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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 foreclosure 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 striking out "and" at the end of clause (iii), by striking out the period at the end of clause (iv) and inserting in lieu thereof "; and", and by 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 section 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 prohibited 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 transactions". 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(c)(l)(A) shall pay a penalty in an amount equal to the amount of

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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.

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"(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) IN 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 capital gain net income for such calendar year. "(2) INCREASE BY PRIOR YEAR SHORTFALL.—The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— "(A) the grossed up required distribution for the preceding calendar year, over "(B) the distributed amount for such preceding calendar year. "(3) GROSSED UP REQUIRED DISTRIBUTION.—The grossed up required distribution for any calendar year is the required distribution 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 section 561) during such calendar year, and "(B) any amount on which tax is imposed under subsection (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—

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"(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 preceding 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(b)(2)) determined— "(A) without regard to subparagraph (B) of section 857(b)(2), "(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 purposes of this title, any dividend declared by a real estate investment 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(b)(8), amounts". (2) TREATMENT OF EARNINGS AND PROFITS.—Subsection (d) of

section 857 is amended to read as follows: "(d) EARNINGS AND PROFITS.—

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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 distributed 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 CONDUITS.

(a) GENERAL RULE.—Subchapter M of chapter 1 (relating to regulated investment companies and real estate investment trusts) is amended by adding at the end thereof the following new part:

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"PART IV—REAL ESTATE MORTGAGE INVESTMENT CONDUITS "Sec. "Sec. "Sec. "Sec. "Sec.

860A. Taxation of REMIC's. 860B. Taxation of holders of regular interests. 860C. Taxation of residual interests 860D. REMIC defined. 860E. Treatment of income in excess of daily accruals on residual interests. "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 Federal rate (as defined in section 1274(d) without regard to paragraph (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 paragraph (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.

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PUBLIC LAW 99-514—OCT. 22, 1986

"(h) DETERMINATION OF TAXABLE INCOME OR NET LOSS.—For purposes 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 subsection (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)(2)(B) for such calendar quarter). "(B) INDEFINITE CARRYFORWARD.—Any loss disallowed by reason of subparagraph (A) shall be treated as incurred by

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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 requirements 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 discovery 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

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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 which section 593 applies. The Secretary may by regulations provide vhat the preceding sentence shall not apply where necessary or appropriate 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 allocating 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 (determined 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 paragraph, 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— . ^

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"(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 QUALIFIED 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 mortgage 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 'prohibited transaction shall not include any disposition required to prevent default on a regular interest where the threatened 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 investment other than pursuant to any qualified liquidation described in subsection (b). "(3) DETERMINATION OF NET INCOME.—For purposes of paragraph (1), the term 'net income derived from prohibited transactions' 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) QUALIFIED 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

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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 aggregate adjusted bases of the property transferred in such transfer. Such amount shall be allocated among such interests 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 mortgage 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 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 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 mortgage 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 distribution 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

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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 interest in any REMIC and any interest in a taxable mortgage pool (as defined in section 7701(i)) comparable to a residual interest in a REMIC shall be treated as substantially 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 specified 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 subparagraph (A) merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent 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 certificate of beneficial ownership therein) which is principally secured, directly or indirectly, by an interest in real property 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.

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n

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 (3)(A) if it were transferred to the REMIC on or before the startup 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 investments' means any— "(A) cash flow investment, "(B) qualified reserve asset, or "(C) foreclosure property. "(6) CASH FLOW INVESTMENT.—The term 'cash flow investment' means any investment of amounts received under qualified mortgages for a temporary period before distribution to holders of interests in the REMIC. "(7) QUALIFIED 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 subparagraph (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;

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Page:United States Statutes at Large Volume 100 Part 3.djvu/509

 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 nonresident 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 residual 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 building and loan associations) is amended by striking out "and" at the end of clause (ix), by striking out the period at the end of

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 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 described 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 sentence, 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 SUBJECT TO ACCELERATION.—

"(A) IN GENERAL.—In the case of any debt instrument to which this paragraph applies, the daily portion of the original 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)."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/511

 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 redesignating 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 mortgage 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 interests) 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 payments 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 domestic 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 payments of interest) is amended by adding at the end thereof the following new paragraph: "(7) INTERESTS INSTRUMENTS.—

IN

REMIC'S

AND

CERTAIN

OTHER

DEBT

"(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.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/512

 100 STAT. 2320

PUBLIC LAW 99-514—OCT. 22, 1986 "(B) REPORTING TO CORPORATIONS, ETC.—Except as otherwise 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 provided 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 prescribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regulations which require more frequent or more detailed reporting."

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 amendment 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 applying 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 CORPORATIONS.

(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.

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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— 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 exemption 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 preference described in section 57. "(c) REGULAR TAX.—
 * (1) IN GENERAL.—The tentative minimum tax for the taxable

"(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.

"(d)

"(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). 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.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/514

 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 paragraph (1)(C). "SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE 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 December 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 determined 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 section 201 of the Tax Reform Act of 1986 apply by reason of an election under section 203(a)(l)(B) of such Act without regard to the requirement of subparagraph (A) that the property be placed in service after December 31, 1986. "(D) NORMAUZATION RULES.—With respect to public utility property described in section 167(1)(3)(A), the Secretary

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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 section 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 subparagraph (A) for the taxable year in which such loss is sustained 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 certified pollution control facility placed in service after December 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. "(b) 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

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Page:United States Statutes at Large Volume 100 Part 3.djvu/516

 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 defined 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 "(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 qualified housing interest (as defined in subsection (e)), "(ii) sections 163(d)(6) and 163(h)(6) (relating to phaseins) 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 deduction referred to in section 57(a)(5)(A), shall be treated as includible in gross income (or as deductible) for purposes 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 alternative 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 EXPENDITURES.—
 * 7.5 percent'.

"(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 3year 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 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 subparagraph (A) for the taxable year in which such loss is sustained 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).

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 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 corporation, 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 December 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 DEFINED.—

"(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 taxable income determined without regard to the alternative 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

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Page:United States Statutes at Large Volume 100 Part 3.djvu/518

 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 determined 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—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/519

 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 subsection— "(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 directly 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 dividends 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 statement 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 patronage 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 adjusted 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 withholding tax paid to a possession of the United States with respect to such dividend, "(ii) TREATMENT AS FOREIGN TAXES.—

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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 receiving 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 appropriately adjusted to allow: '(i) cost recovery and depletion attributable to property 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) IN GENERAL.—The term 'applicable financial statement' means, with respect to any taxable year, any statement 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.

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"(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 application 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 revoked 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 (determined 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 paragraph (4), and "(B) determined without regard to this subsection and the alternative tax net operating loss deduction. "(4) ADJUSTMENTS.—In determining adjusted current earnings, the following adjustments shall apply: "(A) DEPRECIATION.—

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PUBLIC LAW 99-514—OCT. 22, 1986 "(i) PROPERTY PLACED IN SERVICE AFTER 1989.—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 section 168(g). "(iii) PROPERTY TO WHICH ORIGINAL ACRS SYSTEM APPLIES.—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

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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 includible 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 COMPUTING 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 (determined 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 ADJUSTMENTS.—

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 100 STAT. 2332

PUBLIC LAW 99-514—OCT. 22, 1986 "(i) IN GENERAL.—The adjustments provided in section 312(n) shall apply; except that— "(I) paragraphs (1), (2), and (3) shall apply only to amounts paid or incurred in taxable years beginning 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 installment sales in taxable years beginning after December 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 (A)(ii) or (B)(ii) 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 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) 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 meaning of section 382) after the date of the enactment of the Tax Reform Act of 1986 with respect to any corporation, and "(iiXD the aggregate adjusted bases of the assets 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 adjusted 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

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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) IN 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 drilling 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 geothermal 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 geothermal 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 geothermal properties of the taxpayer received or accrued by the taxpayer during the taxable year, over

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PUBLIC LAW 99-514—OCT. 22, 1986 "(ii) the amount of any deductions allocable to such properties reduced by the excess described in subparagraph (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 determined 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 computing 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-interest dividend (as defined in section 852(b)(5)(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

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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(c)(l) 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)(l)(C)(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, 1987. — The

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 purposes of paragraph (2) of subsection (a)— "(1) IN GENERAL.—The term 'straight line recovery of intangibles', when used with respect to intangible drilling and development 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 production 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 taxpayer 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-

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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 the 1st succeeding taxable year. "(2) T A X SHELTER FARM ACTIVITY.—For purposes of t h i s subsec-

tion, the term 'tax shelter farm activity' means— "(A) any farming syndicate as defined in section 464(c) (as modified by section 461(i)(4)(A)), and "(B) any other activity consisting of farming which is a passive activity (within the m e a n i n g of section 469(d), without regard to paragraph (1)(B) thereof). "(3) APPLICATION TO PERSONAL SERVICE CORPORATIONS.—For

purposes of paragraph (1), a personal service corporation (within the 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 taxpayer other than a corporation. "(b) DISALLOWANCE O F PASSIVE ACTIVITY LOSS.—In c o m p u t i n g the

alternative minimum taxable income of the tax p a y e r for any taxable year, section 469 shall apply, except that in applying section 469— "(1) the adjustments of section 56 shall apply, "(2) any deduction to the e x t e n t such deduction is a n item of tax preference under section 57(a) shall not be t a k e n into account, and "(3) the provisions of section 469(1) (relating to phase-in of disallowance) shall not apply. "(c) SPECIAL RULES. — For purposes of t h i s section— "(1) SPECIAL RULE FOR INSOLVENT TAXPAYERS.—

"(A) IN GENERAL.—The a m o u n t of losses to which subsection (a) or (b) applies shall be reduced by the a m o u n t (if any) by which the tax p a y e r is insolvent a s of the close of the taxable year. "(B) INSOLVENT.—For purposes of this paragraph, the term 'insolvent' means the excess of liabilities over the fair m a r k e t value of assets. "(2) Loss ALLOWED FOR YEAR OF DISPOSITION OF FARM SHELTER ACTIVITY.—If the tax p a y e r disposes of his e n t i r e interest in any tax shelter farm activity during any taxable year, the a m o u n t of the loss a t t r i b u t a b l e to such activity (determined after carryovers under subsection (a)(1)(B)) shall (to the e x t e n t otherwise allowable) be allowed for such taxable year in computing a l t e r n a t i v e minimum taxable income and 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 MINIMUM T A X FOREIGN T A X C R E D I T. — For pur-

poses of this part— "(1) IN GENERAL.—The a l t e r n a t i v e minimum tax foreign tax credit for any taxable year shall be the credit which would be determined under section 27(a) for such taxable year if— "(A) the a m o u n t determined under section 55(b)(1)(A) were the tax against which such credit w a s t a k e n for purposes of section 904 for the taxable year and all prior taxable years beginning after December 31, 1986, "(B) section 904 were applied on the basis of a l t e r n a t i v e minimum taxable income instead of taxable income, and "(C) for purposes of section 904, any increase in alternative minimum taxable income by reason of section 56(c)(1)(A) (relating to adjustment for book income) shall have the same proportionate source (and character) as

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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(b)(l)(A) for the taxable year, over "(ii) 10 percent of the amount which would be determined under section 55(b)(l)(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 determined under subparagraph (A), such excess shall, for purposes 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 minimum taxable income shall not include any amount with respect to which the requirements of subparagraph (A) or (B) of section 936(a)(l) 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 taxable 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 section, 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—

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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 expenditures), 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 paragraph (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 (determined 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) applies (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 provided 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-

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