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"(2) such corporation sells, exchanges, or distributes all of such stock, such corporation may elect to treat such sale, exchange, or distribution as a disposition of all of the assets of such other corporation, and no gain or loss shall be recognized on the sale, exchange, or distribution of such stock. "SEC. 337. NONRECOGNITION FOR PROPERTY DISTRIBUTED TO PARENT IN COMPLETE LIQUIDATION OF SUBSIDIARY.

"(a) IN GENERAL.—No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies. "(h) TREATMENT OF INDEBTEDNESS OF SUBSIDIARY, ETC.— "(1) INDEBTEDNESS OF SUBSIDIARY TO PARENT.—If—

"(A) a corporation is liquidated in a liquidation to which K;c? section 332 applies, and "(B) on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee, for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distributee in such liquidation. "(2) TREATMENT OF TAX-EXEMPT DISTRIBUTEE.—

"(A) IN GENERAL.—Except as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter. "(B) EXCEPTION WHERE PROPERTY WILL BE USED IN UNRELATED BUSINESS.—

"(i) IN GENERAL.—Subparagraph (A) shall not apply to any distribution of property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such distribution, such organization uses such property in an unrelated trade or business (as defined in section 513). "(ii) LATER DISPOSITION OR CHANGE IN USE.—If

any

property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding ?fi.. any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall ,;n be included in such organization's unrelated business taxable income. For purposes of the preceding sentence, ' if such property ceases to be used in an unrelated trade or business of such organization, such organization shall be treated as having disposed of such property on the date of such cessation. "(c) 80-PERCENT DISTRIBUTEE.—For purposes of this section, the term '80-percent distributee' means only the corporation which meets the 80-percent stock ownership requirements specified in section 332(b). "(d) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made to this subpart by the Tax Reform Act of 1986, including—

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 100 STAT. 2272

PUBLIC LAW 99-514—OCT. 22, 1986

If;

"(1) regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations and part III of this subchapter), and "(2) regulations providing for appropriate coordination of the provisions of this section with the provisions of this title relating to taxation of foreign corporations and their shareholders." (b) AMENDMENTS TO SECTION 338.— (1) Subsection (a) of section 338 (relating to certain stock purchases treated as asset acquisitions) is amended by striking out "to which section 337 applies". (2) Subsection (c) of section 338 is hereby repealed. (3) Subparagraph (B) of section 338(h)(10) is amended by adding at the end thereof the following new sentence: "To the extent provided in regulations, such term also j^ y includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return)." (c) TREATMENT OF DISTRIBUTIONS OF APPRECIATED PROPERTY.—

Section 311 is amended to read as follows: "SEC. 311. TAXABILITY OF CORPORATION ON DISTRIBUTION. "(a) GENERAL RULE.—Except as provided in subsection (b), no gain

or loss shall be recognized to a corporation on the distribution, with respect to its stock, of— "(1) its stock (or rights to acquire its stock), or "(2) property. "(b) DISTRIBUTIONS OF APPRECIATED PROPERTY.—

"(1) IN GENERAL.—If^

"(A) a corporation distributes property (other than an IK obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and "(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value. "(2) TREATMENT OF LIABILITIES IN EXCESS OF BASIS.—Rules

similar to the rules of section 336(b) shall apply for purposes of this subsection." (d) TREATMENT OF FOREIGN DISTRIBUTEES.—

(1) AMENDMENTS TO SECTION 367.—Subsection (e) of section 367

is amended to read as follows: "(e) TREATMENT OF DISTRIBUTIONS DESCRIBED IN SECTION 355 OR LIQUIDATIONS UNDER SECTION 332.— "(1) DISTRIBUTIONS DESCRIBED IN SECTION 355.—In the case of

any distribution described in section 355 (or so much of section 356 as relates to section 355) by a domestic corporation to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of this section. "(2) LIQUIDATIONS UNDER SECTION 332.—In the case of any liquidation to which section 332 applies, except as provided in regulations, subsections (a) and (b)(1) of section 337 shall not apply where the 80-percent distributee (as defined in section 337(c)) is a foreign corporation." (2) AMENDMENTS TO SECTION 1248.—

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(A) Subsection (e) of section 1248 is amended by striking out "Under regulations" and inserting in lieu thereof "Except as provided in regulations". (B) Subsection (f) of section 1248 is amended by inserting "Except as provided in regulations prescribed by the Secretary—" after the subsection heading. (e) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) Paragraph (4) of section 312(n) (as redesignated by title XVIII) is amended to read as follows: "(4) LIFO INVENTORY ADJUSTMENTS.— "(A) IN GENERAL.—Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary. "(B) LIFO RECAPTURE AMOUNT.—For purposes of this paragraph, the term 'LIFO recapture amount' means the amount (if any) by which— "(i) the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds "(ii) the inventory amount of such assets under the LIFO method. "(C) DEFINITIONS.—For purposes of this paragraph— ' ' ''- •-' "(i) LIFO METHOD.—The term 'LIFO method' means the method authorized by section 472 (relating to lastin, first-out inventories). "(ii) INVENTORY ASSETS.—The term 'inventory assets' means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. "(iii) INVENTORY AMOUNT.—The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined— ' "(I) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or "(II) if subclause (I) does not apply, by using cost or market, whichever is lower." (2) Subsection (c) of section 332 is hereby repealed. (3) Section 333 is hereby repealed. (4)(A) Subsection (a) of section 334 is amended by striking out "(other than a distribution to which section 333 applies)". (B) Subsection (c) of section 334 is hereby repealed. (5) Paragraph (12) of section 338(h) is hereby repealed. (6)(A) Subsection (e) of section 341 is amended by striking out paragraphs (2), (3), and (4). (B) Paragraph (5) of section 341(e) is amended— (i) by striking out "paragraphs (1), (2), and (4)" and insert* ing in lieu thereof "paragraph (1)", and (ii) by striking out subparagraph (B). (7) Subsection (b) of section 346 is amended by striking out

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 100 STAT. 2274

PUBLIC LAW 99-514—OCT. 22, 1986

pm. (8)(A) Subparagraphs (A) and (B) of section 453(h)(1) (relating ) to use of installment sales in section 337 liquidations) are amended to read as follows: i n •'• "(A) IN GENERAL.—If, in a liquidation to which section 331 j< applies, the shareholder receives (in exchange for the shareholder's stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12; t vr month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this -ij section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock. "(B)

OBLIGATIONS ATTRIBUTABLE TO SALE OF INVENTORY MUST RESULT FROM BULK SALE.—Subparagraph (A) shall not

apply to an installment obligation acquired in respect of a sale or exchange of— "(i) stock in trade of the corporation, g "(ii) other property of a kind which would properly be 31 ii ^f. included in the inventory of the corporation if on hand at the close of the taxable year, and as^imB V "(iii) property held by the corporation primarily for "^cj. V a sale to customers in the ordinary course of its trade or business, c^ixi unless such sale or exchange is to one person and involves substantially all of such property attributable to a trade or business of the corporation." (B) Subparagraph (E) of section 453(h)(1) is amended to read as follows: "(E) SALES BY LIQUIDATING SUBSIDIARIES.—For purposes of

 * ,.J

subparagraph (A), in the case of a controlling corporate shareholder (within the meaning of section 368(c)(1)) of a selling corporation, an obligation acquired in respect of a i^ sale or exchange by the selling corporation shall be treated as so acquired by such controlling corporate shareholder. The preceding sentence shall be applied successively to each controlling corporate shareholder above such controlling corporate shareholder." io t ^C)) The heading for section 453(h) is amended by striking out rj; "SECTION 337" and inserting in lieu thereof "CERTAIN". (9) Subsection (d) of section 453B is amended to read as follows: "(d) EFFECT OF DISTRIBUTION IN LIQUIDATIONS TO WHICH SECTION 332 APPLIES.—If—

"(1) an installment obligation is distributed in a liquidation to which section 332 (relating to complete liquidations of subsidiaries) applies, and "(2) the basis of such obligation in the hands of the distributee is determined under section 334(b)(1), then no gain or loss with respect to the distribution of such obligation shall be recognized by the distributing corporation." (10) Paragraph (5) of section 467(c) is amended by striking out "453B(d)(2),". (11) Subsection (b) of section 852 is amended by adding at the end thereof the following new paragraph: "(6) SECTION 3 1 1 (b) NOT TO APPLY TO CERTAIN DISTRIBUTIONS.—

Section 311(b) shall not apply to any distribution by a regulated

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100 STAT. 2275

investment company to which this part applies, if such distribution is in redemption of its stock upon the demand of the shareholder." (12) Subsection (d) of section 897 is amended— (A) by striking out paragraph (2), (B) by striking out the heading for paragraph (1), (C) by appropriately redesignating each subparagraph, •> clause, and subclause of paragraph (1) as a paragraph, subparagraph, or clause, as the case may be, (D) by striking out "subparagraph (A)" in paragraph (2) (as so redesignated) and inserting in lieu thereof "paragraph (1)", and (E) by striking out ", ETC.," in the subsection heading. (13) Subsection (a) of section 1056 is amended by striking out the last sentence thereof. (14) Paragraph (2) of section 1255(b) is amended by striking out "453B(d)(2)". (15) Paragraph (3) of section 1276(c) is amended by striking out "334(c),". (16) The table of sections for subpart A of part II of subchapter C of chapter 1 is amended by striking out the item relating to section 333. (17) The table of sections for subpart B of part II of subchapter C of chapter 1 is amended by striking out the items relating to sections 336 and 337 and inserting in lieu thereof the following: "Sec. 336. Gain or loss recognized on property distributed in complete liquidation. "Sec. 337. Nonrecognition for property distributed to parent in complete liquidation of subsidiary."

SEC. 632. TREATMENT OF CORPORATIONS ELECTING SUBCHAPTER S STATUS.

(a) GENERAL RULE.—Section 1374 (relating to tax imposed on certain capital gains) is amended to read as follows: "SEC. 1374. TAX IMPOSED ON CERTAIN BUILT-IN GAINS.

"(a) GENERAL RULE.—If for any taxable year beginning in the recognition period an S corporation has a recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year. "(b) AMOUNT OF TAX.—

"(1) IN GENERAL.—The tax imposed by subsection (a) shall be a tax computed by applying the highest rate of tax specified in section 11(b) to the lesser of— "(A) the recognized built-in gains of the S corporation for the taxable year, or "(B) the amount which would be the taxable income of the corporation for such taxable year if such corporation '^' were not an S corporation. "(2) NET OPERATING LOSS CARRYFORWARDS FROM C YEARS AL-

LOWED.—Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the corporation was a C corporation shall be allowed as a deduction against the lesser of the amounts referred to in subparagraph (A) or (B) of paragraph (1). For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the lesser of the amounts referred to in subpara-

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 100 STAT. 2276

PUBLIC LAW 99-514—OCT. 22, 1986 graph (A) or (B) of paragraph (1) shall be treated as taxable income. r, •, ? . •--,t "(3) CREDITS.—

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"(A) IN GENERAL.—Except as provided in subparagraph (B), no credit shall be allowable under part IV of subchapter A of this chapter (other than under section 34) against the tax imposed by subsection (a). "(B) BUSINESS CREDIT CARRYFORWARDS FROM C YEARS AL-

LOWED.—Notwithstanding section 1371(b)(1), any business Ccredit carryforward under section 39 arising in a taxable -Elf year for which the corporation was a C corporation shall be allowed as a credit against the tax imposed by subsection (a) in the same manner as if it were imposed by section 11. "(4) COORDINATION WITH SECTION 1201(a).—For purposes of section 1201(a)— "(A) the tax imposed by subsection (a) shall be treated as if it were imposed by section 11, and "(B) the lower of the amounts specified in subparagraphs (A) and (B) of paragraph (1) shall be treated as the taxable income. ^. ,^., "(c) LIMITATIONS.— " ' >• "(1) CORPORATIONS WHICH WERE ALWAYS S CORPORATIONS.—

Subsection (a) shall not apply to any corporation if an election under section 1362(a) has been in effect with respect to such corporation for each of its taxable years. Except as provided in regulations, an S corporation and any predecessor corporation shall be treated as 1 corporation for purposes of the preceding sentence. "(2) LIMITATION ON AMOUNT OF RECOGNIZED BUILT-IN GAINS.—

The amount of the recognized built-in gains taken into account under this section for any taxable year shall not exceed the excess (if any) of— "(A) the net unrealized built-in gain, over "(B) the recognized built-in gains for prior taxable years beginning in the recognition period. "(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) NET UNREALIZED BUILT-IN GAIN.—The term 'net unrealized built-in gain' means the amount (if any) by which— "(A) the fair market value of the sissets of the S corporation as of the beginning of its 1st taxable year for which an election under section 1362(a) is in effect, exceeds "(B) the aggregate adjusted bases of such assets at such time. "(2) RECOGNIZED BUILT-IN GAIN.—The term 'recognized builtin gain' means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that— "(A) such asset was not held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (1), or "(B) such gain exceeds the excess (if any) of— "(i) the fair market value of such asset as of the beginning of such 1st taxable year, over "(ii) the adjusted basis of the asset as of such time.

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100 STAT. 2277

"(3) RECOGNITION PERIOD.—The term 'recognition period' means the 10-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. "(4) TAXABLE INCOME.—Taxable income of the corporation shall be determined under section 63(a)— "(A) without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and "(B) without regard to the deduction under section 172." (b) TREATMENT OF DISTRIBUTIONS.—Subsection (e) of section 1363 is amended to read as follows: "(e) SUBSECTION (d) NOT TO APPLY TO REORGANIZATIONS, ETC.—

Subsection (d) shall not apply to any distribution to the extent it consists of property permitted by section 354, 355, or 356 to be received without the recognition of gain." (c) CONFORMING AMENDMENTS.—

(1) Subparagraph (G) of section 26(b)(2) is amended by striking out "certain capital gains" and inserting in lieu thereof "certain built-in gains". (2) Paragraph (2) of section 1366(f) is amended to read as follows: "(2) REDUCTION IN PASS-THRU FOR TAX IMPOSED ON BUILT-IN

GAINS.—If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount of each recognized built-in gain (as defined in section 1374(d)(2)) for such taxable year shall be reduced by its proportionate share of such tax." (3) Subparagraph (B) of section 13750t))(l) is amended by striking out "section 1374(d)" and inserting in lieu thereof "section 1374(d)(4)". (d) CLERICAL AMENDMENT.—The table of sections for part III of subchapter S of chapter 1 is amended by striking out the item relating to section 1374 and inserting in lieu thereof the following: "Sec. 1374. Tax imposed on certain built-in gains." SEC. 633. EFFECTIVE DATES.

(a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this subtitle shall apply to— (1) any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated before January 1, 1987, (2) any transaction described in section 338 of the Internal Revenue Code of 1986 for which the acquisition date occurs after December 31, 1986, and (3) any distribution (not in complete liquidation) made after December 31, 1986. 03) BUILT-IN GAINS OF S CORPORATIONS.—The amendments made by section 632 (other than subsection (b) thereof) shall apply to taxable years beginning after December 31, 1986, but only in cases where the 1st taxable year for which the corporation is an S corporation is pursuant to an election made after December 31, 1986. (c) EXCEPTION FOR CERTAIN PLANS OF LIQUIDATION AND BINDING CONTRACTS.—

(1) IN GENERAL.—The amendments made by this subtitle shall not apply to—

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PUBLIC LAW 99-514—OCT. 22, 1986

• •'

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(A) any distribution or sale or exchange made pursuant to a plan of liquidation adopted before August 1, 1986, if the liquidating corporation is completely liquidated before January 1, 1988, (B) any distribution or sale or exchange made by any corporation if 50 percent or more of the voting stock O^y value) of such corporation is acquired on or after August 1, 1986, pursuant to a written binding contract in effect before such date and if such corporation is completely liquidated before January 1, 1988, (C) any distribution or sale or exchange made by any corporation if substantially all of the assets of such corporation are sold on or after August 1, 1986, pursuant to 1 or more written binding contracts in effect before such date and if such corporation is completely liquidated before January 1, 1988, or (D) any transaction described in section 338 of the Internal Revenue Code of 1986 with respect to any target corporation if a qualified stock purchase of such target corporation is made on or after August 1, 1986, pursuant to a written binding contract in effect before such date and the acquisition date (within the meaning of such section 338) is before January 1, 1988. (2) SPECIAL RULE FOR CERTAIN ACTIONS TAKEN BEFORE NOVEM-

BER 20, 1985.—For purposes of paragraph (1), transactions shall be treated as pursuant to a plan of liquidation adopted before August 1, 1986, if— (A) before November 20, 1985— >' (i) the board of directors of the liquidating corporation adopted a resolution to solicit shareholder apit • • proval for a transaction of a kind described in section '•\ ^ 336 or 337, or '^ '^^ ' (ii) the shareholders or board of directors have approved such a transaction, (B) before November 20, 1985— (i) there has been an offer to purchase a majority of i ••- ''•" the voting stock of the liquidating corporation, or (ii) the board of directors of the liquidating corpora'•' '• tion has adopted a resolution approving an acquisition or recommending the approval of an acquisition to the shareholders, or (C) before November 20, 1985, a ruling request was "^ submitted to the Secretary of the Treasury or his delegate " * with respect to a transaction of a kind described in section 336 or 337 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this subtitle). For purposes of the preceding sentence, any action taken by the board of directors or shareholders of a corporation with respect to any subsidiary of such corporation shall be treated as taken by the board of directors or shareholders of such subsidiary. (d) TRANSITIONAL RULE FOR CERTAIN SMALL CORPORATIONS.—

(1) IN GENERAL.—In the case of the complete liquidation before January 1, 1989, of a qualified corporation, the amendments made by this section shall not apply to the applicable percentage of each gain or loss which (but for this paragraph) would be recognized by reason of the amendments made by this subtitle.

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100 STAT. 2279

(2) PARAGRAPH ( D NOT TO APPLY TO CERTAIN ITEMS.—Para-

graph (1) shall not apply to— (A) any gain or loss which is an ordinary gain or loss (determined without regard to section 1239 of the Internal Revenue Code of 1986), (B) any gain or loss on a capital asset held for not more than 6 months, and (C) any gain to the extent section 453B of such Code applies. (3) APPLICABLE PERCENTAGE.—For purposes of this subsection, the term 'applicable percentage' means— (A) 100 percent if the applicable value of the qualified corporation is less than $5,000,000, or (B) 100 percent reduced by an amount which bears the t V same ratio to 100 percent as— H 8v (i) the excess of the applicable value of the corporation over $5,000,000, bears to I 0' (ii) $5,000,000. (4) APPLICABLE VALUE.—For purposes of this subsection, the applicable value is the fair market value of all of the stock of the corporation on the date of the adoption of the plan of complete liquidation (or if greater, on August 1, 1986). (5) QUALIFIED CORPORATION.—For purposes of this subsection, the term "qualified corporation" means any corporation if— (A) on August 1, 1986, and at all times thereafter before the corporation is completely liquidated, more than 50 percent (by value) of the stock in such corporation is held by 10 or fewer qualified persons, and (B) the applicable value of such corporation does not exceed $10,000,000. (6) DEFINITIONS AND SPECIAL RULES.—For purposes of this subsection— (A) QUALIFIED PERSON.—The term "qualified person" ^'^ means— (i) an individual, (ii) an estate, or • (iii) any trust described in clause (ii) or (iii) of section 1361(c)(2)(A) of the Internal Revenue Code of 1986. ^ ^ ^

Jg-I <*0f

c

(B) ATTRIBUTION RULES.—

(i) ENTITIES.—Any stock held by a corporation, trust, or partnership shall be treated as owned proportionally by its shareholders, beneficiaries, or partners. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. (ii) FAMILY MEMBERS.—Stock owned (or treated as owned under clause (i)) by members of the same family (within the meaning of section 318(a)(1) of the Internal Revenue Code of 1986) shall be treated as owned by 1 person. (C) CONTROLLED GROUP OF CORPORATIONS.—All members

1

of the same controlled group (as defined in section 267(f)(1) of such Code) shall be treated as 1 corporation for purposes of this subsection. (7) SECTION 338 TRANSACTIONS.—The provisions of this subsection shall also apply in the case of a transaction described in

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 100 STAT. 2280

PUBLIC LAW 99-514—OCT. 22, 1986

section 338 of the Internal Revenue Code of 1986 where the acquisition date (within the meaning of such section 338) is before January 1, 1989. (8) APPLICATION OF SECTION 1374.—Rules similar to the rules of this subsection shall apply for purposes of applying section 1374 of the Internal Revenue Code of 1986 (as amended by section 632) in the case of a qualified corporation which becomes an S corporation for a taxable year beginning before January 1, 1989. (d) COMPLETE LIQUIDATION DEFINED.—For purposes of this section, a corporation shall be treated as completely liquidated if all of the assets of such corporation are distributed in complete liquidation, less assets retained to meet claims. (e) OTHER TRANSITIONAL RULES.—

(1) The amendments made by this subtitle shall not apply to any liquidation of a corporation incorporated under the laws of Pennsylvania on August 3, 1970, if^ (A) the board of directors of such corporation approved a plan of liquidation before January 1, 1986, 1 (B) an agreement for the sale of a material portion of the It assets of such corporation was signed on May 9, 1986 (whether or not the assets are sold in accordance with such agreement), and (C) the corporation is completely liquidated on or before December 31, 1988. (2) The amendments made by this subtitle shall not apply to any liquidation (or deemed liquidation under section 338 of the Internal Revenue Code of 1986) of a diversified financial services corporation incorporated under the laws of Delaware on May 9, 1929, pursuant to a binding written contract entered into on or before December 31, 1986; but only if the liquidation is completed (or in the case of a section 338 election, the acquisition date occurs) before January 1, 1988. (3) The amendments made by this subtitle shall not apply to any distribution, or sale, or exchange— (A) of the assets owned (directly or indirectly) by a testamentary trust established under the will of a decedent dying on June 15, 1956, or its beneficiaries, (B) made pursuant to a court order in an action filed on January 18, 1984, if such order— (i) is issued after July 31, 1986, and (ii) directs the disposition of the assets of such trust .. and the division of the trust corpus into 3 separate subtrusts. For purposes of the preceding sentence, an election under section 338(g) of the Internal Revenue Code of 1986 (or an election under section 338(h)(10) of such Code) qualifying as a section 337 liquidation pursuant to regulations prescribed by the Secretary under section 1.338(h)(10)-lT(j)) made in connection with a sale or exchange pursuant to a court order described in subparagraph (B) shall be treated as a sale of exchange, c (4)(A) The amendments made by this subtitle shall not apply to any distribution, or sale, or exchange— (i) if— (I) an option agreement binding on the selling corporation to sell substantially all its assets is executed

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100 STAT. 2281

before August 1, 1986, the corporation adopts (by approval of its shareholders) a conditional plan of liquidation before August 1, 1986 to become effective upon the exercise of such option agreement (or modification . thereto), and the assets are sold pursuant to the exercise of the option (as originally executed or subseH quently modified provided that the purchase price is not thereby increased), or (II) in the event that the optionee does not acquire substantially all the assets of the corporation, the optionor corporation sells substantially all its assets to another purchaser at a purchase price not greater than that contemplated by such option agreement pursuant to an effective plan of liquidation, and ... (ii) the complete liquidation of the corporation occurs within 12 months of the time the plan of liquidation becomes effective, but in no event later than December 31, 1989. (B) For purposes of subparagraph (A), a distribution, or sale, or exchange, of a distributee corporation (within the meaning of section 337(c)(3) of the Internal Revenue Code of 1986) shall be treated as satisfying the requirements of subparagraph (A) if its subsidiary satisfies the requirements of subparagraph (A). (C) For purposes of section 56 of the Internal Revenue Code of 1986 (as amended by this Act), any gain or loss not recognized by reason of this paragraph shall not be taken into account in determining the adjusted net book income of the corporation. (5) In the case of a corporation incorporated under the laws of Wisconsin on April 3, 1948— (A) a voting trust established not later than December 31, 1987, for purposes of holding employees' shares of stock in such corporation, shall qualify as a trust permitted as a shareholder of an S corporation, and (B) the amendment made by section 632 (other than subsection Oa) thereof) shall not apply to such corporation if it elects to be an S corporation before January 1, 1989. I (6) The amendments made by this subtitle shall not apply to the liquidation of a corporation incorporated on January 26, 1982, under the laws of the State of Alabama with a principal place of business in Colbert County, Alabama, but only if such corporation is completely liquidated on or before December 31, 1987. (7) The amendments made by this subtitle shall not apply to -I? the acquisition by a Delaware bank holding company of all of the assets of an Iowa bank holding company pursuant to a ^ written contract dated December 9, 1981. (8) The amendments made by this subtitle shall not apply to the liquidation of a corporation incorporated under the laws of Delaware on January 20, 1984, if more than 40 percent of the stock of such corporation was acquired by purchase on June 11, 1986, and there was a tender offer with respect to all additional outstanding shares of such corporation on July 29, 1986, but only if the corporation is completely liquidated on or before December 31, 1987. (f) TREATMENT OF CERTAIN DISTRIBUTIONS IN RESPONSE TO HOSTILE TENDER OFFER.—

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 100 STAT. 2282

PUBLIC LAW 99-514—OCT. 22, 1986

(1) IN GENERAL.—No gain or loss shall be recognized under the Internal Revenue Code of 1986 to a corporation (hereinafter in this subsection referred to as "parent") on a qualified distribution. (2) QUALIFIED DISTRIBUTION DEFINED.—For purposes of paragraph (D— (A) IN GENERAL.—The term "qualified distribution" means a distribution— (i) by parent of all of the stock of a qualified subsidiary in exchange for stock of parent which was acquired for purposes of such exchange pursuant to a tender offer dated February 16, 1982, and (ii) pursuant to a contract dated February 13, 1982, and (iii) which was made not more than 60 days after the board of directors of parent recommended rejection of •''• ' ' an unsolicited tender offer to obtain control of parent. (B) QUALIFIED SUBSIDIARY.—The term "qualified subsidiary" means a corporation created or organized under the laws of Delaware on September 7, 1976, all of the stock of which was owned by parent immediately before the qualified distribution. SEC. 634. STUDY OF CORPORATE PROVISIONS.

The Secretary of the Treasury or his delegate shall conduct a study of proposals to reform the provisions of subchapter C of chapter 1 of the Internal Revenue Code of 1986. Not later than January 1, 1988, the Secretary shall submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a report on the study conducted under this section (together with such recommendations as he may deem advisable).

Subtitle E—Other Corporate Provisions SEC. 641. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISITIONS.

(a) IN GENERAL.—Part IV of subchapter O of chapter 1 (relating to special rules for determining basis) is amended by redesignating section 1060 as section 1061 and by inserting after section 1059 the following new section: "SEC. 1060. SPECIAL ALLOCATION RULES FOR CERTAIN ASSET ACQUISITIONS.

"(a) GENERAL RULE.—In the case of any applicable asset acquisition, for purposes of determining both— ^, "(1) the transferee's basis in such assets, and ' "(2) the gain or loss of the transferor with respect to such acquisition, the consideration received for such assets shall be allocated among such assets acquired in such acquisition in the same manner as amounts are allocated to assets under section 338(bM5). "(b) LN'FORMATION REQUIRED TO BE FURNISHED TO SECRETARY.—

Under regulations, the transferor and transferee in an applicable asset acquisition shall, at such times and in such manner as may be

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Page:United States Statutes at Large Volume 100 Part 3.djvu/475

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2283

provided in such regulations, furnish to the Secretary the following information: "(1) The amount of the consideration received for the assets which is allocated to goodwill or going concern value. "(2) Any modification of the amount described in paragraph (1). "(3) Any other information with respect to other assets transferred in such acquisition as the Secretary may find necessary to carry out the provisions of this section. "(c) APPLICABLE ASSET ACQUISITION.—For purposes of this section, the term 'applicable asset acquisition' means any transfer (whether directly or indirectly)— "(1) of assets which constitute a trade or business, and ,^ "(2) with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets. A transfer shall not be treated as failing to be an applicable asset acquisition merely because section 1031 applies to a portion of the assets transferred." (b) CONFORMING AMENDMENT.—The table of sections for part IV of subchapter O of chapter 1 is amended by striking out the item relating to section 1060 and inserting in lieu thereof the following new items: "Sec. 1060. Special allocation rules for certain asset acquisitions. "Sec. 1061. Cross references." EFFECTIVE DATE.—The amendments made by this section

(c) shall apply to any acquisition of assets after May 6, 1986, unless such acquisition is pursuant to a binding contract which was in effect on May 6, 1986, and at all times thereafter. SEC. 642. MODIFICATION OF DEFINITION OF RELATED PARTY. (a) DEFINITIONS OF RELATED PARTY FOR PURPOSES OF CERTAIN SALES.— (1) SALE OF DEPRECIABLE PROPERTY BETWEEN CERTAIN RELATED TAXPAYERS.—

.3^

(A) IN GENERAL.—Paragraph (1) of section 1239(b) (defining related persons) is amended by striking out "80-percent owned entities" and inserting in lieu thereof "controlled entities". (B) CONTROLLED ENTITY DEFINED.—

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f-t,^ If j^.

.:.;.

(i) IN GENERAL.—Section 1239(c)(1) (defining 80-percent owned entity) is amended— (I) by striking out "80-percent owned entity" and inserting in lieu thereof "controlled entity", (II) by striking out "80 percent or more in value" in subparagraph (A) and inserting in lieu thereof "more than 50 percent of the value", (III) by striking out "80 percent or more" in subparagraph (B) and inserting in lieu thereof "more than 50 percent", and (IV) by striking out "and" at the end of subparagraph (A), by striking out the period at the end of subparagraph (B) and inserting ", and", and by adding at the end thereof the following new paragraph: "(C) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b)."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/476

 100 STAT. 2284

PUBLIC LAW 99-514—OCT. 22, 1986 (ii) CONFORMING AMENDMENT.—Section 1239(c) is amended by striking o u t " 8 0 - P E R C E N TO W N E D E N T I T Y "

in the heading thereof and inserting in lieu thereof '

"CONTROLLED E N T I T Y ", (C) CONSTRUCTIVE O W N E R S H I P. — Paragraph (2) of section

1239(c) is amended to read a s follows: "(2) CONSTRUCTIVE O W N E R S H I P. — For purposes of t h i s section,

ownership shall be determined in accordance with r u l e s similar to the rules under section 267(c) (other than paragraph (3) thereof)." (D) CONFORMING AMENDMENT. — S e c t i o n 453(g) is amended by striking o u t " 8 0 - P E R C E N TO W N E D " in the heading thereof

and inserting in lieu thereof "CONTROLLED". (2) PARTNERSHIP S. — Paragraph (2) of section 707(b) (relating to gains t r e a t e d a s o r d i n a r y income) is amended by striking out "80 p e r c e n t " each place it a p p e a r s and inserting i n lieu thereof "50 percent". (3) INSTALLMENT SALES.—Paragraph (1) of section 453(f) (defining related person) is amended to read a s follows: "(1) RELATED PERSON.—Except for purposes of subsection (g)

and (h), the term 'related person' means — "(A) a person whose stock would be a t t r i b u t e d under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, o r "(B) a person w h o b e a r s a relationship described in section 267(b) to the person first disposing of the property." (b) RULES R E L A T I N G TO C O N T I N G E N T P A Y M E N T S. — (1) P A Y M E N T S TO BE RECEIVED DEFINED.—Section 453(f) (relat-

ing to definitions and special rules) is amended by adding a t the end thereof the following new paragraph: "(8) P A Y M E N T S TO BE RECEIVED D E F I N E D. — The term ' payment

to be received' includes— "(A) the aggregate a m o u n t of all payments which a r e not '^ contingent a s to a m o u n t, and "(B) the fair m a r k e t v a l u e of any payments which a r e ' contingent a s to a m o u n t. " (2) S A L E O F DEPRECIABLE PROPERTY BETWEEN RELATED PAR-

TIES.—Paragraph (1) of section 453(g) (relating to sale of depreciable property to controlled entities) is amended to read a s follows: "(1) IN GENERAL.—In the case of a n installment sale of depreciable property between related persons (within the m e a n i n g of section 1239(b))— "(A) subsection (a) shall not apply, and "(B) for purposes of this title— "(i) except a s provided i n clause (ii), all payments to be received shall be t r e a t e d a s received in the year of "' the disposition, and "(ii) in the case of any payments which a r e contingent a s to a m o u n t b u t with respect to which the fair • m a r k e t value may not be reasonably ascertained— ' "(I) the basis shall be recovered ratably, and "(II) the purchase r may not increase the basis of any property acquired in such sale by any a m o u n t before such t i m e a s the seller includes such a m o u n t in income." v. (c) EFFECTIVE D A T E. —

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 * iM

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2285

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to sales after the date of the enactment of this Act, in taxable years ending after such date. (2) TRADITIONAL RULE FOR BINDING CONTRACTS.—The amendments made by this section shall not apply to sales made after August 14, 1986, which are made pursuant to a binding contract in effect on August 14, 1986, and at all times thereafter. SEC. 643. TREATMENT OF AMORTIZABLE BOND PREMIUM AS INTEREST.

(a) IN GENERAL.—Section 171 (relating to amortizable bond premium) is amended by redesignating subsection (e) as (f) and by inserting after subsection (d) the following new subsection: "(e) TREATMENT AS INTEREST.—Except as provided in regulations, the amount of any amortizable bond premium with respect to which a deduction is allowed under subsection (a)(1) for any taxable year shall be treated as interest for purposes of this title." (b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by subsection (a) shall apply to obligations acquired after the date of the enactment of this Act, in taxable years ending after such date. (2) REVOCATION OF ELECTION.—In the case of a taxpayer with respect to whom an election is in effect on the date of enactment of this Act under section 171(c) of the Internal Revenue Code of 1986, such election shall apply to obligations issued after the date of the enactment of this Act only if the taxpayer chooses (at such time and in such manner as may be prescribed by the Secretary of the Treasury or his delegate) to have such election apply with respect to such obligations. SEC. 644. PROVISIONS RELATING TO COOPERATIVE HOUSING CORPORATIONS. (a) TENANT-STOCKHOLDER MAY INCLUDE PERSON OTHER THAN INDIVIDUAL.—

(1) IN GENERAL.—Section 216(b)(2) (defining tenant-stockholder) is amended— (A) by striking out "an individual" and inserting in lieu thereof "a person", and (B) by striking out "such individual" and inserting in lieu thereof "such person". (2) PRIOR APPROVAL OF OCCUPANCY.—Paragraphs (5) and (6) of

section 216(b) are amended to read as follows: "(5) PRIOR APPROVAL OF OCCUPANCY.—For purposes of this section, in the following cases there shall not be taken into account the fact that (by agreement with the cooperative housing corporation) the person or his nominee may not occupy the house or apartment without the prior approval of such corporation: "(A) In any case where a person acquires stock of a cooperative housing corporation by operation of law. "(B) In any case where a person other than an individual acquires stock of a cooperative housing corporation. "(C) In any case where the original seller acquires any stock of the cooperative housing corporation from the corporation not later than 1 year after the date on which the apartments or houses (or leaseholds therein) are transferred by the original seller to the corporation.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/478

 100 STAT. 2286

PUBLIC LAW 99-514—OCT. 22, 1986

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"(6) ORIGINAL SELLER DEFINED.—For purposes of paragraph (5),

the term 'original seller' means the person from whom the corporation has acquired the apartments or houses (or leaseholds therein).". (b) TREATMENT OF DEPRECIATION.—Section 216(c) (relating to treatment as property subject to depreciation) is amended to read as follows: "(c) TREATMENT AS PROPERTY SUBJECT TO DEPRECIATION.—

"(1) IN GENERAL.—So much of the stock of a tenant-stockholder in a cooperative housing corporation as is allocable, under regulations prescribed by the Secretary, to a proprietary lease or right of tenancy in property subject to the allowance for depreciation under section 167(a) shall, to the extent such proprietary lease or right of tenancy is used by such tenantstockholder in a trade or business or for the production of income, be treated as property subject to the allowance for depreciation under section 167(a). The preceding sentence shall not be construed to limit or deny a deduction for depreciation under section 167(a) by a cooperative housing corporation with respect to property owned by such a corporation and leased to tenant-stockholders. "(2) DEDUCTION LIMITED TO ADJUSTED BASIS IN STOCK.—

"(A) IN GENERAL.—The amount of any deduction for depreciation allowable under section 167(a) to a tenantstockholder with respect to any stock for any taxable year by reason of paragraph (1) shall not exceed the adjusted basis of such stock as of the close of the taxable year of the tenant-stockholder in which such deduction was incurred. "(B)

-i il(

CARRYFORWARD

OF

DISALLOWED

AMOUNT.—The

amount of any deduction which is not allowed by reason of subparagraph (A) shall, subject to the provisions of subparagraph (A), be treated as a deduction allowable under section 167(a) in the succeeding taxable year.".

(c) DISALLOWANCE OF DEDUCTIONS FOR PAYMENTS TO CORPORA-

TION.—Section 216 is amended by adding at the end thereof the following new subsection: "(d) DISALLOWANCE OF DEDUCTION FOR CERTAIN PAYMENTS TO THE

CORPORATION.—No deduction shall be allowed to a stockholder in a cooperative housing corporation for any amount paid or accrued to such corporation during any taxable year (in excess of the stockholder's proportionate share of the items described in subsections (a)(D and (a)(2)) to the extent that, under regulations prescribed by the Secretary, such amount is properly allocable to amounts paid or incurred at any time by the corporation which are chargeable to the corporation's capital account. The stockholder's adjusted basis in the stock in the corporation shall be increased by the amount of such disallowance." (d) DEDUCTION OF TAXES AND INTEREST.—Paragraph (3) of section 216(b) (defining tenant-stockholder's proportionate share) is amended to read as follows: "(3) TENANT-STOCKHOLDER'S PROPORTIONATE SHARE.—

V . ^.pj;

"(A) IN GENERAL.—Except as provided in subparagraph (B), the term 'tenant-stockholder's proportionate share' means that proportion which the stock of the cooperative housing corporation owned by the tenant-stockholder is of the total outstanding stock of the corporation (including any stock held by the corporation).

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Page:United States Statutes at Large Volume 100 Part 3.djvu/479

 PUBLIC LAW 99-514—OCT. 22, 1986 •'•'{

100 STAT. 2287

"(B) SPECIAL RULE WHERE ALLOCATION OF TAXES OR INTEREST REFLECT COST TO CORPORATION OF STOCKHOLDER'S

UNIT.— "(i) IN GENERAL.—If, for any taxable year— "(I) each dwelling unit owned or leased by a cooperative housing corporation is separately allocated a share of such corporation's real estate taxes described in subsection (a)(1) or a share of such corporation's interest described in subsection (a)(2), and "(II) such allocations reasonably reflect the cost to such corporation of such taxes, or of such interest, attributable to the tenant-stockholder's dwelling unit (and such unit's share of the common areas),

v>: -H 1 i fj ^j;' >f;; M B

^

the n the term 'tenant-stockholder's proportionate s h a r e ' means the s h a r e s determined in accordance with the allocations described in subclause (II).

"(ii) ELECTION BY CORPORATION REQUIRED.—Clause (i)

3i,

shall apply with respect to any cooperative housing corporation only if such corporation elects its application. Such a n election, once made, may be revoked only with the consent of the Secretary."

(e) T R E A T M E N T OF A M O U N T S RECEIVED I N CONNECTION W I T H THE R E F I N A N C I N G OF INDEBTEDNESS OF CERTAIN COOPERATIVE H O U S I N G CORPORATIONS; T R E A T M ENT OF A M O U N T S P A I D F R O M QUALIFIED R E FINANCING-RELATED R E S E R V E. — (1) P A Y M E N T OF CLOSING COSTS AND CREATION OF RESERVE

EXCLUDED FROM GROSS INCOME.—For purposes of the Internal e Revenue Code of 1954, no amount shall be included in the gross s. income of a qualified cooperative housing corporation by reason t of the payment or reimbursement by a city housing developV ment agency or corporation of amounts for— (A) closing costs, or (B) the creation of reserves for the qualified housing corporation, in connection with a qualified refinancing. f^

cooperative

(2) INCOME FROM RESERVE F U N D TREATED AS MEMBER I N C O M E. —

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 * i!U 1

I> r r I g;0<

(A) IN GENERAL.—Income from a qualified refinancingrelated reserve shall be t r e a t e d a s derived from its members for purposes of— (i) section 216 of the I n t e r n a l Revenue Code of 1954 (relating to deduction of taxes, interest, and business depreciation by cooperative housing corporation tenant-stockholder), and (ii) section 277 of such Code (relating to deductions

incurred by certain membership organizations in transactions with members). (B) No INFERENCE.—Nothing in the provisions of this paragraph shall be construed to infer that a change in law is intended with respect to the treatment of deductions under section 277 of the Internal Revenue Code of 1954 with respect to cooperative housing corporations, and any determination of such issue shall be made as if such provisions had not been enacted. (3) TREATMENT OF CERTAIN INTEREST CLAIMED AS DEDUCTION.—

Any amount—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/480

 100 STAT. 2288

PUBLIC LAW 99-514—OCT. 22, 1986

(A) claimed (on a return of tax imposed by chapter 1 of the Internal Revenue Code of 1954) as a deduction by a qualified cooperative housing corporation for interest for any taxable year beginning before January 1, 1986, on a 3 v^ second mortgage loan made by a city housing development ^''•agency or corporation in connection with a qualified re>' financing, and > (B) reported (before April 16, 1986) by the qualified cooperative housing corporation to its tenant-stockholders as interest described in section 216(a)(2) of such Code, ? • shall be treated for purposes of such Code as if such amount were paid by such qualified cooperative housing corporation during such taxable year. (4) QUALIFIED COOPERATIVE HOUSING CORPORATION.—

' •;': 'i '

(A) IN GENERAL.—For purposes of this subsection, the term "qualified cooperative housing corporation" means any corporation if— (i) such corporation is, after the application of paragraphs (1) and (2), a cooperative housing corporation (as defined in section 216(b) of the Internal Revenue Code of 1954), (ii) such corporation is subject to a qualified limitedprofit housing companies law, and (iii) such corporation either— (I) filed for incorporation on July 22, 1965, or (II) filed for incorporation on March 5, 1964. (B) QUALIFIED LIMITED-PROFIT HOUSING COMPANIES LAW.—

'"'''

For purposes of subparagraph (A), the term "qualified limited-profit housing companies law" means any limitedprofit housing companies law which limits the resale price for a tenant-stockholder's stock in a cooperative housing corporation to the sum of his basis for such stock plus his proportionate share of part or all of the amortization of any mortgage on the building owned by such corporation. '• (5) QUALIFIED REFINANCING.—For purposes of this subsection, the term "qualified refinancing" means any refinancing— (A) which occurred— (i) with respect to a qualified cooperative housing corporation described in paragraph (4)(A)(iii)(I) on September 20, 1978, or (ii) with respect to a qualified cooperative housing ^' corporation described in paragraph (4)(A)(iii)(II) on November 21, 1978, and (B) in which a qualified cooperative housing corporation refinanced a first mortgage loan made to such corporation '•:.:' by a city housing development agency with a first mortgage -=?r loan made by a city housing development corporation and insured by an agency of the Federal Government and a ' ' * second mortgage loan made by such city housing development agency, in the process of which a reserve was created (as required by such Federal agency) and closing costs were paid or reimbursed by such city housing development agency or corporation. (6) QuAUFiED REFINANCING-RELATED RESERVE.—For purposes

of this subsection, the term "qualified refinancing-related re-" serve" means any reserve of a qualified cooperative housing corporation with respect to the creation of which no amount

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Page:United States Statutes at Large Volume 100 Part 3.djvu/481

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2289

was included in the gross income of such corporation by reason of paragraph (a). (7) TREATMENT OF AMOUNTS PAID FROM QUALIFIED REFINANC-

ING-RELATED RESERVE.—

., ^ ^ I

(A) IN GENERAL.—With respect to any payment from a qualified refinancing-related reserve out of amounts excluded from gross income by reason of paragraph (1)— (i) no deduction shall be allowed under chapter 1 of such Code, and (ii) the basis of any property acquired with such payment (determined without regard to this subparau graph) shall be reduced by the amount of such payment. (B) ORDERING RULES.—For purposes of subparagraph (A), payments from a reserve shall be treated as being made— (i) first from amounts excluded from gross income by reason of paragraph (1) to the extent thereof, and (ii) then from other amounts in the reserve.

.. (f) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) SUBSECTION (e).—

(A) Except as provided in subparagraph (B), subsection (e) shall apply to taxable years beginning before January 1, 1986. (B) Subsection (e)(7) shall apply to amounts paid or incurred, and property acquired, in taxable years beginning, after December 31, 1985. SEC. 645. SPECIAL RULES RELATING TO PERSONAL HOLDING COMPANY TAX. ^' (a) COMPUTER SOFTWARE ROYALTIES.—

^ ^'\

s

(1) IN GENERAL.—Paragraph (1) of section 543(a) (defining personal holding company income) is amended— (A) by striking out "and" at the end of subparagraph (A), (B) by striking out the period at the end of subparagraph (B) and inserting in lieu thereof ", and", and (C) by adding at the end thereof the following new subparagraph: "(C) active business computer software royalties (within the meaning of subsection (d))." (2)

ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES DE-

FINED.—Section 543 is amended by adding at the end thereof the following new subsection: = "(d) ACTIVE BUSINESS COMPUTER SOFTWARE ROYALTIES.—

"(1) IN GENERAL.—For purposes of this section, the term 'active business computer software royalties' means any royalties— "(A) received by any corporation during the taxable year in connection with the licensing of computer software, and "(B) with respect to which the requirements of paragraphs (2), (3), (4), and (5) are met. p.-

"(2) ROYALTIES MUST BE RECEIVED BY CORPORATION ACTIVELY

ENGAGED IN COMPUTER SOFTWARE BUSINESS.—The requirements of this paragraph are met if the royalties described in paragraph (D—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/482

 100 STAT. 2290

PUBLIC LAW 99-514—OCT. 22, 1986

fros;f.s 1

"(A) are received by a corporation engaged in the active conduct of the trade or business of developing, manufacturDiAit ing, or producing computer software, and "(B) are attributable to computer software which— ffio. "(i) is developed, manufactured, or produced by such s** ' ' corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or ^' "(ii) is directly related to such trade or business. "(3) ROYALTIES MUST CONSTITUTE AT LEAST 50 PERCENT OF

' • INCOME.—The requirements of this paragraph are met if the - royalties described in paragraph (1) constitute at least 50 perV cent of the ordinary gross income of the corporation for the taxable year. ,iA .'
 * t'

<'(4) DEDUCTIONS UNDER SECTIONS I 6 2 AND 174 RELATING TO ROYALTIES MUST EQUAL OR EXCEED 25 PERCENT OF ORDINARY GROSS INCOME.—

ijii

"(A) jj^ GENERAL.—The requirements of this paragraph are met if— . "(i) the sum of the deductions allowable to the corsisrta a poration under sections 162, 174, and 195 for the taxable year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds 25 percent of the ordinary gross income of such cor4 / nn*' V poration for such taxable year, or .; "(ii) the average of such deductions for the 5-taxable year period ending with such taxable year equals or exceeds 25 percent of the average ordinary gross income of such corporation for such period. V ^'iw.' If a corporation has not been in existence during the 5taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for f..^; such 5-taxable year period. "(B) DEDUCTIONS ALLOWABLE UNDER SECTION 162.—For

t- ^,. purposes of subparagraph (A), a deduction shall not be f,.., treated as allowable under section 162 if it is specifically allowable under another section. •v6ir \ "(^) LIMITATION ON ALLOWABLE DEDUCTIONS.—For purposes of subparagraph (A), no deduction shall be taken into ,jj^«!,^ account with respect to compensation for personal services rendered by the 5 individual shareholders holding the larg-pri est percentage (by value) of the outstanding stock of the .;:,,c; corporation. For purposes of the preceding sentence— "(i) individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into fjn-•;*.jt account, and lovoi /r. "^") stock deemed to be owned by a shareholder solely by attribution from a partner under section 544(a)(2) shall be disregarded. "(5) DIVIDENDS MUST EQUAL OR EXCEED EXCESS OF PERSONAL .£.j, H O L D I N G C O M P A N Y I N C O M E OVER 10 PERCENT OF ORDINARY GROSS

INCOME.—

,'<4i ' "(A) IN GENERAL.—The requirements of this paragraph •. rj are inet if the sum of— t -sr.,' "(i) the dividends paid during the taxable year (determined under section 562),

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Page:United States Statutes at Large Volume 100 Part 3.djvu/483

 PUBLIC LAW 99-514—OCT. 22, 1986 '

.

100 STAT. 2291

"(ii) the dividends considered as paid on the last day of the taxable year under section 563(c) (as limited by the second sentence of section 563(b)), and "(iii) the consent dividends for the taxable year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year exceeds 10 percent of the ordinary gross income of such corporation for such taxable year. "(B)

COMPUTATION

OF PERSONAL

HOLDING

COMPANY

INCOME.—For purposes of this paragraph, personal holding company income shall be computed— "(i) without regard to amounts described in subsection (a)(1)(C), "(ii) without regard to interest income during any ^'*" taxable year— .„ "(I) which is in the 5-taxable year period beginning with the later of the 1st taxable year of the corporation or the 1st taxable year in which the corporation conducted the trade or business described in paragraph (2)(A), and "(II) during which the corporation meets the requirements of paragraphs (2), (3), and (4), and .,, „^ "(iii) by including adjusted income from rents and adjusted income from mineral, oil, and gas royalties (within the meaning of paragraphs (2) and (3) of subsection (a)). "(6) SPECIAL RULES FOR AFFILIATED GROUP MEMBERS.—

"(A) IN GENERAL.—In any case in which— "(i) the taxpayer receives royalties in connection with the licensing of computer software, and "(ii) another corporation which is a member of the same affiliated group as the taxpayer meets the requirements of paragraphs (2), (3), (4), and (5) with respect to such computer software, the taxpayer shall be treated as having met such requirements. "(B) AFFILIATED GROUP.—For purposes of this paragraph, the term 'affiliated group' has the meaning given such term by section 1504(a)." (3) FOREIGN PERSONAL HOLDING COMPANY INCOME.—Paragraph

(1) of section 553(a) (defining foreign personal holding company income) is amended by adding at the end thereof the following new sentence: "This paragraph shall not apply to active business computer software royalties (as defined in section 543(d))." (4) CONFORMING AMENDMENTS.—

'-^'

(A) Section 543(a)(4) (relating to copyright royalties) is amended by adding at the end thereof the following new sentence: "This paragraph shall not apply to active business computer software royalties.". (B) Section 543(b)(3) (relating to adjusted income from rents) is amended— (i) by striking out "or" at the end of subparagraph (C), (ii) by striking out the period at the end of subparagraph (D) and inserting in lieu thereof ", or", and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/484

 100 STAT. 2292

PUBLIC LAW 99-514—OCT. 22, 1986

(iii) by adding at the end thereof the following new •"• ^ subparagraph: "(E) active business computer software royalties (as defined in subsection (d))." (b) SPECIAL RULES FOR BROKER-DEALERS.—In the case of a brokerdealer which is part of an affiliated group which files a consolidated Federal income tax return, the common parent of which was incorporated in Nevada on January 27, 1972, the personal holding company income (within the meaning of section 543 of the Internal Revenue Code of 1986) of such broker-dealer, shall not include any interest received after the date of the enactment of this Act with respect to— (1) any securities or money market instruments held as inventory, ,f (2) margin accounts, or (3) any financing for a customer secured by securities or money market instruments. (c) SPECIAL RULE FOR ROYALTIES RECEIVED BY QUALIFIED TAXPAYER.—

.,

(1) IN GENERAL.—Any qualified royalty received or accrued in taxable years beginning after December 31, 1981, by a qualified taxpayer shall be treated in the same manner as a royalty with respect to software is treated under the amendments made by this section. (2) QUALIFIED TAXPAYER.—For purposes of this subsection, a qualified taxpayer is any taxpayer incorporated on September 7, 1978, which is engaged in the trade or business of manufacturing dolls and accessories. (3) QUALIFIED ROYALTY.—For purposes of this subsection, the term "qualified royalty" means any royalty arising from an agreement entered into in 1982 which permits the licensee to manufacture and sell dolls and accessories.

(d) SPECIAL RULE FOR TREATMENT OF ACTIVE BUSINESS COMPUTER ROYALTIES FOR S CORPORATION PURPOSES.—In the case of a taxpayer

which was incorporated on May 3, 1977, in California and which elected to be taxed as an S corporation for its taxable year ending on December 31, 1985, any active business computer royalties (within the meaning of section 543(d) of the Internal Revenue Code of 1986 as added by this Act) which are received by the taxpayer in taxable years beginning after December 31, 1984, shall not be treated as passive investment income (within the meaning of section 1362(d)(3)(D)) for purposes of subchapter S of chapter 1 of such Code. (e) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to royalties received before, on, and after December 31, 1986. SEC. 646. CERTAIN ENTITIES NOT TREATED AS CORPORATIONS.

(a) GENERAL RULE.—For purposes of the Internal Revenue Code of 1986, if the entity described in subsection (b) makes an election under subsection (c), such entity shall be treated as a trust to which subpart E of part 1 of subchapter J of chapter 1 of such Code applies. (b) ENTITY.—An entity is described in this subsection if— (1) such entity was created in 1906 as a common law trust and . i • is governed by the trust laws of the State of Minnesota, (2) such entity receives royalties from iron ore leases, and (3) income interests in such entity are publicly traded on a v national stock exchange. ^

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(c) ELECTION.—

(1) IN GENERAL.—An election under this subsection to have the provisions of this section apply— (A) shall be made by the board of trustees of the entity, and (B) shall not be valid unless accompanied by an agreement described in paragraph (2). (2) AGREEMENT.—The agreement described in this paragraph is a written agreement signed by the board of trustees of the entity which provides that the entity will not— (A) sell any trust property, (B) purchase any additional trust properties, or (C) receive any income other than— (i) income from long-term mineral leases, or (ii) interest or other income attributable to ordinary and necessary reserves of the entity. (3) PERIOD FOR WHICH ELECTION IS IN EFFECT.—An election

under this subsection shall be in effect during the period— (A) beginning on the first day of the first taxable year beginning after the date of the enactment of this Act and following the taxable year in which the election is made, and (B) ending as of the close of the taxable year preceding the taxable year in which the entity ceases to be described in subsection (b) or violates any term of the agreement under paragraph (2). (4) MANNER OF ELECTION.—Any election under this subsection shall be made in such manner as the Secretary of the Treasury or his delegate may prescribe. (d) SPECIAL RULES FOR TAXATION OF TRUST.— (1) ELECTION TREATED AS A LIQUIDATION.—If an election is

made under subsection (c) with respect to any entity— (A) such entity shall be treated as having been liquidated into a trust immediately before the period described in subsection (c)(3) in a liquidation to which section 333 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this Act) applies, and (B) any person holding an interest in the property held by such entity as of such time shall be treated as a qualified electing shareholder for purposes of section 333 of such Code (as so in effect). (2) TERMINATION OF ELECTION.—If an entity ceases to be de-

scribed in subsection (b) or violates any term of the agreement described in subsection (c)(2), then the tax imposed on such entity for the taxable year in which such cessation or violation occurs shall be increased by the sum of— (A) the amount of taxes which would have been imposed on such entity during any taxable year with respect to which an election under subsection (c) was in effect if such election had not been in effect, plus (B) interest determined for the period— (i) beginning on the due date for any such taxable year, and (ii) ending on the due date for the taxable year in which such cessation or violation occurs, by using the rates and method applicable under section 6621 for underpayments of tax for such period.

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(3) TRUST CEASING TO EXIST.—Paragraph (2) shall not apply if the trust ceases to be described in subsection (b) or violates the agreement in subsection (c)(2) because the trust ceases to exist or by reason of subsection (e). (e) TERMINATION OF ELECTION.—Any election under subsection (c) shall not apply to any taxable year beginning more than 5 years after the date of the enactment of this Act unless the trust petitions a court of competent jurisdiction and the court acts to remove from the trust instrument any powers deemed by the court to be inconsistent with the operation of the entity as a trust for tax purposes (as described in an Internal Revenue Service ruling dated November 1, 1983). SEC. 647. SPECIAL RULE FOR DISPOSITION OF STOCK OF SUBSIDIARY.

If for a taxable year of an affiliated group filing a consolidated return ending on or before December 31, 1987, there is a disposition of stock of a subsidiary (within the meaning of Treasury Regulation section 1.1502-19), the amount required to be included in income with respect to such disposition under Treasury Regulation section 1.1502-19(a) shall, notwithstanding such section, be included in income ratably over the 15-year period beginning with the taxable year in which the disposition occurs. The preceding sentence shall apply only if such subsidiary was incorporated on December 24, 1969, and is a participant in a mineral joint venture with a corporation organized under the laws of the foreign country in which the joint venture mineral project is located.

Subtitle F—Regulated Investment Companies SEC. 651. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED INVESTMENT COMPANIES.

(a) GENERAL RULE.—Chapter 44 (relating to real estate investment trusts) is amended by adding at the end thereof the following new section: "SEC. 4982. EXCISE TAX ON UNDISTRIBUTED INCOME OF REGULATED INVESTMENT COMPANIES,

"(a) IMPOSITION OF TAX.—There is hereby imposed a tax on every regulated investment company for each calendar year equal to 4 percent of the excess (if any) of— "(1) the required distribution for such calendar year, over "(2) the distributed amount for such calendar year. "(b) REQUIRED DISTRIBUTION.—For purposes of this section— "(1) IN GENERAL.—The term 'required distribution' means, with respect to any calendar year, the sum of— "(A) 97 percent of the regulated investment company's ordinary income for such calendar year, plus "(B) 90 percent of the regulated investment company's capital gain net income for the 1-year period ending on October 31 of such calendar year. "(2) INCREASE BY PRIOR YEAR SHORTFALL.—The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— \ "(A) the grossed up required distribution for the preceding calendar year, over

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"(B) the distributed amount for such preceding calendar "(3) GROSSED UP REQUIRED DISTRIBUTION.—The grossed up required distribution for any calendar year is the required distribution for such year determined— "(A) with the application of paragraph (2) to such taxable year, and "(B) by substituting '100 percent' for each percentage set forth in paragraph (1). "(c) DISTRIBUTED AMOUNT.—For purposes of this section— "(1) IN GENERAL.—The term 'distributed amount' means, with respect to any calendar year, the sum of— "(A) the deduction for dividends paid (as defined in section 561) during such calendar year, and "(B) any amount on which tax is imposed under subsection (b)(1) or (b)(3)(A) of section 852 for any taxable year ending in such calendar year. "(2) INCREASE BY PRIOR YEAR OVERDISTRIBUTION.—The amount determined under paragraph (1) for any calendar year shall be increased by the excess (if any) of— "(A) the distributed amount for the preceding calendar year (determined with the application of this paragraph to such preceding calendar year), over "(B) the grossed up required distribution for such preceding calendar year. "(3) DETERMINATION OF DIVIDENDS PAID.—The amount of the dividends paid during any calendar year shall be determined without regard to— "(A) the provisions of section 855, and "(B) any exempt-interest dividend as defined in section 8520a)(5). "(d) TIME FOR PAYMENT OF TAX.—The tax imposed by this section for any calendar year shall be paid on or before March 15 of the following calendar year. "(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ORDINARY INCOME.—The term 'ordinary income' means the investment company taxable income (as defined in section 852(b)(2)) determined— "(A) without regard to subparagraphs (A) and (D) of section 852(b)(2), "(B) by not taking into account any gain or loss from the sale or exchange of a capital asset, and "(C) by treating the calendar year as the company's taxable year. "(2) CAPITAL GAIN NET INCOME.—The term 'capital gain net income' has the meaning given to such term by section 1222(9) (determined by treating the 1-year period ending on October 31 of any calendar year as the company's taxable year). "(3) TREATMENT OF DEFICIENCY DISTRIBUTIONS.—In the case of any deficiency dividend (as defined in section 860(0)— "(A) such dividend shall be taken into account when paid without regard to section 860, and "(B) any income giving rise to the adjustment shall be treated as arising when the dividend is paid. "(4) ELECTION TO USE TAXABLE YEAR IN CERTAIN CASES.— "(A) IN GENERAL.—If—

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PUBLIC LAW 9 9 - 5 1 4 - O C T. 22, 1986 ,.. .^ -, ..>-

"(i) the taxable year of the regulated investment company ends with the month of November or December, and "(ii) such company makes an election under this paragraph, subsection (b)(1)(B) and paragraph (2) of this subsection shall be applied by taking into account the company's taxable year in lieu of the 1-year period ending on October 31 of the calendar year. "(B) ELECTION REVOCABLE ONLY WITH CONSENT.—An election under this paragraph, once made, may be revoked only with the consent of the Secretary."

(b) RELATED AMENDMENTS.— (1) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—

(A) Subsection (b) of section 852 (relating to method of taxation of regulated investment companies and their shareholders) is amended by adding at the end thereof the following new paragraph: "(6) TIME CERTAIN DIVIDENDS TAKEN INTO ACCOUNT.—For purposes of this title, any dividend declared by a regulated investment company in December of any calendar year and payable to shareholders of record on a specified date in such month shall be deemed— "(A) to have been received by each shareholder on such date, and "(B) to have been paid by such company on such date (or, if earlier, as provided in section 855). The preceding sentence shall apply only if such dividend is actually paid by the company before February 1 of the following . calendar year.' (B) Subsection (b) of section 855 is amended by striking out "Amounts" and inserting in lieu thereof "Except as provided in section 852(b)(6), amounts". (2) TREATMENT OF EARNINGS AND PROFITS.—Subsection (c) of

section 852 is amended to read as follows: "(c) EARNINGS AND PROFITS.—

"(1) IN GENERAL.—The earnings and profits of a regulated investment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term 'regulated investment company' includes a domestic corporation which is a regulated investment company determined without regard to the requirements of subsection (a). "(2) COORDINATION WITH TAX ON UNDISTRIBUTED INCOME.—A

regulated investment company shall be treated as having sufficient earnings and profits to treat as a dividend any distribution (other than in a redemption to which section 302(a) applies) which is treated as a dividend by such company. The preceding sentence shall not apply to the extent that the amount distributed during any calendar year by the company exceeds the required distribution for such calendar year (as determined under section 4982)." (3) TREATMENT OF N E T CAPITAL LOSS AFTER OCTOBER 3 1 OF ANY

YEAR.—Subparagraph (C) of section 852(b)(3) (defining capital gain dividend) is amended by adding at the end thereof the following new sentences: "For purposes of this subparagraph.

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the amount of the net capital gain for a taxable year (to which an election under section 4982(e)(4) does not apply) shall be determined without regard to any net capital loss attributable to transactions after October 31 of such year, and any such net capital loss shall be treated as arising on the 1st day of the next taxable year. To the extent provided in regulations, the preceding sentence shall apply also for purposes of computing regulated investment company taxable income." (c) CLERICAL AMENDMENT.—Chapter 44 is amended by striking out the chapter heading and the table of sections and inserting in lieu thereof the following: "CHAPTER 44—QUALIFIED INVESTMENT ENTITIES "Sec. 4981. Excise tax on undistributed income of real estate investment trusts. "Sec. 4982. Excise tax on undistributed income of regulated investment companies." (d) EFFECTIVE DATE.—The amendments made by this section shall

apply to calendar years beginning after December 31, 1986. SEC. 652. TREATMENT OF BUSINESS DEVELOPMENT COMPANIES. (a) GENERAL RULE.—Paragraph (1) of section 851(a) is amended by

striking out "either as a management company or as a unit investment trust" and inserting in lieu thereof "as a management company, business development company, or unit investment trust". OD) TECHNICAL AMENDMENT.—Paragraph (1) of section 851(e) (relating to investment companies furnishing capital to development corporations) is amended by striking out "registered management company" and inserting in lieu thereof "registered management company or registered business development company". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 653. AMENDMENTS TO QUALIFICATION RULES. (a) TREATMENT OF CERTAIN HEDGING TRANSACTIONS.—Section 851

(defining regulated investment company) is amended by adding at the end thereof the following new subsection: "(g) TREATMENT OF CERTAIN HEDGING TRANSACTIONS.—

"(1) IN GENERAL.—In the case of any designated hedge, for purposes of subsection (b)(3), increases (and decreases) during the period of the hedge in the value of positions which are part of such hedge shall be netted. "(2) DESIGNATED HEDGE.—For purposes of this subsection, there is a designated hedge where— "(A) the taxpayer's risk of loss with respect to any position in property is reduced by reason of^ "(i) the taxpayer having an option to sell, being under a contractual option to sell, or having made (and not closed) a short sale of substantially identical property, ' (ii) the taxpayer being the grantor of an option to buy substantially identical property, or "(iii) under regulations prescribed by the Secretary, the taxpayer holding 1 or more other positions, and "(B) the positions which are part of the hedge are clearly identified by the taxpayer in the manner prescribed by regulations.'

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PUBLIC LAW 99-514—OCT. 22, 1986 (b) DEFINITION OF QUALIFYING INCOME.—Paragraph (2) of subsec-

tion 851(b) is amended by striking out the semicolon at the end thereof and inserting in lieu thereof: "(as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies;". (c) FOREIGN CURRENCY GAINS.—Subsection (b) of section 851 is amended by inserting before the last sentence thereof the following new sentence: "For purposes of paragraph (2), the Secretary may by regulation exclude from qualifying income foreign currency gains which are not ancillary to the company's principal business of investing in stock or securities (or options and futures with respect to stock or securities)." (d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act. SEC. 654. TREATMENT OF SERIES FUNDS AS SEPARATE CORPORATIONS.

(a) GENERAL RULE.—Section 851 is amended by adding at the end thereof the following new subsection: "(q) SPECIAL RULE FOR SERIES FUNDS.—

"(1) IN GENERAL.—In the case of a regulated investment company (within the meaning of subsection (a)) having more than one fund, each fund of such regulated investment company shall be treated as a separate corporation for purposes of this title (except with respect to the definitional requirement of subsection (a)). "(2) FUND DEFINED.—For purposes of paragraph (1) the term 'fund' means a segregated portfolio of assets, the beneficial interests in which are owned by the holders of a class or series of stock of the regulated investment company that is preferred over all other classes or series in respect of such portfolio of assets." (b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act, (2) TREATMENT OF CERTAIN EXISTING SERIES FUNDS.—In

the

case of a regulated investment company which has more than one fund on the date of the enactment of this act, and has before such date been treated for Federal income tax purposes as a single corporation— (A) the amendment made by subsection (a), and the resulting treatment of each fund as a separate corporation, shall not give rise to the realization or recognition of income or loss by such regulated investment company, its funds, or its shareholders, and (B) the tax attributes of such regulated investment company shall be appropriately allocated among its funds. SEC. 655. EXTENSION OF PERIOD FOR MAILING NOTICES TO SHAREHOLDERS.

(a) GENERAL RULE.—The following provisions are each amended by striking out "45 days" each place it appears and inserting in lieu thereof "60 days": (1) Paragraph (3) of subsection 852(b).

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(2) Subparagraph (A) of paragraph 852(b)(5). (3) Subsection (c) of section 853. (4) Paragraph (2) of subsection 854(b). (5) Subsection (c) of section 855. (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act. SEC. 656. PROTECTION OF MUTUAL FUNDS RECEIVING THIRDPARTY SUMMONSES.

(a) GENERAL RULE.—Paragraph (3) of subsection 7609(a) is amended— (1) by striking out "and" at the end of subparagraph (F); (2) by striking out the period at the end of subparagraph (G) and inserting in lieu thereof "; and"; and (3) by adding the following new subparagraph: "(H) any regulated investment company (as defined in section 851) and any agent of such regulated investment company when acting as an agent thereof." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to summonses served after the date of the enactment of this Act. SEC. 657. CERTAIN DISTRIBUTIONS NOT TREATED AS PREFERENTIAL DIVIDENDS.

(a) GENERAL RULE.—Subsection (c) of section 562 (relating to preferential dividends) is amended by adding at the end thereof the following new sentence: "In the case of a distribution by a regulated investment company to a shareholder who made an initial investment of at least $10,000,000 in such company, such distribution shall not be treated as not being pro rata or as being preferential solely by reason of an increase in the distribution by reason of reductions in administrative expenses of the company." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to distributions after the date of the enactment of this Act.

Subtitle G—Real Estate Investment Trusts SEC. 661. GENERAL QUALIFICATION REQUIREMENTS. (a) MODIFICATION OF CLOSELY-HELD REQUIREMENTS.—

(1) Paragraph (6) of section 856(a) is amended to read as follows: "(6) which is not closely held (as determined under subsection (h)); and". (2) Section 856 is amended by adding at the end thereof the following new subsection: "(h) CLOSELY HELD DETERMINATIONS.—

"(1) SECTION 542(a)(2) APPLIED.—

"(A) IN GENERAL.—For purposes of subsection (a)(6), a corporation, trust, or association is closely held if the stock ownership requirement of section 542(a)(2) is met. "(B) WAIVER OF PARTNERSHIP ATTRIBUTION, ETC.—For purposes of subparagraph (A)—

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PUBLIC LAW 99-514—OCT. 22, 1986 "(i) paragraph (2) of section 544(a) shall be applied as if such paragraph did not contain the phrase 'or by or for his partner', and "(ii) sections 544(a)(4)(A) and 544(b)(l) shall be applied by substituting 'the entity meet the stock ownership requirement of section 542(a)(2)' for 'the corporation a personal holding company'. "(2) SUBSECTIONS (a)

(5) AND (6) NOT TO APPLY TO IST YEAR.—

Paragraphs (5) and (6) of subsection (a) shall not apply to the 1st taxable year for which an election is made under subsection (c)(1) by any corporation, trust, or association." (b) REQUIREMENT OF N O EARNINGS AND PROFITS ACCUMULATED IN

NoN-REIT YEARS.—Subsection (a) of section 857 is amended by striking out "and" at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof ", and", and by adding at the end thereof the following: "(3) either— "(A) the provisions of this part apply to the real estate investment trust for all taxable years beginning after February 28, 1986, or "(B) as of the close of the taxable year, the real estate investment trust has no earnings and profits accumulated in any non-REIT year. For purposes of the preceding sentence, the term *non-REIT year' means any taxable year to which the provisions of this part did not apply with respect to the entity." (c) INITIAL CHANGE IN ANNUAL ACCOUNTING PERIOD PERMITTED.—

(1) Section 859 is amended by adding at the end thereof the following new subsection: "(b) CHANGE OF ACCOUNTING PERIOD WITHOUT APPROVAL.—Not-

withstanding section 442, an entity which has not engaged in any active trade or business may change its accounting period to a calendar year without the approval of the Secretary if such change is in connection with an election under section 856(c)." (2) Section 859 is amended by striking out "For purposes o f and inserting in lieu thereof "(a) GENERAL RULE.—For purposes of. SEC. 662. ASSET AND INCOME REQUIREMENTS. (a) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.—Sec-

tion 856 (defining real estate investment trust) is amended by adding at the end thereof the following new subsection: "(i) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES.—

"(1) IN GENERAL.—For purposes of this title— "(A) a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and "(B) all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust. "(2) QUALIFIED REIT SUBSIDIARY.—For purposes of this subsection, the term 'qualified REIT subsidiary' means any corporation if 100 percent of the stock of such corporation is held by the real estate investment trust at all times during the period such corporation was in existence. "(3)

TREATMENT OF TERMINATION OF QUALIFIED SUBSIDIARY

STATUS.—For purposes of this subtitle, if any corporation which

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was a qualified REIT subsidiary ceases to meet the requirements of paragraph (2), such corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before such cessation from the real estate investment trust in exchange for its stock." 0?) TEMPORARY INVESTMENT OF N E W EQUITY CAPITAL.—

(1) Paragraph (3) of section 856(c) is amended by striking out "and" at the end of subparagraph (G), by adding "and" at the end of subparagraph (H), and by inserting after subparagraph (H) the following new subparagraph: "(I) qualified temporary investment income;". (2) Subparagraph (B) of section 856(c)(6) is amended by adding at the end thereof the following new sentence: "Such term also includes any property (not otherwise a real estate asset) attributable to the temporary investment of new capital, but only if such property is stock or a debt instrument, and only for the 1year period beginning on the date the real estate trust receives such capital." (3) Paragraph (6) of section 856(c) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: "(D) QUALIFIED TEMPORARY INVESTMENT INCOME.—

"(i) IN GENERAL.—The term 'qualified temporary investment income' means any income which— "(I) is attributable to stock or a debt instrument, "(II) is attributable to the temporary investment of new capital, and "(III) is received or accrued during the 1-year period beginning on the date on which the real estate investment trust receives such capital. "(ii) NEW CAPITAL.—The term 'new capital' means any amount received by the real estate investment trust— "(I) in exchange for stock in such trust (other than amounts received pursuant to a dividend reinvestment plan), or "(II) in a public offering of debt obligations of such trust which have maturities of at least 5 years.' (c) TREATMENT OF SHARED APPRECIATION MORTGAGES.—Section 856

is amended by adding at the end thereof the following new subsection; "(j) TREATMENT OF SHARED APPRECIATION MORTGAGES.—

"(1) IN GENERAL.—Solely for purposes of subsection (c) of this section and section 857(b)(6), any income derived from a shared appreciation provision shall be treated as gain recognized on the sale of the secured property. "(2) TREATMENT OF INCOME.—For purposes of applying subsection (c) of this section and section 857(b)(6) to any income described in paragraph (1)— "(A) the real estate investment trust shall be treated as holding the secured property for the period during which it held the shared appreciation provision (or, if shorter, for the period during which the secured property was held by the person holding such property), and "(B) the secured property shall be treated as property described in section 1221(1) if it is so described in the hands

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PUBLIC LAW 99-514—OCT. 22, 1986 of the person holding the secured property (or it would be so described if held by the real estate investment trust). "(3)

COORDINATION

WITH

PROHIBITED

TRANSACTIONS

SAFE

HARBOR.—For purposes of section 857(b)(6)(C)— "(A) the real estate investment trust shall be treated as having sold the secured property when it recognizes any income described in paragraph (1), and "(B) any expenditures made by any holder of the secured property shall be treated as made by the real estate investment trust. "(4) DEFINITIONS.—For purposes of this subsection— "(A) SHARED APPRECIATION PROVISION.—The term 'shared appreciation provision' means any provision— "(i) which is in connection with an obligation which is held by the real estate investment trust and is secured by an interest in real property, and "(ii) which entitles the real estate investment trust to receive a specified portion of any gain realized on the sale or exchange of such real property (or of any gain which would be realized if the property were sold on a specified date). "(B) SECURED PROPERTY.—The term 'secured property' means the real property referred to in subparagraph (A)." SEC. 663. DEFINITION OF RENTS. (a) MODIFICATION OF INDEPENDENT CONTRACTOR REQUIREMENTS.—

Paragraph (2) of section 856(d) (relating to certain amounts excluded from rents from real property) is amended by adding at the end thereof the following: "Subparagraph (C) shall not apply with respect to any amount if such amount would be excluded from unrelated business taxable income under section 512(b)(3) if received by an organization described in section 511(a)(2)." (b) CERTAIN RENTS OR INTEREST BASED ON NET INCOME OR PROFITS PERMITTED.—

(1) RENTS.—Subsection (d) of section 856 is amended by adding at the end thereof the following new paragraph: "(6) SPECIAL RULE FOR CERTAIN PROPERTY SUBLEASED BY TENANT OF REAL ESTATE INVESTMENT TRUSTS.— "(A) IN GENERAL.—If—

"(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and "(ii) such tenant receives or accrues, directly or indirectly, from subtenants only amounts which are qualified rents, then the amounts that the trust receives or accrues from the tenant shall not be excluded from the term 'rents from real property' solely by reason of being based on the income or profits of such tenant. "(B) QUALIFIED RENTS.—For purposes of subparagraph (A), the term 'qualified rents' means any amount which would be treated as rents from real property if received by the real estate investment trust."

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(2) INTEREST.—Subsection (f) of section 856 (relating to qualifying interest income) is amended to read as follows: "(f) INTEREST.—

"(1) IN GENERAL.—For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term 'interest' does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends (in whole or in part) on the income or profits of any person, except that— "(A) any amount so received or accrued shall not be excluded from the term 'interest' solely by reason of being based on a fixed percentage or percentages of receipts or sales, and "(B) any amount so received or accrued with respect to an obligation secured by a mortgage on real property or an interest in real property shall not be excluded from the term 'interest' solely by reason of being based on the income or profits of the debtor from such property, if— "(i) the debtor derives substantially all of its gross income with respect to such property from the leasing of substantially all of its interests in such property to tenants, and "(ii) the amounts received or accrued directly or indirectly by the debtor from such tenants are only qualified rents (as defined in subsection (d)(6)(B)). "(2) SPECIAL RULE.—Where a real estate investment trust receives or accrues any amount which would be excluded from the term 'interest' solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends (in whole or in part) on the income or profits of any person, only a proportionate part (determined under regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust shall be excluded from the term 'interest'." (3) (DONFORMING AMENDMENT.—Subparagraph (A) of section

856(d)(2) is amended by striking out "paragraph (4)" and inserting in lieu thereof "paragraphs (4) and (6)". SEC. 664. DISTRIBUTION REQUIREMENTS. (a) EXCLUSION OF CERTAIN NONCASH INCOME FROM DISTRIBUTION

REQUIREMENT.—Subparagraph (B) of section 857(a)(l) (relating to distribution requirements) is amended to read as follows: "(B) any excess noncash income (as determined under subsection (e)); and" (b) EXCESS NONCASH INCOME DEFINED.—Section 857 is amended by

redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e) EXCESS NONCASH INCOME.—

"(1) IN GENERAL.—For purposes of subsection (a)(l)(B), the term 'excess noncash income means the excess (if any) of— "(A) the amount determined under paragraph (2) for the taxable year, over "(B) 5 percent of the real estate investment trust taxable income for the taxable year determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain. "(2) DETERMINATION OF AMOUNT.—The amount determined under this paragraph for the taxable year is the sum of—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/496

 100 STAT. 2304

PUBLIC LAW 99-514—OCT. 22, 1986 J i.

' '(A) the amount (if any) by which— "(i) the amounts includible in gross income under section 467 (relating to certain payments for the use of property or services), exceed "(ii) the amounts which would have been includible in gross income without regard to such section, "(B) in the case of a real estate investment trust using the cash receipts and disbursements method of accounting, the amount (if any) by which— "(i) the amounts includible in gross income as original issue discount on instruments to which section 1274 (relating to certain debt instruments issued for property) applies, exceed "(ii) the amount of money and the fair market value of other property received during the taxable year under such instruments; plus "(C) any income on the disposition of a real estate asset if— "(i) there is a determination (as defined in section 860(e)) that such income is not eligible for nonrecognition under section 1031, and "(ii) failure to meet the requirements of section 1031 was due to reasonable cause and not to willful neglect." SEC. 665. TREATMENT OF CAPITAL GAINS. (a) COORDINATION OF NET OPERATING LOSS DEDUCTION WITH PAYMENT OF CAPITAL GAIN DIVIDENDS.—

(1) IN GENERAL.—Paragraph (3) of section 8570b) (relating to capital gains) is amended by adding at the end thereof the following new subparagraph: "(D)

COORDINATION WITH NET OPERATING LOSS PROVI-

SIONS.—For purposes of section 172, if a real estate investment trust pays capital gain dividends during any taxable year, the amount of the net capital gain for such taxable year (to the extent such gain does not exceed the amount of such capital gain dividends) shall be excluded in determining— "(i) the net operating loss for the taxable year, and "(ii) the amount of the net operating loss of any prior taxable year which may be carried through such taxable year under section 1720t))(2) to a succeeding taxable year." (2) REPEAL OF LIMITATION OF NET CAPITAL GAIN TO REAL ESTATE

INVESTMENT TRUST TAXABLE INCOME.—Subparagraph (C) of section 85703)(3) (defining capital gain dividend) is amended by striking out the last sentence. (b) NOTICE OF CAPITAL GAINS DIVIDENDS MAY B E MAILED WITH ANNUAL REPORT.—

(1) Subparagraph (C) of section 8570t))(3) (defining capital gain dividend) is amended by striking out "the close of its taxable year" and inserting in lieu thereof "the close of its taxable year (or mailed to its shareholders or holders of beneficial interests with its annual report for the taxable year)". (2) Subsection (c) of section 858 (relating to notice to shareholders) is amended by striking out "distribution is made" and inserting in lieu thereof "distribution is made (or mailed to its

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