASIS DETERMINED WHEN BUILDING PLACED IN SERVICE.— "(A) IN GENERAL.—Except as provided in subparagraph (B), the eligible basis of any building for the entire compli- ance period for such building shall be its eligible basis on the date such building is placed in service. "(B) ELIGIBLE BASIS REDUCED BY FEDERAL GRANTS.—If, during any taxable year of the compliance period, a grant is made with respect to any building or the operation thereof and any portion of such grant is funded with Federal funds (whether or not includible in gross income), the eligible basis of such building for such taxable year and all succeed- ing taxable years shall be reduced by the portion of such grant which is so funded. "(6) CREDIT ALLOWABLE FOR CERTAIN FEDERALLY-ASSISTED BUILDINGS ACQUIRED DURING 10-YEAR PERIOD DESCRIBED IN PARA- GRAPH (2) (B) (ii).— "(A) IN GENERAL.—On application by the taxpayer, the Secretary (after consultation with the appropriate Federal official) may waive paragraph (2XBXii) with respect to any federally-assisted building if the Secretary determines that such waiver is necessary— "(i) to avert an assignment of the mortgage secured by property in the project (of which such building is a part) to the Department of Housing and Urban Devel- opment or the Farmers' Home Administration, "(ii) to avert a claim against a Federal mortgage insurance fund (or such Department or Administra- tion) with respect to a mortgage which is so secured, or "(iii) to the extent provided in regulations, by reason of other circumstances of financial distress. The preceding sentence shall not apply to any building described in paragraph (7XB). "(B) FEDERALLY-ASSISTED BUILDING.—For purposes of subparagraph (A), the term 'federally-assisted building' means any building which is substantially assisted, fi- nanced, or operated under— "(i) section 8 of the United States Housing Act of 1937 "(ii) section 221(dX3) or 236 of the National Housing Act of 1934, or "(iii) section 515 of the Housing Act of 1949, as such Acts are in effect on the date of the enactment of the Tax Reform Act of 1986. "(C) APPROPRIATE FEDERAL OFFICIAL.—For purposes of subparagraph (A), the term 'appropriate Federal official' means— "(i) the Secretary of Housing and Urban Develop- ment in the case of any building described in subpara- graph (B) by reason of clause (i) or (ii) thereof, and "(ii) the Secretary of Agriculture in the case of any building described in subparagraph (B) by reason of clause (iii) thereof.
100 STAT. 2194 PUBLIC LAW 99-514—OCT. 22, 1986 "(7) ACQUISITION OF BUILDING BEFORE END OF PRIOR COMPLI- ANCE PERIOD.— "(A) IN GENERAL.—Under regulations prescribed by the Secretary, in the case of a building described in subpara- graph (B) which is acquired by the taxpayer— "(i) paragraph (2XB) shall not apply, but "(ii) the credit allowable by reason of subsection (a) to the taxpayer for any period after such acquisition shall be equal to the amount of credit which would have been allowable under sebsection (a) for such period to the prior owner referred to in subpareigraph (B) had such owner not disposed of the building. "(B) DESCRIPTION OF BUILDING.—A building is described in this subparagraph if— "(i) a credit was allowed by reason of subsection (a) to any prior owner of such building, and "(ii) the taxpayer acquired such building before the end of the compliance period for such building with respect to such prior owner (determined without regard to any disposition by such prior owner). "(e) REHABIUTATION EXPENDITURES TREATED AS SEPARATE N E W BUILDING.— "(1) IN GENERAL.—Rehabilitation expenditures paid or in- curred by the taxpayer with respect to any building shall be treated for purposes of this section as a separate new building. "(2) REHABIUTATION EXPENDITURES.—For purposes of para- graph (D— "(A) IN GENERAL.—The term 'rehabilitation expenditures' means amounts chargeable to captial account and incurred for property (or additions or improvements to property) of a character subject to the allowance for depreciation in connection with the rehabilitation of a building. "(B) COST OF ACQUISITION, ETC, NOT INCLUDED.—Such term does not include the cost of acquiring any building (or interest therein) or any amount not permitted to be taken into account under paragraph (3) or (4) of subsection (d). "(3) AVERAGE OF REHABIUTATION EXPENDITURES MUST BE $2,OOO OR MORE.— "(A) I N GENERAL.—Paragraph (1) shall apply to re- habilitation expenditures with respect to any building only if the qualified basis attributable to such expenditures in- curred during any 24-month period, when divided by the low-income units in the building, is $2,000 or more. "(B) DATE OF DETERMINATION.—The determination under subparagraph (A) shall be made as of the close of the 1st taxable year in the credit period with respect to such expenditures, "(4) SPECIAL RULES.—For purposes of applying this section with respect to expenditures which are treated as a separate building by reason of this subsection— "(A) such expenditures shall be treated as placed in service at the close of the 24-month period referred to in paragraph (3XA), and "(B) the applicable fraction under subsection (cXD shall be the applicable fraction for the building (without regard to paragraph (1)) with respect to which the expenditures were incurred.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2195 Nothing in subsection (dX2) shall prevent a credit from being allowed by reason of this subsection. "(5) No DOUBLE COUNTING.—Rehabilitation expenditures may, at the election of the taxpayer, be taken into account under this subsection or subsection (dX2XAXiXII) but not under both such subsections. "(6) REGULATIONS TO APPLY SUBSECTION WITH RESPECT TO GROUP OF UNITS IN BUILDING.—The Secretary may prescribe regulations, consistent with the purposes of this subsection, treating a group of units with respect to which rehabilitation expenditures are incurred as a separate new building. "(f) DEFINITION AND SPECIAL RULES RELATING TO CREDIT PERIOD.— "(1) CREDIT PERIOD DEFINED.—For purposes of this section, the term 'credit period' means, with respect to any building, the period of 10 taxable years beginning with the taxable year in which the building is placed in service or, at the election of the taxpayer, the succeeding taxable year. Such an election, once made, shall be irrevocable. "(2) SPECIAL RULE FOR IST YEAR OF CREDIT PERIOD.— "(A) IN GENERAL.—The credit allowable under subsection (a) with respect to any building for the 1st taxable year of the credit period shall be determined by substituting for the applicable fraction under subsection (cXD the fraction— "(i) the numerator of which is the sum of the ap- plicable fractions determined under subsection (cXD as of the close of each full month of such year during which such building was in service, and "(ii) the denominator of which is 12. "(B) DISALLOWED IST YEAR CREDIT ALLOWED IN IITH YEAR.—Any reduction by reason of subparagraph (A) in the credit allowable (without regard to subparagraph (A)) for the 1st taxable year of the credit period shall be allowable under subsection (a) for the 1st taxable year following the credit period. "(3) SPECIAL RULE WHERE INCREASE IN QUAUFIED BASIS AFTER 1ST YEAR OF CREDIT PERIOD.— "(A) CREDIT INCREASED.—If— "(i) as of the close of any taxable year in the compli- ance period (after the 1st year of the credit period) the qualified basis of any building exceeds "(ii) the qualified basis of such building as of the close of the 1st year of the credit period, the credit allowable under subsection (a) for the taxable year (determined without regard to this paragraph) shall be incrcEised by an amount equal to the product of such excess and the percentage equal to % of the applicable percentage for such building. "(B) 1ST YEAR COMPUTATION APPLIES.—A rule similar to the rule of paragraph (2XA) shall apply to the additional credit allowable by reason of this paragraph for the 1st year in which such additional credit is allowable. "(g) QUAUFIED LOW-INCOME HOUSING PROJECT.—For purposes Oi this section— "(1) IN GENERAL.—The term 'qualified low-income housing project' means any project for residential rental property if the project meets the requirements of subparagraph (A) or (B) whichever is elected by the taxpayer:
100 STAT. 2196 PUBLIC LAW 99-514—OCT. 22, 1986 "(A) 20-50 TEST.—The project meets the requirements of this subparagraph if 20 percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is 50 percent or less of area median gross income. "(B) 40-60 TEST.—The project meets the requirements of this subparagraph if 40 percent or more of the residential units in such project are both rent-restricted and occupied by individuals whose income is 60 percent or less of area median gross income. Any election under this paragraph, once made, shall be irrev- ocable. For purposes of this paragraph, any property shall not be treated £is failing to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes. "(2) RENT-RESTRICTED UNITS.— "(A) IN GENERAL.—For purposes of paragraph (1), a resi- dential unit is rent-restricted if the gross rent with respect to such unit does not exceed 30 percent of the income limitation under paragraph (1) applicable to individuals occupying such unit. "(B) GROSS RENT.—For purposes of subparagraph (A), gross rent— "(i) does not include any payment under section 8 of the United States Housing Act of 1937 or any com- parable Federal rental assistance program (with re- spect to such unit or occupants thereof), and "(ii) includes any utility allowance determined by the Secretary after taking into account such determina- tions under section 8 of the United States Housing Act of 1937. "(3) DATE FOR MEETING REQUIREMENTS.— "(A) PROJECTS CONSISTING OF i BUILDING.—Inthe case of a project which does not have any other building in service, such project shall not be treated as meeting the require- ments of paragraph (1) unless it meets such requirements not later than the date which is 12 months after the date such project is placed in service. "(B) PROJECTS CONSISTING OF MORE THAN i BUILDING.—In the case of a project which has a building in service when a later building is placed in service as part of such project, such project shall not be treated as meeting the require- ments of paragraph (1) with respect to such later building unless— "(i) such project meets such requirements without regard to such later building on the date such later building is placed in service, and "(ii) such project meets such requirements with regard to such later building not later than the date which is 12 months after the date such later building is placed in service. "(4) CERTAIN RULES MADE APPUCABLE.—Paragraphs (2) (other than subparagraph (A) thereof), (3), (4), (5), (6), and (7) of section 142(d), and section 6652(j), shall apply for purposes of determin- ing whether any project is a qualified low-income housing project and whether any unit is a low-income unit.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2197 "(5) ELECTION TO TREAT BUILDING AFTER COMPLIANCE PERIOD AS NOT PART OF A PROJECT.—For purposes of this section, the taxpayer may elect to treat any building as not part of a qualified low-income housing project for any period beginning after the compliance period for such building. "(h) LIMITATION ON AGGREGATE CREDIT ALLOWABLE WITH RESPECT TO PROJECTS LOCATED IN A STATE.— "(1) CREDIT MAY NOT EXCEED CREDIT AMOUNT ALLOCATED TO BUILDING.—No credit shall be allowed by reason of this section for any taxable year with respect to any building in excess of the housing credit dollar amount allocated to such building * under this subsection. An allocation shall be taken into account under the preceding sentence only if it occurs not later than the earlier of— "(A) the 60th day after the close of the taxable year, or "(B) the close of the calendar year in which such taxable year ends. "(2): ALLOCATED CREDIT AMOUNT TO APPLY TO ALL TAXABLE YEARS ENDING DURING OR AFTER CREDIT ALLOCATION YEAR.—ANY housing credit dollar amount allocated to any building for any calendar year— "(A) shall apply to such building for all taxable years in the compliance period ending during or after such calendar year, and "(B) shall reduce the aggregate housing credit dollar amount of the allocating agency only for such calendar ye^r. "(3) HOUSING CREDIT DOLLAR AMOUNT FOR AGENCIES.— "(A) IN GENERAL.—The aggregate housing credit dollar amount which a housing credit agency may allocate for any calendar year is the portion of the State housing credit « ceiling allocated under this paragraph for such calendar year to such agency. ^ "(B) STATE CEIUNG INITIALLY ALLOCATED TO STATE HOUS- ' ING CREDIT AGENCIES.—Except as provided in subpara- graphs (D) and (E), the State housing credit ceiling for each calendar year shall be allocated to the housing credit agency of such State. If there is more than 1 housing credit agency of a State, all such agencies shall be treated as a ! single agency. •i "(C) STATE HOUSING CREDIT CEIUNG.—The State housing credit ceiling applicable to any State for any calendar year shall be an amount equal to $1.25 multiplied by the State population. f "(D) SPECIAL RULE FOR STATES WITH CONSTITUTIONAL HOME RULE CITIES.—For purposes of this subsection— "(i) I N GENERAL.—The aggregate housing credit dollar amount for any constitutional home rule city for , J,, . any calendar year shall be an amount which bears the same ratio to the State housing credit ceiling for such fi0 , calendar year as— "(I) the population of such city, bears to n "(II) the population of the entire State. "(ii) COORDINATION WITH OTHER ALLOCATIONS.—In the case of any State which contains 1 or more constitu- tional home rule cities, for purposes of applying this paragraph with respect to housing credit agencies in
100 STAT. 2198 PUBLIC LAW 99-514—OCT. 22, 1986 ^'' ' such State other than constitutional home rule cities, "''[[ the State housing credit ceiling for any calendar year ' * shall be reduced by the aggregate housing credit dollar 11'.'p.! amounts determined for such year for all constitutional home rule cities in such State. "•'- ^ ""'•' ' "(iii) CONSTITUTIONAL HOME RULE CITY.—For purposes of this paragraph, the term 'constitutional home rule city' has the meaning given such term by section 146(dX3XC). "(E) STATE MAY PROVIDE FOR DIFFERENT ALLOCATION.— Rules similar to the rules of section 146(e) (other than paragraph (2XB) thereof) shall apply for purposes of this paragraph. "(F) POPULATION.—For purposes of this paragraph, popu- lation shall be determined in accordance with section 146(j). "(4) CREDIT FOR BUILDINGS FINANCED BY TAX-EXEMPT BONDS „ SUBJECT TO V O L U M E CAP NOT TAKEN INTO ACCOUNT.— "(A) I N GENERAL.—Paragraph (1) shall not apply to the portion of any credit allowable under subsection (a) which is attributable to eligible basis financed by any obligation the - -. „ interest on which is exempt from tax under section 103 and ,f, ., which is taken into account under section 146. "(B) SPECIAL RULE WHERE 70 PERCENT OR MORE OF BUILD- ING IS FINANCED WITH TAX-EXEMPT BONDS SUBJECT TO VOLUME CAP.—For purposes of subparagraph (A), if 70 per- cent or more of the aggregate basis of any building and the land on which the building is located is financed by any obligation described in subparagraph (A), paragraph (1) shall not apply to any portion of the credit allowable under subsection (a) with respect to such building. "(5) PORTION OF STATE CEIUNG SET-ASIDE FOR CERTAIN PROJECTS INVOLVING QUAUFIED NONPROFIT ORGANIZATIONS.— "(A) IN GENERAL.—Not more than 90 percent of the State housing credit ceiling for any State for any calendar year shall be allocated to projects other than qualified low- income housing projects described in subparagraph (B). "(B) PROJECTS INVOLVING QUAUFIED NONPROFIT ORGANIZA- TIONS.—For purposes of subparagraph (A), a qualified low- income housing project is described in this subparagraph if 5f^!ii ' , a qualified nonprofit organization is to materially partici- pate (within the meaning of section 469(h)) in the develop- ment and operation of the project throughout the compli- ance period. •V J "(C) QUAUFIED NONPROFIT ORGANIZATION.—For purposes of this paragraph, the term 'qualified nonprofit organiza- tion' means any organization if— "(i) such organization is described in paragraph (3) or (4) of section 501(c) and is exempt from tax under ;i5i?;3 I lyi: section 501(a), and "(ii) 1 of the exempt purposes of such organization includes the fostering of low-income housing. "(D) STATE MAY NOT OVERRIDE SET-ASIDE.—Nothing in ' • subparagraph (E) of paragraph (3) shall be construed to permit a State not to comply with subparagraph (A) of this - paragraph. '••'• "(6) S P E C I A L R U L E S . —
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2199 "(A) BUILDING MUST BE LOCATED WITHIN JURISDICTION OF CREDIT AGENCY.—A housing Credit agency may allocate its aggregate housing credit dollar amount only to buildings located in the jurisdiction of the governmental unit of which such agency is a part. "(B) HOUSING CREDIT DOLLAR AMOUNT MAY NOT BE CARRIED OVER, ETC.— "(i) No CARRYOVER.—The portion of the aggregate housing credit dollar amount of any housing credit agency which is not allocated for any calendar year i may not be carried over to any other calendar year. "(ii) ALLOCATION MAY NOT BE EARUER THAN YEAR IN •)f WHICH BUILDING PLACED IN SERVICE.—A housing Credit agency may allocate its housing credit dollar amount for any calendar year only to buildings placed in serv- ice before the close of such calendar year. "(C) AGENCY ALLOCATIONS IN EXCESS OF UMIT.—If the aggregate housing credit dollar amounts allocated by a housing credit agency for any calendar year exceed the portion of the State housing credit ceiling allocated to such agency for such calendar year, the housing credit dollar amounts so allocated shall be reduced (to the extent of such excess) for buildings in the reverse of the order in which the ... allocations of such amounts were made. "(D) CREDIT ALLOWABLE DETERMINED WITHOUT REGARD TO a. .. AVERAGING CONVENTION, ETC.—For purposes of this subsec- tion, the credit allowable under subsection (a) with respect .»' .'. to any building shall be determined— "(i) without regard to paragraphs (2XA) and (3XB) of ! subsection (f), and "(ii) by applying subsection (fK3XA) without regard to ' .^ 'the percentage equal to % of. "(7) OTHER DEFINITIONS.—For purposes of this subsection— "(A) HOUSING CREDIT AGENCY.—The term 'housing credit agency' means any agency authorized to carry out this subsection. "(B) POSSESSIONS TREATED AS STATES.—The term 'State' includes a possession of the United States, "(i) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec- tion— "(1) COMPUANCE PERIOD.—The term 'compliance period' means, with respect to any building, the period of 15 taxable years beginning with the 1st taxable year of the credit period with respect thereto. "(2) DETERMINATION OF WHETHER BUILDING IS FEDERALLY SUB- SIDIZED.— "(A) IN GENERAL.—Except £is otherwise provided in this paragraph, for purposes of subsection (bXD, a new building shall be treated as federally subsidized for any taxable year if, at any time during such taxable year, there is outstand- I ing any obligation the interest on which is exempt from tax under section 103, or any below market Federal loan, the -J proceeds of which are used (directly or indirectly) with respect to such building or the operation thereof. .; "(B) ELECTION TO REDUCE EUGIBLE BASIS BY OUTSTANDING 1. BALANCE OF LOAN.—A loan shall not be taken into account under subparagraph (A) if the taxpayer elects to exclude an
100 STAT. 2200 PUBLIC LAW 99-514—OCT. 22, 1986 * amount equal to the outstanding balance of such loan from the eligible basis of the building for purposes of subsection o "(C) BELOW MARKET FEDERAL LOAN.—For purposes of subparagraph (A), the term 'below market Federal loan' e^i- means any loan funded in whole or in part with Federal funds if the interest rate payable on such loan is less than the applicable Federal rate in effect under section 1274(d)(1) (as of the date on which the loan was made). "(3) LOW-INCOME UNIT.— "(A) IN GENERAL.—The term 'low-income unit' means any unit in a building if— "(i) such unit is rent-restricted (as defined in subsec- tion (gX2)), and "(ii) the individuals occupying such unit meet the income limitation applicable under subsection (gXl) to the project of which such building is a part. "(B) EXCEPTIONS.—A unit shall not be treated as a low- income unit unless the unit is suitable for occupancy and used other than on a transient basis. "(C) SPECIAL RULE FOR BUILDINGS HAVING 4 OR FEWER UNITS.—In the case of any building which has 4 or fewer '' residential rental units, no unit in such building shall be treated £is a low-income unit if the units in such building are owned by— "(i) any individual who occupies a residential unit in ^ - -^" such building, or "(ii) any person who is related (as defined in subsec- '' tion (dX2XDXiii)) to such individual. "(4) NEW BUILDING.—The term 'new building' means a build- ing the original use of which begins with the taxpayer. "(5) EXISTING BUILDING.—The term 'existing building' means any building which is not a new building. "(j) RECAPTURE OF CREDIT.— "(1) IN GENERAL.—If^ "(A) as of the close of any taxable year in the compliance >• '* period, the amount of the qualified basis of any building with respect to the taxpayer is less than ' "(B) the amount of such basis as of the close of the preceding taxable year, then the taxpayer's tax under this chapter for the taxable year shall be increased by the credit recapture amount. "(2) CREDIT RECAPTURE AMOUNT.—For purposes of paragraph (1), the credit recapture amount is an amount equal to the sum of— "(A) the aggregate decrease in the credits allowed to the taxpayer under section 38 for all prior taxable years which would have resulted if the accelerated portion of the credit allowable by reason of this section were not allowed for all prior taxable years with respect to the excess of the amount described in paragraph dXB) over the amount described in paragraph (IXA), plus "(B) interest at the overpayment rate established under section 6621 on the amount determined under subpara- graph (A) for each prior taxable year for the period begin- ning on the due date for filing the return for the prior taxable year involved.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2201 No deduction shall be allowed under this chapter for interest described in subparagraph (B). "(3) ACCELERATED PORTION OF CREDIT.—For purposes of para- graph (2), the accelerated portion of the credit for the prior taxable years with respect to any amount of basis is the excess of— "(A) the aggregate credit allowed by reason of this section (without regard to this subsection) for such years with respect to such basis, over "(B) the aggregate credit which would be allowable by reason of this section for such years with respect to such basis if the aggregate credit which would (but for this subsection) have been allowable for the entire compliance period were allowable ratably over 15 years. "(4) SPECIAL RULES.— "(A) TAX BENEFIT RULE.—The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted. "(B) ONLY BASIS FOR WHICH CREDIT ALLOWED TAKEN INTO ACCOUNT.—Qualified basis shall be taken into account under paragraph (1)(B) only to the extent such basis was taken into account in determining the credit under subsec- tion (a) for the preceding taxable year referred to in such paragraph. "(C) No RECAPTURE OF ADDITIONAL CREDIT ALLOWABLE BY REASON OF SUBSECTION (f) (3).—Paragraph (1) shall apply to a decrease in qualified basis only to the extent such de- crease exceeds the amount of qualified basis with respect to which a credit was allowable for the taxable year referred to in paragraph (1)(B) by reason of subsection (0(3). "(D) No CREDITS AGAINST TAX.—Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under subpart A, B, or D of this part. "(E) No RECAPTURE BY REASON OF CASUALTY LOSS.—The increase in tax under this subsection shall not apply to a reduction in qualified basis by reason of a casualty loss to the extent such loss is restored by reconstruction or replace- ment within a reasonable period established by the Sec- retary. "(5) CERTAIN PARTNERSHIPS TREATED AS THE TAXPAYER.— "(A) IN GENERAL.—For purposes of applying this subsec- tion to a partnership to which this paragraph applies— "(i) such partnership shall be treated as the taxpayer to which the credit allowable under subsection (a) was allowed, "(ii) the amount of such credit allowed shall be treat- ed as the amount which would have been allowed to the partnership were such credit allowable to such partner- ship, ''(iii) paragraph (4XA) shall not apply, and "(iv) the amount of the increase in tax under this subsection for any taxable year shall be allocated among the partners of such partnership in the same
100 STAT. 2202 PUBLIC LAW 99-514—OCT. 22, 1986 manner as such partnership's taxable income for such year is allocated among such partners. "(B) PARTNERSHIPS TO WHICH PARAGRAPH APPUES.—This paragraph shall apply to any partnership— "(i) which has 35 or more partners each of whom is a natural person or an estate, and "(ii) which elects the application of this paragraph. fi "(C) SPECIAL RULES.— "(i) HUSBAND AND WIFE TREATED AS i PARTNER.—For ' f , purposes of subparagraph (BXi), a husband and wife I (and their estates) shall be treated as 1 partner. "(ii) ELECTION IRREVOCABLE.—Any election under , \ subparagraph (B), once made, shall be irrevocable. "(6) No RECAPTURE ON DISPOSITION OF BUILDING WHERE BOND POSTED.—In the case of a disposition of a building, the taxpayer - shall be discharged from liability for any additional tax under this subsection by reason of such disposition if— "(A) the taxpayer furnishes to the Secretary a bond in an amount satifactory to the Secretary and for the period required by the Secretary, and "(B) it is reasonably expected that such building will continue to be operated as a qualified low-income building for the remaining compliance period with respect to such building, "(k) APPUCATION OF AT-RISK RULES.—For purposes of this sec- tion— "(1) IN GENERAL.—Except as otherwise provided in this subsection, rules similar to the rules of section 46(cX8) (other than subparagraph (DXivXD thereof), section 46(cX9), and sec- tion 47(d)(1) shall apply in determining the qualified basis of any building in the same manner as such sections apply in deter- „ ;. mining the credit b£ise of property. "(2) SPECIAL RULES FOR DETERMINING QUAUFIED PERSON.—For purposes of paragraph (1)— "(A) IN GENERAL.—If the requirements of subparagraphs -u; i ' (B), (C), and (D) are met with respect to any financing borrowed from a qualified nonprofit organization (as de- fined in subsection (hX5)), the determination of whether such financing is qualified commercial financing with re- spect to any qualified low-income building shall be made without regard to whether such organization— B ;;. "(i) is actively and regularly engaged in the business of lending money, or "(ii) is a person described in section 46(cX8XDXivXn). • "(B) FINANCING SECURED BY PROPERTY.—The require- ments of this subparagraph are met with respect to any financing if such financing is secured by the qualified low- income building. "(C) PORTION OF BUILDING ATTRIBUTABLE TO FINANCING.— The requirements of this subparagraph are met with re- spect to any financing for any taxable year in the compli- . , ance period if, as of the close of such taxable year, not more than 60 percent of the eligible basis of the qualified low- income building is attributable to such financing (reduced by the principal and interest of any governmental financing which is part of a wrap-around mortgage involving such y. financing).
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2203 "(D) REPAYMENT OF PRINCIPAL AND INTEREST.—The requirements of this subparagraph are met with respect to any financing if such financing is fully repaid on or before the earliest of— -: "(i) the date on which such financing matures, "(ii) the 90th day after the close of the compliance period with respect to the qualified low-income build- ing, or "(iii) the date of its refinancing or the sale of the building to which such financing relates. "(3) PRESENT VALUE OF FINANCING.—If the rate of interest on any financing described in paragraph (2KA) is less than the rate which is 1 percentage point below the applicable Federal rate as of the time such financing is incurred, then the qualified basis (to which such financing relates) of the qualified low-income - building shall be the present value of the amount of such ' financing, using as the discount rate such applicable Federal rate. For purposes of the preceding sentence, the rate of interest on any financing shall be determined by treating interest to the extent of government subsidies as not payable. " "(4) FAILURE TO FULLY REPAY.— "(A) IN GENERAL.—To the extent that the requirements of paragraph (2XD) are not met, then the taxpayer's tax under this chapter for the taxable year in which such failure occurs shall be increased by an amount equal to the ap- plicable portion of the credit under this section with respect ^.^ • to such building, increased by an amount of interest for the period— "(i) beginning with the due date for the filing of the •ifi) * s return of tax imposed by chapter 1 for the 1st taxable year for which such credit was allowable, and ^ ,. "(ii) ending with the due date for the taxable year in \Z''-. which such failure occurs, determined by using the underpayment rate and method .,,;.. under section 6621. "(B) APPLICABLE PORTION.—For purposes of subparagraph (A), the term 'applicable portion' means the aggregate de- crease in the credits allowed to a taxpayer under section 38 for all prior taxable years which would have resulted if the . > . eligible basis of the building were reduced by the amount of financing which does not meet requirements of paragraph (2)(D). "(C) CERTAIN RULES TO APPLY.—Rules similar to the rules of subparagraphs (A) and (D) of subsection (jK4) shall apply for purposes of this subsection. "(1) CERTIFICATIONS TO SECRETARY.— "(1) CERTIFICATION WITH RESPECT TO IST YEAR OF CREDIT PERIOD.—Not later than the 90th day following the close of the 1! 1st taxable year in the credit period with respect to any quali- fied low-income building, the taxpayer shall certify to the Sec- retary (in such form and in such manner as the Secretary prescribes)— "(A) the taxable year, and calendar year, in which such building was placed in service, "(B) the adjusted basis and eligible basis of such building as of the close of the 1st year of the credit period.
100 STAT. 2204 PUBLIC LAW 99-514—OCT. 22, 1986 i-:' i t'^Q^ ^jjg maximum applicable percentage and qualified basis permitted to be taken into account by the appropriate housing credit agency under subsection (h), "(D) the election made under subsection (g) with respect to the qualified low-income housing project of which such building is a part, and "(E) such other information as the Secretary may require. In the case of a failure to make the certification required by the *i? preceding sentence on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, no credit shall be allowable by reason of subsec- tion (a) with respect to such building for any taxable year ending before such certification is made. "(2) ANNUAL REPORTS FROM HOUSING CREDIT AGENCIES.—Each agency which allocates any housing credit amount to any build- ing for any calendar year shall submit to the Secretary (at such time and in such manner as the Secretary shall prescribe) an annual report specifying— ii t "(A) the amount of housing credit amount allocated to each building for such year, "(B) sufficient information to identify each such building « and the taxpayer with respect thereto, and "(C) such other information as the Secretary may require. The penalty under section 6652(j) shall apply to any failure to submit the report required by the preceding sentence on the date prescribed therefor. "(m) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes 01 this section, including regulations— .,^j "(1) dealing with— "(A) projects which include more than 1 building or only ,^- a portion of a building, "(B) buildings which are placed in service in portions, "(2) providing for the application of this section to short ' *'* taxable years, and "(3) preventing the avoidance of the rules of this section. "(n) TERMINATION.— "(1) IN GENERAL.—Except as provided in parargraph (2), the State housing credit ceiling under subsection (h) shall be zero for any calendar year after 1989. "(2) CARRYOVER O F 1989 LIMIT FOR CERTAIN PROJECTS I N i.q. PROGRESS.— "(A) IN GENERAL.—The aggregate housing credit amount of any agency for 1989 which is not allocated for 1989 shall be treated for purposes of applying this section to any building described in subparagraph (B) as the housing credit amount of such agency for 1990. "(B) DESCRIPTION.—A building is described in this subparagraph if— "(i) such building is constructed, reconstructed, or rehabilitated by the taxpayer, t>». r "(ii) more than 10 percent of the reasonably antici- pated cost of such construction, reconstrcution, or re- ti-jm 4 )if V? habilitation has been incurred as of January 1, 1989, and pnib'jtv^ .T. "(iii) such building is placed in service before Janu- ary 1, 1991.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2205 "' "(C) CERTAIN RULE NOT TO APPLY.—Subsection (hX6)(B)(i) shall not apply for purposes of this paragraph." (b) LOW-INCOME HOUSING CREDIT TREATED A S OTHER BUSINESS CREDITS.— (1) Subsection (b) of section 38 (relating to current year busi- ness credits), as amended by this Act, is amended by striking out "plus" at the end of paragraph (3), but striking out the period at the end of paragraph (4) and inserting in lieu thereof ", plus", and by adding at the end thereof the following new paragraph: "(5) the low-income housing credit determined under section 42(a)." (2) Subsection (d) of section 38 is amended by inserting "42(a)," before "46(a)". (c) RECAPTURE TAX NOT TO REDUCE MINIMUM TAX.—Paragraph (1) of section 55(c), as amended by section 701 of this Act, is amended by inserting "or section 42(j)" after "section 47". (d) CLERICAL AMENDMENT.—The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 42. Low-income housing credit." (e) EFFECTIVE DATE.— (1) IN GENERAL.—The amendments made by this section shall apply to buildings placed in service after December 31, 1986, in taxable years ending after such date. (2) SPECIAL RULE FOR REHABILITATION EXPENDITURES.—Subsec- tion (e) of section 42 of the Internal Revenue Code of 1986 (as added by this section) shall apply for purposes of paragraph (1). if) TRANSITIONAL RULES.— (1) LIMITATION TO NON-ACRS BUILDINGS NOT TO APPLY TO CER- TAIN BUILDINGS, ETC.— (A) IN GENERAL.—In the case of a building which is part of a project described in subparagraph (B)— (i) section 42(c)(2)(B) of the Internal Revenue Code of 1986 (as added by this section) shall not apply, and (ii) such building shall be treated as not federally subsidized for purposes of section 42(bXlXA) of such Code. (B) PROJECT DESCRIBED.—A project is described in this subparagraph if— (i) an urban development action grant application ?•'. with respect to such project was submitted on Septem- ber 13,1984, (ii) a zoning commission map amendment related to such project was granted on July 17,1985, and (iii) the number assigned to such project by the Fed- eral Housing Administration is 023-36602. (C) ADDITIONAL UNITS ELIGIBLE FOR CREDIT.—In the case of a building to which subparagraph (A) applies and which is part of a project which meets the requirements of subpara- graph (D), for each low-income unit in such building which is occupied by individuals whose income is 30 percent or less of area median gross income, one additional unit (not otherwise a low-income unit) in such building shall be treated as a low-income unit for purposes of such section 42.
100 STAT. 2206 PUBLIC LAW 99-514—OCT. 22, 1986 i Y^q-':. (D) PROJECT DESCRIBED.—A project is described in this subparagraph if— j^jg^^ (i) rents charged for units in such project are re- stricted by State regulations, (ii) the annual cash flow of such project is restricted by State law, (iii) the project is located on land owned by or ground leased from a public housing authority, (iv) construction of such project begins on or before ' " ' " December 31, 1986, and units within such project are , placed in service on or before June 1, 1990, and '" (v) for a 20-year period, 20 percent or more of the residential units in such project are occupied by l^.y^i '^ft individuals whose income is 50 percent or less of area median gross income. • J (E) MAXIMUM ADDITIONAL CREDIT.—The maximum annual ^' additional credit allowable under section 42 of such Code by reason of subparagraph (C) shall not exceed 25 percent of the eligible basis of the building. (2) ADDITIONAL ALLOCATION OF HOUSING CREDIT CEILING.— '• (A) IN GENERAL.—There is hereby allocated to each housing credit agency described in subparagraph (B) an additional housing credit dollar amount determined in accordance with the following table: '- ' The additional For calendar year: allocation is: 1987 $3,900,000 .^«s., 1988 $7,600,000 1989 $1,300,000. (B) HOUSING CREDIT AGENCIES DESCRIBED.—The housing credit agencies described in this subparagraph are: ''^ * (i) A corporate governmental agency constituted as a public benefit corporation and established in 1971 iifc i hi under the provisions of Article XII of the Private Hous- ing Finance Law of the State. (ii) A city department established on December 20, 1979, pursuant to chapter XVIII of a municipal code of such city for the purpose of supervising and coordinat- ing the formation and execution of projects and pro- grams affecting housing within such city. Mth m (iii) The State housing finance agency referred to in subparagraph (C), but only with respect to projects :UJII '' described in subparagraph (C). . .• (C) PROJECT DESCRIBED.—A project is described in this subparagraph if such project is a qualified low-income hous- ry| f ing project which— (i) receives financing from a State housing finance 4>3 f id agency from the proceeds of bonds issued pursuant to chapter 708 of the Acts of 1966 of such State pursuant %.. n . to loan commitments from such agency made between May 8,1984, and July 8,1986, and (ii) is subject to subsidy commitments issued pursu- ant to a program established under chapter 574 of the Acts of 1983 of such State having award dates from such agency between May 31, 1984, and June 11, 1985. (D) SPECIAL RULES.— , ,, (i) Any building—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2207 (I) which is allocated any housing credit dollar amount by a housing credit agency described in clause (iii) of subparagraph (B), and (II) which is placed in service after June 30, 1986, and before January 1, 1987, I shall be treated for purposes of the amendments made by this section as placed in service on January 1, 1987. (ii) Section 42(c)(2)(B) of the Internal Revenue Code of 1986 shall not apply to any building which is allocated any housing credit dollar amount by any agency de- scribed in subparagraph (B). (E) ALL UNITS TREATED AS LOW INCOME UNITS IN CERTAIN CASES.—In the case of any building— (i) which is allocated any housing credit dollar amount by any agency described in subparagraph (B), and (ii) which after the application of subparagraph (D)(ii) is a qualified low-income building at all times during any taxable year, such building shall be treated as described in section 42(b)(1)(B) of such Code and having an applicable fraction for such year of 1. (3) CERTAIN PROJECTS PLACED IN SERVICE BEFORE I987.— (A) IN GENERAL.—In the case of a building which is part of a project described in subparagraph (B)— (i) section 42(c)(2)(B) of such Code shall not apply, (ii) such building shall be treated as placed in service during the first calendar year after 1986 and before 1990 in which such building is a qualified low-income building (determined after the application of clause (i)), and (iii) for purposes of section 42(h) of such Code, such building shall be treated as having allocated to it a housing credit dollar amount equal to the dollar amount appearing in the clause of subparagraph (B) in which such building is described. (B) PROJECT DESCRIBED.—A project is described in this subparagraph if the code number assigned to such project by the Farmers' Home Administration appears in the fol- lowing table: The housing credit dollar '••' The code number is: amount is: (i) 49284553664 $16,000 (ii) 4927742022446 $22,000 (iii) 49270742276087 $64,000 (iv) 490270742387293 $48,000 (V) 4927074218234 $32,000 (vi) 49270742274019 $36,000 (vii) 5146074234.5074 $53,000. (C) DETERMINATION OF ADJUSTED BASIS.—The adjusted basis of any building to which this paragraph applies for purposes of section 42 of such Code shall be its adjusted basis as of the close of the taxable year ending before the first taxable year of the credit period for such building (D) CERTAIN RULES TO APPLY.—Rules similar to the rules of subparagraph (E) of paragraph (2) shall apply for pur- poses of this paragraph.
100 STAT. 2208 PUBLIC LAW 99-514—OCT. 22, 1986 (4) DEFINITIONS.—For purposes of this subsection, terms used in such subsection which are also used in section 42 of the Internal Revenue Code of 1986 (as added by this section) shall have the meanings given such terms by such section 42. Subtitle G—Merchant Marine Capital Construction Funds SEC. 261. PROVISIONS RELATING TO MERCHANT MARINE CAPITAL CONSTRUCTION FUNDS. (a) PURPOSE.—The purpose of this section is to coordinate the application of the Internal Revenue Code of 1986 with the capital construction program under the Merchant Marine Act, 1936. (b) AMENDMENT OF 1986 CODE.—Chapter 77 (relating to mis- cellaneous provisions) is amended by adding at the end thereof the following new section: "SEC. 7518. TAX INCENTIVES RELATING TO MERCHANT MARINE CAPITAL CONSTRUCTION FUNDS. "(a) C E I L I N G ON D E P O S I T S . — "(1) IN GENERAL.—The amount deposited in a fund established under section 607 of the Merchant Marine Act, 1936 (herein- after in this section referred to as a 'capital construction fund') shall not exceed for any taxable year the sum of: "(A) that portion of the taxable income of the owner or lessee for such year (computed as provided in chapter 1 but without regard to the carryback of any net operating loss or net capital loss and without regard to this section) which is * ' attributable to the operation of the agreement vessels in ,. . the foreign or domestic commerce of the United States or in the fisheries of the United States, "(B) the amount allowable as a deduction under section 167 for such year with respect to the agreement vessels, "(C) if the transaction is not taken into account for purposes of subparagraph (A), the net proceeds (as defined in joint regulations) from— "(i) the sale or other disposition of any agreement vessel, or "(ii) insurance or indemnity attributable to any agreement vessel, and "(D) the receipts from the investment or reinvestment of amounts held in such fund. "(2) LIMITATIONS ON DEPOSITS BY LESSEES.—In the case of a lessee, the maximum amount which may be deposited with respect to an agreement vessel by reason of paragraph (1)(B) for any period shall be reduced by any amount which, under an agreement entered into under section 607 of the Merchant Marine Act, 1936, the owner is required or permitted to deposit for such period with respect to such vessel by reason of para- graph (1)(B). "(3) CERTAIN BARGES AND CONTAINERS INCLUDED.—For pur- poses of paragraph (1), the term 'agreement vessel' includes barges and containers which are part of the complement of such vessel and which are provided for in the agreement. "(b) REQUIREMENTS AS TO INVESTMENTS.— , ,,.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2209 "(1) IN GENERAL.—Amounts in any capital construction fund shall be kept in the depository or depositories specified in the agreement and shall be subject to such trustee and other fidu- ciary requirements as may be specified by the Secretary. "(2) LIMITATION ON FUND INVESTMENTS.—Amounts in any cap- ital construction ftind may be invested only in interest-bearing securities approved by the Secretary; except that, if such Sec- retary consents thereto, an agreed percentage (not in excess of 60 percent) of the assets of the fund may be invested in the stock of domestic corporations. Such stock must be currently fully listed and registered on an exchange registered with the Securi- ties and Exchange Commission as a national securities ex- change, and must be stock which would be acquired by prudent men of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital. If at any time the fair market value of the stock in the fund is more than the agreed percentage of the assets in the fund, any subsequent investment of amounts deposited in the fund, and any subsequent withdrawal from the fund, shall be made in such a way as to tend to restore the fund to a situation in which the fair market value of the stock does not exceed such agreed percentage. "(3) INVESTMENT IN CERTAIN PREFERRED STOCK PERMITTED.— For purposes of this subsection, if the common stock of a corporation meets the requirements of this subsection and if the preferred stock of such corporation would meet such require- ments but for the fact that it cannot be listed and registered as required because it is nonvoting stock, such preferred stock shall be treated as meeting the requirements of this subsection. "(c) NONTAXABILITY FOR DEPOSITS.— "(1) IN GENERAL.—For purposes of this title— "(A) taxable income (determined without regard to this section and section 607 of the Merchant Marine Act, 1936) for the taxable year shall be reduced by an amount equal to the amount deposited for the taxable year out of amounts referred to in subsection (a)(1)(A), "(B) gain from a transaction referred to in subsection ^ (a)(1)(C) shall not be taken into account if an amount equal to the net proceeds (as defined in joint regulations) from such transaction is deposited in the fund, "(C) the earnings (including gains and losses) from the investment and reinvestment of amounts held in the fund shall not be taken into account, "(D) the earnings and profits (within the meaning of section 316) of any corporation shall be determined without regard to this section and section 607 of the Merchant Marine Act, 1936, and "(E) in applying the tax imposed by section 531 (relating to the accumulated earnings tax), amounts while held in the fund shall not be taken into account. "(2) ONLY QUALIFIED DEPOSITS ELIGIBLE FOR TREATMENT.—Para- graph (1) shall apply with respect to any amount only if such amount is deposited in the fund pursuant to the agreement and not later than the time provided in joint regulations. "(d) ESTABLISHMENT OF ACCOUNTS.—For purposes of this section— "(1) IN GENERAL.—Within a capital construction fund 3 ac- counts shall be maintained:
100 S T A T . 2210 P U B L I C L A W 9 9 - 5 1 4 — O C T . 2 2 , 1986 "(A) t h e capital account, », ; • "(B) t h e capital gain account, a n d ' •>. J . ' '(C) t h e ordinary income account. "(2) CAPITAL ACCOUNT.—The capital account shall consist of— "(A) a m o u n t s referred to in subsection (a)(l KB), "(B) a m o u n t s referred to in subsection (a)(1)(C) o t h e r t h a n t h a t portion thereof which r e p r e s e n t s gain n o t t a k e n into account by reason of subsection (c)(1)(B), "(C) t h e percentage applicable u n d e r section 243(a)(1) of any dividend received by t h e fund with respect t o which t h e person m a i n t a i n i n g t h e fund would (but for subsection (c)(1)(C)) be allowed a deduction u n d e r section 243, a n d "(D) interest income exempt from taxation u n d e r section 103. "(3) CAPITAL GAIN A C C O U N T . — T h e c a p i t a l g a i n a c c o u n t s h a l l consist of— "(A) a m o u n t s r e p r e s e n t i n g capital gains on assets held for m o r e t h a n 6 m o n t h s a n d referred to in subsection (a)(1)(C) or (a)(1)(D), reduced by "(B) a m o u n t s r e p r e s e n t i n g capital losses on assets held in I? j t h e fund for more t h a n 6 m o n t h s . "(4) ORDINARY INCOME A C C O U N T . — T h e o r d i n a r y i n c o m e ac- count shall consist of— "(A) a m o u n t s referred to in subsection (a)(1)(A), "(B)(i) a m o u n t s r e p r e s e n t i n g capital gains on assets held for 6 m o n t h s or less and referred to in subsection (a)(1)(C) or (a)(1)(D), reduced by "(ii) a m o u n t s r e p r e s e n t i n g capital losses on assets held in t h e fund for 6 m o n t h s or less, "(C) interest (not including a n y tax-exempt i n t e r e s t re- ferred to in p a r a g r a p h (2XD)) a n d o t h e r ordinary income (not including a n y dividend referred to in s u b p a r a g r a p h (E)) received on assets held in t h e fund, "(D) ordinary income from a t r a n s a c t i o n described in subsection (a)(1)(C), a n d "(E) t h e portion of a n y dividend referred to in p a r a g r a p h (2)(C) not t a k e n into account u n d e r such p a r a g r a p h . "(5) CAPITAL LOSSES ONLY ALLOWED TO OFFSET CERTAIN G A I N S . — Except on t e r m i n a t i o n of a capital construction fund, capital losses referred to in p a r a g r a p h (3)(B) or in p a r a g r a p h (4)(B)(ii) shall be allowed only as a n offset to gains referred t o in para- g r a p h (3)(A) or (4)(B)(i), respectively. "(e) P U R P O S E S OF QUALIFIED W I T H D R A W A L S . — "(1) I N GENERAL.—A qualified w i t h d r a w a l from t h e fund is one m a d e in accordance with t h e t e r m s of t h e a g r e e m e n t b u t only if it is for: "(A) t h e acquisition, construction, or reconstruction of a ',;f?i: qualified vessel, i : I "(B) t h e acquisition, construction, or reconstruction of barges a n d containers which a r e p a r t of t h e c o m p l e m e n t of a qualified vessel, or "(C) t h e p a y m e n t of t h e principal on indebtedness in- Ijif. curred in connection with t h e acquisition, construction, or reconstruction of a qualified vessel or a barge or c o n t a i n e r which is p a r t of t h e complement of a qualified vessel. Except to t h e e x t e n t provided in regulations prescribed by t h e Secretary, s u b p a r a g r a p h (B), a n d so much of s u b p a r a g r a p h (C)
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2211 as relates only to barges and containers, shall apply only with respect to barges and containers constructed in the United States. "(2) PENALTY FOR FAILING TO FULFILL ANY SUBSTANTIAL OBLIGATION.—Under joint regulations, if the Secretary deter- mines that any substantial obligation under any agreement is not being fulfilled, he may, after notice and opportunity for hearing to the person maintaining the fund, treat the entire fund or any portion thereof as an amount withdrawn from the fund in a nonqualified withdrawal. "(f) TAX TREATMENT OF QUALIFIED WITHDRAWALS.— "(1) ORDERING RULE.—Any qualified withdrawal from a fund shall be treated— "(A) first as made out of the capital account, "(B) second as made out of the capital gain account, and "(C) third as made out of the ordinary income account. "(2) ADJUSTMENT TO BASIS OF VESSEL, ETC., WHERE WITH- DRAWAL FROM ORDINARY INCOME ACCOUNT.—If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the ordinary income account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. "(3) ADJUSTMENT TO BASIS OF VESSEL, ETC., WHERE WITH- DRAWAL FROM CAPITAL GAIN ACCOUNT.—If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the capital gain account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. "(4) ADJUSTMENT TO BASIS OF VESSELS, ETC., WHERE WITHDRAW- ALS PAY PRINCIPAL ON DEBT.—If any portion of a qualified with- drawal to pay the principal on any indebtedness is made out of the ordinary income account or the capital gain account, then an amount equal to the aggregate reduction which would be required by paragraphs (2) and (3) if this were a qualified withdrawal for a purpose described in such paragraphs shall be applied, in the order provided in joint regulations, to reduce the basis of vessels, barges, and containers owned by the person maintaining the fund. Any amount of a withdrawal remaining after the application of the preceding sentence shall be treated as a nonqualified withdrawal. "(5) ORDINARY INCOME RECAPTURE OF BASIS REDUCTION.—If any property the basis of which was reduced under paragraph (2), (3), or (4) is disposed of, any gain realized on such disposition, to the extent it does not exceed the aggregate reduction in the basis of such property under such paragraphs, shall be treated as an amount referred to in subsection (g)(3)(A) which was withdrawn on the date of such disposition. Subject to such conditions and requirements as may be provided in joint regula- tions, the preceding sentence shall not apply to a disposition where there is a redeposit in an amount determined under joint regulations which will, insofar as practicable, restore the fund to the position it was in before the withdrawal. "(g) TAX TREATMENT OF NONQUALIFIED WITHDRAWALS.— "(1) IN GENERAL.—Except as provided in subsection (h), any withdrawal from a capital construction fund which is not qualified withdrawal shall be treated as a nonqualified with- drawal.
100 STAT. 2212 PUBLIC LAW 99-514—OCT. 22, 1986 "(2) ORDERING RULE.—Any nonqualified withdrawal from a « fund shall be treated— "(A) first as made out of the ordinary income account, ,,.,,_.„, "(B) second as made out of the capital gain account, and "(C) third as made out of the capital account. For purposes of this section, items withdrawn from any account shall be treated as withdrawn on a first-in-first-out basis; except that (i) any nonqualified withdrawal for research, development, and design expenses incident to new and advanced ship design, machinery and equipment, and (ii) any amount treated as a nonqualified withdrawal under the second sentence of subsec- tion (f)(4), shall be treated as withdrawn on a last-in-first-out basis. "(3) OPERATING RULES.—For purposes of this title— "(A) any amount referred to in paragraph (2)(A) shall be '''" included in income as an item of ordinary income for the taxable year in which the withdrawal is made, "(B) any amount referred to in paragraph (2)(B) shall be included in income for the taxable year in which the with- drawal is made as an item of gain realized during such year from the disposition of an asset held for more than 6 months, and "(C) for the period on or before the last date prescribed '] for payment of tax for the taxable year in which this ^^' withdrawal is made— "(i) no interest shall be payable under section 6601 and no addition to the tax shall be payable under section 6651, "(ii) interest on the amount of the additional tax attributable to any item referred to in subparagraph (A) or (B) shall be paid at the applicable rate (as defined in paragraph (4)) from the last date prescribed for payment of the tax for the taxable year for which such r item was deposited in the fund, and "(iii) no interest shall be payable on amounts re- ferred to in clauses (i) and (ii) of paragraph (2) or in the case of any nonqualified withdrawal arising from the application of the recapture provision of section 606(5) I of the Merchant Marine Act of 1936 as in effect on December 31, 1969. "(4) INTEREST RATE.—For purposes of paragraph (3)(C)(ii), the applicable rate of interest for any nonqualified withdrawal— "(A) made in a taxable year beginning in 1970 or 1971 is 8 percent, or "(B) made in a taxable year beginning after 1971, shall be determined and published jointly by the Secretary of the Treasury or his delegate and the applicable Secretary and shall bear a relationship to 8 percent which the Secretaries determine under joint regulations to be comparable to the relationship which the money rates and investment yields for the calendar year immediately preceding the beginning of the taxable year bear to the money rates and investment yields for the calendar year 1970. "(5) AMOUNT NOT WITHDRAWN FROM FUND AFTER 25 YEARS FROM DEPOSIT TAXED AS NONQUALIFIED WITHDRAWAL.— "(A) I N GENERAL.—The applicable percentage of any amount which remains in a capital construction fund at the
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2213 close of t h e 26th, 27th, 28th, 29th, or 30th taxable y e a r following t h e taxable year for which such a m o u n t was deposited shall be treated as a nonqualified withdrawal in accordance with t h e following table: "If the amount remains in the fund at the The applicable close of the— percentage is— 26th taxable year 20 percent 27th taxable year 40 percent 28th taxable year 60 percent 29th taxable year 80 percent 30th taxable year 100 percent. "(B) E A R N I N G S TREATED AS DEPOSITS.—The e a r n i n g s of a n y capital construction fund for a n y taxable year (other t h a n net gains) shall be t r e a t e d for purposes of this p a r a g r a p h as an a m o u n t deposited for such taxable year. "(C) A M O U N T S COMMITTED TREATED AS W I T H D R A W N . — F o r purposes of s u b p a r a g r a p h (A), a n a m o u n t shall not be treated a s r e m a i n i n g in a capital construction fund a t t h e close of a n y taxable year to t h e extent t h e r e is a binding contract a t t h e close of such y e a r for a qualified withdrawal of such a m o u n t with respect to a n identified item for which such withdrawal m a y be made. "(D) AUTHORITY TO TREAT EXCESS FUNDS AS W I T H D R A W N . — If t h e Secretary determines t h a t t h e balance in a n y capital construction fund exceeds t h e a m o u n t which is a p p r o p r i a t e to meet t h e vessel construction program objectives of t h e person who established such fund, t h e a m o u n t of such excess shall be treated as a nonqualified withdrawal u n d e r s u b p a r a g r a p h (A) unless such person develops appropriate program objectives within 3 years to dissipate such excess. "(E) A M O U N T S IN FUND ON JANUARY i, 1987.—For pur- poses of this p a r a g r a p h , all a m o u n t s in a capital construc- tion fund on J a n u a r y 1, 1987, shall be t r e a t e d a s deposited in such fund on such date. "(6) NONQUALIFIED WITHDRAWALS TAXED AT HIGHEST MAR- GINAL RATE.— "(A) I N GENERAL.—In t h e case of a n y taxable y e a r for which t h e r e is a nonqualified withdrawal (including a n y a m o u n t so treated u n d e r p a r a g r a p h (5)), t h e t a x imposed by c h a p t e r 1 shall be determined— "(i) by excluding such withdrawal from gross income, and "(ii) by increasing t h e t a x imposed by c h a p t e r 1 by t h e product of t h e a m o u n t of such withdrawal a n d t h e highest r a t e of t a x specified in section 1 (section 11 in t h e case of a corporation). With respect to t h e portion of any nonqualified withdrawal made out of t h e capital gain account d u r i n g a taxable y e a r to which section l(i) or 1201(a) applies, t h e r a t e of tax t a k e n into account under t h e preceding sentence shall not exceed 28 percent (34 percent in t h e case of a corporation). "(B) T A X BENEFIT RULE.—If a n y portion of a nonqualified withdrawal is properly a t t r i b u t a b l e to deposits (other t h a n earnings on deposits) made by t h e t a x p a y e r in a n y taxable year which did not reduce t h e t a x p a y e r ' s liability for \x u n d e r c h a p t e r 1 for a n y taxable y e a r preceding t h e taxable year in which such withdrawal occurs—
100 S T A T . 2 2 1 4 P U B L I C L A W 9 9 - 5 1 4 — O C T . 2 2 , 1986 '^^'•'' "(i) such portion shall n o t be t a k e n into account under s u b p a r a g r a p h (A), a n d "(ii) a n a m o u n t equal to such portion shall be treated as allowed a s a deduction u n d e r section 172 for t h e taxable y e a r in which such w i t h d r a w a l occurs. "(C) COORDINATION WITH DEDUCTION FOR N E T OPERATING LOSSES.—Any nonqualified w i t h d r a w a l excluded from gross income u n d e r s u b p a r a g r a p h (A) shall be excluded in deter- mining taxable income u n d e r section 172(b)(2). "(h) CERTAIN CORPORATE REORGANIZATIONS AND C H A N G E S I N P A R T - NERSHIPS.—Under joint regulations— " ( D a transfer of a fund from one person to a n o t h e r person in a transaction to which section 381 applies m a y be t r e a t e d as if such transaction did n o t constitute a nonqualified withdrawal, and "(2) a similar rule shall be applied in t h e case of a continu- ation of a p a r t n e r s h i p . "(i) DEFINITIONS.—For purposes of this section, a n y t e r m defined in section 607(k) of t h e M e r c h a n t M a r i n e Act, 1936 which is also used in this section (including t h e definition of 'Secretary') shall have t h e m e a n i n g given such t e r m by such section 607(k) a s in effect on t h e date of t h e e n a c t m e n t of this section." (c) CREDITS N O T ALLOWED A G A I N S T INCREASE I N T A X . — P a r a g r a p h (2) of section 26(b) is a m e n d e d by striking out " a n d " a t t h e end of s u b p a r a g r a p h (G), by striking o u t t h e period a t t h e end of subpara- g r a p h (H) a n d inserting in lieu thereof ", a n d " , a n d by adding a t t h e end thereof t h e following new s u b p a r a g r a p h : "(I) s u b p a r a g r a p h (A) of section 7518(g)(6) (relating to nonqualified w i t h d r a w a l s from capital construction funds taxed a t highest m a r g i n a l rate)." (d) DEPARTMENTAL REPORTS AND CERTIFICATION.—Section 607 of t h e M e r c h a n t M a r i n e Act, 1936, is a m e n d e d by adding a t t h e end thereof t h e following new subsection: "(m) DEPARTMENTAL REPORTS AND CERTIFICATION.— "(1) I N GENERAL.—For each calendar year, t h e Secretaries shall each provide t h e Secretary of t h e T r e a s u r y , within 120 days after t h e close of such calendar year, a w r i t t e n report with respect to those capital construction funds t h a t a r e u n d e r their jurisdiction. «^ "(2) CONTENTS OF REPORTS.—Each r e p o r t shall set forth the n a m e a n d t a x p a y e r identification n u m b e r of each person— "(A) establishing a capital construction fund d u r i n g such * calendar year; ' "(B) m a i n t a i n i n g a capital construction fund a s of t h e last day of such calendar year; "(C) t e r m i n a t i n g a capital construction fund d u r i n g such c a l e n d a r year; "(D) m a k i n g a n y w i t h d r a w a l from or deposit into (and t h e * a m o u n t s thereof) a capital construction fund d u r i n g such calendar year; or »' "(E) with respect to which a d e t e r m i n a t i o n h a s been made d u r i n g such calendar y e a r t h a t such person h a s failed to fulfill a substantial obligation u n d e r a n y capital construction fund a g r e e m e n t to which such person is a party." (e) CONFORMING A M E N D M E N T S . —
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2215 (1) Subparagraph (A) of section 607(d)(1) of the Merchant Marine Act, 1936 is amended by inserting "and section 7518 of such Code" after "this section". (2) Subparagraph (D) of section 607(d)(1) of such Act is amended by inserting "and section 7518 of such Code" after "this section". (3) Subparagraph (C) of section 607(e)(2) of such Act is amended by striking out "85 percent" and inserting in lieu thereof "the percentage applicable under section 243(a)(1) of the Internal Revenue Code of 1986". (4) Subparagraph (E) of section 607(e)(4) of such Act is amended to read as follows: "(E) the portion of any dividend referred to in paragraph (2)(C) not taken into account under such paragraph." (5) Paragraph (3) of section 607(g) of such Act is amended to read as follows: "(3) If any portion of a qualified withdrawal for a vessel, barge, or container is made out of the capital gain account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion." (6) Subsection (h) of section 607 of such Act is amended by adding at the end thereof the following new paragraphs: "(5) AMOUNT NOT WITHDRAWN FROM FUND AFTER 25 YEARS FROM DEPOSIT TAXED AS NONQUALIFIED WITHDRAWAL.— "(A) IN GENERAL.—The applicable percentage of any amount which remains in a capital construction fund at the close of the 26th, 27th, 28th, 29th, or 30th taxable year following the taxable year for which such amount was deposited shall be treated as a nonqualified withdrawal in accordance with the following table: "If the amount remains in the fund at the The applicable close of the— percentage is— 2()th taxable year 20 percent 27th taxable year 40 percent 2Sth taxable year (jO percent 29th taxable year 80 percent :?()th taxable year 100 percent. "(B) EARNINGS TREATED AS DEPOSITS.—The earnings of any capital construction fund for any taxable year (other than net gains) shall be treated for purposes of this paragraph as an amount deposited for such taxable year. "(C) AMOUNTS COMMITTED TREATED AS WITHDRAWN.—For purposes of subparagraph (A), an amount shall not be treated as remaining in a capital construction fund at the close of any taxable year to the extent there is a binding contract at the close of such year for a qualified withdrawal of such amount with respect to an identified item for which such withdrawal may be made. "(D) AUTHORITY TO TREAT EXCESS FUNDS AS WITHDRAWN.— If the Secretary determines that the balance in any capital construction fund exceeds the amount which is appropriate to meet the vessel construction program objectives of the person who established such fund, the amount of such excess shall be treated as a nonqualified withdrawal under subparagraph (A) unless such person develops appropriate program objectives within 3 years to dissipate such excess.
100 STAT. 2216 PUBLIC LAW 99-514—OCT. 22, 1986 "(E) AMOUNTS IN FUND ON JANUARY i, 1987.—For pur- poses of this paragraph, all amounts in a capital construc- tion fund on January 1, 1987, shall be treated as deposited in such fund on such date. "(6) NONQUALIFIED WITHDRAWALS TAXED AT HIGHEST MAR- GINAL RATE.— "(A) IN GENERAL.—In the case of any taxable year for which there is a nonqualified withdrawal (including any amount so treated under paragraph (5)), the tax imposed by chapter 1 of the Internal Revenue Code of 1986 shall be determined— "(i) by excluding such withdrawal from gross income, .; . and "(ii) by increasing the tax imposed by chapter 1 of <v- |, such Code by the product of the amount of such with- drawal and the highest rate of tax specified in section 1 (section 11 in the case of a corporation) of such Code. With respect to the portion of any nonqualified withdrawal made out of the capital gain account during a taxable year to which section l(i) or 1201(a) of such Code applies, the rate ,,l of tax taken into account under the preceding sentence shall not exceed 28 percent (34 percent in the case of a corporation). "(B) TAX BENEFIT RULE.—If any portion of a nonqualified withdrawal is properly attributable to deposits (other than earnings on deposits) made by the taxpayer in any taxable year which did not reduce the taxpayer's liability for tax under chapter 1 for any taxable year preceding the taxable year in which such withdrawal occurs— "(i) such portion shall not be taken into account under subparagraph (A), and ' "(ii) an amount equal to such portion shall be treated as allowed as a deduction under section 172 of such Code for the taxable year in which such withdrawal occurs. "(C) COORDINATION WITH DEDUCTION FOR NET OPERATING LOSSES.—Any nonqualified withdrawal excluded from gross income under subparagraph (A) shall be excluded in deter- mining taxable income under section 172(b)(2) of the Internal Revenue Code of 1986." (f) CLERICAL AMENDMENT.—The table of sections for chapter 77 is amended by adding at the end thereof the following new item: "Sec. 7518. Tax incentives relating to merchant marine capital construction funds." (g)EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. TITLE III—CAPITAL GAINS Subtitle A—Individual Capital Gains SEC. 301. REPEAL OF EXCLUSION FOR LONG-TERM CAPITAL GAINS OF INDIVIDUALS. (a) IN GENERAL.—Section 1202 (relating to deduction for capital gains) is hereby repealed.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2217 (b) CONFORMING AMENDMENTS.— (1) Section 62(a) (defining adjusted gross income), as amended by section 132, is amended by striking out paragraph (3) and redesignating paragraphs (4), (5), (6), (7), (10), (11), (12), (13), (14), and (15) as paragraphs (3) through (12), respectively. (2) Section 170(e)(1) (relating to certain contributions of ord'- nary income and capital gain property) is amended by striking out "40 percent (^%6 in the case of a corporation) of. (3) Paragraph (2) of section 172(d) (relating to modifications with respect to net operating loss deduction) is amended to read as follows: "(2) CAPITAL GAINS AND LOSSES OF TAXPAYERS OTHER THAN CORPORATIONS.—In the case of a taxpayer other than a corpora- j tion, the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includ- ible on account of gains from sales or exchanges of capital assets." (4) Paragraph (1) of section 219(f) (defining compensation) is amended by striking out "paragraph (7)" and inserting in lieu thereof "paragraph (6)". (5)(A) Section 223 (relating to cross references) is amended to read as follows: "SEC. 223. CROSS REFERENCE. "For deductions in respect of a decedent, see section 691." (B) The table of sections for part VII of subchapter B of - chapter 1 is amended by striking out "references" in the item relating to section 223 and inserting in lieu thereof "reference". (6) Paragraph (4) of section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose) is amended— (A) by striking out the 1st sentence, and (B) by striking out "ADJUSTMENTS" in the paragraph ,' heading and inserting in lieu thereof "COORDINATION WITH SECTION 6 8 l " . (7) Paragraph (3) of section 643(a) (relating to distributable net income) is amended by striking out the last sentence. (8) Paragraph (4) of section 691(c) (relating to deduction for estate tax) is amended— (A) by striking out "1201,1202, and 1211, and for purposes ' of section 57(a)(9)" and inserting in lieu thereof "l(j), 1201, and 1211", and ^^. ; (B) by striking out "CAPITAL GAIN DEDUCTION, ETC.—" in the paragraph heading and inserting in lieu thereof "CAP- j.^ .,, ITAL GAIN PROVISIONS.—". (9) The second sentence of paragraph (2) of section 871(a) (relating to income not connected with United States business) is amended by striking out "such gains and losses shall be determined without regard to section 1202 (relating to deduc- tion for capital gains) and". (10) Subsection (b) of section 1211 (relating to limitation on capital losses) is amended to read as follows: "(b) OTHER TAXPAYERS.—In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—
100 STAT. 2218 PUBLIC LAW 99-514—OCT. 22, 1986 "(1) $3,000 ($1,500 in the case of a married individual filing a separate return), or "(2) the excess of such losses over such gains." ' (11) Paragraph (2) of section 12120t)) (relating to capital loss carrybacks and carryovers) is amended to read as follows: "(2) SPECIAL RULE.—For purposes of determining the excess -f^ referred to in subparagraph (A) or (B) of paragraph (1), an amount equal to the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b) shall be treated as a short- term capital gain in such year." (12) Paragraph (1) of section 1402(i) (relating to special rules •"^'- for options and commodities dealers) is amended to read as follows: "(1) IN GENERAL.—Notwithstanding subsection (a)(3XA), in determining the net earnings from self-employment of any options dealer or commodities dealer, there shall not be ex- cluded 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." (13) The table of sections for part I of subchapter P of chapter ' 1 is amended by striking out the item relating to section 1202. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31,1986. SEC. 302. 28-PERCENT CAPITAL GAINS RATE FOR TAXPAYERS OTHER THAN CORPORATIONS. (a) IN GENERAL.—Section 1 (relating to tax imposed on individ- uals), as amended by sections 101 and 1411, is amended by adding at the end thereof the following new subsection: "(j) MAXIMUM CAPITAL GAINS RATE.— "(1) IN GENERAL.—If a taxpayer has a net capital gain for any taxable year to which this subsection applies, then the tax imposed by this section shall not exceed the sum of— "(A) a tax computed at the rates and in the same manner '^ ' as if this subsection had not been enacted on the greater r. Of- "(i) the taxable income reduced by the amount of net ^ capital gain, or " ' "(ii) the amount of taxable income taxed at a rate below 28 percent, plus f/t ' "(B) a tax of 28 percent of the amount of taxable income ^ J, 1 in excess of the amount determined under subparagraph (A), plus ^ . "(C) the amount of increase determined under subsection '''" (g). "(2) YEARS TO WHICH SUBSECTION APPLIES.—This subsection shall apply to— '(A) any taxable year beginning in 1987, and ' "(B) any taxable year beginning after 1987 if the highest . b * rate of tax set forth in subsection (a), (b), (c), (d), or (e) (whichever applies) for such taxable year exceeds 28 per- cent." (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31,1986. (c) TRANSITIONAL RULE.—The tax under section 1 of the Internal Revenue Code of 1986 on the long-term capital gain on rights to royalties paid under leases and assignments binding on Septem-
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2219 ber 25, 1985, by a limited partnership formed on March 1, 1977, which on October 30, 1979, assigned leases and which assignment was amended on April 27, 1981, shall not exceed 20 percent. Subtitle B—Repeal of Corporate Capital Gains Treatment SEC. 311. REPEAL OF CORPORATE CAPITAL GAINS TREATMENT. (a) GENERAL RULE.—Section 1201 (relating to alternative tax for corporations) is amended to read as follows: "SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS. "(a) GENERAL RULE.—If for any taxable year a corporation has a net capital gain and any rate of tax imposed by section 11, 511, or 831(a) (whichever is applicable) exceeds 34 percent (determined without regard to the last sentence of section 110))), then, in lieu of any such tax, there is hereby imposed a tax (if such tax is less than the tax imposed by such sections) which shall consist of the sum of— "(1) a tax computed on the taxable income reduced by the amount of the net capital gain, at the rates and in the manner as if this subsection had not been enacted, plus "(2) a tax of 34 percent of the net capital gain. "(b) CROSS REFERENCES.— "For computation of the alternative tax— !• "(1) in the case of life insurance companies, see section 801(aX2), tJii' "(2) in the case of regulated investment companies and their sharehold- ers, see section 852(bX3XA) and (D), and "(3) in the case of real estate investment trusts, see section 857(bX3XA)." (b) TECHNICAL AMENDMENTS.— (1) Clause (iii) of section 8520b)(3)(D) is amended by striking out "72 percent" and inserting in lieu thereof "66 percent'. (2) Subparagraph (E) of section 593(b)(2), as in effect before the amendments made by title IX, is amended by adding "and" at the end of clause (iii), by striking out clause (iv), and by re- designating clause (v) as clause (iv). (3) The second sentence of section 631(c) is amended by strik- ; ing out "Such owner" and inserting in lieu thereof "If for the taxable year of such gain or loss the maximum rate of tax imposed by this chapter on any net capital gain is less than such maximum rate for ordinary income, such owner". (4) Paragraphs (1) and (2) of section 1445(e) (as amended by title XVIII) are each amended by striking out "28 percent" and inserting in lieu thereof "34 percent". (c) EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall apply to taxable years beginning after December 31, 1986. (d) T R A N S I T I O N A L R U L E S . — (1) T A X A B L E Y E A R S W H I C H B E G I N I N 1986 A N D E N D I N 1987.—In the case of any taxable year which begins before January 1, 1987, and ends on or after such date, paragraph (2) of section 1201(a) of the Internal Revenue Code of 1954, as in effect on the date before the date of enactment of this Act, shall be applied as if it read as follows: . "(2) the sum of— "(A) 28 percent of the lesser of—
100 STAT. 2220 PUBLIC LAW 99-514—OCT. 22, 1986 ' "(i) the net capital gain determined by taking into ' account only gain or loss which is properly taken into account for the portion of the taxable year before January 1, 1987, or ';^ "(ii) the net capital gain for the taxable year, and "(B) 34 percent of the excess (if any) of^ "(i) the net capital gain for the taxable year, over "(ii) the amount of the net capital gain taken into account under subparagraph (A)." (2) REVOCATION OF ELECTIONS UNDER SECTION 631(a).—Any election under section 631(a) of the Internal Revenue Code of 1954 made (whether by a corporation or a person other than a corporation) for a taxable year beginning before January 1, 1987, may be revoked by the taxpayer for any taxable year ending after December 31, 1986. For purposes of determining whether the taxpayer may make a further election under such section, such election (and any revocation under this paragraph) shall not be taken into account. Subtitle C—Incentive Stock Options SEC. 321. REPEAL OF REQUIREMENT THAT INCENTIVE STOCK OPTIONS ARE EXERCISABLE ONLY IN CHRONOLOGICAL ORDER; MODI- FICATION OF $100,000 LIMITATION. (a) GENERAL RULE.—Subsection (b) of section 422A is amended by inserting "and" at the end of paragraph (6) and by striking out paragraphs (7) and (8) and inserting in lieu thereof the following new paragraph: "(7) under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000." 0)) CONFORMING AMENDMENTS.— (1) Subsection (c) of section 422A is amended— (A) by striking out paragraphs (4) and (7), and (B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively. (2) The last sentence of section 422A(cXl) is amended by striking out "paragraph (8) of subsection Ot)) and paragraph (4) of this subsection" and inserting in lieu thereof "paragraph (7) of subsection (b)". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to options granted after December 31,1986. Subtitle D—Straddles SEC. 331. YEAR-END RULE EXPANDED. (a) IN GENERAL.—Subparagraph (E) of section 1092(cX4) (defining straddle) is amended— (1) by inserting "or the stock is disposed of at a loss" in clause (i) after "closed", (2) by striking out "is" in clause (ii) and inserting in lieu thereof "or gains on such options are", and
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2221 (3) by inserting " o r option" after "stock" a n d " o r t h e disposi- tion of such stock" after "options" in clause (iii). (b) EFFECTIVE D A T E . — T h e a m e n d m e n t s m a d e by this section shall apply to positions established on or after J a n u a r y 1, 1987. TITLE IV^AGRICULTURE, ENERGY, AND NATURAL RESOURCES Subtitle A—Agriculture SEC. 401. LIMITATION ON EXPENSING OF SOIL AND WATER CONSERVA- TION EXPENDITURES. (a) GENERAL RULE.—Subsection (c) of section 175 (relating t o soil and w a t e r conservation expenditures) is a m e n d e d by adding a t t h e end thereof t h e following new p a r a g r a p h : "(3) ADDITIONAL LIMITATIONS.— .: "(A) EXPENDITURES MUST BE CONSISTENT WITH SOIL CON- * SERVATION P L A N . — N o t w i t h s t a n d i n g a n y o t h e r provision of this section, subsection (a) shall not apply to a n y expendi- t u r e s unless such expenditures a r e consistent with— "(i) t h e plan (if any) approved by t h e Soil Conserva- V .: tion Service of t h e D e p a r t m e n t of Agriculture for t h e a r e a in which t h e land is located, or '." ; "(ii) if t h e r e is no plan described in clause (i), a n y soil conservation plan of a comparable S t a t e agency. "(B) CERTAIN WETLAND, ETC., ACTIVITIES NOT Q U A U F I E D . — Subsection (a) shall n o t apply to a n y expenditures in connection with t h e d r a i n i n g or filling of wetlands or land preparation for center pivot irrigation systems." (b) EFFECTIVE DATE.—The a m e n d m e n t m a d e by this section shall apply to a m o u n t s paid or incurred after December 31, 1986, in taxable years ending after such date. SEC. 402. REPEAL OF SPECIAL TREATMENT FOR EXPENDITURES FOR CLEARINC; LAND. (a) I N GENERAL.—Section 182 (relating to expenditures by farmers for clearing land) is hereby repealed. (b) TECHNICAL A M E N D M E N T S . — (1) P a r a g r a p h (1) of section 263(a) (relating to capital expendi- tures) is amended by striking o u t s u b p a r a g r a p h (E) a n d by redesignating s u b p a r a g r a p h s (F), (G), a n d (H) as s u b p a r a g r a p h s (E), (F), a n d (G), respectively. (2) S u b p a r a g r a p h (A) of section 1252(a)(1) (relating to gain from disposition of farm land) is amended by striking out "(relating to expenditures by farmers for clearing land)" a n d inserting in lieu thereof "(as in effect on t h e day before t h e d a t e of t h e e n a c t m e n t of t h e T a x Reform Act of 1986)". (3) T h e table of sections for p a r t VI of subchapter B of chapter 1 is amended by striking out t h e item relating to section 182. (c) EFFECTIVE DATE.—The a m e n d m e n t s m a d e by this section shall apply to a m o u n t s paid or incurred after December 31, 1985, in taxable years ending after such date.
100 STAT. 2222 PUBLIC LAW 99-514—OCT. 22, 1986 SEC. 403. TREATMENT OF DISPOSITIONS OF CONVERTED WETLANDS OR HIGHLY ERODIBLE CROPLANDS. (a) GENERAL RULE.—Part IV of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) is amended by adding at the end thereof the following new section: "SEC. 1257. DISPOSITION OF CONVERTED WETLANDS OR HIGHLY EROD- IBLE CROPLANDS. "(a) GAIN TREATED AS ORDINARY INCOME.—Any gain on the dis- position of converted wetland or highly erodible cropland shall be treated as ordinary income. Such gain shall be recognized notwith- standing any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part. "(b) Loss TREATED AS LONG-TERM CAPITAL LOSS.—Any loss recog- nized on the disposition of converted wetland or highly erodible cropland shall be treated as a long-term capital loss. t^ "(c) DEFINITIONS.—For purposes of this section— "(1) CONVERTED WETLAND.—The term 'converted wetland' means any converted wetland (as defined in section 1201(4) of the Food Security Act of 1985 (16 U.S.C. 3801(4))) held— "(A) by the person whose activities resulted in such land 4; being converted wetland, or "(B) by any other person who at any time used such land for farming purposes. "(2) HIGHLY ERODIBLE CROPLAND.—The term 'highly erodible cropland' means any highly erodible cropland (as defined in section 1201(6) of the Food Security Act of 1985 (16 U.S.C. 3801(6))), if at any time the taxpayer used such land for farming purposes (other than the grazing of animals). "(3) TREATMENT OF SUCCESSORS.—If any land is converted wetland or highly erodible cropland in the hands of any person, such land shall be treated as converted wetland or highly erodible cropland in the hands of any other person whose adjusted basis in such land is determined (in whole or in part) by reference to the adjusted basis of such land in the hands of such person. "(d) SPECIAL RULES.—Under regulations prescribed by the Sec- retary, rules similar to the rules applicable under section 1245 shall apply for purposes of subsection (a). For purposes of sections 170(e), 341(eX12), and 751(c), amounts treated as ordinary income under subsection (a) shall be treated in the same manner as amounts treated as ordinary income under section 1245." OD) CLERICAL AMENDMENT.—The table of sections for part IV of subchapter P of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 1257. Disposition of converted wetlands or highly erodible croplands." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to dispositions of converted wetland or highly erodible crop- land (as defined in section 1257(c) of the Internal Revenue Code of 1986 as added by this section) first used for farming after March 1, 1986, in taxable years ending after that date.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2223 SEC. 404. LIMITATION ON CERTAIN PREPAID FARMING EXPENSES. (a) GENERAL RULE.—Section 464 (relating to limitations on deduc- tions in case of farming syndicates) is amended by adding at the end thereof the following new subsection: "(f) SUBSECTIONS (a) AND (b) To APPLY TO CERTAIN PERSONS PREPAYING 50 PERCENT OR MORE OF CERTAIN FARMING EXPENSES.— "(1) IN GENERAL.—In the case of a taxpayer to whom this subsection applies, subsections (a) and Ot>) shall apply to the excess prepaid farm supplies of such taxpayer in the same manner as if such taxpayer were a farming syndicate. "(2) TAXPAYER TO WHOM SUBSECTION APPLIES.—This subsection applies to any taxpayer for any taxable year if such taxpayer— "(A) does not use an accrual method of accounting, "(B) has excess prepaid farm supplies for the taxable year, and "(C) is not a qualified farm-related taxpayer. "(3) QUALIFIED FARM-RELATED TAXPAYER.— "(A) IN GENERAL.—For purposes of this subsection, the term 'qualified farm-related taxpayer' means any farm- ' related taxpayer if— "(i)(I) the aggregate prepaid farm supplies for the 3 '•'' taxable years preceding the taxable year are less than 50 percent of, "(II) the aggregate deductible farming expenses (other than prepaid farm supplies) for such 3 taxable years, or "(ii) the taxpayer has excess prepaid farm supplies for the taxable year by reason of any change in busi- ness operation directly attributable to extraordinary ' ' circumstances. "(B) FARM-RELATED TAXPAYER.—For purposes of this paragraph, the term 'farm-related taxpayer' means any taxpayer— "(i) whose principal residence (within the meaning of section 1034) is on a farm, '•' "(ii) who has a principal occupation of farming, or "(iii) who is a member of the family (within the meaning of subsection (c)(2)(E)) of a taxpayer described in clause (i) or (ii). "(4) DEFINITIONS.—For purposes of this subsection— "(A) EXCESS PREPAID FARM SUPPLIES.—The term 'excess prepaid farm supplies' means the prepaid farm supplies for the taxable year to the extent the amount of such supplies exceeds 50 percent of the deductible farming expenses for the taxable year (other than prepaid farm supplies). "(B) PREPAID FARM SUPPLIES.—The term 'prepaid farm " supplies' means any amounts which are described in subsec- tion (a) or (b) and would be allowable for a subsequent y' ' taxable year under the rules of subsections (a) and (b). "(C) DEDUCTIBLE FARMING EXPENSES.—The term 'deduct- sj- ible farming expenses' means any amount allowable £is a deduction under this chapter (including any amount allow- able as a deduction for depreciation or amortization) which is properly allocable to the trade or business of farming." (b) CONFORMING AMENDMENTS.—
100 STAT. 2224 PUBLIC LAW 99-514—OCT. 22, 1986 (1) The heading for section 464 is amended by striking out "IN CASE OF FARMING SYNDICATES" and inserting in lieu thereof "FOR CERTAIN FARMING". (2) The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by striking out "in case of farming syndicates" in the item relating to section 464 and inserting in lieu thereof "for certain farming expenses". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to amounts paid or incurred after March 1, 1986, in taxable years beginning after such date. SEC. 405. TAX TREATMENT OF DISCHARGE OF CERTAIN INDEBTEDNESS OF SOLVENT FARMERS. (a) IN GENERAL.—Section 108 (relating to income from discharge of indebtedness) is amended by adding at the end thereof the following new subsection: "(g) SPECIAL RULES FOR DISCHARGE OF QUALIFIED FARM INDEBTED- NESS OF SOLVENT FARMERS.— "(1) IN GENERAL.—For purposes of this section and section 1017, the discharge by a qualified person of qualified farm indebtedness of a taxpayer who is not insolvent at the time of the discharge shall be treated in the same manner as if the discharge had occurred when the taxpayer was insolvent. "(2) QUAUFIED FARM INDEBTEDNESS.—For purpOSeS of t h i s subsection, indebtedness of a taxpayer shall be treated as quali- fied farm indebtedness if— "(A) such indebtedness was incurred directly in connec- tion with the operation by the taxpayer of the trade or business of farming, and "(B) 50 percent or more of the average annual gross sfriJ receipts of the taxpayer for the 3 taxable years preceding .;(, the taxable year in which the discharge of such indebt- edness occurs is attributable to the trade or business of farming. "(3) QuAUFiED PERSON.—For purposes of this subsection, the term 'qualified person' means a person described in section 46(cX8XDXiv)." Ob) BASIS ADJUSTMENT.—Section lOlTOt)) (relating to basis adjust- ment) is amended by adding at the end thereof the following new paragraph: "(4) ORDERING RULE IN THE CASE OF QUALIFIED FARM INDEBTED- NESS.—Any amount which is excluded from gross income under section 108(a) by reason of the discharge of qualified farm indebtedness (within the meaning of section 108(gX2)) and which under subsection (b) of section 108 is to be applied to reduce b£isis shall be applied— "(A) first to reduce the tax attributes described in section 108(bX2) (other than subparagraph (D) thereof), "(B) then to reduce basis of property other than property described in subparagraph (C), and "(C) then to reduce the basis of land used or held for use in the trade or business of farming." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to discharges of indebtedness occurring after April 9, 1986, in taxable years ending after such date.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2225 SEC. 406. RETENTION OF CAPITAL GAINS TREATMENT FOR SALES OF DAIRY CATTLE UNDER MILK PRODUCTION TERMINATION PROGRAM. The amendments made by subtitles A and B of title III shall not apply to any gain from the sale of dairy cattle under a valid contract with the United States Department of Agriculture under the milk production termination program to the extent such gain is properly taken into account under the taxpayer's method of accounting after January 1,1987, and before September 1,1987. Subtitle B—Treatment of Oil, Gas, Geothermal, and Hard Minerals SEC. 411. TREATMENT OF INTANGIBLE DRILLING COSTS AND MINERAL EXPLORATION AND DEVELOPMENT COSTS. (a) TREATMENT UNDER SECTION 291.— (1) INCREASE IN PERCENTAGE DISALLOWANCE.—Paragraph (1) of section 291(b) (relating to special rules for treatment of intangi- ble drilling costs and mineral exploration and development costs) is amended by striking out "20 percent" and inserting in lieu thereof "30 percent". (2) TREATMENT OF DISALLOWED AMOUNT.—Subsection Ot)) of section 291 is amended by striking out paragraphs (2), (3), (4), (5), and (6) and inserting in lieu thereof the following new paragraphs: "(2) AMORTIZATION OF AMOUNTS NOT ALLOWABLE AS DEDUC- • TiONS UNDER PARAGRAPH (1).—The amount not allowable as a deduction under section 263(c), 616(a), or 617(a) (as the case may be) for any taxable year by reason of paragraph (1) shall be allowable as a deduction ratably over the 60-month period beginning with the month in which the costs are paid or incurred. "(3) DISPOSITIONS.—For purposes of section 1254, any deduc- tion under paragraph (2) shall be treated as a deduction allowable under section 263(c), 616(a), or 617(a) (whichever is appropriate). "(4) INTEGRATED OIL COMPANY DEFINED.—For purposes of this subsection, the term 'integrated oil company' means, with re- spect to any taxable year, any producer (within the meaning of section 4996(aXl)) of crude oil other than an independent pro- ducer (within the meaning of section 4992(b)). "(5) COORDINATION WITH COST DEPLETION.—The portion of the adjusted basis of any property which is attributable to amounts to which paragraph (1) applied shall not be taken into account for purposes of determining depletion under section 611." Ot)) TREATMENT OF COSTS INCURRED OUTSIDE THE UNITED STATES.— (1) INTANGIBLE DRILUNG AND DEVELOPMENT COSTS.— (A) IN GENERAL.—Section 263 (relating to capital expendi- tures) is amended by adding at the end thereof the follow- ing new subsection: "(i) SPECIAL RULES FOR INTANGIBLE DRILLING AND DEVELOPMENT COSTS INCURRED OUTSIDE THE UNITED STATES.—In the case of intan- gible drilling and development costs paid or incurred with respect to an oil, gas, or geothermal well located outside the United States— "(1) subsection (c) shall not apply, and
100 STAT. 2226 PUBLIC LAW 99-514—OCT. 22, 1986 ^> "(2) such costs shall— ^ i^ * •-'•• '- 4H "(A) at the election of the taxpayer, be included in adjusted basis for purposes of computing the amount of any deduction allowable under section 611 (determined without regard to section 613), or "(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period r f . PC beginning with the taxable year in which such costs were paid or incurred. This subsection shall not apply to costs paid or incurred with respect to a nonproductive well." (B) CONFORMING AMENDMENT.—Section 263(c) is amended by inserting "and except as provided in subsection (i)," after "subsection (a),". jf (2) DEVELOPMENT AND MINING EXPLORATION COSTS.— (A) IN GENERAL.—Section 616 (relating to development expenditures) is amended by redesignating subsection (d) as subsection (e), and inserting after subsection (c) the follow- ing new subsection: "(d) SPECIAL RULES FOR FOREIGN DEVELOPMENT.—In the case of any expenditures paid or incurred with respect to the development of a mine or other natural deposit (other than an oil, gas, or geothermal well) located outside of the United States— "(1) subsections (a) and (b) shall not apply, and "(2) such expenditures shall— "(A) at the election of the taxpayer, be included in ad- justed basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to section 613), or "(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred." <is > (B) CERTAIN MINING EXPLORATION EXPENDITURES OUTSIDE THE UNITED STATES.—Section 617(h) (relating to limitation) is amended to read as follows: "(h) SPECIAL RULES FOR FOREIGN EXPLORATION.—In the case of any expenditures paid or incurred before the development stage for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (other than an oil, gas, or geothermal well) located outside the United States— "(1) subsection (a) shall not apply, and "(2) such expenditures shall— "(A) at the election of the taxpayer, be included in ad- justed basis for purposes of computing the amount of any deduction allowable under section 611 (without regard to • *''"' section 613), or "(B) if subparagraph (A) does not apply, be allowed as a deduction ratably over the 10-taxable year period beginning with the taxable year in which such expenditures were paid or incurred." (C) CONFORMING AMENDMENTS.— (i) Subsection (a) of section 616 is amended by strik- ing out "subsection (b)" and inserting in lieu thereof "subsections (b) and (d)".
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2227 } ' (ii) Subparagraph (B) of section 29103)(1) is amended by striking out "617" and inserting in lieu thereof "617(a)". '.* (iii) Paragraph (10) of section 381(c) is amended by striking out the last sentence thereof. • (iv) Subparagraph (C) of section 243(b)(3) is i - amended— (I) by adding "and" at the end of clause (i), • ' (II) by striking out clause (ii), and (III) by redesignating clause (iii) as clause (ii). (c) EFFECTIVE DATE.— (1) I N GENERAL.—The amendments made by this section shall apply to costs paid or incurred after December 31, 1986, in taxable years ending after such date. (2) TRANSITION RULE.—The amendments made by this section shall not apply with respect to intangible drilling and develop- ment costs incurred,by United States companies pursuant to a minority interest in a license for Netherlands or United King- dom North Sea development if such interest was acquired on or before December 31, 1985. SEC. 412. MODIFICATION OF PERCENTAGE DEPLETION RULES. (a) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BONUSES, ETC.— (1) IN GENERAL.—Subsection (d) of section 613A (relating to limitations on application of subsection (c)) is amended by adding at the end thereof the following new paragraph: "(5) PERCENTAGE DEPLETION NOT ALLOWED FOR LEASE BONUSES, ETC.—In the case of any oil or gas property to which subsection (c) applies, for purposes of section 613, the term 'gross income from the property' shall not include any lease bonus, advance royalty, or other amount payable without regard to production from property." (2) GEOTHERMAL DEPOSITS.—Section 613(e) is amended by adding at the end thereof the following new paragraph: "(4) PERCENTAGE DEPLETION NOT TO INCLUDE LEASE BONUSES, ETC.—In the case of any geothermal deposit, the term 'gross income from the property' shall, for purposes of this section, not include any amount described in section 613A(d)(5)." (3) EFFECTIVE DATE.—The amendment made by this subsection shall apply to amounts received or accrued after August 16, 1986, in taxable years ending after such date. (b) TREATMENT UNDER SECTION 291 OF COAL AND IRON ORE.— (1) IN GENERAL.—Paragraph (2) of section 291(a) (relating to reductions in percentage depletion) is amended by striking out "15 percent" and inserting in lieu thereof "20 percent". (2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to taxable years beginning after December 31, 1986. SEC. 413. GAIN FROM DISPOSITION OF INTERESTS IN OIL. GAS. GEO- THERMAL. OR OTHER MINERAL PROPERTIES. (a) GENERAL RULE.—Section 1254 is amended to read as follows: "SEC. 1254. GAIN FROM DISPOSITION OF INTEREST IN OIL. GAS. GEO- THERMAL. OR OTHER MINERAL PROPERTIES. "(a) GENERAL RULE.—
100 STAT. 2228 PUBLIC LAW 99-514—OCT. 22, 1986 •'^' "(1) ORDINARY INCOME.—If any section 1254 property is dis- ' .; posed of, the lesser of— ~ "(A) the aggregate amount of— "(i) expenditures which have been deducted by the taxpayer or any person under section 263, 616, or 617 .1 , with respect to such property and which, but for such deduction, would have been included in the adjusted . i basis of such property, and "(ii) the deductions for depletion under section 611 which reduced the adjusted basis of such property, or "(B) the excess of— "(i) in the case of— "(I) a sale, exchange, or involuntary conversion, the amount realized, or "(II) in the case of any other disposition, the fair market value of such property, over "(ii) the adjusted basis of such property, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. "(2) DISPOSITION OF PORTION OF PROPERTY.—For purposes of paragraph (1)— "(A) In the case of the disposition of a portion of section 1254 property (other than an undivided interest), the entire . amount of the aggregate expenditures or deductions de- .^j scribed in paragraph (IXA) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies. "(B) In the case of the disposition of an undivided interest in a section 1254 property (or a portion thereof), a propor- tionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of the Sec- retary that such expenditures do not relate to the portion (or interest therein) disposed of. "(3) SECTION 1254 PROPERTY.—The term 'section 1254 property' means any property (within the meaning of section 614) if— "(A) any expenditures described in paragraph (IXA) are «" properly chargeable to such property, or "(B) the adjusted basis of such property includes adjust- ments for deductions for depletion under section 611. "(b) SPECIAL RULES UNDER REGULATIONS.—Under regulations pre- scribed by the Secretary— "(1) rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and "(2) in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expendi- tures referred to in subsection (aXlXA) of this section." (b) COORDINATION WITH SECTION 617(d).—Subsection (d) of section 617 is amended by adding at the end thereof the following new paragraph:
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2229 "(5) COORDINATION WITH SECTION 1254.—This subsection shall not apply to any disposition to which section 1254 applies." (c) EFFECTIVE DATES.— (1) IN GENERAL.—The amendments made by this section shall apply to any disposition of property which is placed in service by the taxpayer after December 31,1986. (2) EXCEPTION FOR BINDING CONTRACTS.—The amendments made by this section shall not apply to any disposition of property placed in service after December 31, 1986, if such property was acquired pursuant to a written contract which was entered into before September 26, 1985, and which was binding at all times thereafter. Subtitle C—Other Provisions SEC. 421. EXTENSION OF ENERGY INVESTMENT CREDIT FOR SOLAR, GEO- THERMAL, OCEAN THERMAL, AND BIOMASS PROPERTY. (a) I N GENERAL.—The table contained in subparagraph (A) of section 460t)X2) (relating to energy percentage) is amended by adding at the end thereof the following new items: "(viii) SOLAR ENERGY PROPERTY.—Property de- A. 15 percent Jan. 1, 1986 Dec. 31, 1986. scribed in section 48(1X4) (other than wind B. 12 percent Jan. 1, 1987 Dec. 31, 1987. energy property). C. 10 percent Jan. 1, 1988 Dec. 31, 1988. "(ix) GEOTHERMAL PROPERTY.—Property de- A. 15 percent Jan. 1, 1986 Dec. 31, 1986. scribed in section 48(lK3XAXviii). B. 10 percent Jan. 1, 1987 Dec. 31, 1988. "(x) OCEAN THERMAL PROPERTY.—Property de- 15 percent Jan. 1, 1986 Dec. 31, 1988. scribed in section 48(lX3XAXix). "(xi) BiOMASS PROPERTY.—Property described A. 15 percent Jan. 1, 1986 Dec. 31, 1986. in section 48(1X15). B. 10 percent Jan. 1, 1987 Dec. 31, 1987." (h) TREATMENT OF CERTAIN TRANSITIONAL RULE PROPERTY.—Para- graph (2) of section 460t>) is amended by adding at the end thereof the following new subparagraph: "(E) CERTAIN RULES MADE APPLICABLE.—Rules similar to the rules of subsections (c) and (d) of section 49 shall apply to any credit allowable by reason of subparagraph (C) or (D)." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to periods beginning after December 31, 1985, under rules similar to rules under section 48(m) of the Internal Revenue Code of 1986. SEC. 422. PROVISIONS RELATING TO EXCISE TAX ON FUELS. (a) REDUCTION IN EXCISE T A X EXEMPTION FOR Q U A U F I E D METH- ANOL AND ETHANOL F U E L S . — (1) IN GENERAL.—Subparagraph (A) of section 404103X2) (relat- ing to exemption for qualified ethanol and methanol fuels) is amended to read as follows: "(A) IN GENERAL.—In the case of any qualified methanol or ethanol fuel, subsection (aX2) shall be applied by f substituting '3 cents' for '9 cents'.". (2) CONFORMING AMENDMENT.—The heading for section 4041(b) is amended by striking out "Exemption" the second 71-194 0 - 89 - 15 : ex.. 3 Part3
100 STAT. 2230 PUBLIC LAW 99-514—OCT. 22, 1986 *l«r* place it appears and inserting in lieu thereof "Reduction in • "^R- Tax". (3) EFFECTIVE DATE.—The amendments made by this subsec- tion shall take effect on January 1, 1987. (b) EXTENSION OF REDUCTION IN TAX FOR FUEL USED BY TAXI- CABS.—Paragraph (3) of section 6427(e) (relating to termination) is amended by striking out "September 30, 1985" and inserting in lieu thereof "September 30, 1988". SEC. 423. ETHYL ALCOHOL AND MIXTURES T H E R E O F FOR F U E L USE. (a) IN GENERAL.—Except as provided in subsection (b), no ethyl alcohol or a mixture thereof may be considered— (1) for purposes of general headnote 3(a) of the Tariff Sched- ules of the United States, to be— (A) the growth or product of an insular possession of the United States, j'^ft (B) manufactured or produced in an insular possession from materials which are the growth, product, or manufac- -j, , ture of any such possession, or '.,<'/? (C) otherwise eligible for exemption from duty under such '^•"' • headnote as the growth or product of an insular possession; or (2) for purposes of section 213 of the Caribbean Basin Eco- nomic Recovery Act, to be— (A) an article that is wholly the growth, product, or manufacture of a beneficiary country, .•*'•'• (B) a new or different article of commerce which has been grown, produced, or manufactured in a beneficiary country, # (C) a material produced in a beneficiary country, or (D) otherwise eligible for duty-free treatment under such ~- Act as the growth, product, or manufacture of a beneficiary country; unless the ethyl alcohol or mixture thereof is an indigenous product vt 1 hat insular possession or beneficiary country. (b) E X C E P T I O N . — >•<•£•,= ^ (1) Subject to the limitation in paragraph (2), subsection (a) shall not apply to ethyl alcohol that is imported into the United States during calendar years 1987 and 1988 and produced in— (A) an azeotropic distillation facility located in an insular 1 V possession of the United States or a beneficiary country, if that facility was established before, and in operation on, January 1,1986, or (B) an azeotropic distillation facility— k' ajx>3 (i) at least 50 percent of the total value of the equip- ment and components of which were— (I) produced in the United States, and (II) owned by a corporation at least 50 percent of 'Wr-iM f s r I the total value of the outstanding shares of stock of which were owned by a United States person (or -Isl^i) V0. persons) on or before January 1, 1986, and ai (aiBifl (ii) substantially all of the equipment and compo- nents of which were, on or before January 1, 1986— (I) located in the United States under the posses- sion or control of such corporation, (II) ready for shipment to, and installation in, a v:< ' o , ,' beneficiary country, and , jnotxif' :'-" (iii) which— :«i»>.-isi.-c: ixi iu^ij*A:i:.<.i> -,. vu«»--.;s- Uim f
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2231 (I) has on the date of enactment of this Act, or (II) will have at the time such facility is placed in service (based on estimates made before the date of enactment of this Act), ' ''" a stated capacity to produce not more than 42,000,000 gallons of such product per year. (2) The exception provided under paragraph (1) shall cease to apply during each of calendar years 1987 and 1988 to ethyl alcohol produced in a facility described in subparagraph (A) or (B) of paragraph (1) after 20,000,000 gallons of ethyl alcohol produced in that facility are entered into the United States during that year. (c) DEFINITIONS.—For purposes of this section— (1) The term "ethyl alcohol or a mixture thereof means (except for purposes of subsection (e)) ethyl alcohol or any mixture thereof described in item 901.50 of the Appendix to the Tariff Schedules of the United States. (2) Ethyl alcohol or a mixture thereof may be treated as being an indigenous product of an insular possession or beneficiary country only if the ethyl alcohol or a mixture thereof— (A) has been both dehydrated and produced by a process of full-scale fermentation within that insular possession or beneficiary country; or (B) has been dehydrated within that insular possession or beneficiary country from hydrous ethyl alcohol that in- cludes hydrous ethyl alcohol which is wholly the product or -i ^ manufacture of any insular possession or beneficiary coun- '^ try and which has a value not less than— (i) 30 percent of the value of the ethyl alcohol or r, > mixture, if entered during calendar year 1987, except that this clause shall not apply to any ethyl alcohol or mixture which has been dehydrated in the United States Virgin Islands by a facility with respect to which— (I) the owner has entered into a binding contract for the engineering and design of full-scale fer- mentation capacity, and (II) authorization for operation of a full-scale fermentation facility has been granted by the Island authorities before May 1,1986, , (ii) 60 percent of the value of the ethyl alcohol or mixture, if entered during calendar year 1988, and (iii) 75 percent of the value of the ethyl alcohol or mixture, if entered after December 31,1988. (3) The term "beneficiary country" has the meaning given to such term under section 212 of the Caribbean Basin Economic Recovery Act (19 U.S.C. 2702). (4) The term "United States person" has the meaning given to such term by section 7701(aX3) of the Internal Revenue Code of 1986. (5) The term "entered" means entered, or withdrawn from warehouse, for consumption in the customs territory of the United States. (d) AMENDMENT TO APPENDIX TO SCHEDULES.—The item designa- tion for item 901.50 of the Appendix to the Tariff Schedules of the United States is amended to read as follows: "Ethyl alcohol (pro- vided for in item 427.88, part 2D, schedule 4) or any mixture
100 STAT. 2232 PUBLIC LAW 99-514—OOT. 22, 1986 containing such ethyl alcohol (provided for in part 1, 2 or 10, schedule 4) if such ethyl alcohol or mixture is to be used as fuel or in producing a mixture of gasoline and alcohol, a mixture of a special fuel and alcohol, or any other mixture to be used as fuel (including motor fuel provided for in item 475.25), or is suitable for any such uses." (e) DRAWBACKS.— (1) For purposes of subsections O?) and (j)(2) of section 313 of the Tariff Act of 1930 (19 U.S.C. 1313), as amended by section 1888(2) of this Act, any ethyl alcohol (provided for in item 427.88 of the Tariff Schedules of the United States) or mixture contain- ing such ethyl alcohol (provided for in part 1, 2, or 10 of schedule 4 of such Schedules) which is subject to the additional duty imposed by item 901.50 of the Appendix to such Schedules may be treated as being fungible with, or of being of the same kind and quality as, any other imported ethyl alcohol (provided for in item 427.88 of such Schedules) or mixture containing such ethyl alcohol (provided for in part 1, 2, or 10 of schedule 4 of such Schedules) only if such other imported ethyl alcohol or mixture thereof is also subject to such additional duty. (2) Paragraph (1) shall not apply with respect to ethyl alcohol (provided for in item 427.88 of the Tariff Schedules of the United States) or mixture containing such ethly alcohol (pro- vided for in part 1, 2, or 10 of schedule 4 of such Schedules) that is exempt from the additional duty imposed by item 901.50 of the Appendix to such Schedules by resison of— (A) subsection Ot)), or (B) any agreement entered into under section 102 (b) of the Trade Act of 1974. (f) CONFORMING AMENDMENTS.— (1) General headnote 3(a)(i) of the Tariff Schedules of the United States is amended by inserting "and except as provided in section 423 of the Tax Reform Act of 1986," after "part 7 of schedule 7,". (2) Section 213(aXl) of the Caribbean Basin Economic Recov- ery Act (19 U.S.C. 2703(aXl)) is amended by inserting "and subject to section 423 of the Tax Reform Act of 1986,' after "Unless otherwise excluded from eligibility by this title,". (3) The headnotes to subpart A of part 1 of the Appendix to the Tariff Schedules of the United States are amended by adding at the end thereof the following: "2. For purposes of item 901.50, the phrase 'is suitable for any such uses' does not include ethyl alcohol (provided for in item 427.88, part 2D, schedule 4) that is certified by the importer of record to the satisfaction of the Commissioner of Customs (hereinafter in this headnote referred to as the 'Commissioner') to be ethyl alcohol or a mixture containing such ethyl alcohol imported for uses other than liquid motor fuel use or use in producing liquid motor fuel related mixtures. If the importer of record certifies nonliquid motor fuel use for purposes of establishing actual use or suitability under item 901.50, the Commissioner shall not liquidate the entry of ethyl alcohol until he is satisfied that the ethyl alcohol has in fact not been used for liquid motor fuel use or use in producing liquid motor fuel related mixtures. If he is not satisfied within a reasonable period of time not less than 18 months from the date of entry, then the duties provided for in item 901.50 shall be payable retroactive to the date of entry. Such duties shall also become payable, retroactive
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2233 to the date of entry, immediately upon the diversion to liquid motor fuel use of any ethyl alcohol or ethyl alcohol mixture certified upon entry as having been imported for non-liquid motor fuel use." (g) EFFECTIVE PERIOD.— (1) The provisions of, and the amendments made by, this section (other than subsection (e)) shall apply to articles en- tered— (A) after December 31,1986, and (B) before the expiration of the effective period of item 901.50 of the Appendix to the Tariff Schedules of the United States. (2) The provisions of subsection (e) shall take effect on the date of the enactment of this Act. TITLE V—TAX SHELTER LIMITATIONS; INTEREST LIMITATIONS Subtitle A—Limitations On Tax Shelters SEC. 501. LIMITATIONS ON LOSSES AND CREDITS FROM PASSIVE ACTIVI- TIES. (a) GENERAL RULE.—Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deductions taken) is amended by adding at the end thereof the following new section: "SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED. "(a) DISALLOWANCE.— "(1) IN GENERAL.—If for any taxable year the taxpayer is described in paragraph (2), neither— "(A) the passive activity loss, nor "(B) the passive activity credit, for the taxable year shall be allowed. "(2) PERSONS DESCRIBED.—The following are described in this paragraph: "(A) any individual, estate, or trust, ^ "(B) any closely held C corporation, and "(C) any personal service corporation. "(b) DISALLOWED LOSS OR CREDIT CARRIED TO NEXT YEAR.—Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year. "(c) PASSIVE ACTIVITY DEFINED.—For purposes of this section— "(1) IN GENERAL.—The term 'passive activity' means any activity— "(A) which involves the conduct of any trade or business, and "(B) in which the taxpayer does not materially partici- pate. -n. '«(2) PASSIVE ACTIVITY INCLUDES ANY RENTAL ACTIVITY.—The term 'passive activity' includes any rental activity. "(3) WORKING INTERESTS IN OIL AND GAS PROPERTY.— "(A) IN GENERAL.—The term 'passive activity' shall not \ include any working interest in any oil or gas property which the taxpayer holds directly or through an entity
100 STAT. 2234 PUBLIC LAW 99-514—OCT. 22, 1986 'i^'* ^ which does not limit the liability of the taxpayer with l^K ' ' respect to such interest. "(B) INCOME IN SUBSEQUENT YEARS.—If any taxpayer has any loss for any taxable year from a working interest in ^'^' any oil or gas property which is treated as a loss which is '^ not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive J activity. "(4) MATERIAL PARTICIPATION NOT REQUIRED FOR PARAGRAPHS (2) AND (3).—Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity. "(5) TRADE OR BUSINESS INCLUDES RESEARCH AND EXPERIMEN- TATION ACTIVITY.—For purposes of paragraph (IXA), the term 'trade or business' includes any activity involving research or experimentation (within the meaning of section 174). "(6) ACTIVITY IN CONNECTION WITH TRADE OR BUSINESS OR PRODUCTION OF INCOME.—To the extent provided in regulations, for purposes of paragraph (IXA), the term 'trade or business' includes— "(A) any activity in connection with a trade or business, or "(B) any activity with respect to which expenses are allowable as a deduction under section 212. "(d) PASSIVE ACTIVITY Loss AND CREDIT DEFINED.—For purposes of this section— "(1) PASSIVE ACTIVITY LOSS.—The term 'passive activity loss' means the amount (if any) by which— "(A) the aggregate losses from all passive activities for the taxable year, exceed «! It "(B) ^j^e aggregate income from all psissive activities for such year. "(2) PASSIVE ACTIVITY CREDIT.—The term 'passive activity credit' means the amount (if any) by which—^ "(A) the sum of the credits from all passive activities allowable for the taxable year under— "(i) subpart D of part IV of subchapter A, or ' > "(ii) subpart B (other than section 27(a)) of such part IV, exceeds ;4_ "(B) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities. "(e) SPECIAL RULES FOR DETERMINING INCOME OR LOSS FROM A PASSIVE ACTIVITY.—For purposes of this section— "(1) CERTAIN INCOME NOT TREATED AS INCOME FROM PASSIVE ACTIVITY.—In determining the income or loss from any activ- ity- »iyll "(A) IN GENERAL.—There shall not be taken into ac- count— . "(i) any— ,, \ . ', "(I) gross income from interest, dividends, annu- ities, or royalties not derived in the ordinary . :J 5 ; ^, course of a trade or business.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2235 "(II) expenses (other than interest) which are clearly and directly allocable to such gross income, and "(III) interest expense properly allocable to such gross income, and "(ii) gain or loss attributable to the disposition of property— V "(I) producing income of a type described in fV clause (i), or -i "(II) held for investment. For purposes of clause (ii), any interest in a passive activity tt shall not be treated as property held for investment. "(B) RETURN ON WORKING CAPITAL.—For purposes of subparagraph (A), any income, gain, or loss which is attrib- tud utable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. "(2) PASSIVE LOSSES OF CERTAIN CLOSELY HELD CORPORATIONS MAY OFFSET ACTIVE INCOME.— "(A) IN GENERAL.—If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such tax- fi, payer for such taxable year (determined without regard to :' this paragraph)— £, "(i) shall be allowable as a deduction against net active income, and i, "(ii) shall not be taken into account under subsection fio (a) to the extent so allowable as a deduction. A similar rule shall apply in the c£ise of any passive activity -; credit of the taxpayer. t "(B) NET ACTIVE INCOME.—For purposes of this para- graph, the term 'net active income' means the taxable lis 0 income of the taxpayer for the taxable year determined without regard to— "(i) any income or loss from a passive activity, and J' "(ii) any item of gross income, expense, gain, or loss r described in paragraph (IXA). "(3) COMPENSATION FOR PERSONAL SERVICES.—Earned income (within the meaning of section 911(dX2XA)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year. "(4) DIVIDENDS REDUCED BY DIVIDENDS RECEIVED DEDUCTION.— For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243, 244, or 245. "(f) TREATMENT OF FORMER PASSIVE ACTIVITIES.—For purposes of this section— "(1) IN GENERAL.—If an activity is a former passive activity for any taxable year— "(A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year, "(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and
100 STAT. 2236 PUBLIC LAW 99-514—OCT. 22, 1986 "(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity. - ^ "(2) CHANGE IN STATUS OF CLOSELY HELD C CORPORATION OR PERSONAL SERVICE CORPORATION.—If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses » and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corpora- tion, whichever is applicable. "(3) FORMER PASSIVE ACTIVITY.—The term 'former passive activity' means any activity which, with respect to the tax- payer— "(A) is not a passive activity for the taxable year, but "(B) was a passive activity for any prior taxable year. "(g) DISPOSITIONS OF ENTIRE INTEREST IN PASSIVE ACTIVITY.—If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply: "(1) FULLY TAXABLE TRANSACTION.— "(A) IN GENERAL.—If all gain or loss realized on such disposition is recognized, any loss from such activity which •' has not previously been allowed as a deduction (and in the case of a passive activity for the taxable year, any loss ^ tt > realized on such disposition) shall not be treated as a passive activity loss and shall be allowable as a deduction "'^- ' against income in the following order: "(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the '•'f-' disposition). >^?:" "(ii) Net income or gain for the taxable year from all passive activities. • "(iii) Any other income or gain. "(B) SUBPARAGRAPH (A) NOT TO APPLY TO DISPOSITION INVOLVING RELATED PARTY.—If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(bXl), then subpara- '-'"" graph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another •iyfji person who does not bear such a relationship to the tax- payer. "(C) COORDINATION WITH SECTION 1211.—In the ceise of ~ any loss realized on the disposition of an interest in a passive activity, section 1211 shall be applied before subparagraph (A) is applied. "(2) DISPOSITION BY DEATH.—If an interest in the activity is transferred by reason of the death of the taxpayer— "(A) paragraph (1) shall apply to such losses to the extent such losses are greater than the excess (if any) of— i "(i) the basis of such property in the hands of the transferee, over "(ii) the adjusted basis of such property immediately before the death of the taxpayer, and
PUBLIC LAW 9 9 - 5 1 4 - O C T . 22, 1986 100 STAT. 2237 "(B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year. "(3) INSTALLMENT SALE OF ENTIRE INTEREST.—In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale realized (or to be realized) when payment is completed. "(h) MATERIAL PARTICIPATION DEFINED.—For purposes of this sec- tion— "(1) IN GENERAL.—A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is— "(A) regular, "(B) continuous, and "(C) substantial. "(2) INTERESTS IN LIMITED PARTNERSHIPS.—Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates. "(3) TREATMENT OF CERTAIN RETIRED INDIVIDUALS AND SURVIV- ING SPOUSES.—A taxpayer shall be treated as materially partici- pating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(l)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year. "(4) CERTAIN CLOSELY HELD C CORPORATIONS AND PERSONAL SERVICE CORPORATIONS.—A closely held C corporation or per- sonal service corporation shall be treated as materially partici- pating in an activity if— "(A) 1 or more shareholders holding stock representing more than 50 percent Ot)y value) of the outstanding stock of such corporation materially participate in such activity, or "(B) in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity. "(5) PARTICIPATION BY SPOUSE.—In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account, "(i) $25,000 OFFSET FOR RENTAL REAL ESTATE ACTIVITIES.— "(1) IN GENERAL.—In the case of any natural person, subsec- tion (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in the taxable year in which such portion of such loss or credit arose. "(2) DOLLAR LIMITATION.—The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000. "(3) PHASE-OUT OF EXEMPTION.— "(A) IN GENERAL.—In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but
100 STAT. 2238 PUBLIC LAW 99-514—OCT. 22, 1986 '. - \ not below zero) by 50 percent of the amount by which the '*' r adjusted gross income of the taxpayer for the taxable year exceeds $100,000. "(B) SPECIAL PHASE-OUT OF LOW-INCOME HOUSING AND RE- HABILITATION CREDITS.—In the case of any portion of the passive activity credit for any taxable year which is attrib- utable to any credit to which paragraph (6XB) applies, subparagraph (A) shall be applied by substituting '$200,000' for '$100,000'. "(C) ORDERING RULE TO REFLECT SEPARATE PHASE-OUTS.—If "'^"- - subparagraph (B) applies for any taxable year, paragraph (1) shall be applied— "(i) first to the passive activity loss, ^ "(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and "(iii) then to the portion of such credit to which subparagraph (B) applies. "(D) ADJUSTED GROSS INCOME.—For purposes of this para- ^'^^ graph, adjusted gross income shall be determined without ^ regard to— *' "(i) any amount includible in gross income under section 86, "(ii) any amount allowable as a deduction under '• ' section 219, and { "(iii) any passive activity loss. >: - , "(4) SPECIAL RULE FOR ESTATES.— "(A) IN GENERAL.—In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real X!' estate activities with respect to which such decedent ac- ' ' tively participated before his death. "(B) REDUCTION FOR SURVIVING SPOUSE'S EXEMPTION.—For purposes of subparagraph (A), the $25,000 amount under %i paragraph (2) shall be reduced by the amount of the exemp- ^^ tion under paragraph (1) (without regard to paragraph (3)) t^;^ allowable to the surviving spouse of the decedent for the „*^ taxable year ending with or within the taxable year of the ''il-^ estate. "(5) MARRIED INDIVIDUALS FILING SEPARATELY.— "(A) IN GENERAL.—Except as provided in subparagraph (B), in the case of any married individual filing a separate return, this subsection shall be applied by substituting— "(i) '$12,500' for '$25,000' each place it appears, "(ii) '$50,000' for '$100,000' in paragraph (3XA), and "(iii)'$100,000'for'$200,000'in paragraph (3XB). "(B) TAXPAYERS NOT LIVING APART.—This subsection shall .\ not apply to a taxpayer who— "(i) is a married individual filing a separate return ., „,, for any taxable year, and "(ii) does not live apart from his spouse at all times during such taxable year. , .; j i t t m "(6) ACTIVE PARTICIPATION.— "(A) IN GENERAL.—An individual shall not be treated as actively participating with respect to any interest in any ^j|^ rental real estate activity for any period if, at any time ticd? during such period, such interest (including any interest of
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2239 the spouse of the individual) is less than 10 percent Ot)y value) of all interests in such activity. "(B) No PARTICIPATION REQUIREMENT FOR LOW-INCOME HOUSING OR REHABILITATION CREDIT.—Paragraphs (1) and (4XA) shall be applied without regard to the active partici- pation requirement in the case of— "(i) any credit determined under section 42 for any * taxable year, or lu "(ii) any rehabilitation investment credit (within the meaning of section 48(o)). "(C) INTEREST AS A UMITED PARTNER.—No interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates. "(D) PARTICIPATION BY SPOUSE.—In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account. "(j) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) CLOSELY HELD C CORPORATION.—The term 'closely held C corporation' means any C corporation described in section 465(a)(1)(B). "(2) PERSONAL SERVICE CORPORATION.—The term 'personal service corporation' has the meaning given such term by section 269A(b)(l), except that section 269A(bX2) shall be applied— "(A) by substituting 'any' for 'more than 10 percent', and y' "(B) by substituting'any'for'50 percent or more in value' in section 318(a)(2)(C). A corporation shall not be treated as a personal service corpora- tion unless more than 10 percent of the stock Ot)y value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence). "(3) REGULAR TAX UABILITY.—The term 'regular tax liability' has the meaning given such term by section 260t)). "(4) ALLOCATION OF PASSIVE ACTIVITY LOSS AND CREDIT.—The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activi- ties, and within activities, on a pro rata b£isis in such manner as the Secretary may prescribe. "(5) DEDUCTION EQUIVALENT.—The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits. "(6) SPECIAL RULE FOR GIFTS.—In the case of a disposition of any interest in a passive activity by gift— "(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest, and "(B) such losses shall not be allowable as a deduction for any taxable year. "(7) QUALIFIED RESIDENCE INTEREST.—The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)). "(8) RENTAL ACTIVITY.—The term 'rental activity' means any activity where payments are principally for the use of tangible property.
100 STAT. 2240 PUBLIC LAW 99-514—OCT. 22, 1986 ;-v "(9) ELECTION TO INCREASE BASIS OF PROPERTY BY AMOUNT OF DISALLOWED CREDIT.—For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year, "(k) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out provisions of this section, including regulations— "(1) which specify what constitutes an activity, material participation, or active participation for purposes of this section, "(2) which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income), "(3) requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity, "(4) which provide for the determination of the allocation of interest expense for purposes of this section, and "(5) which deal with changes in marital status and changes between joint returns and separate returns. "(1) PHASE-IN OF DISALLOWANCE OF LOSSES AND CREDITS FOR IN- TERESTS HELD BEFORE DATE OF ENACTMENT.— "(1) IN GENERAL.—In the case of any passive activity loss or credit for any taxable year beginning in calendar years 1987 through 1990 which— "(A) is attributable to a pre-enactment interest, but \- "(B) is not attributable to a carryforward to such taxable year of any loss or credit which was disallowed under this section for a preceding taxable year, there shall be disallowed under subsection (a) only the ap- plicable percentage of the amount which Ot)ut for this subsec- tion) would have been disallowed under subsection (a) for such taxable year. "(2) APPLICABLE PERCENTAGE.—For purposes of this subsec- tion, the applicable percentage shall be determined in accord- ance with the following table: "In the case of taxable The applicable vears beginning in: percentage is: '^^ i 1987 35 \\m 60 1989 80 : 1990 90. "(3) PORTION OF LOSS OR CREDIT ATTRIBUTABLE TO PRE-ENACT- MENT INTERESTS.—For purposes of this subsection— "(A) IN GENERAL.—The portion of the passive activity loss for any taxable year which is attributable to pre-enactment interests shall be equal to the lesser of— "(i) the passive activity loss for such taxable year, or "(ii) the passive activity loss for such taxable year f, , determined by taking into account only pre-enactment interests.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2241 For purposes of this subparagraph, the deduction equiva- lent (within the meaning of subsection (jX5)) of a passive activity credit shall be taken into account. "(B) PRE-ENACTMENT INTEREST.— .^, "(i) IN GENERAL.—The term 'pre-enactment interest' means any interest in a passive activity held by a taxpayer on the date of the enactment of the Tax Reform Act of 1986, and at all times thereafter. •V "(ii) BINDING CONTRACT EXCEPTION.—For purposes of '^ clause (i), any interest acquired after such date of enactment pursuant to a written binding contract in effect on such date, and at all times thereafter, shall be treated as held on such date. "(iii) INTEREST IN ACTIVITIES.—The term 'pre-enact- ment interest' shall not include an interest in a passive activity unless such activity was being conducted on such date of enactment. The preceding sentence shall not apply to an activity commencing after such date if— "(I) the property used in such activity is acquired pursuant to a written binding contract in effect on % August 16, 1986, and at all times thereafter, or "(II) construction of property used in such activ- ity began on or before August 16,1986." (b) CONFORMING 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. 469. Passive activity losses and credits limited." (c) EFFECTIVE DATE.— (1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31,1986. (2) SPECIAL RULE FOR CARRYOVERS.—The amendments made by this section shall not apply to any loss, deduction, or credit carried to a taxable year beginning after December 31, 1986, from a taxable year beginning before January 1,1987. (3) SPECIAL RULE FOR LOW-INCOME HOUSING.— (A) IN GENERAL.—Except as provided in subparagraph (B), t section 469(iX6XBXi) of the Internal Revenue Code of 1986 (as added by this section) shall not apply to any property t. placed in service after December 31,1989. (B) EXCEPTION WHERE AT LEAST lO PERCENT OF COSTS IN- CURRED.—In the case of property placed in service after December 31, 1989, and before January 1, 1991, section i 469(iX6XBXi) of such Code shall apply to such property if at least 10 percent of the costs of such property were incurred before January 1,1989. SEC. 502. TRANSITIONAL RULE FOR LOW-INCOME HOUSING. (a) GENERAL RULE.—Any loss sustained by a qualified investor with respect to an interest in a qualified low-income housing project for any taxable year in the relief period shall not be treated as a loss from a psissive activity for purposes of section 469 of the Internal Revenue Code of 1986. (b) R E U E F PERIOD.—For purposes of subsection (a), the term "relief period" means the period beginning with the taxable year in which the investor made his initial investment in the qualified low-income
100 STAT. 2242 PUBLIC LAW 99-514—OCT. 22, 1986 housing project and ending with whichever of the following is the earliest— (1) the 6th taxable year after the taxable year in which the investor made his initial investment, (2) the 1st taxable year after the taxable year in which the investor is obligated to make his last investment, or (3) the taxable year preceding the 1st taxable year for which such project ceased to be a qualified low-income housing project. (c) QUALIFIED LOW-INCOME HOUSING PROJECT.—For purposes of this section, the term "qualified low-income housing project" means any project if— (1) such project meets the requirements of clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) as of the date placed in service and * '^' for each taxable year thereafter which begins after 1986 and for which a passive loss may be allowable with respect to such project, (2) the operator certifies to the Secretary of the Treasury or his delegate that such project met the requirements of para- s' , graph (1) on the date of the enactment of this Act (or, if later, when placed in service) and annually thereafter, (3) such project is constructed or acquired pursuant to a binding written contract entered into on or before August 16, *^ 1986, and (4) such project is placed in service before January 1, 1989. (d) QUALIFIED INVESTOR.—For purposes of this section— ' (1) IN GENERAL.—The term "qualified investor" means any natural person who holds (directly or through 1 or more enti- ties) an interest in a qualified low-income housing project— (A) i f - iif.iiH ;t (i) in the case of a project placed in service before August 16, 1986, such person held an interest in such project on August 16, 1986, and the taxpayer made his .f> initial investment after December 31,1983, or ,dS^I .i (ii) in the case of a project not described in subpara- graph (A), such investor held an interest in such project on December 31,1986, and (B) if such investor is required to make payments after December 31, 1986, of 50 percent or more of the total t original obligated investment for such interest. For purposes of subparagraph (A), a person shall be treated as holding an interest on August 16, 1986, or December 31, 1986, if on such date such person had a binding contract to acquire such interest. (2) TREATMENT OF ESTATES.—The estate of a decedent shall a-^' succeed to the treatment under this section of the decedent but only with respect to the 1st 2 taxable years of such estate ending after the date of the decedent's death, (d) SPECIAL RULES.— (1) WHERE MORE THAN i BUILDING IN PROJECT.—If there is more than 1 building in any project, the determination of when such project is placed in service shall be based on when the 1st ^ building in such project is placed in service. (2) ONLY CASH AND OTHER PROPERTY TAKEN INTO ACCOUNT.—In determining the amount any person invests in (or is obligated to invest in) any interest, only cash and other property shall be taken into account.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2243 (3) COORDINATION WITH CREDIT.—No low-income housing credit shall be determined under section 42 of the Internal Revenue Code of 1986 with respect to any project with respect to which any person has been allowed any benefit under this section. SEC. 503. EXTENSION OF AT RISK LIMITATIONS TO REAL PROPERTY. (a) IN GENERAL.—Paragraph (3) of section 465(c) (relating to activi- ties to which section applies) is amended by striking out subpara- graph (D) and by redesignating subparagraph (E) as subparagraph (D). (b) QUALIFIED NONRECOURSE FINANCING TREATED AS AN AMOUNT AT RISK.—Section 465(b) (relating to amounts considered at risk) is amended by adding at the end thereof the following new paragraph: "(6) QUALIFIED NONRECOURSE FINANCING TREATED AS AMOUNT AT RISK.—For purposes of this section— "(A) IN GENERAL.—Notwithstanding any other provision of this subsection, in the case of an activity of holding real ^ property, a taxpayer shall be considered at risk with I respect to the taxpayer's share of any qualified nonrecourse financing which is secured by real property used in such ,, activity. "'' "(B) QUALIFIED NONRECOURSE FINANCING.—For purposes of this paragraph, the term 'qualified nonrecourse financ- ing' means any financing— "(i) which is borrowed by the taxpayer with respect to the activity of holding real property, "(ii) which is borrowed by the taxpayer from a quali- fied person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local govern- ment, "(iii) except to the extent provided in regulations, with respect to which no person is personally liable for repayment, and "(iv) which is not convertible debt. "(C) SPECIAL RULE FOR PARTNERSHIPS.—In the case of a ,, partnership, a partner's share of any qualified nonrecourse financing of such partnership shall be determined on the basis of the partner's share of liabilities of such partnership incurred in connection with such financing (within the meaning of section 752). ^ "(D) QUALIFIED PERSON DEFINED.—For purposes of this [^ paragraph— rl "(i) IN GENERAL.—The term'qualified person'h£is the meaning given such term by section 46(c)(8)(D)(iv). " ' "(ii) CERTAIN COMMERCIALLY REASONABLE FINANCING lly r, FROM RELATED PERSONS.—For purposes of clause (i), '" section 46(c)(8)(D)(iv) shall be applied without regard to ,; . subclause (I) thereof (relating to financing from related persons) if the financing from the related person is commercially reasonable and on substantially the same terms as loans involving unrelated persons. "(E) ACTIVITY OF HOLDING REAL PROPERTY.—For purposes , , of this paragraph— "(i) INCIDENTAL PERSONAL PROPERTY AND SERVICES.— The activity of holding real property includes the hold-
100 STAT. 2244 PUBLIC LAW 99-514—OCT. 22, 1986 ing of personal property and the providing of services which are incidental to making real property available as living accommodations. "(ii) MINERAL PROPERTY.—The activity of holding real " property shall not include the holding of mineral prop- erty." (c) EFFECTIVE DATES.— (1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to losses incurred after December 31, 1986, with respect to property placed in service by the taxpayer after December 31,1986. (2) SPECIAL RULE FOR LOSSES OF S CORPORATION, PARTNERSHIP, ' OR PASS-THRU ENTITY.—In the case of an interest in an S corpora- tion, a partnership, or other pass-thru entity acquired after December 31, 1986, the amendments made by this section shall ^' apply to losses after December 31, 1986, which are attributable to property placed in service by the S corporation, partnership, or pass-thru entity on, before, or after January 1,1986. (3) SPECIAL RULE FOR ATHLETIC STADIUM.—The amendments made by this section shall not apply to any losses incurred by a taxpayer with respect to the holding of a multi-use athletic stadium in Pittsburgh, Pennsylvania, which the taxpayer ac- quired in a sale for which a letter of understanding was entered into before April 16,1986. J , ; Subtitle B—Interest Expense SEC. 511. LIMITATIONS ON DEDUCTION FOR NONBUSINESS INTEREST. (a) LIMITATION ON INVESTMENT INTEREST.—Subsection (d) of sec- tion 163 (relating to limitation on interest on investment indebted- ness) is amended to read as follows: "(d) LIMITATION ON INVESTMENT INTEREST.— "(1) IN GENERAL.—In the case of a taxpayer other than a •• * corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year. "(2) CARRYFORWARD OF DISALLOWED INTEREST.—The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year. "(3) INVESTMENT INTEREST.—For purposes of this subsection— mm "(A) IN GENERAL.—The term 'investment interest' means any interest allowable as a deduction under this chapter Bit? (determined without regard to paragraph (1)) which is paid or accrued on indebtedness incurred or continued to pur- chase or carry property held for investment. "(B) EXCEPTIONS.—The term 'investment interest' shall not include— "(i) any qualified residence interest (as defined in subsection (hX3)), or "(ii) any interest which is taken into account under section 469 in computing income or loss from a passive '*-'0t| :< activity of the taxpayer. "(C) PERSONAL PROPERTY USED IN SHORT SALE.—For pur- - '-'^ poses of this paragraph, the term 'interest' includes any
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2245 amount allowable as a deduction in connection with per- sonal property used in a short sale. "(4) NET INVESTMENT INCOME.—For purposes of this subsec- tion— "(A) IN GENERAL.—The term 'net investment income' means the excess of— "(i) investment income, over "(ii) investment expenses. "(B) INVESTMENT INCOME.—The term 'investment income' means the sum of— "(i) gross income (other than gain described in clause (ii)) from property held for investment, and "(ii) any net gain attributable to the disposition of property held for investment, but only to the extent such amounts are not derived from the conduct of a trade or business. "(C) INVESTMENT EXPENSES.—The term 'investment ex- penses' means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income. "(D) INCOME AND EXPENSES FROM PASSIVE ACTIVITIES.— Investment income and investment expenses shall not in- clude any income or expenses taken into account under section 469 in computing income or loss from a passive activity. "(E) REDUCTION IN INVESTMENT INCOME DURING PHASE-IN OF PASSIVE LOSS RULES.—Investment income of the taxpayer for any taxable year shall be reduced by the amount of the passive activity loss to which section 469(a) does not apply for such taxable year by reason of section 469(1). The preced- ing sentence shall not apply to any portion of such passive activity loss which is attributable to a rental real estate activity with respect to which the taxpayer actively partici- pates (within the meaning of section 469(iX6)) during such taxable year. "(5) PROPERTY HELD FOR INVESTMENT.—For purposes of this subsection— "(A) IN GENERAL.—The term 'property held for invest- ment' shall include— "(i) any property which produces income of a type described in section 469(eXl), and "(ii) any interest held by a taxpayer in an activity involving the conduct of a trade or business— "(I) which is not a passive activity, and "(II) with respect to which the taxpayer does not materially participate. "(B) INVESTMENT EXPENSES.—In the case of property de- scribed in subparagraph (AXi), expenses shall be allocated to such property in the same manner as under section 469. "(C) TERMS.—For purposes of this paragraph, the terms 'activity', 'passive activity', and 'materially participate' have the meanings given such terms by section 469. "(6) PHASE-IN OF DISALLOWANCE.—In the case of any taxable year beginning in calendar years 1987 through 1990— "(A) IN GENERAL.—The amount of interest disallowed under this subsection for any such taxable year shall be equal to the sum of—
100 STAT. 2246 PUBLIC LAW 99-514—OCT. 22, 1986 *' "(i) the applicable percentage of the amount which „ ,^^. ^ (without regard to this paragraph) is not allowed as a deduction under this subsection for the taxable year to ^^ ., , ; , _^ the extent such amount does not exceed the ceiling amount, "(ii) the amount which (without regard to this para- graph) is not allowed as a deduction under this subsec- -,. _ , tion in excess of the ceiling amount, plus "(iii) the amount of any carryforward to such taxable , §{'•'• ^^^^ under paragraph (2) with respect to which a deduction was disallowed under this subsection for a '|.^ .. preceding taxable year. For purposes of this subparagraph, the amount under f. , clause (i) or (ii) shall be computed without regard to the amount described in clause (iii). "(B) APPLICABLE PERCENTAGE.—For purposes of this para- graph, the applicable percentage shall be determined in ,. accordance with the following table: "In the case of taxable The applicable years beginning in: percentage is: 1987 35 1988 60 - .1' i 1989 80 -•-H^ah^ 1990 90. "(C) CEILING AMOUNT.—For purposes of this paragraph, ^, n. .^... ^j^^ term 'ceiling amount' means— "(i) $10,000 in the case of a taxpayer not described in clause (ii) or (iii), "(ii) $5,000 in the case of a married individual filing a separate return, and "(iii) zero in the case of a trust." (b) DISALLOWANCE OF DEDUCTION FOR PERSONAL INTEREST OF INDIVIDUALS.—Section 163 (relating to deduction for interest) is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection: "(h) DISALLOWANCE OF DEDUCTION FOR PERSONAL INTEREST.— "(1) IN GENERAL.—In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year. ' f V "(2) PERSONAL INTEREST.—For purposes of this subsection, the ^^ term 'personal interest' means any interest allowable as a V- ^' deduction under this chapter other than— "(A) interest paid or accrued on indebtedness incurred or continued in connection with the conduct of a trade or .0n f business (other than the trade or business of performing services as an employee), , -' "(B) any investment interest (within the meaning of subsection (d)), "(C) any interest which is taken into account under sec- tion 469 in computing income or loss from a passive activity of the taxpayer, "(D) any qualified residence interest (within the meaning '"' of paragraph (3)), and "(E) any interest payable under section 6601 on any -"' "* unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6163 or 6166.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2247 "(3) QUALIFIED RESIDENCE INTEREST.—For purposes of this subsection— "(A) IN GENERAL.—The term 'quahfied residence interest' means interest which is paid or accrued during the taxable year on indebtedness which is secured by any property >n which (at the time such interest is paid or accrued) is a ; • qualified residence of the taxpayer. "(B) LIMITATION ON AMOUNT OF INTEREST.—The term 'qualified residence interest' shall not include any interest •om- paid or accrued on indebtedness secured by any qualified residence which is allocable to that portion of the principal "i? amount of such indebtedness which, when added to the outstanding aggregate principal amount of all other indebt- ^r.ir edness previously incurred and secured by such qualified residence, exceeds the lesser of— "(i) the fair market value of such qualified residence, or "(ii) the sum of— "(I) the taxpayer's basis in such qualified resi- dence (adjusted only by the cost of any improve- • -• ments to such residence), plus ''.'•• "(II) the aggregate amount of qualified indebted- ness of the taxpayer with respect to such qualified residence. "(C) COST NOT LESS THAN BALANCE OF INDEBTEDNESS IN- CURRED ON OR BEFORE AUGUST 16, 1936.—The amount under subparagraph (B)(iiXI) at any time after August 16, 1986, •^'ii shall not be less than the outstanding aggregate principal amount (as of such time) of indebtedness which was in- curred on or before August 16, 1986, and which was secured by the qualified residence on August 16,1986. "(D) TIME FOR DETERMINATION.—Except as provided in regulations, any determination under subparagraph (B) shall be made as of the time the indebtedness is incurred. "(4) QUALIFIED INDEBTEDNESS.—For purposes of this subsec- tion— "(A) IN GENERAL.—The term 'qualified indebtedness' means indebtedness secured by a qualified residence of the taxpayer which is incurred after August 16, 1986, to pay for— "(i) qualified medical expenses, or "(ii) qualified educational expenses, which are paid or incurred within a reasonable period of time before or after such indebtedness is incurred. "(B) QUALIFIED MEDICAL EXPENSES.—For purposes of this paragraph, the term 'qualified medical expenses' means amounts, not compensated for by insurance or otherwise, incurred for medical care (within the meaning of subpara- graphs (A) and (B) of section 213(d)(1)) for the taxpayer, his spouse, or a dependent. "(C) QUALIFIED EDUCATIONAL EXPENSES.—For purposes of this paragraph— "(i) IN GENERAL.—The term 'qualified educational expenses' means qualified tuition and related expenses of the taxpayer, his spouse, or a dependent for attend- ed fi;?'. ance at an educational institution described in section 170(b)(lXAXii).
100 STAT. 2248 PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) Q U A L I F I E D TUITION AND RELATED EXPENSES.—The term 'qualified tuition and related expenses' has the meaning given such term by section 117(b), except that such term shall include any reasonable living expenses while away from home. "(D) DEPENDENT.—For purposes of this paragraph, the term 'dependent' has the meaning given such term by section 152. "(5) OTHER DEFINITIONS AND SPECIAL RULES.— "(A) QUALIFIED RESIDENCE.—For purposes of this subsec- tion— "(i) IN GENERAL.—The term 'qualified residence' means— "(I) the principal residence (within the meaning of section 1034) of the taxpayer, and K "(II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(l)). "(ii) MARRIED INDIVIDUALS FILING SEPARATE RE- ,., ^ .. TURNS.—If a married couple does not file a joint return I' for the taxable year— "(I) such couple shall be treated as 1 taxpayer for ' . purposes of clause (i), and "(II) each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence, "(iii) RESIDENCE NOT USED OR RENTED.—For purposes of clause (i)(II), notwithstanding section 280A(d)(l), if the taxpayer does not rent or use a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year. "(B) SPECIAL RULE FOR COOPERATIVE HOUSING CORPORA- TIONS.—For purposes of this paragraph, any indebtedness .,„ secured by stock held by the taxpayer as a tenant-stock- holder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebted- ,, I ness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock. "(6) PHASE-IN OF UMITATION.—In the case of any taxable year beginning in calendar years 1987 through 1990, the amount of interest with respect to which a deduction is disallowed under this subsection shall be equal to the applicable percentage (within the meaning of subsection (dX6)(B)) of the amount which (but for this subsection) would have been so disallowed." (d) TECHNICAL AMENDMENTS.— (1) Clause (i) of section 7872(dXlXE) is amended by striking out "section 163(d)(3)" and inserting in lieu thereof "section 163(dX4)". (2XA) Sections 467(cX5) and 1255(bX2) are each amended by striking out "section 163(d),".
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2249 (B) Section 703(b) is amended by striking out paragraph (3) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively. (C) Section 1363(c)(2) is amended by striking out subparagraph (A) and by redesignating subparagraphs (B) and (C) as subpara- graphs (A) and (B), respectively. (e) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. TITLE VI—CORPORATE PROVISIONS Subtitle A—Corporate Rate Reductions SEC. 601. CORPORATE RATE REDUCTIONS. (a) GENERAL RULE.—Subsection (b) of section 11 is amended to read as follows: "(b) AMOUNT OF TAX.—The amount of the tax imposed by subsec- tion (a) shall be the sum of^ "(1) 15 percent of so much of the taxable income as does not exceed $50,000, "(2) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000, and "(3) 34 percent of so much of the taxable income as exceeds $75,000. In the case of a corporation which has taxable income in excess of $100,000 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) $11,750." (b) EFFECTIVE DATE.— (1) IN GENERAL.—The amendment made by subsection (a) shall apply to taxable years beginning on or after July 1, 1987. (2) CROSS REFERENCE.— For treatment of taxable years which include July 1, 1987. see section 15 of the Internal Revenue Code of 1986. Subtitle B—Treatment of Stock and Stock Dividends SEC. 611. REDUCTION IN DIVIDENDS RECEIVED DEDUCTION. (a) GENERAL RULE.—The following provisions are each amended by striking out "85 percent" and inserting in lieu thereof "80 percent": (1) Section 243(a)(1) (relating to dividends received by corpora- tions). (2) Sections 244 (a)(3) and (bK2) (relating to dividends received on certain preferred stock). (3) Section 2460))(1) (relating to limitation on aggregate amount of deductions). (4) Section 246A(a)(l) (relating to dividends received deduction reduced where portfolio stock is debt financed). (5) Subparagraph (B) of section 805(aX4) (relating to dividends received by insurance company). (b) EFFECTIVE DATES.—
100 STAT. 2250 PUBLIC LAW 99-514—OCT. 22, 1986 (1) I N GENERAL.—The amendments made by subsection (a) f. shall apply to dividends received or accrued after December 31, 1986, in taxable years ending after such date. (2) AMENDMENT RELATING TO LIMITATION ON DEDUCTIONS.— The amendment made by subsection (a) to section 246(b) of the Internal Revenue Code of 1986 shall apply to taxable years beginning after December 31,1986. SEC. 612. REPEAL OF PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS. (a) GENERAL RULE.—Section 116 (relating to partial exclusion of dividends received by individuals) is hereby repealed. (b) TECHNICAL AMENDMENTS.— (1) Subsection (g) of section 301 is amended by striking out paragraph (4). (2)(A) Subsection (c) of section 584 is amended to read as follows: "(c) INCOME OF PARTICIPANTS IN FUND.—Each participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable— "(1) as part of its gains and losses from sales or exchanges of capital assets held for not more than 6 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for not more than 6 months, "(2) as part of its gains and losses from sales or exchanges of capital assets held for more than 6 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of capital assets held for more than 6 months, and "(3) its proportionate share of the ordinary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d)." (B) If the amendments made by section 1001 of the Tax Reform Act of 1984 cease to apply, effective with respect to property to which such amendments do not apply, subsection (c) of section 584 is amended by striking out "6 months" each place it appears and inserting in lieu thereof "1 year". (3) Section 642 is amended by striking out subsection (j). (4) Paragraph (7) of section 643(a) is hereby repealed. (5) Paragraph (5) of section 702(a) is amended to read as follows: "(5) dividends with respect to which there is a deduction under part VIII of subchapter B,". (6) Section 854 is amended— (A) by striking out "section 116 (relating to a n exclusion %m0 fQj. dividends received by individuals), a n d " in subsection , , (a), ^"^ (B) in subsection (b)— (i) by striking o u t s u b p a r a g r a p h (B) of p a r a g r a p h (1) srSisTj^t ^^^ redesignating s u b p a r a g r a p h (C) a s s u b p a r a g r a p h "'" ' (ii) by striking o u t "or (B)" in s u b p a r a g r a p h (B) (as so j^ redesignated), G-. t-i*,» (iii) by striking out " t h e exclusion u n d e r section 116 a n d " in p a r a g r a p h (2), a n d
PUBLIC LAW 99-514-OCT. 22, 1986 100 STAT. 2251 (iv) by amending subparagraph (B) of paragraph (3) to read as follows: "(B)(i) The term 'aggregate dividends received' includes only dividends received from domestic corporations. "(ii) For purposes of clause (i), the term 'dividend' shall not include any distribution from— "(I) a corporation which, for the taxable year of the • '. . • corporation in which the distribution is made, or for k the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relat- ' ing to certain charitable, etc., organizations) or section 521 (relating to farmers' cooperative associations), or "(II) a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part II of subchapter M (section 856 and .; following). ' "(iii) In determining the amount of any dividend for purposes of this subparagraph, a dividend received from a regulated investment company shall be subject to the limitations prescribed in this section." ^ (7) Subsection (c) of section 857 is amended by striking out "section 116 (relating to an exclusion for dividends received by ^ individuals), and". (8) The taljle of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 116. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 613. NONDEDIICTIBILITY OF STOCK REDEMPTION EXPENSES. (a) IN GENERAL.—Section 162 (relating to trade or business ex- penses) is amended by redesignating subsection (1) as subsection (m) \ and inserting after subsection (k) the following new subsection: "(1) STOCK REDEMPTION EXPENSES.— "(1) IN GENERAL.—Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chap- ter for any amount paid or incurred by a corporation in connec- tion with the redemption of its stock. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to— "(A) CERTAIN SPECII-'IC DEDUCTIONS.—Any— "(i) deduction allowable under section 163 (relating to i interest), or "(ii) deduction for dividends paid (within the mean- ing of section 561). "(B) STOCK OF CERTAIN REGULATED INVESTMENT COMPA- ^^'* NiES.—Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder." (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to any amount paid or incurred after February 28, 1986, in taxable years ending after such date. SEC. 614. REDUCTION IN STOCK BASIS FOR NONTAXED PORTION OF E X T R A O R D I N A R Y DIVIDENDS. / / • • (a) 2-YEAR HOLDING REQUIREMENT.—
100 STAT. 2252 PUBLIC LAW 99-514—OCT. 22, 1986 *^*" (1) IN' GENERAL.—Section 1059(a) (relating to corporate share- holder's basis in stock reduced by nontaxed portion of extraor- dinary dividends) is amended to read as follows: "(a) GENERAL RULE.—If any corporation receives any extraor- dinary dividend with respect to any share of stock and such corpora- tion has not held such stock for more than 2 years before the dividend announcement date— "(1) REDUCTION IN BASIS.—The basis of such corporation in such stock shall be reduced Ot>ut not below zero) by the nontaxed portion of such dividends. "(2) RECOGNinoN UPON SALE OR DISPOSITION IN CERTAIN CASES.—In additivon to any gain recognized under this chapter, there shall be treated as gain from the sale or exchange of any stock for the taxable year in which the sale or disposition of such stock occurs Q.n amount equal to the aggregate nontaxed portions of any extraordinary dividends with respect to such stock which did not reduce the basis of such stock by reason of the limitation on reducing basis below zero." (2) DIVIDEND ANNOUNCEMENT DATE.—Section 1059(d) (relating to special rules) is amended by adding at the end thereof the following new paragraph: "(6) DIVIDEND ANNOUNCEMENT DATE.—The term 'dividend announcement date' meains, with respect to any dividend, the date on which the corporaition declares, announces, or agrees to the payment of such dividemd, whichever is the earliest." (3) CONFORMING AMENDMENT.—Section 1059(d)(3) (relating to determination of holding period) is amended by striking out "1 year" and inserting in lieu thereof "2 years". Qo) EXTRAORDINARY DIVIDEND M A Y B E DETERMINED BY REFERENCE TO FAIR MARKET VALUE.—Section 1059(c) (defining extraordinary dividend) is amended by adding a t the end thereof the following new paragraph: "(4) FAIR MARKET VALUE DETERMINATION.—If the taxpayer establishes to the satisfaction of the Secretary the fair market value of any share of stock as of the day before the ex-dividend date, the taxpayer may elect to apply paragraphs (1) and (3) by substituting such value for the taxpayer's adjusted basis." (c) TIME FOR REDUCTION IN BASIS.— (1) IN GENERAL.—Paragraph (1) of section 1059(d) (relating to time for reduction) is amended to i-ead as follows: "(1) TIME FOR REDUCTION.— "(A) IN GENERAL.—Except as provided in subparagraph ji J' (B), any reduction in basis under subsection (aXD shall occur immediately before any sale or disposition of the , ^ stock. "(B) SPECIAL RULE FOR COMPUTING EXTRAORDINARY DIVI- DEND.—In determining a taxpayer's adjusted basis for pur- poses of subsection (cXD, any reduction in basis under subsection (aXD by reason of a prior distribution which was •^ an extraordinary dividend shall be treated as occurring at the beginning of the ex-dividend date for such distribution." (2) CONFORMING AMENDMENT.—Section 1059(cXl) is amended by striking out "(determined without regard to this section)". (d) No EXTRAORDINARY DIVIDEND WHERE STOCK HELD DURING ENTIRE EXISTENCE OF CORPORATION.—Section 1059(d) (relating to special rules) is amended by adding at the end thereof the following new paragraph:
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2253 "(7) EXCEPTION WHERE STOCK HELD DURING ENTIRE EXISTENCE OF CORPORATION.—Subsection (a) shall not apply to any extraor- dinary dividend with respect to any share of stock of a corpora- tion if— "(A) such stock was held by the taxpayer during the entire period such corporation (and any precedessor cor- poration) was in existence, ii! "(B) except as provided in regulations, the only earnings and profits of such corporation were earnings and profits •' i accumulated by such corporation (or any predecessor cor- poration) during such period, and "(C) the application of this paragraph to such dividend is not inconsistent with the purposes of this section." (e) CERTAIN LIQUIDATIONS AND REDEMPTIONS TREATED As EXTRAOR- DINARY DIVIDENDS; QUALIFYING DIVIDENDS NOT TREATED AS EXTRAORDINARY DIVIDENDS; SPECIAL RULE FOR PREFERRED DIVI- DENDS.—Section 1059 (relating to extraordinary dividends) is amended by redesignating subsection (e) as subsection (f) and by adding after subsection (d) the following new subsection: "(e) SPECIAL RULES FOR CERTAIN DISTRIBUTIONS.— "(1) TREATMENT OF PARTIAL LIQUIDATIONS AND NON-PRO RATA REDEMPTIONS.—Except as otherwise provided in regulations, in the case of any redemption of stock which is— "(A) part of a partial liquidation (within the meaning of section 302(e)) of the redeeming corporation, or "(B) not pro rata as to all shareholders, any amount treated as a dividend under section 301 with re- spect to such redemption shall be treated as an extraordinary dividend for purposes of this section (without regard to the f holding period of the stock). "(2) QUAUFYING DIVIDENDS.—Except as provided in regula- tions, the term 'extraordinary dividend' shall not include any qualifying dividend (within the meaning of section 243(bXl)). "(3) QUALIFIED PREFERRED DIVIDENDS.— "(A) IN GENERAL.—A qualified preferred dividend shall be treated as an extraordinary dividend— r, i "(i) only if the actual rate of return of the taxpayer on the stock with respect to which such dividend was paid exceeds 15 percent, or "(ii) if clause (i) does not apply, and the taxpayer disposes of such stock before the taxpayer has held such stock for more than 5 years, only to the extent the actual rate of return exceeds the stated rate of return. 1 "(B) RATE OF RETURN.—For purposes of subparagraph (A)- "(i) ACTUAL RATE OF RETURN.—The actual rate of return shall be the rate of return for the period for which the taxpayer held the stock, determined— "(I) by only taking into account dividends during such period, and "(II) by using the lesser of the adjusted basis of the taxpayer in such stock or the liquidation pref- • * erence of such stock. "(ii) STATED RATE OF RETURN.—The stated rate of return shall be the annual rate of the qualified pre- •' ferred dividend payable with respect to any share of
100 STAT. 2254 PUBLIC LAW 99-514—OCT. 22, 1986 arr fi^ixx H stock (expressed as a percentage of the amount de- ' J scribed in subparagraph (BXiXID). "(C) DEFINITIONS AND SPECIAL RULES.—For purposes of this paragraph— 'K-i "(i) QUALIFIED PREFERRED DIVIDEND.—The term • i ^' 'qualified preferred dividend' means any dividend pay- able with respect to any share of stock which— "(I) provides for fixed preferred dividends pay- /\ able not less frequently than annually, and " : - • "(ID is not in arrears as to dividends at the time the taxpayer acquires the stock. J ^\ <t ' "(ii) HOLDING PERIOD.—In determining the holding period for purposes of subpareigraph (AXii), subsection c . ., (dX3) shall be applied by substituting '5 years' for '2 years'." (f) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to dividends declared after July 18, 1986, in taxable years ending after such date. (2) AGGREGATION.—For purposes of section 1059(cX3) of the Internal Revenue Code of 1986, dividends declared after July 18, 1986, shall not be aggregated with dividends declared on or ;,, ^ before July 18,1986. (3) REDEMPTIONS.—Section 1059(eXl) of the Internal Revenue Code of 1986 (as added by subsection (e)) shall apply to dividends ^ declared after the date of the enactment of this Act, in taxable years ending after such date. Subtitle C—Limitation on Net Operating Loss Carryforwards and Excess Credit Carryfor- wards SEC. 621. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. (a) IN GENERAL.—Section 382 (relating to special limitations on net operating loss carryovers) is amended to read as follows: "SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS AND CERTAIN BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE. "(a) GENERAL RULE.—The amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year. "(b) SECTION 382 LIMITATION.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this sec- ^fi • tion, the section 382 limitation for any post-change year is an amount equal to— "(A) the value of the old loss corporation, multiplied by "(B) the long-term tax-exempt rate. "(2) CARRYFORWARD OF UNUSED UMITATION.—If the section " 382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which wsis ,, offset by pre-change losses, the section 382 limitation for the
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2255 next post-change year shall be increased by the amount of such excess. "(3) SPECIAL RULE FOR POST-CHANGE YEAR WHICH INCLUDES CHANGE DATE.—In the case of any post-change year which in- cludes the change date— "(A) LIMITATION DOES NOT APPLY TO TAXABLE INCOME BEFORE CHANGE.—Subsection (a) shall not apply to the por- s tion of the taxable income for such year which is allocable { to the period in such year on or before the change date. -»• Except as provided in subsection (hX5) and in regulations, taxable income shall be allocated ratably to each day in the A : year. "(B) LIMITATION FOR PERIOD AFTER CHANGE.—For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 382 limita- tion shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as— "(i) the number of days in such year after the change date, bears to "(ii) the total number of days in such year. "(c) CARRYFORWARDS DISALLOWED IF CONTINUITY OF BUSINESS REQUIREMENTS NOT MET.— "(1) IN GENERAL.—Except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section 382 limitation for any post-change year shall be zero. "(2) EXCEPTION FOR CERTAIN GAINS.—The section 382 limita- tion for any post-change year shall not be less than the sum of^ "(A) any increase in such limitation under— ?^> "(i) subsection (hXlXA) for recognized built-in gains for such year, and ri "(ii) subsection (hXlXC) for gain recognized by reason of an election under section 338, plus "(B) any increase in such limitation under subsection (bX2) for amounts described in subparagraph (A) which are carried forward to such year. "(d) PRE-CHANGE Loss AND POST-CHANGE YEAR.—For purposes of this section— "(1) PRE-CHANGE LOSS.—The term *pre-change loss' means— "(A) any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership f' change or in which the change date occurs, and "(B) the net operating loss of the old loss corporation for - the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date. Except as provided in subsection (hX5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year. "(2) POST-CHANGE YEAR.—The term 'post-change year' means any taxable year ending after the change date. "(e) VALUE OF OLD Loss CORPORATION.—For purposes of this sec- tion— "(1) I N GENERAL.—Except as otherwise provided in this subsection, the value of the old loss corporation is the value of
100 STAT. 2256 PUBLIC LAW 99-514—OCT. 22, 1986 4:>, t h e stock of such corporation (including a n y stock described in section 1504(a)(4)) immediately before t h e ownership change. * J "(2) SPECIAL RULE I N THE CASE O F REDEMPTION.—If a r e d e m p - -M tion occurs in connection with a n ownership change, t h e value u n d e r p a r a g r a p h (1) shall be determined after t a k i n g such redemption into account. "(f) L O N G - T E R M T A X - E X E M P T R A T E . — F o r p u r p o s e s of t h i s section— "(1) I N GENERAL.—The long-term tax-exempt r a t e shall be t h e highest of t h e adjusted Federal long-term r a t e s in effect for any m o n t h in t h e 3-calendar-month period ending w i t h t h e calendar m o n t h in which t h e change date occurs. "(2) A D J U S T E D FEDERAL LONG-TERM RATE.—For p u r p o s e s of p a r a g r a p h (1), t h e t e r m 'adjusted Federal long-term r a t e ' m e a n s t h e Federal long-term r a t e determined u n d e r section 1274(d), except that— "(A) p a r a g r a p h s (2) a n d (3) thereof shall n o t apply, a n d "(B) such r a t e shall be properly adjusted for differences between r a t e s on long-term t a x a b l e a n d tax-exempt obliga- tions. "(g) O W N E R S H I P C H A N G E . — F o r p u r p o s e s of t h i s section— "(1) I N GENERAL.—There is a n ownership change if, imme- ms diately after a n y owner shift involving a 5-percent shareholder or any equity s t r u c t u r e shift— ''^ "(A) t h e percentage of t h e stock of t h e new loss corpora- tion owned by 1 or more 5-percent shareholders h a s in- creased by more t h a n 50 percentage points, over v!j> t "(B) t h e lowest percentage of stock of t h e old loss corpora- tion (or a n y predecessor corporation) owned by such share- holders a t any t i m e d u r i n g t h e testing period. "(2) O W N E R SHIFT INVOLVING 5-PERCENT SHAREHOLDER.—There is a n owner shift involving a 5-percent shareholder if— -71 "(A) t h e r e is a n y change in t h e respective ownership of stock of a corporation, a n d :*<,>• . > "(B) such change affects t h e percentage of stock of such corporation owned by a n y person who is a 5-percent share- holder before or after such change. "(3) EQUITY STRUCTURE SHIFT D E F I N E D . — "(A) I N GENERAL.—The t e r m 'equity s t r u c t u r e shift' ':o ;-".-^ m e a n s a n y reorganization (within t h e m e a n i n g of section 368). Such t e r m shall not include— —^ "(i) any reorganization described in s u b p a r a g r a p h (D) or (G) of section 368(a)(1) unless t h e r e q u i r e m e n t s of section 354(b)(1) a r e met, a n d "(ii) a n y reorganization described in s u b p a r a g r a p h ; t (F) of section 368(a)(1). "(B) TAXABLE REORGANIZATION-TYPE TRANSACTIONS, ETC.— To t h e extent provided in regulations, t h e t e r m 'equity s t r u c t u r e shift' includes taxable reorganization-type trans- it 14 actions, public offerings, a n d similar transactions. «i "(4) SPECIAL RULES FOR APPLICATION OF SUBSECTION.— "(A) T R E A T M E N T O F LESS THAN 5-PERCENT SHAREHOLD- Bimetit ERS.—Except a s provided in s u b p a r a g r a p h s (BXi) a n d (C), in determining w h e t h e r a n ownership change h a s occurred, n3f> ?;ri all stock owned by shareholders of a corporation w h o a r e not 5-percent shareholders of such corporation shall be >'rij « t r e a t e d a s stock owned by 1 5-percent shareholder of such to BLUP^ corporation.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2257 "(B) COORDINATION WITH EQUITY STRUCTURE SHIFTS.—For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change— "(i) LESS THAN 5-PERCENT SHAREHOLDERS.—Subpara- graph (A) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift. "(ii) ACQUISITIONS OF STOCK.—Unless a different proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders imme- " '' r diately before such acquisition. "(C) COORDINATION WITH OTHER OWNER SHIFTS.—Except as provided in regulations, the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change. "(h) SPECIAL RULES FOR BUILT-IN GAINS AND LOSSES AND SECTION 338 GAINS.—For purposes of this section— "(1) IN GENERAL.— "(A) NET UNREALIZED BUILT-IN GAIN.— "(i) IN GENERAL.—If the old loss corporation has a net ^^„ unrealized built-in gain, the section 382 limitation for -T^r any recognition period taxable year shall be increased by the recognized built-in gains for such taxable year. gj^., "(ii) LIMITATION.—The increase under clause (i) for any recognition period taxable year shall not exceed— "(I) the net unrealized built-in gain, reduced by "(II) recognized built-in gains for prior years ending in the recognition period. "(B) NET UNREALIZED BUILT-IN LOSS.— "(i) IN GENERAL.—If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a pre-change loss. "(ii) LIMITATION.—Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed— :* r "(I) the net unrealized built-in loss, reduced by "(II) recognized built-in losses for prior taxable years ending in the recognition period. "(C) SECTION 338 GAIN.—The section 382 limitation for any taxable year in which gain is recognized by reason of an election under section 338 shall be increased by the excess of— "(i) the amount of such gain, over "(ii) the portion of such gain taken into account in computing recognized built-in gains for such taxable year. "(2) RECOGNIZED BUILT-IN GAIN AND LOSS.— "(A) RECOGNIZED BUILT-IN GAIN.—The term 'recognized built-in gain' means any gain recognized during the rec-
100 STAT. 2258 PUBLIC LAW 99-514—OCT. 22, 1986 -j^'if._ ognition period on the disposition of any asset to the extent JWIIH : the new loss corporation establishes that— "(i) such asset was held by the old loss corporation « immediately before the change date, and "(ii) such gain does not exceed the excess of— "(I) the fair market value of such asset on the change date, over "(II) the adjusted basis of such asset on such date. *.<o- "(B) RECOGNIZED BUILT-IN LOSS.—The term 'recognized built-in loss' means any loss recognized during the recogni- tion period on the disposition of any asset except to the ., , , extent the new loss corporation establishes that— "(i) such asset was not held by the old loss corpora- tion immediately before the change date, or "(ii) such loss exceeds the excess of— .. .;,. "(I) the adjusted basis of such asset on the „ \',, ^ change date, over -. , "(II) the fair market value of such asset on such date. "(3) NET UNREALIZED BUILT-IN GAIN AND LOSS DEFINED.— "(A) NET UNREALIZED BUILT-IN GAIN AND LOSS.— "(i) IN GENERAL.—The terms 'net unrealized built-in gain' and 'net unrealized built-in loss' mean, with re- (<i« p spect to any old loss corporation, the amount by which— "(I) the fair market value of the assets of such corporation immediately before an ownership change is more or less, respectively, than "(II) the aggregate adjusted basis of such assets 7 at such time. 5 "(ii^ SPECIAL RULE FOR REDEMPTIONS.—If a redemp- '^•'•'"•''I •• tion occurs in connection with an ownership change, determinations under clause (i) shall be made after taking such redemption into account. fe "(B) THRESHOLD REQUIREMENT.— " "(i) If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than 25 percent of the amount deter- bs>ix:^o: ; mined for purposes of subparagraph (AXi)(I), the net lis ? >, unrealized built-in gain or net unrealized built-in loss shall be zero. "(ii) CASH AND CASH ITEMS NOT TAKEN INTO AC- COUNT.—In computing any net unrealized built-in gain or net unrealized built-in loss under clause (i), there ' •'• shall not be taken into account— "(I) any cash or cash item, or "(II) any marketable security which has a value which does not substantially differ from adjusted basis. ni "(4) DISALLOWED LOSS TREATED AS A NET OPERATING LOSS.—If a <l-] deduction for any portion of a recognized built-in loss is dis- allowed for any post-change year, such portion— "(A) shall be carried forward to subsequent taxable years basiii under rules similar to the rules for the carrying forward of ;>3i n'li net operating losses, but ,. _ „ :, : .
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2259 "(B) shall be subject to limitation under this section in the same manner as a pre-change loss. "(5) SPECIAL RULES FOR POST-CHANGE YEAR WHICH INCLUDES '^ CHANGE DATE.—For purposes of subsection (bX3)— "(A) in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized ' * built-in gains and losses, and gain described in paragraph (1)(C), for the year, and "(B) in applying subparagraph (B) thereof, the section 382 limitation shall be computed without regard to recognized ^ built-in gains, and gain described in paragraph (IXC), for the year. "(6) SECRETARY MAY TREAT CERTAIN DEDUCTIONS AS BUILT-IN LOSSES.—The Secretary may by regulation treat amounts which accrue on or before the change date but which are allowable as ^ a deduction after such date as recognized built-in losses. "(7) RECOGNITION PERIOD, ETC.— 8ft «(^) RECOGNITION PERIOD.—The term 'recognition period' means, with respect to any ownership change, the 5-year period beginning on the change date. "(B) RECOGNITION PERIOD TAXABLE YEAR.—The term 'rec- ^ ognition period taxable year' means any tsixable year any portion of which is in the recognition period. "(8) DETERMINATION OF FAIR MARKET VALUE IN CERTAIN '^ CASES.—If 80 percent or more in value of the stock of a corpora- tion is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of deter- mining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up "^ amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items. X "(9) TAX-FREE EXCHANGES OR TRANSFERS.—The Secretary shall prescribe such regulations as may be necessary to carry out the ••'' purposes of this subsection where property held on the change date is transferred in a transaction where gain or loss is not recognized (in whole or in part). "(i) TESTING PERIOD.—For purposes of this section— "^ "(1) 3-YEAR PERIOD.—Except as otherwise provided in this ^I section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. "(2) SHORTER PERIOD WHERE THERE HAS BEEN RECENT OWNER- SHIP CHANGE.—If there has been an ownership change under ^' this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change. ' "(3) SHORTER PERIOD WHERE ALL LOSSES ARISE AFTER 3-YEAR PERIOD BEGINS.—The testing period shall not begin before the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st post- change year. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unreal- ized built-in loss (determined after application of subsection (hX3XB)). "(j) CHANGE DATE.—For purposes of this section, the change date is—
100 STAT. 2260 PUBLIC LAW 99-514—OCT. 22, 1986 "(1) in the case where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the s. date on which such shift occurs, and "(2) in the case where the last component of an ownership change is an equity structure shift, the date of the reorganiza- tion, "(k) DEFINITIONS AND SPECIAL RULES.—For purposes of this sec- tion— "(1) Loss CORPORATION.—The term 'loss corporation' means a corporation entitled to use a net operating loss carryover. Except to the extent provided in regulations, such term includes ; any corporation with a net unrealized built-in loss. "(2) OLD LOSS CORPORATION.—The term 'old loss corporation' means any corporation with respect to which there is an owner- ,. ship change— "(A) which (before the ownership change) was a loss corporation, or •5 "(B) with respect to which there is a pre-change loss described in subsection (d)(1)(B). "(3) NEW LOSS CORPORATION.—The term 'new loss corporation' means a corporation which (after an ownership change) is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corpora- tion and the new loss corporation. "(4) TAXABLE INCOME.—Taxable income shall be computed with the modifications set forth in section 172(d). "(5) VALUE.—The term 'value' means fair market value. "(6) RULES RELATING TO STOCK.— "(A) PREFERRED STOCK.—Except as provided in regula- ,,^ . tions and subsection (e), the term 'stock' means stock other than stock described in section 1504(a)(4). "(B) TREATMENT OF CERTAIN RIGHTS, ETC.—The Secretary shall prescribe such regulations as may be necessary— "(i) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar in- terests as stock, and "(ii) to treat stock as not stock, "(C) DETERMINATIONS ON BASIS OF VALUE.—Determina- tions of the percentage of stock of any corporation held by any person shall be made on the basis of value. "(7) 5-PERCENT SHAREHOLDER.—The term '5-percent share- holder' means any person holding 5 percent or more of the stock of the corporation at any time during the testing period. "(1) CERTAIN ADDITIONAL OPERATING RULES.—For purposes of this section— "(1) CERTAIN CAPITAL CONTRIBUTIONS NOT TAKEN INTO AC- COUNT.— fA "(A) I N GENERAL.—Any capital c o n t r i b u t i o n received by a n old loss corporation a s p a r t of a p l a n a principal purpose of which is to avoid or increase a n y limitation u n d e r this section shall not be taken into account for purposes of this section. "(B) CERTAIN CONTRIBUTIONS TREATED AS PART OF PLAN.— For purposes of subparagraph (A), any capital contribution made during the 2-year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (A).
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2261 "(2) ORDERING RULES FOR APPLICATION OF SECTION.— "(A) COORDINATION WITH SECTION 172(b) CARRYOVER RULES.—In the case of any pre-change loss for any taxable year (hereinafter in this subparagraph referred to as the 'loss year') subject to limitation under this section, for purposes of determining under the 2nd sentence of section 172(b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than— "(i) the section 382 limitation for such taxable year, reduced by "(ii) the unused pre-change losses for taxable years preceding the loss year. Similar rules shall apply in the case of any credit or loss subject to limitation under section 383. "(B) ORDERING RULE FOR LOSSES CARRIED FROM SAME TAX- ABLE YEAR.—In any case in which— "(i) a pre-change loss of a loss corporation for any taxable year is subject to a section 382 limitation, and "(ii) a net operating loss of such corporation from such taxable year is not subject to such limitation, taxable income shall be treated as having been offset first by the loss subject to such limitation. "(3) OPERATING RULES RELATING TO OWNERSHIP OF STOCK.— "(A) CONSTRUCTIVE OWNERSHIP.—Section 318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that— "(i) paragraphs (1) and (5)(B) of section 318(a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318(a) shall be treated as 1 individual for purposes of applying this section, "(ii) paragraph (2) of section 318(a) shall be applied— "(I) without regard to the 50-percent limitation contained in subparagraph (C) thereof, and "(II) except as provided in regulations, by treat- ing stock attributed thereunder as no longer being held by the entity from which attributed, "(iii) paragraph (3) of section 318(a) shall be applied only to the extent provided in regulations, and "(iv) except to the extent provided in regulations, paragraph (4) of section 318(a) shall apply to an option if such application results in an ownership change. A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests. "(B) STOCK ACQUIRED BY REASON OF DEATH, GIFT, DIVORCE, SEPARATION, ETC.—If^ "(i) the basis of any stock in the hands of any person is determined— "(I) under section 1014 (relating to property ac- quired from a decedent), "(II) section 1015 (relating to property acquired by a gift or transfer in trust), or "(III) section 1041(b)(2) (relating to transfers of property between spouses or incident to divorce, 71-19^ 0 - 89 - 16 : QL. 3 P a r t 3
100 STAT. 2262 PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) stock is received by any person in satisfaction of t a right to receive a pecuniary bequest, or "(iii) stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning ,1 of section 71(b)(2)), such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired. "(C) SPECIAL RULE FOR EMPLOYEE STOCK OWNERSHIP "i.- J" - P L A N S . — "(i) IN GENERAL.—Except as provided in clause (ii), '' * -' the acquisition of employer securities (within the mean- ing of section 409(1)) by— ^ -' ' ' "(I) a tax credit employee stock ownership plan or an employee stock ownership plan (within the '^- KJ/./ ^'- meaningofsection 4975(e)(7)), or "(II) a participant of any such plan pursuant to '''^' " the requirements of section 409(h), '•' „ shall not be taken into account in determining whether *"^ ' an ownership change has occurred. ' "(ii) OWNERSHIP AND ALLOCATION REQUIREMENTS.— * Subclause (I) of clause (i) shall not apply to any acquisi- tion unless— "(I) immediately after such acquisition the plan holds stock meeting the requirements of section ' ' ^- • 1042(b)(2), except that such section shall be applied by substituting '50 percent' for *30 percent', and *'"/ "(II) the plan meets requirements similar to the ;'' \. requirements of section 409(n). **/ • "(D) CERTAIN CHANGES IN PERCENTAGE OWNERSHIP WHICH ' ' ARE ATTRIBUTABLE TO FLUCTUATIONS IN VALUE NOT TAKEN INTO ACCOUNT.—Except as provided in regulations, any ^,^ ' change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of differeat classes of stock shall not be taken into account. ^ "(4) REDUCTION IN VALUE WHERE SUBSTANTIAL NONBUSINESS ASSETS.— "(A) IN GENERAL.—If, immediately after an ownership change, the new loss corporation has substantial ^, nonbusiness assets, the value of the old loss corporation ,y shall be reduced by the excess (if any) of— 'r "(i) the fair market value of the nonbusiness assets of jf-. the old loss corporation, over *.^, . "(ii) the nonbusiness asset share of indebtedness for c,, 5 which such corporation is liable. "(B) CORPORATION HAVING SUBSTANTIAL NONBUSINESS ASSETS.—For purposes of subparagraph (A)— "(i) IN GENERAL.—The old loss corporation shall be 3'* ,, treated as having substantial nonbusiness assets if at least Vb of the value of the total assets of such corpora- ...r .. tion consists of nonbusiness assets. "(ii) EXCEPTION FOR CERTAIN INVESTMENT ENTITIES.— .J- I j. A regulated investment company to which part I of subchapter M applies, a real estate investment trust to to ?'i3 which part II of subchapter M applies, or a real estate •d'.i^i .^ mortgage pool to which part IV of subchapter M ap-
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2263 plies, shall not be treated as a new loss corporation having substantial nonbusiness assets. "(C) NONBUSINESS ASSETS.—For purposes of this para- graph, the term 'nonbusiness assets' means assets held for investment. "(D) NONBUSINESS ASSET SHARE.—For purposes of this \-i I paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as— "(i) the fair market value of the nonbusiness assets of y0 . the corporation, bears to "(ii) the fair market value of all assets of such cor- . ; poration. "(E) TREATMENT OF SUBSIDIARIES.—For purposes of this paragraph, stock and securities in any subsidiary corpora- . tion shall be disregarded and the parent corporation shall r be deemed to own its ratable share of the subsidiary's assets. For purposes of the preceding sentence, a corpora- . >r^ tion shall be treated £is a subsidiary if the parent owns 50 percent or more of the combined voting power of all clsisses of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock. ' r , "(5) TITLE i i OR SIMILAR CASE.— "(A) I N GENERAL.—Subsection (a) shall not apply to any ; ?* ownership change if— "(i) the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and r; "(ii) the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (immediately after such owner- ship change) stock of the new loss corporation (or stock 1 of controlling corporation if also in bankruptcy) which meets the requirements of section 1504(aX2) (deter- mined by substituting '50 percent' for '80 percent' each place it appears). "(B) REDUCTION FOR INTEREST PAYMENTS TO CREDITORS . g. BECOMING SHAREHOLDERS.—In any case to which subpara- graph (A) applies, the net operating loss deduction under jjgj, section 172(a) for any post-change year shall be determined as if no deduction was allowable under this chapter for the ,,,, interest paid or accrued by the old loss corporation on / indebtedness which was converted into stock pursuant to title 11 or similar case during— "(i) any taxable year ending during the 3-year period JC''». preceding the taxable year in which the ownership change occurs, and "(ii) the period of the taxable year in which the ownership change occurs on or before the change date. "(C) REDUCTION OF CARRYFORWARDS WHERE DISCHARGE OF INDEBTEDNESS.—In any case to which subparagraph (A) ap- plies, the pre-change losses and excess credits (within the meaning of section 383(aX2)) which may be carried to a post- change year shall be computed as if 50 percent of the amount which, but for the application of section 108(eX10XB), would have been includible in gross income for any taxable year had been so included.
100 STAT. 2264 PUBLIC LAW 99-514—OCT. 22, 1986 "(D) SECTION 382 LIMITATION ZERO IF ANOTHER CHANGE WITHIN 2 YEARS.—If, during the 2-year period immediately following an ownership change to which this paragraph f applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section 382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd « !4 ownership change shall be zero. "(E) ONLY CERTAIN STOCK OF CREDITORS TAKEN INTO AC- COUNT.—For purposes of subparagraph (AXii), stock trans- ferred to a creditor in satisfaction of indebtedness shall be iw! taken into account only if such indebtedness— "(i) was held by the creditor at least 18 months before the date of the filing of the title 11 or similar case, or "(ii) arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in such indebtedness. "(F) SPECIAL RULE FOR CERTAIN FINANCIAL INSTITUTIONS.— / "(i) IN GENERAL.—In the case of any ownership Hi>: •:'•>-> change to which this subparagraph applies, this para- graph shall be applied— "(I) by substituting '20 percent' for '50 percent' •:•-''• in subparagraph (AXii), and "(II) without regard to subparagraphs (B) and (C). .- "(ii) SPECIAL RULE FOR DEPOSITORS.—For purposes of en' applying this paragraph to an ownership change to which this subparagraph applies— ?sm ': ' '• "(I) a depositor in the old loss corporation shall f'j be treated as a stockholder in such loss corporation immediately before the change, "(II) deposits which, after the change, become . deposits of the new loss corporation shall be A-- treated as stock of the new loss corporation, and "(III) the fair market value of the outstanding stock of the new loss corporation shall include « . deposits described in subclause (II). "(iii) CHANGES TO WHICH SUBPARAGRAPH APPUES.— This subparagraph shall apply to— "(I) an equity structure shift which is a reorga- nization described in section 368(aX3XDXii), or L "(II) any other equity structure shift (or trans- it action to which section 351 applies) which occurs as an integral part of a transaction involving a ; >ru : • change to which subclause (I) applies. f;l.'krt.'i>i This subparagraph shall not apply to any equity struc- ture shift or transaction occurring after December 31, •i- ' 1988. "(G) TITLE i i OR SIMILAR CASE.—For purposes of this :*5 paragraph, the term 'title 11 or similar case' has the mean- ing given such term by section 368(aX3XA). "(H) ELECTION NOT TO HAVE PARAGRAPH APPLY.—A new loss corporation may elect, subject to such terms and condi- tions as the Secretary may prescribe, not to have the provisions of this paragraph apply. "(6) SPECIAL RULE FOB INSOLVENCY TRANSACTIONS.—If para- graph (5) does not apply to any reorganization described in
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2265 subparagraph (G) of section 368(a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section 368(a)(3)(A)), the value under subsection (e) shall be the value of the new loss corporation immediately after the ownership change. "(7) COORDINATION WITH ALTERNATIVE MINIMUM TAX.—The Secretary shall by regulation provide for the application of this section to the alternative tax net operating loss deduction under section 56(d). "(m) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regula- tions— "(1) providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and "(2) providing for the application of this section and section 383 in the case of a short taxable year, "(3) providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries, "(4) providing for the treatment of corporate contractions as redemptions for purposes of subsections (e)(2) and (h)(3)(A), and "(5) providing for the application of subsection (g)(4) where there is only 1 corporation involved." (b) AMENDMENT OF SECTION 383.—Section 383 (relating to special limitations on unused investment credits, etc.) is amended to read as follows: "SEC. 383. SPECIAL LIMITATIONS ON CERTAIN EXCESS CREDITS, ETC. "(a) EXCESS CREDITS.— "(1) IN GENERAL.—Under regulations, if an ownership change occurs with respect to a corporation, the amount of any excess credit for any taxable year which may be used in any post- change year shall be limited to an amount determined on the basis of the tax liability which is attributable to so much of the taxable income as does not exceed the section 382 limitation for such post-change year to the extent available after the applica- tion of section 382 and subsections (b) and (c) of this section. "(2) EXCESS CREDIT.—For purposes of paragraph (1), the term 'excess credit' means— "(A) any unused general business credit of the corpora- tion under section 39, and "(B) any unused minimum tax credit of the corporation under section 53. "(b) LIMITATION ON NET CAPITAL Loss.—If an ownership change occurs with respect to a corporation, the amount of any net capital loss under section 1212 for any taxable year before the 1st post- change year which may be used in any post-change year shall be limited under regulations which shall be based on the principles applicable under section 382. Such regulations shall provide that any such net capital loss used in a post-change year shall reduce the section 382 limitation which is applied to pre-change losses under section 382 for such year.
100 STAT. 2266 PUBLIC LAW 99-514—OCT. 22, 1986 "(c) FOREIGN TAX CREDITS.—If an ownership change occurs with respect to a corporation, the amount of any excess foreign taxes under section 904(c) for any taxable year before the 1st post-change taxable year shall be limited under regulations which shall be consistent with purposes of this section and section 382. "(d) PRO RATION RULES FOR YEAR WHICH INCLUDES CHANGE.—For purposes of this section, rules similar to the rules of subsections (b)(3) and (d)(1)(B) of section 382 shall apply. "(e) DEFINITIONS.—Terms used in this section shall have the same respective meanings as when used in section 382, except that appro- priate adjustments shall be made to take into account that the limitations of this section apply to credits and net capital losses." (c) CONFORMING AMENDMENTS.— (1) Paragraph (5) of section 318(b) is amended by striking out "section 382(a)(3)" and inserting in lieu thereof "section 382(1)(3)". (2) The table of sections for part V of subchapter C of chapter 1 is amended— J (A) by striking out the item relating to section 382 and *^'- inserting in lieu thereof the following new item: "Sec. 382. Limitation on net operating loss carryforwards and certain built- in losses following ownership change.", and (B) by striking out the item relating to section 383 and inserting in lieu thereof the following new item: "Sec. 383. Special limitations on certain excess credits, etc.". (d) REPORT ON DEPRECIATION AND BUILT-IN DEDUCTIONS; REPORT ON BANKRUPTCY WORKOUTS.—The Secretary of the Treasury or his delegate— (1) shall, not later than January 1, 1989, conduct a study and report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate with respect to the treatment of depreciation, amortization, depletion, and other built-in deductions for purposes of sections 382 and 383 of the Internal Revenue Code of 1986 (as amended by this section), and (2) shall, not later than January 1, 1988, conduct a study and report to the committees referred to in paragraph (1) with respect to the treatment of informal bankruptcy workouts for purposes of sections 108 and 382 of such Code. (e) REPEAL OF CHANGES MADE BY TAX REFORM ACT OF 1976.— (1) Subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 (including the amendment treated as part of such subsections under section 59(b) of the Tax Reform Act of 1984) are hereby repealed. (2) Subsection (g) of such section 806 is amended by striking out paragraphs (2) and (3). (f) EFFECTIVE DATES.— (1) IN GENERAL.—The amendments made by subsections (a), (b), and (c) shall apply to any ownership change following— (A) an owner shift involving a 5-percent shareholder occurring after December 31,1986, or (B) an equity structure shift occurring pursuant to a plan ISO of reorganization adopted after December 31,1986. (2) F O R A M E N D M E N T S TO T A X R E F O R M A C T O F 1976.—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2267 (A) IN GENERAL.—The repeals made by subsection (eXD and the amendment made by subsection (e)(2) shall take effect on January 1,1986. (B) ELECTION TO HAVE AMENDMENTS APPLY.— (i) If a taxpayer described in clause (ii) elects to have the provisions of this subparagraph apply, the amend- ments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 shall apply to the reorga- nization described in clause (ii). (ii) A taxpayer is described in this clause if the taxpayer filed a title 11 or similar case on December 8, 1981, filed a plan of reorganization on February 5,1986, f filed an amended plan on March 14, 1986, and received court approval for the amended plan and disclosure statement on April 16,1986. (C) APPLICATION OF OLD RULES TO CERTAIN DEBT.—In the case of debt of a corporation incorpqrated in Colorado on November 8, 1924, with headquarters in Denver, Colorado— (i) the amendments made by subsections (a), (b), and (c) shall not apply to any debt restructuring of such debt which was approved by the debtor's Board of Directors and the lenders in 1986, and ^^1 (ii) the amendments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976 (including the amendment treated as part of such subsections under section 590t)) of the Tax Reform Act of 1984) shall apply to such debt restructuring. (D) SPECIAL RULE FOR OIL AND GAS WELL DRILUNG BUSI- NESS.—In the case of a Texas corporation incorporated on July 23, 1935, in applying section 382 of the Internal Reve- nue Code of 1986 (as in effect before and after the amend- ments made by subsections (a), (b), and (c)) to a loan restructuring agreement during 1985, section 382(aX5XC) of the Internal Revenue Code of 1954 (as added by the amend- ments made by subsections (e) and (f) of section 806 of the Tax Reform Act of 1976) shall be applied as if it were in effect with respect to such restructuring or reorganization. (3) TESTING PERIOD.—For purposes of determining whether there is an ownership change after December 31, 1986, the testing period shall not begin before the later of— (A) May 6,1986, or (B) in the case of an ownership change which occurs after May 5,1986, and to which the amendments made by subsec- tions (a), (b), and (c) do not apply, the first day following the date on which such ownership change occurs. (4) SPECIAL TRANSITION RULES.—The amendments made by subsections (a), (b), and (c) shall not apply to any— (A) stock-for-debt exchanges and stock sales made pursu- ant to a plan of reorganization with respect to a petition for reorganization filed by a corporation under chapter 11 of title 11, United States Code, on August 26, 1982, and which filed with a United States district court a first amended and related plan of reorganization before March 1, 1986, or (B) ownership change of a Delaware corporation incor- porated in August 1983, which may result from the exercise of put or call option under an agreement entered into on September 14, 1983, but only with respect to taxable years
100 STAT. 2268 PUBLIC LAW 99-514—OCT. 22, 1986 ; 2) -It beginning after 1991 regardless of when such ownership •>M; change takes place. Any regulations prescribed under section 382(g)(3)(B) of the Internal Revenue Code of 1986 (as amended by subsection (a)) ft' shall not apply with respect to domestic building and loan trasactions for any period before January 1,1989. (5) BANKRUPTCY PROCEEDINGS.—In the case of a reorganization , described in subparagraph (G) of section 368(a)(1) of the Internal Revenue Code of 1986 or an exchange of debt for stock in a title 11 or similar case, as defined in section 368(a)(3) of such Code, the amendments made by subsections (a), (b), and (c) shall not apply to any ownership change resulting from such a reorga- nization or proceeding if a petition in such case was filed with **' the court before August 14,1986. (6) CERTAIN PLANS.—The amendments made by subsections (a), (b), and (c) shall not apply to any ownership change with respect to— * (A) the acquisition of a corporation the stock of which is acquired pursuant to a plan of divestiture which identified such corporation and its assets, and was agreed to by the board of directors of such corporation's parent corporation on May 17,1985, (B) a merger which occurs pursuant to a merger agree- ment (entered into before September 24, 1985) and an ap- plication for approval by the Federal Home Loan Bank Board was filed on October 4,1985, (C) a reorganization involving a party to a reorganization of a group of corporations engaged in enhanced oil recovery operations in California, merged in furtherance of a plan of reorganization adopted by a board of directors vote on September 24, 1985, and a Delaware corporation whose principal oil and gas producing fields are located in Califor- nia, or (D) the conversion of a mutual savings and loan associa- tion holding a Federal charter dated March 22, 1985, to a stock savings and loan association pursuant to the rules and regulations of the Federal Home Loan Bank Board. ^^ (7) OWNERSHIP CHANGE OF REGULATED AIR CARRIER.—The amendments made by subsections (a), (b), and (c) shall not apply to an ownership change of a regulated air carrier if— (A) on July 16, 1986, at least 40 percent of the outstanding common stock (excluding all preferred stock, whether or not convertible) of such carrier had been acquired by the ^' parent corporation referred to in section 203(d)(13XB), and .„ (B) the acquisition (hy or for such parent corporation) or retirement of the remaining common stock of such carrier is completed before the later of March 31, 1987, or 90 days after the requisite governmental approvals are finally granted, but only if the ownership change occurs on or before the later of March 31, 1987, or such 90th day. The aggregate reduction in tax for any taxable year by reason of this paragraph shall not exceed $10,000,000. The testing period for determining whether a subsequent ownership change has occurred shall not begin before the 1st day following an ownership change to which this paragraph applies.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2269 (8) The amendments made by subsections (a), (b), and (c) shall not apply to any ownership change resulting from the conver- sion of a Minnesota mutual savings bank holding a Federal charter dated December 31, 1985, to a stock savings bank pursu- ant to the rules and regulations of the Federal Home Loan Bank Board, and from the issuance of stock pursuant to that conver- sion to a holding company incorporated in Delaware on Febru- ary 21, 1984. For purposes of determining whether any ownership change occurs with respect to the holding company or any subsidiary thereof (whether resulting from the transaction described in the preceding sentence or otherwise), any issuance of stock made by such holding company in connection with the ' transaction described in the preceding sentence shall not be taken into account. (9) DEFINITIONS.—Except as otherwise provided, terms used in this subsection shall have the same meaning as when used in section 382 of the Internal Revenue Code of 1986 (as amended by this section). Subtitle D—Recognition of Gain and Loss on \ Distributions of Property in Liquidation SEC. 631. RECOGNITION OF GAIN AND LOSS ON DISTRIBUTIONS OF PROP- ERTY IN LIQUIDATION. (a) GENERAL RULE.—Subpart B of part II of subchapter C (relating to effects on corporation) is amended by striking out sections 336 and 337 and inserting in lieu thereof the following: "SEC. 336. GAIN OR LOSS RECOGNIZED ON PROPERTY DISTRIBUTED IN COMPLETE LIQUIDATION. "(a) GENERAL RULE.—Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value. "(bj TREATMENT OF LIABILITIES IN EXCESS OF BASIS.—If any prop- erty distributed in the liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337. the fair market value of such property shall be treated as not less than the amount of such liability. "(c) EXCEPTION FOR CERTAIN LIQUIDATIONS TO WHICH PART III APPLIES.—This section shall not apply with respect to any distribu- tion of property to the extent there is nonrecognition of gain or loss with respect to such property to the recipient under part III. "(d) LIMITATIONS ON RECOGNITION OF Loss.— "(1) N o LOSS RECOGNIZED IN CERTAIN DISTRIBUTIONS TO RELATED PERSONS.— "(A) IN GENERAL.—No loss shall be recognized to a liq- uidating corporation on the distribution of any property to a related person (within the meaning of section 267) if— "(i) such distribution is not pro rata, or "(ii) such property is disqualified property. "(B) DISQUALIFIED PROPERTY.—For purposes of subpara- graph (A), the term 'disqualified property means any prop-
100 STAT. 2270 PUBLIC LAW 99-514—OCT. 22, 1986 i .1 , erty which is acquired by the liquidating corporation in a transaction to which section 351 applied, or as a contribu- tion to capital, during the 5-year period ending on the date of the distribution. Such term includes any property if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. "(2) SPECIAL RULE FOR CERTAIN PROPERTY ACQUIRED IN CERTAIN CARRYOVER BASIS TRANSACTIONS.— "(A) IN GENERAL.—For purposes of determining the amount of loss recognized by any liquidating corporation on ';i . any sale, exchange, or distribution of property described in . subparagraph (B), the adjusted basis of such property shall be reduced (but not below zero) by the excess (if any) of— f»i :. "(i) the adjusted basis of such property immediately after its acquisition by such corporation, over "(ii) the fair market value of such property as of such time. "(B) DESCRIPTION OF PROPERTY.— ,,t| J ^;. "(i) IN GENERAL.—For purposes of subparagraph (A), property is described in this subparagraph if^ iti^ "(I) such property is acquired by the liquidating corporation in a transaction to which section 351 . . ..' , . applied or as a contribution to capital, and "(II) the acquisition of such property by the liq- , uidating corporation was part of a plan a principal ' •' purpose of which was to recognize loss by the liquidating corporation with respect to such prop- erty in connection with the liquidation. ; , , Other property shall be treated as so described if the adjusted basis of such other property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence. "(ii) CERTAIN ACQUISITIONS TREATED AS PART OF PLAN.—For purposes of clause (i), any property de- scribed in clause (i)(I) acquired by the liquidating cor- j ., poration during the 2-year period ending on the date of / .' the adoption of the plan of complete liquidation shall, ^' except as provided in regulations, be treated as part of a plan described in clause (i)(II). J...J "(C) RECAPTURE IN LIEU OF DISALLOWANCE.—The Sec- retary may prescribe regulations under which, in lieu of disallowing a loss under subparagraph (A) for a prior tax- able year, the gross income of the liquidating corporation for the taxable year in which the plan of complete liquida- tion is adopted shall be increased by the amount of the disallowed loss. .,. "(3) SPECIAL RULE IN CASE OF LIQUIDATION TO WHICH SECTION 332 APPLIES.—In the case of any liquidation to which section 332 applies, no loss shall be recognized to the liquidating corpora- tion on any distribution in such liquidation. "(e) CERTAIN STOCK SALES AND DISTRIBUTIONS MAY B E TREATED As ASSET TRANSFERS.—Under regulations prescribed by the Secretary, if— "(1) a corporation owns stock in another corporation meeting the requirements of section 1504(a)(2), and
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2271 "(2) such corporation sells, exchanges, or distributes all of such stock, such corporation may elect to treat such sale, exchange, or distribu- tion as a disposition of all of the assets of such other corporation, and no gain or loss shall be recognized on the sale, exchange, or distribution of such stock. "SEC. 337. NONRECOGNITION FOR PROPERTY DISTRIBUTED TO PARENT IN COMPLETE LIQUIDATION OF SUBSIDIARY. "(a) IN GENERAL.—No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies. "(h) TREATMENT OF INDEBTEDNESS OF SUBSIDIARY, ETC.— "(1) INDEBTEDNESS OF SUBSIDIARY TO PARENT.—If— "(A) a corporation is liquidated in a liquidation to which K ;c? section 332 applies, and "(B) on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee, for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distribu- tee in such liquidation. "(2) TREATMENT OF TAX-EXEMPT DISTRIBUTEE.— "(A) I N GENERAL.—Except as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. "(B) EXCEPTION WHERE PROPERTY WILL BE USED IN UNRE- LATED BUSINESS.— "(i) I N GENERAL.—Subparagraph (A) shall not apply to any distribution of property to an organization de- scribed in section 511(aX2) or 511(b)(2) if, immediately after such distribution, such organization uses such property in an unrelated trade or business (as defined in section 513). "(ii) LATER DISPOSITION OR CHANGE IN USE.—If any property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding ?fi. . any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall ,;n be included in such organization's unrelated business taxable income. For purposes of the preceding sentence, ' if such property ceases to be used in an unrelated trade or business of such organization, such organization shall be treated as having disposed of such property on the date of such cessation. "(c) 80-PERCENT DISTRIBUTEE.—For purposes of this section, the term '80-percent distributee' means only the corporation which meets the 80-percent stock ownership requirements specified in section 332(b). "(d) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of the amendments made to this subpart by the Tax Reform Act of 1986, including—
100 STAT. 2272 PUBLIC LAW 99-514—OCT. 22, 1986 If; "(1) regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regula- tions (including the consolidated return regulations and part III of this subchapter), and "(2) regulations providing for appropriate coordination of the provisions of this section with the provisions of this title relat- ing to taxation of foreign corporations and their shareholders." (b) AMENDMENTS TO SECTION 338.— (1) Subsection (a) of section 338 (relating to certain stock purchases treated as asset acquisitions) is amended by striking out "to which section 337 applies". (2) Subsection (c) of section 338 is hereby repealed. (3) Subparagraph (B) of section 338(h)(10) is amended by adding at the end thereof the following new sentence: "To the extent provided in regulations, such term also j^ y includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return)." (c) TREATMENT OF DISTRIBUTIONS OF APPRECIATED PROPERTY.— Section 311 is amended to read as follows: "SEC. 311. TAXABILITY OF CORPORATION ON DISTRIBUTION. "(a) GENERAL RULE.—Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock, of— "(1) its stock (or rights to acquire its stock), or "(2) property. "(b) DISTRIBUTIONS OF APPRECIATED PROPERTY.— "(1) IN GENERAL.—If^ "(A) a corporation distributes property (other than an IK obligation of such corporation) to a shareholder in a dis- tribution to which subpart A applies, and "(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. "(2) TREATMENT OF LIABILITIES IN EXCESS OF BASIS.—Rules similar to the rules of section 336(b) shall apply for purposes of this subsection." (d) TREATMENT OF FOREIGN DISTRIBUTEES.— (1) AMENDMENTS TO SECTION 367.—Subsection (e) of section 367 is amended to read as follows: "(e) TREATMENT OF DISTRIBUTIONS DESCRIBED IN SECTION 355 OR LIQUIDATIONS UNDER SECTION 332.— "(1) DISTRIBUTIONS DESCRIBED IN SECTION 355.—In the case of any distribution described in section 355 (or so much of section 356 as relates to section 355) by a domestic corporation 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. "(2) LIQUIDATIONS UNDER SECTION 332.—In the case of any liquidation to which section 332 applies, except as provided in regulations, subsections (a) and (b)(1) of section 337 shall not apply where the 80-percent distributee (as defined in section 337(c)) is a foreign corporation." (2) A M E N D M E N T S TO SECTION 1248.—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2273 (A) Subsection (e) of section 1248 is amended by striking out "Under regulations" and inserting in lieu thereof "Except as provided in regulations". (B) Subsection (f) of section 1248 is amended by inserting "Except as provided in regulations prescribed by the Sec- retary—" after the subsection heading. (e) TECHNICAL AND CONFORMING AMENDMENTS.— (1) Paragraph (4) of section 312(n) (as redesignated by title XVIII) is amended to read as follows: "(4) LIFO INVENTORY ADJUSTMENTS.— "(A) IN GENERAL.—Earnings and profits shall be in- creased or decreased by the amount of any increase or decrease in the LIFO recapture amount 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 preced- ing the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary. "(B) LIFO RECAPTURE AMOUNT.—For purposes of this paragraph, the term 'LIFO recapture amount' means the amount (if any) by which— "(i) the inventory amount of the inventory assets under the first-in, first-out method authorized by sec- tion 471, exceeds "(ii) the inventory amount of such assets under the LIFO method. "(C) DEFINITIONS.—For purposes of this paragraph— ' ' ''- •-' "(i) LIFO METHOD.—The term 'LIFO method' means the method authorized by section 472 (relating to last- in, first-out inventories). "(ii) INVENTORY ASSETS.—The term 'inventory assets' means stock in trade of the corporation, or other prop- erty of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. "(iii) INVENTORY AMOUNT.—The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined— ' - "(I) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or "(II) if subclause (I) does not apply, by using cost or market, whichever is lower." (2) Subsection (c) of section 332 is hereby repealed. (3) Section 333 is hereby repealed. (4XA) Subsection (a) of section 334 is amended by striking out "(other than a distribution to which section 333 applies)". (B) Subsection (c) of section 334 is hereby repealed. (5) Paragraph (12) of section 338(h) is hereby repealed. (6)(A) Subsection (e) of section 341 is amended by striking out paragraphs (2), (3), and (4). (B) Paragraph (5) of section 341(e) is amended— (i) by striking out "paragraphs (1), (2), and (4)" and insert- * ing in lieu thereof "paragraph (1)", and (ii) by striking out subparagraph (B). (7) Subsection (b) of section 346 is amended by striking out
100 STAT. 2274 PUBLIC LAW 99-514—OCT. 22, 1986 pm. (8)(A) Subparagraphs (A) and (B) of section 453(h)(1) (relating ) to use of installment sales in section 337 liquidations) are amended to read as follows: i n •'• "(A) IN GENERAL.—If, in a liquidation to which section 331 j< applies, the shareholder receives (in exchange for the share- holder's stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12- ; t vr month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this -ij section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock. "(B) OBLIGATIONS ATTRIBUTABLE TO SALE OF INVENTORY MUST RESULT FROM BULK SALE.—Subparagraph (A) shall not apply to an installment obligation acquired in respect of a sale or exchange of— "(i) stock in trade of the corporation, g "(ii) other property of a kind which would properly be 31 ii ^f. included in the inventory of the corporation if on hand at the close of the taxable year, and as^imB V "(iii) property held by the corporation primarily for "^cj. V a sale to customers in the ordinary course of its trade or business, c^ixi unless such sale or exchange is to one person and involves substantially all of such property attributable to a trade or business of the corporation." (B) Subparagraph (E) of section 453(h)(1) is amended to read as follows: "(E) SALES BY LIQUIDATING SUBSIDIARIES.—For purposes of ;, .J subparagraph (A), in the case of a controlling corporate shareholder (within the meaning of section 368(c)(1)) of a selling corporation, an obligation acquired in respect of a i^ sale or exchange by the selling corporation shall be treated as so acquired by such controlling corporate shareholder. The preceding sentence shall be applied successively to each controlling corporate shareholder above such control- ling corporate shareholder." io t ^C)) The heading for section 453(h) is amended by striking out rj ; "SECTION 337" and inserting in lieu thereof "CERTAIN". (9) Subsection (d) of section 453B is amended to read as follows: "(d) EFFECT OF DISTRIBUTION IN LIQUIDATIONS TO WHICH SECTION 332 APPLIES.—If— "(1) an installment obligation is distributed in a liquidation to which section 332 (relating to complete liquidations of subsidi- aries) applies, and "(2) the basis of such obligation in the hands of the distributee is determined under section 334(b)(1), then no gain or loss with respect to the distribution of such obliga- tion shall be recognized by the distributing corporation." (10) Paragraph (5) of section 467(c) is amended by striking out "453B(d)(2),". (11) Subsection (b) of section 852 is amended by adding at the end thereof the following new paragraph: "(6) SECTION 3 1 1 (b) NOT TO APPLY TO CERTAIN DISTRIBUTIONS.— Section 311(b) shall not apply to any distribution by a regulated
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2275 investment company to which this part applies, if such distribu- tion is in redemption of its stock upon the demand of the shareholder." (12) Subsection (d) of section 897 is amended— (A) by striking out paragraph (2), (B) by striking out the heading for paragraph (1), (C) by appropriately redesignating each subparagraph, •> clause, and subclause of paragraph (1) as a paragraph, subparagraph, or clause, £is the case may be, (D) by striking out "subparagraph (A)" in paragraph (2) (as so redesignated) and inserting in lieu thereof "para- graph (1)", and (E) by striking out ", ETC.," in the subsection heading. (13) Subsection (a) of section 1056 is amended by striking out the last sentence thereof. (14) Paragraph (2) of section 1255(b) is amended by striking out "453B(d)(2)". (15) Paragraph (3) of section 1276(c) is amended by striking out "334(c),". (16) The table of sections for subpart A of part II of sub- chapter C of chapter 1 is amended by striking out the item relating to section 333. (17) The table of sections for subpart B of part II of subchapter C of chapter 1 is amended by striking out the items relating to sections 336 and 337 and inserting in lieu thereof the following: "Sec. 336. Gain or loss recognized on property distributed in complete liquidation. "Sec. 337. Nonrecognition for property distributed to parent in complete liquidation of subsidiary." SEC. 632. TREATMENT OF C CORPORATIONS ELECTING SUBCHAPTER S STATUS. (a) GENERAL RULE.—Section 1374 (relating to tax imposed on certain capital gains) is amended to read as follows: "SEC. 1374. TAX IMPOSED ON CERTAIN BUILT-IN GAINS. "(a) GENERAL RULE.—If for any taxable year beginning in the recognition period an S corporation has a recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year. "(b) AMOUNT OF TAX.— "(1) IN GENERAL.—The tax imposed by subsection (a) shall be a tax computed by applying the highest rate of tax specified in section 11(b) to the lesser of— "(A) the recognized built-in gains of the S corporation for the taxable year, or "(B) the amount which would be the taxable income of the corporation for such taxable year if such corporation '^' were not an S corporation. "(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS AL- LOWED.—Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the cor- poration was a C corporation shall be allowed as a deduction against the lesser of the amounts referred to in subparagraph (A) or (B) of paragraph (1). For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the lesser of the amounts referred to in subpara-
100 STAT. 2276 PUBLIC LAW 99-514—OCT. 22, 1986 graph (A) or (B) of paragraph (1) shall be treated as taxable income. r ,? •, . •--,t "(3) CREDITS.— "(A) I N GENERAL.—Except as provided in subparagraph (B), no credit shall be allowable under part IV of subchapter A of this chapter (other than under section 34) against the .•'ki tax imposed by subsection (a). "(B) BUSINESS CREDIT CARRYFORWARDS FROM C YEARS AL- LOWED.—Notwithstanding section 1371(b)(1), any business C- credit carryforward under section 39 arising in a taxable -Elf year for which the corporation was a C corporation shall be allowed as a credit against the tax imposed by subsection (a) in the same manner as if it were imposed by section 11. "(4) COORDINATION WITH SECTION 1201(a).—For purposes of section 1201(a)— "(A) the tax imposed by subsection (a) shall be treated as if it were imposed by section 11, and ** "(B) the lower of the amounts specified in subparagraphs (A) and (B) of paragraph (1) shall be treated as the taxable income. ^. ,^ ., "(c) LIMITATIONS.— " ' >• "(1) CORPORATIONS WHICH WERE ALWAYS S CORPORATIONS.— Subsection (a) shall not apply to any corporation if an election under section 1362(a) has been in effect with respect to such corporation for each of its taxable years. Except as provided in regulations, an S corporation and any predecessor corporation shall be treated as 1 corporation for purposes of the preceding sentence. "(2) LIMITATION ON AMOUNT OF RECOGNIZED BUILT-IN GAINS.— The amount of the recognized built-in gains taken into account under this section for any taxable year shall not exceed the excess (if any) of— "(A) the net unrealized built-in gain, over "(B) the recognized built-in gains for prior taxable years beginning in the recognition period. "(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) NET UNREALIZED BUILT-IN GAIN.—The term 'net unreal- ized built-in gain' means the amount (if any) by which— "(A) the fair market value of the sissets of the S corpora- tion as of the beginning of its 1st taxable year for which an election under section 1362(a) is in effect, exceeds "(B) the aggregate adjusted bases of such assets at such time. "(2) RECOGNIZED BUILT-IN GAIN.—The term 'recognized built- in gain' means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that— "(A) such asset was not held by the S corporation as of the beginning of the 1st taxable year referred to in para- graph (1), or "(B) such gain exceeds the excess (if any) of— "(i) the fair market value of such asset as of the beginning of such 1st taxable year, over "(ii) the adjusted basis of the asset as of such time.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2277 "(3) RECOGNITION PERIOD.—The term 'recognition period' means the 10-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. "(4) TAXABLE INCOME.—Taxable income of the corporation shall be determined under section 63(a)— "(A) without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and "(B) without regard to the deduction under section 172." (b) TREATMENT OF DISTRIBUTIONS.—Subsection (e) of section 1363 is amended to read as follows: "(e) SUBSECTION (d) NOT TO APPLY TO REORGANIZATIONS, ETC.— Subsection (d) shall not apply to any distribution to the extent it consists of property permitted by section 354, 355, or 356 to be received without the recognition of gain." (c) CONFORMING AMENDMENTS.— (1) Subparagraph (G) of section 26(b)(2) is amended by striking out "certain capital gains" and inserting in lieu thereof "certain built-in gains". (2) Paragraph (2) of section 1366(f) is amended to read as follows: "(2) REDUCTION IN PASS-THRU FOR TAX IMPOSED ON BUILT-IN GAINS.—If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount of each recognized built-in gain (as defined in section 1374(d)(2)) for such taxable year shall be reduced by its propor- tionate share of such tax." (3) Subparagraph (B) of section 13750t))(l) is amended by strik- ing out "section 1374(d)" and inserting in lieu thereof "section 1374(d)(4)". (d) CLERICAL AMENDMENT.—The table of sections for part III of subchapter S of chapter 1 is amended by striking out the item relating to section 1374 and inserting in lieu thereof the following: "Sec. 1374. Tax imposed on certain built-in gains." SEC. 633. EFFECTIVE DATES. (a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this subtitle shall apply to— (1) any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated before January 1, 1987, (2) any transaction described in section 338 of the Internal Revenue Code of 1986 for which the acquisition date occurs after December 31,1986, and (3) any distribution (not in complete liquidation) made after December 31, 1986. 03) BUILT-IN GAINS OF S CORPORATIONS.—The amendments made by section 632 (other than subsection (b) thereof) shall apply to taxable years beginning after December 31, 1986, but only in cases where the 1st taxable year for which the corporation is an S corporation is pursuant to an election made after December 31, 1986. (c) EXCEPTION FOR CERTAIN PLANS OF LIQUIDATION AND BINDING CONTRACTS.— (1) IN GENERAL.—The amendments made by this subtitle shall not apply to—
100 STAT. 2278 PUBLIC LAW 99-514—OCT. 22, 1986 • •' (A) any distribution or sale or exchange made pursuant to a plan of liquidation adopted before August 1, 1986, if the liquidating corporation is completely liquidated before January 1, 1988, (B) any distribution or sale or exchange made by any corporation if 50 percent or more of the voting stock O^y value) of such corporation is acquired on or after August 1, 1986, pursuant to a written binding contract in effect before *^ such date and if such corporation is completely liquidated • f before January 1, 1988, (C) any distribution or sale or exchange made by any corporation if substantially all of the assets of such corpora- ' tion are sold on or after August 1, 1986, pursuant to 1 or f ' more written binding contracts in effect before such date and if such corporation is completely liquidated before January 1,1988, or (D) any transaction described in section 338 of the In- ternal Revenue Code of 1986 with respect to any target corporation if a qualified stock purchase of such target ^s i corporation is made on or after August 1, 1986, pursuant to a written binding contract in effect before such date and the acquisition date (within the meaning of such section 338) is before January 1,1988. (2) SPECIAL RULE FOR CERTAIN ACTIONS TAKEN BEFORE NOVEM- BER 20, 1985.—For purposes of paragraph (1), transactions shall be treated as pursuant to a plan of liquidation adopted before August 1,1986, if— (A) before November 20,1985— >' (i) the board of directors of the liquidating corpora- tion adopted a resolution to solicit shareholder ap- it • • proval for a transaction of a kind described in section '•\ ^ 336 or 337, or '^ '^^ ' (ii) the shareholders or board of directors have ap- proved such a transaction, ; (B) before November 20,1985— (i) there has been an offer to purchase a majority of i ••- ''•" the voting stock of the liquidating corporation, or (ii) the board of directors of the liquidating corpora- '•' '• tion has adopted a resolution approving an acquisition or recommending the approval of an acquisition to the shareholders, or (C) before November 20, 1985, a ruling request was "*^ submitted to the Secretary of the Treasury or his delegate " * with respect to a transaction of a kind described in section 336 or 337 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this subtitle). For purposes of the preceding sentence, any action taken by the board of directors or shareholders of a corporation with respect to any subsidiary of such corporation shall be treated as taken by the board of directors or shareholders of such subsidiary. (d) TRANSITIONAL RULE FOR CERTAIN SMALL CORPORATIONS.— (1) IN GENERAL.—In the case of the complete liquidation before January 1, 1989, of a qualified corporation, the amend- ments made by this section shall not apply to the applicable percentage of each gain or loss which (but for this paragraph) would be recognized by reason of the amendments made by this subtitle.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2279 (2) PARAGRAPH ( D NOT TO APPLY TO CERTAIN ITEMS.—Para- graph (1) shall not apply to— (A) any gain or loss which is an ordinary gain or loss (determined without regard to section 1239 of the Internal Revenue Code of 1986), (B) any gain or loss on a capital asset held for not more than 6 months, and (C) any gain to the extent section 453B of such Code applies. (3) APPLICABLE PERCENTAGE.—For purposes of this subsection, the term 'applicable percentage' means— (A) 100 percent if the applicable value of the qualified corporation is less than $5,000,000, or (B) 100 percent reduced by an amount which bears the t V same ratio to 100 percent as— H 8v (i) the excess of the applicable value of the corpora- tion over $5,000,000, bears to I 0' (ii) $5,000,000. (4) APPLICABLE VALUE.—For purposes of this subsection, the applicable value is the fair market value of all of the stock of the corporation on the date of the adoption of the plan of complete liquidation (or if greater, on August 1, 1986). (5) QUALIFIED CORPORATION.—For purposes of this subsection, the term "qualified corporation" means any corporation if— (A) on August 1, 1986, and at all times thereafter before the corporation is completely liquidated, more than 50 percent (by value) of the stock in such corporation is held by 10 or fewer qualified persons, and (B) the applicable value of such corporation does not exceed $10,000,000. (6) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— (A) QUALIFIED PERSON.—The term "qualified person" ^'^ means— (i) an individual, (ii) an estate, or • (iii) any trust described in clause (ii) or (iii) of section 1361(c)(2)(A) of the Internal Revenue Code of 1986. ^^ ^ (B) ATTRIBUTION RULES.— (i) ENTITIES.—Any stock held by a corporation, trust, or partnership shall be treated as owned proportionally Jg-I by its shareholders, beneficiaries, or partners. Stock <*0f considered to be owned by a person by reason of the application of the preceding sentence shall, for pur- poses of applying such sentence, be treated as actually owned by such person. (ii) FAMILY MEMBERS.—Stock owned (or treated as owned under clause (i)) by members of the same family (within the meaning of section 318(a)(1) of the Internal Revenue Code of 1986) shall be treated as owned by 1 c person. (C) CONTROLLED GROUP OF CORPORATIONS.—All members 1 of the same controlled group (as defined in section 267(f)(1) of such Code) shall be treated as 1 corporation for purposes of this subsection. (7) SECTION 338 TRANSACTIONS.—The provisions of this subsec- tion shall also apply in the case of a transaction described in
100 STAT. 2280 PUBLIC LAW 99-514—OCT. 22, 1986 section 338 of the Internal Revenue Code of 1986 where the acquisition date (within the meaning of such section 338) is before January 1, 1989. (8) APPLICATION OF SECTION 1374.—Rules similar to the rules of this subsection shall apply for purposes of applying section 1374 of the Internal Revenue Code of 1986 (as amended by section 632) in the case of a qualified corporation which becomes an S corporation for a taxable year beginning before January 1, 1989. (d) COMPLETE LIQUIDATION DEFINED.—For purposes of this section, a corporation shall be treated as completely liquidated if all of the assets of such corporation are distributed in complete liquidation, less assets retained to meet claims. (e) OTHER TRANSITIONAL RULES.— (1) The amendments made by this subtitle shall not apply to any liquidation of a corporation incorporated under the laws of Pennsylvania on August 3,1970, if^ (A) the board of directors of such corporation approved a plan of liquidation before January 1,1986, 1 (B) an agreement for the sale of a material portion of the It assets of such corporation was signed on May 9, 1986 (whether or not the assets are sold in accordance with such agreement), and (C) the corporation is completely liquidated on or before December 31,1988. (2) The amendments made by this subtitle shall not apply to any liquidation (or deemed liquidation under section 338 of the Internal Revenue Code of 1986) of a diversified financial serv- ices corporation incorporated under the laws of Delaware on May 9,1929, pursuant to a binding written contract entered into on or before December 31, 1986; but only if the liquidation is completed (or in the case of a section 338 election, the acquisi- tion date occurs) before January 1,1988. (3) The amendments made by this subtitle shall not apply to any distribution, or sale, or exchange— (A) of the assets owned (directly or indirectly) by a testa- mentary trust established under the will of a decedent dying on June 15,1956, or its beneficiaries, (B) made pursuant to a court order in an action filed on January 18,1984, if such order— (i) is issued after July 31, 1986, and (ii) directs the disposition of the assets of such trust . . and the division of the trust corpus into 3 separate sub- trusts. For purposes of the preceding sentence, an election under section 338(g) of the Internal Revenue Code of 1986 (or an election under section 338(h)(10) of such Code) qualifying as a section 337 liquidation pursuant to regulations prescribed by the Secretary under section 1.338(h)(10)-lT(j)) made in connection with a sale or exchange pursuant to a court order described in subparagraph (B) shall be treated as a sale of exchange, c (4)(A) The amendments made by this subtitle shall not apply to any distribution, or sale, or exchange— (i) if— (I) an option agreement binding on the selling cor- poration to sell substantially all its assets is executed
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2281 before August 1, 1986, the corporation adopts (by ap- proval of its shareholders) a conditional plan of liquida- tion before August 1,1986 to become effective upon the exercise of such option agreement (or modification . thereto), and the assets are sold pursuant to the exer- cise of the option (as originally executed or subse- H quently modified provided that the purchase price is not thereby increased), or (II) in the event that the optionee does not acquire substantially all the assets of the corporation, the optionor corporation sells substantially all its assets to another purchaser at a purchase price not greater than that contemplated by such option agreement pursuant to an effective plan of liquidation, and ... (ii) the complete liquidation of the corporation occurs within 12 months of the time the plan of liquidation be- comes effective, but in no event later than December 31, 1989. (B) For purposes of subparagraph (A), a distribution, or sale, or exchange, of a distributee corporation (within the meaning of section 337(c)(3) of the Internal Revenue Code of 1986) shall be treated as satisfying the requirements of subparagraph (A) if its subsidiary satisfies the requirements of subparagraph (A). (C) For purposes of section 56 of the Internal Revenue Code of 1986 (as amended by this Act), any gain or loss not recognized by reason of this paragraph shall not be taken into account in determining the adjusted net book income of the corporation. (5) In the case of a corporation incorporated under the laws of Wisconsin on April 3, 1948— (A) a voting trust established not later than December 31, 1987, for purposes of holding employees' shares of stock in such corporation, shall qualify as a trust permitted as a shareholder of an S corporation, and (B) the amendment made by section 632 (other than subsection Oa) thereof) shall not apply to such corporation if it elects to be an S corporation before January 1, 1989. I (6) The amendments made by this subtitle shall not apply to the liquidation of a corporation incorporated on January 26, 1982, under the laws of the State of Alabama with a principal place of business in Colbert County, Alabama, but only if such corporation is completely liquidated on or before December 31, 1987. (7) The amendments made by this subtitle shall not apply to -I ? the acquisition by a Delaware bank holding company of all of the assets of an Iowa bank holding company pursuant to a ^ written contract dated December 9,1981. (8) The amendments made by this subtitle shall not apply to the liquidation of a corporation incorporated under the laws of Delaware on January 20, 1984, if more than 40 percent of the stock of such corporation was acquired by purchase on June 11, 1986, and there was a tender offer with respect to all additional outstanding shares of such corporation on July 29, 1986, but only if the corporation is completely liquidated on or before December 31, 1987. (f) TREATMENT OF CERTAIN DISTRIBUTIONS IN RESPONSE TO HOSTILE TENDER OFFER.—
100 STAT. 2282 PUBLIC LAW 99-514—OCT. 22, 1986 (1) IN GENERAL.—No gain or loss shall be recognized under the Internal Revenue Code of 1986 to a corporation (hereinafter in this subsection referred to as "parent") on a qualified distribu- tion. (2) QUALIFIED DISTRIBUTION DEFINED.—For purposes of para- graph (D— (A) IN GENERAL.—The term "qualified distribution" means a distribution— (i) by parent of all of the stock of a qualified subsidi- ary in exchange for stock of parent which was acquired for purposes of such exchange pursuant to a tender offer dated February 16, 1982, and (ii) pursuant to a contract dated February 13, 1982, and (iii) which was made not more than 60 days after the board of directors of parent recommended rejection of •''• ' ' an unsolicited tender offer to obtain control of parent. (B) QUALIFIED SUBSIDIARY.—The term "qualified subsidi- ary" means a corporation created or organized under the laws of Delaware on September 7, 1976, all of the stock of which was owned by parent immediately before the quali- fied distribution. SEC. 634. STUDY OF CORPORATE PROVISIONS. The Secretary of the Treasury or his delegate shall conduct a study of proposals to reform the provisions of subchapter C of chapter 1 of the Internal Revenue Code of 1986. Not later than January 1, 1988, the Secretary shall submit to the Committee on Ways and Means of the House of Representatives and the Commit- tee on Finance of the Senate a report on the study conducted under this section (together with such recommendations as he may deem advisable). Subtitle E—Other Corporate Provisions SEC. 641. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISI- TIONS. (a) IN GENERAL.—Part IV of subchapter O of chapter 1 (relating to special rules for determining basis) is amended by redesignating section 1060 as section 1061 and by inserting after section 1059 the following new section: "SEC. 1060. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISI- TIONS. "(a) GENERAL RULE.—In the case of any applicable asset acquisi- tion, for purposes of determining both— ^, "(1) the transferee's basis in such assets, and ' "(2) the gain or loss of the transferor with respect to such acquisition, the consideration received for such assets shall be allocated among such assets acquired in such acquisition in the same manner as amounts are allocated to assets under section 338(bM5). "(b) LN'FORMATION REQUIRED TO BE FURNISHED TO SECRETARY.— Under regulations, the transferor and transferee in an applicable asset acquisition shall, at such times and in such manner as may be
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2283 provided in such regulations, furnish to the Secretary the following information: "(1) The amount of the consideration received for the assets which is allocated to goodwill or going concern value. "(2) Any modification of the amount described in paragraph (1). "(3) Any other information with respect to other assets trans- ferred in such acquisition as the Secretary may find necessary to carry out the provisions of this section. "(c) APPLICABLE ASSET ACQUISITION.—For purposes of this section, the term 'applicable asset acquisition' means any transfer (whether directly or indirectly)— "(1) of assets which constitute a trade or business, and ,^ "(2) with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets. A transfer shall not be treated as failing to be an applicable asset acquisition merely because section 1031 applies to a portion of the assets transferred." (b) CONFORMING AMENDMENT.—The table of sections for part IV of subchapter O of chapter 1 is amended by striking out the item relating to section 1060 and inserting in lieu thereof the following new items: "Sec. 1060. Special allocation rules for certain asset acquisitions. "Sec. 1061. Cross references." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to any acquisition of assets after May 6, 1986, unless such acquisition is pursuant to a binding contract which was in effect on May 6, 1986, and at all times thereafter. SEC. 642. MODIFICATION OF DEFINITION OF RELATED PARTY. (a) DEFINITIONS OF RELATED PARTY FOR PURPOSES OF CERTAIN SALES.— (1) SALE OF DEPRECIABLE PROPERTY BETWEEN CERTAIN RELATED TAXPAYERS.— (A) IN GENERAL.—Paragraph (1) of section 1239(b) (defin- .3^ ing related persons) is amended by striking out "80-percent owned entities" and inserting in lieu thereof "controlled entities". (B) CONTROLLED ENTITY DEFINED.— v,., (i) IN GENERAL.—Section 1239(c)(1) (defining 80-per- •p >, cent owned entity) is amended— (I) by striking out "80-percent owned entity" and inserting in lieu thereof "controlled entity", (II) by striking out "80 percent or more in value" f-t ,^ in subparagraph (A) and inserting in lieu thereof If j^. "more than 50 percent of the value", (III) by striking out "80 percent or more" in subparagraph (B) and inserting in lieu thereof "more than 50 percent", and (IV) by striking out "and" at the end of subpara- graph (A), by striking out the period at the end of subparagraph (B) and inserting ", and", and by adding at the end thereof the following new para- . :.;. graph: "(C) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b)."
100 STAT. 2284 PUBLIC LAW 99-514—OCT. 22, 1986 (ii) C O N F O R M I N G AMENDMENT.—Section 1239(c) is a m e n d e d by s t r i k i n g o u t " 8 0 - P E R C E N T O W N E D E N T I T Y " in t h e heading thereof a n d inserting in lieu thereof "CONTROLLED E N T I T Y " , ' (C) CONSTRUCTIVE O W N E R S H I P . — P a r a g r a p h (2) of section 1239(c) is amended to read a s follows: "(2) CONSTRUCTIVE O W N E R S H I P . — F o r p u r p o s e s of t h i s section, ownership shall be d e t e r m i n e d in accordance with r u l e s similar to t h e rules u n d e r section 267(c) (other t h a n p a r a g r a p h (3) thereof)." (D) C O N F O R M I N G A M E N D M E N T . — S e c t i o n 453(g) is a m e n d e d by s t r i k i n g o u t " 8 0 - P E R C E N T O W N E D " in t h e h e a d i n g thereof and inserting in lieu thereof "CONTROLLED". (2) P A R T N E R S H I P S . — P a r a g r a p h (2) of section 707(b) (relating to gains t r e a t e d a s o r d i n a r y income) is a m e n d e d by striking out "80 p e r c e n t " each place it a p p e a r s a n d inserting i n lieu thereof "50 percent". (3) INSTALLMENT SALES.—Paragraph (1) of section 453(f) (defin- ing related person) is a m e n d e d t o read a s follows: "(1) RELATED PERSON.—Except for p u r p o s e s of subsection (g) and (h), t h e t e r m 'related person' m e a n s — "(A) a person whose stock would be a t t r i b u t e d u n d e r section 318(a) (other t h a n p a r a g r a p h (4) thereof) to t h e person first disposing of t h e property, o r "(B) a person w h o b e a r s a relationship described in sec- tion 267(b) to t h e person first disposing of t h e property." (b) R U L E S R E L A T I N G TO C O N T I N G E N T P A Y M E N T S . — (1) P A Y M E N T S TO BE RECEIVED DEFINED.—Section 453(f) (relat- ing to definitions a n d special rules) is a m e n d e d by adding a t t h e end thereof t h e following new p a r a g r a p h : "(8) P A Y M E N T S TO BE RECEIVED D E F I N E D . — T h e t e r m ' p a y m e n t to be received' includes— "(A) t h e aggregate a m o u n t of all p a y m e n t s which a r e n o t '^ contingent a s to a m o u n t , a n d "(B) t h e fair m a r k e t v a l u e of a n y p a y m e n t s which a r e ' contingent a s to a m o u n t . " (2) S A L E O F DEPRECIABLE PROPERTY BETWEEN RELATED PAR- TIES.—Paragraph (1) of section 453(g) (relating t o sale of depre- ciable property t o controlled entities) is a m e n d e d t o read a s follows: "(1) I N GENERAL.—In t h e case of a n i n s t a l l m e n t sale of depre- ciable property between related persons (within t h e m e a n i n g of section 1239(b))— "(A) subsection (a) shall n o t apply, a n d "(B) for purposes of this title— "(i) except a s provided i n clause (ii), all p a y m e n t s t o be received shall be t r e a t e d a s received in t h e y e a r of "' - t h e disposition, a n d "(ii) in t h e case of a n y p a y m e n t s which a r e contin- gent a s to a m o u n t b u t with respect to which t h e fair ; • m a r k e t value m a y n o t be reasonably ascertained— ' "(I) t h e basis shall be recovered ratably, a n d "(II) t h e p u r c h a s e r m a y n o t increase t h e basis of a n y property acquired in such sale by a n y a m o u n t before such t i m e a s t h e seller includes such a m o u n t in income." v- . (c) EFFECTIVE D A T E . — w.-^ ; ifM
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2285 (1) I N GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to sales after the date of the enactment of this Act, in taxable years ending after such date. (2) TRADITIONAL RULE FOR BINDING CONTRACTS.—The amend- ments made by this section shall not apply to sales made after August 14, 1986, which are made pursuant to a binding contract in effect on August 14,1986, and at all times thereafter. SEC. 643. TREATMENT OF AMORTIZABLE BOND PREMIUM AS INTEREST. (a) IN GENERAL.—Section 171 (relating to amortizable bond pre- mium) is amended by redesignating subsection (e) as (f) and by inserting after subsection (d) the following new subsection: "(e) TREATMENT AS INTEREST.—Except as provided in regulations, the amount of any amortizable bond premium with respect to which a deduction is allowed under subsection (aXD for any taxable year shall be treated as interest for purposes of this title." (b) EFFECTIVE DATE.— (1) IN GENERAL.—The amendment made by subsection (a) shall apply to obligations acquired after the date of the enact- ment of this Act, in taxable years ending after such date. (2) REVOCATION OF ELECTION.—In the case of a taxpayer with respect to whom an election is in effect on the date of enactment of this Act under section 171(c) of the Internal Revenue Code of 1986, such election shall apply to obligations issued after the date of the enactment of this Act only if the taxpayer chooses (at such time and in such manner as may be prescribed by the Secretary of the Treasury or his delegate) to have such election apply with respect to such obligations. SEC. 644. PROVISIONS RELATING TO COOPERATIVE HOUSING CORPORA- TIONS. (a) TENANT-STOCKHOLDER MAY INCLUDE PERSON OTHER THAN INDIVIDUAL.— (1) IN GENERAL.—Section 216(b)(2) (defining tenant-stock- holder) is amended— (A) by striking out "an individual" and inserting in lieu thereof "a person", and (B) by striking out "such individual" and inserting in lieu thereof "such person". (2) PRIOR APPROVAL OF OCCUPANCY.—Paragraphs (5) and (6) of section 216(b) are amended to read as follows: "(5) PRIOR APPROVAL OF OCCUPANCY.—For purposes of this section, in the following cases there shall not be taken into account the fact that (by agreement with the cooperative hous- ing corporation) the person or his nominee may not occupy the house or apartment without the prior approval of such corpora- tion: "(A) In any case where a person acquires stock of a cooperative housing corporation by operation of law. "(B) In any case where a person other than an individual acquires stock of a cooperative housing corporation. "(C) In any case where the original seller acquires any stock of the cooperative housing corporation from the cor- poration not later than 1 year after the date on which the apartments or houses (or leaseholds therein) are trans- ferred by the original seller to the corporation.
100 STAT. 2286 PUBLIC LAW 99-514—OCT. 22, 1986 &«! "(6) ORIGINAL SELLER DEFINED.—For purposes of paragraph (5), the term 'original seller' means the person from whom the corporation has acquired the apartments or houses (or lease- holds therein).". (b) TREATMENT OF DEPRECIATION.—Section 216(c) (relating to treat- ment as property subject to depreciation) is amended to read as follows: "(c) TREATMENT AS PROPERTY SUBJECT TO DEPRECIATION.— "(1) I N GENERAL.—So much of the stock of a tenant-stock- holder in a cooperative housing corporation as is allocable, under regulations prescribed by the Secretary, to a proprietary lease or right of tenancy in property subject to the allowance for depreciation under section 167(a) shall, to the extent such proprietary lease or right of tenancy is used by such tenant- stockholder in a trade or business or for the production of income, be treated as property subject to the allowance for depreciation under section 167(a). The preceding sentence shall not be construed to limit or deny a deduction for depreciation under section 167(a) by a cooperative housing corporation with respect to property owned by such a corporation and leased to tenant-stockholders. "(2) DEDUCTION UMITED TO ADJUSTED BASIS IN STOCK.— "(A) I N GENERAL.—The amount of any deduction for depreciation allowable under section 167(a) to a tenant- stockholder with respect to any stock for any taxable year by reason of paragraph (1) shall not exceed the adjusted basis of such stock as of the close of the taxable year of the tenant-stockholder in which such deduction was incurred. "(B) CARRYFORWARD OF DISALLOWED AMOUNT.—The amount of any deduction which is not allowed by reason of -i il( subparagraph (A) shall, subject to the provisions of subpara- graph (A), be treated as a deduction allowable under section 167(a) in the succeeding taxable year.". (c) DISALLOWANCE OF DEDUCTIONS FOR PAYMENTS TO CORPORA- TION.—Section 216 is amended by adding at the end thereof the following new subsection: "(d) DISALLOWANCE OF DEDUCTION FOR CERTAIN PAYMENTS TO THE CORPORATION.—No deduction shall be allowed to a stockholder in a cooperative housing corporation for any amount paid or accrued to such corporation during any taxable year (in excess of the stockhold- er's proportionate share of the items described in subsections (aXD and (aX2)) to the extent that, under regulations prescribed by the Secretary, such amount is properly allocable to amounts paid or incurred at any time by the corporation which are chargeable to the corporation's capital account. The stockholder's adjusted basis in the stock in the corporation shall be increased by the amount of such disallowance." (d) DEDUCTION OF TAXES AND INTEREST.—Paragraph (3) of section 216(b) (defining tenant-stockholder's proportionate share) is amended to read as follows: "(3) TENANT-STOCKHOLDER'S PROPORTIONATE SHARE.— "(A) I N GENERAL.—Except as provided in subparagraph V (B), the term 'tenant-stockholder's proportionate share' means that proportion which the stock of the cooperative . housing corporation owned by the tenant-stockholder is of ^.pj; the total outstanding stock of the corporation (including any stock held by the corporation).
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2287 •'•'{ "(B) SPECIAL RULE WHERE ALLOCATION OF TAXES OR IN- TEREST REFLECT COST TO CORPORATION OF STOCKHOLDER'S UNIT.— "(i) IN GENERAL.—If, for any taxable year— "(I) each dwelling unit owned or leased by a cooperative housing corporation is separately allo- cated a share of such corporation's real estate v> : taxes described in subsection (a)(1) or a share of -H 1 such corporation's interest described in subsection (a)(2), and i "(II) such allocations reasonably reflect the cost fj to such corporation of such taxes, or of such in- terest, attributable to the tenant-stockholder's dwelling unit (and such unit's share of the common ^j;' areas), >f;; M t h e n t h e t e r m 'tenant-stockholder's proportionate s h a r e ' m e a n s t h e s h a r e s determined in accordance with B ^ t h e allocations described in subclause (II). *, "(ii) ELECTION BY CORPORATION REQUIRED.—Clause (i) 3i, shall apply with respect to a n y cooperative housing corporation only if such corporation elects its applica- tion. Such a n election, once made, m a y be revoked only with t h e consent of t h e Secretary." (e) T R E A T M E N T OF A M O U N T S RECEIVED I N CONNECTION W I T H THE R E F I N A N C I N G OF INDEBTEDNESS OF C E R T A I N COOPERATIVE H O U S I N G CORPORATIONS; T R E A T M E N T O F A M O U N T S P A I D F R O M QUALIFIED R E - FINANCING-RELATED R E S E R V E . — (1) P A Y M E N T OF CLOSING COSTS AND CREATION OF RESERVE EXCLUDED FROM GROSS INCOME.—For purposes of the Internal e Revenue Code of 1954, no amount shall be included in the gross s. income of a qualified cooperative housing corporation by reason t of the payment or reimbursement by a city housing develop- V ment agency or corporation of amounts for— (A) closing costs, or (B) t h e creation of reserves for t h e qualified cooperative housing corporation, in connection with a qualified refinancing. f^ (2) INCOME FROM RESERVE F U N D TREATED AS MEMBER I N C O M E . — r (A) I N GENERAL.—Income from a qualified refinancing- related reserve shall be t r e a t e d a s derived from its mem- |i!U 1 bers for purposes of— ISO U (i) section 216 of t h e I n t e r n a l Revenue Code of 1954 (relating to deduction of taxes, interest, a n d business ? depreciation by cooperative housing corporation I tenant-stockholder), a n d 5 (ii) section 277 of such Code (relating to deductions I> incurred by certain membership organizations in trans- r actions with members). (B) No INFERENCE.—Nothing in the provisions of this r paragraph shall be construed to infer that a change in law : is intended with respect to the treatment of deductions I under section 277 of the Internal Revenue Code of 1954 with respect to cooperative housing corporations, and any deter- g ;0< mination of such issue shall be made as if such provisions had not been enacted. (3) TREATMENT OF CERTAIN INTEREST CLAIMED AS DEDUCTION.— Any amount—
100 STAT. 2288 PUBLIC LAW 99-514—OCT. 22, 1986 (A) claimed (on a return of tax imposed by chapter 1 of the Internal Revenue Code of 1954) as a deduction by a qualified cooperative housing corporation for interest for any taxable year beginning before January 1, 1986, on a 3 v^ second mortgage loan made by a city housing development ^''•- agency or corporation in connection with a qualified re- >' financing, and >- (B) reported (before April 16, 1986) by the qualified co- operative housing corporation to its tenant-stockholders as interest described in section 216(a)(2) of such Code, ? • shall be treated for purposes of such Code as if such amount were paid by such qualified cooperative housing corporation during such taxable year. (4) QUALIFIED COOPERATIVE HOUSING CORPORATION.— (A) IN GENERAL.—For purposes of this subsection, the term "qualified cooperative housing corporation" means any corporation if— (i) such corporation is, after the application of para- graphs (1) and (2), a cooperative housing corporation (as defined in section 216(b) of the Internal Revenue Code of 1954), (ii) such corporation is subject to a qualified limited- profit housing companies law, and (iii) such corporation either— ' •;': (I) filed for incorporation on July 22, 1965, or 'i ' (II) filed for incorporation on March 5, 1964. (B) QUALIFIED LIMITED-PROFIT HOUSING COMPANIES LAW.— '"''' For purposes of subparagraph (A), the term "qualified lim- ited-profit housing companies law" means any limited- profit housing companies law which limits the resale price for a tenant-stockholder's stock in a cooperative housing corporation to the sum of his basis for such stock plus his proportionate share of part or all of the amortization of any mortgage on the building owned by such corporation. '• (5) QUALIFIED REFINANCING.—For purposes of this subsection, the term "qualified refinancing" means any refinancing— (A) which occurred— (i) with respect to a qualified cooperative housing corporation described in paragraph (4)(A)(iii)(I) on September 20,1978, or (ii) with respect to a qualified cooperative housing ^' corporation described in paragraph (4)(A)(iii)(II) on November 21,1978, and (B) in which a qualified cooperative housing corporation refinanced a first mortgage loan made to such corporation '•:.:' by a city housing development agency with a first mortgage -=?r loan made by a city housing development corporation and insured by an agency of the Federal Government and a ' ' * second mortgage loan made by such city housing develop- ment agency, in the process of which a reserve was created (as required by such Federal agency) and closing costs were paid or reimbursed by such city housing development agency or corporation. (6) QuAUFiED REFINANCING-RELATED RESERVE.—For purposes of this subsection, the term "qualified refinancing-related re- -" serve" means any reserve of a qualified cooperative housing corporation with respect to the creation of which no amount
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2289 was included in the gross income of such corporation by reason of paragraph (a). (7) TREATMENT OF AMOUNTS PAID FROM QUALIFIED REFINANC- ING-RELATED RESERVE.— (A) IN GENERAL.—With respect to any payment from a qualified refinancing-related reserve out of amounts ex- cluded from gross income by reason of paragraph (1)— (i) no deduction shall be allowed under chapter 1 of such Code, and (ii) the basis of any property acquired with such payment (determined without regard to this subpara- ., u graph) shall be reduced by the amount of such pay- ment. ^ (B) ORDERING RULES.—For purposes of subparagraph (A), ^ payments from a reserve shall be treated as being made— (i) first from amounts excluded from gross income by I reason of paragraph (1) to the extent thereof, and (ii) then from other amounts in the reserve. .. (f) EFFECTIVE DATE.— (1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31,1986. (2) SUBSECTION (e).— (A) Except as provided in subparagraph (B), subsection (e) shall apply to taxable years beginning before January 1, 1986. (B) Subsection (e)(7) shall apply to amounts paid or in- curred, and property acquired, in taxable years beginning, after December 31,1985. SEC. 645. SPECIAL RULES RELATING TO PERSONAL HOLDING COMPANY TAX. ^' (a) COMPUTER SOFTWARE ROYALTIES.— (1) IN GENERAL.—Paragraph (1) of section 543(a) (defining ^ personal holding company income) is amended— ^'\ (A) by striking out "and" at the end of subparagraph (A), (B) by striking out the period at the end of subparagraph (B) and inserting in lieu thereof ", and", and (C) by adding at the end thereof the following new - subparagraph: "(C) active business computer software royalties (within the meaning of subsection (d))." s (2) ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES DE- FINED.—Section 543 is amended by adding at the end thereof the following new subsection: = "(d) ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES.— "(1) IN GENERAL.—For purposes of this section, the term 'active business computer software royalties' means any royal- ties— "(A) received by any corporation during the taxable year in connection with the licensing of computer software, and "(B) with respect to which the requirements of para- graphs (2), (3), (4), and (5) are met. p.- "(2) ROYALTIES MUST BE RECEIVED BY CORPORATION ACTIVELY ENGAGED IN COMPUTER SOFTWARE BUSINESS.—The requirements of this paragraph are met if the royalties described in para- graph (D—
100 STAT. 2290 PUBLIC LAW 99-514—OCT. 22, 1986 fros;f .s 1 "(A) are received by a corporation engaged in the active conduct of the trade or business of developing, manufactur- Di^Ait ing, or producing computer software, and "(B) are attributable to computer software which— ;. ffio. "(i) is developed, manufactured, or produced by such s** ' ' corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or ^' "(ii) is directly related to such trade or business. "(3) ROYALTIES MUST CONSTITUTE AT LEAST 50 PERCENT OF ' • INCOME.—The requirements of this paragraph are met if the - royalties described in paragraph (1) constitute at least 50 per- V cent of the ordinary gross income of the corporation for the taxable year. ,iA <'(4) DEDUCTIONS UNDER SECTIONS I 6 2 AND 174 RELATING TO .' ROYALTIES MUST EQUAL OR EXCEED 25 PERCENT OF ORDINARY GROSS ;t' INCOME.— ijii "(A) jj^ GENERAL.—The requirements of this paragraph are met if— . "(i) the sum of the deductions allowable to the cor- sisrta a poration under sections 162, 174, and 195 for the tax- able year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds ; •"' 25 percent of the ordinary gross income of such cor- 4 / nn*' V poration for such taxable year, or .; "(ii) the average of such deductions for the 5-taxable year period ending with such taxable year equals or *' exceeds 25 percent of the average ordinary gross income of such corporation for such period. V ^'iw.' If a corporation has not been in existence during the 5- taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for f. .^; such 5-taxable year period. "(B) DEDUCTIONS ALLOWABLE UNDER SECTION 162.—For t- ^ ,. purposes of subparagraph (A), a deduction shall not be f,.. , treated as allowable under section 162 if it is specifically allowable under another section. •v6ir \ "(^) LIMITATION ON ALLOWABLE DEDUCTIONS.—For pur- poses of subparagraph (A), no deduction shall be taken into ,jj^«! ,^ account with respect to compensation for personal services rendered by the 5 individual shareholders holding the larg- -j^ri est percentage Ot)y value) of the outstanding stock of the . ; : , ,c; corporation. For purposes of the preceding sentence— "(i) individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into fjn-• ;*.jt account, and lovoi /r. "^") stock deemed to be owned by a shareholder solely by attribution from a partner under section 544(a)(2) shall be disregarded. "(5) DIVIDENDS MUST EQUAL OR EXCEED EXCESS OF PERSONAL .£.j, H O L D I N G C O M P A N Y I N C O M E OVER 10 PERCENT OF ORDINARY GROSS INCOME.— ,'<4i ' "(A) I N GENERAL.—The requirements of this paragraph • . rj are inet if the sum of— t -sr. ,' "(i) the dividends paid during the taxable year (deter- mined under section 562),
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2291 ' . "(ii) the dividends considered as paid on the last day of the taxable year under section 563(c) (as limited by the second sentence of section 563(b)), and "(iii) the consent dividends for the taxable year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year exceeds 10 percent of the ordinary gross income of such corporation for such taxable year. "(B) COMPUTATION OF PERSONAL HOLDING COMPANY INCOME.—For purposes of this paragraph, personal holding company income shall be computed— "(i) without regard to amounts described in subsec- tion (a)(1)(C), "(ii) without regard to interest income during any ^'*" taxable year— .„ "(I) which is in the 5-taxable year period begin- ning with the later of the 1st taxable year of the corporation or the 1st taxable year in which the corporation conducted the trade or business de- scribed in paragraph (2)(A), and "(II) during which the corporation meets the requirements of paragraphs (2), (3), and (4), and .,, „^ "(iii) by including adjusted income from rents and adjusted income from mineral, oil, and gas royalties (within the meaning of paragraphs (2) and (3) of subsec- tion (a)). "(6) SPECIAL RULES FOR AFFILIATED GROUP MEMBERS.— "(A) IN GENERAL.—In any case in which— "(i) the taxpayer receives royalties in connection with the licensing of computer software, and "(ii) another corporation which is a member of the same affiliated group as the taxpayer meets the requirements of paragraphs (2), (3), (4), and (5) with respect to such computer software, the taxpayer shall be treated as having met such require- ments. "(B) AFFILIATED GROUP.—For purposes of this paragraph, the term 'affiliated group' has the meaning given such term by section 1504(a)." (3) FOREIGN PERSONAL HOLDING COMPANY INCOME.—Paragraph (1) of section 553(a) (defining foreign personal holding company income) is amended by adding at the end thereof the following new sentence: "This paragraph shall not apply to active busi- ness computer software royalties (as defined in section 543(d))." (4) CONFORMING AMENDMENTS.— '-^' (A) Section 543(a)(4) (relating to copyright royalties) is amended by adding at the end thereof the following new sentence: "This paragraph shall not apply to active busi- ness computer software royalties.". (B) Section 543(b)(3) (relating to adjusted income from rents) is amended— (i) by striking out "or" at the end of subparagraph (C), (ii) by striking out the period at the end of subpara- graph (D) and inserting in lieu thereof ", or", and
100 STAT. 2292 PUBLIC LAW 99-514—OCT. 22, 1986 (iii) by adding at the end thereof the following new •"• ^ subparagraph: "(E) active business computer software royalties (as de- fined in subsection (d))." (b) SPECIAL RULES FOR BROKER-DEALERS.—In the case of a broker- dealer which is part of an affiliated group which files a consolidated Federal income tax return, the common parent of which was incor- porated in Nevada on January 27, 1972, the personal holding com- pany income (within the meaning of section 543 of the Internal Revenue Code of 1986) of such broker-dealer, shall not include any interest received after the date of the enactment of this Act with respect to— (1) any securities or money market instruments held as inven- tory, ,f (2) margin accounts, or (3) any financing for a customer secured by securities or money market instruments. (c) SPECIAL RULE FOR ROYALTIES RECEIVED BY QUALIFIED TAX- PAYER.— (1) IN GENERAL.—Any qualified royalty received or accrued in taxable years beginning after December 31, 1981, by a qualified taxpayer shall be treated in the same manner as a royalty with respect to software is treated under the amendments made by this section. (2) QUALIFIED TAXPAYER.—For purposes of this subsection, a qualified taxpayer is any taxpayer incorporated on September 7, 1978, which is engaged in the trade or business of manufactur- ing dolls and accessories. (3) QUALIFIED ROYALTY.—For purposes of this subsection, the ., term "qualified royalty" means any royalty arising from an agreement entered into in 1982 which permits the licensee to manufacture and sell dolls and accessories. (d) SPECIAL RULE FOR TREATMENT OF ACTIVE BUSINESS COMPUTER ROYALTIES FOR S CORPORATION PURPOSES.—In the case of a taxpayer which was incorporated on May 3, 1977, in California and which elected to be taxed as an S corporation for its taxable year ending on December 31, 1985, any active business computer royalties (within the meaning of section 543(d) of the Internal Revenue Code of 1986 as added by this Act) which are received by the taxpayer in taxable years beginning after December 31, 1984, shall not be treated as passive investment income (within the meaning of section 1362(d)(3)(D)) for purposes of subchapter S of chapter 1 of such Code. (e) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to royalties received before, on, and after December 31, 1986. SEC. 646. CERTAIN ENTITIES NOT TREATED AS CORPORATIONS. (a) GENERAL RULE.—For purposes of the Internal Revenue Code of 1986, if the entity described in subsection (b) makes an election under subsection (c), such entity shall be treated as a trust to which subpart E of part 1 of subchapter J of chapter 1 of such Code applies. (b) ENTITY.—An entity is described in this subsection if— (1) such entity was created in 1906 as a common law trust and . i • is governed by the trust laws of the State of Minnesota, (2) such entity receives royalties from iron ore leases, and (3) income interests in such entity are publicly traded on a v^ national stock exchange.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2293 (c) ELECTION.— (1) IN GENERAL.—An election under this subsection to have the provisions of this section apply— (A) shall be made by the board of trustees of the entity, and (B) shall not be valid unless accompanied by an agree- ment described in paragraph (2). (2) AGREEMENT.—The agreement described in this paragraph is a written agreement signed by the board of trustees of the entity which provides that the entity will not— (A) sell any trust property, (B) purchase any additional trust properties, or (C) receive any income other than— (i) income from long-term mineral leases, or (ii) interest or other income attributable to ordinary and necessary reserves of the entity. (3) PERIOD FOR WHICH ELECTION IS IN EFFECT.—An election under this subsection shall be in effect during the period— (A) beginning on the first day of the first taxable year beginning after the date of the enactment of this Act and following the taxable year in which the election is made, and (B) ending as of the close of the taxable year preceding the taxable year in which the entity ceases to be described in subsection (b) or violates any term of the agreement under paragraph (2). (4) MANNER OF ELECTION.—Any election under this subsection shall be made in such manner as the Secretary of the Treasury or his delegate may prescribe. (d) SPECIAL RULES FOR TAXATION OF TRUST.— (1) ELECTION TREATED AS A LIQUIDATION.—If an election is made under subsection (c) with respect to any entity— (A) such entity shall be treated as having been liquidated into a trust immediately before the period described in subsection (c)(3) in a liquidation to which section 333 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this Act) applies, and (B) any person holding an interest in the property held by such entity as of such time shall be treated as a qualified electing shareholder for purposes of section 333 of such Code (as so in effect). (2) TERMINATION OF ELECTION.—If an entity ceases to be de- scribed in subsection (b) or violates any term of the agreement described in subsection (c)(2), then the tax imposed on such entity for the taxable year in which such cessation or violation occurs shall be increased by the sum of— (A) the amount of taxes which would have been imposed on such entity during any taxable year with respect to which an election under subsection (c) was in effect if such election had not been in effect, plus (B) interest determined for the period— (i) beginning on the due date for any such taxable year, and (ii) ending on the due date for the taxable year in which such cessation or violation occurs, by using the rates and method applicable under section 6621 for underpayments of tax for such period. 71-194 0 - 89 - 17 : CSL. 3 Part3
100 STAT. 2294 PUBLIC LAW 99-514—OCT. 22, 1986 (3) TRUST CEASING TO EXIST.—Paragraph (2) shall not apply if the trust ceases to be described in subsection (b) or violates the agreement in subsection (cX2) because the trust ceases to exist or by reason of subsection (e). (e) TERMINATION OF ELECTION.—Any election under subsection (c) shall not apply to any taxable year beginning more than 5 years after the date of the enactment of this Act unless the trust petitions a court of competent jurisdiction and the court acts to remove from the trust instrument any powers deemed by the court to be inconsistent with the operation of the entity as a trust for tax purposes (as described in an Internal Revenue Service ruling dated November 1,1983). SEC. 647. SPECIAL RULE FOR DISPOSITION OF STOCK OF SUBSIDIARY. If for a taxable year of an affiliated group filing a consolidated return ending on or before December 31, 1987, there is a disposition of stock of a subsidiary (within the meaning of Treasury Regulation section 1.1502-19), the amount required to be included in income with respect to such disposition under Treasury Regulation section 1.1502-19(a) shall, notwithstanding such section, be included in income ratably over the 15-year period beginning with the taxable year in which the disposition occurs. The preceding sentence shall apply only if such subsidiary was incorporated on December 24, 1969, and is a participant in a mineral joint venture with a corpora- tion organized under the laws of the foreign country in which the joint venture mineral project is located. Subtitle F—Regulated Investment Companies SEC. 651. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED INVESTMENT COMPANIES. (a) GENERAL RULE.—Chapter 44 (relating to real estate investment trusts) is amended by adding at the end thereof the following new section: "SEC. 4982. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED INVESTMENT COMPANIES, "(a) IMPOSITION OF TAX.—There is hereby imposed a tax on every regulated investment company for each calendar year equal to 4 percent of the excess (if any) of— "(1) the required distribution for such calendar year, over "(2) the distributed amount for such calendar year. "(b) REQUIRED DISTRIBUTION.—For purposes of this section— "(1) I N GENERAL.—The term 'required distribution' means, with respect to any calendar year, the sum of— "(A) 97 percent of the regulated investment company's ordinary income for such calendar year, plus "(B) 90 percent of the regulated investment company's capital gain net income for the 1-year period ending on October 31 of such calendar year. "(2) INCREASE BY PRIOR YEAR SHORTFALL.—The amount deter- mined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— \ "(A) the grossed up required distribution for the preced- ing calendar year, over
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2295 "(B) the distributed amount for such preceding calendar "(3) GROSSED UP REQUIRED DISTRIBUTION.—The grossed up re- quired distribution for any calendar year is the required dis- tribution for such year determined— "(A) with the application of paragraph (2) to such taxable year, and "(B) by substituting '100 percent' for each percentage set forth in paragraph (1). "(c) DISTRIBUTED AMOUNT.—For purposes of this section— "(1) IN GENERAL.—The term 'distributed amount' means, with respect to any calendar year, the sum of— "(A) the deduction for dividends paid (as defined in sec- tion 561) during such calendar year, and "(B) any amount on which tax is imposed under subsec- tion (bXD or (bX3)(A) of section 852 for any taxable year ending in such calendar year. "(2) INCREASE BY PRIOR YEAR OVERDISTRIBUTION.—The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— "(A) the distributed amount for the preceding calendar year (determined with the application of this paragraph to such preceding calendar year), over "(B) the grossed up required distribution for such preced- ing calendar year. "(3) DETERMINATION OF DIVIDENDS PAID.—The amount of the dividends paid during any calendar year shall be determined without regard to— "(A) the provisions of section 855, and "(B) any exempt-interest dividend as defined in section 8520a)(5). "(d) TIME FOR PAYMENT OF TAX.—The tax imposed by this section for any calendar year shall be paid on or before March 15 of the following calendar year. "(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ORDINARY INCOME.—The term 'ordinary income' means the investment company taxable income (as defined in section 852(bX2)) determined— "(A) without regard to subparagraphs (A) and (D) of section 852(bX2), "(B) by not taking into account any gain or loss from the sale or exchange of a capital asset, and "(C) by treating the calendar year as the company's taxable year. "(2) CAPITAL GAIN NET INCOME.—The term 'capital gain net income' has the meaning given to such term by section 1222(9) (determined by treating the 1-year period ending on October 31 of any calendar year as the company's taxable year). "(3) TREATMENT OF DEFICIENCY DISTRIBUTIONS.—In the case of any deficiency dividend (as defined in section 860(0)— "(A) such dividend shall be taken into account when paid without regard to section 860, and "(B) any income giving rise to the adjustment shall be treated as arising when the dividend is paid. "(4) ELECTION TO USE TAXABLE YEAR IN CERTAIN CASES.— "(A) IN GENERAL.—If—
100 STAT. 2296 PUBLIC LAW 9 9 - 5 1 4 - O C T . 22, 1986 ,.. "(i) the taxable year of the regulated investment company ends with the month of November or Decem- .^ -, ber, and ..>- "(ii) such company makes an election under this paragraph, subsection (b)(1)(B) and paragraph (2) of this subsection shall be applied by taking into account the company's taxable year in lieu of the 1-year period ending on Octo- ber 31 of the calendar year. "(B) ELECTION REVOCABLE ONLY WITH CONSENT.—An elec- tion under this paragraph, once made, may be revoked only with the consent of the Secretary." (b) RELATED AMENDMENTS.— (1) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.— (A) Subsection (b) of section 852 (relating to method of taxation of regulated investment companies and their shareholders) is amended by adding at the end thereof the following new paragraph: "(6) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For pur- poses of this title, any dividend declared by a regulated invest- ment company in December of any calendar year and payable to shareholders of record on a specified date in such month shall be deemed— "(A) to have been received by each shareholder on such date, and "(B) to have been paid by such company on such date (or, if earlier, as provided in section 855). The preceding sentence shall apply only if such dividend is actually paid by the company before February 1 of the following . calendar year.' (B) Subsection (b) of section 855 is amended by striking out "Amounts" and inserting in lieu thereof "Except as provided in section 852(b)(6), amounts". (2) TREATMENT OF EARNINGS AND PROFITS.—Subsection (c) of section 852 is amended to read as follows: "(c) EARNINGS AND PROFITS.— "(1) IN GENERAL.—The earnings and profits of a regulated investment company for any taxable year (but not its accumu- lated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term 'regulated investment company' includes a domestic corporation which is a regulated investment company deter- mined without regard to the requirements of subsection (a). "(2) COORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—A regulated investment company shall be treated as having suffi- cient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such company. The preceding sentence shall not apply to the extent that the amount distrib- uted during any calendar year by the company exceeds the required distribution for such calendar year (as determined under section 4982)." (3) TREATMENT OF N E T CAPITAL LOSS AFTER OCTOBER 3 1 OF ANY YEAR.—Subparagraph (C) of section 852(b)(3) (defining capital gain dividend) is amended by adding at the end thereof the following new sentences: "For purposes of this subparagraph.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2297 the amount of the net capital gain for a taxable year (to which an election under section 4982(eX4) does not apply) shall be determined without regard to any net capital loss attributable to transactions after October 31 of such year, and any such net capital loss shall be treated £is arising on the 1st day of the next taxable year. To the extent provided in regulations, the preced- ing sentence shall apply also for purposes of computing regu- lated investment company taxable income." (c) CLERICAL AMENDMENT.—Chapter 44 is amended by striking out the chapter heading and the table of sections and inserting in lieu thereof the following: "CHAPTER 44—QUALIFIED INVESTMENT ENTITIES "Sec. 4981. Excise tax on undistributed income of real estate investment trusts. "Sec. 4982. Excise tax on undistributed income of regulated investment companies." (d) EFFECTIVE DATE.—The amendments made by this section shall apply to calendar years beginning after December 31,1986. SEC. 652. TREATMENT OF BUSINESS DEVELOPMENT COMPANIES. (a) GENERAL RULE.—Paragraph (1) of section 851(a) is amended by striking out "either as a management company or as a unit invest- ment trust" and inserting in lieu thereof "as a management com- pany, business development company, or unit investment trust". OD) TECHNICAL AMENDMENT.—Paragraph (1) of section 851(e) (relat- ing to investment companies furnishing capital to development corporations) is amended by striking out "registered management company" and inserting in lieu thereof "registered management company or registered business development company". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31,1986. SEC. 653. AMENDMENTS TO QUALIFICATION RULES. (a) TREATMENT OF CERTAIN HEDGING TRANSACTIONS.—Section 851 (defining regulated investment company) is amended by adding at the end thereof the following new subsection: "(g) TREATMENT OF CERTAIN HEDGING TRANSACTIONS.— "(1) IN GENERAL.—In the case of any designated hedge, for purposes of subsection (bX3), increases (and decreases) during the period of the hedge in the value of positions which are part of such hedge shall be netted. "(2) DESIGNATED HEDGE.—For purposes of this subsection, there is a designated hedge where— "(A) the taxpayer's risk of loss with respect to any posi- tion in property is reduced by reason of^ "(i) the taxpayer having an option to sell, being under a contractual option to sell, or having made (and not closed) a short sale of substantially identical prop- ertv, ' (ii) the taxpayer being the grantor of an option to buy substantially identical property, or "(iii) under regulations prescribed by the Secretary, the taxpayer holding 1 or more other positions, and "(B) the positions which are part of the hedge are clearly identified by the taxpayer in the manner prescribed by regulations.'
100 STAT. 2298 PUBLIC LAW 99-514—OCT. 22, 1986 (b) DEFINITION OF QUALIFYING INCOME.—Paragraph (2) of subsec- tion 851(b) is amended by striking out the semicolon at the end thereof and inserting in lieu thereof: "(as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies;". (c) FOREIGN CURRENCY GAINS.—Subsection (b) of section 851 is amended by inserting before the last sentence thereof the following new sentence: "For purposes of paragraph (2), the Secretary may by regulation exclude from qualifying income foreign currency gains which are not ancillary to the company's principal business of investing in stock or securities (or options and futures with respect to stock or securities)." (d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act. SEC. 654. TREATMENT OF SERIES FUNDS AS SEPARATE CORPORATIONS. (a) GENERAL RULE.—Section 851 is amended by adding at the end thereof the following new subsection: "(q) SPECIAL RULE FOR SERIES FUNDS.— "(1) I N GENERAL.—In the case of a regulated investment company (within the meaning of subsection (a)) having more than one fund, each fund of such regulated investment company shall be treated as a separate corporation for purposes of this title (except with respect to the definitional requirement of subsection (a)). "(2) FUND DEFINED.—For purposes of paragraph (1) the term 'fund' means a segregated portfolio of assets, the beneficial interests in which are owned by the holders of a class or series of stock of the regulated investment company that is preferred over all other classes or series in respect of such portfolio of assets." (b) EFFECTIVE DATE.— (1) IN GENERAL.—The amendment made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act, (2) TREATMENT OF CERTAIN EXISTING SERIES FUNDS.—In the case of a regulated investment company which has more than one fund on the date of the enactment of this act, and has before such date been treated for Federal income tax purposes as a single corporation— (A) the amendment made by subsection (a), and the resulting treatment of each fund as a separate corporation, shall not give rise to the realization or recognition of income or loss by such regulated investment company, its funds, or its shareholders, and (B) the tax attributes of such regulated investment com- pany shall be appropriately allocated among its funds. SEC. 655. EXTENSION OF PERIOD FOR MAILING NOTICES TO SHARE- HOLDERS. (a) GENERAL RULE.—The following provisions are each amended by striking out "45 days" each place it appears and inserting in lieu thereof "60 days": (1) Paragraph (3) of subsection 852(b).
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2299 (2) Subparagraph (A) of paragraph 852(b)(5). (3) Subsection (c) of section 853. (4) Paragraph (2) of subsection 854(b). (5) Subsection (c) of section 855. (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to taxable years beginning after the date of the enact- ment of this Act. SEC. 656. PROTECTION OF MUTUAL FUNDS RECEIVING THIRDPARTY SUMMONSES. (a) GENERAL RULE.—Paragraph (3) of subsection 7609(a) is amended— (1) by striking out "and" at the end of subparagraph (F); (2) by striking out the period at the end of subparagraph (G) and inserting in lieu thereof "; and"; and (3) by adding the following new subparagraph: "(H) any regulated investment company (as defined in section 851) and any agent of such regulated investment company when acting as an agent thereof." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to summonses served after the date of the enactment of this Act. SEC. 657. CERTAIN DISTRIBUTIONS NOT TREATED AS PREFERENTIAL DIVIDENDS. (a) GENERAL RULE.—Subsection (c) of section 562 (relating to preferential dividends) is amended by adding at the end thereof the following new sentence: "In the case of a distribution by a regulated investment company to a shareholder who made an initial invest- ment of at least $10,000,000 in such company, such distribution shall not be treated as not being pro rata or as being preferential solely by reason of an increase in the distribution by reason of reductions in administrative expenses of the company." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to distributions after the date of the enactment of this Act. Subtitle G—Real Estate Investment Trusts SEC. 661. GENERAL QUALIFICATION REQUIREMENTS. (a) MODIFICATION OF CLOSELY-HELD REQUIREMENTS.— (1) Paragraph (6) of section 856(a) is amended to read as follows: "(6) which is not closely held (as determined under subsection (h)); and". (2) Section 856 is amended by adding at the end thereof the following new subsection: "(h) CLOSELY HELD DETERMINATIONS.— "(1) SECTION 542(a)(2) APPLIED.— "(A) I N GENERAL.—For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 542(a)(2) is met. "(B) WAIVER OF PARTNERSHIP ATTRIBUTION, ETC.—For pur- poses of subparagraph (A)—
100 STAT. 2300 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) paragraph (2) of section 544(a) shall be applied as if such paragraph did not contain the phrase 'or by or for his partner', and "(ii) sections 544(aX4XA) and 544(bXl) shall be applied by substituting 'the entity meet the stock ownership requirement of section 542(aX2)' for 'the corporation a personal holding company'. "(2) SUBSECTIONS (a) (5) AND (6) NOT TO APPLY TO IST YEAR.— Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st taxable year for which an election is made under subsection (cXD by any corporation, trust, or association." (b) REQUIREMENT OF N O EARNINGS AND PROFITS ACCUMULATED IN NoN-REIT YEARS.—Subsection (a) of section 857 is amended by striking out "and" at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof ", and", and by adding at the end thereof the following: "(3) either— "(A) the provisions of this part apply to the real estate investment trust for all taxable years beginning after Feb- ruary 28,1986, or "(B) as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in any non-REIT year. For purposes of the preceding sentence, the term *non-REIT year' means any taxable year to which the provisions of this part did not apply with respect to the entity." (c) INITIAL CHANGE IN ANNUAL ACCOUNTING PERIOD PERMITTED.— (1) Section 859 is amended by adding at the end thereof the following new subsection: "(b) CHANGE OF ACCOUNTING PERIOD WITHOUT APPROVAL.—Not- withstanding section 442, an entity which has not engaged in any active trade or business may change its accounting period to a calendar year without the approval of the Secretary if such change is in connection with an election under section 856(c)." (2) Section 859 is amended by striking out "For purposes o f and inserting in lieu thereof "(a) GENERAL RULE.—For purposes of. SEC. 662. ASSET AND INCOME REQUIREMENTS. (a) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.—Sec- tion 856 (defining real estate investment trust) is amended by adding at the end thereof the following new subsection: "(i) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.— "(1) IN GENERAL.—For purposes of this title— "(A) a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and "(B) all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust. "(2) QUALIFIED REIT SUBSIDIARY.—For purposes of this subsec- tion, the term 'qualified REIT subsidiary' means any corpora- tion if 100 percent of the stock of such corporation is held by the real estate investment trust at all times during the period such corporation was in existence. "(3) TREATMENT OF TERMINATION OF QUALIFIED SUBSIDIARY STATUS.—For purposes of this subtitle, if any corporation which
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2301 w£is a qualified REIT subsidiary ceases to meet the require- ments of paragraph (2), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the real estate investment trust in exchange for its stock." 0?) TEMPORARY INVESTMENT OF N E W EQUITY CAPITAL.— (1) Paragraph (3) of section 856(c) is amended by striking out "and" at the end of subparagraph (G), by adding "and" at the end of subparagraph (H), and by inserting after subparagraph (H) the following new subparagraph: "(I) qualified temporary investment income;". (2) Subparagraph (B) of section 856(c)(6) is amended by adding at the end thereof the following new sentence: "Such term also includes any property (not otherwise a real estate asset) attrib- utable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1- year period beginning on the date the real estate trust receives such capital." (3) Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: "(D) QUALIFIED TEMPORARY INVESTMENT INCOME.— "(i) IN GENERAL.—The term 'qualified temporary investment income' means any income which— "(I) is attributable to stock or a debt instrument, "(II) is attributable to the temporary investment of new capital, and "(III) is received or accrued during the 1-year period beginning on the date on which the real estate investment trust receives such capital. "(ii) NEW CAPITAL.—The term 'new capital' means any amount received by the real estate investment trust— "(I) in exchange for stock in such trust (other than amounts received pursuant to a dividend re- investment plan), or "(II) in a public offering of debt obligations of such trust which have maturities of at least 5 years.' (c) TREATMENT OF SHARED APPRECIATION MORTGAGES.—Section 856 is amended by adding at the end thereof the following new subsec- tion; "(j) TREATMENT OF SHARED APPRECIATION MORTGAGES.— "(1) IN GENERAL.—Solely for purposes of subsection (c) of this section and section 857(b)(6), any income derived from a shared appreciation provision shall be treated as gain recognized on the sale of the secured property. "(2) TREATMENT OF INCOME.—For purposes of applying subsec- tion (c) of this section and section 857(b)(6) to any income described in paragraph (1)— "(A) the real estate investment trust shall be treated as holding the secured property for the period during which it held the shared appreciation provision (or, if shorter, for the period during which the secured property was held by the person holding such property), and "(B) the secured property shall be treated as property described in section 1221(1) if it is so described in the hands
100 STAT. 2302 PUBLIC LAW 99-514—OCT. 22, 1986 of the person holding the secured property (or it would be so described if held by the real estate investment trust). "(3) COORDINATION WITH PROHIBITED TRANSACTIONS SAFE HARBOR.—For purposes of section 857(b)(6)(C)— "(A) the real estate investment trust shall be treated as having sold the secured property when it recognizes any income described in paragraph (1), and "(B) any expenditures made by any holder of the secured property shall be treated as made by the real estate invest- ment trust. "(4) DEFINITIONS.—For purposes of this subsection— "(A) SHARED APPRECIATION PROVISION.—The term 'shared appreciation provision' means any provision— "(i) which is in connection with an obligation which is held by the real estate investment trust and is secured by an interest in real property, and "(ii) which entitles the real estate investment trust to receive a specified portion of any gain realized on the sale or exchange of such real property (or of any gain which would be realized if the property were sold on a specified date). "(B) SECURED PROPERTY.—The term 'secured property' means the real property referred to in subparagraph (A)." SEC. 663. DEFINITION OF RENTS. (a) MODIFICATION OF INDEPENDENT CONTRACTOR REQUIREMENTS.— Paragraph (2) of section 856(d) (relating to certain amounts excluded from rents from real property) is amended by adding at the end thereof the following: "Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business tax- able income under section 512(b)(3) if received by an organiza- tion described in section 511(a)(2)." (b) CERTAIN RENTS OR INTEREST BASED ON NET INCOME OR PROFITS PERMITTED.— (1) RENTS.—Subsection (d) of section 856 is amended by adding at the end thereof the following new paragraph: "(6) SPECIAL RULE FOR CERTAIN PROPERTY SUBLEASED BY TENANT OF REAL ESTATE INVESTMENT TRUSTS.— "(A) IN GENERAL.—If— "(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and "(ii) such tenant receives or accrues, directly or in- directly, from subtenants only amounts which are qualified rents, then the amounts that the trust receives or accrues from the tenant shall not be excluded from the term 'rents from real property' solely by reason of being based on the income or profits of such tenant. "(B) QUALIFIED RENTS.—For purposes of subparagraph (A), the term 'qualified rents' means any amount which would be treated as rents from real property if received by the real estate investment trust."
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2303 (2) INTEREST.—Subsection (f) of section 856 (relating to qualify- ing interest income) is amended to read as follows: "(f) INTEREST.— "(1) IN GENERAL.—For purposes of paragraphs (2XB) and (3XB) of subsection (c), the term 'interest' does not include any amount received or accrued (directly or indirectly) if the deter- mination of such amount depends (in whole or in part) on the income or profits of any person, except that— "(A) any amount so received or accrued shall not be excluded from the term 'interest' solely by reason of being based on a fixed percentage or percentages of receipts or sales, and "(B) any amount so received or accrued with respect to an obligation secured by a mortgage on real property or an interest in real property shall not be excluded from the term 'interest' solely by reason of being based on the income or profits of the debtor from such property, if— "(i) the debtor derives substantially all of its gross income with respect to such property from the leasing of substantially all of its interests in such property to tenants, and "(ii) the amounts received or accrued directly or indirectly by the debtor from such tenants are only qualified rents (as defined in subsection (dX6)(B)). "(2) SPECIAL RULE.—Where a real estate investment trust receives or accrues any amount which would be excluded from the term 'interest' solely because the debtor of the real estate investment trust receives or accrues any amount the determina- tion of which depends (in whole or in part) on the income or profits of any person, only a proportionate part (determined under regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust shall be excluded from the term 'interest'." (3) (DONFORMING AMENDMENT.—Subparagraph (A) of section 856(dX2) is amended by striking out "paragraph (4)" and insert- ing in lieu thereof "paragraphs (4) and (6)". SEC. 664. DISTRIBUTION REQUIREMENTS. (a) EXCLUSION OF CERTAIN NONCASH INCOME FROM DISTRIBUTION REQUIREMENT.—Subparagraph (B) of section 857(aXl) (relating to distribution requirements) is amended to read £is follows: "(B) any excess noncash income (as determined under subsection (e)); and" (b) EXCESS NONCASH INCOME DEFINED.—Section 857 is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e) EXCESS NONCASH INCOME.— "(1) IN GENERAL.—For purposes of subsection (aXlXB), the term 'excess noncash income means the excess (if any) of— "(A) the amount determined under paragraph (2) for the taxable year, over "(B) 5 percent of the real estate investment trust taxable income for the taxable year determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain. "(2) DETERMINATION OF AMOUNT.—The amount determined under this paragraph for the taxable year is the sum of—
100 STAT. 2304 PUBLIC LAW 99-514—OCT. 22, 1986 J i. ' '(A) the amount (if any) by which— "(i) the amounts includible in gross income under section 467 (relating to certain payments for the use of property or services), exceed "(ii) the amounts which would have been includible in gross income without regard to such section, "(B) in the case of a real estate investment trust using the cash receipts and disbursements method of accounting, the amount (if any) by which— "(i) the amounts includible in gross income as origi- nal issue discount on instruments to which section 1274 (relating to certain debt instruments issued for prop- erty) applies, exceed "(ii) the amount of money and the fair market value of other property received during the taxable year under such instruments; plus "(C) any income on the disposition of a real estate asset if— "(i) there is a determination (as defined in section 860(e)) that such income is not eligible for nonrecogni- tion under section 1031, and "(ii) failure to meet the requirements of section 1031 was due to reasonable cause and not to willful neglect." SEC. 665. TREATMENT OF CAPITAL GAINS. (a) COORDINATION OF NET OPERATING LOSS DEDUCTION WITH PAY- MENT OF CAPITAL GAIN DIVIDENDS.— (1) IN GENERAL.—Paragraph (3) of section 8570b) (relating to capital gains) is amended by adding at the end thereof the following new subparagraph: "(D) COORDINATION WITH NET OPERATING LOSS PROVI- SIONS.—For purposes of section 172, if a real estate invest- ment trust pays capital gain dividends during any taxable year, the amount of the net capital gain for such taxable year (to the extent such gain does not exceed the amount of such capital gain dividends) shall be excluded in determin- ing— "(i) the net operating loss for the taxable year, and "(ii) the amount of the net operating loss of any prior taxable year which may be carried through such tax- able year under section 1720t))(2) to a succeeding tax- able year." (2) REPEAL OF LIMITATION OF NET CAPITAL GAIN TO REAL ESTATE INVESTMENT TRUST TAXABLE INCOME.—Subparagraph (C) of sec- tion 85703)(3) (defining capital gain dividend) is amended by striking out the last sentence. (b) NOTICE OF CAPITAL GAINS DIVIDENDS MAY B E MAILED WITH ANNUAL REPORT.— (1) Subparagraph (C) of section 8570t))(3) (defining capital gain dividend) is amended by striking out "the close of its taxable year" and inserting in lieu thereof "the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year)". (2) Subsection (c) of section 858 (relating to notice to share- holders) is amended by striking out "distribution is made" and inserting in lieu thereof "distribution is made (or mailed to its
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2305 shareholders or holders of beneficial interests with its annual report for the taxable year)". SEC. 666. MODIFICATIONS OF PROHIBITED TRANSACTION RULES. (a) EXEMPTIONS FROM PROHIBITED TRANSACTIONS RULES.— (1) Clause (iii) of section 857(b)(6)(C) (relating to certain sales not to constitute prohibited transactions) is amended to read as follows: "(iii)(I) during the taxable year the trust does not make more than 7 sales of property (other than fore- closure property), or (II) the aggregate adjusted bases (as determined for purposes of computing earnings and protlts) of property (other than foreclosure property) sold during the taxable year does not exceed 10 percent of the aggregate bases (as so determined) of all of the assets of the trust as of the beginning of the taxable year; and". (2) Clause (ii) of section 8570aX6)(C) is amended by striking out "20 percent" and inserting in lieu thereof "30 percent". (3) Subparagraph (C) of section 857(b)(6) is amended by strik- ing out "and" at the end of clause (iii), by striking out the period at the end of clause (iv) and inserting in lieu thereof "; and", and by inserting after clause (iv) the following new clause: "(v) if the requirement of clause (iii)(I) is not satisfied, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor (as defined in sec- tion 856(d)(3)) from whom the trust itself does not derive or receive any income." (b) NET LOSS FROM PROHIBITED TRANSACTIONS.— (1) L o s s FROM PROHIBITED TRANSACTIONS NOT ALLOWED TO OFFSET GAIN FROM SUCH TRANSACTIONS.—ClaUSe (li) o f Section 857(b)(6)(B) (relating to income from prohibited transactions) is amended to read as follows: "(ii) in determining the amount of the net income derived from prohibited transactions, there shall not be taken into account any item attributable to any prohib- ited transaction for which there was a loss; and". (2) NET LOSS MAY REDUCE TAXABLE INCOME.—Subparagraph (F) of section 8570t))(2) (defining real estate investment trust taxable income) is amended by striking out "and there shall be included an amount equal to any net loss derived from prohibited trans- actions". SEC. 667. DEFICIENCY DIVIDENDS OF REAL ESTATE INVESTMENT TRUSTS NOT SUBJECT TO PENALTY UNDER SECTION 6697. (a) GENERAL RULE.—The section heading and subsection (a) of section 6697 (relating to assessable penalties with respect to liability for tax of qualified investment entities) are amended to read as follows: "SEC. 6697. ASSESSABLE PENALTIES WITH RESPECT TO LIABILITY FOR T A X O F REGULATED INVESTMENT COMPANIES. "(a) CIVIL PENALTY.—In addition to any other penalty provided by law, any regulated investment company whose tax liability for any taxable year is deemed to be increased pursuant to section 860(cXlXA) shall pay a penalty in an amount equal to the amount of
100 STAT. 2306 PUBLIC LAW 99-514—OCT. 22, 1986 the interest (for which such company is liable) which is attributable solely to such increase." (b) CONFORMING AMENDMENT.— (1) Subsection (j) of section 860 is amended by striking out "qualified investment entity" and inserting in lieu thereof "regulated investment company". (2) The table of sections for subchapter B of chapter 68 is amended by striking out the item relating to section 6697 and inserting in lieu thereof the following: "Sec. 6697. Assessable penalties with respect to liability for tax of regulated investment companies." SEC. 668. EXCISE TAX ON UNDISTRIBUTED INCOME OF REAL ESTATE INVESTMENT TRUSTS. (a) GENERAL RULE.—Section 4981 is amended to read as follows: "SEC. 498L EXCISE TAX ON UNDISTRIBUTED INCOME OF REAL ESTATE INVESTMENT TRUSTS. "(a) IMPOSITION OF TAX.—There is hereby imposed a tax on every real estate investment trust for each calendar year equal to 4 percent of the excess (if any) of— "(1) the required distribution for such calendar year, over "(2) the distributed amount for such calendar year. "(b) REQUIRED DISTRIBUTION.—For purposes of this section— "(1) I N GENERAL.—The term 'required distribution' means, with respect to any calendar year, the sum of— "(A) 85 percent of the real estate investment trust's ordinary income for such calendar year, plus "(B) 95 percent of the real estate investment trust's cap- ital gain net income for such calendar year. "(2) INCREASE BY PRIOR YEAR SHORTFALL.—The amount deter- mined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— "(A) the grossed up required distribution for the preced- ing calendar year, over "(B) the distributed amount for such preceding calendar year. "(3) GROSSED UP REQUIRED DISTRIBUTION.—The grossed up re- quired distribution for any calendar year is the required dis- tribution for such year determined— "(A) with the application of paragraph (2) to such taxable year, and "(B) by substituting '100 percent' for each percentage set forth in paragraph (1). "(c) DISTRIBUTED AMOUNT.—For purposes of this section— "(1) IN GENERAL.—The term 'distributed amount' means, with respect to any calendar year, the sum of— "(A) the deduction for dividends paid (as defined in sec- tion 561) during such calendar year, and "(B) any amount on which tax is imposed under subsec- tion (b)(1) or Ob)(3)(A) of section 857 for any taxable year , ending in such calendar year. "(2) INCREASE BY PRIOR YEAR OVERDISTRIBUTION.—The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2307 "(A) the distributed amount for the preceding calendar year (determined with the application of this paragraph to such preceding calendar year), over "(B) the grossed up required distribution for such preced- ing calendar year. "(3) DETERMINATION OF DIVIDENDS PAID.—The amount of the dividends paid during any calendar year shall be determined without regard to the provisions of section 858. "(d) TIME FOR PAYMENT OF TAX.—The tax imposed by this section for any calendar year shall be paid on or before March 15 of the following calendar year. "(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ORDINARY INCOME.—The term 'ordinary income' means the real estate investment trust taxable income (as defined in section 857(bX2)) determined— "(A) without regard to subparagraph (B) of section 857(bX2), "(B) by not taking into account any gain or loss from the sale or exchange of a capital asset, and "(C) by treating the calendar year as the trust's taxable year. "(2) CAPITAL GAIN NET INCOME.—The term 'capital gain net income' has the meaning given to such term by section 1222(9) (determined by treating the calendar year as the trust's taxable year). "(3) TREATMENT OF DEFICIENCY DISTRIBUTIONS.—In the case of any deficiency dividend (as defined in section 860(f))— "(A) such dividend shall be taken into account when paid without regard to section 860, and "(B) any income giving rise to the adjustment shall be treated as arising when the dividend is paid." (b) RELATED AMENDMENTS.— (1) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.— (A) Subsection (b) of section 857 (relating to method of taxation of real estate investment trusts and holders of interests therein) is amended by adding at the end thereof the following new paragraph: "(8) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For pur- poses of this title, any dividend declared by a real estate invest- ment trust in December of any calendar year and payable to shareholders of record on a specified date in such month shall be deemed— "(A) to have been received by each shareholder on such date, and "(B) to have been paid by such trust on such date (or, if earlier, as provided in section 858). The preceding sentence shall apply only if such dividend is actually paid by the company before February 1 of the following calendar year.' (B) Subsection (b) of section 856 is amended by striking out "Amounts" and inserting in lieu thereof "Except as provided in section 857(bX8), amounts". (2) TREATMENT OF EARNINGS AND PROFITS.—Subsection (d) of section 857 is amended to read as follows: "(d) EARNINGS AND PROFITS.—
100 STAT. 2308 PUBLIC LAW 99-514—OCT. 22, 1986 "(1) IN GENERAL.—The earnings and profits of a real estate investment trust for any taxable year O^ut not its accumulated earnings) shall not be reduced by any amount which is not allowable in computing its taxable income for such taxable year. For purposes of this subsection, the term 'real estate investment trust' includes a domestic corporation, trust, or association which is a real estate investment trust determined without regard to the requirements of subsection (a). "(2) COORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—A real estate investment trust shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such trust. The preceding sentence shall not apply to the extent that the amount distrib- uted during any calendar year by the trust exceeds the required distribution for such calendar year (as determined under section 4981)." (3) TREATMENT OF NET CAPITAL GAIN AFTER OCTOBER 3 1 OF ANY YEAR.—Subparagraph (C) of section 857(b)(3) (defining capital gain dividend) is amended by adding at the end thereof the following new sentences: "For purposes of this subparagraph, the amount of the net capital gain for any taxable year which is not a calendar year shall be determined without regard to any net capital loss attributable to transactions after December 31 of such year, and any such net capital loss such be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing real estate investment trust taxable income." SEC. 669. EFFECTIVE DATES. (a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this part shall apply to taxable years beginning after December 31, 1986. (b) SECTION 668.—The amendments made by section 668 shall apply to calendar years beginning after December 31, 1986. (c) RETENTION OF EXISTING TRANSITIONAL RULE.—The amendment made by section 663(b)(2) shall not apply with respect to amounts received or accrued pursuant to loans made before May 28, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976. Subtitle H—Taxation of Interests in Entities Holding Real Estate Mortgages SEC. 671. TAXATION OF REAL ESTATE MORTGAGE INVESTMENT CON- DUITS. (a) GENERAL RULE.—Subchapter M of chapter 1 (relating to regu- lated investment companies and real estate investment trusts) is amended by adding at the end thereof the following new part:
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2309 "PART IV—REAL ESTATE MORTGAGE INVESTMENT CONDUITS "Sec. 860A. Taxation of REMIC's. "Sec. 860B. Taxation of holders of regular interests. "Sec. 860C. Taxation of residual interests "Sec. 860D. REMIC defined. "Sec. 860E. Treatment of income in excess of daily accruals on residual in- terests. "Sec. 860F Other rules. "Sec 860G. Other definitions and special rules. "SEC 860A. TAXATION OF REMIC's. "(a) GENERAL RULE.—Except as otherwise provided in this part, a REMIC shall not be subject to taxation under this chapter (and shall not be treated as a corporation, partnership, or trust for purposes of this chapter). "(b) INCOME TAXABLE TO HOLDERS.—The income of any REMIC shall be taxable to the holders of interests in such REMIC as provided in this part. "SEC. 860B. TAXATION OF HOLDERS OF REGULAR INTERESTS "(a) GENERAL RULE.—In determining the tax under this chapter of any holder of a regular interest in a REMIC, such interest (if not otherwise a debt instrument) shall be treated as a debt instrument. "(b) HOLDERS MUST USE ACCRUAL METHOD.—The amounts includ- ible in gross income with respect to any regular interest in a REMIC shall be determined under the accrual method of accounting. "(c) PORTION OF GAIN TREATED AS ORDINARY INCOME.—Gain on the disposition of a regular interest shall be treated as ordinary income to the extent such gain does not exceed the excess (if any) of— "(1) the amount which would have been includible in the gross income of the taxpayer with respect to such interest if the yield on such interest were 110 percent of the applicable Fed- eral rate (as defined in section 1274(d) without regard to para- graph (2) thereof) as of the beginning of the taxpayer's holding period, over "(2) the amount actually includible in gross income with respect to such interest by the taxpayer. "(d) CROSS REFERENCE.— "For special rules in determining inclusion of original issue discount on regular interests, see section 1272(a)(6). •SEC. 860C. TAXATION OF RESIDUAL INTERESTS. "(a) PASS-THRU OF INCOME OR Loss.— "(1) IN GENERAL.—In determining the tax under this chapter of any holder of a residual interest in a REMIC, such holder shall take into account his daily portion of the taxable income or net loss of such REMIC for each day during the taxable year on which such holder held such interest. "(2) DAILY PORTION.—The daily portion referred to in para- graph (1) shall be determined— "(A) by allocating to each day in any calendar quarter its ratable portion of the taxable income (or net loss) for such quarter, and "(B) by allocating the amount so allocated to any day among the holders (on such day) of residual interests in proportion to their respective holdings on such day.
100 STAT. 2310 PUBLIC LAW 99-514—OCT. 22, 1986 "(h) DETERMINATION OF TAXABLE INCOME OR NET LOSS.—For pur- poses of this section— "(1) TAXABLE INCOME.—The taxable income of a REMIC shall be determined under an accrual method of accounting and in the same manner as in the case of an individual, except that— "(A) regular interests in such REMIC (if not otherwise debt instruments) shall be treated as indebtedness of such REMIC, "(B) market discount on any market discount bond shall be included in gross income for the taxable years to which it is attributable as determined under the rules of section 1276(b)(2) (and sections 1276(a) and 1277 shall not apply), "(C) there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction, and "(D) the deductions referred to in section 703(a)(2) (other than any deduction under section 212) shall not be allowed. "(2) NET LOSS.—The net loss of any REMIC is the excess of— "(A) the deductions allowable in computing the taxable income of such REMIC, over "(B) its gross income. Such amount shall be determined with the modifications set forth in paragraph (1). "(c) DISTRIBUTIONS.—Any distribution by a REMIC— "(1) shall not be included in gross income to the extent it does not exceed the adjusted basis of the interest, and "(2) to the extent it exceeds the adjusted basis of the interest, shall be treated as gain from the sale or exchange of such interest. "(d) BASIS RULES.— "(1) INCREASE IN BASIS.—The basis of any person's residual interest in a REMIC shall be increased by the amount of the taxable income of such REMIC taken into account under subsec- tion (a) by such person with respect to such interest. "(2) DECREASES IN BASIS.—The basis of any person's residual interest in a REMIC shall be decreased (but not below zero) by the sum of the following amounts: "(A) any distributions to such person with respect to such interest, and "(B) any net loss of such REMIC taken into account under subsection (a) by such person with respect to such interest. "(e) SPECIAL RULES.— "(1) AMOUNTS TREATED AS ORDINARY INCOME.—Any amount included in the gross income of any holder of a residual interest in a REMIC by reason of subsection (a) shall be treated as ordinary income. "(2) LIMITATION ON LOSSES.— "(A) IN GENERAL.—The amount of the net loss of any REMIC taken into account by a holder under subsection (a) with respect to any calendar quarter shall not exceed the adjusted basis of such holder's residual interest in such REMIC as of the close of such calendar quarter (determined without regard to the adjustment under subsection (d)(2XB) for such calendar quarter). "(B) INDEFINITE CARRYFORWARD.—Any loss disallowed by reason of subparagraph (A) shall be treated as incurred by
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2311 the REMIC in the succeeding calendar quarter with respect to such holder "(3) CROSS REFERENCE.— "For special treatment of income in excess of daily accruals, see section 860E. "SEC. 860D. REMIC DEFINED. "(a) GENERAL RULE.—For purposes of this title, the terms 'real estate mortgage investment conduit' and 'REMIC mean any entity— "(1) to which an election to be treated as a REMIC applies for the taxable year and all prior taxable years, "(2) all of the interests in which are regular interests or residual interests, "(3) which has 1 (and only 1) class of residual interests (and all distributions, if any, with respect to such interests are pro rata), "(4) as of the close of the 4th month ending after the startup day and each quarter ending thereafter, substantially all of the assets of which consist of qualified mortgages and permitted investments, and "(5) which has a taxable year which is a calendar year. "(b) ELECTION.— "(1) IN GENERAL.—An entity (otherwise meeting the require- ments of subsection (a)) may elect to be treated as a REMIC for its 1st taxable year. Such an election shall be made on its return for such 1st taxable year. Except as provided in paragraph (2), such an election shall apply to the taxable year for which made and all subsequent taxable years. "(2) TERMINATION.— "(A) IN GENERAL.—If any entity ceases to be a REMIC at any time during the taxable year, such entity shall not be treated as a REMIC for such taxable year or any succeeding taxable year. "(B) INADVERTENT TERMINATIONS.—If— "(i) an entity ceases to be a REMIC, "(ii) the Secretary determines that such cessation was inadvertent, "(iii) no later than a reasonable time after the discov- ery of the event resulting in such cessation, steps are taken so that such entity is once more a REMIC, and "(iv) such entity, and each person holding an interest in such entity at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such entity as a REMIC or a C corporation) as may be required by the Secretary with respect to such period, then, notwithstanding such terminating event, such entity shall be treated as continuing to be a REMIC (or such cessation shall be disregarded for purposes of subparagraph (A)) whichever the Secretary determines to be appropriate. "SEC 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL INTERESTS. "(a) EXCESS INCLUSIONS MAY NOT BE OFFSET BY NET OPERATING LOSSES.— "(1) IN GENERAL.—Except as provided in paragraph (2), the taxable income of any holder of a residual interest in a REMIC
100 STAT. 2312 PUBLIC LAW 99-514—OCT. 22, 1986 for any taxable year shall in no event be less than the excess inclusion for such taxable year. "(2) EXCEPTION FOR CERTAIN FINANCIAL INSTITUTIONS.—Para- graph (1) shall not apply to any organization to whicli section 593 applies. The Secretary may by regulations provide vhat the preceding sentence shall not apply where necessary or appro- priate to prevent avoidance of tax imposed by this chapter. "(b) ORGANIZATIONS SUBJECT TO UNRELATED BUSINESS TAX.—If the holder of any residual interest in a REMIC is an organization subject to the tax imposed by section 511, the excess inclusion of such holder for any taxable year shall be treated as unrelated business taxable income of such holder for purposes of section 511. "(c) EXCESS INCLUSION.—For purposes of this section— "(1) IN GENERAL.—The term 'excess inclusion' means, with respect to any residual interest in a REMIC for any calendar quarter, the excess (if any) of— "(A) the amount taken into account with respect to such interest by the holder under section 860C(a), over "(B) the sum of the daily accruals with respect to such interest for days during such calendar quarter while held by such holder. To the extent provided in regulations, if residual interests in a REMIC do not have significant value, the excess inclusions with respect to such interests shall be the amount determined under subparagraph (A) without regard to subparagraph (B). "(2) DETERMINATION OF DAILY ACCRUALS.— "(A) IN GENERAL.—For purposes of this subsection, the daily accrual with respect to any residual interest for any day in any calendar quarter shall be determined by allocat- ing to each day in such quarter its ratable portion of the product of— "(i) the adjusted issue price of such interest at the beginning of such quarter, and "(ii) 120 percent of the long-term Federal rate (deter- mined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). "(B) ADJUSTED ISSUE PRICE.—For purposes of this para- graph, the adjusted issue price of any residual interest at the beginning of any calendar quarter is the issue price of residual interest— "(i) increased by the amount of daily accruals for prior quarters, and "(ii) decreased by any distribution made with respect to such interest before the beginning of such quarter. "(C) FEDERAL LONG-TERM RATE.—For purposes of this paragraph, the term 'Federal long-term rate' means the Federal long-term rate which would have applied to the residual interest under section 1274(d) (determined without regard to paragraph (2) thereof) if it were a debt instrument. "(d) TREATMENT OF RESIDUAL INTERESTS HELD BY REAL ESTATE INVESTMENT TRUSTS.—If a residual interest in a REMIC is held by a real estate investment trust, under regulations prescribed by the Secretary— "(1) any excess of— . ^
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2313 "(A) the aggregate excess inclusions determined with respect to such interests, over "(B) the real estate investment trust taxable income (within the meaning of section 857(b)(2), excluding any net capital gain), shall be allocated among the shareholders of such trust in proportion to the dividends received by such shareholders from such trust, and "(2) any amount allocated to a shareholder under paragraph (1) shall be treated as an excess inclusion with respect to a residual interest held by such shareholder. •SEC. 860F. OTHER RULES. "(a) 100 PERCENT TAX ON PROHIBITED TRANSACTIONS.— ' "(1) TAX IMPOSED.—There is hereby imposed for each taxable year of a REMIC a tax equal to 100 percent of the net income derived from prohibited transactions. "(2) PROHIBITED TRANSACTION.—For purposes of this part, the term 'prohibited transaction' means— "(A) DISPOSITION OF QUAUFIED MORTGAGE.—The disposi- tion of any qualified mortgage transferred to the REMIC other than a disposition pursuant to— "(i) the substitution of a qualified replacement mort- gage for a qualified mortgage, "(ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage, "(iii) the bankruptcy or insolvency of the real estate mortgage pool, or "(iv) a qualified liquidation. Notwithstanding the preceding sentence, the term 'prohib- ited transaction shall not include any disposition required to prevent default on a regular interest where the threat- ened default resulted from a default on 1 or more qualified mortgages. "(B) INCOME FROM NONPERMITTED ASSETS.—The receipt of any income attributable to any asset which is neither a qualified mortgage nor a permitted investment. "(C) COMPENSATION FOR SERVICES.—The receipt by the real estate mortgage pool of any amount representing a fee or other compensation for services. "(D) GAIN FROM DISPOSITION OF CASH FLOW INVEST- MENTS.—Gain from the disposition of any cash flow invest- ment other than pursuant to any qualified liquidation described in subsection (b). "(3) DETERMINATION OF NET INCOME.—For purposes of para- graph (1), the term 'net income derived from prohibited trans- actions' means the excess of the gross income from prohibited transactions over the deductions allowed by this chapter which are directly connected with such transactions; except that there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss. "(4) QUAUFIED UQUIDATION.—For purposes of this part— "(A) IN GENERAL.—The term 'qualified liquidation' means a transaction in which— "(i) the REMIC adopts a plan of complete liquidation, "(ii) such REMIC sells all its assets (other than cash) within the liquidation period, and
100 STAT. 2314 PUBLIC LAW 99-514—OCT. 22, 1986 111 V "(iii) all proceeds of the liquidation (plus the cash), less assets retained to meet claims, are credited or distributed to holders of regular or residual interests on or before the last day of the liquidation period. "(B) LIQUIDATION PERIOD.—The term liquidation period' means the period— "(i) beginning on the date of the adoption of the plan of liquidation, and "(ii) ending at the close of the 90th day after such date. "(b) TREATMENT OF TRANSFERS TO THE R E M I C . — "(1) TREATMENT OF TRANSFEROR.— "(A) NONRECOGNITION GAIN OR LOSS.—No gain or loss ' shall be recognized to the transferor on the transfer of any property to a REMIC. "(B) ADJUSTED BASES OF INTERESTS.—The adjusted bases of the regular and residual interests received in a transfer described in subparagraph (A) shall be equal to the aggre- gate adjusted bases of the property transferred in such transfer. Such amount shall be allocated among such in- terests in proportion to their respective fair market values. "(C) TREATMENT OF NONRECOGNIZED GAIN.—If the issue price of any regular or residual interest exceeds its adjusted basis as determined under subparagraph (B), for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— "(i) in the case of a regular interest, such excess shall be included in gross income (as determined under rules similar to rules of section 1276(b)), and "(ii) in the case of a residual interest, such excess shall be included in gross income ratably over the anticipated period during which the real estate mort- gage pool will be in existence. "(D) TREATMENT OF NONRECOGNIZED LOSS.—If the adjusted basis of any regular or residual interest received in a transfer described in subparagraph (A) exceeds its issue price, for periods during which such interest is held by the transferor (or by any other person whose basis is deter- mined in whole or in part by reference to the basis of such interest in the hand of the transferor)— "(i) in the case of a regular interest, such excess shall be allowable as a deduction under rules similar to the rules of section 171, and "(ii) in the case of a residual interest, such excess shall be allowable as a deduction ratably over the anticipated period during which the real estate mort- gage pool will be in existence. "(2) BASIS TO REMIC.—The basis of any property received by a REMIC in a transfer described in paragraph (1)(A) shall be its fair market value immediately after such transfer. "(c) DISTRIBUTIONS OF PROPERTY.—If a REMIC makes a distribu- tion of property with respect to any regular or residual interest— "(1) notwithstanding any other provision of this subtitle, gain shall be recognized to such REMIC on the distribution in the
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2315 same manner as if it had sold such property to the distributee at its fair market value, and "(2) the basis of the distributee in such property shall be its fair market value. "(d) COORDINATION WITH WASH SALE RULES.—For purposes of section 1091— "(1) any residual interest in a REMIC shall be treated as a security, and "(2) in applying such section to any loss claimed to have been sustained on the sale or other disposition of a residual interest in a REMIC— "(A) except as provided in regulations, any residual in- terest in any REMIC and any interest in a taxable mort- gage pool (as defined in section 7701(i)) comparable to a residual interest in a REMIC shall be treated as substan- tially identical stock or securities, and "(B) subsections (a) and (e) of such section shall be applied by substituting '6 months' for '30 days' each place it appears. "(e) TREATMENT UNDER SUBTITLE F.—For purposes of subtitle F, a REMIC shall be treated as a partnership (and holders of residual interests in such REMIC shall be treated as partners). Any return required by reason of the preceding sentence shall include the amount of the daily accruals determined under section 860E(c). "SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES. "(a) DEFINITIONS.—For purposes of this part— "(1) REGULAR INTEREST.— The term 'regular interest' means an interest in a REMIC the terms of which are fixed on the startup day, and which— "(A) unconditionally entitles the holder to receive a speci- fied principal amount (or other similar amount), and "(B) provides that interest payments (or other similar amounts), if any, at or before maturity are payable based on a fixed rate (or to the extent provided in regulations, at a variable rate). An interest shall not fail to meet the requirements of subpara- graph (A) merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contin- gent on the extent of prepayments on qualified mortgages and the amount of income from permitted investments. "(2) RESIDUAL INTEREST.—The term 'residual interest' means an interest in a REMIC which is not a regular interest and is designated as a residual interest. '•(3) QUALIFIED MORTGAGE.—The term 'qualified mortgage' means— "(A) any obligation (including any participation or certifi- cate of beneficial ownership therein) which is principally secured, directly or indirectly, by an interest in real prop- erty and which— "(i) is transferred to the REMIC on or before the startup day, or "(ii) is purchased by the REMIC within the 3-month period beginning on the startup day, "(B) any qualified replacement mortgage, and "(C) any regular interest in another REMIC transferred to the REMIC on or before the startup day.
100 STAT. 2316 PUBLIC LAW 99-514—OCT. 22, 1986 "(4) QUALIFIED REPLACEMENT MORTGAGE.—The term 'qualified replacement mortgage' means any obligation— "(A) which would be described in paragraph (3XA) if it were transferred to the REMIC on or before the startup n day, and "(B) which is received for— "(i) another obligation within the 3-month period beginning on the startup day, or "(ii) a defective obligation within the 2-year period beginning on the startup day. "(5) PERMITTED INVESTMENTS.—The term 'permitted invest- ments' means any— "(A) cash flow investment, "(B) qualified reserve asset, or "(C) foreclosure property. "(6) CASH FLOW INVESTMENT.—The term 'cash flow invest- ment' means any investment of amounts received under quali- fied mortgages for a temporary period before distribution to holders of interests in the REMIC. "(7) QUAUFIED RESERVE ASSET.— "(A) IN GENERAL.—The term 'qualified reserve asset' means any intangible property which is held for investment and as part of a qualified reserve fund. "(B) QUALIFIED RESERVE FUND.—For purposes of subpara- graph (A), the term 'qualified reserve fund' means any reasonably required reserve to provide for full payment of expenses of the REMIC or amounts due on regular interests in the event of defaults on qualified mortgages. The amount of any such reserve shall be promptly and appropriately reduced as payments of qualified mortgages are received. "(C) SPECIAL RULE.—A reserve shall not be treated as a qualified reserve for any taxable year (and all subsequent taxable years) if more than 30 percent of the gross income from the assets in such fund for the taxable year is derived from the sale or other disposition of property held for less than 3 months. For purposes of the preceding sentence, gain on the disposition of a qualified reserve asset shall not be taken into account if the disposition giving rise to such gain is required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages. "(8) FORECLOSURE PROPERTY.—The term 'foreclosure property' means property— "(A) which would be foreclosure property under section 856(e) if acquired by a real estate investment trust, and "(B) which is acquired in connection with the default or imminent default of a qualified mortgage held by the REMIC. Property shall cease to be foreclosure property with respect to the REMIC on the date which is 1 year after the date such real estate mortgage pool acquired such property. "(9) STARTUP DAY.—The term 'startup day* means any day selected by a REMIC which is on or before the 1st day on which interests in such REMIC are issued. "(10) ISSUE PRICE.—The issue price of any regular or residual interest in a REMIC shall be determined under section 12730?) in the same manner as if such interest were a debt instrument;
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2317 except that if the interest is issued for property, paragraph (3) of section 1273(b) shall apply whether or not the requirements of such paragraph are met. "(b) TREATMENT OF NONRESIDENT ALIENS AND FOREIGN CORPORA- TIONS.—If the holder of a residual interest in a REMIC is a non- resident alien individual or a foreign corporation, for purposes of sections 871(a), 881,1441, and 1442— "(1) amounts includible in the gross income of such holder under this part shall be taken into account when paid or distributed (or when the interest is disposed of), and "(2) no exemption from the taxes imposed by such sections (and no reduction in the rates of such taxes) shall apply to any excess inclusion. The Secretary may by regulations provide that such amounts shall be taken into account earlier than as provided in paragraph (1) where necessary or appropriate to prevent the avoidance of tax imposed by this chapter. "(c) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations— "(1) to prevent unreasonable accumulations of assets in a REMIC, "(2) permitting determinations of the fair market value of property transferred to a REMIC and issue price of interests in a REMIC to be made earlier than otherwise provided, and "(3) requiring reporting to holders of residual interests of such information as frequently as is necessary or appropriate to permit such holders to compute their taxable income accurately." (b) TECHNICAL AMENDMENTS.— (1) TREATMENT FOR REIT PURPOSES.—Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: "(D) A regular or residual interest in a REMIC shall be treated as an interest in real property, and any amount includible in gross income with respect to such an interest shall be treated as interest; except that, if less than 95 percent of the assets of such REMIC are interests in real property (determined as if the taxpayer held such assets), such interest shall be so treated only in the proportion which the assets of the REMIC consist of such interests." (2) TREATMENT FOR PURPOSES OF SECTION 593.—Subsection (d) of section 593 (defining loans) is amended by adding at the end thereof the following new paragraph: "(4) TREATMENT OF INTERESTS IN REMIC'S.—A regular or resid- ual interest in a REMIC shall be treated as a qualifying real property loan; except that, if less than 95 percent of the assets of such REMIC are qualifying real property loans (determined as if the taxpayer held the assets of the REMIC), such interest shall be so treated only in the proportion which the assets of such REMIC consist of such loans." (3) TREATMENT FOR PURPOSES OF SECTION 7701(a) ( 1 9 ) . — Subparagraph (C) of section 7701(a)(19) (defining domestic build- ing and loan associations) is amended by striking out "and" at the end of clause (ix), by striking out the period at the end of
100 STAT. 2318 PUBLIC LAW 99-514—OCT. 22, 1986 clause (x) and inserting in lieu thereof ", and", and by inserting after clause (x) the following new clause: "(xi) any regular or residual interest in a REMIC, but only in the proportion which the assets of such REMIC consist of property described in any of the preceding clauses of this subparagraph; except that if 95 percent or more of the assets of such REMIC are loans de- scribed in clauses (i) through (x), the entire interest in the REMIC shall qualify." (4) TREATMENT FOR PURPOSES OF SECTION 582(C).—Paragraph (1) of section 582(c) is amended by adding at the end thereof the following new sentence: "For purposes of the preceding sen- tence, any regular or residual interest in a REMIC shall be treated as an evidence of indebtedness." SEC. 672. RULES FOR ACCRUING ORIGINAL ISSUE DISCOUNT ON REGULAR INTERESTS AND SIMILAR DEBT INSTRUMENTS. Subsection (a) of section 1272 (relating to current inclusion in income of original issue discount) is amended by redesignating paragraph (6) as paragraph (7) and by inserting after paragraph (5) the following new paragraph: "(6) DETERMINATION OF DAILY PORTIONS WHERE PRINCIPAL SUB- JECT TO ACCELERATION.— "(A) I N GENERAL.—In the case of any debt instrument to which this paragraph applies, the daily portion of the origi- nal issue discount shall be determined by allocating to each day in any accrual period its ratable portion of the excess (if any)of^ "(i) the sum of (I) the present value determined under subparagraph (B) of all remaining payments under the debt instrument as of the close of such period, and (II) the payments during the accrual period of amounts included in the stated redemption price of the debt instrument, over "(ii) the adjusted issue price of such debt instrument at the beginning of such period. "(B) DETERMINATION OF PRESENT VALUE.—For purposes of subparagraph (A), the present value shall be determined on the basis of— "(i) the original 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), "(ii) events which have occurred before the close of the accrual period, and "(iii) a prepayment assumption determined in the manner prescribed by regulations. "(C) DEBT INSTRUMENTS TO WHICH PARAGRAPH APPLIES.— This paragraph applies to— "(i) any regular interest in a REMIC or qualified mortgage held by a REMIC, or "(ii) any other debt instrument if payments under such debt instrument may be accelerated by reason of prepayments of other obligations securing such debt instrument (or, to the extent provided in regulations, by reason of other events)."
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2319 SEC. 673. TREATMENT OF TAXABLE MORTGAGE POOLS. Section 7701, as amended by section 201(c), is amended by re- designating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection: "(i) TAXABLE MORTGAGE POOLS.— "(1) TREATED AS SEPARATE CORPORATIONS.—A taxable mort- gage pool shall be treated as a separate corporation which may not be treated as an includible corporation with any other corporation for purposes of section 1501. "(2) TAXABLE MORTGAGE POOL DEFINED.—For purposes of this title— "(A) IN GENERAL.—Except as otherwise provided in this paragraph, a taxable mortgage pool is any entity (other than a HEMIC) if— "(i) substantially all of the assets of such entity consists of debt obligations (or interests therein) and more than 50 percent of such debt obligations (or in- terests) consists of real estate mortgages (or interests therein), "(ii) such entity is the obligor under debt obligations with 2 or more maturities, and "(iii) under the terms of the debt obligations referred to in clause (ii) (or underlying arrangement), payments on such debt obligations bear a relationship to pay- ments on the debt obligations (or interests) referred to in clause (i). "(B) PORTION OF ENTITIES TREATED AS POOLS.—Any portion of an entity which meets the definition of subparagraph (A) shall be treated as a taxable mortgage pool. "(C) EXCEPTION FOR DOMESTIC BUILDING AND LOAN.—Noth- ing in this subsection shall be construed to treat any domes- tic building and loan association (or portion thereof) as a taxable mortgage pool. "(D) TREATMENT OF CERTAIN EQUITY INTERESTS.—To the extent provided in regulations, equity interest of varying classes which correspond to maturity classes of debt shall be treated as debt for purposes of this subsection. "(3) TREATMENT OF CERTAIN REIT'S.—If— "(A) a real estate investment trust is a taxable mortgage pool, or "(B) a qualified REIT subsidiary (as defined in section 856(i)(2)) of a real estate investment trust is a taxable mortgage pool, under regulations prescribed by the Secretary, adjustments similar to the adjustments provided in section 860E(d) shall apply to the shareholders of such real estate investment trust." SEC. 674. COMPLIANCE PROVISIONS. Subsection (d) of section 6049 (relating to returns regarding pay- ments of interest) is amended by adding at the end thereof the following new paragraph: "(7) INTERESTS IN REMIC'S AND CERTAIN OTHER DEBT INSTRUMENTS.— "(A) IN GENERAL.—For purposes of subsection (a), the term 'interest' includes amounts includible in gross income with respect to regular interests in REMIC's.
100 STAT. 2320 PUBLIC LAW 99-514—OCT. 22, 1986 "(B) REPORTING TO CORPORATIONS, ETC.—Except as other- wise provided in regulations, in the case of any interest described in subparagraph (A) of this paragraph and any other debt instrument to which section 1272(a)(6) apphes, subsection (b)(4) of this section shall be applied without regard to subparagraphs (A), (H), (I), (J), (K), and (L)(i). "(C) ADDITIONAL INFORMATION.—Except as otherwise pro- vided in regulations, any return or statement required to be filed or furnished under this section with respect to interest income described in subparagraph (A) and interest on any other debt instrument to which section 1272(a)(6) applies shall also provide information setting forth the issue price of the interest to which the return or statement relates at the beginning of each accrual period with respect to which interest income is required to be reported on such return or statement and information necessary to compute accrual of market discount. "(D) REGULATORY AUTHORITY.—The Secretary may pre- scribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regula- tions which require more frequent or more detailed report- ing." SEC. 675. EFFECTIVE DATES. (a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this part shall apply to taxable years beginning after December 31, 1986. (b) RULES FOR ACCRUING ORIGINAL ISSUE DISCOUNT.—The amend- ment made by section 672 shall apply to debt instruments issued after December 31, 1986, in taxable years ending after such date. (c) TREATMENT OF TAXABLE MORTGAGE POOLS.— (1) IN GENERAL.—The amendment made by section 673 shall take effect on January 1, 1992. (2) TREATMENT OF EXISTING ENTITIES.—The amendment made by section 673 shall not apply to any entity in existence on December 31, 1991. The preceding sentence shall cease to apply with respect to any entity as of the 1st day after December 31, 1991, on which there is a substantial transfer of cash or other property to such entity. (3) SPECIAL RULE FOR COORDINATION WITH WASH-SALE RULES.— Notwithstanding paragraphs (1) and (2), for purposes of apply- ing section 860F(d) of the Internal Revenue Code of 1986 (as added by this part), the amendment made by section 673 shall apply to taxable years beginning after December 31,1986. TITLE VII—ALTERNATIVE MINIMUM TAX SEC. 701. ALTERNATIVE MINIMUM TAX FOR INDIVIDUALS AND CORPORA- TIONS. (a) GENERAL RULE.—Part VI of subchapter A of chapter 1 (relating to minimum tax for tax preferences) is amended to read as follows: "PART VI—ALTERNATIVE MINIMUM TAX "Sec. 55. Alternative minimum tax imposed. "Sec. 56. Adjustments in computing alternative minimum taxable income.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2321 "Sec. 57. Items of tax preference. "Sec. 58. E)enial of certain losses. "Sec. 59 Other definitions and special rules "SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED. "(a) GENERAL RULE.—There is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to the excess (if any) of- "(1) the tentative minimum tax for the taxable year, over "(2) the regular tax for the taxable year. "(b) TENTATIVE MINIMUM TAX.—For purposes of this part— *(1) IN GENERAL.—The tentative minimum tax for the taxable year is— "(A) 20 percent (21 percent in the case of a taxpayer other than a corporation) of so much of the alternative minimum taxable income for the taxable year as exceeds the exemp- tion amount, reduced by "(B) the alternative minimum tax foreign tax credit for the taxable year. "(2) ALTERNATIVE MINIMUM TAXABLE INCOME.—The term 'alternative minimum taxable income* means the taxable income of the taxpayer for the taxable year— "(A) determined with the adjustments provided in section 56 and section 58, and "(B) increased by the amount of the items of tax pref- erence described in section 57. "(c) REGULAR TAX.— "(1) IN GENERAL.—For purposes of this section, the term 'regular tax' means the regular tax liability for the taxable year (as defined in section 26(b)) reduced by the foreign tax credit allowable under section 27(a). Such term shall not include any tax imposed by section 402(e) and shall not include any increase in tax under section 47. "(2) CROSS REFERENCES.— "For provisions providing that certain credits are not allowable against the tax imposed by this section, see sections 26(a), 28(d)(2), 29(b)(5), and 38(c). "(d) EXEMPTION AMOUNT.—For purposes of this section— "(1) EXEMPTION AMOUNT FOR TAXPAYERS OTHER THAN CORPORA- TIONS.—In the case of a taxpayer other than a corporation, the term 'exemption amount' means— "(A) $40,000 in the case of— "(i) a joint return, or "(ii) a surviving spouse, "(B) $30,000 in the case of an individual who— "(i) is not a married individual, and "(ii) is not a surviving spouse, and "(C) $20,000 in the case of— "(i) a married individual who files a separate return, or "(ii) an estate or trust. For purposes of this paragraph, the term 'surviving spouse' has the meaning given to such term by section 2(a), and marital status shall be determined under section 7703. "(2) CORPORATIONS.—In the case of a corporation, the term 'exemption amount' means $40,000.
100 STAT. 2322 PUBLIC LAW 99-514—OCT. 22, 1986 "(3) PHASE-OUT OF EXEMPTION AMOUNT.—The exemption amount of any taxpayer shall be reduced (but not below zero) by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds— "(A) $150,000 in the case of a taxpayer described in paragraph (IX A) or (2), "(B) $112,500 in the case of a taxpayer described in paragraph (1)(B), and "(C) $75,000 in the case of a taxpayer described in para- graph (1)(C). "SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAX- ABLE INCOME. "(a) ADJUSTMENTS APPLICABLE TO ALL TAXPAYERS.—In determin- ing the amount of the alternative minimum taxable income for any taxable year the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax): "(1) DEPRECIATION.— "(A) IN GENERAL.— "(i) PROPERTY OTHER THAN CERTAIN REAL PROPERTY.— Except as provided in clause (ii), the depreciation deduction allowable under section 167 with respect to any tangible property placed in service after Decem- ber 31, 1986, shall be determined under the alternative system of section 168(g). '•(ii) 150-PERCENT DECLINING BALANCE METHOD FOR CERTAIN PROPERTY.—The method of depreciation used shall be— "(I) the 150 percent declining balance method, "(II) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of the year will yield a higher allowance. The preceding sentence shall not apply to any section 1250 property (as defined in section 1250(c)) or to any other property if the depreciation deduction deter- mined under section 168 with respect to such other property for purposes of the regular tax is determined by using the straight line method. "(B) EXCEPTION FOR CERTAIN PROPERTY.—This paragraph shall not apply to property described in paragraph (1), (2), (3), or (4) of section 168(a "(C) COORDINATION WITH TRANSITIONAL RULES.— "(i) IN GENERAL.—This paragraph shall not apply to property placed in service after December 31, 1986, to which the amendments made by section 201 of the Tax Reform Act of 1986 do not apply. "(ii) TREATMENT OF CERTAIN PROPERTY PLACED IN SERVICE BEFORE 1987.—This paragraph shall apply to any property to which the amendments made by sec- tion 201 of the Tax Reform Act of 1986 apply by reason of an election under section 203(aXl)(B) of such Act without regard to the requirement of subparagraph (A) that the property be placed in service after Decem- ber 31, 1986. "(D) NORMAUZATION RULES.—With respect to public util- ity property described in section 167(1X3)(A), the Secretary
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2323 shall prescribe the requirements of a normalization method of accounting for this section. "(2) MINING EXPLORATION AND DEVELOPMENT COSTS.— "(A) IN GENERAL.—With respect to each mine or other natural deposit (other than an oil, gas, or geothermal well) of the taxpayer, the amount allowable as a deduction under section 616(a) or 617(a) (determined without regard to sec- tion 291(b)) in computing the regular tax for costs paid or incurred after December 31, 1986, shall be capitalized and amortized ratably over the 10-year period beginning with the taxable year in which the expenditures were made. "(B) Loss ALLOWED.—If a loss is sustained with respect to any property described in subparagraph (A), a deduction shall be allowed for the expenditures described in subpara- graph (A) for the taxable year in which such loss is sus- tained in an amount equal to the lesser of— "(i) the amount allowable under section 165(a) for the expenditures if they had remained capitalized, or "(ii) the amount of such expenditures which have not previously been amortized under subparagraph (A). "(3) TREATMENT OF CERTAIN LONG-TERM CONTRACTS.—In the case of any long-term contract entered into by the taxpayer on or after March 1, 1986, the taxable income from such contract shall be determined under the percentage of completion method of accounting (as modified by section 4600t))). "(4) ALTERNATIVE TAX NET OPERATING LOSS DEDUCTION.—The alternative tax net operating loss deduction shall be allowed in lieu of the net operating loss deduction allowed under section 172. "(5) POLLUTION CONTROL FACILITIES.—In the case of any cer- tified pollution control facility placed in service after Decem- ber 31, 1986, the deduction allowable under section 169 (without regard to section 291) shall be determined under the alternative system of section 168(g). "(6) INSTALLMENT SALES OF CERTAIN PROPERTY.—In the case of any— "(A) disposition after March 1,1986, of property described in section 1221(1), or "(B) other disposition if an obligation arising from such disposition would be an applicable installment obligation (as defined in section 453C(e)) to which section 453C applies, income from such disposition shall be determined without regard to the installment method under section 453 or 453A and all payments to be received for the disposition shall be deemed received in the taxable year of the disposition. This paragraph shall not apply to any disposition with respect to which an election is in effect under section 453C(e)(4). "(7) ADJUSTED BASIS.—The adjusted basis of any property to which paragraph (1) or (5) applies (or with respect to which there are any expenditures to which paragraph (2) or subsection 03)(2) applies) shall be determined on the basis of the treatment prescribed in paragraph (1), (2), or (5), or subsection (b)(2), whichever applies. "Ot)) ADJUSTMENTS APPLICABLE TO INDIVIDUALS.—In determining the amount of the alternative minimum taxable income of any taxpayer (other than a corporation), the following treatment shall
100 STAT. 2324 PUBLIC LAW 99-514—OCT. 22, 1986 apply (in lieu of the treatment applicable for purposes of computing the regular tax): "(1) LIMITATION ON ITEMIZED DEDUCTIONS.— "(A) IN GENERAL.—No deduction shall be allowed— "(i) for any miscellaneous itemized deduction (as de- fined in section 67(b)), or "(ii) for any taxes described in paragraph (1), (2), or (3) of section 164(a). Clause (ii) shall not apply to any amount allowable in computing adjusted gross income. "(B) MEDICAL EXPENSES.—In determining the amount allowable as a deduction under section 213, subsection (a) of section 213 shall be applied by substituting '10 percent' for *7.5 percent'. "(C) INTEREST.—In determining the amount allowable as a deduction for interest, subsections (d) and (h) of section 163 shall apply, except that— "(i) in lieu of the exception under section 163(h)(2)(D), the term 'personal interest' shall not include any quali- fied housing interest (as defined in subsection (e)), "(ii) sections 163(d)(6) and 163(h)(6) (relating to phase- ins) shall not apply, and "(iii) interest on any specified private activity bond (and any amount treated as interest on a specified activity bond under section 56(a)(5)(B)), and any deduc- tion referred to in section 57(a)(5)(A), shall be treated as includible in gross income (or as deductible) for pur- poses of applying section 163(d). "(D) TREATMENT OF CERTAIN RECOVERIES.—No recovery of any tax to which subparagraph (A)(ii) applied shall be included in gross income for purposes of determining alter- native minimum taxable income. "(E) STANDARD DEDUCTION NOT ALLOWED.—The standard deduction provided in section 63(c) shall not be allowed. "(2) CIRCULATION AND RESEARCH AND EXPERIMENTAL EXPENDI- TURES.— "(A) IN GENERAL.—The amount allowable as a deduction under section 173 or 174(a) in computing the regular tax for amounts paid or incurred after December 31, 1986, shall be capitalized and— "(i) in the case of circulation expenditures described in section 173, shall be amortized ratably over the 3- year period beginning with the taxable year in which the expenditures were made, or "(ii) in the case of research and experimental expenditures described in section 174(a), shall be amor- tized ratably over the 10-year period beginning with the taxable year in which the expenditures were made. "(B) Loss ALLOWED.—If a loss is sustained with respect to any property described in subparagraph (A), a deduction shall be allowed for the expenditures described in subpara- graph (A) for the taxable year in which such loss is sus- tained in an amount equal to the lesser of— "(i) the amount allowable under section 165(a) for the expenditures if they had remained capitalized, or "(ii) the amount of such expenditures which have not previously been amortized under subparagraph (A).
PUBLIC LAW 9 9 - 5 1 4 - O C T . 22, 1986 100 STAT. 2325 "(C) SPECIAL RULE FOR PERSONAL HOLDING COMPANIES.—In the case of circulation expenditures described in section 173, the adjustments provided in this paragraph shall apply also to a personal holding company (as defined in section 542). "(c) ADJUSTMENTS APPLICABLE TO CORPORATIONS.—In determining the amount of the alternative minimum taxable income of a cor- poration, the following treatment shall apply: "(1) ADJUSTMENT FOR BOOK INCOME OR ADJUSTED EARNINGS AND PROFITS.— "(A) BOOK INCOME ADJUSTMENT.—For taxable years begin- ning in 1987, 1988, and 1989, alternative minimum taxable income shall be adjusted as provided under subsection (f). "(B) ADJUSTED EARNINGS AND PROFITS.—For taxable years beginning after 1989, alternative minimum taxable income shall be adjusted as provided under subsection (g). "(2) MERCHANT MARINE CAPITAL CONSTRUCTION FUNDS.—In the case of a capital construction fund established under section 607 of the Merchant Marine Act, 1936 (46 U.S.C. 1177)— "(A) subparagraphs (A), (B), and (C) of section 7518(c)(1) (and the corresponding provisions of such section 607) shall not apply to— "(i) any amount deposited in such fund after Decem- ber 31,1986, or "(ii) any earnings (including gains and losses) after December 31, 1986, on amounts in such fund, and "(B) no reduction in basis shall be made under section 7518(f) (or the corresponding provisions of such section 607) with respect to the withdrawal from the fund of any amount to which subparagraph (A) applies. For purposes of this paragraph, any withdrawal of deposits or earnings from the fund shall be treated as allocable first to deposits made before (and earnings received or accrued before) January 1, 1987. "(3) SPECIAL DEDUCTION FOR CERTAIN ORGANIZATIONS NOT AL- LOWED.—The deduction determined under section 8330t)) shall not be allowed. "(d) ALTERNATIVE TAX N E T OPERATING LOSS DEDUCTION DE- FINED.— "(1) IN GENERAL.—For purposes of subsection (a)(4), the term 'alternative tax net operating loss deduction' means the net operating loss deduction allowable for the taxable year under section 172, except that— "(A) the amount of such deduction shall not exceed 90 percent of alternative minimum taxable income determined without regard to such deduction, and "(B) in determining the amount of such deduction— "(i) the net operating loss (within the meaning of section 172(c)) for any loss year shall be adjusted as provided in paragraph (2), and "(ii) in the case of taxable years beginning after December 31, 1986, section 172(b)(2) shall be applied by substituting '90 percent of alternative minimum tax- able income determined without regard to the alter- native tax net operating loss deduction' for 'taxable income' each place it appears. "(2) ADJUSTMENTS TO NET OPERATING LOSS COMPUTATION.— 71-194 0 - 89 - 18 : QL. 3 Part3
100 STAT. 2326 PUBLIC LAW 99-514—OCT. 22, 1986 "(A) POST-1986 LOSS YEARS.—In the case of a loss year beginning after December 31, 1986, the net operating loss for such year under section 172(c) shall— "(i) be determined with the adjustments provided in this section and section 58, and "(ii) be reduced by the items of tax preference deter- mined under section 57 for such year (other than subsection (a)(6) thereof). "(B) PRE-1987 YEARS.—In the case of loss years beginning before January 1, 1987, the amount of the net operating loss which may be carried over to taxable years beginning after December 31, 1986, for purposes of paragraph (2), shall be equal to the amount which may be carried from the loss year to the first taxable year of the taxpayer beginning after December 31, 1986. "(e) QUALIFIED HOUSING INTEREST.—For purposes of this part— "(1) IN GENERAL.—The term 'qualified housing interest' means interest which is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially rehabilitating any property which— "(A) is the principal residence (within the meaning of section 1034) of the taxpayer at the time such interest accrues or is paid, or "(B) is a qualified dwelling which is a qualified residence (within the meaning of section 163(h)(3)). Such term also includes interest on any indebtedness resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence; but only to the extent that the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness immediately before the refinancing. "(2) QUALIFIED DWELLING.—The term 'qualified dwelling' means any— "(A) house, "(B) apartment, "(C) condominium, or "(D) mobile home not used on a transient basis (within the meaning of section 7701(a)(19)(C)(v)), including all structures or other property appurtenant thereto. "(3) SPECIAL RULE FOR INDEBTEDNESS INCURRED BEFORE JULY i, 1982.—The term 'qualified housing interest' includes interest paid or accrued on indebtedness which— "(A) was incurred by the taxpayer before July 1, 1982, and "(B) is secured by property which, at the time such indebtedness was incurred, was— "(i) the principal residence (within the meaning of section 1034) of the taxpayer, or "(ii) a qualified dwelling used by the taxpayer (or any member of his family (within the meaning of section 267(c)(4))). "(f) ADJUSTMENTS FOR BOOK INCOME OF CORPORATIONS.— "(1) IN GENERAL.—The alternative minimum taxable income of any corporation for any taxable year beginning in 1987, 1988, or 1989 shall be increased by 50 percent of the amount (if any) by which—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2327 "(A) the adjusted net book income of the corporation, exceeds "(B) the alternative minimum taxable income for the taxable year (determined without regard to this subsection and the alternative tax net operating loss deduction). "(2) ADJUSTED NET BOOK INCOME.—For purposes of this subsec- tion— "(A) IN GENERAL.—The term 'adjusted net book income' means the net income or loss of the taxpayer set forth on the taxpayer's applicable financial statement, adjusted as provided in this paragraph. "(B) ADJUSTMENTS FOR CERTAIN TAXES.—The amount determined under subparagraph (A) shall be appropriately adjusted to disregard any Federal income taxes, or income, war profits, or excess profits taxes imposed by any foreign country or possession of the United States, which are di- rectly or indirectly taken into account on the taxpayer's applicable financial statement. The preceding sentence shall not apply to any such taxes imposed by a foreign country or possession of the United States if the taxpayer does not choose to take, to any extent, the benefits of section 901. "(C) SPECIAL RULES FOR RELATED CORPORATIONS.— "(i) CONSOLIDATED RETURNS.—If the taxpayer files a consolidated return for any taxable year, adjusted net book income for such taxable year shall take into account items on the taxpayer's applicable financial statement which are properly allocable to members of such group included on such return. "(ii) TREATMENT OF DIVIDENDS.—In the case of any corporation which is not included on a consolidated return with the taxpayer, adjusted net book income shall take into account the earnings of such other corporation only to the extent of the sum of the divi- dends received from such other corporation and other amounts required to be included in gross income under this chapter in respect of the earnings of such other corporation. "(D) STATEMENTS COVERING DIFFERENT PERIODS.—Appro- priate adjustments shall be made in adjusted net book income in any case in which an applicable financial state- ment covers a period other than the taxable year. "(E) SPECIAL RULE FOR COOPERATIVES.—In the case of a cooperative to which section 1381 applies, the amount determined under subparagraph (A) shall be reduced by the amounts referred to in section 1382(b) (relating to patron- age dividends and per-unit retain allocations) to the extent such amounts were not otherwise taken into account in determining adjusted net book income. "(F) TREATMENT OF DIVIDENDS FROM 936 CORPORATIONS.— "(i) IN GENERAL.—In determining the amount of ad- justed net book income, any dividend received from a corporation eligible for the credit provided by section 936 shall be increased by the amount of any withhold- ing tax paid to a possession of the United States with respect to such dividend, "(ii) TREATMENT AS FOREIGN TAXES.—
100 STAT. 2328 PUBLIC LAW 99-514—OCT. 22, 1986 "(I) IN GENERAL.—50 percent of any withholding tax paid to a possession of the United States with respect to dividends referred to in clause (i) (to the extent such dividends do not exceed the excess referred to in paragraph (1), determined without regard to clause (i)) shall, for purposes of this part, be treated as a tax paid by the corporation receiv- ing the dividend to a foreign country. "(II) TREATMENT OF TAXES IMPOSED ON 936 COR- PORATION.—For purposes of this subparagraph, taxes paid by any corporation eligible for the credit provided by section 936 to a possession of the United States, shall be treated as a withholding tax paid with respect to any dividend paid by such corporation to the extent such taxes would be treated as paid by the corporation receiving the dividend under rules similar to the rules of section 902. "(G) RULES FOR ALASKA NATIVE CORPORATIONS.—The amount determined under subparagraph (A) shall be appro- priately adjusted to allow: '(i) cost recovery and depletion attributable to prop- erty the basis of which is determined under section 21(c) of the Alaska Native Claims Settlement Act (43 U.S.C. 1620(c)), and "(ii) deductions for amounts payable made pursuant to section 7(i) or section 7(j) of such Act (43 U.S.C. 1606(i) and 1606(j)) only at such time as the deductions are allowed for tax purposes. "(H) SECRETARIAL AUTHORITY TO ADJUST ITEMS.—Under regulations, adjusted net book income shall be properly adjusted to prevent the omission or duplication of any item. "(3) APPLICABLE FINANCIAL STATEMENT.—For purposes of this subsection— "(A) I N GENERAL.—The term 'applicable financial state- ment' means, with respect to any taxable year, any state- ment covering such taxable year— "(i) which is required to be filed with the Securities and Exchange Commission, "(ii) which is a certified audited income statement to be used for the purposes of a statement or report— "(I) for credit purposes, "(II) to shareholders, or "(III) for any other substantial nontax purpose, "(iii) which is an income statement required to be provided to— "(I) the Federal Government or any agency thereof, "(II) a State government or any agency thereof, or "(III) a political subdivision of a State or any agency thereof, or "(iv) which is an income statement to be used for the purposes of a statement or report— "(I) for credit purposes, "(II) to shareholders, or "(III) for any other substantial nontax purpose.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2329 "(B) EARNINGS AND PROFITS USED IN CERTAIN CASES.—If— "(i) a taxpayer has no applicable financial statement, or "(ii) a taxpayer has only a statement described in subparagraph (A)(iv) and the taxpayer elects the ap- plication of this subparagraph, the net income or loss set forth on the taxpayer's applicable financial statement shall, for purposes of paragraph (3)(A), be treated as being equal to the taxpayer's earnings and profits for the taxable year (without diminution by reason of distributions during the tax year). Such election, once made, shall remain in effect for any taxable year for which the taxpayer is described in this subparagraph unless re- voked with the consent of the Secretary. "(C) SPECIAL RULE WHERE MORE THAN i STATEMENT.—For purposes of subparagraph (A), if a taxpayer has a statement described in more than 1 clause or subclause, the applicable financial statement shall be the statement described in the clause or subclause with the lowest number designation. "(4) EXCEPTION FOR CERTAIN CORPORATIONS.—This subsection shall not apply to any S corporation, regulated investment company, real estate investment trust, or HEMIC. Xg) ADJUSTMENTS BASED ON ADJUSTED CURRENT EARNINGS.— "(1) IN GENERAL.—The alternative minimum taxable income of any corporation for any taxable year beginning after 1989 shall be increased by 75 percent of the excess (if any) of— "(A) the adjusted current earnings of the corporation, over "(B) the alternative minimum taxable income (deter- mined without regard to this subsection and the alternative tax net operating loss deduction). "(2) ALLOWANCE OF NEGATIVE ADJUSTMENTS.— "(A) IN GENERAL.—The alternative minimum taxable income for any corporation of any taxable year beginning after 1989, shall be reduced by 75 percent of the excess (if any) of^ "(i) the amount referred to in subparagraph (B) of paragraph (1), over "(ii) the amount referred to in subparagraph (A) of paragraph (1). "(B) LIMITATION.—The reduction under subparagraph (A) for any taxable year shall not exceed the excess (if any) of— "(i) the aggregate increases in alternative minimum taxable income under paragraph (1) for prior taxable years, over "(ii) the aggregate reductions under subparagraph (A) of this paragraph for prior taxable years. "(3) ADJUSTED CURRENT EARNINGS.—For purposes of this subsection, the term 'adjusted current earnings' means the alternative minimum taxable income for the taxable year— "(A) determined with the adjustments provided in para- graph (4), and "(B) determined without regard to this subsection and the alternative tax net operating loss deduction. "(4) ADJUSTMENTS.—In determining adjusted current earn- ings, the following adjustments shall apply: "(A) DEPRECIATION.—
100 STAT. 2330 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) PROPERTY PLACED IN SERVICE AFTER I989.—The depreciation deduction with respect to any property placed in service in a taxable year beginning after 1989 shall be determined under whichever of the following methods yields deductions with a smaller present value: "(I) The alternative system of section 168(g), or "(II) The method used for book purposes, "(ii) PROPERTY TO WHICH NEW ACRS SYSTEM APPLIES.— In the case of any property to which the amendments made by section 201 of the Tax Reform Act of 1986 apply and which is placed in service in a taxable year beginning before 1990, the depreciation deduction shall be determined— "(I) by taking into account the adjusted basis of such property (as determined for purposes of computing alternative minimum taxable income) as of the close of the last taxable year beginning before January 1, 1990, and "(II) by using the straight-line method over the remainder of the recovery period applicable to such property under the alternative system of sec- tion 168(g). "(iii) PROPERTY TO WHICH ORIGINAL ACRS SYSTEM AP- PLIES.—In the case of any property to which section 168 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986 and without regard to subsection (d)(l)(A)(ii) thereof) applies, the depreciation deduction shall be determined— "(I) by taking into account the adjusted basis of such property (as determined for purposes of computing the regular tax) as of the close of the last taxable year beginning before January 1, 1990, and "(II) by using the straight line method over the remainder of the recovery period which would apply to such property under the alternative system of section 168(g). "(iv) PROPERTY PLACED IN SERVICE BEFORE 1981.—In the case of any property not described in clause (i), (ii), or (iii), the amount allowable as depreciation or amortization with respect to such property shall be determined in the same manner as for purposes of computing taxable income. "(v) SLOWER METHOD USED IF USED FOR BOOK PUR- POSES.—In the case of any property to which clause (ii), (iii), or (iv) applies, if the depreciation method used for book purposes yields deductions for taxable years beginning after 1989 with a smaller present value than the method which would otherwise be used under such clause, the method used for book purposes shall be used in lieu of the method which would otherwise be used under such clause. "(B) INCLUSION OF ITEMS INCLUDED FOR PURPOSES OF COMPUTING EARNINGS AND PROFITS.— "(i) IN GENERAL.—In the case of any amount which is excluded from gross income for purposes of computing
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2331 alternative minimum taxable income but is taken into account in determining the amount of earnings and profits— "(I) such amount shall be included in income in the same manner as if such amount were includ- ible in gross income for purposes of computing alternative minimum taxable income, and "(II) the amount of such income shall be reduced by any deduction which would have been allowable in computing alternative minimum taxable income if such amount were includible in gross income, "(ii) INCLUSION OF BUILDUP IN LIFE INSURANCE CON- TRACTS.—In the case of any life insurance contract— "(I) the income on such contract (as determined under section 7702(g)) for any taxable year shall be treated as includible in gross income for such year, and "(II) there shall be allowed as a deduction that portion of any premium which is attributable to insurance coverage, "(iii) INCLUSION OF INCOME ON ANNUITY CONTRACT.— In the case of any annuity contract, the income on such contract (as determined under section 72(u)(2)) shall be treated as includible in gross income for such year. "(C) DISALLOWANCE OF ITEMS NOT DEDUCTIBLE IN COMPUT- ING EARNINGS AND PROFITS.— "(i) IN GENERAL.—A deduction shall not be allowed for any item if such item would not be deductible for any taxable year for purposes of computing earnings and profits. "(ii) SPECIAL RULE FOR IOO-PERCENT DIVIDENDS.— Clause (i) shall not apply to any deduction allowable under section 243 or 245 for a 100-percent dividend— "(I) if the corporation receiving such dividend and the corporation paying such dividend could not be members of the same affiliated group under section 1504 by reason of section 1504(b), "(II) but only to the extent such dividend is attributable to income of the paying corporation which is subject to tax under this chapter (deter- mined after the application of sections 936 and 921). For purposes of the preceding sentence, the term '100 percent dividend' means any dividend if the percentage used for purposes of determining the amount allowable as a deduction under section 243 or 245 with respect to such dividend is 100 percent. "(iii) SPECIAL RULE FOR DIVIDENDS FROM SECTION 936 COMPANIES.—In the case of any dividend received from a corporation eligible for the credit provided by section 936, rules similar to the rules of subparagraph (F) of subsection (f)(1) shall apply, except that '75 percent' shall be substituted for '50 percent' in clause (ii)(I) thereof. "(D) CERTAIN OTHER EARNINGS AND PROFITS ADJUST- MENTS.—
100 STAT. 2332 PUBLIC LAW 99-514—OCT. 22, 1986 "(i) I N GENERAL.—The adjustments provided in sec- tion 312(n) shall apply; except that— "(I) paragraphs (1), (2), and (3) shall apply only to amounts paid or incurred in taxable years begin- ning after December 31,1989, "(II) paragraph (4) shall apply only to taxable years beginning after December 31,1989, "(III) paragraph (5) shall apply only to install- ment sales in taxable years beginning after Decem- ber 31,1989, "(IV) paragraph (6) shall apply only to contracts entered into on or after March 1,1986, and "(V) paragraphs (7) and (8) shall not apply. "(ii) SPECIAL RULE FOR INTANGIBLE DRILLING COSTS AND MINERAL EXPLORATION AND DEVELOPMENT COSTS.— If— "(I) the present value of the deductions provided under subparagraph (AXii) or (BXii) of section 312(n)(2) with respect to amounts paid or incurred in taxable years beginning after December 31, 1989, exceeds "(II) the present value of the deductions for such amounts under the method used for book purposes, such amounts shall be deductible under the method used for book purposes in lieu of that provided in such subparagraph. "(E) DISALLOWANCE OF LOSS ON EXCHANGE OF DEBT POOLS.—No loss shall be recognized on the exchange of any pool of debt obligations for another pool of debt obligations having substantially the same effective interest rates and maturities. "(F) ACQUISITION EXPENSES OF U F E INSURANCE COMPA- NIES.—Acquisition expenses of life insurance companies shall be capitalized and amortized in accordance with the treatment generally required under generally accepted accounting principles as if this subparagraph applied to all taxable years. "(G) DEPLETION.—The allowances for depletion with re- spect to any property placed in service in a taxable year beginning after 1989, shall be determined under whichever of the following methods yields deductions with a smaller present value: "(i) cost depletion determined under section 611, or "(ii) the method used for book purposes. "(H) TREATMENT OF CERTAIN OWNERSHIP CHANGES.—If— "(i) there is an ownership change (within the mean- ing of section 382) after the date of the enactment of the Tax Reform Act of 1986 with respect to any cor- poration, and "(iiXD the aggregate adjusted bases of the eissets of such corporation (immediately after the change), exceed "(II) the value of the stock of such corporation (as determined for purposes of section 382), properly ad- justed for liabilities and other relevant items, then the adjusted basis of each asset of such corporation (as of such time) shall be its proportionate share (determined
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2333 on the basis of respective fair market values) of the amount referred to in clause (iiXII). "(5) OTHER DEFINITIONS.—For purposes of paragraph (4)— "(A) BOOK PURPOSES.—The term 'book purposes' means the treatment for purposes of preparing the applicable financial statement referred to in subsection (f). "(B) EARNINGS AND PROFITS.—The term 'earnings and profits' means earnings and profits computed for purposes of subchapter C. "(C) PRESENT VALUE.—Present value shall be determined as of the time the property is placed in service (or, if later, as of the beginning of the first taxable year beginning after 1989) and under regulations prescribed by the Secretary. "(D) TREATMENT OF ALTERNATIVE MINIMUM TAXABLE INCOME.—The treatment of any item for purposes of computing alternative minimum taxable income shall be determined without regard to this subsection. "(6) EXCEPTION FOR CERTAIN CORPORATIONS.—This subsection shall not apply to any S corporation, regulated investment company, real estate investment trust, or REMIC. "SEC. 57. ITEMS OF TAX PREFERENCE. "(a) GENERAL RULE.—For purposes of this part, the items of tax preference determined under this section are— "(1) DEPLETION.—With respect to each property (as defined in section 614), the excess of the deduction for depletion allowable under section 611 for the taxable year over the adjusted basis of the property at the end of the taxable year (determined without regard to the depletion deduction for the taxable year). "(2) INTANGIBLE DRILLING COSTS.— "(A) I N GENERAL.—With respect to all oil, gas, and geo- thermal properties of the taxpayer, the amount (if any) by which the amount of the excess intangible drilling costs arising in the taxable year is greater than 65 percent of the net income of the taxpayer from oil, gas, and geothermal properties for the taxable year. "(B) EXCESS INTANGIBLE DRILLING COSTS.—For purposes of subparagraph (A), the amount of the excess intangible drill- ing costs arising in the taxable year is the excess of— "(i) the intangible drilling and development costs paid or incurred in connection with oil, gas, and geo- thermal wells (other than costs incurred in drilling a nonproductive well) allowable under section 263(c) or 291(b) for the taxable year, over "(ii) the amount which would have been allowable for the taxable year if such costs had been capitalized and straight line recovery of intangibles (as defined in subsection (b)) had been used with respect to such costs. "(C) NET INCOME FROM OIL, GAS, AND GEOTHERMAL PROP- ERTIES.—For purposes of subparagraph (A), the amount of the net income of the taxpayer from oil, gas, and geo- thermal properties for the taxable year is the excess of— "(i) the aggregate amount of gross income (within the meaning of section 613(a)) from all oil, gas, and geo- thermal properties of the taxpayer received or accrued by the taxpayer during the taxable year, over
100 STAT. 2334 PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) the amount of any deductions allocable to such properties reduced by the excess described in subpara- graph (B) for such taxable year. "(D) PARAGRAPH APPLIED SEPARATELY WITH RESPECT TO GEOTHERMAL PROPERTIES AND OIL AND GAS PROPERTIES.—This paragraph shall be applied separately with respect to— "(i) all oil and gas properties which are not described in clause (ii), and "(ii) all properties which are geothermal deposits (as defined in section 613(e)(3)). "(3) INCENTIVE STOCK OPTIONS.— "(A) IN GENERAL.—With respect to the transfer of a share of stock pursuant to the exercise of an incentive stock option (as defined in section 422A), the amount by which the fair market value of the share at the time of exercise exceeds the option price. For purposes of this paragraph, the fair market value of a share of stock shall be deter- mined without regard to any restriction other than a restriction which, by its terms, will never lapse. "(B) BASIS ADJUSTMENT.—In determining the amount of gain or loss recognized for purposes of this part on any disposition of a share of stock acquired pursuant to an exercise (in a taxable year beginning after December 31, 1986) of an incentive stock option, the basis of such stock shall be increased by the amount of the excess referred to in subparagraph (A). "(4) RESERVES FOR LOSSES ON BAD DEBTS OF FINANCIAL INSTITU- TIONS.—In the case of a financial institution to which section 585 or 593 applies, the amount by which the deduction allowable for the taxable year for a reasonable addition to a reserve for bad debts exceeds the amount that would have been allowable had the institution maintained its bad debt reserve for all taxable years on the beisis of actual experience. "(5) TAX-EXEMPT INTEREST.— "(A) IN GENERAL.—Interest on specified private activity bonds reduced by any deduction (not allowable in comput- ing the regular tax) which would have been allowable if such interest were includible in gross income. "(B) TREATMENT OF EXEMPT-INTEREST DIVIDENDS.—Under regulations prescribed by the Secretary, any exempt-in- terest dividend (as defined in section 852(bX5)(A)) shall be treated as interest on a specified private activity bond to the extent of its proportionate share of the interest on such bonds received by the company paying such dividend. "(C) SPECIFIED PRIVATE ACTIVITY BONDS.— "(i) IN GENERAL.—For purposes of this part, the term 'specified private activity bonds' means any private activity bond (as defined in section 141) issued after August 7, 1986. "(ii) EXCEPTION FOR QUALIFIED 501 (C) (3) BONDS.—For purposes of clause (i), the term 'private activity bond' shall not include any qualified 501(c)(3) bond (as defined in section 145). "(iii) EXCEPTION FOR REFUNDINGS.—For purposes of clause (i), the term 'private activity bond' shall not include any refunding bond if the refunded bond (or in
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2335 the case of a series of refundings, the original bond) was issued before August 8, 1986. "(iv) CERTAIN BONDS ISSUED BEFORE SEPTEMBER i, 1986.—For purposes of this subparagraph, a bond issued before September 1, 1986, shall be treated as issued before August 8, 1986, unless such bond would be a private activity bond if— "(I) paragraphs (1) and (2) of section 141(b) were applied by substituting '25 percent' for *10 percent' each place it appears, "(II) paragraphs (3), (4), and (5) of section 141(b) did not apply, and "(III) subparagraph (B) of section 141(cXl) did not apply. "(6) APPRECIATED PROPERTY CHARITABLE DEDUCTION.— "(A) IN GENERAL.—The amount by which the deduction allowable under section 170 would be reduced if all capital gain property were taken into account at its adjusted basis. "(B) CAPITAL GAIN PROPERTY.—For purposes of subpara- graph (A), the term 'capital gain property' has the meaning given to such term by section 170(b)(lXC)(iv). Such term shall not include any property to which an election under section 170(b)(l)(C)(iii) applies. "(7) ACCELERATED DEPRECIATION OR AMORTIZATION ON CERTAIN PROPERTY PLACED IN SERVICE BEFORE JANUARY 1, 1 9 8 7 . — T h e amounts which would be treated as items of tax preference with respect to the taxpayer under paragraphs (2), (3), (4), and (12) of this subsection (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986). The preceding sentence shall not apply to any property to which section 56(a) (1) or (5) applies. "(b) STRAIGHT LINE RECOVERY OF INTANGIBLES DEFINED.—For pur- poses of paragraph (2) of subsection (a)— "(1) IN GENERAL.—The term 'straight line recovery of intangi- bles', when used with respect to intangible drilling and develop- ment costs for any well, means (except in the case of an election under paragraph (2)) ratable amortization of such costs over the 120-month period beginning with the month in which produc- tion from such well begins. "(2) ELECTION.—If the taxpayer elects with respect to the intangible drilling and development costs for any well, the term 'straight line recovery of intangibles' means any method which would be permitted for purposes of determining cost depletion with respect to such well and which is selected by the taxpayer for purposes of subsection (a)(2). "SEC. 58. DENIAL OF CERTAIN LOSSES. "(a) DENIAL OF FARM Loss.— "(1) IN GENERAL.—For purposes of computing the amount of the alternative minimum taxable income for any taxable year of a taxpayer other than a corporation— "(A) DISALLOWANCE OF FARM LOSS.—NO loss of the tax- payer for such taxable year from any tax shelter farm activity shall be allowed. "(B) DEDUCTION IN SUCCEEDING TAXABLE YEAR.—Any loss from a tax shelter farm activity disallowed under subpara-
100 STAT. 2336 PUBLIC LAW 99-514—OCT. 22, 1986 g r a p h (A) shall be t r e a t e d a s a deduction allocable to such activity in t h e 1st succeeding taxable year. "(2) T A X SHELTER FARM ACTIVITY.—For p u r p o s e s of t h i s subsec- tion, t h e t e r m 'tax shelter farm activity' means— "(A) a n y farming syndicate as defined in section 464(c) (as modified by section 461(i)(4)(A)), and "(B) a n y other activity consisting of farming which is a passive activity (within t h e m e a n i n g of section 469(d), with- out regard to p a r a g r a p h (1)(B) thereof). "(3) APPLICATION TO PERSONAL SERVICE CORPORATIONS.—For purposes of p a r a g r a p h (1), a personal service corporation (within t h e m e a n i n g of section 469(g)(1)(C)) shall be t r e a t e d a s a tax- payer other t h a n a corporation. "(b) DISALLOWANCE O F PASSIVE ACTIVITY LOSS.—In c o m p u t i n g t h e alternative m i n i m u m taxable income of t h e t a x p a y e r for a n y tax- able year, section 469 shall apply, except t h a t in applying section 469— "(1) t h e adjustments of section 56 shall apply, "(2) a n y deduction to t h e e x t e n t such deduction is a n item of tax preference u n d e r section 57(a) shall not be t a k e n into account, and "(3) t h e provisions of section 469(1) (relating to phase-in of disallowance) shall not apply. "(c) SPECIAL R U L E S . — F o r p u r p o s e s of t h i s section— "(1) SPECIAL RULE FOR INSOLVENT TAXPAYERS.— "(A) I N GENERAL.—The a m o u n t of losses to which subsec- tion (a) or (b) applies shall be reduced by t h e a m o u n t (if any) by which t h e t a x p a y e r is insolvent a s of t h e close of t h e taxable year. "(B) INSOLVENT.—For purposes of this p a r a g r a p h , t h e t e r m 'insolvent' m e a n s t h e excess of liabilities over t h e fair m a r k e t value of assets. "(2) Loss ALLOWED FOR YEAR OF DISPOSITION OF FARM SHELTER ACTIVITY.—If t h e t a x p a y e r disposes of his e n t i r e interest in a n y tax shelter farm activity d u r i n g any taxable year, t h e a m o u n t of t h e loss a t t r i b u t a b l e t o such activity (determined after carryovers u n d e r subsection (a)(1)(B)) shall (to t h e e x t e n t other- wise allowable) be allowed for such taxable y e a r in computing a l t e r n a t i v e m i n i m u m taxable income a n d not t r e a t e d a s a loss from a tax shelter farm activity. "SEC. 59. OTHER DEPINITIONS AND SPECIAL RULES. "(a) ALTERNATIVE M I N I M U M T A X F O R E I G N T A X C R E D I T . — F o r pur- poses of this part— "(1) I N GENERAL.—The a l t e r n a t i v e m i n i m u m t a x foreign t a x credit for a n y taxable y e a r shall be t h e credit which would be determined u n d e r section 27(a) for such taxable y e a r if— "(A) t h e a m o u n t determined u n d e r section 55(b)(1)(A) were t h e t a x against which such credit w a s t a k e n for purposes of section 904 for t h e taxable y e a r a n d all prior taxable years beginning after December 31, 1986, "(B) section 904 were applied on t h e basis of a l t e r n a t i v e m i n i m u m taxable income instead of taxable income, a n d "(C) for purposes of section 904, a n y increase in alter- native m i n i m u m taxable income by reason of section 56(c)(1)(A) (relating to adjustment for book income) shall have t h e same proportionate source (and character) as
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2337 alternative minimum taxable income determined without regard to such increase. "(2) LIMITATION TO 90 PERCENT OF TAX.— "(A) IN GENERAL.—The alternative minimum tax foreign tax credit for any taxable year shall not exceed the excess (if any) of— "(i) the amount determined under section 55(bXlXA) for the taxable year, over "(ii) 10 percent of the amount which would be deter- mined under section 55(bXl)(A) without regard to the alternative tax net operating loss deduction. "(B) CARRYBACK AND CARRYFORWARD.—If the alternative minimum tax foreign tax credit exceeds the amount deter- mined under subparagraph (A), such excess shall, for pur- poses of this part, be treated as an amount to which section 904(c) applies. "(b) MINIMUM TAX NOT TO APPLY TO INCOME ELIGIBLE FOR SECTION 936 CREDIT.—In the case of any corporation for which a credit is allowable for the taxable year under section 936, alternative mini- mum taxable income shall not include any amount with respect to which the requirements of subparagraph (A) or (B) of section 936(aXl) are met. "(c) TREATMENT OF ESTATES AND TRUSTS.—In the case of any estate or trust, the alternative minimum taxable income of such estate or trust and any beneficiary thereof shall be determined by applying part I of subchapter J with the adjustments provided in this part. "(d) APPORTIONMENT OF DIFFERENTLY TREATED ITEMS IN CASE OF CERTAIN ENTITIES.— "(1) IN GENERAL.—The differently treated items for the tax- able year shall be apportioned (in accordance with regulations prescribed by the Secretary)— "(A) REGULATED INVESTMENT COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.—In the case of a regulated investment company to which part I of subchapter M applies or a real estate investment company to which part II of subchapter M applies, between such company or trust and shareholders and holders of beneficial interest in such company or trust. "(B) COMMON TRUST FUNDS.—In the case of a common trust fund (as defined in section 584(a)), pro rata among the participants of such fund. "(2) DIFFERENTLY TREATED ITEMS.—For purposes of this sec- tion, the term 'differently treated item' means any item of tax preference or any other item which is treated differently for purposes of this part than for purposes of computing the regular tax. "(e) OPTIONAL 10-YEAR WRITEOFF OF CERTAIN TAX PREFERENCES.— "(1) IN GENERAL.—For purposes of this title, any qualified expenditure to which an election under this paragraph applies shall be allowed as a deduction ratably over the 10-year period (3-year period in the case of circulation expenditures described in section 173) beginning with the taxable year in which such expenditure was made. "(2) QUALIFIED EXPENDITURE.—For purposes of this subsection, the term 'qualified expenditure' means any amount which, but for an election under this subsection, would have been allowable as a deduction for the taxable year in which paid or incurred under—
100 STAT. 2338 PUBLIC LAW 99-514—OCT. 22, 1986 "(A) section 173 (relating to circulation expenditures), "(B) section 174(a) (relating to research and experimental expenditures), "(C) section 263(c) (relating to intangible drilling and development expenditures), "(D) section 616(a) (relating to development expendi- tures), or "(E) section 617(a) (relating to mining exploration expenditures). "(3) OTHER SECTIONS NOT APPLICABLE.—Except as provided in this subsection, no deduction shall be allowed under any other section for any qualified expenditure to which an election under this subsection applies. "(4) ELECTION.— "(A) IN GENERAL.—An election may be made under para- graph (1) with respect to any portion of any qualified expenditure. "(B) REVOCABLE ONLY WITH CONSENT.—Any election under this subsection may be revoked only with the consent of the Secretary. "(C) PARTNERS AND SHAREHOLDERS OF S CORPORATIONS.—In the case of a partnership, any election under paragraph (1) shall be made separately by each partner with respect to the partner's allocable share of any qualified expenditure. A similar rule shall apply in the case of an S corporation and its shareholders. "(5) DISPOSITIONS.— "(A) APPLICATION OF SECTION 1254.—In the case of any disposition of property to which section 1254 applies (deter- mined without regard to this section), any deduction under paragraph (1) with respect to amounts which are allocable to such property shall, for purposes of section 1254, be treated as a deduction allowable under section 263(c), 616(a), or 617(a), whichever is appropriate. "(B) APPLICATION OF SECTION 617(d).—In the case of any disposition of mining property to which section 617(d) ap- plies (determined without regard to this subsection), any deduction under paragraph (1) with respect to amounts which are allocable to such property shall, for purposes of section 617(d), be treated as a deduction allowable under section 617(a). "(6) AMOUNTS TO WHICH ELECTION APPLY NOT TREATED AS TAX PREFERENCE.—Any portion of any qualified expenditure to which an election under paragraph (1) applies shall not be treated as an item of tax preference under section 57(a) and section 56 shall not apply to such expenditure. "(f) COORDINATION WITH SECTION 291.—Except as otherwise pro- vided in this part, section 291 (relating to cutback of corporate preferences) shall apply before the application of this part. "(g) TAX BENEFIT RULE.—The Secretary may prescribe regulations under which differently treated items shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer's regular tax for any taxable year. "(h) COORDINATION WITH CERTAIN LIMITATIONS.—The limitations of sections 704(d), 465, and 1366(d) (and such other provisions as may be specified in regulations) shall be applied for purposes of comput-
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2339 ing the alternative minimum taxable income of the taxpayer for the taxable year— "(1) with the adjustments of section 56, and "(2) by not taking into account any deduction to the extent such deduction is an item of tax preference under section 57(a). "(i) SPECIAL RULE FOR INTEREST TREATED AS TAX PREFERENCE.— For purposes of this subtitle, interest shall not fail to be treated as wholly exempt from tax imposed by this title solely by reason of being included in alternative minimum taxable income." (b) CREDIT AGAINST REGULAR TAX FOR PRIOR YEAR MINIMUM TAX LIABILITY.—Part IV of subchapter A of chapter 1 (relating to credits allowable) is amended by adding at the end thereof the following new subpart: "Subpart G—Credit Against Regular Tax for Prior Year Minimum Tax Liability "Sec. 53. Credit for prior year minimum tax liability. "SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY. "(a) ALLOWANCE OF CREDIT.—There shall be allowed as a credit against the tax imposed by this chapter for any taxable year an amount equal to the minimum tax credit for such taxable year. "(b) MINIMUM TAX CREDIT.—For purposes of subsection (a), the minimum tax credit for any taxable year is the excess (if any) of^ "(1) the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over "(2) the amount allowable as a credit under subsection (a) for such prior taxable years. "(c) LIMITATION.—The credit allowable under subsection (a) for any taxable year shall not exceed the excess (if any) of— "(1) the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of this part, over "(2) the tentative minimum tax for the taxable year. "(d) DEFINITIONS.—For purposes of this section— "(1) NET MINIMUM TAX.— "(A) IN GENERAL.—The term 'net minimum tax' means the tax imposed by section 55. "(B) CREDIT NOT ALLOWED FOR EXCLUSION PREFERENCES.— "(i) ADJUSTED NET MINIMUM TAX.—The adjusted net minimum tax for any taxable year is— "(I) the amount of the net minimum tax for such taxable year, reduced by "(II) the amount which would be the net mini- mum tax for such taxable year if the only adjust- ments and items of tax preference taken into ac- count were those specified in clause (ii). "(ii) SPECIFIED ITEMS.—The following are specified in this clause— "(I) the adjustments provided for in subsections (b)(1) and (c)(3) of section 56, and "(II) the items of tax preference described in paragraphs (1), (5), and (6) of section 57(a). In the case of taxable years beginning after 1989, the adjustments provided in section 56(g) shall be treated as specified in this clause to the extent attributable to
100 STAT. 2340 PUBLIC LAW 99-514—OCT. 22, 1986 items which are excluded from gross income for any taxable year for purposes of the regular tax, or are not deductible for any taxable year under the adjusted earnings and profits method of section 56(g). "(2) TENTATIVE MINIMUM TAX.—The term 'tentative minimum tax' has the meaning given to such term by section 55(b)." (c) CREDITS NOT ALLOWABLE AGAINST MINIMUM TAX.— (1) PERSONAL CREDITS.— (A) IN GENERAL.—Subsection (a) of section 26 (relating to limitation based on amount of tax) is amended to read as follows: "(a) LIMITATION BASED ON AMOUNT OF TAX.—The aggregate amount of credits allowed by this subpart for the taxable year shall not exceed the excess (if any) of— "(1) the taxpayer's regular tax liability for the taxable year, over "(2) the tentative minimum tax for the taxable year (deter- mined without regard to the alternative minimum tax foreign tax credit)." (B) REGULAR TAX LIABILITY.—Subsection (b) of section 26 (as amended by title II) is amended— (i) by striking out "this section" in the matter preced- ing paragraph (1) and inserting in lieu thereof "this part", (ii) by striking out "tax liability" in paragraph (1) and inserting in lieu thereof "regular tax liability", (iii) by striking out subparagraph (A) of paragraph (2) and inserting in lieu thereof the following: "(A) section 55 (relating to minimum tax),", (iv) by striking out "and" at the end of paragraph (2)(H), by striking out the period at the end of para- graph (2)(I) and inserting in lieu thereof ", and", and by adding at the end of paragraph (2) the following new subparagraph: "(J) sections 871(a) and 881 (relating to certain income of nonresident aliens and foreign corporations,", and (v) by striking out "TAX LIABILITY" in the subsection heading and inserting in lieu thereof "REGULAR TAX LIABILITY". (C) TENTATIVE MINIMUM TAX.—Subsection (c) of section 26 is amended to read as follows: "(c) TENTATIVE MINIMUM TAX.—For purposes of this part, the term 'tentative minimum tax' means the amount determined under section 55(b)(1)." (2) CREDIT FOR CLINICAL TESTING EXPENSES.—Paragraph (2) of section 28(d) is amended to read as follows: "(2) LIMITATION BASED ON AMOUNT OF TAX.—The credit al- lowed by this section for any taxable year shall not exceed the excess (if any) of— "(A) the regular tax (reduced by the sum of the credits allowable under subpart A and section 27), over "(B) the tentative minimum tax for the taxable year." (3) CREDIT FOR PRODUCTION OF FUEL FROM NONCONVENTIONAL SOURCES.—Paragraph (5) of section 29(b) is amended to read as follows:
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2341 "(5) APPLICATION WITH OTHER CREDITS.—The credit allowed by subsection (a) for any taxable year shall not exceed the excess (if any) of— "(A) the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27 and 28, over "(B) the tentative minimum tax for the taxable year." (4) GENERAL BUSINESS CREDIT.—Subsection (c) of section 38 (relating to limitation based on amount of tax), as amended by section 631(a), is amended by redesignating paragraph (3) as paragraph (4), and by striking out paragraphs (1) and (2) and inserting in lieu thereof the following: "(1) IN GENERAL.—The credit allowed under subsection (a) for any taxable year shall not exceed the lesser of— "(A) the allowable portion of the taxpayer's net regular tax liability for the taxable year, or "(B) the excess (if any) of the taxpayer's net regular tax liability for the taxable year over the tentative minimum tax for the taxable year. "(2) ALLOWABLE PORTION OF NET REGULAR TAX LIABILITY.—For purposes of this subsection, the allowable portion of the tax- payer's net regular tax liability for the taxable year is the sum of- "(A) so much of the taxpayer's net regular tax liability for the taxable year as does not exceed $25,000, plus "(B) 75 percent of so much of the taxpayer's net regular tax liability for the taxable year as exceeds $25,000. For purposes of the preceding sentence, the term 'net regular tax liability' means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part. "(3) REGULAR INVESTMENT TAX CREDIT MAY OFFSET 25 PERCENT OF MINIMUM TAX.—In the case of any C corporation, to the extent the credit under subsection (a) is attributable to the application of the regular percentage under section 46, the limitation of paragraph (1) shall be the greater of— "(A) the lesser of— "(i) the allowable portion of the taxpayer's net regu- lar tax liability for the taxable year, or "(ii) the excess (if any) of the taxpayer's net regular tax liability for the taxable year over 75 percent of the tentative minimum tax for the taxable year, or "(B) 25 percent of the taxpayer's tentative minimum tax for the year." In no event shall this paragraph permit the allowance of a credit which (in combination with the alternative tax net operating loss deduction and the alternative minimum tax for- eign tax credit) would reduce the tax payable under section 55 below an amount equal to 10 percent of the amount which would be determined under section 55(b) without regard to the alternative tax net operating loss deduction and the alternative minimum tax foreign tax credit." (d) ESTIMATED TAX PROVISIONS TO APPLY TO CORPORATE MINIMUM TAX.— (1) Paragraph (1) of section 6154(c) is amended to read as follows: "(1) The amount which the corporation estimates as the sum of—
100 STAT. 2342 PUBLIC LAW 99-514—OCT. 22, 1986 "(A) the income tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever applies, and "(B) the minimum tax imposed by section 55, over" (2) Subparagraph (A) of section 6425(c)(1) is amended to read as follows: "(A) The sum of— "(i) the tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever is applicable, plus "(ii) the tax imposed by section 55, over". (3) Paragraph (1) of section 6655(f) is amended to read as follows: "(1) the sum of— "(A) the tax imposed by section 11 or 1201(a), or sub- chapter L of chapter 1, whichever is applicable, plus "(B) the tax imposed by section 55, over". (e) TECHNICAL AMENDMENTS.— (1) APPLICATION OF SECTION 381.—Subsection (c) of section 381 is amended by adding at the end thereof the following new paragraph: "(27) CREDIT UNDER SECTION 53.—The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 53, and under such regula- tions as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 53 in respect of the distributor or transferor corporation." (2) LIMITATION IN CASE OF CONTROLLED CORPORATIONS.— Subsection (a) of section 1561 (relating to limitations on certain multiple tax benefits in the case of certain controlled corpora- tions) is amended— (A) by striking out "and" at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof ", and" and by inserting after paragraph (2) the following new paragraph: "(3) one $40,000 exemption amount for purposes of computing the amount of the minimum tax.", (B) by striking out "amounts specified in paragraph (1)" and inserting in lieu thereof "amounts specified in para- graph (1) (and the amount specified in paragraph (3))", and (C) by adding at the end thereof the following new sen- tence: "In applying section 55(d)(3), the alternative mini- mum taxable income of all component members shall be taken into account and any decrease in the exemption amount shall be allocated to the component members in the same manner as under paragraph (3)." (3) TREATMENT OF SHORT TAXABLE YEARS.—Subsection (d) of section 443 (relating to adjustment in computing minimum tax for tax preference) is amended to read as follows: "(d) ADJUSTMENT IN COMPUTING MINIMUM TAX AND TAX PREF- ERENCES.—If a return is made for a short period by reason of subsection (a)— "(1) the alternative minimum taxable income for the short period shall be placed on an annual basis by multiplying such amount by 12 and dividing the result by the number of months in the short period, and "(2) the amount computed under paragraph (1) of section 55(a) shall bear the same relation to the tax computed on the annual basis as the number of months in the short period bears to 12."
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2343 (4) CONFORMING AMENDMENTS.— (A) Paragraph (4) of section 5(a) is amended to read as follows: "(4) For alternative minimum tax, see section 55." (B) Paragraph (7) of section 12 is amended to read as follows: "(7) For alternative minimum tax, see section 55." (C) Subparagraph (D) of section 48(d)(4) is amended by striking out "section 57(c)(1)(B)" and inserting in lieu thereof "section 57(c)(1)(B) (as in effect on the day before the date of the enactment of the Tax Reform Act of 1986)". (D) Section 173(b), 174(e)(2), 263(c), and 1016(a)(24) (as redesignated by section 634(b)(2)) are each amended by striking out "section 58(i)" and inserting in lieu thereof "section 59(d)". (E) Subsection (b) of section 703 (relating to elections of the partnership), as amended by title V, is amended by striking out paragraph (1) and by redesignating paragraphs (2) through (4) as paragraphs (1) through (3), respectively. (F) Paragraph (1) of section 882(a) (relating to imposition of tax on income of foreign corporations connected with United States business) is amended by striking out "or 1201(a)" and inserting in lieu thereof ", 55, or 1201(a)". (G) So much of section 897(a)(2) as precedes subparagraph (B) thereof is amended to read as follows: "(2) 21-PERCENT MINIMUM TAX ON NONRESIDENT ALIEN INDIVID- UALS.— "(A) IN GENERAL.—In the case of any nonresident alien individual, the amount determined under section 55(b)(1)(A) shall not be less than 21 percent of the lesser of— "(i) the individual's alternative minimum taxable income (as defined in section 55(b)(2)) for the taxable year, or "(ii) the individual's net United States real property gain for the taxable year." (H) Paragraph (2) of section 904(i) (relating to cross ref- erences) is amended by striking out "by an individual" and all that follows and inserting in lieu thereof "against the alternative minimum tax, see section 59(a)." (I) Paragraph (3) of section 936(a) is amended by striking out subparagraph (A) and by redesignating subparagraphs (B), (C), and (E) as subparagraphs (A), (B), and (C), respec- tively. (J) Subsection (a) of section 1363 is amended by striking out "and in section 58(d)". (K) Paragraph (2) of section 1366(f) (relating to reduction in pass-thru for tax imposed on capital gain) is amended by striking out "56 or", (f) EFFECTIVE DATES.— (1) IN GENERAL.—Except as otherwise provided in this subsec- tion, the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) ADJUSTMENT OF NET OPERATING LOSS.— (A) INDIVIDUALS.—In the case of a net operating loss of an individual for a taxable year beginning after December 31,
100 STAT. 2344 PUBLIC LAW 99-514—OCT. 22, 1986 1982, and before January 1, 1987, for purposes of determin- ing the amount of such loss which may be carried to a taxable year beginning after December 31, 1986, for pur- poses of the minimum tax, such loss shall be adjusted in the manner provided in section 55(d)(2) of the Internal Revenue Code of 1954 as in effect on the day before the date of the enactment of this Act. (B) CORPORATIONS.—If the minimum tax of a corporation was deferred under section 56(b) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) for any taxable year beginning before January 1, 1987, and the amount of such tax has not been paid for any taxable year beginning before January 1, 1987, the amount of the net operating loss carryovers of such corporation which may be carried to taxable years beginning after December 31, 1986, for purposes of the minimum tax shall be reduced by the amount of tax pref- erences a tax on which was so deferred. (3) INSTALLMENT SALES.—Section 56(a)(6) of the Internal Reve- nue Code of 1986 (as amended by this section) shall not apply to any disposition to which the amendments made by section 811 of this Act (relating to allocation of dealer's indebtedness to installment obligations) do not apply by reason of section 811(c)(2) of this Act. (4) EXCEPTION FOR CHARITABLE CONTRIBUTIONS BEFORE AUGUST 16, 1986.—Section 57(a)(6) of the Internal Revenue Code of 1986 (as amended by this section) shall not apply to any deduction attributable to contributions made before August 16, 1986. (5) BOOK INCOME.— (A) IN GENERAL.—In the case of a corporation to which this paragraph applies, the amount of any increase for any taxable year under section 56(c)(1)(A) of the Internal Reve- nue Code of 1986 (as added by this section) shall be reduced (but not below zero) by the excess (if any) of— (i) 50 percent of the excess of taxable income for the 5-taxable year period ending with the taxable year preceding the 1st taxable year to which such section applies over the adjusted net book income for such period, over (ii) the aggregate amounts taken into account under this paragraph for preceding taxable years. (B) TAXPAYER TO WHOM PARAGRAPH APPLIES.—This para- graph applies to a taxpayer which was incorporated in Delaware on May 31, 1912. (C) TERMS.—Any term used in this paragraph which is used in section 56 of such Code (as so added) shall have the same meaning as when used in such section. (6) CERTAIN PUBLIC UTILITY.— (A) In the case of investment tax credits described in subparagraph (B) or (C), subsection 38(c)(3)(A)(ii) of the In- ternal Revenue Code of 1986 shall be applied by substitut- ing "25 percent" for "75 percent", and section 38(c)(3XB) of the Internal Revenue Code of 1986 shall be applied by substituting "75 percent" for "25 percent". (B) If, on September 25, 1985, a regulated electric utility owned an undivided interest, within the range of 1,111 and 1,149, in the "maximum dependable capacity, net,
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2345 megawatts electric" of an electric generating unit located in Illinois or Mississippi for which a binding written con- tract was in effect on December 31, 1980, then any invest- ment tax credit with respect to such unit shall be described in this subparagraph. The aggregate amount of investment tax credits with respect to such unit shall be described in this subparagraph. (C) If, on September 25, 1985, a regulated electric utility owned an undivided interest, within the range of 1,104 and 1,111, in the "maximum dependable capacity, net, megawatts electric" of an electric generating unit located in Louisiana for which a binding written contract was in effect on December 31, 1980, then any investment tax credit of such electric utility shall be described in this subpara- graph. The aggregate amount of investment tax credits allowed solely by reason of being described by this subpara- graph shall not exceed $20,000,000. SEC. 702. STUDY OF BOOK AND EARNINGS AND PROFITS ADJUSTMENTS. The Secretary of the Treasury or his delegate shall conduct a study of the operation and effect of the provisions of sections 56(f) and 56(g) of the Internal Revenue Code of 1986. TITLE VIII—ACCOUNTING PROVISIONS Subtitle A—General Provisions SEC. 801. LIMITATION ON USE OF CASH METHOD OF ACCOUNTING. (a) GENERAL RULE.—Subpart A of part II of subchapter E of chapter 1 (relating to methods of accounting) is amended by adding at the end thereof the following new section: "SEC. 448. LIMITATION ON USE OF CASH METHOD OF ACCOUNTING. "(a) GENERAL RULE.—Except as otherwise provided in this section, in the case of a— "(1) C corporation, "(2) partnership which has a C corporation as a partner, or "(3) tax shelter, taxable income shall not be computed under the cash receipts and disbursements method of accounting. "(b) EXCEPTIONS.— "(1) FARMING BUSINESS.—Paragraphs (1) and (2) of subsection (a) shall not apply to any farming business. "(2) QUALIFIED PERSONAL SERVICE CORPORATIONS.—Paragraphs (1) and (2) of subsection (a) shall not apply to a qualified personal service corporation, and such a corporation shall be treated as an individual for purposes of determining whether paragraph (2) of subsection (a) applies to any partnership. "(3) ENTITIES WITH GROSS RECEIPTS OF NOT MORE THAN $5,000,000.—Paragraphs (1) and (2) of subsection (a) shall not apply to any corporation or partnership for any taxable year if, for all prior taxable years beginning after December 31, 1985, such entity (or any predecessor) met the $5,000,000 gross re- ceipts test of subsection (c). "(c) $5,000,000 GROSS RECEIPTS TEST.—For purposes of this section—
100 STAT. 2346 PUBLIC LAW 99-514—OCT. 22, 1986 "(1) IN GENERAL.—A corporation or partnership meets the $5,000,000 gross receipts test of this subsection for any prior taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with such prior taxable year does not exceed $5,000,000. "(2) AGGREGATION RULES.—All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one person for purposes of paragraph (1). "(3) SPECIAL RULES.—For purposes of this subsection— "(A) NOT IN EXISTENCE FOR ENTIRE 3-YEAR PERIOD.—If the entity was not in existence for the entire 3-year period referred to in paragraph (1), such paragraph shall be ap- plied on the basis of the period during which such entity (or trade or business) was in existence. "(B) SHORT TAXABLE YEARS.—Gross receipts for any tax- able year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period. "(C) GROSS RECEIPTS.—Gross receipts for any taxable year shall be reduced by returns and allowances made during such year. "(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) FARMING BUSINESS.— "(A) IN GENERAL.—The term 'farming business' means the trade or business of farming (within the meaning of section 263A(e)(4)). "(B) TIMBER AND ORNAMENTAL TREES.—The term 'farming business' includes the raising, harvesting, or growing of trees to which section 263A(c)(5) applies. "(2) QUALIFIED PERSONAL SERVICE CORPORATION.—The term 'qualified personal service corporation' means any corpora- tion— "(A) substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and "(B) substantially all of the stock of which Qyy value) is held directly or indirectly by— "(i) employees performing services for such corpora- tion in connection with the activities involving a field referred to in subparagraph (A), "(ii) retired employees who had performed such serv- ices for such corporation, "(iii) the estate of any individual described in clause (i) or (ii), or "(iv) any other person who acquired such stock by reason of the death of an individual described in clause (i) or (ii) (but only for the 2-year period beginning on the date of the death of such individual). "(3) TAX SHELTER DEFINED.—The term 'tax shelter' has the meaning given such term by section 461(i)(3) (determined after application of paragraph (4) thereof). "(4) SPECIAL RULES FOR APPLICATION OF PARAGRAPH (2).—For purposes of paragraph (2)—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2347 / "(A) community property laws shall be disregarded, "(B) stock held by a plan described in section 401(a) which is exempt from tax under section 501(a) shall be treated as held by an employee described in paragraph (2)(B)(i), and "(C) at the election of the common parent of an affiliated group (within the meaning of section 1504(a)), all members of such group may be treated as 1 taxpayer for purposes of paragraph (2)(B) if substantially all of the activities of all such members involve the performance of services in the same field described in paragraph (2)(A). "(5) SPECIAL RULE FOR SERVICES.—In the case of any person using an accrual method of accounting with respect to amounts to be received for the performance of services by such person, such person shall not be required to accrue any portion of such amounts which (on the basis of experience) will not be collected. This paragraph shall not apply to any amount if interest is required to be paid on such amount or there is any penalty for failure to timely pay such amount. "(6) TREATMENT OF CERTAIN TRUSTS SUBJECT TO TAX ON UNRE- LATED BUSINESS INCOME.—For purposes of this section, a trust subject to tax under section 511(b) shall be treated as a C corporation with respect to its activities constituting an unre- lated trade or business. "(7) COORDINATION WITH SECTION 481.—In the case of any taxpayer required by this section to change its method of accounting for any taxable year— "(A) such change shall be treated as initiated by the taxpayer, "(B) such change shall be treated as made with the consent of the Secretary, and "(C) the period for taking into account the adjustments under section 481 by reason of such change— "(i) except as provided in clause (ii), shall not exceed 4 years, and "(ii) in the case of a hospital, shall be 10 years." (b) COORDINATION WITH APPLICATION OF ECONOMIC PERFORMANCE RULES TO TAX SHELTERS.— (1) IN GENERAL.—So much of section 461(i) as precedes para- graph (3) thereof is amended to read as follows: "(i) SPECIAL RULES FOR TAX SHELTERS.— "(1) RECURRING ITEM EXCEPTION NOT TO APPLY.—In the case of a tax shelter, economic performance shall be determined with- out regard to paragraph (3) of subsection (h). "(2) SPECIAL RULE FOR SPUDDING OF OIL OR GAS WELLS.—In the case of a tax shelter, economic performance with respect to the act of drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year." (2) CONFORMING AMENDMENT.—Paragraph (4) of section 461(i) is amended to read as follows: "(4) SPECIAL RULES FOR FARMING.—In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in section 464(c) shall be substituted for subpara- graphs (A) and (B) of paragraph (3)."
100 STAT. 2348 PUBLIC LAW 99-514—OCT. 22, 1986 (c) CLERICAL AMENDMENT.—The table of sections for subpart A of part II of subchapter E of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 448. Limitation on use of cash method of accounting." (d) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) ELECTION TO RETAIN CASH METHOD FOR CERTAIN TRANS- ACTIONS.—A taxpayer may elect not to have the amendments made by this section apply to any loan or lease, or any trans- action with a related party (within the meaning of section 267(b) of the Internal Revenue Code of 1954, as in effect before the enactment of this Act), entered into on or before September 25, 1985. Any election under the preceding sentence may be made separately with respect to each transaction. (3) CERTAIN CONTRACTS.—The amendments made by this sec- tion shall not apply to— (A) contracts for the acquisition or transfer of real prop- erty, and (B) contracts for services related to the acquisition or development of real property, but only if such contracts were entered into before September 25, 1985, and the sole element of the contract which has not been performed as of September 25, 1985, is payment for such property or services. (4) TREATMENT OF AFFILIATED GROUP PROVIDING ENGINEERING SERVICES.—Each member of an affiliated group of corporations (within the meaning of section 1504(a) of the Internal Revenue Code of 1986) shall be allowed to use the cash receipts and disbursements method of accounting for any trade or business of providing engineering services with respect to taxable years ending after December 31, 1986, if the common parent of such group— (A) was incorporated in the State of Delaware in 1970, (B) was the successor to a corporation that was incor- porated in the State of Illinois in 1949, and (C) used the completed contract method of accounting for a substantial part of its income from the performance of engineering services. SEC. 802. SIMPLIFIED DOLLAR-VALUE LIFO METHOD FOR CERTAIN SMALL BUSINESSES. (a) GENERAL RULE.—Section 474 (relating to election by certain small businesses to use one inventory pool) is amended to read as follows: "SEC. 474. SIMPLIFIED DOLLAR-VALUE LIFO METHOD FOR CERTAIN SMALL BUSINESSES. "(a) GENERAL RULE.—An eligible small business may elect to use the simplified dollar-value method of pricing inventories for pur- poses of the LIFO method. "(b) SIMPLIFIED DOLLAR-VALUE METHOD OF PRICING INVEN- TORIES.—For purposes of this section—
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2349 "(1) IN GENERAL.—The simplified dollar-value method of pric- ing inventories is a dollar-value method of pricing inventories under which— "(A) the taxpayer maintains a separate inventory pool for items in each major category in the applicable Government price index, and "(B) the adjustment for each such separate pool is based on the change from the preceding taxable year in the component of such index for the major category. "(2) APPLICABLE GOVERNMENT PRICE INDEX.—The term 'ap- plicable Government price index' means— "(A) except as provided in subparagraph (B), the Producer Price Index published by the Bureau of Labor Statistics, or "(B) in the case of a retailer using the retail method, the Consumer Price Index published by the Bureau of Labor Statistics. "(3) MAJOR CATEGORY.—The term 'major category' means— "(A) in the case of the Producer Price Index, any of the 2- digit standard industrial classifications in the Producer Prices Data Report, or "(B) in the case of the Consumer Price Index, any of the general expenditure categories in the Consumer Price Index Detailed Report. "(c) ELIGIBLE SMALL BUSINESS.—For purposes of this section, a taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer for the 3 preceding taxable years do not exceed $5,000,000. For purposes of the preced- ing sentence, rules similar to the rules of section 448(c)(3) shall apply. "(d) SPECIAL RULES.—For purposes of this section— "(1) CONTROLLED GROUPS.— "(A) IN GENERAL.—In the case of a taxpayer which is a member of a controlled group, all persons which are compo- nent members of such group shall be treated as 1 taxpayer for purposes of determining the gross receipts of the tax- payer. "(B) CONTROLLED GROUP DEFINED.—For purposes of subparagraph (A), persons shall be treated as being compo- nent members of a controlled group if such persons would be treated as a single employer under section 52. "(2) ELECTION.— "(A) IN GENERAL.—The election under this section may be made without the consent of the Secretary. "(B) PERIOD TO WHICH ELECTION APPLIES.—The election under this section shall apply— "(i) to the taxable year for which it is made, and "(ii) to all subsequent taxable years for which the taxpayer is an eligible small business, unless the taxpayer secures the consent of the Secretary to the revocation of such election. "(3) LIFO METHOD.—The term 'LIFO method' means the method provided by section 472(b). "(4) TRANSITIONAL RULES.— "(A) IN GENERAL.—In the case of a year of change under this section— "(i) the inventory pools shall—
100 STAT. 2350 PUBLIC LAW 99-514—OCT. 22, 1986 "(I) in the case of the 1st taxable year to which such an election applies, be established in accord- ance with the major categories in the applicable Government price index, or "(ID in the case of the 1st taxable year after such election ceases to apply, be established in the manner provided by regulations under section 472; "(ii) the aggregate dollar amount of the taxpayer's inventory as of the beginning of the year of change shall be the same as the aggregate dollar value as of the close of the taxable year preceding the year of change, and "(iii) the year of change shall be treated as a new base year in accordance with procedures provided by regulations under section 472. "(B) YEAR OF CHANGE.—For purposes of this paragraph, the year of change under this section is— "(i) the 1st taxable year to which an election under this section applies, or "(ii) in the case of a cessation of such an election, the 1st taxable year after such election ceases to apply." (b) CLERICAL AMENDMENT.—The table of sections for subpart D of part II of subchapter E of chapter 1 is amended by striking out the item relating to section 474 and inserting in lieu thereof the following: "Sec. 474. Simplified dollar-value LIFO method for certain small busi- nesses." (c) EFFECTIVE DATES.— (1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31,1986. (2) TREATMENT OF TAXPAYERS WHO MADE ELECTIONS UNDER EXISTING SECTION 474.—The amendments made by this section shall not apply to any taxpayer who made an election under section 474 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) for any period during which such election is in effect. Notwithstanding any provision of such section 474 (as so in effect), an election under such section may be revoked without the consent of the Secretary. SEC. 803. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF CERTAIN EXPENSES. (a) GENERAL RULE.—Part IX of subchapter B of chapter 1 (relating to items not deductible) is amended by inserting after section 263 the following new section: "SEC. 263A. CAPITALIZATION AND INCLUSION IN INVENTORY COSTS OF CERTAIN EXPENSES. "<a) NONDEDUCTIBIUTY OF CERTAIN DIRECT AND INDIRECT COSTS.— "(1) IN GENERAL.—In the case of any property to which this section applies, any costs described in paragraph (2)— "(A) in the case of property which is inventory in the hands of the taxpayer, shall be included in inventory costs, and "(B) in the case of any other property, shall be capital- ized.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2351 "(2) ALLOCABLE COSTS.—The costs described in this p a r a g r a p h with respect to a n y property are— "(A) t h e direct costs of such property, a n d "(B) such property's proper s h a r e of those indirect costs (including taxes) p a r t or all of which a r e allocable to such property. "(b) PROPERTY TO W H I C H SECTION A P P U E S . — E x c e p t a s o t h e r w i s e provided in this section, this section shall apply to— "(1) PROPERTY PRODUCED BY TAXPAYER.—Real or t a n g i b l e per- sonal property produced by t h e taxpayer. "(2) PROPERTY ACQUIRED FOR RESALE.— "(A) I N GENERAL.—Real or personal property described in section 1221(1) which is acquired by t h e t a x p a y e r for resale. "(B) EXCEPTION FOR TAXPAYER WITH GROSS RECEIPTS O F $10,000,000 OR LESS.—Subparagraph (A) shall n o t apply to a n y personal property acquired d u r i n g a n y taxable y e a r by t h e t a x p a y e r for resale if t h e average a n n u a l gross receipts of t h e t a x p a y e r (or a n y predecessor) for t h e 3-taxable y e a r period ending with t h e t a x a b l e y e a r preceding such taxable y e a r do not exceed $10,000,000. "(C) AGGREGATION RULES, ETC.—For p u r p o s e s of s u b p a r a - g r a p h (B), r u l e s similar t o t h e rules of p a r a g r a p h s (2) a n d (3) of section 448(c) shall apply. For purposes of p a r a g r a p h (1), t h e t e r m 'tangible personal property' shall include a film, sound recording, video tape, book, or similar property. "(c) G E N E R A L E X C E P T I O N S . — "(1) PERSONAL USE PROPERTY.—This section s h a l l n o t a p p l y t o a n y property produced by t h e t a x p a y e r for u s e by t h e t a x p a y e r o t h e r t h a n in a t r a d e or business or a n activity conducted for profit. "(2) RESEARCH A N D EXPERIMENTAL EXPENDITURES.—This sec- tion shall n o t apply t o a n y a m o u n t allowable a s a deduction u n d e r section 174. "(3) CERTAIN DEVELOPMENT AND OTHER COSTS O F OIL AND GAS WELLS OR OTHER MINERAL PROPERTY.—This section shall n o t apply t o a n y cost allowable a s a deduction u n d e r section 263(c), 616(a), or 617(a). "(4) COORDINATION WITH LONG-TERM CONTRACT RULES.—This section shall n o t apply t o a n y property produced by t h e tax- p a y e r p u r s u a n t t o a long-term contract. "(5) T I M B E R A N D CERTAIN ORNAMENTAL TREES.—This section shall not apply to— "(A) trees raised, harvested, or grown by t h e t a x p a y e r o t h e r t h a n t r e e s described in clause (ii) of subsection (eX4XB) (after application of t h e last sentence thereof), a n d "(B) a n y real property underlying such trees. "(d) EXCEPTION FOR F A R M I N G BUSINESSES.— "(1) SECTION TO APPLY ONLY I F PREPRODUCTIVE PERIOD IS MORE T H A N 2 YEARS.— "(A) I N GENERAL.—This section shall n o t apply to a n y p l a n t or a n i m a l which is produced by t h e t a x p a y e r in a farming business and which h a s a preproductive period of 2 y e a r s or less. "(B) EXCEPTION FOR TAXPAYERS REQUIRED TO USE ACCRUAL METHOD.—Subparagraph (A) shall n o t apply t o a n y corpora-
100 STAT. 2352 PUBLIC LAW 99-514—OCT. 22, 1986 tion, partnership, or tax shelter required to use an accrual method of accounting under section 447 or 448(aX3). "(2) TREATMENT OF CERTAIN PLANTS LOST BY REASON OF CASUALTY.— "(A) IN GENERAL.—If plants bearing an edible crop for human consumption were lost or damaged (while in the hands of the taxpayer) by reason of freezing temperatures, disease, drought, pests, or casualty, this section shall not apply to any costs of the taxpayer of replanting plants bearing the same type of crop (whether on the same parcel of land on which such lost or damaged plants were located or any other parcel of land of the same acreage in the United States). "(B) SPECIAL RULE FOR PERSON WITH MINORITY INTEREST WHO MATERIALLY PARTICIPATES.—Subparagraph (A) shall apply to amounts paid or incurred by a person (other than the taxpayer described in subparagraph (A)) if— "(i) the taxpayer described in subparagraph (A) has an equity interest of more than 50 percent in such grove, orchard, or vineyard, and "(ii) such other person holds any part of the remain- ing equity interest and materially participates in the planting, maintenance, cultivation, or development of such grove, orchard, or vineyard during the 4-taxable year period beginning with the taxable year in which the grove, orchard or vineyard was lost or damaged. The determination of whether an individual materially partici- pates in any activity shall be made in a manner similar to the manner in which such determination is made under section 2032A(eX6). "(3) ELECTION TO HAVE THIS SECTION NOT APPLY.— "(A) IN GENERAL.—If a taxpayer makes an election under this paragraph, this section shall not apply to any plant or animal produced in any farming business carried on by such taxpayer. "(B) CERTAIN PERSONS NOT EUGIBLE.—No election may be made under this paragraph— "(i) by a corporation, partnership, or tax shelter, if such corporation, partnership, or tax shelter is re- quired to use an accrual method of accounting under section 447 or 448(a)(3), or "(ii) with respect to the planting, cultivation, mainte- nance, or development of pistachio trees. "(C) SPECIAL RULE FOR CITRUS AND ALMOND GROWERS.—An election under this paragraph shall not apply with respect to any item which is attributable to the planting, cultiva- tion, maintenance, or development of any citrus or almond grove (or part thereof) and which is incurred before the close of the 4th taxable year beginning with the taxable year in which the trees were planted. For purposes of the preceding sentence, the portion of a citrus or almond grove planted in 1 taxable year shall be treated separately from the portion of such grove planted in another taxable year. "(D) ELECTION.—Unless the Secretary otherwise consents, an election under this paragraph may be made only for the taxpayer's 1st taxable year which begins after December 31, 1986, and during which the taxpayer engages in a farming
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2353 business. Any such election, once made, may be revoked only with the consent of the Secretary. "(e) DEFINITIONS AND SPECIAL RULES FOR PURPOSES OF SUBSECTION (d).- "(1) RECAPTURE OF EXPENSED AMOUNTS ON DISPOSITION.— "(A) IN GENERAL.—In the case of any plant or animal with respect to which amounts would have been capitalized under subsection (a) but for an election under subsection (d)(3)- "(i) such plant or animal (if not otherwise section 1245 property) shall be treated as section 1245 property, and "(ii) for purposes of section 1245, the recapture amount shall be treated as a deduction allowed for depreciation with respect to such property. "(B) RECAPTURE AMOUNT.—For purposes of subparagraph (A), the term 'recapture amount' means any amount allow- able as a deduction to the taxpayer which, but for an election under subsection (d)(3), would have been capitalized with respect to the plant or animal. "(2) EFFECTS OF ELECTION ON DEPRECIATION.— "(A) IN GENERAL.—If the taxpayer (or any related person) makes an election under subsection (d)(3), the provisions of section 168(g)(2) (relating to alternative depreciation) shall apply to all property of the taxpayer used predominantly in the farming business and placed in service in any taxable year during which any such election is in effect. "(B) RELATED PERSON.—For purposes of subparagraph (A), the term 'related person' means— "(i) the taxpayer and members of the taxpayer's family, "(ii) any corporation (including an S corporation) if 50 percent or more (in value) of the stock of such corporation is owned (directly or through the applica- tion of section 318) by the taxpayer or members of the taxpayer's family, "(iii) a corporation and any other corporation which is a member of the same controlled group described in section 1563(a)(1), and "(iv) any partnership if 50 percent or more (in value) of the interests in such partnership is owned directly or indirectly by the taxpayer or members of the tax- payer's family. "(C) MEMBERS OF FAMILY.—For purposes of this para- graph, the term 'family' means the taxpayer, the spouse of the taxpayer, and any of their children who have not attained age 18 before the close of the taxable year. "(3) PREPRODUCTIVE PERIOD.— "(A) IN GENERAL.—For purposes of this section, the term 'preproductive period' means— "(i) in the case of a plant or animal which will have more than 1 crop or yield, the period before the 1st marketable crop or yield from such plant or animal, or "(ii) in the case of any other plant or animal, the period before such plant or animal is reasonably ex- pected to be disposed of.
100 STAT. 2354 PUBLIC LAW 9 9 - 5 1 4 - O C T . 22, 1986 For purposes of this subparagraph, use by the taxpayer in a farming business of any supply produced in such business shall be treated as a disposition, "(B) RULE FOR DETERMINING PERIOD.—In the case of a plant grown in commercial quantities in the United States, the preproductive period for such plant if grown in the United States shall be based on the nationwide weighted average preproductive period for such plant. "(4) FARMING BUSINESS.—For purposes of this section— * "(A) IN GENERAL.—The term 'farming business' means the trade or business of farming. "(B) CERTAIN TRADES AND BUSINESSES INCLUDED.—The term 'farming business' shall include the trade or business of- "(i) operating a nursery or sod farm, or "(ii) the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees. For purposes of clause (ii), an evergreen tree which is more than 6 years old at the time severed from the roots shall not be treated as an ornamental tree. "(5) CERTAIN INVENTORY VALUATION METHODS PERMITTED.— The Secretary shall by regulations permit the taxpayer to use reasonable inventory valuation methods to compute the amount required to be capitalized under subsection (a) in the case of any plant or animal. "(0 SPECIAL RULES FOR ALLOCATION OF INTEREST TO PROPERTY PRODUCED BY THE TAXPAYER.— "(1) INTEREST CAPITAUZED ONLY IN CERTAIN CASES.—Subsec- tion (a) shall only apply to interest costs which are— "(A) paid or incurred during the production period, and "(B) allocable to property which is described in subsection (b)(1) and which has— "(i) a long useful life, "(ii) an estimated production period exceeding 2 years, or "(iii) an estimated production period exceeding 1 year and a cost exceeding $1,000,000. "(2) ALLOCATION RULES.— "(A) IN GENERAL.—In determining the amount of interest required to be capitalized under subsection (a) with respect to any property— "(i) interest on any indebtedness directly attributable to production expenditures with respect to such prop- erty shall be assigned to such property, and "(ii) interest on any other indebtedness shall be as- signed to such property to the extent that the tax- payer's interest costs could have been reduced if production expenditures (not attributable to indebted- ness described in clause (i)) had not been incurred. "(B) EXCEPTION FOR QUALIFIED RESIDENCE INTEREST.— Subparagraph (A) shall not apply to any qualified residence interest (within the meaning of section 163(h)). "(C) SPECIAL RULE FOR FLOW-THROUGH ENTITIES.—Except as provided in regulations, in the case of any flow-through entity, this paragraph shall be applied first at the entity level and then at the beneficiary level.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2355 "(3) INTEREST RELATING TO PROPERTY USED TO PRODUCE PROP- ERTY.—This subsection shall apply to any interest on indebted- ness incurred or continued in connection with property used to produce property to which this subsection applies to the extent such interest is allocable to the produced property. "(4) DEFINITIONS.—For purposes of this subsection— "(A) LONG USEFUL LIFE.—Property has a long useful life if *; V., such property is— "(i) real property, or "(ii) property with a class life of 20 years or more (as determined under section 168). "(B) PRODUCTION PERIOD.—The term 'production period' means, when used with respect to any property, the period— "(i) beginning on the date on which production of the property begins, and "(ii) ending on the date on which the property is ready to be placed in service or is ready to be held for sale. "(C) PRODUCTION EXPENDITURES.—The term 'production expenditures' means the costs (whether or not incurred during the production period) required to be capitalized under subsection (a) with respect to the property. "(g) PRODUCTION.—For purposes of this section— "(1) IN GENERAL.—The term 'produce' includes construct, build, install, manufacture, develop, or improve. "(2) TREATMENT OF PROPERTY PRODUCED UNDER CONTRACT FOR THE TAXPAYER.—The taxpayer shall be treated as producing any property produced for the taxpayer under a contract with the taxpayer; except that only costs paid or incurred by the tax- payer (whether under such contract or otherwise) shall be taken into account in applying subsection (a) to the taxpayer. "(h) REGULATIONS.—The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this section, including— "(1) regulations to prevent the use of related parties, pass- thru entities, or intermediaries to avoid the application of this section, and "(2) regulations providing for simplified procedures for the application of this section in the case of property described in subsection (b)(2)." (b) TECHNICAL AMENDMENTS.— (1) Section 189 is hereby repealed. (2)(A) Section 280 is hereby repealed. (B) Paragraph (5) of section 48(r) (defining sound recording) is amended to read as follows: "(5) SOUND RECORDING.—For purposes of this subsection, the term 'sound recording' means works which result from the fixation of a series of musical, spoken, or other sounds, regard- less of the nature of the material objects (such as discs, tapes, or other phonorecordings) in which such sounds are embodied." (3) Section 312(n)(l) is amended— (A) by striking out "(determined without regard to section 189) in subparagraph (B)", and (B) by striking out subparagraph (C) and inserting in lieu thereof:
100 STAT. 2356 PUBLIC LAW 99-514—OCT. 22, 1986 "(C) CONSTRUCTION PERIOD.—The term 'construction period' has the meaning given the term production period under section 263A(f)(4)(B)." (4) Section 471 (relating to general rule for inventories) is amended— (A) by striking out "Whenever" and inserting in lieu thereof "(a) GENERAL RULE.—Whenever", and (B) by adding at the end thereof the following new subsec- tion: "(b) CROSS REFERENCE.— "For rules relating to capitalization of direct and indirect costs of prop- erty, see section 263A." (5) Section 267(e)(5)(D) is amended— (A) by striking out "low-income housing (as defined in paragraph (5) of section 189(e))" and inserting "property described in clause (i), (ii), (iii), or (iv) of section 1250(aXlXB)", and (B) by striking out "low-income housing (as so defined)" and inserting "such property". (6) Section 278 is hereby repealed. (7XA) Subsection (b) of section 447 is amended to read as follows: "(b) PREPRODUCTIVE PERIOD OF EXPENSES.— "For rules requiring capitalization of certain preproductive period of expenses, see section 263A." (B) Subsection (a) of section 447 is amended by striking out "and with the capitalization of preproductive period of expenses described in subsection (b)". (C) Section 447(gXl) is amended by striking out " I f and inserting in lieu thereof "Notwithstanding subsection (a) or section 263A, i f . (8) Subsection (d) of section 464 is amended to read as follows: "(d) EXCEPTION.—Subsection (a) shall not apply to any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, or other casualty, or on account of disease or drought." (c) CLERICAL AMENDMENTS.— (1) The table of sections for part IX of subchapter B of chapter 1 is amended by striking out the item relating to section 278 and by inserting after the item relating to section 263 the following: "Sec. 263A. Capitalization and inclusion in inventory costs of certain expenses." (2) The table of sections for part VI of subchapter B of chapter 1 is amended by striking out the item relating to section 189. (3) The table of sections for part IX of subchapter B of chapter 1 is amended by striking out the item relating to section 280. (d) EFFECTIVE DATE.— (1) I N GENERAL.—Except as provided in this subsection, the amendments made by this section shall apply to costs incurred after December 31, 1986, in taxable years ending after such date. (2) SPECIAL RULE FOR INVENTORY PROPERTY.—In the case of any property which is inventory in the hands of the taxpayer— (A) I N GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986.
PUBLIC LAW 99-514—OCT. 22, 1986 100 STAT. 2357 (B) CHANGE IN METHOD OF ACCOUNTING.—If the taxpayer is required by the amendments made by this section to change its method of accounting with respect to such prop- erty for any taxable year— (i) such change shall be treated as initiated by the taxpayer, (ii) such change shall be treated as made with the consent of the Secretary, and (iii) the period for taking into account the adjust- ments under section 481 by reason of such change shall not exceed 4 years. (3) SPECIAL RULE FOR SELF-CONSTRUCTED PROPERTY.—The amendments made by this section shall not apply to any prop- erty which is produced by the taxpayer for use by the taxpayer if substantial construction had occurred before March 1, 1986. (4) TRANSITIONAL RULE FOR CAPITALIZATION OF INTEREST AND TAXES.— (A) TRANSITION PROPERTY EXEMPTED FROM INTEREST CAPiTAUZATiON.—Section 263A(f) of the Internal Revenue Code of 1986 (as added by this section) and the amendment made by subsection OaXl) shall not apply to any property— (i) to which the amendments made by section 201 do not apply by reason of sections 203(aXlXD) and (E) and 203(aX5XA), and (ii) to which the amendments made by section 251 do not apply by reason of section 251(dX3XM). (B) INTEREST AND TAXES.—Section 263A of such Code shall not apply to property described in the matter following subparagraph (B) of section 207(eX2) of the Tax Equity and Fis