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(b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) CHANGE IN METHOD OF ACCOUNTING.—If a taxpayer is

required by the amendments made by this section to change its method of accounting for any taxable year— (A) such change shall be treated as initiated by the taxpayer, (B) such change shall be treated as having been made with the consent of the Secretary, and (C) the adjustments under section 481 of the Internal Revenue Code of 1954 by reason of such change shall be taken into account ratably over a period no longer than the first 4 taxable years beginning after December 31, 1986. (3) SPECIAL RULE FOR CERTAIN CYCLE BILLING.—If a taxpayer

for any taxable year beginning before August 16, 1986, for purposes of chapter 1 of the Internal Revenue Code of 1986 took into account income from services described in section 451(f) of such Code (as added by subsection (a)) on the bsisis of the period in which the customers' meters were read, then such treatment for such year shall be deemed to be proper. SEC. 822. REPEAL OF APPLICATION OF DISCHARGE OF INDEBTEDNESS RULES TO QUALIFIED BUSINESS INDEBTEDNESS.

(a) GENERAL RULE.—Paragraph (1) of section 108(a) (relating to exclusion from gross income of income from discharge of indebtedness) is amended by striking out subparagraph (C), by inserting "or" at the end of subparagraph (A), and by striking out ", or" at the end of subparagraph (B) and inserting in lieu thereof a period. (b) CONFORMING AMENDMENTS.—

(1) Paragraph (2) of section 108(a) is amended to read as follows: "(2) COORDINATION OF EXCLUSIONS.—Subparagraph (B) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case." (2) Section 108 is amended by striking out subsection (c). (3) Section 108(d) is amended— (A) by striking out paragraph (4), (B) by striking out "subsections (a), (b), and (c)" each place it appears in the heading thereof and in the text and heading of paragraphs (6) and (7) and inserting in lieu thereof "subsections (a) and (b)", (C) by striking out the last sentence of paragraph (7)(B), and (D) by striking out "under paragraph (4) of this subsection or" in paragraph (9) thereof. (4) Section 1017(a)(2) is amended by striking out ", 03)(5), or (c)(1)(A)" and inserting in lieu thereof "or G))(5)". (5) Section 10170t))(3)(A) is amended by striking out "or (c)(1)(A)". (c) EFFECTIVE DATE.—The amendments made by this section shall apply to discharges after December 31, 1986. SEC. 823. REPEAL OF DEDUCTION FOR QUALIFIED DISCOUNT COUPONS.

(a) GENERAL RULE.—Section 466 (relating to qualified discount coupons redeemed after close of taxable year) is repealed. Ob) CONFORMING AMENDMENTS.—

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 100 STAT. 2374

PUBLIC LAW 99-514—OCT. 22, 1986 (1) Paragraph (5) of section 461(h) is amended by striking out subparagraph (C) and by redesignating subparagraph (D) as subparagraph (C). (2) The table of contents for subpart C of part II of subchapter E of chapter 1 is amended by striking out the item relating to section 466. (c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any taxpayer who elected to have section 466 of the Internal Revenue Code of 1954 apply for such taxpayer's last taxable year beginning before January 1, 1987, and is required to change its method of accounting by reason of the amendments made by this section for any taxable year— (A) such change shall be treated as initiated by the taxpayer, (B) such change shall be treated as having been made with the consent of the Secretary, and (C) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall— (i) be reduced by the balance in the suspense account under section 466(e) of such Code as of the close of such last taxable year, and (ii) be taken into account over a period not longer than 4 years. SEC. 824. INCLUSION IN GROSS INCOME OF CONTRIBUTIONS IN AID OF CONSTRUCTION.

(a) GENERAL RULE.—Section 118 (relating to contributions to the capital of a corporation) is amended by striking out subsections (b) and (c), by redesignating subsection (d) as subsection (c), and by inserting after subsection (a) the following new subsection: "(b) CONTRIBUTIONS IN AID OF CONSTRUCTION, ETC.—For purposes

of subsection (a), the term 'contribution to the capital of the taxpayer' does not include any contribution in aid of construction or any other contribution as a customer or potential customer." (b) TECHNICAL AMENDMENT.—Subsection (c) of section 362 (relating to special rules for certain contributions to capital) is amended by striking out paragraph (3). (c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to amounts received after December 31, 1986, in taxable years ending after such date. (2) TREATMENT OF CERTAIN WATER SUPPLY PROJECTS.—The

amendments made by this section shall not apply to amounts which are paid by the New Jersey Department of Environmental Protection for construction of alternative water supply projects in zones of drinking water contamination and which are designated by such department as being taken into account under this paragraph. Not more than $4,631,000 of such amounts may be designated under the preceding sentence. (3) TREATMENT OF CERTAIN CONTRIBUTIONS BY TRANSPORTATION

AUTHORITY.—The amendments made by this section shall not apply to contributions in aid of construction by a qualified

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100 STAT. 2375

transportation authority which were clearly identified in a master plan in existence on September 13, 1984, and which are designated by such authority as being taken into account under this paragraph. Not more than $68,000,000 of such contributions may be designated under the preceding sentence. For purposes of this paragraph, a qualified transportation authority is an entity which was created on February 20, 1967, and which was established by an interstate compact and consented to by Congress in Public Law 89-774, 80 Stat. 1324 (1966). (4) TREATMENT OF CERTAIN PARTNERSHIPS.—In the case of a partnership with a taxable year beginning May 1, 1986, if such partnership realized net capital gain during the period beginning on the 1st day of such taxable year and ending on May 29, 1986, pursuant to an indemnity agreement dated May 6, 1986, then such partnership may elect to treat each asset to which such net capital gain relates as having been distributed to the partners of such partnership in proportion to their distributive share of the capital gain or loss realized by the partnership with respect to such asset and to treat each such asset as having been sold by each partner on the date of the sale of the asset by the partnership. If such an election is made, the consideration received by the partnership in connection with the sale of such assets shall be treated as having been received by the partners in connection with the deemed sale of such assets. In the case of a tiered partnership, for purposes of this paragraph each partnership shall be treated as having realized net capital gain equal to its proportionate share of the net capital gain of each partnership in which it is a partner, and the election provided by this paragraph shall apply to each tier.

TITLE IX—FINANCIAL INSTITUTIONS SEC. 901. LIMITATIONS ON BAD DEBT RESERVES. (a) LARGE BANKS NOT ELIGIBLE FOR BAD DEBT RESERVES.—

(1) IN GENERAL.—Subsection (a) of section 585 (relating to reserves for losses on loans of banks) is amended to read as follows: "(a) RESERVE FOR BAD DEBTS.—

"(1) IN GENERAL.—Except as provided in subsection (c), a bank shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a). "(2) BANK.—For purposes of this section— "(A) IN GENERAL.—The term 'bank' means any bank (as defined in section 581) other than an organization to which section 593 applies. "(B) BANKING BUSINESS OF UNITED STATES BRANCH OF FOREIGN CORPORATION.—The term 'bank' also includes any cor-

poration to which subparagraph (A) would apply except for the fact that it is a foreign corporation. In the case of any such foreign corporation, this section shall apply only with respect to loans outstanding the interest on which is effectively connected with the conduct of a banking business within the United States."

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 100 STAT. 2376

PUBLIC LAW 99-514—OCT. 22, 1986 (2) RESERVE DEDUCTION NOT AVAILABLE FOR LARGE BANKS.—

Section 585 is amended by adding at the end thereof the following new subsection: "(c) SECTION NOT TO APPLY TO LARGE BANKS.—

"(1) IN GENERAL.—In the case of a large bank, this section shall not apply (and no deduction shall be allowed under any other provision of this subtitle for any addition to a reserve for bad debts). "(2) LARGE BANKS.—For purposes of this subsection, a bank is a large bank if, for the taxable year (or for any preceding taxable year beginning after December 31, 1986)— "(A) the average adjusted bases of all assets of such bank exceeded $500,000,000, or "(B) such bank was a member of a parent-subsidiary controlled group and the average adjusted bases of all assets of such group exceeded $500,000,000. "(3) 4-YEAR SPREAD OF ADJUSTMENTS.—

"(A) IN GENERAL.—Except as provided in paragraph (4), in the case of any bank which for its last taxable year before the disqualification year maintained a reserve for bad debts— "(i) the provisions of this subsection shall be treated as a change in the method of accounting of such bank for the disqualification year, "(ii) such change shall be treated as having been made with the consent of the Secretary, and "(iii) the net amount of adjustments required by section 481(a) to be taken into account by the taxpayer shall be taken into account in each of the 4 taxable years beginning with the disqualification year with— "(I) the amount taken into account for the 1st of such taxable years being the greater of 10 percent of such net amount or such greater amount as the taxpayer may designate, and "(II) the amount taken into account in each of the 3 succeeding taxable years being equal to the applicable fraction (determined in accordance with the following table for the taxable year involved) of the portion of such net amount not taken into account under subclause (I). The applicable fraction is— % Vs %.

If the case of the— 1st succeeding year 2nd succeeding year 3rd succeeding year "(B)

SUSPENSION

OF RECAPTURE

FOR TAXABLE

Y E A R FOR

WHICH B A N K IS F I N A N C I A L L Y TROUBLED.—

"(i) IN GENERAL.—In the case of a bank which is a financially troubled bank for any taxable year— "(I) no adjustment shall be taken into account under subparagraph (A) for such taxable year, and "(II) such taxable year shall be disregarded in determining whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under subparagraph (A) or the amount of such adjustment.

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100 STAT. 2377

"(ii) EXCEPTION FOR ELECTIVE RECAPTURE FOR IST

YEAR.—Clause (i) shall not apply to the 1st taxable year referred to in subparagraph (A)(iiiXD if the taxpayer designates an amount in accordance with such subparagraph. "(iii) FINANCIALLY TROUBLED BANK.—For purposes of clause (i), the term 'financially troubled bank' means any bank if, for the taxable year, the nonperforming loan percentage of such bank exceeds 75 percent. "(iv) NONPERFORMING LOAN PERCENTAGE.—For purposes of clause (iii), the term 'nonperforming loan percentage' means the percentage determined by dividing— "(I) the sum of the outstanding balances of nonperforming loans of the bank as of the close of each quarter of the taxable year, by "(II) the sum of the amounts of equity of the bank as of the close of each such quarter. In the case of a bank which is a member of a parentsubsidiary controlled group for the taxable year, the preceding sentence shall be applied with respect to such group. "(v) OTHER DEFINITIONS.—For purposes of this subparagraph— "(I) NONPERFORMING LOANS.—The term 'nonperforming loan' means any loan which is considered to be nonperforming by the primary Federal regulatory agency with respect to the bank. "(II) EQUITY.—The term 'equity' means the equity of the bank as determined for Federal regulatory purposes. "(C) COORDINATION WITH ESTIMATED TAX PAYMENTS.—For

purposes of applying section 6655(d)(3) with respect to any installment, the determination under subparagraph (B) of whether an adjustment is required to be taken into account under subparagraph (A) shall be made as of the last day prescribed for payment of such installment. "(4) ELECTIVE CUT-OFF METHOD.—If a bank makes an election under this paragraph for the disqualification year— "(A) the provisions of this subsection shall not be treated as a change in the method of accounting of the taxpayer for purposes of section 481, "(B) the taxpayer shall continue to maintain its reserve for loans held by the bank as of the 1st day of the disqualification year and charge against such reserve any losses resulting from loans held by the bank as of such 1st day, and "(C) no deduction shall be allowed under this section (or any other provision of this subtitle) for any addition to such reserve for the disqualification year or any subsequent taxable year. "(5) DEFINITIONS.—For purposes of this subsection— "(A) PARENT-SUBSIDIARY CONTROLLED GROUP.—The term 'parent-subsidiary controlled group' means any controlled group of corporations described in section 1563(a)(l). In determining the average adjusted bases of assets held by

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 100 STAT. 2378

PUBLIC LAW 99-514—OCT. 22, 1986 such a group, i n t e r e s t s held by one m e m b e r of such group in a n other m e m b e r of such group shall be disregarded. "(B) DISQUALIFICATION YEAR.—The term 'disqualification year ' means, with respect to any bank, the 1st taxable year beginning after December 31, 1986, for which such bank was a large b a n k if such b a n k m a i n t a i n e d a reserve for bad debts for the preceding taxable year. "

(b) RESERVES O F DOMESTIC B U I L D I N G AND L O A N M U T U A L S A VI N G S B A N K S, AND COOPERATIVE B A N K S -

ASSOCIATIONS,

CD IN GENERAL.—Subsection (a) of section 593 (relating to reserves for losses on loans) is amended to read a s follows: "(a) RESERVE FOR B A D D E B T S. —

"(1) IN GENERAL.—Except a s provided in paragraph (2), in the case of— "(A) any domestic building and loan association, "(B) any m u t u a l savings b a n k, or "(C) any cooperative b a n k w i t h o u t capital stock organized and operated for m u t u a l purposes and without profit, the r e shall be allowed a deduction for a reasonable addition to a reserve for bad debts. Such deduction shall be in lieu of any deduction under section 166(a). "(2) ORGANIZATION MUST MEET 60-PERCENT ASSET TEST O F SEC-

TION 770i(axi9).—This section shall apply to a n association or bank referred to in paragraph (1) only if it m e e t s the requirements of section 7701(a)(19)(C)." (2) LIMITATION O N PERCENTAGE O F TAXABLE INCOME METHOD.—

Paragraph (2) of section 593(b) (relating to percentage of taxable income method) is amended— (A) by striking o u t subparagraph s (A), (B), and (C) and inserting in lieu thereof the following: "(A) IN GENERAL.—Subject to subparagraph s (B) and (C), the a m o u n t determined under this paragraph for the taxable year shall be a n a m o u n t equal to 8 percent of the tax a b l e income for such year. "(B) REDUCTION FOR AMOUNTS REFERRED TO IN PARAGRAPH

(IKA).—The a m o u n t determined under subparagraph (A) shall be reduced (but not below 0) by the a m o u n t determined under paragraph (1)(A).", and (B) by redesignating subparagraph s (D) and (E) a s subparagraph s (C) and (D), respectively. (3) R E P E A L O F PERCENTAGE METHOD O F COMPUTING RESERVES

FOR BAD DEBTS.—SubsectioD (b) of section 593 (relating to addition to reserves for bad debts) is amended by striking out paragraph s (3) and (5) and by redesignating paragraph (4) a s paragraph (3). (4) SECTION 593 RESERVES N O T TREATED AS PREFERENCE FOR

PURPOSES OF SECTION 291.—Subparagraph (A) of section 291(e)(1) (defining financial institution preference item) is amended by striking o u t "or 593". (c) REPEAL OF SECTION 586.—Section 586 (relating to reserves for losses on loans of small business investment companies, etc.) is hereby repealed. (d) CONFORMING AMENDMENTS. —

(1) AMENDMENT TO SECTION 585.—Paragraph (1) of section

585(b) is amended by striking out "section 166(c)" and inserting in lieu thereof "subsection (a)". (2) AMENDMENTS TO SECTION 593.—

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(A) Paragraph (1) of section 593(b) is amended by striking out "section 166(c)" and inserting in lieu thereof "subsection (a)". (B) Subparagraph (B) of section 593(b)(1) is amended— (i) by striking out "paragraph (2), (3), or (4), whichever amount is the largest" and inserting in lieu thereof "paragraph (2) or (3), whichever is the larger", and (ii) by striking out "paragraph (4)" in clause (i) and inserting in lieu thereof "paragraph (3)". (B) Subparagraph (D) of section 593(b)(2) (as redesignated by subsection (b)(2)) is amended by striking out "the applicable percentage (determined under subparagraphs (A) and (B))" and inserting in lieu thereof "8 percent". (C) Subparagraph (B) of section 593(e)(1) is amended by striking out "subsection (b)(4)" and inserting in lieu thereof "subsection (b)(3)". (3) BONDS, ETC., LOSSES AND GAINS OF FINANCIAL INSTITUTIONS.—

(A) Paragraph (1) of section 582(c) (relating to bonds, etc., losses and gains of financial institutions) is amended by striking out "a financial institution to which section 585, 586, or 593 applies" and inserting in lieu thereof "a financial institution referred to in paragraph (5)". (B) Subsection (c) of section 582 is amended by adding at the end thereof the following new paragraph: "(5) FINANCIAL APPLIES.—

INSTITUTIONS TO WHICH

PARAGRAPH

(i)

"(A) IN GENERAL.—For purposes of paragraph (1), the financial institutions referred to in this paragraph are— "(i) any bank (and any corporation which would be a bank except for the fact it is a foreign corporation), "(ii) any financial institution referred to in section 591, "(iii) any small business investment company operating under the Small Business Investment Act of 1958, and "(iv) any business development corporation. "(B) BUSINESS DEVELOPMENT CORPORATION.—For purposes

of subparagraph (A), the term 'business development corporation' means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and industry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes. "(C) LIMITATIONS ON FOREIGN BANKS.—In the case of a foreign corporation referred to in subparagraph (A)(i), paragraph (1) shall only apply to gains and losses which are effectively connected with the conduct of a banking business in the United States." (4) OTHER CONFORMING AMENDMENTS.—

(A) Subsection (g) of section 166 is amended by striking out paragraphs (3) and (4).

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 100 STAT. 2380

PUBLIC LAW 99-514—OCT. 22, 1986

(B) Subparagraph (F) of section 172(b)(l) is amended by striking out "to which section 585, 586, or 593 applies" and inserting in lieu thereof "referred to in section 582(c)(5)". (C) Clause (i) of section 291(e)(1)(B) is amended by striking out "to which section 585 or 593 applies" and inserting in lieu thereof "which is a bank (as defined in section 582(a)(2)) or to which section 593 applies". (D) Section 596 is amended by striking out "an amount equal to" and all that follows down through the period at the end thereof and inserting in lieu thereof "an amount equal to 8 percent of such total amount." (E) Paragraph (4) of section 856(a) is amended by striking out "to which section 585, 586, or 593 applies" and inserting in lieu thereof "referred to in section 582(c)(5)". (F) Subsection (c) of section 1277 is amended by striking out "to which section 585 or 593 applies" and inserting in lieu thereof "which is a bank (as defined in section 585(a)(2) or to which section 593 applies". (G) Subparagraph (B) of section 1361(b)(2) is amended by striking out "to which section 585 or 593 applies" and inserting in lieu thereof "which is a bank (as defined in section 585(a)(2)) or to which section 593 applies". (H) The table of sections for part I of subchapter H of chapter 1 is amended by striking out the item relating to section 586. (e) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 902. INTEREST INCURRED TO CARRY TAX-EXEMPT BONDS. (a) GENERAL RULE.—Section 265 (relating to expenses and interest

relating to tax-exempt income) is amended by adding at the end thereof the following new subsection: "(b) PRO RATA ALLOCATION OF INTEREST EXPENSE OF FINANCIAL INSTITUTIONS TO TAX-EXEMPT INTEREST.—

"(1) IN GENERAL.—In the case of a financial institution, no deduction shall be allowed for that portion of the taxpayer's interest expense which is allocable to tax-exempt interest. "(2) ALLOCATION.—For purposes of paragraph (1), the portion of the taxpayer's interest expense which is allocable to taxexempt interest is an amount which bears the same ratio to such interest expense as— "(A) the taxpayer's average adjusted bases (within the meaning of section 1016) of tax-exempt obligations acquired after August 7, 1986, bears to "(B) such average adjusted bases for all assets of the taxpayer. "(3) EXCEPTION FOR CERTAIN TAX-EXEMPT OBLIGATIONS.—

"(A) IN GENERAL.—Any qualified tax-exempt obligation acquired after August 7, 1986, shall be treated for purposes of paragraph (2) and section 291(e)(1)(B) as if it were acquired on August 7, 1986. "(B) QUALIFIED TAX-EXEMPT OBLIGATION.—For purposes of subparagraph (A), the term 'qualified tax-exempt obligation' means a tax-exempt obligation which— "(i) is not a private activity bond (as defined in section 141), and

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2381

"(ii) is designated by the issuer for purposes of this paragraph. For purposes of the preceding sentence and subparagraph (C), a qualified 501(c)(3) bond (as defined in section 145) shall not be treated as a private activity bond. "(C) LIMITATION ON ISSUER.—An obligation issued by an issuer during any calendar year shall not be treated as a qualified tax-exempt obligation unless the reasonably anticipated amount of qualified tax-exempt obligations (other than private activity bonds) which will be issued by such issuer during such calendar year does not exceed $10,000,000. "(D) OVERALL $10,000,000 LIMITATION.—Not more than $10,000,000 of obligations issued by an issuer during any calendar year may be designated by such issuer for purposes of this paragraph. "(E) AGGREGATION OF ISSUERS.—For purposes of subpara-

graphs (C) and (D), an issuer and all subordinate entities thereof shall be treated as 1 issuer. "(4) DEFINITIONS.—For purposes of this subsection— "(A) INTEREST EXPENSE.—The term 'interest expense' means the aggregate amount allowable to the taxpayer as a deduction for interest for the taxable year (determined without regard to this subsection and section 291). For purposes of the preceding sentence, the term 'interest' includes amounts (whether or not designated as interest) paid in respect of deposits, investment certificates, or withdrawable or repurchasable shares. "(B) TAX-EXEMPT OBLIGATION.—The term 'tax-exempt obligation' means any obligation the interest on which is wholly exempt from taxes imposed by this subtitle. Such term includes shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends. "(5) FINANCIAL INSTITUTION.—For purposes of this subsection, the term 'financial institution' means any person who— "(A) accepts deposits from the public in the ordinary course of such person's trade or business, and is subject to Federal or State supervision as a financial institution, or "(B) is a corporation described in section 585(a)(2). "(6) SPECIAL RULES.— "(A) COORDINATION WITH SUBSECTION (a).—If interest on

any indebtedness is disallowed under subsection (a) with respect to any tax-exempt obligation— "(i) such disallowed interest shall not be taken into account for purposes of applying this subsection, and "(ii) for purposes of applying paragraph (2), the adjusted basis of such tax-exempt obligation shall be reduced (but not below zero) by the amount of such indebtedness. "(B) COORDINATION WITH SECTION 263A.—This section

shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property)." (b) REPEAL OF SPECIAL TREATMENT FOR CERTAIN FINANCIAL

INSTITUTIONS.—Paragraph (2) of section 265 (as in effect on the day

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PUBLIC LAW 99-514—OCT. 22, 1986

before the date of the e n a c t m e n t of this Act) is amended by striking out the second sentence. (c) TERMINATION O F REDUCTION I N DEDUCTION FOR INTEREST ALLOCABLE TO T A X - E X E M P T OBLIGATIONS U N D E R SECTION 291.—

(1) IN GENERAL.—Clause (i) of section 291(e)(1)(B) (relating to interest on debt to c a r r y tax-exempt obligations acquired after December 31, 1982) is amended by striking o u t "after December 31, 1982" and inserting in lieu thereof "after December 31, 1982, and before August 8, 1986". (2) TECHNICAL

AMENDMENTS.—Subparagraph

(B) of section

291(e)(1) is amended— (A) by striking out "(but for this paragraph) " in clause and inserting in lieu thereof "(but for this paragraph section 265(b))", (B) by striking out " w i t h o u t regard to this section" clause (ii) and inserting in lieu thereof "without regard this section and section 265(b)", (C) by striking out "AFTER DECEMBER 3 1,

(i) or in to

1982" in the

subparagraph heading and inserting in lieu thereof "AFTER DECEMBER 31, 1982, AND BEFORE AUGUST 8, 1986", and

(D) by adding a t the end thereof the following new clause: "(iv) APPLICATION O F SUBPARAGRAPH TO CERTAIN OBLIGATIONS ISSUED AFTER AUGUST 7, 1986.— "For application of this subparagraph to certain obligations issued after August 7, 1986, see section 265(b)(3)." (d) CLERICAL AMENDMENT. — S e c t i o n 265 is amended by striking

out " N o deduction shall be allowed for—" and inserting in lieu thereof the following: "(a) GENERAL RULE. — N o deduction shall be allowed for—". (e) CONFORMING AMENDMENTS. —

(1) Section 163(h)(12) is amended by striking out "section 265(2)" and inserting in lieu thereof "section 265(a)(2)". (2) Section 1277(c) is amended by striking out "section 265(5)" and inserting in lieu thereof "section 265(a)(5)". (1) EFFECTIVE D A T E. —

(1) IN GENERAL.—Except as provided in this subsection, the amendments m a d e by this section shall apply to taxable years ending after December 31, 1986. (2) OBLIGATIONS

ACQUIRED

PURSUANT

TO CERTAIN

COMMIT-

MENTS.—For purposes of sections 265(b) and 291(e)(1)(B) of the I n t e r n a l Revenue Code of 1986, any tax-exempt obligation which is acquired after August 7, 1986, pursuant to a direct or indirect w r i t t e n commitment— (A) to purchase or r e purchase such obligation, and (B) entered into on or before September 25, 1985, shall be treated as a n obligation acquired before August 8, 1986. (3) TRANSITIONAL RULES.—For purposes of sections 265(b) and

291(e)(1)(B) of the I n t e r n a l Revenue Code of 1986, obligations with respect to any of the following projects shall be treated as obligations acquired before August 8, 1986, in the h and s of the first and any subsequent financial institution acquiring such obligations: (A) P a r k Forest, Illinois, redevelopment project. (B) Clinton, Tennessee, Carriage Trace project. (C) S a v a n n a h, Georgia, Mall Terrace Warehouse project. (D) Chattanooga, Tennessee, Warehouse Row project.

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100 STAT. 2383

(E) Dalton, Georgia, Towne Square project. (F) Milwaukee, Wisconsin, Standard Electric Supply Company—distribution company. (G) Wausau, Wisconsin, urban renewal project. (H) Cassville, Missouri, UDAG project. (I) Outlook Envelope Company—plant expansion. (J) Woodstock, Connecticut, Crabtree Warehouse partnership. (K) Louisville, Kentucky, Speed Mansion renovation project. (L) Charleston, South Carolina, waterfront project. (M) New Orleans, Louisiana, Upper Pontabla Building renovation. (N) Woodward Wight Building. (O) Minneapolis, Minnesota, Miller Milling Company— flour mill project. (P) Birmingham, Alabama, Club Apartments. (Q) Charlotte, North Carolina—qualified mortgage bonds acquired by NCNB bank ($5,250,000). (R) Grand Rapids, Michigan, Central Bank project. (S) Ruppman Marketing Services, Inc.—building project. (4)

ADDITIONAL

TRANSITIONAL

RULE.—Obligations

issued

pursuant to an allocation of a State's volume limitation for private activity bonds, which allocation was made by Executive Order 25 signed by the Governor of the State on May 22, 1986 (as such order may be amended before January 1, 1987), shall be treated as acquired on or before August 7, 1986, in the hands of the first and any subsequent financial institution acquiring such obligation. The aggregate face amount of obligations to which this subparagraph applies shall not exceed $200,000,000. SEC. 903. TERMINATION OF SPECIAL 10-YEAR CARRYBACK RULES FOR CERTAIN FINANCIAL INSTITUTIONS; NEW SPECIAL CARRYOVER RULES FOR CERTAIN LOSSES. (a) TERMINATION OF SPECIAL 10-YEAR CARRYBACK RULES FOR CERTAIN FINANCIAL INSTITUTIONS.—

(1) Subparagraph (F) of section 172(b)(1) (relating to years to which loss may be carried) is amended by striking out "after December 31, 1975," and inserting in lieu thereof "after December 31, 1975, and before January 1, 1987,". (2) Subparagraph (G) of section 172(b)(1) is amended by striking out "after December 31, 1969," and inserting in lieu thereof "after December 31, 1969, and before January 1, 1987,". (3) Subparagraph (H) of section 172(b)(1) is amended— (A) by striking out "after December 31, 1981," and inserting in lieu thereof "after December 31, 1981, and before January 1, 1987,", and (B) by striking out "after December 31, 1984," and inserting in lieu thereof "after December 31, 1984, and before January 1, 1987,". (b) SPECIAL 10-YEAR CARRYBACK FOR BAD DEBT LOSSES OF COMMERCIAL BANKS; ADDITIONAL 3-YEAR CARRYFORWARD FOR LOSSES OF THRIFT INSTITUTIONS.—

(1) IN GENERAL.—Paragraph (1) of section 172(b) (relating to year to which loss may be carried) is amended by adding at the end thereof the following new subparagraphs:

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 100 STAT. 2384

PUBLIC LAW 99-514—OCT. 22, 1986 "(L) BAD DEBT LOSSES OF COMMERCIAL BANKS.—In the case of any bank (as defined in section 585(a)(2)), the portion of the net operating loss for any taxable year beginning after December 31, 1986, and before January 1, 1994, which is attributable to the deduction allowed under section 166(a) shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of the loss and a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss. "(M) LOSSES OF THRIFT INSTITUTIONS.—In the case of an organization to which section 593 applies, in lieu of applying subparagraph (F), a net operating loss for any taxable year beginning after December 31, 1981, and before January 1, 1986, shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 8 taxable years following the taxable year of such loss." (2) TECHNICAL AMENDMENTS.—

(A) Subparagraph (A) of section 172(b)(1) is amended by striking out "and (K)" and inserting in lieu thereof "(K), (L), and (M)". (B) Subparagraph (B) of section 1720t>Xl) is amended by striking out "and (J)" and inserting in lieu thereof "(J), (L), and (M)". (C) Section 172 is amended by redesignating subsection (1) as subsection (m) and by inserting after subsection (k) the following new subsection: "(1)

RULES RELATING TO BAD DEBT

LOSSES OF COMMERCIAL

BANKS.—For purposes of this section— "(1) PORTION ATTRIBUTABLE TO DEDUCTION FOR BAD DEBTS.—

The portion of the net operating loss for any taxable year which is attributable to the deduction allowed under section 166(a) shall be the excess of— "(i) the net operating loss for such taxable year, over "(ii) the net operating loss for such taxable year determined without regard to the amount allowed as a deduction under section 166(a) for such taxable year. "(2) COORDINATION WITH SUBSECTION (b)(2).—In applying paragraph (2) of subsection (b), the portion of the net operating loss for any taxable year which is attributable to the deduction allowed under section 166(a) shall be treated in a manner similar to the manner in which a foreign expropriation loss is treated." (c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to losses incurred in taxable years beginning after December 31, 1986. (2) ADDITIONAL CARRYFORWARD PERIOD FOR LOSSES OF THRIFT

INSTITUTIONS.—Subparagraph (M) of section 1720))(1) of the Internal Revenue Code of 1986 (as added by this section) shall apply to losses incurred in taxable years beginning after December 31, 1981.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/577

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2385

SEC. 904. REPEAL OF SPECIAL REORGANIZATION RULES FOR FINANCIAL INSTITUTIONS.

(a) GENERAL RULE.—Subparagraph (D) of section 368(a)(3) (relating to agency receivership proceedings which involve financial institutions) is amended to read as follows: "(D)

AGENCY

RECEIVERSHIP

PROCEEDINGS

WHICH

INVOLVE

FINANCIAL INSTITUTIONS.—For purposes of subparagraphs (A) and (B), in the case of a receivership, foreclosure, or similar proceeding before a Federal or State agency involving a financial institution referred to in section 581 or 591, the agency shall be treated as a court." (b) REPEAL OF SPECIAL TREATMENT FOR F S L I C FINANCIAL ASSISTANCE.—

(1) Section 597 (relating to FSLIC financial assistance) is hereby repealed. (2) The table of sections for part II of subchapter H of chapter 1 is amended by striking out the item relating to section 597. (c) EFFECTIVE DATES.— (1) SUBSECTION (a).—The amendments made by subsection (a)

shall apply to acquisitions after December 31, 1988, in taxable years ending after such date. (2) SUBSECTION (b).—

(A) IN GENERAL.—The amendments made by subsection (b) shall apply to transfers after December 31, 1988, in taxable years ending after such date; except that such amendments shall not apply to transfers after such date pursuant to an acquisition to which the amendments made by subsection (a) do not apply. (B) CLARIFICATION OF TREATMENT OF AMOUNTS EXCLUDED

UNDER SECTION 597.—Section 265(a)(1) of the Internal Revenue Code of 1986 (as amended by this title) shall not deny any deduction by reason of such deduction being allocable to amounts excluded from gross income under section 597 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act). SEC. 905. TREATMENT OF LOSSES ON DEPOSITS OR ACCOUNTS IN INSOLVENT FINANCIAL INSTITUTIONS.

(a) IN GENERAL.—Section 165 (relating to losses^ is amended by redesignating subsection (1) as subsection (m) and by inserting after subsection (k) the following new subsection: "(1) TREATMENT OF CERTAIN LOSSES IN INSOLVENT FINANCIAL INSTITUTIONS.— "(1) IN GENERAL.—If—

"(A) as of the close of the taxable year, it can reasonably be estimated that there is a loss on a qualified individual's deposit in a qualified financial institution, and "(B) such loss is on account of the bankruptcy or insolvency of such institution, then the taxpayer may elect to treat the amount so estimated as a loss described in subsection (c)(3) incurred during the taxable year. "(2) QUALIFIED INDIVIDUAL DEFINED.—For purposes of this subsection, the term 'qualified individual' means any individual, except an individual— "(A) who owns at least 1 percent in value of the outstanding stock of the qualified financial institution,

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PUBLIC LAW 99-514—OCT. 22, 1986

"(B) who is an officer of the qualified financial institution, "(C) who is a sibling (whether by the whole or half blood), spouse, aunt, uncle, nephew, niece, ancestor, or lineal descendant of an individual described in subparagraph (A) or (B), or "(D) who otherwise is a related person (as defined in section 267(b)) with respect to an individual described in subparagraph (A) or (B). "(3) QUALIFIED FINANCIAL INSTITUTION.—For purposes of this subsection, the term 'qualified financial institution' means— "(A) any bank (as defined in section 581), "(B) any institution described in section 591, "(C) any credit union the deposits or accounts in which are insured under Federal or State law or are protected or guaranteed under State law, or "(D) any similar institution chartered and supervised under Federal or State law, "(4) DEPOSIT.—For purposes of this subsection, the term 'deposit' means any deposit, withdrawable account, or withdrawable or repurchasable share. "(5) ELECTION.—Any election by the taxpayer under this subsection may be revoked only with the consent of the Secretary and shall apply to all losses of the taxpayer on deposits in the institution with respect to which such election was made. "(6) COORDINATION WITH SECTION 166.—Section 166 shall not apply to any loss to which an election under this subsection applies." (b) INTEREST ON FROZEN DEPOSITS.—Section 451 (relating to general rule for taxable year of inclusion) is amended by adding at the end thereof the following new subsection: "(f) TREATMENT OF INTEREST ON FROZEN DEPOSITS IN CERTAIN FINANCIAL INSTITUTIONS.—

"(1) IN GENERAL.—In the case of interest credited during any calendar year on a frozen deposit in a qualified financial institution, the amount of such interest includible in the gross income of a qualified individual shall not exceed the sum of— "(A) the net amount withdrawn by such individual from such deposit during such calendar year, and "(B) the amount of such deposit which is withdrawable as of the close of the taxable year (determined without regard to any penalty for premature withdrawals of a time deposit). "(2) INTEREST TESTED EACH YEAR.—Any interest not included

in gross income by reason of paragraph (1) shall be treated as credited in the next calendar year. "(3) DEFERRAL OF INTEREST DEDUCTION.—No deduction shall be allowed to any qualified financial institution for interest not includible in gross income under paragraph (1) until such interest is includible in gross income. "(4) FROZEN DEPOSIT.—For purposes of this subsection, the term 'frozen deposit' means any deposit if, as of the close of the calendar year, any portion of such deposit may not be withdrawn because of— "(A) the bankruptcy or insolvency of the qualified financial institution (or threat thereof), or

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Page:United States Statutes at Large Volume 100 Part 3.djvu/579

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100 STAT. 2387

"(B) any requirement imposed by the State in which such institution is located by reason of the bankruptcy or insolvency (or threat thereof) of 1 or more financial institutions in the State. "(5) OTHER DEFINITIONS.—For purposes of this subsection, the terms 'qualified individual', 'qualified financial institution', and 'deposit' have the same respective meanings as when used in section 165(1)." (c) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 1982. (2) SPECIAL RULES FOR SUBSECTION (b).—

(A) The amendment made by subsection (b) shall apply to taxable years beginning after December 31, 1982, and before January 1, 1987, only if the qualified individual elects to have such amendment apply for all such taxable years. (B) In the case of interest attributable to the period beginning January 1, 1983, and ending December 31, 1987, the interest deduction of financial institutions shall be determined without regard to paragraph (3) of section 451(f) of the Internal Revenue Code of 1986 (as added by subsection (b)).

TITLE X—INSURANCE PRODUCTS AND COMPANIES Subtitle A—Policyholder Issues SEC. 1001. REPEAL OF EXCLUSION FOR INTEREST ON INSTALLMENT PAYMENTS OF LIFE INSURANCE PROCEEDS.

(a) IN GENERAL.—The second sentence of paragraph (1) of section 101(d) (relating to payment of life insurance proceeds at a date later than death) is amended to read as follows: "There shall be excluded from the gross income of such beneficiary in the taxable year received any amount determined by such proration." (b) DETERMINATION OF AMOUNT HELD BY INSURER.—Clause (ii) of

section 101(d)(2)(B) is amended to read as follows: "(ii) as discounted on the bsisis of the interest rate used by the insurer in calculating payments under the agreement and mortality tables prescribed by the Secretary." (c) TECHNICAL AMENDMENTS.—

(1) Subsection (d) of section 101 is amended by striking out paragraph (3) and by redesignating paragraph (4) as paragraph (3). (2) Subparagraph (B) of section 101(d)(2) is amended by striking out "is equal" and inserting in lieu thereof "equal". (d) EFFECTIVE DATE.—The amendments made by this section shall apply to amounts received with respect to deaths occurring after the date of the enactment of this section in taxable years ending after such date.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/580

 100 STAT. 2388

PUBLIC LAW 99-514—OCT. 22, 1986

SEC. 1002. EXCLUSION FROM INCOME WITH RESPECT TO STRUCTURED SETTLEMENTS LIMITED TO CASES INVOLVING PHYSICAL INJURY.

(a) IN GENERAL.—Subsection (c) of section 130 (relating to certain personal insurance liability assignments) is amended by inserting "(in a case involving physical injury or physical sickness)" after "personal injury or sickness". (b) EFFECTIVE DATE.—The amendment made by this section shall apply to assignments entered into after December 31, 1986, in taxable years ending after such date. SEC. 1003. DENIAL OF DEDUCTION FOR INTEREST ON LOANS FROM CERTAIN LIFE INSURANCE CONTRACTS.

(a) IN GENERAL.—Section 264(a) (relating to disallowance of deduction for certain amounts paid in connection with insurance contracts) is amended by adding after paragraph (3) the following new paragraph: "(4) Any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual who— "(A) is an officer or employee of, or "(B) is financially interested in, any trade or business carried on by the taxpayer to the extent that the aggregate amount of such indebtedness with respect to policies covering such individual exceeds $50,000." (b) CONFORMING AMENDMENT.—Section 264(a) is amended by adding at the end thereof the following new sentence: "Paragraph (4) shall apply with respect to contracts purchased after June 20, 1986." (c) EFFECTIVE DATE.—The amendments made by this section shall apply to contracts purchased after June 20, 1986, in taxable years ending after such date. SEC. 1004. DEDUCTION FOR NONBUSINESS CASUALTY LOSSES COVERED BY INSURANCE ALLOWABLE ONLY IF CLAIM FILED.

(a) IN GENERAL.—Paragraph (4) of section 165(h) (relating to treatment of casualty gains and losses) is amended by adding at the end thereof the following new subparagraph: "(E) CLAIM REQUIRED TO BE FILED IN CERTAIN CASES.—Any

loss of an individual described in subsection (c)(3) to the extent covered by insurance shall be taken into account under this section only if the individual files a timely insurance claim with respect to such loss." (b) EFFECTIVE DATE.—The amendment made by this section shall apply to losses sustained in taxable years beginning after December 31, 1986.

Subtitle B—Life Insurance Companies SEC. 1011. REPEAL OF SPECIAL LIFE INSURANCE COMPANY DEDUCTION.

(a) IN GENERAL.—Section 806 is amended by striking out subsection (a) and by redesignating subsections (b), (c), and (d), as subsections (a), (b), and (c), respectively. (b) TECHNICAL AND CONFORMING AMENDMENTS.—

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Page:United States Statutes at Large Volume 100 Part 3.djvu/581

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2389

(1) Sections 453B(e)(2)(B) and 465(c)(7)(D)(v) are each amended by striking out "section 806(c)(3)" and inserting in lieu thereof "section 806a)X3)". (2) Section 804 is amended by adding "and" at the end of paragraph (1) and by striking out paragraphs (2) and (3) and inserting in lieu thereof the following: "(2) the small life insurance company deduction (if any) determined under section 806(a)." (3) Subparagraph (C) of section 801(a)(2) is amended— (A) by striking out "the amounts allowable as deductions under paragraphs (2) and (3)" and inserting in lieu thereof "the amount allowable as a deduction under paragraph (2)", and (B) by striking out "SPECIAL U F E INSURANCE COMPANY DEDUCTION AND" in the heading. (4) Clause (i) of section 805(a)(4)(B) and clause (iii) of section 80503X3XA) are each amended by striking out "the special life insurance company deduction and". (5) Paragraph (1) of section 806(b), as redesignated by subsection (a), is amended by striking out "without regard to—" and all that follows and inserting in lieu thereof "without regard to the small life insurance company deduction." (6) Paragraph (1) of section 806(c), as redesignated by subsection (a), is amended— (A) by striking out "subsections (a) and (b)" and inserting in lieu thereof "subsection (a)", (B) by striking out "any special life insurance company deduction and", and (C) by striking out "SPECIAL LIFE INSURANCE COMPANY DEDUCTION AND SMALL" in the heading and inserting in lieu thereof "SMALL". (7) Paragraph (2) of section 806(c), as redesignated by subsection (a), is amended by striking out "subsection (b)(3)" and inserting in lieu thereof "subsection (a)(3)". (8) Subsection (c) of section 806, as redesignated by subsection (a), is amended by striking out paragraph (4) and by redesignating paragraph (5) as paragraph (4). (9) Subparagraph (A) of section 813(a)(4) is amended by striking out "section 806(b)(3)(C)" and inserting in lieu thereof "section 806(a)(3)(C)". (10) Clause (ii) of section 815(c)(2)(A) is amended by striking out "special deductions" and inserting in lieu thereof "small life insurance company deduction." (IIXA) The section heading of section 806 is amended by striking out "SPECIAL DEDUCTIONS" and inserting in lieu thereof "SMALL LIFE INSURANCE COMPANY DEDUCTION".

(B) The table of sections for subpart C of part I of subchapter L of chapter 1 is amended by striking out "Special deductions" in the item relating to section 806 and inserting in lieu thereof "Small life insurance company deduction". (c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) SPECIAL RULE.—Section 217(k) of the Tax Reform Act of 1984 is amended—

71-19/, 0 - 89 - 20: QL. 3 Part3

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Page:United States Statutes at Large Volume 100 Part 3.djvu/582

 100 STAT. 2390

PUBLIC LAW 99-514—OCT. 22, 1986 (A) by striking out "the special deductions under section 806" and inserting in lieu thereof "the small life insurance company deduction under sectiorf 806(a)", and (B) by adding at the end thereof the following: "For purposes of determining taxable income, the amount of any income, gain, loss, or deduction attributable to the ownership of such stock shall be an amount equal to 46 times the amount of such income, gain, loss, or deduction, divided by 36.8." (d) TREATMENT OF CERTAIN MARKET DISCOUNT BONDS.—

f 1) IN GENERAL.—Notwithstanding the amendments made by subtitle B of title III, any gain recognized by a qualified life insurance company on the redemption at maturity of any bond which was issued before July 19, 1984, and acquired by such company on or before September 25, 1985, shall be subject to tax at the rate of 28 percent. (2) QUALIFIED LIFE INSURANCE COMPANY.—For purposes of paragraph (1), the term "qualified life insurance company" means any of the following companies: Aetna, Provident Life and Accident, Massachusetts Mutual, Mutual Benefit, Connecticut Mutual, Phoenix Mutual, John Hancock, New England Life, Pennsylvania Mutual, Transamerica, Northwestern, Provident Mutual, Prudential, Mutual of Omaha, and Metropolitan. SEC. 1012. REPEAL OF TAX-EXEMPT STATUS FOR CERTAIN ORGANIZATIONS PROVIDING COMMERCIAL-TYPE INSURANCE,

(a) IN GENERAL.—Section 501 (relating to exemption from tax on corporations, certain trusts, etc.) is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (1) the following new subsection: "(m) CERTAIN ORGANIZATIONS PROVIDING COMMERCIAL-TYPE INSURANCE NOT EXEMPT FROM TAX.— "(1) DENIAL OF TAX EXEMPTION WHERE PROVIDING COMMERCIALTYPE INSURANCE IS SUBSTANTIAL PART OF ACTIVITIES.—An

organization described in paragraph (3) or (4) of subsection (c) shall be exempt from tax under subsection (a) only if no substantial part of its activities consists of providing commercial-type insurance. "(2) OTHER ORGANIZATIONS TAXED AS INSURANCE COMPANIES ON

INSURANCE BUSINESS.—In the case of an organization described in paragraph (3) or (4) of subsection (c) which is exempt from tax under subsection (a) after the application of paragraph (1) of this subsection— "(A) the activity of providing commercial-type insurance shall be treated as an unrelated trade or business (as defined in section 513), and "(B) in lieu of the tax imposed by section 511 with respect to such activity, such organization shall be treated as an insurance company for purposes of applying subchapter L with respect to such activity. "(3) COMMERCIAL-TYPE INSURANCE.—For purposes of this subsection, the term 'commercial-type insurance' shall not include— "(A) insurance provided at substantially below cost to a class of charitable recipients.

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100 STAT. 2391

"(B) incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organizations, "(C) property or casualty insurance provided (directly or through an organization described in section 414(e)(3)(B)(ii)) by a church or convention or association of churches for such church or convention or association of churches, and "(D) providing retirement or welfare benefits (or both) by a church or a convention or association of churches (directly or through an organization described in section 414(e)(3)(A) or 414(e)(3)(B)(ii)) for the employees (including employees described in section 414(e)(3)(B)) of such church or convention or association of churches or the beneficiaries of such employees. "(4) INSURANCE INCLUDES ANNUITIES.—For purposes of this subsection, the issuance of annuity contracts shall be treated as providing insurance." (b) TREATMENT OF BLUE CROSS AND BLUE SHIELD ORGANIZATIONS AND SIMILAR ORGANIZATIONS.—

(1) IN GENERAL.—Part III of subchapter L of chapter 1 is amended by adding at the end thereof the following new section: "SEC. 833. TREATMENT OF BLUE CROSS AND BLUE SHIELD ORGANIZATIONS. ETC.

"(a) GENERAL RULE.—In the case of any organization to which this section applies— "(1) TREATED AS STOCK COMPANY.—Such organization shall be taxable under this part in the same manner as if it were a stock insurance company. "(2) SPECIAL DEDUCTION ALLOWED.—The deduction determined under subsection (b) for any taxable year shall be allowed. "(3)

REDUCTIONS IN UNEARNED PREMIUM RESERVES NOT TO

APPLY.—Subparagraph (B) of paragraph (4) of section 832(b) shall be applied by substituting '100 percent' for '80 percent', and subparagraph (C) of such paragraph (4) shall not apply. "(b) AMOUNT OF DEDUCTION.—

"(1) IN GENERAL.—Except as provided in paragraph (2), the deduction determined under this subsection for any taxable year is the excess (if any) of— "(A) 25 percent of the sum of— "(i) the claims incurred during the taxable year, and "(ii) the expenses incurred during the taxable year in connection with the administration, adjustment, or settlement of claims, over "(B) the adjusted surplus as of the beginning of the taxable year. "(2) LIMITATION.—The deduction determined under paragraph (1) for any taxable year shall not exceed taxable income for such taxable year (determined without regard to such deduction). "(3) ADJUSTED SURPLUS.—For purposes of this subsection— "(A) IN GENERAL.—The adjusted surplus as of the beginning of any taxable year is an amount equal to the adjusted surplus as of the beginning of the preceding taxable year— "(i) increased by the amount of any adjusted taxable income for such preceding taxable year, or "(ii) decreased by the amount of any adjusted net operating loss for such preceding taxable year.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/584

 100 STAT. 2392

PUBLIC LAW 99-514—OCT. 22, 1986 "(B) SPECIAL RULE.—The adjusted surplus as of the beginning of the organization's 1st taxable year beginning after December 31, 1986, shall be its surplus as of such time. For purposes of the preceding sentence and subsection (c)(3)(C), the term 'surplus' means the excess of the total assets over total liabilities as shown on the annual statement. "(C) ADJUSTED TAXABLE INCOME.—The term 'adjusted taxable income' means taxable income determined— "(i) without regard to the deduction determined under this subsection, "(ii) without regard to any carr3rforward or carryback to such taxable year, and "(iii) by increasing gross income by an amount equal to the net exempt income for the taxable year. "(D) ADJUSTED NET OPERATING LOSS.—The term 'adjusted net operating loss' means the net operating loss for any taxable year determined with the adjustments set forth in subparagraph (C). "(E) NET EXEMPT INCOME.—The term 'net exempt income' means— "(i) any tax-exempt interest received or accrued during the taxable year, reduced by any amount (not otherwise deductible) which would have been allowable as a deduction for the taxable year if such interest were not tax-exempt, and "(ii) the aggregate amount allowed as a deduction for the taxable year under sections 243, 244, and 245. The amount determined under clause (ii) shall be reduced by the amount of any decrease in deductions allowable for the taxable year by reason of section 832(b)(5)(B) to the extent such decrease is attributable to deductions under sections 243, 244, and 245. "(4) ONLY HEALTH-RELATED ITEMS TAKEN INTO ACCOUNT.—Any

determination under this subsection shall be made by only taking into account items attributable to the health-related business of the taxpayer. "(c) ORGANIZATIONS TO WHICH SECTION APPLIES.—

"(1) IN GENERAL.—This section shall apply to— "(A) any existing Blue Cross or Blue Shield organization, and "(B) any other organization meeting the requirements of paragraph (3). "(2) EXISTING BLUE CROSS OR BLUE SHIELD ORGANIZATION.—The

term 'existing Blue Cross or Blue Shield organization' means any Blue Cross or Blue Shield organization if— "(A) such organization was in existence on August 16, 1986, "(B) such organization is determined to be exempt from tax for its last taxable year beginning before January 1, 1987, and "(C) no material change has occurred in the operations of such organization or in its structure after August 16, 1986, and before the close of the taxable year. To the extent permitted by the Secretary, any successor to an organization meeting the requirements of the preceding sentence, and any organization resulting from the merger or consolidation of organizations each of which met such require-

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Page:United States Statutes at Large Volume 100 Part 3.djvu/585

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2393

ments, shall be treated as an existing Blue Cross or Blue Shield organization. "(3) OTHER ORGANIZATIONS.—

"(A) IN GENERAL.—An organization meets the requirements of this paragraph for any taxable year if— "(i) substantially all the activities of such organization involve the providing of health insurance, "(ii) at least 10 percent of the health insurance provided by such organization is provided to individuals and small groups (not taking into account any medicare supplemental coverage), "(iii) such organization provides continuous full-year open enrollment (including conversions) for individuals and small groups, "(iv) such organization's policies covering individuals provide full coverage of pre-existing conditions of highrisk individuals without a price differential (with a reasonable waiting period), and coverage is provided without regard to age, income, or employment status of individuals under age 65, "(v) at least 35 percent of its premiums are determined on a community rated basis, and "(vi) no part of its net earnings inures to the benefit of any private shareholder or individual. "(B) SMALL GROUP DEFINED.—For purposes of subpara-

graph (A), the term 'small group' means the lesser of— "(i) 15 individuals, or "(ii) the number of individuals required for a small group under applicable State law. "(C) SPECIAL RULE FOR DETERMINING ADJUSTED SURPLUS.—

For purposes of subsection (b), the adjusted surplus of any organization meeting the requirements of this paragraph as of the beginning of the 1st taxable year for which it meets such requirements shall be its surplus as of such time." (2) CLERICAL AMENDMENT.—The table of sections for such part III is amended by adding at the end thereof the following new item: "Sec. 833. Treatment of Blue Cross and Blue Shield organizations, etc." (c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) STUDY OF FRATERNAL BENEFICIARY ASSOCIATIONS.—The Secretary of the Treasury or his delegate shall conduct a study of organizations described in section 501(c)(8) of the Internal Revenue Code of 1986 and which received gross annual insurance premiums in excess of $25,000,000 for the taxable years of such organizations which ended during 1984. Not later than January 1, 1988, the Secretary of the Treasury shall submit to the Committee on Ways and Means of the House of Representatives, the Committee on Finance of the Senate, and the Joint Committee on Taxation the results of such study, together with such recommendations as he determines to be appropriate. The Secretary of the Treasury shall have authority to require the furnishing of such information as may be necessary to carry out the purposes of this paragraph.

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Page:United States Statutes at Large Volume 100 Part 3.djvu/586

 100 STAT. 2394

PUBLIC LAW 99-514—OCT. 22, 1986 (3) SPECIAL RULES FOR EXISTING BLUE CROSS OR BLUE SHIELD ORGANIZATIONS.—

(A) IN GENERAL.—In the case of any existing Blue Cross or Blue Shield organization (as defined in section 833(c)(2) of the Internal Revenue Code of 1986 as added by this section)— (i) no adjustment shall be made under section 481 (or any other provision) of such Code on account of a change in its method of accounting for its 1st taxable year beginning after December 31, 1986, and (ii) for purposes of determining gain or loss, the adjusted basis of any asset held on the 1st day of such taxable year shall be treated as equal to its fair market value as of such day. (B) TREATMENT OF CERTAIN DISTRIBUTIONS.—For purposes of section 833(b)(3)(B), the surplus of any organization as of the beginning of its 1st taxable year beginning after December 31, 1986, shall be increased by the amount of any distribution (other than to policyholders) made by such organization after August 16, 1986, and before the beginning of such taxable year. (C) RESERVE WEAKENING AFTER AUGUST 16, 1986.—Any

reserve weakening after August 16, 1986, by an existing Blue Cross or Blue Shield organization shall be treated as occurring in such organization's 1st taxable year beginning after December 31, 1986. (4) OTHER SPECIAL RULES.—

(A) The amendments made by this section shall not apply with respect to that portion of the business of Mutual of America which is attributable to pension business. (B) The amendments made by this section shall not apply to that portion of the business of the Teachers Insurance Annuity Association-College Retirement Equities Fund which is attributable to pension business. (C) The amendments made by this section shall not apply to— (i) the retirement fund of the YMCA, (ii) the Missouri Hospital Association, (iii) administrative services performed by municipal leagues, and (iv) dental benefit coverage provided by Delta Dental Plans Association through contracts with independent professional service providers so long as the provision of such coverage is the principal activity of such Association. (D) For purposes of this paragraph, the term "pension business" means the administration of any plan described in section 401(a) of the Internal Revenue Code of 1954 which includes a trust exempt from tax under section 501(a), any plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b) of such Code, any individual retirement plan described in section 408 of such Code, and any eligible deferred compensation plan to which section 457(a) of such Code applies. „,,^_—^;., w ~,-^ -,. --

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 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2395

SEC. 1013. OPERATIONS LOSS DEDUCTION OF INSOLVENT COMPANIES MAY OFFSET DISTRIBUTIONS FROM POLICYHOLDERS SURPLUS ACCOUNT. (a) IN GENERAL.—If—

(1) on November 15, 1985, a life insurance company was insolvent, (2) pursuant to the order of any court of competent jurisdiction in a title 11 or similar case (as defined in section 368(a)(3) of the Internal Revenue Code of 1954), such company is liquidated, and (3) as a result of such liquidation, the tax imposed by section 801 of such Code for any taxable year (hereinafter in this subsection referred to as the "liquidation year") would (but for this subsection) be increased under section 815(a) of such Code, then the amount described in section 815(a)(2) of such Code shall be reduced by the loss from operations (if any) for the liquidation year, and by the unused operations loss carryovers (if any) to the liquidation year (determined after the application of section 810 of such Code for such year). No carryover of any loss from operations of such company arising during the liquidation year (or any prior taxable year) shall be allowable for any taxable year succeeding the liquidation year. (b) DEFINITIONS.—For purposes of subsection (a)— (1) INSOLVENT.—The term "insolvent" means the excess of liabilities over the fair market value of assets. (2) Loss FROM OPERATIONS.—The term "loss from operations" has the meaning given such term by section 810(c) of such Code. (c) EFFECTIVE DATE.—This section shall apply to liquidations on or after November 15, 1985, in taxable years ending after such date.

Subtitle C—Property and Casualty Insurance Companies SEC. 1021. INCLUSION IN INCOME OF 20 PERCENT OF UNEARNED PREMIUM RESERVE.

(a) IN GENERAL.—The first sentence of paragraph (4) of section 832(b) (defining premiums earned) is amended by striking out subparagraph (B) and inserting in lieu thereof the following: "(B) To the result so obtained, add 80 percent of the unearned premiums on outstanding business at the end of the preceding taxable year and deduct 80 percent of the unearned premiums on outstanding business at the end of the taxable year. "(C) To the result so obtained, in the case of a taxable year beginning after December 31, 1986, and before January 1, 1993, add an amount equal to dVs percent of unearned premiums on outstanding business at the end of the most recent taxable year beginning before January 1, 1987." (b) SPECIAL RULES.—Subsection (b) of section 832 is amended by adding at the end thereof the following new paragraph: "(7) SPECIAL RULES FOR APPLYING PARAGRAPH (4).— "(A) REDUCTION NOT TO APPLY TO LIFE INSURANCE RE-

SERVES.—Subparagraph (B) of paragraph (4) shall be applied with respect to amounts included in unearned premiums

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Page:United States Statutes at Large Volume 100 Part 3.djvu/588

 100 STAT. 2396

PUBLIC LAW 99-514—OCT. 22, 1986 under the 2nd sentence of such paragraph by substituting '100 percent' for '80 percent' each place it appears in such subparagraph (B), and subparagraph (C) of paragraph (4) shall be applied by not taking such amounts into account. "(B) SPECIAL TREATMENT OF PREMIUMS ATTRIBUTABLE TO

INSURING CERTAIN SECURITIES.—In the case of premiums attributable to insurance against default in the payment of principal or interest on securities described in section 165(g)(2)(C) with maturities of more than 5 years— "(i) subparagraph (B) of paragraph (4) shall be applied by substituting '90 percent' for '80 percent' each place it appears, and "(ii) subparagraph (C) of paragraph (4) shall be applied by substituting ' 1 % percent' for 'SVa percent'. "(C) TERMINATION AS NONLIFE INSURANCE COMPANY.—

Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if, for any taxable year beginning before January 1, 1993, the taxpayer ceases to be an insurance company taxable under this part, the aggregate adjustments which would be made under paragraph (4)(C) for such taxable year and subsequent taxable years but for such cessation shall be made for the taxable year preceding such cessation year. "(8) SPECIAL RULES FOR APPLYING PARAGRAPH (4) TO TITLE INSURANCE PREMIUMS.—

i

"(A) IN GENERAL.—In the case of premiums attributable to title insurance— "(i) subparagraph (B) of paragraph (4) shall be applied by substituting 'the discounted unearned premiums' for '80 percent of the unearned premiums' each place it appears, and "(ii) subparagraph (C) of paragraph (4) shall not apply. "(B) METHOD OF DISCOUNTING.—For purposes of subpara-

graph (A), the amount of the discounted unearned premiums as of the end of any taxable year shall be the present value of such premiums (as of such time and separately with respect to premiums received in each calendar year) determined by using— "(i) the amount of the undiscounted unearned premiums at such time, "(ii) the applicable interest rate, and "(iii) the applicable statutory premium recognition pattern. "(C) DETERMINATION OF APPLICABLE FACTORS.—In determining the amount of the discounted unearned premiums as of the end of any taxable year— "(i) UNDISCOUNTED UNEARNED PREMIUMS.—The term 'undiscounted unearned premiums' means the unearned premiums shown in the yearly statement filed by the taxpayer for the year ending with or within such taxable year. "(ii) APPLICABLE INTEREST RATE.—The term 'applicable interest rate' means the annual rate determined under 846(c)(2) for the calendar year in which the premiums are received. ,„,.. ^ ^ „. -

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Page:United States Statutes at Large Volume 100 Part 3.djvu/589

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2397

"(iii) APPLICABLE STATUTORY PREMIUM RECOGNITION PATTERN.—The term 'applicable statutory premium recognition pattern' means the statutory premium recognition pattern— "(I) which is in effect for the calendar year in which the premiums are received, and "(II) which is based on the statutory premium recognition pattern which applies to premiums received by the taxpayer in such calendar year. For purposes of the preceding sentence, premiums received during any calendar year shall be treated as received in the middle of such year." (c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by this section shall apply to taxable years beginning after December 31, 1986. (2) SPECIAL TRANSITIONAL RULE FOR TITLE INSURANCE COMPA-

NIES.—For the 1st taxable year beginning after December 31, 1986, in the case of premiums attributable to title insurance— (A) IN GENERAL.—The unearned premiums at the end of the preceding taxable year as defined in paragraph (4) of section 832(b) shall be determined as if the amendments made by this section had applied to such unearned premiums in the preceding taxable year and by using the interest rate and premium recognition pattern applicable to years ending in calendar year 1987. (B) FRESH START.—Except as provided in subparagraph (C), any difference between— (i) the amount determined to be unearned premiums for the year preceding the first taxable year of a title insurance company beginning after December 31, 1986, determined without regard to subparagraph (A), and (ii) such amount determined with regard to subparagraph (A), shall not be taken into account for purposes of the Internal Revenue Code of 1986. (C) EFFECT ON EARNINGS AND PROFITS.—The earnings and

profits of any insurance company for its 1st taxable year beginning after December 31, 1986, shall be increased by the amount of the difference determined under subparagraph (A) with respect to such company. SEC. 1022. TREATMENT OF CERTAIN DIVIDENDS AND TAX-EXEMPT INTEREST.

(a) IN GENERAL.—Paragraph (5) of section 8320t)) (defining losses incurred) is amended to read as follows: "(5) LOSSES INCURRED.—

"(A) IN GENERAL.—The term 'losses incurred' means losses incurred during the taxable year on insurance contracts, computed as follows: "(i) "To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. "(ii) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct

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Page:United States Statutes at Large Volume 100 Part 3.djvu/590

 100 STAT. 2398

PUBLIC LAW 99-514—OCT. 22, 1986 unpaid losses outstanding at the end of the preceding taxable year. "(B) REDUCTION OF DEDUCTION.—The amount which would (but for this subparagraph) be taken into account under subparagraph (A) shall be reduced by an amount equal to 15 percent of the sum of— "(i) tax-exempt interest received or accrued during such taxable year, and "(ii) the aggregate amount of deductions provided by sections 243, 244, and 245 for— "(I) dividends (other than 100 percent dividends) received during the taxable year, and "(II) 100 percent dividends received during the taxable year to the extent attributable to prorated amounts. In the case of a 100 percent dividend paid by an insurance company, the portion attributable to prorated amounts shall be determined under subparagraph (E)(ii). "(C) EXCEPTION FOR INVESTMENTS MADE BEFORE AUGUST 8, 1986.—

"(i) IN GENERAL.—Except as provided in clause (ii), subparagraph (B) shall not apply to any dividend or interest received or accrued on any stock or obligation acquired before August 8, 1986. "(ii) SPECIAL RULE FOR lOO PERCENT DIVIDENDS.—For

purposes of clause (i), the portion of any 100 percent dividend which is attributable to prorated amounts shall be treated as received with respect to stock acquired on the later of— "(I) the date the payor acquired the stock or obligation to which the prorated amounts are attributable, or "(II) the 1st day on which the payor and payee were members of the same affiliated group (as defined in section 243(b)(5)). "(D) DEFINITIONS.—For purposes of this paragraph— "(i) PRORATED AMOUNTS.—The term 'prorated amounts' means tax-exempt interest and dividends with respect to which a deduction is allowable under section 243, 244, or 245 (other than 100 percent dividends), "(ii) 100 PERCENT DIVIDEND.—

"(I) IN GENERAL.—The term '100 percent dividend' means any dividend if the percentage used for purposes of determining the deduction allowable under section 243, 244, or 2450t>) is 100 percent. "(II)

CERTAIN DIVIDENDS RECEIVED BY FOREIGN

CORPORATIONS.—A dividend received by a foreign corporation from a domestic corporation which would be a 100 percent dividend if section 15O40t>X3) did not apply for purposes of applying section 243(b)(5) shall be treated as a 100 percent dividend. "(E) SPECIAL RULES FOR DIVIDENDS SUBJECT TO PRORATION AT SUBSIDIARY LEVEL.—

"(i) IN GENERAL.—In the case of any 100 percent dividend paid to an insurance company to which this

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Page:United States Statutes at Large Volume 100 Part 3.djvu/591

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2399

part applies by any insurance company, the amount of the decrease in the deductions of the payee company by reason of the portion of such dividend attributable to prorated amounts shall be reduced (but not below zero) by the amount of the decrease in the deductions (or increase in income) of the payor company attributable to the application of this section or section 805(a)(4)(A) to such amounts. "(ii) PORTION OF DIVIDEND ATTRIBUTABLE TO PRORATED

AMOUNTS.—For purposes of this subparagraph, in determining the portion of any dividend attributable to prorated amounts— "(I) any dividend by the paying corporation shall be treated as paid first out of earnings and profits attributable to prorated amounts (to the extent thereof), and "(II) by determining the portion of earnings and profits so attributable without any reduction for the tax imposed by this chapter." (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 1986. SEC. 1023. DISCOUNTING OF UNPAID LOSSES AND CERTAIN UNPAID EXPENSES. (a) LIMITATION OF DEDUCTION IN THE CASE OF PROPERTY AND CASUALTY INSURANCE COMPANIES.— (1) LOSSES INCURRED.—Clause (ii) of section 832(b)(5)(A) (defin-

ing losses incurred), as amended by section 1022, is amended to read as follows: "(ii) To the result so obtained, add all unpaid losses on life insurance contracts plus all discounted unpaid losses (as defined in section 846) outstanding at the end of the taxable year and deduct unpaid losses on life insurance contracts plus all discounted unpaid losses outstanding at the end of the preceding taxable year." (2) EXPENSES INCURRED.—Section 832(b)(6) (defining expenses

incurred) is amended by inserting after the 1st sentence: "For purposes of this subchapter, the term 'expenses unpaid' shall not include any unpaid loss adjustment expenses shown on the annual statement, but such unpaid loss adjustment expenses shall be included in unpaid losses." (h) LIMITATION OF DEDUCTION IN THE CASE OF LIFE INSURANCE

COMPANIES.—Section 807(c) (relating to reserves and similar items taken into account) is amended by adding at the end thereof the following new sentence: "For purposes of paragraph (2) and section 805(a)(l), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section 846." (c) DISCOUNTED UNPAID LOSSES DEFINED.—Part IV of subchapter L of chapter 1 (relating to provisions of general application) is amended by adding at the end thereof the following new section: "SEC. 846. DISCOUNTED UNPAID LOSSES DEFINED. "(a) DISCOUNTED LOSSES DETERMINED.— "(1) SEPARATELY COMPUTED FOR EACH ACCIDENT YEAR.—The

amount of the discounted unpaid losses as of the end of any taxable year shall be the sum of the discounted unpaid losses (as

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Page:United States Statutes at Large Volume 100 Part 3.djvu/592

 100 STAT. 2400

PUBLIC LAW 99-514—OCT. 22, 1986 of such time) separately computed under this section with respect to unpaid losses in each line of business attributable to each accident year. "(2) METHOD OF DISCOUNTING.—The amount of the discounted unpaid losses as of the end of any taxable year attributable to any accident year shall be the present value of such losses (as of such time) determined by using— "(A) the amount of the undiscounted unpaid losses as of such time, "(B) the applicable interest rate, and "(C) the applicable loss payment pattern. "(3) LIMITATION ON AMOUNT OF DISCOUNTED LOSSES.—In no

event shall the amount of the discounted unpaid losses with respect to any line of business attributable to any accident year exceed the aggregate amount of unpaid losses with respect to such line of business for such accident year included on the annual statement filed by the taxpayer for the year ending with or within the taxable year. "(4) DETERMINATION OF APPLICABLE FACTORS.—In determining the amount of the discounted unpaid losses attributable to any accident year— "(A) the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and "(B) the applicable loss payment pattern shall be the loss payment pattern determined under subsection (d) which is in effect for the calendar year with which such accident year ends. "(b) DETERMINATION OF UNDISCOUNTED UNPAID LOSSES.—For purposes of this section— "(1) IN GENERAL.—Except as otherwise provided in this subsection, the term 'undiscounted unpaid losses' means the unpaid losses shown in the annual statement filed by the taxpayer for the year ending with or within the taxable year of the taxpayer. "(2) ADJUSTMENT IF LOSSES DISCOUNTED ON ANNUAL STATEMENT.—If—

"(A) the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and "(B) the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement, the amount of the unpaid losses shall be determined without regard to any reduction attributable to such discounting. "(c) RATE OF INTEREST.—

"(1) IN GENERAL.—For purposes of this section, the rate of interest determined under this subsection shall be the annual rate determined by the Secretary under paragraph (2). "(2) DETERMINATION OF ANNUAL RATE.—

"(A) IN GENERAL.—The annual rate determined by the Secretary under this paragraph for any calendar year shall be a rate equal to the average of the applicable Federal mid-term rates (as defined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the test period. "(B) TEST PERIOD.—For purposes of subparagraph (A), the

test period is the most recent 60-calendar-month period

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Page:United States Statutes at Large Volume 100 Part 3.djvu/593

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100 STAT. 2401

ending before the beginning of the calendar year for which the determination is made; except that there shall be excluded from the test period any month beginning before August 1, 1986. "(d) Loss PAYMENT PATTERN.— "(1) IN GENERAL.—For each determination year, the Secretary shall determine a loss payment pattern for each line of business by reference to the historical loss payment pattern applicable to such line of business. Any loss payment pattern determined by the Secretary shall apply to the accident year ending with the determination year and to each of the 4 succeeding accident years. "(2) METHOD OF DETERMINATION.—Determinations under paragraph (1) for any determination year shall be made by the Secretary— "(A) by using the aggregate experience reported on the annual statements of insurance companies, "(B) on the basis of the most recent published aggregate data from such annual statements relating to loss payment patterns available on the 1st day of the determination year, "(C) as if all losses paid or treated as paid during any year are paid in the middle of such year, and "(D) in accordance with the computational rules prescribed in paragraph (3). "(3) COMPUTATIONAL RULES.—For purposes of this subsection— "(A) IN GENERAL.—Except as otherwise provided in this paragraph, the loss payment pattern for any line of business shall be based on the assumption that all losses are paid— "(i) during the accident year and the 3 calendar years following the accident year, or "(ii) in the case of any line of business reported in the schedule or schedules of the annual statement relating to auto liability, other liability, medical malpractice, workers' compensation, and multiple peril lines, during the accident year and the 10 calendar years following the accident year. "(B) TREATMENT OF CERTAIN LOSSES.—Except as otherwise

provided in this paragraph— "(i) in the case of any line of business not described in subparagraph (A)(ii), losses paid after the 1st year following the accident year shall be treated as paid equally in the 2nd and 3rd year following the accident year, and "(ii) in the case of a line of business described in subparagraph (A)(ii), losses paid after the close of the period applicable under subparagraph (A)(ii) shall be treated as paid in the last year of such period. "(C) SPECIAL RULE FOR CERTAIN LONG-TAIL LINES.—In the

case of any long-tail line of business— "(i) the period taken into account under subparagraph (A)(ii) shall be extended (but not by more than 5 years) to the extent required under clause (ii), and "(ii) the amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each

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Page:United States Statutes at Large Volume 100 Part 3.djvu/594

 100 STAT. 2402

PUBLIC LAW 99-514—OCT. 22, 1986 subsequent year in an amount equal to the amount of the losses treated as paid in the 9th year after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). Notwithstanding clause (ii), to the extent such unpaid losses have not been treated as paid before the last year of the extension, they shall be treated as paid in such last year. "(D) LONG-TAIL LINE OF BUSINESS.—-For purposes of subparagraph (C), the term 'long-tail line of business' means any line of business described in subparagraph (A)(ii) if the amount of losses which (without regard to subparagraph (O) would be treated as paid in the 10th year after the accident year exceeds the losses treated as paid in the 9th year after the accident year. "(E) SPECIAL RULE FOR INTERNATIONAL AND REINSURANCE LINES OF BUSINESS.—Except as otherwise provided by regu-

lations, any determination made under subsection (a) with respect to unpaid losses relating to the international or reinsurance lines of business shall be made using, in lieu of the loss payment pattern applicable to the respective lines of business, a pattern determined by the Secretary under paragraphs (1) and (2) based on the combined losses for all lines of business described in subparagraph (A)(ii). "(F)

ADJUSTMENTS IF LOSS

EXPERIENCE INFORMATION

AVAILABLE FOR LONGER PERIODS.—The Secretary shall make appropriate adjustments in the application of this paragraph if annual statement data with respect to payment of losses is available for longer periods after the accident year than the periods assumed under the rules of this paragraph. "(G) SPECIAL RULE FOR 9TH YEAR IF NEGATIVE OR ZERO.—If

the amount of the losses treated as paid in the 9th year after the accident year is zero or a negative amount, subparagraphs (C)(ii) and (D) shall be applied by substituting the average of the losses treated as paid in the 7th, 8th, and 9th years after the accident year for the losses treated as paid in the 9th year after the accident year. "(4) DETERMINATION YEAR.—For purposes of this section, the term 'determination year' means calendar year 1987 and each 5th calendar year thereafter. "(e) ELECTION To U S E COMPANY'S HISTORICAL PAYMENT PATTERN.—

"(1) IN GENERAL.—The taxpayer may elect to apply subsection (a)(2)(C) with respect to all lines of business by using a loss payment pattern determined by reference to the taxpayer's loss payment pattern for the most recent calendar year for which an annual statement was filed before the beginning of the accident year. Any such determination shall be made with the application of the rules of paragraphs (2)(C) and (3) of subsection (d). "(2) ELECTION.—

"(A) IN GENERAL.—An election under paragraph (1) shall be made separately with respect to each determination year under subsection (d). "(B) PERIOD FOR WHICH ELECTION IN EFFECT.—Unless re-

voked with the consent of the Secretary, an election under paragraph (1) with respect to any determination year shall

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Page:United States Statutes at Large Volume 100 Part 3.djvu/595

 PUBLIC LAW 99-514—OCT. 22, 1986

100 STAT. 2403

apply to accident years ending with the determination year and to each of the 4 succeeding accident years. "(C) TIME FOR MAKING ELECTION.—An election under paragraph (1) with respect to any determination year shall be made on the taxpayer's return for the taxable year in which (or with which) the determination year ends. "(3) No ELECTION FOR INTERNATIONAL OR REINSURANCE BUSINESS.—No election under this subsection shall apply to any international or reinsurance line of business. "(4) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection including— "(A) regulations providing that a taxpayer may not make an election under this subsection if such taxpayer does not have sufficient historical experience for the line of business to determine a loss payment pattern, and "(B) regulations to prevent the avoidance (through the use of separate corporations or otherwise) of the requirement of this subsection that an election under this subsection applies to all lines of business of the taxpayer. "(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of this section— "(1) ACCIDENT YEAR.—The term 'accident year' means the calendar year in which the incident occurs which gives rise to the related unpaid loss. "(2) UNPAID LOSS ADJUSTMENT EXPENSES.—The term 'unpaid losses' includes any unpaid loss adjustment expenses shown on the annual statement. "(3) ANNUAL STATEMENT.—The term 'annual statement' means the annual statement approved by the National Association of Insurance Commissioners which the taxpayer is required to file with insurance regulatory authorities of a State. "(4) LINE OF BUSINESS.—The term 'line of business' means a category for the reporting of loss payment patterns determined on the basis of the annual statement for fire and casualty insurance companies for the calendar year ending with or within the taxable year, except that the multiple peril lines shall be treated as a single line of business. "(5) MULTIPLE PERIL LINES.—The term 'multiple peril lines' means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery. "(6) SPECIAL RULE FOR CERTAIN ACCIDENT AND HEALTH INSURANCE LINES OF BUSINESS.—Any determination under subsection

(a) with respect to unpaid losses relating to accident and health insurance lines of businesses (other than credit disability insurance) shall be made— "(A) in the case of unpaid losses relating to disability income, by using the general rules prescribed under section 807(d) applicable to noncancellable accident and health insurance contracts and using a mortality or morbidity table reflecting the taxpayer's experience; except that— "(i) the prevailing State assumed interest rate shall be the rate in effect for the year in which the loss occurred rather than the year in which the contract was issued, and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/596

 100 STAT. 2404

PUBLIC LAW 99-514—OCT. 22, 1986

"(ii) the limitation of subsection (a)(3) shall apply in lieu of the limitation of the last sentence of section 807(d)(1), and "(B) in all other cases, by using an assumption (in lieu of a loss payment pattern) that unpaid losses are paid during the year following the accident year. "(g) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— "(1) regulations providing proper treatment of allocated reinsurance, and "(2) regulations providing proper treatment of salvage and reinsurance recoverable attributable to unpaid losses." (d) CLERICAL AMENDMENT.—The table of sections for such part IV is amended by adding at the end thereof the following new item: "Sec. 846. Discounted unpaid losses defined." (e) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 1986. (2) TRANSITIONAL RULE.—For the first taxable year beginning after December 31, 1986— (A) the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and (B) the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year, shall be determined as if the amendments made by this section had applied to such unpaid losses and expenses unpaid in the preceding taxable year and by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 1987. For subsequent taxable years, such amendments shall be applied with respect to such unpaid losses and expenses unpaid by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 1987. (3) FRESH START.—

(A) IN GENERAL.—Except as otherwise provided in this paragraph, any difference between— (i) the amount determined to be the unpaid losses and expenses unpaid for the year preceding the 1st taxable year of an insurance company beginning after December 31, 1986, determined without regard to paragraph (2), and (ii) such amount determined with regard to paragraph (2), shall not be taken into account for purposes of the Internal Revenue Code of 1986. (B) RESERVE STRENGTHENING IN YEARS AFTER

1985.—

Subparagraph (A) shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer's 1st taxable year beginning after December 31, 1986. (C) EFFECT ON EARNINGS AND PROFITS.—The earnings and

profits of any insurance company for its 1st taxable year

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100 STAT. 2405

beginning after December 31, 1986, shall be increased by the amount of the difference determined under subparagraph (A) with respect to such company. SEC. 1024. REPEAL OF PROTECTION AGAINST LOSS ACCOUNT; REVISION OF SPECIAL TREATMENT FOR SMALL COMPANIES; COMBINATION OF PARTS II AND III. (a) GENERAL RULE.—Subchapter L of chapter 1 is amended as follows: (1) Part II (other than sections 822 and 826) is hereby repealed. (2) Parts III and IV are hereby redesignated as parts II and III, respectively. (3) Section 822 (relating to determination of taxable investment income) and section 826 (relating to election by reciprocal) are hereby redesignated as sections 834 and 835, respectively, and transferred to the end of part II (as redesignated by paragraph (2)). (4) Section 831 is amended to read as follows: "SEC. 83L TAX ON INSURANCE COMPANIES OTHER THAN LIFE INSURANCE COMPANIES. "(a) GENERAL RULE.—Taxes computed as provided in section 11 shall be imposed for each taxable year on the taxable income of every insurance company other than a life insurance company. "(b) ALTERNATIVE TAX FOR CERTAIN SMALL COMPANIES.—

"(1) IN GENERAL.—In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in section 11(b). "(2) COMPANIES TO WHICH THIS SUBSECTION APPLIES.—

"(A) IN GENERAL.—This subsection shall apply to every insurance company other than life (including interinsurers and reciprocal underwriters) if— "(i) the net written premiums (or, if greater, direct written premiums) for the taxable year exceed $350,000 but do not exceed $1,200,000, and "(ii) such company elects the application of this subsection for such taxable year. "(B) CONTROLLED GROUP RULES.—

"(i) IN GENERAL.—For purposes of subparagraph (A), in determining whether any company is described in clause (i) of subparagraph (A), such company shall be treated as receiving during the taxable year amounts described in such clause (i) which are received during such year by all other companies which are members of the same controlled group as the insurance company for which the determination is being made. "(ii) CONTROLLED GROUP.—For purposes of clause (i),

the term 'controlled group' means any controlled group of corporations (as defined in section 1563(a)); except that— "(I) 'more than 50 percent' shall be substituted for 'at least 80 percent' each place it appears in section 1563(a), and

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Page:United States Statutes at Large Volume 100 Part 3.djvu/598

 100 STAT. 2406

PUBLIC LAW 99-514—OCT. 22, 1986 "(II) subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply. "(c) CROSS REFERENCES.— "(1) For alternative tax in case of capital gains, see section 1201(a). "(2) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842. "(3) For exemption from tax for certain insurance companies other than life, see section 501(c)(15)." REVISION OF EXEMPTION FROM TAX.—Paragraph (15) of section

(b) 501(c) (relating to list of exempt organizations) is amended to read as follows: "(15)(A) Insurance companies or associations other than life (including interinsurers and reciprocal underwriters) if the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $350,000. "(B) For purposes of subparagraph (A), in determining whether any company or association is described in subparagraph (A), such company or association shall be treated as receiving during the taxable year amounts described in subparagraph (A) which are received during such year by all other companies or associations which are members of the same controlled group as the insurance company or association for which the determination is being made. "(C) For purposes of subparagraph (B), the term 'controlled group' has the meaning given such term by section 831(b)(2)(B)(ii)." (c) CONFORMING AMENDMENTS.—

(1) Subparagraph (C) of section 832(b)(1) is amended by striking out "a mutual fire insurance company described in section 831(a)(3)(A)" and inserting in lieu thereof "a mutual fire insurance company exclusively issuing perpetual policies". (2) Subparagraph (D) of section 832(b)(1) is amended to read as follows: "(D) in the case of a mutual fire or flood insurance company whose principal business is the issuance of policies— "(i) for which the premium deposits are the same (regardless of the length of the term for which the policies are written), and "(ii) under which the unabsorbed portion of such premium deposits not required for losses, expenses, or establishment of reserves is returned or credited to the policyholder on cancellation or expiration of the policy, an amount equal to 2 percent of the premiums earned on insurance contracts during the taxable year with respect to such policies after deduction of premium deposits returned or credited during the same taxable year, and". (3) Paragraph (4) of section 8320t)) is amended— (A) by striking out "section 831(a)(3)(B)" each place it appears and inserting in lieu thereof "paragraph (1)(D)", and (B) by striking out the last sentence and inserting in lieu thereof the following: "Premiums paid by the subscriber of a mutual flood insurance company described in paragraph (1)(D) or issuing exclusively perpetual policies shall be treated, for purposes of computing the taxable income of such subscriber, in the same manner as premiums paid by a

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