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 100 STAT. 2104

PUBLIC LAW 99-514—OCT. 22, 1986 Clause (iv) shall not apply if for the taxable year such spouse makes a separate return or any other taxpayer is entitled to an exemption for such spouse under section 151(c). "(B) The amount specified in clause (i), (ii), or (iii) of subparagraph (A) shall be increased by the amount of 1 additional standard deduction (within the meaning of section 63(c)(3)) in the case of an individual entitled to such deduction by reason of section 63(fKl)(A) (relating to individuals age 65 or more), and the amount specified in clause (iv) of subparagraph (A) shall be increased by the amount of the additional standard deduction for each additional standard deduction to which the individual or his spouse is entitled by reason of section 63(f)(l). "(C) The exception under subparagraph (A) shall not apply to any individual— "(i) who is described in section 63(c)(5) and who has— "(I) income (other than earned income) in excess of the amount in effect under section 63(c)(5)(A) (relating to limitation on standard deduction in the case of certain dependents), or "(II) total gross income in excess of the standard deduction, or •../ «^j) fQj, ^hom the standard deduction is zero under section 63(c)(6). "(D) For purposes of this subsection— "(i) The terms 'standard deduction', 'basic standard deduction' and 'additional standard deduction' have the respective meanings given such terms by section 63(c). "(ii) The term 'exemption amount' has the meaning given such term by section 151(d). In the case of an individual described in section 151(d)(2), the exemption amount shall ' be zero." (B) Paragraph (9) of section 6012(a) is amended by striking out "$2,700 or more" and inserting in lieu thereof "not less than the sum of the exemption amount plus the basic standard deduction under section 63(c)(2)(D)". (2) SECTION 6013.—Subparagraph (A) of section 6013(b)(3) (relating to when return deemed filed) is amended— (A) by striking out "(twice the exemption amount in case such spouse was 65 or over)" each place it appears, (B) by striking out "section 151(f)" and inserting in lieu thereof "section 151(d)", and (C) by adding at the end thereof the following new sentence: "For purposes of clauses (ii) and (iii), if the spouse whose gross income is being compared to the exemption amount is 65 or over, such clauses shall be applied by substituting 'the sum of the exemption amount and the additional standard deduction under section 63(c)(2) by reason of section 63(fKlXA)' for 'the exemption amount'. O> OTHER AMENDMENTS.— t) M) SECTION 21 ETTC.

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(A) Sections 21(b)(l)(A), 21(e)(6)(A), and 129(c)(l) are each amended by striking out "section 151(e)" and inserting in lieu thereof "section 151(c)". (B) Sections 21(e)(6)(B), 32(c)(l)(A)(i), 129(c)(2), and 152(e)(l)(A) are each amended by striking out "section 151(e)(3)" and inserting in lieu thereof "section 151(c)(3)".

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100 STAT. 2105

(2) SECTION I08.—Subparagraph (B) of section 108(b)(3) is amended by striking out "50 cents" and inserting in lieu thereof "331/3 cents". (3) SECTION 152, ETC.—Sections 152(d)(2) and 2032A(c)(7)(D) are each amended by striking out "section 151(e)(4)" and inserting in Heu thereof "section 151(c)(4)". (4) SECTION 172.—Subsection (d) of section 172 (relating to modifications) is amended by striking out paragraph (7). (5) SECTION 402.—Subparagraph (B) of section 402(e)(1), as amended by section 1222(b), is amended by striking out "the zero bracket amount applicable to such individual for the taxable year plus". (6) SECTION 441.—Clause (iii) of section 441(f)(2)(B) (relating to change in accounting period) is amended by striking out "and by adding the zero bracket amount,". (7) SECTION 443.— (A) Paragraph (1) of section 443(b) (relating to computation of tax on change of annual accounting period) is amended by striking out ", and adding the zero bracket amount". (B) Clause (ii) of section 443G))(2)(A) (relating to computation based on 12-month period) is amended to read as follows: "(ii) the tax computed on the modified taxable income for the short period." (8) SECTION 541.—Section 541 is amended by striking out "50 percent" and inserting in lieu thereof "28 percent (38.5 percent in the case of taxable years beginning in 1987)". (9) SECTION 613A.—Paragraph (1) of section 613A(d) (relating to limitation on percentage depletion based on taxable income) is amended by striking out "(reduced in the case of an individual by the zero bracket amount)". (10) SECTION 667.—Paragraph (2) of section 667(b) (relating to tax on amount deemed distributed by trust in preceding years) is amended to read as follows: "(2) TREATMENT OF LOSS YEARS.—For purposes of paragraph (1), the taxable income of the beneficiary for any taxable year shall be deemed to be not less than zero." (11) SECTION 86I.—Subsection (b) of section 861 (relating to taxable income from sources within the United States) is amended by striking out "the zero bracket amount" and inserting in lieu thereof "the standard deduction". (12) SECTION 862.—Subsection (b) of section 862 (relating to taxable income from sources without the United States) is amended by striking out "the zero bracket amount" and inserting in lieu thereof "the standard deduction". (13) SECTION 904.—Subsection (a) of section 904 (relating to limitation on foreign tax credit) is amended by striking out the last sentence. (14) SECTION 1398.—Subsection (c) of section 1398 (relating to computation and payment of tax; zero bracket amount) is amended— (A) by striking out

"ZERO BRACKET AMOUNT" in the subsection heading and inserting in lieu thereof "BASIC STANDARD DEDUCTION", and

(B) by striking out paragraph (3) and inserting in lieu thereof the following:

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license: Creative Commons - Attribution Share-Alike - https://creativecommons.org/licenses/by-sa/4.0/


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 100 STAT. 2106

PUBLIC LAW 99-514—OCT. 22, 1986 ^:! "(3) BASIC STANDARD DEDUCTION.—In the case of an estate f'' which does not itemize deductions, the basic standard deduction for the estate for the taxable year shall be the same as for a married individual filing a separate return for such year." (15) SECTION 3402.— (A) Paragraph (1) of section 3402(f) (relating to withholdI A»'' ing exemptions) is amended by striking out subparagraphs (B) and (C) and by redesignating subparagraphs (D), (E), (F), and (G) as subparagraphs (B), (C), (D), and (E), respectively. (B) Subparagraph (A) of section 3402(f)(1) is amended by inserting "unless he is an individual described in section 151(d)(2)" after "himself'. (C) Subparagraph (B) of section 3402(f)(1), as redesignated " ' by subparagraph (A), is amended by striking out "subparagraph (A), (B), (C), or (F)" and inserting in lieu thereof .. "subparagraph (A) or (D)". (D) Subparagraph (C) of section 3402(D(1), as redesignated '.^ by subparagraph (A), is amended by striking out "section 151(e)" and inserting in lieu thereof "section 151(c)". (E) Subparagraph (E) of section 3402(f)(1), as redesignated by subparagraph (A), is amended by striking out "zero bracket" and inserting in lieu thereof "standard deducsio.:. tion". (F) The last sentence of paragraph (1) of section 3402(f) is . < ' amended— = (i) by striking out "subparagraph (G)" and inserting in lieu thereof "subparagraph (E)", and -ii' (ii) by striking out "zero bracket" and inserting in lieu thereof "standard deduction". •'-'' (G) Paragraph (3) of section 3402(m) is amended by inserting "(including the additional standard deduction under » section 63(c)(3) for the aged and blind)" after "deductions". '«^

(16) SECTION 6014.—

(A) Subsection (a) of section 6014 (relating to income tax return—tax not computed by taxpayer) is amended by strik• ing out "who does not have an unused zero bracket amount (determined under section 63(e))" and inserting in lieu l'^ thereof "who is not described in section 6012(a)(l)(C)(i)". (B) Paragraph (4) of section 6014(b) is amended to read as follows: "(4) to cases where the taxpayer itemizes his deductions or ' where the taxpayer claims a reduced standard deduction by reason of section 63(c)(5)." (17) SECTION 6212.—Subparagraph (A) of section 6212(c)(2) (relating to cross references) is amended to read as follows: -jj., "(A) Deficiency attributable to change of treatment with respect to itemized deductions, see section 63(e)(3)." (18) SECTION 6504.—Paragraph (2) of section 6504 (relating to cross references) is amended to read as follows: ^.

"(2) Change of treatment with respect to itemized deductions where taxpayer and his spouse make separate returns, see section 63(e)(3)."

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2107

Subtitle B—Provisions Related to Tax Credits SEC. 111. INCREASE IN EARNED INCOME CREDIT.

(a) INCREASE IN AMOUNT OF CREDIT.—Subsection (a) of section 32 (relating to earned income credit) is amended— (1) by striking out "11 percent" and inserting in lieu thereof b "14 percent", and (2) by striking out "$5,000" and inserting in lieu thereof "$5,714". Oa) INCREASE IN INCOME LEVEL AT WHICH PHASEOUT BEGINS.—

Subsection O> of section 32 is amended to read as follows: t) "(b) LIMITATION.—The amount of the credit allowable to a taxpayer under subsection (a) for any taxable year shall not exceed the excess (if any) of— "(1) the maximum credit allowable under subsection (a) to any taxpayer, over "(2) 10 percent of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds $9,000. In the case of any taxable year beginning in 1987, paragraph (2) shall be applied by substituting '$6,500' for '$9,000'." (c) INFLATION ADJUSTMENTS.—Section 32 is amended by adding at the end thereof the following new subsection: "(i) INFLATION ADJUSTMENTS.—

"(1) IN GENERAL.—In the case of any taxable year beginning after the applicable calendar year, each dollar amount referred to in paragraph (2)(B) shall be increased by an amount equal to— "(A) such dollar amount, multiplied by "(B) the cost-of-living adjustment determined under section 1(f)(3), for the calendar year in which the taxable year begins, by substituting 'calendar year 1984' for 'calendar year 1987' in subparagraph (B) thereof. "(2) DEFINITIONS, ETC.—For purposes of paragraph (1)— "(A) APPLICABLE CALENDAR YEAR.—The term 'applicable calendar year' means— -,if 3 G "(i) 1986 in the case of the dollar amounts referred to in clause (i) or (ii) of subparagraph (B), and "(ii) 1987 in the case of the dollar amount referred to in clause (iii) of subparagraph (B). "(B) DOLLAR AMOUNTS.—The dollar amounts referred to, J in this subparagraph are— "(i) the $5,714 amount contained in subsection (a), -e- Au "(ii) the $6,500 amount contained in the last sentence of subsection (b), and "(iii) the $9,000 amount contained in subsection (b)(2). "(3) ROUNDING.—If any increase determined under paragraph (1) is not a multiple of $10, such increase shall be rounded to the i nearest multiple of $10 (or, if such increase is a multiple of $5, such increase shall be increased to the next higher multiple of $10)." (d) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 32(f) (relating to amount of credit to be determined under tables) is amended by striking out subparagraphs (A) and (B) and inserting in lieu thereof the following:

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 100 STAT. 2108

PUBLIC LAW 99-514—OCT. 22, 1986

II;

"(A) for earned income between $0 and the amount of earned income at which the credit is phased out under subsection (b), and "(B) for adjusted gross income between the dollar amount i& tiOii at which the phaseout begins under subsection (b) and the amount of adjusted gross income at which the credit is j::•-' phased out under subsection (b)." (2) Subparagraph (B) of section 3507(c)(2) (relating to earned "^^ income advance amount) is amended by striking out clauses (i) and (ii) and inserting in lieu thereof the following: "(i) of not more than 14 percent of earned income not in excess of the amount of earned income taken into '• account under section 32(a), which "(ii) phases out between the amount of earned income at which the phaseout begins under subsection V ~ • (b) of section 32 and the amount of earned income at which the credit under section 32 is phased out under such subsection, or". (3) Subparagraph (C) of section 3507(c)(2) is amended by striking out clauses (i) and (ii) and inserting in lieu thereof the following: "(i) of not more than 14 percent of earned income not in excess of Vz of the amount of earned income taken into account under section 32(a), which "(ii) phases out between amounts of earned income which are V2 of the amounts of earned income described in subparagraph (B)(ii)." (e) EMPLOYEE NOTIFICATION.—The Secretary of the Treasury is

directed to require, under regulations, employers to notify any employee who has not had any tax withheld from wages (other than an employee whose wages are exempt from withholding pursuant to section 3402(n) of the Internal Revenue Code of 1986) that such employee may be eligible for a refund because of the earned income credit. SEC. 112. REPEAL OF CREDIT FOR CONTRIBUTIONS TO CANDIDATES FOR PUBLIC OFFICE.

(a) GENERAL RULE.—Section 24 (relating to contributions to candidates for public office) is hereby repealed. (b) TECHNICAL AMENDMENTS.—

(1) Subsection (g) of section 527 (relating to treatment of newsletter funds) is amended— (A) by striking out "section 24(c)(2)" in paragraph (1) and inserting in lieu thereof "paragraph (3)", and (B) by adding at the end thereof the following new paragraph: '^ "(3) CANDIDATE.—For purposes of paragraph (1), the term 'candidate' means, with respect to any Federal, State, or local elective public office, an individual who— "(A) publicly announces that he is a candidate for > nomination or election to such office, and "(B) meets the qualifications prescribed by law to hold such office." (2) Subsection (a) of section 642 (relating to credits against tax for estates and trusts) is amended to read as follows: "(a) FOREIGN TAX CREDIT ALLOWED.—An estate or trust shall be allowed the credit against tax for taxes imposed by foreign countries

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2109

and possessions of the United States, to the extent allowed by section 901, only in respect of so much of the taxes described in such section as is not properly allocable under such section to the beneficiaries." (3) Paragraph (3) of section 901(i) (relating to cross references) is amended by striking out "section 642(a)(1)" and inserting in lieu thereof "section 642(a)". (4) Paragraph (6) of section 7871(a) (relating to Indian tribal governments treated as States for certain purposes) is amended by striking out subparagraph (A) and by redesignating subparagraphs (B), (C), (D), (E), and (F) as subparagraphs (A), (B), (C), (D), and (E), respectively. (5) The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by striking out the item relating to section 24.

Subtitle C—Provisions Related to Exclusions SEC. 121. TAXATION OF UNEMPLOYMENT COMPENSATION.

Section 85 (relating to unemployment compensation) is amended to read as follows: "SEC. 85. UNEMPLOYMENT COMPENSATION.

"(a) GENERAL RULE.—In the case of an individual, gross income includes unemployment compensation. "(b)

UNEMPLOYMENT COMPENSATION DEFINED.—For purposes of

this section, the term 'unemployment compensation' means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation." SEC. 122. PRIZES AND AWARDS. (a) EXCLUSION FROM GROSS INCOME.—

(1) IN GENERAL.—Section 74 (relating to prizes and awards) is amended— (A) by striking out "Except as provided in subsection (b) and" in subsection (a) and inserting in lieu thereof "Except as otherwise provided in this section or", (B) by striking out "EXCEPTION" in the heading for subsection (b) and inserting in lieu thereof "EXCEPTION FOR CERTAIN PRIZES AND AWARDS TRANSFERRED TO CHARITIES",

(C) by striking out "and" at the end of subsection (b)(1), by striking out the period at the end of subsection (b)(2) and inserting in lieu thereof "; and", and by adding after subsection (b)(2) the following new paragraph: "(3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.", and (D) by adding at the end thereof the following new subsection: "(c) EXCEPTION FOR CERTAIN EMPLOYEE ACHIEVEMENT AWARDS.—

"(1) IN GENERAL.—Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount

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 100 STAT. 2110

PUBLIC LAW 99-514-OCT. 22, 1986

"1 allowable as a deduction to the employer for the cost of the employee achievement award. "(2) EXCESS DEDUCTION AWARD.—If the cost to the employer of the employee achievement award received by the taxpayer '<;?) exceeds the amount allowable as a deduction to the employer, "(A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or "(B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer. The remaining portion of the value of such award shall not be included in the gross income of the recipient. "(3) TREATMENT OF TAX-EXEMPT EMPLOYERS.—In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction ? to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle. "(4) CROSS REFERENCE.— "For provisions excluding certain de minimis fringes from gross income, see section 132(e)." (2) CONFORMING AMENDMENTS.— . .....
 * \ then gross income includes the greater of—

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(A) Clause (i) of section 4941(d)(2)(G) is amended by striking out "section 74(b)" and inserting in lieu thereof "section

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74(b) (without regard to paragraph (3) thereof)". (B) Paragraph (2) of section 4945(g) is amended by striking out "section 74(b)" and inserting in lieu thereof "section 74(b) (without regard to paragraph (3) thereof)". (b) AMOUNTS TRANSFERRED BY EMPLOYER NOT EXCLUDABLE AS

GIFTS.—Section 102 (relating to gifts and inheritances) is amended by adding at the end thereof the following new subsection: "(c) EMPLOYEE GIFTS.—

"(1) IN GENERAL.—Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee. "(2) CROSS REFERENCES.—

,

"For provisions excluding certain employee achievement awards from gross income, see section 74(c). "For provisions excluding certain de minimis fringes from gross income, see section 132(e)."

(c) GIFTS.—Section 2740t)) (relating to gifts) is amended— (1) by adding "or" at the end of subparagraph (A) of paragraph (1), (2) by striking out "or" at the end of subparagraph (B) of paragraph (1), and inserting in lieu thereof a period, (3) by striking out subparagraph (C) of paragraph (1), and (4) by striking out paragraph (3). (d) DEDUCTION FOR COST OF EMPLOYEE ACHIEVEMENT AWARDS.—

Section 274 (relating to certain entertainment, etc., expenses) is amended by redesignating subsection (j) as subsection (k) and by inserting after subsection (i) the following new subsection: "(j) EMPLOYEE ACHIEVEMENT AWARDS.— "(1) GENERAL RULE.—No deduction shall be allowed under

section 162 or section 212 for the cost of an employee achieve-

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2111

ment award except to the extent that such cost does not exceed the deduction Hmitations of paragraph (2). "(2) DEDUCTION LIMITATIONS.—The deduction for the cost of an employee achievement award made by an employer to an employee— "(A) which is not a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year which are not qualified plan awards, shall not exceed $400, and "(B) which is a qualified plan award, when added to the cost to the employer for all other employee achievement awards made to such employee during the taxable year (including employee achievement awards which are not qualified plan awards), shall not exceed $1,600. "(3) DEFINITIONS.—For purposes of this subsection— "(A) EMPLOYEE ACHIEVEMENT AWARD.—The term 'employee achievement award* means an item of tangible personal property which is— "(i) transferred by an employer to an employee for length of service achievement or safety achievement, ..^ "(ii) awarded as part of a meaningful presentation, and "(iii) awarded under conditions and circumstances that do not create a significant likelihood of the pay ment of disguised compensation. "(B) QUALIFIED PLAN AWARD.—

"(i) IN GENERAL.—The term 'qualified plan award' means an employee achievement award awarded as part of an established written plan or program of the taxpayer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)) as to eligibility or benefits. "(ii) LIMITATION.—An employee achievement award shall not be treated as a qualified plan award for any taxable year if the average cost of all employee achievement awards which are provided by the employer during the year, and which would be qualified plan awards but for this subparagraph, exceeds $400. For i purposes of the preceding sentence, average cost shall be determined by including the entire cost of qualified plan awards, without taking into account employee achievement awards of nominal value. "(4) SPECIAL RULES.—For purposes of this subsection— "(A) PARTNERSHIPS.—In the case of an employee achievement award made by a partnership, the deduction limitations contained in paragraph (2) shall apply to the partnership as well as to each member thereof. "(B) LENGTH OF SERVICE AWARDS.—An item shall not be treated as having been provided for length of service achievement if the item is received during the recipient's 1st 5 years of employment or if the recipient received a length of service achievement award (other than an award excludable under section 132(e)(1)) during that year or any of the prior 4 years.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/304

 100 STAT. 2112

PUBLIC LAW 99-514—OCT. 22, 1986

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"(C) SAFETY ACHIEVEMENT AWARDS.—An item provided by an employer to an employee shall not be treated as having been provided for safety achievement if— "(i) during the taxable year, employee achievement awards (other than awards excludable under section 132(e)(1)) for safety achievement have previously been awarded by the employer to more than 10 percent of the employees of the employer (excluding employees described in clause (ii)), or "(ii) such item is awarded to a manager, administrator, clerical employee, or other professional employee.".

(e) TREATMENT FOR PURPOSES OF EMPLOYMENT TAXES.—Each of the

following provisions are amended by striking out "117 or" and inserting in lieu thereof "74(c), 117, or": (1) Section 3121(a)(20). (2) Section 3231(e)(5). (3) Section 3306(b)(16). (4) Section 3401(a)(20). (5) Section 209(s) of the Social Security Act. SEC. 123. SCHOLARSHIPS.

(a) IN GENERAL.—Section 117 (relating to scholarship and fellowship grants) is amended to read as follows: "SEC. 117. QUALIFIED SCHOLARSHIPS.

"(a) GENERAL RULE.—Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(l)(A)(ii). "(b) QUALIFIED SCHOLARSHIP.—For purposes of this section— "(1) IN GENERAL.—The term 'qualified scholarship' means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accord• ance with the conditions of the grant, such amount was used for qualified tuition and related expenses. "(2) QUALIFIED TUITION AND RELATED EXPENSES.—For purposes of paragraph (1), the term 'qualified tuition and related expenses' means— "(A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(l)(A)(ii), and "(B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization. "(c) LIMITATION.—Subsections (a) and (d) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction. "(d) QUALIFIED TUITION REDUCTION.—

,,

"(1) IN GENERAL.—Gross income shall not include any qualified tuition reduction. "(2) QUALIFIED TUITION REDUCTION.—For purposes of this subsection, the term 'qualified tuition reduction' means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(l)(A)(ii) for the edu-

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 PUBLIC LAW 99-514-OCT. 22, 1986

100 STAT. 2113

cation (below the graduate level) at such organization (or another organization described in section 170(b)(l)(A)(ii)) of— "(A) such employee, or "(B) any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(f). "(3) REDUCTION MUST NOT DISCRIMINATE IN FAVOR OF HIGHLY

COMPENSATED, ETC.—Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any officer, owner, or highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of officers, owners, or highlv compensated employees (within the meaning of section 414(q)).' (b) TECHNICAL AMENDMENTS.—

(1) Subsection (a) of section 74 is amended by striking out "(relating to scholarship and fellowship grants)" and inserting in lieu thereof "(relating to qualified scholarships)". (2) The second sentence of section 1441(b) (relating to income items) is amended to read as follows: "The items of income referred to in subsection (a) from which tax shall be deducted and withheld at the rate of 14 percent are amounts which are received by a nonresident alien individual who is temporarily present in the United States as a nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act and which are incident to a qualified scholarship to which section 117(a) applies, but only to the extent such amounts are includible in gross income." (3) Paragraph (6) of section 7871(a) (relating to Indian tribal governments treated as States for certain purposes), as amended by section 112, is amended by striking out subparagraph (B) and by redesignating subparagraphs (C), (D), and (E) as subparagraphs (B), (C), and (D), respectively. (4) The table of sections for part III of subchapter B of chapter 1 is amended by striking out the item relating to section 117 and inserting in lieu thereof the following new item: "Sec. 117. Qualified scholarships."

Subtitle D—Provisions Related to Deductions SEC. 131. REPEAL OF DEDUCTION FOR 2-EARNER MARRIED COUPLES.

(a) GENERAL RULE.—Section 221 (relating to deduction for 2-earner married couples) is hereby repealed. (b) CONFORMING AMENDMENTS.—

(1) Section 62 is amended by striking out paragraph (16). (2) Subparagraph (A) of section 86(b)(2) is amended by striking out "sections 221," and inserting in lieu thereof "sections. (3) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out the item relating to section 221. SEC. 132. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS.

(a) GENERAL RULE.—Part I of subchapter B of chapter 1 (defining gross income, adjusted gross income, etc.) is amended by adding at the end thereof the following new section:

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 100 STAT. 2114

PUBLIC LAW 99-514—OCT. 22, 1986

"SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS.

"(a) GENERAL RULE.—In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income. "(b) MISCELLANEOUS ITEMIZED DEDUCTIONS.—For purposes of this section, the term 'miscellaneous itemized deductions' means the itemized deductions other than— "(1) the deduction under section 163 (relating to interest), "(2) the deduction under section 164 (relating to taxes), "(3) the deduction under section 165(a) for losses described in subsection (c)(3) or (d) of section 165, "(4) the deduction under section 170 (relating to charitable, etc., contributions and gifts), "(5) the deduction under section 213 (relating to medical, dental, etc., expenses), "(6) the deduction under section 217 (relating to moving expenses), "(7) any deduction allowable for impairment-related work expenses, "(8) the deduction under section 691(c) (relating to deduction for estate tax in ceise of income in respect of the decedent), "(9) any deduction allowable in connection with personal property used in a short sale, "(10) the deduction under section 1341 (relating to computation of tax where taxpayer restores substantial amount held under claim of right), "(11) the deduction under section 720t))(3) (relating to deduction where annuity payments cease before investment recovered), "(l2) the deduction under section 171 (relating to deduction for amortizable bond premium), and "(13) the deduction under section 216 (relating to deductions in connection with cooperative housing corporations). "(c) DISALLOWANCE OF INDIRECT DEDUCTION THROUGH PASS-THRU

ENTITY.—The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection. The preceding sentence shall not apply with respect to estates, trusts, cooperatives, and real estate investment trusts. "(d) IMPAIRMENT-RELATED WORK EXPENSES.—For purposes of this section, the term 'impairment-related work expenses means expenses— "(1) of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual's place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and "(2) with respect to which a deduction is allowable under section 162 (determined without regard to this section). "(e) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ESTATES AND TRUSTS.—For purposes of this section, the adjusted gross

income of an estate or trust shall be computed in the same manner as in the case of an individual, except that the deductions for osts

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 P U B L I C L A W 9 9 - 5 1 4 — O C T. 22, 1986

100 S T A T. 2115

which a r e paid or incurred in connection with the administration of the estate or t r u s t and would not h a v e been incurred if the property were not held in such t r u s t or e s t a t e shall be t r e a t e d as allowable in a r r i v i n g a t adjusted gross income." (b) T R E A T M ENT OF TRADE A N D B U S I N E S S DEDUCTIONS O F EMPLOYEES.—

(1) IN GENERAL. — Paragraph (2) of section 62 (defining adj u s t e d gross income) is amended to read a s follows: "(2) CERTAIN TRADE AND BUSINESS DEDUCTIONS OF EMPLOYEES.— "(A) REIMBURSED EXPENSES O F EMPLOYEES.—The deduc-

tions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by h i m of services as a n employee, under a reimbursement or other expense allowance a r r a n g e m e n t with his employer. ' -

"(B)

CERTAIN

EXPENSES

O F PERFORMING

ARTISTS.—The

deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing a r t i s t in connection with the performances by him of services in the performing a r t s a s a n employee." (2) DEFINITION OF Q U A U F I E D PERFORMING ARTIST.—Section 62

is amended— (A) by striking out " For purposes of t h i s s u b title " and inserting in lieu thereof "(a) GENERAL RULE. — For purposes ^ of this subtitle", and (B) by a d d i n g a t the end thereof the following new subsection: "(b) Q U A U F I E D P E R FOR M I N G A R T I S T. —

"(1) IN GENERAL.—For purposes of subsection (a)(2)(B), the term 'qualified performing a r t i s t ' means, with respect to any taxable year, any individual if— "(A) such individual performed services in the performing a r t s a s a n employee during the taxable year for a t least 2 employers, "(B) the aggregate a m o u n t allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual's gross income a t t r i b u t a b l e to the performance of such services, and "(C) the adjusted gross income of such individual for the (STi k taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000. "(2)

NOMINAL

EMPLOYER

NOT TAKEN

INTO

ACCOUNT.—An

individual shall not be t r e a t e d as performing services in the performing a r t s a s a n employee for any employer during any taxable year unless the a m o u n t received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200. "(3) SPECIAL RULES FOR MARRIED COUPLES.—

"(A) IN GENERAL.—Except in the case of a h u s b and and wife who lived a part a t all times during the taxable year, if the tax p a y e r is m a r r i e d a t the close of the taxable year, subsection (a)(2)(B) shall apply only if the tax p a y e r and his spouse file a joint r e t u r n for the taxable year. "(B) APPLICATION O F PARAGRAPH (1).—In the case of a

joint r e t u r n —

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 100 STAT. 2116

PUBLIC LAW 99-514—OCT. 22, 1986

-

^

/.? J

"(i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but "(ii) paragraph (1)(C) shall be applied with respect to their combined adjusted gross income. "(C) DETERMINATION OF MARITAL STATUS.—For purposes of

'iM:, ''

^j^-g subsection, marital status shall be determined under section 7703(a). "(D) JOINT RETURN.—For purposes of this subsection, the term 'joint return' means the joint return of a husband and wife made under section 6013."

(c) MOVING EXPENSE DEDUCTION NOT ALLOWABLE IN COMPUTING ADJUSTED GROSS INCOME.—Subsection (a) of section 62 (as amended

by subsection (b)) is amended by striking out paragraph (8). (d) CLERICAL AMENDMENT.—The table of sections for part I of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 67. 2-percent floor on miscellaneous itemized deductions." SEC. 133. MEDICAL EXPENSE DEDUCTION LIMITATION INCREASED.

Subsection (a) of section 213 (relating to deduction for medical, dental, etc., expenses) is amended by striking out "5 percent" and inserting in lieu thereof "7.5 percent". SEC. 134. REPEAL OF DEDUCTION FOR STATE AND LOCAL SALES TAXES.

(a) GENERAL RULE.—Subsection (a) of section 164 (relating to deduction for taxes) is amended— (1) by striking out paragraph (4) and by redesignating paragraph (5) as paragraph (4), and (2) by adding at the end thereof the following new sentence: "Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition." (b) CONFORMING AMENDMENTS.—Subsection (b) of section 164 is

amended— (1) by striking out paragraphs (2) and (5), and (2) by redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively. SEC. 135. REPEAL OF DEDUCTION FOR ADOPTION EXPENSES.

(a) GENERAL RULE.—Section 222 (relating to deduction for adoption expenses) is hereby repealed. (b) CONFORMING AMENDMENTS.—

(1) Section 223 is redesignated as section 220. (2) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out the items relating to sections 222 and 223 and inserting in lieu thereof the following: "Sec. 220. Cross references."

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2117

Subtitle E—Miscellaneous Provisions SEC. 141. REPEAL OF INCOME AVERAGING.

(a) GENERAL RULE.—Part I of subchapter Q of chapter 1 (relating to income averaging) is hereby repealed. (b) TECHNICAL AMENDMENTS.—

••

(1) Subsection (b) of section 3 (relating to section inapplicable to certain individuals) is amended by striking out paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively. (2) Subsection (b) of section 5 (relating to cross references relating to tax on individuals) is amended by striking out paragraph (2) and by redesignating paragraph (3) as paragraph (2). (3) Subparagraph (B) of section 6511(d)(2) (relating to special rules applicable to income taxes) is amended to read as follows: "(B) APPLICABLE RULES.—

' f

"(i) IN GENERAL.—If the allowance of a credit or refund of an overpayment of tax attributable to a net operating loss carryback or a capital loss carryback is otherwise prevented by the operation of any law or rule of law other than section 7122 (relating to compromises), such credit or refund may be allowed or made, if claim therefor is filed within the period provided in subparagraph (A) of this paragraph. "(ii) TENTATIVE CARRYBACK ADJUSTMENTS.—If

the

allowance of an application, credit, or refund of a decrease in tax determined under section 6411(b) is otherwise prevented by the operation of any law or rule of law other than section 7122, such application, credit, or refund may be allowed or made if application for a tentative carryback adjustment is made within the period provided in section 6411(a). "(iii) DETERMINATIONS BY COURTS TO BE CONCLUSIVE.— In the case of any such claim for credit or refund or any such application for a tentative carryback adjustment, the determination by any court, including the Tax Court, in any proceeding in which the decision of the court has become final, shall be conclusive except with respect to— "(I) the net operating loss deduction and the effect of such deduction, and "(II) the determination of a short-term capital loss and the effect of such short-term capital loss, to the extent that such deduction or short-term capital loss is affected by a carryback which was not an issue in such proceeding." (c) CLERICAL AMENDMENT.—The table of parts for subchapter Q of chapter 1 is amended by striking out the item relating to part I. SEC. 142. LIMITATIONS ON DEDUCTIONS FOR MEALS. TRAVEL, AND ENTERTAINMENT. (a) BUSINESS MEALS.—

(1) IN GENERAL.—Section 274 (relating to disallowance of certain entertainment, etc. expenses), as amended by section 122(d), is amended by redesignating subsection (k) as subsection

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Page:United States Statutes at Large Volume 100 Part 3.djvu/310

 100 STAT. 2118

PUBLIC LAW 99-514—OCT. 22, 1986 (o) and by inserting after subsection (j) the following new subsection: "(k) BUSINESS MEALS.—

"(1) IN GENERAL.—No deduction shall be allowed under this chapter for the expense of any food or beverages unless— "(A) such expense is not lavish or extravagant under the circumstances, and "(B) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to any ex-

pense if subsection (a) does not apply to such expense by reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection (e)." (2) TECHNICAL AMENDMENTS.—

(A) Subsection (e) of section 274 (relating to specific exceptions to application of subsection (a)) is amended by striking out paragraph (1) and by redesignating paragraphs (2) through (10) as paragraphs (1) through (9), respectively. (B) Paragraph (3) of section 274(e), as redesignated by subparagraph (A), is amended by striking out "paragraph (3)" and inserting in lieu thereof 'paragraph (2)". (b) ADDITIONAL RESTRICTIONS ON EXPENSES FOR MEALS, TRAVEL,

AND ENTERTAINMENT.—Section 274 is amended by inserting after

the subsection added by subsection (a) the following new subsections: "(1) ADDITIONAL LIMITATIONS ON ENTERTAINMENT TICKETS.— "(1) E N T E R T A I N M E N T TICKETS.—

"(A) IN GENERAL.—In determining the a m o u n t allowable as a deduction under t h i s chapter for any ticket for any activity or facility described in subsection (d)(2), the a m o u n t t a k e n into account shall not exceed the face value of such ticket. "(B) EXCEPTION FOR CERTAIN CHARITABLE SPORTS EVENTS.—

Subparagraph (A) shall not apply to any ticket for any sports event— "(i) which is organized for the p r i m a r y purpose of benefiting a n organization which is described in section 501(c)(3) and exempt from tax under section 501(a), "(ii) all of the n e t proceeds of which a r e contributed to such organization, and "(iii) which utilizes volunteers for substantially all of the work performed in c a r r y i n g o u t such event.

vi

"(2) SKYBOXES, ETC.—

"(A) IN GENERAL.—In the case of a skybox or other priv a t e l u x u r y box leased for more than 1 event, the a m o u n t allowable a s a deduction under this chapter with respect to such events shall not exceed the s u m of the face value of non-luxury box seat tickets for the seats in such box covered by the lease. For purposes of the preceding sentence, 2 or more related leases shall be t r e a t e d as 1 lease. f,

"(B) P H A S E I N. — I n the case of—

"(i) a taxable year beginning in 1987, the a m o u n t disallowed under subparagraph (A) shall be Va of the a m o u n t which would be disallowed w i t h o u t r e g a r d to

«»; H

.

,

this subparagraph, and "(ii) in the case of a taxable year beginning in 1988, the amount disallowed under subparagraph (A) shall be % of the amount which would have been disallowed without regard to this subparagraph."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/311

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2119

"(m) ADDITIONAL LIMITATIONS ON TRAVEL EXPENSES.— "(1) LUXURY WATER TRANSPORTATION.—

"(A) IN GENERAL.—No deduction shall be allowed under this chapter for expenses incurred for transportation by water to the extent such expenses exceed twice the aggregate per diem amounts for days of such transportation. For purposes of the preceding sentence, the term 'per diem amounts' means the highest amount generally allowable with respect to a day to employees of the executive branch of the Federal Government for per diem while away from '" ' home but serving in the United States. "(B) EXCEPTIONS.—Subparagraph (A) shall not apply to— "(i) any expense allocable to a convention, seminar, or other meeting which is held on any cruise ship, and I.. "(ii) any expense to which subsection (a) does not ' apply by reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection (e). "(2) TRAVEL AS FORM OF EDUCATION.—No deduction shall be allowed under this chapter for expenses for travel as a form of education, "(n) ONLY 80 PERCENT OF MEAL AND ENTERTAINMENT EXPENSES ALLOWED AS DEDUCTION.—

•' j

•

?-! ?j ft

%_ 5 ij

J'

"(1) IN GENERAL.—The amount allowable as a deduction under this chapter for— "(A) any expense for food or beverages, and "(B) any item with respect to an activity which is of a type generally considered to constitute entertainment, a amusement, or recreation, or with respect to a facility used in connection with such activity, shall not exceed 80 percent of the amount of such expense or item which would (but for this paragraph) be allowable as a deduction under this chapter. "(2) EXCEPTIONS.—Paragraph (1) shall not apply to any expense if— "(A) subsection (a) does not apply to such expense by reason of paragraph (2), (3), (4), (7), (8), or (9) of subsection " (e), "(B) in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason of subsection (e) thereof (relating to de minimis fringes), "(C) such expense is covered by a package involving a ticket described in subsection (1)(1)(B), or "(D) in the case of an expense for food or beverages before January 1, 1989, such expense is an integral part of a qualified meeting. "(3) QUALIFIED MEETING.—For purposes of paragraph (2)(D), the term 'qualified meeting' means any convention, seminar, annual meeting, or similar business program with respect to which— "(A) an expense for food or beverages is not separately stated, "(B) more than 50 percent of the participants are away from home, "(C) at least 40 individuals attend, and

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 100 STAT. 2120

PUBLIC LAW 99-514—OCT. 22, 1986 "(D) such food and beverages are part of a program which includes a speaker."

(c) No DEDUCTION ALLOWED FOR SEMINARS, ETC., FOR SECTION 212 PURPOSES.—

(1) IN GENERAL.—Subsection (h) of section 274 (relating to attendance at conventions, etc.) is amended by adding at the end thereof the following new paragraph: "(7) SEMINARS, ETC. FOR SECTION 212 PURPOSES.—No deduction

shall be allowed under section 212 for expenses allocable to a convention, seminar, or similar meeting." (2) TECHNICAL AMENDMENTS.—Paragraphs (1), (2), (4), and (5)

of section 274(h) are each amended— (A) by striking out "or 212" each place it appears, and (B) by striking out "or to an activity described in section 212 and" each place it appears. (d) DENIAL OF CHARITABLE CONTRIBUTION FOR CERTAIN TRAVEL

EXPENSES.—Section 170 (relating to charitable, etc., contributions and gifts) is amended by redesignating subsections (k) and (1) as subsections (1) and (m), respectively, and by inserting after subsection (j) the following new subsection: "(k) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL EXPENSES.—NO

deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel." SEC. 143. CHANGES IN TREATMENT OF HOBBY LOSS, ETC.

(a) HOBBY Loss.—Subsection (d) of section 183 (relating to presumption) is amended— (1) by striking out "2 or more of the taxable years in the period of 5 consecutive taxable years" and inserting in lieu thereof "3 or more of the taxable years in the period of 5 consecutive taxable years", and (2) by striking out the last sentence and inserting in lieu thereof the following: "In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting '2'for'3'and T for'5'." (b) TREATMENT OF RENTAL TO EMPLOYER UNDER SECTION 280A.— Subsection (c) of section 280A (relating to exceptions for certain business or rental use; limitation on deductions for such use) is amended by adding at the end thereof the following new paragraph: "(6) TREATMENT OF RENTAL TO EMPLOYER.—Paragraphs (1) and

(3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer." (c) REVISION OF LIMITATION ON DEDUCTION FOR BUSINESS U S E OF

HOME.—Paragraph (5) of section 280A(c) (relating to exceptions for certain business or rental use; limitation on deductions for such use) is amended by striking out subparagraph (B) and inserting in lieu thereof the following: "(B) the sum of— "(i) the deductions allocable to such use which are allowable under this chapter for the taxable year

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2121

whether or not such unit (or portion thereof) was so used, and "(ii) the deductions allocable to the trade or business in which such use occurs (but which are not allocable to such use) for such taxable year. Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year." SEC. 144. DEDUCTION FOR MORTGAGE INTEREST AND REAL PROPERTY TAXES ALLOWABLE WHERE PARSONAGE ALLOWANCE OR MILITARY HOUSING ALLOWANCE RECEIVED.

Section 265 (relating to expenses and interest relating to taxexempt income) is amended by adding at the end thereof the following new paragraph: "(6) SECTION NOT TO APPLY WITH RESPECT TO PARSONAGE AND MiuTARY HOUSING ALLOWANCES.—No deduction shall be denied

under this section for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as-r "(A) a military housing allowance, or "(B) a parsonage allowance excludable from gross income under section 107." fi-i.'

Subtitle F—Effective Dates SEC. 15L EFFECTIVE DATES.

(a) GENERAL RULE.—Except as otherwise provided in this section, the amendments made by this title shall apply to taxable years beginning after December 31, 1986. (b) UNEMPLOYMENT COMPENSATION.—The amendment made by section 121 shall apply to amounts received after December 31, 1986, in taxable years ending after such date. (c) PRIZES AND AWARDS.—The amendments made by section 122 shall apply to prizes and awards granted after December 31, 1986. (d) SCHOLARSHIPS.—The amendments made by section 123 shall apply to taxable years beginning after December 31, 1986, but only in the case of scholarships and fellowships granted after August 16, 1986. (e)

PARSONAGE

AND

MILITARY

HOUSING

ALLOWANCES.—The

amendment made by section 144 shall apply to taxable years beginning before, on, or after, December 31, 1986.

TITLE II—PROVISIONS RELATING TO CAPITAL COST Subtitle A—Depreciation Provisions SEC. 201. MODIFICATION OF ACCELERATED COST RECOVERY SYSTEM.

(a) GENERAL RULE.—Section 168 (relating to accelerated cost recovery system) is amended to read as follows:

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 100 STAT. 2122

PUBLIC LAW 99-514—OCT. 22, 1986

"SEC. 168. ACCELERATED COST RECOVERY SYSTEM.

"(a) GENERAL RULE.—Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using— "(1) the applicable depreciation method, "(2) the applicable recovery period, and "(3) the applicable convention. "(b) APPLICABLE DEPRECIATION METHOD.—For purposes of this section— "(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), the applicable depreciation method is— "(A) the 200 percent declining balance method, "(B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance. "(2) 15-YEAR AND 20-YEAR PROPERTY.—In the case of 15-year and 20-year property, paragraph (1) shall be applied by substituting '150 percent' for '200 percent'. "(3) PROPERTY TO WHICH STRAIGHT U N E METHOD APPLIES.—The

applicable depreciation method shall be the straight line method in the case of the following property: "(A) Nonresidential real property. "(B) Residential rental property. "(C) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply. "(4) SALVAGE VALUE TREATED AS ZERO.—Salvage value shall be treated as zero. "(5) ELECTION.—An election under paragraph (3)(C) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable. "(c) APPLICABLE RECOVERY PERIOD.—For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: "In the case of: 3-year property 5-year property 7-year property 10-year property 15-year property 20-year property Residential rental property Nonresidential real property

The applicable recovery period is: 3 years 5 years 7 years 10 years 15 years 20 years 27.5 years 31.5 years.

"(d) APPLICABLE CONVENTION.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, the applicable convention is the half-year convention. "(2) REAL PROPERTY.—In the case of— "(A) nonresidential real property, and "(B) residential rental property, "K.the applicable convention is the mid-month convention. "(3) SPECIAL RULE WHERE SUBSTANTIAL PROPERTY PLACED IN SERVICE DURING LAST 3 MONTHS OF TAXABLE YEAR.—

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 PUBLIC LAW 99-514—OCT. 22, 1986 in >

- • tw'd

100 STAT. 2123

"(A) IN GENERAL.—Except as provided in regulations, if during any taxable year— "(i) the aggregate bases of property to which this section applies and which are placed in service during the last 3 months of the taxable year, exceed "(ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention. «^g^ CERTAIN REAL PROPERTY NOT TAKEN INTO ACCOUNT.—

For purposes of subparagraph (A), nonresidential real property and residential rental property shall not be taken into account. "(4) DEFINITIONS.— "(A) HALF-YEAR CONVENTION.—The

half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year. "(B) MID-MONTH CONVENTION.—The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month.

.

 * j,:

"(C)

MID-QUARTER

CONVENTION.—The

mid-quarter

 * k|<!"

convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed

« of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter. i "(e) CLASSIFICATION OF PROPERTY.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, property shall be classified under the following table: "Property shall be treated as: 3-year property 5-year property 7-year property i 10-year property 15-year property 20-year property

If such property has a class life (in years) of: 4 or less More than 4 but less than 10 10 or more but less than 16 16 or more but less than 20 20 or more but less than 25 25 or more.

"(2) RESIDENTIAL RENTAL OR NONRESIDENTIAL REAL PROPERTY.— "(A) RESIDENTIAL RENTAL PROPERTY.—The term 'residen-

tw V of^b-

tial rental property' has the meaning given such term by section 167(j)(2)(B). "(B) NONRESIDENTIAL REAL PROPERTY.—The term 'nonresidential real property' means section 1250 property which is not— "(i) residential rental property, or "(ii) property with a class life of less than 27.5 years. "(3) CLASSIFICATION OF CERTAIN PROPERTY.—

'r

"(A) 3-YEAR PROPERTY.—The term '3-year property' includes—

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 100 STAT. 2124

PUBLIC LAW 99-514—OCT. 22, 1986 ,,'C'5

"(i) any race horse which is more than 2 years old at the time it is placed in service, and ,.J ff',f - " "(ii) any horse other than a race horse which is more ^^a'l.r. ' than 12 years old at the time it is placed in service. "(B) 5-YEAR PROPERTY.—The term '5-year property' includes— "(i) any automobile or light general purpose truck, "(ii) any semi-conductor manufacturing equipment, ,, J: "(iii) any computer-based telephone central office . switching equipment, "(iv) any qualified technological equipment, _.-^.,^,., "(v) any property used in connection with research and experimentation, and "(vi) any property which— "(I) is described in paragraph (3)(A)(viii), (3)(A)(ix), or (4) of section 48(1), or "(II) is described in paragraph (15) of section 48(1) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Federal Power Act (16 U.S.C. 796(17)(C)), as in effect on September 1, 1986. "(C) 7-YEAR PROPERTY.—The term '7-year property' includes— "(i) any railroad track, •' "(ii) any single-purpose agricultural or horticultural 'structure (within the meaning of section 48(p)), and "(iii) any property which— -ftj* =,! or «<(j) (jQgg jjQ^ have a class life, and "(II) is not otherwise classified under paragraph (2) or this paragraph. ••>• > . "(D) 15-YEAR PROPERTY.—The term *15-year property' includes— "(i) any municipal wastewater treatment plant, and ', "(ii) any telephone distribution plant and comparable . equipment used for 2-way exchange of voice and data communications. "(E) 20-YEAR PROPERTY.—The term '20-year property' includes any municipal sewers. "(0 PROPERTY TO WHICH SECTION DOES NOT APPLY.—This section shall not apply to— "(1) CERTAIN METHODS OF DEPRECIATION.—Any property i — f

"(A) the taxpayer elects to exclude such property from the application of this section, and "(B) for the 1st taxable year for which a depreciation I ' * deduction would be allowable with respect to such property in the hands of the taxpayer, the property is properly pa: depreciated under the unit-of-production method or any •~rp, ( ri*: method of depreciation not expressed in a term of years (other than the retirement-replacement-betterment method or similar method). "(2) CERTAIN PUBLIC UTILITY PROPERTY.—Any public utility property (within the meaning of section 167(1)(3)(A)) if the taxpayer does not use a normalization method of accounting. 3-yi (3) FILMS AND VIDEO TAPE.—Any motion picture film or video tape. 0? "(4) SOUND RECORDINGS.—Any sound recording described in section 48(r)(5).

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2125

"(5) CERTAIN PROPERTY PLACED IN SERVICE IN CHURNING TRANSACTIONS.— "(A) IN GENERAL.—Property—

"(i) described in paragraph (4) of section 168(e) (as in effect before the amendments made by the Tax Reform Act of 1986), or "(ii) which would be described in such paragraph if such paragraph were applied by substituting '1987' for '1981' and '1986' for '1980' each place such terms appear. "(B) SUBPARAGRAPH (A) (ii) NOT TO APPLY.—Clause (ii) of

subparagraph (A) shall not apply to— "(i) any residential rental property or nonresidential real property, or "(ii) any property if, for the 1st full taxable year in which such property is placed in service— "(I) the amount allowable as a deduction under this section (as in effect before the date of the enactment of this paragraph) with respect to such property is greater than, "(II) the amount allowable as a deduction under this section (as in effect on or after such date and using the half-year convention) for such taxable year. '(g) ALTERNATIVE DEPRECIATION SYSTEM FOR CERTAIN PROPERTY.— "(1) IN GENERAL.—In the case of—

"(A) any tangible property which during the taxable year is used predominantly outside the United States, "(B) any tax-exempt use property, "(C) any tax-exempt bond financed property, "(D) any imported property covered by an Executive order under paragraph (6), and "(E) any property to which an election under paragraph (7) applies, the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system. "(2) ALTERNATIVE DEPRECIATION SYSTEM.—For purposes of

paragraph (1), the alternative depreciation system is depreciation determined by using— "(A) the straight line method (without regard to salvage value), "(B) the applicable convention determined under subsection (d), and "(C) a recovery period determined under the following table: The recovery period shall be: The class life. 12 years.

"In the case of: (i) Property not described in clause (ii) or (iii) (ii) Personal property with no class life (iii) Nonresidential real and residential rental property » 40 years. "(3) SPECIAL RULES FOR DETERMINING CLASS LIFE.— "(A) TAX-EXEMPT USE PROPERTY SUBJECT TO LEASE.—In the

case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall in no event be less than 125 percent of the lease term.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/318

 100 STAT. 2126

PUBLIC LAW 99-514—OCT. 22, 1986

'4.1/-i

"(B) SPECIAL RULE FOR CERTAIN PROPERTY ASSIGNED TO CLASSES.—For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:

"If property is described .,,, •ji 4 in subparagraph: --*; <: (B)(ii) ....:. '^'*(B)(iii) dr;K.' (C)(i) (C)(ii) (D)(i) ' (D)(ii) (E) "(C) QUALIFIED TECHNOLOGICAL EQUIPMENT.—In
 * .c

The class life is: 5 9.5 10 15 24 24 50.

the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years. "(D) AUTOMOBILES, ETC—In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years. "(E) CERTAIN REAL PROPERTY.—In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.

"(4) PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED

STATES.—For purposes of this subsection, rules similar to the rules under section 48(a)(2) (including the exceptions contained in subparagraph (B) thereof) shall apply in determining whether property is used predominantly outside the United States. In addition to the exceptions contained in such subparagraph (B), there shall be excepted any satellite or other spacecraft (or any interest therein) held by a United States person if such satellite or spacecraft was launched from within the United States.

^ a

"(5) TAX-EXEMPT BOND FINANCED PROPERTY.—For purposes of

, this subsection— ^' "(A) IN GENERAL.—Except as otherwise provided in this paragraph, the term 'tax-exempt bond, financed property' ^' ^•' means any property to the extent such property is financed " (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a). '' •

'^' ' • '' » • >

'

"(B) ALLOCATION OF BOND PROCEEDS.—For purposes of

subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service. "(C) QUALIFIED RESIDENTIAL RENTAL PROJECTS.—The term 'tax-exempt bond financed property' shall not include any qualified residential rental project (within the meaning of section 142(a)(7)). "(6) IMPORTED PROPERTY.— "(A) COUNTRIES MAINTAINING TRADE RESTRICTIONS OR ENGAGING IN DISCRIMINATORY ACTS.—If the President deter-

mines that a foreign country— .^ r,\ "(i) maintains nontariff trade restrictions, including Mf • variable import fees, which substantially burden •',/<; United States commerce in a manner inconsistent with provisions of trade agreements, or

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100 STAT. 2127

"(ii) engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the application of paragraph (I)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order. "(B) IMPORTED PROPERTY.—For purposes of this subsection, the term 'imported property' means any property if— "(i) such property was completed outside the United States, or "(ii) less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term 'United States' includes the Commonwealth of Puerto Rico and the possessions of the United States.

'•

"(7) ELECTION TO USE ALTERNATIVE DEPRECIATION SYSTEM.—

"(A) IN GENERAL.—If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property. "(B) ELECTION IRREVOCABLE.—An election under subparagraph (A), once made, shall be irrevocable.

>'

'(h) TAX-EXEMPT USE PROPERTY.—

"(1) IN GENERAL.—For purposes of this section— "(A) PROPERTY OTHER THAN NONRESIDENTIAL REAL PROP-

ERTY.—Except as otherwise provided in this subsection, the term 'tax-exempt use property' means that portion of any tangible property (other than nonresidential real property) leased to a tax-exempt entity. "(B) NONRESIDENTIAL REAL PROPERTY.—

,rj..

"(i) IN GENERAL.—In the csise of nonresidential real property, the term 'tax-exempt use property' means that portion of the property leased to a tax-exempt entity in a disqualified lease. "(ii) DISQUAUFIED LEASE.—For purposes of this subparagraph, the term 'disqualified lease' means any lease of the property to a tax-exempt entity, but only if— "(I) part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a) and such entity (or a related entity) participated in such financing, "(II) under such lease there is a fixed or determinable price purchase or sale option which in-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/320

 100 STAT. 2128

PUBLIC LAW 99-514—OCT. 22, 1986

•.'

volves such entity (or a related entity) or there is the equivalent of such an option, "(HI) such lease has a lease term in excess of 20 years, or "(IV) such lease occurs after a sale (or other transfer) of the property by, or lease of the property from, such entity (or a related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease, "(iii) 35-PERCENT THRESHOLD TEST.—Clause (i) shall apply to any property only if the portion of such property leased to tax-exempt entities in disqualified leases is more than 35 percent of the property. "(iv) TREATMENT OF IMPROVEMENTS.—For purposes of this subparagraph, improvements to a property (other than land) shall not be treated as a separate property.

•,

"(v) LEASEBACKS DURING IST 3 MONTHS OF USE NOT

TAKEN INTO ACCOUNT.—Subclause (IV) of clause (ii) shall not apply to any property which is leased within 3 months after the date such property is first used by the tax-exempt entity (or a related entity). "(C) EXCEPTION FOR SHORT-TERM LEASES.—

"(i) IN GENERAL.—Property shall not be treated as tax-exempt use property merely by reason of a shortterm lease. "(ii) SHORT-TERM LEASE.—For purposes of clause (i),

J-. •;,;>q ^

the term 'short-term lease' means any lease the term of which is— "(I) less than 3 years, and "(II) less than the greater of 1 year or 30 percent of the property's present class life. In the case of nonresidential real property and property with no present class life, subclause (II) shall not apply. "(D) EXCEPTION WHERE PROPERTY USED IN UNRELATED

TRADE OR BUSINESS.—The term 'tax-exempt use property' ioif shall not include any portion of a property if such portion is predominantly used by the tax-exempt entity (directly or through a partnership of which such entity is a partner) in an unrelated trade or business the income of which is subject to tax under section 511. For purposes of subparagraph (B)(iii), any portion of a property so used shall not be 4 . lease. "(E) NONRESIDENTIAL REAL PROPERTY DEFINED.—For purposes of this paragraph, the term 'nonresidential real propt-i erty' includes residential rental property. "(2) TAX-EXEMPT ENTITY.—
 * IJ Seated as leased to a tax-exempt entity in a disqualified

-t 3,

"(A) IN GENERAL.—For purposes of this subsection, the term 'tax-exempt entity' means— "(i) the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing, "(ii) an organization (other than a cooperative described in section 521) which is exempt from tax imposed by this chapter, and "(iii) any foreign person or entity.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/321

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2129

"(B) EXCEPTIONS FOR CERTAIN PROPERTY SUBJECT TO UNITED STATES TAX AND USED BY FOREIGN PERSON OR ENTITY.— "(i) INCOME FROM PROPERTY SUBJECT TO UNITED STATES

TAX.—Clause (iii) of subparagraph (A) shall not apply with respect to any property if more than 50 percent of the gross income for the taxable year derived by the foreign person or entity from the use of such property is— "(I) subject to tax under this chapter, or "(II) included under section 951 in the gross income of a United States shareholder for the taxable year with or within which ends the taxable year of the controlled foreign corporation in which such income was derived. For purposes of the preceding sentence, any exclusion or exemption shall not apply for purposes of determining the amount of the gross income so derived, but shall apply for purposes of determining the portion of such gross income subject to tax under this chapter. "(ii) MOVIES AND SOUND RECORDINGS.—Clause (iii) of

subparagraph (A) shall not apply with respect to any qualified film (as defined in section 48(k)(l)(B)) or any sound recording (as defined in section 48(r)(5)). "(C) FOREIGN PERSON OR ENTITY.—For purposes of this paragraph, the term 'foreign person or entity' means— "(i) any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, and "(ii) any person who is not a United States person. Such term does not include any foreign partnership or other foreign pass-thru entity. "(D)

TREATMENT OF CERTAIN TAXABLE INSTRUMENTAL-

ITIES.—For purposes of this subsection, a corporation shall not be treated as an instrumentality of the United States or of any State or political subdivision thereof if— "(i) all of the activities of such corporation are subject to tax under this chapter, and "(ii) a majority of the board of directors of such corporation is not selected by the United States or any State or political subdivision thereof. "(E) CERTAIN PREVIOUSLY TAX-EXEMPT ORGANIZATIONS.—

"(i) IN GENERAL.—For purposes of this subsection, an organization shall be treated as an organization described in subparagraph (A)(ii) with respect to any property (other than property held by such organization) if such organization was an organization (other than a cooperative described in section 521) exempt from tax imposed by this chapter at any time during the 5-year period ending on the date such property was first used by such organization. The preceding sentence and subparagraph (D)(ii) shall not apply to the Federal Home Loan Mortgage Corporation. "(ii) ELECTION NOT TO HAVE CLAUSE (I) APPLY.—

"(I) IN GENERAL.—In the case of an organization formerly exempt from tax under section 501(a) as an organization described in section 501(c)(12),

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Page:United States Statutes at Large Volume 100 Part 3.djvu/322

 100 STAT. 2130

PUBLIC LAW 99-514—OCT. 22, 1986 •^' " -' f

'

i^' ^ •

clause (i) shall not apply to such organization with respect to any property if such organization elects not to be exempt from tax under section 501(a) during the tax-exempt use period with respect to such property. "(II) TAX-EXEMPT USE PERIOD.—For purposes of

subclause (I), the term 'tax-exempt use period' means the period beginning with the taxable year in which the property described in subclause (I) is first used by the organization and ending with the " ' "' close of the 15th taxable year following the last taxable year of the applicable recovery period of such property. "(III) ELECTION.—Any election under subclause (I), once made, shall be irrevocable, "(iii) TREATMENT OF SUCCESSOR ORGANIZATIONS.—Any organization which is engaged in activities substantially similar to those engaged in by a predecessor organization shall succeed to the treatment under this subparagraph of such predecessor organization. ''."(iv) FIRST USED.—For purposes of this subparagraph, property shall be treated as first used by the organization— "(I) when the property is first placed in service '^ under a lease to such organization, or "(II) in the case of property leased to (or held by) a partnership (or other pass-thru entity) in which the organization is a member, the later of when such property is first used by such partnership or '" • ' pass-thru entity or when such organization is first B' a member of such partnership or pass-thru entity. "(3) SPECIAL RULES FOR CERTAIN HIGH TECHNOLOGY EQUIPMENT.— "(A) EXEMPTION WHERE LEASE TERM IS 5 YEARS OR LESS.—
 * -* ^ f^

i:>t

For purposes of this section, the term 'tax-exempt use property shall not include any qualified technological equipment if the lease to the tax-exempt entity has a lease term of 5 years or less.

f >? !

{• -- '

<i^* J (if'} <»•'

"(B) EXCEPTION FOR CERTAIN PROPERTY.—

"(i) IN GENERAL.—For purposes of subparagraph (A), the term 'qualified technological equipment' shall not include any property leased to a tax-exempt entity if^ "(I) part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a), "(II) such lease occurs after a sale (or other transfer) of the property by, or lease of such property from, such entity (or related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease, or "(III) such tax-exempt entity is the United States or any agency or instrumentality of the United States. "(ii) LEASEBACKS DURING IST 3 MONTHS OF USE NOT TAKEN INTO ACCOUNT.—Subclause (II) of clause (i) shall

not apply to any property which is leased within 3

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 PUBLIC LAW 99-514—OCT. 22, 1986

fsl t

-c

100 STAT. 2131

months after the date such property is first used by the tax-exempt entity (or a related entity). "(4) RELATED ENTITIES.—For purposes of this subsection— "(A)(i) Each governmental unit and each agency or instrumentality of a governmental unit is related to each other such unit, agency, or instrumentality which directly or indirectly derives its powers, rights, and duties in whole or in part from the same sovereign authority. "(ii) For purposes of clause (i), the United States, each State, and each possession of the United States shall be treated as a separate sovereign authority. "(B) Any entity not described in subparagraph (A)(i) is related to any other entity if the 2 entities have— "(i) significant common purposes and substantial common membership, or "(ii) directly or indirectly substantial common direction or control., "(C)(i) An entity is related to another entity if either entity owns (directly or through 1 or more entities) a 50 percent or greater interest in the capital or profits of the other entity. "(ii) For purposes of clause (i), entities treated as related under subparagraph (A) or (B) shall be treated as 1 entity. "(D) An entity is related to another entity with respect to a transaction if such transaction is part of an attempt by such entities to avoid the application of this subsection. "(5) TAX-EXEMPT USE OF PROPERTY LEASED TO PARTNERSHIPS, ETC., DETERMINED AT PARTNER LEVEL.—For purposes of this

subsection— "(A) IN GENERAL.—In the case of any property which is leased to a partnership, the determination of whether any portion of such property is tax-exempt use property shall be - i made by treating each tax-exempt entity partner's propor5- > tionate share (determined under paragraph (6)(C)) of such property as being leased to such partner. "(B) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules

as.

similar to the rules of subparagraph (A) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. "(C) PRESUMPTION WITH RESPECT TO FOREIGN ENTITIES.—

Unless it is otherwise established to the satisfaction of the toSecretary, it shall be presumed that the partners of a foreign partnership (and the beneficiaries of any other I foreign pass-thru entity) are persons who are not United States persons.
 * ^;.. "(6) TREATMENT OF PROPERTY OWNED BY PARTNERSHIPS, ETC.—

"(A) IN GENERAL.—For purposes of this subsection, if— • "(i) any property which (but for this subparagraph) is •f'snot tax-exempt use property is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, and "(ii) any allocation to the tax-exempt entity of partnership items is not a qualified allocation, an amount equal to such tax-exempt entity's proportionate share of such property shall (except as provided in paragraph (I)(D)) be treated as tax-exempt use property.

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 100 STAT. 2132

PUBLIC LAW 99-514—OCT. 22, 1986 .:;,rQ f ,

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•, ' .;.; (

"(B) QUALIFIED ALLOCATION.—For purposes of subparagraph (A), the term 'qualified allocation' means any allocation to a tax-exempt entity which— "(i) is consistent with such entity's being allocated the same distributive share of each item of income, gain, loss, deduction, credit, and basis and such share remains the same during the entire period the entity is a partner in the partnership, and "(ii) has s u b s t a n t i a l economic effect within the meaning of section 704(b)(2). For purposes of this subparagraph, items allocated under section 704(c) shall not be t a k e n into account. "(C) DETERMINATION OF PROPORTIONATE SHARE.— "(i) IN GENERAL.—For purposes of subparagraph (A), a tax-exempt entity's proportionate s h a r e of any property owned by a partnership shall be determined on the basis of such entity's s h a r e of partnership items of income or gain (excluding gain allocated under section 704(c)), whichever results in the largest proportionate

share. "(ii) DETERMINATION WHERE ALLOCATIONS VARY.—For

-,»„...

purposes of clause (i), if a tax-exempt entity's share of partnership items of income or gain (excluding gain allocated under section 704(c)) may vary during the period such entity is a partner in the partnership, such share shall be the highest share such entity may receive. "(D) DETERMINATION OF WHETHER PROPERTY USED IN UNRELATED TRADE OR BUSINESS.—For purposes of this subsec-

tion, in the case of any property which is owned by a partnership which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners, the determination of whether such property is used in an unrelated trade or business of such an entity shall be made without regard to section 514. "(E) OTHER PASS-THRU ENTITIES; TIERED ENTITIES.—Rules

similar to the rules of subparagraphs (A), (B), (C), and (D) shall also apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities. "(F) TREATMENT OF CERTAIN TAXABLE ENTITIES.—

"(i) IN GENERAL.—For purposes of this paragraph and paragraph (5), except as otherwise provided in this subparagraph, any tax-exempt controlled entity shall be treated as a tax-exempt entity. .,i "(ii) ELECTION.—If a tax-exempt controlled entity makes an election under this clause— vj "(I) such entity shall not be treated as a taxexempt entity for purposes of this paragraph and paragraph (5), and "(II) any gain recognized by a tax-exempt entity on any disposition of an interest in such entity (and any dividend or interest received or accrued by a ,y.,, ', tax-exempt entity from such tax-exempt controlled -*-;. ' J,:* entity) shall be treated as unrelated business taxable income for purposes of section 511.

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100 STAT. 2133

Any such election shall be irrevocable and shall bind all tax-exempt entities holding interests in such taxexempt controlled entity. For purposes of subclause (II), there shall only be taken into account dividends which are properly allocable to income of the tax-exempt controlled entity which was not subject to tax under this chapter. "(iii) TAX-EXEMPT CONTROLLED ENTITY.—

"(I) IN GENERAL.—The term 'tax-exempt controlled entity' means any corporation (which is not a tax-exempt entity determined without regard to this subparagraph and paragraph (2)(E)) if 50 percent or more (in value) of the stock in such corporation is held by 1 or more tax-exempt entities (other than a foreign person or entity). "(II) ONLY 5-PERCENT SHAREHOLDERS TAKEN INTO ACCOUNT IN CASE OF PUBLICLY TRADED STOCK.—For

purposes of subclause (I), in the case of a corporation the stock of which is publicly traded on an established securities market, stock held by a taxexempt entity shall not be taken into account unless such entity holds at least 5 percent (in value) of the stock in such corporation. For purposes of this subclause, related entities (within the meaning of paragraph (4)) shall be treated as 1 entity. "(Ill) SECTION 3 1 8 TO APPLY.—For purposes of this clause, a tax-exempt entity shall be treated as holding stock which it holds through application of section 318 (determined without regard to the 50percent limitation contained in subsection (a)(2)(C) thereof). "(G) REGULATIONS.—For purposes of determining whether there is a qualified allocation under subparagraph (B), the regulations prescribed under paragraph (8) for purposes of this paragraph— "(i) shall set forth the proper treatment for partnership guaranteed payments, and "(ii) may provide for the exclusion or segregation of items. "(7) LEASE.—For purposes of this subsection, the term 'lease' includes any grant of a right to use property. "(8) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. "(i) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) CLASS LIFE.—

"(A) IN GENERAL.—Except as provided in this section, the term 'class life' means the class life (if any) which would be applicable with respect to any property as of January 1, 1986, under subsection (m) of section 167 (determined without regard to paragraph (4) thereof and as if the taxpayer had made an election under such subsection). "(B) SECRETARIAL AUTHORITY.—The Secretary, through an office established in the Treasury—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/326

 100 STAT. 2134

PUBLIC LAW 99-514—OCT. 22, 1986 "(i) shall monitor and analyze actual experience with respect to all depreciable assets, and "(ii) except in the case of residential rental property or nonresidential real property— "(I) may prescribe a new class life for any property, (II) in the case of assigned property, may modify any assigned item, or "(III) may prescribe a class life for any property which does not have a class life within the meaning of subparagraph (A). Any class life or assigned item prescribed or modified under the preceding sentence shall reasonably reflect the anticipated useful life, and the anticipated decline in value over time, of the property to the industry or other group. "(C) EFFECT OF MODIFICATION.—Any class life or assigned item with respect to any property prescribed or modified under subparagraph (B) shall be used in classifying such property under subsection (e) and in applying subsection (g). "(D) No MODIFICATION OF ASSIGNED PROPERTY BEFORE JANUARY 1, 1992.—

"(i) IN GENERAL.—Except as otherwise provided in this subparagraph, the Secretary may not modify an assigned item under subparagraph (B)(ii)(II) for any assigned property which is placed in service before January 1, 1992. "(ii) EXCEPTION FOR SHORTER CLASS LIFE.—In the case of assigned property which is placed in service before January 1, 1992, and for which the assigned item reflects a class life which is shorter than the class life under subparagraph (A), the Secretary may modify such assigned item under subparagraph (B)(ii)(II) if such modification results in an item which reflects a shorter class life than such assigned item. "(E) ASSIGNED PROPERTY AND ITEM.—For purposes of this paragraph— "(i) ASSIGNED PROPERTY.—The term 'assigned property' means property for which a class life, classification, or recovery period is assigned under subsection (e)(3) or subparagraph (B), (C), or (D) of subsection (g)(3). "(ii) ASSIGNED ITEM.—The term 'assigned item' means the class life, classification, or recovery period assigned under subsection (e)(3) or subparagraph (B), (C), or (D) of subsection (g)(3). "(2) QUALIFIED TECHNOLOGICAL EQUIPMENT.—

equipment' means— "(i) any computer or peripheral equipment, "(ii) any high technology telephone station equipment installed on the customer's premises, and "(iii) any high technology medical equipment. "(B) COMPUTER OR PERIPHERAL EQUIPMENT DEFINED.—For
 * (A) IN GENERAL.—The term 'qualified technological

purposes of this paragraph— "(i) IN GENERAL.—The term 'computer or peripheral equipment' means— "(I) any computer, and "(II) any related peripheral equipment.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/327

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100 STAT. 2135

"(ii) COMPUTER.—The term 'computer' means a programmable electronically activated device which— "(I) is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without human intervention, and "(II) consists of a central processing unit containing extensive storage, logic, arithmetic, and control capabilities, "(iii) RELATED PERIPHERAL EQUIPMENT.—The term 'related peripheral equipment' means any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer. "(iv) EXCEPTIONS.—The term 'computer or peripheral equipment' shall not include— "(I) any equipment which is an integral part of other property which is not a computer, "(II) typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and "(III) equipment of a kind used primarily for amusement or entertainment of the user. "(C) HIGH TECHNOLOGY MEDICAL EQUIPMENT.—For purposes of this paragraph, the term 'high technology medical equipment' means any electronic, electromechanical, or computer-based high technology equipment used in the screening, monitoring, observation, diagnosis, or treatment of patients in a laboratory, medical, or hospital environment. "(3) LEASE TERM.—

"(A) IN GENERAL.—In determining a lease term— "(i) there shall be taken into account options to renew, and "(ii) 2 or more successive leases which are part of the same transaction (or a series of related transactions) with respect to the same or substantially similar property shall be treated as 1 lease. "(B)

SPECIAL

RULE

FOR

FAIR

RENTAL

OPTIONS

ON

NONRESIDENTIAL REAL PROPERTY OR RESIDENTIAL RENTAL PROPERTY.—For purposes of clause (i) of subparagraph (A), in the case of nonresidential real property or residential rental property, there shall not be taken into account any option to renew at fair market value, determined at the time of renewal. "(4) GENERAL ASSET ACCOUNTS.—Under regulations, a taxpayer may maintain 1 or more general asset accounts for any property to which this section applies. Except as provided in regulations, all proceeds realized on any disposition of property in a general asset account shall be included in income as ordinary income. "(5) CHANGES IN USE.—The Secretary shall, by regulations, provide for the method of determining the deduction allowable under section 167(a) with respect to any tangible property for any taxable year (and the succeeding taxable years) during which such property changes status under this section but continues to be held by the same person.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/328

 100 STAT. 2136

PUBLIC LAW 99-514—OCT. 22, 1986 "(6) TREATMENTS OF ADDITIONS OR IMPROVEMENTS TO PROP-

ERTY.—In the case of any addition to (or improvement of) any property— "(A) any deduction under subsection (a) for such addition or improvement shall be computed in the same manner as the deduction for such property would be computed if such property had been placed in service at the same time as such addition or improvement, and "(B) the applicable recovery period for such addition or improvement shall begin on the later of— "(i) the date on which such addition (or improvement) is placed in service, or "(ii) the date on which the property with respect to which such addition (or improvement) was made is placed in service. "(7) TREATMENT OF CERTAIN TRANSFEREES.—

"(A) IN GENERAL.—In the case of any property transferred in a transaction described in subparagraph (B), the transferee shall be treated as the transferor for purposes of computing the depreciation deduction determined under this section with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. "(B) TRANSACTIONS COVERED.—The transactions described

in this subparagraph are any transaction described in section 332, 351, 361, 371(a), 374(a), 721, or 731. Subparagraph (A) shall not apply in the case of a termination of a partnership under section 708(b)(1)(B). "(C) PROPERTY REACQUIRED BY THE TAXPAYER.—Under

regulations, property which is disposed of and then reacquired by the taxpayer shall be treated for purposes of computing the deduction allowable under subsection (a) as if such property had not been disposed of. "(D) EXCEPTION.—This paragraph shall not apply to any transaction to which subsection (fK5) applies (relating to churning transactions). "(8) TREATMENT OF LEASEHOLD IMPROVEMENTS.—In the case of any building erected (or improvements made) on leased property, if such building or improvement is property to which this section applies, the depreciation deduction shall be determined under the provisions of this section. "(9) NORMAUZATION RULES.—

"(A) IN GENERAL.—In order to use a normalization method of accounting with respect to any public utility property for purposes of subsection (fK2)— "(i) the taxpayer must, in computing its tax expense for purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account, use a method of depreciation with respect to such property that is the same as, and a depreciation period for such property that is no shorter than, the method and period used to compute its depreciation expense for such purposes; and "(ii) if the amount allowable as a deduction under this section with respect to such property differs from the amount that would be allowable as a deduction under section 167 (determined without regard to sec-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/329

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2137

tion 167(1)) using the method (including the period, first and last year convention, and salvage value) used to compute regulated tax expense under clause (i), the taxpayer must make adjustments to a reserve to reflect the deferral of taxes resulting from such difference. "(B) USE OF INCONSISTENT ESTIMATES AND PROJECTIONS, ETC.—

"(i) IN GENERAL.—One way in which the requirements of subparagraph (A) are not met is if the taxpayer, for ratemaking purposes, uses a procedure or adjustment which is inconsistent with the requirements of subparagraph (A). "(ii) U S E OF INCONSISTENT ESTIMATES AND PROJEC-

TIONS.—The procedures and adjustments which are to be treated as inconsistent for purposes of clause (i) shall include any procedure or adjustment for ratemaking purposes which uses an estimate or projection of the taxpayer's, tax expense, depreciation expense, or reserve for deferred taxes under subparagraph (A)(ii) unless such estimate or projection is also used, for ratemaking purposes, with respect to the other 2 such items and with respect to the rate base. "(iii) REGULATORY AUTHORITY.—The Secretary may

by regulations prescribe procedures and adjustments (in addition to those specified in clause (ii)) which are to be treated as inconsistent for purposes of clause (i). "(C) PUBLIC UTILITY PROPERTY WHICH DOES NOT MEET

NORMALIZATION RULES.—In the case of any public utility property to which this section does not apply by reason of subsection (fK2), the allowance for depreciation under section 167(a) shall be an amount computed using the method and period referred to in subparagraph (A)(i). "(10) PUBLIC UTILITY PROPERTY.—The term 'public utility property' has the meaning given such term by section 167(1)(3)(A). "(11) RESEARCH AND EXPERIMENTATION.—The term 'research and experimentation' has the same meaning as the term research and experimental has under section 174. "(12) SECTION 1245 AND 1250 PROPERTY.—The terms 'section 1245 property' and 'section 1250 property' have the meanings given such terms by sections 1245(a)(3) and 1250(c), respectively." (b) SYSTEM USED FOR PURPOSES OF EARNINGS AND PROFITS.—Para-

graph (3) of section 312(k) is amended to read as follows: "(3) EXCEPTION FOR TANGIBLE PROPERTY.—

"(A) IN GENERAL.—Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168(g)(2)). "(B) TREATMENT OF AMOUNTS DEDUCTIBLE UNDER SECTION

179.—For purposes of computing the earnings and profits of a corporation, any amount deductible under section 179 shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179)."

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Page:United States Statutes at Large Volume 100 Part 3.djvu/330

 100 STAT. 2138

PUBLIC LAW 99-514—OCT. 22, 1986 (c) CONTINUATION OF RULES RELATING TO MOTOR VEHICLE OPERAT-

ING LEASES.—Section 7701 is amended by redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following new subsection: "(h) MOTOR VEHICLE OPERATING LEASES.—

"(1) IN GENERAL.—For purposes of this title, in the case of a qualified motor vehicle operating agreement which contains a terminal rental adjustment clause— "(A) such agreement shall be treated as a lease if Ojut for such terminal rental adjustment clause) such agreement would be treated as a lease under this title, and "(B) the lessee shall not be treated as the owner of the property subject to an agreement during any period such agreement is in effect. "(2)

QUALIFIED MOTOR VEHICLE OPERATING AGREEMENT DE-

FINED.—For purposes of this subsection— "(A) IN GENERAL.—The term 'qualified motor vehicle operating agreement' means any agreement with respect to a motor vehicle (including a trailer) which meets the requirements of subparagraphs (B), (C), and (D) of this paragraph. "(B) MINIMUM LIABILITY OF LESSOR.—An agreement meets the requirements of this subparagraph if under such agreement the sum of— "(i) the amount the lessor is personally liable to repay, and "(ii) the net fair market value of the lessor's interest in any property pledged as security for property subject to the agreement, equals or exceeds all amounts borrowed to finance the acquisition of property subject to the agreement. There shall not be taken into account under clause (ii) any property pledged which is property subject to the agreement or property directly or indirectly financed by indebtedness secured by property subject to the agreement. "(C)

CERTIFICATION BY LESSEE; NOTICE OF TAX OWNER-

SHIP.—An agreement meets the requirements of this subparagraph if such agreement contains a separate written statement separately signed by the lessee— "(i) under which the lessee certifies, under penalty of perjury, that it intends that more than 50 percent of the use of the property subject to such agreement is to be in a trade or business of the lessee, and "(ii) which clearly and legibly states that the lessee has been advised that it will not be treated as the owner of the property subject to the agreement for Federal income tax purposes. "(D) LESSOR MUST HAVE NO KNOWLEDGE THAT CERTIFICATION IS FALSE.—An agreement meets the requirements of

this subparagraph if the lessor does not know that the certification described in subparagraph (C)(i) is false. "(3) TERMINAL RENTAL ADJUSTMENT CLAUSE DEFINED.—

"(A) IN GENERAL.—For purposes of this subsection, the term 'terminal rental adjustment clause' means a provision of an agreement which permits or requires the rental price to be adjusted upward or downward by reference to the

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