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PUBLIC LAW 97-34—AUG. 13, 1981 and shall be added to the amount allowable as a credit by this section for such years. If any portion of such excess is a carryback to a taxable year beginning before July 1, 1981, this section shall be deemed to have been in effect for such taxable year for purposes of allowing such carryback as a credit under this section. The entire amount of the unused credit for an unused credit year shall be carried to the earliest of the 18 taxable years to which (by reason of clauses (i) and (ii)) such credit may be carried, and then to each of the other 17 taxable years to the extent that, because of the limitation contained in subparagraph (B), such unused credit may not be added for a prior taxable year to which such unused credit may be carried. "(B) LIMITATION.—The amount of the unused credit which may be added under subparagraph (A) for any preceding or succeeding taxable year shall not exceed the amount by which the limitation provided by paragraph (1) for such taxable year exceeds the sum of— "(i) the credit allowable under this section for such taxable year, and "(ii) the amounts which, by reason of this paragraph, are added to the amount allowable for such taxable year and which are attributable to taxable years preceding the unused credit year."

94 Stat. 3514. 9^j%c Isf

Ante, p. 241.

26 USC 383.

(b) TECHNICAL AMENDMENTS RELATED TO CARRYOVER AND CARRYBACK OP CREDITS.— (1) CARRYOVER OF CREDIT.—

(A) Subparagraph (A) of section 55(c)(4) (relating to carryover and carryback of certain credits) is amended by striking out "section 44E(e)(l)" and inserting in lieu thereof "section 44F(g)(l), 44E(e)(l)". ^^^ Subsection (c) of section 381 (relating to items of the distributor or transferor corporation) is amended by adding at the end thereof the following new paragraph: "(28) CREDIT UNDER SECTION 44P.—The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 44F, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 44F in respect of the distributor or transferor corporation." (C) Section 883 (relating to special limitations on unused investment credits, work incentive program credits, new employee credits, alcohol fuel credits, foreign taxes, and capital losses), as in effect for taxable years beginning after June 30, 1982, is amended— (i) by inserting "to amr unused credit of the corporation under section 44F(g)(2)," after "44E(e)(2),", and (ii) by inserting "RESEARCH CREDITS," after "ALCOHOL FUEL CREDITS," in the section heading. (D) Section 383 (as in effect on the day before the date of the enactment of thie Tax Reform Act of 1976) is amended— (i) by inserting "to any unused credit of the corporation which could otherwise be carried forward under section 44F(g)(2)," after "44E(e)(2),", and (ii) by inserting "RESEARCH CREDITS," after "ALCOHOL FUEL CREDITS," in the section heading. (E) The table of sections for part V of subchapter C of chapter 1 is amended by inserting "alcohol fuel credits,

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research credits," after "new employee credits," in the item relating to section 383. (2) CARRYBACK OF CREDIT TarmstroBot (talk)

(A) Subparagraph (C) of section 6511(d)(4) (defining credit carryback) is amended by striking out "and new employee credit carryback" and inserting in lieu thereof "new employee credit carryback, and research credit carryback". (B) Section 6411 (relating to quick refunds in respect of tentative carryback adjustments) is amended— (i) by striking out "or unused new employee credit" each place it appears and inserting in lieu thereof "unused new employee credit, or unused research credit"; (ii).by inserting "by a research credit carryback provided in section 44F(g)(2)," after "63(b)," in the first sentence of subsection (a); (iii) by striking out "or a new employee credit carryback from" each place it appears and inserting in lieu thereof "a new employee credit carryback, or a research credit carryback from; and (iv) by striking out "work incentive program carryback)" and inserting in lieu thereof "work incentive program carryback, or, in the case of a research credit carryback, to an investment credit carryback, a work incentive program carryback, or a new employee credit carryback)".

Post,?. 295 ^ ^^^ ^'^^^ 26 USC 64ii.

94 Stat. 211.

(c) OTHER TECHNICAL AND CLERICAL AMENDMENTS.—

(1) Subsection (b) of section 6096 (relating to designation of 94 Stat. 276. income tax payments to Presidential Election Campaign Fund) is ^^st, p. 295. amended by striking out "and 44E" and inserting in lieu thereof "44E,and44F". (2) The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by inserting after the item relating to section 44E the following new item: "Sec. 44F. Credit for increasing research activities." (d) EFFECTIVE DATE.—

26 USC 44F

(1) IN GENERAL.—The amendments made by this section shall "°^® apply to amounts paid or incurred after June 30, 1981, and before January 1, 1986. (2) TRANSITIONAL RULE.—

(A) IN GENERAL.—If, with respect to the first taxable year to which the amendments made by this section apply and which ends in 1981 or 1982, the taxpayer ma^ only take into account qualified research expenses paid or mcurred during a portion of such taxable year, the amount of the qualified research expenses taken into account for the base period of such taxable year shall be the amount which bears the same ratio to the total qualified research expenses for such base period as the number of months in such portion of such taxable year bears to the total number of months in such taxable year. A similar rule shall apply in the case of a taxpayer's first taxable year ending after December 31, 1985. (B) DEFINITIONS.—For purposes of the preceding sentence, the terms "qualified research expenses and "base period" have the meanings given to such terms by section 44F of the Internal Revenue Code of 1954 (as added by this section). Ante, p. 241.

89-194 0—82

18:QL3

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26 USC 170.

PUBLIC LAW 97-34—AUG. 13, 1981 SEC. 222. CHARITABLE CONTRIBUTIONS OF SCIENTIFIC PROPERTY USED FOR RESEARCH. (a) IN GENERAL.—Subsection (e) of section 170 (relating to deductions for charitable, etc., contributions and gifts) is amended by adding at the end thereof the following new paragraph: "(4) SPECIAL RULE FOR CONTRIBUTIONS OF SCIENTIFIC PROPERTY USED FOR RESEARCH.— "(A) LIMIT ON REDUCTION.—In the case of a qualified

26 USC 170 "°^-

research contribution, the reduction under paragraph (1)(A) shall be no greater than the amount determined under paragraph (8)(B). "(B) QUALIFIED RESEARCH CONTRIBUTIONS.—For purposes of this paragraph, the term 'qualified research contribution' means a charitable contribution by a corporation of tangible personal property described in paragraph (1) of section 1221, but only if— which is described in subsection (b)(l)(A)(ii) of this section and which is an institution of higher education (as defined in section 3804(f)), "(ii) the property is constructed by the taxpayer, "(iii) the contribution is made not later than 2 years after the date the construction of the property is substantially completed, "(iv) the original use of the property is by the donee, "(v) the property is scientific equipment or apparatus substantially all of the use of which by the donee is for research or experimentation (within the meaning of section 174), or for research training, in the United States in physical or biological sciences, "(vi) the property is not transferred by the donee in exchange for money, other property, or services, and "(vii) the taxpayer receives from the donee a written statement representing that its use and disposition of the property will be in accordance with the provisions of clauses (v) and (vi). "(C) CONSTRUCTION OF PROPERTY BY TAXPAYER.—For purposes of this paragraph, property shall be treated as constructed by the taxpayer only if the cost of the parts used in the construction of such property (other than parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer's basis in such property. "(D) CORPORATION.—For purposes of this paragraph, the term 'corporation' shall not include— "(i) an electing small business corporation (as defined in section 1371(b)), "(ii) a personal holding company (as defined in section 542), and "(iii) a service organization (as defined in section 414(m)(3))." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to charitable contributions made after the date of the enactment of this Act, in taxable years ending after such date.
 * '(i) the contribution is to an educational organization

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SEC. 223. SUSPENSION OP REGULATIONS RELATING TO ALLOCATION 26 USC 174 UNDER SECTION 861 OF RESEARCH AND EXPERIMENTAL " " ^ "^ EXPENDITURES. (a) 2-YEAR SUSPENSION.—In the case of the taxpayer's first 2

taxable years beginning within 2 years after the date of the enactment of this Act, all research and esperimental expenditures (within the meaning of section 174 of the Internal Revenue Code of 1954) which are paid or incurred in such year for research activities conducted in the United States shall be allocated or apportioned to sources within the United States. (b) STUDY.—

(1) IN GENERAL.—The Secretary of the Treasury shall conduct a study with respect to the impact which section 1.861-8 of the Internal Revenue Service K^;ulations would have (A) on 26 CFR 1.861-8. research and experimental activities conducted in the United States and (B) on the availability of the foreign tax credit. (2) REPORT.—Not later than the date 6 months £uter the date of the enactment of this Act, the Secretary of the Treasury shall submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a report on the study conducted under paragraph (1) (together with such recommendations as he may deem advisable).

Subtitle D—Small Business Provisions SEC. 231. REDUCTION IN CORPORATE TAX RATES.

(a) IN GENERAL.—Subsection (b) of section 11 (relating to amount of 26 USC 11. corporate tax) is amended— (1) by striking out "17 percent" in paragraph (1) and inserting in lieu thereof "15 percent (16 percent for taxable years beginning in 1982)'\ and (2) by striking out "20 percent" in paragraph (2) and inserting in lieu thereof "18 percent (19 percent for taxable years beginning in 1982)". (b) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 821(a) (relating to imposition of tax 26 USC 821. on mutual insurance companies to which part 11 applies) is amended to read as follows: "(2) CAP ON TAX WHERE INCOME IS LESS THAN $12,000.—The tax imposed by paragraph (1) on so much of the mutual insurance company taxable income as does not exceed $12,000 shall not exceed 32 percent (30 percent for taxable years beginning after December 31, 1982) of the amount by which such income exceeds $6,000." (2) Subparagraph (B) of section 821(c)(l) (relating to imposition of alternative tax for certain small companies) is amended to read as follows: "(B) CAP WHERE INCOME IS LESS THAN $6,000.—The tax imposed by subparagraph (A) on so much of the taxable investment income as does not exceed $6,000 shall not exceed 32 percent (30 percent for taxable years beginning after December 31, 1982) of the amount by which such income exceeds $3,000." (3) The amendments made by paragraphs (1) and (2) shall apply 26 USC 821 to taxable years beginning after December 31, 1978; except that note. for purposes of applying sections 821(a)(2) and 821(c)(l)(B) of the Internal Revenue Code of 1954 (as amended by this subsection) to

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taxable years beginning before January 1, 1982, the percentage referred to in such section shall be deemed to be 34 percent. 26 USC 11 note. (c) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 1981. SEC. 232. INCREASE IN ACCUMULATED EARNINGS CREDIT. (a) INCREASE IN CREDIT FOR CERTAIN CORPORATIONS.—Paragraph (2)

26 USC 535.

of section 535(c) (relating to accumulated earnings credit) is amended to read as follows: "(2) MINIMUM CREDIT.—

"(A) IN GENERAL.—The credit allowable under paragraph (1) shall in no case be less than the amount by which $250,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year. (B) CERTAIN SERVICE CORPORATIONS.—In the case of a corporation the principal function of which is the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, subparagraph (A) shall be applied by substituting '$150,000' for '$250,000'." (b) CONFORMING AMENDMENTS.—

26 USC 243. 26 USC 1551. 26 USC 1561.

26 USC 535 "ote. 26 USC 1371.

26 USC 1371 "^ot®

(1) Paragraph (3) of section 535(c) is amended by striking out "$150,000'^and inserting in lieu thereof "$250,000". (2) Sections 243(b)(3)(C)(i) (relating to qualifying dividends for purposes of the dividends received deduction) and 1551(a) (relating to disallowance of surtax exemption and accumulated earnings credit) are each amended by striking out "$150,000". (3) Section 1561(a)(2) (relating to limitations on certain multiple tax benefits in the case of certain controlled corporations) is amended by striking out "$150,000" and inserting in lieu thereof "$250,000 ($150,000 if any component member is a corporation described in section 535(c)(2)(B))^'. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1981. SEC. 233. SUBCHAPTER S SHAREHOLDERS. (a) INCREASE IN NUMBER OF SHAREHOLDERS.—Section 1371(a) (defining small business corporation) is amended by striking out "15 shareholders" in paragraph (1) and inserting in lieu thereof "25 shareholders". (b) EFFECTIVE DATE.—The amendment made by this section shall apply with respect to taxable years beginning after December 31, 1981. SEC. 234. TREATMENT OF TRUSTS AS SUBCHAPTER S SHAREHOLDERS.

(a) IN GENERAL.—Subsection (e) of section 1371 (relating to certain trusts permitted as shareholders) is amended to read as follows: "(e) CERTAIN TRUSTS PERMITTED AS SHAREHOLDERS.—

26 USC 671.

"(1) IN GENERAL.—For purposes of subsection (a), the following trusts may be shareholders: "(A) A trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as owned by an individual who is a citizen or resident of the United States. "(B) A trust which was described in subparagraph (A) immediately before the death of the deemed owner and which continues in existence after such death, but only for the 60-day period beginning on the day of the deemed owner's death. If a trust is described in the preceding

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sentence and if the entire corpus of the trust is includible in the gross estate of the deemed owner, the preceding sentence shall be applied by substituting *2-year period' for *60-day period'. "(C) A trust with respect to stock transferred to it pursuant to the terms of a will, but only for the 60-day period beginning on the day on which such stock is transferred to it. "(D) A trust created primarily to exercise the voting power of stock transferred to it. "(2) TREATMENT AS SHAREHOLDERS.—For purposes of subsection (a)"(A) In the case of a trust described in subparagraph (A) of paragraph (1), the deemed owner shall be treated as the shareholder. "(B) In the case of a trust described in subparagraph (B) of paragraph (1), the estate of the deemed owner shall be treated as the shareholder. "(C) In the case of a trust described in subparagraph (C) of paragraph (1), the estate of the testator shall be treated as the shareholder. "(D) In the case of a trust described in subparagraph (D) of paragraph (1), each beneficiary of the trust shall be treated as a shareholder." (b) QUALIFIED SUBCHAPTER S TRUSTS.—Section 1371 is amended by 26 USC i37i. adding at the end thereof the following new subsection: "(g) SPECIAL RULE FOR QUALIFIED SUBCHAPTER S TRUST.—

"(1) IN GENERAL.—In the case of a qualified subchapter S trust with respect to which a beneficiary makes an election under paragraph (2)— "(A) such trust shall be treated as a trust described in subsection (e)(l)(A), and "(B) for purposes of section 678(a), the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an electing small business corporation with respect to which the election under paragraph (2) is made. "(2) ELECTION.— "(A) IN GENERAL.—A beneficiary

of a qualified subchapter S trust (or his legal representative) may elect to have this subsection apply. "(B) MANNER AND TIME OP ELECTION.—An election under this paragraph shall be made— "(i) separately with respect to each electing small business corporation the stock of which is held by the trust, "(ii) separately with respect to each successive income beneficiary of the trust, and "(iii) in such manner and form, and at such time, as the Secretary may prescribe. "(C) ELECTION IRREVOCABLE.—An election under this paragraph, once made, may be revoked only with the consent of the Secretary. "(D) GRACE PERIOD.—An election under this paragraph shall be effective up to 60 days before the date of the election. "(3) QUALIFIED SUBCHAPTER S TRUST.—For purposes of this subsection, the term 'qualified subchapter S trust' means a trust—

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26 USC 1371 ^°^-

26 USC 472.

PUBLIC LAW 97-34—AUG. 13, 1981 "(A) which owns stock in 1 or more electing small business corporations, (B) all of the income of which is distributed currently to one individual who is a citizen or resident of the United States, and "(C) the terms of which require that— "(i) at any time, there shall be only one income beneficiary of the trust, "(ii) any corpus distributed during the term of the trust may be distributed only to the current income beneficiary thereof, "(iii) each income interest in the trust shall terminate on the earlier of the death of the income beneficiary or the termination of the trust, and "(iv) upon the termination of the trust during the life of an income beneficiary, the trust shall distribute all of its assets to such income beneficiary. "(4) TRUST CEASING TO BE QUALIFIED.—If a qualified subchapter S trust ceases to meet any requirement under paragraph (3), the provisions of this subsection shall not apply to such trust as of the date it ceases to meet such requirements." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31,. 1981. SEC. 235. SIMPLIFICATION OF LIFO BY USE OF GOVERNMENT INDEXES TO BE PROVIDED BY REGULATIONS. Section 472 is amended by adding at the end thereof the following new subsection: "(f) USE OF GOVERNMENT PRICE INDEXES IN PRICING INVENTORY.—

The Secretary shall prescribe regulations permitting the use of suitable published governmental indexes in such manner and circumstances as determined by the Secretary for purposes of the method described in subsection (b)." SEC. 236. 3-YEAR AVERAGING PERMITTED FOR INCREASES IN INVENTORY VALUE. (a) GENERAL RULE.—Subsection (d) of section 472 is amended to read as follows: "(d) 3-YEAR AVERAGING FOR INCREASES IN INVENTORY VALUE.—The

26 USC 472 ^°^-

26 USC 474.

beginning inventory for the first taxable year for which the method described in subsection (b) is used shall be valued at cost. Any change in the inventory amount resulting from the application of the preceding sentence shall be taken into account ratably in each of the 3 taxable years beginning with the first taxable year for which the method described in subsection (b) is first used." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1981. SEC. 237. ELECTION BY SMALL BUSINESS TO USE ONE INVENTORY POOL WHEN LIFO IS ELECTED. (a) IN GENERAL.—Subpart D of part II of subchapter E of chapter 1 (relating to inventories) is amended by adding at the end thereof the following new section: "SEC. 474. ELECTION BY CERTAIN SMALL BUSINESSES TO USE ONE INVENTORY POOL. "(a) IN GENERAL.—A taxpayer which is an eligible small business and which uses the dollar-value method of pricing inventories under

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the method provided by section 472(b) may elect to use one inventory 26 USC 472. pool for any trade or business of sucb taxpayer. "Qo) EuGiBLE SMALL BUSINESS DEFINED.—For purposes of this section, a taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer do not exceed $2,000,000 for the 3-taxable-year period ending with the taxable year. "(c) SPECIAL RULES.—For purposes of this section— "(1) CONTROLLED GROUPS.—

"(A) IN GENERAL.—In the case of a taxpayer which is a member of a controlled group, all persons which are component members of such group at any time during the calendar year shall be treated as one taxpayer for such year for purposes of determining the gross receipts of the taxpayer. "(B) CONTROLLED GROUP DEFINED.—For purposes of subparagraph (A), persons shall be treated as being members of a controlled group if such persons would be treated as a single employer under the regulations prescribed under section 52(b). "(2) ELECTION.—

"(A) IN GENERAL.—The election under this section may be made without the consent of the Secretary and shall be made at such time and in such manner as the Secretary may by regulations prescribe. "(B) PERIOD TO WHICH ELECTION APPLIES.—The election under this section shall apply— "(i) to the taxable year for which it is made, and "(ii) to all subsequent taxable years for which the taxpayer is an eligible small business, unless the taxpayer secures the consent of the Secretary to the revocation of such election. "(3) TRANSITIONAL RULES.—In the case of a taxpayer who changes the number of inventory pools maintained by him in a taxable year by reason of an election (or cessation thereof) under this section— "(A) the inventory pools combined or separated shall be combined or separated in the manner provided by regulations under section 472; "(B) the aggregate dollar value of the taxpayer's inventory as of the beginning of the first taxable year— "(i) for which an election under this section is in effect, or "(ii) after such election ceases to apply, shall be the same as the aggregate dollar value as of the close of the taxable year preceding the taxable year described in clause (i) or (ii) (as the case may be), and "(C) the first taxable year for which an election under this section is in effect or after such election ceases to apply (as the case may be) shall be treated as a new base year in accordance with procedures provided by regulations under section 472." (b) CLERICAL AMENDMENT.—The table of sections for such subpart D is amended by adding at the end thereof the following new item: "Sec. 474. Election by certain small businesses to use one inventory pool." (c) EFFECTIVE DATE.—The amendments made by this section shall

apply to taxable years beginning after December 31, 1981.

26 USC 474 note.

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26 USC 471

SEC. 238. STUDY OF ACCOUNTING METHODS FOR INVENTORY.

^^ ^

(a) STUDY.—The Secretary of the Treasury shall conduct a full and complete study of methods of tax accounting for inventory with a view toward the development of simplified methods. Such study shall include (but shall not be limited to) an examination of the last-in firstout method and the cash receipts and disbursements method. (b) REPORT.—Not later than December 31, 1982, the Secretary of the Treasury shall submit to the Committee on Ways and Means of the House of Representatives and to the Committee on Finance of the Senate a report on the study conducted under subsection (a), together with such recommendations as he deems appropriate.

Subtitle E—Savings and Loan Associations SEC.

26 USC 368.

241. REORGANIZATIONS INVOLVING FINANCIALLY TROUBLED THRIFT INSTITUTIONS. AMENDMENT OF SECTION 368(a)(3)(D).—Section 368(a)(3)(D) (relating

to agency receivership proceedings which involve financial institutions) is amended to read as follows: "(D) AGENCY PROCEEDINGS WHICH INVOLVE FINANCIAL INSTITUTIONS.—

"Title 11 or similar case."

"(i) For purpose of subparagraphs (A) and (B)— "(I) In the case of a receivership, foreclosure, or similar proceeding before a Federal or State agency involving a financial institution to which section 585 applies, the agency shall be treated as a court, and "(II) In the case of a financial institution to which section 593 applies, the term 'title 11 or similar case* means only a case in which the Board (which will be treated as the court in such case) makes the certification described in clause (ii). "(ii) A transaction otherwise meeting the requirements of subparagraph (G) of paragraph (1), in which the transferor corporation is a financial institution to which section 593 applies, will not be disqualified as a reorganization if no stock or securities of the corporation to which the assets are transferred (transferee) are received or distributed, but only if all of the following conditions are met: "(I) the requirements of subparagraphs (A) and (B) of section 354(b)(l) are met with respect to the acquisition of the assets, (II) substantially all of the liabilities of the transferor immediately before the transfer become, as a result of the transfer, liabilities of the transferee, and "(III) the Board certifies that the grounds set forth in section 1464(d)(6)(A)(i), (ii), or (iii) of title 12, United States Code, exist with respect to the transferor or will exist in the near future in the absence of action by the Board, "(iii) For purposes of this subparagraph, the 'Board' means the Federal Home Loan Bank Board or the Federal Savings and Loan Insurance Corporation or, if neither has supervisory authority with respect to the transferor, the equivalent State authority."

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SEC. 242. LIMITATIONS ON CARRYOVERS OF FINANCIAL INSTITUTIONS. Section 382(b)(7) (relating to reduction of net operating loss carryovers in title 11 or similar cases), as added by section 2(d) of Public Law 96-589, is amended to read as follows: 94 Stat. 3396. "(7) SPECIAL RULE FOR REORGANIZATIONS IN TITLE i i OR SIMILAR

CASES.—For purposes of this subsection— "(A) a creditor who receives stock in a reorganization in a title 11 or similar case (within the meaning of section 368(a)(3)(A)) shall be treated as a stockholder immediately before the reorganization, and "(B) in a transaction qualifying under section 368(a)(3)(D)(ii)— Ante, p. 254. "(i) a depositor in the transferor shall be treated as a stockholder immediately before the reorganization of the loss corporation, "(ii) deposits in the transferor which become, as a result of the transfer, deposits in the transferee shall be treated as stock of the acquiring corporation owned as a result of owning stock of the loss corporation, and "(iii) the fair market value of the outstanding stock of the acquiring corporation shall include the amount of deposits in the acquiring corporation immediately after the reorganization." SEC. 243. RESERVES FOR LOSSES ON LOANS. Paragraph (1) of section 593(e) (relating to distributions to share- 26 USC 593. holders of a domestic building and loan association) is amended by striking out "applies." in the last sentence thereof and substituting therefor the following: "applies, or to any distribution to the Feder^ Savings and Loan Insurance Corporation in redemption of an interest in an association, if such interest was originally received by the Federal Savings and Loan Insurance Corporation in exchange for financial assistance pursuant to section 406(f) of the National Housing Act (12 U.S.C. sec. 1729(f))." SEC. 244. FSLIC FINANCIAL ASSISTANCE. (a) IN GENERAL.—Part II of subchapter H of subtitle A of chapter 1 is amended by adding at the end thereof the following new section: "SEC. 597. FSLIC FINANCIAL ASSISTANCE. 26 USC 597. "(a) EXCLUSION FROM GROSS INCOME.—Gross income of a domestic building and loan association does not include any amount of money or other property received from the Federal Savings and Loan Insurance Corporation pursuant to section 406(f) of the National Housing Act (12 U.S.C. sec. 1729(f)), regardless of whether any note or other instrument is issued in exchange therefor. "(b) No REDUCTION IN BASIS OP ASSETS.—NO reduction in the basis of assets of a domestic building and loan association shall be made on account of money or other property received under the circumstances referred to in subsection (a)." (b) CLERICAL AMENDMENT.—The table of sections for part 11 of subchapter H of chapter 1 is amended by inserting after the item relating to section 596 the following: "Sec. 597. FSLIC financial assistance." SEC. 245. MUTUAL SAVINGS BANKS WITH CAPITAL STOCK.

(a) IN GENERAL.—Section 591 (relating to dividends paid on depos- 26 USC 59i. its) is amended—

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PUBLIC LAW 97-34—AUG. 13, 1981 (1) by inserting "(a) IN GENERAL.—" before "In", and (2) by adding at the end thereof the following new subsection: "(b) MUTUAL SAVINGS BANK TO INCLUDE CERTAIN BANKS WITH CAPITAL STOCK.—For purposes of this part, the term 'mutual savings

bank' includes any bank— "(1) which has capital stock represented by shares, and "(2) which is subject to, and operates under. Federal or State laws relating to mutual savings bank." (b) PERCENTAGE OF TAXABLE INCOME METHOD.—

26 USC 593.

(1) Subparagraph (B) of section 593(b)(2) (relating to reduction of applicable percentage in certain cases) is amended by inserting "which is not described in section 591(b)" after "mutual savings bank" each place it appears. (2) Subparagraph (C) of section 593(b)(2) is amended by inserting "which are not described in section 591(b)" after mutual savings banks". (c) CONFORMING AMENDMENTS.—

26 USC 368 ^°^^26 USC 593 ^°^^26 USC 597 "°^^ 26 USC 591 ^°*®

(1) Sections 593(a) (relating to reserves for losses on loans) is amended by striking out "not having capital stock represented by shares". (2) Paragraph (1) of section 593(e) (relating to distributions to shareholders) is amended by inserting "or an institution that is treated as a mutual savings bank under section 591(b)" after "association" each place it appears. SEC. 246. EFFECTIVE DATES. (a) The amendment made by sections 241 and 242 shall apply to any transfer made on or after January 1, 1981. (b) The amendment made by section 243 shall apply to any distribution made on or after January 1, 1981. (c) The amendment made by section 244 shall apply to any payment made on or after January 1, 1981. (d) The amendments made by section 245 shall apply with respect to taxable years ending after the date of the enactment of this Act.

Subtitle F—Stock Options, etc. SEC. 251. STOCK OPTIONS.

(a) IN GENERAL.—Part II of subchapter D of chapter 1 (relating to certain stock options) is amended by adding after section 422 the following new section: 26 USC 422A.

"SEC. 422A. INCENTIVE STOCK OPTIONS.

"(a) IN GENERAL.—Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an incentive stock option if— "(1) no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 1 year after the transfer of such share to him, and "(2) at all times during the period beginning on the date of the granting of the option and ending on the day 3 months before the date of such exercise, such individual was an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 425(a) applies.

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 PUBLIC LAW 97-34—AUG. 13, 1981 "(b) INCENTIVE STOCK OPTION.—For purposes of this part, the term 'incentive stock option' means an option granted to an individual for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if— "(1) the option is granted pursuant to a plan which includes the aggregate number of shares which may be issued under options and the employees (or class of employees) eligible to receive options, and which is approved by the stockholders of the granting corporation witmn 12 months before or after the date such plan is adopted; "(2) such option is granted within 10 years from the date such plan is adopted, or the date such plan is approved by the stockholders, whichever is earlier; "(3) such option by its terms is not exercisable after the expiration of 10 years from the date such option is granted; (4) the option price is not less than the fair market value of the stock at the time such option is granted; "(5) such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; "(6) such individual, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation; "(7) such option by its terms is not exercisable while there is outstanding (within the meaning of subsection (c)(7)) any incentive stock option which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; and "(8) in the case of an option granted after December 31, 1980, under the terms of the plan the aggregate fair market value (determined as of the time the option is granted) of the stock for which any employee may be granted options in any calendar year (under all such plans of his employer corporation and its parent and subsidiary corporation) shall not exceed $100,000 plus any unused limit carryover to such year. "(c) SPECIAL RULES.— "(1) EXERCISE OF OPTION WHEN PRICE IS LESS THAN VALUE OF

STOCK.—If a share of stock is transferred pursuant to the exercise by an individual of an option which would fail to qualify as an incentive stock option under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subsection (b)(4), the requirement of subsection (b)(4) shall be considered to have been met. "(2) CERTAIN DISQUAUFYING DISPOSITIONS WHERE AMOUNT REALIZED IS LESS THAN VALUE AT EXERCISE.—If—

"(A) an individual who has acquired a share of stock by the exercise of an incentive stock option makes a disposition of such share within the 2-year period described in subsection (a)(l),and "(B) such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual,

95 STAT. 257

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PUBLIC LAW 97-34—AUG. 13, 1981 then the amount which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the amount realized on such sale or exchange over the adjusted basis of such share. "(8)

CERTAIN TRANSFERS BY INSOLVENT INDIVIDUALS.—If

an

insolvent individual holds a share of stock acquired pursuant to his exercise of an incentive stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary in any proceeding under title 11 or any other similar insolvency proceeding, neither such transfer, nor any other transfer of such share for the benefit of his creditors in such proceeding, shall constitute a disposition of such share for purposes of subsection (a)(1). "(4) CARRYOVER OF UNUSED LIMIT.— "(A) IN GENERAL.—If—

"(i) $100,000 exceeds, "(ii) the aggregate fair market value (determined as of the time the option is granted) of the stock for which an employee was granted options in any calendar year after 1980 (under all plans described in subsection (b) of his employer corporation and its parent and subsidiary corporations), one-half of such excess shall be unused limit carryover to each of the 3 succeeding calendar years. "(B) AMOUNT CARRIED TO EACH YEAR.—The amount of the unused limit carryover from any calendar year which may be taken into account in any succeeding calendar year shall be the amount of such carryover reduced by the amount of such carryover which was used in prior calendar years. "(C) SPECIAL RULES.—For purposes of subparagraph (B)— "(i) the amount of options granted during any calendar year shall be treated as first using up the $100,000 limitation of subsection (b)(8), and "(ii) then shall be treated as using up unused limit carryovers to such year in the order of the calendar years in which the carryovers arose. "(5) PERMISSIBLE PROVISIONS.—An option which meets the requirements of subsection (b) shall be treated as an incentive stock option even if— (A) the employee may pay for the stock with stock of the corporation granting the option, "(B) the employee has a right to receive property at the time of exercise of the option, or "(C) the option is subject to any condition not inconsistent with the provisions of subsection (b). Subparagraph (B) shall apply to a transfer of property (other than cash) only if section 83 applies to the property so transferred. "(6) COORDINATION WITH SECTIONS 422 AND 424.—Sections 422 and 424 shall not apply to an incentive stock option. "(7) OPTIONS OUTSTANDING.—For purposes of subsection (b)(7), any incentive stock option shall be treated as outstanding until such option is exercised in full or expires by reason of lapse of time. "(8) 10-PERCENT SHAREHOLDER RULE.—Subsection (b)(6) shall not apply if at the time such option is granted the option price is

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at least 110 percent of the fair market value of the stock subject to the option and such option by its terms is not exercisable after the expiration of 5 years from the date such option is granted. "(9) SPECIAL RULE WHEN DISABLED.—For purposes of subsection (a)(2), in the case of an employee who is disabled (within the meaning of section 105(d)(4)), the 3-month period of subsection (a)(2) shall be 1 year." (b) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Section 421 (relating to general rules in the case of stock 26 USC 421. options) is amended— (A) by inserting "422A(a)," after "422(a)," in subsections (a),(b),and(c)(l)(A),and (B) by inserting "422A(a)(l)," after "section 422(a)(l)," in subsection (b). (2) Section 425(d) (relating to attribution of stock ownership) is 26 USC 425. amended by inserting "422A(b)(6)," after "422(b)(7),". (3) Section 425(g) (relating to special rules) is amended by inserting "422A(a)(2)," after *^422(a)(2),". (4) Section 425(h)(3)(B) (relating to definition of modification) is amended by inserting "422A(b)(5)," after "422(b)(6),". (5) Section 6039 (relating to information required in connection 26 USC 6039. with certain options) is amended— (A) by inserting ", an incentive stock option," after "qualified stock option in subsection (a)(l), (B) by inserting "incentive stock option," after "qualified stock option," in subsection ObXl), and (C) by adding at the end of subsection (c) the following new paragraph: "(4) The term 'incentive stock option', see section 422A(b)." (6) The table of sections for part II of subchapter D of chapter 1 is amended by inserting after the item relating to section 422 the following new item:

'Sec. 422A. Incentive stock options." (c) EFFECTIVE DATES AND TRANSITIONAL RULES.— (1) OPTIONS TO WHICH SECTION APPLIES.—

(A) IN GENERAL.—Except as provided in subparagraph (B), the amendments made by this section shall apply with respect to options granted on or after January 1, 1976, and exercised on or after January 1, 1981, or outstanding on such date. (B) ELECTION AND DESIGNATION OF OPTIONS.—In the case of an option granted before January 1, 1981, the amendments made by this section shall apply only if the corporation granting such option elects (in the manner and at the time prescribed by the Secretary of the Treasury or his delegate) to have the amendments made by this section apply to such option. The aggregate fair market value (determined at the time the option is granted) of the stock for which any employee was granted options (under all plans of his employer corporation and its parent and subsidiary corporations) to which the amendments made by this section apply by reason of this subparagraph shall not exceed $50,000 per calendar year and shall not exceed $200,000 in the aggregate. (2) CHANGES IN TERMS OF OPTIONS.—In the case of an option granted on or after January 1, 1976, and outstanding on the date of the enactment of this Act, paragraph (1) of section 425(h) of the

26 USC 422A "* °®

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26 USC 83.

PUBLIC LAW 97-34—AUG. 13, 1981 Internal Revenue Code of 1954 shall not apply to any change in the terms of such option (or the terms of the plan under which granted, including shareholder approval) made within 1 year after such date of enactment to permit such option to qualify as a incentive stock option. SEC. 252. PROPERTY TRANSFERRED TO EMPLOYEES SUBJECT TO CERTAIN RESTRICTIONS. (a) GENERAL RULE.—Subsection (c) of section 83 (relating to special rules) is amended by adding at the end thereof the following new paragraph: "(3) SALES WHICH MAY GIVE RISE TO SUIT UNDER SECTION 16(b) OF THE SECURITIES AND EXCHANGE ACT OF 1934.—So l o n g aS the Sale

15 USC 78p.

26 USC 83 note.

26 USC 83 note.

of property at a profit could subject a person to suit under section 16(b) of the Securities and Exchange Act of 1934, such person's rights in such property are— "(A) subject to a substantial risk of forfeiture, and "(B) not transferable." (b) SPECIAL RuLE FOR CERTAIN ACCOUNTING RuLES.—For purpOSeS

of section 83 of the Internal Revenue Code of 1954, property is subject to substantial risk of forfeiture and is not transferable so long as such property is subject to a restriction on transfer to comply with the "Pooling-of-interests Accounting" rules set forth in Accounting Series Release Numbered 130 ((10/5/72) 37 FR 20937; 17 CFR 211.130) and Accounting Series Release Numbered 135 ((1/18/73) 38 FR 1734; 17 CFR 211.135). (c) EFFECTIVE DATE.—The amendment made by subsection (a) and the provisions of subsection (b) shall apply to taxable years ending after December 31, 1981.

Subtitle G—Miscellaneous Provisions 26 USC 51. "Wages."

SEC. 261. ADJUSTMENTS TO NEW JOBS CREDIT. (a) EXTENSION.—Paragraph (4) of section 51(c) (defining wages) is amended to read as follows: "(4) TERMINATION.—The term 'wages' shall not include any amount paid or incurred to an individual who begins work for the employer after December 31, 1982." (b) INDIVIDUALS QUALIFYING AS MEMBERS OF A TARGETED GROUP.—

(1) IN GENERAL.—Paragraph (1) of section 51(d) (defining members of targeted groups) is amended by striking out "or" at the end of subparagraph (F), by striking out the period at the end of subparagraph (G) and inserting in lieu thereof a comma, and by adding at the end thereof the following new subparagraphs: "(H) an eligible work incentive employee, or "(I) an involuntarily terminated CETA employee.". (2) DEFINITIONS.—

42 USC 601.

(A) IN GENERAL.—Subsection (d) of section 51 is amended by redesignating paragraphs (9), (10), (11), and (12) as paragraphs (11), (12), (13), and (14), respectively, and by inserting after paragraph (8) the following new paragraph: "(9) ELIGIBLE WORK INCENTIVE EMPLOYEES.—The term 'eligible work incentive employee' means an individual who has been certified by the designated local agency as— "(A) being eligible for financial assistance under part A of title IV of the Social Security Act and as having continually received such financial assistance during the 90-day period

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which immediately precedes the date on which such individual is hired by the employer, or "(B) having been placed in employment under a work incentive program established under section 432(b)(1) of the Social Security Act. 42 USC 632. "(10) INVOLUNTARILY TERMINATED CETA EMPLOYEE.—The term 'involuntarily terminated CETA employee' means an individual who is certified by the designated local agency as having been involuntarily terminated after December 31, 1980, from employment financed in whole or in part under a program under part D of title II or title VI of the Comprehensive Employment and 29 USC 853, Training Act." 961.(B) CONFORMING AMENDMENTS.—

(i) Subsection (a) of section 50B (relating to definitions 26 USC 50B. and special rules) is amended by adding at the end thereof the following new paragraph: "(5) TERMINATION.—The term 'work incentive program expenses' shall not include any amount paid or incurred in any taxable year beginning after December 31, 1981." (ii) Subsection (c) of section 51 (defining wages) is amended by striking out paragraph (3) and redesignating paragraph (4) as paragraph (3). (iii) Paragraphs (3)(A)(ii), (4)(C), and (7)(B) of section 51(d) are each amended by striking out "paragraph (9)" 26 USC 51. and inserting in lieu thereof "paragraph (11)". (3) REMOVAL OF AGE LIMITATION ON VIETNAM VETERANS.—

Paragraph (4) of section 51(d) (relating to Vietnam veterans) is amended— (A) by inserting "and" at the end of subparagraph (B), (B) by striking out ", and" at the end of subparagraph (C) and inserting in lieu thereof a period, and (C) by striking out subparagraph (D). (4) YOUTHS PARTICIPATING IN QUALIFIED COOPERATIVE EDUCATION PROGRAMS MUST BE ECONOMICALLY DISADVANTAGED.—Sub-

paragraph (A) of section 51(d)(8) is amended by striking out and at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof ", and", and by adding at the end thereof the following new clause: "(iv) being a member of an economically disadvantaged family (as determined under paragraph (11))." (c) CERTIFICATIONS.— (1) CERTIFICATIONS MUST BE MADE BEFORE EMPLOYEE BEGINS

WORK, ETC.—Subsection (d) of section 51 is amended by adding at the end thereof the following new paragraph: "(15) SPECIAL RULES FOR CERTIFICATIONS.—

"(A) IN GENERAL.—An individual shall not be treated as a member of a targeted group unless, before the day on which such individual begins work for the employer, the employer— "(i) has received a certification from a designated local agency that such individual is a member of a targeted group, or "(ii) has requested in writing such certification from the designated local agency. "(B) INCORRECT CERTIFICATIONS.—If—

"(i) an individual has been certified as a member of a targeted group, and

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PUBLIC LAW 97-34—AUG. 13, 1981 "(ii) such certification is incorrect because it was based on false information provided by such individual, the certification shall be revoked and wages paid by the employer after the date on which notice of revocation is received by the employer shall not be treated as qualified wages." (2) CERTIFICATION OF ECONOMICALLY DISADVANTAGED FAMI-

UES.—Paragraph (11) of section 51(d) (as redesignated by subsection (b)(2)(A)) is amended to read as follows: "(11) MEMBERS OF ECONOMICALLY DISADVANTAGED FAMIUES.—

26 USC 51.

An individual is a member of an economically disadvantaged family if the designated local agency determines that such individual was a member of a family which had an income during the 6 months immediately preceding the month in which such determination occurs, which, on an annual basis, would be 70 percent or less of the Bureau of Labor Statistics lower living standard. Any such determination shall be valid for the 45-day period beginning on the date such determination is made. (d) EuGiBiLiTY.—Section 51 is amended by adding at the end thereof the following new subsection: "(i) CERTAIN INDIVIDUALS INELIGIBLE.— "(1) RELATED INDIVIDUALS.—No wages shall be taken into

account under subsection (a) with respect to an individual who— "(A) bears any of the relationships described in paragraphs (1) through (8) of section 152(a) to the taxpayer, or, if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation (determined with the application of section 267(c)), (B) if the taxpayer is an estate or trust, is a grantor, beneficiary, or fiduciary of the estate or trust, or is an individual who bears any of the relationships described in paragraphs (1) through (8) of section 152(a) to a grantor, beneficiary, or fiduciary of the estate or trust, or "(C) is a dependent (described in section 152(a)(9)) of the taxpayer, or, if the taxpayer is a corporation, of an individual described in subparagraph (A), or, if the taxpayer is an estate or trust, of a grantor, beneficiary, or fiduciary of the estate or trust. "(2) NONQUAUFYING REHIRES.—No wages shall be taken into account under subsection (a) with respect to any individual if, prior to the hiring date of such individual, such individual had been employed by the employer at any time during which he was not a member of a targeted group." (e) REPEAL OF PROVISION LIMITING FIRST-YEAR WAGES TO 80 PERCENT OF F U T A WAGES.—

(1) Subsection (e) of section 51 is hereby repealed. (2) Subsection (f) of section 51 is amended— (A) by striking out paragraph (3), and (B) by striking out any year" in paragraphs (1) and (2) and inserting in lieu thereof any taxable year. (f) ADMINISTRATION, AUTHORIZATION OF APPROPRIATIONS.— (1) ADMINISTRATION.— (A) DESIGNATED LOCAL AGENCY.—Paragraph (14) of section

51(d) (as redesignated by subsection (b)(2)(A)) is amended to read as follows: "(14) DESIGNATED LOCAL AGENCY.—The term 'designated local agency' means a State employment security agency established

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in accordance with the Act of June 6, 1933, as amended (29 U.S.C. 49-49n)." (B) NOTIFICATION.—Subsection (g) of section 51 (relating to 26 USC 5i. notification of employers) is amended by striking out "Secretary of Labor" each place it appears in the heading and text and inserting in lieu thereof "United States Employment Service". (2) AUTHORIZATION OF APPROPRIATIONS.—There is authorized to 26 USC 5i note. be appropriated for fiscal year 1982 the sum of $30,000,000 to carry out the functions described by the amendments made by paragraph (1), except that, of the amounts appropriated pursuant to this paragraph— (A) $5,000,000 shall be used to test whether individuals certified as members of targeted groups under section 51 of such Code are eligible for such certification (including the use of statistical sampling techniques), and (B) the remainder shall be distributed under performance standards prescribed by the Secretary of Labor. (g) EFFECTIVE DATES.— 26 USC 5i note. (1) AMENDMENTS RELATING TO MEMBERS OF TARGETED GROUPS.—

(A) IN GENERAL.—Except as provided in subparagraphs (B), (C), and (D), the amendments made by subsections (b), (c)(2), and (d) shall apply to wages paid or incurred with respect to individuals first beginning work for an employer after the date of the enactment of this Act in taxable years ending after such date. (B) ELIGIBLE WORK INCENTIVE EMPLOYEES.—The amendments made by subsection (b)(2)(A) to the extent relating to the designation of eligible work incentive employees (within the meaning of section 51(d)(9) of the Internal Revenue Code of 1954) as members of a targeted group and subsection (b)(2)(B)(ii) shall apply to taxable years beginning after December 31, 1981. In the case of an eligible work incentive employee, subsections (a) and (b) of section 51 of such Code shall be applied for taxable years beginning after December 31, 1981, as if such employees had been members of a targeted group for taxable years beginning before January 1, 1982. (C) COOPERATIVE EDUCATION PROGRAM PARTICIPANTS.—The

amendments made by subsection (b)(4) shall apply to wages paid or incurred after December 31, 1981, in taxable years ending after such date. (D) DESIGNATED LOCAL AGENCY.—The amendments made by subsection (f)(1) shall take effect on the date 60 days after the date of the enactment of this Act. (2) CERTIFICATIONS.—

(A) IN GENERAL.—The amendment made by subsection (c)(1) shall apply to all individuals whether such individuals began work for their employer before, on, or after the date of the enactment of this Act. (B) SPECIAL RULE FOR INDIVIDUALS WHO BEGAN WORK FOR THE EMPLOYER BEFORE 45TH DAY BEFORE DATE OF ENACT-

MENT.—In the case of any individual (other than an individual described in section 51(d)(8) of the Internal Revenue Code of 1954) who began work for the employer before the date 45 days before the date of the enactment of this Act, paragraph (15) of section 51(d) of the Internal Revenue Code of 1954 (as added by subsection (c)(1)) shall be applied by

89-194 0 - 8 2

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PUBLIC LAW 97-34—AUG. 13, 1981 substituting "July 23, 1981," for the day on which such individual begins work for the employer. (C) INDIVIDUALS WHO BEGIN WORK FOR EMPLOYER WITHIN 45 DAYS BEFORE OR AFTER DATE OF ENACTMENT.—In the Case o f

26 USC 51.

any individual (other than an individual described in section 51(d)(8) of the Internal Revenue Code of 1954) who begins work for the employer during the 90-day period beginning with the date 45 days before the date of the enactment of this Act, and in the case of an individual described in section 51(d)(8) of such Code who begins work before the end of such 90-day period, paragraph (15) of section 51(d) of such Code (as added by subsection (c)(1)) shall be applied by substituting "the last day of the 90-day period beginning with the date 45 days before the date of the enactment of this Act" for the day on which such individual begins work for the employer. (3) LIMITATION ON QUALIFIED FIRST-YEAR WAGES.—The amendment made by subsection (e) shall apply to taxable years beginning after December 31, 1981. SEC. 262. SECTION 189 MADE INAPPLICABLE TO LOW-INCOME HOUSING.

26 USC 189.

(a) IN GENERAL.—The table contained in subsection (b) of section 189 (relating to amortization of real property construction period, interest, and taxes) is amended by striking out the column relating to "Low-income housing". (b) CONFORMING AMENDMENT.—Subsection (d) of section 189 (relat-

26 USC 189 ^ote-

ing to certain residential property excluded) is amended to read as follows: "(d) CERTAIN PROPERTY EXCLUDED.—This section shall not apply to any— "(1) low-income housing, or "(2) real property acquired, constructed, or carried if such property is not, and cannot reasonably expected to be, held in a trade or business, or in an activity conducted for profit." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1981. SEC. 263. INCREASE IN DEDUCTION ALLOWABLE TO A CORPORATION IN ANY TAXABLE YEAR FOR CHARITABLE CONTRIBUTIONS.

26 USC 170. 26 USC 170 "°**-

(a) IN GENERAL.—Paragraph (2) of section 170(b) (relating to percentage limitations) is amended by striking out "5 percent" and inserting in lieu thereof "10 percent". (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 1981. SEC. 264. AMORTIZATION OF LOW-INCOME HOUSING.

26 USC 167.

(a) IN GENERAL.—Paragraph (2) of section 167(k) (relating to rehabilitation of low-income rental housing) is amended by striking out "The" in subparagraph (A) and inserting in lieu thereof "Except as provided in subparagraph (B), the", by redesignating subparagraph (B) as subparagraph (C), and by inserting after subparagraph (A) the following: "(B) The aggregate amount of rehabilitation expenditures paid or incurred by the taxpayer with respect to any dwelling unit in any low-income rental housing which may be taken into account under paragraph (1) may exceed $20,000, but shall not exceed $40,000, if the rehabilitation is conducted pursuant to a program certified by the Secretary of Housing and Urban Development, or his delegate, or by the

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§overnmentif:of a State or political subdivision of the United tates and "(i) the certification of development costs is required; "(ii) the tenants occupy units in the property as their principal residence and the program provides for sale of the units to tenants demonstrating home ownership responsibility; and (iii) the leasing and sale of such units are pursuant to a program in which the sum of the taxable income, if any, from leasing of each such unit, for the entire period of such leasing, and the amount realized from sale or other disposition of a unit, if sold, normally does not exceed the excess of the taxpayer's cost basis for such unit of property, before adjustment under section 1016 for deductions under section 167, over the net tax benefits realized by the taxpayer, consisting of the tax benefits from such deductions under section 167 minus the tax incurred on such taxable income from leasing, if any." (b) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to rehabilitation expenditures incurred after December 31, 1980. SEC. 265. DEDUCTIBILITY OF GIFTS BY EMPLOYERS TO EMPLOYEES. (a) IN GENERAL.—Subparagraph (C) of section 274(b)(l) (relating to limitation on deductibility of gifts) is amended to read as follows: "(C) an item of tangible personal property which is awarded to an employee by reason of length of service, productivity, or safety achievement, but only to the extent that'll) the cost of such item to the taxpayer does not exceed $400, or "(ii) such item is a qualified plan award." (b) QUALIFIED PLAN AWARD DEFINED.—Subsection (b) of section 274 is amended by adding at the end thereof the following new paragraph: "(3) QuAUFiED PLAN AWARD.—For purposes of this subsection— "(A) IN GENERAL.—The term 'qualified plan award' means an item which is awarded as part of a permanent, written plan or program of the taxpayer which does not discriminate in favor of officers, shareholders, or highly compensated employees as to eligibility or benefits. (B) AVERAGE AMOUNT OF AWARDS.—An item shall not be treated as a qualified plan award for any taxable year if the average cost of all items awarded under all plans described in subparagraph (A) of the taxpayer during the taxable year exceeds $400. "(C) MAXIMUM AMOUNT PER ITEM.—An item shall not be treated as a qualified plan award under this paragraph to the extent that the cost of such item exceeds $1,600." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years ending on or after the date of the enactment of this Act. SEC. 266. DEDUCTION FOR MOTOR CARRIER OPERATING AUTHORITY. (a) GENERAL RULE.—For purposes of chapter 1 of the Internal Revenue Code of 1954, in computing the taxable income of a taxpayer

26 USC 167 note.

26 USC 274

26 USC 274 note. 26 USC 165 note.

26 USC i et seq.

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49 USC 10921. 26 USC 1 et seq.

PUBLIC LAW 97-34—AUG. 13, 1981 who, on July 1, 1980, held one or more motor carrier operatiii£ authorities, an amount equal to the a^regate ac^usted basis of all motor carrier operating authorities held by the t ^ i a y e r on July 1, 1980, or acquirea subsequent thereto pursuant to a binding contract in effect on July 1, 1980, shall be allowed as a deduction ratabl^^ over a period of 60 months. Such 60-month period shall b ^ i n with the month of July 1980 (or if later, the month in which acquired), or at the election of the taxpayer, the first month of the taxpayer's first taxable year beginning after July 1, 1980. (b) DEnNinoN OP MOTOR CARRIER OPERATING AUTHORITY.—For purposes of this section, the term "motor carrier operating authority means a certificate or permit held by a motor common or contract carrier of property and issued pursuant to subchapter II of chapter 109 of title 49 of the United States Code. (c) SPECIAL RULES.— (1) ADJUSTED BASIS.—For

purposes of the Internal Revenue Code of 1954, proper adjustments shall be made in the adjusted basis of any motor carrier operating authority held by the taxpayer on July 1, 1980, for the amounts allowable as a deduction under this section. (2) CERTAIN STOCK ACQUISITIONS.—

(A) IN GENERAL.—Under regulations prescribed by the Secretary of the Treasury or his delegate, and at the election of the holder of the authority, in any case in which a corporation— (i) on or before July 1, 1980 (or after such date pursuant to a binding contract in effect on such date), acquired stock in a corporation which held, directly or indirectly, any motor carrier operating authority at the time of such acquisition, and (ii) would have been able to allocate to the basis of such authority that portion of the acquiring corporation's cost basis in such stock attributable to such authority if the acquiring corporation had received such authority in the liquidation of the acquired corporation immediately following such acquisition and such allocation would have been proper under section 334(b)(2) of such Code, the holder of the authority may, for purposes of this section, allocate a portion of the basis of the acquiring corporation in the stock of the acquired corporation to the basis of such authority in such manner as the Secretary may prescribe in such regulations. (B) ADJUSTMENT TO BASIS.—Under regulations prescribed by the Secretary of the Treasury or his delegate, proper adjustment shall be made to the basis of the stock or other assets in the manner provided by such regulations to take into account any allocation under subparagraph (A). (d) EFFECTIVE DATE.—The provisions of this section shall apply to taxable years ending after June 30, 1980. SEC. 267. LIMITATION ON ADDITIONS TO BANK LOSS RESERVES. (a) GENERAL RULE.—

26 USC 585.

(1) The first sentence after subparagraph (B) of paragraph (2) of section 585(b) is amended by striking out "but before 1982; and 0.6 percent for taxable years beginning after 1981" and inserting in lieu thereof "but before 1982; 1.0 percent for taxable years

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beginning in 1982; and 0.6 percent for taxable years beginning after 1982". (2) The last sentence of paragraph (2) of section 585(b) is 26 USC 585. amended by striking out "but before 1982, the last taxable year beginning before 1976, and for taxable years beginning after 1981, the last taxable year beginning before 1982" and inserting in lieu thereof "but before 1983, the last taxable year beginning before 1976, and for taxable years beginning after 1982, the last taxable year beginning before 1983". (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall 26 USC 585 apply to taxable years beginning after 1981. n°te

TITLE III—SAVINGS PROVISIONS Subtitle A—Interest Exclusion SEC. 301. EXCLUSION OF INTEREST ON CERTAIN SAVINGS CERTIFICATES. (a) GENERAL RULE.—Part III of subchapter B of chapter 1 (relating

to items specifically excluded from gross income) is amended by redesignating section 128 as section 129 and by inserting after section 127 the following new section: "SEC. 128. INTEREST ON CERTAIN SAVINGS CERTIFICATES.

"(a) IN GENERAL.—Gross income does not include any amount received b^ any individual during the taxable year as interest on a depository institution tax-exempt savings certificate, (b) MAXIMUM DOLLAR AMOUNT.—

"(1) IN GENERAL.—The aggregate amount excludable under subsection (a) for any taxable year shall not exceed the excess of— "(A) $1,000 ($2,000 in the case of a joint return under section 6013), over "(B) the aggregate amount received by the taxpayer which was excludable under subsection (a) for any prior taxable year. "(2) SPECIAL RULE.—For purposes of paragraph (I)(B), one-half of the amount excluded under subsection (a) on any joint return shall be treated as received by each spouse. "(c) DEPOSITORY INSTITUTION TAX-EXEMPT SAVINGS CERTIFICATE.—

For purposes of this section— "(1) IN GENERAL.—The term 'depository institution tax-exempt savings certificate' means any certificate— "(A) which is issued by a qualified savings institution after September 30, 1981, and before January 1, 1983, (B) which has a maturity of 1 year, "(C) which has an investment yield equal to 70 percent of the average investment yield for the most recent auction (before the week in which the certificate is issued) of United States Treasury bills with maturities of 52 weeks, and "(D) which is made available in denominations of $500. "(2) QuAUFiED INSTITUTION.—The term 'qualified institution' means— "(A)(i) a bank (as defined in section 581), "(ii) a mutual savings bank, cooperative bank, domestic building and loan association, or other savings institution chartered and supervised as a savings and loan or similar institution under Federal or State law, or

26 USC 128.

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PUBLIC LAW 97-34—AUG. 13, 1981 "(iii) a credit union, the deposits or accounts of which are insured under Federal or State law or are protected or guaranteed under State law, or "(B) an industrial loan association or bank chartered and supervised under Federal or State law in a manner similar to a savings and loan institution. The term "qualified institution" does not include any foreign branch or international banking facility of an institution described in the preceding sentence and such a branch or facility shall not be taken into account under subsection (d). "(d) INSTITUTIONS REQUIRED TO PROVIDE RESIDENTIAL PROPERTY FINANCING.—

"(1) IN GENERAL.—If a qualified savings institution (other than an institution described in subsection (c)(2)(A)(iii)) issues any depository institution tax-exempt savings certificate during any calendar quarter, the amount of the qualified residential financing provided by such institution shall during the succeeding calendar quarter not be less than the lesser of— "(A) 75 percent of the face amount of depository institution tax-exempt savings certificates issued during the calendar quarter, or "(B) 75 percent of the qualified net savings for the calendar quarter. The aggregate amount of qualified tax-exempt savings certificates issued by any institution described in subsection (c)(2)(A)(iii) which are outstanding at the close of any calendar quarter may not exceed the limitation determined under paragraph (4) with respect to such institution for such quarter. "(2) PENALTY FOR FAILURE TO MEET REQUIREMENTS.—If, as of the

close of any calendar quarter, a qualified institution has not met the requirements of paragraph (1) with respect to the preceding calendar quarter, such institution may not issue any certificates until it meets such requirements. "(3) QUALIFIED RESIDENTIAL FINANCING.—The term 'qualified residential financing' includes, and is limited to— "(A) any loan secured by a lien on a single-family or multiiPamily residence, "(B) any secured or unsecured qualified home improvement loan (within the meaning of section 103A(1)(6) without regard to the $15,000 limit), (C) any mortgage (within the meaning of section 103A(1)(1)) on a single-family or multifamily residence which is insured or guaranteed by the Federal, State, or local government or any instrumentality thereof, "(D) any loan to acquire a mobile home, "(E) any construction loan for the construction or rehabilitation of a single-family or multifamily residence, "(F) the purchase of mortgages secured by single-family or multifamily residences on the secondary market but only to the extent the amount of such purchases exceed the amount of sales of such mortgages by an institution, "(G) the purchase of securities issued or guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or securities issued by any other person if such securities are secured by mortgages originated by a qualified institution, but only to the extent the amount

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of such purchases exceed the amount of sales of such securities by an institution, and "(H) any loan for agricultural purposes. For purposes of this paragraph, the term 'single-family residence' includes 2-, 8-, and 4-family residences, and the term "Single-family 'residence' includes stock in a cooperative housing corporation residence" (as defined in section 216(b)). ^"^ residence. "(4) LIMITATION FOR CREDIT UNIONS.—For purposes of paragraph (1), the limitation determined under this paragraph with respect to any institution described in subsection (c)(2)(A)(iii) for any calendar quarter is the sum of^ "(A) the aggregate of the amounts described in subparagraph (A) of paragraph (5) with respect to such institution as of September 30, 1981, plus "(B) 10 percent of the excess of— "(i) the aggregate of such amounts as of the close of such calendar (quarter, over "(ii) the amount referred to in subparagraph (A). "(5) QuAUFiED NET SAVINGS.—The term 'qualified net savings' means, with respect to any qualified institution, the excess of^ "(A) the amounts paid into pgissbook savings account, 6-month money market certificates, 30-month small-saver certificates, time deposits with a face amount of less than $100,000, and depository institution tax-exempt savings certificates issued by such institution, over "(B) the amounts withdrawn or redeemed in connection with the accounts and certificates described in subparagraph (A). "(6) CoNSOUDATED GROUPS.—For purposes of this subsection, all members of the same affiliated group (as defined in section 1504) which file a consolidated return for the taxable year shall be treated as 1 corporation. "(e) PENALTY FOR EARLY WITHDRAWALS.—

"(1) IN GENERAL.—If any portion of a depository institution taxexempt savings certificate is redeemed before the date on which it matures— "(A) subsection (a) shall not apply to any interest on such certificate for the taxable year of redemption and any subsequent taxable year, and "(B) there shall be included in gross income for the tsixable year of redemption the amount of any interest on such certificate excluded under subsection (a) for any preceding taxable year. "(2) CERTIFICATE PLEDGED AS COLLATERAL.—For purposes of

paragraph (1), if the taxpayer uses any depository institution taxexempt savings certificate (or portion thereof) as collateral or security for a loan, the taxpayer shall be treated as having redeemed such certificate. "(f) OTHER SPECIAL RULES.— "(1) COORDINATION WITH SECTION II6.—Section 116 shall not

apply to the interest on any depository institution tax-exempt savings certificate. "(2) ESTATES AND TRUSTS.—

"(A) IN GENERAL.—Except as provided in subparagraph (B), the exclusion provided by this section shall not apply to estates and trusts. "(B) CERTIFICATES ACQUIRED BY ESTATE FROM DECEDENT.—

In the case of a depository institution tax-exempt savings

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 95 STAT. 270

PUBLIC LAW 97-34—AUG. 13, 1981 certificate acquired by an estate by reason of the death of the decedent— "(i) subparagraph (A) shall not apply, and "(ii) subsection O> shall be applied as if the estate were t) the decedent." (b) CONFORMING AMENDMENTS.—

(1) The table of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 128 and inserting in lieu thereof the following new items: "Sec. 128. Interest on certain savings certificates. "Sec. 129. Cross references to other Acts."

26 USC 265.

26 USC 584. 26 USC 643.

26 USC 702.

94 Stat. 306. 26 USC 128 note. Report to Congress. 26 USC 128 note.

Ante, p. 267.

(2) Section 265 (relating to expenses and interest relating to tax-exempt income) is amended by inserting ", or to purchase or carry any certificate to the extent the interest on such certificate is excludable under section 128" after "116". (8) Paragraph (2) of section 584(c) (relating to income of participants in common trust funds), as in effect for taxable years beginning in 1981, is amended by inserting "or 128" after 116". (4) Paragraph (7) of section 643(a) (defining distributable net income), as in effect for taxable years beginning in 1981, is amended by inserting "or section 128 (relating to interest on certain savings certificates)" after "received)". (5) Section 702(a)(5) (relating to income and credits of partners), as in effect for taxable years beginning in 1981, is amended by inserting "or 128" after "116". (6) Each of the following provisions, as in effect for taxable years beginning after December 31, 1981, are amended by inserting "or interest" after "dividends" each place it appears in the caption or text: (A) section 584(c)(2), (B) section 643(a)(7), (C) section 702(a)(5). (c) STUDY.—The Secretary of the Treasury or his delegate shall conduct a study of the exemption from income of interest earned on depository institution tax-exempt savings certificates established by this section to determine the exemption^ effectiveness in generating additional savings. Such report shall be submitted to the Congress before June 1, 1983. (d) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years ending after September 30, 1981. (2) CONFORMING AMENDMENTS.—The amendments made by subsection (b)(6) shall apply to taxable years beginning after December 31, 1981.

SEC. 302. PARTIAL EXCLUSION OF INTEREST. (a) AMOUNT OF EXCLUSION.—Section 128 (relating to the interest on

certain savings certificates) is amended to read as follows: "SEC. 128. PARTIAL EXCLUSION OF INTEREST.

"(a) IN GENERAL.—Gross income does not include the amounts received during the taxable year by an individual as interest. "(b) MAXIMUM DOLLAR AMOUNT.—The aggregate amount excludable under subsection (a) for any taxable year shall not exceed 15 percent of the lesser of— "(1) $3,000 ($6,000 in the case of a joint return under section 6013), or

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"(2) the excess of the amount of interest received by the taxpayer during such taxable year (less the amount of any deduction under section 62(12)) over the amount of qualified 26 USC 62. interest expenses of such taxpayer for the taxable year. "(c) DEFINITIONS.—For purposes of this section— "(1) INTEREST DEFINED.—The term 'interest' means— "(A) interest on deposits with a bank (as defined in section 581), "(B) amounts (whether or not designated as interest) paid, in respect of deposits, investment certificates, or withdrawable or repurchasable shares, by— "(i) an institution which is— "(I) a mutual savings bank, cooperative bank, domestic building and loan association, or credit union, or "(II) any other savings or thrift institution which is chartered and supervised under Federal or State law, the deposits or accounts in which are insured under Federal or State law or which are protected and guaranteed under State law, or "(ii) an industrial loan association or bank chartered and supervised under Federal or State law in a manner similar to a savings and loan institution. "(C) interest on— "(i) evidences of indebtedness (including bonds, debentures, notes, and certificates) issued by a domestic corporation in registered form, and "(ii) to the extent provided in reg^ulations prescribed by the Secretary, other evidences of indebtedness issued by a domestic corporation of a type offered by corporations to the public, "(D) interest on obligations of the United States, a State, or a political subdivision of a State (not excluded from gross income of the taxpayer under any other provision of law), "(E) interest attributable to participation shares in a trust established and maintained by a corporation established pursuant to Federal law, and "(F) interest paid by an insurance company under an agreement to pay interest on— "(i) prepaid premiums, "(ii) life insurance policy proceeds which are left on deposit with such company by a beneficiary, and (iii) under regulations prescribed by the Secretary, policyholder dividends left on deposit with such company. "(2) QuAUFiED INTEREST EXPENSE DEFINED.—The term 'qualified interest expense' means an amount equal to the excess of— "(A) the amount of the deduction allowed the taxpayer under section 163(a) (relating to interest) for the taxable year, over "(B) the amount of such deduction allowed with respect to interest paid or accrued on indebtedness incurred in— "(i) acquiring, constructing, reconstructing, or rehabilitating property which is primarily used by the taxpayer as a dwelling unit (as defined in section 280A(fKl)),or "(ii) the taxpayer's conduct of a trade or business."

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Page:United States Statutes at Large Volume 95.djvu/298

 95 STAT. 272

PUBLIC LAW 97-34—AUG. 13, 1981 (b) REPEAL OF PARTIAL EXCLUSION OF INTEREST.—

94 Stat. 305. 26 USC 116 note. 26 USC 116.

(1) IN GENERAL.—Subsection (c) of section 404 of the Crude Oil Windfall Profit Tax Act of 1980 is amended by striking out "1983" and inserting in lieu thereof "1982". (2) CONFORMING AMENDMENT.—Section 116(a) (relating to partial exclusion of dividends) is amended to read as follows: "(a) EXCLUSION FROM GROSS INCOME.—

"(1) IN GENERAL.—Gross income does not include amounts received by an individual as dividends from domestic corporations. "(2) MAXIMUM DOLLAR AMOUNT.—The aggregate amount excluded under subsection (a) for any taxable year shall not exceed $100 ($200 in the case of a joint return under section 6013)." (c) CONFORMING AMENDMENTS.—

(1) The table of sections for part III of subchapter B of chapter 1, as amended by section 301(b)(1), is amended by striking out the item relating to section 128 and inserting in lieu thereof the following new item: "Sec. 128. Partial exclusion of interest." Ante, p. 270.

Ante, pp. 267, 270. 26 USC 46.

26 USC 854.

(2) Section 265 (relating to expenses and interest relating to tax-exempt income), as amended by section 301(b)(2), is amended by striking out "or to purchase or carry any certificate to the extent the interest on such certificate is excludable under section 128" and inserting in lieu thereof "or to purchase or carry obligations or shares, or to make other deposits or investments, the interest on which is described in section 128(c)(l) to the extent such interest is excludable from gross income under section 128". (3) Section 46(c)(8) (relating to limitation to amount at risk) is amended by striking out "clause (i), (ii), or (iii) of subparagraph (A) or subparagraph (B) of section 128(c)(2)" and inserting in lieu thereof "subparagraph (A) or (B) of section 128(c)(l)". (4) Subsection (b) of section 854 is amended to read as follows: "(b) OTHER DIVIDENDS AND TAXABLE INTEREST.— "(1) DEDUCTION UNDER SECTION 243.—In the case of a dividend

received from a regulated investment company (other than a dividend to which subsection (a) applies)— "(A) if such investment company meets the requirements of section 852(a) for the taxable year during which it paid such dividend; and "(B) the aggregate dividends received by such company during such taxable year are less than 75 percent of its gross income. then, in computing the deduction under section 243, there shall be taken into account only that portion of the dividend which bears the same ratio to the amount of such dividend as the aggregate dividends received by such company during such taxable year bear to its gross income for such taxable year. "(2) EXCLUSION UNDER SECTIONS II 6 AND 128.—For purposes of sections 116 and 128, in the case of any dividend (other than a dividend described in subsection (a)) received from a regulated investment company which meets the requirements of section 852 for the taxable year in which it paid the dividend— "(A) the entire amount of such dividend shall be treated as a dividend if the aggregate dividends received by such company during the taxable year equal or exceed 75 percent of its gross income,

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"(B) the entire amount of such dividend shall be treated as interest if the aggregate interest received by such company during the taxable year equals or exceeds 75 percent of its gross income, or "(C) if subparagraphs (A) and (B) do not apply, a portion of such dividend shall be treated as a dividend (and a portion of such dividend shall be treated as interest) based on the portion of the company's gross income which consists of aggregate dividends or aggregate interest, as the case may be. For purposes of the preceding sentence, gross income and aggregate interest received shall each be reduced by so much of the deduction allowable by section 163 for the taxable year as does not exceed aggregate interest received for the taxable year. "(3) NOTICE TO SHAREHOLDERS.—The amount of any distribu-

tion by a regulated investment company which may be taken into account as a dividend for purposes of the exclusion under section 116 and the deduction under section 243 or as interest for purposes of section 128 shall not exceed the amount so Ante, pp. 267, designated by the company in a written notice to its share- ^70. holders mailed not later than 45 days after the close of its taxable year. "(4) DEFINITIONS.—For purposes of this subsection— "(A) The term 'gross income' does not include gain from the sale or other disposition of stock or securities. "(B) The term 'aggregate dividends received' includes only dividends received from domestic corporations other than dividends described in section 116(b)(2) (relating to dividends excluded from gross income). In determining the amount of any dividend for purposes of this subparagraph, the rules provided in section 116(c)(2) (relating to certain distributions) shall apply. "(C) The term 'aggregate interest received' includes only interest described in section 128(c)(l)." (5) Subsection (c) of section 857 is amended to read as follows: 26 USC 857. "(c) LIMITATIONS APPLICABLE TO DIVIDENDS RECEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—

"(1) IN GENERAL.—For purposes of section 116 (relating to an exclusion for dividends received by individuals) and section 243 (relating to deductions for dividends received by corporations), a dividend received from a real estate investment trust which meets the requirements of this part shall not be considered as a dividend. "(2) TREATMENT FOR SECTION 128.—In the case of a dividend (other than a capital gain dividend, as defined in subsection (b)(3)(C)) received from a real estate investment trust which meets the requirements of this part for the taxable year in which it paid the dividend— "(A) such dividend shall be treated as interest if the aggregate interest received by the real estate investment trust for the taxable year equals or exceeds 75 percent of its gross income, or "(B) if subparagraph (A) does not apply, the portion of such dividend which bears the same ratio to the amount of such dividend as the aggregate interest received bears to gross income shall be treated as interest. "(3) ADJUSTMENTS TO GROSS INCOME AND AGGREGATE INTEREST

RECEIVED.—For purposes of paragraph (2)—

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 95 STAT. 274

Ante, pp. 267, 2'70.

PUBLIC LAW 97-34—AUG. 13, 1981 "(A) gross income does not include the net capital gain, "(B) gross income and aggregate interest received shall each be reduced by so much of the deduction allowable by section 163 for the taxable year (other than for interest on mortgages on real property owned by the real estate investment trust) as does not exceed aggregate interest received by the taxable jrear, and "(C) gross income shall be reduced by the sum of the taxes imposed by paragraphs (4), (5), and (6) of section 857(b). "(4) AGGREGATE INTEREST RECEIVED.—For purposes of this subsection, the term 'aggregate interest received means only interest described in section 128(c)(l). "(5) N O T I C E TO SHAREHOLDERS.—The a m o u n t of any distribu-

tion by a real estate investment trust which may be taken into account as interest for purposes of the exclusion under section 128 shall not exceed the amount so designated by the trust in a written notice to its shareholders mailed not later than 45 days after the close of its taxable year." (d) EFFECTIVE DATES.—

26 USC 128 "°*®26 USC 116 "°t^

(1) IN GENERAL.—The amendments made by subsections (a) and (c) shall apply to taxable years beginning after December 31, 1984. (2) DIVIDEND EXCLUSION.—The amendment made by subsection (b)(2) shall apply to tsixable years beginning after December 31, 1981.

Subtitle B—Retirement Savings Provisions 26 USC 219.

SEC. 311. RETIREMENT SAVINGS. (a) GENERAL RULE.—Section 219 (relating to deduction for retirement savings) is amended to read as follows: "SEC. 219. RETIREMENT SAVINGS. "(a) ALLOWANCE OF DEDUCTION.—In the case of an individual, there shall be allowed as a deduction an amount equal to the qualified retirement contributions of the individual for the taxable year. "(b) MAXIMUM AMOUNT OF DEDUCTION.—

"(1) IN GENERAL.—The amount allowable as a deduction under subsection (a) to any individual for any taxable year shall not exceed the lesser of^ "(A) $2,000, or "(B) an amount equal to the compensation includible in the individual's gross income for such taxable year. "(2) SPECIAL RULES FOR EMPLOYER CONTRIBUTIONS UNDER SIMPLIFIED EMPLOYEE PENSIONS.—

"(A) LIMITATION.—If there is an employer contribution on behalf of the employee to a simplified employee pension, an employee shall be allowed as a deduction under subsection (a) (in addition to the amount allowable under paragraph (1) an amount equal to the lesser of— "(i) 15 percent of the compensation from such employer includible in the employee's gross income for the taxable year (determined without regard to the employer contribution to the simplified employee pension), or "(ii) the amount contributed by such employer to the simplified employee pension and included in gross income (but not in excess of $7,500).

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"(B) CERTAIN LIMITATIONS DO NOT APPLY TO EMPLOYER

CONTRIBUTION.—Paragraph (1) of this subsection and paragraph (1) of subsection (d) shall not apply with respect to the employer contribution to a simplified employee pension. (C) SPECIAL RULE FOR APPLYING SUBPARAGRAPH (Axii).—In the case of an employee who is an officer, shareholder, or owner-employee described in section 408(k)(3), the $7,500 Post, p. 283. amount specified in subparagraph (A)(ii) shall be reduced by the amount of tax taken into account with respect to such individual under subparagraph (D) of section 408(k)(3). "(3) SPECIAL RULE FOR INDIVIDUAL RETIREMENT PLANS.—If the

individual has paid any qualified voluntary employee contributions for the taxable year, the amount of the qualified retirement contributions (other than employer contributions to a simplified employee pension) which are paid for the taxable year to an individual retirement plan and which are allowable as a deduction under subsection (a) for such taxable year shall not exceed— "(A) the amount determined under paragraph (1) for such taxable year, reduced by "(B) the amount of the qualified voluntary employee contributions for the taxable year. "(4) CERTAIN DIVORCED INDIVIDUALS.—

"(A) IN GENERAL.—In the case of an individual to whom this paragraph applies, the limitation of paragraph (1) shall not be less than the lesser of— "(i) $1,125, or "(ii) the sum of the amount referred to in paragraph (1)(B) and any qualifying alimony received by the individual during the taxable year. "(B) QUALIFYING AUMONY.—For purposes of this paragraph, the term 'qualifying alimony' means amounts includible in the individual's gross income under paragraph (1) of section 71(a) (relating to decree of divorce or separate maintenance). "(C) INDIVIDUALS TO WHOM PARAGRAPH APPLIES.—This

paragraph shall apply to an individual if^ "(i) an individual retirement plan was established for the benefit of the individual at least 5 years before the beginning of the calendar year in which the decree of divorce or separate maintenance was issued, and "(ii) for at least 3 of the former spouse's most recent 5 taxable years ending before the taxable year in which the decree was issued, such former spouse was allowed a deduction under subsection (c) (or the corresponding provisions of prior law) for contributions to such individual retirement plan. "(c) SPECIAL RULES FOR CERTAIN MARRIED INDIVIDUALS.—

"(1) IN GENERAL.—In the case of any individual with respect to whom a deduction is otherwise allowable under subsection (a)— "(A) who files a joint return under section 6013 for a taxable year, and "(B) whose spouse has no compensation (determined without regard to section 911) for such taxable year, Ante, p. 190. there shalibe allowed as a deduction any amount paid in cash for the taxable year by or on behalf of the individual to an individual retirement plan established for the benefit of his spouse. "(2) LIMITATION.—The amount allowable as a deduction under paragraph (1) shall not exceed the excess of—

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 95 STAT. 276

PUBLIC LAW 97-34—AUG. 13, 1981 "(A) the lesser of— "(i) $2,250, or "(ii) an amount equal to the compensation includible in the individual's gross income for the taxable year, over "(B) the amount allowed as a deduction under subsection (a) for the taxable year. In no event shall the amount allowable as a deduction under paragraph (1) exceed $2,000. "(d) OTHER LIMITATIONS AND RESTRICTIONS.— "(1) INDIVIDUALS WHO HAVE ATTAINED AGE 7 0 ^ 2. - N O deduction

26 USC 402.

shall be allowed under this section with respect to any qualified retirement contribution which is made for a taxable year of an individual if such individual has attained age 70 V before the a close of such taxable year. "(2) RECONTRIBUTED AMOUNTS.—No deduction shall be allowed under this section with respect to a rollover contribution described in section 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3),or409(b)(3)(C). "(3) AMOUNTS CONTRIBUTED UNDER ENDOWMENT CONTRACT.—In

the case of an endowment contract described in section 408(b), no deduction shall be allowed under this section for that portion of the amounts paid under the contract for the taxable year which is properly allocable, under regulations prescribed by the Secretary, to the cost of life insurance. "(e) DEFINITION OF RETIREMENT SAVINGS (CONTRIBUTIONS, ETC.—For

purposes of this section— "(1) QUALIFIED RETIREMENT CONTRIBUTION.—The term 'qualified retirement contribution' means— "(A) any qualified voluntary employee contribution paid in cash by the individual for the taxable year, and "(B) any amount paid in cash for the taxable year by or on behalf of such individual for his benefit to an individual retirement plan. For purposes oi the preceding sentence, the term 'individual retirement plan' includes a retirement bond described in section 409 only if the bond is not redeemed within 12 months of its issuance. "(2) OUAUFIED VOLUNTARY EMPLOYEE CONTRIBUTION.—

(A) IN GENERAL.—The term 'qualified voluntary employee contribution' means any voluntary contribution— "(i) which is made by an individual as an employee under a qualified employer plan or government plan, which plan allows an employee to make contributions which may be treated as qualified voluntary employee contributions under this section, and "(ii) with respect to which the individual has not designated such contribution as a contribution which should not be taken into account under this section. "(B) VOLUNTARY CONTRIBUTION.—For purposes of subparagraph (A), the term 'voluntary contribution' means any contribution which is not a mandatory contribution (within the meaning of section 41 l(c)(2)(C)). "(C) DESIGNATION.—For purposes of determining whether or not an individual has made a designation described in subparagraph (A)(ii) with respect to any contribution during any calendar year under a qualified employer plan or government plan, such individual shall be treated as having

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made such designation if he notifies the plan administrator of such plan, not later than the earlier of— (i) April 15 of the succeeding calendar year, or "(ii) the time prescribed by the plan administrator, that the individual does not want such contribution taken into account under this section. Any designation or notification referred to in the preceding sentence shall be made in such manner as the Secretary shall by regulations prescribe and, after the last date on which such designation or notification may be made, shall be irrevocable for such taxable year. "(3) QuAUFiED EMPLOYER PLAN.—The term 'qualified employer plan' means— "(A) a plan described in section 401(a) which includes a 26 USC 401. trust exempt from tax under section 501(a), "(B) an annuity plan described in section 403(a), "(C) a qualified bond purchase plan described in section 405(a), "(D) a simplified employee pension (within the meaning of section 408(k)), and "(E) a plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b). "(4) GOVERNMENT PLAN.—The term 'government plan' means any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing. "(5) PAYMENTS FOR CERTAIN PLANS.—The term 'amounts paid to an individual retirement plan' includes amounts paid for an individual retirement annuity or a retirement bond. "(f) OTHER DEFINITIONS AND SPECIAL RULES.—

"(1) COMPENSATION.—For purposes of this section, the term 'compensation' includes earned income as defined in section 401(c)(2). "(2) MARRIED INDIVIDUALS.—The maximum deduction under subsections (b) and (c) shall be computed separately for each individual, and this section shall be applied without regard to any community property laws. (3) TIME WHEN CONTRIBUTIONS DEEMED MADE.— "(A) INDIVIDUAL RETIREMENT PLANS.—For purposes

of this section, a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). "(B) QUALIFIED EMPLOYER OR GOVERNMENT PLANS.—For

purposes of this section, if a qualified employer or government plan elects to have the provisions of this subparagraph apply, a taxpayer shall be deemed to have made a voluntary contribution to such plan on the last day of the preceding calendar year (if, without regard to this paragraph, such contribution may be made on such date) if the contribution is made by April 15 of the calendar year or such earlier time as is provided by the plan administrator. "(4) REPORTS.—The Secretary shall prescribe regulations which prescribe the time and the manner in which reports to the

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