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96 STAT. 435

"(B) COORDINATION WITH CRUDE OIL WINDFALL PROFIT

TAX.—Section 4988(b)(3)(A) shall be applied without regard to subparagraph (A). "(7) TRANSITIONAL RULE FOR APPLICATION OF PARAGRAPH (i)

TO CERTAIN TRANSACTIONS.—In the case of any deduction or credit with respect to— "(A) any transitional safe harbor lease property (within the meaning of section 208(d)(3) of the Tax Equity and Fiscal Responsibility Act of 1982), or "(B) any other safe harbor lease property placed in service during 1982 and to which paragraph (1) does not apply, paragraph (1) shall not operate to disallow any such deduction or credit for the taxable year for which such deduction or credit would otherwise be allowable but deductions and credits with respect to such property shall be taken into account first in determining whether any deduction or credit is allowable under paragraph (1) with respect to any other safe harbor lease property. "(8) SAFE HARBOR LEASE PROPERTY.—For purposes of this section, the term 'safe harbor lease property' means qualified leased property with respect to which an election under section 168(f)(8) is in effect." (2) CONFORMING AMENDMENT.—

(A) Subparagraph (A) of section 168(0(8) (relating to spe- 95 Stat. 204. cial rules for leases) is amended by inserting "except as provided in subsection (i)," before "for purposes of this subtitle". (B) Subparagraph (D) of section 47(a)(5) (relating to cer- 26 USC 47. tain dispositions, etc., of section 38 property) is amended by adding at the end thereof the following new sentence: "If, prior to a disposition to which this subsection applies, any portion of any credit is not allowable with respect to any property by reason of section 168(i)(3), such portion shall be treated (for purposes of this subparagraph) as not having been used to reduce tax liability." Qo) ADDITIONAL REQUIREMENTS TO QUALIFY AS LEASE FOR PURPOSES OF ACCELERATED COST RECOVERY.— (1) RELATED PERSONS MAY NOT QUALIFY AS LESSORS.—Subclause

(I) of section 168(fK8XBXi) (relating to qualified lessors) is amended by inserting "which is not a related person with respect to the lessee" before the comma at the end thereof. (2) MAXIMUM LEASE TERM REDUCED.—Clause (iii) of section

168(fK8XB) (relating to term of lease) is amended to read as follows: "(iii) the term of the lease (including any extensions) does not exceed the greater of— "(I) 120 percent of the present class life of the property, or "(II) the period equal to the recovery period determined with respect to such property under subsection (i)(2)." (3)' DEFINITION OF QUALIFIED LEASED PROPERTY.—Subparagraph

(D) of section 168(f)(8) (defining qualified leased property) is amended to read as follows: "(D) QUALIFIED LEASED PROPERTY DEFINED.—For purposes

of this section—

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Page:United States Statutes at Large Volume 96 Part 1.djvu/478

 96 STAT. 436

PUBLIC LAW 97-248—SEPT. 3, 1982 "(i) IN GENERAL.—The term 'qualified leased property' means recovery property— "(I) which is new section 38 property of the lessor, which is leased within 3 months after such property was placed in service, and which, if acquired by the lessee, would have been new section 38 property of the lessee, or "(II) which was new section 38 property of the lessee, which is leased within 3 months after such property is placed in service by the lessee, and with respect to which the adjusted basis of the lessor does not exceed the adjusted basis of the lessee at the time of the lease. "(ii) ONLY 45 PERCENT OF THE LESSEE'S PROPERTY MAY

BE TREATED AS QUALIFIED.—The cost basis of all Safe harbor lease property (determined without regard to this clause)— "(I) which is placed in service during any calendar year, and "(II) with respect to which the taxpayer is a lessee, shall not exceed an amount equal to the 45 percent of the cost basis of the taxpayer's qualified base property placed in service during such calendar year. "(iii) ALLOCATION OF DISQUALIFIED BASIS.—The cost basis not treated as qualified leased property under clause (ii) shall be allocated to safe harbor lease property for such calendar year (determined without regard to clause (ii)) in reverse order to when the agreement described in subparagraph (A) with respect to such property was entered into. "(iv) CERTAIN PROPERTY MAY NOT BE TREATED AS QUALIFIED LEASED PROPERTY.—The term 'qualified

26 USC 48.

Ante, p. 423.

leased property' shall not include recovery property— "(I) which is a qualified rehabilitated building (within the meaning of section 48(g)(l)), "(II) which is public utility property (within the meaning of section 167(1)(3)(A)), "(III) which is property with respect to which a deduction is allowable by reason of section 291(b), "(IV) with respect to which the lessee of the property (other than property described in clause (v)) under the agreement described in subparagraph (A) is a nonqualified tax-exempt organization, or "(V) property with respect to which the user of such property is a person (other than a United States person) not subject to United States tax on income derived from the use of such property. "(v)

QUALIFIED

MASS

COMMUTING

VEHICLES

INCLUDED.—The term 'qualified leased property' includes recovery property which is a qualified mass commuting vehicle (as defined in section 103(b)(9)) which is financed in whole or in part by obligations the interest on which is excludable under section 103(a). "(vi) QUALIFIED BASE PROPERTY.—For purposes of this subparagraph, the term 'qualified base property' means

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property placed in service during any calendar year which— "(I) is new section 38 property of the taxpayer, "(II) is safe harbor lease property (not described in subclause (I)) with respect to which the taxpayer is the lessee, or "(III) is designated leased property (other than property described in subclause (I) or (II)) with respect which the taxpayer is the lessee. Any designated leased property taken into account by any lessee under the preceding sentence shall not be taken into account by the lessor in determining the lessor's qualified base property. The lessor shall provide the lessee with such information with respect to the cost basis of such property as is necessary to carry out the purposes of this clause. "(vii) DEFINITION OF DESIGNATED LEASED PROPERTY.—

For purposes of this subparagraph, the term 'designated leased property' means property— "(I) which is new section 38 property, "(II) which is subject to a lease with respect to which the lessor of the property is treated (without regard to this paragraph) as the owner of the property for Federal tax purposes, "(III) with respect to which the term of the lease to which such property is subject is more than 50 percent of the present class life (or, if no present class life, the recovery period used in subsection (i)(2)) of such property, and "(IV) which the lessee designates on his return as designated leased property, "(viii) DEFINITION; SPECIAL RULE.—For purposes of

this subparagraph— "(I) N E W SECTION 38 PROPERTY.—The term 'new section 38 property' has the meaning given such term by section 48(b). "(II) PROPERTY PLACED IN SERVICE.—For purposes

of this title (other than clause (i)), any property described in clause (i) to which subparagraph (A) applies shall be deemed originally placed in service not earlier than the date such property is used under the lease." (4) DEFINITIONS AND SPECIAL RULES.—Paragraph (8) of section

168(f) (relating to special rules for leases) is amended by redes- 95 Stat. 204. ignating subparagraph (H) as subparagraph (K) and by inserting after subparagraph (G) the following new subparagraphs: "(H) DEFINITIONS.—For purposes of this paragraph— "(i) RELATED PERSON.—A person is related to another person if both persons are members of the same affiliated group (within the meaning of subsection (a) of section 1504 and determined without regard to subsection (b) of section 1504). "(ii) NONQUALIFIED TAX-EXEMPT ORGANIZATION.—

"(I) IN GENERAL.—The term 'nonqualified taxexempt organization' means, with respect to any agreement to which subparagraph (A) applies, any organization (or predecessor organization which

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 96 STAT. 438

PUBLIC LAW 97-248—SEPT. 3, 1982 was engaged in substantially similar activities) which was exempt from taxation under this title at any time during the 5-year period ending on the date such agreement was entered into. "(II) SPECIAL RULE FOR FARMERS' COOPERATIVES.—

26 USC 521.

The term 'nonqualified tax-exempt organization' shall not include any farmers' cooperative organization described in section 521 whether or not exempt from taxation under section 521. "(Ill) SPECIAL RULE FOR PROPERTY USED IN UNRELATED TRADE OR BUSINESS.—An Organization shall not be treated as a nonqualified tax-exempt organization with respect to any property if such property is used in an unrelated trade or business (within the meaning of section 513) of such organization which is subject to tax under section 511. "(I) TRANSITIONAL RULES FOR CERTAIN TRANSACTIONS.—

"(i) IN GENERAL.—Except as provided in clause (ii), clause (ii) of subparagraph (D) shall not apply to any transitional safe harbor lease property (within the meaning of section 208(d)(3) of the Tax Equity and Fiscal Responsibility Act of 1982). "(ii) SPECIAL RULES.—For purposes of subparagraph (D)(ii)"(I)

DETERMINATION OF QUALIFIED BASE PROP-

ERTY.—The cost basis of property described in clause (i) (and other property placed in service during 1982 to which subparagraph (D)(ii) does not apply) shall be taken into account in determining the qualified base property of the taxpayer for the taxable year in which such property was placed in service. "(II) REDUCTION IN QUALIFIED LEASED PROPERTY.—

The cost basis of property which may be treated as qualified leased property under subparagraph (D)(ii) for the taxable year in which such property was placed in service (determined without regard to this subparagraph) shall be reduced by the cost basis of the property taken into account under subclause (I). "(J) COORDINATION WITH AT RISK RULES.—

"(i) IN GENERAL.—For purposes of section 465, in the case of property placed in service after the date of the enactment of this subparagraph, if^ "(I) an activity involves the leasing of section 1245 property which is safe harbor lease property, and "(II) the lessee of such property (as determined under this paragraph) would, but for this paragraph, be treated as the owner of such property for purposes of this title, then the lessor (as so determined) shall be considered to be at risk with respect to such property in an amount equal to the amount the lessee is considered at risk with respect to such property (determined under section 465 without regard to this paragraph).

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96 STAT. 439

"(ii) SUBPARAGRAPH NOT TO APPLY TO CERTAIN SERVICE

CORPORATIONS.—Clause (i) shall not apply to any lessor which is a corporation the principal function of which is the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, athletics, or consulting. "(iii) SPECIAL RULE FOR PROPERTY PLACED IN SERVICE BEFORE DATE OF ENACTMENT OF THIS SUBPARAGRAPH.— This subparagraph shall apply to property placed in service before the date of enactment of this subparagraph if the provisions of section 465 did not apply to the lessor before such date but become applicable to such lessor after such date." (c) CERTAIN LEASES BEFORE OCTOBER 20, 1981, TREATED AS QUAU- 26 USC 168 note. FiED LEASES.—Nothing in paragraph (8) of section 168(f) of the Internal Revenue Code of 1954, or in any regulations prescribed Post, p. 442. thereunder, shall be treated as making such paragraph inapplicable to any agreement entered into before October 20, 1981, solely because under such agreement 1 party to such agreement is entitled to the credit allowable under section 38 of such Code with respect to property and another party to such agreement is entitled to the deduction allowable under section 168 of such Code with respect to such property. Section 168(f)(8)(B)(ii) of such Code shall not apply to the party entitled to such credit. (d) EFFECTIVE DATES.— 26 USC 168 note. (1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by subsections (a) and (b) of this section shall apply to agreements entered into after July 1, 1982, or to property placed in service after July 1, 1982. (2) TRANSITIONAL RULE FOR CERTAIN SAFE HARBOR LEASE PROPERTY.—

(A) IN GENERAL.—The amendments made by subsections (a) and (b) shall not apply to transitional safe harbor lease property. (B) SPECIAL RULE FOR CERTAIN PROVisiONS.Subparagraph (A) shall not apply with respect to the provisions of paragraph (6) of section 168(i) of the Internal Revenue Code of 1954 (as added by subsection (a)(D), to the provisions of ^"^e. P- 432. section 168(f)(8)(J) of such Code (as added by subsection Ante, p. 437. (b)(4)), or to the amendment made by subsection (b)(1). (3) TRANSITIONAL SAFE HARBOR LEASE PROPERTY.—For purposes

of this subsection, the term "transitional safe harbor lease property" means property described in any of the following subparagraphs: (A) IN GENERAL.—Property is described in this subparagraph if such property is placed in service before January 1, 1983, if— (i) with respect to such property a binding contract to acquire or to construct such property was entered into by the lessee after December 31, 1980, and before July 2, 1982, or (ii) such property was acquired by the lessee, or construction of such property was commenced by or for the lessee, after December 31, 1980, and before July 2, 1982.

97-200 O—84—pt. 1

16: QL3

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 96 STAT. 440

PUBLIC LAW 97-248—SEPT. 3, 1982 (B) CERTAIN QUALIFIED LESSEES.—Property is described in

this subparagraph if such property is placed in service before July 1, 1982, and with respect to which— (i) an a g r e e m e n t to which section 168(f)(8)(A) of the I n t e r n a l Revenue Code of 1954 applies was entered into before August 15, 1982, and (ii) the lessee under such a g r e e m e n t is a qualified lessee (within the m e a n i n g of paragraph (6)).

Post, p. 442.

(C) M A N U F ACT U R E R S OF CERTAIN PRODUCTS.—Property is

26 USC 1381.

described in this subparagraph if such property— (i) is used to produce a class of products (within the m e a n i n g of paragraph (6)(B)) in a n industry described in paragraph (6)(A)(ii)(II) (determined without regard to the p h r a s e "other than the taxpayer"), and (ii) would be described in subparagraph (A) if "October 1" were substituted for " January 1". (D) CERTAIN AIRCRAFT.—Property is described in this subparagraph if such property— (i) is a commercial passenger aircraft (other than a helicopter), and (ii) would be described in subparagraph (A) if " January 1, 1984" were substituted for " January 1, 1983". For purposes of determining w h e the r property described in this subparagraph is described in subparagraph (A), subparagraph (A)(ii) shall be applied by substituting " June 25, 1981" for "December 31, 1980" and by substituting "February 20, 1982" for " July 2, 1982" and construction of the aircraft shall be t r e a t e d as h a v i n g been begun during the period referred to in subparagraph (A)(ii) if during such period construction or reconstruction of a subassembly was commenced, or the stub wing join occurred. (E) TURBINES AND BOILERS.—Property is described in this subparagraph if such property— (i) is a t u r b i n e or boiler of a cooperative organization described in section 1381(a), and (ii) would be property described in subparagraph (A) if " July 1" were substituted for " January 1". For purposes of determining w h e the r property described in this subparagraph is described in subparagraph (A), such property shall be t r e a t e d as having been acquired during the period referred to in subparagraph (A)(ii) if a t least 20 percent of the cost of such property is paid during such period. (F) PROPERTY USED IN THE PRODUCTION O F STEEL.—Prop-

erty is described in this subparagraph if such property— (i) is used by the tax p a y e r directly in connection with the trade or business of the tax p a y e r of the manufact u r e or production of steel, and (ii) would be described in subparagraph (A) if " January 1, 1984" were substituted for " January 1, 1983". (4) SPECIAL RULE FOR ANTIAVOIDANCE PROVISIONS.—The provi-

Ante, p. 432.

sions of paragraph (6) of section 168(i) of such Code (as added by subsection (a)(1)), and the amendment m a d e by subsection (b)(1), shall apply to leases entered into after February 19, 1982, in taxable years ending after such date. (5)

SPECIAL

RULE

FOR MASS

COMMUTING

VEHICLES.—The

amendments m a d e by this section (other than section 168(i)(1)

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96 STAT. 441

and (7) of such Code, as added by subsection (a)(1)) and section 209 shall not apply to qualified leased property described in section 168(f)(8)(D)(V) of such Code (as in effect after the amend- Ante, p. 435. ments made by this section) which— (A) is placed in service before January 1, 1988, or (B) is placed in service after such date— (i) pursuant to a binding contract or commitment entered into before April 1, 1983, and (ii) solely because of conditions which, as determined by the Secretary of the Treasury or his delegate, are not within the control of the lessor or lessee. (6) QUALIFIED LESSEE DEFINED.—

(A) IN GENERAL.—The term "qualified lessee" means a taxpayer which is a lessee of an agreement to which section 168(f)(8)(A) of such Code applies and which— Post, p. 442. (i) had net operating losses in each of the three most recent taxable years ending before July 1, 1982, and had an aggregate net operating loss for the five most recent taxable years ending before July 1, 1982, and (ii) which uses the property subject to the agreement to manufacture and produce within the United States a class of products in an industry with respect to which— (I) the taxpayer produced less than 5 percent of the total number of units (or value) of such products during the period covering the three most recent taxable years of the taxpayer ending before July 1, 1982, and (II) four or fewer United States persons (including as one person an affiliated group as defined in section 1504(a)) other than the taxpayer manufac- 26 USC 1504. tured 85 percent or more of the total number of all units (or value) within such class of products manufactured and produced in the United States during such period. (B) CLASS OF PRODUCTS.—For purposes of subparagraph

(A)(i) the term "class of products" means any of the categories designated and numbered as a "class of products" in the 1977 Census of Manufacturers compiled and published by the Secretary of Commerce under title 13 of the United States Code, and (ii) information— (I) compiled or published by the Secretary of Commerce, as part of or in connection with the Statistical Abstract of the United States or the Census of Manufacturers, regarding the number of units (or value) of a class of products manufactured and produced in the United States during any period, or (II) if information under subclause (I) is not available, so compiled or published with respect to the number of such units shipped or sold by such manufacturers during any period, shall constitute prima facie evidence of the total number of all units of such class of products manufactured and produced in the United States in such period.

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 96 STAT. 442

PUBLIC LAW 97-248—SEPT. 3, 1982 (6) UNDERPAYMENTS OF TAX FOR 1982.—No addition to the tax

shall be made under section 6655 of the Internal Revenue Code of 1954 (relating to failure by corporation to pay estimated income tax) for any period before October 15, 1982, with respect to any underpayment of estimated tax by a taxpayer with respect to any tax imposed by chapter 1 of such Code, to the extent that such underpayment was created or increased by any provision of this section.

26 USC 6655.

SEC.

209. REPEAL OF LEASING; SPECIAL RULE FOR LEASES WITH ECONOMIC SUBSTANCE.

(a) SPECIAL RULE FOR LEASES WITH ECONOMIC SUBSTANCE.—Para-

95 Stat. 204.

graph (8) of section 168(f) (relating to special rules for leasing) is amended to read as follows: "(8) SPECIAL RULES FOR FINANCE LEASES.—

"(A) IN GENERAL.—For purposes of this title, except as provided in subsection (i), in the case of any agreement with respect to any finance lease property, the fact that— "(i) a lessee has the right to purchsise the property at a fixed price which is not less than 10 percent of the original cost of the property to the lessor, or (ii) the property is of a type not readily usable by any person other than the lessee, shall not be taken into account in determining whether such agreement is a lease. "(B) FINANCE LEASE PROPERTY DEFINED.—For purposes of

this section— "(i) IN GENERAL.—The term 'finance lease property' means recovery property which is subject to an agreement which meets the requirements of subparagraph (C) and— "(I) which is new section 38 property of the lessor, which is leased within 3 months after such property was placed in service, and which, if acquired by the lessee, would have been new section 38 property of the lessee, or "(II) which was new section 38 property of the lessee, which is leased within 3 months after such property is placed in service by the lessee, and with respect to which the adjusted basis of the lessor does not exceed the adjusted basis of the lessee at the time of the lease. "(ii) ONLY 40 PERCENT OF THE LESSEE'S PROPERTY MAY BE TREATED AS QUALIFIED.—The cost basis of all finance

lease property (determined without regard to this clause)— "(I) which is placed in service during any calendar year beginning before January 1, 1986, and "(II) with respect to which the taxpayer is a lessee, shall not exceed an amount equal to 40 percent of the cost basis of the taxpayer's qualified base property placed in service during such calendar year. "(iii) ALLOCATION OF DISQUAUFIED BASIS.—The cost basis not treated as finance lease property under clause (ii) shall be allocated to finance lease property for such calendar year (determined without regard to clause (ii))

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96 STAT. 443

in reverse order to when the agreement described in subparagraph (A) with respect to such property was entered into. "(iv) CERTAIN PROPERTY MAY NOT BE TREATED AS FINANCE LEASE PROPERTY.—The term 'finance lease

property' shall not include recovery property— "(I) which is a qualified rehabilitated building (within the meaning of section 48(g)(l)), 26 USC 48. "(11) which is public utility property (within the meaning of section 167(1)(3)(A)), "(III) which is property with respect to which a deduction is allowable by reason of section 291(b), -^"fe, p. 423. "(IV) with respect to which the lessee of the property under the agreement described in subparagraph (A) is a nonqualified tax-exempt organization, or "(V) property with respect to which the user of such property is a person (other than a United States person) not subject to United States tax on income derived from the use of such property. "(v) QUALIFIED BASE PROPERTY.—For purposes of this subparagraph, the term 'qualified base property' means property placed in service during any calendar year which— "(I) is new section 38 property of the taxpayer, "(II) is finance lease property (not described in subclause (I)) with respect to which the taxpayer is the lessee, or "(III) is designated leased property (other than property described in subclause (I) or (ID) with respect to which the taxpayer is the lessee. Any designated leased property taken into account by any lessee under the preceding sentence shall not be taken into account by the lessor in determining the lessor's qualified base property. The lessor shall provide the lessee with such information with respect to the cost basis of such property as is necessary to carry out the purposes of this clause. "(vi) DEFINITION OF DESIGNATED LEASED PROPERTY.—

For purposes of this subparagraph, the term 'designated leased property' means property— "(I) which is new section 38 property, "(II) which is subject to a lease with respect to which the lessor of the property is treated (without regard to this paragraph) as the owner of the property for Federal tax purposes, "(III) with respect to which the term of the lease to which such property is subject is more than 50 percent of the present class life (or, if no present class life, the recovery period under subsection (a)) of such property, and "(XV) which the lessee designates on his return as designated leased property, "(vii) DEFINITION; SPECIAL RULES.—For purposes of this subparagraph—

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 96 STAT. 444

PUBLIC LAW 97-248—SEPT. 3, 1982 "(I)

N E W SECTION 38 PROPERTY DEFINED,—The

term 'new section 38 property' has the meaning given such term by section 4803). "(II) LESSEE LIMITATION NOT TO APPLY TO CERTAIN 26 USC 2032A.

FARM PROPERTY.—Clause (ii) shall not apply to any property which is used for farming purposes (within the meaning of section 2032A(e)(5)) and which is placed in service during the calendar year but only if the cost basis of such property, when added to the cost basis of other finance lease property used for such purpose does not exceed $150,000 (determined under rules similar to the rules of section 209(d)(1)(B) of the Tax Equity and Fiscal Responsibility Act of 1982). "(Ill) PROPERTY PLACED IN SERVICE.—For purposes of this title (other than clause (i), any finance lease property shall be deemed originally placed in service not earlier than the date such property is used under the lease. "(C) AGREEMENTS MUST MEET CERTAIN REQUIREMENTS.—

The requirements of this subparagraph are met with respect to any agreement if— "(i) LESSOR REQUIREMENT.—Any lessor under the agreement must be— "(I) a corporation (other than an electing small business corporation within the meaning of section 1371(b) or a personal holding company within the meaning of section 542(a)), "(II) a partnership all of the partners of which are corporations described in subclause (I), or "(III) a grantor trust with respect to which the grantor and all the beneficiaries of the trust are described in subclause (I) or (II). "(ii) CHARACTERIZATION OF AGREEMENT.—The parties

to the agreement characterize such agreement as a lease. "(iii) AGREEMENT CONTAINS CERTAIN PROVISIONS.— The agreement contains the provision described in clause (i) or (ii) of subparagraph (A), or both. "(iv) AGREEMENT OTHERWISE LEASE, ETC.—For purposes of this title (determined without regard to the provisions described in clause (iii)), the agreement would be treated as a lease and the lessor under the agreement would be treated as the owner of the property. "(D) PARAGRAPH NOT TO APPLY TO AGREEMENTS BETWEEN

RELATED PERSONS.—This paragraph shall not apply to any agreement if the lessor and lessee are both persons who are members of the same affiliated group (within the meaning of subsection (a) of section 1504 and determined without regard to subsection (b) of section 1504). '(E) NONQUAUFIED TAX-EXEMPT ORGANIZATION.—

"(i) IN GENERAL.—The term 'nonqualified tax-exempt organization' means, with respect to any agreement to which subparagraph (A) applies, any organization (or predecessor organization which was engaged in substantially similar activities) which was exempt from

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96 STAT. 445

taxation under this title at any time during the 5-year period ending on the date such agreement was entered into. "(ii) SPECIAL RULE FOR FARMERS' COOPERATIVES.—The

term 'nonqualified tax-exempt organization' shall not include any farmers' cooperative organization which is described in section 521 whether or not exempt from 26 USC 521. taxation under section 521. "(iii) SPECIAL RULE FOR PROPERTY USED IN UNRELATED TRADE OR BUSINESS.—An organization

shall not be

treated as a nonqualified tax-exempt organization with respect to any property if such property is used in an unrelated trade or business (within the meaning of section 513) of such organization which is subject to taxation under section 511. "(F) CROSS REFERENCE.— "For special recapture in case where lessee acquires financed recovery property, see section 1245." (b) SPECIAL LIMITATIONS ON FINANCE LEASE PROPERTY.—Subsec-

tion (i) of section 168 (relating to limitations and additional require- ^"^e> P- 432. ments with respect to leases) is amended to read as follows: "(i)

LIMITATIONS

RELATING

TO LEASES

OF FINANCE

LEASE

PROPERTY.—For purposes of this subtitle, in the case of finance lease property, the following limitations shall apply: "(1) LESSOR MAY NOT REDUCE TAX LIABILITY BY MORE THAN 50 PERCENT.—

"(A) IN GENERAL.—The aggregate amount allowable as deductions or credits for any taxable year which are allocable to all finance lease property with respect to which the taxpayer is the lessor may not reduce the liability for tax of the taxpayer for such taxable year (determined without regard to finance lease items) by more than 50 percent of such liability. "(B) CARRYOVER OF AMOUNTS NOT ALLOWABLE AS DEDUC-

TIONS OR CREDITS.—Any amount not allowable as a deduction or credit under subparagraph (A)— "(i) may be carried over to any subsequent taxable year, and "(ii) shall be treated as a deduction or credit allocable to finance lease property in such subsequent taxable year. "(C) ALLOCATION AMONG DEDUCTIONS AND CREDITS.—The

Secretary shall prescribe regulations for determining the amount— "(i) of any deduction or credit allocable to finance lease property for any taxable year to which subparagraph (A) applies, and "(ii) of any carryover of any such deduction or credit under subparagraph (B) to any subsequent taxable year. "(D)

LIABILITY FOR TAX AND FINANCE LEASE ITEMS

DEFINED.—For purposes of this paragraph— "(i) LIABILITY FOR TAX DEFINED.—Except as provided in this subparagraph, the term 'liability for tax' means the tax imposed by this chapter, reduced by the sum of

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 96 STAT. 446

PUBLIC LAW 97-248—SEPT. 3, 1982 the credits allowable under subpart A of part IV of subchapter A of this chapter. "(ii)

FINANCE

LEASE

ITEMS

DEFINED.—The

term

'finance lease items' means any of the following items which a r e properly allocable to finance lease property with respect to which the tax p a y e r is the lessor: "(I) Any deduction or credit allowable under this chapter. "(II) Any r e n t a l income received by the tax p a y e r from any lessee of such property. "(iii) CERTAIN TAXES NOT INCLUDED.—The term

26 USC 53.

'tax

imposed by this chapter' shall not include any tax t r e a t e d as not imposed by this chapter under the last sentence of section 53(a) (other than the tax imposed by section 56). "(E) CERTAIN SAFE HARBOR LEASE PROPERTY TAKEN INTO

ACCOUNT.—Under regulations prescribed by the Secretary, deductions and credits and safe h a r b o r lease items which a r e allocable to safe h a r b o r lease property to which this paragraph (as in effect for taxable years beginning in 1983) applies shall be t a k e n into account for purposes of applying this paragraph. "(2) INVESTMENT CREDIT ALLOWED ONLY OVER 5-YEAR PERIOD.—

In the case of any credit which would otherwise be allowable under section 38 with respect to any finance lease property for any taxable year (determined without regard to this paragraph), only 20 percent of the a m o u n t of such credit shall be allowable in such taxable year and 20 percent of such a m o u n t shall be allowable in each of the succeeding 4 taxable years. "(3) COMPUTATION OF TAXABLE INCOME OF LESSEE FOR PURPOSES OF PERCENTAGE DEPLETION.—

"(A) IN GENERAL.—For purposes of section 613 or 613A, the taxable income of any tax p a y e r who is a lessee of any financed recovery property shall be computed as if the taxpayer w a s the owner of such property, except that the a m o u n t of the deduction under subsection (a) of this section shall be determined after application of paragraph (2) of this subsection. "(B) COORDINATION WITH

CRUDE

OIL WINDFALL PROFIT

TAX.—Section 4988(b)(3)(A) shall be applied without regard to subparagraph (A). "(4) L I M I T A T I O N S. — "(A) TERMINATION OF CERTAIN PROVISIONS.—

"(i) PARAGRAPH (i). — Paragraph (1) shall not apply to property placed in service after September 30, 1985, in taxable years beginning after such date. "(ii) PARAGRAPH (2).—Paragraph (2) shall not apply to property placed in service after September 30, 1985. "(B) CERTAIN FARM PROPERTY.—This subsection shall not

Ante, p. 442.

apply to property which is used for farming purposes (within the m e a n i n g of section 2032A(e)(5)) and which is placed in service during the taxable year but only if the cost basis of such property, when added to the cost basis of other finance lease property used for such purpose, does not exceed $150,000 (determined under rules similar to the rules of section 209(d)(1)(B) of the T a x Equity and Fiscal Responsibility Act of 1982)."

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96 STAT. 447

(c) DEFINITION OF N E W SECTION 38 PROPERTY.—Subsection (b) of

section 48 (defining new section 38 property) is amended by adding at the end thereof the following new sentence: "For purposes of determining whether section 38 property subject to a lease is new section 38 property, such property shall be treated as originally placed in service not earlier than the date such property is used under the lease but only if such property is leased within 3 months after such property is placed in service." (d) EFFECTIVE DATES.—

26 USC 48.

26 USC 168 note.

(1) SUBSECTION (a).—

(A) IN GENERAL.—Except as provided in subparagraph (B) and paragraph (2), the amendments made by this section shall apply to agreements entered into after December 31, 1983. (B) SPECIAL RULE FOR FARM PROPERTY AGGREGATING $150,000 OR LESS.—

(i) IN GENERAL.—The amendments made by subsection (a) shall also apply to any agreement entered into after July 1, 1982, and before January 1, 1984, if the property subject to such agreement is section 38 property which is used for farming purposes (within the meaning of section 2032A(e)(5)). (ii) $150,000 UMiTATiON.—The provisions of clause (i) shall not apply to any agreement if the sum of— (I) the cost basis of the property subject to the agreement, plus (II) the cost basis of any property subject to an agreement to which this subparagraph previously applied, which was entered into during the same calendar year, and with respect to which the lessee was the lessee of the agreement described in subclause (I) (or any related person within the meaning of section 168(e)(4)(D)), exceeds $150,000. For purposes of subclause (II), in the case of an individual, there shall not be taken into account any agreement of any individual who is a related person involving property which is used in a trade or business of farming of such related person which is separate from the trade or business of farming of the lessee described in subclause (II). (2)

SPECIAL

RULE

FOR DEFINITION

OF NEW SECTION

38

PROPERTY.—The amendment made by subsection (c) shall apply to property placed in service after December 31, 1983. SEC. 210. MOTOR VEHICLE OPERATING LEASES.

(a) IN GENERAL.—In the case of any qualified motor vehicle agreement, the fact that such agreement contains a terminal rental adjustment clause shall not be taken into account in determining whether such agreement is a lease. (b) DEFINITIONS.—For purposes of this section— (1) QUALIFIED MOTOR VEHICLE AGREEMENT.—The term "qualified motor vehicle agreement" means any agreement with respect to a motor vehicle (including a trailer)— (A) which was entered into before— (i) the enactment of any law, or (ii) the publication by the Secretary of the Treasury or his delegate of any regulation.

26 USC 168 note.

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Page:United States Statutes at Large Volume 96 Part 1.djvu/490

 96 STAT. 448

PUBLIC LAW 97-248—SEPT. 3, 1982 which provides that any agreement with a terminal rental adjustment clause is not a lease, (B) with respect to which the lessor under the agreement— (i) is personally liable for the repayment of, or (ii) has pledged property (but only to the extent of the net fair market value of the lessor's interest in such property), other than property subject to the agreement or property directly or indirectly financed by indebtedness secured by property subject to the agreement, as security for, all amounts borrowed to finance the acquisition of property subject to the agreement, and (C) with respect to which the lessee under the agreement uses the property subject to the agreement in a trade or business or for the production of income. (2) TERMINAL RENTAL ADJUSTMENT CLAUSE.—The term "terminal rental adjustment clause" means a provision of an agreement which permits or requires the rental price to be adjusted upward or downward by reference to the amount realized by the lessor under the agreement upon sale or other disposition of such property. PART III—FOREIGN TAX SEC. 211. FOREIGN TAX CREDIT FOR TAXES ON OIL AND GAS INCOME. (a) AMENDMENT OF SECTION 907(CX4) TO RECAPTURE FOREIGN OIL AND GAS EXTRACTION LOSSES BY RECHARACTERIZING LATER EXTRAC-

26 USC 907.

TiON INCOME.—Paragraph (4) of section 907(c) (relating to certain losses) is amended to read as follows: "(4) RECAPTURE OF FOREIGN OIL AND GAS EXTRACTION LOSSES BY RECHARACTERIZING LATER EXTRACTION INCOME.—

"(A) IN GENERAL.—That portion of the income of the taxpayer for the taxable year which (but for this paragraph) would be treated as foreign oil and gas extraction income shall be treated as income (from sources without the United States) which is not foreign oil and gas extraction income to the extent of the excess of— "(i) the aggregate amount of foreign oil extraction losses for preceding taxable years beginning after December 31, 1982, over "(ii) so much of such aggregate amount as was recharacterized under this subparagraph for preceding taxable years beginning after December 31, 1982. "(B) FOREIGN OIL EXTRACTION LOSS DEFINED.—

"(i) IN GENERAL.—For purposes of this paragraph, the term 'foreign oil extraction loss' means the amount by which— "(I) the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the foreign oil and gas extraction income for such year, is exceeded by

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Page:United States Statutes at Large Volume 96 Part 1.djvu/491

 PUBLIC LAW 97-248—SEPT. 3, 1982

96 STAT. 449

"(II) the sum of the deductions properly apportioned or allocated thereto. "(ii) NET OPERATING LOSS DEDUCTION NOT TAKEN INTO

ACCOUNT.—For purposes of clause (i), the net operating loss deduction allowable for the taxable year under section 172(a) shall not be taken into account. "(iii) EXPROPRIATION AND CASUALTY LOSSES NOT TAKEN INTO ACCOUNT.—For purposes of clause (i), there shall not be taken into account— "(I) any foreign expropriation loss (as defined in section 172(h)) for the taxable year, or "(II) any loss for the taxable year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise."

26 USC 172.

(b) EXTRACTION INCOME REMOVED FROM FOREIGN OIL RELATED

INCOME.—Paragraph (2) of section 907(c) (defining foreign oil related income) is amended to read as follows: "(2) FOREIGN OIL RELATED INCOME.—The term 'foreign oil related income' means the taxable income derived from sources outside the United States and its possessions from— "(A) the processing of minerals extracted (by the taxpayer or by any other person) from oil or gas wells into their primary products, "(B) the transportation of such minerals or primary products, "(C) the distribution or sale of such minerals or primary products, "(D) the disposition of assets used by the taxpayer in the trade or business described in subparagraph (A), (B), or (C), or "(E) the performance of any other related service."

26 USC 907.

(c) REPEAL OF SEPARATE APPLICATION OF SECTION 904 TO FOREIGN OIL RELATED INCOME; AMOUNTS TREATED AS FOREIGN TAXES ON SUCH INCOME.—

(1) IN GENERAL.—Subsection (b) of section 907 (relating to special rules in case of foreign oil and gas income) is amended to read as follows: "(b) FOREIGN TAXES ON FOREIGN OIL RELATED INCOME.—For purposes of this subtitle, in the csise of taxes paid or accrued to any foreign country with respect to foreign oil related income, the term 'income, war profits, and excess profits taxes' shall not include any amount paid or accrued after December 31, 1982, to the extent that the Secretary determines that the foreign law imposing such amount of tax is structured, or in fact operates, so that the amount of tax imposed with respect to foreign oil related income will generally be materially greater, over a reasonable period of time, than the amount generally imposed on income that is neither foreign oil related income nor foreign oil and gas extraction income. In computing the amount not treated as tax under this subsection, such amount shall be treated as a deduction under the foreign law." (2) REPEAL OF SEPARATE TREATMENT OF FOREIGN OIL RELATED

LOSS.—Subsection (f) of section 904 (relating to recapture of overall foreign loss) is amended by striking out paragraph (4) and redesignating paragraphs (5) and (6) as paragraphs (4) and (5), respectively.

26 USC 904.

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Page:United States Statutes at Large Volume 96 Part 1.djvu/492

 96 STAT. 450

PUBLIC LAW 97-248—SEPT. 3, 1982 (d) CARRYBACK AND CARRYOVER OF DISALLOWED CREDITS; TRANSITIONAL RULES.—

26 USC 907.

(1) TRANSITIONAL RULES.—Subsection (e) of section 907 (relating to transitional rules) is amended to read as follows: "(e) TRANSITIONAL RULES.— "(1) CREDITS ARISING IN TAXABLE YEARS BEGINNING BEFORE

Ante, p. 324.

JANUARY 1, 1983.—The amount of taxes paid or accrued in any taxable year beginning before January 1, 1983 (hereinafter in this paragraph referred to as the 'excess credit year') which under section 904(c) or 907(f) may be deemed paid or accrued in a taxable year beginning after December 31, 1982, shall not exceed the amount which could have been deemed paid or accrued if sections 907(b), 907(f), and 904(f)(4) (as in effect on the day before the date of the enactment of the Tax Equity and Fiscal Responsibility Act of 1982) remained in effect for taxable years beginning after December 31, 1982. "(2) CARRYBACK OF CREDITS ARISING IN TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1982.—The amount of the taxes paid

or accrued in a taxable year beginning after December 31, 1982, which may be deemed paid or accrued under section 904(c) or 907(f) in a taxable year beginning before January 1, 1983, shall not exceed the amount which could have been deemed paid or accrued if sections 907(b), 907(f), and 904(f)(4) (as in effect on the day before the date of the enactment of the Tax Equity and Fiscal Responsibility Act of 1982) remained in effect for taxable years beginning after December 31, 1982." (2) R E P E A L O F 2 - P E R C E N T L I M I T A T I O N O N C A R R Y B A C K A N D CAR-

RYOVER OF DISALLOWED EXTRACTION TAXES.—

(A) IN GENERAL.—Paragraph (1) of section 907(f) (relating to carryback and carryover of disallowed credits) is amended— (i) by striking out "so much of such excess as does not exceed 2 percent of foreign oil and gas extraction income for such taxable year" and inserting in lieu thereof "such excess", (ii) by striking out the last sentence. (B) TECHNICAL AMENDMENTS.—

(i) Subparagraph (B) of section 907(f)(2) is amended— (I) by striking out "on taxes paid or accrued with respect to foreign oil related income", and (II) by striking out "with respect to such income" in clause (i). (ii) Subparagraph (A) of section 907(f)(3) is amended by striking out "with respect to oil-related income". (iii) Subparagraph (B) of section 907(f)(3) is amended by striking out "oil-related". 26 USC 907 note.

(e) EFFECTIVE D A T E. —

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1982. (2) RETENTION OF OLD SECTIONS 907(b) AND 904(f)(4) WHERE TAXPAYER HAD FOREIGN LOSS FROM AN ACTIVITY NOT RELATED TO

OIL AND GAS.—If, after applying old sections 907(b) and 904(f)(4) to a taxable year beginning before January 1, 1983, the taxpayer had a foreign loss attributable to activities not taken into account in determining foreign oil related income (as defined in old section 907(c)(2)), such loss shall not be recaptured from

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Page:United States Statutes at Large Volume 96 Part 1.djvu/493

 PUBLIC LAW 97-248—SEPT. 3, 1982

96 STAT. 451

foreign oil related income more rapidly than ratably over the 8-year period beginning with the first taxable year beginning after December 31, 1982. For purposes of the preceding sentence, an "old" section is such section as in effect on the day before the date of the enactment of this Act. SEC. 212. CURRENT TAXATION OF FOREIGN OIL RELATED INCOME OF CONTROLLED FOREIGN CORPORATIONS. (a) FOREIGN OIL RELATED INCOME ADDED TO CURRENTLY TAXED

AMOUNTS.—Subsection (a) of section 954 (defining foreign base com- 26 USC 954. pany income) is amended by adding at the end thereof the following new paragraph: "(5) the foreign bsise company oil related income for the taxable year (determined under subsection (h) and reduced as provided in subsection (b)(5))." (b) SPECIAL RULES.— (1) ALLOWANCE OF DEDUCTIONS AGAINST FOREIGN BASE COMPANY OIL RELATED INCOME.—Paragraph (5) of section 954(b)

is amended by striking out "and the foreign base company shipping income" and inserting in lieu thereof ", the foreign base company shipping income, and the foreign base company oil related income'. (2) PREEMPTION OF FOREIGN BASE COMPANY OIL RELATED

INCOME.—Subsection (b) of section 954 is amended by adding at the end thereof the following new paragraph: "(8) FOREIGN BASE COMPANY OIL RELATED INCOME NOT TREATED

AS ANOTHER KIND OF BASE COMPANY INCOME.—Income of a Corporation which is foreign base company oil related income shall not be considered foreign base company income of such corporation under paragraph (1), (2), or (3) of subsection (a)." (c) DEFINITION OF FOREIGN BASE COMPANY OIL RELATED INCOME.—

Section 954 (relating to foreign base company income) is amended by adding at the end thereof the following new subsection: "(h) FOREIGN BASE COMPANY OIL RELATED INCOME.—For purposes

of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, the term 'foreign base company oil related income' means foreign oil related income (within the meaning of section 907(c)(2)) other than income derived from a source within a foreign country in connection with— "(A) oil or gas which was extracted from an oil or gas well located in such foreign country, or "(B) oil, gas, or a primary product of oil or gas which is sold by the foreign corporation or a related person for use or consumption within such country or is loaded in such country on a vessel or aircraft as fuel for such vessel or aircraft. "(2) PARAGRAPH (i) APPLIES ONLY WHERE CORPORATION HAS PRODUCED 1,000 BARRELS PER DAY OR MORE.—

"(A) IN GENERAL.—The term 'foreign base company oil related income' shall not include any income of a foreign corporation if such corporation is not a large oil producer for the taxable year. "(B) LARGE OIL PRODUCER.—For purposes of subparagraph

(A), the term 'large oil producer' means any corporation if, for the taxable year or for the preceding taxable year, the average daily production of foreign crude oil and natural

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Page:United States Statutes at Large Volume 96 Part 1.djvu/494

 96 STAT. 452

PUBLIC LAW 97-248—SEPT. 3, 1982 gas of the related group which includes such corporation equaled or exceeded 1,000 barrels. "(C) RELATED GROUP.—The term 'related group' means a group consisting of the foreign corporation and any other person who is a related person with respect to such corporation. "(D) AVERAGE DAILY PRODUCTION OF FOREIGN CRUDE OIL AND NATURAL GAS.—For purposes of this paragraph, the

average daily production of foreign crude oil or natural gas of any related group for any taxable year (and the conversion of cubic feet of natural gas into barrels) shall be determined under rules similar to the rules of section 613A except that only crude oil or natural gas from a well located outside the United States shall be taken into account." (d) EXCEPTION FROM FOREIGN BASE COMPANY INCOME FOR CERTAIN

FOREIGN CORPORATIONS NOT TO APPLY.—Paragraph (4) of section

26 USC 954.

954(b) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply to foreign base company oil related income described in subsection (a)(5)." (e) CONFORMING AMENDMENTS.—Subsection (a) of section 954 is

amended by striking out "and" at the end of paragraph (3), and by striking out the period at the end of paragraph (4) and inserting in lieu thereof, and". 26 USC 954 note. (f) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1982, and to taxable years of United States shareholders in which, or with which, such taxable years of foreign corporations end. SEC. 213. POSSESSION TAX CREDIT; INCOME TAX LIABILITY INCURRED TO THE VIRGIN ISLANDS. (a) POSSESSION TAX CREDIT.— (1) ACTIVE TRADE OR BUSINESS REQUIREMENT.—Paragraph (2) of

26 USC 936.

section 936(a) (relating to conditions which must be satisfied) is amended— (A) by striking out "50 percent" in subparagraph (B) and inserting in lieu thereof "65 percent", and (B) by adding at the end thereof the following new subparagraph: "(C) TRANSITIONAL RULE.—In applying subparagraph (B)

with respect to taxable years beginning after December 31, 1982, and before January 1, 1985, the following percentage shall be substituted for "65 percent": "For taxable years beginning in calendar year: 1983 1984

The percentage tax is: 55 60".

(2) INCOME ATTRIBUTABLE TO CERTAIN INTANGIBLE PROPERTY.—

Section 936 (relating to Puerto Rico and possession tax credit) is amended by adding at the end thereof the following new subsection: "(h) TAX TREATMENT OF INTANGIBLE PROPERTY INCOME.— "(1) IN GENERAL.— "(A) INCOME ATTRIBUTABLE TO SHAREHOLDERS.—The intan-

gible property income of a corporation electing the application of this section for any taxable year shall be included on a pro rata basis in the gross income of all shareholders of

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Page:United States Statutes at Large Volume 96 Part 1.djvu/495

 PUBLIC LAW 97-248—SEPT. 3, 1982 such electing corporation at the close of the taxable year of such electing corporation as income from sources within the United States for the taxable year of such shareholder in which or with which the taxable year of such electing corporation ends. "(B) EXCLUSION FROM THE INCOME OF AN ELECTING CORPO-

RATION.—Any intangible property income of a corporation electing the application of this section which is included in the gross income of a shareholder of such corporation by reason of subparagraph (A) shall be excluded from the gross income of such corporation. "(2) FOREIGN SHAREHOLDERS; SHAREHOLDERS NOT SUBJECT TO TAX.—

"(A) IN GENERAL.—Paragraph (1)(A) shall not apply with respect to any shareholder— "(i) who is not a United States person, or "(ii) who is not subject to tax under this title on intangible property income which would be allocated to such shareholder (but for this subparagraph). "(B) TREATMENT OF NONALLOCATED INTANGIBLE PROPERTY

INCOME.—For purposes of this subtitle, intangible property income of a corporation electing the application of this section which is not included in the gross income of a shareholder of such corporation by reason of subparagraph (A)"(i) shall be treated as income from sources within the United States, and "(ii) shall not be taken into account under subsection (a)(2). "(3) INTANGIBLE PROPERTY INCOME.—For purposes of this subsection— "(A) IN GENERAL.—The term 'intangible property income' means the gross income of a corporation attributable to any intangible property other than intangible property which has been licensed to such corporation since prior to 1948 and is in use by such corporation on the date of the enactment of this subparagraph. "(B) INTANGIBLE PROPERTY.—The term 'intangible property' means any— "(i) patent, invention, formula, process, design, pattern, or know-how; "(ii) copyright, literary, musical, or artistic composition; "(iii) trademark, trade name, or brand name; "(iv) franchise, license, or contract; "(v) method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data; or "(vi) any similar item, which has substantial value independent of the services of any individual. "(C) EXCLUSION OF REASONABLE PROFIT.—The term 'intangible property income' shall not include any portion of the income from the sale, exchange or other disposition of any product, or from the rendering of services, by a corporation electing the application of this section which is determined by the Secretary to be a reasonable profit on the direct and

96 STAT. 453

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Page:United States Statutes at Large Volume 96 Part 1.djvu/496

 96 STAT. 454

PUBLIC LAW 97-248—SEPT. 3, 1982 indirect costs incurred by such electing corporation which are attributable to such income. "(D) RELATED PERSON.—

"(i) IN GENERAL.—A person (hereinafter referred to as the 'related person') is related to any person if— "(I) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(l), or "(II) the related person and such person are members of the same controlled group of corporations, "(ii) SPECIAL RULES.—For purposes of clause (i)— "(I) section 267(b) and section 707(b)(1) shall be applied by substituting '10 percent' for '50 percent', and "(II) section 267(b)(3) shall be applied without regard to whether a person was a personal holding company or a foreign personal holding company, "(E) CONTROLLED GROUP OF CORPORATIONS.—The term 'controlled group of corporations' has the meaning given to such term by section 1563(a), except that— "(i) 'more than 10 percent' shall be substituted for 'at least 80 percent' and 'more than 50 percent' each place either appears in section 1563(a), and "(ii) the determination shall be made without regard to subsections (a)(4), (b)(2), and (e)(3)(C) of section 1563.

26 USC 267.

"(4) DISTRIBUTIONS TO MEET QUALIFICATION REQUIREMENTS.—

,

\ ^

"(A) IN GENERAL.—If the Secretary determines that a corporation does not satisfy a condition specified in subparagraph (A) or (B) of subsection (a)(2) for any taxable year by reason of the exclusion from gross income under paragraph (1)(B), such corporation shall nevertheless be treated as satisfying such condition for such year if it makes a pro rata distribution of property after the close of such taxable year to its shareholders (designated at the time of such distribution as a distribution to meet qualification requirements) with respect to their stock in an amount which is equal to— "(i) if the condition of subsection (a)(2)(A) is not satisfied, that portion of the gross income for the period described in subsection (a)(2)(A)— "(I) which was not derived from sources within a possession, and "(II) which exceeds the amount of such income for such period which would enable such corporation to satisfy the condition of subsection (a)(2)(A), "(ii) if the condition of subsection (a)(2)(B) is not satisfied, that portion of the gross income for such period— "(I) which was not derived from the active conduct of a trade or business within a possession, and "(II) which exceeds the amount of such income for such period which would enable such corporation to satisfy the conditions of subsection (a)(2)(B), or "(iii) if neither of such conditions is satisfied, that portion of the gross income which exceeds the amount

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Page:United States Statutes at Large Volume 96 Part 1.djvu/497

 PUBLIC LAW 97-248—SEPT. 3, 1982 of gross income for such period which would enable such corporation to satisfy the conditions of subparagraphs (A) and (B) of subsection (a)(2). "(B) EFFECTIVELY CONNECTED INCOME.—In the case of a shareholder who is a nonresident alien individual or a foreign corporation, trust, or estate, any distribution described in subparagraph (A) shall be treated as income which is effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States. "(C) DISTRIBUTION DENIED IN CASE OF FRAUD OR WILLFUL

NEGLECT.—Subparagraph (A) shall not apply to a corporation if the determination of the Secretary described in subparagraph (A) contains a finding that the failure of such corporation to satisfy the conditions in subsection (a)(2) was due in whole or in part to fraud with intent to evade tax or willful neglect on the part of such corporation. '(5) ELECTION OUT.—

"(A) IN GENERAL.—The rules contained in paragraphs (1) through (4) do not apply for any taxable year if an election pursuant to subparagraph (F) is in effect to use one of the methods specified in subparagraph (C). "(B) ELIGIBILITY.— "(i) REQUIREMENT OF SIGNIFICANT BUSINESS PRES-

ENCE.—An election may be made to use one of the methods specified in subparagraph (C) with respect to a product or type of service only if an electing corporation has a significant business presence in a possession with respect to such product or type of service. An election may remain in effect with respect to such product or type of service for any subsequent taxable year only if such electing corporation maintains a significant business presence in a possession with respect to such product or type of service in such subsequent taxable year. If an election is not in effect for a taxable year because of the preceding sentence, the electing corporation shall be deemed to have revoked the election on the first day of such taxable year. "(ii) DEFINITION.—For purposes of this subparagraph, an electing corporation has a 'significant business presence' in a possession for a taxable year with respect to a product or type of service if: "(I) the total production costs (other than direct material costs and other than interest excluded by regulations prescribed by the Secretary) incurred by the electing corporation in the possession in producing units of that product sold or otherwise disposed of during the taxable year by the affiliated group to persons who are not members of the affiliated group are not less than 25 percent of the difference between (a) the gross receipts from sales or other dispositions during the taxable year by the affiliated group to persons who are not members of the affiliated group of such units of the product produced, in whole or in part, by the electing corporation in the possession, and (b) the direct material costs of the purchase of materials for such

96 STAT. 455

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Page:United States Statutes at Large Volume 96 Part 1.djvu/498

 96 STAT. 456

26 USC 954.

PUBLIC LAW 97-248—SEPT. 3, 1982 units of that product by all members of the affiliated group from persons who are not members of the affiliated group; or "(11) no less than 65 percent of the direct labor costs of the affiliated group for units of the product produced during the taxable year in whole or in part by the electing corporation or for the type of service rendered by the electing corporation during the taxable year, is incurred by the electing corporation and is compensation for services performed in the possession; or "(III) with respect to purchases and sales by an electing corporation of all goods not produced in whole or in part by any member of the affiliated group and sold by the electing corporation to persons other than members of the affiliated group, no less than 65 percent of the total direct labor costs of the affiliated group in connection with all purchases and sales of such goods sold during the taxable year by such electing corporation is incurred by such electing corporation and is compensation for services performed in the possession. Notwithstanding satisfaction of one of the foregoing tests, an electing corporation shall not be treated as having a significant business presence in a possession with respect to a product produced in whole or in part by the electing corporation in the possession, for purposes of an election to use the method specified in subparagraph (C)(ii), unless such product is manufactured or produced in the possession by the electing corporation within the meaning of subsection (d)(1)(A) of section 954. "(iii) SPECIAL RULES.— "(I) An electing corporation which produces a product or renders a type of service in a possession on the date of the enactment of this clause is not required to meet the significant business presence test in a possession with respect to such product or type of service for its taxable years beginning before January 1, 1986. "(II) For purposes of this subparagraph, the costs incurred by an electing corporation or any other member of the affiliated group in connection with contract manufacturing by a person other than a member of the affiliated group, or in connection with a similar arrangement thereto, shall be treated as direct labor costs of the affiliated group and shall not be treated as production costs incurred by the electing corporation in the possession or as direct material costs or as compensation for services performed in the possession, except to the extent as may be otherwise provided in regulations prescribed by the Secretary, "(iv) REGULATIONS.—The Secretary may prescribe regulations setting forth: "(I) an appropriate transitional (but not in excess of three taxable years) significant business pres-

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96 STAT. 457

ence test for commencement in a possession of operations with respect to products or types of service after the date of the enactment of this clause and not described in subparagraph (B)(iiiXD, "(ID a significant business presence test for other appropriate cases, consistent with the tests specified in subparagraph (B)(ii), "(III) rules for the definition of a product or type of service, and "(IV) rules for treating components produced in whole or in part by a related person as materials, and the costs (including direct labor costs) related thereto as a cost of materials, where there is an independent resale price for such components or where otherwise consistent with the intent of the substantial business presence tests. "(C) METHODS OF COMPUTATION OF TAXABLE INCOME.—If

an election of one of the following methods is in effect pursuant to subparagraph (F) with respect to a product or type of service, an electing corporation shall compute its income derived from the active conduct of a trade or business in a possession with respect to such product or type of service in accordance with the method which is elected. "(i) COST SHARING.— "(I) PAYMENT OF COST SHARING.—If an election of

this method is in effect, the electing corporation must make a payment for its share of the cost (if any) of product area research which is paid or accrued by the affiliated group during that taxable year. Such share shall not be less than the same proportion of the cost of such product area research which the amount of 'possession sales' bears to the amount of 'total sales of the affiliated group. The cost of product area research paid or accrued solely by the electing corporation in a taxable year (excluding amounts paid directly or indirectly to or on behalf of related persons and excluding amounts paid under any cost sharing agreements with related persons) will reduce (but not below zero) the amount of the electing corporation's cost sharing payment under this method for that year. "(a) PRODUCT AREA RESEARCH.—For purposes

of this section, the term 'product area research' includes (notwithstanding any provision to the contrary) the research, development and experimental costs, losses, expenses and other related deductions—including amounts paid or accrued for the perfbrmance of research or similar activities by another person; qualified research expenses within the meaning of section 44F(b); amounts paid or 95 Stat. 241. accrued for the use of, or the right to use, research or any of the items specified in subsection (h)(3)(B)(i); and a proper allowance for amounts incurred for the acquisition of any of the items specified in subsection (h)(3)(B)(i)—

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26 USC 482.

PUBLIC LAW 97-248—SEPT. 3, 1982 which are properly apportioned or allocated to the same product area as that in which the electing corporation conducts its activities, and a ratable part of any such costs, losses, expenses and other deductions which cannot definitely be allocated to a particular product area. "(b) AFFILIATED GROUP.—For purposes of this subsection, the term 'affiliated group' shall mean the electing corporation and all other organizations, trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, within the meaning of section 482. "(c) POSSESSION SALES.—For purposes of this section, the term 'possession sales' means the aggregate sales or other dispositions for the taxable year to persons who are not members of the affiliated group by members of the affiliated group of products produced, in whole or in part, by the electing corporation in the possession which are in the same product area as is used for determining the amount of product area research, and of services rendered, in whole or in part, in the possession in such product area to persons who are not members of the affiliated group. "(d) TOTAL SALES.—For purposes of this section, the term 'total sales' means the aggregate sales or other dispositions for the taxable year to persons who are not members of the affiliated group by members of the affiliated group of all products in the same product area as is used for determining the amount of product area research, and of services rendered in such product area to persons who are not members of the affiliated group. "(e) PRODUCT AREA.—For purposes of this section, the term 'product area' shall be defined by reference to the three-digit classification of the Standard Industrial Classification code. The Secretary may provide for the aggregation of two or more three-digit classifications where appropriate, and for a classification system other than the Standard Industrial Classification code in appropriate cases. "(II) EFFECT OF ELECTION.—For purposes of deter-

mining the amount of its gross income derived from the active conduct of a trade or business in a possession with respect to a product produced by, or type of service rendered by, the electing corporation for a taxable year, if an election of this method is in effect, the electing corporation shall be treated as the owner (for purposes of obtaining a return thereon) of intangible property described in

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subsection (h)(3)(B)(i) which is related to the units of the product produced, or type of service rendered, by the electing corporation. Such electing corporation shall not be treated as the owner (for purposes of obtaining a return thereon) of any intangible property described in subsection (h)(3)(B)(ii) through (v) (to the extent not described in subsection (h)(3)(B)(i)) or of any other nonmanufacturing intangible. Notwithstanding the preceding sentence, an electing corporation shall be treated as the owner (for purposes of obtaining a return thereon) of (a) intangible property which was developed solely by such corporation in a possession and is owned by such corporation, (b) intangible property described in subsection (h)(3)(B)(i) acquired by such corporation from a person who was not related to such corporation (or to any person related to such corporation) at the time of, or in connection with, such acquisition, and (c) any intangible property described in subsection (h)(3)(B)(ii) through (v) (to the extent not described in subsection (h)(3)(B)(i)) and other nonmanufacturing intangibles which relate to sales of units of products, or services rendered, to unrelated persons for ultimate consumption or use in the possession in which the electing corporation conducts its trade or business. "(Ill) PAYMENT PROVISIONS.— "(a) The cost sharing payment determined under subparagraph (C)(i)(I) for any taxable year shall be made to the person or persons specified in subparagraph (C)(i)(IV)(a) not later than the time prescribed by law for filing the electing corporation's return for such taxable year (including any extensions thereof). If all or part of such payment is not timely made, the amount of the cost sharing payment required to be paid shall be increased by the amount of interest that would have been due under section 6601(a) had the portion of the 26 USC 6601. cost sharing payment that is not timely made been an amount of tax imposed by this title and had the last date prescribed for payment been the due date of the electing corporations return (determined without regard to any extension thereof). The amount by which a cost sharing payment determined under subparagraph (C)(i)(I) is increased by reason of the preceding sentence shall not be treated as a cost sharing payment or as interest. If failure to make timely payment is due in whole or in part to fraud or willful neglect, the electing corporation shall be deemed to have revoked the election made under subparagraph (A) on the first day of the taxable year for which the cost sharing payment was required.

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 96 STAT. 460

PUBLIC LAW 97-248—SEPT. 3, 1982 "(b) For purposes of this title, any tax of a foreign country or possession of the United States which is paid or accrued with respect to the payment or receipt of a cost sharing payment determined under subparagraph (C)(i)(D or of an amount of increase referred to in subparagraph (C)(i)(IIIXa) shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduction shall be allowed under this title with respect to any amounts of such tax so paid or accrued. "(IV) SPECIAL RULES.—

26 USC 482.

95 Stat. 241.

"(a) The amount of the cost sharing payment determined under subparagraph (C)(i)(I), and any increase in the amount thereof in accordance with subparagraph (C)(i)(IIIXa), shall not be treated as income of the recipient, but shall reduce the amount of the deductions (and the amount of reductions in earnings and profits) otherwise allowable to the appropriate domestic member or members (other than an electing corporation) of the affiliated group, or, if there is no such domestic member, to the foreign member or members of such affiliated group as the Secretary may provide under regulations. "(b) If an election of this method is in effect, the electing corporation shall determine its intercompany pricing under the appropriate section 482 method, provided, however, that an electing corporation shall not be denied use of the resale price method for purposes of such intercompany pricing merely because the reseller adds more than an insubstantial amount to the value of the product by the use of intangible property. "(c) The amount of qualified research expenses, within the meaning of section 44F, of any member of the controlled group of corporations (as defined in section 44F(f)) of which the electing corporation is a member shall not be affected by the cost sharing payment required under this method. "(ii) PROFIT SPLIT.— "(I) GENERAL RULE.—If

an election of this method is in effect, the electing corporation's taxable income derived from the active conduct of a trade or business in a possession with respect to units of a product produced or type of service rendered, in whole or in part, by the electing corporation shall be equal to 50 percent of the combined taxable income of the affiliated group (other than foreign affiliates) derived from covered sales of units of the product produced or type of service rendered, in whole or in part, by the electing corporation in a possession.

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 PUBLIC LAW 97-248—SEPT. 3, 1982 "(II)

COMPUTATION

OF

COMBINED

96 STAT. 461 TAXABLE

INCOME.—Combined taxable income shall be computed separately for each product produced or type of service rendered, in whole or in part, by the electing corporation in a possession. Combined taxable income shall be computed (notwithstanding any provision to the contrary) for each such product or type of service rendered by deducting from the gross income of the affiliated group (other than foreign affiliates) derived from covered sales of such product or type of service all expenses, losses, and other deductions properly apportioned or allocated to gross income from such sales or services, and a ratable part of all expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income, which are incurred by the affiliated group (other than foreign affiliates). Notwithstanding any other provision to the contrary, in computing the combined taxable income for each such product or type of service rendered, the research, development, and experimental costs, expenses and related deductions for the taxable year which would otherwise be apportioned or allocated to the gross income of the affiliated group (other than foreign affiliates) derived from covered sales of such product produced or type of service rendered, in whole or in part, by the electing corporation in a possession, shall not be less than the same proportion of the amount of the share of product area research determined under subparagraph (C)(i)(I) (without regard to the third sentence thereof) in the product area which includes such product or type of service, that such gross income from the product or type of service bears to such gross income from all products produced and types of service rendered, in whole or part, by the electing corporation in a possession. "(Ill) DIVISION OF COMBINED TAXABLE INCOME.— 50 percent of the combined taxable income computed as provided in subparagraph (C)(ii)(II) shall be allocated to the electing corporation. Combined tsixable income, computed without regard to the last sentence of subparagraph (C)(ii)(II), less the amount allocated to the electing corporation under the preceding sentence, shall be allocated to the appropriate domestic member or members (other than any electing corporation) of the affiliated group and shall be treated as income from sources within the United States, or, if there is no such domestic member, to a foreign member or members of such affiliated group as the Secretary may provide under regulations. "(IV) COVERED SALES.—For purposes of this paragraph, the term 'covered sales means sales by members of the affiliated group (other than foreign affiliates) to persons who are not members of the affiliated group or to foreign affiliates.

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 96 STAT. 462

PUBLIC LAW 97-248—SEPT. 3, 1982 "(D) UNRELATED PERSON.—For purposes of this paragraph, the term 'unrelated person' means any person other than a person related within the meaning of paragraph (3)(D) to the electing corporation. "(E) ELECTING CORPORATION.—For purposes of this subsection, the term 'electing corporation' means a domestic corporation for which an election under this section is in effect. "(F) TIME AND MANNER OF ELECTION; REVOCATION.—

"(i) IN GENERAL.—An election under subparagraph (A) to use one of the methods under subparagraph (C) shall be made only on or before the due date prescribed by law (including extensions) for filing the tax return of the electing corporation for its first taxable year beginning after December 31, 1982. If an election of one of such methods is made, such election shall be binding on the electing corporation and such method must be used for each taxable year thereafter until such election is revoked by the electing corporation under subparagraph (F)(iii). If any such election is revoked by the electing corporation under subparagraph (F)(iii), such electing corporation may make a subsequent election under subparagraph (A) only with the consent of the Secretary. "(ii) MANNER OF MAKING ELECTION.—An

election

under subparagraph (A) to use one of the methods under subparagraph (C) shall be made by filing a statement to such effect with the return referred to in subparagraph (F)(i) or in such other manner as the Secretary may prescribe by regulations, "(iii) REVOCATION.—

"(I) Except as provided in subparagraph (F)(iii) (II), an election may be revoked for any taxable year only with the consent of the Secretary. "(II) An election shall be deemed revoked for the year in which the electing corporation is deemed to have revoked such election under subparagraph (B)(i) or (C)(i)(III)(a), "(iv) AGGREGATION.—

"(I) Where more than one electing corporation in the affiliated group produces any product or renders any services in the same product area, all such electing corporations must elect to compute their taxable income under the same method under subparagraph (C). "(II) All electing corporations in the same affiliated group that produce any products or render any services in the same product area may elect, subject to such terms and conditions as the Secretary may prescribe by regulations, to compute their taxable income from export sales under a different method from that used for all other sales and services. For this purpose, export sales means all sales by the electing corporation of products to foreign persons for use or consumption outside the United States and its possessions, provided such products are manufactured or produced in the pos-

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session within the meaning of subsection (d)(l)(A) of section 954, and further provided (except to the 26 USC 954. extent otherwise provided by regulations) the income derived by such foreign person on resale of such products (in the same state or in an altered state) is not included in foreign base company income for purposes of section 954(a). "(Ill) All members of an affiliated group must consent to an election under this subsection at such time and in such manner as shall be prescribed by the Secretary by regulations. "(6) TREATMENT OF CERTAIN SALES MADE AFTER JULY i, 1982.— "(A) IN GENERAL.—For purposes of this section, in the case of a disposition of intangible property made by a corporation after July 1, 1982, any gain or loss from such disposition shall be treated as gain or loss from sources within the United States to which paragraph (5) does not apply. (B) EXCEPTION.—Subparagraph (A) shall not apply to any disposition by a corporation of intangible property if such disposition is to a person who is not a related person to such corporation. "(C) PARAGRAPH DOES NOT AFFECT ELIGIBILTTY.—This paragraph shall not apply for purposes of determining whether the corporation meets the requirements of subsection (a)(2). "(7) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including rules for the application of this subsection to income from leasing of products to unrelated persons." (b) INCOME TAX LIABILITY INCURRED TO THE VIRGIN ISLANDS.—

Section 934 (relating to limitation on reduction in income tax liabil- 26 USC 934. ity incurred to the Virgin Islands) is amended— (1) by striking out "50 percent" in subsection (b)(2) and inserting in lieu thereof "65 percent", and (2) by adding at the end thereof the following new subsections: "(e) TAX TREATMENT OF INTANGIBLE PROPERTY INCOME OF CERTAIN DOMESTICORPORATIONS.— "(1) IN GENERAL.— "(A) INCOME ATTRIBUTABLE TO SHAREHOLDER.—The intan-

gible property income (within the meaning of section 936(h)(3)) for any taxable year of any domestic corporation Ante, p. 452. which is described in subsection (b) and which is an inhabitant of the Virgin Islands (within the meaning of section 28(a) of the Revised Organic Act of the Virgin Islands (48 U.S.C. 1642)), shall be included on a pro rata basis in the gross income of all shareholders of such corporation at the close of the taxable year of such corporation as income from sources within the United States for the taxable year of such shareholder in which or with which the taxable year of such corporation ends. "(B) EXCLUSION FROM THE INCOME OF THE CORPORATION.—

Any intangible property income of a corporation described in subparagraph (A) which is included in the gross income of a shareholder of such corporation by reason of subparagraph (A) shall be excluded from the gross income of such corporation.

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 96 STAT. 464

PUBLIC LAW 97-248—SEPT. 3, 1982 "(2) FOREIGN SHAREHOLDERS; SHAREHOLDERS NOT SUBJECT TO TAX; INHABITANTS OF THE VIRGIN ISLANDS.—

"(A) IN GENERAL.—Paragraph (1)(A) shall not apply with respect to any shareholder— "(i) who is not a United States person, "(ii) who is not subject to tax under this title on intangible property income which would be allocated to such shareholder (but for this subparagraph), or "(iii) who is an inhabitant of the Virgin Islands. "(B) TREATMENT OF NONALLOCATED INTANGIBLE PROPERTY

INCOME.—For purposes of this subtitle, intangible property income of a corporation described in paragraph (I)(A) which is not included in the gross income of a shareholder of such corporation by reason of subparagraph (A)— "(i) shall be treated as income from sources within the United States, and "(ii) shall not be taken into account for purposes of determining whether the conditions specified in paragraph (1) or (2) of subsection (b) are satisfied. "(3)

,

DISTRIBUTION TO MEET QUALIFICATION REQUIREMENTS.—

"(A) IN GENERAL.—If the Secretary determines that a corporation does not satisfy a condition specified in paragraph (1) or (2) of subsection (b) for any taxable year by reason of the exclusion from gross income under paragraph (1)(B), such corporation shall nevertheless be treated as satisfying such condition for such year if it makes a pro rata distribution of property after the close of such taxable year to its shareholders (designated at the time of such distribution as a distribution to meet qualification requirements) with respect to their stock in an amount which is equal to— "(i) if the condition of subsection (b)(1) is not satisfied, that portion of the gross income for the period described in subsection (b)(1)— "(I) which was not derived from sources within the Virgin Islands, and "(II) which exceeds the amount of such income for such period which would enable such corporation to satisfy the condition of subsection (b)(1), "(ii) if the condition of subsection (b)(2) is not satisfied, that portion of the aggregate gross income for such period— "(I) which was not derived from the active conduct of a trade or business within the Virgin Islands, and "(II) which exceeds the amount of such income for such period which would enable such corporation to satisfy the conditions of subsection Cb)(2), or "(iii) if neither of such conditions is satisfied, that portion of the gross income which exceeds the amount of gross income for such period which would enable such corporation to satisfy the conditions of paragraphs (1) and (2) of subsection (b). "(B) EFFECTIVELY CONNECTED INCOME.—In the case of a shareholder who is a nonresident alien individual, an inhabitant of the Virgin Islands, or a foreign corporation, trust, or estate, any distribution described in subparagraph

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96 STAT. 465

(A) shall be treated as income which is effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States. "(C) DISTRIBUTION DENIED IN CASE OF FRAUD OR WILLFUL

NEGLECT.—Subparagraph (A) shall not apply to a corporation if the determination of the Secretary described in subparagraph (A) contains a finding that the failure of such corporation to satisfy the conditions in subsection Qa) was due in whole or in part to fraud with intent to evade tax or willful neglect on the part of such corporation. "(4) CERTAIN PROVISIONS OF SECTION 936 TO APPLY.—

"(A) IN GENERAL.—The rules contained in paragraphs (5), (6), and (7) of section 936(h) shall apply to a domestic Ante, p. 452. corporation described in paragraph (I)(A) of this subsection. "(B) CERTAIN MODIFICATIONS.—For purposes of subpara-

graph (A), section 936(h) shall be applied by substituting wherever appropriate— "(i) 'Virgin Islands' for 'possession', and "(ii) qualification under paragraphs (1) and (2) of subsection (b) for qualification under section 936(a)(2). "(f) TRANSITIONAL RULE.—In applying subsection (b)(2) with respect to taxable years beginning after December 31, 1982, and before January 1, 1985, the following percentage shall be substituted for '65 percent': "For taxable years beginning in calendar year: 1983 1984

The percentage is: 55 60".

(c) DENIAL OF DIVIDEND RECEIVED DEDUCTION IN CASE OF A DISTRIBUTION T MEET QUALIFICATION REQUIREMENTS.—Section 246 (relatO

26 USC 246.

ing to rules applying to deduction for dividends received) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: "(e)

CERTAIN

DISTRIBUTIONS TO SATISFY

REQUIREMENTS.—No

deduction shall be allowed under section 243(a) with respect to a dividend received pursuant to a distribution described in section 936(h)(4) or 934(e)(3)." Ante, pp. 452, (d) TRANSFER OF INTANGIBLES BY POSSESSION CORPORATION ^^^ TREATED AS TRANSFER TO AVOID TAXES.—Section 367 (relating to 26 USC 367.

foreign corporations) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: "(d) SPECIAL RULE RELATING TO TRANSFER OF INTANGIBLES BY POSSESSION CORPORATIONS.—

"(1) IN GENERAL.—If, after August 14, 1982, any possession corporation transfers, directly or indirectly, any intangible property (within the meaning of section 936(h)(3)(B)) to any foreign corporation, such transfer shall be treated for purposes of subsection (a) as pursuant to a plan having as one of its principal purposes the avoidance of Federal income taxes. "(2) POSSESSION CORPORATION.—

"(A) IN GENERAL.—The term 'possession corporation' means any corporation— "(i) to which an election under section 936 applies, or

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Page:United States Statutes at Large Volume 96 Part 1.djvu/508

 96 STAT. 466 26 USC 934. 48 USC 1642.

Ante, p. 452.

26 USC 936 note.

PUBLIC LAW 97-248—SEPT. 3, 1982 "(ii) which is described in subsection (b) of section 934 and which is an inhabitant of the Virgin Islands (within the meaning of section 28(a) of the Revised Organic Act of the Virgin Islands). "(B) FORMER POSSESSION CORPORATION.—A corporation shall be treated as a possession corporation with respect to any transfer if such corporation was a possession corporation (within the meaning of subparagraph (A)) at any time during the 5-year period ending on the date of such transfer. "(3) TRANSFER BY UNITED STATES AFFILIATES.—A rule similar to the rule of paragraph (1) shall apply in the case of a direct or indirect transfer by a United States affiliate to a foreign person of intangible property which, after August 14, 1982, was being used (or held for use) by a possession corporation under an arrangement with a United States affiliate. For purposes of the preceding sentence, the term "United States affiliate" means any United States person who is a member of an affiliated group (within the meaning of section 936(h)(5)(C)(i)(I)(b)) which includes the possession corporation. "(4) WAIVER AUTHORITY.—Subject to such terms and conditions as the Secretary may provide, paragraph (1) or (3) shall not apply to any case where the Secretary is satisfied that the transfer will not result in the reduction of current or future Federal income taxes." (e) EFFECTIVE D A T E S. —

(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to taxable years beginning after December 31, 1982. (2) CERTAIN SALES MADE AFTER JULY i, 1982.—Paragraph (6) of

Ante, p. 463.

section 936(h) of the Internal Revenue Code of 1954, and so much of section 934 to which such paragraph applies by reason of section 934(e)(4) of such Code, shall apply to taxable years ending after July 1, 1982. (3) CERTAIN TRANSFERS OF INTANGIBLES MADE AFTER AUGUST

14, 1982.—Subsection (d) shall apply to taxable years ending after August 14, 1982. PART IV—TAX-EXEMPT OBLIGATIONS SEC. 214. MODIFICATION OF EXEMPTION FOR SMALL ISSUES.

26 USC 103.

(a) COMPOSITE ISSUES.—Paragraph (6) of section 103(b) (relating to exemption for certain small issues) is amended by adding at the end thereof the following new subparagraphs: "(K) LIMITATIONS ON TREATMENT OF OBLIGATIONS AS PART OF THE SAME ISSUE.—For purposes of this paragraph, sepa-

rate lots of obligations which (but for this subparagraph) would be treated as part of the same issue shall be treated as separate issues unless the proceeds of such lots are to be used with respect to 2 or more facilities— "(i) which are located in more than 1 State, or "(ii) which have, or will have, as the same principal user the same person or related persons. "(L) FRANCHISES.—For purposes of subparagraph (K), a person (other than a governmental unit) shall be considered

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96 STAT. 467

a principal user of a facility if such person (or a group of related persons which includes such person)— "(i) g u a r a n t e e s, a r r a n g e s, participates in, or assists with the issuance (or pays any portion of the cost of issuance) of any obligation the proceeds of which a r e to be used to finance or refinance such facility, and "(ii) provides any property, or any franchise, trade m a r k, or trade n a m e (within the m e a n i n g of section 1253), which is to be used in connection with such facility." (b) SMALL ISSUE E X E M P T I O N N O T ALLOWED W H E R E OBLIGATIONS ISSUED AS P A R T OF ISSUE E X E M P T F R O M T A X OTHER T H A N AS A

SMALL I S S U E. — Paragraph (6) of section 103(b), as amended by subsection (a), is amended by adding a t the end thereof the following new subparagraph:

26 USC 103.

"(M) PARAGRAPH N O T TO APPLY I F OBLIGATIONS ISSUED

WITH CERTAIN OTHER TAX-EXEMPT OBLIGATIONS.—This paragraph shall not apply to any obligation which is issued as part of a n issue (other than a n issue to which subparagraph (D) applies) if the i n t e r e s t on any other obligation which is part of such issue is excluded from gross income under any provision of law other than this paragraph. " (c) TERMINATION OF SMALL ISSUE E X E M P T I O N A F T E R DECEMBER 31,

1986.—Paragraph (6) of section 103(b), as amended by subsections (a) and (b), is amended by adding a t the end thereof the following new subparagraph: "(N) PARAGRAPH NOT TO APPLY TO OBLIGATIONS ISSUED

AFTER DECEMBER 31, 1986.—This paragraph shall not apply to any obligation issued after December 31, 1986 (including any obligation issued to refund a n obligation issued on or before such date)." (d) EXCLUSION OF CERTAIN RESEARCH EXPENDITURES F R O M THE LIMITATION O N CERTAIN INDUSTRIAL DEVELOPMENT B O N D S. — S u b p a r -

a g r a p h (F) of section 103(b)(6) (relating to exclusion of certain expenditures) is amended — (1) by striking out " o r " a t the end of clause (ii), (2) by adding " o r " at the end of clause (iii), and (3) by adding a t the end thereof the following n e w "(iv) described in clause (i) or (ii) of 44F(b)(2)(A) for which a deduction was allowed section 174(a),".

capital

clause: section under

(e) RESTRICTIONS ON F I N A N C I N G CERTAIN F A C I L I T I E S. — Paragraph

(6) of section 103(b) is amended by adding a t the end thereof the following n e w subparagraph: "(O)

RESTRICTIONS ON F I N A N C I N G CERTAIN

FACILITIES.—

This paragraph shall not apply to a n issue if— "(i) more than 25 percent of the proceeds of the issue a r e used to provide a facility the p r i m a r y purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or enter t a i n m e n t; or "(ii) any portion of the proceeds of the issue is to be used to provide the following: any private or commercial golf course, c o u n t r y club, massage parlor, t e n n i s club, s k a t i n g facility (including roller skating, skateboard, and ice skating), racquet sports facility (includ-

95 Stat. 241.

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 96 STAT. 468

PUBLIC LAW 97-248—SEPT. 3, 1982 ing any handball or racquetball court), hot tub facility, suntan facility, or racetrack."

26 USC 103 note.

(f) EFFECTIVE D A T E S. — (1) COMPOSITE ISSUES; SMALL ISSUE EXEMPTION.—The amend-

ments made by subsections (a) and (b) shall apply to obligations issued after the date of the enactment of this Act. (2) TERMINATION.—The amendment made by subsection (c) shall take effect on the date of the enactment of this Act. (3) RESEARCH EXPENDITURES.—The amendment made by subsection (d) shall apply with respect to expenditures made after the date of the enactment of this Act. (4) CERTAIN FACILITIES.—The amendment made by subsection (e) shall apply to obligations issued after December 31, 1982. SEC. 215. PUBLIC APPROVAL AND INFORMATION REPORTING REQUIREMENTS APPLICABLE TO PRIVATE ACTIVITY BONDS.

Post, p. 596.

(a) PuBuc APPROVAL.—Section 103 (relating to interest on certain governmental obligations) is amended by redesignating subsection (k) as subsection (1) and by inserting after subsection (j) the following new subsection: "(k) PUBLIC APPROVAL FOR INDUSTRIAL DEVELOPMENT BONDS.—

"(1) IN GENERAL.—Notwithstanding subsection (b), an industrial development bond shall be treated as an obligation not described in subsection (a) unless the requirements of paragraph (2) of this subsection are satisfied. "(2) PUBLIC APPROVAL REQUIREMENT.—

"(A) IN GENERAL.—An obligation shall satisfy the requirements of this paragraph if such obligation is issued as a part of an issue which has been approved by— "(i) the governmental unit— "(I) which issued such obligation, or "(II) on behalf of which such obligation was issued, and "(ii) each governmental unit having jurisdiction over the area in which any facility, with respect to which financing is to be provided from the proceeds of such issue, is located (except that if more than 1 governmental unit within a State has jurisdiction over the entire area within such State in which such facility is located, only 1 such unit need approve such issue). "(B) APPROVAL BY A GOVERNMENTAL UNIT.—For purposes

of subparagraph (A), an issue shall be treated as having been approved by any governmental unit if such issue is approved— "(i) by the applicable elected representative of such governmental unit after a public hearing following reasonable public notice, or "(ii) by voter referendum of such governmental unit. "(C) SPECIAL RULES FOR APPROVAL OF FACILITY.—If there has been public approval under subparagraph (A) of the plan of financing a facility, such approval shall constitute approval under subparagraph (A) for any issue— "(i) which is issued pursuant to such plan within 3 years after the date of the first issue pursuant to the approval, and

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